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A Golden opportunity missed? Considering the recoverability of worker's compensation payments from public liability insurers

  • 27 August 2020 27 August 2020
  • Asia Pacific

Summary

When is a worker's compensation payment not a worker's compensation payment?  The answer, according to Western Australian courts, is when it is to be deducted from an award of common law damages.

The recent WA decision of Smith v MMG Golden Grove Pty Ltd [2020] WADC 103 concerned a claim by an insured company, who had settled a common law damages claim by a worker, to recover the whole of the settlement sum from its public liability insurer. 

The insurer disputed the claim on various grounds, including that the settlement sum included a component of worker's compensation payments made by the worker's employer, which was excluded from cover by the terms of the public liability insurance policy. 

The District Court found in favour of the insured.  The decision highlights an important issue regarding the scope of the worker's compensation exclusion which is common in public liability insurance policies but which may not be as broad as its terms may suggest. 

Facts

Spencer Smith (the Plaintiff) suffered injuries when he was struck on the head by a rock while working underground at the Golden Grove Mine.  The mine was owned and operated by MMG Golden Grove Pty Ltd (MMG). The Plaintiff was employed by Central Earthmoving Company Pty Ltd (CEC).  Under a services agreement, MMG had subcontracted CEC to perform haulage of ore, underground road grading and management of the run of mine pad.  MMG was a principal under the services agreement.  

The service agreement required CEC to hold two policies of insurance which covered MMG and CEC for their respective "rights, interests and liabilities", and CEC purchased the following policies:

  1. an employer's indemnity insurance policy with Allianz Australia Insurance Limited (the Allianz Policy); and
  2. a miscellaneous liability policy with Chaucer Syndicate 1084 (the Chaucer Policy)

The Plaintiff brought an action for damages against MMG which settled in June 2017 for $488,500.  The settlement sum included $170,000 toward an amount of worker's compensation payments received by the Plaintiff from CEC/Allianz. 

As MMG was insured as a principal under the Chaucer Policy, it sought indemnity from Chaucer for the entire settlement sum, including the $170,000 in respect of worker's compensation payments, and related investigation and defence costs. 

Chaucer contended that it was not liable to indemnify MMG in respect of the $170,000 worker's compensation payment, by reason of:

  1. the worker's compensation exclusion clause in the Chaucer Policy; and
  2. the waiver of subrogation clause in the Allianz Policy.

The Allianz Policy

MMG was insured with Allianz under a principal indemnity endorsement, which provided:

[Allianz] will indemnify the Principal against legal liability to pay damages, and in addition will pay all reasonable costs and expenses incurred with our written consent ... at common law for personal injury sustained by any person employed by you under a contract of service ... if such injury is an injury in respect of which such person is entitled to recover from you both compensation under the Act and (subject to section 92 of the Act) damages independently thereof and if you would be entitled to indemnity under the Policy in respect of any compensation so recovered ...

The reference to the Act was to the Workers Compensation and Injury Management Act 1981 (WA) (WCIMA).

The principal indemnity endorsement was subject to the following relevant terms and conditions:

  1. The indemnity provided by this endorsement only applies where you have a contractual obligation to the Principal to obtain employers indemnity insurance that extends cover to the Principal in respect of the Principal's liability for personal injury sustained by any person employed by you under a contract of service or apprenticeship.
  2. The indemnity provided by this endorsement only applies if you are entitled to indemnity under the Policy in respect of a legal liability to pay damages for personal injury sustained by any person employed by you under a contract of service or apprenticeship.

        …

        7.      We waive any rights of subrogation against the Principal.

The Chaucer Policy

MMG was covered as a principal under the Chaucer Policy, under which Chaucer agreed to:

pay to or on behalf of the Insured all Claims which the Insured shall become legally liable to pay by way of compensation and claimant's costs and expenses in respect of Personal Injury ... first happening during the Period of Insurance as a result of an Occurrence in connection with the Insured's Business ...

The Chaucer Policy contained a worker's compensation exclusion, which provided that the policy did not cover liability for:

6.1(a) personal injury to any Worker in respect of which the Insured is or would be entitled to indemnity under any policy of insurance ... pursuant to or required by any legislation relating to Workers Compensation Law ... whether or not such policy... has been effected...

Sections 92 and 93 of the WCIMA

Sections 92 and 93 of the WCIMA provide, in effect, that a worker cannot recover both damages and worker's compensation.  If the worker brings an action for damages against the employer and another person and judgment is entered against the employer and/or other person, the amount of worker's compensation recoverable by the worker is to be deducted or recovered from any damages award and paid to the employer (to then be paid to the worker's compensation insurer).

The Parties' Arguments

$170,000 of the settlement sum was described as "discounted worker's compensation recovery".  Chaucer argued that cover for this component of the settlement sum was excluded by the worker's compensation exclusion in the Chaucer Policy.  Against that, MMG argued the description was inaccurate and the $170,000 represented payments of worker's compensation payments that had to be deducted from a common law damages award under s92 of the WCIMA, and so was not caught by the worker's compensation exclusion. 

Chaucer also argued that the waiver of subrogation clause in the Allianz Policy prevented any recovery by Allianz from MMG, as a principal of CEC, with the result that MMG never had any liability for the worker's compensation component of the settlement sum.  Against that, MMG argued that Allianz had never sought to exercise its right of subrogation and so the waiver clause was irrelevant.

The Decision

Her Honour Judge Burrows found in favour of MMG. 

The worker's compensation exclusion did not exclude cover for the payment of $170,000.  That payment was not a worker's compensation payment.  Instead, it was a payment from damages of an amount equal to a previously paid amount of worker's compensation.  The worker's compensation had been paid by CEC and Allianz, not MMG.  The claim against MMG (for which it sought indemnity under the Chaucer Policy) was a claim by the Plaintiff for damages, not a claim by Allianz for recovery of the worker's compensation payment.  

The waiver of subrogation clause did not apply in this case to prevent a liability arising for the worker's compensation component.  Allianz did not bring an action against MMG to recover worker's compensation.  Instead, the Plaintiff had brought a claim for damages against MMG.  The terms of the Chaucer Policy obliged Chaucer to indemnify MMG for liability in damages. 

Consistent with that, s92(c) of the WCIMA provides that judgment is to be entered against the defendant for the full amount of damages recoverable by the worker without regard to any worker's compensation already paid.  The operation of s92 results in the worker's compensation insurer having an entitlement in respect of the damages to the extent of the worker's compensation payment.  That does not amount to a subrogation claim of the kind contemplated by the waiver clause in the Allianz Policy.  Moreover, there was no authority supporting the proposition that Chaucer, as a third party insurer, had the benefit of the waiver. 

Analysis

This case highlights some of the complexities of the worker's compensation regime in Western Australia and an area of exposure for public liability insurers.  The WCIMA regime regulates not only the liability of the employer to make worker's compensation payments but also the liability of negligent employers and third parties (including principals and contractors) to pay damages in respect of claims for injuries. 

In this case, the terms of the public liability insurance policy provided cover for liability to pay damages and the worker's compensation exclusion was construed narrowly so as not to apply to a liability of the insured to pay damages, even if those damages included a component which was equivalent to a worker's compensation payment or described as a worker's compensation recovery. 

Clearer language to the effect that there was no cover for such amounts may have made a difference.  However, excluding cover for such components of damages awards would not be commercially attractive to insureds, as it would leave them liable to pay the whole of a damages award, while bearing a potentially significant uninsured liability, if sued by a worker who had received worker's compensation payments.

The waiver of subrogation clause in the Allianz Policy may have applied if Allianz had sought reimbursement of the worker's compensation payments directly from MMG.  However, this did not happen and nor did it need to happen for Allianz to be reimbursed those payments under s92(c) of the WCIMA. 

The decision is consistent with the WCIMA regime which seeks to avoid double recovery by the worker and allocate ultimate responsibility for the worker's injury to the negligent party/ies (whether the worker, employer or another person).  Under s92, damages are to be awarded without giving credit for worker's compensation payments previously paid and the employer has a first charge on the judgment in respect of those payments. 

The decision is consistent also with the worker's entitlement to recover the full amount of damages from any single tortfeasor, subject to a deduction for the worker's own contributory negligence, and earlier decisions in the Western Australian courts over the past 30 years.[1] 

The main message for public liability insurers is that the worker's compensation exclusion will not apply to exclude cover for a component of a judgment or settlement sum just because it is labelled a worker's compensation recovery.  The court will consider the substance of the transaction.  Further, without clearer language to this effect, a worker's compensation exclusion will not exclude cover for any amount of a damages award or settlement that is otherwise covered under the policy, just because that amount is to be reimbursed to a worker's compensation insurer. 

 

[1]               See e.g. Co-operative Bulk Handling Limited v The State Government Insurance Commission (1990) 3 WAR 145; and Hi-Tec Demolition Co Pty Ltd v Mainline Demolitions [2000] WASCA 342 per Kennedy J at [6].

End

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