Double insurance, double the fun? Double insurance and section 45 ICA

The High Court's decision in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50 gives valuable guidance to the operation of section 45 of the Insurance Contracts Act and the liability of insurers when two policies apply to one loss - that is, double insurance. It's a particularly important decision if you require your suppliers to take out insurance naming you as the insured.

The contract, the indemnity, and the double insurance

Speno entered into a contract with Hamersley to perform certain services for Hamersley. Part of the deal required Speno to indemnify Hamersley for any common-law claims for personal injury to Speno's employees engaged in contract works, and any liability arising from the performance of the works. Speno also had to arrange liability insurance to cover Hamersley's interest as a principal.

Speno took out insurance with Zurich, naming Hamersley as the insured. Hamersley then took out its own insurance with MMI, which contained an "other insurance" clause. This said that if another policy covered the same risk, the MMI policy would act only as excess.

So, Hamersley now had two policies in which it was the insured, covering the same sorts of risks. This double insurance is not rare, and insurers try to deal with it by including an "other insurance" term to limit or exclude their own liability.

Enter section 45 of the Insurance Contracts Act. This tries to sort out the confusion by saying that:

• provisions which have the effect of limiting or excluding the liability of the insurer, and do so by reason that the insured has entered into some other contract of insurance (ie. "other insurance" clauses), are void
• they are, however, still valid if the other policy is a primary policy, clearly specified as such, over which the intention of the insurer is to write excess coverage.

Inevitably, two workers were injured, and Zurich sought contribution from MMI. MMI pointed to the "other insurance" clause, saying that this meant it was only liable for any excess. Zurich countered by saying the "other insurance" clause had no effect because of section 45. Who was right?

How section 45 of the Insurance Contracts Act operates

The High Court said that section 45 is only concerned with "other insurance" provisions affecting double insurance where the insured is a party to the relevant contracts of insurance.

In this case, Hamersley did not enter into the insurance contract with Speno, but was merely the insured under an insurance contract made by two other parties.

What if - as here - the "other insurance" provision tries to limit or exclude an insurer's liability because the insured has entered into another contract of insurance or been named as the insured (as was the case here)? Are all parts void? The High Court said no - you can sever the part that breaches section 45 and the rest is left standing - such as, for example, a part which limits the insurer's liability because the insured has the benefit of other insurance without having entered into the contract.

That means that the "other insurance" clause in its contract with MMI can operate, and MMI is liable only for the excess.

So what does this mean for you?

If you require suppliers to arrange insurance for your benefit, as part of your service and supply contracts, then this decision is an important one for you.

You will need to insulate your own insurance policies from being called into contribution with the other insurances under which you are entitled to cover, but which you did not take out.

This means:

• make sure that your own policy's "other insurance" clause makes it excess of insurance the benefit of which extends to you, not into which you have entered or which you have taken out; and
• double-check your service and supply contracts. Does the term requiring the other party to arrange insurance for your benefit say that it must do so on your behalf, or "on behalf of itself and the purchaser"? If so, it should be amended to require that you (purchaser) be noted on the supplier's policy as a person to whom the benefit of the insurance extends.