Australia: 'Other Insurance': High Court Affirms Narrow Application Of s.45 Of The Insurance Contracts Act 1984 (Cth)

The High Court of Australia (HCA) has handed down its much anticipated decision in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50, dismissing the appeal and applying a strict interpretation of Section 45 of the Insurance Contracts Act 1984 (Cth) (s.45).

s.45 regulates the enforceability of what are known as 'other insurance' provisions and in Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd¹ the Full Court of the Supreme Court of Western Australia concluded that s.45(1) was confined in its operation to a policy the insured "...has entered into" in a narrow sense.

The HCA agreed, thus allowing Metals & Minerals Insurance Pte Ltd (MMI) to rely upon an 'other insurance' provision (such a provision provides that an insurer is not liable to indemnify the insured if the insured is entitled to indemnity under another policy of insurance) to resist a claim for contribution from Zurich Australian Insurance Ltd (Zurich).

Background

• Hamersley contracted Speno Rail Maintenance Australia Pty Ltd (Speno) to perform work for it (Works Contract) and during this process an employee of Speno, Mr Nolan, was injured. Mr Nolan subsequently filed a suit against Hamersley in the District Court of Western Australia and was awarded $1,259,969.00 in damages for his injury.
• Under clause 38 of the Works Contract, Speno effected an insurance policy with Zurich that provided indemnity to Hamersley under a principal's extension.
• Hamersley made a claim for indemnity in respect of its liability to pay damages to Mr Nolan. Zurich accepted the claim and discharged Hamersley's liability.
• Hamersley was also entitled to indemnity under a policy it held with MMI and Zurich sought contribution from MMI.
• MMI sought to resist Zurich's claim for contribution by relying upon an 'other insurance' provision in the MMI Policy. MMI submitted that it was not obliged to indemnify Hamersley because it had been indemnified under the Zurich policy.
• In reply, Zurich submitted that MMI was not entitled to rely on the other insurance provision because it contravened s.45(1) and was rendered void. s.45(1) provides:

(1) Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.

This complex scenario is illustrated in the diagram below:

At first instance

At first instance the court applied an expansive interpretation of s.45, holding that it is enlivened in respect of any other contract of insurance under which the insured is entitled to cover. The court held that it was immaterial how the insured came to be entitled to cover, including whether a third party entered into the other contract of insurance on behalf of itself and the insured or if the insured is covered under the contract by operation of an extension.

Appeal

The Full Court of the Supreme Court of Western Australia considered a range of issues, including subrogation and 'good faith'. Relevant to the appeal to the HCA, it ultimately adopted a strict interpretation applying the rationale that s.45 only renders void an 'other insurance' provision to the extent that it applies to some other contract of insurance the insured has actually entered into.

As previously discussed in gadens lawyers August 2009 Update, ...The practical result of this interpretation is that the insurer can decline cover where the insured is entitled to cover under some other contract of insurance, only if the insured was a contracting party (as opposed to a third party beneficiary or even 'additional insured'). In this instance, the insurer can force the insured to seek cover under the other contract of insurance.

High Court Decision

On 31 July 2009, the HCA granted leave to appeal from the decision in Speno so far as the interpretation of the s.45 was concerned.

The decision, handed down on 2 December 2009, confirmed the appellate court's decision and dismissed Zurich's appeal with costs.

Justices French, Gummow and Crennan, conducted a thorough analysis of the ALRC report giving rise to s.45 and various other references to non-contracting insureds throughout the Insurance Contracts Act. They ultimately concluded that 'entered into' in the context of s.45 must have a narrow meaning thus excluding third party beneficiaries or any other party covered under the contract, even if described as an 'insured', that is not a party to the contract.

It was open to those drafting s.45 to specifically refer to non-party insureds, a tactic adopted elsewhere in the Insurance Contracts Act, but this approach was not adopted. The narrow view was therefore preferred. They explained that the contract of insurance relevant to this matter does not allow room for a construction which would include a non-party insured among the ranks of those who have 'entered into the relevant contract'.

Justices Hayne and Heydon further commented that in this case, the insurance was insurance effected on behalf of (but not by) Hamersley in respect of a claim for which indemnity was available under the MMI contract. Because Hamersley could be indemnified under the Zurich contract, the... 'other insurance clauses'...had the effect of limiting MMI's liability, in effect, to excess insurance.

Despite the operation of s.48(1) of the Insurance Contracts Act, providing that an insured has "a right to recover the amount of [its] loss from the insurer in accordance with the contract notwithstanding that [it was] not a party to the contract", the HCA determined that s.45(1) was not engaged.

On the further appeal point relating to severance, Justices French, Gummow and Crennan again adopted a narrow view that each statement included in a clause is properly regarded as a "provision" of that insurance contract and thus s.45 only operates to render void that part (provision) of the clause, not the clause in its entirety.

Justices Hayne and Heydon briefly commented that no matter how the insurance contract may be drafted, the contract cannot be given an operation of the kind identified in s.45(1). That operation of the contract, which is to say, the provision made by the contract to that effect, is void. But no other operation of the contract is avoided.

Conclusion

The HCA's narrow construction of s.45 means that an insurer can rely upon an 'other insurance' clause to decline coverage to an insured that is entitled to indemnity under another contract of insurance, provided that the insured is not a contracting party to that other contract of insurance (e.g. a third party beneficiary or an 'additional insured').

This strict approach arguably goes against the broad remedial effect of s.45 advocated in the ALRC report. s.45 was arguably an attempt to make the circumstances that led to an insured having the benefit of coverage under a policy of insurance irrelevant. The HCA's decision arguably elevates the prominence of insurance contracts where one has merely obtained the benefit of cover by virtue of an expansive definition of those covered, sometimes without even knowing it.

Things to consider

For both insurers and insureds, the decision highlights the importance of thoroughly considering the interaction of insurance and indemnity arrangements at the outset to specify which is to be primary. Otherwise, another decade of litigation may await.

For insurers, 'other insurance' provisions may have greater effect than sometimes understood. When handling claims, it will be useful to determine whether the insured is entitled to the benefit of any other insurance policy as a non-contracting party. There may also be a benefit in ensuring that all persons covered under the contract also "enter into it" to prevent the policy being considered primary, if that person has "entered into" another insurance contract.

The flipside for insureds is that by being a mere beneficiary of cover, rather than entering into a policy, you may remain subject to 'other insurance' provisions in other applicable insurance contracts. This should be considered when determining whether to be a mere noted party and greater scrutiny should also be given to whether 'other insurance' provisions should remain in their policies.

Footnotes

1. [2009] WASCA 31

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