Insuring Risk
In Construction Projects
Lecture by:
Laina Chan, Barrister
Nine Wentworth Chambers, Sydney
For: University of Melbourne

Financiers
Developers
Head Contractor
Design Consultant Sub-Contractors
Economic viability
Cash flow can be impacted upon by
delays
Claims against the contractor
Insolvency of major parties
Design risk which can be laid off to design sub-consultants
Unforseen site conditions
Construction risk in terms of defects supervision
Responsibility for the work of subcontractors
Specified, defect and warranty obligations
Delay, penalties and liquidated damages claims
Monitor and ensure compliance with insurance requirementsNegligence and defective design
Job delivered late
Job delivered with defects
Increased costs
Risk Diagram

Types of Insurance
– Contractors’ All Risk policies;
– Industrial Special Risk policies which take over
insurance of the project once the works are complete;
– Professional Indemnity;
– Public liability insurance;
– Workers’ Compensation;
– Compulsory third party
motor vehicle; and
– Marine cargo or transit.

Trident General Insurance Co Ltd v
McNiece Bros Pty Ltd (1988) 165 CLR 107
Applicable in the context of public liability
insurance and property insurance.
Common law exception to the rules of privity
of contract and consideration;

Insurance Contracts Act 1984
48(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 has a right to recover the amount of
the person’s loss from the insurer in accordance with the
contract notwithstanding that the person is not a party to
the contract.
16(1) A contract of general insurance is not void by reason only that the insured did not
have, at the time when the contract was entered into, an interest in a subject-matter of the
contract.
17(1) Where the insured under a contract of general
insurance has suffered a pecuniary or economic loss
by reason that property the subject-matter of the
contract has been damaged or destroyed, the insurer
is not relieved of liability under the contract by reason
only that, at the time of the loss, the insured did not
have an interest at law or in equity in the property.

Contract Works Policies
No cover for defective workmanship and design
But what does this mean?

Graham Evans & Co (Qld) Pty Limited v
Vanguard Insurance Company Limited
(1987) 4 ANZ Insurance Cases 60-772
“…all risks of physical loss of or damage to property of every kind and
description (including the whole of the Contract Plant, Equipment, Materials
and Supplies up to but not exceeding the respective sums insured in the
Schedule owned by the Insured or for which the Insured may be responsible
or, prior to any occurrence for which may be made hereunder, assumed
responsibility, used or to be used
in part of or incidental to the
Insured’s Contracting Operations
detailed in the Schedule.”

Chalmers Leask Underwriting Agencies v
May Nicholas Limited (1983) 155 CLR 279
“…loss or damage directly caused by
defective workmanship, material or
design or wear and tear or mechanical
breakdown or normal upkeep or normal
making good but so that this exclusion
shall be limited to the part immediately
affected and shall not apply to any other
part or parts lost or damage in
consequence thereof…”
Vehicles passing over a coffer dam damaged the coffer dam (which was alleged
to be defective). Flood waters breaching the coffer dam and caused damage to
the construction works including leaving behind deposits of silt and debris.
Q: Is the cost of rectifying the damage to the construction works
(but not the cost of repair of the coffer dam) insured under the policy?

Walkers Civil Engineering v Sun Alliance & London
Insurance PLC & Ors (1999) 10 ANZ Ins Cases 61-
418
• Similar exclusion clause to clause construed in Chalmers Leask
• The insuring clause provided:
“This section, subject to the limitations, exclusions, terms and
conditions hereinafter mentioned, is to insure in respect of occurrences
happening during the period stated in the Schedule against all risks of
physical loss of or damage to property of every kind and description
(including the whole of the contract plant, equipment, materials and
supplies up to but not exceeding the respective sums Insured in the
Schedule) owned by the insured or for which the Insured may be
responsible or, prior to any occurrence for which claim may be made
hereunder, have assumed responsibility, use or to be used in part of or
incidental to the “Insured’s Contracting Operations” detailed in the
Schedule wherever the said property may be located in Australia or
whilst in transit within and between any place or places therein.”

Exclusion 2(c) provided:
Walkers Civil Engineering v Sun Alliance & London
Insurance PLC & Ors (1999) 10 ANZ Ins Cases 61-
418
“This insurance does not cover loss or damage directly caused by
defective workmanship, construction or design or wear and tear or
mechanical breakdown or normal upkeep or normal making good
but this exclusion shall be limited to the part which is defective and
shall not apply to any other part or parts lost or damaged in
consequence thereof.”

• Three sewerage treatment plants
• Cement poured onto fibreglass sewerage tanks to counter hydrostatic
ground pressure
• Fibreglass tanks defective
• Rectification works included the removal of the concrete
Q: Is the insured entitled to indemnity for the cost of the removal
of the concrete?
Walkers Civil Engineering v Sun Alliance & London
Insurance PLC & Ors (1999) 10 ANZ Ins Cases 61-
418

Cementation Piling & Foundations Limited v
Aegon Insurance Co Limited and Commercial Union
Insurance Co PLC [1995] 1 Lloyd’s Rep 97
(1) Rectification of the gaps and/or voids in the walls;
(2) Removal of the sand fill from the dock bed; and
(3) Grouting and filling behind the walls of the voids from which the
sand fill had escaped.
The losses suffered by Cementation fell into three distinct areas:

“… (2) the cost of replacing or rectifying defects in design, materials or
workmanship unless the property insured suffers actual loss,
destruction or damage as a result of such defects.
Cementation Piling & Foundations Limited v
Aegon Insurance Co Limited and Commercial Union
Insurance Co PLC [1995] 1 Lloyd’s Rep 97
The policy excludes:
However, initial costs of introducing
improvements, betterments or
corrections in the rectification of the
design, material or workmanship
causing such loss or damage shall
always be excluded.”

In deciding whether the costs of rectifying the gaps and voids in the wall
(category 1) were covered by the policy, the court looked at the exclusion
clauses in the policy:
Cementation Piling & Foundations Limited v
Aegon Insurance Co Limited and Commercial Union
Insurance Co PLC [1995] 1 Lloyd’s Rep 97
“It is common ground that an exception clause
cannot extend the cover from which the exception is
made. It is also, however, common ground that the
terms of an exception clause may provide material
from which the Court can discern that the first
possible meaning of the indemnity clause is to be
preferred to another or second possible meaning.”

Cross Liability Clauses
• What do they mean?
• What is the defence of circuity?

Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors;
Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547
The policy had three sections:
Section C set out various
terms and conditions.
Section B covered legal liability under the
terms of any contract maintenance or defects
liability clauses for loss and/or damage in
identified circumstances
Section A provided insurance for loss or
damage to property owned by the insured or
for which the insured may have been
responsible.

Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors;
Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547
W&D Elliot
Earthmoving Pty
Ltd (Elliot)
DN Pearce &
Maintenance Pty
Ltd (Pearce)
Connell Wagner Coffey
Transfield
(Head Contractor)
Transfield Bouygues JV
Transfield Holdings
Pty Ltd
JV to construct a
section of railway
Subcontracted
with

(a) Pay on behalf of the Insured all sums which the
Insured shall become legally obligated to pay as
compensation for:
…
(2) loss of and/or damage to and/or destruction of property and/or the Loss of Use
thereof; in respect of and/or arising out of Occurrences happening anywhere in the
Geographical Limits during the Period of Insurance in connection with the
Construction Operation and/or Other Business Operations and/or Products
Liability/Completed Operations and/or Property Insured detailed in the Schedule.”
The Insuring Clause provided relevantly:
“The Insurers hereby agree, subject to the
limitations, terms and conditions hereafter mentioned,
that they will:
Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors;
Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547

“Exclusions applicable to Section C
This section shall not apply to liability:
…
for damage to property owned by the insured”
Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors;
Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547

The cross liability clause provided:
• “Each of the persons comprising the Insured shall for the purposes of this
policy be considered a separate and distinct unit and the words “the
Insured” shall be considered as applying to each of such persons in the
same manner as if a separate policy had been issued to each of them in his
name alone and the Insurers waive all rights of subrogation or action which
they may have or acquire against any of such persons. Provided that
nothing in this clause shall be deemed to increase the limit of the Insurers’
liability under this policy in respect of any one occurrence.
Transfield Pty Limited v National Vulcan Engineering Ins Group Ltd & Ors;
Connell Wagner Pty Ltd National Vulcan Engineering Ins Group Ltd & Ors
(2003) 12 ANZ Insurance Cases 61-547

Waiver of Subrogation
How wide is too ?
Does a waiver of subrogation clause only
apply to claims covered by the policy?

GPS Power Pty Ltd v Gardiner Willis Associates Pty Ltd
[2000] QSC 075
• The insurers agreed that “in the event of the insurers indemnifying or
making a payment to any insured(s), the insurers shall not exercise any
rights of subrogation against any other insured(s) hereunder.”
• The insurers also agreed “to waive any rights and remedies or relief to
which they may become entitled by subrogation against … [a]ny insured
named or described by this policy.”

Larson-Juhl Australia LLC v Jaywest International
Pty Ltd (2000) 11 ANZ Ins Cases 61-472 and 61-500
The New South Wales Court of appeal affirmed the decision of Master
MacReady who construed the following clause literally and held that there was
nothing in the clause to confine the generality of the phrase “shall waive any
rights and remedies or relief” :
1. Any co-insured (including its directors, officers and employees);
2. Any corporation or entity (including its directors, officers and
employees) owned or controlled by any insured or against any
co-owner of the property insured.”
“14.8.1 The insurer shall waive any rights and remedies or relief to which it is
or may become entitled by subrogation against:

Thiess Contractors Pty Ltd v Norcon Pty Ltd
(2001) 11 ANZ Ins cases 61-509
Should a plaintiff who had suffered loss as a result of a
defendant’s negligence,
but is the beneficiary of an insurance policy covering that
loss,
have the sum that it has received from the insurer taken into
account to reduce the damages recoverable from the
defendant?

“5. Further or alternatively, if the second third party [the respondent] breached clause
8.04 of the Norcon Subcontract as alleged or at all, which is not admitted, then:-
(a) at all material times the first third party [the appellant] had taken out its own public
liability policy of insurance (‘the Policy’), the further particulars of which the
second third party is not presently aware;
(b) the first third party has made a claim, or is entitled to make a claim, pursuant to
the Policy with respect to any liability that it has in these proceedings;
(c) further or alternatively to subparagraph (b) above, the first third party has been
granted indemnity pursuant to, or is entitled to be granted indemnity pursuant to,
the Policy;
(d) by reason of the matters pleaded above, there is no loss or liability in respect of
which the first third party is entitled to claim indemnity pursuant to any other
policy of insurance;
(e) the insurer or insurers on the Policy are not entitled to exercise a right of
subrogation so as to claim pursuant to another policy of insurance on behalf of
the first third party;
(f) the first third party has suffered no loss by reason of any breach by the second
third party of clause 8.04 of the Norcon Subcontract.”
In its defence, Norcon denied that it was a joint tortfeasor with Thiess Contractors.
It also pleaded the following paragraph:
Thiess Contractors Pty Ltd v Norcon Pty Ltd
(2001) 11 ANZ Ins cases 61-509