Focus: Validity of 'other insurance' clauses
10 December 2009
In brief: The High Court has recently confirmed that section 45(1) of the Insurance Contracts Act 1984 (Cth) does not void an 'other insurance'1 provision that limits the insurer's liability where the insured is named as a non-party insured in another insurance policy. The High Court confirmed that s45(1) only applies to provisions affecting double insurance where the insured is a party to the other contract of insurance. Partner Jenny Thornton and Lawyer Clara Wren consider the case.2
- Key issue: application of section 45(1)
- Questions considered by High Court
- Application where insured is not a party to other contract of insurance
- Does section 45(1) render the entire clause void?
How does it affect you?
- Section 45(1) is intended to make 'other insurance' clauses void. However, this case confirms that s45(1) does not apply to all 'other insurance' clauses. In particular, s45(1) will probably not void an 'other insurance' provision in a policy where the insured is not a party to the contract providing it with 'other insurance' cover. Insurers and insureds should be aware of this, apparently anomalous, limit on the reach of s45(1).3
- This case has significance where, for example, a principal (or subsidiary) is named as an insured in a contractor's (or a holding company's) policy.
- If the principal is named as an insured when the contractor's policy is first taken out, the principal may be treated as a party to the contract of insurance and may retain double insurance despite an 'other insurance' clause in the principal's own policy.
- However, if the contractor's existing policy is subsequently extended to cover a principal without further consideration being paid, the principal will probably not be treated as a party to the contract of insurance. In these circumstances, an 'other insurance' clause in the principal's own policy would probably be valid and the principal would not have double insurance.
- Insureds may wish to review any 'other insurance' clauses in applicable or proposed policies to ensure they understand the extent of their cover under each policy.
- Insurers extending their policies to contractors so as to include principals as named non-party insureds (or extending their policies to include additional insureds in other circumstances) should be aware that the principal's own insurer may validly limit its liability with an 'other insurance' clause.
This case related to an accident that occurred during the performance of works on a private railway system. Essentially, the case was a dispute between two insurers, Zurich Australian Insurance Ltd and Metals & Minerals Insurance Pte Ltd (M&M), as to whether M&M had to contribute towards a damages payment Zurich made to people injured in the accident.
Speno Rail Maintenance Australia Pty Ltd had contracted to undertake rail grinding works for Hamersley Iron Pty Ltd on Hamersley's railway system. Speno took out a general indemnity insurance policy with Zurich in relation to the works (the Speno/Zurich policy). Hamersley was included as a named insured under the Speno/Zurich policy, but was not a party to the contract of insurance between Speno and Zurich.4
Hamersley also had its own public liability insurance policy with M&M (the Hamersley/M&M policy).
Two Speno employees were injured in an accident while carrying out the rail grinding works. The accident occurred as a result of Hamersley's negligence and Hamersley was liable to pay damages to the employees. Hamersley claimed indemnity from Zurich under the Speno/Zurich policy.5
Zurich paid the damages and then sought contribution from M&M. Co-insurers with coordinate liability have a right of contribution against each other.6
M&M refused to contribute to the damages payment and denied that it had coordinate liability with Zurich in relation to the personal injuries claims. M&M relied upon an 'other insurance' clause in the Hamersley/M&M policy, which purported to limit the coverage under that policy to excess insurance cover if other insurance covered Hamersley in relation to a claim. This clause stated:
The Underwriters acknowledge that it is customary for the Insured to effect, or for other parties (including ... contractors ...) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk.
In the event of the Insured being indemnified under such other Insurance effected by or on behalf of the Insured ...in respect of a Claim for which Indemnity is available under this Policy ... the Insurance afforded by this Policy shall be Excess Insurance over the applicable Limit of Indemnity of the [other] Insurance ...
The key issue in the case was whether the 'other insurance' clause in the Hamersley/M&M policy was void under s45(1) of the Insurance Contracts Act.
Section 45(1) provides:
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 ... the provision is void. [emphasis added]
The High Court ultimately found that the relevant part of the 'other insurance' clause escaped the application of s45(1) and therefore operated to protect M&M from Zurich's contribution claim.
The High Court considered two questions in coming to this conclusion:
- does s45(1) apply to provisions in an insurance policy that limit the insured's cover where the insured is named as an insured person in another insurance policy but is not a party to that other insurance contract? and
- does it render the whole of an 'other insurance' clause void if one part of the clause is caught by the section?
Section 45(1) applies to provisions that limit or exclude the insured's coverage if 'the insured has entered into some other contract of insurance'.
The High Court held that the use of the phrase 'entered into' means that s45 only applies to 'other insurance' provisions limiting double insurance where the insured is a party to the other contract of insurance. Section 45(1) does not apply to 'other insurance' provisions limiting double insurance where the insured is a non-party insured under the other policy.
The High Court acknowledged that it could not rely upon the apparent purpose of s45 to support this interpretation. Section 45(1) was enacted for the general purpose of addressing the detrimental effect 'other insurance' provisions had on insureds because of uncertainties in the interpretation and application of such provisions.7 The relevant legislative materials discussing the purpose behind s45 did not mention the distinction drawn by the High Court.8
However, the High Court considered that the text of the legislation itself is not capable of supporting an interpretation of s45(1) that included a non-party insured among the ranks of those who have 'entered into' the relevant contract.
It followed that the 'other insurance' clause in the Hamersley/M&M policy did not directly offend s45(1) in its application to Hamersley's coverage under the Speno/Zurich policy because Hamersley was not a party to that contract of insurance. However, Zurich argued that the whole clause was void because it also applied where Hamersley was covered by other insurance effected directly by Hamersley.
Zurich's argument was based on the interpretation of the word 'provision' in s45(1). Zurich argued that the 'other insurance' clause was a single 'provision' within the meaning of s45(1) and, because one part of the clause offended s45(1), 'the provision' as a whole was void.
The High Court disagreed with Zurich. The High Court held that the 'other insurance' clause contained two separate 'provisions'. Only the provision that specified the Hamersley/M&M policy would be reduced to an excess insurance policy where Hamersley was covered by other insurance to which Hamersley was a party was void as a result of section 45(1). The other part of the clause that specified that the Hamersley/M&M policy would be reduced to an excess insurance policy where Hamersley was covered by other insurance as a non-party insured was a separate 'provision' and remained valid.
Accordingly, the Hamersley/M&M policy was reduced to an excess insurance policy providing coverage to the extent that Hamersley was not covered under the Speno/Zurich policy. Zurich could not claim contribution from M&M in relation to the damages payment.
This case means that it is very unlikely that an insured or purported co-insurer will be able to rely on s45(1) to void an 'other insurance' provision in an insurance policy where the insured is not a party to the contract of insurance providing it with 'other insurance' cover.9
If a principal is added as a person covered by the contractor's policy without any consideration passing between the principal and the insurer, the principal will be a non-party and s45(1) will not void an 'other insurance' provision in the principal's policy. If, however, a principal is added as a party to the contractor's policy at the time the policy is entered into, s45(1) may apply to void an 'other insurance' provision in the principal's policy.
As a result of this decision, the effect of s45(1) seems to depend on whether or not an agreement is made between a person 'A' and the insurer when 'A' becomes covered by the policy. This will depend on whether consideration moves from 'A' to the insurer and whether 'A' is a 'party' to the contract. This gives rise to the need to look closely at the circumstances surrounding making 'A' a person covered by the policy. It also means that insurers have the opportunity to arrange the cover in ways that may step around the operation of s45(1) and so preserve the operation of 'other insurance' provisions that may otherwise be struck down by s45(1).
- An 'other insurance' clause is a clause in an insurance policy that purports to exclude or limit the insurer's liability where the insured has double insurance.
- Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd  HCA 50 (2 December 2009).
- There are other exceptions. Section 45(1) allows insurers to limit or exclude liability that is also covered by a contract that the insured is required to effect by law. Section 45(2) allows insurers to provide excess cover in relation to loss not covered by another specified contract of insurance. This second exception was not dealt with by the High Court, but was considered by the Western Australian Court of Appeal's decision in the case: see Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (2009) 253 ALR 364.
- The works contract between Hamersley and Speno required Speno to take out an insurance policy that was endorsed to include Hamersley as a named insured.
- Hamersley also claimed indemnity from Speno under a contractual indemnity provided by Speno in the works contract. The Speno/Zurich policy also covered Speno's liability under this indemnity.
- When an insured has such double insurance in relation to a claim, the insured can claim indemnity from either issuer and, if both insurers are properly liable, the insurer who makes the payment may seek contribution from the other insurer.
- Frequently, both an insured's policies would contain such a provision, which led to uncertainties in determining the interaction of the policies and created the potential for unintended gaps in an insured's protection.
- Neither the explanatory memorandum, nor the Australian Law Reform Commission that recommended the enactment of the section, distinguished between provisions affecting double insurance, which includes insurance to a non-party, and provisions affecting double insurance where the insured is a party to both contracts.
- The High Court did leave open the possibility that some 'other insurance' clauses may have different elements so intertwined that they could not be regarded as distinct 'provisions', with the result that the whole clause could be void if one element offended s45: see .
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