Arson and insurance: financier’s cover goes up in flames

Secure Funding Pty Ltd v. Insurance Australia Limited [2010] FCA 1094 (1 October 2010)

Financiers routinely require borrowers to take out insurance cover and to note the insurer’s interests on the policy. This case illustrates the limited cover available to financiers who are noted as “interested parties” in circumstances where the insured’s actions trigger an exclusion in the policy.

Mr P owned a property in New South Wales. Mr P and his business partner obtained insurance cover for the property from IAL. One of the events that the insurance policy covered was damage caused by fire. The policy also contained the following clause:

However, we will NOT cover loss or damage as a result of fire started with the intention of causing damage by you or someone

(i) who lives in your home, or

(ii) who has entered your home or site with your consent, or the consent of a person who lives in your home.

The following terms were defined in the policy:

“You” means the person or persons named as the insured on your current Certificate of Insurance. If more than one person is named as the insured, we will treat a statement, act, omission or claim by any one of those people as a statement, act, omission or claim by all those people.

“Your home” is the home insured identified on your current Certificate of Insurance. If you are a landlord your rental property is identified as the home insured on your current certificate of insurance.

Mr P and his business partner later mortgaged the property to Secure Funding Pty Ltd (Secure Funding). The interest in the property that Secure Funding had as credit provider was noted on the IAL policy, as required by the mortgage.

Mr P deliberately set fire to the property causing damage. Secure Funding sought to claim under the insurance policy for the loss it had suffered as a result of the property damage. IAL refused the claim based on the exclusion set out above.

The court found that the exclusion clause in the policy operated regardless of whether the claimant was the named insured (i.e. Mr P and his partner) or Secure Funding.

Secure Funding argued that the purpose or commercial object of the policy was to protect a financier, regardless of any illegal or other conduct of the named insured.

The court concluded that whether or not Secure Funding was a party to the wrongful conduct was irrelevant, as on a proper construction of the policy it did not cover the event that occurred. The court pointed out “it is possible for a person with a limited interest (such as a mortgagee) to take out their own policy to avoid difficulty with insurance should the mortgagor (or someone with temporary carriage of an asset) be tempted to destroy the property”.

This case highlights the vulnerable position of an interested party to a contract of insurance. Unless a financier is prepared to take out its own policy of insurance, it runs the risk that any policy of insurance over mortgaged property will not respond because of the actions or inactions of the insured.