Australia: The Implications Of Dual Insurance

The recent Victorian Court of Appeal decision of Insurance Australia Ltd v HIH & Ors deals with a situation where two relevant insurance policies cover the same event. The Court of Appeal, constituted by Chernov, Ashley and Redlich JA, upheld the trial judge's decision that a sub-contractor does not have a right of repayment under a relevant insurance policy if it is the case that he has already been indemnified under another policy in respect of the same risk.

The case also contains useful commentary on the nature of insurance contracts, dual insurance, what constitutes a payment pursuant to an insurance contract, and the nature of indemnification.

Main Facts

• In 1989, Screenco entered into a contract with the Australian Grand Prix Corporation to erect a large video screen at Albert Park, in connection with the 1989 Australian Grand Prix. Screenco engaged R L Dew ("Dew") to erect the necessary scaffolding to support the screen. Dew then sub-contracted that work to Ronald Steele ("Steele").
• Steele carried out the work over two days in March 1989. The scaffolding included a horizontal beam, from which the screen was to be suspended. Once Steele had completed the scaffolding and left the site, the screen was hung from the beam. The beam was not strong enough and it buckled, causing the screen to fall to the ground and be destroyed.
• Steele held liability insurance, including public liability cover, under a policy with HIH Casualty & General Insurance Limited ("HIH"), prior to their collapse. The policy responded to the incident.
• So too did a second policy, which had been taken out by the Australian Grand Prix Corporation with the Appellant (then known as SGIC General Insurance) ("SGIC"). Subject to certain exclusions, terms and conditions, the SGIC policy covered the event in question, as its coverage extended to contractors and sub-contractors of the Australian Grand Prix Corporation.
• In 1989, Screenco bought proceedings in the NSW Supreme Court against Dew and Steele, claiming damages as a result of the destruction of the screen. Steele called on the HIH policy in connection with these proceedings. HIH accepted that the policy responded and undertook the defence of the claim on Steele's behalf. Then, on 27 August 2001, HIH was placed into liquidation.
• Following HIH's liquidation, Steel applied for assistance from HCSL, a non-profit company set up by the insurance industry to administer the $640 million HIH Claims Support Scheme ("the Scheme"). The Scheme was established by the Commonwealth Government to assist persons disadvantaged by the collapse of HIH.
• HCSL was unsuccessful in its defence of the Screenco claim. On 11 November 2002, Sceenco obtained judgment against Dew and Steele in the NSW proceedings in the amount of $1,461,045. In the contribution proceedings against Dew and Steele, Steele was held liable to contribute 100% and to pay Dew's costs.
• The insurer appointed by HCSL to manage Steele's defence, QBE Management Services, paid 90% of the judgment debt to Screenco and 90% of Screenco's costs. These payments were funded by the Scheme and payment of those moneys represented acceptance by HCSL of an offer of assignment of rights, which Steele had signed when he applied for assistance from HCSL.
• In the meantime, in June 2000 and well before the NSW proceedings had resolved, HIH and Steele commenced proceedings in the Victorian Supreme Court against SGIC. HIH claimed equitable contribution against SGIC on the basis that SGIC were liability insurers of Steele for the same risk. HIH claimed that there was double insurance.
• In the Victorian proceedings, Steele claimed that, if he had any liability to Screenco or Dew in the NSW proceedings, it was liability for which he was entitled to be indemnified under the SGIC policy. It was pleaded that SGIC was liable in equity to make contribution to HIH in a sum that was just and equitable, and that it was just and equitable that each HIH and SGIC pay 50% of any sum for which Steele should become liable.
• By the time the Victorian proceedings came to trial, the NSW proceedings had concluded. SGIC maintained at trial that the claim to indemnity from SGIC must fail because Steele had already been indemnified by another insurer, being HCSL, and that, in any event, what had been paid was an indemnity, and Steele had no right to be indemnified twice. The success of Steele's claim in the Victorian proceedings therefore depended on characterisation of the payments made by HCSL as not being an indemnification.
• The trial judge in the Victorian proceedings focused on whether HCSL should be characterised as an insurer, whether the assignment agreement was a contract of indemnity insurance, and whether amounts paid on Steele's behalf constituted an indemnity. He found that HCSL and/or the Scheme was not an insurer. He further held that what had been paid on Steele's behalf was not an indemnity.
• The trial judge, having rejected the arguments put forward by SGIC, including its reliance on certain exclusion clauses in the policy, made the declaration sought by Steele, being that SGIC contribute 50%, and gave judgment in Steele's favour.

The Appeal

• Counsel for SGIC submitted on appeal that a contract was entered into between Steele and HCSL, and that it was a contract of insurance, namely, a contract of liability insurance. SGIC argued that this was so as the three requirements for such a contact were present:

• SGIC argued that there was a contract, that there was an uncertain event and that, when Steele and HCSL entered into their contract, Steele was at risk of suffering a loss, that is, the imposition of liability in respect of the incident.
• In characterising the payments made under the Scheme, the Court of Appeal disagreed with the trial judge and did not accept that such payments were a merciful benefit, or a payment akin to social security payments. Instead, the Court of Appeal considered that the payments, when made to a successful litigant, constituted an indemnification of Steele. The effect of the HCSL payments was to indemnify Steele against his liability in the NSW proceeding. Payments made in return for such assignment would seem to be of little if any value if they were simply made ex gratia, and other than by way of indemnification.
• Furthermore, the Court of Appeal noted that the Scheme exhibited discretionary features (for example, it picked and chose which classes of HIH policy holders were eligible for benefits). This led to a conclusion that the contract was not a contract of insurance. Even when the discretionary element disappeared when a contract was concluded by the making of a payment, there still remained an element of uncertainty and discretion in that the Commonwealth reserved the right to withdraw the Scheme at any time.
• With regards to the necessary consideration under the insurance contract, Ashley JA doubted that an assignment of rights by Steele should be equated with a premium, which is the usual form of consideration paid for insurance cover.
• At the highest, Ashley JA in the Court of Appeal thought that the liability of HCSL was co-ordinate with the liability of SGIC (in other words, there was a situation of dual insurance), and, in those circumstances, HCSL should have brought a proceeding seeking contribution. It followed, then, that Steele could not sue SGIC seeking indemnification in respect of the amounts paid on his behalf in the NSW proceeding. Nor could HCSL sue to recoup its payments in a stand alone proceeding against SGIC.
• Because the Court of Appeal concluded that the payments made by HCSL were an indemnification of Steele against his liability in the NSW proceeding, it followed that Steele could not obtain indemnification by SGIC in this proceeding, whether he was treated as suing in his own right or in some way for the benefit of HCSL. Nor could HCSL recover from SGIC the indemnity paid by it for Steele. At best, HCSL could recover equitable contribution from SGIC.
• SGIC was therefore relieved from any obligation to indemnify Steele under the SGIC policy because of the payment made by HCSL. Once HCSL accepted Steele's offer to assign his relevant rights to it by effectively paying 90% of the NSW judgment debt and costs, an enforceable contract came into existence between the 2 parties. The Court of Appeal agreed with the trial judge that that contract could not be characterised as a contract of insurance.
• The Court of Appeal held that the trial judge in the Victorian proceedings was correct to allow the HIH claim for equitable contribution between HIH and SGIC. They accordingly upheld the trial judge's order for payment by SGIC of contribution, and allowed the appeal.

Implications

• Although Steele was seeking indemnification from SGIC in these proceedings, the case illustrates the practicalities involved in a situation of dual insurance as the Court of Appeal held that was in fact the situation which applied here.
• The principles of dual insurance can often be complex. In dealing with the position where two legally-enforceable policies cover the same interest against the same loss, the Court of Appeal's judgment indicates that co-ordinate insurers can be required to contribute to the same liability. As should have been the case here, an insurer who pays out an insured's loss can seek contribution from other insurers.
• The case also indicates that principles of equity and fairness are involved with regard to contribution between insurers. Such considerations are often difficult to apply when dealing with two insurance policies which, although they may cover the same risk, might have different terms and premiums. The Court of Appeal, in this case, upheld a 50/50 contribution, reflecting the extent to which both insurers were seen to be liable. Such considerations do not necessarily reflect the number of insurance contracts involved, but rather will look at the number of insurers involved and the nature of the liability insured under each policy. A 50/50 split is generally applicable where the liability of both insurers is unlimited.
• A practical implication which is highlighted by this case, although not specifically referred to by the Court of Appeal, is that often insurers, and the insured, may not be aware that a situation of dual insurance exists. In this case, SGIC was required to contribute to the liability as the Australian Grand Prix Corporation had an insurance policy which extended to contractors and sub-contractors. In the absence of exclusion clauses and special provisions, dual insurance will exist and both insurers may be held liable to contribute.
• Furthermore, where dual insurance exists, and insured is not entitled to seek indemnity from an insurer once he had already been indemnified for the same risk by a co-insurer. This highlights the need for insurers to be conscious of the possibility of dual insurance existing at the outset so that, should they need to call on an insurance policy, the appropriate proceedings can be issued seeking contribution from a co-insurer.

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.