ROYAL & SUN ALLIANCE INS AUS/L v MIHAILOFF & ANOR No. SCCIV-01-858 [2001] SASC 259

LANDER J. This is an appeal from a decision given by a Magistrate in the civil jurisdiction of the Magistrates Court.

The appellant was defendant to an action in which the plaintiffs claimed under a policy of insurance. I shall refer to the parties by their description in the Court below. The plaintiffs recovered in the Magistrates Court and judgment was entered for the amount of the claim $29,736.55 together with interest of $3,000 and costs.

The plaintiffs were the owners of a house property at Craigmore in South Australia and contracted with a builder, Ash Home Improvement Branch Ltd, to carry out building work on the house property. At the same time they entered into a contract of insurance with the defendant which was entitled 'Statutory Cover Policy', which purported to comply with Division 3 of Part 5 of the Building Work Contractors Act 1995 (the Act).

The plaintiffs claimed that the policy of insurance provided cover to make good or pay any loss resulting from:

"non-completion of the building work because of the insolvency, death or disappearance of the builder or

your inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency, death or disappearance of the builder."

The plaintiffs claimed that the builder failed to comply with a statutory warranty given under s 32 of the Act in that the building work was not performed in a proper manner, to accepted trade standards and in accordance with the plans and specifications agreed to by the parties.

The plaintiffs claimed that such a warranty was implied into the contract between the plaintiffs and the builder by reason of s 32 of the Act.

The plaintiffs attempted to enforce the statutory warranty by submitting the matter to arbitration.

On 18 February 2000 the arbitrator published an award (the first award) in favour of the plaintiffs awarding the plaintiffs the sum of $11,658, together with interest 'to accrue at the Supreme Court rate' from 14 days after the date of the award until payment, in satisfaction of the plaintiffs' claim in relation to breach of statutory warranty.

On 30 March 2000 the arbitrator published a second award (the second award) in relation to costs in favour of the plaintiffs, ordering the builder to pay the plaintiffs' costs and disbursements in the sum of $17,379.55.

As a result of those two awards, the builder was indebted to the plaintiffs in the total sum of $29,037.55.

The builder became insolvent. The plaintiffs claimed that they were unable to recover their loss from the builder by reason of his insolvency.

The plaintiffs claimed that the defendant was liable to indemnify them pursuant to the terms of the policy in the total sum of $29,037.55 together with interest of $699. The plaintiffs also claimed prejudgment interest pursuant to s 34 of the Magistrates Court Act 1991.

The defendant admitted that the awards had been made and that the total of the awards was due by the builder to the plaintiffs. Further it admitted that by reason of the builders' insolvency the plaintiffs are unable to recover their loss from the builder.

The defendant pleaded that its liability to the plaintiffs was limited to the award in respect of the breach of statutory warranty, namely the first award of $11,658. It denied any liability in respect of the second award made for costs. Further it denied any liability to pay interest.

It claimed that its liability was reduced by reason of an obligation on the part of the plaintiffs to pay a deductible of $400.

There were two points in this matter. First whether the statutory policy of insurance covered the plaintiffs for the costs associated with establishing the breaches of statutory warranty, and secondly whether the plaintiffs were entitled to interest.

The Magistrate found that the policy of insurance covered the plaintiffs against the costs incurred in establishing the breach of statutory warranty. Implicitly, because he gave judgment for the total amount of the claim which included interest, he allowed the plaintiffs their claim for interest.

The defendant has appealed. Numerous grounds have been raised but the main point on appeal, as it was before the learned Magistrate, is whether the policy covers the legal and associated costs incurred by an owner in establishing a breach of statutory warranty against a builder, who has become or is insolvent. There was the further issue of interest.

The question of interest can be dealt with briefly. The plaintiffs claim to be entitled to $699 interest which sum they included in their claim. It is not clear how that sum has been calculated or upon what basis the claim is made. There is no entitlement to interest pursuant to the contract of insurance. The plaintiffs only entitlement to interest was pursuant to s 34 of the Magistrates Court Act. That entitlement did not arise until judgment was entered in favour of the plaintiffs for damages. Interest was calculated in accordance with the provisions of s 34. If interest was allowed under that section that would duplicate the interest claimed in the claim for damages.

The plaintiffs were not entitled to interest under both heads. That would be to over compensate the plaintiffs. The claim for $699 interest should not have been allowed even if the plaintiffs were otherwise entitled to succeed.

Section 34 of the Building Work Contractors Act 1995 provides that a building work contractor cannot perform building work, to which the Division applies, unless a policy of insurance complying with the Division is in force in relation to that building work and the building owner has been provided with a certificate that evidences the taking out of that policy of insurance and complies with the requirements in the regulations.

"A policy of insurance in relation to building work complies with this Division if:

(a) It insures each person who is, or may become, entitled to the benefit of a statutory warranty in respect of the building work against the risk of being unable to enforce or recover under the statutory warranty by reason of the insolvency, death or disappearance of the building work contractor; and

(b) in the case of building work to be performed by the building work contractor on behalf of some other person - it insures that person against the risk of loss resulting from non completion of the building work by reason of the insolvency, death or disappearance of the contractor; and

(c) any limitation on the liability of the insurer under the policy conform with regulations; and

(d) it otherwise conforms with the requirements of the regulations."

"(2) A person who is entitled to the benefit of a statutory warranty in respect of building work in relation to which a policy of insurance has been taken out under this Division (or under Part 5 of the repealed Act) is entitled to sue on the policy in his or her own right."

24. Regulation 19 of the Building Work Contractors Regulation 1996 provides:

"(1) The following are the only permissible limitations on the liability of the insurer under a policy of insurance under Division 3 of Part 5 of the Act:

(a) A limitation under which the insurer is not liable for the first $400 (or some stipulated lesser amount) of each claim;

(b) A limitation under which the total amount that the insurer is liable to pay in relation to building work or the non-completion of building work at a particular site is fixed at not less than $80,000.

(2) A policy of insurance under Division 3 of Part 5 of the Act -

(a) Must contain a clause allowing a claimant at least 90 days (from the date on which the claimant becomes aware of the grounds for the claim) in which to make the claim;

(b) Must not confer any right on the insurer to avoid liability on the ground of misrepresentation or non-disclosure on the part of the building work contractor or on any similar ground."

25. The learned Magistrate was of the opinion that Regulation 19 supported the plaintiffs' case. He said, referring to the Regulation, 'the terms of the statute (sic) appear to support, in its entirety, the plaintiffs' claim in this matter.'

26. In my opinion the Regulation does not assist in the construction of the policy of insurance. The Regulation prescribes the only limitations which might be included in the policy if it is to comply with the Statute. It also provides for the period within which a claim might be brought. The Regulation is concerned with limitations. The Regulation like the Act is silent on the question of costs. It does not assist in determining the extent of the cover.

27. The plaintiffs entitlement to recover costs under the policy of insurance must arise from the policy itself.

"Will at our option make good or pay you your loss resulting from -

• non-completion of the building work because of insolvency death or disappearance of the builder or

• your inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency death or disappearance of the builder."

In this case the plaintiffs' entitlement to costs arises if the policy requires the defendant to pay costs, being their loss resulting from their inability to enforce or recover under a statutory warranty in respect of the building work because of the insolvency of the builder.

The policy does not mention any costs incurred by an owner in attempting to enforce or recover under a statutory warranty or in petitioning for the insolvency of the builder.

The defendant will be obliged to pay costs if the "loss" includes costs.

The policy provides for limits of indemnity, exceptions and a deductible. It provides for the limitations allowed in Regulation 19 and for the insurer's rights of subrogation. Relevantly it provides:

"4 If we pay a claim, we are subrogated to your rights against any party in relation to the claim. You must not exclude or limit your rights against any such party. If you do, we will not pay a claim to the extent we can no longer recover from that other party because those rights are affected.

10 We may conduct or take over any legal action in connection with any claim and compromise and settle it as we wish. However, we must ensure that any claim you may have against another party and to which we are not subrogated is not adversely affected."

There are two matters, in my opinion, which suggest that the construction arrived at by the learned Magistrate is correct. First condition 10 contemplates that the insurer may conduct or take over any legal action in connection with any claim which is the subject of indemnity. The perils insured against are the non-completion of the building work or the inability to enforce or recover under the statutory warranty.

If the insurer were to conduct or take over a legislation relating to a statutory warranty it would thereby meet the costs of the insured. That suggests that the policy contemplates that the insured's costs in enforcing the statutory warranty will be met.

Secondly a statutory warranty can only be enforced by arbitral or legal proceedings. An insured could not make a claim under the policy without being able to satisfy the insurer that they are unable to enforce or recover under a statutory warranty. That can only be satisfied by establishing that the insured cannot enforce the statutory warranty or cannot recover under the statutory warranty. The establishment of either claim, of course, necessarily means the insured would incur costs.

It seems to me that the policy covers all losses resulting from the breach of the statutory warranty, subject to the policy limit, arising out of the insured's inability to enforce or recover under that statutory warranty, including those incurred in proving the breach of the statutory warrant.

In other words, in my opinion, the word "loss" in the policy includes the costs incurred by the insured in establishing, first the breach of the statutory warranty and, secondly the inability to enforce or recover under it by arbitral or legal proceedings.

In my opinion the policy contemplates that the insured's costs in establishing the breach of the statutory warranty and in attempting to enforce or recover under that warranty by arbitral or legal proceedings will also be met in circumstances where the builder has become insolvent or has died or disappeared.

The appeal must be allowed but only for the purpose of reducing the amount of the award by the claimed interest of $699.

The award of interest of $3,000 pursuant to s 34 of the Magistrates Court Act should stand. Judgment should be entered for the plaintiff for the sum of $29,037.55 together with interest of $3,000.