IN THIS EDITION
“Other insurance” clause can operate against a “beneficiary”
Determining just how so-called “other insurance” or “double insurance” clauses in an insurance policy operate can sometimes be a complex – not to mention, controversial – exercise. The High Court has recently weighed into at least some of the issues surrounding these types of clauses, thereby providing some guidance.
In 1992, Hamersley Iron Pty Ltd contracted with Speno Rail Maintenance Australia Pty Ltd to provide rail grinding services. The contract required Speno to indemnify Hamersley and insure itself against all claims occurring as a result of anything done in the performance of the contract causing death or injury to any person. It also required that Speno’s insurance policy include Hamersley as a named insured. Consistently with its obligations, Speno obtained a Combined General Liability Insurance Policy from Zurich Insurance in September 1995. Although Hamersley was not a party to the policy, it was a named insured under it.
Hamersley took out its own policy with Metals & Minerals Insurance Pte Ltd (MMI). That policy contained an “other insurance” clause which read:
“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:
(i) in the event of reduction pay the excess of the reduced underlying limit
(ii) in the event of cancellation or exhaustion continue in force as underlying insurance
but subject always to the terms and Conditions of this Policy.”
After two employees of Speno were injured on the project (as a result of the negligence of Hamersley), they sued in the WA District Court. Those proceedings led to judgment in favour of one of the employees against Hamersley in the amount of about $1.1 million and a settlement of $25,000 in favour of the other. Zurich and Speno were ordered to indemnify Hamersley in respect of the judgment sum. Zurich paid the judgment amount and the settlement.
Zurich then sought contribution from MMI in the WA Supreme Court based on MMI’s asserted liability to indemnify Hamersley under its policy. MMI argued that it had no coordinate liability with Zurich which would ground an equitable right of contribution. It also relied upon the Underlying Insurance clause to reduce its liability to the amount of the excess insurance within the meaning of the clause.
Zurich however argued that s45(1) of the Insurance Contracts Act rendered the Underlying Insurance clause void. Zurich’s contention was accepted by the trial judge, but rejected in the Court of Appeal. Zurich was granted special leave to appeal to the High Court.
For the sake of completeness, section 45 provides:
-
“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.”
The trial judge decided that s.45(1) does not operate to avoid an “other insurance” provision where it relates to another policy to which the insured is not a party but in which it is named as a non-party beneficiary. Nonetheless, the trial judge went on to find that the Underlying Insurance clause in the MMI Policy was void as a whole because some elements of it were caught by s.45(1). The net result was a finding in favour of Zurich against MMI.
The Court of Appeal however found that the trial judge had erred in finding that s.45(1) operated to avoid the Underlying Insurance clause in its entirety. It set aside the judgment and ordered that the Zurich contribution action be dismissed.
The five-member bench of the High Court agreed that s.45(1) did not operate in circumstances where the “other insurance” was the result of the insured being a named (or even an unnamed) beneficiary of the policy, but not a party to it. The justices noted that the section only applied to clauses that excluded liability because “the insured [had] entered into some other contract of insurance”.
In this instance, Hamersley had not “entered into” any other insurance. It was merely a named beneficiary of the Zurich policy. Accordingly, the provision did not apply to the Zurich policy. As a result, all five members agreed that Zurich’s appeal had to be dismissed.
Where the majority (comprising Chief Justice French and Justices Gummow and Crennan) differed from the minority (Justices Hayne and Heydon) was on the subsidiary question of whether the effect of s.45(1) could be limited by “severing” any void part of the policy from the remainder of it. The majority felt that it could, although they did not decide whether the particular way in which the Underlying Insurance provision was worded rendered it one “provision” or several “provisions”.
The minority took the view that where a provision in a policy had the effect prescribed by s.45(1), it was void and there was no room for any question of severance. The minority stated that the section was directed to the effect of the provision, not any “discrete collocation of words” within the policy.
In the end result however, the difference of opinion made no difference to the outcome because of the unanimous finding on the application of s.45(1) to the Zurich policy in the circumstances; and the appeal was dismissed.
Zurich Australian Insurance Ltd v Metals and Minerals Insurance Pte Ltd [2009] HCA 50
Fraud “card” does not need to be laid on the table
Detecting and discouraging fraud in insurance claims is a constant battle for insurers. A recent decision of the NSW Court of Appeal would seem to assist in that battle.
Mr & Mrs Halpin, and an associated company, (the Halpins) made a claim on their policy with Lumley General Insurance for losses allegedly arising from a theft at their home in August 2006. They said that among the items stolen were sporting memorabilia, including valuable rugby league jerseys and cricket bats.
In March 2007 Lumley denied the claim, and the Halpins commenced legal action. In its Defence, Lumley maintained that the Halpins had deliberately provided false information for the purposes of inducing it to pay the claim. The allegedly false information related to the existence; ownership; payment; purchase; authenticity and value of the goods.
After proceedings had commenced, the court made orders relating to the service of evidence. The Halpins served some 40 affidavits. Lumley served some affidavits, but then applied to the court to modify the earlier order by exempting certain affidavits and loss assessors’ reports. The judge at first instance allowed Lumley’s application. The Halpins appealed.
Justice Sackville delivered a lengthy judgment in the Court of Appeal analysing the basis of the court’s power to allow a party to withhold providing evidence before a hearing. Justice Sackville found, despite submissions to the contrary, and despite the changes wrought by the Civil Procedure Act and the Uniform Civil Procedure Rules, that the court did indeed have that power. The issue was however whether the power had been appropriately exercised in this case.
The Halpins, through their legal counsel, identified three policy reasons why, they said, parties to litigation should serve all witness statements in advance of the trial; being:
- that efficiency in the listing and hearing of cases would be imperilled by the risk, if all evidence was not served in advance, that the trial would have to be adjourned because the party denied access to the documents required time to prepare evidence in reply;
- fairness to parties and witnesses required that they should know the full scope of any case were required to respond to; and
- the prospects of settlement would be enhanced if the Halpins and their lawyers knew and could assess the evidence against them.
In other words, the Halpins argued that Lumley should have to “put their cards on the table”.
Justice Sackville found that there was no inconsistency between the principles in the Civil Procedure Act and the UCPR, and the existence of a power to allow a party to withhold affidavits until trial.
While noting that other judges might have taken a different view of the weight to be accorded to the competing considerations, that did not demonstrate any error of principle or any other basis for intervention by the Court of Appeal. Justice Tobias agreed with Justice Sackville; while Justice Basten delivered a separate judgment arriving at the same result.
Accordingly, the appeal was dismissed and Lumley were entitled to withhold the evidence.
Halpin & Ors v Lumley General Insurance Ltd [2009] NSWCA 372
Excess does not need actual payment
Most common types of insurance carry some form of excess or deductible. While these serve to deliver several sound commercial objectives, their legal status is rarely tested. The NSW Court of Appeal has however recently had occasion to examine the operation of an excess clause in a public liability context.
Mr Chisholm had been injured in 2007 as the result of alleged negligence on the part of a company known as Employ (No. 14) Pty Ltd. Shortly after the incident the company went into liquidation. Mr Chisholm then sought, and was granted, leave to join the company’s public liability insurer, Calliden Insurance Ltd, into the action.
Calliden sought leave to appeal that decision, but the application for leave and the appeal itself were heard at the same time. The appeal was based on what Justice Allsop (delivering the court’s unanimous judgment) called a “short point of construction”. Calliden argued that its excess clause meant that payment of the excess by Employ was a pre-condition to cover under the policy; and since the excess had not been paid, it had never become liable to indemnify the company.
The excess clause was a condition to the policy in the following terms:
“Where an Excess is shown in the Schedule or within Your Policy wording You or any other person insured must first bear the amount of the Excess for each and every claim arising out of the one event or occurrence before becoming entitled to cover under Your Policy. Where two or more different Excesses apply to an event or occurrence giving rise to a claim only the greatest of those Excesses shall be applied to the whole claim.”
The term “excess” was defined as:
“…the amount the Insured first bears in relation to each claim caused by an Occurrence. The Excess applies to all amounts payable under this Policy.”
The Court of Appeal noted that the primary judge had found that the excess clause required Employ to “bear” the specified excess but not to “pay” the amount as a condition precedent to Calliden incurring liability under the policy. The primary judge had taken the view that the clause did no more than “relieve the insurer of liability to pay the first $25,000 of a claim”; and that its intention was not that Calliden should be paid $25,000 but rather that it should not have to pay that amount of a claim that was represented by the excess.
The Court of Appeal found that the primary judge had been “clearly correct” in coming to those conclusions.
In addition, the policy provided that the insured was to pay “the premium, any adjustments of premium and other amounts charged for this Policy” or a renewal of it. The excess did not fit within any of those terms.
Finally, the Court found there was “no coherent business purpose disclosed by the policy” to construe it as requiring actual payment of the excess by the insured as a pre-condition to indemnity.
As a result, leave to appeal was refused.
Calliden Insurance Ltd v Chisholm [2009] NSWCA 398
Unsuitability is not a “defect”
Product liability is an insurance line in which deciding exactly what cover is provided by the policy can be difficult. The Victorian Supreme Court has had to consider just such a difficult question.
The claim arose out of the 2004 Sydney-Hobart yacht race. The yacht Skandia was severely damaged when piston rods on the canting keel buckled and broke causing the keel to detach from the hull. The yacht’s owner, Timelink Pacific Pty Ltd, wrote (through its solicitors) to Major Engineering shortly after the mishap advising that it held Major responsible for the damage.
The claim as first articulated was that Major had “advised on the requirements for, designed, manufactured and supplied two hydraulic cylinders ... to control the keel of the maxi racing yacht”. The letter went on to state that its claim was “that the cylinders were inadequately specified, were not properly manufactured and further, were not fit for the purpose intended”.
Major duly gave notice to its insurer, CGU, of the claim. The claim was made under Major’s public and products liability insurance policy. CGU declined indemnity under the policy, relying on exclusions relating to liability “arising from the rendering of professional advice or service or the making or formulating of a design or specification within the domain of the engineering profession, and for defects in the product which were known or should have been known to Major and its agents”.
Timelink then sued Major. The matter went through a rather lengthy process of hearings and appeals, but ultimately Major succeeded against Timelink. It had however incurred over $1 million in legal costs that were not recovered from Timelink. Major claimed those costs from CGU in the Supreme Court of Victoria.
The legal costs clause in the policy read:
"Your legal costs
(a) In the case of:
(i) Public Liability or Products Liability; or
(ii) a claim of Public Liability or Products Liability being made against You;
for which indemnity is, or would be, available under this Policy, we will pay Your Legal Costs.”
Accordingly, the payment of legal costs was dependent on indemnity being “available” for the claim against Major.
CGU, for its part, relied on exclusion clause 19, which excluded cover in relation to:
“Liability caused by or arising out of Your performance or failure to perform the following:
(a) the rendering of professional advice or service.
[...]
(c) making or formulating a design or specification within the domain of the architectural, engineering, scientific, chemical, actuarial, statistical, economic, financial or medical profession.”
Justice Pagone noted that the question of whether the claim fell within the terms of the indemnity did not depend on the way the Timelink had framed its claim. Often, plaintiffs might frame their claim in such a way as to try to engage an exclusion clause in a defendant’s insurance policy, in the hope of obtaining a “forensic advantage”.
The key issue in deciding whether Timelink’s claim against Major fell within the terms of the policy was making “an adequate identification of the claim and an evaluation of whether the claim falls within the terms of the policy as properly construed”. In that regard, neither the actual facts nor the words used to formulate the claim were determinative; nor was the defence maintained by Major. It was the “true nature” of the claim that had to be considered.
Justice Pagone found that Timelink’s case was in essence that Major had provided a product that was not suitable for the purpose it had been obtained. This however was not a claim for “product liability” as defined in the policy. Timelink’s argument was not based on a “defect” in the product; the issue was its unsuitability for its intended purpose.
Although Timelink may not have succeeded on that claim, it remained fundamentally a complaint that the product supplied ought not to have been supplied for the purpose which had been sought.
The CGU policy was intended to protect Major from liability arising from unknown defects in its product. It did not extend, and expressly excluded, liability arising out of the rendering of professional advice or service, or the making and formulation of a design or specification within the domain of particular expertise. Timelink’s claim, however misconceived it might have been, was nonetheless a claim for liability caused by or arising out of Major’s rendering of (or failing to render) professional advice or service through the supply of a product which, while arguably not defective, was claimed to have been unfit for the design it had been supplied to satisfy.
As the claim fell within the exclusion clause, it followed that the claim for legal costs was similarly excluded. Major’s claim was therefore dismissed.
Major Engineering Pty Ltd v CGU Insurance Ltd [2009] VSC 504
