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Focus: Extrinsic evidence and interpreting 'gap' insurance policies

2 September 2010

In brief: A recent NSW Court of Appeal decision helps clarify the circumstances when extrinsic facts may be taken into account in interpreting written contracts and is a reminder of the precision required when drafting insurance coverage clauses. Partner Dean Carrigan and Lawyer Rhiannon Eagles look at the decision.

How does it affect you?

  • The scope and terms of gap cover insurance must be very clearly set out in the policy documents. In this case1, the drafting of the coverage clause meant the cover provided by the policy was not as limited as the insurer had intended, but was held to be significantly broader.
  • Extrinsic facts surrounding a written contract will generally not be admissible as an aid to construction unless they were known to all the contracting parties (that is, a reasonable person in the situation of the contracting parties) at the time the contract was entered into.
  • Knowledge of a third party will not generally be imputed to a contracting party unless it can be proved that the third party was an agent of the contracting party. In this case, there was no evidence the insurance broker who developed and promoted the insurance cover was an agent of the insurer.
  • Although not addressed in this case, it is important when drafting gap insurance policies to bear in mind the potential application of section 45 of the Insurance Contracts Act 1984 (Cth) which renders void a provision that has the effect of limiting or excluding an insurer's liability by reason that the insured has entered into another contract of insurance.

Background

Two people visited the insureds' property for an overnight hunting excursion, where they stayed in shearers' quarters on the property. A sum was paid to the insureds for hunting and the accommodation. That night, a fire broke out in the shearers' quarters that caused severe burns to one visitor who sued the insureds for damages in negligence.

The relevant coverage clause of the policy issued by the insurer (the policy) indemnified the insureds:

for legal liability to third parties for bodily injury and/or property damage caused by an occurrence in connection with the Insured's activity of allowing licensed shooters on their properties for the purpose of hunting only.

The insurer pointed to the existence of a previous insurance policy taken out by the insureds for farm legal liability (the farm policy), which specifically excluded 'any personal injury caused by or arising directly or indirectly from any activity involving the use of a firearm'. The insurer's position was that the policy was intended to operate only as 'gap' cover insurance to cover incidents arising from the use of firearms on rural properties, which were excluded from the farm policy.

The insurer also contended that the words 'hunting only' meant the policy did not provide coverage for the circumstances in question because the relevant occurrence arose from the visitor sleeping overnight in accommodation on the property, which was outside the activity of hunting.

At first instance, the Supreme Court determined as a separate question that the insureds were entitled to indemnity under the policy. On appeal, the insurer argued the primary judge misunderstood the policy wording and failed to have regard to four documents as extrinsic material. These included the proposal, the wording of the farm policy and an insurance broker's statement as to the purpose and genesis of the policy (which the insurer said supported its position that the insurance was only intended to operate as gap insurance).

The decision

The Court of Appeal held:

  • the primary judge was correct to reject the extrinsic material in the interpretation of the policy. The existence of the farm policy could not be taken into account in interpreting the policy because there was no evidence to show that the insurer had any knowledge of the existence of the farm policy and, in particular, the exclusion clause in that policy. There was also insufficient evidence to prove that the insurance broker who developed the insurance cover was an agent of the insurer and so the broker's knowledge and intentions as to the coverage to be provided under the policy were irrelevant.
  • the policy covered the insureds for liability. The court rejected the insurer's submission that cover was limited to licensed shooters and for the purpose of hunting only. On its proper construction, the court found the policy provided coverage because the insureds had allowed the visitors onto the property knowing that they came onto the property for the purpose of hunting and knowing that this included remaining on the property overnight.

Implications

Where an insurance policy is intended to provide only gap cover insurance, unless this is clearly stated within the policy terms (having regard to the potential application of s45 of the Insurance Contracts Act) and/or there is clear, admissible evidence to support the fact the policy was intended by the parties to cover only the gap, the likelihood is the policy will be held to provide wider coverage.

Following this decision, the insurer was successful in seeking a declaration from the court that it was entitled to contribution from the insurer of the farm policy on the basis of dual insurance arising under the two policies.2

Footnotes
  1. QBE Insurance Australia Ltd v Vasic [2010] NSWCA 166.
  2. QBE Insurance (Aust) Ltd v Wesfarmers General Insurance Ltd [2010] NSWSC 855.

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