By: Andrew Moore and Marcus Saw

Absolute Tiling Solutions Pty Ltd v Certain Underwriters at Lloyds

At a glance

• The decision of the Supreme Court of New South Wales in Absolute Tiling Solutions Pty Ltd v Certain Underwriters at Lloyds [2024] NSWSC 364 is a useful example of how a court grapples with the design vs installation dichotomy (the former usually covered, the latter usually excluded) frequently encountered on building and construction-related claims under D&C PI policies.
• The decision also deals with prior known circumstances and issues of non-disclosure that are commonplace for such claims, highlighting some of the matters that will be persuasive in determining indemnity disputes by reference to such provisions.

Design vs installation

The case concerned Harbourfront Balmain, a mixed-use residential development in Balmain, New South Wales, for which Absolute Tiling was the floor and wall tiling design and construct subcontractor. The case concerned a single category of defect relating to delamination of tiles.

Harbourfront Balmain was to be clad in sandstone tiles. The original design was for those tiles to be mechanically fixed. To save on cost, a decision was made to glue fix the tiles instead. It was uncontroversial that Absolute Tiling was contractually liable for the consequences of that design change.

Shortly after they were installed, the sandstone tiles began to detach. A claim was made on the defendant underwriters’ D&C PI policy.

The Court was required to form a view on whether the detachment of the tiles arose from “Insured Activities”. In so doing, it needed to identify the “proximate” (or direct) and not the “remote cause of loss or damage”. It also noted that the proximate cause rule was “not divorced…from the terms of the particular policy under consideration” and that it “would not apply if it would defeat the manifest intention of the parties”.

The “Insured Activities” covered under the policy included the usual design, drafting, project management, etc services for PI policies of that kind. Similarly, there was a carve-out from the “Insured Services” for “performance or supervision…of…installation”.

The experts in the proceeding met in conclave and prepared a joint report. They formed the view that the causes of the tile detachment were as follows:

1. the majority of the tiles had detached due to adhesion / cohesion failure of the waterproofing between the tiles and the walls
2. some instances of deficiencies in the method of applying the tile adhesive (although those instances made only a minimal contribution to the detachment of the tiles)
3. the failure to mechanically fix the sandstone tiles to the walls (which would have eliminated the risk of the tiles detaching due to the cohesive failure of either the waterproofing membrane or the tile adhesive), and
4. the tile adhesive system being unsuited to the walls due to deviations in the substrate.

Based upon the above matters, the experts concluded that the design of the sandstone tiling system (and the failure to adopt a system of mechanically fixing the sandstone tiles to the substrate) was a design flaw. They opined that rectification would need to involve the installation of a mechanically fixed stone cladding system.

Having accepted that evidence, the Court found that the claims against Absolute Tiling did not “result from” the “performance…of…installation” of the tiling system. The Court acknowledged that there were some deficiencies in the application of the tile adhesive, but that such deficiencies did not contribute to the detachment of the tiles to any material extent. Or, to put it another way, the deficiencies in the application of the adhesive were not the “proximate cause” of the failure of the tiles.

Previously known claim or circumstance

The cover to Absolute Tiling was provided under three consecutive years of account for the 2018/19 (first inception) and subsequent 2019/20 and 2020/21 policy years. The policies were subject to a ‘previously known claim or circumstance’ exclusion (Prior Circumstances Exclusion) (in relation to “facts, matters or circumstances” within the insured’s knowledge or constructive knowledge) with a continuous coverage write-back in conventional form.

Underwriters submitted that Absolute Tiling had relevant knowledge prior to the inception of policy in 2018/19.

The Court was required to apply the test in FAI General Insurance Co Ltd v McSweeney (1999) 10 ANZ Insurance Cases 61-443 regarding the expression “may give rise to a claim”. In so doing, it was to have regard as to whether the bringing of a claim against the insured was more than just the mere existence of a legal liability, but that a claim was a “definite risk”, a “real possibility” or “on the cards”.

The Court considered various communications and evidence relating to the knowledge of Absolute Tiling’s managing director. It concluded that, at the relevant time (i.e. before policy inception), Absolute Tiling had only limited knowledge regarding the detachment of the tiles. Tile detachments were modest in number and confined geographically. No issue had been raised regarding Absolute Tiling’s design or installation of the system. Further, advice obtained by Absolute Tiling appeared to resolve questions around the technique that Absolute Tiling had used to fix the tiles. The Court was also not satisfied on the evidence that a reasonable person in Absolute Tiling’s position would have seen a claim as being “on the cards”.

It was also argued that by not disclosing circumstances relating to the tile detachment, Absolute Tiling had not complied with its duty of disclosure pursuant to s21 of the Insurance Contracts Act 1984 (Cth) (ICA) and that, by virtue of that failure, underwriters were entitled to reduce their liability to nil pursuant to s28 of that Act.

Absolute Tiling argued (unsuccessfully) that the Prior Circumstances Exclusion showed an intent by the parties to exclude the operation of s21 of the ICA. (A similar argument had been run unsuccessfully in CIMIC Group Limited v AIG Group Limited [2022] NSWSC 999).

Underwriters’ s21 arguments were largely moot, however, as underwriters’ evidence was to the effect that had they been notified of circumstances during the 2019/20 policy, they would have accepted it as a notification under the 2019/20 year of account. As such, underwriters’ position would, for all intents and purposes, have been the same irrespective of whether notification was given in the 2019/20 policy period or not.

Non-disclosure

In an alternative defence under s21 of the ICA, the underwriters argued that if it had been disclosed to them prior to policy inception that Absolute Tiling intended to perform installation of tiles (or cladding) to external areas of buildings (and not just ‘fit out’ works, as noted in the proposal and the accompanying documents), they would not have agreed to provide cover.

The Court considered in detail the background to granting cover and the questions asked of the insured by underwriters in the proposals and other communications.

It was not put that Absolute Tiling was personally aware that disclosure of an intention to perform external tiling or cladding works would have caused underwriters to decline to provide cover. As such, the Court considered what a reasonable person in the position of the insured would have been aware of (i.e. an objective analysis).

The Court found that a person in Absolute Tiling’s position would not have been aware that an intention to perform external tiling and/or cladding works would affect the insurer’s decision as to whether or not to provide cover. In doing so (and following Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited [2017] NSWCA 71), the Court placed weight on the fact that the proposal forms that Absolute Tiling (and related companies) were asked to complete did not ask any questions about whether or not external cladding works were, or were to be, undertaken, nor were such questions asked in subsequent correspondence.

Key takeaways

As claims personnel and underwriters will appreciate, design vs installation issues frequently arise in the context of PI D&C policies, particularly where subcontractors’ design responsibilities are typically extensive and defects may have arisen from factors of differing causal potency. It goes without saying that close consideration of policy wording, the inferred intention of the parties to the insurance contract, and the underlying facts will often all weigh into the analysis.

Questions of prior known circumstances and the constructive awareness of an insured are fertile areas for factual contest and, the authors respectfully submit, often difficult to predict. It is worth remembering that knowledge of a defect per se may not necessarily be sufficient to engage a prior known circumstances exclusion – there must be an appreciation or constructive appreciation on the part of an insured that a claim was a “definite risk”, a “real possibility” or “on the cards”.

Finally, when considering whether to write cover or not, underwriters might be well-served by adopting a prescriptive or explicit approach in asking questions of an insured regarding its business and business intentions, even where such questions might seem obvious at the time they are asked.