INSURED LOSES BID TO MAKE AN EXCESS POLICY PROVIDE PRIMARY COVER
November 27, 2017
Kellogg Brown & Root Pty Ltd (KBR) was a subcontractor on a large construction project. In 2012, Liberty and co-insurers issued a 10 year PI policy to the project principal, head contractors and other parties including KBR. This was obtained by the head contractors pursuant to a requirement of the construction contract. It also required the head contractors to ensure that subcontractors held PI cover, and this was reflected in KBR’s subcontract. KBR held its own PI cover.
The Liberty policy was written on the basis that it was ‘in excess of any Additional Insurance’. It listed as ‘Additional Insurance’ a number of policies, one of which included KBR’s own PI policy for 2012–2013. It was identified by reference to its underwriters and the policy number, and was described as being an ‘annual’ PI policy.
In April 2014, a claim was made against KBR by the head contractors. It was notified to both Liberty and the underwriters of KBR’s 2013–2014 PI policy. However due to its lower deductible, KBR pursued cover under the Liberty policy. KBR argued that it was available as a primary policy because on its terms, it was only to be in excess of KBR’s 2012–2013 PI policy, which could not respond to the claim as it occurred in the 2013–2014 policy year. KRB’s 2013–2014 PI policy had the same underwriters, but a slightly different policy number to the 2012–2013 policy listed in the Liberty policy.
Liberty disagreed, and sought a declaration from the NSW Supreme Court that its policy would only respond to the extent that KBR’s loss exceeded the limit under KBR’s 2013–2014 PI policy.
The court agreed with Liberty’s position. It held that KBR’s argument would lead to ‘extraordinary results’, including that in its first year, the Liberty policy was in excess of KBR’s PI policy, but not in subsequent years. The court also referred to the circumstances in which the Liberty policy was issued to justify that conclusion. These included the fact that Liberty had been provided a copy of KBR’s 2012–2013 PI policy and was told that it would be maintained. Also, it was provided a copy of the construction contract, which required KBR and the other project participants to obtain PI cover. The court said reasonable business entities, in the position of KBR and Liberty, would have understood the listing in the Liberty policy of the additional insurance policies was not an exhaustive statement of what constituted ‘Additional Insurance’. Rather ‘Additional Insurance’ meant insurance of the class actually identified in the policy, which the contractors (including KBR), were obliged by the construction contract to take out.
This case is an example an insurance policy being given a ‘common sense’ businesslike interpretation, reflecting what the court considered must have been the intention of the parties, rather than a literal reading of the policy documents.
Authored by Scott Krischock, Special Counsel, Melbourne
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