Abstract

Construction.  The factor of commerciability is qualified by the paarties' freedom to agree, and the provision of a benefit may depend on the amount of the consideration given for it.

Cover for Costs of Defence - Forms

Insurer's costs of defence - part of claim not covered - allocation

Mitigation of threatened harm - allocation

Article

Construction - Commerciality

The words of a policy should be read in their commercial context, but as in any contract, subject to certain exceptions such as public policy and legislative intervention the parties are free to structure its terms according to their agreement: benefits of terms may be granted and paid for. Thus, statements of the commerciality or otherwise of a construction of its terms and reach of cover must be carefully assessed. A suggested want of commerciality may simply reflect what has been paid for by a higher or lower premium: Australasian Correctional Services Pty Limited v AIG Australia Limited [2018] FCA 2043.

Indemnity for Defence Costs under Liability Insurance

The primary promise in an insuring clause to indemnify for “all amounts which the Insured shall become legally liable to pay” is to be interpreted as indemnity for legal liability ascertained by judgment, award or settlement: Distillers Co Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1 at 25–26; Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373–74 and 377–78; Vero Insurance Ltd v Baycorp Advantage Ltd [2004] NSWCA 390; 13 ANZ Insurance Cases 61-630 at [1], [48] and [89]; Allianz Australia Insurance Ltd v Bluescope Steel Ltd 87 NSWLR 332 at 349 [78], 381 [267]-[270}.

It is limited to third party cover of liability to another, and does not cover first party loss in the form of the insured's loss through the costs of defence of a claim by the third party. That is covered by the virtually ubiquitous supplementary first party cover to that effect, usually cntained in a condition. Thus, the insured's right to indemnity for defence costs depends totally on the terms of that promise.

The absence of this cover may cause practical difficulties for an insured, who may be left to fund a defence of a claim without the involvement of the insurer. Solutions of varying favourability are usually reflected in the premium. The nature and extent of the indemnity and of any valuable promises are to be taken from their words, but the approach taken to the language of other policies is not determinative.

One solution is to give the insurer the right, but not the duty, to take over the defence. Another may require it to pay defence costs expended by the insured with its consent, but confined to claims for which indemnity is provided.

 

Another may require it to undertake the defence of the suit in which covered claims are made.

A provision for allocation or apportionment in respect of the insurer’s defence of claims not within the cover is sometimes expressed: CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Pty Ltd [2008] FCAFC 173. Depending on its language, costs that relate to both indemnified claims and non-indemnified claims may be covered, costs solely related to parts of the claim that are not covered may not. There may be an apportionment, based on specific wording involved: McCarthy v St Paul International Insurance Co Ltd [2007] 157 FCR 402; Major Engineering Pty Ltd v CGU Insurance Limited [2011] 35 VR 458; Bank of Queensland Limited v Chartis Australia Insurance Limited [2012] QSC 319; Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; Alpine Florist & Food Market Ltd v AXA Pacific Insurance Co 2004 BCSC 1731 at [46]).

The insurer’s defence costs recoverable by apportionment may be the subject  of a specific term, when the question turns upon its construction. The result may vary with the language adopted and the circumstances. In McCarthy v St Paul, Major Engineering and Bank of Queensland (supra), the issue was the effect of exclusions and the limitation on the relevant indemnity provisions. In Weir Services (supra), the costs and expenses were to be paid in relation to a claim covered under the policy. In Wesfarmers Federation Insurance Limited v Stephen Wells t/as Wells Plumbing [2008] NSWCA 186, the contested costs may well not have been, in substance, defence costs at all.

Without its express presence but based on the specific wording involved, costs between claims that were covered and not covered have been apportioned: McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; 157 FCR 402; Major Engineering Pty Ltd v CGU Insurance Limited [2011] VSCA 226; 35 VR 458; Bank of Queensland Limited v Chartis Australia Insurance Limited [2012] QSC 319; Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] NSWCA 100; Alpine Florist & Food Market Ltd v AXA Pacific Insurance Co 2004 BCSC 1731 at [46]). In John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] Lloyd’s Rep IR 420 at 451–452; Ace European Group v Standard Life Assurance Ltd [2012] EWCA Civ 1713 at [21]–[49]. In Capel-Cure Myers Capital Management v McCarthy [1995] LRLR 498; New Zealand Products v New Zealand Insurance [1997] 1 WLR 1237; Thornton Springer v NEM Insurance [2000] Lloyd’s Rep IR 590 and John Wyeth, the court rejected t apportionment.

 

If the insurer’s promise were to pay reasonably incurred defence costs, its words might limit it to those costs relating to claims for which indemnity will be provided; or it could be similarly impliedly limited. If it were to defend any suit against the insured, this requires the suit to contain some indemnified claim. But as it is a not uncommon for an action against the insured to contain some claims that are covered and some that are not, the promise may oblige the insurer to defend the whole suit and pay all expenses of that defence. The obligation to defend the suit is triggered by the presence of a covered claim and extends to the whole suit.

This is a matter of simple construction of its terms: Australasian Correctional Services Pty Limited v AIG Australia Limited [2018] FCA 2043. The cover is expressed to provide protection against the cost of litigation in which a claim covered by the indemnity coverage clause can be found, which triggers the insurer’s obligation to defend and pay all expenses incurred. Such  a form of cover may still contain other express limitations.

In these circumsances, the duty to defend is the provision of a service which is distinct from indemnification of third party liability, and so it is not necessarily logically limited by the indemnity for liability structure but is controlled by the words of the contractual responsibility to defend. That responsibility is to defend a suit, and there must often be a real possibility that some claims in it may not be covered. Unless the words of the policy require it, there is no manifest or implied reason to reduce or qualify the unambiguous obligation to defend it and pay all expenses of doing so.

In this reasoning, The Law of Liability Insurance 3^rd ed Derrington and Ashton paras [8-565]–[8-575], and [9-155]–[9-160] was approved.

This result is not affected by a provision in the following terms: “The Insured shall bear the first $X of each and every claim inclusive of costs associated with the settlement of such claims”. The insurer’s own expenses of performing its contractual obligation to defend the suit are not costs referred to in it. “Costs included” usually means the costs ordered to be paid to the claimant which fall within the indemnity of liability.the insurer’s expenses of conducting the defence do not create any liability in the insured. The usual meaning of “inclusive of all costs incurred” is the costs of the claimant against the insured: Allen v London Guarantee & Accident Co Ltd (1912) 28 TLR 254; National Insurance Company of New Zealand Ltd v Wilson [1941]  NZLR 639; Dodds v Ferguson [1960] Tas SR 160; Government Insurance Office (NSW) v Crowley [1975] 2 NSWLR 78; Commercial & General Insurance Co v Government Insurance Office (NSW) 129 CLR 374. Consequently, such a deductible does not entitle the insurer to apply it to its own expenses in defending the suit, a fortiori, if the payments to defend the suit are called “expenses incurred by the Company” (rather than costs, and thereafter there is a reference to “all costs taxed against the Insured in any such suit”: Australasian Correctional Services Pty Limited v AIG Australia Limited (supra).

Such caution is necessary in this reasoning. The cover for the insured’s costs of defending a claim is first party cover as a practical addition to the policy’s primary third party liability cover, and the two are joined in a composite policy because the costs cover is supplementary to the liability cover. Consequently, care must be taken to avoid too much mphasis on the factor of liability when addressing the applicatiom of the defence costs provision.  Of course, this observati0n does not apply to the cover of the insuredd’s liability to the third party under a costs order, which is a pure third party liability. This recognition would avoid an anomaly if the insurer’s defence expenses obligation has a limit which is separate and distinct from the liability cover’s deductible but can be used to fill it and so erode its cover. In that form its words and structure would keep liability, including liability for costs to the third party, and the expense of funding the defence of the suit broadly distinct.

These principles are analogous to those relating to the apportionment of the cost of mitigating harm under a Civil Liability policy, where part of the harm is within and part without the cover: New Zealand Products (upra) 1242.

In Illinois, if the insurer has a contractual obligation to defend a suit, it must do so if conduct covered by the policy is alleged: Health Care Industry Liability Insurance Program v Momence Meadows Nursing Center, Inc. 566 F.3d 689 at 696–699 (7 CCA 2009); Connecticut Indemnity Company v DER Travel Service, Inc. [2003] USCA7 272; 328 F.3d 347 at 349 (7 CCA 2003); Hurst-Rosche Engineers v Commercial Union Insurance Company [1995] USCA7 421; 51 F.3d 1336 at 1342 (7 CCA 1995). This obligation to defend comes with the obligation to pay for the defence.