Location, location, “location insured” – the Full Federal Court interprets a rainfall exclusion in a contract works policy

Update – 7 September 2023  In September, the claimant applied to the High Court (Australia’s highest court) for special leave to appeal. The claimant’s application was rejected on the grounds that it did not “raise a question of law of public importance sufficient to warrant a grant of special leave and otherwise advances no arguable ground of appeal against the unanimous decision of the Full Federal Court”.

In the recent decision of Acciona Infrastructure Australia Pty Ltd v Zurich Australian Insurance Limited [2023] FCAFC 47, the Federal Court of Australia held that insurers could rely on a rainfall exclusion in a contract works policy on the basis of logic and business efficacy.

This decision highlights that insureds and insurers should be careful to ensure that the level of cover they hold is adequate, and that policies are appropriately drafted and priced. This is especially relevant in light of the increasing number of extreme weather events and the difficulties associated with obtaining insurance coverage in the face of climate change.

Background

The case concerns a Construction Risks – Material Damage Project Insurance Policy (the Policy) between Zurich Australian Insurance Limited, Allianz Australia Insurance Ltd, and XL Insurance Co SE (the Insurers), and New South Wales Roads and Maritime Services (RMS). Acciona Infrastructure Australia Pty Ltd and Ferrovial Construction (Australia) Pty Ltd (the Contractors), the Plaintiffs in the Proceedings, were added insureds under the Policy.

In or about July 2014, the Contractors entered into a design and construct project deed with RMS under which they agreed to perform works, including the construction of a 19.5 kilometre stretch of dual carriageway road between Warrell Creek and Nambucca Heads in northern New South Wales (Project Works).

In June 2016, there was extensive rainfall and flooding along the east coast of Australia. The Contractors claimed that the weather event caused damage to the Project Works, both to the south and to the north of the Nambucca River, and sought indemnity under the Policy. The Insurers contended that a ‘rainfall’ exclusion in the Policy applied to exclude cover in relation to claimed damage to the Project Works to the north of the Nambucca River.

The relevant exclusion excluded loss or damage due to rain on earthworks, except if the storm was a 1-in-20 year rain event, as measured from the nearest Bureau of Meteorology (BOM) weather station.

“Location insured"

Importantly, due to the length the Project Works stretched (19.5 kilometres), there were three weather stations which recorded rainfall differently. The Nambucca Heads Bowling Club BOM Weather Station and the Bellwood Nambucca Heads BOM Weather Station, located closest to where the Project Works were damaged, did not record that the rainfall event was a 1-in-20 year event, whereas the Site Southern Automatic Weather Station, located further away, did. 

The question for the Court centred on what was meant by “location insured” in the rainfall exclusion.

• The Contractors argued that “location insured” should be understood to refer to the whole area of the “Project Site” as defined in the Policy, such that the exception/write-back to the exclusion applied to provide cover.
• The Insurers contended that it only applied to the location of the damage to the Project Works which was the subject of the claim, such that the exception/write-back to the exclusion did not apply and cover was excluded.

Federal Court favoured Insurers’ more logical and businesslike construction

The Court, consisting of Derrington, Button and Jackman JJ, preferred the Insurers’ construction of the exclusion. The Court held the expression, “location insured”, should be construed as that place within the Project Site where the loss or damage in respect of which the claim is made has occurred.

In reaching this conclusion, the Court highlighted:

• Given the Project Works extended over a lengthy geographical area, where the intensity of rainfall could vary from place to place, it was more logical to determine the degree of relevant rainfall intensity by referencing rainfall experienced at or near the location of the resulting loss or damage.
• The businesslike practicality of the competing constructions. It was difficult to see the logic in ascertaining the intensity of an event causing the damage, to which the insurance would apply, by reference to the intensity of the same event obtained at some distant part of the Project Site. The Court considered such an unbusinesslike outcome tended to negate the suggestion that it was intended by the Policy.

Implications

Like any commercial contract, policies of insurance are constructed as a whole. Policy drafters must take care to not only consider the operation of defined terms where they are deployed, but also to consider what effect the absence of the use of those defined terms in other parts of the policy may have. This case illustrates that in instances of ambiguity, the Court may use a more pragmatic “common sense” approach that aligns with logic and business efficacy to determine the correct interpretation of a policy.

Going forward, insureds and insurers should be careful to ensure that the level of cover they hold is adequate, and that policies are appropriately written and priced. This is especially relevant in light of the increasing number of extreme weather events and the difficulties associated with obtaining insurance coverage in the face of climate change.

Further reading

Acciona Infrastructure Australia Pty Ltd v Zurich Australian Insurance Limited [2023] FCAFC 47

Read other items in the Australian Insurance Brief – August 2023