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Limelight 02/24

Court clarifies scope of ‘agent’ and ‘subcontractor’ in construction risks policy 

In the recent decision of Mie Force Pty Ltd v Allianz Australia Insurance Ltd [2024] NSWCA 23, the NSW Court of Appeal has clarified the scope of the terms ‘agent’ and ‘subcontractor’ in the definition of ‘Named Insured’ in a Construction Risks – General Liability Policy.

In overturning the first instance decision, the Court of Appeal found that the term ‘agent’ should be constructed in accordance with its strict legal meaning.

Background

Rohrig (NSW) Pty Ltd (Rohrig) was the principal contractor for a project at the General Gordon Hotel, Sydenham (Hotel). Rohrig subcontracted demolition works to Rhino Commercial Stripouts Pty Ltd (Rhino Stripouts) as part of the project. The insurer, Allianz, issued the policy to Rohrig.

Mie Force Pty Ltd (Mie Force) employed workers and provided labour to Rhino (which itself had no employees). Employees of Mie Force were undertaking the works when there was a fire at the Hotel, causing property damage to the Hotel and neighbouring properties.

Proceedings were commenced against Rohrig, Rino Stripouts and Mie Force. Allianz accepted liability to indemnify Rohrig and Rhino Stripouts but denied indemnity to Mie Force.

The availability of cover for Mie Force hinged on the construction of the definition of ‘Insured ’. The policy definition of ‘Insured ’ expressly included Rohrig and its subcontractors, as well as ‘employees and agents of such entities’.

First instance 

At first instance, Mie Force contended that it fell within the definition of insured on the basis that it was an ‘agent’ of Rhino Stripouts or, alternatively, because it was a ‘sub-contractor’ of Rohrig. The primary judge rejected both contentions.

Her Honour found that the term ‘subcontractor’ did not include ‘sub-sub contractors’, and therefore excluded Mie Force (as the sub-subcontractor of Rohrig). It was found that the better construction was that ‘Named Insured ’ was intended to include only those legal entities that had a direct legal relationship with the Rohrig.

Her Honour explained that the parties had diverged on whether ‘agent’ as used in the Policy meant ‘agent’ in its stricter legal meaning of a person who can legally bind a principal (as Allianz contended) or an agent as understood in a more colloquial meaning of ‘any form of intermediary, or of persons who simply perform functions for others’.

Her Honour ultimately did not decide on a meaning, as Mie Force was not factually found to be the agent of Rhino Stripouts in any sense of the word. However, if she was to decide, her Honour indicted that she preferred the term agent to be used in a colloquial sense i.e. ‘any form of intermediary, or of persons who simply perform functions for others’.

Appeal

Mie Force appealed the decision, seeking to uphold the primary judge’s expanded definition of ‘agent’ and argue that it was an ‘Insured ’ under the policy. It otherwise sought to challenge the court’s interpretation of the term ‘subcontractor’.

The Court of Appeal found that the term ‘agent ’ was used in its established sense as a legal term of art, that is, describing persons with authority to create binding legal relations between a principal and third parties.

In coming to this conclusion, the court stressed that while the term ‘agent ’ can convey a number of meanings, the meaning to be imported will depend on the context in which the word is used. As the policy was drafted in a careful way and likely by lawyers, it was reasonable to start with a presumption that the word ‘agent ’ would be taken by a reasonable businessperson to have been employed in its established legal sense.

The Court otherwise upheld the primary judge’s ruling that subcontractor did not include Rohrig’s sub-subcontractors. It found that the effect of the construction sought by Mie Force would render anyone providing services to Rohrig’s contractors a named insured under the Policy, which was not supported by the Policy.

Learnings

This decision re-enforces the court’s approach to policy interpretation, which has been the subject of a number of recent decisions.

In WSP Structures Pty Ltd v Liberty Mutual Insurance Company t/as Liberty Specialty Markets [2023] FCA 1157, the Federal Court of Australia assessed whether the term contractor or sub-contractor included consultants who did not carry out any physical construction work. Ultimately the court found that the term contractor did include consultants.

These decisions emphasis the fundamental aspects of policy interpretation, including:

  • the policy must be given a business like interpretation;
  • the interpretation must be objective;
  • interpretation requires attention to the specific language used by the parties;
  • interpretation requires an assessment of the commercial circumstances the document addresses and the objects it is to secure; and
  • where possible, the policy will be interpreted, on the basis that all aspects of it have a job to do and will work congruently together.

In both cases, the courts found that each policy should be interpreted based on its own wording. Assessment of prior decisions involving other policies or the operations of similar policies is of little weight to the courts assessment.

Insurers and underwriters should pay careful attention to the drafting of their individual policy and ensure that any ambiguity in the drafting and operation of that particular policy is expressly clarified to ensure that the commercial intent of the parties is reflected in the policy wording.

This publication constitutes a summary of the information of the subject matter covered. This information is not intended to be nor should it be relied upon as legal or any other type of professional advice. For further information in relation to this subject matter please contact the author.