Home Warranty Insurance and Bankrupt Builders

Kreisson acted for the owners in the recent case of The Owners – Strata Plan 80647 v WFI Insurance Limited t/as Lumley Insurance [2015] NSWSC 1161. The case involved a dispute over whether an insurer was required to indemnify the owners where a builder had been discharged from bankruptcy.

The Facts

In December 2013, the Owners Corporation SP 80647 (“the Owners”), lodged a claim (“the Claim”) with the WFI Insurance Limited t/a Lumley Insurance (“the Insurers”) under the Home Warranty Insurance Policy (“the Policy”) for compensation for repair of defective building work undertaken by Lawrance Crestani (“the Builder”).

The Insurers refused the Claim on the basis that the Builder was no longer a bankrupt. The Builder was a declared bankrupt in 2009 and was discharged from bankruptcy on 17 June 2012 and was therefore no longer a bankrupt when the Claim was lodged.

As a result of the denial of the Claim, the Owners commenced proceedings against the Builder.

In his defence, the Builder claimed that the claims against him for breach of statutory warranties and in negligence, were claims provable in his bankruptcy pursuant to Section 82 of the Bankruptcy Act 1966 (Cth) (“the Act”). The Builder argued that, by reason of Section 153 of the Act, the Builder has been released from any liability in relation to these claims.

The Owners commenced proceedings against the Insurer where the Owners relied on clause 2(1) of the Policy, which provided that due to the Builder’s insolvency, the Insurers were required to indemnify the Owners for the loss and damage suffered from the breach of the statutory warranties by the Builder.

Again in its defence, the Insurers denied indemnity due to the Builder’s discharge from bankruptcy prior to the Owners making its Claim. Given the conflicting positions, the Owners brought an application for determination of a separate question.

Justice Hammerschlag consolidated the Owners’ proceedings against the Builder and the Insurers and ordered that the following question be determined separately and before any other question.

“Is the first defendant [Lumley] entitled to deny indemnity in respect of the plaintiff’s [Owner’s Corporation’s] claims by reason only of the bankruptcy and discharge therefrom of the second defendant [Mr Crestani] prior to the plaintiff [Owners Corporation] making a claim on the policy against the first defendant [Lumley]?”

The Insurer’s position:

1. That the Builder’s discharge from bankruptcy meant that the Policy no longer responded as the definition of “insolvent” contemplated in the Policy was a state of insolvency existing at the time the claim on the Policy was made. At the time of the Claim, the builder was not bankrupt;
2. That the Owners claim for breach of statutory warranties under the Home Building Act 1989 (NSW) (“the HBA”) fell into the exception of section 82(2) of the Act as it “arises otherwise than by reason of contract…or promise” and therefore are demands that “are not provable in bankruptcy.” For the purposes of section 82(2) of the Act, the Insurer submitted it was necessary for there to be a contract between the Builder and the Owners and submitted in this case there was a contract between the Builder and the developer but not with the Owners and the Owners had mere statutory rights;
3. The Insurers cited the authority of Coventry v Charter Pacific Corporation Limited [2005] HCA 67 (“Coventry”) in asserting that it was necessary for there to be a contract between the Owners and Builder for the claim to be provable in bankruptcy; and
4. As a result, the Owners’ claim against the Builder would not be subject to the release under section 153 of the Act.

The Owners position:

1. That the rights granted to the Owners under section 18D of the HBA may be described as a statutory extension of the terms implied in the contract between the Builder and the developer. The contract could thus could be described as central to the relationship between the Builder and the Owners;
2. That the judgment in Coventry was made in the context of claims for fraudulent misinterpretation, and the Owners claim under section 18D of the HBA was not such a claim; and
3. As a result, the Owners’ claim did not fall within the exception of section 82(2) of the Act and was not subject to the release under section 153 of the Act.

The Decision

The Honourable Justice Darke held:

1. that the Owners’ status derived from provisions of the HBA, but that this statutory element did not preclude the demand from arising out of contract;
2. that the Insurers position on Coventry was incorrect and it was not necessary for there to be a contract between the Owners and Builder for the claim to be provable in bankruptcy for the purposes of section 82(2) of the Act;
3. that the claim against the Builder for a breach of the statutory warranties did not fall into an exception of section 82(2) of the Act and was a debt provable in the Builder’s bankruptcy. Therefore, pursuant to section 153 of the Act, the Builder had been released in relation to that claim upon his discharge; and
4. As the Owners could not obtain redress from the Builder due to his insolvency within meaning of the Policy, Justice Darke held that the Insurers were not entitled to deny the claim for indemnity made by the Owners.

What are the Implications?

This decision appears to be a common sense approach to the issues raised. In essence Justice Darke found that the Owners had a claim that fell within the cover provided by the Policy. The claim was a debt provable in the bankruptcy and therefore was discharged in the bankruptcy.

An alternative decision would have left all owners in a position of having to ensure they lodged claims within the period of bankruptcy of the Builder to ensure assessment by the Insurers. Arguably this scenario was not in the contemplation of the lawmakers when formulating the legal position on cover provided under home warranty insurance policies.

The case provides owners with some assurance and a basis to assert an entitlement in lodging a claim for compensation for repair of defective building work even where the builder has dipped in and out of bankruptcy.