Reasonable Precaution clauses and conditions precedent: Court of Appeal weighs in on construction and application
31 May 2022
Background
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On 28 October 2015, Mr Zelmai Noori (the Worker) was working alone installing steel facia and guttering on the top level of scaffolding located at 54 Shaftsbury Street, Coburg when the guttering he was carrying made contact with 22kv overhead power lines and he was electrocuted. Shortly prior to the incident the Worker was carrying a 5.4m length of roof guttering on his shoulder and as he followed the scaffold around a corner, the end of the guttering swung out beyond the scaffold and came into contact with power lines. It was alleged that this section of scaffold had been constructed by Dhillon Scaffolding Pty Ltd (Dhillon Scaffolding). That section in any event was within the “No Go Zone” (a mandated exclusion zone near power lines).
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Dhillon Scaffolding was initially prosecuted by WorkSafe for failing to ensure that a permit was obtained and that any scaffolding works in the “No Go Zone” were completed in accordance with such a permit. Dhillon Scaffolding pleaded guilty in 2018, resulting in a conviction and a significant fine.
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Dhillon Scaffolding was then joined as a defendant to both the Worker’s common law claim for damages and the Victorian WorkCover Authority (VWA) claim, which sought to recover workers compensation payments.
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Dhillon Scaffolding then made a claim under its Public Liability Insurance Policy (the Policy) in relation to the claims made by the Worker and the VWA.
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Certain Underwriters at Lloyds (Underwriters) relied upon two conditions precedent in the Policy wording and denied indemnity on the grounds that Dhillon Scaffolding failed to (relevantly):
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notify Underwriters of the Incident or the WorkSafe Prosecution, which constituted a breach of clause 15 of the Policy
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comply with the Australian/New Zealand Guidelines, which identify the proximity to power lines as a potential hazard to persons erecting or working from a scaffold, and
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take all reasonable precautions to prevent personal injury (Dhillon Scaffolding did not prepare or sight any risk assessment, job safety assessment or safe work method statement for the job).
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The latter two were conditions precedent to the insured being entitled to cover.
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As a result of the declinature, Underwriters were joined as a Third Party to both proceedings, with Dhillon Scaffolding seeking a declaration that the Policy applies and for indemnity under the Policy.
Decision at first instance
The Trial Judge (Her Honour Justice Forbes) considered whether or not Underwriters were entitled to deny liability under the Policy; she concluded that they were not. The major matters dealt with by the Trial Judge were as follows:
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whether the General Conditions of the Policy and the Schedule Condition that an insured must comply with the Aust/NZ Guidelines AS/NZ 4576:995 should be construed as conditions precedent requiring strict compliance or whether the insured was only required to take ”reasonable precautions” to comply
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whether the conduct of Dhillon Scaffolding was in breach of the Policy conditions, which required it to take reasonable precautions to ensure compliance with the Aust/NZGuidelinesAS/NZ4576: and other statutory requirements and safety regulations
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whether Dhillon Scaffolding failed to comply with a policy condition that it must:
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notify the insurer as soon as possible of any occurrence that may give rise to a claim under the policy
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if so, whether any such failure to notify caused the insurer any prejudice, and
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whether the claim was excluded from cover because it arose out of the deliberate, conscious or intentional disregard by the insured's technical or administrative management of the need to take all reasonable steps to prevent Personal Injury or Property Damage.
The Trial Judge found that the insurer was not entitled to deny indemnity. She was not satisfied that the insured had failed to comply with the conditions precedent under the Policy, there had not been a breach of the reasonable precautions provisions and if there was a failure to notify Underwriters of the incident, that failure was not able to be relied on by the insurer because of s 54 of the Insurance Contracts Act 1988 (Cth).
The Appeal
The matter was appealed on two grounds: whether the Trial Judge erred in her finding that the “reasonable precautions” provision in the Policy was breached only if the conduct of Dhillon Scaffolding was reckless; and whether the Trial Judge erred in finding that Dhillon Scaffolding had in fact taken reasonable precautions to prevent injury.
At its core, the appeal related to the proper construction of the Policy that Dhillon Scaffolding held and whether that Policy would respond to the liability of Dhillon Scaffolding in the two civil proceedings. The Court of Appeal considered the two key issues of whether Dhillon Scaffolding had an absolute obligation to comply with statutory requirements, safety regulations and Australian Standards, or whether it was only required to take reasonable precautions to comply. If the requirement was that Dhillon Scaffolding should take reasonable precautions, the question is then whether it did.
With respect to Ground 1, the Court found that when reviewing the purpose and context of the Policy, the elements of reasonableness need to be considered. Ultimately, the critical question is whether those conditions required Dhillon Scaffolding to take reasonable precautions to comply with all statutory requirements, other safety regulations and the guidelines, or alternatively, whether strict compliance was necessary. The Court determined that the commercial purpose of the Policy would be hindered if it required absolute compliance with the regulations and that properly construed, the obligation on Dhillon Scaffolding was to take reasonable precautions to comply with the guidelines. Having reached that conclusion, the Court found that it was unnecessary to deal with that aspect of Ground 1 concerning the effect of s 54 of the Insurance Contracts Act in the event that the General Conditions and the Schedule Condition were not reasonable precautions conditions. Further, the Court noted that there was no reference to reasonable precautions in the Schedule Condition and hence this Ground of the appeal was dismissed.
However, Underwriters succeeded on Ground 2 i.e. that Dhillon Scaffolding had failed to take reasonable precautions. Dhillon Scaffolding knew that there was a risk with the scaffolding being built in close proximity to the power lines, it recognised the danger, raised the alarm but was indifferent to whether any action was taken to prevent the risk (which ultimately – and tragically – manifested). Therefore, Dhillon Scaffolding had not discharged its burden of establishing that it took reasonable precautions to comply with the regulations and guidelines. The Court held that this was a subjective test and the burden was not discharged on the facts of this case.
Key Takeaways
Significantly, the decision showed that Courts should consider the Policy wording in its entirety and with its commercial purpose in mind. Provisions in insurance contracts that operate as conditions precedent need to be specifically considered—these are “gate openers” to an insured being able to seek indemnity and need to be approached differently to exclusions within a policy. The test to establish whether reasonable precautions have been taken will of course depend upon the facts in each individual case and is always a subjective test. However, in cases involving conditions precedent such as those applicable to this case, insurers should scrutinise whether in fact insureds have complied with and met those conditions, which are a precursor to cover.
One action arising that brokers or insurers should consider is whether conditions precedent similar to these should be specifically drawn to the attention of insureds at the time policies are entered, so that insureds are under no misapprehension about what steps they need to take to avoid a situation such as this, where indemnity may be declined.
Thanks to Zoe Fatouros and Jehan Mata who worked on this matter.
The Judgment can be viewed here: https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSCA/2022/92.html
