Abstract

General Rules of Construction

The Character of Liability Insurance

The need for Proof of Liability in respect of a Settlement

The Nature of Activity Covered - incidental activity

‘Acknowledged’ Liability - Meaning of 'acknowledged

Cover of Restitutionary Orders ifincluded in insuring promise

Exclusion: Liability Arising out of Contract -Whether applies to a settlementSettlement

Legally Liable to Pay - Whether applies to a settlementSettlement

Declaratory Judgment - Principles

Article

Construction

 

Some of the major principles of construction  are as follows:

1. It is assumed that the parties intended to produce a commercial result (Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 at 656-657 [35]), mening that the Policy ought to be given the business-like construction, that is, one which a reasonable business person would give it: Ecosse Property Holdings Pty Ltd v Gee Dee Nominees Pty Ltd (2017) 261 CLR 544 at 551 [17]; Simic v New South Wales Land and Housing Corporation  (2016) 260 CLR 85 at 111 [78].

(2) A policy of insurance is to be construed according to general principles of contractual interpretation and in its contextual framework to the extent to which it is known by both parties in order to identify its purpose and commercial objective: McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at 589.

(3) Attention must be given to the language, the commercial objects of the transaction, and the circumstances then known to the parties: Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at 461-462 [22]; Woodside Energy at 656-657 [35].

 
(4) The structure of the policy as a whole may be relevant: (Johnson v American Home Assurance Company (1998) 192 CLR 266 at 272 [19(1)]), and a construction supplying a congruent operation to its components as a whole will be preferred: Wilkie v Gordian Runoff Limited (2005) 221 CLR 522 at 529 [16].

(5) A policy shouldbe given a fair and reasonable construction, so that, inter alia, an insured may know the bargain which it has secured: American Home Assurance Company at 274 [19(4)].

National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139

See National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139

 

The exercise of construction of a provision of a clause of a policy is not a determination of final liability to indemnify under the policy under another provision, and the latter does not determine the construction of the former: National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139, but the policy must be read as a whole, when the effect of the exclsion may influence the construction.

 

Liability Insurance

Common characteristics of liability insurance  include -

(1) that a claimant’s judgment against the insured is usually conclusive to establish his entitlement to indemnity: VACC Insurance Ltd v BP Australia Ltd (1999) 47 NSWLR 716; QBE Insurance Ltd v Nguyen (2008) 100 SASR 560.

(2) Typically, the cover promised by an insuring clause is not limited in respect of the way in which the insured’s liability is imposed, which, generally may be by a judgment, an award of an arbitrator or a compromise settlement: Derrington, D K, and Ashton, R S, The Law of Liability Insurance (LexisNexis, 3^rd ed, 2013) at 1451 [8-510]; Australasian Correction Services Pty Limited v AIG Australia Limited [2018] FCA 2043 at [15]; Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564.

(3) The policy often contains a condition that an insured must not compromise a claim by a settlement without the insurer’s consent; but if consent is given, the insurer will usually be prevented from going behind it. National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139

 

Liability insurance compensates the insured for liability for damage which the insured must pay to others because of the insured’s actions, or actions of those for whom he is responsible. The risk is the formal establishment of his liability to a third party rather than the harm that is done to that party, which is only an element of his liability. The purpose of insurance is to provide against the consequences of uncertain future events, and in the context the formal establishment of the insured’s liability to a third party is the peril which constitutes the uncertain future. The “peril”, then, is his exposure to loss through established liability to a third party in accordance with the meaning of that term ... Essentially, his “loss” which is the risk insured against is the attachment to the insured of enforceable liability to another through the conduct of the insured  leading to financial detriment: National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139, citing Derrington and Ashton – The Law of Liability Insurance 3^rd ed at [8.1]:.

 

 

 

Proof for Indemnity on Settlement

There are divergent lines of authority as to what an insured is usually required to prove to obtain indemnify for a settlement agreement which was entered into without obtaining the insurer’s consent: Vero Insurance v Baycorp Advantage Limited [2004] NSWCA 390; (2005) 13 ANZ Ins Cas 61-630 at 77,735 [48]. See “An Uneasy Compromise: An Analysis of the Effect of a Settlement Reached by an Insured with a Third Party Claimant vis-a-vis his or her Insurer” K Sutherland (1998) 9 ILJ 1). One line which favours the insured holds that provided the settlement is reasonable, the insurer is liable to pay the settlement sum to the extent of the policy’s cover and it is not necessary to prove the insured’s actual liability to the claimant – the “settlement is liability” approach: Edwards v Insurance Office of Australia [1933] NSWStRp 61; (1933) 34 SR (NSW) 88; General Omnibus Co v London General Insurance Co Ltd [1936] IR 596; Distillers Co (Bio-Chemicals) (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1, at 9, 25. The other line, which favours the insurer, requires that the insured establish actual liability before the insurer is liable to indemnify, the “settlement is irrelevant approach”: Broadlands Properties Ltd & Broadlands Estates Ltd v Guardian Assurance Co Ltd (1984) 3 ANZ Ins Cas 60-552; Royal Insurance Fire & General (NZ) Ltd v Mainfreight Transport Ltd (1993) 7 ANZ Ins Cas 61-172 at 77, 976; Drayton v Martin [1996] FCA 1504; (1996) 137 ALR 145, at 157. Even within the authorities supporting the latter, if the insurer does not repudiate the policy, there is controversy as to the extent to which the quantum of the settlement may be in issue, whether  a reasonable settlement should be treated as binding on an insurer if the insured has established liability: Royal Insurance v Mainfreight (supra), or not: Drayton v Martin  (supra).

Even if the policy provides that the insured must obtain the insurer’s consent to a settlement, the requirement is waived if the insurer has breached the contract before the insured settles the claim or this prior breach entitles the insured to an award of damages, and if the settlement was reasonable, its amount is the measure of the insured’s loss. The insurer’s breach would have compelled the insured to defend itself against third party claims, and in those circumstances, the insured was entitled to act reasonably to resolve them. In Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1,where it was also held that any admission, offer, promise or payment by the insured in an action would amount to a breach of the policy, notwithstanding that the insurer had elected not to take over and conduct the defence or settlement of the actions.Because this could be unfair to the insured, Section 41 of the Insurance Contracts Act 1984 (Cth) ameliorates the position in some circumstances. Unless the insurer is in breach of the contract, such as by refusing to conuct the defence of the claim when the policy requires it to do so, as distinct from giving it an option, h einsured must prove liability and the reasonableness of the amount of the settlement. But this is always subject to the construction of the policy’s terms: National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139.

 

 

Nature of Covered Activity

Relevant to the issue of whether the insured’s liability is of the kind covered by the insuring promise is whether that this type of activity in which liability was incurred is at the heart of what an insured in such an occupation does. For example, typically a natural and ordinary risk arising from the activities of an insured trading bank when providing Financial or Professional Services is its becoming liable to pay compensation to customers or incurring loss arising from regulatory misconduct, when financial services have been provided unsatisfactorily so as to cause harm: National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139

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‘Acknowledged’ Liability

If it is used in the phrase, legally enforceable obligation acknowledged by an agreement,  acknowledge may refer to an obligation arising from an agreed settlement of a claim. Its presence, shown by entry into the settlement replaced the previously undetermined and unestablished liability.  

In the Oxford English Dictionary acknowledge is defined to mean inter alia, “to own as of legal force or validity. In Webster’s Third New International Dictionary,it is defined to mean inter alia, to show by word or act that one has knowledge of and regard for” and “to recognize as genuine assent to so as to give validity, avow or admit in legal form. The Macquarie Dictionary defines it as relevantly including: to admit to be real or true; recognise the existence, truth, or fact of” and “to own as binding or of legal force: Re Cotton Crops Pty Ltd [1986] 2 Qd R 328.  If the insurer promises indemnity for liability acknowledged by the insured  and arising under a settlement, it may be that the insured need not prove actual underlying liability in respect of what he has acknowledged. Much depends on the policy’s language: National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139.

 

Cover of Restitutionary Orders

The policy may promise indemnity for liability for restitutionary orders, in which case the policy’s language will prevail ove any implied exclusion of cover:  National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139.

 

 

Exclusion: Liability Arising out of Contract

An exclusion of cover for any loss arising out of a contract may not apply to a contract in settlement of a claim if, as is common,specificc provisions are made in respect of settlements: National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139.

 

 

Legally Liable to Pay - Settlement

Legally liable to pay covers a legal liability imposed by law and may, depending on the policy’s terms, include a legal liability to pay provided for in a settlement agreement: National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139.

 

Declaratory Judgment

In respectof an appliction for a declaratory judgment, it will hardly ever be a bar on its own that it might not conclude an entire dispute. The proper approach to the grant of declaratory relief is that as explained by Street CJ in Lohar Corporation Pty Ltd v Dibu Pty Ltd (1976) 1 BPR 97,014; National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2) [2019] FCA 1543;

56. National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) [2019] FCA 2139. If an exercise of judicial power to make a declaration is prima facie present, the discretion as to whether it should be made should be exercised conformably with case management imperatives identified in Pt VB of Federal Court of Australia Act 1976 (Cth) or its equivalent. Although s 21 gives the Court a discretionary power to make declarations of right, it should be exercised not only in accordance with the established principles as to the grant of declaratory relief, but also in a way consistent with the facilitation of the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. Some of the reticence evident in some earlier cases in granting declaratory relief on discretionary grounds on the basis of “incomplete adjudication” may be aat odds with the necessity to facilitate the overarching purpose of commercial pragmatism: Edwards v Santos Limited [2011] HCA 8; (2011) 242 CLR 421 at 435-436 [37]). declaration of right is ordinarily granted as final relief in a proceeding. It is intended to state the rights of the parties with respect to a particular matter with precision, and in a binding way. The remedy of a declaration is not an appropriate way of recording in a summary form, conclusions reached by the Court in reasons for judgment. This is even more strongly the case when the conclusion is not one from which any right or liability necessarily flows: Warramunda Village Inc v Pryde [2001] FCA 61; (2001) 105 FCR 437 at 440 [8]. It must not only be utile (Ainsworth v Criminal Justice Commission [1992] HCA 10; (1992) 175 CLR 564 at 582, but also be precise; a fortiori if the relief sought is necessarily limited and will not resolve the entire justiciable controversy.

 National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 3) (supra).