Larson-Juhl v Jaywest

[2000] NSWSC 524

Reported Decision: [2000] 11 ANZ Ins Cas 61-472

New South Wales

Supreme Court

CITATION:	LARSON-JUHL v JAYWEST [2000] NSWSC 524
CURRENT JURISDICTION:	Equity Division
FILE NUMBER(S):	SC 1854/97
HEARING DATE(S):	07/03/2000
JUDGMENT DATE:	15 June 2000
PARTIES :	LARSON-JUHL AUSTRALIA LLC v JAYWEST INTERNATIONAL PTY LIMITED & ORS
JUDGMENT OF:	Master Macready at 52

COUNSEL :	Mr T. Alexis and Mr T Hudson for the plaintiff/Respondent Mr R.A. Dick for defendants/applicants
SOLICITORS:	Minter Ellison for plaintiff/respondent Parry Carroll Kanjian for defendants/applicants
CATCHWORDS:	Insurance - Subrogation and Industrial All Risks Policy. - Loss of profits' claim by one insured paid by insurer. Subrogated proceedings brought by insurer against co-assured based upon contractual arrangements between them for sale of business. Loss of profits caused by matters separate from events giving rise to subrogated claim. Held that express waiver clause prevented claim. Consideration of principles of circuitry of action.
CASES CITED:	Woodside Petroleum Development Pty Ltd (1997 18 WAR 539. Woodside Petroleum Development P/L v H&R-E&W Pty Ltd (1999) 10 ANZ Ins Cas 61-430; Petrofina (UK) Ltd v Magnaload Ltd (1984) 1QB 127; Cooperative Bulk Handling Ltd v Jennings Industries Ltd (1996) 9 ANZ Ins cas 61-355; Commonwealth Construction Co Ltd v Imperial Oil Ltd (1976) 69 DLR(3d)558 at 566; National Oilwell (UK) Ltd v Davy Offshore Ltd (1993)2 Lloyds Rep 582; Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd & Anor (1998) 10 ANZ Ins cas 61-393; Marathon Oil Co v Mid Continent Underwriters (1986) 786 F2d 1301 at 1302; Agip Petroleum Co Inc v Gulf Island Fabrication Inc (1966) 920 F Supp 1318 (at 1328-1330); GPS Power Pty Ltd v Gardiner Willis Associates Pty Ltd Mackenzie J Supreme Court of Queensland 6/4/2000; Great American Insurance Co NY v Gulf Marine Drilling No 1 302 F (2d) 332 (1962); Wilson v Harvey Trinder (NSW) P/L (1973) 2 NSWLR 870; L. Schuler AG v Wickman Machine Tool Sales Ltd (1973) 2 LLoyds Rep 53; ABC v Australian Performing Right Association Ltd (1973 129 CLR 99; McCamley v Harris Young J 2/09/97.
DECISION:	Paragraph 52

- 1 -

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

MASTER MACREADY

Thursday 15 June 2000.

1854 OF 1997 LARSON-JUHL AUSTRALIA LLC v JAYWEST INTERNATIONAL PTY LIMITED & ORS

JUDGMENT

1 MASTER: On 13 December 1999 the court ordered pursuant to Part 31 Rule 2 of the Supreme Court Rules that a separate question be determined in these proceedings. The proceedings have been referred by a Judge of the Court to a Master for hearing. 2 The proceedings arise out of the sale of a picture framing business that was being conducted by the first and second defendant in leased premises at Unit 11, 1 Bennelong Road, Homebush Bay. The plaintiff purchased the business on 27 March 1994 pursuant to an Asset Purchase Agreement and the fourth defendant, Mr Bruce West was retained by the plaintiff pursuant to a Consulting Agreement. In June 1996 the plaintiff was required to vacate because the premises were deemed by Auburn Council to be unsafe. The roof structure had sagged and was liable to collapse. As a result the plaintiff relocated the business to alternative premises. 3 The plaintiff was insured with MMI General Insurance Limited for, inter alia, interruption to business under a policy of insurance. The first, second and third defendants were also expressly named as insured in the policy. The plaintiff made a claim pursuant to the policy and was paid a sum in excess of some $1M. MMI General Insurance Limited has commenced these recovery proceedings in the name of the plaintiff pursuant to its rights of subrogation under the policy. 4 Although the defendants did not cause, by any act or omission, the roof of the premises to sag or otherwise render them unsafe, they are sued in the present proceedings for breach of the Asset Purchase Agreement and for conduct in breach of the Trade Practices Act and the Fair Trading Act. 5 The separate question to be determined is whether the plaintiff is entitled to maintain proceedings against the defendants having regard to:-

(a) The general law dealing with the right of an insurer to bring subrogated recovery proceedings against a co-insured under the policy of insurance in which the right of subrogation derives and;

(b) The terms and conditions of Industrial Special Risk policy No 71-00556551SR issued by MMI General Insurance Limited in favour of the plaintiff and the 1st. 2nd and 3rd defendants jointly in respect of the period from 31 March 1996 to 31 March 1997.

6   For the purposes of the these proceedings the following admissions are made by the plaintiff.

1. That these proceedings are brought in the name of the plaintiff by MMI General Insurance Ltd acting as subrogated insurer under industrial special risks policy no 71-0055655-ISR issued by MMI in the name of the plaintiff and the first, second and third defendants in respect of the period from 31 March 1996 to 31 March 1997.

2. That excluding interest and costs, the amount sought to be recovered in these proceedings by MMI in the name of the plaintiff is equivalent or approximately equivalent to the amount paid by MMI to the plaintiff under the policy of insurance to indemnify the plaintiff against loss and damage sustained by it when it was forced to abandon premises known as unit no 11, 1 Bennelong Road, Homebush Bay on 17 May 1996; and

3. The authenticity of the copy of industrial special risks policy no 71-0055655-1SR annexed to the notice and issued by MMI in the name of the plaintiff and the first, second and third defendants in respect of the period from 31 March 1996 to 31 March 1997.

7   The two alternatives in the preliminary question reflect the two different arguments which are advanced by the defendants, the applicants. The first area concerns the principle of circuity of action. The second is a matter of construction of the terms of the policy and in particular clause 14.8 of the policy. 8   I turn to the first matter, namely, the principle of circuity of action. In his article on “Co-Insurance and Subrogation” (1990) 3 ILJ 48 The Honourable Mr Justice Brownie described the principle in these words:-

“The defence (the circuity of action) is available whenever the rights of the competing litigants is such that the defendant would be entitled to recover back from the plaintiff the same amount which the plaintiff seeks to recover from the defendant whether those sums are categorised as debts, or damages.”

9 The defendants’ submissions in the present proceedings are that the first and second admissions to which I have made reference are sufficient to establish the two essential ingredients in the defence, namely, the identity of parties and identity of amounts recoverable. The plaintiff’s answer to this claim by the defendants is that the defendants would have no basis to seek an indemnity from MMI pursuant to the policy. It is submitted that the policy does not cover that for which the plaintiff is suing the defendants in these proceedings, namely, a the breach of the terms of the Assets Purchase Agreement, misrepresentations as to the transfer of the lease to the plaintiff and claims under the Fair Trading Act and Trade Practices Act. The matters complained of in the Statement of Claim all relate to the actions in 1994 which surround the sale of the business at that time. 10 The policy is an industrial special risks policy covering in section 1 Property Damage and in section 2 Consequential Loss of Profits Insurance. The cover under the first section is against damage occurring to property insured during the period of insurance and the second section is against loss resulting from the interruption of or interference with the business provided the interruption is caused in certain ways. 11 I have referred to the fact that the Statement of Claim is basically in respect of breaches of the Asset Purchase Agreement and the warranties contained therein. In this regard it is useful to note some of these matters so that one can understand the nature of the claim brought. On page 1 of Exhibit A clause 3.5 provides that the sellers (the defendants or some of them) have obtained all appropriate approvals for the transfer of certain assets including the lease. Clause 3.14 (d) on page 43 provides for a warranty that the relevant assets are in good condition and repair. Clause 3.21 on page 44 provides that in respect of leasehold interests there is no breach of any lease and in particular the other party thereto, namely, the lessor, is not in default. Clause 5.7 of the agreement on page 49 includes an indemnity in respect of any expense or loss incurred in connection with a breach of the warranties to which I have referred. 12 In essence to succeed the plaintiff merely has to prove a breach of one of the warranties by the defendants either as to the property passing or that the lessor was not in breach of the lease. There is no necessary allegation of the defendants having caused the damage to the building and the facts would suggest otherwise. 13 In Woodside Petroleum Development Pty Limited v H & R - E & W Pty Ltd (1999) 10 ANZ Insurance Cases 61-430 the Full Court of Western Australia considered the principle as well as an argument on the construction of the relevant policies there involved to which I will return. The case concerned damage to a natural gas platform under construction owned by Woodside Petroleum. The defendants were various sub-contractors included within the principal policy which referred to principal assureds and other assureds. The leading judgment was that of Ipp J who decided the matter on the construction of the policy. The defence of circuity of action was raised and His Honour did not express any concluded view on it because he came to the view that the appeal should be dismissed on other grounds. So far as circuity of action is concerned His Honour said at 74,863 as follows:

“I have difficulty with the proposition that where a wrongdoer is insured for physical damage to property causes damage to that property without himself sustaining loss can rely on the principle of circuity of action. As Brownie J points out (at 54) in the article cited, there is an essential ingredient of the defence of circuity of action that “there must be a complete identity between amounts recoverable by the respective parties”. I do not comprehend on what basis the respondents could make a claim against the underwriters under section 1 of the policy and circumstances where they have sustained no damage to property owned by them. It seems to me that in the present case there is prima facie no identity between the amounts recoverable by the respective parties.”

14   This neatly expresses the dilemma for the defendants in the present case. Here they articulate no basis upon which they can claim under the policy. Although they may be able to claim for their own loss of profits this is not the same amount as that which was claimed by the plaintiff from the insurer. As both submissions depend upon the view one takes of the various cases I will turn to the second matter which is the question of the construction of the policy as that tends to highlight the problems. 15   The relevant clause under the heading “14.8 Waiver of Subrogation” is in the following terms:-

“14.8.1 The insurer shall waive any rights and remedies or relief to which it is or may become entitled by subrogation against.
1. any co-insured (including its directors, officers and employees);
2. any corporation or entity (including its directors, officers and employees owned or controlled by any insured or against any co-owner of the property insured.”

16 It seems clear that the 1st, 2nd and 3rd defendants are insured under the policy and the 4th and 5th defendants are directors of those companies and thus prima facie fall within the terms of the waiver contained in clause 14.8.1. The construction of such waiver clauses has produced a wide divergence of opinion in the authorities. Recently in Australia in the Woodside case the Full Court of Western Australia allowed the clause in that case to have full effect according to its tenor because of the good commercial reasons for construing the clause in that way. At page 74,853 Mr Justice Ipp who gave the majority judgment referred to the reasons being well known having been articulated by Lloyd J in Petrofina (UK) Ltd v Magnaload Ltd (1984) 1 QB 127 and referred to on several occasions thereafter. His Lordship had said (at 136):

“In the case of a building or engineering contract, where numerous different sub-contractors may be engaged, there can be no doubt about the convenience from everybody’s point of view, including, I would think the insurer’s, of allowing the head contractor to take out a single policy covering the whole risk, that is to say covering all contractors and sub-contractors in respect of loss of or damage to the entire contract works. Otherwise each sub-contractor would be compelled to take out his own separate policy. That would mean, at the very least, extra paper work; at worst it could lead to overlapping claims and cross-claims in the event of an accident. Furthermore ..the costs of insuring his liability might, in the case of a small sub-contractor, be uneconomic. The premium might be out of all proportion to the value of the sub-contract. If the sub-contractor had to insure his liability in respect of the entire works, he might well have to decline the contract.”

17 His Honour also referred to Co-operative Bulk Handling Ltd v Jennings Industries Ltd (1996) 9 ANZ Insurance Cases 61-355 at pp 76,932-76,934; 17 WAR 257 at 269-271 and Commonwealth Construction Co Ltd v Imperial Oil Ltd (1976) 69 DLR (3d) 558 at 566.
18 The alternative view propounded by the plaintiff was expressed by Colman J in National Oilwell (UK) Ltd v Davy Offshore Ltd (1993) 2 Lloyd’s Rep 582. His construction of the clause confines the effect of the waiver to claims for losses which are insured for the benefit of the party claimed against under the policy. In other words one does not qualify for the benefit of the waiver clause merely by being a party to the contract of insurance and the benefit is only available for insured losses. His Honour Colman J expressed the principle at page 603 of the report in the following terms:-

“If the effect of the waiver clause would be to preclude (the underwriters) from pursuing by subrogation post-delivery claims which but for the waiver clause would not arise out of the losses insured for the benefit of (National Oilwell) under the policy, this would place (National Oilwell) in exactly the same position vis-a-vis insurers as regards such claims as if those losses had been fully insured under the policy. In effect the waiver clause would extend the scope of the insurance to cover losses which were never actually insured for the benefit of (the assured). This gives rise to the question whether, as a matter of construction of the policy, if the provisions to the contrary clause limit the cover available to a sub-contractor to a scope less than the full scope provided by the policy ..the waiver clause has the effect of protecting the sub-contractor against subrogated claims for losses which, so far as that sub-contractor is concerned, were uninsured by that policy. Such a consequence would indeed be remarkable. The policy would limit the cover with one hand and indirectly by waiver of subrogation remove the limit by another hand.
In my judgment the waiver of subrogation clause by the words:
“…against any Assured and any person, company or corporation whose interest are covered by this policy..”
confines the effect of the waiver to claims for losses which are insured for the benefit of the party claimed against under the policy. In other words one does not qualify for the benefit of the waiver clause merely by being a party to the contract of insurance. The benefit is only available for insured losses.”

19   Clearly the Full Court of Western Australia did not follow the principle adumbrated by Mr Justice Colman and it is a matter to be determined as to whether they have over-ruled such decision or merely considered it inappropriate on the facts before them. In order to approach this question it is probably useful to consider the extent of the cover provided both to the plaintiff and to the defendants under the policy. 20   The policy was called an Industrial Special Risks policy. The description of the risk was “tool/picture framing supplier” and the situation of the risk was at the particular property at Homebush and elsewhere in Australia. Interested parties (obviously financiers) were named as interested parties. The total asset value for cover was for $11,126,684. There were sub-limits on the claims and, for example, material damage had a limit of $4 million and consequential loss a limit of $6 million. The face of the policy shows under the heading, “Full Name of Insured” the following:-

“Larson-Juhl Australia LLC, Jaywest T/as Poster Parade, Jaywest International Pty Limited, Jaywest Pty Limited together with all subsidiary and affiliated companies.”

21 Given the admissions I have referred to it seems that Jaywest trading as Poster Parade is the third defendant, Jaywest Pty Limited. Accordingly, each of the plaintiff, first defendant, second defendant and third defendant are included as insured under the policy. It contains two different sections. Section 1 covered property damage and section 2 consequential loss of profits insurance. There were special conditions applying to each of these sections and also clause 14 being conditions applying to both sections 1 and 2. Clause 14 it will be remembered included the waiver to which I have earlier referred. The policy was apparently issued at the time of the agreement for the sale of the business to the plaintiff company. 22 The Agreement for Sale of the business provided for sale of the business less certain excluded assets. The detail of the documentation in respect of these was not included in the evidence but it appears from evidence given by Mr West, one of the defendants, that his companies retained some stock and a picture rod business. In addition apparently his wife operated a retail shop at Hurstville but still continued to have stock at the subject premises at Homebush. Given the balance sheets of his companies it would appear that the amount of the stock retained was small compared with that which had been transferred to the plaintiff under their Asset Purchase Agreement. It is apparent therefore that all the insured had their own separate stock which would be covered by the policy. There was no suggestion in the evidence that the parties were carrying on business in partnership. The documentation points to a sale of the majority of the stock to the plaintiff with Mr West being retained as a consultant for the purposes of the plaintiff’s business. The defendant companies have retained a separate business. Thus any claims on section 2 of the policy would be in respect of quite separate businesses. The insurance thus would be several (or composite) rather than joint. True joint insurance would, of course, prevent any subrogated claim. I do note that there is no clause to the effect that the insurance is for the parties’ respective rights and interests. However, that is not necessarily determinative. See Petrofina. 23 On the face of the insurance policy there was no reason why the policy would not cover consequential loss for all the insured in contrast to the plaintiff who has claimed provided that the business of each insured fitted the description in the policy. Mr West suggested that he had not made a claim for the destruction of his business and indicated that this was because the insurance company had told him not to. 24 This factual background perhaps highlights the difficulty of construction in respect of the wide terms of the waiver clause. Each of the parties is entitled to claim for loss of profits in respect of a business of “tool/picture framing supplier” and one of them has done so. However the action being brought by the plaintiff is based upon a cause of action which relates to matters totally unrelated, in a liability sense, to the cause of the loss of profits. 25 The different views in the authorities have attracted the interest of commentators and writers and there have been a number of articles dealing with the relevant cases. These articles have appeared in America, Canada and in England as well as in Australia. The Honourable Mr Justice Brownie in his article “Co-insurance and subrogation” (supra) argued that the reasoning of Lloyd J in Petrofina which relied upon the Canadian case to which I have referred should not be followed in Australia. His article was before the decision in the two West Australian cases to which I have referred. Mr Patrick Mead tackled the subject in his article, “Of Subrogation, Circuity and Co-insurance: Recent Developments in Contract Works and Contractors’ All Risk Policies” (1988) 9 Insurance Law Journal 125. His article was after the first Western Australian case Co-operative Bulk Handling Ltd v Jennings Industries Ltd but prior to Woodside. The most recent article appears to be that of Stephen Warne “In Search of the Rationale for the Co-insured Subcontractors Immunity from Subrogated Actions in Contractors’ All Risks Policies” which is reported in (1999) 10 Insurance Law Journal at 262. His article was after the Woodside decision and also importantly a more recent decision not referred to by the parties in this matter which was a decision of the Court of Appeal in Victoria, Maxitherm Boilers Pty Ltd v Pacific Dunlop Ltd & Anor (1998) 10 ANZ Insurance Cases 61-393. The decision is useful in that it concerns the type of policy with which I am concerned in the present case in contrast to the other cases which usually concern contractors all risks insurance. 26 It is important to realise that the three principal cases, namely, Petrofina (UK) Ltd v Magnaload Ltd, Co-operative Bulk Handling v Jennings Industries Ltd and Woodside Petroleum Development Pty Limited v H & R - E & W Pty Ltd were all cases where there was a construction project and the policies involved insurance of property. Although it was before Woodside the case of Maxitherm is instructive for the comments by His Honour Justice Buchanan. The case was one which concerned the supply by Maxitherm of an autoclave to Pacific Dunlop. The Autoclave exploded causing extensive damage to itself and the building in which it was housed. It like the matter with which I am presently concerned involved an industrial special risks policy of insurance. Pacific Dunlop sought damages from Maxitherm for a breach of the terms of the contract pursuant to which the autoclave was delivered and other causes of action. In response to that claim Maxitherm sought indemnity under Pacific Dunlop’s insurance policy. The court determined that the insurance was not project insurance and there was no warrant for treating Maxitherm as one of a number of persons engaged in a cooperative enterprise. The case particularly concerned whether or not Maxitherm had an insurable interest in the property. His Honour Mr Justice Buchanan gave the main judgment and referred to Co-operative Bulk Handling, Commonwealth Construction, Petrofina and National Oil Well cases. He analysed them in these terms:-

“The project cases referred to above did not treat property insurance as liability insurance. Instead, contractors escaped liability altogether because of the inability of the insurers to pursue subrogated claims against them. Thus in Petrofina it was not held that the sub-contractor was entitled to indemnity against his liability for the loss. Rather, it was held that the insurers could not bring a subrogated suit against him as a co-insured. Where the policy is one covering loss of and damage to property together with liability, the immunity of a co-insured may be due to the notion of circuity. See The Yasin [1979] 2 Lloyd’s Rep. 45 at 55; Co-operative Bulk Handling Ltd. v. Jennings Industries Ltd. (1996) 17 W.A.R. 257 at 275-6. Where the cover is limited to loss of and damage to property, the immunity may be due to an implied term in the contract of insurance based upon the perceived inconsistency of causing a co-insured to sustain a loss arising from damage to the subject matter of the insurance in respect of which the co-insured has an insurable interest and a right of indemnity under the policy: Stone Vickers Ltd. v. Appledore Ferguson Shipbuilders Ltd. [1991] 2 Lloyd’s Rep. 288 at 302; National Oilwell (U.K.) v. Davy Offshore Ltd. [1993] 2 Lloyd’s Rep. 582 at 613-14. The same result is achieved by invoking a basic principle, which was expressed in the following terms by the Supreme Court of Canada in Commonwealth Construction Co. Ltd. v. Imperial Oil Ltd. (1977) 69 D.L.R. (3d) 558 at 561:
“The starting point of that submission is the basic principle that subrogation cannot be obtained against the insured himself. The classic example is, of course, to be found in Simpson v. Thomson. In the case of true joint insurance, there is, of course, no problem; the interests of the joint insured are so inseparably connected that the several insureds are to be considered as one with the obvious result that subrogation is impossible. In the case of several insurance, if the different interests are pervasive and if each relates to the entire property, albeit from different angles, again there is no question that the several insureds must be regarded as one and that no subrogation is possible.”
In the present case the insurance was not project insurance, and there is no warrant for treating Maxitherm as one of a number of persons engaged in a co-operative enterprise, whose position in relation to the subject matter of the enterprise should be likened to that of a bailee. This policy was not issued to enable one of a number of persons engaged upon a construction project to take out a single policy covering the whole risk and thereby avoid not only the necessity of each sub-contractor taking out his own separate policy, but also overlapping and cross-claims in the event of an accident. The policy was designed to cover the property of the named insured anywhere in Australia and to cover the proprietary interests of others in property owned or in the possession of the named insured.
Even if Maxitherm did have an insurable interest in the autoclave, that could not convert the policy from property to liability insurance. If it had had an insurable interest of the type it claimed, Maxitherm may have been able to resist a subrogated claim. However, that question was not raised by the pleadings or the evidence.”

27   There have been some criticism of His Honour’s conclusion by Mr Warne in his article at 280 to 281. It is plain from consideration of Co-operative Bulk Handling that the liability provisions in that case would not have responded to the subcontractor’s claim and that thus the claim was in the circumstances only a property insurance claim. The case’s importance lies in the fact that the court sought to restrict the notions of pervasive interest to project construction insurance. Clearly enough the present case is not one concerned with such insurance. There is thus no warrant for applying the immunity from subrogated claims in such cases to the present matter. Indeed, that was not argued by the defendants (except in respect of circuity) who relied on the express terms of the waiver. 28   I turn to the proper construction of the waiver clause. As I have already noted it is in the widest possible terms unrestricted to the subject matter of insurance and prima facie it would cover all five defendants. 29   It is useful to note some of the other cases where such a waiver clause existed and in particular the treatment of it in the Woodside case. The clause in that case was in the following terms:-

“Underwriters agree to waive rights of subrogation against any Assured and any person, including visitors, experts and VIP’s etc., Company, Firm or Corporation whose interests are covered by this Policy and against any employee, agent or contractor of the Principal Assured or any individual, agent, firm or affiliate or corporation for whom the Principal Assured may be acting or with whom the Principal Assured may have agreed prior to any loss to waive subrogation…..”

30 Anderson J at first instance held that subrogation was a contractual right which could be waived. It was the width of the waiver that led His Honour to hold that it prevented a claim based on subrogation. The phrase “whose interests are covered by this policy” was read by His Honour to mean “who is entitled to the benefit of cover under the policy irrespective of whether such cover is a right to indemnity in respect of the subrogated claim” and not as “whose interests are covered by this policy in respect of the loss the subject of the subrogated claim”. Dealing with National Oilwell His Honour Mr Justice Anderson rejected the reasoning of Mr Justice Coleman in that case. He was unable to see why it could not have been intended to restrict the co-insured’s insurance coverage and at the same time to give them a blanket waiver of subrogation. He used the context of the construction project to illustrate why matters could be organised to accommodate this fact. He was of the view that co-insurance and waiver of subrogation were different concepts and he could not see why it should be presumed that the parties must have intended that the one be coextensive with the other. He referred to Marathon Oil Co v Mid-Continent Underwriters (1986) 786 F2d 1301 at 1302 and the comments of Judge Alvin B. Rubin 1302 when he said:-

“The underwriters that wrote a policy containing a provision waiving “all subrogation” against an additional assured contends that the clause does not mean what it says: insurers argue that the waiver of subrogation applies only with respect to claims covered by the policy. Because that interpretation would render the waiver meaningless, we hold that, when underwriters issue a policy covering an additional assured and waiving “all subrogation rights” against it, they cannot recoup from the additional assured any portion of the sums they have paid to settle the risk covered by the policy, even on the theory that the recoupment is based on the additional assured’s exposure for risks not covered by the policy.”

31 He also referred to the consistent American approach that waiver of subrogation is not co-extensive with coverage under the insurance policy and the discussion in Agip Petroleum Co Inc v Gulf Island Fabrication Inc (1996) 920 F Supp 1318 (at 1328-1330) where National Oilwell was expressly not followed. His Honour Mr Justice Ipp in the Court of Appeal essentially agreed with the trial judge on his conclusions on this aspect. At page 74,857 His Honour said:-

“In my view there is no warrant for limiting the ambit of cl 6 to the cover provided. Were this to be done the express extension of the waiver to persons who do not fall within the category “any Assured” would be nullified. There is no reason in principle why parties to an insurance policy should not agree that the underwriters should waive their rights of subrogation against persons additional to those insured by the policy. The ordinary meaning of cl 6 reflects such an agreement and, in my view, effect should be given to it. I respectfully agree with Anderson J that the reasoning in Marathon Oil Co v Mid Continent Underwriters is to be preferred to that in National Oilwell (UK) Ltd v Davy Offshore Ltd. I would reject the argument that the waiver is commensurate with cover.”

32 Apart from the obvious interests in extending cover in construction cases His Honour Mr Justice Ipp also referred to the fact that the clause provided for a waiver of subrogation “against any employee, agent or contractor of the principal assured” and “any individual agent, firm or affiliate or corporation for whom the principal assured may be acting”. 33 Another recent case is GPS Power Pty Ltd v Gardiner Willis Associates Pty Ltd a decision of Mackenzie J in the Supreme Court of Queensland on 6 April 2000. [2000] QSC 075. That also was a construction project case and His Honour followed the decision in Woodside. The waiver clause in that case was as follows:-

“(c) In the event of the insurers indemnifying or making a payment to any insured(s), the insurers shall not exercise any rights of subrogation against any other insured(s) hereunder.
(d) The insurers agree to waive any rights and remedies or relief to which they may become entitled by subrogation against:-
…………
(ii) Any insured named or described by this policy
…………”

34   His Honour held that the subrogated claim must fail as the clause was to be given full effect. There is no doubt that in respect of cases concerning project construction that the decision of the Full Court of Western Australia in Woodside means that the decision of Coleman J in National Oil Well should not be followed on this aspect.
35   An essential part of the reasoning in Woodside both at first instance and on appeal was that co-insurance and waiver of subrogation are different concepts and it should not be presumed that the parties must have intended that one be co-extensive with the other. The reasoning in Marathon Oil was preferred to that in National Oilwell. Mr Justice Ipp referred to the following passage in Marathon Oil as exemplifying that reasoning.

“As an additional assured, Marathon had coverage only for liability it incurred as an operator, owner or charterer of (a certain oil platform), not for liability arising from its other activities. The parties agree that British Underwriters did not insure Marathon for liability arising from its capacity as platform owner. British Underwriters contend that the waiver of subrogation is co-extensive with coverage and thus did not apply with regard to Marathon’s uninsured exposure. No waiver of subrogation was required, however, with respect to covered liability, for the provision of insurance necessarily implies that the insurer will not seek to recoup amounts paid by it to satisfy insured claims. Were this not so, the insurance would be illusory . The addition of a waiver-of-subrogation clause reinforces the provision implied by law, that the clause is not merely redundant, particularly when, as here, ‘all subrogation’ is waived. Because they had waived ‘all subrogation’, British Underwriters could not have sued…to recover from Marathon any part of the $60,000 the paid (the insured), even on the theory that Marathon, in its uninsured capacity as platform owner, was contributorily liable as a joint tortfeasor.”

36   Marathon Oil and other American cases such as Great American Insurance Co New York v Gulf Marine Drilling No 1 302 F (2d)332 (1962) were not construction project cases and the reasoning is not restricted to a narrower range of circumstances. The reasoning is basic to insurance law and it seems to me that the full court in Western Australia has adopted such reasoning. Given its width I see no reason to confine it to project construction cases. 37   If one turns to the circumstances of this insurance one has four separate assureds apparently operating separate businesses and having separate stock covered by the policy. Damage to stock could, for example, be incurred as a result of matters the responsibility of only one insured or as a result of matters extraneous to all the insured. In these circumstances it does not seem surprising that there should be a waiver of subrogation. In addition the clause extends the waiver beyond co-insured to:-

1. …..(including its directors, officers and employees);
2. any corporation or entity (including its directors, officers and employees) owned or controlled by any insured or against any co-owner of the property insured.”

38   his extension, particularly for example, to a co-owner of property clearly shows the waiver to cover a greater field than the persons covered by the insurance. 39   I acknowledge that the circumstances of the present case is not one concerning damage to property. The outstanding matter about this case is that there was no damage to property. All that has happened is that there has been a loss of profits as a result of a collapsing roof not attributable to the fault of any of the parties. It may seem in these circumstances surprising to apply the ordinary terms of the waiver clause to prevent recovery based upon an earlier breach of contract and statutory obligations. 40   The plaintiff submits that clause 14.8 of the policy cannot extend, upon its proper construction, beyond the coverage provided to both defendants under the policy. Precisely what was meant by “beyond the coverage” was not articulated but presumably means the risks insured against, i.e. damage to property and loss of profits. That leads to a confusion because waiver relates to claims made based upon a cause of action. Of necessity such a cause of action will be based upon facts which are not necessarily the facts which allow a claim on the policy. Each subject matter is quite different. Thus trying to define the extent of the waiver in this way is fraught with difficulties. 41   Logically a restriction upon the extent of a waiver of a right of subrogation can only be by varying -

(i) the person in favour of whom there is a waiver;
(ii) the nature of the claims that are waived.

42 Under the instant policy the first matter has been addressed in a precise way and the second by the adoption of a wide form of waiver. Such words should normally be construed in accordance with their “plain, ordinary and popular sense”. 43 However a construction which leads to unreasonable results should normally be awarded. See Wilson v Harvey Trinder (NSW) Pty Ltd (1973) 2 NSWLR 870 and L Schuler AG v Wickman Machine Tool Sales Ltd (1973) 2 Lloyds Rep 53 where Lord Reid said at 60:-

This is so unreasonable that it must make one search for some other possible meaning of the contract. If none can be found then Wickman must suffer the consequences. But only if that is the only possible interpretation.”

44   Although the application of the ordinary language may be surprising I do not think that it is unreasonable. This flows from the facts to which I have referred in paragraph 37 above. Even if the result were unreasonable it is difficult to determine a mechanism for restricting the expressed waiver. Is it to be a limitation on the nature of the claims that are waived expressed -

(a) as a temporal limitation;
(b) as to the nature of the cause of action or
(c) as to the facts upon which the cause of action is based?

45 None of these limits flow from a consideration of the terms of the policy or the circumstances of the insurance. 46 In Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99 Chief Justice Barwick said at 105:-

“It may be granted that the computation of the amount of the annual figure according to the expressly stated formula in cl. 2 may produce results which may not commend themselves to a person seeking to achieve an actual or even approximately constant value of the licence fee. But if that result is produced by the application of the words in which the parties have expressed themselves, it is no part of the function of a court by some process of divination as distinct from construction of the language employed to attribute to parties an intention to do something for which their express words do not provide.”

47   Give the clear language used in clause 14.8.1 it would be more a process of divination rather than construction to adopt one of these three approaches mentioned above as a limitation on the extent of the waiver. 48   In these circumstances I am not satisfied that clause 14.8.1 should be construed to imply a limitation along the lines suggested by the plaintiff and accordingly I will determine the separate point adversely to them. 49   Although it is not necessary in view of my decision I will briefly refer to the principle relating to circuity of action referred to by His Honour Mr Justice Brownie in the article to which I have referred in these terms:-

“The defence (the circuity of action) is available whenever the rights of the competing litigants is such that the defendant would be entitled to recover back from the plaintiff the same amount which the plaintiff seeks to recover from the defendant whether those sums are categorised as debts, or damages.”

50   Recently in McCamley v Harris Young J 2 September 1997 His Honour, after reference to a number of cases, set out the requirements in respect of the defence of circuity of action. These he said were -

(a) it must be shown that precisely the same amount of damages would be awarded in the defendant’s proposed action as in the plaintiff’s action;
(b) both the plaintiff and the defendant must be suing each other in the same right;
(c) both actions must be actions at low, not one in law and one in equity; and
(d) either the cause of action must be complete, or alternatively, the defendant so obviously has an action as a result of the finding for the plaintiff that it would be scandalous to put the defendant to the trouble of starting a fresh action.”

51   In the instant case the only way in which the defendant companies can claim on the policy is in respect of their loss of profits. As I have earlier set out their loss of profits (if any) would be quite a different amount from that of the plaintiff’s claim in the present case. There is in the authorities and the literature some debate about the extent of the identity of parties necessary but assuming for the present purposes that the plaintiff is in fact the insurer there would be the relevant identity of parties. The defendants did not submit that they had a right of action against the plaintiff but that they could recover against the insurer. In the present circumstances any such claim must relate to the defendants several claims (if any) under the policy for their loss of profits which would be in a different amount from that of the plaintiff. In these circumstances the defence fails. 52   Accordingly -

1. I determine that the plaintiff is not entitled to maintain the proceedings against the defendants having regard to -

(b) The terms and conditions of Industrial Special Risk policy No 71-00556551SR issued by MMI General Insurance Limited in favour of the plaintiff and the 1st. 2nd and 3rd defendants jointly in respect of the period from 31 March 1996 to 31 March 1997.


2. I dismiss the proceedings.

3. I order the plaintiff to pay the defendants’ costs of the proceedings.

Last Modified: 09/26/2000