Abstract

Exclusion of Damages or Compensation for Personal Injury - Exclusion of Assumed Liability - Effect of Consent Judgment - Cross-Liability Clause - Variation of Cover - Disclosure - Reasonableness of a Settlement

Article

Damages or Compensation in respect of Personal Injury exclusion

If by the use of the nexus, “for”, an exclusion refers to a particular feature of a factor which is expressed more broadly in the insuring clause in terms of “in respect of”, the exclusion is read more narrowly. Such inchoate relational terms should not be construed in isolation: Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd 14 ANZ Ins Cas 61-715 at [43]- [45]. A claim for statutory contribution falls within a statute limiting compensation payable by a party in an action “to recover damages or compensation in respect of personal injury”: Unsworth v Commissioner for Railways (1958) 101 CLR 73. So is liability for contractual damages whose measure is the liability to pay tortious damages for the same injury: QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55. A claim for contribution and/or indemnity from a joint tortfeasor pursuant to statute arising out of the personal injury does not fall within an exclusion of claims against the insured “for any alleged or actual bodily injury”: Allianz Australia Ltd v Wentworthville Real Estate Pty Ltd [2004] NSWCA 100; 13 ANZ Ins Cas 61-598

Assumed Liability’ exclusion

The point of an ‘assumed liability’ exclusion is to exclude liability which is voluntarily assumed by the insured, as opposed to liability arising in the ordinary course of the law. But it will be assumed under a contract only if it is the only reason for the insured’s liability. The exception as to liability which would ordinarily be incurred is to be read with the word, ‘assumed’, and confirms that the exclusion is directed to liability which rests with the insured only because of its act of assumption: QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55.

If the insured would be entitled to indemnity for liability for which it would have been liable in the absence of an ‘assumption of liability’ exclusion, the issue may arise as to whether the ‘liability’ refers to its statutory liability for contibution in respect of contributory negligence when it is also liable to its co-tortfeasor under a contractual indemnity in respect of its own responsibility for any harm in the performance of a contract with that other.

Under the principle in European Bank Ltd v Robb Evans of Robb Evans & Associates (2010) 240 CLR 432; [2010] HCA 6, the question is whether the other party’s liability to the victim arose naturally according to the usual course of things from the insured’s breach of contract or such damages as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the insured’s breach. If so, then that loss would be recoverable by the other from the insured as damages if the insured’s breach of its obligations under their contract were to lead to the other’s liability.

As a consequence the liability for which the insured would seek indemnity includes liability for which it would have been liable in the absence of the exclusion because it is a liability which arose as a matter of general law following the breach of the ordinary terms of the contract, that is, those aside from the exception to the exclusion.  For example, if the other is sued as occupier by one of the insured’s employees as a consequence of the insured’s breach of its contractual obligations to the other, then its liability as occupier may be sufficiently causally connected with the insured’s breach of contract. In the usual course of things the contractually indemnified loss of the other party is for the insured’s breach of the contract leading to injury resulting in the action gainst the other party: Southern Colliery Maintenance Pty Ltd (supra).

In respect of this exclusion, absent clear words to the contrary the commercial purpose of a Product Liability policy encompasses the range of obligations normally associated with such liability in law, and usually the language of a policy does not contain any such clear words. Something distinctive and out of the ordinary, by way of additional liability, must arise before the exclusion takes effect. Implied terms of merchantable quality and fitness for purpose with respect to product liability are so common that only clear words will be found to exclude cover for their breach which causes harm in a Product Liability policy: Zurich Australian Insurance v Regal Pearl at [117]-[118].

The same reasoning applies to an exclusion for liability assumed by the insured to exclude the liability it incurs for supplying services which breach a contractual obligation to provide fit and proper services by an employee who is properly trained and supervised: QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55, which also suggests, obiter, that this clause comprises a single concept, that is, liability voluntarily assumed by the insured which it would not otherwise bear, and does not contain an exception from the exclusion, entailing a shift of onus of proof.

The way in which the insured pleads its case against the insurer as to the nature of the liability for which it sought indemnity is not dispositive. The nature of the liability is a question of law, turning on its legal nature, and whether it falls within the exclusion on the proper construction of the policy: Ibid.

However, in both cases, the claim against the insured was for tortious independent harm through the insured’s omission to perform its obligations under its contract.  That is not the same as a claim against it for the claimant’s simple financial loss for the depleted value of the promised product or services through mere non-performance of its contract without other consequential harm.  If the claimant’s claim against the insured were merely for damages for want of value received because of a defect in the quality of the product or services, the insured’s business risk in failing to meet its contractual obligations is not within the risk covered by Liability insurance, and the insured’s assumption of its liability to perform the contract could well be within the ordinary meaning of the language of such an exclusion in its usual form, particularly if it refers to liability ‘arising out of’ a contract.

If the indemnity to the insured is extended to another party to  a contract with it, there may be a finely balanced issue whether the exclusion could be read as referring to only external contracts falling outside those contemplated by the extension. There may be no clear textual basis to do so, save for the extension. But it is somewhat contrary to commercial commonsense that the added insured could claim on the policy in circumstances where the named insured could not: QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55.

In a case such as this, the claimant should not sue the insured for breach of a tortious duty owed directly to it, for that would not permit the whole of the liability to be shifted to the insured. The contractual obligations should be  alleged to have been breached as concurrent and co-extensive with a duty of care in tort, so as to engage the extended definition of “wrong” in the Contributory Negligence legislation.

 

Effect of Consent Judgment

Entry into a consent judgment as between the insured and the other party may in that judgment merge the other party’s rights, not only under their contract, but also for its other causes of action in contract and for statutory contribution: Tomlinson v Ramsey Food Processing Pty Ltd (2015) 256 CLR 507; [2015] HCA 28 at [20]. The insured’s agreement to it does not itself engage the ‘assumed liability’ exclusion. The merger would not alter the position.

Cross-liability Provision

A cross-liability provision in the policy is directed to rendering the policy     composite: Federation Insurance Ltd v Wasson  (1987) 163 CLR 303 at 309-311. The policy consists of the contracts of all insureds, gathered together but by the cross-liability provision separated as to their respective interests.

Variation of Cover

If the insurer reserves the right to charge an adjustment of premium at the end of the period because the premium is provisionally based on the insured’s estimates in accordance with the contract and if the the adjustment is to be calculated by reference to any altered definition of “Insured’s Business”, it could be sufficient consideration for the variation to be effective. Even if there were no consideration, if both the insurer and the insured regarded the contract as having been varied, that would give rise to an estoppel by convention and in equity: : QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55.

Disclosure

The insured’s omission to  disclose its agreement to indemnify the other party to a works contract amounts to material non-disclosure: QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55. The principles are set out in Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] 302 ALR 732 at [70]- [71]. There is a distinction between reaching agreement on contractual terms and expressing an intention to be bound by those terms: Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 548.

As the duty of disclosure is required by the Insurance Contracts Act 1984 in respect of material matters is limited to matters prior to the commencement of the contract, an issue may arise as to whether a variation of the cover involves a new contract so that matters arising between the commencement of the original contract and the date of the variation are required to be disclosed.  It depends on whether there is a renewal, extension or variation. If there is a different risk at a different site owned by a different company, that an additional premium is not demanded does not mean that the terms of the contract are not extended or varied, particularly if the insuring clause turns on an “Occurrence in connection with the Insured’s Business”, as specified. It would be a question as to whetther the new activity could be comprehended within the definition of the business.

The provisions of the Insurance Contracts Act relating to the insured’s duty of material disclosure excepts such matters which are known to the insurer or which it ought to know. Section 21 consistently distinguishes between knowledge and disclosure, which must not be confused. They are different. The duty of disclosure requires an act of communication: knowledge is a state of mind. The performance of disclosure requires merely that the insured communicate the matter to the insurer. Because an insurer is not a person, it is necessary for it to be communicated to its agent. Disclosure may be performed if it is provided to the insurer in accordance with the arrangements specified by it and its broker, when it is not necessary to ensure that it is made to the appropriate persons within the insurer’s organisation: QBE Underwriting Ltd as managing agent for Lloyds Syndicate 386 v Southern Colliery Maintenance Pty Ltd [2018] NSWCA 55.

Knowledge has a level of certainty, rather than suspicion or belief. Knows’ is strong, meaning considerably more than ‘believes’, ‘suspects’, or even ‘strongly suspects’: Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (2003) 214 CLR 514; [2003] HCA 25 at [30]; Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Ltd [2017] NSWCA 71 at [50]- [56]. Knowledge by an artificial entity, such as a corporation, also requires attributionto an appropriate officer or agent of the insurer or contained in current official records. Ordinarily, the appropriate officers will be those who are handling the particular insurance on behalf of the insurer: Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; [1999] NSWCA 422 at [62]; Meridian Global Funds Management Asia Ltd v Securities Commission [1995] UKPC 5; [1995] 2 AC 500. For the attribution of an agent’s knowledge to a principal, see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [126]- [127].

As to whether a matter has been fairly disclosed, there are divergent views as to principle: WISE (Underwriting Agency) Ltd & Ors v Grupo Nacional Provincial SA [2004] 2 Lloyd’s Rep 483 at [63[-[68], [114]-[117] and [130]-[133].

An issue may arise as to an insurer’s obligation to investigate a possibly material  matter which is partly communicated by the proponent. At common law, which continues to apply to some Liability insurance policies which have been expressly excepted from the Act, an insured could discharge its duty even if it failed to disclose the entirety of the information in its possession. The duty is satisfied if it discloses sufficient to attract the insurer’s attention so that it can see that if it requires further information it should ask for it: Asfar & Co v Blundell [1896] 1 QB 123 at 129-130. If there is partial disclosure, there may be scope for debate as to whether sufficient has been disclosed. That is a question of degree.A warning letter disclosing the existence of the contract which it is said “may well contain” an indemnity is of this order.

  This is not to say that the proponent may discharge its duty by providing the insurer with no more than the means of knowledge. Less than the whole of the information may amount to disclosure if what is conveyed fairly indicates to the insurer that there is more information to be obtained if it chooses to ask for it, or to have it: Roumeli Food Stores (NSW) Pty Ltd v The New India Assurance Co Ltd [1972] 1 NSWLR 227 at 233-234. if it reasonably indicates the possible existence of further material facts, the insurer will have waived disclosure if it fails to make further inquiry: QBE Insurance (International) Ltd v Jaggar [2006] NZCA 358; [2007] 2 NZLR 336 at [35]; The Law of Liability Insurance Professor M Clarke (2013, Routledge) p 35.

Under the Insurance Contracts Act, the metes and bounds of the word, “disclose”, may be informed by the previous law: Marks v Commonwealth [1964] HCA 45; (1964) 111 CLR 549 at 573, and the statute expressly picks up the concept of waiver by an insurer. “The proponent may discharge the duty by giving the insurer information which amounts to less than the total known material facts, provided that what is conveyed fairly indicates that there is more information to be obtained if the insurer chooses to seek it. If the insured discloses facts and circumstances which reasonably indicate the possible existence of other material facts, the insurer will have waived disclosure if it fails to make further inquiries, but not if the matter is so unusual that the insurer is not put on notice”: The Law of Liability Insurance 3^rd ed Derrington and Ashton at pp 594-595.  See also Sutton on Insurance Law at 572-573.

Reasonableness of a Settlement

The onus of establishing the reasonableness of a settlement is borne by the insured: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603.