Court of Appeal decides cap and collar does not fit

Summary

The NSW Court of Appeal delivered judgment on 16 May 2018 in Weir Services Australia v AXA Corporate Solutions Assurance [2018] NSWCA 100. The Court considered the nature of a cap and collar agreement between Weir Services Australia (Weir) and AXA Corporate Solutions Assurance (AXA) and the characterisation of a liability to be indemnified under broad form liability insurance policy.

At first instance, the Supreme Court found that the cap and collar agreement did not demonstrate a reasonable settlement sufficient to establish liability for which AXA was obliged to indemnify Weir under the insurance contract. Further, the Supreme Court determined that there was no ‘occurrence’ which triggered indemnity.

The Court of Appeal agreed and held that the cap and collar agreement did not have the characteristics of a reasonable settlement. The Court considered the strict distinction between occurrence and damage, which in these circumstances, prevented the loss claimed from triggering the policy’s provisions.

Background

Weir was retained by Phil Gold to refurbish a semi-autogenous grinding mill which was to be used in a mineral processing facility. Two years after the refurbishment was complete, a circumferential weld disintegrated causing damage.

Phil Gold commenced arbitration proceedings against Weir claiming substantial damages for breach of contract and pursuant to the then applicable Trade Practice Act 1974 (Cth). Before any arbitration determination, Weir and Phil Gold entered into a cap and collar agreement which provided that if Phil Gold was awarded damages in the arbitration its recovery would be limited to US$10.725 million (cap) and that Weir would pay Phil Gold a fixed amount of US$2 million (collar) regardless of the outcome of the arbitration proceedings. This became known as the cap and collar agreement.

The arbitration determination ruled that Weir had no liability in damages to Phil Gold. Weir was however left to bear its own substantial legal costs. Weir made a claim for indemnity under its broadform liability policy against AXA for the collar amount, which became payable to Phil Gold under the cap and collar agreement. Weir also made a claim for its legal costs incurred in defending the arbitration proceedings. AXA denied indemnity in respect of both claims. Weir argued that, by refusing to meet the claims, AXA was in breach of the contract of insurance and sued for damages.

At first instance, it was held that the cap and collar agreement did not constitute a reasonable settlement which established the existence of a liability or determined quantum. It followed there was no legal liability to be indemnified by AXA. The Court further reasoned that Weir had not established an occurrence which had resulted in property damage and that any entitlement that may prima facie have existed under the policy would be excluded by operation of a professional services exclusion.

Court of Appeal

On appeal, it was argued by AXA that the cap and collar agreement did not create or constitute a “settlement” and therefore could not be a “reasonable settlement” as referred to in Distillers (Bio Chemicals) v Ajax Insurances Ltd (1974) 130 CLR 1.

In considering Weir’s contractual obligation under the cap and collar agreement the Court noted that the parties agreed that determination of any legal liability of Weir to pay compensation to Phil Gold would be left entirely to the arbitration process. Accordingly, the existence of liability depended solely on the making of the arbitral award. Therefore, there was no reasonable settlement, no legal liability as contemplated by the policy, and consequently, no breach of the contract of insurance by AXA in failing to indemnify Weir.

The Court of Appeal found that the primary judge had correctly considered the distinction between an occurrence and the damage which results from it. The Court reasoned that while the failure of the weld was a readily observable change in physical circumstances, it was, in its own right, damage. The failure of the weld was not found to be an occurrence. The alternate occurrence claimed, being cyclic loading, was an ordinary operation of the mill and not something that could, of itself result in damage. It was found that there was no occurrence as required by the policy to require AXA to indemnify Weir.

The Court of Appeal also considered the professional services exclusion contained in the broadform liability policy and held that the main contractual obligation required Weir to conduct the mechanical refurbishment of the mill. Weir argued that the provision of the services in an unworkmanlike way was distinct from the misleading representations regarding the quality of the service and did not comprise a professional service. The Court of Appeal rejected this submission and confirmed the primary judge’s finding that the professional services exclusion would operate to exclude the claim had the primary insuring clause been operative.

Weir’s appeal was dismissed with costs.

Comment

The decision confirms that Courts will closely consider the intent and effect of any binding agreements entered into by insureds when an insurer’s indemnity determination is challenged.

The Court of Appeal has reaffirmed the distinction between the essential concepts of occurrence and damage which is helpful for liability insurers when considering indemnity under public liability policies.