Double (insurance) trouble and the pitfalls of other insurance provisions in energy insurance
A recent Australian Appeal judgment of Allianz v Underwriters at Lloyd’s has ruled on an issue regarding the interplay between two different types of 'other insurance' clauses and the ability of insurers to seek contribution from other policies. In light of the number of entities involved with energy risks, and the likelihood for there to be numerous overlapping coverages, this case highlights the importance of the language selected in other insurance clauses.
A summary of the case has been prepared by Christopher Smith and Ronan Guyomarc'h from our Sydney office:
The purpose of this article is to provide further insight to energy insurers on the different types of clauses available to cater for 'other insurance' provisions and practical guidance to ensure that underwriters are aware of what they are including in their policy wordings and the impact it will have on double insurance.
Basic Principle of Double Insurance
Double insurance arises where an insured has at least two insurance policies which apply to the same interest on the same subject-matter against the same risks. Subject to the terms of the policy, English law (in common with many other jurisdictions) allows the insured to elect which of the policies it recovers from pursuant to the doctrine set out in Newby v Reed (1762) 96 E.R. 237. The insurer which pays is then entitled to recover a contribution from the other insurer.
Other Insurance Clauses
Insurers often try to use 'other insurance' provisions in their insurance policies to try and restrict or limit the application of double insurance and the right of contribution. Typically, there are three types of 'other insurance' provisions:
'escape clause' – a clause that will exclude liability if another policy also responds;
'excess clause' – a clause that will cause the insurance policy to sit excess of another policy that responds; and
'rateable proportion clause' – a clause that limits the insurers' cover to a proportion of the loss if another policy also responds.
In the energy sector, section 2 of WELCAR 2001 and the JL2013-007 wordings both include 'excess clauses' whilst the London Standard Platform Form (2009) includes an 'escape clause'. Rateable proportion clauses are not common in the energy sector.
In the recent Australian case of Allianz v Underwriters at Lloyd’s, the NSW Court of Appeal held that a competing 'escape clause' and an 'excess clause' operated to cancel each other out.
Escape vs Excess - Appeal Judgment Analysis
As set out in the above-referenced article, the case turned on the interpretation of an 'escape clause' in one policy (which excluded all liability which is the subject of insurance by any other policy) versus an 'excess clause' in another policy (which provided it would sit excess of "any other valid and collectible insurance").
The analysis hinged upon whether one of these clauses carried greater weight so that they should not cancel each other out. The key question was whether either of the clauses were contingent upon the loss in question actually being recoverable under another policy, for example: if the escape clause operated to exclude all liability whatsoever falling within the scope of another policy whilst the excess clause was only effective if the claim under the other policy is covered i.e. "collectible", is the escape clause stronger?
The NSW Court of Appeal analysed each of the policies independently and concluded that it was not and, therefore, that the two clauses cancelled each other out. Consequently, following the English position in Weddell v Road Transport & General Insurance Co Ltd  2 K.B. 563, there was double insurance and both policies responded.
This was not a straightforward decision as the Court of Appeal was split in its judgment and overturned the first instance judge's decision that the escape clause took precedence, albeit the first instance decision also turned upon the analysis of an additional "underlying insurance" clause in the policy which contained the excess clause. The first instance judge analysed the excess clause alongside the underlying insurance clause whilst the Court of Appeal held that the underlying insurance clause was irrelevant in the context of these two independent policies.
Guidance for Underwriters in England
The English Courts have not considered the interplay between an 'escape clause' and an 'excess clause' in the scenario which arose in Allianz v Underwriters at Lloyd’s. Moreover, an English Court is not bound by Australian precedent.
However, this Australian, NSW Court of Appeal judgment would likely be of persuasive effect in England, thereby highlighting the importance of understanding the effect of 'other insurance' clauses. This importance is reinforced by the fact that, when an 'other insurance' clause is drafted, the underwriter will not know the wording of a potential future competing clause which has the same objective. Therefore, a very robust escape clause could, despite clear drafting, lead to contribution with another policy containing an arguably less robust 'other insurance' clause.
If you have any questions regarding the above principles and/or the strength of other insurance clauses in your wordings, we would be happy to discuss them.
 Allianz Australia Insurance Ltd v Certain Underwriters at Lloyd’s of London Subscribing to Policy Number B105809GCOM0430  NSWCA 271
 We note that the Court in National Farmers Union Mutual Insurance Society Ltd. v HSBC Insurance (UK) Ltd.  EWHC 773 (Comm) reached an outcome on the interplay between a rateable proportion clause in one policy and a separate policy which had both an escape clause and an excess clause. That said, the Court in that case did not consider the question of the interplay between one policy with an excess clause and a separate policy with an escape clause.