Murphy, McCarthy & Associates Pty Limited v Zurich Australian Insurance Limited

Murphy, McCarthy & Associate Pty Ltd (MMA) moves, under s 5(1) of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the Act), for leave to proceed against Zurich Australian Insurance Ltd (Zurich) under s 4.

MMA is a specialist civil engineer and project manager. Zurich is an insurer.

Sections 4, 5(1) and 5(4) of the Act provide:

Zurich stands in the place of CFC Fibre Cement Pty Ltd (CFC), against which, MMA has a claim for damages in connection with waterproofing and coating the internal walls of a well at Balmain by CFC in 2015. MMA had been retained by Sydney Water to install the well and MMA sub-contracted the coating work to CFC.

MMA, on the instructions of Sydney Water, required CFC to use an epoxy coating product called Ultra High Build Epoxy Coating (epoxy coating). MMA, in turn, imposed this requirement on CFC and the contract price took it into account.

On 1 September 2015, an inspection revealed significant defects with the coating. It had apparently been applied in 7 layers and large areas had delaminated.

There is material to indicate that this was due to amine bloom on the surfaces of coats 3 and 5.

On 10 September 2015, MMA gave notice to CFC of the defects. CFC did not remedy the works.

MMA then engaged Eptec Services Pty Ltd (Eptec) to carry out the remedial works, at a cost, according to MMA, of $941,953.30.

MMA asserts that it has a claim for damages against CFC in contract, tort and under the Australian Consumer Law. [1]

On 14 September 2017, CFC went into liquidation.

MMA seeks leave to bring proceedings against Zurich for recovery of its damages.

During the period 1 May 2015 to 1 May 2016, CFC held a ‘Business Insurance Policy’ (the Policy) with Zurich. The Policy provides, relevantly, for cover in the following terms:

The Policy contains the following relevant exclusions:

The applicable legal principles are not in issue.

The requirement for leave under s 5(4) of the Act is one imposed to insulate insurers from exposure to untenable claims. The discretion to give leave to bring such a claim is to be exercised with this in mind.

MMA must have an arguable case against CFC, there must be an arguable case that the Policy responds to it and there must be a real possibility that if judgment is obtained CFC would not be able to meet it; Opes Prime Stockbroking Ltd (in liq) (Scheme Administrators Appointed) v Stevens [2014] NSWSC 659; Oswald v Bailey (1987) 11 NSWLR 715; Tzaidas v Child (2004) 61 NSWLR 18; Bede Polding College v Limit (No 3) Ltd [2008] NSWSC 887. A residual discretion to refuse leave remains even if these requirements are met; DSHE Holdings Ltd (receivers and managers appointed) (in liq) v Abboud [2017] NSWSC 579.

It is not in issue that MMA has an arguable case against CFC or that if judgment is obtained, CFC would not be able to meet it.

The only question is whether it is arguable that the Policy would respond to the claimed liability of CFC to MMA. It is not suggested that if it is arguable, leave should be refused.

Does the Policy, on its proper construction, arguably respond to the claim? If it does, that is on a construction which can seriously be put and is not untenable, this requirement, in respect of which MMA bears the burden, will be satisfied; Nettle v Mathieson Group Pty Limited & Anor [2007] NSWCA 98; Macquarie Underwriting Pty Ltd v Permanent Custodians Ltd (2007) 240 ALR 519.

Zurich accepted that at least part of MMA’s claim is arguably in respect of a sum for which CFC would be legally liable to pay for compensation in respect of property damage, as defined in the Policy.

Zurich argues only that the Policy would not respond because MMA’s claim falls under one or more of the exclusions.

I am satisfied that MMA has an arguable case that its claim is not excluded by any of them.

As to the Product Efficacy exclusion, it is arguable that the exclusion does not apply because the damage to the well was not the result of the failure by the epoxy coating to cure, alleviate, monitor, detect or retard, within the meaning of the Policy, but by CFC’s defective workmanship in the application of the epoxy coating; Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336.

As to Exclusion 4, it is arguable that the liability or obligation of CFC to MMA is not one which is assumed by it under their agreement (within the meaning of the Policy). Arguably, the exclusion covers liability assumed by explicit and voluntary act. Here, the liability is imposed by law as a consequence of the breach of the agreement; Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328. Also, MMA’s claims are not only contractual.

As to Exclusion 5, it is arguable that it does not apply because the damage here is not damage to a product. The well itself is unlikely to be construed as a product and the cause of the damage was arguably attributable not to the epoxy coating product, but its faulty application; Aspen Insurance UK Ltd v Adana Construction Ltd [2015] EWCA Civ 176.

As to Exclusion 8, it is arguable that the amount claimed, being that paid to Eptec, is not the cost of performing, correcting or improving work undertaken by CFC. That work had already been done and was of no value. This was new work in its place; Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd & Ors (1986) 4 ANZ Ins Cas 60-689.

As to Exclusion 11, this is not a claim for loss of use and it is not a claim resulting from delay. Additionally, it is arguably not a loss resulting from lack of performance (as opposed to defective performance). It is also arguably not a loss resulting from failure of the product to meet performance criteria; Siegwerk Australia Pty Ltd (in liq) v Nuplex Industries (Aust) Pty Ltd (2013) 305 ALR 412. This has been discussed above in relation to the Product Efficacy Exclusion.

As to Exclusion 13, this is not a claim under any product warranty or guarantee given by CFC to MMA.

I am satisfied that leave should be given.

I make an order in terms of prayer 1 of the summons that leave be granted to the plaintiff pursuant to s 5 of the Act to proceed against the defendant under s 4 of the Act.