In AIG Insurance Australia Ltd v McMurray [2023] WASCA 148, the Court of Appeal of the Supreme Court of Western Australia considered whether long standing principles of contractual construction had been correctly applied to give meaning to the word ‘structure’ in an insurance policy. The seemingly innocuous term was worth millions.
Background
In August 2014, Frederick and Jennifer McMurray bought 179 Wellington Street, Mosman Park in Western Australia (Property) for $8.95M.
Before moving in, the McMurrays carried out renovations on the Property.
The McMurrays told their insurance broker that they wanted Property fully insured during renovations.
Subsequently, an AIG home insurance policy was obtained for the Property (Policy).
Between mid-2015 and early 2016, the McMurrays spent more than $1M renovating the Property.
On 16 January 2016, a fire broke out at the Property. The fire was said to have been started by the ignition of oil rags that had been left in the Property.
The Property had to be demolished.
The McMurrays lodged a claim with AIG under the Policy.
The Policy
AIG denied the McMurrays’ claim.
AIG considered that (among other things) the following provisions of an exclusion clause (Exclusion Clause) in the Policy defeated the McMurrays’ claim for indemnity:
Contract Works Exclusion
Notwithstanding any terms or conditions to the contrary no cover shall be provided under the Your Policy for:
- Damage:
– in connection with the Contract Work, Temporary Work, Free Issue Materials or Works…
For the purposes of this exclusion the following definitions apply:
Damage means any loss, fine, penalty, cost, charge, liability, physical loss or Property Damage including any Earth Movement
Contract Work means any and all structures constructed or in the course of construction wheresoever located or whilst in transit and which are incorporated or are to be incorporated into a permanent structure at the Location
All other terms utilised in this exclusion shall be defined in accordance with the applicable definition of such terms as found in Your Policy.
The McMurrays sued AIG in the Supreme Court of Western Australia.
At first instance
The McMurrays’ claim was heard by Smith J.
AIG argued that the Exclusion Clause applied because the:
- fire damage to the Property was caused by the ignition of oily rags;
- oily rags were used to stain timber panels and doors;
- timber panels and doors were ‘structures’ as referred to in the definition of “Contract Work”; and
- damage, therefore, occurred “in connection with Contract Work”.
The McMurrays argued that the Exclusion Clause did not apply because the timber panels and doors were not ‘structures’.
Smith J looked to the Policy for guidance as to what ‘structure’ meant in the context of the Exclusion Clause. In doing so, Her Honour found that ‘structure’ meant more than mere components of a structure.
Ultimately, Her Honour found that ‘structure’ meant:
“…a building or a substantial built form that has a particular purpose, which can contain either built form of contents or is designed to contain contents once constructed, such as furniture in a granny flat, and not merely items installed or constructed in the course of, alteration, renovation or refurbishment work to the house” (emphasis added)
Alternatively, Her Honour concluded that if the Exclusion Clause remained ambiguous, the contra proferentum rule applied meaning that the argument about the meaning of ‘structure’ should be resolved in favour of the McMurrays.
AIG appealed the decision.
On appeal
AIG’s extensive grounds of appeal contended, among other things, that the primary judge’s interpretation of ‘structures’ was too narrow and that the contra proferentum rule had been inappropriately applied.
AIG contended that the term ‘structure’ meant ‘building materials’ because building materials create structures. AIG further argued that its interpretation of ‘structure’ was so obviously correct that there was no confusion that warranted the application of the contra proferentum rule.
Legal principles
Interpreting an ambiguous word in contracts requires that the word be given its ordinary and natural meaning.
The Court of Appeal noted that dictionary definitions of ‘structure’ included:
- “mode of building, construction or organisation; arrangement of parts, elements or constituents”
- “something built or constructed; a building, bridge, dam, framework, etc”
- “Any framework or fabric of assembled material parts; a (typically large) man-made construction”
On that basis, the Court of Appeal concluded that:
“The primary judge’s construction is… entirely consistent with the ordinary and natural usage of the word ‘structure’ and the sense of the word on an ordinary and natural reading of the…[Exclusion Clause]”
The Court of Appeal also dismissed AIG complaint about the primary judge’s application of the contra proferentum rule.
The Court of Appeal acknowledged that ‘structure’ was open to ambiguity and said that the primary judge had, correctly, “only relied on the contra proferentem principle as a secondary and alternative approach” to interpreting the word based on its ordinary and natural meaning.
Takeaways
Sometimes, the operation of a significant clause in an insurance policy can turn on a seemingly innocuous word.
If your insurance claim has been declined, consider obtaining legal advice about your insurer’s interpretation of the policy. It would be worth millions!
Feel free to contact the Insurance and Dispute Resolution team at Chamberlains Law Firm.
If you have any questions or concerns please contact Stirling Owen of our Insurance & Dispute Resolution Team on 02 9264 9111