Facts

Australian Securities Limited (ASL) was a mortgagee who took possession of land on which 3 townhouses were being constructed and proceeded to complete, and rectify defects in, the work of the insured builder before selling them. ASL obtained judgment against the builder in the County Court for the cost to complete and rectify the work. When the builder became insolvent, ASL sought to recoup its losses for the remedial works under the builder’s Domestic Building Insurance (DBI) policies.

Clause 8 of the Ministerial Order identifies that a policy of domestic building insurance must cover the current building owner. Clause 11 of the Ministerial Order extends that cover to:

1. Each person who becomes entitled to the benefit of any of the warranties referred to in clause 8(2)(b) of the Order, which refers to the warranties implied into the building contract by s8 of the Domestic Building Contracts Act 1995 (Vic); and
2. To the owner for the time being of the building or land.

ASL argued it was entitled to claim under the policies on the basis that:

1. It was a person to whom the cover extended under clause 11(b) of the Ministerial Order as it became an owner for the time being when it assumed possession of the site as mortgagee in possession;
2. It was a person to whom the cover extended under clause 11(a) of the Ministerial Order as it was entitled to the benefit of the warranties referred to in clause 8(2)(b) of the Order by virtue of a tripartite deed it had executed with the developer and builder prior to the commencement of the work, pursuant to which the builder had agreed to give ASL the same warranties, guarantees and indemnities it had given to the developer under the building contract;
3. The builder represented it would effect domestic building insurance in the name of ASL and, to the extent ASL was not named on the policies, ss20 and 48 of the Insurance Contracts Act 1984 (Cth) did not relieve the VMIA from liability.

Findings

VCAT did not accept that ASL, as mortgagee in possession, was ever a building owner for the purposes of the policy. It was noteworthy that the developer had not novated the building contract to ASL in this matter.

VCAT also rejected the argument that the tripartite deed operated to extend the warranties to ASL. The Senior Member drew a distinction between the warranties given under the deed, which were found to comprise only the express warranties given by the builder to the developer under clause 10.1 of the contract, and the warranties implied into the contract by statute which are contemplated by clause 11(a) of the Ministerial Order. The Senior Member did not agree that a builder was able to convey the benefit of the implied warranties to third parties, including those outside the building contract.  The implied warranties, whilst prima facie almost identical to the express warranties, were found not to be the same as those extended under the deed.

Finally, there was no evidence the builder effected insurance in the name of ASL with Victorian Managed Insurance Authority. The Senior Member held that the Insurance Council of Australia (ICA) was not enlivened unless it was found that ASL was a person to whom the cover extends at first instance. Since it was not a beneficiary, the ICA provisions could not operate to extend cover.

Take Aways

The case again reinforces the consumer protectionist approach of DBI, as the Senior Member notes the aim of the insurance is to cover building owners and not mortgagees in possession. However, the question of whether a policy will extend to cover a party other than the named beneficiary has by no means been answered. Each case will turn on its own facts, including the drafting of any financier agreement and the rights of the mortgagee, if any.

Further information / assistance regarding the issues raised in this article is available from the authors, James Collier and Partner, Fabienne Loncar, Partner, or your usual contact at Moray & Agnew.