Lumley General Insurance Limited v QBE Insurance (Australia) Limited

[2008] VSC 216

Sub-

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

No. 6101 of 2007

LUMLEY GENERAL INSURANCE LIMITED ABN 24 000 036 279	Plaintiff
v
QBE INSURANCE (AUSTRALIA) LIMITED ABN 78 003 191 936	Defendant

---

JUDGE:	PAGONE J
WHERE HELD:	Melbourne
DATE OF HEARING:	16-17 June 2008
DATE OF JUDGMENT:	24 June 2008
CASE MAY BE CITED AS:	Lumley General Insurance Ltd v QBE Insurance (Aust) Ltd
MEDIUM NEUTRAL CITATION:	[2008] VSC 216

---

INSURANCE – Contribution between insurers – Construction – Contractual liability –Whether authorisation or ratification necessary for liability of co-insurers

---

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr G. McArthur S.C. and Mr D. Masel	DLA Philips Fox
For the Defendant	Mr D. Levin Q.C. and Mr T. Messer	Hall & Wilcox

HIS HONOUR:

1. The plaintiff (“Lumley”), an insurer, claims $268,055.75 by way of contribution from the defendant (“QBE”), another insurer, plus interest.  Lumley paid an amount of $545,051.50 and maintained that QBE should contribute its rateable share of that amount. 

1. The occurrence giving rise to the dispute was an accident which occurred on 31 March 2005 during the course of fitout works undertaken at 600 Bourke Street, Melbourne at premises to be occupied by Messrs Mallesons Stephen Jaques (“Mallesons”).  Probuild Constructions (Aust) Pty Ltd (“Probuild”) was the principal contractor under a contract with Dabserv Pty Ltd (“Dabserv”), a service company of Mallesons.  The fitout works were to prepare the premises for occupation by Dabserv and Mallesons.  Commercial Interiors Australia Pty Ltd (“Commercial Interiors”) was a subcontractor to Probuild in respect of the fitout works.  On 31 March 2005, Mark Xerri, a director or employee of Commercial Interiors, was performing works on the premises when he accidentally dislodged a flush sprinkler head in the ceiling of a meeting room on level 50 of the premises.  That caused the sprinkler head to activate for a period of approximately 50 minutes discharging water at a rate of approximately 20 litres per second causing significant damage to the fitout works and to the contents on levels 48, 49 and 50 of the premises.  Mallesons and Dabserv were in occupation of the premises on and prior to 31 March 2005 and were the owners of the fitout and the contents. 

1. Commercial Interiors was insured by QBE (“the QBE policy”) at the time of the occurrence.  Probuild was insured by Lumley (“the Lumley policy”) at the time of the occurrence.  Both policies enured to the benefit of the principal insured as well as others as set out in each of the respective policies. In particular, Commercial Interiors was covered by the Lumley policy and Lumley maintained that the payment it made of $546,051.50 was in discharge of that liability. 

1. QBE accepted, and indeed it was common ground, that Mark Xerri and Commercial Interiors owed Mallesons and Dabserv a duty to take reasonable care to avoid damage to property in the performance of the task which was undertaken at the time the accident occurred.  It also accepted, and it was common ground, both that the accident was caused by the negligence of Mark Xerri and Commercial Interiors in the performance of the work carried out by them, and that as a result of the accident the premises occupied by Dabserv and Mallesons at 600 Bourke Street, Melbourne were damaged as were items of furniture.  The items damaged included the premises, and fixtures and fittings, which were contract works under the contract for the fitout.  The items damaged also included six “living edge” chairs which were not contract works under the fitout works contract.  The chairs were replaced with payment of $8,940 by QBE on a claim made by Commercial Interiors on the QBE policy.  The more substantial rectification works required were performed by Probuild and paid for by Lumley in the sum of $565,051.50.  The parties agree that that sum was fair and reasonable. 

1. A right of contribution between insurers exists where two or more insurers are liable in respect of the same loss.  The doctrine of contribution on insurance claims is fundamental to the common law both in law and equity.  In Albion Insurance Co Ltdv Government Insurance Office of New South Wales[1] it was said in the joint judgment:

   [1](1969) 121 CLR 342.

There is double insurance when an assured is insured against the same risk with two independent insurers. To insure doubly is lawful but the assured cannot recover more than the loss suffered and for which there is indemnity under each of the policies. The insured may claim indemnity from either insurer. However, as both insurers are liable, the doctrine of contribution between insurers has been evolved. It began in the second half of the eighteenth century with Lord Mansfield's decisions with respect to marine insurers and there is no doubt that it now applies generally to insurance which provides the insured with an indemnity. There is no reason why the doctrine should not apply to insurance against liability to third parties and there is every reason in principle that it should. The doctrine, however, only applies when each insurer insures against the same risk, although it is not necessary that the insurances should be identical. Thus one insurer may insure properties A and B against fire and the other insurer may only insure property A against fire. Again, one policy may be for a limited amount and the other may be for an unlimited amount. One policy may cover the risk of a whole voyage and the other may cover only part of the voyage. Differences of this sort may affect the amount of contribution recoverable but they do not bear upon the question whether or not each insurer has insured against the same risk so as to give rise to some contribution. The element essential for contribution is that, whatever else may be covered by either of the policies, each must cover the risk which has given rise to the claim. There is no double insurance unless each insurer is liable under his policy to indemnify the insured in whole or in part against the happening which has given rise to the insured's loss or liability[2].

[2]Ibid, 345-6 (Barwick CJ, McTiernan and Menzies JJ).

Later in the joint judgment their Honours said:

The matter can, we think, be decided simply enough by inquiring whether payment by one insurer of the policy holder's claim for indemnity would provide the other insurer with a defence to a like claim against it. It clearly would, and it would simply because the policy holder had by the payment made been indemnified against the risk insured against. He had received all that he was entitled to receive under both policies so the payment by one insurer would discharge both. Thus, payment by one is made for the benefit of both, and, contribution is equity[3].

Kitto J said:

What attracts the right of contribution between insurers, then, is not any similarity between the relevant insurance contracts as regards their general nature or purpose or the extent of the rights and obligations they create, but is simply the fact that each contract is a contract of indemnity and covers the identical loss that the identical insured has sustained; for that is the situation in which "the insured is to receive but one satisfaction" (to use Lord Mansfield's expression) and accordingly all the insurances are "regarded as truly one insurance"[4].

In this case Lumley contended, and QBE disputed, that the amount it paid fell within this principle.

[3]Ibid, 346 (Barwick CJ, McTiernan and Menzies JJ).

[4]Ibid, 352.

1. Lumley contended that the occurrence in respect of which it made a payment was a risk that was insured against both by it under the Lumley policy and by QBE under the QBE policy.  QBE accepted, in my view correctly, that it had insured the occurrence but maintained, first, that Commercial Interiors was not the insured who had made the claim on the Lumley policy and, secondly, that any payment which Lumley made was voluntary and not in discharge of any liability of Commercial Interiors pursuant to the Lumley policy.  There is no doubt that QBE insured Commercial Interiors and that Commercial Interiors could have claimed on the QBE policy in respect of the damage caused by the occurrence.  In this instance the damage was made good by Probuild but I do not think that the case depends upon that circumstance. The damage was done to the property of Dabserv and Mallesons, and that damage needed to be made good.  That the rectification works were performed by Probuild was, in my view, a distracting fact, but one to which I will refer below.

1. The parties did not agree, however, that Lumley was also liable to indemnify Commercial Interiors under the Lumley policy with Probuild.  It seems to me that the Lumley policy did oblige Lumley to indemnify Commercial Interiors in respect of the latter’s liability in respect of the occurrence.  The Lumley policy provided that the “insured” included, amongst others, subcontractors other than subcontractors of a kind not relevant to this proceeding.  Commercial Interiors was undoubtedly a subcontractor within the meaning of that term in the Lumley policy.  Section 3 of the Lumley policy provided that Lumley would pay on behalf of the insured (including Commercial Interiors) all claims which they may become legally obliged to pay as compensation for property damage that happened during the period of insurance as a result of an occurrence arising in connection with the business and activities of the insured and the insured contracts.  Commercial Interiors was within the class of “insured” as defined; expressly and intentionally so.  The accident on the premises on 31 March 2005 was within the definition of occurrence under the policy, being an event resulting in loss or damage or the destruction of property which the insured neither expected nor intended would result.  The amounts paid were payable as compensation for property damage within the meaning of that term in the Lumley policy.  The occurrence arose in connection with the business and activities of Commercial Interiors within the meaning of “business and activities” in the Lumley policy and occurred within the period of insurance, namely 30 June 2004 and 30 June 2005. 

1. In Drayton v Martin[5] Sackville J said:

   [5](1996) 137 ALR 145.

An insurer under an indemnity policy seeking contribution from a co-insurer must establish that:

vit is liable to indemnify the insured under its own policy;

vit has paid out sums in respect of that liability;

vthe co-insurer is also liable under its policy to indemnify the insured; and

vthe co-insurer has not paid out moneys to meet its liability to the insured.[6]

In this case I am satisfied that each of these four elements have been established by Lumley.  Lumley did have a liability to indemnify Commercial Interiors, it paid out sums in respect of that liability, QBE was also liable under its policy to indemnify the insured, and QBE has not paid out monies to meet its liabilities to Commercial Interiors. 

[6]Ibid, 156.

1. The existence of double insurance must be determined “at the time of the casualty”[7].  In that inquiry it is important to be precise about the identity of the insured and of the risk covered.  In Australian Eagle Insurance Co Ltd v Mutual Acceptance (Insurance) Pty Ltd[8] Priestley JA said:

… [A] sound way of deciding whether one insurer can claim contribution from another on the ground of double insurance is to ask two questions (1) did the two insurers have a common burden? (2) if the insured were to be paid under both policies would he be paid twice in respect of the same damage?[9]

The answer to those questions will require precision about the burden said to be common and the identity of the person who might be paid under the policies.

[7]AMP Workers’ Compensation Services (NSW) Ltd v QBE Insurance Ltd (2001) 53 NSWLR 35, 39 (Handley JA, Mason P and Beazley JA agreeing).

[8][1983] 3 NSWLR 59.

[9]Ibid, 64.

1. The insuring clause in Section 3 of the Lumley policy required Lumley to pay on behalf of the insured (including Commercial Interiors) all sums obliged to be paid, amongst others, as compensation for property damage.  The occurrence on 31 March 2005 caused property damage for which Commercial Interiors was liable.  That liability fell within both the Lumley policy and the QBE policy and the two insurers had a common burden. 

1. QBE submitted, however, that “true” double insurance required that Commercial Interiors had authorised or ratified the Lumley policy[10]. In this case Commercial Interiors did not know that Probuild had entered into the Lumley policy on and prior to 31 March 2005 and had neither authorised Probuild to enter into the Lumley policy on its behalf nor ratified it. I accept Lumley’s submission in answer that the requirements of authorisation or ratification are no longer relevant under this branch of Australian law since the enactment of ss 48 and 76 of the Insurance Contracts Act 1984.  By these provisions Commercial Interiors was by statute entitled to the benefits of the Lumley policy without authorisation or ratification.

   [10]Stretch v The State Insurance General Manager (1984) 3 ANZ Insurance Cases ¶60-577, 78,467-8 (Eichelbaum J).

1. QBE also maintained that for the principle of double insurance to be enlivened it was necessary that there be a claim by Commercial Interiors on the Lumley policy.  In that regard I was taken to a series of cases which were said to support the proposition that the words “the insured” in an insurance policy should be construed as referring to the person seeking indemnity in respect of a particular claim[11].  I do not accept this submission on behalf of QBE.  Whatever might have been the position about making claims under the QBE policy, the only provision in the Lumley policy concerning claims is found in clause 6 under the heading “General Conditions Applicable to all Sections”.  Clause 6(c) provides:

Any notice of claim given to the Insurer by any party insured under this Policy shall be accepted by the Insurer as a notice of claim given on behalf of all other parties insured under this Policy.  (My emphasis)

The actual notification to Lumley given on 1 April 2005 by Probuild was not in terms, and I cannot read it as being, a claim limited to the liability of Probuild alone. Probuild was notifying “the incident” as a whole and was not making a claim limited to Probuild itself but, rather, was notifying an incident that would give rise to claims in accordance with the policy. There was no further requirement for the making of a claim and in all the correspondence with Lumley it is clear that the claim which was made related to the liability occasioned by the occurrence caused by Commercial Interiors. Indeed, the single and only wrongful act enlivening a claim was the act of Mr Xerri for which Commercial Interiors was responsible. The notification by Probuild was of that event and there was no requirement for any separate claim by Commercial Interiors. The notification of claim by Probuild was in accordance with the express terms of clause 6(c) a notification by Commercial Interiors. Furthermore, s 54 of the Insurance Contracts Act 1984 would apply had the obligation to make a claim (had there been one) not been satisfied. 

[11]Stolberg v Pearl Assurance Co Ltd [1971] SCR 1026; Re FAI General Insurance Company Limited v Fletcher Construction Australia Limited (1998) 10 ANZ Insurance Cases ¶61-403, 74,429-74,432 (White J); Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291, 310-311 (Ipp J), 323 (Wheeler J); National Vulcan Engineering Insurance Group Ltd v Transfield Pty Ltd (2003) 59 NSWLR 119, 134-5 (Santow JA).

1. The occurrence causing damage occurred on Thursday 31 March 2005.  Lumley was notified the following morning and on that afternoon Probuild issued a site instruction to Commercial Interiors requesting that it notify its insurance company of a possible insurance loss claim.  The site instruction went on to note that the initial repair and cleaning works were proceeding immediately to minimise the impact on the operations of the Mallesons business and any further loss or damage occurring to fixtures and fittings.  The following Monday, Probuild wrote to Lumley’s broker noting that Commercial Interiors had been requested to notify their insurance company of a possible insurance claim and that the day before (Monday 4 April 2005) a representative from NR Thomas & Associates (“Thomas”) had attended the site on behalf of QBE to assess the damage.  Thomas was QBE’s loss adjustors.  On 6 April 2005 Commercial Interiors made a formal claim against QBE in respect of the occurrence described broadly as “rectification of defects works on suspended ceiling [which] accidentally knocked sprinkler head”.

1. Part of the damage caused by the occurrence was to the six living edge chairs.  The attitude of Probuild and Lumley in respect of these chairs was that any liability in respect of them was to be dealt with separately from the major damage to the premises and contents.  On 16 May 2005 Probuild wrote to Commercial Interiors requesting that they be replaced at their own cost through Commercial Interiors’ insurance policy.  On 18 July 2005 Probuild wrote to Thomas confirming that the damaged chairs would not be claimed “by Probuild through [its] insurance policies” but that “as agreed with Commercial Interiors” they would be claimed and reimbursed through their third party insurance policy.  Two days later Thomas wrote to Lumley advising that they acted for QBE as insurers of Commercial Interiors, which was described in the letter as “a sub-contractor acting for Probuild”, when a sprinkler head was bumped and significant water damage occurred.  The letter went on to say:

In order that our principals might adequately assess their involvement in this matter, could you please confirm that liabilities attaching to sub-contractors would fall within the scope of policy cover issued by your company.  Will you also confirm the policy excess carried by Probuild and thirdly, that a set of six living edge chairs belonging to the tenants Mallesons Stephen Jaques, are not included in the claim being handled by your company.  (My emphasis)

By this letter from Thomas, on behalf of QBE, it is plain that all parties concerned were fully aware that Lumley was considering the claim in respect of the occurrence and that it was doing so by reference to the “liabilities attaching to subcontractors” within the scope of the Lumley policy.  The six living edge chairs were plainly considered as a separate item.  This, if it be relevant, was also made clear in a letter from Thomas to Mallesons dated 20 July 2005 which referred to the building restoration work being undertaken through Lumley.  The letter went on to state that the liability in respect of the six chairs “were the only items” not being processed as part of the Lumley general claim.  On 4 August 2005 Lumley wrote to Thomas in response to its letter dated 20 July 2005 confirming that Lumley was treating the whole matter as a liability issue and specifically confirmed that “the sub-contractors are allowed for in the scope of the cover”.  The letter also went on to indicate that the handling of the living edge chairs claim was not part of the current handling by Lumley.  The fact was, however, that, contrary to the submission put on QBE’s behalf, the parties understood Lumley to be treating the claim as one in respect of the damage caused by Commercial Interiors which, from the outset, was contemplated as falling within the Lumley policy.

1. In support of its submissions, QBE relied upon a letter dated 1 June 2006 from Technical Assessing (Vic) Pty Ltd, Lumley’s loss adjustor, to Thomas, QBE’s loss adjustor, in which the former recorded that “Lumley is the liability insurer of Probuild Constructions”.  QBE also relied upon an internal memorandum of Lumley’s dated 10 April 2006 from which it sought to draw inferences to support the proposition that the insured for the purposes of any claim under the Lumley policy was Probuild and not Commercial Interiors.  I do not think that a fair reading of these documents in the context of all the documents supports the conclusion for which QBE contended.  I do not regard the internal document as relevant to my enquiry into whether the payment made by Lumley was in discharge of Commercial Interior’s liability for the damage to the fit-out works.  It is an internal document recording what someone may have thought was happening for the purpose of seeking to obtain more funding.  The document, in any event, does not displace the more direct evidence that when Lumley was specifically asked by QBE’s loss adjustor how it was handling the matter, the specific response given by Lumley was that it was treating the whole matter “as a liability issue, and the sub-contractors are allowed for in the scope of cover”.  In addition, as I have previously indicated, it was made clear by Lumley that it would “be seeking contribution from” QBE’s policy. 

1. QBE placed considerable reliance upon the decision in John Collyear v CGU Insurance Ltd[12] in support of the proposition that Commercial Interiors had suffered no loss recoverable under the Lumley policy because Probuild satisfied the loss under its contractual obligation.  In that case it was held that the double insurance of the landlord had become irrelevant because the landlord had been indemnified by the reinstatement of the premises.  The landlord in that case had double insurance but did not elect to throw the loss onto one of the insurers.  Rather, the liability was eliminated not by any payment under an insurance policy but by compliance with an obligation under a contract to re-instate the premises.  The facts in that case are not comparable to those with which I am concerned.  Here the loss suffered was to the premises in respect of which Commercial Interiors had an obligation to pay for the damage caused.  The fact that the rectification works were performed by Probuild should not obscure the nature of the liability and the identity of the person who had the liability.  It is not a case where Commercial Interiors had two risks one of which was covered by two policies and another risk which was either covered by only one or by neither.  Such a situation would have been comparable to the facts in Collyear.  In this case the liability of Commercial Interiors covered under the Lumley policy and under the QBE policy was the same, and was indemnified in the same way.  The fact of payment of Commercial Interiors’ liability by Lumley did extinguish the obligation of QBE under the QBE policy to the extent of the payment. 

   [12][2008] NSWCA 92.

1. QBE also contended that Lumley was not liable to indemnify Probuild under Section 3 of the Lumley policy because of the specific exclusion for contractual liability.  Exclusion 11 from the indemnity arising under Section 3 to the Lumley policy was for liability assumed by the insurer “under any contract, warranty, guarantee or agreement; except to the extent that such liability would otherwise have attached to the insured by law”. QBE contended that the effect of this exclusion on the facts as they occurred was that Lumley was not liable to indemnify Probuild under Section 3 of the Lumley policy.  The relevant insuring clause in Section 3 required Lumley to pay on behalf of the insured (including both Probuild and Commercial Interiors) all sums which they should become legally obliged to pay as compensation for property damage happening during the period of insurance as a result of an occurrence which arose in connection with the business and activities of Probuild and insured contracts.  QBE maintained that Probuild was under no legal obligation to pay compensation to either Mallesons or Dabserv for property damage caused by the accident apart from its obligation under the fitout works contract.  Thus, the argument for QBE ran, the liability of Probuild under the fitout works contract to perform the works to make good the defects was a contractual liability to which exclusion 11 applied and, therefore, that there was no obligation on Lumley to indemnify Probuild. 

1. Exclusion 11 meant that Lumley was not required to indemnify Probuild for any liability assumed by Probuild under any contract except, of course, to the extent that such liability would “otherwise have attached” to Probuild by law.  The payment by Lumley was, however, not simply the payment of a liability by Probuild assumed under a contract.  The liability to property damage was assumed at very least also by Commercial Interiors and that liability of Commercial Interiors was not only under contract but, fundamentally, by reason of the negligent conduct causing the accident which led to the very substantial damage.  Commercial Interiors’ liability was not excluded by exclusion clause 11 of the Lumley policy nor by its equivalent clause 3.8 of the QBE policy.  Under each policy the liability of Commercial Interiors was one which, apart from contract, either “would otherwise have attached to the insured by law” (the Lumley policy) or would “have been implied by law” (the QBE policy).  Even if Probuild may have been obliged in contract to make good the damage caused by Commercial Interiors, the liability discharged by Lumley’s payment was Commercial Interiors’ liability in tort. 

1. The parties agreed that if I decided in favour of Lumley, the amount to be awarded against QBE was $268,055.75 together with interest.  The parties also agreed about the date from which interest on the contribution was to commence, namely from 6 June 2006.  That is, the day after Thomas (QBE’s loss adjustor) received notification from Lumley’s loss adjustor of the amount sought as contribution.  Accordingly, I will order that the defendant pay to the plaintiff the sum of $268,055.75 with interest from 6 June 2006 and will hear counsel on what orders I should make about the costs of this proceeding.

---