Australia: Dual Insurance Revisited

Dabserv engaged Probuild as head contractor for fit out works at a commercial premises. Probuild in turn engaged Commercial Interiors as a subcontractor in the fit out work. Commercial Interiors was insured with QBE, whose policy also covered "principals" of Commercial Interiors, including Probuild.

In March 2005, an employee of Commercial Interiors accidentally caused a flash sprinkler head to activate and discharge water, causing significant damage to the fit out works and contents. In August 2005, Probuild's public liability insurer, Lumley, accepted liability in respect of the claim by Probuild. The damage to the fit-out was made good by Probuild in its capacity as a builder rather than as an insured. The cost of the rectification, $565,051.50, was paid by Lumley to Probuild under the Lumley policy. Lumley requested a contribution from QBE in respect of a sum that it had paid to Probuild but QBE refused to make any contribution. Lumley subsequently commenced proceedings seeking contribution in the sum of $272,525.75 from QBE, being half of the total it had paid to Probuild.

At trial, it was held that all the requirements of the insuring clause of the Lumley policy were satisfied and that, accordingly, the policy covered Commercial Interiors in respect of its liability to Dabserv arising from the accident. The trial judge ordered that QBE make contribution to Lumley. QBE appealed this decision.

On appeal, QBE's argument that Lumley was not liable to indemnify Commercial Interiors under the Lumley policy was put on two main bases. The first was that, in order for Commercial Interiors to be covered under the Lumley policy, Commercial Interiors had to authorise or ratify the cover being conferred upon it under that policy. The trial judge rejected this argument on the basis that ss48 and 76 of the Insurance Contracts Act (Act) do not require authorisation or ratification by a person named as an insured under the policy as a condition to the ability to recover under the policy.

The second basis for QBE's argument was that for liability to arise under the Lumley policy, it was necessary for Commercial Interiors to first make a claim on that policy, and that no such claim had been made. The trial judge rejected this argument, noting that the notification by Probuild was of the wrongful act on behalf of the Commercial Interiors employee and that there was no requirement for any separate claim by Commercial Interiors.

The Victorian Court of Appeal upheld the trial judge's decision and dismissed QBE's appeal.

In considering QBE's appeal, the Court of Appeal noted that the principles governing contribution between insurers were well established. They referred to Kitto J's judgment in Albion Insurance Co Limited v Government Insurance Office (NSW) (1969), in which his Honour stated that contribution between insurers is based on two fundamental principles. The first is that persons who are under coordinate liabilities to make good the one loss must share the burden pro rata. The second is that since an insurance policy is a contract of indemnity, where several insurers have separately insured the one person against the one loss, that person may not recover from any or all of the insurers more than the total loss suffered.

The Court of Appeal also referred to the High Court's decision in AMP Workers Compensation Services (NSW) Limited v QBE Insurance Limited (2001), which established that determination of whether double insurance exists at the time of the casualty giving rise to the insured's loss or liability rather than at a later time is more consistent with the underlying rationale and purpose of the contribution principles, because it prevents one insurer from being unjustly enriched at the expense of another insurer as a risk of deliberate or fortuitous events occurring after the casualty.

The Court of Appeal summarised the relevant contribution principles as follows:

An insurer (1st Insurer) is entitled to contribution from another insurer (2nd Insurer) if the following requirements are met:

  • Both insurers insure a common insured. It does not matter if one or both insure other persons or if, where they do so, not all insureds are covered by both policies. Nor does it matter if the common insured is a party to the insurance contract under one policy and a person referred to in s48 of the Act in respect of other policy.
  • The common insured has suffered a loss or incurred a liability that is covered by both policies in whole or in part. It does not matter if one or both policies cover other risks or if, where they do so, not all risks are covered by both policies.
  • The 1st Insurer has indemnified the common insured in respect of the loss or liability in whole or in part in accordance with its obligations under the policy.
  • The 2nd Insurer has not indemnified the common insured in respect of the loss or liability in whole or in part in accordance with its obligations under its policy.
  • The question of whether the loss or liability is covered by both policies would ordinarily be determined at the time of the insuring clause event. The fact that the 2nd Insurer may subsequently cease to be liable under the policy because the common insured has been indemnified by the 1st Insurer and its policy does not extinguish the 1st Insurer's right to contribution.
  • Where loss or liability falls within an exclusion in the second policy, the 1st Insurer is not entitled to contribution from the 2nd Insurer.

QBE submitted that Commercial Interiors was not insured under the Lumley policy because it had not taken any steps to authorise or ratify its inclusion as an insured under that policy. In response, Lumley submitted that there was nothing in either s48 of the Act or the decision of Trident General Insurance Co Limited v McNiece Brothers Pty Limited [1988], upon which QBE relied, that requires a third party to an insurance contract to take any steps to authorise, ratify or otherwise engage in the insurance contract as a precondition to being covered under that contract. The Court of Appeal agreed that s48 of the Act was enacted to confer a statutory right on a person who is included as an insured in an insurance policy but who is not a party to the contract of insurance, to recover the loss or liability covered by the policy, and is therefore subject to the same rights and obligations as the insured who is a party to the contract. The Court noted that there was nothing in either the language or the underlying purpose of s48 that required such a person to do anything as a precondition to enforcing the rights conferred by the section. It followed that the absence of any act by Commercial Interiors to authorise Probuild to include Commercial Interiors as insured under the Lumley policy or to ratify its inclusion as an insured in the policy or otherwise engage the policy, did not alter the legal effect of Commercial Interior's inclusion as an insured under the Lumley policy.

QBE also submitted that, in order for Lumley to be liable to indemnify Commercial Interiors under the Lumley policy and for double insurance to exist, it was necessary for Commercial Interiors to first make a claim under the Lumley policy. The Court of Appeal noted that although Commercial Interiors was not a party to the Lumley policy, it came within the definition of "Insured" under the policy and, in accordance with s48 of the Act, it had a right to be indemnified under that policy. Neither s48 nor the Lumley policy made that right contingent on the making of a claim.

QBE attempted to argue that the trial judge erred in finding that all parties concerned were aware that Lumley was considering the claim in respect of the occurrence and that it was doing so by reference to the "liabilities attaching to subcontractors" within the scope of the Lumley policy, as there was no evidence that Commercial Interiors was aware of this. In response, Lumley submitted that the only insured that Lumley had an obligation to indemnify was Commercial Interiors, and that it was this obligation that it met. It submitted that it was not relevant whether QBE or Commercial Interiors was aware that this was the position or understood what Lumley was doing.

The Court of Appeal found that both insurers had proceeded on the basis that Lumley would pay for the rectification costs on behalf of Commercial Interiors and would then seek contribution from QBE. By paying the rectification costs, Lumley discharged Commercial Interiors' liability to Dabserv, which had the effect of discharging the contractual liability of Probuild to Dabserv. The payment of the rectification costs by Lumley also had the effect of extinguishing QBE's liability to indemnify Commercial Interiors under the QBE policy, it being common ground that if the payment had not been made by Lumley, QBE would have been obliged to make the payment on behalf of Commercial Interiors. The Court of Appeal agreed with the trial judge's conclusion that Lumley's payment of the rectification costs was made on behalf of Commercial Interiors to discharge this liability in tort to Dabserv.

QBE raised a further argument, submitting that Lumley was an officious intervener who acted without authority from Commercial Interiors or QBE in discharging any liability arising from the damage to the fit-out. On this basis, it argued that Lumley should not be able to recover anything from QBE. The Court, having concluded that Lumley paid the rectification costs pursuant to its obligations under its policy to discharge Commercial Interiors' liability to Dabserv, held that the principle relied upon by QBE had no application.

The Court of Appeal therefore determined that it would be unjust for Lumley not to be able to obtain contribution from QBE.

QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd (2009) 256 ALR 574 (4 June 2009)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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