Insurance Coverage: an insured in all but name
The Supreme Court of Western Australia determined that, despite its interpretation rendering certain policy terms redundant, if a person or entity falls within the general definition of ‘insured’ in a policy schedule, but is unspecified by use of a proper noun, it is entitled to coverage as an insured.
- Whether the definition of ‘You’ and the schedule’s definition of ‘Insured’ when read together meant that a sub-contractor was an insured and entitled to cover.
Mr and Mrs McMurray’s home was being renovated by Mosman Bay Construction when it caught fire. The McMurrays brought proceedings against the insurer of the house (AIG), the broker who arranged the insurance and Mosman’s project and legal liability insurer (Tokio). Mosman joined its interior painting subcontractor (Holgersson) to the proceedings. Holgersson brought an application to determine whether it was entitled to cover under the Tokio policy.
The Tokio policy schedule described ‘insured’ as Mosman and ‘all Principals, Contractors and Sub-Contractors’. ‘Principals, Contractors and Sub-Contractors’ were not defined in the Tokio policy.
The relevant insuring clause provided coverage to ‘You’. The policy definitions provided ‘You’, ‘Your’ and ‘Insured’ to mean ‘a person(s) or legal entity named in the Schedule’. ‘Named Insured’ was defined in the policy as ‘You’ as well as ‘Additional Insured(s) (which included sub-contractors) not being You but being a legal entity with whom You have entered into a Contract and provided their interests are required to be insured jointly by You, and then only to the extent required by the terms set out in the Contract, and only in respect of work performed as part of the Project’.
The specific question was whether the definition of ‘You’ and the schedule’s definition of ‘insured’ when read together meant that Holgersson was an insured and covered under the relevant insuring clause. Holgersson argued it was ‘named’ as it came within the class of insured persons described in the schedule. Holgersson asserted that this was consistent with the commercial rationale underlying the decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd and section 48 of the Insurance Contracts Act 1984 (Cth) in relation to the extension of cover to third party beneficiaries.
Tokio contended that ‘named’ necessarily meant named by proper noun and argued that the intention was to limit the definition of insured to only those specified and who paid a premium. Tokio also argued that the limiting words in relation to ‘Additional Insureds’ meant that if all subcontractors fell within the definition of ‘You’ by virtue of the schedule, the carefully drafted limiting words would have no effect.
The court adopted a business-like interpretation, taking into account the commercial circumstances and the purposes for which the insurance was effected.
The court observed that it was artificial to construe the word ‘named’ in the definition of ‘You’ and ‘Insured’ as meaning named by proper noun. It was also found that because the words were clear, a reasonable business person reading the schedule would understand the policy to extend to all principals, contractors and sub-contractors, regardless of whether their particular name was specified.
So far as the limiting words in relation to ‘Additional Insured’ were concerned, the court found that the fact that these words were rendered redundant was not fatal as there were numerous boiler plate provisions in the policy that had no application. The court also rejected Tokio’s contention that there was no intention for coverage to be extended to Holgersson as only Mosman paid the premium and at the time that the policy was incepted all contractors and sub-contractors were not known. Tokio had argued that the decision in Trident could be distinguished as the Tokio policy related to a specific single project, however the court found that there was no difference between the nature of the Tokio policy and the policy considered in Trident.
Holgersson was found to be an insured and entitled to cover under the Tokio policy.
Implications for you
This case serves as a reminder that in the absence of a clear intention to the contrary, third party beneficiaries will be entitled to coverage under a policy where they come within the relevant definition of an insured entity. The decision also indicates that the courts can at times lean towards a policy interpretation which favours insureds, even those who have paid no premium.
The take home for insurers is that policy provisions which identify the insured parties should be drafted in a manner that is clear and consistent. This minimises the risk of the policy being interpreted in a way not intended by the insurer.
Hayden Gregory, a graduate in our Insurance & Health team, assisted in preparing this case note.
  HCA 44; (1988) 165 CLR 107