31 Mar 2010

The dog ate my insurance policy - so who has to prove what it said or what it covered?

If you know an insurance policy was in place at a particular time but can't find a copy, who has to establish its terms or any limits on the level of indemnity? This is a constant problem for companies involved in litigation over gradual onset diseases. Yesterday the High Court set out the rules (Wallaby Grip Limited v QBE Insurance (Australia) Limited; Stewart v QBE Insurance (Australia) Limited [2010] HCA 9).

The employee, the employer, and the lost workers' compensation policy

Mr Stewart was employed in the late 1960s by Pilkington. As a result of exposure to asbestos dust given off by asbestos products supplied by Wallaby Grip, he contracted mesothelioma. His widow Mrs Stewart successfully sued Pilkington and Wallaby Grip.

At the time Pilkington employed Mr Stewart, it was obliged to take out a policy of insurance or indemnity in respect of its liability at common law for any injury to a worker. This obligation in the Workers' Compensation Act 1926 (NSW) also specified a minimum amount for the policy of $40,000, although employers were free to take out policies for greater amounts.

The problem here was that while everyone accepted that a policy existed for the relevant time period, and that QBE was responsible to meet the indemnity, no-one had a copy of the policy, as QBE had not produced it. While there are standard terms in the Regulations, meaning that the basic shape of the policy was known, the crucial detail of the amount was only to be found on the policy - which itself could not be found.

There were two possibilities - payment under the policy could have been limited to the statutory minimum of $40,000, or it could have been higher. The crucial question was this: who has to prove the size of the limit?

Who has to prove what when the insurance policy is missing?

The High Court said that a contract of insurance normally has three elements: an insured event, the subject matter (such as the class of people being insured) and the cause of the loss (ie. the risk). With indemnity insurance, the word "indemnity" implies payment for the loss suffered, which is to say the whole loss. An insurer can try to limit it with a cap on the amount payable under the indemnity, but if that cap is not in place with statutory forms of policies, the insurer is on the hook for the entire amount awarded by a judgment against the insured.

So what does this mean for Mrs Stewart, Pilkington, Wallaby Grip and QBE?

In this case, the policy said that the indemnity given by the insurer attached to the liability of the employer, which therefore extended to payment of the amount for which the employer was liable, according to a judgment or other determination.

Mrs Stewart had to establish that a contract of insurance under the Act was in existence at the relevant time and that Pilkington was liable to her husband for his injuries, both of which she did. That meant that the claim was within the terms of the cover provided and the insurer's obligation arose.

The burden of proof then switched to QBE to show what limit, if any, had been placed upon its liability to indemnify. It did not do so, and so it is liable to pay the full amount awarded to Mrs Stewart.

What does this mean for insureds?

The High Court's reasoning is generally consistent with general insurance principle that the insured bears the burden of proving the existence of a policy and that the loss falls within the insuring clause, while the insurer has to prove an exclusion or other restriction on the scope of indemnity – so in that sense it's no great surprise.

Although this might seem to make life easier for insureds whose policies have gone missing, there are still practical problems which were not present in this case, as the existence of the policy, its scope, and the liability were all known. For example, Wallaby Grip might have greater problems if it needed to show its insurance policies during the period of exposure included product liability cover, as it would not be able to point to standard terms in any legislation.

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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.