Watch your language: The importance of defined terms in an insurance contract

Rawson Homes Pty Ltd v Allianz Australia Insurance Limited [2020] NSWSC 1654

Background

On 18 February 2017, a severe hailstorm passed through Sydney causing damage to parts of a residential development that was being constructed by the plaintiff building company, Rawson Homes. The damage was to the tiled roofs of 122 partially constructed houses in Kellyville and Rouse Hill.

In the above proceedings, Rawson Homes sought orders that it be fully indemnified by the defendant insurer, Allianz Australia Insurance Limited (Allianz) for the losses sustained during the hailstorm. The applicable policy was an Allianz Construction Annual Policy issued to Rawson Homes on or about 30 June 2016 (Policy).

Issues

There were two key issues for determination by the Court:

1. the date from which interest pursuant to section 57 of the Insurance Contracts Act 1984 (Cth) (ICA) should be paid by Allianz; and
2. whether one $10,000 deductible was payable by Rawson Homes under the policy or whether a $10,000 deductible was payable in respect of each of the 122 damaged houses (Deductible Issue).

This note explores the Deductible Issue as it provides a salutary reminder / lesson on policy construction and interpretation.

Deductible Issue

Rawson Homes' position was that only one $10,000 deductible applied to its claim for indemnity for losses to all 122 houses. It argued that, on a proper construction of the policy, one deductible was payable for all claims arising from the one event, which in this case was the hailstorm.

Allianz's position was that the policy provided for a deductible to be applied to the "Sum Insured" in respect of each of the 122 houses as the Deductible was payable for each claim made in relation to each Insured Contract.¹ It submitted that Rawson Homes had made 122 claims for indemnity and there were as many claims as there were "Insured Contracts".

Allianz submitted that its interpretation was supported by a reading of the policy as a coherent whole because:

1. the Insuring clause provides indemnity in respect of an individual and identifiable Insured Contract against an Indemnifiable Event;
2. the Sum(s) Insured and Total Sum Insured clause refers to Allianz’s liability as not simply the Sum Insured but the Sum Insured “less any applicable Deductible” and to its “maximum liability” as being the Total Sum Insured “less the highest applicable Deductible”; and
3. the format and wording of the Policy Schedule was consistent with a separate Deductible applying to each claim under an Insured Contract as it provides a dollar figure for “Any One Event”, such that for each individual Insured Contract in respect of which a claim is made for cover for Material Damage to Contract Works the Sum Insured is $2,000,000 after the deduction of a Deductible of $10,000.

However, the Court ultimately accepted Rawson Homes' position noting that the starting point in determining the Deductible Issue was the parts of the policy that dealt with that subject matter.

The Application of Deductible clause in the policy provided:

The amount of the Deductible will be subtracted from the amount payable by Us for each event giving rise to a claim under this Section. If a claim arises from a single event and the Insured can obtain cover under more than one benefit in this Section, the Insured will only be required to pay the highest single Deductible applicable regardless of the number of Deductibles applying to this Section. Only for the purpose of the application of any Deductible, any loss, destruction or damage to the Contract Works or other insured property arising during any one period of seventy two consecutive hours caused by water, flood, cyclone, storms, tempest, earthquake or bush fire shall be deemed to be a single event and therefore to constitute one occurrence. The Insured may select the time from which any such period shall commence but no two such selected periods shall overlap.

The General Definitions section of the policy document defined "Deductible" as:

"Deductible" means either the amount of money specified in the Schedule or stated in the Policy for each applicable Section or type of loss as specified, that the Insured must contribute as the first payment for all claims arising out of one event or occurrence.

The Court found that, on a proper construction of the policy, one deductible was payable by Rawson Homes because:

1. the definition of Deductible reflected an intention that one Deductible be payable irrespective of the number of claims made under the policy if all claims arise out of the one event or occurrence;
2. the Application of Deductible clause provided that the amount of the Deductible was to be subtracted from the amount payable by Allianz for "each event giving rise to a claim" under the insuring clause; and
3. whilst the drafting of the second paragraph of the Application of Deductible clause was somewhat unclear, it appeared intended to aggregate losses to Contract Works and other insured property over a 72 hour period caused by storm (or other natural peril) activity into a single event for the purposes of the deductible with the consequence that a claim in respect of the aggregate loss would be treated as arising from a single event, with the highest single deductible to be applied.

The Court found that these parts of the policy reflected an intention for the Deductible to be payable "per event" by way of a contribution to all material damage claims arising from the "one event". The Court considered the hailstorm to be the "event" and "one event" giving rise to Rawson Homes' claim(s) under the policy.

Illustrative of the key principles of construction applied, the Court held:

1. the characterisation of the hailstorm as the one event that gave rise to Rawson Homes’ claim (or claims) conformed to common sense and the ordinary and natural meaning of the word “event”;
2. as the words “event”, “one event” and “claim” are not defined, they are to be construed according to their ordinary and natural meaning in the context of the policy providing for annual construction insurance that insures works the subject of multiple building contracts; and
3. a reasonable businessperson would understand the definition to mean that the amount of the Deductible is to be contributed by Rawson Homes as the first payment for all claims arising out of the one hailstorm event, and not the first payment for all claims arising out of that one event per Insured Contract.

Takeaways

While the determination of the Deductible Issue turned on the wording of the specific policy terms, this case offers some useful takeaways on policy interpretation generally including that:

1. as a commercial contract, a policy of insurance is to be given a business-like interpretation that requires attention to the language used, the commercial circumstances which the document addresses and the objects which it is intended to secure;
2. the meaning of words used in an insurance policy are to be construed in favour of the insured as far as the ordinary and natural meaning of the words used by the insurer allows; and
3. although the Court is to give force to the words used by the insurer as the author of the insurance contract, any ambiguity in the drafting of the terms would be resolved in favour of the insured.

The case emphasises the crucial importance of defined terms in an insurance contract. If important terms are not defined, they will be given their ordinary and natural meaning which may be detrimental to the insurer depending on the circumstances of the case.

[1] It was common ground that each of the 122 partially constructed houses damaged by the hailstorm was the subject of a residential building contract entered into between Rawson Homes and the individual house owner, and that each building contract was an "Insured Contract".