Dual insurance and circular arguments

The NSW Court of Appeal recently handed down Allianz Australia Insurance Ltd v Certain Underwriters at Lloyd’s of London Subscribing to Policy Number B105809GCOM0430 [2019] NSWCA 271, which you can access in full here.

The judgment confirms the principle that where two policies of insurance exclude cover through “other insurance” provisions, the clauses cancel each other out with the result that both policies respond. In other words, the insurer who pays the claim can seek contribution based on the principles of “dual insurance”.

Sparke Helmore acted for the successful appellant.

The background – a circular argument

The case involved a claim for dual insurance by Allianz Australia Insurance Ltd (Allianz) against Lloyd’s Underwriters (Underwriters).

Thomas Dempsey sustained injuries on 8 September 2009 and claimed they were caused by the negligence of Baulderstone Hornibrook Pty Ltd (Baulderstone). The claim arose out of an upgrade of Victoria Road, Rozelle, New South Wales under contract with the Roads and Traffic Authority of New South Wales (RTA).

Allianz had issued a Principal’s Arranged Insurance policy providing cover to the RTA and to Baulderstone for liability risks arising from the works. Separately, Bilfinger Berger Australia Pty Ltd (a parent company of Baulderstone) arranged a liability policy with Underwriters to cover Bilfinger and its subsidiaries for their corporate liability risks (Lloyd’s Policy).

It was the Lloyd’s Policy that led to Allianz’s claim for dual insurance. The problem was how both policies responded considering the different provisions they each had dealing with the existence of other insurance covering Mr Dempsey’s claim. Both policies said in that scenario, they were either excess policies or excluded cover.

Underwriters argued their exclusion clause (or “escape clause”) prevailed over the provisions in Allianz’s policy. Further, they argued that a “difference in conditions” clause in the Allianz Policy meant Allianz provided cover. It was Allianz’s position that the clauses were on equal footing. This potentially meant that Baulderstone had two policies, but no cover. Allianz took the view that the correct interpretation was that the “other insurance” clauses in each policy cancelled each other out with the result that both policies responded. It was on that basis that Allianz said it was entitled to contribution (or “dual insurance”) from Underwriters.

The provisions

The Allianz Policy contained two provisions:

• A “difference in conditions” clause (8.17), which operated where there was “Underlying Insurance”. A policy was “Underlying Insurance” if it provided cover for a risk that was covered by the Allianz Policy. On this basis, the Lloyd’s Policy became the “Underlying Insurance”, and the Allianz Policy became the “Master Policy”, if the Lloyd’s Policy “covered the risk”. Once it was a Master Policy, the Allianz Policy provided excess cover [8.17(a) and (b)], unless there was a “gap in cover”, in which case the Allianz Policy “filled the gap” [clause 8.17(c)].
• An “excess clause” saying that where allowable by law, the Allianz Policy was excess over and above any other “valid and collectible insurance” [clause 8.20].

The Lloyd’s Policy had an exclusion, which said it did not “cover liability which forms the subject of insurance by any other policy”. This was argued to be a complete “escape clause”.

The principles and the issue

It was agreed that s 45 of the Insurance Contracts Act 1984 (Cth) had no application or relevance to the case, as Baulderstone was not a contracting party to either policy.[1]

It was also agreed that if reading the policies independently (ignoring the existence of the other) each would respond to the liability, “the exclusions are treated as cancelling each other out”. This “self-cancelling” principle comes from Weddell v Road Transport and General Insurance Co Ltd [1931] 2 KB 563 (Weddell). The result of that “self-cancelling” meant that both insurers would provide cover and Allianz was entitled to contribution from Underwriters.[2]

The issues between the parties were:

• whether Underwriters’ escape clause (10.5) was broader and therefore “trumped” the Allianz provisions, and
• whether the “difference in conditions” cover [clause 8.17(c)] meant that the “gap in cover” was the whole claim. If that was the case, the Allianz Policy covered the whole claim and was not entitled to contribution.

The primary judgment

Rees J delivered the primary judgment on 24 April 2019 (accessible here). Her Honour found that if Allianz’s “excess clause” (clause 8.20) and Underwriters’ “escape clause” (clause 10.5) were the only clauses in each policy, then the “self-cancelling” scenario would have occurred. Her Honour accepted a broad reading of Underwriters’ “escape clause” but found that Allianz’s “excess clause” was just as broad.

However, her Honour found that because of the difference in conditions clause [clause 8.17(c)], the Allianz Policy specifically contemplated a scenario where there is another policy with an “other insurance” clause (such as clause 10.5). In that event, her Honour found that Allianz agreed to indemnify its insured and that Allianz’s claim for dual insurance failed.

The appeal

Bathurst CJ and Meagher JA delivered the majority opinion and Macfarlan JA dissented. Each judgment goes through a detailed interpretation of each policy. The important elements of the majority decision were:

• To decide whether competing “other insurance” clauses cancel each other out, you must carefully interpret each policy to determine whether it is truly the case that the insured has two policies, but no cover. In some cases, the insured may have cover under one policy and not the other. This was not such a case.
• Insurers use a variety of ways to escape liability if another policy exists. Unless there are very clear words, these clauses will be read narrowly, to avoid a scenario where the insured will not have any cover under two policies, merely because there is an “other insurance” provision in one.
• While clause 8.17(c) did mean that Allianz needed to fill “gaps in cover” that clause was only relevant where was “Underlying Insurance”. The Lloyd’s Policy was not “Underlying Insurance” because its “escape clause” (clause 10.5) meant it did not cover Baulderstone.
• Allianz’s “excess clause” (clause 8.20) and Underwriters’ “escape clause” (clause 10.5) were on equal footing and they cancelled each other out.

The result was that there was dual insurance for Baulderstone and Allianz was entitled to contribution from Underwriters.

What does it all mean?

The Court of Appeal’s decision demonstrates two key points when considering dual insurance and competing “other insurance” provisions:

• The form of the clauses in question, be it a difference in conditions, excess or complete exclusion clause, does not matter. What matters is the effect of the clause.
• Application of the principle is not a forgone conclusion where two clauses appear on their face to have the same effect. To decide whether the clauses are self-cancelling, a careful process of interpreting each policy should occur to determine whether the circularity referred to in Weddell arises.

Notes

[1]       Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391 at [26]; Lambert Leasing Inc v QBE Insurance (Australia) Ltd (2016) 93 NSWLR 166 at [119]-[133]

[2]       Weddell v Road Transport and General Insurance Co Ltd [1931] 2 KB 563 at 567-8; Lambert Leasing Inc v QBE Insurance (2016) 93 NSWLR 166 at [176]-[178]