On 4 February 2025 the Full Court of the Federal Court of Australia (Coram Markovic, Halley and Goodman JJ) delivered its unanimous decision in AAI Limited v The Owners – Strata Plan No 91086 [2025] FCAFC 6.
The applicant on the appeal (AAI) was the insurer pursuant to a series of policies of insurance in respect of which Fairview Architectural Pty Ltd (‘Fairview’) was the insured. The policies covered the period from 14 February 2012 to 30 May 2016. During the currency of the policies, the insured manufactured and supplied aluminium composite panels which were fixed using a framework known as a “Top Hat Subframe” to the exterior of high rise residential buildings at Warwick Farm in NSW, which were owned by the respondent during the construction of those buildings.
In March 2019, (subsequent to the expiry of the last of the policies on 30 May 2016) and following fires in residential towers in London and Melbourne that were found to have been accelerated or worsened by the presence of aluminium composite panels, Liverpool City Council directed the respondent to remove the panels on the buildings.
On 13 June 2019 the respondent commenced a representative proceeding against the insured pursuant to part IVA of the Federal Court of Australia Act 1976 (Cth) on behalf of itself and other members of a class being, in summary, persons who owned or had a leasehold interest in a building fitted with aluminium composite panels that had been supplied between 13 June 2009 and 13 June 2019.
The insured having entered into voluntary administration in July of 2020 and in November 2020,, the primary Judge granted the respondent leave to proceed against the insured pursuant to Section 444E of the Corporations Act 2001 (Cth); The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd [2020] FCA 1892.
On 20 July 2023, the primary Judge made Orders including the following:
- Pursuant to Rule 9.05 of the Federal Court Rules 2011 (Cth) [the insurer] be joined to the proceedings as the second respondent.
- Pursuant to Section 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) v the [respondent] have leave to bring and continue the proceeding against [the insurer].
(See The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3) [2023 FCA 814].
The insurer sought leave to appeal and, if leave were granted, to appeal the Joinder Order and the Third Party Claims Act Order. Leave to appeal was refused.
The decision of Wigney J at first instance, [2023] FCA 814, and the Full Court decision, will be of interest to insurers and insureds alike on account of the discussion in both decisions (without any binding decision being delivered) as to what could amount to Property Damage, for the purposes of the respondent’s policies of insurance with AAI, and, in particular, that it could encompass the removal of the combustible panels and remediation of the buildings to which they had been affixed.
Insuring clause 2.1 provided:
“We [the insurer] agree [subject to the terms, Claim Conditions, General Conditions, Exclusions, Definitions and Limits of Liability incorporated herein] to pay to [the insured] or on [the insured’s] behalf all amounts which [the insured] shall become legally liable to pay as Compensation in respect of:
- Personal injury, and/or
- Property damage; and/or
- Advertising injury;
happening during the Period of Insurance within the Geographical Limits in connection with the Business or [the insured’s] Products and/or work performed by [the insured] or on [the insured’s] behalf and caused by or arising out of an Occurrence”.
The expression “Property Damage” was defined in the policies as follows:
“Property Damage means:
- Physical loss, destruction of or damage to tangible property, including the loss of use thereof at any time resulting therefrom; and/or
- Loss of use of tangible property which has not been physically lost, destroyed or damaged; provided that such loss of use is caused by or arises out an Occurrence”.
The word “Occurrence” was defined in the policies as follows:
“Occurrence means an event, including continuous or repeated exposure to substantially the same general conditions, which results in Personal Injury and/or Property Damage and/or Advertising Injury that is neither expected nor intended (except for the matters set out in (f) of the definition of Personal Injury) from [the insured’s] standpoint”.
The primary Judge had determined that:
- The respondent had an arguable case against the insured
- There was an arguable case that the policies responded to the insured’s claim or potential liability to the respondent and the insurer had not established an entitlement to disclaim liability under the policies
- The insurer was not entitled to disclaim liability on the basis of any exclusion clauses
- There was no reason not to exercise the discretion favourably to the respondent
And identified no. 2 as the central issue determination.
The insurer sought leave to appeal on the grounds that:
- By reason of the grounds of appeal stated in the draft Notice of Appeal, the primary judgment was attended by sufficient doubt to warrant the granting of leave to appeal; and
- The Orders made by the primary Judge would cause substantial injustice to the insurer if they were allowed to stand.
These grounds reflected the views expressed by the Full Court of the Federal Court (Sheppard, Burchett and Heerey JJ) in Décor Corporation Pty Ltd v Dart Industries Inc [1991] FCA 844) which were noted to have been followed on many occasions as the considerations to be taken into account on application for leave to appeal from an interlocutory decision. Both grounds must be proven and are interrelated.
As to the Joinder Order, the Court noted that as Section 24(1AA)(b)(i) of the FCA Act operates so as to prohibit any appeal from the Joinder Order it would be inappropriate to grant leave from the Order in respect of any of the proposed grounds of appeal. It followed that the application seeking leave to do so should be refused. However, that section did not prohibit an appeal on the Third Party Claims Act Order.
The Third Party Claims Act Order
The first draft ground of appeal was that the primary Judge ought to have determined on a final basis that the insurer was entitled to disclaim liability under the contract of insurance within the meaning of Section 5(4) of the Third Party Claims Act (NSW)
It was noted that the primary Judge’s decision whether to determine that the application on either an interlocutory or final basis involved the exercise of a discretion, and the insurer was required to demonstrate that the primary Judge erred in the manner described in House v The King [1936] HCA 40; (1936) 55 CLR 499 at 505.
The Full Federal Court was of the view that the primary Judge’s approach of considering whether the respondent’s claim that the policies responded was arguable was consistent with a strong line of authority.
In AFG Insurances v Andjelkovic (1980) 47 FLR 48, Blackburn CJ sitting in the Supreme Court of The Australian Capital Territory, considered an application pursuant Section 26 of the Law Reform (Miscellaneous Provisions) Ordinance 1955 (ACT) which was the analogue of Section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) being the predecessor to Section 5 of the Third Party Claims Act.
At pages 355 to 356 His Honour said:
“The main purpose of the provision requiring leave to commence the statutory actions is to prevent the substitution of a statutory claim for a claim against the insured where the latter is available and will apparently be effective. Leave may also be refused where the applicant’s claim is unarguable, that is, where the applicant’s contention that the statutory conditions for the vesting in him of a right of action have been fulfilled could not possibly succeed. But if on such an issue there is an argument in the applicant’s favour which could seriously be put, then in my opinion, on the proper construction of the Ordinance, leave should be granted and the issue should be determined in the action in any available way.
In the case before the Court the applicant relied in the alternative on a construction of the insurance contract which, on the facts, entailed that the insured was indemnified against a claim. I am of opinion that the contention cannot be said to be an unarguable one. I therefore expressly refrain from expressing any further opinion on it, notwithstanding that a substantial argument on each side was put to me”.
Blackburn CJ found that the claim presented by the third party in that case was arguable. An appeal to the Full Court of the Federal Court (Franki, McGregor and Kelly JJ) succeeded on the basis that the Full Court considered that the claim presented by the third party was not arguable; see AFG Insurances Limited v Andjelkovic [1981] FCA 119. The Full Court set out the above passage from the judgment of Blackburn CJ and stated that:
“Section 26(3) commands the Court not to grant leave in certain circumstances. It is not easy to decide precisely what is embraced in the words which describe the circumstances where the Court is not to grant leave. In our opinion the Court has a general power to grant leave in all cases which do not fall within the provision that it shall not grant leave and in which is made to appear by evidence available in the application that there is an arguable case of liability against the insured, being a liability against which the insured is indemnified by a contract of insurance in force at the time of the happening of the event said to give rise to the claim. We accept the relevant test proposed by the respondent which is really the test formulated by the primary Judge, namely has the respondent presented a case which is at least arguable”.
An appeal to the High Court was dismissed with Mason ACJ, Murphy, Wilson, Deane and Dawson JJ agreeing with the Full Court’s conclusion that the case advanced was not arguable: Andjelkovic v AFG Insurances Limited (1982) 58 ALJR 52.
The passage from the Full Court in Andjelkovic set out above has been adopted and applied numerous times in this Court and in the Court of Appeal of the Supreme Court of New South Wales: see e.g. Dixon v Royal Insurance Australia Limited (1998) 90 FCR 390 at 398 to 399; Travel Compensation Fund v FAI General Insurance Co Limited [1999] FCA 124; Macquarie Underwriting Pty Ltd v Permanent Custodians Limited [2007] FCAFC 60 and Energize Fitness Pty Ltd v Vero Insurance Limited [2012] NSW CA 213.
In Dixon after setting out the above passage from Andjelkovic the Full Court continued:
“Nothing was said by the High Court on further appeal ((1982) 49 ALR 245), which cast any doubt on those propositions (the appeal to the High Court) was dismissed. The effect of what this Court said was that, apart from one set of circumstances (the boundaries of which are uncertain) and which the Court is bound to refuse leave, leave will be granted to a plaintiff whose case against an insurer is “arguable”, having regard to matters (plainly enough) both going to the insured’s liability to the plaintiff and relevant to the insurer’s liability under the policy. That reasoning has been applied or referred to with approval, on numerous occasions”.
The insured contended that the primary Judge misdirected himself as to the statutory test applicable on a joinder application and, in particular, applied a test in which it was sufficient for the respondent to establish an arguable case, without engaging with Section 5(4) of the Third Party Claims Act, which section required the refusal of the application if the insurer established an entitlement to disclaim liability.
The members of the Full Court were of the view that the insurer’s submission posited a false dichotomy. The question whether an insurer is entitled to disclaim a liability is not separate from, but forms part of, the inquiry as to whether there is an arguable case. If the insurer can establish such an entitlement then there can be no arguable case. Andjelkovic is an example. In any event, it is clear that the primary Judge recognised the effect of Section 5 of the Third Party Claims Act including that the Court “must refuse leave if the insurer can establish that it is entitled to disclaim liability under the policies”. They considered whether the insurer had established an entitlement to disclaim liability but concluded that it had not done so.
The insurer also submitted that the primary Judge had erred in making “clear and definitive findings in respect of the coverage issue, based on the detailed evidence before the Court, rather than resorting to findings based on what the evidence arguably established” and that this approach risked prejudicing the insurer’s conduct of its defence.
It was noted that the primary Judge had made detailed findings as to the effect of removing the panels. That course was available to the primary Judge and he did not err in doing so. Further, as the primary Judge explained, no final decision had been made as to the evidence that may be adduced at a final hearing; and, the primary Judge noted, his determination that the insurer had not established an entitlement to disclaim liability had been made on the evidence “currently before the Court”.
It was found that the primary Judge’s decision to determine the application before him on an interlocutory, rather than a final basis was not attended by sufficient doubt to warrant a grant of leave to appeal.
There were 10 other draft grounds of appeal.
It was noted that the primary Judge made the Third Party Claims Act Order on the basis of his resolution of the issues identified above including, relevantly for the purposes of the application for leave to appeal, that it was arguable that the policies respond. The primary Judge did not purport to finally determine the question of whether the policies in fact responded and expressly limited his determination to whether such a proposition was arguable.
The primary Judge stated that he proposed to make “clear and definitive findings” in relation to the “coverage issue” based on the detailed evidence before the Court, rather than “resorting to findings based on what the evidence arguably established”.
His Honour then considered the expert evidence that the parties had adduced from Façade Engineers and Builders concerning the manner in which the insured’s panels were fixed to the buildings and the means by which they could be removed and then made factual findings based on the experts’ and cross- examination.
The significance of the “clear and definitive” factual findings made by the primary Judge needed to be assessed in the context of His Honour’s observations that while he would be “inclined to permit” the parties to tender expert reports and transcript of their cross‑examination at trial, without the need to recall the experts, and that it “may also be appropriate” to impose limits on any further evidence in respect of the issues addressed by the experts, he was “inclined to the view” that the parties should be permitted to “re-agitate those issues without regard to what had taken place in the course of the hearing of the interlocutory application”. The primary Judge also observed that he was not satisfied that further evidence bearing on whether the buildings were damaged as a result of the affixation of the panels might not also be adduced at trial.
On appeal, the Full Court considered the better view was that these observations make plain that the “clear and definitive” findings were made for the purposes of the interlocutory hearing, namely whether it was arguable that the policies respond, and His Honour did not proceed on the basis that the parties were precluded from seeking to revisit or re-agitate those issues at the final hearing.
The primary Judge ultimately found that it was “at the very least arguable” that the policies respond and that he was not satisfied “on the basis of the evidence currently before the Court” that the insurer had established an entitlement to disclaim liability under the policies.
Accordingly the assessment of sufficiency of doubt had to be made as against the primary Judge’s conclusion that it was arguable that the policies respond (including by reason of the non‑establishment of an entitlement to disclaim liability) and not whether the policies in fact respond, a question which had yet to be determined.
The Full Court took the view that it was convenient, and consistent with the manner in which the application was argued, to consider proposed appeal grounds 2 to 11 together in determining whether the primary Judge’s conclusion that the proposition that the policies respond was arguable was attended by sufficient doubt to warrant a grant of leave to appeal.
The starting point was that the insuring clause responds when (relevantly) there is “Property Damage … happening during the Period of Insurance … caused by or arising out of an Occurrence”.
The insurer’s submissions focused on two species of damage and contended that the insuring clause did not respond to either. The first was the damage to the buildings caused by the insertion of nails and screws into the outside of the building so as to support the subframes and, in turn, the panels.
The insurer accepted that such damage occurred during a period of insurance and that it was Property Damage. However, the insurer contended that such damage was expected and intended from the insured’s standpoint, and as such the definition of “Occurrence” was not satisfied.
The second species of damage upon which the insurer’s submissions focused was the damage flowing from the need to replace the panels. On the primary Judge’s approach, such damage was physical damage which occurred during a period of insurance because the need to remove the panels was immediate and would cause damage to the subframes. The insurer contended that no such damage occurred in a period of insurance; that during the periods of insurance there was only a risk of such damage; and that no property damage would be suffered unless and until the panels were removed (which would necessarily occur outside of any period of insurance).
The Full Court was of the view that the insurer’s submissions took an overly narrow view of the primary Judge’s conclusions as to Property Damage caused by the installation of the panels, by focusing upon particular passages of the primary judgment, at the expense of a fair understanding of the whole of that judgment. Read as a whole, it was plain that the primary Judge considered it to be at least arguable that the policies responded because, inter alia, there had been a immediate physical alteration or change to the buildings by dint of the affixation of the panels which affixation had caused a physical alteration to the buildings and had rendered the buildings less suitable for their use as residential buildings.
The proposition that the primary Judge considered the relevant Property Damage to include the buildings having been rendered less suitable for use as residential buildings was underscored by His Honour’s detailed analysis of the authorities which addressed various scenarios in which the Property Damage had (or had not) been suffered when an object was rendered unsuitable or less suitable for its intended use.
It was unnecessary (and considered undesirable) for the purposes of the application before the Court for leave to appeal) to address those authorities or the parties’ submissions concerning them in any detail, particularly as the facts in the case were yet to be finally determined and the authorities considered to some extent depend upon their particular facts.
As the primary Judge had noted “[m]any of the authorities referred to by the parties turned on their own unique and distinguishable facts. The more contentious issues were those where the physical damage was alleged to be a loss of functionality”.
Nevertheless, those authorities underscored the proposition that the second category of damage was arguable.
In particular the primary Judge indicated that he considered the circumstances in the present case to be relevantly indistinguishable from the circumstances in the decision of the Court of Appeal of the Supreme Court of Queensland in Austral Plywoods Pty Ltd v FAI [1992] QCA 4[ which the primary Judge had discussed and considered there to be “significant parallels” between the present case and each of Carwald and Bundy Tubing decisions, which the primary Judge had discussed.
The insurer contended that these authorities were variously wrong, distinguishable, or not to be followed, which rather demonstrated the arguability of the proposition, based upon such authorities, that the policies respond. Consistent with the authorities referred to by the primary Judge, it was considered by the Full Court to be at least arguable that damage to property occurs when there is “a physical alteration or change, not necessarily permanent or irreparable, which impairs the value of usefulness of the thing said to have been damaged”; see Ranicar v Frigmobile Pty Ltd; Ranicar v Royal Insurance Pty Ltd [1983] 2 Tas R 113.
As Jackman J noted in Capral Limited v Insurance Australia Limited trading as CGU Insurance [2024] FCA 775, the conception of Property Damage has been applied or cited with approval by intermediate appellant Courts. It is at least arguable that the affixation of the panels effected an immediate physical alteration or change to the buildings which impaired their usefulness as residential buildings and as such caused Property Damage to those buildings in the sense described in Ranicar.
Although it was arguable that the policies responded, whether or not they will ultimately be found to do so was not presently discernible.
The insurer also faintly contended that the insured knew that the panels were combustible and thus damage in the form of impairment to the use of the building was expected and intended from the insured’s standpoint. This contention was based upon certain paragraphs of the insured’s defence and upon a certificate issued by the CSIRO which identified the insured as the sponsor of the panels and described the panels as combustible.
The Full Court was of the view that whilst these matters “may establish knowledge on the part of the insured that the panels were combustible, it did not necessarily follow that impairment to the use of their building was expected and intended from the insured’s standpoint”. Furthermore, questions of corporate attribution and knowledge may arise. In short, the insurer’s contention was arguable but the insurer had not established a right to disclaim at that stage. Thus, the primary Judge’s conclusion that it was arguable that the policies responded was not attended by sufficient doubt to warrant a grant of leave to appeal.
In any event, the insurer had not established, on the premise that the primary Judge erred and thus that the insurer was wrongly joined to the proceeding, that a refusal of leave to appeal would cause substantial injustice to the insurer.
No substantial injustice would follow from a refusal to grant leave to appeal in circumstances where:
- The question whether the policies responded had not been determined on a final basis and the insurer would have the opportunity at the final hearing to contend that the policies do not in fact respond;
- If the insurer ultimately established that it ought not have been joined to the proceeding because the policies did not respond, then it would have a prima facie entitlement to payment of its costs; and
- The insurer had not suggested that it was unable to bear its costs of the proceeding (which it estimated to be of the order of $1.6 million) or that the bearing of such costs would cause it any difficulty. It is, after all, a substantial insurance company and litigation forms part of its business. Of course, the insurer may be unable to recover its solicitor and client costs, but that would not be a substantial injustice.
Although, as the insurer submitted, Courts may be more willing to grant leave and thus to spare a party the time and trouble of a trial in circumstances where the appeal had substantial prospects of success, for the reasons outlined, that was not the case here.
Accordingly, leave to appeal was refused and an Order was made that costs follow the event.
