Insurance update

Publication | August 2010


This edition of the Norton Rose Australia Insurance update considers cause before causation, policy response in a products liability policy, the High Court’s decision on pure mental harm, the latest decision involving labour hire companies, NSW joining Victoria on the meaning of consequential loss, the end of the TPA, claiming against the insurer of a deregistered company, lost policies and the onus of proof and a NZ decision involving a common meaning of a term of an exclusion clause.

The High Court has spoken: Cause before contribution

by Riaan Piek

On 3 March 2010, the High Court delivered an important decision, holding that the asbestos exposure of a smoker who died of lung cancer was not, on its own, a cause of injury, even when the medical and scientific evidence available was unable to definitely attribute the cancer to any particular cause.

Paul Cotton died of lung cancer. He had smoked between 15 and 20 cigarettes a day for over 26 years. He was also exposed to respirable asbestos fibres in the course of his employment with the South Australian Engineering and Water Supply Department (EWSD) and then later with Millennium Inorganic Chemicals Ltd (Millennium). During his employment with EWSD, Mr Cotton worked with asbestos cement pipes manufactured by Amaca (formerly James Hardie & Co Pty Ltd) (Amaca). The executor of Mr Cotton’s estate, Teresa Ellis (the plaintiff), sued EWSD, Millenium and Amaca (the defendants) in negligence for a breach of duty to provide safe working conditions for Mr Cotton which caused his death.

The issue for determination by the High Court was causation. The essential question was whether the plaintiff had shown that it was more probable than not that the negligence of each defendant was a cause of Mr Cotton’s lung cancer. Ultimately, to show this, the plaintiff had to establish that Mr Cotton’s exposure to respirable asbestos fibres was, on its own, more probably than not, a cause of his lung cancer.

No expert evidence was available to say definitively what had caused Mr Cotton’s cancer. The only evidence available was of an epidemiological nature.

The evidence showed that the relative risk of cancer due to smoking was greater than that due to exposure to asbestos. None of the expert witnesses assigned a probability of greater than 23 per cent to Mr Cotton's cancer being caused by asbestos exposure (or a combination of asbestos exposure and smoking). However, all expert witnesses assigned not less than a 67 per cent chance to Mr Cotton’s cancer being caused by smoking alone.

One of the experts, a consultant occupational physician and epidemiologist, suggested that smoking and asbestos exposure had a synergistic effect by operating interdependently and cumulatively to cause lung cancer. However, he also said it was possible to partition attributability to smoking and asbestos under mathematical risk models. The High Court, reading that expert’s opinion as a whole, concluded that the expert did not mean that when a smoker has been exposed to asbestos and develops lung cancer, the asbestos exposure is, or is probably, a cause of that cancer.

In rejecting the approach of looking at the risks to Mr Cotton developing lung cancer in isolation of each other, the trial judge in the Supreme Court had found in favour of the plaintiff. The trial judge accepted the medical evidence that the synergistic effect between smoking and asbestos exposure caused the two to operate cumulatively towards lung cancer. On that basis, it was found that Mr Cotton’s asbestos exposure materially contributed to his lung cancer.

The trial judge’s approach to establishing a causal connection between the asbestos exposure and the lung cancer was to assume that Mr Cotton’s cumulative exposure to asbestos, by the negligence of more than one defendant, was sufficient to establish the relevant nexus between an individual defendant’s negligence and the damage suffered. This approach was subsequently found by the High Court as diverting attention from whether individual defendants were to be found liable.

The trial judge also said that the plaintiff would succeed if the evidence established that it was more probable than not that Mr Cotton’s lung cancer was caused by asbestos arising from one or both of his periods of occupational exposure to asbestos or if it supported the conclusion, on the probabilities, that his cancer was caused to a material extent by the combined effects of his periods of asbestos exposure with the effects of his chronic smoking.

The majority of the Court of Appeal upheld the trial judge’s decision. In dissent, Martin CJ opined that the approach taken by the trial judge in determining the liability of individual defendants was incorrect. Martin CJ was of the view that the plaintiff’s claim against each defendant was decided by whether the negligence of that defendant was a cause of Mr Cotton’s cancer. His Honour made clear that deciding only whether Mr Cotton’s aggregate exposure to asbestos was a cause of his cancer did not answer the question about the particular responsibility of each defendant.

The High Court ultimately found that the evidence did not establish that it was more probable than not that the negligence of any of the defendants, in isolation of each other, was a cause of Mr Cotton’s lung cancer because:

  • the epidemiological evidence only established that smoking was a more probable cause of Mr Cotton’s lung cancer than the asbestos exposure, and
  • the evidence did not show that when a smoker has been exposed to asbestos and develops lung cancer, the asbestos exposure is, or is probably, a cause of the cancer.

The High Court further held that material contribution was incorrectly considered by the trial judge as an approach to establishing causal connection. The High Court explained that the question of material contribution is not a test for causal connection and is only relevant to contribution to the damage suffered where more than one cause of damage has already been established.

In making its decision, the High Court made the following observations:

  • it is the role of the court to decide legal causation (on the balance of probabilities) even when science and medicine cannot attribute a cause, and
  • in determining causation, questions of material contribution do not arise – material contribution of a cause of damage only arises once the connection between the cause of damage and the damage has been established.

The decision highlights issues of causation in cases involving injuries that have no scientifically proven cause. The important lesson here is that causation will only be established if it can be shown, on a balance of probabilities, that the alleged cause is the cause of the damage and not only that it may be a cause of the damage. This is in stark contrast with the position in the United Kingdom, where the required standard for causation is met if it can be shown that the asbestos exposure materially increased the risk of the injury suffered. In such circumstances it would not be necessary to show that the asbestos exposure is a cause of the injury (Fairchild v Glenhaven Funeral Services Ltd [2003]).

The decision underlines the significant difficulty a plaintiff may face in establishing asbestos exposure as a cause of injury where the cancer sufferer has a history of smoking. In such circumstances, the plaintiff’s success will turn on the individual facts of the asbestos exposure. At this point, epidemiological evidence alone would seem to fall short as a basis for establishing causation. Causation will remain a significant hurdle in asbestos/smoking cases until further developments in science occur or the standard for causation is relaxed in Australia.

Amaca Pty Ltd v Ellis; The State of South Australia v Ellis; Millennium Inorganic Chemicals Ltd v Ellis (2010) 240 CLR 111

Failure to render “professional advice”… or a defective product?

by Jason Symons

In a recent Victorian Supreme Court decision, the trial judge was required to consider whether a claim which had been made by Timelink Pacific Pty Limited (Timelink) against Major Engineering Pty Limited (Major) triggered the provision for the payment of legal costs in the insurance policy between Major and CGU Insurance Limited (CGU).

In December 2004, during the Sydney to Hobart Yacht Race, the maxi racing yacht “Skandia” was damaged when its piston rods on the canting keel buckled and broke, causing the keel to detach from the hull, forcing the crew to abandon the yacht. Timelink brought an action against Major, which had designed and manufactured the hydraulic cylinders that controlled the keel of the yacht, alleging Major had caused the loss by its defective performance or failure to perform the formulating of the design. Relevantly, Timelink did not allege that the hydraulic cylinders were defectively constructed. The claim was ultimately determined in Major’s favour. Major had incurred $1.1 million in legal costs, of which $162,500 was settled, leaving over $900,000 in legal costs unpaid.

On 10 January 2005, Major notified CGU of the claim by Timelink and provided a copy of the Statement of Claim. Major had effected a products liability policy with CGU under which CGU agreed to pay damages for an occurrence caused by an unknown defect in Major’s products, and in certain circumstances, to pay Major’s legal costs. On 15 April 2005, CGU denied indemnity, relying on an exclusion in the policy for liability arising from the rendering of professional advice or service or the making or formulating of a design or specification within the domain of the engineering profession.

Consequently, Major brought an application against CGU seeking indemnity for the unpaid legal costs. The application was dismissed.

Central to Major’s application was whether Timelink’s claim against Major fell within the legal costs clause of the products liability policy. According to Pajone J, whether the policy responds to the claim:

“… depends upon the proper construction of the terms of the policy, an adequate identification of the claim and an evaluation of whether the claim falls within the terms of the policy as properly construed.”

With regard to the task of properly construing the terms of the policy, his Honour considered that:

“… it is always essential to bear in mind that what is to be determined is whether the intention of the parties as revealed by the insurance contract was to cover the particular claim which the events gave rise to.” (our emphasis)

His Honour did not consider that the actual facts of the case, nor the particular formulation of the claim, were determinative in relation to policy response in the circumstances. Rather, Pajone J stated:

“It’s the true nature of the claim that must be considered and for that purpose it is necessary to make such enquiry as is necessary.” (our emphasis)

Further, it was not relevant to the determination of policy response to address whether the claim would have succeeded or not. In that regard, Pajone J stated:

“The obligation to provide legal costs for a defence must be judged in this policy upon the assumption that the claim brought would succeed.”

Counsel for Major argued that the true nature of the claim against Major was not for defective design. However, in his Honour’s view, the claim was not one of product liability, since at no stage did Timelink contend that there was any defect with the product supplied (the hydraulic cylinders) other than its unsuitability for its intended purpose. His Honour found:

“Timelink’s claim may, perhaps, never have been capable of success, but if it had succeeded it would not have been a claim of a defect in Major’s product capable of engaging the right of indemnity under its contract of insurance with CGU.”

Pajone J also found the claim brought by Timelink fell within the terms of an exclusion in the policy for liability arising out of Major rendering professional advice or in making a design. Consequently, even if Timelink was successful, CGU would not have been obligated to indemnify Major.

Interestingly however, his Honour commented on the interpretation of the term “professional advice” when referred to in an exclusion. Pajone J stated:

“It may be accepted, for present purposes, that a professional negligence exclusion may be read contra proferentum, so as to give a wider meaning to the concept of “professional advice” in an insuring clause than in an exclusion clause, but here the claim was of a liability caused by or arising out of Major’s performance or failure to perform the rendering of professional advice or service through the supply of a product which, in itself perhaps not defective, was claimed to have been unfit for the design it had been supplied to satisfy.” (our emphasis)

His Honour appears to suggest that a court would be more willing to accept that “professional advice” falls within the ambit of a professional indemnity policy, rather than accept that such advice is excluded by a products liability policy. However, the Court was satisfied in this case that the “professional advice” which was the subject of the claim by Timelink fell squarely within the scope of the exclusion.

In this case, the Supreme Court of Victoria has provided some interesting points of reference in relation to the determination of policy response. In summary, whether a policy responds to a claim will depend upon:

  • the proper construction of the terms of the policy
  • an adequate identification of the claim and an evaluation of whether the claim falls within the terms of the policy as properly construed; neither the actual facts nor the particular formulation of the claim will be determinative
  • the true nature of the claim must be considered
  • whether it was the intention of the parties as revealed by the insurance contract to cover the particular claim which the events in question have given rise to, and
  • a professional negligence exclusion may be read contra proferentum so as to give a wider meaning to the concept of “professional advice” in the insuring clause than in an exclusion clause.

Major Engineering Pty Limited v CGU Insurance Limited [2009] VSC 504

Pure mental harm: Observing the aftermath is now enough

by Christine Dunn

On 16 June 2010, the High Court unanimously reversed the NSW Court of Appeal’s finding that two former police officers, who were among the first to attend the scene of the Waterfall train crash disaster in 2003, were prevented form bringing claims for pure mental harm or nervous shock. Mr Wicks and Mr Sheehan did not observe the actual train crash but were quickly at the scene and observed death, injury and wreckage. They spent many hours rescuing and assisting the injured, observed bodies and body parts, as well as the torn overhead electrical cables which may have still been a source of danger. Both developed post traumatic stress disorder and were medically discharged from the force in 2004. Their claims for damages were dismissed at trial and by the Court of Appeal on the basis that the police rescuers had not observed the train crash itself or the passengers being actually killed or injured.

Section 30(2)(a) of the Civil Liability Act 2002 (NSW) (the Act) prevents a plaintiff from recovering damages for pure mental harm, that is, harm not consequential upon physical injury, unless “(a) the plaintiff witnessed, at the scene, the victim being killed injured or put in peril, or (b) the plaintiff is a close member of the family of the victim.” Section 32 of the Act states that a duty of care is not owed unless the defendant ought to have foreseen that a person of normal fortitude might, in the circumstances of the case, suffer a recognised psychiatric illness if reasonable care was not taken. Similar provisions are found in the legislation of all other states, except Qld and NT. These legislative provisions resulted from Tame v NSW; Annetts v Australian Stations Pty Ltd [2002] HCA (the Annetts Case), where the High Court held that whether a duty to avoid recognisable psychiatric injury existed depended on whether the risk of injury was reasonably foreseeable. The old common law requirements of sudden shock, direct perception and normal fortitude were no longer prerequisites. In the Annetts Case, the parents of a 16 year old jackaroo, who died in the outback after his vehicle became bogged, successfully claimed damages from their son’s employer when they developed psychiatric illness after being informed of his death.

The High Court in Wicks and Sheehan stated that, in part, section 32 of the Act reflects the common law identified in Tame and that sudden shock and witnessing a person being killed or injured are not necessary prerequisites to finding a duty to take reasonable care to prevent mental harm.

Assuming a duty not to cause mental harm was owed by the State Rail Authority to the police rescuers (a matter not decided by the High Court at the request of the parties), whether section 30(2) was engaged turns on whether the police “witnessed, at the scene, the victim being killed, injured or put in peril”. The High Court held that the event which caused shock did not finish when the train came to rest as a twisted collection of carriages. The consequences of the derailment took time. It can be inferred that some passengers who suffered physical injury suffered further injury as they were removed from the wreckage and that the process of suffering injury (for those who did so) was not over by the time the police arrived. Further, the survivors remained in peril until they were rescued and taken to a place of safety. Accordingly, Mr Wicks and Mr Sheehan did witness victims being injured and put in peril as required by the Act.

The submission of the State Rail Authority that a plaintiff must observe what was happening to a particular victim, as opposed to many victims, was also rejected.

This decision should serve as a warning to all liability insurers and insureds holding liability policies that where an event necessitates the rescue of injured/trapped persons over a period of time that the capacity of that situation to cause mental harm to rescuers/witnesses is not necessarily limited to the moment in time in which the event occurs. Rather, it appears that the court must also assess the aftermath of an event in order to determine the period during which the victim(s) were “killed injured or put in peril”.

Whether the State Rail Authority owed rescuers such as Mr Wicks and Mr Sheehan a duty of care and whether the police had suffered a recognised psychiatric injury were remitted to the Court of Appeal. We will report on the outcome of that remission in due course.

Wicks v State Rail Authority of New South Wales; Sheehan v State Rail Authority of NSW (2010) 267 ALR 23

Labour hire companies still liable for workers’ injuries

by Kristal Rowe

The NSW Supreme Court has again reaffirmed that employers owe non-delegable duties of care to employees notwithstanding the employer was a labour hire company, though it did note that the absence of a direct breach of the duty of care by the labour hire company is relevant to a claim for apportioning of other parties’ liability. The worker brought a claim in negligence for injuries sustained at his workplace against his employer, who was a labour hire company, as well as the occupier of the premises where the worker worked and sustained his injuries (CSR). The Court held that both the employer and the occupier of the premises were liable in negligence for damages to the worker.

The worker was tasked by CSR to remove solidified concrete from a concrete barrel attached to a truck. Ordinarily, CSR would provide the worker with a jackhammer weighing 10-15 kilograms for such a task. However, prior to this task being undertaken, the CSR jackhammer was stolen, so CSR hired another, but this weighed 25 kilograms. The worker used the 25 kilogram jackhammer between eye and waist level to attack the concrete for a full day. The worker alleged that he sustained injuries to his cervical spine as a result of this task.

The worker was not able to state the specific date that he undertook this task. However, Hislop J found that the date of injury did “not appear to be of particular significance” because what happened on the day is what matters.

Hislop J found that by requiring the worker to undertake the task with such a heavy jackhammer, CSR had breached its duty of care owed to the worker. His Honour also found that the employer had a non-delegable duty of care owing to the worker to provide a safe system of work and had failed to do so. He found that the employer could not escape liability simply because it delegated its duty of care to CSR and CSR had not properly fulfilled that duty of care.

Both defendants argued that the worker contributed to his own negligence by using the jackhammer between waist and eye height as he should have used it at thigh height to prevent the injury. The worker gave evidence that he did not use the jackhammer at thigh height because he did not know what would fall on his head if he did so and because he had been instructed by CSR to not do so. Neither defendants challenged this evidence. His Honour held that the defendants bore the onus of establishing contributory negligence and had failed to do so.

CSR sought to reduce its liability to the worker pursuant to section 151Z(2) of the Workers Compensation Act 1987 (NSW) (the Act) by apportioning 35 per cent of its liability to the employer. However, His Honour held that according to the rationale in Pollard v Baulderstone Hornibrook Engineering Pty Ltd [2008], a direct breach of the duty of care was required in order for liability to be apportioned. His Honour held that the employer did not directly breach its duty of care and as such no apportionment could be made. He held that there was no direct breach by the employer because (among other things) it had no direct involvement at the CSR site, if it had inspected CSR’s site prior to the incident and the worker had been using a jackhammer weighing 10-15 kilograms there would have been no issue, the worker was experienced and the employer had provided the worker with a handbook of safety instructions.

The employer also made a cross claim against CSR under section 151Z(1)(d) of the Act. His Honour found that the circumstances in which the worker’s injury had occurred had been caused by CSR and accordingly the employer was entitled to recover an indemnity from CSR for all payments made to, for, or on behalf of the worker pursuant to the Act.

Hodge v CSR Ltd [2010] NSWSC 27

Consequential loss: Guidance from the Court of Appeal

by Joseph Callaghan

Losses falling within the second limb of the rule in Hadley v Baxendale [1854], being losses “in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of contract”, are generally called ‘consequential’ or ‘indirect’ losses.

Whether any particular loss falls within the category of loss defined by the second limb of Hadley v Baxendale, or within the first limb (loss which is a direct and natural consequence of the breach), is not always immediately clear and often the subject of judicial interpretation.

The NSW Court of Appeal has recently endorsed the same broader consideration of the term “consequential loss” applied by its Victorian counterpart in Environmental Systems Pty Limited v Peerless Holdings Pty Limited [2008] (Peerless).

In Peerless, consequential loss, it was held, should be given its “ordinary and natural” meaning. The Court considered the distinction between normal loss, which one might ordinarily expect a plaintiff to suffer, and consequential loss, to be “anything beyond the normal measure, such as profits lost or expenses incurred through the breach”.

Waterbrook at Yowie Bay Limited (Waterbrook) purchased a retirement village from the developer, Yowie Pty Limited. The development was residential building work for the purposes of the Home Building Act 1999 (NSW) (the Act). Allianz issued a builder’s home warranty insurance policy in respect of the development. The builder was subsequently placed into liquidation.

The policy issued by Allianz included a clause purporting to exclude cover for “consequential loss arising directly or indirectly out of any event listed in the building owner’s indemnity…”

McDougall J, at first instance, found Allianz’s purported exclusion of consequential loss to be inconsistent with Waterbrook’s statutory entitlement to cover under the Act and Regulations. Significantly, his Honour decided that consequential loss may fall within the first limb of Hadley v Baxendale (loss which is a direct and natural consequence of the breach), following the Victorian Court of Appeal’s decision in Peerless.

The Court of Appeal agreed with McDougall J.

Since the NSW Court of Appeal’s decision in Waterbrook, there is arguably less uncertainty surrounding judicial interpretation of consequential loss and therefore ‘a better road map’ for parties to follow in their endeavour to exclude (contractually) a particular liability.

The drafting implications remain as they did following the Peerless decision – it is prudent to identify with as much specificity as possible, the types of losses intended to be excluded.

Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224

Goodbye to the Trade Practices Act 1974

by Wesley Rose

In our October 2009 issue, we addressed the Federal Government’s Australian Consumer Law Initiative which was to take the form of amendments to the Trade Practices Act 1974, Australian Securities and Investments Commission Act 2001 and Corporations Act 2001. Broadly, the amendments were to come in two phases. Firstly, there were the unfair contract provisions which had implications for section 15 of the Insurance Contracts Act 1984 (see our October 2009 issue for details) and secondly, there were the amendments concerning product safety and consumer guarantees.

On 1 July 2010, the first phase of amendments came into force.

As to the second phase, on 24 June 2010, very quietly it would seem, the House of Representatives approved the amendments suggested by the Senate to the Trade Practices Amendment (Australian Consumer Law) Bill (No. 2) 2010. This second phase is expected to be operational by 1 January 2011.

We await with anticipation the issuance of the full text of the new Act which will be known as the Competition and Consumer Act 2010. At that time we will provide a detailed update of the most significant provisions and an analysis their implication for insureds and insurers alike.

Watch this space!

Competition and Consumer Act 2010

Claiming against the insurer of a deregistered company

by Andrew Ebbott

The NSW Supreme Court recently considered the proper construction of section 601AG of the Corporations Act 2001 (Cth), which can allow a claim to be made against the insurer of a deregistered company.

A medial negligence action was brought by a child and his parents (the plaintiffs) in May 2001 against two doctors and a hospital following the child’s birth in November 1996. In July 2002, the plaintiffs sought and were later granted leave to join the hospital’s insurer, CGU Insurance Ltd (CGU), pursuant to section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRMPA), which enables a person to enforce a charge on insurance moneys arising under section 6(1) of the LRMPA.

On 24 May 2005, the hospital was deregistered. The doctors filed cross-claims against the hospital and CGU as joint tortfeasors seeking contribution under section 5 of the LRMPA on 19 May 2006. The Court of Appeal then gave its decision in Owners – Strata Plan 50530 v Walter Construction Group Ltd (in liq) [2007] (Walter Construction), which held that no charge arises under section 6(1) of the LRMPA where the policy in question was not in existence at the time of the events giving rise to the claim.

The decision in Walter Construction was timely for the plaintiffs as they sought to rely upon the hospital’s 1999/2000 CGU professional indemnity policy, despite the events giving rise to the claim occurring in November 1996.

On 14 May 2008, CGU sought declaratory relief and orders striking out the doctors’ cross-claims following Walter Construction. The doctors then sought leave to amend their cross-claims against CGU to include a claim under section 601AG of the Corporations Act, on the basis that they were entitled to recover insurance moneys payable by CGU to the hospital.

Section 601AG provides that:

A person may recover from the insurer of a company that is deregistered an amount
that was payable to the company under the insurance contract if:

  • the company had a liability to the person, and
  • the insurance contract covered that liability immediately before deregistration.

CGU argued that neither subsection (a) nor (b) were satisfied on the basis that since no liability has been established by the plaintiffs against the doctors or the hospital, they did not have a liability immediately before deregistration. The doctors contended that it is sufficient if the determination that a liability existed immediately before deregistration is made at the hearing of the claim under section 601AG.

In considering the construction of section 601AG, McCallum J held that the section is remedial and creates a new cause of action to recover an amount that was payable to the deregistered company under the relevant insurance contract, with no requirement for leave needed to bring an action under the section, as compared to section 6(4) of the LRMPA.

McCallum J relied upon the authority in National Mutual Fire Insurance Co Ltd v Commonwealth [1981] that the liability of one tortfeasor includes their “secondary liability” to contribute to the damages payable by another and under section 601AG(a) it must be proved that as at the time of the hearing, the deregistered company was a joint tortfeasor immediately before deregistration.

While the plaintiffs had not obtained judgement against the doctors prior to the hospital’s deregistration, McCallum J accepted that if it is established at a final hearing that the hospital and doctors are liable to the plaintiff and entitled to recover contribution from each other, those findings will establish that the hospital “had a liability” to the doctors immediately before deregistration pursuant to section 601AG.

With respect to section 601AG(b), CGU submitted that the hospital “shall become” liable only when established by “judgement, award or settlement”. However, the doctors submitted that the question was whether the insurance policy covered their liability.

McCallum J was in agreement with the doctor’s submissions and held that if the hospital is found to have had a liability to the doctors and the doctors establish that the policy, when properly interpreted, responds to that liability, the doctors will have shown that the policy “covered that liability” immediately before deregistration of the hospital.

This case highlights an alternative avenue for claims to be made against insurers of deregistered companies, rather than attempting to have a deregistered company reinstated.

Tzaidas v Child & Ors (2009) 74 NSWLR 208

Lost policies and the onus of proof

by Cassandra Woolley

The High Court has recently held that an insurer bears the onus of proof when asserting the applicability of an exception that precludes entitlement to indemnity or the existence of a limit of liability.

Mr Stewart was exposed to asbestos during the course of his employment with Pilkington Bros (Australia) Limited (Pilkington). He developed mesothelioma and commenced proceedings against Pilkington, QBE Insurance (Australia) Limited (QBE) (as insurer of Pilkington) and Wallaby Grip Limited (Wallaby) (the manufacturer of the products containing asbestos). Mr Stewart died before the matter was heard. The proceedings were continued by Mr Stewart’s wife in her capacity as legal representative of his estate.

At the time of Mr Stewart’s employment, it was a requirement of the Workers Compensation Act 1926 (NSW) (the Act) that an employer obtain a policy of insurance or indemnity from a licensed insurer in respect of the employer’s liability at common law for any injury to a worker. Section 18(1) of the Act provided:

“Subject to (1A) of this section, every employer shall obtain from an insurer licensed under this Act to carry on business in the State, a policy of insurance or indemnity for the full amount of his liability under this Act to all workers employed by him and for an amount of at least forty thousand dollars in respect of his liability independently of this Act for any injury to any such worker and shall maintain such policy in force.”

In the proceedings against Pilkington, Mr Stewart alleged the existence of a contract of insurance by which Pilkington was entitled to be indemnified against its liability for damages arising independently of the Act. During his employment, Pilkington indeed had a policy of insurance or indemnity of the kind required by the Act – it had a policy of insurance with Eagle Star Insurance Ltd (Eagle Star) (the Policy). QBE, as successor to Eagle Star, admitted the existence of the Policy and that it was responsible to meet any liability of Eagle Star to indemnify Pilkington, but it did not admit the Policy extended beyond the statutory minimum.

A Notice to Produce was issued to obtain a copy of the Policy, but it was not produced.

The Tribunal was asked to rule on which party had the onus of providing the monetary limit of the indemnity. The Tribunal concluded that at least an “evidentiary onus” lay upon QBE because it was asserting a limit to its liability.

QBE appealed to the NSW Court of Appeal. The Court of Appeal found the trial judge had erred:

“Where the extent of the cover is defined by a maximum amount it may be said that cover is limited to that amount but that is not to categorise that amount as an exception to, condition of or limitation to cover. It is an essential part of the primary obligation to insure.”

The High Court granted special leave to Wallaby to appeal the decision of the Court of Appeal. Contrary to the Court of Appeal, the High Court considered it necessary only for Mrs Stewart to establish that a contract of insurance under the Act was in existence at the relevant time and that Pilkington was liable to her husband for his injuries. The first was admitted, the second was established by evidence. It followed that the claim was within the terms of the cover provided and the insurer’s obligations arose.

The High Court distinguished between asserting the applicability of an exception (to preclude an obligation to indemnity from arising) and the existence of a limitation (which would not preclude the obligation to indemnify from arising but would limit the amount payable).

While a limitation could be placed upon the extent of the indemnity for the amount for which the employer was liable (according to a judgment or other determination) that existence of a limitation did not prevent the obligation to indemnify from arising:

“Where an indemnity is limited to payment of a specified maximum sum, proof of actual loss will identify whether all or part of the loss is recoverable, but that is merely a practical consequence. It does not reflect a condition of the insurance contract.”

However, the distinction between an exception and a limitation of liability was of little practical significance in the subject appeal as the High Court held that in each case (whether alleging the application of an exception or the existence of a limit of liability) the insurer bears the onus of proof:

“The legal burden of proof arises from the principle: he who alleges must prove.”

Consequently, QBE had to do more than decline to admit that Pilkington was entitled to an indemnity greater than the statutory minimum. It was required to establish what limit, if any, had been placed upon its liability to indemnify. It did not do so. Consequently, the High Court allowed the appeal.

This case illustrates that insurers, insureds and brokers should all be careful that policies of insurance (regardless of how old) are kept safely and within reach, as failure to do so may well prevent an insurer from relying on an exclusion or applying a limit of indemnity to cap the amount claimed.

Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd (2010) 264 ALR 425

Common meaning of term of exclusion clause prevented indemnity being available

by Brooke Morrow

The global financial crisis has led to many claims being made on financial advisers by investors who have suffered losses as a result of a decrease in the value of their investments. This has in turn led many financial advisers to seek indemnity under their insurance policies for the investors’ claims.

Trustees Executors Ltd (TEL) provided investment administration services and mortgage lending. TEL is trustee and manager of Tower Mortgage Plus Fund (Tower) which primarily invests in mortgages. In 2007, 16 loans involving $33 million made by TEL on behalf of Tower fell into arrears. The loans had been made by TEL outside the approved loan criteria agreed to by Tower. In response to a claim by Tower, TEL agreed to make good any losses which Tower incurred as a result of the unauthorised lending. By mid-February 2008, TEL had settled Tower’s claim with its insurer’s consent (QBE) (subject to a reservation of rights).

Subsequently TEL formally sought indemnity from QBE. While the parties accepted that indemnity was prima facie available under the operative clause of the policy, QBE denied indemnity on the basis that the Securities Exclusion clause applied to exclude liability for Tower’s claim.

The Securities Exclusion provided:

“Notwithstanding anything to the contrary stated in the Policy or endorsed thereon, it is hereby declared and agreed that this Policy does not provide indemnity against any Claim or Claims arising from or contributed to by depreciation (or failure to appreciate) in value of any investments, including but not limited to, property, shares, securities, commodities, currencies, options and futures or derivative transactions, or as a result of any actual or alleged misrepresentation, advice guarantee or warranty provided by or on behalf of the insured as to the performance or characteristics of any such investments.”

TEL sought a declaration from the NZ High Court that:

  • the words “depreciation (or failure to appreciate)” in the Securities Exclusion refer only to a loss of an investment caused by market fluctuations or as a result of a mixture of market fluctuations and negligence by the insured
  • in the alternative, the exclusion clause did not apply because Tower’s claim was caused by TEL’s negligence and not by any fall in value of investments, or
  • in the further alternative, the Securities Exclusion did not cover losses from unauthorised investments.

QBE asserted that the phrase “depreciation (or failure to appreciate)” covers any loss in the value of investments.

The Court accepted this argument and found that the ordinary meaning of the words should be applied and it was not “inherently illogical or commercially absurd” to do so. The Court also found that there was no basis in the policy requiring a “special” meaning.

It is worth noting that the Court did consider the terms of the policy in the context of the Insured’s business. Importantly, the Insured’s mortgage lending activities (to which the exclusion clause could apply) only made up a “modest part of the plaintiff’s business”. Therefore, by defining the words broadly, the Court did not render the policy ineffective.

The Court found that while the cause of the loss of value of the mortgages was the negligent actions of TEL, the demand for compensation by Tower arose because of the loss of value. Support for this view was found in the fact that there had been other negligent unauthorised lending by TEL that Tower could not claim for because no loss had been suffered.

In contrast to the decisions in Darlington Futures Ltd v Delco Australia Pty Ltd [1986] and Done v Financial Wisdom Ltd [2008], the NZ High Court found that there was nothing in the language in QBE’s policy that limited the meaning of “investments” to authorised investments only.

In determining the above, the Court also noted several general principles relating to the interpretation of exclusion clauses in insurance policies:

  • the onus of establishing that an exclusion clause applies is on the insurer
  • exclusion clauses should be narrowly construed, and
  • ambiguities are generally to be construed against the insurer if they have drafted the Policy (contra proferentum).

The judgement of TEL v QBE supports the principle of common usage interpretation of insurance policies even when the result goes against an insured. Ironically, the result of the NZ High Court’s determination in this case was that, while it held that exclusion clauses should be narrowly construed applying the common meaning of “depreciation” to the Securities Exclusion, it resulted in giving a wide application of the exclusion clause.

Trustees Executors Limited v QBE Insurance (International) Limited