INDEMNIFICATION BY ANOTHER INSURER WHEN INSURED HAS DOUBLE INSURANCE & PAID BY OTHER INSURER
October 13, 2016
A partnership purchased an aircraft from two subsidiaries of SAAB AB (‘the Appellants’). The partnership leased the aircraft to Lessbrook Pty Ltd (‘Lessbrook’). Later, the aircraft crashed, killing everyone on board. Proceedings were brought in the United States (‘the US Proceedings’) by the relatives and dependants of the deceased against the Appellants and the partnership.
The Appellants made a claim under an insurance policy issued by Global Aerospace Underwriting Managers Limited (‘Global’) to SAAB AB and its subsidiaries (including the Appellants) (‘the Global Policy’), in respect of the US Proceedings. SAAB AB and its subsidiaries were described as ‘insureds’, in this policy. The Global Policy contained an ‘other insurance’ clause which purported to reduce Global’s liability where another insurance policy covered the same risk.
Global indemnified the Appellants in respect of both defence costs and a settlement in connection with the US Proceedings.
Following Global’s grant of indemnity, Global discovered that QBE Insurance Ltd (‘QBE’) had issued an aircraft liability insurance policy to Lessbrook (‘the QBE Policy’). Under this policy, the Appellants were specified as ‘Additional Insureds’. The QBE Policy contained an ‘other insurance’ clause similar to that in the Global Policy. The Appellants made a claim on the QBE Policy in respect of the US Proceedings.
Following this, the Appellants entered into a deed with Global (‘the Deed’). The Deed sought to characterise past and future payments made by Global under its policy to the Appellants as a loan.
QBE sought further information before making a decision on indemnity, pursuant to a co-operation clause, to satisfy itself as to the Appellants’ compliance with certain conditions precedent in the QBE Policy. The Appellants did not provide these documents to QBE, claiming that they would waive privilege if they did. As a result, QBE could not make a decision on indemnity and proceedings were commenced by the Appellants.
First instance decision
The Appellants claimed indemnity from QBE under the QBE Policy. They argued the ‘other insurance’ clause in the QBE Policy was void under section 45(1) of the Insurance Contracts Act 1984 (Cth) (‘ICA’) which 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 … the provision is void. (emphasis added)
Section 45(2) specifies that the section does not apply to reinsurance policies.
The primary judge dismissed the proceedings. The primary judge held that section 45 of the ICA did not apply to the ‘other insurance’ clause of the QBE Policy, because the Appellants had not established they had ‘entered into’ either the QBE or Global policies as required by section 45 of the ICA. Further, the Appellants were not entitled to recover their past costs from QBE, because either they had not incurred costs or, if they had, these had already been indemnified by Global.
In addition, the primary judge held that it was premature to determine whether QBE was required to indemnify the Appellants. This was because the Appellants had not provided QBE with documents that they were contractually required to provide.
New South Wales Court of Appeal
The Court of Appeal considered the following issues:
- Whether the appellants commenced the proceedings prematurely.
- Whether s 45 of the ICA rendered the QBE ‘other insurance’ clause void.
- If the answer to issue (2) is no, whether that clause and the ‘other insurance’ clause in the Global Policy cancel each other out.
- Whether the payments made to or on behalf of the appellants by Global provided an indemnity which precluded the appellants from claiming indemnity under the QBE Policy.
In relation to issue (1), the Court of Appeal’s answer was yes. The Court held that, having regard to the particular circumstances of the case and the failure of the Appellants to provide documents necessary for QBE to make a determination about indemnity, the primary judge did not err in finding that the proceedings brought by the Appellants against QBE were premature.
In relation to issue (2), the Court of Appeal answered no.
The Court reiterated the High Court’s clear position that, for section 45 of the ICA to apply, the ‘insured’ must have ‘entered into’ each of the relevant contracts of insurance.
The Court of Appeal agreed with the trial judge that the Appellants had not established that they had entered into either the QBE or the Global Policy. The Court of Appeal held that the characterisation given by the QBE Policy to the Appellants as ‘Additional Insureds’, distinguished their role from ‘the Insured’ (specified as Lessbrook). This made it clear that they were third party beneficiaries of the contract of insurance rather than parties who have been a party to (and therefore ‘entered into’) the QBE Policy. The Court of Appeal also rejected the Appellants’ argument that they had entered into the QBE Policy as an agent of Lessbrook due to a lack of evidence, and because neither Appellant was involved in the negotiation of the policy or paid any premium to QBE.
The Court of Appeal also held that the Appellants did not ‘enter into’ the Global Policy for several reasons, including that the Appellants were not listed as the ‘Assured’ on the slip binding cover and that the evidence showed that the Appellants held an insurable interest, but were not contracting parties to the Global Policy. The Court of Appeal also dismissed the Appellants’ argument that they had ‘entered into’ the Global Policy as an agent of SAAB AB, again referring to the lack of evidence that the Appellants had paid any premium or were involved in the negotiations of the terms of the policy.
In relation to issue (3), the Court of Appeal answered yes. According to Associate Justice Payne, it was common ground in the appeal that, should the Court reach the conclusion that s 45 does not render the ‘Other Insurance’ clause of the QBE Policy void, the two ‘other insurance clauses’ would cancel one another out. In the normal course where both policies responded, the insured would then be entitled to elect from which of its two insurers it sought indemnity.
In relation to issue (4), the Court of Appeal answered yes. The Court cited authority for the proposition that where the insured has already been indemnified by its insurer, the insured cannot, generally, then also be indemnified by another insurer. At most, the indemnifying insurer can seek contribution from the non-indemnifying insurer. An exception to this is where the indemnifying insurer does provide indemnity in the ‘strict sense’ (that is, where the insurer has no liability but pays out the claim honestly). In these circumstances, the insured, on behalf of the indemnifying insurer, is entitled to take action against the insurer that is liable to indemnify the insured for the claim.
The Appellants submitted that the effect of the Deed was that past and future payments from Global to the Appellants were made by way of a limited recourse loan and therefore indemnity was not provided in the ‘strict sense’.
The Court of Appeal reasoned that the ‘issue was not the label the parties have attached to the payment but, rather, whether the relevant insurer, here Global, was required to provide indemnity to its insured.’ The Court of Appeal held that:
Payments under the Deed, although described as a loan, were payments Global was obliged to make under the Global Policy and the [A]ppellants have been fully indemnified by Global. [QBE] is entitled to succeed against the [A]ppellants by reason of the provision of that indemnity…
The Court of Appeal also noted that Global would have a right of contribution under
s 76 of the ICA or in equity against QBE.
This case reiterates that, for section 45 of the ICA to apply to an ‘other insurance’ clause, the insured must show evidence that it has ‘entered into’ both contracts of insurance. It also emphasises that, generally speaking, contribution proceedings between the insurers is the proper mechanism to ensure that all insurers with a responsive policy proportionately pay out a claim.
Authored by Stephanie Young, Senior Associate, Melbourne.
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