December 2, 2019

Case Note: Double insurance and untangling the ‘other insurance’ knot

The NSW Court of Appeal has recently allowed the appeal in Allianz Australia Insurance Ltd v Certain Underwriters at Lloyd's of London Subscribing to Policy Number B105809GCOM0430 [2019] NSWCA 271. The case concerned how two competing "other insurance" clauses, an "escape" clause and an "excess" clause, should be interpreted to determine whether double insurance applied.

The Facts

A worker was injured on a road project being managed by Baulderstone Hornibrook (Baulderstone). The worker sought compensation and obtained a consent judgement of AUD1,025,000 against Baulderstone.

Baulderstone was insured under two different liability insurance policies:

  1. a Construction Risks - Material Damage, Public and Products Liability Annual Insurance Policy issued by Allianz Insurance Australia (Allianz) to the Roads and Traffic Authority of New South Wales (the Allianz Policy); and
  2. a Public and Products/Contract Works Liability Policy issued by Underwriters at Lloyd's of London (Lloyd's) to Bilfinger Berger Australia Pty Ltd, the parent company of Baulderstone (the Lloyd’s Policy).

Allianz indemnified Baulderstone against the judgement. It sought a declaration in the Supreme Court that Lloyd's were also liable to indemnify Baulderstone and sought equitable contribution. By judgement of 24 April 2019, Rees J found that the Lloyd's Policy did not respond and dismissed Allianz's claim. Allianz subsequently appealed that decision.

The Policies

The Allianz Policy contained the following presently relevant provisions:

Definitions / Interpretations to this Policy

Underlying Insurance means a policy of insurance arranged by or on behalf of an Insured either voluntarily or pursuant to a Contract (which may include a policy(ies) arranged by joint venture partners, principals, contractors, etc) that provides cover to the Insured for a risk, which save for the Underlying Insurance, would be covered by this Policy. Underlying Insurance includes those policies identified in the Schedule.

8.17 Difference In Conditions Cover

In circumstances where an Underlying Insurance has been arranged, this Policy shall be deemed to be the ‘Master Policy’.

a) In the event of the Insured being indemnified by an Underlying Insurance in respect of a claim for which indemnity is available under this Master Policy, the insurance afforded by this Policy shall be excess insurance over the applicable limit of indemnity of the Underlying Insurance.

b) Coverage under this Master Policy shall not apply unless and until a claim for payment is made under the Underlying Insurance up to the amount of the Underlying Limit which, save for the limit of indemnity of the Underlying Insurance, would be covered by this Master Policy.

c) Should any such Underlying Insurance, by virtue of its scope of cover, definitions, deductibles or excesses, conditions or limits of indemnity, not indemnify the Insured in whole or in part in respect of a loss, damage, liability, costs or expenses indemnifiable under this Master Policy, this Master Policy will provide indemnity to the extent that such indemnity is not provided by the terms and conditions of such Underlying Insurance. For the purpose of clarity, it is intended that indemnity by this Policy extends to cover losses not covered under the Underlying Insurance by virtue of the fact that such Underlying Insurance has a higher deductible or excess than the Excess under this Master Policy.

d) The provisions of this clause are subject always to the terms, Conditions and Exclusions of this Master Policy, except as provided under (c) above.

8.20 Other Insurance

Where allowable by law, this Policy is excess over and above any other valid and collectible insurance and shall not respond to any loss until such times as the limit of liability under such other primary and valid insurance has been totally exhausted. The Treasury Managed Fund is not deemed to be regarded as a policy of insurance or Underlying Insurance, for the purposes of this policy.

The Lloyd’s Policy contained the following presently relevant provisions:

10. General exclusions

This Policy does not cover liability:

10.5 which forms the subject of insurance by any other policy and this Policy shall not be drawn into contribution with such other insurance.

The Judgement Below

The primary judge proceeded to examine the two policies separately. Looking at the Lloyd's Policy, Rees J determined that cl 10.5 excluded a risk if that risk "forms the subject" of insurance by another policy. She determined that use of the phrase "form the subject" meant that it did not matter whether that risk would be excluded under the other policy; all that was needed was for the other policy to "cover the same risk". In this case the exclusion was held to apply.

Clause 8.17(c) of the Allianz Policy was critical to Her Honour's determination, as she believed that the purpose of the clause was for a situation such as Baulderstone's claim. The Allianz Policy specifically contemplated a scenario where there was another policy which has been arranged by the insured and which provided cover for a risk also covered by the Allianz Policy but where indemnity was denied because of the precise wording of that other policy. In these circumstances no double insurance applied as the Allianz Policy responded under clause 8.17(c) because the Lloyd's Policy did not.

It was common ground that section 45 of the Insurance Contracts Act 1984 did not apply because Baulderstone was not a contracting party to either policy.

Determination of the Appeal

The Court of Appeal (Bathurst CJ and Meagher JA, Macfarlan JA dissenting) allowed the appeal brought by Allianz.

The majority determined that if cl 8.20 and cl 10.5 were construed without regard to cl 8.17 then both policies would be liable as primary insurance and, but for the existence of each other, would act as double insurance and cancel each other out. The only issue was whether cl 8.17 changed the interpretation of cl 8.20.

The majority focused on the definition of 'Underlying Insurance'. They held that if the Lloyd's Policy was not 'Underlying Insurance' then cl 8.17 had no application and cl 10.5 and cl 8.20 would cancel each other out, entitling Allianz to contribution from Lloyd's.

Meagher JA confirmed that the Lloyd's Policy satisfied the first part of the definition of 'Underling Insurance' as it had been arranged by Bilfinger on behalf of its subsidiary Baulderstone, but it did not satisfy the second element of the definition. This was because to be 'Underlying Insurance' it must convert, by operation of cl 8.20 of the Allianz Policy to excess insurance. The Lloyd's Policy did not convert the Allianz Policy to excess cover because the effect of cl. 10.5 of the Lloyd's Policy  that there was no primary cover for Baulderstone's liability under the Lloyd's Policy. Accordingly, each "other insurance" clause cancelled each other out. 

In his dissent Macfarlan JA interpreted the definition of "Underlying Insurance" as referring to a policy that "prima facie" provided indemnity for a risk also covered by the Allianz Policy, leaving aside the effect of its "other insurance" clause (although to do this required that effect to be implied into the definition of "Underlying Insurance"). As a result His Honour concluded that cl 8.17 applied because, leaving aside clause 8.20, the Lloyd's Policy did not provide cover in respect of Baulderstone's claim.  

Analysis

The difference in opinion amongst the four judges shows that the issue of competing "other insurance" clauses and double insurance remains a grey area open to interpretation.  

The appeal confirms that determinations of double insurance involve a two-stage process:

  1. First, an interpretation of each policy independently of each other; and
  2. Secondly, once that independent review is concluded, an analysis of the interaction between the two policies.

For underwriters and brokers the case highlights the importance to carefully consider how specific definitions are used and to ensure that clear language is used with definitions to convey the parties' intentions. This was illustrated in this case by the majority's strict interpretation of the term "Underlying Insurance". The outcome of the case may have been different had "Underlying Insurance" been defined in line with Macfarlan's JA interpretation.

Underwriters should also exercise caution when drafting Differences-In-Conditions clauses to ensure that they do not risk permeating into the realm of double insurance as clause 8.17 almost did.

Should you have any queries relating to policy coverage or claims, please feel free to contact Christopher Smith, who is based in our Sydney office.