Table of Contents
On 4 October 2024, the Supreme Court, Court of Appeal, handed down its decision in the case of Drummond v Gordian Runoff Limited ACN 052 179 647 [2024] NSWCA 239. This decision deals with issues regarding the failure to notify defective work under a policy of home warranty insurance.
The factual background
The homeowner in this case, Drummond, contracted with a builder named Kralane Properties Pty Ltd in 2009 for the construction of a new house in Northbridge.
The builder obtained home warranty insurance, as required under section 92 of the Home Building Act 1989 (“Act”). The policy wording appears to have been the standard wording at that time and, as required under the Act, the policy provided cover for defective work where compensation was unable to be recovered from the builder due to the insolvency of the builder.
The work was completed in early 2011. Defects were identified shortly after completion. The homeowner made an application in the NSW Civil and Administrative Tribunal, the builder agreed to rectify some of the defects prior to a hearing taking place in the Tribunal.
The homeowner subsequently, in September 2019, made a new claim against the builder in the Tribunal alleging the builder failed to complete the rectification work. The builder was placed into external administration in August 2020.
The main issue
The main issue for the homeowner is that notification of the defective work was not given to the home warranty insurer until July 2020, which is about 9 years after the work was completed.
This is an issue because the policy, and section 103BB of the Act provides that:
A claim must be made within the period of insurance, being 2 years for non-major defects and 6 years for major defects.
If defective work becomes apparent during the period of insurance, but a claim cannot be made because the builder has not been placed into administration, a claim may be made only if the loss was properly notified during the period of insurance.
For the homeowner, as the work was completed in 2011, notification in July 2020 was well and truly after the period of insurance had expired. This meant that, when the builder eventually went into administration in August 2020, the claim could not be made.
Section 54 of the Insurance Contracts Act 1984
In an attempt to get around the problem that notification had not taken place within the period of insurance, the homeowner relied upon section 54 of the Insurance Contracts Act 1984.
In summary, Section 54 provides that if an insured (such as the homeowner) does something after the policy was entered into which would entitle the insurer to refuse to pay, the insurer may not refuse to pay the claim, but may only reduce its liability based upon the extent to which the insurer’s interests were affected.
An extract of the wording from section 54 is as follows:
Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
The homeowner’s argument was that 1033BB of the Home Building Act 1989 was incorporated into the contract of insurance, or it altered the effect of the policy of insurance, such that section 54 of the Insurance Contracts Act 1984 applies and overrides the time restriction in section 1033BB.
The practical effect of the homeowner’s argument would be that the insurer would not be permitted to refuse the claim but instead would need to prove how and to what extent the homeowners delay in notifying the insurer of the defects allowed the insurer to reduce its liability to the homeowner.
Supreme Court decision
On 9 June 2023 Justice Rees handed down his decision finding that, as section 103BB of the Act operates outside of the insurance policy, it alters the policy to preclude the homeowners claim because notification had not taken place within the period of insurance.
Justice Rees reasoned that section 54 of the Insurance Contracts Act 1984 did not assist the homeowner because that section refers to the “effect of a contract of insurance” whereas the effect to the homeowner arose under the Home Building Act 1989, not the contract of insurance.
For a detailed look at the Supreme Court’s decision, read the full judgment here.
Court of Appeal decision
The Court of Appeal was divided on the issue however the majority agreed with the decision of Justice Rees, resulting in the homeowner failing to recover under the home warranty insurance.
The majority determined that section 54 of the Insurance Contracts Act 1984 is not incorporated into the policy and it does not alter the contract of insurance. Section 103BB of the Act was intended to operate as a supervening statutory scheme regulating the circumstances in which insurance cover under a home warranty insurance policy will respond to claims made without any intention to alter contractual rights under contracts of insurance.
Read the Court of Appeal’s decision.
Important notes for homeowners
As the factual background to this case demonstrates, there is almost always a degree of uncertainty in relation to claims involving defective work. The Home Building Act 1989 is complicated and sometimes it can be difficult to apply in practice. Even when a work order is made by the Tribunal, care needs to be applied to ensure the order is complied with. Homeowners always need to be conscious of the potential for the builder to become insolvent.
Homeowners should always be aware of when residential building work was completed and the dates the statutory warranties and periods of insurance expire. Homeowners should act promptly when defects are identified and ensure all contingencies are addressed, such as the contingency that the builder may enter into administration.
The cost of obtaining advice from a legal practitioner who specialises in construction law is usually quite low in comparison to the costs which may be incurred if a dispute arises due to steps not being addressed correctly or within the relevant time frames. As is often said, prevention is more effective than the cure.
If there are settlement negotiations, a legal practitioner who specialises in construction law can advise on strategies and provisions which reduce the risk that rectification work will not be completed.
This article was prepared to assist homeowners who do not understand the law, it touches on only a few of issues and some of risks which may occur. This article is by no means a substitute for legal advice.
Important Notice:
The information provided in this article is general information only and should not be relied upon as legal advice or be used as a substitute for obtaining legal advice. The examples provided have been simplified to explain a particular issue and there are other factors which need to be taken into consideration. The specific circumstances relating to you impact upon your legal rights and obligations and personal legal advice based upon your circumstances should be obtained. This area of law changes frequently and the law may have changed after the time this article was prepared, up-to-date legal advice should be obtained.