Reminder: Interpret the interaction of policy provisions, not each provision in isolation

Legal Directions

The New South Wales Court of Appeal recently found that a claim for indemnity was subject to a large excess even when it was made by an insured in respect of whom no excess was prescribed in the policy. The case highlights the importance of construing the provisions of the policy as a whole and considering how they interact, rather than only certain provisions in isolation.

Background

At all relevant times the defendant, Australian Rail Track Corporation Ltd (ARTC) was the manager of a rail network and a named insured under a policy of insurance which was effected by, amongst others, the owner of the network, Country Rail Infrastructure Authority (CRIA). It claimed indemnity under that policy in relation to a property damage claim arising from a derailment and a personal injury claim arising from maintenance work.

Some of the relevant features of the policy were as follows:

  • ARTC was named as an insured but only in connection with its management agreement with the CRIA
  • The operative clause of the policy provided that indemnity only applied to liability arising out of the business specified in the schedule of the policy. The business was defined as, amongst other things, ‘managers and maintainers of the New South Wales rail network and infrastructure’
  • The policy was subject to a self-insured excess.
  • The effect of the definition of the self-insured excess was that for each occurrence the insured was liable to pay up to the amount of excess and the insurer was only liable to indemnify for that part of the occurrence which exceeded the excess
  • The amount of the excess was defined in the schedule by reference to each named insured
  • Different excesses were specified in respect of the different named insureds
  • In respect of the CRIA, the excess was $2.5 million
  • Importantly, ARTC was not listed in this schedule. In other words, no excess was specified in respect of ARTC
  • The limit of indemnity was defined in respect of any one occurrence.

The issues

The issue for determination was whether an excess applied to ARTC’s claims for indemnity. The insurer’s position was that an excess of $2.5 million applied in respect of both claims.

ARTC’s position was that its claims for indemnity were not subject to any excess. ARTC contended that because it was not listed amongst those entities in respect of whom the policy prescribed an excess, it must follow that no excess applied to claims for indemnity made by ARTC.

The Court’s interpretation of the policy

The Court held that ARTC’s position was incorrect. It found (consistent with the definitions of ‘self-insured excess’ and ‘limit of indemnity’) that for every claim for indemnity there must be an occurrence, namely the event which gives rise to injury to third parties. An excess applies to each occurrence and there will be an excess in relation to every claim to an indemnity under the policy.

The Court also found that the effect of the policy was that an insured is indemnified by an insurer in respect of its liability for injury to third parties, and the insured’s liability must arise out of its business activities as described in the policy.

Taking into account the above, the Court held that in respect of every claim, there must be an enquiry to determine which of the named insured (in respect of whom an excess was specified), or which described business activity, had the closest connection with the relevant occurrence.

As ARTC was effectively a subcontractor of one of the named insureds, liability was connected to the business activities of that named insured.

Undertaking this enquiry also meant that the amount of excess which applied in a particular claim did not depend upon a third party’s decision to sue one particular insured. Rather, it always depends upon the named insured or the business activity which has closest connection to the occurrence involved in the claim.

Finally, the Court held that both of the claims against ARTC were connected to CRIA, because the tracks were owned and operated by it, and neither incident had anything to do with the other named insured. Therefore, a single $2.5 million excess applied to each claim for indemnity by ARTC.

Conclusion

The Court pointed out that its interpretation of the policy does not lead to outcomes which may be regarded as unbusinesslike and, for that reason, unlikely to have been agreed between reasonable persons. This is a sensible conclusion given it is common practice for a policy to be subject to an excess.

The case also highlights the importance of taking into account all clauses of the policy, and considering the interaction between the relevant clauses. Only when all relevant provisions of the policy are considered can one conclude that an excess applied to each claim.

However the court appears to the writer to have overlooked the practical difficulty of two insureds, CRIA and ARTC each claiming on the policy and being, on one reading, subject to only one excess between them. It is expected that this issue will receive further consideration as the primary causes of action develop.

*Australian Rail Track Corporation Ltd v QBE Insurance (Europe) Ltd and Ors [2013] NSWCA 175

Authored by Oszkar Denes, Senior Associate, Brisbane.


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