BARRY.NILSSON. Lawyers

Zürich Australian Insurance Limited v Metals & Minerals Insurance Pty Ltd Supreme Court of Western Australia

THE FACTS

Speno Maintenance Australia Pty Ltd (Speno) is in the business of rail grinding. Hammersley Iron Pty Ltd (Hammersley) mines iron ore. Speno entered into a contract with Hammersley to do certain works. Sean Nolan and Damian Oatway, employees of Speno, were injured at the workplace on 24 May 1995. Under the Speno/Hammersley agreement, Speno agreed to:-

• Arrange public liability insurance to cover Hammersley as a principal.
• Be liable for, and indemnify and hold harmless Hammersley against, common law liability for injury to Speno's employees arising from the performance of the works.

Speno took out insurance with Zurich (maximum liability $2M) which included cover for Hammersley as a principal. Hammersley also had direct cover with MMI (maximum liability $200,000.00).

THE LITIGATION

Hammersley admitted negligence in relation to the claims made by Oatway and Nolan, and then sought indemnities from Speno under the commercial contract, and Zurich under the insurance policy. The Nolan action went to trial, and appeal, and damages of just over $1.1M were awarded. Ultimately, Zurich paid Nolan's damages, and $25,000 to Oatway.

Zurich claimed contribution from MMI toward the amounts paid on the basis that the MMI policy covered the same liability that Zurich had indemnified Hammersley for, and the principles of double insurance applied. In denying Zurich's claim MMI relied on a 'special clause' in its policy which read:-

'Underlying Insurance

Underwriters acknowledge that it is customary for the Insured to effect, or for other parties (including joint venture partners, contractors and the like), to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk.

In the event of the Insured being indemnified under such other Insurance effected by or on behalf of the Insured (not being an Insurance specifically effected as Insurance excess of this Policy) in respect of a Claim for which Indemnity is available under this Policy, such other Insurance hereinafter referred to as Underlying Insurance, the Insurance afforded by this Policy shall be Excess Insurance over the applicable Limit of Indemnity of the Underlying Insurance, but subject always to the terms and conditions of this Policy . . .'

MMI pleaded that by virtue of the underlying insurance clause its policy operated as an excess policy over the limit of indemnity in the Zurich policy, and hence the liability of the 2 insurers was not coordinate.

Zurich pleaded that the underlying insurance clause was void by virtue of section 45 of the Insurance Contracts Act 1984 (Cth) (the ICA), which reads:-

'45. Other Insurance Provisions

(1)    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.

(2)    Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first mentioned contract.'

Subsection 45(2) saves true excess of loss policies from the operation of subsection (1). Zurich denied that the MMI policy was a true excess of loss policy because the 'other insurance' in the underlying clause was described too generally.

MMI argued that section 45 did not apply as it was only relevant where 'the insured has entered into some other contract of insurance' and here someone else had taken out insurance on the insured's behalf (Speno for Hammersley under the Zurich policy). In the alternative MMI argued that if the underlying insurance clause was caught by section 45(1), it was excepted by section 45(2) as a true excess of loss policy provision.

THE DECISION

His Honour agreed with MMI's first argument, ie. that section 45(1) specifically refers to the insured entering into some other contract of insurance, which is not the same as insurance being taken out on the insured's behalf. In this situation section 45 has no application, which His Honour acknowledged was seen to be an unintended result looking at the explanatory memorandum to the Act.

His Honour disagreed with MMI's second argument that its policy was a true excess policy. His Honour said that the underlying insurance provision needed to refer to the 'other insurance' with greater specificity before it will fall within section 45(2). There was insufficient detail in the first paragraph of the underlying insurance clause to meet this requirement.

However in the end result His Honour was able to hold the underlying insurance clause void under section 45, because even though Speno took out the other insurance on behalf of Hammersley, the underlying insurance clause itself still stated that the policy would convert to an excess policy if the insured itself took out other insurance. That of course didn't happen here, but His Honour held that it is the insurance policy provision which section 45 locks onto, and so the entire provision was void because it allowed for this possibility.

Zurich succeeded with its claim for contribution.

COMMENT

If MMI's underlying insurance clause was limited to 'other Insurance effected on behalf of the insured', then section 45 would not have applied and the MMI Policy would have been held to be an excess policy over and above the sum insured by Zurich. The wording of section 45 in this regard is clear, even if contrary to the intent of Parliament at the time of enactment.

The implications are potentially significant. The use of independent contractors to do specific tasks is a widespread practice across Australia. It is often the case that sub contractors are required to take out insurance on behalf of principals who may also be separately insured of their own accord. It would, we suspect, create a significant groundshift in the insurance industry if the various insurers of principals were to rely on broadbrush underlying insurance clauses to avoid dual insurance claims made by sub contractor insurers.

The Government ought to look at amending section 45 so that it does what it was intended to do.

For further information on this topic, please contact:

• Robert Samut