In QBE Insurance (Australia) Limited v Lumley General Insurance Limited  VSCA 124 the Victorian Court of Appeal examined the law relating to double insurance and considered its application to a property damage claim involving two liability policies. The Court held that in the circumstances the first insurer was entitled to contribution from the second insurer.
The case demonstrates an insurer (first insurer) is entitled to contribution from another insurer (second insurer) if the following requirements are met:
- Both insurers insure a common insured. It does not matter if one or both policies insure other persons or if, where they do so, not all insureds are covered by both policies.
- The common insured has suffered a loss or incurred a liability that is covered by both policies in whole or in part.
- The first insurer has indemnified the common insured for the loss or liability in whole or in part in accordance with its obligations under its policy.
- The second insurer has not indemnified the common insured for the loss or liability in whole or in part in accordance with its obligations under its policy.
Double insurance arises when two or more insurers cover the same insured against the same risk.
The common law position relating to double insurance has been codified by section 76 of the Insurance Contracts Act 1984 (Cth) (ICA), which states:
(1) When two or more insurers are liable under separate
contracts of general insurance to the same insured in respect of
the same loss, the insured is, subject to subsection (2), entitled
immediately to recover from any one or more of those insurers such
amount as will, or such amounts as will in the aggregate, indemnify
the insured fully in respect of the loss.
(2) Nothing in subsection (1) entitles an insured:
(a) to recover from an insurer an amount that exceeds the sum insured under the contract between the insured and that insurer; or
(b) to recover an amount that exceeds, or amounts that in the aggregate exceed, the amount of the loss.
(3) Nothing in this section prejudices the rights of an insurer or insurers from whom the insured recovers an amount or amounts in accordance with this section to contribution from any other insurer liable in respect of the same loss.'
Probuild Constructions (Australia) Pty Ltd (Probuild) was insured by Lumley General Insurance Limited (Lumley) under an 'Annual Contract Works, Plant and Equipment and Third Party Liability Policy'. The policy extended to include subcontractors. Probuild contracted with Dabserv Pty Ltd (Dabserv) to undertake fit-out works at the premises of law firm Mallesons Stephen Jacques (Mallesons).
Probuild engaged Commercial Interiors Australia Pty Ltd (Commercial Interiors) as a subcontractor for the works. Under the sub-contract, Commercial Interiors was required to take out its own third party liability insurance, which it did with QBE Insurance (Australia) Ltd (QBE).
An employee of Commercial Interiors negligently triggered a fire sprinkler, which caused extensive water damage to works and to some other property at Mallesons.
Probuild notified Lumley, and Commercial Interiors notified QBE, of a claim arising from the incident. Both insurers engaged loss adjusters to assess the damage. Lumley accepted liability and paid Probuild nearly $550,000 for the rectification works it carried out. Lumley then sought 50% contribution from QBE by way of double insurance. QBE denied it was liable to contribute.
At first instance, Justice Pagone found QBE liable to contribute to the claim. QBE appealed the decision. In dismissing the appeal, and holding that double insurance did apply, the Court of Appeal reiterated the principles (outlined below) under which one insurer is entitled to contribution from another.
No authorisation/ratification of the policy was required QBE argued that Lumley was not liable to indemnify Commercial Interiors, as Commercial Interiors was unaware of the Lumley policy. It argued that Commercial Interiors had not authorised or ratified, the Lumley policy.
The Court of Appeal upheld the trial judge's finding that in view of sections 76 and 48 of the ICA, there was no such requirement for authorisation or ratification. Section 48 provides that where a person other than a contracting insured is referred to in a policy as someone to whom the benefit of the policy is intended to cover, that person may enforce the policy directly against the insurer even though they are not a party to the contract of insurance.
No claim needed to be made
QBE argued that for Lumley to indemnify Commercial Interiors under its policy, it was necessary for Commercial Interiors to first make a claim on the Lumley policy. It was argued that without a claim, Lumley had no liability.
This submission was rejected by the Court of Appeal on the following grounds:
- There was a clause in the Lumley policy which stated that: 'Any notice of claim given to the Insurer by any party Insured under this Policy shall be accepted by the Insurer as a notice of claim given on behalf of all other parties insured under this Policy'.
- The insuring clauses were triggered at the time of the accident. In accordance with the principles in AMP Workers Compensation Services (NSW) Ltd v QBE Insurance Ltd  NSWCA 267 the right to contribution is determined by reference to an entitlement to indemnity at the time of the casualty. Subsequent events such as a failure by Commercial Interiors to make a claim could not affect that position.
- Even if Commercial Interiors was obliged to make a claim under the Lumley policy, section 54 of the ICA would apply. (Section 54 stops an insurer from failing to pay the claim, but allows it to reduce the claim proportionately with the prejudice it has suffered.) The Court held it would be difficult for Lumley to point to any prejudice.
Indemnification of Commercial Interiors
QBE argued that Lumley paid the claim on behalf of Probuild, and that the trial judge erred in finding that the payment discharged any liability to Commercial Interiors.
While the Court of Appeal found some evidence to support this argument, it ultimately determined that the evidence must be considered as a whole. In making the payment to Probuild, Commercial Interiors' liability was indemnified, as Commercial Interiors always had primary liability to Mallesons in negligence.
The Court also stated that the payment made by Lumley had the effect of extinguishing QBE's liability to indemnify Commercial Interiors under the QBE policy, and that if the payment had not been made by Lumley, QBE would have been obliged to make the payment on behalf of Commercial Interiors.
Ultimately, the Court of Appeal stated that in the circumstances of this case, it would be 'unjust' for Lumley not to be able to obtain contribution from QBE.
More on contribution
Ordinarily, the question whether the loss or liability is covered by both policies is determined at the time of the insuring clause event.
Examples of events occurring after the insuring clause event which will usually not affect the first insurer's right of contribution include:
- A decision by a plaintiff to sue a person who is a joint tortfeasor with the common insured by virtue of the latter being vicariously liable for the former's negligence, and to enforce judgment against the joint tortfeasor in circumstances where the joint tortfeasor is an insured under the first policy but not the second policy.
- An agreement by the common insured and the second insurer under which the common insured waives his or her rights under the second policy or releases the second insurer from liability under the second policy.
- In the case of an occurrence policy, failure by the common insured to make a claim under the second policy.
- Cancellation of the second policy by the common insured. Where the second insurer refunds part of the premium as a result of the cancellation, the refunded amount may need to be taken into account in quantifying the second insurer's liability to contribute.
Where the loss or liability falls within an exclusion in the second policy, the first insurer is not entitled to contribution from the second insurer.
DLA Phillips Fox acted for Lumley in this case.
© DLA Phillips Fox
DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit www.dlaphillipsfox.com
This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.