Earlier this year the New South Wales Supreme Court delivered its judgment in Allianz Insurance Australia Limited v Certain Underwriters at Lloyd's of London subscribing to policy number B105809GCOM0430 [2019] NSWSC 453, which considered the interaction of ‘other insurance’ clauses and in particular, a competing ‘excess’ and ‘escape’ clause (considered in our previous article).
The decision was appealed by Allianz Insurance Australia Limited (Allianz), who lost at first instance and as a consequence, was unable to seek a contribution from Underwriters of Lloyd’s of London (Lloyd’s) in respect of a claim exceeding $1 million. By a 2 to 1 majority, and in a decision that further highlights the complexities that can arise from cases involving double insurance, Lloyd’s’ win at first instance was recently overturned by the Court of Appeal1.
Background
Allianz was the issuer of a Construction Risks - Material Damage, Public and Products Liability Policy (Allianz Policy), which provided cover to Baulderstone Hornibrook Pty Ltd (Baulderstone). Baulderstone had successfully recovered under the Allianz Policy in respect of a claim involving an injured worker. Allianz then sought contribution from Lloyd’s on the basis that Baulderstone was also a beneficiary under a Lloyd’s' Public and Products/Contract Works Liability Policy (Lloyd’s Policy), which Allianz asserted also responded to the claim.
Relevantly, both policies contained the following ‘other insurance’ clauses:
- The Allianz Policy contained what is commonly referred to as an ‘excess clause’. In general terms, this provided that the Allianz Policy operated as excess insurance over and above any ‘Underlying Insurance’2 or ‘any other valid collectible insurance’ held by the insured. Clauses 8.17 and 8.20 of the Allianz Policy relevantly provided:
8.17 Difference in Conditions Cover
In circumstances where an Underlying Insurance has been arranged, this Policy shall be deemed to be the ‘Master Policy’.
(a) In the event of the Insured being indemnified by an Underlying Insurance in respect of a claim for which indemnity is available under this Master Policy, the insurance afforded by this Policy shall be excess insurance over the applicable limit of indemnity of the Underlying Insurance.
(b) Coverage under this Master Policy shall not apply unless and until a claim for payment is made under the Underlying Insurance up to the amount of the Underlying Limit which, save for the limit of indemnity of the Underlying Insurance, would be covered by this Master Policy.
(c) Should any such Underlying Insurance, by virtue of its scope of cover, definitions, deductibles or excesses, conditions or limits of indemnity, not indemnify the Insured in whole or in part in respect of a loss, damage, liability, costs or expenses indemnifiable under this Master Policy, this Master Policy will provide indemnity to the extent that such indemnity is not provided by the terms and conditions of such Underlying Insurance. For the purpose of clarity, it is intended that indemnity by this Policy extends to cover losses not covered under the Underlying Insurance by virtue of the fact that such Underlying Insurance has a higher deductible or excess than the Excess under this Master Policy.
8.20 Other Insurance
Where allowable by law, this Policy is excess over and above any other valid and collectible insurance and shall not respond to any loss until such times as the limit of liability under such other primary and valid insurance has been totally exhausted…
- The Lloyd’s Policy contained what is commonly referred to as an ‘escape clause’, which purported to wholly exclude any liability which was the subject of insurance by any other policy. On its face, the Lloyds escape clause was a blanket ‘escape’ clause in that it was not expressed to be contingent on whether the other policy was claimed upon, responded to or paid out under. Clause 10.5 of the Lloyd’s Policy relevantly provided:
10 GENERAL EXCLUSIONS
This Policy does not cover liability ...
10.5 which forms the subject of insurance by any other policy and this Policy shall not be drawn into contribution with such other insurance.
Section 45 of the Insurance Contracts Act, which renders void those policy terms that have the effect of limiting or excluding the liability of the insurer by reason of an insured having entered into some other contract of insurance, did not apply in this case because Baulderstone was a third party beneficiary and not a contracting party to either policies3.
First instance decision
As part of the hearing of the original summons, Allianz argued that the Lloyd’s Policy was Underlying Insurance within the meaning of its policy; there was double insurance and by applying the principles in Weddell v Road Transport and General Insurance [1932] 2 KB 563 (Weddell), the other insurance clauses under both policies cancelled each other out, meaning that Allianz, as the paying insurer, could claim a contribution from Lloyd’s. Lloyd’s argued the contrary position noting that when both policies are properly interpreted, only the Allianz Policy afforded cover to Baulderstone.
In finding in favour of Lloyd’s, and adopting an approach that examined each policy independently rather than side by side, the primary judge held that this was not truly a case of double insurance, but instead was one in which the Allianz Policy responded and the Lloyd’s Policy did not. In her Honour’s view, the excess clause in the Allianz Policy specifically contemplated, and would provide cover in circumstances where, there was another policy arranged by the insured covering the same risk, but that other policy did not ultimately result in indemnity for the insured because of its precise wording (as was the case here).
Appeal decision
The first instance decision was overturned on appeal, with the majority appellant judges finding that the escape and excess clauses had the effect of ‘cancelling each other out’ with the consequence that Allianz was entitled to contribution from Lloyd’s in respect of the claim. In arriving at this view, the majority appellant judges:
- First considered the escape clause in the Lloyd’s Policy (at clause 10.5) and the excess clause in the Allianz Policy (at clause 8.20) Their Honours found that when construed separately and without regard to clause 8.17 of the Allianz Policy, the clauses had the effect of denying liability under each policy because of the existence of the other policy. It followed that the principles in Weddell applied and the clauses cancelled each other out. On this point, the majority appellant judges and the primary judge did not materially differ, although the appellant judges found that the escape clause only applied to policies to which liability was indemnified (namely it was not a blanket escape clause);
- Then considered whether clause 18.17 of the Allianz Policy had any bearing on the above finding, which in turn depended on whether the Lloyd’s Policy was Underlying Insurance as that term was defined in the Allianz Policy (see footnote 2); and
- Found that the Lloyd’s Policy was not Underlying Insurance because the second limb of the definition was not satisfied. To this end, their Honours noted that:
- A policy will satisfy the second limb of the definition if the subject policy (in this case, the Lloyd’s Policy) converts the Allianz cover into excess insurance. However, given the presence of the escape clause, their Honours confirmed that the Lloyd’s Policy neither provided cover for the risk in question nor converted the Allianz cover into excess insurance; and
- On the basis above, the definition of Underlying Insurance was not satisfied and there was no need to consider the potential application of clause 18.17 of the Allianz Policy. Meagher JA (as part of the majority) found that even if the Lloyd’s Policy was Underlying Insurance, clause 18.17 only applied as excess insurance over the Underlying Insurance’s applicable limit of indemnity and would therefore, not apply in any event.
The dissenting appellant judge formed a different view. In line with the decision at first instance, his Honour found that the Lloyd’s Policy was Underlying Insurance because prima facie and leaving aside the excess clause in the Allianz Policy, the Lloyd’s Policy provided indemnity for the risk in question (as required by the definition). On the basis that the Lloyd’s Policy was Underlying Insurance, the dissenting appellant judge found (as the primary judge did) that the Allianz Policy specifically contemplated, and would provide cover in circumstances where, there was another policy arranged by the insured covering the same risk, but which did not respond.
Implications
This is the first occasion on which competing escape and excess other insurance clauses have been considered in detail by an appellant court.
It remains to be seen whether the type of competing other insuring clauses (i.e. whether they be competing excess clauses, escape clauses or both) will be a material consideration for the courts. Given the approach at first instance and on appeal, competing other insurance clauses will likely continue to be considered on their individual merits, in light of the specific language used and by reference to the usual principles of contractual interpretation.
The case is also significant because it highlights the potential complexities arising from cases involving double insurance and the practical difficulties parties may face in giving effect to competing other insurance clauses. Whilst 2 of the 4 judges who considered the issue (being the majority appellant judges) interpreted the competing clauses in a way that resulted in their mutual cancellation (and a win for Allianz), the other 2 judges (being the primary and dissenting appellant judge) interpreted the clauses in a way that would have seen Allianz bear 100% of the risk (and a win for Lloyd’s). This reinforces our comments in our earlier article that:
- Insurers faced with a potential double insurance scenario would do well to look carefully to ensure that their own policy response is not affected by another potentially operative policy; and
- Brokers looking to add greater certainty and expedite policy responses will benefit from close consideration to their client’s overall insurance program.
1 Allianz Australia Insurance Ltd v Certain Underwriters at Lloyd’s of London Subscribing to Policy Number B105809GCOM0430 [2019] NSWCA 271.
2 ‘Underlying Insurance’ was defined in the Allianz Policy to mean ‘a policy of insurance arranged by or on behalf of an Insured either voluntarily or pursuant to a Contract (which may include a policy(ies) arranged by joint venture partners, principals, contractors, etc.) that provides cover to an Insured for a risk, which save for the Underlying Insurance, would be covered by this policy. Underlying Insurance includes those policies identified in the Schedule’. No policies were identified in the Schedule.
3 Zurich Australian Insurance Ltd v Metals and Minerals Insurance Pty Ltd (2009) 240 CLR 39 and Lambert Leasing Inc. v QBE Insurance (Australia) Ltd [2016] NSWCA 254.
