Executive summary

• The Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (Third Party Claims Act) may assist a plaintiff to continue a claim for damages arising from defects in construction work against the insurer of a defendant company that has been placed into administration.
• The Owners Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3)¹ (Interlocutory Proceedings) concerned an interlocutory application by which the Owners successfully sought leave to join an insurer to the main proceedings (described below) pursuant to the Third Party Claims Act.

Background

The Owners initially commenced proceedings against Fairview, alleging that cladding products provided by Fairview and installed on the Owners’ apartment building were not of merchantable or acceptable quality² and seeking damages (Main Proceedings). During the Main Proceedings, Fairview was placed into administration. A Deed of Company Arrangement was executed, part of which had the effect of extinguishing all claims against Fairview except those covered by a policy of insurance (insurance carve-out).³

When a company is placed into administration, other parties are not allowed to commence or continue litigation against that company unless the Court grants leave.⁴ The Owners were granted leave to continue the Main Proceedings against Fairview (in administration). The Court’s decision to grant leave was based (at least partly) on the existence of the insurance carve-out and, when granting that leave, the Court noted that if Fairview’s insurer (AAI) declined coverage, the Owners may seek leave to join AAI to the Main Proceedings, pursuant to the Third Party Claims Act.⁵

Under the relevant insurance policy, AAI agreed to provide coverage to Fairview for any ‘property damage’ (as that term was defined in the policy) that was caused by Fairview during performance of construction work on the Owners’ building. When approached by the Owners, AAI declined coverage on the basis that the provision of unsuitable cladding products did not amount to ‘property damage’ for the purposes of the policy.

The Owners commenced the Interlocutory Proceedings, seeking leave to join AAI to the Main Proceedings pursuant to section 5 of the Third Party Claims Act. The Owners were successful in the Interlocutory Proceedings, meaning that the Owners could continue recovery action which would otherwise have likely been at an end.

‘Property damage’

When installed on the building, the unsuitable cladding panels supplied by Fairview created an unacceptable fire risk. The main point in the Interlocutory Proceedings was whether any ‘property damage’ had been caused by reason of Fairview’s supply of the cladding. The Owners argued (successfully) that the affixation of the unsuitable cladding caused physical loss or damage to tangible property.⁶ The Owners argued that ‘property damage’ had been caused in four ways:

1. The affixation of the defective panels caused damage to the buildings because the panels created a fire risk and therefore made the buildings unsuitable, or less suitable, for their intended use, being habitation.⁷
2. The process of affixing the defective panels to the buildings, using thousands of screws, caused damage to the structure of the buildings. That is because it was necessary to affix devices known as ‘top hats’ to the concrete and steel stud walls of the building by screws or masonry anchors. That physical interference with the structure of the buildings amounted to damage.⁸
3. The process of removing the panels will inevitably result in damage to the top hat subframes which were affixed to the buildings for the purpose of attaching the panels and were suitable for that purpose at the time of affixation. That constitutes damage to tangible property – the property in this respect being the top hat subframes.⁹
4. There was damage to the buildings or the top hat subframes because of the risk, which existed from the point in time when the panels were affixed to the buildings via the subframes, that the structural integrity of the buildings or the subframes would be damaged when the panels came to be removed.¹⁰

During remedial work (to replace the unsuitable cladding with a suitable and compliant product), the existing top hat and subframe design could not be utilised, and a new bespoke system had to be designed to affix the replacement panels.¹¹

Third Party Claims Act, Section 5

As summarised by the Court at paragraphs [37] and [38] of the judgment in the Interlocutory Proceedings:

“The general effect of s 5 of the Third Party Claims Act is that the relevant court has a discretion to grant or refuse leave to bring or continue proceedings against an insurer in the court, but must refuse leave if the insurer can establish that it is entitled to disclaim liability under the policy.

To enliven the discretion, a claimant must generally establish: first, that there is an arguable case against the insured; second, that there is an arguable case that the relevant insurance policy responds to the arguable case against the insured; and third, that there is a real possibility that the insured would not be able to meet any judgment against it…”

In relation to coverage under the relevant policy for ‘property damage’, the Court found, amongst other things, that the assertion made by the Owners (that is, that ‘property damage’ had been caused by reason of the installation of the unsuitable cladding) was at least arguable.¹² The Court also found that it was “…not satisfied…that AAI has established that it is entitled to disclaim liability under its policies…“.¹³ On that basis, leave was granted to the Owners to join the insurer to the Main Proceedings.¹⁴ The insurer appealed unsuccessfully against the granting of leave.

Key takeaways

Had the provisions of the Third Party Claims Act not been available, the Owners’ claim for damages would likely have come to an end when Fairview was placed into administration. By reason of the Act (read together with the specific wording of the relevant insurance policy), the Owners were granted leave to join the insurer as a defendant in the Main Proceedings, meaning that the Owners could at least continue their claim through to settlement or final judgment and maintain the prospect of recovering damages.¹⁵

A party claiming damages against a company that is placed into administration may wish to consider whether the Third Party Claims Act could be utilised to pursue the claim against an insurer.

This article was written by Matthew Graham, Partner, Jacques Lourens, Special Counsel, and Thomas Williams, Solicitor.

¹ [2023] FCA 814.
²At [1]; ultimately, it was conceded by the relevant parties that the cladding products were not suitable for use on a residential building of the type the subject of the Proceedings. Note: paragraph references in these footnotes are references to the judgment in the Interlocutoy Proceedings.
³ At [15].
⁴ See section 440D of the Corporations Act 2001.
⁵ At [16].
⁶ At [70].
⁷At [72].
⁸At [72].
⁹ At [73] to [74].
¹⁰ At [74].
¹¹ At [113].
¹² At [178]. Note that it is open to the insurer, in a separate proceeding, to have the issue of coverage determined.
¹³ At [179].
¹⁴ At [182].