Drilling and Ducting Ltd (DDL) is a company that uses a directional drill to bore holes in the ground. DDL then feeds lengths of ducting into the holes, to protect fibre-optic cables that other contractors will later install. To join together two lengths of ducting, DDL digs a hole down to the two ends, and then uses a ‘mastic kit’ to wrap the two ends together. DDL then backfills and compresses the ground beneath the ducting. Finally, it tests that the ducting is free of faults using the ‘blow test’: blowing objects through the ducting using compressed air.
Unfortunately, while DDL was working on a section of a street one day, even though it had carried out the compaction work to industry standard, some of the ground beneath the ducting collapsed. This in turn caused the ducting to flex, and meant that this section of ducting failed the blow test.
DDL had to re-excavate and remedy every join, at a cost to it of around $250,000. It was able to use the same ducting, which had flexed but not broken.
DDL had contract works insurance. That is insurance that provides cover for certain perils that may cause damage to the works site or the material or equipment used in completing the works. DDL lodged a claim with its insurer under its contract works insurance for the cost of the remedial work.
The insurer’s view
The insurer declined DDL’s claim. The insurer agreed that FSCL could look at the claim, even though the loss exceeded $200,000, and DDL agreed to limit the amount claimed to $200,000.
The insurer pointed out that ‘loss’ in the policy means ‘physical … damage that is not excluded by the policy’. The insurer said there was no actual ‘damage’, as no ducting or equipment needed to be replaced.
The insurer also said that, even if there was damage, cover for that damage was excluded under the policy. The relevant clause said the insurer would not pay for loss or damage that was due to ‘unforeseen ground conditions’.
DDL complained to FSCL. It pointed out that in Australia, a court had said ‘damage’ did not have to mean a permanent physical change to a thing; ‘damage’ could just mean a change that made the thing less useful. DDL said the soil collapse had made the ducts unable to be used (until the joins were fixed), and so they were ‘damaged’.
DDL also said that it had put a fully complete stretch of ducting in the ground but the ducting had been split up when the soil collapsed. It said that was physical damage as the ducting was no longer in one piece.
We noted that a court in New Zealand had looked at the Australian case about damage. The New Zealand court said there is a difference between ‘damage’ (as in the Australian case) and ‘physical damage’. Where a policy requires ‘physical damage’ (not just ‘damage’), said the New Zealand court, there has to be something more than a loss of usefulness.
In DDL’s case, the policy defined loss as being ‘physical damage’. However, the ducts had not been lost or destroyed or harmed. They were just unable to be used until the joins were fixed.
We did not agree with DDL’s claim that a fully complete stretch of ducting had been physically damaged. We looked at another case (from England) where the court said that physical damage could only happen when the thing was ‘complete’. If the problem occurs before the thing is ‘complete’, there is no physical damage, said the English court. We considered that DDL’s ducting would not have been complete until DDL had successfully blow tested the ducting.
We considered that DDL’s loss was not due to physical damage to insured property, but rather to costs incurred to remedy the defective works.
We also considered whether, even if there had been damage, cover was excluded. Expert opinion was that heavy rain combined with a variation of soil types caused the ground beneath the ducting to collapse. One expert noted that he had never seen anything like it in his 45 years of experience. We were of the view that this situation fell within the exclusion for loss caused by ‘unforeseen ground conditions’.
We could not uphold DDL’s complaint and recommended that DDL discontinue its claim. DDL did not provide any further comments and we closed our file.
Insight for consumers
This case confirms that the words in an insurance policy are very important. There may have been other types of insurance that could have covered DDL for the cost of the remedial work, but this policy for contract works insurance only covered the cost of any physical damage.