In this edition:
Claims made conundrum
The issues concerning claims made policies seem to grow ever more complex, as a recent – and rather quizzical – decision of the Supreme Court of Victoria illustrates.
The insured, Mr Asquith, was an accountant who practised via his company Aussie Tax Pty Ltd. He was insured via a group policy issued through his professional association for the years commencing 30 September 1999, 2000, and 2001. There were different insurers for each of the three years.
From July 1999 to October 2001, he gave advice to certain clients which resulted in claims being made against him for professional negligence. Those claims were notified to the insurers (who were Lloyds syndicates, represented by Markel Capital Ltd) in February 2002; within the period of the 2001 policy. Proceedings were ultimately brought against him; and those proceedings were settled in 2007 for $935,000. Mr Asquith and his company then sought indemnity from the 2001 insurers for that amount.
The policy was a claims made policy, and contained the usual exclusion that cover was not provided for claims where the insured was aware of circumstances likely to give rise to a claim prior to the commencement of the policy. Mr Asquith accepted, for the limited purposes of the hearing, that he was aware of such circumstances prior to the inception of the 2001 policy. However, he relied on a “continuity extension” to the policy, which read as follows:
“4. Continuity Extension
If:
(a) during the Period of Insurance –
(i) a claim is first made against the Practitioner, the Firm or the Company, as the case may be, which arises from circumstances which occurred prior to the Period of Insurance; or
(ii) circumstances are first reported to the Insurers; and
(b) the Practitioner, the Firm or the Company, as the case may be, knew, or a reasonable person in the circumstances could be expected to have known, at a point in time prior to the Period of Insurance, that the circumstances were likely to give rise to a claim against an Insured; but
(c) the circumstances were not reported prior to the Period of Insurance and, as a result, the Insured is not entitled to indemnity under any preceding policy; and
(d) the Practitioner, the Firm or the Company, as the case may be, has been insured under the Scheme continuously from the point referred to in paragraph(b) until commencement of the Policy.
then:
(A) exclusion 1(a) will not apply to the claim or to any claim arising from the circumstances; and
(B) the Insurers will not avoid this Policy or reduce their liability under this Policy by reason of the failure to disclose the circumstances prior to commencement of this Policy, unless the failure was fraudulent; but
(C) the liability of the Insurers will be reduced by the amount that fairly represents the extent by which the insurers could have mitigated their liability under the policy which was current at the point in time referred to in paragraph(b), had the circumstances been duly reported under that policy;
For the avoidance of doubt, this extension will not apply if any Insured is entitled to indemnity under any preceding policy in respect of a claim arising from the circumstances.”
Markel argued that the continuity extension was inapplicable because Mr Asquith was entitled to indemnity under the 1999 and 2000 policies (which meant that paragraph (c) of the extension was not satisfied). A preliminary hearing was listed to determine whether the continuity extension applied.
At that hearing, Justice Byrne noted the curious position that confronted Mr Asquith. He was effectively forced to argue on behalf of the 1999 and 2000 insurers (who were not parties to the proceeding) that they were not liable so as to engage the extension; even though if the decision went against him, he might later wish to argue that they were liable.
Markel’s argument hinged on s.54 of the Insurance Contracts Act. It argued that, pursuant to that section, the 1999 and 2000 insurers could not refuse to pay the claim by reason of the insured’s failure to notify of the claims during the relevant periods of insurance, but could reduce their liability by the extent of any prejudice.
After examining the 1999 and 2000 policies, and considering the High Court’s decision in FAI v Australian Hospital Care Pty Ltd (2001) 204 CLR 641, Justice Byrne found that Markel’s argument was correct. The insurers from the earlier years could not refuse to pay a claim by Mr Asquith based on his failure to give notice, by reason of the “statutory entitlement to indemnity” created by s.54.
It followed then that the continuity extension did not apply to Mr Asquith’s claim against the 2001 insurers.
Aussie Tax Pty Ltd & Anor v Markel Capital Ltd [2008] VSC 592
“Precautions” don’t equate to “construction”
The argument (previously covered in these pages) that the “all reasonable precautions” clause in a construction insurance policy is, itself, a “construction contract” has been given short shrift by the NSW Court of Appeal.
Thiess held a construction risks policy with Zurich in relation to work on the Lane Cove tunnel in Sydney. Following the collapse of that tunnel, Thiess carried out work on the tunnel. It then sought to argue that the insurance policy constituted a “construction contract” within the meaning of the Building and Construction Industry Security of Payment Act. If the policy was a “construction contract”, Thiess could rely on the Act to claim progress payments from Zurich.
The matter was heard in the Supreme Court, which decided that the policy; and in particular, the “all reasonable precautions” clause in the policy did not constitute a “construction contract” within the meaning of the Act. Thiess appealed.
The term “construction contract” was defined to mean “…a contract or other arrangement under which one party undertakes to carry out construction work, or to supply related goods and services, for another party”.
The Act also provided that it did not apply to:
“(a) a construction contract that forms part of ... a contract of insurance under which a recognised financial institution undertakes:
...
(iii) to provide an indemnity with respect to construction work carried out, or related goods and serves supplied, under the construction contract, ...”
The somewhat complicated “all reasonable precautions” clause in the policy read:
“18. Project Deed Compliance
Insurers agree that they are aware of the obligation imposed on Insureds #1 and #3 by the project deed and other contracts for the Project that specifies that Insureds #1 and #3 must – following loss or damage to the Subject Matter Insured for Section I:
(a) subject to allowing reasonable time for inspection by Insurers, take immediate steps to clear any debris and begin initial repair work;
(b) promptly consult with Insured #2 and carry out such steps as are necessary to ensure the prompt repair or replacement of the Subject Matter Insured so that it complies with contractual requirements, disruption of the Project is minimised and Insureds #1 and #3 continue to comply with their contractual obligations to the greatest degree possible.
Notwithstanding the above, the Insured shall take and cause to be taken all reasonable precautions to safeguard the Subject Matter Insured and to prevent loss or damage. The Insured shall also afford reasonable facilities for Insurers’ representatives to examine any of the Subject Matter Insured.”
It was immediately followed by a term providing that “due observance and fulfilment of the terms, Conditions and limitations” of the policy was a condition precedent to the insurers’ liability to make a payment under the policy.
Although both parties agreed that an insurance policy could, in some circumstances, amount to a “construction contract”, Zurich maintained this was not one of them. The Court of Appeal unanimously agreed. Delivering the court’s judgment, Justice McFarlan succinctly stated the position as follows:
“The requirement to take reasonable precautions which admittedly might in certain circumstances involve the performance of construction work is designed to protect the insurers by limiting their obligations to indemnify the insureds. This role is made clear by cl 19 which immediately follows the clause relied upon by the appellants. In that clause compliance with the terms, conditions and limitations of the policy is made a condition precedent to any liability of the insurers to make payment under the policy.
Whether there is a promise, or to use the expression used in the definition of “construction contract” in the Act, undertaking to carry out construction work can in my view be tested by asking whether the insurers could sue the insureds for damages if the insureds failed to take reasonable precautions as required by cl 18. Clearly, in my view, they could not. That would not be in conformity with the commercial purpose of the policy and is not dictated by any language used by the parties.
The requirement of reasonable precautions is a condition of the insurer’s obligation to indemnify, not a promise or undertaking by the insured to take those steps.”
As a result, Thiess’s appeal was dismissed.
The case is significant as it appears to largely close off (subject to any appeal to the High Court) any argument that compliance with “all reasonable precautions” clauses in construction risks policies (or, indeed, certain other types of policy) amount to a “construction contract” to which the laws regulating the construction industry apply.
Thiess Pty Ltd & Anor v Zurich Specialties London Ltd & Anor [2009] NSWCA 47
Occurrence = action; damage = consequence
The often fine line between an “occurrence” and “damage” in liability policies has been illuminated to some extent by a recent decision of the Supreme Court of Queensland.
Selected Seeds had acquired seeds that were represented to it to be Jarra grass. In fact, the seeds were summer grass seeds; a distinction that was important because Jarra grass is regarded as a valuable agricultural crop whereas summer grass is, in the words of the trial judge, “effectively a weed”.
Selected Seeds provided the seed to intermediaries and it was eventually acquired by Mr & Mrs Shrimp who planted it on their land. When they discovered it was summer grass and not Jarra grass, they claimed damages from the intermediaries, who in turn joined Selected Seeds into the action. The matter was eventually settled, with Selected Seeds providing $150,000 to the settlement.
Selected Seeds claimed on its liability policy with QBEMM, seeking indemnity for the $150,000 settlement and almost $700,000 in legal costs.
The insurer resisted the claim on two primary bases – firstly, that there had been no “occurrence” within the meaning of the insuring clause in the policy; and secondly, that an exclusion in relation to failure of the product supplied to “correctly fulfil its intended use”.
In relation to the “occurrence” issue, the insuring clause in the policy provided cover for legal liability “in respect of Personal Injury or Property Damage happening during the Period of Insurance and caused by an Occurrence within the Territorial Limits in connection with Your Business”.
Selected Seeds argued that planting the summer grass on the Shrimps’ land was the relevant “Occurrence”. QBEMM however argued that there had been no “Occurrence” within the meaning of the policy because the suggested “Occurrence” was the same as the “Property Damage” that had been sustained by the Shrimps. Since the insuring clause required that the damage be caused by the “Occurrence”, they could logically not be the same thing.
Justice McMurdo examined the authorities and agreed with the proposition that if the “occurrence” and the “damage” were the same thing, then the policy would not respond. However, he found that QBEMM’s argument in this case blurred the distinction between action and consequence.
The “action” in this case was the planting of the seed. That action then resulted in the “consequence” of the Shrimps’ land being in a damaged condition. Accordingly, the “occurrence” and the “damage” were not the same thing and the insuring clause was therefore engaged.
On the exclusion clause issue, QBEMM contended that the seed had failed to fulfil its intended purpose, being to produce Jarra grass. While Justice McMurdo accepted that the production of Jarra grass was the intended purpose, and that purpose had not been fulfilled, it was necessary to consider whether the liability of Selected Seeds arose from that failure.
It was noted that Selected Seeds’ liability for damages arose not from what the product failed to do (i.e. grow Jarra grass) but what it did do to the Shrimps’ land (i.e. to put it in a “contaminated” state). Accordingly, the exclusion did not apply and Selected Seeds was entitled to indemnity.
Selected Seeds P/L v QBEMM P/L & Anor [2009] QSC 70
Interest after refusal to pay claim – s.57 Insurance Contracts Act
Section 57 of the Insurance Contracts Act allows an insured to claim interest in the event that an insurer refuses to pay a claim. The interest is payable for the period “commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount”. But when exactly does it become “unreasonable” for an insurer to withhold payment? Some guidance on that issue can be found in a recent decision of the Supreme Court of Victoria.
In March 2001, the plaintiff McConnell Dowell Middle East LLC, notified its brokers of several items of mining equipment that were “missing” in the Central African Republic following political and social unrest there. A claim was submitted to the insurer, Royal & Sun Alliance, who appointed loss adjusters in April 2001. The adjusters provided a report in May 2001 which, although expressed as being “preliminary”, indicated that the claim appeared to be legitimate and that the equipment appeared to have been stolen. Discussions then ensued about whether the theft was “permanent” or not, including whether there was any prospect of litigation to recover the equipment.
On 31 August 2001, McConnell Dowell provided the insurer with a copy of legal advice it had received about the prospects of, and options for, recovery. It asked for “input” from the insurer about the various options. No “input” was forthcoming (although the insurers asked for and were provided with, additional documents) and in January 2002, McConnell Dowell asked (via the loss adjusters) for a “definitive response on policy liability”. None was forthcoming and in 2003, McConnell Dowell commenced proceedings.
Those proceedings travelled what the trial judge, Justice Hansen, described as a “rough road”, with several amendments and additions to the pleadings in the years between 2003 and the trial. Significantly, in July 2007, McConnell Dowell pleaded (for the first time) a positive case that the equipment had been lost as a result of “theft”.
Following trial, Justice Hansen found that the equipment had indeed been stolen and entered judgment in favour of McConnell Dowell. Royal & Sun Alliance was ordered to pay approximately $US3.3 million in respect of the claim. McConnell Dowell claimed interest pursuant to s.57 of the Insurance Contracts Act.
While Royal & Sun Alliance conceded it had to pay interest, it argued that as the claim on which McConnell Dowell succeeded had not been fully crystallised until the amendments to the pleadings in July 2007, interest should not start to run until August 2007 (allowing the insurer some 4 weeks to consider the amendments).
For their part, McConnell Dowell argued that interest on the bulk of the claim should run from May 2001 when the loss adjusters’ report was provided.
Justice Hansen noted that the question to be answered was when the insurer ought to have known of its obligation to pay the claim, even though it may have genuinely held different views prior to the determination of the issue. In deciding that, the insurer was to be allowed a reasonable period to investigate the claim and determine its position. Once the insurer had denied liability however, the subsequent course of the litigation was irrelevant to determining when interest should start to run. The insurer’s argument that interest should only run from August 2007 was therefore rejected.
Justice Hansen however found that the date proposed by McConnell Dowell was also incorrect. The loss adjuster’s report of May 2001 was preliminary only, and at that stage, there was still some prospect of recovering the equipment. However, the request of 31 August 2001 for the insurer’s advice on recovery options was crucial. That request was, in effect, seeking the insurer’s position on policy liability. Justice Hansen found that a period of 4 months should be allowed for Royal & Sun Alliance to have considered its position and carried out any additional investigations. That then set the date for interest to run as 1 January 2002.
Significantly, Justice Hansen also observed that “…the fact that the exact circumstances surrounding the loss of the equipment remained unclear, even after the trial, does not mean that an insurer who chooses to request further information and defer a decision on policy liability until such time as the picture is clear (when the practical reality is that the picture may never become as clear as the insurer might wish) can avoid the running of interest on a payment which the Court has ultimately held should have been made by the insurer at an earlier time.”
In other words, an insurer cannot simply “sit on its hands” and defer making a decision on a claim in the hope of avoiding interest.
McConnell Dowell Middle East LLC v Royal and Sun Alliance Insurance Plc (No 2) [2009] VSC 49
This publication is no more than general comment. Readers should not act on the basis of the material without taking professional advice relating to their particular circumstances.
