Certain Underwriters at Lloyd's of London Subscribing to Policy Number B105809gcom0430 v Allianz Australia Insurance Limited

[2020] HCATrans 58

[2020] HCATrans 058

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S334 of 2019

B e t w e e n -

CERTAIN UNDERWRITERS AT LLOYD’S OF LONDON SUBSCRIBING TO POLICY NUMBER B105809GCOM0430

Applicant

and

ALLIANZ AUSTRALIA INSURANCE LIMITED ABN 15000122850

Respondent

Application for special leave to appeal

KIEFEL CJ
KEANE J

TRANSCRIPT OF PROCEEDINGS

FROM BRISBANE BY VIDEO LINK TO SYDNEY

ON FRIDAY, 24 APRIL 2020, AT 12.31 PM

Copyright in the High Court of Australia

MR A.J. SULLIVAN, QC:   May it please the Court, I appear for the applicant with my learned friend, MR J.G. SIMPKINS.  (instructed by HBM Lawyers)

MR S.R. DONALDSON, SC:   If your Honours please, I appear for the respondent with my learned friend, MR S.W.W. SYKES.  (instructed by Sparke Helmore)

KIEFEL CJ:   Yes, Mr Sullivan.

MR SULLIVAN:   Thank you.  Your Honours, as the primary judge observed at paragraph 5 of her judgment:

The interaction between ‘other insurance’ clauses is the subject of complex case law –

and as she observes correctly at AB 7:

The degree of difficulty is enhanced where the competing policies contain different types of ‘other insurance’ clauses –

as was the case before her Honour.  As her Honour observed, Allianz in this case, the respondent, deployed what is termed – and it is not a label, but it is a characterisation – “an ‘excess’ clause”, whilst the Lloyd’s policy used what is characterised as “an ‘escape’ clause”. 

Now, what we respectfully submit to your Honours is that the central issue in this case which is of general application and therefore importance is whether the principle of construction articulated in Weddell’s Case which treats two other insurance clauses as cancelling each other out such that both insurers are liable, applies otherwise than in cases where on a proper construction each of the clauses states that the cover afforded by the policy is itself cancelled by reason of the co‑existence of the other policy.  Your Honours will find the Weddell principle summarised in its fullest extent in paragraph 33 of Justice Macfarlan’s judgment at page 45 of the application book which I refer your Honours to but I shall not read at this stage. 

What we submit is that as the trial judge found - this is a finding, her Honour adopting what was stated in the Supreme Court of Canada in the case of Family Insurance Corporation v Lombard which her Honour refers to in paragraph 9 of her judgment - is that the Weddell principle applies only where there is a true impasse between the two insurance policies.  It does not apply if the requisite wordings of the other insurance clauses can be reconciled so as to give effect to both policies whilst providing coverage for the insured.  Since then, no mutual repugnancy exists, and the process ‑ ‑ ‑

KIEFEL CJ:   Mr Sullivan, is it important not to confuse the notion of how effective escape or excess policy clauses are with the question upon which Weddell seems to operate, which is whether there is double insurance because the answer to that question is fairly simple, is it not?  Albion Insurance says it is whether you are insured against the same risk with two different insurers.

MR SULLIVAN:   Yes, it is important not to confuse those two matters, your Honour, and we will be candid, as we obviously have to be with the Court, that this case does involve at its heart the construction of two private contracts, the policy of insurance in each case.  We do, however, submit that notwithstanding the reticence of this Court in some cases to grant special leave in respect of construction issues this is one of those cases where that issue is an important one because we are not talking here about bespoke contracts, we are talking here about standard wordings, policies, issued by large insurers, and apparently intended to be of general application. 

We are talking about this, your Honours, in our respectful submission, in a context where the legislature has seen fit by reason of section 45 of the Insurance Contracts Act to interfere with the operation of such clauses in respect of particular contracts of insurance but left it to the common law in respect of other insurance contracts, such as this one.

KIEFEL CJ: Section 45 did not operate in the present case because the insured did not enter into either of the policies, I understand.

MR SULLIVAN:   That is precisely right, your Honour, but the point I was ‑ ‑ ‑

KIEFEL CJ:   So what are we left with as a matter of general application, then?  You touch upon this in your submissions.

MR SULLIVAN:   Your Honour, I am grateful for your Honour asking.  The general application is this.  Commonly, in infrastructural construction contracts, insurance policies are taken out of, taken out by people who “enter into” the insurance policy, but on behalf of subcontractors and others who have not “entered into” the policy. 

In that circumstance as here, when, say, a subcontractor on an infrastructure project’s employee is injured or the like, it will be a situation where section 45 has no operation because the relevant insured is not the party who has entered into the policy. That is a common practice, or the common form throughout Australia in respect of infrastructure contracts and construction contracts and contracts of that nature are entered into, and of course, on the other hand, typically, the subcontractor or the like will also have its own policy of insurance operating to protect its workers and the like.

So the intervention in section 45, although an important one, is a relatively confined one. May I say this, your Honour, that in that regard, although this is only a very slight matter we acknowledge, the fact that two large insurers have sought to agitate this matter at such length over a comparatively small amount indicates it may have significance well beyond the ambit of this – so far as those insurers are concerned.

KIEFEL CJ:   Might depend upon the advice they are receiving, Mr Sullivan. 

MR SULLIVAN:   It may, your Honour, but not in view of the amount of money which is involved, in our respectful submission, necessarily. 

KIEFEL CJ:   Yes. 

MR SULLIVAN:   So we do say this is a matter of public importance and we do say, with great respect, that there are a number of clear errors in the approach which the majority of the Court of Appeal took.  Your Honours, the first of those errors, we respectfully submit, was the construction of clause 20 of the Allianz policy.  There are a number of places where the provisions of the policy are set out, but conveniently, in our respectful submission, they are set out in the judgment of Justice Meagher, because they are on two overlapping pages at application book 53 and 54.

The first error, in our respectful submission, was in respect of the construction of clause 8.20 of the Allianz policy, was to treat that policy as providing for an escape from primary liability by Allianz on the basis that the Lloyd’s insurance was valid and collectable even though it did not grant indemnity.  In our respectful submission, that is a clear error of construction.

Justice Meagher dealt with this matter at paragraph 65 of his judgment at application book page 37 – sorry I withdraw that – application book page 56 and his Honour deals with it in just one paragraph.  His Honour says:

It is necessary next to consider the provisions of the Allianz policy, commencing with cl 8.20.  That clause purports to make the cover provided under that policy “excess over and above any other valid and collectible insurance” and provides that as an excess policy, the Allianz policy should not respond to any loss until the limit under “such other primary and valid insurance has been totally exhausted”.

His Honour’s then sole reasoning for saying this is not valid and collectable insurance goes to the next sentence:

The earlier reference to “valid and collectible” insurance is to insurance which has legal force issued by a solvent insurer –

and his Honour then quotes the well‑known work of Mr Clarke which in turn cites a decision of the Alabama Supreme Court.  Justice Bathurst simply agrees with Justice Meagher on that point.  What we respectfully submit, your Honour, is this.  First, as a matter of the ordinary, natural meaning of the words “valid and collectible”, it extends well beyond insurance which is of legal force and issued by a solvent insurer.  We say that as a matter of ordinary construction, insurance cannot be “valid and collectible” if a relevant policy does not indemnify the insured.

Secondly, we say in respect of that, and we have provided your Honours an electronic copy of this document, the Alabama Case referred to by his Honour does not in fact support the proposition.  What in fact that case supports – and we can take your Honours to it if your Honours wish us to - is that the word “collectible” extends the circumstances in which cover is granted, but the insurance is not “valid or collectible” if it is not covered by the policy.  So in other words, in order to be “valid and collectible” it has to be both covered and also the subject of a solvent insurer’s issue. 

So we say, with respect, that is a clear error and that infected the whole judgment ‑ and that alone is enough to overcome the majority decision because on the majority decision clause 8.17 had no application.  The majority construed clause 8.17 as if the insurance to be underlying insurance had to in fact indemnify the insured.  Justice Meagher, with whom the Chief Justice agreed, found that that was not the case.  In fact, the Chief Justice’s reasoning is succinct and brief, and your Honours will see that at paragraph 10 of the Chief Justice’s reasoning, which is contained at page 37 of the application book:

In the present case, the Lloyd’s policy is not “Underlying Insurance” as defined because by virtue of cl 10.5 the insurance does not provide cover for the risk in question.

The alternative approach adopted by Justice Macfarlan in dissent, and by Justice Rees at first instance is, we respectfully submit, the preferable construction of clause 8.17 and that is that in order to qualify as underlying insurance, the underlying insurance only has to prima facie cover loss.  Your Honours will find that reasoning set out in Justice Macfarlan’s judgment at paragraphs 42 to 45 at application book 47 to 48 and in Justice Rees’ judgment at paragraph 39 at application book 19 to 20.

That that is so, your Honours, in our respectful submission, is made plain when one looks at the language of clause 8.17, particularly the chapeau, and particularly subparagraphs (a) and (c) of that paragraph.  The chapeau to clause 8.17, which appears at application book 53, line 50, talks specifically in terms of the underlying insurance having “been arranged” and then in subparagraph (a) has a provision there which would be superfluous if the definition meant that there had to be coverage because it says:

In the event of the Insured being indemnified by an Underlying Insurance –

policy, et cetera.  It would have been unnecessary to state that if inherent in the definition of “underlying insurance” was the concept of cover or indemnity.  Likewise, in subparagraph (c) where it is provided that:

Should any such Underlying Insurance, by reason of its scope of cover . . . not indemnify the Insured in whole or in part –

once again, we say, construing the provisions in the context of the definition - the concept and the context of the contract as a whole it is clear that “underlying insurance” for the purposes of this clause 8.17 embraces insurance which would not otherwise be the subject of – which is not necessarily insurance which provides an indemnity. 

In that circumstance the approach adopted by Justice Macfarlan in the Court of Appeal and by the primary judge was correct.  That approach was that when you look at clauses 8.17(c) and (d) they provide that where the underlying insurance does not indemnify the insured in whole by reason of a condition in that policy then the Allianz policy responds as primary cover. 

Here, by reason of clause 10.5 of the Lloyd’s policy, which is set out at page 54 of the application book at line 40, it is plain – indeed, all judges below found this – that the Lloyd’s policy did not indemnify.  Then following on – so you then have a potential tension between clauses 8.17(c) and the majority’s interpretation of 8.20, that tension is overcome by subparagraph (d) which makes it plain that the provisions of this clause, including clause 8.20, are subject to the overriding provision of clause 8.17(c).

So, in our respectful submission, when one goes back to the proper approach to determine whether Weddell’s principle applies or not you first have to construe each policy from the point of view of a reasonable insured on the one hand, and the reasonable insurer on the other hand to that particular policy, and to see whether or not it excludes liability if in fact there is another co‑existing policy.

We respectfully submit it is clear that the Allianz policy did not do so for the reasons asserted by Justice Macfarlan and Justice Rees at first instance and that the approach adopted by the majority, with respect, is wrong.  If that is the case, in our respectful submission, it is clear there is no double insurance, there is only one policy response to the risk, and in our respectful submission it would be clear that no question of contribution would arise.  If the Court pleases, they are our submissions.

KIEFEL CJ:   Thank you, Mr Sullivan.  Yes, Mr Donaldson.

MR DONALDSON:   Your Honours, the rule of construction that was established by Weddell’s Case and expressed in slightly different terms but, nevertheless, endorsed and applied by the New South Wales Court of Appeal is not the subject of any serious doubt as to its current application.  It is something that addresses a complex problem in a logical and commercially convenient way and resolves it and is not currently the subject of any doubt.

What the applicant seeks to do by this application is place a gloss or a qualification on the operation of that principle, which is not commercially sound or logical.  It did not form the basis of the decision of the primary judge or of Justice Macfarlan in dissent in the Court of Appeal, and while it is suggested that the argument was pursued below, none of the four judges appeared to understand that it was being pursued, as it is not dealt with in any of the judgments. 

KIEFEL CJ:   What is the gloss that you say the applicant is putting on it, Mr Donaldson?

MR DONALDSON:   The gloss that the applicant is putting on it is to say that where one clause can be characterised as an escape clause and the other clause can be characterised only as an excess clause then the principle does not apply and that is not something that arises either from the terms of the decision of Weddell or from the way in which that decision was interpreted…..Lambert Leasing v QBE Australia, which was referred to in paragraph 3 of Justice Bathurst’s decision. 

If I can take your Honours, please, to paragraph 33 in Justice Macfarlan’s decision, which is seen at 45 of the application book.  The seminal passage from Weddell is set out and the solution that is provided to the problem of competing other insurance clauses is a construction question.  What Justice Rowlatt said, in the fourth line:

On the contrary the reasonable construction is to exclude from the category of co‑existing cover any cover which is expressed to be itself cancelled by such co‑existence, and to hold in such cases that both companies are liable.

So the process that the Weddell formulation involves in resolving these problems is this.  One first addresses, in this case, the question of whether or not the insured is entitled to indemnity under the Lloyd’s policy.  As your Honours have read, the Lloyd’s policy provided, in effect, that the insurer was not liable where there was another policy covering the same risk. 

What Weddell tells us is that a reasonable construction of the Lloyd’s policy is that the reference to another policy covering the same risk is not to be read as including another policy which itself has another insurance clause.  One then adopts a consistent approach to the application of the Allianz policy which says we will only give you cover in excess of the limits of any other policy.  Applying this approach to the construction of that policy one excludes from the reference to “other policies” any policy which itself includes another insurance clause.

Now, that is a simple commercially sound, legally logical approach to addressing the problems of competing other insurance clauses.  It was expressed in slightly different terms by the New South Wales Court of Appeal when the principle was adopted in Lambert Leasing and that is evident at page 36 of the application book in paragraph 3 of the decision of the Chief Justice where the rule is described – or where the decision is quoted in these terms:

“if each [insurer] would be liable but for the existence of the other [policy], then the exclusions would be treated as cancelling each other out, both insurers are then liable” and “the one who pays can claim contribution from the other” –

Now, that does not seek to spell out in detail the approach that was adopted by Justice Rowlatt in Weddell or its reasoning but it is, with respect, a concise and useful statement of the effect of the principle and it represents the law of New South Wales.

Now, in no way does the approach for which the applicant seeks to contend through for the proposed grant of special leave, in no way is that accommodated within the operation of that simple principle.  The approach is that one looks at the two policies independently and then asks the question, but for the existence of the other would there be cover and that rule of construction, or that approach is perfectly workable in cases where one clause provides or retains cover in excess of the limits of the other policy and one clause simply excludes cover altogether.  There is no…..addressed through this proposed grant of leave.

My learned friend then spent some time addressing issues which can be seen as quite independent of what is in fact posed by the special leave question.  He asserted that the construction issues which he addressed arise from standard wordings.  That, with respect, is not something that is substantiated nor is it by any means self‑evident.  Without wishing to be seen to be in any way critical of the terms of my client’s policy, when one looks at pages 40 and 41, for example, of the application book, where clause 8.17 is set out, one could quite confidently conclude this is something in the nature of a standard wording as opposed to a bespoke wording.

The decision both of the primary judge and of Justice Macfarlan in dissent was to the effect that subparagraph (c) of clause 8.17 which provides “Difference in Conditions Cover” provides difference in conditions cover in circumstances where the underlying insurance so‑called provides no cover at all.

Your Honours will be familiar with difference in conditions cover and what it does is serve – it frequently arises where excess cover is given and it…..to expand cover within the scope of the primary policy so as to match the cover given by the excess policy.  But the decision by the majority to the effect that this difference in conditions clause should not be read as somehow overriding the other insurance clause, so that where the difference in conditions is that the so‑called underlying cover provides no cover at all, is not a decision that is attended with any real doubt, in our respectful submission.

The decision turned on the definition of “underlying insurance” which your Honours will see at page 40.  The majority held that no occasion arises for the consideration of the operation of the difference in conditions cover.  There is no underlying insurance and since underlying insurance is defined as insurance which provides cover for a risk, the argument to the effect that there is underlying insurance if there is no cover under the Lloyd’s policy was, in our respectful submission, manifestly unsound and not attended by sufficient doubt to warrant a grant of special leave and in any event not of any general application whatsoever given that it arises from the terms of this quite specific, and one might safely assume, unique policy.

So, in summary, the issues that arise under the special leave questions that are posed do not arise under the current state of the law and are unsupported by logic or authority.  The other construction issues which my learned friend seeks to agitate which fall outside the scope of the special leave questions in any event are not of general application and are not attended by any real doubt.  They are our submissions.

KIEFEL CJ:   Thank you.  Mr Sullivan, anything in reply?

MR SULLIVAN:   Your Honours, just briefly.  First, we do not seek to put a gloss on the relevant test by saying one simply says this is an escape clause and this is an excess clause.  With great respect, it is a question of proper construction as to the effect of each clause and as we acknowledge and, indeed, we set out in our reply submissions at application book page 83 in paragraph 5, in a dialogue before the Court of Appeal – and the relevant dialogue is set out at lines 25 to 30:

The dialogue concludes at T25.26-.31 with an acceptance by counsel for the Applicant that if on the true construction of the policies the effect of clause 8.20 of the Allianz Policy in the context of the Lloyd’s Policy is that the Allianz Policy does not respond and the effect of clause 10.5 of the Lloyd’s Policy in the context of the Allianz Policy is that the Lloyd’s Policy does not respond, they in effect cancel each other out –

Our characterisation of – and her Honour’s characterisation and the Court of Appeal’s characterisation of the two clauses, escape or excess, depends upon the proper interpretation.  Here we say properly interpreted there is only one escape clause of the type we articulate in clause 8.20 where there is an attempt to cancel out co‑existing liability and that is the Lloyd’s policy clause 10.5 and 8.20 does not do so.

So far as the construction arguments, I will not take your Honours back to those.  A fundamental flaw in respect of the majority decision is to rely solely on the definition and to assume it is unambiguous and to assert – and this appears in the judgment of Justice Meagher at paragraphs 71 and 72 at application book 59, that the definition has to be slavishly applied if it is a definition the parties have adopted.

First, that would only be true if it is not ambiguous.  It is ambiguous for the reasons given by Justice Macfarlan and Justice Rees.  Secondly, it is well‑settled law, of course, including by decisions of this Court such as Halford v Price, that a definition must always yield to the context.  Here the relevant context was the two subparagraphs of clause 8.17 to which I referred your Honours.  If it please the Court, they are our submissions in reply.

KIEFEL CJ:   Yes, thank you, Mr Sullivan.  The Court will adjourn to consider the course that it will take.

AT 1.03 PM SHORT ADJOURNMENT

UPON RESUMING AT 1.06 PM:

KIEFEL CJ:   We do not consider that the grant of special leave is warranted in this case.  It involves the application of settled principle to the terms of these policies.  Special leave is refused with costs. 

The Court will now adjourn to a date to be fixed.

AT 1.07 PM THE MATTER WAS CONCLUDED