The insuring clause in a commercial policy of liability insurance will typically provide cover for "liability for any claim... in connection with (or similar words such as "'in respect of" or "arising from" or "in the conduct of") the insured business".
This article looks at a series of recent legal decisions that have focused on two of the main triggers of cover in such insuring clauses:
- The identification of the types of claim covered
- The concept of connection to the insured business.
In commercial liability policies, the cover provided in the main insuring clause is generally restricted to claims for compensation. This limitation is most commonly found in the definition of "claim". In some policies it may be contained in the insuring clause itself or in the definition of the "loss" covered. Two recent cases provide some guidance as to the way in which this limitation may operate in practice.
Hamcor Pty Ltd v The State of Queensland  QSC 9
Hamcor was the owner of land that contained a chemical manufacturing plant operated by a tenant. In August 2005, the property was destroyed by a fire. Large quantities of water were used by the fire brigade to bring the fire under control. Those waters became contaminated with chemicals and contaminated the land and surrounding waterways.
The Environmental Protection Agency (EPA) issued a remediation notice and obtained orders requiring Hamcor to remove contaminated substances from the property and surrounding land and to clean relevant structures. Hamcor spent over AU$10 million complying with the notice and orders.
The Supreme Court of Queensland considered whether those costs fell for cover under the insuring clause of a policy covering public, pollution and products liability. The issue arose in the form of a stated case brought for separate determination by Hamcor's broker, which had been sued for, among other things, failure to ensure that Hamcor was noted as an insured under the policy. The insuring clause covered "liability to pay compensation" for "claims... made against the insured".
The court held that "the costs incurred by [Hamcor] in complying with the notices issued by the EPA, and the subsequent court orders are costs met by the respondents in respect of their own property. They do not constitute a liability to pay compensation in respect of a claim made against the insured. The fact that they arise as a result of action taken by a statutory authority is insufficient to allow them to be properly categorised as a liability to pay compensation in respect of a claim made against the insured".
Kyriackou v Ace Insurance Limited  VSC 214
In May 2007, the Australian Securities and Investments Commission (ASIC) commenced Federal Court proceedings seeking interlocutory and final relief against Mr Kyriackou and others. The proceedings related to Mr Kyriackou's alleged involvement in an unregistered managed investment scheme. ASIC sought numerous forms of relief, including that Mr Kyriackou be restrained from promoting or advancing the relevant scheme.
Mr Kyriackou incurred substantial legal costs in defending the ASIC proceedings. In July 2008, ASIC discontinued the proceedings. Mr Kyriackou sought indemnity for such costs and expenses pursuant to a policy of professional indemnity insurance with ACE Insurance Limited (ACE). Mr Kyriackou's claim was declined. He commenced proceedings against ACE.
The insuring clause covered "loss arising from any claim". "Claim" was defined as "a written demand for, or an assertion of rights to, civil compensation or civil damages arising out of the firm's business or a written intimation of an intention to seek such compensation or damages".
The central question was whether the ASIC proceeding was a "claim" as defined.
The court interpreted "civil compensation" or "civil damages" to mean a claim for pecuniary redress for some actionable wrong, as that concept was considered in Kantfield Pty Ltd v Lockwood  VSC 420 at  per Byrne J. The originating process and affidavits in the ASIC proceedings did not comprise (nor allude to) a claim against Mr Kyriackou for "civil compensation" or "civil damages". Accordingly, the definition of "claim" within the policy was not met and Mr Kyriackou was not entitled to indemnity.
DEMAND FOR COMPENSATION
In "claims made" policies, the insuring clause is triggered by a "claim" being made against the insured during the policy period. As such, the entitlement of an insured to indemnity under any particular policy will require the identification of precisely what constitutes a "claim" and when the claim was "first made".
Sometimes that will be clear, such as when an insured receives a statement of claim out of the blue. In other cases, particularly where a client or customer makes a complaint, the question of whether that complaint constitutes a "claim" can be far more complicated. That was the situation considered by the Queensland Supreme Court in the recent case of Livesay v Hawkins  QSC 122.
Mr Newman, the managing agent of a rental property, was sued by Mrs Livesay as a result of an accident in which a curtain pelmet came away from the bedroom wall and struck her on the head in April 2005.
The following day, Mrs Livesay and her husband, who were the tenants of the property, sent a long and rambling letter of complaint to Mr Newman. The letter raised 17 separate items of maintenance, which the tenants sought to have addressed. The letter also included the following comments:
- "We are currently seeking medical advice and will advise you of our intentions on this matter."
- "As per the Tenancy Act and advice from the Rental Tribunal, Ray White Real Estate and the owners of a rental property will be held liable for any personal injury claims arising from damage caused to the tenants due to poor living conditions."
- "This does not include the Personal Injury Claim that we are currently entitled to due to injury caused by dangerous fixture."
- "We will take no legal action if this property is repaired effectively and promptly and made safe for living in. We state again, that we would be happy for the owners of this property to visit and meet us and inspect their property."
At the time that Mr Newman received the letter, he was insured under a professional indemnity policy issue, which had a policy period of 24 July 2004 to 25 July 2005. Mr Newman did not notify the insurer of his receipt of the letter.
Mrs Hawkins commenced proceedings against Mr Newman in relation to the injury in September 2005. By that time the policy was no longer in force.
Mr Newman's claim on the policy was declined on the basis that no claim, as defined in the policy, had been made during the policy period. Mr Newman joined the insured to the proceedings commenced by Mrs Livesay. The central issue in the dispute between Mr Newman and his insurer was whether the letter was a "claim" as defined in the policy.
Claim was defined to include "any written demand... for compensation made against the insured but only in respect of the performance of professional services by the insured".
The court held that the letter did contain a demand for compensation. In doing so, the court cited with approval the following passage from the judgment of Fryberg J Junemill (in liq) v FAI  QCA 261:
"There is no formula which must be included in a claim by a third party. What is required, unless the policy expressly so stipulates, is a form of demand or assertion of liability, not a formal demand or assertion of liability. It must be remembered that the wording is a matter quite beyond the control of the insured."
The court held that it was sufficient that the letter asserted an entitlement on the part of Mrs Livesay to recover for her personal injury claim "due to injury caused by dangerous fixture". Even in the context of the other matters mentioned in the letter, it was clear that Mrs Livesay was making an assertion of liability on the part of Mr Newman. It was not necessary that the "compensation" sought be expressly identified. It was sufficient that the letter asserted the existence of a liability (which must implicitly involve a right to compensation).
IN CONNECTION WITH THE INSURED BUSINESS
The recent case of Rian Lane v Dive Two Pty Ltd  NSWSC 104 concerned a scuba diving instruction business owned and operated by its sole director, Mr Todd. On 29 July 2006, Mr Todd was driving a boat owned by Dive Two when it collided with a fishing boat. Mr Lane, who was in the fishing boat at the time of the collision, commenced proceedings against Dive Two and Mr Todd, seeking compensation for his injuries.
Liberty Mutual Insurance Company (Liberty) issued a master policy issued to "PADI Asia Pacific and individual members, dive centres and resorts and others as agreed". Dive Two, a member of the PADI Asia Pacific group, was noted as an insured under the policy. The policy was a combined general and products and professional indemnity policy. The cover provided under the policy extended to Mr Todd as a director of the company.
Liberty contended that it was not liable to indemnify the defendants because the claim did not arise "in connection with the insured business".
The "insured business" was defined as "scuba diving", which was defined as "... principally incorporating class and water based learning activities and modules including first aid training and certification, including the determination of standards by the accrediting agency and all activities relating to training, instructing, observing and control of recreational scuba diving. This includes all activities relating to snorkelling, skin diving, swimming, recreational surface supplied air to a maximum depth of 10 meters, servicing hiring and repairing of equipment and sales of related products, tours of reefs by glass bottom boats (under 12 meters), transportations of people from one island to another, bird watching, guided tours of island when not diving, jungle and/or bush walking, fishing, underwater photography/video, whale watching, scuba doos, beach games".
After the collision, Mr Todd told the police that the boat trip was for the purpose of a private function for his wife and her friends. Mr Todd later asserted that the trip was for marketing purposes or as a "thank you" to friends who had referred business. That evidence was rejected. As a result of that finding, the central issue in the dispute became whether the accident, which occurred in the course of a private boat trip, was "in connection with the insured business".
Dive Two argued that because the term "insured business" was defined by reference to a list of activities, which included the activities that were being engaged in at the time of the accident, the claim fell within the insuring clause.
Her Honour held that the activities identified in the definition of "insured business" would only be covered where they were undertaken for business, rather than private, purposes. To find otherwise would be to ignore the fact that the parties have chosen to use the words "insured business" in the insuring clause.
Her Honour also rejected Dive Two's argument that sufficient "connection" to the insured business could be established by the fact that the boat was owned by the company, that Mr Todd was the company's usual boat skipper or that the boat was being operated in the general vicinity of the area in which diving excursions were generally undertaken by the company.
Her Honour stated that the necessary connection to the business must be "real and not merely tenuous". However, the words "in connection with" were words of broad import and ought not be interpreted narrowly. In the event that Mr Todd's evidence that the outing had a promotional or marketing purpose had been accepted, such connection would have been sufficient to attract cover.
The insuring clause in any liability policy is fundamental to the cover provided. As these recent cases show, there continues to be areas of uncertainty in relation to how these clauses operate. It is essential for insureds and brokers to understand the limitations inherent in the insuring clause of the policy and to ensure that the cover provided is sufficient to meet the insured's needs. It is also important to remember that automatic and optional extensions and endorsements will often be subject to the insuring clause and must be read together with it. It is usual for such terms to be stated to be subject to all other policy terms and condition unless otherwise stated.
Finally, great care needs to be taken in considering the appropriateness of the description of the insured business. Where it is defined by reference to activities, great care needs to be taken to ensure that all relevant activities are included. Otherwise, the insured may not be fully covered.
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