High Court Clarifies s45 and Double Insurance Dilemma by TurksLegal

High Court Clarifies s45 and Double Insurance Dilemma By Roger Walter, Peter Moriarty & Richard Wang | December 2009 Area of Expertise | General Insurance

Summary On 2 December 2009, the High Court handed down its decision in the Speno Rail Maintenance case, Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd. By conﬁning the operation of s45 of the Insurance Contracts Act 1984, which seeks to conﬁne the operation of ‘other insurance’ clauses, the decision has the effect of permitting the operation of clauses voided in part by the section, at least to the extent that the offending part can be excised and the insured was not itself a contracting party in the contract for the other insurance. The decision has the effect of limiting the instances of double insurance and therefore the opportunities for successful contribution claims between insurers.

Who Does This Impact? Those involved in general insurance.

What Action Should Be Taken? Whether double insurance arises depends on the provisions of the relevant policies and the extent to which any ‘other insurance’ clause is voided by s45 of the Insurance Contracts Act 1984. This decision conﬁnes the operation of s45, which operates to promote double insurance by rendering ‘other insurance’ clauses void, but only in limited circumstances. This decision clariﬁes when it is that those limited circumstances arise.

Background In this appeal from Western Australia, the High Court was required to consider whether s45 of the Insurance Contracts Act 1984 (ICA) rendered void a clause in a contract of general insurance. The clause was an ‘other insurance’ clause. It sought to conﬁne the cover under the policy to excess cover if another underlying policy responded. The clause purported to operate whether the other insurance policy was taken out by or simply for the beneﬁt of the insured. Section 45 of the ICA has two subsections: 1.

Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.

Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is speciﬁed in the ﬁrst-mentioned contract. (emphasis added)

On 1 March 1992, Speno Rail Maintenance Australia Pty Ltd (‘Speno’) entered into a contract with Hammersley Iron Pty Ltd (‘Hammersley’) for the provision of rail grinding services. Under the contract it was agreed that:

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High Court Clarifies s45 and Double Insurance Dilemma by Roger Walter, Peter Moriarty & Richard Wang

(a) Speno would arrange public liability insurance and include Hammersley as an insured; (b) Speno would indemnify Hammersley for any personal injury claims brought against Hammersley by Speno’s employees as a result of the contracted works. Speno duly entered into a general insurance policy with Zurich Australian Insurance Ltd (‘Zurich’) on 12 September 1995 (‘Zurich policy’) and this policy named Hammersley as an insured. Hammersley entered into its own policy of general insurance with Metals & Minerals Insurance Pte Ltd (‘MMI’) and this policy contained an ‘other insurance’ clause, which relevantly provided: In the event of the insured being indemniﬁed under such other insurance effected by or on behalf of the insured (not being an insurance speciﬁcally effected as insurance excess of this policy) in respect of a claim for which indemnity is available under this policy, such other insurance hereinafter referred to as underlying insurance, the insurance afforded by this policy shall be excess insurance over the applicable limit of indemnity of the underlying insurance but subject always to the terms and conditions of this policy. (emphasis added)

Two Speno employees injured while working on the contract brought negligence actions against Hammersley. In one action negligence was established against Hammersley. The other action settled. Hammersley then turned to Speno for indemnity, relying on the indemnity granted in the contract for the provision of Speno’s services. Zurich as the insurers of Speno paid the claims and instituted proceedings in the Supreme Court of WA against MMI, seeking contribution on double insurance principles. MMI responded by relying upon the ‘other insurance’ clause, which it said reduced the extent of its cover to one of excess insurance, so that in the circumstances its policy did not respond at all. Zurich in turn relied upon s45(1) of the ICA and argued that it rendered the entire ‘other insurance’ clause void and inoperable. In the Supreme Court of WA the primary judge determined that it was not intended that s45(1) would be triggered in circumstances where the other insurance was the result of a policy to which the insured was not a party but in which it was merely named as a non-party beneficiary. Her Honour nevertheless went on to find against MMI on the basis that the wording of the ‘other insurance’ clause, with its two-limbed operation (insurance effected by or on behalf of the insured), was a single provision and therefore void by operation of s45(1). On appeal to the Western Australia Court of Appeal, MMI was successful on the basis that the primary judge had erred in finding that the entire clause was void. The Court held that if the clause could operate with the offending part severed (that part which purported to apply to instances where the insured was a party to the contract of other insurance) then it should so operate – MMI was therefore successful in defeating Zurich’s claim for contribution as there was no dual insurance. Zurich then appealed unsuccessfully to the High Court.

The Decision of the High Court The High Court made determinations on two crucial points about the operation of s45(1) of the ICA. The first was a finding that s45(1) did not render void provisions confining cover where the insured was not a party to the policy but merely a third party beneficiary. The second concerned the severability of offending insurance policy provisions.

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High Court Clarifies s45 and Double Insurance Dilemma by Roger Walter, Peter Moriarty & Richard Wang

In explaining the orders dismissing the appeal, the High Court, in the ﬁrst of two joint judgments, made reference to the 1982 report of the Australian Law Reform Commission and observed that it was not the intention of those who drafted s45(1) to extend its protection beyond insured persons who were parties to the other insurance policy . Of course the High Court also considered the construction of s45 and interpreted the words ‘entered into’ as not having some informal meaning that would include arrangements other than those in which the insured concerned was a party to the relevant insurance policy. At paragraph 26 of the ﬁrst joint judgment it was explained: Zurich submitted that s45(1) should be construed as if the text read: Where a provision ... has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured [including a person entitled under s48] has entered into [an arrangement giving it cover under] some other contract of insurance ... the provision is void. That submission should not be accepted. The text of the provisions of the Act with which s45 must be read points inexorably to the conclusion that s45 is only concerned with ‘‘other insurance’ provisions affecting double insurance where the insured is a party to the relevant contracts of insurance. It does not allow room for a construction which would include a non-party insured among the ranks of those who have ‘‘entered into’ the relevant contract. … the words ‘‘entered into’ are not capable of encompassing a non-party insured.

In relation to severability, the High Court held that where there are void and unenforceable policy provisions by operation of s45(1), those provisions, even if they are part of a larger clause (as was the case here), can be severed so as to permit the operation of the remaining non-offending part of the clause. In reaching this conclusion, the High Court explained that a clause must be examined in light of its discrete components. Should one of those components have the operation of impinging on s45(1), ...that operation of the contract, which is to say, the provision provided by the contract to that effect, is void. But no other operation of the contract is avoided.

Implications of the Decision ‘Other insurance’ clauses seek to confine the cover under a policy of general insurance by not making cover available where other insurance is available to the insured. Section 45 of the ICA operates to promote double insurance by rendering ‘other insurance’ clauses void, but only in limited circumstances. The words ‘entered into’ in s45(1) are to be given their formal legal effect such that ‘other insurance’ provisions will only be rendered void where the insured has the benefit of the ‘other insurance’ as a result of having contracted for it with the other insurer. This voiding of an ‘other insurance’ provision will not necessarily operate to remove an entire ‘other insurance’ clause, as was evidenced in the ruling here by the High Court and the WA Court of Appeal. This is because the word ‘provision’ is not to be taken as meaning an entire clause; the part or component of a clause voided by s45 can be severed, leaving the balance of the clause operational. Insurance policies that provide cover in relation to construction work often give rise to double insurance situations. Identification of the contracting parties to the various policies should clarify the extent to which ‘other insurance’ clauses might operate to remove the prospect of double insurance.

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High Court Clarifies s45 and Double Insurance Dilemma by Roger Walter, Peter Moriarty & Richard Wang

Obviously, more complicated situations arise where there are groups of companies or trusts, with policy schedules recording several entities as the insured (as opposed to ‘interested parties’). Agency principles would in some circumstances operate to make the parties that entered into the contract of insurance the same as those recorded as the insured. Similarly, agency would need to be considered in a situation where a building contract required one of the Principal or the Principal Contractor to effect the required policy of insurance; it could be either one but it is for the direct benefit of both, with other incidental parties such as upstream financiers and downstream sub-contractors also having cover in their roles as third party beneficiaries. Although the contract was entered into by one party, perhaps both the Principal and the Principal Contractor would be taken to have entered into the contract of insurance if identified as the ‘insured’. Perhaps the issue of whether the expression ‘entered into’ will be extended by agency principles beyond the party actually contracting the insurance, and if so, to what classes of the named insured it will extend, will be the next area of contention in the application of s45.

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High Court Clarifies s45 and Double Insurance Dilemma by Roger Walter, Peter Moriarty & Richard Wang

For more information, please contact: Roger Walter Partner T: 02 8257 5736 roger.walter@turkslegal.com.au

Peter Moriarty Partner T: 03 8600 5112 peter.moriarty@turkslegal.com.au

Richard Wang Lawyer T: 03 8600 5115 richard.wang@turkslegal.com.au

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