An Excess of Excess (Clauses)

A recent interlocutory decision of the Supreme Court of New South Wales provides clarification on the scope of ‘other insurance’ clauses, ‘excess’ clauses, double insurance and the application of sections 45 and 48 of the Insurance Contracts Act, 1984 (Cth). The decision is beneficial to general insurers and their lawyers dealing with coverage issues in multiparty disputes.

The parties to the application

Brendan Foster – Plaintiff

QBE European Underwriting Services (Australia) Pty Ltd (First defendant)

QBE Underwriting Limited as managing agent for Lloyds Syndicate 2999 (Second defendant)

Novae Syndicates Limited (Company No. 2082070, England) (Third defendant)

Allianz Australia Insurance Limited (Fourth defendant) (Allianz)

*the first, second and third defendants will be referred to collectively as ‘QBE’.

Background

The parties to the application sought answers from the Court to five separate questions which they agreed ought be considered prior to a substantive hearing. The questions related to the interpretation and application of three separate insurance policies.

The plaintiff was employed by D.C Resourcing, a labour hire company, and suffered a personal injury whilst working as a plant operator/labourer as lent-labour for Reed Constructions Australia Pty Ltd (Reed). The incident occurred on 15 December 2011 when, allegedly, a vehicle rolled on the foot of the plaintiff at a Roads and Maritime Services (RMS) construction site.

Reed went into liquidation after the proceedings commenced, and so pursuant to section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Miscellaneous Provisions Act), the plaintiff joined QBE instead of Reed. The Court subsequently ordered that Allianz be joined to the proceedings on the basis that such joinder was necessary for the determination of all matters in dispute.

The contract between RMS and Reed required that RMS take out an insurance policy to cover RMS, Reed and all Subcontractors engaged from time-to-time in relation to the works for third-party liability, which included personal injury.

As at the date of the incident, this policy was underwritten by Allianz (2011 Allianz Policy). The 2011 Allianz Policy commenced on 1 October 2011 and operated for the period 2011 to 2012.

On or about 1 October 2006, an insurance contract was entered into whereby Allianz would underwrite insurance for all work required by RMS in relation to the construction site. The policy was consistently renewed on the same terms until 2009 when the policy was underwritten with a term that the insurance should apply as primary insurance and without an ‘excess clause’ (2009 Allianz Policy). In contrast, the 2011 Allianz Policy contained a provision for ‘other insurance’ which specified that, in circumstances where there were two or more insurance policies covering the requisite liability, the 2011 Allianz Policy would operate as an excess policy.

The 2011 Allianz Policy was intended to have the effect that, if Reed were otherwise insured, Allianz would be responsible only for the loss and damage not covered by the other insurance.

Reed also obtained insurance from QBE against third-party liability, including personal injury of the kind suffered by the plaintiff. Its policy operated for the period between 25 July 2011 and 25 July 2012 (QBE Policy). An ‘excess clause’ was contained in the QBE Policy and was to the same effect as that within the 2011 Allianz Policy.

Enforcing the 2009 Allianz Policy

The 2009 Allianz Policy expired in the ordinary course on 30 September 2010, but the period of insurance was defined as ending on completion of the construction period. As a result, QBE sought to rely on the 2009 Allianz Policy operating as at the date of incident, therefore making QBE only liable to indemnify over and above the limit of primary insurance pursuant to the 2009 Allianz Policy.

The Court, having regard to a reading of the 2009 Allianz Policy as a whole, and bearing in mind its commercial context, held that it necessarily expired on 30 September 2010. Therefore, the 2009 Allianz Policy did not apply to cover liability for the loss or damage for which Reed was responsible as a result of the incident in December 2011.

Consequently, the incident was covered by the 2011 Allianz Policy and the QBE Policy (but not the 2009 Allianz Policy), and so a dual insurance issue arose.

Dual insurance

Dual insurance, or double insurance, occurs when an assured is insured against the same risk with two independent insurers. The insured may claim indemnity from either insurer, but must not recover more than the loss suffered.

Tied in with the principle of dual insurance is the doctrine of privity of contract. Historically, contract law has required that only parties to a contract are entitled to enforce a contract or be legally bound by it. Whilst third parties can benefit from the performance of a contract, third parties cannot enforce terms of a contract. An insurer is an example of a third party.

The juncture between the doctrine of privity and insurance contracts has long been scrutinised by Courts, lawmakers, academics and legal professionals. A review of these concepts by the Australian Law Reform Commission led to sections 45 and 48 of the Insurance Contracts Act 1984 (Cth) (ICA) in their current form:

“[45]    ‘Other insurance’ provisions

(1)    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.

(2) 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.

[48] Contracts of general insurance—entitlements of third party beneficiaries

(1)    A third party beneficiary under a contract of general insurance has a right to recover from the insurer, in accordance with the contract, the amount of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party to the contract.

(2)    Subject to the contract, the third party beneficiary:

(a)    has, in relation to the third party beneficiary’s claim, the same obligations to the insurer as the third party beneficiary would have if the third party beneficiary were the insured; and

(b)    may discharge the insured’s obligations in relation to the loss.

(3)   The insurer has the same defences to an action under this section as the insurer would have in an action by the insured, including, but not limited to, defences relating to the conduct of the insured (whether the conduct occurred before or after the contract was entered into).”

Section 45 of the ICA deals with ‘other insurance’ or ‘excess provisions’ and in nominated circumstances renders such provisions void. However, it applies only where the insured has ‘entered into’ another ‘contract of insurance’.

Reed, which entered into the QBE insurance contract, was not ‘the insured’ under the 2011 Allianz Policy. Similarly, RMS, which was the insured under the 2011 Allianz Policy, did not enter into the QBE Policy. Accordingly, neither excess/other insurance clause was voided by the application of section 45 of the ICA.

Section 48 of the ICA deals with the entitlements of third-party beneficiaries and provides that the insurer has the same defences to an action taken by a third-party beneficiary as it would if the action had been taken by the insured. It gives a third party beneficiary under a contract of insurance the same right of recovery from the insurer as the insured under that policy. This overcomes the restrictions entrenched in the common law doctrine of privity.

The 2011 Allianz Policy contained the following ‘other insurance’ clause:

This Policy is excess over and above any other valid and collectable insurance and shall not respond to any loss until such times as the limit of liability under such other primary and valid insurance has been completely exhausted.

Clause 8 of the QBE Policy contained ‘Insurance Arranged by Principal’ clause:

If the Insured enters into an agreement with any other party (who for the purpose of this clause is called the principal) pursuant to which the Principal has agreed to provide a policy of insurance which is intended to indemnify the Insured for any loss or liability arising out of the performance of the said agreement then the insurer will (subject to the terms and conditions of the Policy) only indemnify the Insured for loss or liability not covered by the policy of insurance provided by the Principal.

The clause in the QBE Policy was operative only if ‘the insured enters into an agreement’ with any other party. This was triggered as Reed (the Insured) entered into an agreement with RMS (the Principal) to provide a policy of insurance, which intended to indemnify the Insured for the loss or liability that has or may arise, if the plaintiff were to be successful in his claim.

On the reading of both the 2011 Allianz and QBE Policies, as a matter of logic, the effect of each excess clause was that neither of the contracts of insurance provided cover for the incident. However, if neither policy responded then the excess clause in each policy would not operate to exclude the liability of the respective insurer. The Court referred to this as a ‘catch-22’ – a wholly circular and self-defeating proposition.

With reference to the relevant authorities of Weddell¹ and Lambert Leasing,² the Court determined that each excess clause within the 2011 Allianz Policy and the QBE Policy created an absurdity and that the most appropriate interpretation was that each excess clause, read together, cancelled the other out.

On this basis, the Court concluded that both the 2011 Allianz Policy and the QBE Policy obliged QBE and Allianz to equally indemnify Reed for an amount up to $20 million in relation to each operative policy, conditional upon the amount (if any) awarded to the plaintiff as a result of the incident.

Comments

This Court used a common sense approach to contract interpretation, specifically in the realm of insurance contracts, to determine the logical path to ensuring the insurable event was appropriately insured. For practitioners, it provides a summary of the key issues surrounding cases of dual insurance, and provides clarity as to which insurer ought to be liable to indemnify the insured, and which insurer is liable to pay contribution.

Foster v QBE European Underwriting Services (Australia) Pty Ltd as managing agent for Lloyd’s Syndicate 386 [2018] NSWSC 440

¹Weddell v Road Transport and General Insurance Co Ltd [1932] 2 KB 563
²Lambert Leasing Inc v QBE Insurance (Australia) Ltd (2016) 93 NSWLR 166