The Victorian Supreme Court recently re-examined the right of contribution between insurers in light of the Insurance Contracts Act 1984 (ICA) and some tricky policy terms.
Lumley General Insurance Ltd (Lumley) commenced proceedings against QBE Insurance (Aust) Ltd (QBE) seeking a rateable contribution from QBE for an amount that it paid to a common insured. The accident which underpins the dispute occurred during the course of fit out works undertaken for premises to be occupied by Mallesons Stephen Jaques (Mallesons) in Melbourne. The principal contractor was Probuild Constructions (Aust) Pty Ltd (Probuild). Commercial Interiors Australia Pty Ltd (Interiors) was subcontracted by Probuild to carry out the fit out works. During the course of the works, a director/employee of Interiors accidentally dislodged a flush sprinkler head in the ceiling of the premises. The sprinkler was activated for 50 minutes, discharging water at a rate of 20 litres per second, causing significant damage to the fit out works and to the contents on other levels of the premises.
Interiors was insured by QBE. Probuild was insured by Lumley. Interiors was also covered by the Lumley policy as subcontractor. Both insurers accepted that Interiors owed Mallesons a duty to take reasonable care to avoid damage to property, Interiors breached that duty and, as a result of the accident, the premises occupied by Mallesons were damaged. Substantial rectification works were required, which were performed by Probuild and paid for by Lumley in an amount of $565,051. Both insurers agreed that that sum was fair and reasonable. Lumley contended, and QBE disputed, that the amount paid by Lumley to rectify the damage fell within the "double insurance" principle and Lumley had a right of contribution from QBE.
The Court's judgment began by stating that the right of contribution exists where two or more insurers are liable for the same loss. The Court relied on the 1969 decision in Albion Insurance Co Ltd v Government Insurance Office of NSW, in which the High Court held that the test for double insurance is whether the payment by one insurer provides the other insurer with a defence to a like claim against it or, in other words, discharges the other insurer's liability. If this test is satisfied, the insurer that pays is entitled to contribution from the other insurer.
QBE contended that Lumley was not entitled to contribution for the amounts it had paid because:
- Interiors had not authorised or ratified the Lumley policy and, in fact, did not even know of the policy's existence when the accident happened. The Court rejected this argument and held that Interiors was entitled to the benefits of the Lumley policy without authorisation or ratification pursuant to ss 48 and 76 of the ICA.
- It was necessary for Interiors to make the claim on the Lumley policy, which, in fact, had only been made by Probuild. The Court rejected this and relied upon a clause in the Lumley policy which entitled "any party insured" to give notice of a claim. It found that the notification given by Probuild was in relation to the accident and not limited to a claim for Probuild's liability alone. Indeed, the only wrongful act enlivening a claim was the act for which Interiors was responsible. The Court also found that s 54 of the ICA would apply had there been an obligation to make a claim which had not been satisfied.
- The payment by Lumley was voluntary and not in discharge of any liability Lumley had to Interiors. QBE relied upon Lumley's internal memorandum from which it sought to draw inferences that the insured for the purposes of the claim was Probuild and not Interiors. The Court rejected this, holding that it did not regard the internal document as relevant to its inquiry into whether the payment by Lumley was in discharge of Interiors' liability for the damage. The Court noted that Lumley had treated the claim as covering subcontractors and had indicated to QBE that it would be seeking contribution from it.
- Interiors had suffered no loss recoverable under the Lumley policy because Probuild satisfied the loss under its contractual obligations. The Court rejected that submission, holding that the loss suffered was to the premises in respect of which Interiors had an obligation to pay for the damage caused. The fact that the rectification works were performed by Probuild should not obscure the nature of the liability of the person who had the liability. The liability of Interiors covered by the Lumley policy and under the QBE policy was the same and was indemnified in the same way. The payment by Lumley did not extinguish the obligation of QBE to the extent of the payment.
- Lumley was not liable to indemnify Probuild for any liability assumed by Probuild under any contract other than liability which would have otherwise attached by law. The Court again rejected this argument, finding that Interiors' liability is the relevant liability to consider and this was not excluded by the policy as it had been negligent for the accident which it caused.
The Court cited Drayton v Martin , where the Federal Court held that an insurer seeking contribution from a co-insurer must establish that (i) it is liable to indemnify the insured under its own policy; (ii) it has paid out sums in respect of that liability; (iii) the co-insurer is also liable under its policy to indemnify the insured; and (iv) the co-insurer has not paid out moneys to meet its liability to the insured. The Court found that each of these four elements had been established by Lumley and that it was entitled to rateable contribution from QBE for the amounts it had paid to rectify the damage.
This decision reaffirms the principles of double insurance and suggests a long-standing sympathy towards the insurer that has "paid out" and is seeking contribution from a co-insurer.
Lumley General Insurance Limited v QBE Insurance (Australia) Limited  VSC 216 (24 June 2008)
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