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

Background

The Applicants, Acciona Infrastructure Australia Pty Ltd and Ferrovial Construction (Australia) Pty Ltd (together, Contractors), were insureds under a "Construction Risks – Material Damage Project Insurance Policy" (Policy) issued in June 2014 by the Respondent insurers, Zurich Australian Insurance Limited, Allianz Australia Insurance Limited and XL Insurance Company Se (together, Insurers) to NSW Roads and Maritime Services (RMS).

Shortly after policy inception, the Contractors entered into a design and construct project deed with RMS for works (Project 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, extending to the south and north of the Nambucca River. A link to the official Project map can be found here.

Rainfall and damage to works

On 4 and 5 June 2016, heavy rainfall and flooding occurred on certain areas of the east coast of NSW. The rainfall and flooding caused damage to certain parts of the Project Works.

There were four weather stations stationed at various locations on and around the project – two automatic weather stations north and south of the river, and two BOM stations in Nambucca east of the Project and north of the river.

Only one of the four weather stations – the automatic station south of the river – recorded a rainfall event “with a minimum return period of 20 years” on 4 and 5 June 2016 (this is relevant to the Policy exclusion issue, discussed further below).

The Policy

The Contractors are identified as added insureds in the Policy, which was purchased from the Insurers by RMS in respect of the Project Works. The Contractors sought indemnity for:

• the expense of mitigation action to protect the works from damage caused by flooding / rainfall;
• damage to those works requiring repairs arising out of three distinct occasions of unusually heavy rainfall during the construction period; and
• the costs of the preparation of the claims, and losses consequential upon the Insurers’ failure to indemnify them.

Insuring clause 1.1 of the policy read as follows:

“1.1 Insured Property

The Insurers will indemnify the Insured in accordance with the Basis of Settlement, against Damage to the Insured Property other than from a cause specifically excluded, occurring at the Project Site or in transit within the Territorial Limits during the Construction Period.”

Relevantly Project Site was defined in the policy to mean “[T]he situation(s) stated in the Schedule against this item and any other situation where the Insured is performing the works or has property stored or being processed together with all surrounding areas in connection with the Project. Project Site shall extend to include overseas situations stated in the Schedule or subsequently endorsed onto this Policy.”

It was common ground that the relevant “situation”, being the part of the Project Site where the road construction work was being performed, was a lengthy and narrow strip of land including within it the roadworks and certain associated land on either side of the roadway.

Exclusion 3.12, on which the Insurers relied, read:

“This Policy does not provide indemnity in respect of:

...

3.12 Earthwork Materials and Pavement Materials

It is agreed and understood that otherwise subject to the terms, exclusions, provisions and conditions contained in the Policy or endorsed thereon, the Insurers will not indemnify the Insured for loss or damage due to rain on earthwork materials and or pavement materials, except where such loss or damage is due to an event with a minimum return period of 20 years for the location insured on the basis of the 24 hour statistics prepared by the Bureau of Meteorology for the nearest station to the location insured, or such other independently operated weather station situation near or adjacent to the location insured.”

The Court held that the purpose of this exclusion was to exclude cover for damage to particular materials by general rainfall, but to preserve cover by way of an exception when the damage was caused by an uncommonly heavy rainfall event.

The dispute

The Contractors initially commenced proceedings in the Federal Court against the Insurers in relation to damage to the Project Works. The question of whether exclusion 3.12 was enlivened was referred to the Full Court to be heard as a separate question.

At the core of the dispute between the parties was the meaning of the term "location insured" within exclusion 3.12, and, as a result, which weather station was the “nearest station to the location insured”. Damage had occurred to the Project Works both to the north and south of the river, but recordings differed between the four weather stations.

The only one of the four weather stations which recorded a rainfall event “with a minimum return period of 20 years”, as used in the wording of the exclusion, was the automatic station south of the River. That automatic station was the station which was geographically closest to the “situation”, being the carriageway Project Works, but it was not the closest station to the damage that had occurred north of the river.

• The Insurers contended that the "location insured" was limited to the location of the damage to earthwork materials and pavement materials which are the subject of the claim.
• The Contractors contended that "location insured" should mean the situation that comprises a "Project Site" defined by the Policy and within which the loss or damage due to rain on earthwork materials or pavement materials occurred. The Contractors submitted that the general scheme of the Policy was to treat the entire Project as one "situation".

The Insurers said that, on their construction, the exclusion would apply to the damage north of the river, because the weather station closest to the location of that damage did not record the requisite "20 year" readings. On the Contractors’ construction, the weather station closest to the Project Site – i.e. the situation – did record the requisite "20 year" readings, so the exception within the exclusion would apply.

The Court’s decision

The Court found that it would be in accordance with both a logical construction of the wording of the exclusion and the business efficacy of the Policy as a whole, to regard the "location insured" as the location insured in respect of the particular claim for loss or damage, not the Project Site as a whole. The former, more narrow location is relevant to the insurance cover provided under the policy, since it would be the occurrence of the damage there that would operate to trigger the insurance cover. Accordingly, the narrower construction of "location insured" would also be the appropriate construction for the relevant exclusions to cover in the Policy.

In rejecting the Contractors’ argument, the Court held that treating the "Project Site" as one "situation" was intended to be for more general purposes only, but not where the issues related to particular, more limited locations as the point of the context. It was held that the use of the term "location insured" in the exclusion had the effect of making it clear that the location to which the issue of proximity was to be applied was one that was within the insurance cover, rather than a location where the insureds’ works that were harmed might be outside the cover.

The Court found that it was not appropriate to substitute the words "situation" or "Project Site" in for the words "insured location" in the exclusion. This is because, on doing either of those things, the exclusion would require one to determine – illogically – whether damage was caused by a 20-year rainfall event by reference to the rainfall at a distant weather station, rather than the weather station closest to the claimed damage.

The Contractors argued that the wording of exclusion 3.12 was grammatically incongruous with the chapeau to section 3, and that in the premises greater latitude should be afforded to the exclusion. The Court accepted that the incongruity was there, but that the chapeau and exclusion could be sensibly merged together without the need to alter the rest of the exclusion and the words relating to the insured location.

Orders

The Court ordered that the term "location insured" as it appeared in exclusion 3.12 means the location of the loss or damage caused by the event referred to in that exclusion which is covered under the Policy.

The Contractors were ordered to pay the Insurers’ costs of the separate question hearing.