Insurable Interest Issue 35

Contents

The Insurance Contracts Act's latest makeover

It's only words

Unhappy meal

GST Surprise (Not)

That sinking feeling

A two man job

The Insurance Contracts Act’s latest makeover

The Insurance Contracts Amendment Act (Amendment Act) was finally passed on 28 June 2013, making various and long-awaited changes to the Insurance Contracts Act (ICA). Many of the changes to the ICA have already taken effect as from 28 June 2014. The final wave of changes will come into effect on 28 December 2015.

The Amendment Act makes changes to the ICA by:

• expanding the scope and application of the duty of utmost good faith;
• allowing insurers to provide notices electronically;
• expanding the powers of ASIC to intervene in any matter arising under the ICA;
• clarifying the duties of disclosure;
• reforming the remedies of insurers in respect of life insurance policies;
• clarifying and extending the rights of third party beneficiaries under insurance policies; and
• amending section 67 to provide clear rules in respect of subrogated claims and the allocation of proceeds of recovery monies between insurer and insured.

Schedule 6 - third party beneficiaries

The focus of this update is to highlight the changes to sections 41, 48, 48AA, 48A and 51 of the ICA which commenced on 28 June 2014.

A definition of third party beneficiary has now been inserted into the ICA, meaning:

“a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends”.

The new section 41 is amended to give third party beneficiaries the same rights as insureds to call on a liability insurer to advise whether it admits that a claim is covered and whether or not it intends to take over the defence of a claim. If the insurer fails to do so within a reasonable period of time then the insured, and now also the third party beneficiary, is relieved of any obligation it may have under the policy to not compromise a proceeding or not make any admission or payment.

Section 48 now provides that a third party beneficiary has the same obligations in relation to a claim as it would have if it were the insured. The amended section also confirms that an act or omission of an insured can now also be raised as a defence to a third party beneficiary claim.

Section 48AA is similarly worded and deals with defences that an insurer has against a third party beneficiary claim under a life insurance policy. Section 48A relates to the rights of third party beneficiaries under life insurance policies to bring a claim against an insurer directly. The intent of the amendments to sections 48 and 48AA is that third party beneficiaries should have the same rights, but also the same obligations, as the named insured in respect of their ability to claim.

Lastly, section 51 now encompasses the situation where a person who is not the insured but who is entitled to cover under a liability policy, has died or cannot be found. The claimant can now proceed directly against the insurer in that situation.

The changes to the sections discussed above apply to new insurance contracts made or renewed after 28 June 2014.

Should you have any queries in relation to the amendments to the Insurance Contracts Act, please contact a member of our Insurance team in Melbourne or Sydney.

This article was written by Sophie Marino, Lawyer

It's only words

Centennial entered into an agreement with Longwall Advantage (Advantage) for the supply of labour to a coalmine operated by Centennial in New South Wales. There was a separate contract under which Advantage obtained some of the labour from Labourforce.

A worker was employed by Labourforce and was injured in the coalmine in 2008. The worker issued proceedings against Centennial, Advantage and Labourforce and each party was found to have breached its duty of care to the worker. However, in determining contribution, the Court decided that Centennial should bear 100% of the liability.

Centennial had made a claim on Advantage’s insurance policy held with GIO. GIO denied indemnity to Centennial and so Centennial joined GIO to the proceeding as a third party. The trial judge determined that Centennial was entitled to indemnity.

GIO’s policy extended liability cover to Centennial as the ‘principal’ with respect to its liability arising out of the performance of the contract with Advantage “but only to the extent required by such contract or agreement”.

Clause 8.3 of the agreement between Centennial and Advantage required Advantage to maintain public liability insurance. Clause 43.2.2 additionally required that:

“Unless otherwise agreed in writing by [Centennial], public and product liability policies must note [Centennial] and all subcontractors as interested parties and must cover the respective liabilities of each of those parties to each other and to third parties. The policy must cover each indemnified party to the same extent as it would if each of the parties had a separate policy of insurance.”

The question on appeal was whether the agreement required Advantage to take out public liability insurance to cover Centennial’s liability.

GIO raised a number of arguments on appeal and in particular argued that the contract should be interpreted in accordance with the principles laid down by the New South Wales Supreme Court in Erect Safe Scaffolding (Australia) Pty Ltd v Sutton. In that case McClellan CJ said:

“in the absence of express words, the obligation under an insurance clause in a contract which is provided to support an indemnity clause will not require the subcontractor to maintain insurance against loss occasioned by the head contractor’s negligence.”

In rejecting GIO’s submission the New South Wales Court of Appeal found that McClellan’s statement reflected an “approach to be taken”, rather than a “statement of principle”. The Court held that McClellan’s decision in Erect Scaffolding was not determinative of the interpretation of cl.43.2.2 in the present case.  The Court found that the relevant clause was “clearly directed to providing Centennial with cover of the same character under the Policy for its own interests in the performance of the Agreement by Advantage.”

In making its decision the Court emphasised that when approaching the construction of a contract it is important to look at the express words of the agreement. The Court will construe the clauses of a contract so as to render them ‘harmonious’ with one another. In this regard it is important to look at the agreement as a whole.

GIO General Limited v Centennial Newstan Pty Ltd

‘Insurance Clauses' in commercial contracts continue to be controversial. The interpretation of them depends significantly on the particular words used.

This article was written by Kate Lawford, Lawyer

Unhappy meal

The plaintiff was injured when he slipped and fell on stairs at a McDonalds restaurant. To access the counter at the restaurant, customers had to walk up a set of stairs at the entrance. The counter was located at the back of the restaurant.

The plaintiff and his friend arrived at McDonalds at about 4.30am. At the time of the incident, the restaurant was being cleaned.  There was a pile of rubbish on the floor about one to three metres from the top of the stairs. The floor between the rubbish and the counter had recently been mopped. The plaintiff saw a thin film of water on the floor and smelled cleaning chemicals. He stepped over the rubbish and walked along the wet floor to the counter. Finding the counter unattended, the plaintiff walked back across the wet floor, stepped over the rubbish and walked back along the dry section of floor to the stairs. He slipped as he began walking down the stairs. At the time, he was talking to his friend, was carrying his skateboard under his arm and was not holding on to the side handrails.

McDonalds engaged Holistic Cleaning Services to clean the restaurant. The store was open 24 hours a day. McDonalds required Holistic to carry out cleaning between the hours of 4am and 7am. McDonalds supplied the equipment and instructed Holistic to dry mop the floor, which involved mopping the floor with a mixture of water and slip resistant detergent, which was supplied in controlled portions by McDonalds.

McDonalds instructed Holistic to mop the dining area in four sections, allowing one section to dry before moving on to the next, so that customers would always have a dry section on which to walk.  However, at the time of the incident, the entire section of floor between the pile of rubbish and the counter was wet.

McDonalds also instructed Holistic to use a minimum of three ‘cleaning in progress’ signs – one at the entrance of the restaurant, one near the counter and at least one near the area actually being cleaned. At the time of the incident, there was one, possibly two signs at the counter, but none at the entrance of the restaurant or top of the stairs, or on the area that had been recently cleaned. So by the time the plaintiff encountered a sign, he had already walked across the wet floor.

None of the parties relied on any expert evidence in relation to the stairs. The evidence from McDonalds’ employees was that ceramic non-slip tiles were used on the floor and stairs, that there was a strip of bubble-tiles across the top of the flight of stairs and there was a strip of abrasive material on the edge of each stair.  Beyond that, there was no evidence about the slip resistance of the tiles when wet or of the effect of residual moisture on the plaintiff’s shoes.

On appeal, the New South Wales Court of Appeal unanimously found that neither McDonalds nor Holistic were liable for the plaintiff’s injuries. The majority of judges held that McDonalds and Holistic had breached their duty of care by not mopping the floor in sections and by not cordoning off a section of dry floor for customers to use as a walkway. The judges considered that both of these precautions were simple and caused no inconvenience to McDonalds or Holistic.

However, the plaintiff’s claim failed because he could not establish that the wetness from the floor actually caused him to slip and fall. In the absence of any evidence from the plaintiff, lay or expert, on the effect of moisture on the floor and on his shoes, the judges were not satisfied that it was more probable than not that the wet floor caused the fall. Nor was the Court willing to make an inference that as a matter of common experience it is more probable than not that the plaintiff slipped by reason of wetness on his shoes rather than because of any other reason such as inattention, excessive speed or failing to take advantage of a handrail.

Jackson v McDonalds Australia Limited

Although expert evidence is sometimes overused, this is a case where the Court was not prepared to make an assumption about a relatively simple factual issue without the benefit of expert evidence.

This article was written by Melissa Macrae, Special Counsel

GST Surprise (Not)

An insured factory was totally destroyed by fire.  The various losses (building, contents, business interruption etc) all exceeded the respective sums insured.

However the insurer did not pay out the full sums insured, but instead paid out only 10/11ths of each policy limit.  In doing so it relied on a clause in the policy to the effect that, when making any payment under the policy in respect of the acquisition of goods or services, the insurer was entitled to reduce the amount by any input tax credit to which the insured would be entitled.

Rather surprisingly, a judge bought that argument when the dissatisfied insured sued the insurer.  Less surprisingly, the Queensland Court of Appeal disagreed.  It accepted the insured's argument that under the policy the sequence for calculating payments was:

• quantify the loss;
• apply the ITC reduction; and
• if the loss (so reduced) exceeded the sum insured, then the full sum insured was payable.

 Mattress Innovations Pty Ltd v Suncorp Metway Insurance

When construing a clause in an insurance policy it helps to read the clause in the context of the policy as a whole and to bear in mind the logical purpose behind the clause.

That sinking feeling

The plaintiff was the owner of a $250,000 Aston Martin DB9 Volante F1 convertible, which he somehow drove off a boat ramp in May 2011, causing it to become submerged in seawater and rendering it a total loss. The insurer refused the claim on the basis that the plaintiff had failed to disclose a prior licence suspension and numerous traffic infringements when the policy was taken out.

The plaintiff (and his employee) gave evidence that at policy inception the plaintiff disclosed the suspension of his driver’s licence on the basis of an accumulation of demerit points but that he was not sure when the suspension occurred. The plaintiff also claimed that he disclosed having received multiple infringements and fines but was not asked further questions in relation to this.

There was no audio recording of the relevant telephone call. However, given the expensive vehicle involved, the insurer’s employees claimed to vaguely remember the plaintiff taking out the policy. Aided by the insurer’s ‘screen dumps’ which indicated the plaintiff had a clean driving record, the insurer’s employees gave evidence that the plaintiff did not disclose a license suspension or the loss of demerit points when he applied for the policy. Evidence was given that had a licence suspension or multiple traffic infringements been recorded on the system, it would have been referred to a manager to determine whether the insurer would accept the risk.

Evidence was given by the insurer’s state manager that had the plaintiff disclosed his full driving history including the license suspension and six traffic infringements for which three demerit points were assigned, the plaintiff would have been deemed an unacceptable risk in accordance with the insurer’s National Underwriting Guidelines.

The trial judge considered the plaintiff and his employee to be unreliable witnesses and accepted the evidence of the insurer’s witnesses. The judge considered it unlikely that the insurer’s employees would have failed to record the license suspension or traffic infringements had they been disclosed by the plaintiff and determined that the plaintiff did not disclose his full driving history when he applied for the policy. The judge determined that these matters were within the plaintiff’s consciousness and ought to have been disclosed.

Section 28(3) of the Insurance Contracts Act provides that where an insured fails to comply with the duty of disclosure and that failure was not made fraudulently, the insurer is entitled to reduce its liability to put it in the position it would have been in had full disclosure been made. The trial judge accepted that had the plaintiff disclosed his true driving history, the insurer’s underwriting criteria would have deemed him an unacceptable risk and the insurer would not have issued the policy. Accordingly the insurer was able to reduce its liability to nil. The trial judge also determined that the insurer did not need to repay premiums to the insured.

The insured appealed claiming that even if full disclosure had been made, the insurer would have accepted the risk. The Queensland Court of Appeal disagreed and upheld the trial judge’s findings that had the plaintiff made full disclosure, the insurer would not have accepted the risk and therefore had no liability for the claim.

Michail v Australian Alliance Insurance Co Ltd

This case demonstrates the importance of having clear underwriting guidelines. The insurer was able to successfully rely on its underwriting criteria to prove that it would not have accepted the risk had the plaintiff disclosed his full driving history.

This article was written by George Ioannidis, Lawyer

A two man job

The plaintiff was a subcontractor on a building site who alleged he was injured when a ladder he was descending fell over in high winds. He said that on the day in question he was approached by the site’s production manager and asked to perform overtime work and repair spot leaks at the building site after a wet day. The plaintiff said that he agreed to perform the work under the supervision of the production manager. Proceedings were issued directly against the insurer of the builder.

The builder denied liability on the basis that the plaintiff had not, in fact, fallen off the ladder as alleged. The builder’s case was that after the plaintiff’s ladder fell over in the wind, the plaintiff attempted to vault off a light fixture in an attempt to climb to the ground and suffered injuries after falling from a significant height. The Supreme Court of New South Wales did not accept this explanation, finding that the plaintiff, an experienced tradesman, would not attempt such a risky manoeuvre in order to reach the ground.

Alternatively the builder denied that it owed the plaintiff a duty of care on the basis that the plaintiff was an independent contractor. The Court considered relevant High Court authorities which establish that a principal contractor is under a duty to use reasonable care in organising an activity to avoid or minimise the risk of injury to subcontractors. However, it held that unless the builder or its employees assumed responsibility to supervise the subcontractor as to how the work was performed, it did not owe a duty of care to supervise.

Although the Court accepted that it was industry practice for two persons to carry out the work performed by the plaintiff, it noted that the builder was entitled to rely on the plaintiff’s judgement as to how the work should be performed. The Court rejected the plaintiff’s allegation that the builder’s production manager had assumed responsibility to assist the plaintiff in his duties on the day in question by being the ‘second man’ for the repairs. The plaintiff, as an experienced independent contractor, had a choice to refuse the relevant work, or to carry it out in a manner that he saw fit.  No duty of care was owed by the builder in those circumstances.

McGlashan v QBE Insurance (Australia) Ltd (No 2)

A principal contractor has a duty to minimise the risk of injury to subcontractors on a building site.  However the duty of care does not extend to supervising a competent subcontractor who is performing work within the subcontractor’s experience. 

This article was written by David Carolan, Lawyer