New South Wales Supreme Court CITATION : The Owners Strata Plan 56587 v TMG Developments Pty Limited [2007] NSWSC 1364 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 26/11/07 JUDGMENT DATE : 29 November 2007 JURISDICTION : Equity Division Technology and Construction List JUDGMENT OF : Einstein J DECISION : Insurer under Part 6 of Home Building Act 1989 having paid out the Owners Corporation is subrogated to rights of Owners Corporation against developer. CATCHWORDS : Equity - Rights of subrogation - Insurance Contracts Act - Insurance requirements of Home Building Act 1989 - Insurer having provided insurance under the Home Building Act 1989 - Questions as to what were the limits, if any, to the rights of subrogation of such insurer - Whether insurer was subrogated only to the rights of the builder (who had effected the insurance and paid premiums) whose liabilities had been discharged, so that the insurer could only sue in the name of the builder - Whether the insurer was not subrogated to the rights of the beneficiaries with whom it enjoyed no previous contractual relationship - Consideration of background to statutory scheme set up by the Home Building Act Corporations Act 2001 (Cth) Home Building Act 1989 (NSW) Home Building Regulation 1990 (NSW) LEGISLATION CITED : Home Building Regulation 1997 (NSW) Insurance Contracts Act 1984 (NSW) Riot (Damages) Act 1886 (UK) Strata Schemes (Freehold Development) Act 1973 (NSW) Banque Financiere de la Cite v Parc (Battesea) Ltd [1998] 2 WLR 475 Castellain v Preston (1883) 11 QBD 380 Ellerbeck Collieries Ltd v Cornhill Insurance Co Ltd [1932] 1 KB 401 Insurance Commission of Western Australia v Kightly (2005) 225 ALR 380 CASES CITED : Jones & Anor v Building Insurers' Guarantee Corporation [2005] NSWCA 7 National Fire Insurance Co v McLaren (1886) 12 OR 682 Petrofina (UK) Ltd v Magnaload Ltd [1984] QB 127 Simpson & Co v Thomson (1877) 3 App Cas 279 Woodside Petroleum Developments Pty Limited (1999) 20 WAR 380 Zurich Australian Insurance Ltd v Metals and Minerals Insurance Pty Ltd [2007] WASC 62 PARTIES : The Owners Strata Plan 56587 (Plaintiff) TMG Developments Pty Limited (Defendant) FILE NUMBER(S) : SC 55006/06 COUNSEL : Mr M Jacobs QC, Mr P Bambagiotti (Plaintiff) Mr M Rudge SC, Mr R Steele (Defendant) SOLICITORS : Mills Oakley Lawyers (Plaintiff) Baker McKenzie (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST Einstein J Thursday 29 November 2007 55006/06 The Owners Strata Plan 56587 v TMG Developments Pty Limited JUDGMENT The separate questions 1 The following have been ordered to be heard as separate questions: 1.1 In the event that the statutory warranties (the Statutory Warranties) provided in Part 2C of the Home Building Act 1989 (the HBA) are found to have been breached leading to loss and damage, would the defendant be liable to the plaintiff in relation to the statutory warranties set out in sec 18B of the HBA by operation of sec 18C and/or sec 18D of that Act? 1.2 If the answer to question 1.1 is yes, is Vero subrogated to the plaintiff's claim against the defendant: · under any clause of the relevant policy; and/or · at common law; and/or · under clause 5.1 of the Deed of 15 June 2006 between Vero and the plaintiff? 1.3 If the answer to question 1.1 is yes and the answer to question 1.2 is no, is Royal & Sun Alliance Insurance Australia Ltd, now known as Vero Insurance Ltd ["Vero"], entitled to exercise the right to take over the plaintiff's claim against the defendant: · by virtue of any clause of the relevant policy (and has it, in fact, done so); and/or · under clause 5.1 of the Deed of 15 June 2006 between Vero and the plaintiff? Agreement as to mode of proceeding 2 Albeit not itself comprising a separate question, the orders for the hearing of the separate questions have included the following statement: 1.4 The parties agree that the separate questions are to proceed on the basis of the Statement of Agreed Facts and the documents referred to therein and that no further evidence shall sought to be relied upon by either party without the leave of the Court. Overview 3 The convenient course is: i. to begin by setting out the plaintiff's short summary of what are said to be background matters several of which are to be found in the Statement of Agreed Facts; ii. to then set out the precise terms of the Agreed Facts document; iii. to then treat with the issues which are raised. 4 The general background is as follows (a) TMG was the developer of a complex consisting of 194 residential home units. (b) TMG engaged Consolidated Constructions Pty Ltd (now in liquidation) (the Builder) by a building contract to undertake the actual building work. (c) The work involved in constructing the home units constitutes residential building work, as defined in sec 3 of the Home Building Act 1989 (the HBA). (d) Vero issued 195 certificates of insurance evidencing the provision of insurance pursuant to Part 6 of the HBA in respect of the work done by the Builder. The relevant terms of the certificates are set out below. (e) The Owners Corporation was a beneficiary under the Home Owners Warranty Policy (Developer Policy) 1997 (the Policy) in respect of the common property in the strata scheme, see paragraph 2.3.1 of the Statement of Agreed Facts. (f) The insurance was subject to the terms set out in the Policy, the relevant terms of which will be referred to below. (g) The Builder constructed the development and a strata scheme was registered by which each of the units became a 'lot' in that strata scheme, and: (i) the Owners Corporation (the plaintiff) came into existence; and (ii) the common property was created and was vested in the Owners Corporation pursuant to sec 18 of the Strata Schemes (Freehold Development) Act 1973 (the SSFDA). (h) Upon the registration of the strata plan, each of the lots became immediately vested in TMG who then sold them. (i) By virtue of sec 3A of the HBA, TMG is a 'developer who did the work' as provided for in that section. (j) The work involved in the construction of the development was the subject of the statutory warranty regime provided for in Part 2C of the HBA. This scheme consists of: (i) a suite of statutory warranties (the Statutory Warranties) set out in sec 18B that are implied into every contract to do residential building work. The terms of the warranties are set out below; (ii) specific provisions in sections 18C and 18D that extend the warranties to persons other than those strictly privy to a building contract into which the warranties are otherwise implied; (iii) further provisions, in sections 18E to 18G, which provide for the mechanics of the scheme, which are not relevant to the issues raised in the separate questions. (k) The residential apartment complex, and more specifically the common property in it contained defects, which for the purposes of this preliminary question are agreed to constitute breaches of the Statutory Warranties. (l) The Owners Corporation made a claim upon the insurance in respect of those breaches of the Statutory Warranties. (m) The Owners Corporation commenced these proceedings against, initially, Vero, and against TMG. Those proceedings were brought initially in the Consumer, Trader & Tenancy Tribunal and thereafter were transferred to this Court to continue as if begun in this Court. (n) The Owners Corporation settled with Vero by a Deed of Settlement, the relevant provisions are set out herein below, by which Vero paid money to the Owners Corporation. (o) Following that payment, Vero assumed carriage of these proceedings in the name of the Owners Corporation exercising the Owners Corporation's rights as against TMG. The relevant provisions of the Certificates 5 The relevant provisions of the Certificates evidencing insurance are as follows: (a) The Certificate is expressed to be issued "in respect of insurance work by Developers and Others". (b) The certificate says it was issued "in respect of: Unit/Duplex/Villa … at 1/12 Morgan Street Botany … carried out by: TMG Developments P/L", and states: "Subject to the Act and the Home Building Regulation 1990 and the conditions of the insurance contract, cover will be provided to the immediate successor in title to the contractor or developer who did the work and subsequent successors in title." The relevant provisions of the Policy 6 The relevant provisions of the Policy are as follows: (a) Under the heading "Your Insurance Cover" the policy provides: "If (and only if) you, the insured, have complied strictly with all your obligations in this policy then, subject to the terms of the policy, we, the insurers, will at our option make good or pay you your loss or damage resulting from – 1. a breach by the developer of a statutory warranty (as defined in the Act) in respect of the work or 2. the cost of alternative accommodated, removal and storage costs reasonably and necessarily incurred as a result of an event in 1 above or … 4. any act or omission of a person contracted by the developer to do the work which results in loss or damage of the kind mentioned above. Cover is subject to the limits, exceptions, conditions and terms below." (b) Under the heading "Definitions" the following is provided: (i) " You, your : The person who is a purchaser of land on which the work is done, together with any successor in title to that person." (ii) " The developer . The party named as the developer in your application form." (iii) " Your application form. The form signed by you (or a previous owner of the home) or the developer to apply for this insurance." (iv) " The work. Residential building work (as defined in the Act and the Home Building Regulation ) carried out, or to be carried out, or in respect of, the home by the developer." (v) " The Act. The Home Building Act 1989 as amended." (c) Under the heading "What will we pay?" at the second paragraph to paragraph 1, the Policy provided: "If the home is a dwelling in a building or complex containing more than one dwelling, any claim paid relating to the common property (as defined in the Act) is applied pro rata to all such dwellings, and reduces your remaining available cover accordingly." (d) Under the heading "When is cover limited or excluded?": (i) clause 6 provides that: "We have no liability to you whatsoever if you are also named as the developer in your application form" (ii) clause 7 provides that: "We have no liability to you whatsoever if you are a person who carried out the work." (iii) clause 8 provides that: "We have no liability to you whatsoever if you are a company related, within the meaning of the Corporations Law, to any corporate person referred to in paragraphs 6 or 7. (iv) clause 12 provides that: "We will not pay any claim for loss or damage as could be reasonably be expected to result from your failure to maintain the work." (e) Under the heading "Conditions on cover" the Policy provides: (i) at clause 19: "If we pay a claim, we are subrogated to your rights against any other 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." (ii) at clause 20: "The cover provided by this policy does not extend to an interest in the home that is not your interest. We will not be liable under this policy to anybody except you." (f) Under the heading "Other terms" it is provided that: (i) at clause 24: "Unless you have reasonable grounds to refuse access, you must give us, our nominated builder, and the developer, reasonable access to inspect, rectify or complete the work." (ii) at clause 29: "This policy is issued in compliance with the Act and the Home Building Regulation . To the extent it conflicts with any mandatory requirement in them, it is to be read and to be enforceable as if complying with them." (iii) at clause 30: "We may conduct or take over any legal action in connection with any claim and compromise and settle it as we wish. …" The provisions of the HBA 7 Part 2C of the HBA includes the following terms: Sec 18B Warranties as to residential building work The following warranties by the holder of a contractor licence, or a person required to hold a contractor licence before entering into a contract, are implied in every contract to do residential building work: (a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract, (b) a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new, (c) a warranty that the work will be done in accordance with, and will comply with, this or any other law, (d) a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time, (e) a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling, (f) a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known to the holder of the contractor licence or person required to hold a contractor licence, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the holder or person, the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the holder's or person's skill and judgment. Sec 18C Warranties as to work by others A person who is the immediate successor in title to an owner-builder, a holder of a contractor licence, a former holder or a developer who has done residential building work on land is entitled to the benefit of the statutory warranties as if the owner-builder, holder, former holder or developer were required to hold a contractor licence and had done the work under a contract with that successor in title to do the work. Sec 18D Extension of statutory warranties (1) A person who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person's predecessor in title in respect of the statutory warranty. (2) Subsection (1) does not give a successor in title any right to enforce a statutory warranty in proceedings in relation to a deficiency in work or materials if the warranty has already been enforced in relation to that particular deficiency by the person's predecessor in title. The Home Building Regulations 1997 8 The HBA was augmented by the Home Building Regulations 1997. 9 Clause 42 of the 1997 Regulations provided as follows: "42 Beneficiaries (1) An insurance contract must provide that the beneficiaries under the contract are: (a) a person: (i) on whose behalf residential building work covered by the contract is done or is to be done, or (ii) to whom a kit home covered by the contract is supplied or is proposed to be supplied, or (iii) who is a purchaser of land on which owner-builder work, or work required by section 95 or 96 of the Act to be insured, and covered by the contract, is done, or (b) a successor in title to any person referred to in paragraph (a) (i), (ii) or (iii). (2) The following persons are not required to be beneficiaries under an insurance contract: (a) a developer who does residential building work, (b) a person who does residential building work other than under a contract, (c) a holder of a contractor licence who or which carried out residential building work, (d) companies related, within the meaning of section 50 of the Corporations Act 2001 of the Commonwealth, to any corporate person referred to in paragraph (a), (b) or (c). (3) Nothing in this clause prevents a person referred to in subclause (2) from being a beneficiary under an insurance contract. (4) For the purposes of this clause, the owner or owners of common property the subject of work referred to in section 95 or 96 of the Act are taken to be purchasers of the land on which the common property is situated." The precise terms of the Agreed Statement of Facts was as follows 1. Agreed Facts 1.1 In conformity with the statement of the separate questions, the Home Building Act 1989 (the HBA) and the statutory warranties in Part 2C of that Act as in the form relevant to the undertaking of the Project at the time it was undertaken (as defined below) are the Statutory Warranties. 2. The Project 2.1.1 The proceedings relate to the construction of 194 residential home units, being residential building work for the purposes of sec 3 of the HBA on Lot 100 in Development Plan 864361, Botany (the 'Project'). 2.1.2 The defendant was the proprietor of the land upon which the development occurred and engaged Consolidated Constructions Pty Ltd ('Consolidated') to construct the Project under a deed of agreement for the design and construction of the Project dated 28 May 1997 (the 'Contract'), a copy of which is Annexure "A" hereto. 2.1.3 The construction was subject to a staged development for the purposes of Part 2, Div 2A of the Strata Schemes (Freehold Development) Act 1973 ( the SSFDA), the principal strata plan being No 56587 which was registered on 24 February 1998 and the following strata plans of subdivision were lodged on the dates set out below: (i) No: 56587 on 24 February 1998; (ii) No: 56811 on 23 March 1998; (iii) No: 57367 on 30 June 1998; (iv) No 57368 on 1 July 1998; (v) No: 58358 on 20 November 1998; (vi) No: 58359 on 23 November 1998; (vii) No: 58723 on 21 January 1999. The Strata Plan and strata plans of subdivision and associated documents are attached as Annexure "B" hereto. 2.1.3 The plaintiff as the owners corporation was created upon the registration of Strata Plan 56587. 2.1.4 Pursuant to sec 18 of the SSFDA, the plaintiff is the holder of the common property in Strata Plan 56587 and such common property vested in the plaintiff upon registration of Strata Plan 56587. 2.1.5 The defendant was the owner of the land that became subject of strata plan 56587 up to the registration of that plan, both those parts that became the 195 lots and that part that became the common property in that strata plan. 2.1.6 Upon registration of the said strata plan and each subsequent strata plan of subdivision, the defendant became the owner of the lots created by and upon that registration, and the defendant thereafter sold those lots to various purchasers. 2.1.6 Each of the lots and the common property is a 'dwelling' for the purposes of sec 3 of the HBA. 2.1.7 By virtue of sec 3A of the HBA, the defendant was the owner of more than three dwellings and was therefore in the present circumstances a developer who did the work as provided for by that section. 2.2 Home Warranty Insurance 2.2.1 On 15 July 1997, Royal & Sun Alliance Insurance Australia Ltd (now known as Vero Insurance Ltd) issued 195 certificates of insurance evidencing the provision of insurance pursuant to Part 6 of the HBA in respect of the work done by Consolidated in relation to the Project (the 'Insurance'). 2.2.2 The terms of the Insurance were as set out in the said certificates, a copy of a representative of which is attached hereto as Annexure "C", together with a document entitled 'Home Owners Warranty Policy (Developer Policy) 1997 Policy' (the Policy) a copy of which is attached as Annexure "D". 2.2.3 Each of the said certificates was sent to the defendant under cover of letter, a copy of a representative of which is attached hereto as Annexure " E ". 2.2.4 The letter, being Annexure E , was a standard letter automatically generated by Vero's agent, Home Owners Warranty's, computer system to reflect certain key data included in the certificates of insurance. 2.3 The Claim and The Proceedings 2.3.1 On or about 8 June 2000, the plaintiff, being a beneficiary to the Insurance in respect of the common property in the strata scheme, made a claim upon the Insurance by lodging with Vero a claim form relating to breaches of the Statutory Warranties (the Claim). 2.3.2 Although Vero is one of a number of insurers named on the certificate of insurance, it is agreed that Vero is the insurer under the Insurance and that it stands in the shoes of all the other insurers. 2.3.3 On or about 15 June 2006 Vero entered into a Deed of Settlement with the plaintiff (the 'Deed') a copy of which is attached hereto as Annexure "F". 2.3.4 By the said settlement, Vero paid money by way of indemnity under the Insurance in respect of the breaches of the Statutory Warranties that were the subject of the Claim and Vero has otherwise, for purposes material to these questions, fulfilled its obligations under the said Deed. The central issue 10 Although there were a number of issues litigated it seems fair to describe the central issue in the following terms: The insurer having provided Insurance under the HBA, what were the limits, if any, to the rights of subrogation of such insurer? In particular: a) was that insurer in the present case [as the defendant contended] subrogated only to the rights of the builder (who had effected the insurance and paid premiums) whose liabilities had been discharged, so that the insurer could only sue in the name of the builder; b) was the correct analysis [as the defendant again contended] that the insurer was also not subrogated to the rights of the beneficiaries, for example the plaintiff, with whom it was said to have enjoyed no previous contractual relationship. 11 Hence the enquiry requires: i. to deal with the background circumstances in which rights of subrogation arise in an insurer; ii. to deal with the need to identify who was the relevant "insured" in the present circumstances; iii. to consider each of these matters against the background of the statutory scheme set up by the HBA, but also requiring some analysis of relevant provisions of the Insurance Contracts Act 1984 (NSW). Dealing with the matter 12 It is convenient to look firstly at the nature, extent and purpose of section 96 insurance under the HBA. As the plaintiff has contended: i. The insurance requirements provided for by sec 96 of the HBA have been the subject of a number of changes since the scheme was brought into effect in 1997. The relevant version of sec 96 is then the version of that was current at the time the certificates were issued, viz 15 June 1997. At that time, sec 96 of the HBA provided as follows: Sec 96 Insurance by developers and others 96(1) A person who does residential building work otherwise than under a contract, or a developer who does residential building work, must not do the residential building work unless a contract of insurance that complies with this Act is in force in relation to the work. 96(2) A person who does residential building work otherwise than under a contract, or a developer who does residential building work, must not enter into a contract for the sale of land on which the residential building work has been done, or is to be done, unless a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, is attached to the contract. ii. The privatised insurance regime provided for in Part 6 was brought in at the same time as the statutory warranty scheme in Part 2C. Further, as may be seen in the terms of the then, sec 99(b) and sec 101 of the HBA, the privatised insurance scheme mirrored the warranty regime imposed by Part 2C. iii. In very simplistic terms, whereas sec 18B provided for the builder to give statutory warranties to the home owner, sec 92 provided insurance to provide indemnity to the home owners in the event of breach of those warranties. Parallel provisions are found in sec 18C, by which others, including a 'developer who does the work' provides statutory warranties to the home owner, and in sec 96 by which the home owner is to be indemnified of the risk of the developer failing to satisfy those warranties. See Jones & Anor v Building Insurers' Guarantee Corporation [2005] NSWCA 7 at [10] per Giles JA (with Ipp JA and Brownie AJA agreeing). iv. The structure of Parts 2 and 6 of the HBA, when read with Part 5 of the Home Building Regulation 1997 as was, demonstrates an intention that those that 'control' the risk associated with the statutory warranties, viz the builder on the one hand and the 'developer' who engages the builder (and owning 4 or more dwellings is presumed to have a sufficiently sound financial stake to protect its own interests) provide warranties to those who are not necessarily in the same position, including those that purchase the property down the track. Part 6 provides that the consumer is not to be prejudiced, in the event of breach of those statutory warranties, by the insolvency, unavailability, or unwillingness of either or both the builder and developer to satisfy their statutory warranties. Other provisions of the HBA Section 92 13 Section 92 of the HBA relevantly provided: (1) A person must not contract to do any residential building work unless a contract of insurance that complies with this Act is in force in relation to the proposed work Maximum penalty: 100 penalty units. (2) A person must not contract to do any residential building work unless a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, is attached to the contract. Maximum penalty: 100 penalty units. (3) - (4) - (5) - Section 99 14 Section 99 of the HBA provided: A contract of insurance in relation to residential building work required by section 92 must insure: (a) a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency or death of the contractor or because of the fact that, after due search and inquiry, the contractor cannot be found, and (b) a person on whose behalf the work is being done and the person's successors in title against the risk of loss arising from a breach of a statutory warranty in respect of the work. Section 101 15 Section 101 of the HBA provided: A contract of insurance in relation to owner-builder work or residential building work required by section 95 or 96 must insure a purchaser of the land on which the work is done and the purchaser's successors in title against the risk of loss arising from a breach of a statutory warranty. Section 102 16 Section 102 of the HBA set out the general requirements for all contracts of insurance required pursuant to Part 6 of the HBA: (1) - (2) The insurance must be of a kind approved by the Minister and be provided by an insurer approved by the Minister. (3) The contract of insurance must provide for cover of not less than $200,000, or such other amount as may be prescribed by the regulations, in relation to each dwelling to which the insurance relates. (4) Any limitations on liability under the contract of insurance must comply with any requirements of the regulations. (5) The contract of insurance must comply with any other requirements of the regulations. (6) A contract of insurance may provide that the insurer is not liable for such amount (not exceeding $500) of each claim as is specified in the contract. Section 103B 17 Section 103B of the HBA provided: (1) A contract of insurance must provide insurance cover for loss arising from non-completion of the work for a period of not less than 12 months after the failure to commence, or cessation of, the work the subject of the cover. (2) A contract of insurance must provide insurance cover for other loss insured in accordance with this Act for a period of not less than 7 years after the completion of the work or the supply of the kit home, or the end of the contract relating to the work or supply, whichever is the later. (3) - (4) - Section 103C 18 Section 103C of the HBA provided: (1) The Governor may make regulations for or with respect to requirements for insurance required to be entered into under this Part. (2) Without limiting subsection (1), regulations may be made for or with respect to the following: (a) limitations on liability, (b) beneficiaries who must be insured, (c) losses indemnified, (d) the period within which a claim must be made, (e) subrogation, (f) when an insurance claim is taken to have been refused, (g) the manner of determining the maximum amount of insurance cover, (h) when work is complete, (i) the making of appeals against decisions of insurers, including the time within which appeals may be made. Material clauses of the 1990 Regulation Clause 34 19 Clause 34 of the 1990 Regulation provided: (1) An insurance contract must provide that the beneficiaries under the contract are: (a) a person: (i) on whose behalf residential building work covered by the contract is done or is to be done, or (ii) - (iii) who is a purchaser of land on which owner-builder work, or work required by section 95 or 96 of the Act to be insured, and covered by the contract, is done, or (b) a successor in title to any person referred to in paragraph (a) (i), (ii) or (iii). (2) The following persons are not required to be beneficiaries under an insurance contract: (a) a developer who does residential building work, (b) - (c) - (d) - (3) Nothing in this clause prevents a person referred to in subclause (2) from being a beneficiary under an insurance contract. (4) For the purposes of this clause, the owner or owners of common property the subject of work referred to in section 95 or 96 of the Act are taken to be purchasers of the land on which the common property is situated. Clause 35 20 Clause 35 of the Regulation provided, inter alia: (1) An insurance contract must indemnify beneficiaries under the insurance contract for the following losses or damage in respect of residential building work covered by the insurance contract: (a) loss or damage resulting from non-completion of the work because of the insolvency or death of the contractor or because, after due search and inquiry, the contractor cannot be found, (2) - (3) Without limiting subclause (1) or (2), an insurance contract must indemnify a beneficiary for the following loss or damage, being loss or damage in respect of which a beneficiary cannot recover compensation from the contractor or supplier concerned, or have the contractor or supplier rectify, because of the insolvency, death or disappearance of the contractor or supplier: (a) - (b) - (c) - (d) - (4) The insurance contract must state that the risks indemnified include the acts and omissions of all persons contracted by the contractor, supplier, owner-builder or other person to perform the work resulting in loss or damage of a kind referred to in this clause. 21 It is of course quite clear that the insurer having provided the insurance under the HBA, is subrogated to the rights of the builder [who had effected the insurance and paid the premiums] and whose liabilities it has discharged. Hence for example, if it had been that the builder was not itself responsible for the breach of statutory warranties, but that one of its subcontractors had the relevant responsibility for such breach, the insurer, having paid out the liability of the builder to the owners corporation, would be entitled to a right of subrogation to the rights of the builder as its insured. 22 The real question is whether in the above described particular circumstances of the HBA legislative scheme [and taking into account the terms of the Insurance Contracts Act and the terms of the instant insurance cover], the so-called "third-party beneficiaries" [one of whom is of course the Owners Corporation], were also appropriately characterised [or are to be deemed] as "the insured/s": in which case the insurer would also have a right of subrogation to their relevant rights once they had been paid out. 23 The defendant's proposition is that the third-party beneficiaries never became a party to the contract of insurance, so that the insurer having provided insurance cover under the HBA, could never be subrogated to the rights of entities with whom it had enjoyed no previous contractual relationship. 24 Insofar as the policy included clause 19 reading inter alia, "If we pay a claim, we are subrogated to your rights against any other party in relation to the claim", the defendant: i. repeats that the plaintiff is not a party to any contract of insurance; ii. contends that the policy offers no route by which the insurer can take over the plaintiff's claim; iii. contends that in any event, the policy does not provide for additional rights beyond the conventional application of the subrogation doctrine but merely confirms a truism: namely that, to the extent that the doctrine of subrogation applies, it does so apply; iv. contends that if the subrogation clause was not in the policy, the doctrine would still apply and that the policy does not create a right of subrogation independently. 25 In my view the insurer was subrogated to the rights of the Owners Corporation in the circumstances described above. The scheme set up by the HBA clearly required the relevant contract of insurance to insure the person on whose behalf the work was being done, and the person's successors in title, against the risk of loss arising from a breach of the statutory warranties in respect of the work [section 99; cf section 92]: cf the Second Reading Speech introducing the Building Services Corporation Legislation Amendment Bill in which the intent was said to be that the beneficiary of the requisite insurance cover would be 'the client' of home builders, described as "the consumer". 26 The terms of section 48(1) and (2) of the Insurance Contracts Act 1984 provided: (1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person had a right to recover the amount of his loss from the insurer in accordance with the contract notwithstanding that he is not a party to the contract. (2) Subject to the contract, a person who has such a right, (a) has in relation to his claim, the same obligation to the insurer as he would have if he were the insured; (b) may discharge the insurance obligations in relation to the loss. 27 Further the insurer had the same defences to an action under section 48 as he would have in an action by the insured. 28 Notably the very terms of clause 19 of the instant policy provided that the insurer would be subrogated to the rights [relevantly of the beneficiaries] against any other party in relation to the claim. 29 This combination of circumstances requires to be assessed in the light of the general law concerning how rights of subrogation may arise. Clearly the right of subrogation may arise either from the express or implied agreements of the parties or by operation of law in a number of different situations [cf Lord Hoffman in Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] 2 WLR 475; cited in Woodside Petroleum Development Pty Ltd and Ors v H & R – E & W Pty Ltd and Ors (1999) 20 WAR 380 per Ipp J (as he then was)]. 30 The rights to subrogation in contracts of insurance may arise in many and varied circumstances. As Lord Hoffman observed in Banque, 'the subject is bedevilled by problems of terminology and classification which are calculated to cause confusion'. Arguably differing analyses of the circumstances in which rights to subrogation may arise were given in two decisions of the Full Court of the Supreme Court of Western Australia: i. that in Woodside Petroleum, where the reasons given by Ipp J (as he then was) were accepted by Malcolm CJ and Pidgeon J; ii. that more recently given, in Insurance Commission of Western Australia v Kightly (2005) 225 ALR 380 where the decision was given by Steytler P with whose reasons Wheeler and Roberts-Smith JJA agreed. 31 In my view it may be accepted that the doctrine of subrogation whether or not exclusively founded upon equitable principles, certainly finds a heartland in those principles. In an insurance context the doctrine prevents the insured from making a double recovery, once from the insurer and once from the tortfeasor [in a tort case] in circumstances in which the insurer has undertaken to indemnify the insured against actual financial loss. As Steytler P made clear in Insurance Commission, it does that by giving two rights to the insurer: i. the right to require the insured to pursue any remedy available against the tortfeasor for the benefit of the insurer; ii the right to recover from the insured any benefit received by the insured in termination or extinction of the loss against which the insured has been indemnified. 32 Like assistance is available from a decision of the Appellate Division of the Ontario Supreme Court, recently the subject of an observation, again in the Supreme Court of Western Australia. In Zurich Australian Insurance Ltd v Metals and Minerals Insurance Pty Ltd, Supreme Court of Western Australia [2007] WASC 62, Johnson J said at [402]: [402] In reaching its decision, the Appellate Division of the Ontario Supreme Court considered the doctrine of subrogation and its application in the circumstances before them. Hodgins JA (with whom Middleton JA and Grant JA agreed) quoted from the decision in National Fire Insurance Co v McLaren (1886) 12 OR 682, where Boyd C provided the following view on subrogation (at 687): The doctrine of subrogation is a creature of equity not founded on contract, but arising out of the relations of the parties. In cases of insurance where a third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principle of securing full indemnity to the insured, on the one hand, and on the other of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss. 33 The problem for the Court in the present case simply arises because, as is common ground, at the point in time when the insurance contract came into existence, in the very nature of things there could not have been a contract of insurance to which the insurer and the Owners Corporation were parties. 34 However and as the plaintiff has contended, the design and purpose of the Insurance provisions of the HBA was to require and create a legal relationship between the insurer issuing the section 96 policy and the Owners Corporation and the ultimate lot owners and their successors in title. To my mind this "intent and purpose" is enshrined in both the Act and the Regulations [see sections 18C and 18D, the definition of beneficiary in regulation clause 39(1) and the provisions of regulation clause 42 under the heading of "beneficiaries". 35 It seems plain that Vero's common law rights of subrogation, are underlined and enshrined in clauses 19 and 30 of the Policy, referred to above. 36 Additionally, and again as the plaintiff has submitted, the effect of the Deed, and in particular clauses 5.1(a), 5.1(c) and 8.2, not only reaffirms the common law right of subrogation, and the rights accorded to Vero under clauses 19 and 30 of the Policy, but in so far as it is necessary for Vero to advance its rights in the matter, these clauses authorise Vero to maintain and proceed with the action in the name of the Owners Corporation [or for that matter of fact in its own name]. Dealing seriatim with certain of the defendant's submissions 37 The defendant's answer to separate question 1.1 was that the question should be answered in the negative. The defendant's contention was that this was because the plaintiff had recovered from the insurer for the costs of rectification of the defective work of the builder. The proposition was that for that reason, the insurer did not stand in the shoes of the plaintiff which had been fully compensated, any accessorial right through the medium of the HBA against the developer having been extinguished. 38 This analysis is rejected. On the correct analysis the insurer, on payment to the Owners Corporation, became subrogated to all of its rights, including the statutory right under sections 3A and 18C of the HBA against the defendant in relation to the claim [cf Ellerbeck Collieries Ltd v Cornhill Insurance Co Ltd [1932] 1 KB 401 at 411]. Dealing with the proposition that the insurer is out of court for the reason that the defendant was itself an insured entity 39 The defendant has also submitted that if the Court was to find that the plaintiff was the insured, the corollary would have to be that the defendant is a co-insured. This is said to follow from sections 92 and 99; the latter section requiring that the contract of insurance must insure inter alia 'the person on whose behalf the work is being done' [here the defendant developer] as well as 'a person on whose behalf the work is being done and the person's successors in title against the risk of loss arising from a breach of a statutory warranty in respect of the work'. 40 The proposition then put is that it is clear that an insurer cannot sue its own insured: Simpson & Co v Thomson (1877) 3 App Cas 279. The proposition is that an insurer cannot be subrogated to the rights of one insured against a co-insured: cf Petrofina (UK) Ltd v Magnaload Limited [1984] QB 127. Hence the defendant's proposition that either way, the insurer has no right of subrogation of any rights of the plaintiff as against the defendant. 41 The short answer to this contention is the provision in the Policy [clause 7] that "the insurer has no liability to 'you'" [in this context a reference to the defendant] if you are a person who carried out the work". This is a circumstance in which it cannot be said that the insurer could appropriately be regarded as bringing proceedings against its own insured: the defendant is not relevantly to be regarded as an insured to whose claims the policy could respond. 42 The breadth necessarily ascribed to the operation of the doctrine of subrogation may be seen from the following statements of principle to be found in E R Hardy Ivamy in General Principles of Insurance Law, 6th Ed, Chapter 46 – Subrogation: i. Paragraph 1, p 493, under the heading 'The types of policies to which subrogation applies': "In the case of all policies of insurance which are contracts of indemnity the insurers, on payment of the loss, by virtue of the doctrine of 'subrogation' are entitled to be placed in the position of the assured, and succeed to all his rights and remedies against third parties in respect of the subject-matter of insurance. …" ii. Paragraph 3, p 494-495, under the heading 'The principles of indemnity': "… The insurers are, therefore, entitled as between the assured and themselves, 'to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by [them] in the name of the assured , by the exercise or acquiring of which right or condition the loss against which the assured is insured can be or has been diminished: Castellain v Preston (1883) 11 QBD 380 per Brett LJ at 388. …" [Emphasis added.] iii. Paragraph 2, p 500-501, under the heading 'Rights arising out of contract': "… The doctrine of subrogation is not, however, confined to contracts imposing the obligation of making good the loss. It extends to any contract relating to the subject-matter of insurance: Castellain v Preston (1883) 11 QBD 380 per Cotton LJ at 395, which entitles the assured to be put by the other contracting party into as good a position as if the loss insured against had not happened: Castellain v Preston (1883) 11 QBD 380 per Brett LJ at 390, 392. …" iv. Paragraph 3, p 501, under the heading 'Rights under statute': "If the assured would be able to recover, under the terms of statute , the whole or part of his loss, the insurers are subrogated to his right: Ellerbeck Collieries Ltd v Cornhill Insurance Co Ltd [1932] 1 KB 401, CA (employers' liability insurance) per Scrutton LJ at 411. In fire insurance, this particularly arises in the case of destruction of or damage to property as a result of riot: Riot (Damages) Act 1886, s 2(2)." [Emphasis added.] 43 From the standing perspective, the insurer's standing not only rests on an implied term giving rise to subrogation. It rests also on the express term in clause 19 of the Policy, the provisions of the Deed, and of course but not least, the transference of the rights of the Owners Corporation which it has under section 18D of the HBA as read with section 3A (the defendant is a Developer who does the work, under that section). Answers to the separate questions 44 The answers to the separate questions are: 1.1 Yes; 1.2 This right of subrogation does arise for the reasons given in the judgment; 1.3 Does not arise. Short minutes 45 The parties are to bring in short minutes of order on which occasion costs may be argued. 10/12/2007 - CorrigendumTo substitute in place of the first sentence of paragraph 41 the following:The short answer to this contention is the provision in the Policy [clause 6] that "the insurer has no liability to 'you'" [in this context a reference to the defendant] if you are also named as the developer in your application form ". - Paragraph(s) 41 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.