THE TOKIO MARINE AND FIRE INSURANCE CO LTD v COSTAIN AUSTRALIA LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, SAMUELS and MCHUGH JJA 16 November 1988, 23 December 1988 [1988] NSWCA 157 Appeal from Common Law Division — Interpretation of Insurance Policy — Builder built house on wrong land — Claim by landowner and by client for whom house erected — Builder compromises claims by buying land and transferring that land and the house to client. Claim by Builder under Insurance Policy for amounts paid on compromise under indemnity as "damage to property" - Insurer admitted amounts were "damage to property" but claimed they were within exception of "claims in respect of the cost of... Correcting... any work undertaken by The Insured". Held: amounts not within the exception. ORDERS Appeal dismissed with costs. Mahoney JA The Tokio Marine and Fire Insurance Co Ltd ("the insurer') insured the plaintiff Costain Australia Limited ("the insured') against all sums which the insured should become legally liable to pay for compensation in respect of, inter alia, damage to property "happening in connection with" the insured's business. The insured made a claim under the policy. The insurer said that the claim was not within the policy. The insured therefore sued the insurer and the proceeding was heard by Carruthers J. At the trial, a number of issues were contested. The learned judge found for the insured. The insurer has appealed to this Court against his Honour's judgment. The contest before this Court has been limited to one question, namely, whether the claim falls within a particular exception in the policy ("the faulty workmanship exception'). At the trial before Carruthers J the facts were agreed. Those facts are set forth in the record as follows: "At all relevant times the plaintiff carried on business as a builder under the name and style Costain Homes. At all relevant times Leigh and Marcelle Carmichael were owners of a vacant block of land known as Lot 675 Simpson Drive, Bilambil Heights. At all relevant times Michael James Potter was the owner of a vacant block of land known as lot 674 Simpson Drive, Bilambil Heights. By a building contract dated 16 January 1980 the plaintiff agreed for Leigh and Marcelle Carmichael to erect a brick veneer dwelling house on lot 675. Between 1 April and 29 August 1980 the plaintiff constructed a brick veneer dwelling house pursuant to the building contract referred to. The said dwelling house was erected partly upon lot 674 and partly upon lot 675. The plaintiff did not have the permission of either Leigh and Marcelle Carmichael or Michael James Potter to erect the said dwelling house in the position in which it was erected. 2 UNREPORTED JUDGMENTS In October 1982 Leigh and Marcelle Carmichael commenced proceedings No $3673 of 1982 in the Equity Division of this Court by way of summons against Michael James Potter, Tweed Shire Council, Department of Planning and Environment and Costain Australia Ltd, the plaintiff in these proceedings. By the proceedings Leigh and Marcelle Carmichael sought inter alia an order that the plaintiff pay to them the damages which they had sustained by reason of the neglect of the plaintiff to perform the building contract previously referred to. By across-claim filed in the proceedings Michael James Potter sought an order that Leigh and Marcelle Carmichael remove that portion of the said dwelling house which they alleged encroached lot 674. The plaintiff made a claim under the public liability policy in or about March 1983 and then the first defendant has denied any liability to indemnify the plaintiff in respect of the said claim. The Equity court proceedings were settled on or about 22 August 1983 on the basis that lot 674 was purchased by the plaintiff from Michael James Potter for the sum of $61,000 and transferred to Leigh and Marcelle Carmichael. The plaintiff paid the costs of Leigh and Marcelle Carmichael and Michael James Potter of the Equity Court proceedings. The plaintiff incurred costs in defending the Equity court proceedings. It is admitted by the first defendant that the basis upon which the Equity court proceedings were settled constituted a fair and reasonable settlement in all the circumstances. The costs incurred by the plaintiff in relation to the Equity court proceedings total $86,286.96 dating from 1 September 1983." The policy was described a Public Liability Policy. As far as is here relevant it was in the following terms: "The Insured having made to the Company a written Proposal and declaration which shall be the basis of this contract... the Company will indemnify The Insured as hereinafter provided: S1 - PUBLIC LIABILITY The Company will pay to or on behalf of The Insured all sums which The Insured shall become legally liable to pay for compensation in respect of (a) bodily injury (which expression in this Policy includes death and illness) (b) damage to property (which expression in this Policy includes loss of property) occurring during the Period of Insurance set forth in the Schedule and happening in connection with The Business. Provided... EXCEPTIONS The Company shall not be liable for: VEHICLES... AIRCRAFT.... WATERCRAFT... FAULTY WORKMANSHIP claims in respect of the cost of performing completing correcting or improving any work undertaken by The Insured. AIRCRAFT LANDING AREAG.... EMPLOYER'S LIABILITY... WAR.... RADIOACTIVITY..." It has been expressly accepted that the amount claimed, viz, $88,429.32 constitutes "damage to property" within the meaning of that term in the opening provisions of the policy. That was held by the learned judge. The argument before this Court has proceeded upon that basis and upon the basis that, as I have said, URE TOKIO MARINE AND FIRE INSURANCE CO LTD v COSTAIN AUSTRALIA LTB (Mahoney JA) the only question for determination is whether the exception to which I have referred applies so as to prevent the insured from recovering. The proceeding before the learned judge was conducted upon the basis that the amount for which judgment was given, namely, $88,429.32 was "the agreed amount of damage". In its statement of claim, that which the insured claimed was set forth in the following terms: 12. The plaintiff claims from the defendant indemnity under the said policy in respect of the loss and damage suffered by it in respect of the damage to property aforesaid. PARTICULARS OF LOSS AND DAMAGE SUFFERED BY PLAINTIFF (i) Settlement moneys paid to Michael James Potter in proceedings in the Supreme Court of New South Wales, Equity Division in matter no $3673 of 1982 amounting to $61,000.00. (ii) Payment of costs of Michael James Potter in relation to the said proceedings amounting to $7,847.56. (iii) Payment of costs of Leigh A Carmichael and Marcelle Carmichael in relation to the said proceedings amounting to $10,699.70. (iv) Costs incurred by the plaintiff in the said proceedings in the Supreme Court - particulars of those costs to be advised. (v) Stamp duty and costs of various searches made to convey property comprised in Certificate of Title Volume 9107 Folio 225 to Leigh A Carmichael and Marcelle L Carmichael as part of the terms of settlement in the said proceedings amounting to $732.00. 13. The plaintiff accordingly claims against the defendant the sum of $80,279.26 together with the costs of being represented in the said proceedings no 3673 of 1982 referred to in paragraph 12(iv) above and the plaintiff claims interest in respect of those amounts. The court is informed that the amount of $88,429. 32 is made up of the sum of $80,279.26 referred to in CL13 of the statement of claim together with the costs and interest there referred to. In the economic sense, what the insured obtained for the sum of $88,429.32 (or, more correctly, that sum less the interest component included in it) was three things: (1) a transfer of land from Mr Potter to Mr and Mrs Carmichael and the release by Mr Potter of his claim for damages to his property; (2) arelease by Mr and Mrs Carmichael of the insured's obligations to them under the original building contract or under obligations substituted for it; and (3) a discharge from all of the parties in respect of the insured's obligations for costs incurred by the relevant parties. In the economic sense, therefore, the sum paid by the insured included what the insured had to pay for damage to Mr Potter's property? and the cost to it of doing what in substance it had agreed to do for Mr and Mrs Carmichael, viz, to build a house for them. It is therefore to an extent incongruous that as "damage to property" the insured may recover amounts which, in the sense to which I have referred, relate to the discharge of its obligations to Mr and Mrs Carmichael. However, as I have said, the appeal has proceeded on the basis that the amount of the judgment is recoverable as "damage to property" within the policy. I come now to consider whether the exception applies so as to preclude recovery by the insured. 4 UNREPORTED JUDGMENTS Submissions were made as to the construction of the exception and whether, for example, the sidenote "Faulty Workmanship" is to be taken into account in determining what the words of the exception mean. It is, I think, not seriously in contest but that it is: see Digby v General Accident Fire and Life Assurance Corporation [1943] AC 121 at 136. But that does not mean that the exception applies only to claims which are no more than claims for faulty workmanship as such. The exception applies to "claims in respect of the cost of performing, completing, correcting or improving any work undertaken by The Insured". If the exception had applied, in its terms, only to claims "for" the cost of such matters, it would not apply in the present case. That "for" which the amount of $88,429. 32 was paid was the matters specified in pars 12 and 13 of the statement of claim plus the costs and interest there referred to. The moneys were, in the relevant sense, paid as "settlement moneys", costs, stamp duty and the like as there particularised. The payment was therefore not "for" the cost of doing things within the exception. But the exception refers not merely to claims "for" the cost of such matters but also the claims "in respect of" the cost of them. What is to be determined is, therefore, whether there was incurred by the insured "the cost of performing, completing, correcting or improving any work undertaken" by it and whether the present claim is "in respect of" that cost. The only term which, I think, is arguably relevant is "correcting". The exception may arguably apply if the amount claimed had the relevant relation to "the cost of... correcting... any work undertaken by The Insured". I do not think that the cost in question was the cost of "correcting" such work. The insured had been obliged to erect a dwelling on lot 675. It had not done that. What it had done was different: it had erected a dwelling partly on lot 674 and partly on lot 675. The amount was paid to procure that what it had done would be accepted, by Mr Potter and Mr and Mrs Carmichael, as a substitute for what it had agreed to do for Mr and Mrs Carmichael. The amount was paid because it had made a mistake in what it had done. But the payment was not a payable in respect of the cost of "correcting... any work undertaken by The Insured". If and insofar as the sidenote "Faulty Workmanship"is to be taken into account, it provides additional confirmation of this. In my opinion, therefore, the appeal should be dismissed with costs. Counsel for the Appellant: DF Jackson QC and AM Colefax Solicitors for the Appellant: Hunt and Hunt Counsel for the Respondent: CSC Sheller QC and CR Hoeben Solicitors for the Respondent: RN Henderson