Not an exclusion: New South Wales Court of Appeal declines to apply an exclusion clause for liability assumed under contract | QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55

The plaintiff sustained injuries in 2008 while retrieving a chain block from the roof of an underground tunnel, when he slipped from a step ladder. Endeavour Coal Pty Ltd (Endeavour) owned the premises on which the plaintiff sustained his injuries. The plaintiff was employed by Southern Colliery Maintenance Pty Ltd (SCM), a labour hire company providing workers to Endeavour.
In 2005, Endeavour and SCM entered into a contract for the provision of labour hire services. The contract provided comprised several key clauses including:

that SCM would be liable, and would indemnify Endeavour for any negligence on SCM's part and "any liability and/or loss or damage of any kind whatsoever, arising directly or indirectly from…illness, injury or death of any [SCM's] employees…"

The contract also contained warranties that SCM's services would be performed by an appropriately trained employee and performed with due care and skill. The contract had not been disclosed to QBE when SCM first obtained insurance in 2005, or upon any renewals.
The plaintiff commenced proceedings against Endeavour and SCM, alleging negligence of each party. Endeavour pursued a cross-claim against SCM in negligence and breach of contract. Endeavour further relied on the indemnity clause in the contract. SCM claimed on both its workers compensation policy with Coal Mines Insurance Pty Ltd (CMI) and its public liability policy with QBE Underwriting Ltd as managing agent for Lloyd's Syndicate 386 (QBE). CMI indemnified SCM for its tortious liability to the plaintiff, but not for the contractual liability to Endeavour. QBE denied indemnity on a number of basis including its exclusion clause "for injury to any Worker" to the extent of SCM's tortious liability to the plaintiff and the clause excluding liability assumed under contract. Additionally, QBE argued that any liability to indemnify SCM ought to be reduced to nil pursuant to s 28(3) of the Insurance Contracts Act 1984 on account of SCM's failure to disclose the contract.

SCM settled the cross-claim, agreeing to indemnify Endeavour and to pay its costs in the sum of $40,000. SCM then settled the plaintiff's claim for $375,000, with CMI contributing 40% of the settlement sum. QBE did not participate in any settlement, and SCM sought indemnity from QBE for the balance of the settlement as well as reimbursement of Endeavour's defence costs. In 2017, the primary judge [2] entered judgment in favour of SCM for the sum of $265,000 plus interest. QBE appealed the judgment.

The Court of Appeal allowed the appeal in part and varied the judgment entered in favour of SCM by replacing $265,000 with $215,000. Otherwise the Appeal was dismissed.

The Court of Appeal held that Endeavour's liability to the plaintiff arose naturally from SCM's breach of contract, being that it failed to ensure the plaintiff was properly trained and that his work was performed with due care and skill. The Court of Appeal also held that Endeavour's loss was sufficiently causally connected to the breach of contract by SCM that it could recover the loss from SCM as damages. Therefore, SCM's liability to Endeavour for breach of the "ordinary terms" of the contract was a liability to pay compensation for injuries which fell within the insuring clause of QBE's policy.

The Court of Appeal further held that the exclusion clause for liability assumed under contract was not enlivened as SCM's claim for indemnity included liability for which it was liable irrespective of the indemnity clause. It was a liability in contract and statutory contribution. The exclusion only extended to the indemnity provided under the contract and not to the damages which flowed from a breach of the contract's "ordinary terms" (regarding appropriate training and due care and skill) [3]. It applied to something extraordinary, creating additional liability.

As the natural consequence of paying damages was for the unsuccessful party to pay costs, the Court of Appeal held that these damages included Endeavour's costs in the proceedings. Having regard to the wording of the policy, QBE was also liable to indemnify SCM for Endeavour's costs.

On the issue of SCM not disclosing the contract to QBE, the Court of Appeal upheld the trial Judge's ruling that QBE failed to prove that SCM breached its duty of disclosure, noting that the contract and its indemnity clause were referred to in correspondence provided by SCM to QBE's representative, prior to a variation made to the policy before the subject accident. In so doing, the Court confirmed the principle that an insurer waives disclosure of a fact it has been put on notice, even if full disclosure has not been provided.

Finally, the Court of Appeal allowed QBE to rely upon its $50,000 deductible which the primary Judge overlooked, as it was pleaded and not abandoned. Subsequently, judgment was varied by replacing $265,000 with $215,000.
 

In this case, the Court of Appeal took a different approach to interpreting a commonly worded excluding clause for liability 'assumed' under contract. This extends the principle in Zurich Australian Insurance v Regal Pearl [2006] NSWCA 328, which took a similar approach to the application of a similar exclusion clause to liability implied into contracts by consumer protection laws.

An assumption of liability under contract was determined to be outside of "ordinary terms" and an exclusion only effective to the extent liability exceeds the damages that would have arisen in negligence and a breach of ordinary terms of a contract.

Essentially, an insurer is covering their insured for any breach of contract that is causally related to a loss and injury.

As the primary action was settled, it is important to note that the trial judge was not required to apportion liability between SCM and Endeavour. A different outcome is possible if this had occurred.