The contribution doctrine versus "other insurance" clauses22 December 2016
Where an insured has a liability to pay compensation and has two or more insurance policies that might respond, the insured is entitled to recover the full amount of its loss from any one of its insurers under s 76(1) of the Insurance Contracts Act 1984 (Cth) (ICA). The principle of contribution allows for the indemnifying insurer to seek contribution from the other insurer(s) also liable to indemnify the insured.
Insurance policies may, however, include "other insurance" clauses, that exclude or limit an insurer's liability where the insured has another policy available. If upheld, these clauses may prevent the insured from making a claim under that policy and remove the operation of the doctrine of contribution.
To avoid this outcome, s 45(1) of the ICA provides that an "other insurance" clause is void if more than one insurance is in effect for the same risk.
Section 45(1) provides:
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, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.
In Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd  HCA 50 (Zurich v MMI), the High Court adopted a narrow view of s 45(1) by stating that an insured had only "entered into" two contracts of insurance if it was the contracting party to both contracts. Subsequently, the Supreme Court of Queensland and of New South Wales adopted different approaches, leading to confusion about whether or not "other insurance" clauses would be upheld.
Lambert Leasing Inc. v QBE Insurance (Australia) Ltd  NSWCA 254 (Lambert Leasing), the first Court of Appeal decision considering s 45(1) since the decision in Zurich v MMI, clarifies the approach that courts will likely take on such clauses going forward.
What did this case involve?
Lambert Leasing and Saab Aircraft Leasing Inc (Saab) sold an aircraft to a partnership, which then leased it to a third party who was to operate it. After an accident two years later, relatives of the deceased passengers and crew commenced proceedings in the United States to claim compensation from Lambert Leasing and Saab.
Two policies potentially responded to Lambert Leasing and Saab's liability:
- The first policy with Global Aerospace Underwriting Managers Ltd (Global) was taken out by SAAB AB, who was the parent company of the group that included Lambert Leasing and Saab. This policy contained a definition of the "Insured" that included "SAAB AB and its subsidiaries".
- The policy with the second insurer was taken out as a result of a contractual requirement under the aircraft sale agreement. Lambert Leasing and Saab were listed as "Additional Insured(s)" under the policy.
Both policies contained an "other insurance" clause, which effectively provided that where there was more than one policy of insurance covering the same risk, that their policy would only respond as an excess policy.
Lambert Leasing and Saab, as two wholly owned subsidiaries of SAAB AB, made a claim on the Global policy and indemnity was granted.
A claim was subsequently made on the second policy. The second policy insurer did not decline indemnity, but reserved its position until further information was provided by Lambert Leasing and Saab (subject to claims of privilege). Lambert Leasing and Saab commenced proceedings against the second policy insurer seeking a declaration that they were entitled to indemnity.
Does the second policy respond?
At first instance the proceedings were dismissed, with the primary judge stating that s 45 of the ICA did not render the "other insurance" clause in the policy void.
The NSW Court of Appeal agreed.
It found that s 45 required the "insured" to have "entered into" both contracts of insurance, which was consistent with the narrow view taken by the High Court in Zurich v MMI. As s 45 did not render the second policy's "other insurance" clause void, the Court of Appeal agreed with the primary judge that the two clauses cancelled each other out.
Lambert Leasing and Saab were entitled to elect which of its two insurers it required indemnity from. As they had already obtained indemnity from Global, they were unable to seek the same indemnity from the second policy insurer . Global would instead need to seek contribution.
This decision means that s 45(1) is unlikely to void an "other insurance" clause in respect of cover for an insured who is:
- an additional insured and not the policyholder
- someone forming part of a group identified as a category in the particular contract of insurance (e.g. subsidiaries of the named insured, contractors or persons with a secured interest in the property), or
- a person with rights to claim under s 48 of the ICA.
The decision in Lambert Leasing confirms that "other insurance" clauses can operate validly in policies if the relevant entity was not the contracting party of both insurance contracts. Insurers and insureds therefore should consider the circumstances of the entry into the insurance contract and the construction of the contract itself.