Section 45 Insurance Contracts Act 1984 - Revisited after Speno Ruling by TurksLegal

Section 45 Insurance Contracts Act 1984 Revisited after Speno Ruling By Roger Walter | December 2010 Area of Expertise | General Insurance

Summary The 30 November 2010 decision of the Supreme Court of Queensland in Nicholas v Wesfarmers Curragh Pty Ltd & Or is the ﬁrst s45 decision of signiﬁcance since the High Court’s decision in Zurich last year. The Supreme Court held that an ‘other insurance’ clause was rendered void by s45 and in doing so it dealt with arguments about the meaning of ‘entered into’ in the context of the second policy being a group policy taken out on behalf of a wholly owned subsidiary.

Who Does This Impact? Insurers.

What Action Should Be Taken? ‘Other insurance’ clauses will only be rendered void by s45 where the insured has ‘entered into’ the other insurance. This Queensland case, if binding or at least followed, extends the meaning of ‘entered into’ to encompass group insurance arrangements involving a named insured having its parent company contract on its behalf. The case is also authority for the voiding provision of s45 to operate in cases in which the party seeking to avoid the ‘other insurance’ provision is not a contracting party to the policy containing it.

Introduction On 30 November 2010, McMeekin J of the Supreme Court of Queensland handed down his decision in Nicholas v Wesfarmers Curragh Pty Ltd & Or1, a case requiring a determination of whether an ‘other insurance’ clause was rendered void by s45 of the Insurance Contracts Act 1984. This is the ﬁrst s45 decision of signiﬁcance since the High Court’s December 2009 decision in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd2, which emanated from the Speno Rail Maintenance litigation conducted in Western Australia3. The debate in Zurich centred upon whether the s45(1) phrase ‘entered into’ should be regarded as including those named as insured persons but who were not contracting parties to the insurance contract. The High Court held that it should not – as discussed in our 11 December 2009 TurkAlert which concludes with a prescient reference to the law of agency. The plaintiff sued Wesfarmers Curragh Pty Ltd (Curragh) and G & S Engineering Services Pty Ltd (G&S) as occupier and employer, respectively, in respect of injuries he allegedly sustained at a mine in 2008. G&S had a liability policy with Brit Syndicates Limited (Brit), which provided coverage for various parties other than just G&S, including its Principals. Curragh was relevantly a Principal of G&S and there was no dispute about this. Curragh claimed under the Brit policy rather than under its own policy, which had been issued to it by QBE as a group policy. Brit refused to indemnify Curragh though, contending that its policy did not respond because of its ‘other insurance’ clause. So Curragh joined Brit as a third party to the proceedings and sought and obtained a declaration that s45 rendered Brit’s ‘other insurance’ clause void.

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Section 45 Insurance Contracts Act 1984 Revisited after Speno Ruling by Roger Walter

Facts & Overview of Arguments Section 45(1) provides: ‘(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.’ In asserting that its policy did not respond, Brit relied upon condition 5 of its policy, which provided: ‘5. Other Insurance Where allowable by law, this Policy is excess over and above any other valid and collectable insurance and shall not respond to any loss until such times as the limit of liability under such other primary and valid insurance has been totally exhausted.’ As one might expect, Brit asserted that the QBE policy issued to Curragh was ‘valid and collectible insurance’ with the result that by operation of condition 5, the Brit policy acted as an excess policy above the QBE policy. If this was right then Curragh would be left with the option of claiming on its own QBE policy, which would have been sufﬁcient to meet the claim, with the result that the excess cover provided by Brit would not be called upon. Not content with Brit’s position, Curragh argued that condition 5 of the Brit policy was void because it purports to limit or exclude Brit’s liability by reason that Curragh had ‘entered into’ the QBE policy. This was not a simple argument though as Curragh had its parent company, Wesfarmers Limited (Wesfarmers), negotiate and pay for the QBE policy, which was a group policy taken out for Curragh and a number of other wholly owned subsidiaries of Wesfarmers. Brit unsuccessfully raised two separate propositions in defence of the case brought by Curragh. Firstly, Brit focused on the parent company complication and argued that the QBE policy was not a policy ‘entered into’ by Curragh within the meaning of s45. Secondly, Brit argued that s45 could not apply in any event because Curragh had not entered into the Brit policy, its claimed rights under the Brit policy having arisen only by virtue of its status as a Principal in the works undertaken by G&S.

The First Proposition – the extended meaning of ‘entered into’ In relation to the first proposition, Brit contended that Curragh was merely a non-party beneficiary of the QBE policy. Brit relied upon the Zurich case in which it was held that the phrase ‘entered into’ in s45(1) must be given its ordinary meaning. Curragh contended that it entered into the policy of insurance. This was in circumstances in which Wesfarmers negotiated and contracted for group insurance on behalf of its wholly owned subsidiaries and received from each of them a sum representing a proportion of the group policy premium together with an administration fee – a total figure of $2,756,000 was paid by Curragh to Wesfarmers. Curragh argued that it entered into the QBE contract of insurance, either because that was the true nature of the arrangements, or alternatively because Wesfarmers was acting as its agent in securing insurance on its behalf.

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Section 45 Insurance Contracts Act 1984 Revisited after Speno Ruling by Roger Walter

In Zurich the majority judgment includes the sentence: ‘The inclusion of persons not parties to the relevant contract would be inconsistent with the ordinary or any plausibly extended meaning of ‘entered into’ in relation to contracts.’ So the issue as identified by his Honour in the present case was whether the method of entering into the contract of insurance on behalf of the subsidiaries is consistent with the ordinary or any plausibly extended meaning of ‘entered into’ in relation to contracts. His Honour observed that ‘[t]he entrusting of a parent company with the task of effecting insurance is quite different to becoming the third party beneficiary of a policy effected by a stranger’ and determined the issue in favour of Curragh. He gave the following reasons: ‘(a) The better characterisation of Wesfarmers’ relationship with Curragh is as principal and agent evidenced principally by the payment by Curragh to Wesfarmers of a significant proportion of the premium paid to QBE after entrusting Wesfarmers with the task of obtaining appropriate insurance to cover the risks inherent in its operations. (b) Even if I am wrong in that view it would be appropriate in the circumstances to extend the meaning of ‘enter into’ to encompass Wesfarmers actions here because: (i) if Brit’s approach were to be adopted the mischief that s45(1) was designed to prevent would be encouraged, and encouraged in respect of a significant class of insurance policies, the approach of Wesfarmers here being not uncommon between principals and subsidiaries in company groups; (ii) Curragh does not become an insured by some form of extended definition of insured person – it is a ‘Named Insured’ in the QBE contract.’ Therefore and importantly, his Honour held that even if his conclusions on agency were erroneous, he would still ‘consider the present situation to be one where it is appropriate to extend the meaning of ‘entered into’ beyond the party who has been the immediate contracting party…’ His Honour considered it significant in this regard that ‘Curragh was not in the category of persons that may or may not become an insured – as might occur in some instances say when contractors are yet to be engaged on a project yet the principal contractor wants all such future possible insureds covered.’

The Second Proposition - Curragh has to be a contracting party to the Brit policy too Brit contended that for s45 to have any operation, Curragh would also need to be the contracting party to the Brit policy (which it was not). Thus Brit was taken by his Honour to have submitted in effect that it is proper to construe s45 as if it reads: ‘Where a provision included in a contract of general insurance [entered into by the insured] 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…’. This submission was rejected by his Honour on the basis that the passages taken from Zurich and presented in support of it were obiter dicta and taken out of context and because of the principles of statutory interpretation. His Honour made particular mention of the remedial4 nature of the provision and the legislature’s omission of ‘entered into by the insured’ in the context of the express inclusion of ‘entered into’ later in the subsection to qualify ‘some other contract of insurance,’ which suggests that the proposed importation of ‘entered into by the insured’ was not intended.

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Section 45 Insurance Contracts Act 1984 Revisited after Speno Ruling by Roger Walter

Implications The Zurich case established that the phrase ‘entered into’ in s45 must be given its ordinary meaning and that insureds would not be considered as having ‘entered into’ the insurance contract merely because of their status as an insured. The present case is authority for extending the sense of ‘entered into’ so that a group insurance policy is taken to have been entered into by each of the parent company’s subsidiaries where they are named as an insured. Finally on the strength of this decision the operation of s45 is not diminished by the fact that the cover available to the insured Finally, under the ﬁrst policy (the policy containing the ‘other insurance’ clause being relied upon) is available to it as a mere beneﬁciary or non-party to the insurance contract. In the present case the cover was available to Curragh in its capacity as a Principal of the policy holder.

Endnotes 1

Nicholas v Wesfarmers Curragh Pty Ltd & Or [2010] QSC 447

Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50

See: Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd [2009] WASCA 31

C.f. East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 at 409 per Gleeson CJ re s54 of the Act

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

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