Rodney Mcdonald and Monica Brotherton v Amp General Insurance Co Limited, Gio Australia Limited, Mercantile Mutual Insurance (Aust) Limited and Fai General Insurance Company Ltd [1995] ACTSC 64 (30 June 1995)

SUPREME COURT OF THE ACT

RODNEY McDONALD AND MONICA BROTHERTON v. AMP GENERAL INSURANCE CO LIMITED, GIO
AUSTRALIA LIMITED, MERCANTILE MUTUAL INSURANCE (AUST) LIMITED AND FAI GENERAL
INSURANCE COMPANY LTD
No. SC752 of 1994
Number of pages - 9
Building and Construction

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
HIGGINS J

CATCHWORDS

Building And Construction - building contract - breach of statutory warranties contained in s58C of Building Act 1972 (ACT) - plaintiffs in receipt of Certificate of Housing Indemnity Insurance - claim against defendants by plaintiffs pursuant to that policy - breaches agreed between parties - disagreement as to range of costs and expenses covered by the indemnity - held that policy covers all expenses necessary to recompense plaintiffs for remedying breach in question or suffered as a direct consequence of it including any added cost of completion - policy does not extend to cover indirect consequential losses - particular losses considered - plaintiffs entitled to have indemnity against loss of value of the work and for removal of defective work.

Building Act 1972 (ACT), s58

Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613

D Galambos and Son Pty Ltd v McIntyre (1974) 5 ACTR 10
Kennedy v Collings Constructions Company Pty Ltd (1989) 7 BCL 25
Maurice v Goldsborough Mort and Co (1939) AC 452
Kenmore Properties Ltd v Guardian Royal Exchange Ltd (1990) 6 ANZ Insurance

Cases 61-020

HEARING

CANBERRA, 1 May 1995
30:6:1995

Counsel for the Plaintiffs: Mr R Crowe

Instructing solicitors: Clayton Utz

Counsel for the Defendants: Mr J Harris

Instructing solicitors: Moray and Agnew by their Canberra agents
Allen Allen and Hemsley

ORDER

THE COURT makes findings and declarations in accordance with the within reasons:
1. General damages are not recoverable from the defendants.

2. Leave to the parties to bring in short minutes giving effect thereto.

DECISION

HIGGINS J On 16 October 1992, the plaintiffs were issued with a Certificate of Housing Indemnity Insurance. The defendants are, collectively, the insurers named in the policy, the subject of the certificate.

2. At that time, the plaintiffs were the owners of the Crown Lease of land at 26 Buller Crescent, Palmerston North in the Australian Capital Territory (the property). They had entered into a contract with a builder, Mr Peter Dwight, for the construction of a dwelling upon the property.

3. By virtue of the provisions of s58C of the Building Act 1972 (ACT) (Building Act), certain warranties (the statutory warranties) were impliedly given by the builder to the plaintiffs.

4. Those statutory warranties were:

(a) that the work would be carried out in accordance with the Act;
(b) that the work would be carried out in a proper and workmanlike
manner and in accordance with the plans approved for work by the
Building Controller;
(c) that good and proper materials for the work would be used in
carrying out the work;
(d) that the work would be carried out with reasonable diligence;
(e) that the work and any materials used in carrying out the work
would be reasonably fit for the purpose of constructing a
residential building at the Property in accordance with the laws of
the Australian Capital Territory or of such a nature and quality
that they might reasonably be expected to achieve that result.

5. The parties are agreed that the builder breached certain of those statutory warranties. The plaintiffs suffered loss and damage as a result of those breaches. They made a claim under the policy upon the defendants.

6. Regrettably, the plaintiffs' view of the range of costs and expenses covered by the indemnity is not shared by the defendants.

7. The defendants contend that their liability is limited to the cost of rectifying defective work carried out by the builder. That contention involves an interpretation of the Building Act relating to such insurance as well as of the terms of the policy itself.

8. The policy issued by the defendants purports to be a residential building insurance policy. Section 58E of the Building Act applies to such a policy. Section 58E(1)(g) requires the policy to insure the owner (inter alia):

... against the risk of loss resulting from a breach of a statutory
warranty.

9. Such a policy must also, pursuant to s58E(1)(k), be in a form "approved in writing by the Building Controller".

10. The policy purports to:

... indemnify the Insured for losses resulting from events specified
herein in respect of claims made against us or notified to us by the
Insured during the period of insurance specified in the Schedule.
('Us' is, of course, a reference to the defendants.)

11. The Schedule contained a reference to "Insured Events". The relevant "event" was described as:

A breach of a statutory warranty as specified in Section 58C of the
Building Ordinance 1972.

12. Also specified in the Schedule was the "Basis of Indemnity/Sum Insured". That provided:

In respect of damage:
The cost incurred to rectify the fault which has given rise to a
claim under this Policy.

13. Having regard to the provisions of s58E(1)(g), the term "cost incurred" cannot be given a meaning more restricted than the "loss resulting from a breach of a statutory warranty" referred to in that subsection.

14. That conclusion is supported by the provisions of s58E(4) which provides:

Any provision, stipulation, covenant or agreement (whether made
before or after the commencement of this Part) which negatives,
limits or modifies or purports to negative, limit or modify the
operation of this Part is void and of no effect.

15. The policy should be interpreted consistently with its validity rather than otherwise. In any event, if 'cost incurred' was to be read more narrowly than 'loss resulting' it would be, to that extent, void.

16. It was agreed that it was not necessary to decide whether the indemnity extended to cover damages for physical inconvenience caused to the plaintiffs as a result of the breaches of statutory warranty committed by the builder.

17. Mr Crowe, for the plaintiffs, contended that the term "loss resulting from a breach of a statutory warranty" was co-extensive with the compensatory damages which would have been payable by the builder had the plaintiffs sued him in respect of such breach.

18. Mr Harris, for the defendants, contended that only the direct cost of rectification work was contemplated by that expression.

19. Further, Mr Harris contrasted s58E(1)(g), which provides for indemnity against loss, with s58(1)(f) which insures against:

... the risk of being unable to enforce or recover under the
contract pursuant to which the work has been or is to be carried out
because of the insolvency, disappearance or death of the builder.

20. The latter would indemnify the plaintiffs against their inability to realise a chose in action arising against the builder by virtue of or under the contract. It would clearly include all such items as may have been recoverable from the builder by reason of the latter's breach of or failure to perform the contract. However, it is only if the failure to recover from the builder is due to the latter's 'insolvency, disappearance or death'. None of those circumstance is alleged in this matter.

21. Insofar as the builder had failed properly to construct the dwelling, the cost of rectification would embrace removal of defective work and the replacement of it by work conforming to the contract.

22. That principle is subject to the qualification that, if it was impracticable to carry out rectification work, the proper measure of loss would be the diminution in the value of the building caused by the defective work: see Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613; D Galambos and Son Pty Ltd v McIntyre (1974) 5 ACTR 10.

23. That would clearly be part of the 'loss resulting' from the breach of the relevant statutory warranty.

24. Where the warranty breached has been that relating to proceeding with due diligence then, as against the builder, the added cost, if any, of materials, additional interest payments and, if applicable, rental payments incurred additionally to loan repayments and loss of profits of rental or resale would be recoverable: see, for example, Kennedy v Collings Constructions Company Pty Ltd (1989) 7 BCL 25.

25. However, the insurance policy does not purport to indemnify the builder against his liability to the owners or to indemnify the owners to the extent of that liability. Rather it indemnifies the owners for those losses caused by the relevant default of the builder.

26. In Maurice v Goldsborough Mort and Co (1939) AC 452, an appeal from the High Court of Australia to the Privy Council, it was held that an indemnity to the owner of goods against the risk of loss of, or damage to, the goods, did not provide indemnity against loss of profits which would have been earned by resale of the goods.

27. In the absence of any contrary view having been subsequently endorsed by the High Court, I regard that decision as binding upon me.

28. Of course, the loss in question was, in that case, able to be made good either by replacing the goods or by paying to the insured their wholesale value. Profits were expressly excluded from cover. To that extent, the case is distinguishable from the present.

29. In Kenmore Properties Ltd v Guardian Royal Exchange Ltd (1990) 6 ANZ Insurance Cases 61-020 loss of rental of premises damaged by fire was held to be within the peril insured against as the damaged caused had resulted in the cessation of the lease of the premises. That risk was distinguished from the risk of inability to re-let the premises after reinstatement of the premises which was not within the risk covered.

30. It is a question of the proper construction of the policy issued in this matter.

31. I conclude that this policy covers, and is intended to cover, all expenses incurred as a result of the breach complained of which are necessary to recompense the plaintiffs for remedying the breach in question or suffered as a direct consequence of it. It does not extend to indirect consequential losses, such as loss of rents or the cost of non-occupancy during repairs or other period of delay. The added cost of completion, if any, as a result of delay will be included but not the consequential costs of alternative accommodation.

32. It follows that general damages, even had they been recoverable against the builder, would not, even if pressed, have been recoverable from the defendants.

33. I turn now to the specific categories of loss, other than general damages.

ISSUE 1
1.1 Architect's and Surveyor's fees
Fees properly and reasonably incurred to complete the dwelling, or
ascertain or rectify faults, are recoverable insofar as work done
fails to conform to the agreement with the builder. Insofar as
delay is complained of, additional expenses incurred in order to
complete the dwelling in accordance with the contract are covered by
the indemnity.
1.2 Additional insurance expenses
If delay led to the period of reasonable and necessary construction
insurance being extended, such expenses as additional premiums,
duties etc, would be recoverable.
1.3 Additional travelling expenses
It is difficult to see how this could be covered. They may be
covered if they related to work reasonably required to remedy faults
and achieve completion which expenses would otherwise fall to a
builder or subcontractor. Otherwise, they are consequential and not
recoverable. They could be part of "general damages".
1.4 Cost of materials lost, damaged or destroyed
That cost will be covered insofar as the loss thereof and the need
for replacement results from a breach of a relevant warranty by the
builder.
1.5 Legal expenses incurred prior to the commencement of this
litigation
It seems to me unlikely that expenses incurred to cause the builder
to comply with the statutory warranties or to remedy his
would be covered by the policy. I express no view as to the scope
of any order for costs which might be made in these proceedings
relating to work required to prove breaches of statutory warranty by
the builder and/or failure by the builder to remedy such breaches
thus resulting in a loss covered by the policy.
ISSUE 2
It will be apparent that the indemnity is limited to restoration of
defective work and expenses associated therewith. That is not
limited merely to the cost of actual repair work. The plaintiffs
are entitled to have an indemnity against loss of value of the works
and for removal of defective work, including any fees or expenses
necessary to achieve that result. The losses from delay, limited as
I have indicated, are also covered.
ISSUE 3
The answer is no, subject to the scope of the indemnity being
understood as previously indicated in these reasons.
ISSUE 4
I do not find the policy to be at variance with the Act.

34. I will hear the parties as to consequential orders and costs.