In this July 2023 appeal judgment previously discussed here Insurance and reasonable precautions clauses (Australia) | Financial Institutions Legal Snapshot one of the issues for consideration was the meaning of “defect in an item” where the policy provided cover to the insured’s buildings and contents for accidental damage or accidental loss but which excluded cover for any accidental damage or accidental loss caused by “a defect in an item, faulty workmanship, structural defects or structural design”.

An issue was the operation of a hydrostatic valve in the insured’s pool, to which the claim related, designed to perform a specific function.  The valves were not available for inspection.  The relevant valve in question did not function as designed because they developed a defect resulting in the lifting of the pool.

The insured argued that construing “defect in an item” to encompass ordinary wear and tear would be repugnant to the commercial purpose of the contract and inconsistent with the terms that followed in the clause which related to matters that would affect an item from the outset.

The engineering experts explained the intended function of the hydrostatic valve installed in the pool.  They agreed that the pool could have remained empty without it lifting out of the ground if the valve was functioning as intended.  The experts were agreed that at least one valve had a defect and it stopped functioning as it was supposed to do.  The lower court found that the lifting of the pool accordingly demonstrated the presence of “a defect in an item”.

The appeal court said that there was no requirement in the clause for the defect to be present in the item from the outset.  The exclusion contained no express temporal limitation.  There was no evidence to support a change in the condition or functioning of the valves at some time after the installation such that the defect in the item only arose at a later point.  As the pool was full for a significant period of time “one would simply not know, during the whole of that period, whether such a defect existed”. 

The appeal court confirmed the lower court’s reasoning that in circumstances where the valves were not available for inspection, it was open to the experts to conclude, based on their experience, that the valves were probably defective in the meaning of the term used in the policy.  There was no requirement in the clause for the defect to be present in the item from the outset. 

It was clear from the evidence that there was a “defect in the item”, the valve, and cover was excluded.

Flanagan v Bernasconi [2023] NSWCA 150 (4 July 2023) (austlii.edu.au)