Insurers can't 'escape' cover just because of 'other insurance'
Originally Published by Priya Paquet and Isabel Cusumano on Wednesday, November 27, 2019 2:31:23 PM
The proper application of ‘other insurance’ clauses is an issue subject to constant debate in the insurance industry. In Allianz Insurance Australia Limited v Certain Underwriters at Lloyd’s of London [2019] NSWCA 271, the NSW Court of Appeal recently overturned a decision and found that despite having relevant 'other insurance' clauses, both insurers were required to indemnify pursuant to contribution.
Author: Isabel Cusumano
Judgment date: 7 November 2019
Citation: Allianz Insurance Australia Limited v Certain Underwriters at Lloyd’s of London [2019] NSWCA 271
Jurisdiction: New South Wales Court of Appeal
Background
On 8 September 2009, Thomas Dempsey was seriously injured when he was struck by a car during the course of his employment. At the time, he was employed by a subcontractor to Baulderstone Hornibrook Pty Ltd (Baulderstone) and was completing road work for the Road and Traffic Authority of NSW (RTA).
Mr Dempsey issued proceedings against Baulderstone and obtained a judgment in the sum of $1,025,000.
Baulderstone was insured under two different liability policies issued by:
- Allianz Australia Insurance Ltd (Allianz) to the RTA whereby Baulderstone was insured as a contractor (Allianz Policy); and
- Certain Underwriters at Lloyd’s of London (Lloyd's) to Bilfinger Berger Australia Pty Ltd whereby Baulderstone was insured as a subsidiary of Bilfinger (Lloyd’s policy).
Allianz indemnified Baulderstone for the judgment obtained by Mr Dempsey.
Allianz then commenced proceedings against Lloyd’s seeking equal contribution towards the judgment on the basis that Lloyd’s were also liable to indemnify Baulderstone in relation to Mr Dempsey's claim.
The other insurance provisions of Section 45(1) of the Insurance Contracts Act 1984 (Cth) did not apply as Baulderstone had not entered into either of the policies.
The Policies
The Allianz Policy contained the following exclusions:
8.17 Difference in Conditions Cover
In circumstances where an Underlying Insurance has been arranged, this Policy shall be deemed to be the 'Master Policy'.
- In the event of the insured being indemnified by an Underlying Insurance in respect of a claim for which indemnity is available under this Master Policy, the insurance afforded by this Policy shall be excess insurance over the applicable limit of indemnity of the Underlying Insurance.
- …
- Should any such Underlying Insurance, by virtue of its scope of cover, definitions, deductibles or excesses, conditions or limits of indemnity, not indemnify the Insured in whole or in part in respect of a loss, damage, liability, costs or expenses indemnifiable under this Master Policy, this Master Policy shall provide indemnity to the extent that such indemnity is not provided by the terms and conditions of such Underlying Insurance.
(Clause 8.17)
Underlying Insurance was defined as insurance arranged on behalf of an insured pursuant to a contract that provides cover for a risk which, save for the underlying insurance would have been covered by the Allianz Policy.
The Allianz Policy also included an ‘other insurance’ exclusion clause which stated that:
8.20 Other Insurance
Where allowable by law this policy is excess cover and 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
(Clause 8.20)
Clause 8.17 and 8.20 are considered 'Excess Clauses' as they only provide cover for losses in excess of other valid insurance.
In comparison, the Lloyd’s policy contained an exclusion at Clause 10.5 which stated that the Policy did not cover liability "which forms the subject of insurance by any other policy and this policy shall be drawn into contribution with such other insurance" (Clause 10.5).
Clause 10.5 is considered an 'Escape Clause' as it provides that Lloyd's will not be liable if there is other valid insurance available.
The question of whether Lloyd’s was liable to indemnify Baulderstone was determined separately by the Supreme Court. On 24 April 2019 Justice Rees determined that Lloyd’s was not required to indemnify Baulderstone and that the proceedings should be dismissed.
As a result, there was no double insurance because Clause 8.17 of the Allianz Policy provided indemnity even though (and in fact because) the Lloyd's Policy did not not provide indemnity. The existence of cover under the Allianz policy excluded Lloyd's liability by reason of the operation of Clause 10.5.
Allianz appealed this decision.
On 7 November 2019, the NSW Court of Appeal found in favour of Allianz and allowed the appeal.
Chief Justice Bathurst and Justice Meagher agreed that Lloyd’s was liable to indemnify Baulderstone. Justice Macfarlan dissented and agreed with the original findings of Justice Rees.
The Court applied the rule of construction set out in Weddell1 and found that Clause 10.5 of the Lloyd's Policy and Clause 8.20 in the Allianz Policy cancelled each other out. Chief Justice Bathurst held that:
In comparison, the Lloyd’s policy contained an exclusion at Clause 10.5 which stated that the Policy did not cover liability "which forms the subject of insurance by any other policy and this policy shall be drawn into contribution with such other insurance" (Clause 10.5).
Clause 10.5 is considered an 'Escape Clause' as it provides that Lloyd's will not be liable if there is other valid insurance available.
Supreme Court Decision
The question of whether Lloyd’s was liable to indemnify Baulderstone was determined separately by the Supreme Court. On 24 April 2019 Justice Rees determined that Lloyd’s was not required to indemnify Baulderstone and that the proceedings should be dismissed.
As a result, there was no double insurance because Clause 8.17 of the Allianz Policy provided indemnity even though (and in fact because) the Lloyd's Policy did not not provide indemnity. The existence of cover under the Allianz policy excluded Lloyd's liability by reason of the operation of Clause 10.5.
Allianz appealed this decision.
Court of Appeal Decision
On 7 November 2019, the NSW Court of Appeal found in favour of Allianz and allowed the appeal.
Chief Justice Bathurst and Justice Meagher agreed that Lloyd’s was liable to indemnify Baulderstone. Justice Macfarlan dissented and agreed with the original findings of Justice Rees.
The Court applied the rule of construction set out in Weddell1 and found that Clause 10.5 of the Lloyd's Policy and Clause 8.20 in the Allianz Policy cancelled each other out. Chief Justice Bathurst held that:
Each policy is to be construed independently and if each insurer would be liable but for the existence of the other policy, then the exclusions would be treated as cancelling each other out, both insurers are then liable.2
As the clauses cancelled each other out, the result was that both Policies responded to the claim by Baulderstone and Allianz was entitled to contribution from Lloyd's.
With respect to the application of Clause 8.17 of the Allianz Policy, the Court found that the Lloyd's Policy was not Underlying Insurance as by virtue of Clause 10.5, the Lloyd's Policy did not provide cover for the risk in question. Therefore Clause 8.17 had no application.
Why this case is important
1 Weddell v Road Transport and General Insurance Company Ltd [1932] 2 KB 563.
2 Allianz Insurance Australia Limited v Certain Underwriters at Lloyd’s of London [2019] NSWCA 271, par 3.
With respect to the application of Clause 8.17 of the Allianz Policy, the Court found that the Lloyd's Policy was not Underlying Insurance as by virtue of Clause 10.5, the Lloyd's Policy did not provide cover for the risk in question. Therefore Clause 8.17 had no application.
Why this case is important
- The application of an 'escape' clause is not necessarily effective to deny indemnity to an insured.
- When responding to a claim for contribution it is important to consider whether both policies contain an 'escape' or 'excess' clause as it is likely that these clauses will cancel each other out resulting in both policies responding to the claim.
- This case demonstrates that an 'escape' clause can be held to be void in circumstances where the policy itself is considered to respond to the relevant risk and the insured.
1 Weddell v Road Transport and General Insurance Company Ltd [1932] 2 KB 563.
2 Allianz Insurance Australia Limited v Certain Underwriters at Lloyd’s of London [2019] NSWCA 271, par 3.