Abstract

When Insured's Settlement of Claim with Claimant Justified - onus of proof

When Cause of Action to Right to Indemnity Arises

Assignment of Insured's Right to Indemnity to Claimant

Insured's Liability Need not be Enforceable

Other Insurance

Cover for Cost of Preventing Covered Loss

Damron Agreement

Severance Clause

Breach of Condition - Onus of Proof

Construction - Nearest Antecedent - Cognate Words

- Insurance Contracts Act s 54 - Proofs

- Limitation of Actions Against Insurer

Article

Insured’s Settlement of Claim – Onus of Proof of Liability

There is controversy as to whether, where the insurer has not repudiated the policy, an insured who settles the claim of a third party and then claims an indemnity rather than damages for breach of the policy must prove original liability to the third party: Hurlock v Council of the Shire of Johnstone [2002] QCA 256 at [28] – [31]; Vero Insurance Ltd v Baycorp Advantage Ltd (2005) 13 ANZ Ins Cas 61-630; Weir Services Australia v AXA Corporate Solutions Assurance [2018] NSWCA 100. See also other decisions discussed in “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; “In what circumstances is an insurer bound by a judgment or settlement against its insured?” – S Traves (2015) 26 ILJ 209.

Comment: The answer is easily understood. If the insured sues for indemnity under the terms of the contract, he rejects the insurer’s repudiation of the contract by its declinature of cover, and remaining bound by the contract’s terms he is obliged to observe its conditions, which forbid settlement without the insurer’s consent.  If the insured sues for damages for the insurer’s breach of the contract, he impliedly accepts the insurer’s repudiation and is freed of the policy’s restraint on settlement.

Insured’s Settlement of Claim – When Justified

At least where the insurer has breached the contract by denying liability, the insured can recover the amount of a reasonable settlement from the insurer: Edwards v Insurance Office of Australia Ltd (1933) 34 SR 88; General Omnibus Co Ltd v London General Insurance Co Ltd (1936) IR 596; and Distillers Co Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd As a general rule, a contract breaker must be taken to have reasonably contemplated that its breach may force the innocent party into litigation with third parties and that the innocent party may conclude that it is in its best interest to compromise the third party’s claim.

If a contract of indemnity is wrongly repudiated, the party who is faced with an adverse claim will have to litigate the issues on two fronts, and his reasonable settlement of the claim by his acceptance of liability will crystallise his loss for which he is entitled to indemnity: Edwards v Insurance Office of Australia Ltd (1933) 34 SR (NSW) 88. It is within the notional reasonable contemplation of the parties and a result of the breach. A party who breaks a contract must reasonably contemplate that its breach may force the other party into litigation with third parties and conclude that it is in its best interest to compromise that claim: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603. This refers  to principles applicable in a claim for damages for the insurer’s breach of the insurance contract, which is distinct from whether at the time of settlement the insured was entitled to indemnity according to the policy’s terms.

It is also necessary to a claim against the insurer that the insured will have suffered a loss through incurring liability underthe settlement. Further, if the settlement involves an assignment of the insured’s rights against the insurer, it is necessary that he should have a right of indemnity against the insurer, which would need the establishment of his own liability to the assignee if that were not already established.  Properly drafted, the settlement could do that, but if it merely exonerated him from liability in exchange for the assignment, it would not establish his liability which would be necessary to attract an indemnity.

To establish a liability, a settlement must be both reasonable and bona fide: Vero Insurance Ltd v Baycorp Advantage Ltd [2004] NSWCA 390. It requires a reasonable assessment of the risk faced by the insurer, the claim’s true prospects of success if the proceedings against the insured were conducted with care and skill and a reasonable evaluation of the prospects of a successful defence, and proceed to judgment: The Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1973) 130 CLR 1; CGU Insurance Limited v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; BNP Paribas (supra) The insured must have regard to the proper interests of the insurer.

  Bona fides excludes an ulterior purpose extraneous to the insured risks which might motivate an insured to settle, such as avoiding adverse publicity or relieving a parent company of its part in liability. It is not that such matters make the settlement unreasonable generally: they may provide sensible commercial reasons to settle. But in terms of the rule currently under discussion, these extraneous motives mean that the settlement is not reasonable because it is not a bona fide or accurate measure of liability in the action.

Right to Indemnity – When Cause of Action Arises

The right to indemnity under a Liability insurance policy which applies to a particular claim does not arise before the insured’s liability is established by a judgment, award or settlement: Post Office v Norwich Union [1967] 2 QB 363; Cacciola v Fire & All Risks Insurance Co Ltd [1971] 1 NSWLR 691; Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; Corti v Rodwell [1985] VR 287;  Vero Insurance Ltd v Baycorp Advantage Ltd (2005) 13 ANZ Ins Cas 61-630; Allianz Australia Insurance Ltd v Bluescope Steel Ltd(2014) 87 NSWLR 332; Australasian Correctional Services Pty Ltd v AIG Australia Ltd [2018] FCA 2043.

Comment: This does not mean that when a cover for a lability is triggered, the insured does not acquire any rights: a contingent chose in action is created.  The chose in action for indemnity is contingent on the claimant’s pursuing the claim and the establishment of the insured’s liability in the way indicated.  It should be assignable.

Assignment to Claimant of Insured’s Right to Indemnity - Effectiveness

An assignee of the insured’s rights under the policy pursuant to a settlement cannot succeed in a claim for the insured’s indemnity under the policy if it were not established that the settlement rendered him liable to pay the settlement amount, a position which may come about if his liability is expunged in consideration of the assignment of the policy rights.  This depends on the construction of the settlement’s terms. In Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62, it was found that it did so since it provided that the insured remained liable to the assignee though the assignee was not entitled to enforce it except to the extent of the amount which it recovered from the insurer pursuant to its assigned rights to the benefit of the policy. BNP Paribas v Pacific Carriers Ltd [2005] NSWCA 72 distinguished.

 

Insured’s Liability Need not be Enforceable

An insured may be legally liable to pay money for the purposes of Liability insurance though the liability is not enforceable against him, whether under a consent judgment or a contract: CGU Insurance Ltd v One.Tel Ltd (In liq) CGU Insurance Ltd v One.Tel Ltd (In liq) (2014) 242 CLR 174; Blakeley & Ors v CGU Insurance Ltd (2017) 53 VR 733; Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd (supra).

Other Insurance

‘Other Insurance’ clauses

By various ‘other insurance’ clauses, insurers took up a practice of circumscribing the insured’s rights under double insurance. These included an “escape” clause, an “excess” clause and a “rateable proportion” clause. The presence of different or even the same clause in respective policies relating to a claim sometimes caused uncertainty or an unjust want of cover. As such a clause is inserted by the insurer for its benefit, it is construed contra proferentem: Family Insurance Corporation v Lombard Canada Limited [2002] 2 SCR 695; 2002 SCC 48; Jauvin v L’Ami Michel Automobile Canada Ltée (1986) 33 DLR (4th) 576; The Law of Insurance Contracts – M Clarke, (6th ed) at [28-9].

Section 45 of the Insurance Contracts Act 1984 (Cth) renders ‘other insurance’ clauses void where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, but not in relation to a contract that provides cover in respect of so much of a loss as is not covered by a contract of insurance that is specified in the first-mentioned contract. The section does not apply when the insured was not a contracting party to either policy but rather an added insured to a policy contracted by others: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; Lambert Leasing Inc v QBE Insurance (Australia) Ltd (2016) 93 NSWLR 166. Further, the Act does not apply to all insurance contracts: s 9.

If the section does not apply it may be necessary to assess whether the clause in one policy will prevail over the other, for example, an absolute ‘escape’ clause or an excess clause will prevail over  a rateable proportion clause so that the loss will be covered by the latter and not by both: Bankers & Traders Insurance Co Ltd v National Insurance Co Ltd [1985] 1 WLR 734 (PC); National Employers’ Mutual General Ins Association Ltd v Haydon [1980] 2 Ll Rep 149; Australian Eagle Insurance Co Limited v Mutual Acceptance (Insurance) Pty Ltd [1983] 3 NSWLR 59.

If both clauses are of equal force, they cancel each other out and both cover the loss: Weddell v Road Transport and General Insurance [1932] 2 KB 563. For competing excess clauses, see Foster v QBE European Underwriting Services (Australia) Pty Ltd [2018] NSWSC 440 at [96]- [97] and General Accident Insurance Co of Australia Ltd v Sun Alliance Insurance Ltd (1989) 17 NSWLR 80; (1989) 5 ANZ Ins Cas 60-916. But if the clauses can be reconciled so as to give effect to both, there is no mutual repugnancy which would diminish their respective operation: Deaves v CML Fire and General Insurance Co Limited [1979] HCA 12; (1979) 143 CLR 24.

The process involves two stages, the construction of each policy to determine whether it provides coverage in the circumstances , having regard to the clause, and if both are affected by their respective clauses, to compare the force of the result. Cf Evans v Maritime Medical Care Inc. (1992) 87 DLR (4th) 173; Nanyang Insurance Co Ltd v Commercial Union Assurance Plc [1996] 1 SLR(R) 441; National Employers’ Mutual General Ins Association Ltd v Haydon (supra); Australian Eagle Insurance Co Limited v Mutual Acceptance (Insurance) Pty Ltd  (supra). The value of authorities is limited since each decision will be a matter of construction of two policies, which may vary in language from case to case: Australian Eagle.

If one policy defines underlying insurance to mean a policy of insurance arranged by or on behalf of an Insured, including one arranged by joint venture partners, principals, contractors, etc. that provides cover to an Insured for a risk, which save for underlying insurance, would be covered by this policy, but that the insurance afforded by this Policy should be excess cover of valid and collectible insurance  over the applicable limit of indemnity of the underlying insurance, but would provide cover not provided by it, and if it also had a general excess clause, and if the other policy contained an escape clause in the form of an exclusion of  cover for liability which forms the subject of insurance by any other policy and this Policy shall not be drawn into contribution with such other insurance, the latter, being absolute, will prevail over the former, which is not. The reference to the former policy’s being in excess of valid and collectible insurance is consistent with the insurer’s intention to drop down to the primary layer in the event that the other policy cannot be collected because the other insurer is insolvent: Clarke, op cit at [28-9B]. The language of the latter would be construed as providing absolute escape by reaason of the presence of other insurance: Allianz Insurance Australia Limited v Certain Underwriters at Lloyd’s [2019] NSWSC 453. In Commercial Union Assurance Co of NZ Ltd v Murphy [1989] 1 NZLR 687; (1989) 6 ANZ Ins Cas 60-948, an escape clause was found to prevail over an excess clause.

If a policy extends its cover to an added insured conditional upon his not otherwise having insurance, s 45(1) of the Insurance Contracts Act 1984 (Cth) does not operate to render the condition void: Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62. As the insured has the onus of proof of the cover, in such circumstances the added insured has the onus of proving that it has no other insurance for the claim: Ibid.

Cover for Cost of Preventing Covered Loss

If a policy contains a provision extending cover for incurred costs in the event that the insured acted reasonably and proactively in preventing Property Loss or Personal Injury, it will be engaged in appropriate circumstances: Guardian Assurance Co Ltd v Underwood Constructions Pty Ltd (1974) 48 ALJR 307. But it will depend on the construction of the promise to indemenify and on whether the circumstances conform to it. If there is a limitation which confines this cover to liability for the costs of such an operation, it may nnot be apt to extend to incurred costs which could not be characterised as a liability, which may be the case if the workis performed by an added insured.  Further, it is a matter of construction whether a provion such  as this will extend the cover to other than the named insured. There may be an issue whether the cover in this respect extends to costs incurred after the expiration of the policy period though the need for it becomes apparent before that date: Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62.

 

The Damron Agreement

The analysis in “The Damron Assignment” - DK Derrington (1995) 7 Insurance Law Journal 65, is distinguishable if by the deed the parties did not create any liability by the insured to the assignee in that respect, for as the insured would not become liable under the settlement and would not be sued by the assignee in its enforcement action against the insurer, there was no established liability in the insured to support the insurer’s claimed obligation to indemnify it, and the assignment was without content in the enforcement action.  If in its enforcement action based on the settlement, the assignee were to try to prove the insured’s liability to it otherwise than through the settlement, it would be met by the defence that no liability remained since the insured had been exonerated by the settlement. In Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62, the settlement deed was construed on appeal as imposing liability on the insured, but the complexity of the exercised fortified theimportance of clearly expressing it so.

By analogy, conventional principles of contractual construction broadly justify upholding the Damron Assignment, but the American jurisprudence differs in important respects from Australian law, and the applicability of the Damron principles may be qualified to that extent.  It could never be authoritative in Australia, but may be useful in guiding consideration in suitable cases.

 

Severance Clause

The influence of a severance clause on a definition of “You” in a policy was considered obiter in Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62.

Breach of Condition

 Where the onus of proof of breach of a condition lies depends primarily upon the nature of the condition and the provisions of the policy. If a clause is expressed as a condition to which the existence of an obligation to indemnity is made subject, it operates as a condition unless it is incapable of doing so.^. If it cannot operate as a condition precedent to the policy’s existence or concurrent with the accrual of a liability to indemnify, it could operate as a condition of the existence of liability only as a condition precedent to the liability’s being accrued or as a condition subsequent which discharges an accrued liability. If the clause refers to a factor antecedent to the liability-creating occurrence, it is a condition to be fulfilled by the insured precedent to the accrual of the insurer’s liability to indemnify. Any provision which is merely a condition precedent to the accrual of the insurer’s liability according to the terms of the policy, the insured must allege and prove, his performance of it. For enforcement of an obligation qualified by a general exception the applicant must negative the exception. If the obligation is general and qualified only by a particular exception, he must prove himself within it: Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (1942) SR (NSW) 231; Wallaby Grip Ltd v QBE Insurance (Australia) Ltd (2010) 240 CLR 444.

However, an exception may prevent an insurer’s liability from arising, whereas a limitation operates after the obligation to indemnify has arisen and upon the amount payable pursuant to it, and the burden of proof arises from the principle that he who alleges must prove. So the incidence of the onus burden depends on what each party needs to allege: Barrie Toepfer Earthmoving and Land Management Pty Ltd v CGU Insurance Ltd [2016] NSWCA 67. the result willdepend on the terms of the condition: elta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62.

Construction

Cognate Words

There is an expectation that cognate words such as “liable” and “liability” have congruent meanings, particularly where they are used in the same sentence in a short document drawn with legal assistance: Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62.

Nearest Antecedent

It is an ordinary rule of grammar that words of relation prima facie refer to their nearest antecedent: Campbell v Director of Prosecutions for the Commonwealth of Australia [1995] VicRp 82. However, the antecedent referred to is often discovered by good sense and a businesslike interpretation rather than by the position of a word in the sentence. The choice should be the reasonable one, and not emphatically the grammatical one. A relative should be referred to that antecedent to which the context properly attracts it rather than that which will make sense with the context: Eastern Counties and London and Blackwall Railway Co v Marriage; (1860) ER 1067; Campbell v Director of Prosecutions for the Commonwealth of Australia [1995] 2 VR 654; Re Godfrey [1921] SASR 148; Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62.

Section 54 of the Insurance Contracts Act 1984 (Cth)

In Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62, the policy contained an exclusion in respect of liability for Specific Types of Project, and in particular in respect of Personal Injury or Property Loss directly or indirectly resulting from excavations deeper than 10 metres.  It had been held obiter that the harm was caused by an excavation’s being created deeper than 10 metres, which constituted the ‘act’ required by s. s 54 of the Insurance Contracts Act 1984 (Cth), though on the same reasoning it might be thought to be the insured’s conducting an operation there. However, it was also noted that the insured had not proved the elements of aub-ss (3) and (4) that no part of the loss that gave rise to the claim was caused by the act or that some part of such loss was not caused by it.

Comment: It might be thought that no act was involved in the exclusion: that it referred to loss caused by a a state of affairs without regard to an act or omission by any person, so that the section was not engaged. 

Limitation of Actions

The authorities differ as to whether a cause of action against an insurer arises when loss within the policy was suffered: Callaghan v Dominion Insurance Co Ltd [1997] 2 Lloyd’s Rep 541; Cigna Insurance Asia Pacific Ltd v Packer [2000] WASCA 415; Commonwealth v Vero Insurance Ltd [2012] FCA 826; (2012) 291 ALR 563 (obiter); Associated Forest Holdings Pty Ltd v Gordian Runoff Ltd [2015] TASFC 6; Globe Church Incorporated v Allianz Australia Insurance Ltd [2019] NSWCA 27; Delta Pty Ltd v Mechanical and Construction Insurance Pty Ltd [2019] QCA 62 (obiter); Indemnities against Breach of Contract Professor Carter 25^th Annual Banking and Financial Services Law and Practice Conference, p 435, or when the insurer refuses to indemnify: Hunter v Stronghold Insurance (Australia) Ltd [1995] VicSC 5; Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564.