The landmark case of Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd & Ors  WASCA 91 may limit an insurer's ability to recover money paid out for a claim where another insurer is also potentially liable to contribute under the principle of double insurance.
The decision shows that carefully worded 'other insurance' clauses are not voided by the Insurance Contracts Act 1984 (Cth) and can be used by insurers to avoid double insurance claims. It also highlights that insurers may need to consider measures that encourage their insureds to make a claim for indemnity under their policy first (even if another insurance policy providing cover has a lower deductible) to avoid the loss of a right of subrogation.
In this recent case, the Western Australian Court of Appeal has held that:
- The Insurance Contracts Act 1984 (ICA) does not void 'other insurance' clauses where those clauses only refer to insurance that has been taken out on behalf of (rather than by) an insured.
- In cases of double insurance, only the insurer that has paid out first and has fully indemnified the insured is able to exercise a right of subrogation.
- An insurer liable to contribute under the principles of double insurance cannot recover, by subrogation, the amount of that contribution from a third party who has a primary liability for the same loss.
Speno Rail Maintenance Australia Pty Ltd's employees were injured while they were performing work under a contract between Speno and Hamersley Iron Pty Ltd. The contract required Speno to indemnify Hamersley against Hamersley's liability to injured workers. It also required Speno to arrange public liability insurance on Hamersley's behalf. Speno took out this policy with Zurich Australia Insurance Ltd.
Following a District Court trial,1 Speno and Zurich were each ordered to indemnify Hamersley against its liability to the workers. Zurich indemnified Hamersley against this amount, which totalled more than $1.2 million. However, Speno did not make any payment to Hamersley. As a result of a waiver of subrogation clause in Zurich's policy, Zurich could not subrogate to Hamersley's rights and pursue Speno under the judgment. Consequently, Zurich had to look to other avenues to recover its losses.
Zurich therefore sued Metals & Minerals Insurance Pte Ltd (M&M), Hamersley's own insurer, for contribution under the principles of double insurance. M&M denied it was liable to Zurich because of an 'underlying insurance' clause in its policy. In the clause, M&M acknowledged that it was customary for Hamersley to effect, or for contractors to effect on Hamersley's behalf, insurance specific to a particular project or contract. The clause said that if Hamersley was indemnified under such a policy, the insurance provided under M&M's policy was excess insurance only.
As a precaution however, M&M asked the Court for a declaration that, if it was liable to contribute, it would also be entitled to subrogate to Hamersley's rights against Speno. Its intention was to enforce the District Court's judgment against Speno to the extent that Speno was required to contribute, and thereby M&M would have no net exposure in the claim.
The trial judge found2 that section 45(1) of the ICA voided the underlying insurance clause in M&M's policy, and ordered M&M to contribute to Zurich. However, the trial judge also held that M&M could exercise a right of subrogation and allowed M&M to enforce the District Court judgment against Speno for the amount M&M had to contribute.
Both Speno and Hamersley appealed the decision to the Western Australian Court of Appeal.
SPENO RAIL MAINTENANCE AUSTRALIA PTY LTD v METALS & MINERALS INSURANCE PTE LTD & ORS  WASCA 91
The Court of Appeal delivered a unanimous decision earlier this month, which is likely to cause significant difficulties for the insurance industry.
Not all 'other insurance' clauses are void
The Court of Appeal agreed with the trial judge that section 45 of the ICA only voided 'other insurance clauses' when those clauses referred to a policy 'entered into' by the insured. However, unlike the trial judge, the Court of Appeal held that the parts of the underlying insurance clause in M&M's policy which fell within the scope of section 45 could be severed from the parts that did not. As a result, section 45 of the ICA did not void the underlying insurance clause to the extent it applied to policies entered into by Hamersley's contractors (under which Hamersley was entitled to cover) rather than Hamersley itself. The Court therefore held that the underlying insurance clause transformed the M&M policy into an excess layer policy for this particular claim, and dismissed Zurich's claim for contribution.
Contributing insurers have no rights of subrogation
While it was not necessary to consider the issue after dismissing Zurich's claim, the Court of the Appeal nonetheless then addressed M&M's claimed right to subrogate to Hamersley's entitlement to enforce the original District Court judgment against Speno.
The Court held that the doctrine of subrogation did not permit subrogation by an insurer who makes a payment of contribution to another insurer. The Court said the insurer who indemnifies the insured has an exclusive right of subrogation, and extending a right of subrogation to a contributing co-insurer could not be justified by the core purpose of the doctrine of subrogation – this being (in the Court's view) the avoidance of double recovery by the insured. The Court relied on a body of authority that payment or agreement by an insurer of a full indemnity was a pre-condition to it exercising a right of subrogation.
In apparent recognition of the impact that its finding would have, the Court commented in passing that where co-insurers know of the existence of double insurance, it is open to them to take that into account in determining which insurer is to indemnify the insured. Further, the Court said that if the ability to exercise a right of subrogation is of particular importance to an insurer, it is open to that insurer (at least when it knows there is double insurance) to pay on the indemnity early so as to obtain the right of subrogation.
Hamersley had no rights for M&M to subrogate to anyway
Speno argued that Zurich's payment to the plaintiff in the primary action had discharged Speno's obligations to indemnify Hamersley. The Court of Appeal answered the question by referring to the original District Court judgment, and not by analysing the character of the causes of action which gave rise to the obligation of each of Zurich and Speno to indemnify Hamersley. The Court of Appeal considered that there was nothing in the District Court judgment which gave a different character to the respective liabilities of Speno and Zurich. In particular, the Court said that one liability was not primary and the other secondary. Rather, the Court determined that each party was simply liable to indemnify. Once Hamersley had been indemnified against its liability by Zurich, the Court said Speno's obligation to indemnify Hamersley was then extinguished given there was no contrary provision in the original District Court judgment. As such, there was nothing left that M&M could subrogate to (even if it had had a right of subrogation).
Impact on insurers and claims handling
The implications of the decision are potentially significant:
- Contractors are often required to take out insurance on behalf of principals even though principals have taken out their own insurance. A carefully drafted 'other insurance' clause in the principal's insurance policy will enable the principal's insurer to avoid double insurance claims made by a contractor's insurer.
- Judgments need to be worded carefully where more than one party is ordered to indemnify a defendant. In particular, reference should be made in the terms of the judgment as to which party's liability to indemnify is primary and which is secondary. (The original District Court judgment in this case was entered in 1999, which was before the emergence of case law that specifically addressed the distinction between the primary and secondary liability of an insurer and someone who has agreed to providing a contractual indemnity.)
- An insurer cannot indemnify its insured unless and until it is called on to do so by its insured. If an insured does not claim an indemnity from its 'own' insurer and is instead indemnified by a contractor's insurer (who might have a lower excess on its policy), the insured's 'own' insurer will not be able to reduce its losses by way of a subrogation claim if it is later called upon to make a contribution to the contractor's insurer. If the contractor's insurer has waived its right of subrogation against the contractor, and the contractor was the cause of the loss or otherwise liable to indemnify the insured against that loss, insurers will need to consider whether:
- They should argue that they have been prejudiced by their insured's omission to claim indemnity under their policy first, and their liability to contribute is therefore reduced to the extent of that prejudice.
- They should include a condition in their policies to the effect that the insured must make a claim for indemnity under their policy first.
- The now exclusive right of subrogation will be enjoyed only by those insurers who offer the lowest deductibles to their insureds.
While the time for the parties to lodge an application for leave to appeal to the High Court has yet to expire, insurers should be conscious of the decision and take steps to protect themselves against its consequences.
1. The trial judge's decision was upheld on appeal: see Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd  WASCA 408; (2000) 23 WAR 291.
2. Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd  WASC 62.
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