Insurers have been urged to give careful consideration into how far their coverage will extend when it comes to “consequential loss” under Australian Consumer Law.
At the 17th annual ANZIIF Australian Liability Conference in Sydney last week, the emerging theme centred around social inflation and the increasing cost of premiums. Speakers focused on how insureds and insurers could reduce their exposure when it comes to risks for personal injury in the tort of negligence.
Crawford & Company’s Australian law firm, HBA Legal, said policy wording was central.
“Just as there is no ability to contract out of the law of negligence, there is also no ability to contract out of the Australian Consumer Law,”
HBA Senior Associate Courtney Burrows told conference delegates.
Australian Consumer Law (ACL) is found withing Schedule 2 of the Competition and Consumer Act 2010, and Section 18 is a broadly worded provision stating a person must not, in trade or commerce, engage in conduct that is misleading or deceptive, or is likely to mislead or deceive.
“The addition of ‘likely to mislead or deceive’ provides an additional aspect to the provision, where the intention of the party making the representation need not to be intentional.
“The test for what is, or is likely to, mislead or deceive is not a burdensome hurdle for claimants to overcome and as the proscription is focused on conduct, rather than representations, it is far wider and includes positive acts as well as omissions or silence,” she said.
Burrows explained: “Section 236 of the ACL allows that any person who has suffered loss or damage as a result of misleading and deceptive conduct can seek damages from that other person, or against any person involved in the conduct. The reach of section 236 is still largely untested and raises significant issues as the claimant does not need to establish a duty of care or negligence as in tort, nor does there need to be privity of contract between the claimant and the other person.
“Establishing a claim under the ACL will be far easier, and there is nothing to suggest courts must draw on analogies with contract law or negligence, such as remoteness or foreseeability, when quantifying claims under the ACL.”
She elaborated saying: “Let’s take the sale of a business where the purchaser has been misled by the seller as to the value of the business. In the first instance, the court will likely award the purchaser the difference between what they paid for the business and the actual value. This is the direct loss. The purchaser may then make a claim for consequential losses being reduced trading profit or administrative fees incurred by setting up the business - these are consequential losses that could be claimed by the purchaser.
“The legislation is there to provide for fair commercial practice, so the ability to circumvent these provisions would undermine the effectiveness of the law in this regard. For example, claims have time limitations, which have been prescribed in the Act to six years. Contracts with clauses seeking to reduce this period will not be held as valid. But there are certainly things insurers can and should be considering when it comes to liability insurance products – and one such consideration is limiting liability to direct losses only,” she said.
At the conference, as part of the presentation, a real commercial construction case was discussed to illustrate how misleading or deceptive conduct can spiral further beyond the initial misleading or deceptive conduct, leading to consequential losses.
“There were significant consequences in a case where a property development company relied on a defective structural engineering certificate for the raft slab of its project – it was a defect that was not discovered until eight of the ten stories had been constructed.
“Naturally, due to the defect, construction was suspended and that meant that the developer was faced with delay and uncertainty. The project lender audited the works and found a host of other issues and errors and demanded immediate repayment of the loan amount outstanding which could not be met by the developers.
“The land was sold by the lender with the project in an incomplete state, along with a second property that had been used as security against the loan for the project.
“The developer sought recovery from the engineering company that issued the engineering certificate for their misleading and deceptive conduct. The developer claimed for millions in loss of profits and the court sided with the developer.”
Burrows told Insurance Business that the relevant consideration was the liability faced by the engineers for their misleading certificate: “The engineers argued that it was not foreseeable that their conduct would lead to the developer’s bank to move on the default of the loan, and therefore that element was not within their scope of liability. This argument did not stand, so the engineering company was not only liable for the initial development, but also the property held on security for the bank loan.”
