Skip to content.

Home

Allens

Focus: Fight for your right (to be a party) – limits on claims for contribution

13 July 2011

In brief: A recent decision of the Supreme Court of New South Wales highlights the importance of assessing the limits on rights of contribution when issuing insurance policies. Partner Dean Carrigan (view CV), Senior Associate Philip Hopley and Lawyer Patricia Abordo report.

How does it affect you?

  • This decision – Vero Insurance Limited v QBE Insurance (Australia) Limited1 – is a reminder to those insurers who specify wide categories of named insureds in construction insurance policies that this may limit their rights of contribution from other insurers who rely on an 'other insurance' clause.
  • Parties to proceedings who may be considering the referral of issues to a referee for determination should bear in mind that the normal rules of evidence may not apply and that rights of appeal will be limited. As this case shows, courts will be reluctant to interfere with the outcome of a referral and will not disturb factual findings that are properly made.

Background

The plaintiff, Vero, issued a policy of contract works and public liability insurance to the then NSW Department of Commerce for all works contracts awarded by it during the policy period.

This type of insurance is commonly used in the construction industry and is known as a 'floater' or 'open cover' policy because it describes the insurance in general terms. The insurance only operates once an individual works contract has been issued and then included within the policy cover, which can occur automatically or by way of an endorsement.

Such policies, which may involve dozens of separate works contracts, usually contain wide categories of persons involved in the works, such as contractors and sub-contractors, who are not parties to the original insurance but are instead treated as insureds.

In this case, an employee of a sub-contractor was injured during the course of a construction project and he later received an award of compensation against the relevant contractor in a District Court proceeding. Vero indemnified the contractor and then sought contribution from the contractor's own public liability insurer, QBE, for this compensation award, as well as Vero's legal defence costs.

QBE argued that it was not liable to make any contribution because of the presence of an 'other insurance' clause in its policy. This provided that:

The Liability of the Insurer to indemnify the Insured...shall not extend to any of the following:
...
Liability for which a separate insurance protection has been effected by the Named Insured...except as provided for by Memorandum 6.1..." [which provided that QBE would indemnify any losses that were not recoverable under, or in excess of, the separate insurance].

Vero argued in response that the 'other insurance' clause did not apply here because:

  • the Vero policy was not 'effected by' the contractor – it was placed on its behalf by the Department's insurance broker; or
  • alternatively, the contractor should be treated as being a party to the Vero policy because it fell within the category of persons who were defined in it as 'Named Insureds', which included contractors, sub-contractors, workmen and 'all like disciplines' associated with the works contract. As a result, the provisions of section 45(1) Insurance Contracts Act 1984 (Cth) voided the 'other insurance' clause, following the recent decision of the High Court in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd.

Return to top

The referral

Following the commencement of proceedings by Vero, the parties agreed to refer the issues in dispute to a referee to determine in light of the modest amounts of money involved and their wish to resolve the matter quickly and efficiently.

The referee, a senior barrister, found that Vero was not entitled to claim contribution from QBE on the following basis:

  • the 'other insurance' provision applied because Vero's policy was 'effected by' the contractor, acting through the agency of the Department and the broker who placed the insurance. The contractor had covenanted under the works contract to effect and maintain this insurance and it also paid the premium;
  • the contractor was not, however, a party to the Vero policy. Although persons are commonly referred to as a 'Named Insured' when the intention is that they be parties to the contract of insurance (as opposed to those referred to as 'the Insured') the sheer width of the class of entities defined as 'Named Insureds' under the Vero policy made that interpretation untenable here. Properly construed, the contractor's position was equivalent to that of a non-party insured. Following Zurich, s45(1) of the Insurance Contracts Act did not apply to void the 'other insurance' provision; and
  • in addition, Vero was not entitled to seek contribution towards its legal costs of defending the District Court proceedings since these costs were incurred by Vero itself. The contractor did not incur or have a liability to repay these costs and so a right of contribution against QBE could not arise.

Vero sought to challenge the referee's findings by applying to the court for an order that they be rejected. In essence, it asserted that the referee should have made different findings on the two main issues of whether or not the Vero policy had been effected by the contractor and whether it was a party to the policy.

Return to top

The decision

In adopting the referee's report and entering a verdict and judgment in favour of QBE, Justice Einstein made it clear that the court is only permitted to reject a referee's findings where, for example, these can be shown to have adopted an incorrect approach, failed to consider evidence, or the referee has not given the parties an opportunity to present their arguments.

In his judgment, Vero had not demonstrated any error by the referee. As the findings of fact made were reasonably supported by the reasons given in the report, there was no justification for rejecting them. Since there was no dispute about the operation of s45(1), Vero's disagreement with the referee's findings based on its own interpretation of the evidence was not a proper basis for challenging the report.

Return to top

Comment

This decision is a reminder of the difficult issues of construction that can arise in determining whether a named insured should be treated as a contracting party to a policy when an insurer is faced with an 'other insurance' provision as a bar to a claim for contribution.

Insurers who wish to maximise their potential rights of contribution should carefully consider whether their policy wordings protect their interests for those insureds who are most exposed to losses where this is likely to be a consideration, and to seek legal advice if in doubt.

While it is not possible to speculate on whether a different approach to resolving this matter would have led to a better outcome for the plaintiff, care should always be taken when assessing if the commercial, factual and legal issues involved in a particular dispute justify seeking a referral over other alternative methods of dispute resolution.

Footnotes
  1. [2011] NSWSC 593.

For further information, please contact:

Return to top

Share with

What are these?

 

 

Recent Insurance & Reinsurance publications