Many businesses assume that if disaster strikes, their commercial insurance policy will cover the loss. This is usually true for more obvious incidents such as fire damage, inventory theft, or public liability claims. The real issue often lies in policy definitions in commercial insurance. This is particularly relevant to hidden infrastructure such as pipes, wires, and cables. It also applies to underground systems that are essential to your operation but out of sight.
The sudden rupture of a water main can create significant unforeseen costs. The collapse of an underground retaining wall can disrupt operations for an extended period. Damage to an industrial fuel line can cause similar disruption and expense. In these scenarios, many business owners are shocked to discover that their insurer may refuse to pay the claim.
The reason for refusal is simple; however, the outcome often comes down to the precise wording of the insurance contract.
How a Single Definition Can Make or Break a Claim
An insurance policy is, in its most basic form, a legally binding contract. When a significant claim arises, the insurer must first meticulously review this contract to determine if the loss falls squarely within the scope of the coverage purchased. The single most critical component of this review is the Definitions section.
Insurers are commercial entities that routinely adopt the narrowest possible interpretation of a policy’s definitions. Terms that may seem straightforward, such as “building,” “fixtures and fittings,” “improvements,” or “plant and machinery”, are systematically interpreted in a way that attempts to exclude essential, yet hidden, infrastructure.
If an insurer argues the damaged asset does not fall within a defined term, they may deny the claim. This applies to underground pipe networks, HVAC chiller lines, or deep-set foundational wiring. If successful, the insurer is legally positioned to deny the claim outright.
The Tanwar Case: Testing the Definition of “Building”
A recent significant decision from the New South Wales Court of Appeal provides a compelling illustration of why testing these policy definitions is essential: Tanwar Institute of Professional Studies Pty Ltd as trustee for Tanwar Family Trust v Gordian Runoff Ltd [2025] NSWCA 247.
The case concerned a service station owner who lodged a claim for damage to underground fuel pipes. The damage occurred during remedial work required by the Environmental Protection Authority. The insurer denied the claim and argued that the pipes were not physically part of the building. The insurer also relied on an exclusion that applied if the cost exceeded a set percentage of the insured sum.
The Court of Appeal firmly rejected both of the insurer’s core arguments. The Court highlighted that the policy’s definition of “building” was broad. A list of specific items was included, but coverage was not limited to those items. No contractual distinction was made between improvements located above or below ground. The underground fuel pipes were correctly deemed structural improvements, as they are integrally connected to the fuel storage tanks. Therefore, they were held to fall within the policy’s defined term.
The Court further found that the exclusion clause relied upon by the insurer could not be successfully utilised. The insurer had failed to provide sufficient evidence of any actual contract price or the cost of work performed by the director or subcontractors. Given that the owner was insured on a reinstatement or replacement basis, the reasonable costs of repairing or replacing the damaged infrastructure were entitled to them. The insurer had not met its burden of proof.
The Key Takeaway
The Tanwar decision highlights a few essential principles that every commercial policyholder should understand.
- Coverage is determined by the policy’s contractual wording, not by the visibility of an asset. Even infrastructure completely hidden from view can be covered if the policy definition is broad enough or if the asset serves a function tied to an insured item.
- Insurers carry the burden of proving that any exclusion applies. A denial based on an exclusion is not automatic. The insurer must provide clear, defensible evidence showing that the clause genuinely applies to the specific circumstances of the claim.
- When a policy provides reinstatement or replacement, the recovery should reflect the reasonable cost of repairing or replacing the assets today. This ensures policyholders receive full, practical coverage rather than a depreciated or nominal payout.
This ruling is significant for businesses that depend on complex, hidden infrastructure. Property owners should check that essential water, drainage, and utility systems are covered. Strata managers need to confirm that shared assets, like deep-set foundation pipes and standard service lines, are included. Retailers and commercial tenants should ensure that any specialised leasehold improvements, such as refrigerated piping or bespoke ventilation systems, fall within the policy’s definitions.
Practical Steps to Protect Your Coverage
To protect your business and improve your chances of successfully claiming for damage to hidden infrastructure, consider a few practical steps.
- Before undertaking any major construction, renovation, or installation of underground systems, have a legal professional review your policy definitions. Understanding exactly how terms such as “building,” “improvements,” and “contents” apply to new assets can help prevent costly coverage gaps.
- Keep thorough records of all work. Detailed plans, technical specifications, engineer sign-offs, invoices, and compliance certificates can be invaluable. They demonstrate how the asset functions within your property and provide evidence of value, which can help counter any insurer arguments about exclusions or cost limits.
- If a regulator issues a notice requiring repairs or upgrades to existing infrastructure, seek legal advice promptly. Such work may relate to underlying damage or failure, and acting quickly can be critical to making a valid insurance claim.
Conclusion
Commercial insurance policies are detailed, complex legal documents, not a simple consumer product warranty. The terms and definitions in the policy carry more weight than many business owners realise. This is especially true for unseen parts of your operation. A clear reminder is provided by the Tanwar decision that hidden infrastructure can and should be covered. It also confirms that insurers must meet a demanding evidentiary burden before relying on an exclusion to deny a claim.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
