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11 Feb 2009

One insured + one loss + two insurers = section 45 Insurance Contracts Act

A party in a contract might be required to indemnify the other party. While this seems straightforward, it can lead to double insurance and some complex problems. The WA Court of Appeal's decision in Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd [2009] WASCA 31 (6 February 2009) gives some guidance about how these complex arrangements work, and the operation of section 45 of the Insurance Contracts Act.

Speno entered into a contract with Hamersley, under which it was obliged 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 was also required to arrange liability insurance to cover Hamersley's interest as a principal, which it did. Hamersley however also had its own insurance. A worker was injured due to Hamersley's negligence and sued, triggering the policy - and an avalanche of litigation between the companies and insurers which has now been in the courts for the best part of a decade.

Dealing with double insurance: section 45 of the Insurance Contracts Act

Traditionally, insurers would use an "other insurance" provision to limit or exclude their own liability when an insured had another insurance policy covering the same risk. Where both policies contained such terms and each required notice of the other insurance, insureds could get caught up in disputes between insurers over who should pay the loss. Section 45 of the Insurance Contracts Act attempts to deal with the problem 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, are void (section 45(1))
  • 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, (section 45(2)).

What does this actually mean? And how does it operate in real life? Speno provides some answers, as well as giving some general answers on complex contractual indemnities and insurer contribution.

Does it matter if the insured is a party to the contract, or just a beneficiary?

Yes, it matters. Section 45 only applies to contracts into which the insured entered as a contracting party. This means that an insurer can still limit its liability if the insured has the benefit of cover under another contract of insurance but is not a party to that contract.

When do you decide if a provision is void under section 45?

There are two possible routes: you could determine the answer by analysing the provision as it is written, or you could wait until the claim is made and see how it all pans out. The Court held that section 45 requires you to look at the potential effect of an "other insurance" clause to see if it has the effect of limiting or excluding the liability of the insurer, not its actual effect in the events that have occurred. This means that an insurer (or an insured for that matter) cannot wait and see.

How much of a provision is void - all or just part?

An "other insurance" provision is void only to the extent that it has the effect of limiting or excluding the liability of the insurer by reason of the insured's entry into another contract of insurance. This means that if the part of the provision which offends section 45 can be severed then the remainder of the clause, including a part which limits the insurer's liability because the insured has the benefit of other insurance without having entered into the contract, can remain valid.

How specifically must the excess contract be "specified"?

Pretty specifically. In this case, the contract acknowledged "that it is customary for the Insured to effect or for other parties (including joint venture partners, contractors and the like) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk."

Not good enough, said the Court. For a primary policy to be "specified" for the purposes of section 45(2), the specification must contain sufficient information to enable the identification of a specific primary policy, over the limit of which the excess policy is intended to provide top-up cover.

The insurer has waived subrogation - does this prevent it from seeking contribution?

In this case Speno's insurer had waived subrogation against its insured, including Speno, but then sought contribution from Hamersley's insurer. This had the practical effect of exposing Speno to a claim from the contributing insurer, on the purported basis that it was subrogated to Hamersley's contractual indemnity rights against Speno. The net effect would have been to deprive Speno of the benefit of the waiver of subrogation. Could Speno's insurer do this?

Yes, said the Court. The waiver of subrogation only meant that Speno's insurer itself would not pursue any right which Hamersley might have against Speno. The insurer's duty of good faith does not stretch so far that it must subjugate its interests to those of Speno.

The second insurer who pays contribution and rights to subrogation

Where there is double insurance, insurer one indemnifies the insured and insurer two subsequently pays contribution to insurer one, is insurer two entitled to be subrogated to the insured's rights against a third party?

No it is not. In the case of double insurance, the insurer who indemnifies has the exclusive right of subrogation. It must account for the proceeds of subrogation, if any, in its contribution claim against the co-insurer, so effectively it claims equitable contribution in respect of its net loss. If the insured has two policies to claim on in respect of the same loss, under one of which the insurer has waived subrogation and under the other it hasn't, then the insured can decide under which policy it is in its best interests to claim. This may have the practical effect that the co-insurer, from whom the indemnifying insurer claims contribution, is also stuck with the consequences of the waiver of subrogation, however, that is not necessarily a bad thing. In the context of this case, it would have prevented an unjust outcome for Speno.

But in this case, there was nothing left to be subrogated to. Hamersley was successfully sued by the injured worker, and Speno's insurer then indemnified Hamersley. This had tbhe effect, said the Court, of merging Speno's primary, contractual liability to indemnify Hamersley with the insurer's secondary liability to indemnify Hamersley, in respect of the same liability to the worker, in the judgment. As a result, there was nothing left for Hamersley's insurer to be subrogated to.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.