The High Court of Australia has confirmed that carefully worded 'other insurance' clauses are not voided by the Insurance Contracts Act 1984 (Cth) and can, in some circumstances, be used by insurers to avoid double insurance claims.
On 2 December 2009, the High Court of Australia dismissed Zurich Australian Insurance Ltd's appeal in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd1 (the first of three appeals against the decision in Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd & Ors2). In doing so, the Court confirmed that section 45 of the Insurance Contracts Act 1984 (ICA):
- Does not apply to provisions in insurance contracts which purport to exclude or limit liability where the insured is not a party to another contract of insurance but rather is only named in it as an insured person.
- Does not void an entire clause of an insurance contract where that clause includes one provision to which section 45 applies and another provision to which the section does not apply
The dismissal of Zurich's appeal led to the consequential dismissal of Metals & Minerals Insurance Pte Ltd's (M&M) and Hamersley Iron Pty Ltd's related appeals. This was because those parties accepted that it was not necessary to resolve those appeals if Zurich's claim for contribution against M&M failed. Accordingly, the law (in Western Australia at least) remains that an insurer's ability to recover money paid out for a claim where another insurer is also potentially liable to contribute to the claim under the principle of double insurance is limited in certain circumstances. As such, insurers should continue 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.
Speno Rail Maintenance Australia Pty Ltd's employees were injured while they were performing work under a contract between Speno and Hamersley. The contract required Speno to indemnify Hamersley against Hamersley's liability to the injured workers. It also required Speno to arrange public liability insurance on Hamersley's behalf. Speno took out that policy with Zurich.
Following a District Court trial,3 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. Due to a waiver of subrogation clause in Zurich's policy, Zurich could not subrogate to Hamersley's rights and was precluded from pursuing Speno under the judgment. Consequently, Zurich had to look to other avenues to recover its losses.
Zurich therefore sued 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 with Hamersley. 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 (underlying insurance clause).
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 M&M was required to contribute, and thereby M&M would have no net exposure in the claim.
The WA Court of Appeal decision
The Supreme Court of Western Australia Court of Appeal held that section 45 of the ICA only voided 'other insurance clauses' when those clauses referred to a policy 'entered into' by the insured (as opposed to a policy where the insured is simply named as an insured). The Court also 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 in M&M's policy transformed it into an excess layer policy for the particular claim, and dismissed Zurich's claim for contribution.
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 a 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 - that being (in the Court's view) the avoidance of double recovery by the insured. The Court relied on a body of authority that a 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.
Zurich, M&M and Hamersley all applied for and were granted special leave to appeal to the High Court against the Court of Appeal's decision.
Appeal to the High Court of Australia
The High Court considered Zurich's appeal before the other two appeals. This was because M&M and Hamersley acknowledged that it would not be necessary for their appeals to be resolved if Zurich's appeal failed (ie M&M's claimed right to subrogate to Hamersley's entitlement to enforce the original District Court judgment against Speno was moot if M&M was not liable to contribute to Zurich under the principles of double insurance).
In considering Zurich's appeal, the High Court analysed the following two questions.
Does section 45 apply to provisions that purport to exclude or limit liability where the insured is not a party to the contract of insurance but rather is merely a named insured?
In considering this question, the High Court considered the legislative history of section 45, the statutory framework of the ICA, the ordinary meaning of the term 'enter into' and the construction of section 45 itself.
Chief Justice French and Justices Gummow and Crennan held that the text of the provisions of the ICA, with which section 45 had be read, pointed to the conclusion that section 45 was only concerned with 'other insurance' provisions affecting double insurance where the insured was a party to the relevant contracts of insurance. It did not allow room for a construction that included a non-party insured among the ranks of those who had 'entered into' the relevant contract.
Their Honours concluded that the inclusion of people who were not parties to the relevant contract would be inconsistent with the ordinary or any plausible extended meaning of 'entered into' in relation to the contracts. In doing so, their Honours acknowledged that the purpose of section 45 appeared from the Australian Law Reform Commission Report and the relevant Explanatory Memorandum. They thought the most that could be said was that the ALRC Report seemed to have proceeded on the assumption that the problem of 'other insurance' clauses arose in cases in which the insured was a party to both contracts. Their Honours concluded, however, that notwithstanding the generality of the mischief to which section 45 was directed, the words 'entered into' were not capable of encompassing a non-party insured.
In separate reasons for their decision, Justices Hayne and Heydon held that there was nothing in the provisions of the ICA, or in the history of the Act, which provided any footing for reading section 45(1) and the phrase 'the insured has entered into some other contract of insurance' otherwise than in accordance with its ordinary meaning. Hamersley has not entered in to any contract of insurance with Zurich. Speno, not Hamersley, had made the Zurich contract.
Does section 45 render void an entire clause of an insurance contract where the clause includes a provision to which section 45 applies and a further provision to which it doesn't apply?
The High Court considered arguments regarding both severance and the proper construction of the word 'provision' when deciding this issue.
Chief Justice French and Justices Gummow and Crennan commented that the relevant definition in the Oxford English Dictionary of the term 'provision' was 'each of the clauses or divisions of a legal or formal statement, or such a statement itself providing for some particular matter', with the important element of the definition being 'for some particular matter'.
Their Honours held that the fact that there may be more than one provision for a particular matter in one numbered clause of a contract was merely an accident of drafting. The inclusion in one clause of two statement of rights or liabilities in the form of 'if X, then Z' and 'if Y, then Z' had the same effect as the inclusion of those statement in two separate numbered clauses. Each statement was a provision of the contract. Their Honours concluded that there was no requirement to construe section 45(1) so that its operation depended upon accidents of paragraphing or numbering in contacts of insurance. M&M's underlying insurance clause contained two statements, each specifying a circumstance in which the M&M policy was to be reduced to an Excess Insurance policy. Each of those statements was to be properly regarded as a 'provision' of the insurance contract. The result was that section 45(1) voided only that part of the Underlying Insurance clause in M&M's policy that related to contracts of insurance to which Hamersley was a party.
Similarly, Justices Hayne and Heydon held that the extent of the avoidance worked by section 45(1) does not depend upon the way in which a particular insurance contract has been drafted. The ICA's reference to a provision having a particular effect was not to be read as reference to a discrete co-location of words. Their Honours held that section 45(1) directs attention to a particular operation which the contract would have according to its terms. It renders that operation of the contract void but no other operation. In the circumstances, their Honours concluded that no question of severance arose.
Impact on insurers and claims handling
The implications of the decision (and the consequential dismissal of the related appeals) are 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 drafted 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, who might have been 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.
1.  HCA 50
2.  WASCA 91M
3. 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
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