Australia: A Turbulent Year for Australian Insurers

Last Updated: 29 February 2012
Article by Robert Crittenden and Travis Luk

EXCLUSION CLAUSES

In two cases this year, subject exclusion clauses have been read down so as to retain the commercial purpose of the policies.

In Mainstream Aquaculture Pty Ltd v Calliden Insurance Ltd [2011] VSC 286 (Mainstream decision), Mainstream Aquaculture Pty Ltd (Mainstream) conducted a commercial fish breeding business involving the growing and sale of fish and had a business interruption policy with Calliden Insurance Ltd (Calliden). On 26 October 2008, the property experienced a loss of electrical power supply due to the failure of a fuse, which resulted in the death of a large portion of Mainstream's fish stock. Mainstream claimed under clause three of its policy with Calliden, which provided cover for losses arising from the failure of supply from public utilities.

However, the policy contained an exclusion that stated that "we will not pay for... interruptions or interference to your business arising from loss or damage cause by... mechanical, electrical or electronic breakdown or breakages".

Croft J held that the property damage required to trigger the failure of supply provisions would necessarily be mechanical, electrical or electronic in nature. If the electronic breakdown exclusion operated in such circumstances, it would render the failure of supply cover devoid of meaning and clearly out of line with the "commercial purpose" of the parties. Croft J also held that the fuse could constitute property within the meaning of the policy and that it had sustained damage (damage to the electricity provider was a prerequisite to cover under clause 3), despite it "tripping"' as it was designed to.

A similar approach to an exclusion clause was adopted in Major Engineering Pty Ltd v CGU Insurance Ltd [2011] VSCA 226 (Major Engineering decision). Major Engineering Pty Ltd (Major) was initially sued by Timelink Pacific Pty Limited (Timelink). Timelink claimed damages arising out of the failure of two hydraulic cylinders that were supplied by Major and fitted Skandia, a 30-metre ocean racing yacht, owned by Timelink.

After a trial, an appeal, a question being remitted to the trial judge and another appeal, Major was ultimately successful in defending Timelink's claim. Major subsequently sought indemnity for the costs it incurred, claimed at $1,026,010.55, in defending the litigation pursuant to a costs extension clause contained in a policy of Broadform Liability Insurance issued by CGU Insurance Ltd (CGU). Amongst other things, CGU argued that the professional advice and service exclusion applied.

Bongiorno JJA (with whom and Hansen JJA and Kyrou AJA agreed) held that, as a commercial contract, a policy of insurance should be given a business-like interpretation, with attention being paid to the language used by the parties, the commercial circumstances that the document addresses and the objects that it is intended to secure.

With respect to exclusion 19(a), Bongiorno JJA found that Major was not providing a professional service, much less professional advice. It was simply operating its business, as defined (ie the design, manufacture and sale of general engineering and hydraulic equipment). To construe otherwise would be repugnant to the commercial efficacy of the policy. Accordingly, Bongiorno JJA upheld Major's appeal, set aside the trial judge's decision and entered judgment for Major for the declaration sought and the agreed sum.

COMMUNICATION WITH INSUREDS

Imprecise and incomplete communications between a broker and an insurer has led to an insurer being found on risk even though, as the judge observed, "no policy was prepared; no invoice was sent; no premium was paid".

In the Victorian Supreme Court decision of Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd & Anor [2011] VSC 467, Leading Synthetics Pty Ltd (Leading) instructed its broker, Austbrokers, to obtain a policy against the risk that one of its customers, Signum, might fail to pay under its trading account. By 28 April 2008, the broker and the insurer had negotiated all essential terms. Specifically, in its email of 28 April 2008, Artadius sought confirmation from the broker that the policy commencement date was 1 April 2008. Austbrokers replied that the date was acceptable.

A few days prior to 28 April 2008, Atradius sent an "indication of terms" document, expressed to be "without commitment on the part of Atradius until such time we provide you with written confirmation that we are on risk for your transaction and agree to issue a policy". Atradius argued that the email exchange of 28 April 2008 did not constitute written confirmation that it was on risk.

On 5 May 2008, the broker emailed Atradius about various risks it was then placing for Leading and noted that the cover for the Signum risk was "placed awaiting outcome on others prior to processing". The email sought Atradius' confirmation of that but when Atradius replied, it did not address the Signum risk. There matters lay until November 2008, when warnings of Signum's impending failure rose.

The only issue in dispute was whether there was an intention to create legal relations.

Imprecise and incomplete communications between a broker and an insurer has led to an insurer being found on risk.

Macaulay J found that while Atradius had conveyed that it did not wish to be bound by contract until it confirmed such in writing, he did not believe the written confirmation had to be in any particular form of words. For other credit risk covers, Atradius had used language to confirm when it was on risk, such as "the policy set to live" or "cover commences". In considering all the circumstances including the sense of urgency that characterised the final stage of negotiation, his Honour found that Atradius' email of 28 April 2008 referring to a commencement date of 1 April 2008 constituted the insurer's advice that risk had commenced. The court found that even if there had been no policy in place, Atradius was estopped from denying that such a contract of insurance had been entered into because it had induced the assumption that insurance had been placed.

Atradius also argued that Leading's failure to disclose Signum's worsening payment record was a material non-disclosure, however that argument was rejected.

Therefore, despite the insurer issuing no policy, no invoice and no premium being paid, Atradius was ordered to pay the insured loss of $720,000.

Herde v Oxford Aviation Academy (Australia) Pty Ltd [2011] NSWCA 385 is of relevance to insurers who might sometimes fail to consult with their insured about the terms on which they settle subrogated claims. Oxford Aviation Academy (Australia) Pty Ltd (Oxford) was the owner of an aircraft that crashed on a test flight, fatally injuring the pilot and significantly damaging a plane owned by the plaintiff. The plaintiff's insurer, QBE, settled its claim against the defendant's insurer, Hemisphere, for damage to the plane in the amount of $73,408 under the terms of a release. Oxford was a releasee, however any liability the pilot may have was not considered. This would not normally have been a problem, but Hemisphere was unable to pay QBE and QBE therefore obtained summary judgment directly against Oxford for the $73,408 owing to it.

Oxford appealed, arguing that the trial judge had incorrectly entered summary judgment. The sole issue on appeal was whether the defendant's insurer had authority to enter into the release on his behalf.

In the appeal, the plaintiff relied upon clause five of the Hemisphere policy, which stated:

"The company shall be entitled... to take absolute control of all negotiations and proceedings and in the name of the Insured to settle, defend or pursue any claim".

Despite the meaning and effect of that clause being clear, Giles JA held that "it cannot be said that clause five is so obvious a source of authority that the judge came to the correct result". Giles JA held that Hemisphere's failure to investigate whether the defendant or the pilot had both incurred liability for the damage suffered by the plaintiff potentially demonstrated conduct not taken in the common interest of the insurer and insured and therefore arguably not on the authority given by the defendant to Hemisphere.

NON - DISCLOSURE AND FRAUDULENT MISREPRESENTATION

In Moore v The National Mutual Life Association of Australia Limited [2011] NSWSC 411, Dr Moore commenced proceedings against The National Mutual Life Associate of Australia Limited (National Mutual), claiming benefits he did not receive between 2002 to age 65 pursuant to a policy of life insurance he obtained from National Mutual. National Mutual cross-claimed against Dr Moore, seeking to avoid the contract for fraudulent misrepresentations and non-disclosure and sought repayment of amounts it did pay to Dr Moore between 1995 and 2002.

At the time the insurance application form was completed, Dr Moore represented that:

  • He was a self-employed psychiatrist
  • His annual income was $90,000
  • He had never received advice or treatment for a mental disorder
  • He had not used or injected himself with any drug not prescribed by a doctor.

In fact, Dr Moore was a psychiatric registrar earning only $52,000 (at the time) with a long history of depression and intravenous injection of pethidine. He had been suspended from the register of medical practitioners in Tasmania, discharged from the Australian Army for misappropriating pethidine reserves and charged on two occasions in connection with the use of pethidine.

Ball J found that Dr. Moore was guilty of each of the misrepresentations and that the misrepresentations were made "with the intention that they be acted upon in the knowledge they were false" and therefore fraudulently. He held that pursuant to section 29 of the Insurance Contracts Act 1984 (Cth), National Mutual was entitled to avoid the contract.

As to whether National Mutual had affirmed the contract, Ball J noted that Dr Moore had to prove that National Mutual made an unequivocal election between inconsistent rights, which was communicated to Dr Moore and made with knowledge of all relevant facts. Ball J held that the mere payment of benefits with some knowledge of Dr Moore's drug use and depression was insufficient in that regard. However, he did hold that given Dr Moore would have mitigated his living expenses or tried to obtain alternative employment had the benefits not been paid, he had "altered his position" and that it would be unjust to require him to refund the payments.

The claim and cross-claim were dismissed.

CONCLUSION

The commercial approach of the courts to the interpretation of exclusion clauses, as was demonstrated in the Mainstream and Major Engineering decisions, will often result in an interpretation that is favourable to the insured. However, when an exclusion clause is unambiguous and in line with the commercial purpose of the insurance contract, the courts seem prepared to strictly apply the exclusion against the insured. Insurers should be aware of these decisions when drafting exclusions clauses.

© DLA Piper

This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.


DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com

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