Exclusions in a House and Contents Policy: Are You Covered for Liability to a Tenant of a Granny Flat?

The District Court of NSW (Coram Andronos SC DCJ) delivered a decision on 14 August 2023 in the interesting case of Walsh v Yang & Ors.

The case concerned a tortious claim in negligence/occupier’s liability arising from a slip and fall on residential premises. The Judge’s decision considered the factual issue of whether the occupier had knowledge of the slipperiness of the tiled surface on which the plaintiff slipped.

Of interest to readers of this publication, however, was His Honour’s consideration of the property owners’ claim under their policy of house and contents insurance with Insurance Australia Limited (“IAL”).

The facts

On 24 March 2019, the plaintiff, Colin Walsh (“Mr Walsh”) slipped and fell on external tiled stairs at the rear of a residential property in Baulkham Hills, NSW. The tiles were wet and slippery due to rain. 
The property was owned by the first and second defendants, Ms Yang and Mr Xu, (“Yang & Wu”) who were also cross claimants against their house and contents insurer, IAL.

The primary claim

Mr Walsh sought damages for personal injury from Yang & Xu, alleging they were negligent as owners of the property in failing to take any measures to render the tiles slip resistant when they knew, or ought to have known, that the tiles were slippery when wet. Yang & Xu denied liability to Mr Walsh.

Mr Walsh also brought a claim against the IAL as insurer of Yang & Xu, pursuant to section 4(1) of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW). IAL had denied indemnity under the policy to Yang & Wu so they too brought a cross claim against IAL.

The issues

There was no dispute that Yang and Xu owed Mr Walsh a common law duty to take reasonable care to avoid a foreseeable risk of injury to him, as occupiers of the property, nor was there any dispute that the tiles were slippery when wet.

The principal dispute between Mr Walsh and Yang and Xu concerned whether the risk that eventuated was foreseeable, whether the duty had been breached and whether there was any causal connection between any breach of duty and any injury suffered by Mr Walsh.

There was also a significant dispute as to the extent of the injury suffered by Mr Walsh and the extent of losses.

As between Yang & Xu (and Mr Walsh) on the one hand and IAL on the other, there was a significant dispute as to whether the insurer was entitled to decline indemnity pursuant to certain exclusions in the policy of Insurance issued to Yang & Xu. That, in turn, raised the ,question of whether section 35 of the Insurance Contracts Act 1984 (Cth) (“ICA”), when read with regulation 19 of the Insurance Contracts Regulations 2017 (Cth) (“ICR”) prevented IAL from relying on the exclusions and also whether IAL was able to rely on the exclusions if it had clearly informed the insured of the effect of those exclusions.

Background

In July of 2018, Mr Walsh and his partner, Ms Radovan, commenced a Certificate III course in commercial cookery at Baulkham Hills TAFE. Mr Walsh’s the intention was to obtain employment as a cook or chef.

Although Mr Walsh owned a property in the country, he was frequently in Sydney assisting an aged parent and spent time with Ms Radovan at a townhouse in Baulkham Hills which belonged to a friend of hers.

At about the time of the commencement of the TAFE course, Mr Walsh and Ms Radovan learned that the owner of the townhouse was going to sell the property. Accordingly, they needed to find a place to live in Sydney.

Mr Walsh and Ms Radovan met Ms Yang at the TAFE cookery course and they became friends.

Yang & Xu jointly owned a property comprising a freestanding house with a separate structure comprising a storeroom and space at the rear of the house called “the flat.”

At one stage, the flat was a garage and it was later used as an office. Yang & Xu had gas and water services installed to accommodate visiting family from China.

In 2015, an officer from the local shire Council inspected the property and determined that unauthorised building works, (comprising the creation of a carport and the conversion of the garage into an unauthorised secondary dwelling) may have been carried out, and Council notified Yang & Xu in writing that the works appeared to be contrary to the development standards outlined in State Environmental Planning Policy (Exempt and Complying Code) 2008 and, as a result, development consent should have been obtained prior to the works being carried out. An explanation was sought as to why the works had been undertaken without consent. 

Ms Yang’s response addressed the failure to obtain consent for the carport but did not address the conversion of the garage. She asked Council what she could do to remedy the situation. The Council’s response directed Ms Yang to remove the unauthorised kitchen and cap all associated services within the wall cavity. Ms Yang arranged for removal of the stove and sink and for the services to be capped but left part of the cabinetry and a power point in place. Council again inspected the property and noted the direction to remove all cupboards and benchtops had not been complied with in its entirety. Nevertheless, Council did not appear to consider the state of the garage to be a breach of the Environmental Planning & Assessment Act 1979 (NSW) as at that date; rather, Council stated that reconverting or using the garage building for the purpose of a secondary dwelling was a breach of the Act.

Some time between July and October of 2018, Mr Walsh and Ms Radovan informed Ms Yang of their urgent need for accommodation and Ms Yang offered ‘the flat’ to them. All parties agreed that Mr Walsh and Ms Radovan would not stay for long and would look for more permanent accommodation. 

Mr Walsh reconnected gas and water and installed an oven, fridge and dishwasher in the flat to render it habitable. He also did domestic tasks around the property and some maintenance work to the main house, as a result of which Ms Yang reduced the initially agreed weekly rental. 

Ms Yang, Mr Walsh and Ms Radovan maintained a friendly relationship, often sharing meals and going to TAFE together; however, they maintained separate households.

The fall

On 24 March 2019, Mr Walsh suffered a fall whilst walking down tiled steps from the washing line.

There was no dispute that the tiles were slippery, nor that it was raining at the time of the accident.

The Plaintiff’s injuries

Mr Walsh’s GP noted that Mr Walsh had suffered extensive soft tissue injury to his left upper arm with laceration, soft tissue injury to his left hand with bruises and swelling, very painful restricted left shoulder movements and painful restricted left elbow movements.

The Judge found that Mr Walsh continued to suffer physical pain in his shoulders, upper back, neck and arms but was not undergoing any active treatment to manage his pain, although he was taking Celebrex and Diazepam for pain relief.

Liability

In determining liability for Mr Walsh’s fall, His Honour referred to the Civil Liability Act 2002 (NSW) and in particular sections 5B, 5D and 5E.

He found that no later than a previous fall suffered by Mr Walsh in the storeroom in early November 2018 (on identical tiles to those on the outside stairs), and subsequent conversations with Yang & Xu, the latter were alerted to the risk that an entrant to the property could suffer injury by slipping and falling on the tiles when they were wet and that was the very risk that eventuated when Mr Walsh suffered the fall which was the subject of the proceedings.

On the basis of an expert report, the Judge was satisfied that the surface of the stairs failed the minimum standards of the relevant Australian Standards requirements in that they were inadequately slip-resistant when wet and inappropriate for use on external surfaces which would be wet from time to time.

Reasonable preventative measures were identified that could have been implemented simply and inexpensively, but were not.

His Honour considered the suggestions made would have been a reasonable response to a foreseeable risk of which Yang & Wu had actual notice from November 2018 and found that a reasonable person in the position of Yang & Wu would have taken precaution against the risk of harm. As they did not do so, the Court was satisfied that their duty of care to Mr Walsh was breached.

Insurance issues

IAL denied indemnity under the defendants’ house and contents Policy of Insurance on the basis of the operation of all or any of six exclusions, which would also defeat Mr Walsh’s claim for indemnity under the Third Party Claims Act.

The relevant exclusions were:

1. The business occupation exclusion
2. The business use exclusion
3. The unlawful activity exclusion
4. The ordinary resident exclusion
5. The building regulation exclusion
6. The local authority regulation exclusion

Yang & Xu said that pursuant to section 35(1) of the ICA, IAL could not refuse to pay the claim as the policy was a prescribed contract and the event giving rise to the claim was a prescribed event within the meaning of the relevant section of the ICA.

IAL, in turn, relied on section 35(2) ICA to defeat the insureds’ reliance on section 35(1), on the basis that before the policy was taken out, they were clearly informed in writing of the relevant provisions of the proposed policy or they knew (or a reasonable person in the circumstances could be expected to have known) that the policy would not provide insurance cover in respect of the happening of the relevant event.

The Policy Schedule stated that the policy was for building and contents insurance. The insureds’ relationship to the property was described as “Live in it as your home. Do not expect the property to be unoccupied for more than 60 days in a row in the policy year.”

The process of applying for cover involved answering a number of questions on IAL’s website and Ms Yang undertook that task for both insureds.

In answer to the question of how the home would be used, she answered, “To live in as your main home.” In response to the question, “Is any part of the home used for business purposes?” Ms Yang answered “No.”

The insuring clause provided cover for loss or damage caused by 30 specific insured events not relevant to the current proceedings.

A further insuring clause provided cover for legal liability:

“…against the costs of paying compensation for death or bodily injury to other people or for loss or damage to their property…”

…

“If your Schedule shows that you have building and contents cover, we cover your legal liability as a result of an incident which happens anywhere in Australia.”

There was no dispute that, prima facie, the insuring clause covered Mr Walsh’s claim.

There were 29 separate exclusions in the legal liability cover section of the policy and a further 45 exclusions in the general exclusions section, many of which referred to multiple risks and all of which were incorporated into the legal liability section exclusions by way of cross-reference.

His Honour referred to the relevant principles of contractual construction, noting that as with any commercial contract, a Policy of Insurance must be construed in a business-like manner, paying attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure;^[1] construction is determined objectively according to what a reasonable business person would have understood the terms to mean.^[2]  The insurer bore the onus of proving any qualification or limitation on cover.^[3]  Unless evidence demonstrated that both parties were aware of extrinsic facts or there was some evidence as to a practice to which both parties subscribed, His Honour was unable to take any extrinsic material into account on the question of construction of the policy.

As a matter of ordinary construction, the policy excluded liability where there was a sufficiently close relationship between the basis for the insureds’ liability to Mr Walsh and an exclusion in the policy. 

Nevertheless, the question arose as to how close the relationship had to be in order to enliven the relevant exclusions.

The policy used two composite formulations to connote the requisite relationship between the liability and the exclusion(s):

1. “arising from, or in connection with directly, or indirectly, for the purpose of each of the exclusions” (the first formulation); and
2. “arising directly, or indirectly, from or in any way connected with for the purpose of the building regulation and local authority exclusions” (the second formulation).

IAL asserted that both of the limbs of each formulation were engaged, which the insureds challenged.

On the topic of the “business occupation” exclusion and the “business use” exclusion, His Honour found that in renting the “flat” to Mr Walsh and Ms Radovan, the insureds had not established a business. Prior to the occupation of the flat by Mr Walsh and Ms Radovan, the flat had been unoccupied. There was no evidence that the insureds contemplated letting the flat to anyone else on their departure. The insureds let the flat to Mr Walsh in Ms Radovan in order to assist them and they remained friends. Their friendship was the key factor in the foundation of the arrangement. The fact that the arrangement had continued for five months as at the date of the accident, did not change its character in that period. 

His Honour considered that the period of the arrangement was not sufficient to establish the requisite element of repetition as at the date of the accident. Accordingly, His Honour was not satisfied that the occupation or use of the flat by Mr Walsh and Ms Radovan was pursuant to any business conducted by the insureds within the meaning of the policy.

On the “ordinary resident” exclusion, counsel for IAL contended that a degree of continuity and repetition had been established with respect to Mr Walsh’s residency of the flat by the time of the accident sufficient to characterise him as ordinarily resident there.

However, His Honour found that Mr Walsh did not reside with Yang & Xu in any relevant sense. Whilst they maintained friendly relations, they lived their lives independently and were more like neighbours than family members or flatmates.

On the “unlawful activity,” “building regulation” and “local authority regulation” exclusions, IAL’s primary submission was directed to the building regulation and local authority regulation exclusions, noting the correspondence received from Council in 2015 directing Yang & Xu to remove certain services from the flat and that some, but not all, of those services were removed and there things rested until about October 2018 when Mr Walsh, (with the consent of Ms Yang), reconnected certain services and reinstalled some kitchen appliances, thereby making the flat habitable.

It was submitted that the evidence established that the installation of a kitchen (in what was originally the garage), its use as a dwelling and the agreement to let it to Mr Walsh for the purpose of habitation were in contravention of the relevant planning law; further, each of these matters was clearly known to the defendants at the time they agreed to let the converted garage to Mr Walsh and Ms Radovan. They had been expressly notified by Council that reinstallation of services and conversion or use of the garage as a secondary dwelling would be in breach of the EPAA.^[4]  

The Judge took the view that the evidence did not establish that development consent (had it been sought) would not have been granted. Yang & Xu submitted that there was no demonstrated connection between the fact of reconversion of the garage and occupation without consent and any elevation of risk or likelihood of a claim being made. In other words, it was submitted that the connection with the event creating liability must be with the illegality, not the mere fact of occupation.

His Honour considered that the language of the exclusion was sufficiently broad to embrace the circumstances. As Mr Walsh was residing in the secondary dwelling and was injured in the course of performing a domestic task associated with one’s place of residence, on balance, the liability was “in any way connected with” or “in connection with directly, or indirectly,” with the reconversion without consent. He found that the building regulation exclusion and local authority exclusions both applied, but considered the “unlawful activity” exclusion did not apply because it connoted activity that went beyond mere occupation.

His Honour then went on to consider the effect of section 35 of the ICA.

There was no dispute that the policy was a prescribed contract and Mr Walsh’s claim against Yang & Xu was a prescribed event within the meaning of section 35(1).

As His Honour had found that the business and ordinary residence exclusions did not apply, regulation 19(2)(d) (iv) and (k) did not arise.
However, the operation of the building regulation exclusion and the local authority regulation exclusion did enliven section 35(1). 

The issue then was whether section 35(2) applied in the circumstances. For section 35(2) to operate, IAL had to establish that it had “clearly informed” the insureds in writing, (or a reasonable person in the position of the insured would have known), that the policy would not cover the insureds’ liability to Mr Walsh.

Ms Yang completed the proposal to obtain the insurance via an online portal. It was agreed that during this process, the wording of the exclusions was disclosed to her by provision of a copy of the policy wording; however, it was not contended that Ms Yang had actual knowledge of the exclusions on any other basis - or that she ought to have known liability to Mr Walsh would not be covered by the policy.

The question which remained was whether the provision to her of the policy wording “clearly informed” Ms Yang that the relevant event would not be covered.

IAL contended that the provision of the actual policy wording is contemplated by section 35(2) and was sufficient.

In response, Yang & Xu submitted that the wording required such careful and detailed analysis to be properly understood that, even if, as a matter of construction, the exclusions did apply, IAL had not “clearly informed” them of the effect of the exclusions, simply by providing the policy wording at the time the policy was proposed.

Referring to Lockwood & Lockwood v Insurance Australia Limited trading as SGIC^[5], it was noted that Kourakis J of the SA Supreme Court (as he then was) considered an exclusion in a motor vehicle policy to which section 35 of the ICA also applied, which excluded liability “if at the time of the incident…your vehicle was being driven…by a person who was not licensed or permitted to drive it.” The insured’s car was stolen and driven by an unlicensed driver whilst stolen. 

As a matter of construction, Kourakis J held that the unlicensed driver exclusion did not apply in the circumstances; however, if the exclusion did apply, section 35(1) of the ICA prevented reliance on the exclusion by the insurer as the provision of the wording was not sufficient to “clearly inform” the policy holder of the exclusion.

In Harris v CGU Insurance Limited^[6] Einstein J considered a policy of building and contents insurance which excluded liability in respect of flood, defined to include inundation following the escape of water from the normal confines of that body of water. His Honour considered the question of whether provision of the relevant policy in and of itself was sufficient to satisfy the test in section 35(2); ultimately, on the facts of that case, it was held that the insurer had clearly informed the insured of the relevant limitation by provision of the policy wording.

It was noted that Einstein J had laid out a general (but not absolute) principle that it is in the nature of section 35(2) that its operation depends on the circumstances and the wording of the policy itself, in order to establish whether particular steps to inform an insured did so at all, let alone did so clearly. Just as there is no general rule that it is incumbent on an insurer to annotate a policy, it was found that there was no absolute rule, as a matter of construction of section 35(2), that provision of the policy will always be sufficient.

The Judge noted that there was no explanation in the IAL policy or in any material made available to the insured as to how the provisions relating to the building regulation and local authority regulation exclusions operated. He also noted those terms had been the subject of a number of authorities and good faith legal debate over many years.

The operation of the building regulation and local authority regulation exclusions and their relationship with the insureds’ liability to Mr Walsh, were not straightforward questions.

On balance, it was found that the insurer was not able to rely on section 35(2) of the ICA in the present case. Informing the insureds of the building regulation and local authority regulation exclusions, by providing them with a copy of the policy, was not sufficient to satisfy section 35(2). This was because they were not sufficiently clear, in the circumstances, to exclude liability, where the relevant connection between the relevant breaches of regulation. and liability was only that Mr Walsh resided in a dwelling for which building consent had not been obtained.

Judgment was entered for Mr Walsh against Yang & Xu in the sum of $102,508.20 and an order was made for them to pay Mr Walsh’s costs on an ordinary basis.

On the cross claim, there was judgment for the cross claimants against the cross defendant.

First published in the LexisNexis Australian Insurance Law Bulletin 2024 . Vol 39 No 1.