“Other Insurance” or “Excess of Loss”
Despite the introduction of s.45 of the Insurance Contracts Act, many commercial insurance policies still contain what are arguably “other insurance” provisions. Perhaps surprisingly there is little case law on this subject, but the Western Australian Supreme Court has recently had occasion to consider the construction of one such policy provision.
The case stemmed from a personal injury action. Two employees of a rail grinding contractor, Speno Rail Maintenance, were injured while working on a contract for Hammersley Iron. The accident was Hammersley’s fault. Speno, as it was required to do under the contract, had arranged public liability insurance with Zurich naming Hammersley as an insured. Hammersley however also held public liability insurance with Metals & Minerals Insurance (MMI).
Zurich claimed that a situation of double insurance existed, and that it was therefore entitled to contribution from MMI for the claims. The MMI policy however contained the following clause:
"Underlying Insurance"
Underwriters acknowledge that it is customary for the Insured to effect, or for other parties (including joint venture partners, contractors and the like) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk.
In the event of the Insured being indemnified under such other Insurance effected by or on behalf of the Insured (not being an Insurance specifically effected as Insurance excess of this Policy) in respect of a Claim for which Indemnity is available under this Policy, such other Insurance hereinafter referred to as Underlying Insurance, the Insurance afforded by this Policy shall be Excess Insurance over the applicable Limit of Indemnity of the Underlying Insurance, but subject always to the terms and conditions of this Policy.
In the event of cancellation of the Underlying Insurance or reduction or exhaustion of the Limits of Indemnity thereunder, this Policy shall:
but subject always to the terms and conditions of this Policy."
MMI argued that the clause, in effect, converted the MMI policy from a primary liability policy to an excess liability policy where Hammersley held other insurance. In response, Zurich relied on s.45 of the Insurance Contracts Act, which provides:
"45 'Other insurance' provisions
-
Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.
-
Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first-mentioned contract."
In a lengthy judgment, Justice Johnson analysed the policy and the few decided cases on s.45. She found that the provision in the MMI policy did have the effect of “limiting or excluding” MMI’s liability.
She however expressed some doubts as to whether it did so “by reason that the insured has entered into some other contract of insurance”. In this instance, although Hammersley was an insured under the Zurich policy, it had been arranged by Speno. After a detailed analysis of the decided cases and the extrinsic material concerning Parliament’s intentions in enacting s.45, she found that the section operated "by reference to the language of the limitation of the insurer's liability and what its effects may be as a matter of interpretation or logic, rather than by reference to whether the prescribed effect stands to arise in the particular circumstances of an individual claim."
That meant that the provision would be void, unless it was “saved” by s.45(2). In that regard, Justice Johnson found that the the MMI policy did not sufficiently “specify” the Zurich policy to allow s.45(2) to operate. As a result, the “other insurance” provision in the MMI policy was void, and it followed that Zurich was entitled to contribution based on double insurance.
In an unusual step, Justice Johnson called for s.45 of the Act to be amended to make its intent (particularly surrounding the “entered into” issue) clearer.
It should also be noted that this case is merely the latest in several rounds of litigation arising from the initial accident. Given the matter’s history and the amounts of money involved, an appeal might be considered likely.
Zurich Australian Insurance Limited v. Metals & Minerals Insurance Pte Ltd [2007] WASC 62
Beware the raw prawn
A claim “for” something can, in some cases, take on the wider meaning of a claim “in respect of” that same thing. That’s the effect of a significant case from the NSW Court of Appeal.
Regal Pearl ran a restaurant. A number of customers became ill after eating prawns at the restaurant, and the cause was traced to a prawn wholesaler. Regal Pearl (which had faced claims from the affected customers) sued the wholesaler and succeeded, primarily on the ground that the wholesaler had breached the Sale of Goods Act by providing the unfit prawns. The wholesaler held a product liability policy with Zurich, but it was denied indemnity under the policy. When the wholesaler could not meet the judgment, Regal Pearl sought direct access to the Zurich policy [under s6(1) of the NSW Law Reform (Miscellaneous Provisions) Act 1946] and was successful.
Zurich appealed, arguing that the trial judge had misconstrued the policy in two respects. First, it argued, the policy expressly stated that it was intended to cover liability to pay "compensation for ... Personal Injury". Since Regal Pearl had succeeded against the wholesaler based on a claim in contract, Zurich argued that the claim was not a claim “for… Personal Injury” and therefore not covered by the policy. Secondly, Zurich relied on an exclusion clause that excluded cover for any liability "that is accepted under any contract requiring the acceptance of liability". Zurich argued that the statutorily implied terms of the contract between Regal Pearl and the wholesaler constituted an acceptance of such a liability.
The NSW Court of Appeal unanimously ruled against both arguments. Delivering the main judgment, Chief Justice Spilegman held that, in insurance cases, the term "for personal injury" was capable of meaning "in respect of personal injury". Whether it did so or not had to be determined by the context. In the context of the Zurich products liability policy, which focussed attention on the event giving rise to the liability rather than the type of liability incurred, it did mean "in respect of". Regal Pearl’s claim was a claim " in respect of" personal injury.
Interestingly, the Chief Justice noted that the same term in an exclusion clause may well not mean the same thing, due to the different rules of construction applying to exclusion clauses as opposed to insuring clauses.
In relation to the exclusion clause, the Chief Justice noted that the commercial purpose of providing cover against risks in a product liability policy will ordinarily (in the absence clear words to the contrary) encompass the range of obligations normally associated with such liability in Australian law. The wording of the Zurich policy did not contain any clear words to the contrary. In addition, the exclusion clause spoke of the insured “accepting” liability under a contract “requiring the acceptance of liability”. That connoted something more than the usual terms implied by statute. The exclusion clause therefore did not apply.
Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328
When can an Insurer join in?
The courts commonly deal with cases of claimants seeking to join insurers into actions; but a recent case has seen an insurer itself seek to be joined into an action.
Long-running litigation had been on foot between Baulderstone Hornibrook, Connell Wagner and Reinforced Earth arising out of the construction of the third runway at Sydney Airport. The latter two companies held insurance with Gordian Runoff. Baulderstone sought to amend its statement of claim against Connell Wagner and Reinforced Earth in a way that meant Gordian Runoff would potentially have to indemnify.
Instead of waiting, Gordian sought to be added into the action in order to oppose Baulderstone’s application, and to apply to strike out the action.
While there was no real dispute that Gordian’s interests might be affected if Baulderstone’s application was allowed, the difficulty was that its liability (if any) was entirely contingent. It had not indemnified Connell Wagner and Reinforced Earth against the Baulderstone claim nor sought to come to some other arrangement with them allowing it to conduct proceedings on their behalf at the time of its application.
The court found that Gordian had to elect either to indemnify or to refuse indemnity. If it indemnified, it was entitled to take over the defence of the claim; if it did not, then the insured could join it into the action seeking indemnity. But the insurer could not adopt an approach of seeking to be joined into proceedings for limited purposes without taking a position on its liability to its insured.
Sydney Airport Corporation Ltd v. Baulderstone Hornibrook Engineering Pty Ltd [2006] NSWSC 1106
Agent’s liability limited
The distinction between insurance brokers and insurance agents is generally well known to industry practitioners, but perhaps not so well known to prospective insureds. A recent case from the NSW Court of Appeal has emphasised the difference, and limited the extent of liability of insurance agents.
Caldwell carried on business as a grazier, which included leasing certain property and allowing the agistment of stock. He was previously covered by a different insurance company and wished to obtain cheaper cover. His de facto, Ms Kennedy, spoke with a representative of J A Neilson, which was an agent for AMP Insurance. The new policy provided by the agent contained an exclusion clause limiting public liability cover to one specific property. Caldwell’s previous policy did not contain such a limitation. He only became aware of the clause after an accident occurred on another property he had leased. AMP denied indemnity for a claim arising out of the accident due to the exclusion clause. Caldwell sued, and lost at trial. He appealed.
By a 2-1 majority, the NSW Court of Appeal dismissed his appeal.
The majority found that there was no difference in this context between an insurance agent (carrying on business at an office separate from the insurer) and an employee of an insurer, sitting behind the counter at the insurer’s offices. In each case, their task was to sell insurance. Merely completing a proposal form on behalf of the prospective insured did not require the agent to take reasonable steps to give advice about the quality, extent and conditions of the cover being sought.
The court also held that it was not appropriate to describe the agent’s duty as being one requiring the agent to exercise the degree of care and skill that any insurance agent of ordinary prudence and ability might be expected to show in the situation.
Finally, while Caldwell had not been specifically advised about the particular exclusion in issue, the fact that there were a number of other exclusion clauses demonstrated the practical difficulties that would have faced the agent if it were required to warn the insured of all exclusions in the policy. The agent could not reasonably have been expected to undertake such an exercise.
Caldwell v J A Neilson Investments Pty Ltd [2007] NSWCA 3
Defence delayed
The fact that an insurer may have defences to a claim on the policy does not necessarily mean that it can successfully resist an application by a plaintiff to directly join the insurer into an action under s6(1) of the NSW Law Reform (Miscellaneous Provisions) Act 1946.
The plaintiff had been injured as the result of an alleged assault at a hotel. He sued the security firm involved and sought to join its insurer into the action. The insurer argued it was not obliged to meet the claim because of the “reasonable care” clause in its policy with the security firm; and because of an exclusion which operated where a person was charged with criminal assault (which had occurred in this case).
The insurer conceded however that the issue of “reasonable care” would be ventilated at the trial. So far as the “criminal assault” exclusion was concerned, the plaintiff argued that s.54 of the Insurance Contracts Act applied to prevent the insurer from relying on that exclusion.
Judge Sidis considered that there were arguments both ways on the “criminal assault” clause, and given the insurer’s concession on the “reasonable care” clause, it was appropriate to allow the insurer to be joined into the action so that the issues could be litigated.
Swan v Trans Pacific Insurance Corporation [2007] NSWDC 17
Heart of the matter
Insurance policies, like any other contract, may define terms by reference to matters not usually associated with those terms. If their meaning is clear however, the courts must give effect to the contractual definition. That proposition has recently been illustrated by a judgment from the Victorian Court of Appeal.
Larwint Pty Ltd had taken out a policy with Norwich containing a “critical illness benefit” in relation to a Mr King. The policy provided for payment of such a benefit in the case of “heart attack”. That term however was defined as:
Heart attack means death of a portion of heart muscle as a result of inadequate blood supply to a relevant area. The basis for diagnosis shall include:
- electrocardiographic changes associated with the myocardial infarction; and
- elevation of cardiac enzymes consistent with the myocardial infarction.
If in the policyowners [sic] opinion the above tests are inconclusive we will, at our discretion, consider other appropriate tests."
Mr King suffered a heart attack in the medically accepted use of that phrase. However while he showed elevation of cardiac enzymes, he did not show any electrocardiographic (ECG) changes. Norwich accordingly declined to pay the benefit. Larwint sued, but Norwich was successful at the trial. Larwint appealed to the Court of Appeal.
The court unanimously rejected the appeal. Delivering the main judgment, Justice Ashley found that the definition of “heart attack” had an unambiguous and rational meaning, and its application produced no absurd or unjust result.
The definition required, on first reading, that the basis for diagnosis must include both "electrocardiographic changes associated with the myocardial infarction", and "elevation" of cardiac enzymes "consistent with the myocardial infarction."
As a matter of general principle, every part of the definition had to be given work to do. Although the description of what constituted a heart attack was set out in the first sentence, the second and third sentences could not be ignored. It was clear that the second and third sentences played an important part in the operation of the clause. In addition, the last sentence (which allowed for “other appropriate tests”) expanded the circumstances in which a heart attack may attract indemnity. The corollary was that there could be no purpose at all to the last sentence if consideration of the other tests could lead nowhere.
It followed that the trial judge’s application of the policy definition was correct and Larwint’s appeal had to be dismissed.
Larwint Pty Ltd v Norwich Union Life Australia Ltd [2007] VSCA 21
If you would like more information, please contact a member of our National Insurance Team listed on the right hand side of the screen.
To view a print friendly version please click on the PDF link below.
