Aquamore Finance Pty Ltd v Australis Consulting Pty Ltd t/a Castles Valuers

1. [1]

   Before the Court is an application by the plaintiff to join as defendants to these proceedings Certain Underwriters at Lloyd’s (the Underwriters). The plaintiff is a provider of finance. I will refer to it as Aquamore Finance, for ease of understanding the relationships between the various entities concerned in the proceedings.

The first and second defendants’ valuation of land

1. [2]

   In February 2021 BBARC Pty Ltd became the registered proprietor of real property at 1131-1133 Pacific Highway, Cowan, located approximately 42 km north of the Sydney CBD. The property is on three titles and has a total area of 2428 m². The only improvement on the land in 2021 was a disused service station building. The property had been used for the storage and sale of fuel. Its soil was contaminated with hydrocarbons.

2. [3]

   In October 2021 BBARC Pty Ltd engaged a broker to arrange finance, to be secured over the property. At that time the first defendant carried on a land valuation business. I will refer to the first defendant by its the trading name, Castle Valuers. The finance broker commissioned Castle Valuers to prepare a valuation “for the purpose of First Mortgage Lending” by “a lender that is to be approved”. The quoted words are taken from cl 1.5 of Castle Valuers’ valuation report that was subsequently issued on 16 November 2021.

3. [4]

   The principal of Castle Valuers is the second defendant, Mr Slim Hawatt. Mr Hawatt inspected the property on 14 October 2021. He caused Castle Valuers’ report of 16 November 2021 to be issued, valuing the property at the date of his inspection at $4.2 million. At about the same time the broker, on behalf of BBARC Pty Ltd, applied to Aquamore Finance for a loan of 65% of that value, being $2.73 million.

4. [5]

   On 18 November 2021 Aquamore Finance requested Mr Hawatt to assign the valuation to itself. Mr Hawatt caused there to be issued a fresh report, dated 18 November 2021, in the same terms as the report of 16 November 2021 except that cl 1.1 identified Aquamore Finance as the instructing entity and at cl 1.5 the following appeared:

The plaintiff’s claim against the defendants for negligent valuation

1. [6]

   Aquamore Finance alleges in its statement of claim that in reliance upon the report of 18 November 2021 (hereafter referred to as the valuation) it entered into an agreement with BBARC Pty Ltd pursuant to which on 26 November 2021 it advanced 60% of the assessed value, namely $2.52 million. The advance was made on security of the property. BBARC Pty Ltd defaulted on 9 February 2023 and 3 March 2023, resulting in Aquamore Finance appointing receivers and managers to the property. It was sold on 26 June 2023 for $1.5 million. Aquamore Finance was unable to recover the balance of its loan from any other source and hence suffered loss and damage.

2. [7]

   It is Aquamore Finance’s case against the present defendants, Castle Valuers and Mr Hawatt, that the valuation was prepared negligently and that the market value of the property at 14 October 2021, assuming the continuance of existing use rights and that no soil remediation was required, was no more than $1.6 million. It is alleged that Aquamore Finance’s loss on the transaction, which it calculates in the order of $1.7 million, was caused by the negligence of the defendants.

The defendants’/valuers’ professional indemnity insurance

1. [8]

   On 22 August 2022 Woodina Underwriting Agency Pty Ltd issued to Castle Valuers a policy of professional indemnity insurance with a retroactive date of 15 September 2021. The Underwriters authorised the issue of the policy, thereby binding themselves to insure in accordance with the policy terms, endorsement and schedule. It is a claims made policy for the period 15 September 2022 to 15 September 2023. Pursuant to the insuring clause in Section 2, the Insured, Castle Valuers, is indemnified against “civil liability for compensation to any third party arising from any claim as a result of the conduct of the Insured’s Professional Services” that is first made against the Insured during the period of insurance and notified to the Underwriters during the period of insurance, concerning professional conduct “committed” after the Retroactive Date.

2. [9]

   The Schedule to the policy specifies the Retroactive Date as 15 September 2021. Aquamore Finance’s claim against Castle Valuers arises from professional coduct subsequent to that date and the claim was first made during the period of insurance, by letter of demand sent on 5 September 2023. Castle Valuers notified Woodina Underwriting Agency Pty Ltd of that claim on 12 September 2023, still within the period of insurance. Prima facie, the insuring clause responds to Aquamore Finance’s damages claim against Castle Valuers and Mr Hawatt, subject to the effect of exclusions contained in the policy wording and endorsement.

Statutory prerequisites for joinder of the Underwriters

1. [10]

   The provisions under which Aquamore Finance now applies for joinder of the Underwriters are ss 4 and 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW), as follows:

2. [11]

   The Underwriters oppose the application to join them. The first and second defendants have taken no part in the application. It is agreed between the active parties that three things would have to be established for the order to be made, namely:

3. [12]

   Those prerequisites are drawn from decisions of the Court of Appeal made under the predecessor legislation, being s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). The parties’ common position accords with the requirements of the previous law, as set out in Guild Insurance Ltd v Hepburn [2014] NSWCA 400 at [3] (Macfarlan JA) and [44] (Meagher JA). It has been held that those requirements are equally applicable under s 5 of the Civil Liability (Third Party Claims Against Insurers) Act: Avant Insurance Ltd v Burnie [2021] NSWCA 272 at [8] (McCallum JA and Simpson AJA); Clark v Avant Insurance Ltd; Stevens v Avant Insurance Ltd [2022] NSWCA 175 at [27].

4. [13]

   It is common ground that the requirements i and iii are satisfied. As to the latter, there is evidence that an order for Castle Valuers to be wound up in insolvency was made on 22 August 2025. The applicant for the winding up order was the Commissioner of Taxation. The extent of Castle Valuers’ deficiency is not in evidence. There is no real property registered in the company’s name in Australia. It has ceased to instruct solicitors to defend it against Aquamore Finance’s claim in the present proceedings. Mr Hawatt is also not registered as the proprietor of any real property and he is no longer legally represented in these proceedings. In separate proceedings, on 4 April 2025 Aquamore Finance entered judgment by consent against Castle Valuers and Mr Hawatt for $400,000, which remains unsatisfied.

5. [14]

   As to requirement ii, in circumstances where the insuring clause prima facie responds, the Underwriters contend that certain exclusions are engaged. I accept the submission of Aquamore Finance that at a final hearing the Underwriters would carry the onus of proving all facts necessary to attract the operation of any exclusion and that it follows that, on this application, the Underwriters bear the burden of satisfying me that one or more of the exclusions is an unarguable answer to a claim on the policy. The incidence of that burden is confirmed by s 5(4) of the Civil Liability (Third Party Claims Against Insurers) Act.

6. [15]

   At the hearing of the joinder application the Underwriters relied upon two exclusions, the first of which excludes cover for “development valuations” prepared on an “as if complete” basis. The exclusion is in Section 7.2 of the policy wording. It is repeated, but in more stringent terms, in the endorsement. Aquamore Finance concedes that its application for joinder of the Underwriters must fail if they can demonstrate that the stricter wording is unarguably applicable. The second exclusion is contained in Section 7.6 of the policy wording. It requires that in any valuation issued to a defined category of finance institutions, for lending purposes, the insured must include a clause stipulating that the valuation has been prepared on an assumption concerning adherence to nominated standards of prudence in lending.

Section 7.2: the “development valuation” exclusion

1. [16]

   Section 7.2 is as follows:

2. [17]

   It is at least reasonably arguable for Aquamore Finance that the definition of “development valuation” in the last two paragraphs of Section 7.2 is not met by Castle Valuers’ valuation report of 18 November 2021. It was not a valuation of “vacant land” within par (a) of the definition because the land had a disused service station building erected on it. For the purposes of par (b), the valuation was not undertaken in circumstances “where the improvements are to be demolished and then the land redeveloped”. There is no evidence that the proprietor had a settled plan to that effect. Hence, it is at least arguable that Aquamore Finance did not seek and obtain the valuation for any such purpose and that Castle Valuers did not proceed on any such basis. As noted at [5] above, the valuation expressly recorded that it was undertaken “for the purpose of First Mortgage Lending”, with no reference anywhere in the document to demolition, redevelopment, construction or any project whatsoever.

3. [18]

   In Section 6.2 of the valuation the method of arriving at a value is explained. It involved consideration of the cost of a purely hypothetical remediation of the contaminated soil ($320,000) and the purely hypothetical subdivision into four lots ($280,000). Castle Valuers estimated the value of the four hypothetical subdivided lots, of 607 m² each, by direct comparison with reportedly comparable sales in the area. The method proceeded by deducting the total hypothetical costs ($600,000) from the sum of the values of the four hypothetical lots ($4.8 million) to arrive at an as is valuation of $4.2 million. That method is certainly open to criticism but it does not purport to reflect an actual development project proposed by the proprietor/borrower, or intended by either the valuer or Aquamore Finance to be the purpose for which funding was to be provided.

4. [19]

   It is not necessary to construe the exclusion for the purpose of determining how the last paragraph of Section 7.2 is intended to qualify or operate in conjunction with the preceding paragraph in which pars (a) and (b) are contained. Whatever may be the role of that last paragraph, it is at least arguable that the valuation in question here does not fall within it. There is no evidence that the proprietor, the valuer or the financier had any settled purpose of undertaking “construction”, or “development”, or a “project”. There is no evidence that any of the parties intended that finance should be advanced for any such purpose or that the valuation would be given with a view to finance being provided for a purpose of that nature.

Endorsement: Development exclusion

1. [20]

   The Development exclusion contained in the endorsement to the policy is as follows:

2. [21]

   The two-part definition of “development valuation” in the second paragraph of this exclusion and the second last paragraph by which “for the sake of clarity” the definition is further explained are in terms identical to corresponding paragraphs in Section 7.2. For the reasons already given in relation to Section 7.2, it is at least reasonably arguable that the valuation in question in the present proceedings was not a “development valuation” and hence that the exclusion contained in the endorsement is not engaged.

Section 7.6: the requirement of a prudential lending clause

1. [22]

   Section 7.6 of the policy wording is in the following terms

2. [23]

   Aquamore Finance is not an authorised deposit taking institution. I accept as reasonably arguable the argument that the valuation with which the present proceedings are concerned would fulfil the requirement of incorporating “a similar clause” to the one set out in Section 7.6 if it could be shown that any two or more clauses or paragraphs of the valuation conveyed the substantial effect of the model clause. Adapted to the circumstances of this case, the elements of the model clause may be broken down to the following. Castle Valuers is not indemnified unless the valuation in question contained statements that it was prepared on these assumptions:

3. [24]

   Assumption A is clearly stated in the valuation, in clause 1.5 quoted at [5] above. The assumption is repeated in clauses 1.9 and 8.

4. [25]

   Aquamore Finance submits that Assumption B is satisfied by clauses 5.3 and 5.4. In clause 5.3 Castle Valuers set out in a table three risks that it perceived as bearing upon the valuation in the short term, namely, interest-rate variations, a low rate of Covid-19 vaccination and domestic Covid-19 lockdowns and restrictions. Immediately below the table the following text is inserted:

5. [26]

   The statement “it is expected” is substantially equivalent to saying that the valuation has been prepared on the assumption of what follows. However, I do not consider it reasonably arguable that an expectation of the lender being “notionally subject to finance industry standards with regards to general risk mitigation and prudent lender practices” is equivalent to, or even substantially to the same effect as, Assumption B. The paragraph extracted from cl 5.3 says nothing about Aquamore Finance having its own lending guidelines and complying with them or having considered “prudent aspects of credit risks” relating to the borrower “including the borrower’s ability to service and repay”. The paragraph from cl 5.3 is solely concerned with “finance industry standards” rather than any internal guidelines of Aquamore Finance or specific consideration of the credit risk of the particular borrower. Further, the reference in cl 5.3 to Aquamore Finance being “notionally” subject to finance industry standards is not adequate to convey an assumption that the lender will actually comply with “prudent finance industry lending practices”.

6. [27]

   Clause 5.4 of the valuation is headed “RBA monthly economic statement”. It contains Castle Valuers’ understanding of the condition of the Australian economy in general terms, the significance of the Reserve Bank’s decision at its meeting of 2 November 2021 and the outlook for the economy and interest rates. This clause does not avail Aquamore Finance. It does not satisfy any part of the assumptions that the valuation was required to state, by force of Section 7.6, in order to avert exclusion.

7. [28]

   As to Assumption C, Aquamore Finance relies upon Section 1.7 of the valuation, headed “Valuers PI policy extract”. Under that heading, Section 1.7 contains nothing more than an extract from endorsements to Castle Valuers’ policy relating to “Non Bank Lenders (Tier A)” and “Non Bank Lenders (Tier B)”. It is clear enough from the latter endorsement that Aquamore Finance is a Tier B non-bank lender for the purposes of the policy. The endorsement, as quoted in Section 1.7 of the valuation is as follows:

8. [29]

   The quotation of that endorsement in the valuation is not accompanied by any explanation of its significance. In my view the mere quotation of the endorsement does not convey to Aquamore Finance anything to the effect that the valuation is provided on the assumption that the loan to be advanced will be at a “conservative and prudent” LVR, or even that the loan will be at an LVR of no more than 70%. Assumption C, specified in the model clause, is not conveyed by Section 1.7 or anything else in the valuation.

Conclusion

1. [30]

   The Underwriters have satisfied the Court that the exclusion in Section 7.6 is engaged and that they are not obliged to indemnify the defendants in respect of Aquamore Finance’s claim. Accordingly, the following orders of the court will be entered: