Australia: Costs Clauses In Claims Made Policies:

In December 2001 Mr Hubbard suffered minor burns whilst working for Mr Wells (a plumbing subcontractor) on a construction site in Sydney. Mr Hubbard sought damages from Mr Wells who joined his business liability insurer, Wesfarmers Federation Insurance (Wesfarmers) to proceedings. The business liability policy covered liability to independent contractors but not employees. At first instance, the Court held that Mr Hubbard was a subcontractor and Wesfarmers was liable under the policy and consequently Wesfarmers was ordered to pay the judgment sum and Mr Well's costs.

Wesfarmers appealed on the basis that Mr Hubbard was in fact an employee and not a subcontractor and the costs clause in the policy did not cover Mr Well's costs. The NSW Court of Appeal unanimously agreed that Mr Hubbard was in fact an employee and the judgment for Mr Hubbard was set aside.

Of relevance to insurers was the Court's treatment of the costs clause in the policy. That clause provided as follows:

Despite the absence of a liability to Mr Hubbard, Mr Wells sought an order that Wesfarmers pay his defence costs. Mr Wells argued that the reference to a claim in the clause meant that indemnity should be construed by reference to the actual claim made by Mr Hubbard and as long as the claim itself was formulated as one which engaged the policy, the conditions in the clause were satisfied. Wesfarmers argued that the insuring clause indemnified against a 'liability' to pay compensation, that this was a precondition to a claim for costs and in this case no such liability arose and therefore there could be no indemnity for costs.

The Court distinguished policies that contained different language, but on the facts of this case the Court held that the clause did not apply to 'liabilities' but to 'claims' and as no exclusions applied, Wesfarmers should respond under the policy and indemnify Mr Wells for "reasonable legal costs incurred with prior written consent in defending or settling the claim".

Points to note: Underwriters need to be mindful of the language used for costs coverage and whether they wish to extend cover for costs in the event that an insured is ultimately found not to be entitled to indemnity for the claim under the policy.

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