Lumley General Insurance Ltd v Port Phillip City Council

SUPREME COURT OF VICTORIA
COURT OF APPEAL

S APCI 2012 0137
S APCI 2012 0138

LUMLEY GENERAL INSURANCE LTD	Appellant
v
PORT PHILLIP CITY COUNCIL	Respondent

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JUDGES	NETTLE, WEINBERG and SANTAMARIA JJA
WHERE HELD	MELBOURNE
DATE OF HEARING	18 November 2013
DATE OF JUDGMENT	12 December 2013
MEDIUM NEUTRAL CITATION	[2013] VSCA 367
JUDGMENT APPEALED FROM	Threlfall v TBS Building Services & Ors and VWA v City of Port Phillip & Ors [2011] VCC 1491 (Judge O’Neill)

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CONTRACTS – Contract of insurance - Contractors all risk policy – Recovery under contract of insurance pursuant to insurance clause – Construction of insurance clause – Whether owner an ‘Insured’ under contract of insurance – Injury and damage caused in area that had been vacated by Insured – Whether owner entitled to be indemnified under contract taken out by contractor - Whether event happened ‘as a result of an Occurrence which arises in connection with the Business and Activities of the Insured and Insured Contracts’ – Deductible or excess – Several persons entitled to indemnity in respect of same occurrence – Whether excess payable once in respect of event – Whether excess payable by each person entitled to be indemnified.

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Appearances:	Counsel	Solicitors
For the Appellant	Mr A J Kelly SC with Mr S E Gladman	Wotton & Kearney
For the Respondent	Mr G G McArthur SC with Mr A J Fraatz	DLA Piper Australia

NETTLE JA:

In this matter, I have had the advantage of reading in draft the reasons for judgment of Santamaria JA. I agree with his Honour for the reasons he gives that the appeal should be dismissed.

WEINBERG JA:

I agree, for the reasons given by Santamaria JA, that this appeal should be dismissed.

SANTAMARIA JA:

Summary

By an agreement dated 15 December 2005, Port Phillip City Council (the Council), as ‘Principal’, retained Kane Constructions Pty Ltd (Kane), as ‘Contractor’, to carry out works in its town hall (construction contract). Under the construction contract, the Council could issue variations that decreased the scope of any part of the works. Also, under the construction contract, Kane was required to take out public liability insurance for its benefit and that of the Council for their respective rights and interests, one that covered their liabilities to third parties.

By a policy of insurance dated 31 August 2006, Lumley General Insurance Ltd (Lumley) agreed to indemnify Kane for works undertaken in the town hall (insurance contract). On 21 September 2007, the Council varied the scope of the works under the construction contract by deleting from it an area known as the gallery (gallery).

On 21 November 2007, during the carrying out of work, an employee of another contractor working in the gallery was injured. He was paid compensation by the Victorian WorkCover Authority (VWA) under the Accident Compensation Act1985 (Vic) (ACA).

Subsequently, the employee made a claim in the County Court for common

law damages (the principal proceeding).[1] The Council and Kane were two of several defendants to the principal proceeding. The employee’s claim in that proceeding was successful. Each of the Council and Kane was ordered to pay a proportion of the damages. In the principal proceeding, the Council had, by way of a third party notice, claimed indemnity from Lumley, under the insurance contract, for any damages it was ordered to pay to the employee in that proceeding. In another set of proceedings, the VWA claimed to be entitled to a statutory indemnity pursuant to s 138 of the ACA for the payments it had made to the employee (the VWA proceeding). Each of the Council and Kane was a defendant to the VWA proceeding. In the VWA proceeding, the Council had, by way of a third party notice, similarly claimed indemnity from Lumley in respect of any amount that it was required to pay to the VWA.

[1]Threlfall v TBS Building Services & Ors and VWA v City of Port Phillip & Ors [2011] VCC 1491 (Reasons).

The resolution of these appeals turns upon the language in the documents and upon their proper construction. That said, some general observations can be made.

The insurance contract had a structure common where a main contractor is retained in a large building or engineering project: a single policy exists covering several parties in respect of loss and damage occurring anywhere in the project. In Petrofina (UK) Ltd v Magnaload Ltd,[2] Lloyd J held that:

… a head contractor ought to be able to insure the entire contract works in his own name and the name of all his sub-contractors, just like a bailee or mortgagee, and that a sub-contractor ought to be able to recover the whole of the loss insured, holding the excess over his own interest in trust for the others.[3]

Convenient as such policies are, the availability of indemnity to persons other than the main contractor will always require close attention to the language of the policy.

[2][1984] 1 QB 127.

[3]Ibid 136.

The insurance contract conferred its benefits on the ‘Insured’, in respect of all sums which the ‘Insured’ should become legally obligated to pay as compensation for personal injury that happened as a result of an occurrence which arose in connection with the business and activities of the Insured. Several issues in the case depended upon Lumley’s contention that, when the scope of works under the construction contract was reduced, there was a corresponding reduction in the indemnity contained in the insurance contract. Lumley contended that, when the scope of the works was varied by the deletion of the gallery, the Council ceased, to that extent, to be an ‘Insured’ under the insurance contract such that, if there was to be any indemnity for an occurrence in the gallery, it had to arise in connection with the business and activities of Kane. Lumley further contended that, in so far as there was no relevant causal connection between the occurrence in the gallery and the business and the activities of Kane, no indemnity was payable. The principal issue in the case was whether the variation in the scope of the works had the effect contended for by Lumley. The trial judge held that it did not, and upheld the Council’s claim for indemnity in both matters. Lumley has appealed from the judgments below. The Council has filed a notice of contention in which it said that the trial judge erred in finding that there was no relevant connection between the occurrence and the business and activities of Kane.

There is a subsidiary issue: whether, when separate insured parties make a claim in respect of the same incident, each such party is burdened by a separate ‘deductible’. The trial judge held that, an excess having been paid by Kane in respect of its entitlement to indemnity for the compensation and damages it was required to pay in respect of the injury to the employee, no further excess was payable by the Council.

For the reasons which appear below, the appeals should be dismissed.

The proceedings in the County Court

The Council owns the St Kilda Town Hall which is located in Carlisle Street, St Kilda. Pursuant to the construction contract, Kane carried out construction works at the Town Hall. The construction work was carried out over a period which included November 2007. At that time various contractors, including TBS Building Services Pty Ltd (TBS), were also engaged in work at the Town Hall. TBS employed Peter Threlfall (Threlfall).

As part of the construction work carried out under the construction contract, Kane built a hoarding in the gallery. Kane cut a doorway through the hoarding. The doorway was not cut through to the ground; a step-over remained along the bottom of the doorway, some several inches high. The doorway was secured with a door. On 21 November 2007, Threlfall was carrying a plasterboard sheet in the gallery. As he proceeded through the doorway, he tripped on the step-over. He fell to the ground, and suffered injury.

After the accident, the VWA made payments to Threlfall by way of compensation pursuant to the ACA.

By a proceeding commenced 5 May 2009,[4] the VWA sought to recover from (a) the Council, (b) Kane and (c) 350Q BBS Pty Ltd (formerly Burns Bridge Services Pty Ltd) (Burns Bridge) compensation paid by VWA pursuant to s 138 of the ACA.
[4]Proceeding CI-09-01916 (Appeal S APCI 2012 0137) (VWA Proceeding).

By a further proceeding commenced 23 November 2009,[5] Threlfall claimed damages against (a) TBS, (b) Kane, (c) the Council and (d) Burns Bridge alleging negligence and breach of duty as a cause of his injury, loss and damage.
[5]Proceeding CI-09-05565 (Appeal S APCI 2012 0138) (Principal Proceeding).

In both the principal proceeding and the VWA proceeding, there were various third party and contribution proceedings:

(a) the Council against Kane, under the construction contract and the Wrongs Act 1958 (Vic);

(b) Kane against the Council, under the construction contract and the Wrongs Act1958 (Vic);

(c) the Council against Lumley, for indemnity under the insurance contract.

The principal proceeding was tried before a judge of the County Court and a jury, at Warrnambool in August and September 2010.[6] The jury found for Threlfall and damages in the agreed sum of $450,000 were ordered. The jury apportioned liability between the defendants as follows:
[6]Threlfall brought the principal proceeding (Proceeding CI-09-05565) pursuant to Part IV of the Accident Compensation Act 1985 (Vic).

·TBS: 60%
·The Council: 35%
·Kane: 5%
·Burns Bridge: no liability

On 8 September 2010, judgment was entered for Threlfall in accordance with the jury’s findings.[7]

[7]It should be noted that Kane did not make any application that the jury’s finding that it bore a share of the liability should be set aside non obstante veredicto; Herald & Weekly Times Ltd v Popovic (2003) 9 VR 1, 31 [127]-[131]; Naxakis v Western General Hospital (1999) 197 CLR 269, 274-5 [16] (Gaudron J); 281-282 [39] (McHugh J). Nor has that finding been appealed.

The VWA proceeding was resolved by agreement between the parties following the jury verdict. The parties agreed to pay the VWA, such payment to be apportioned between the Council as to 87.5% and Kane as to 12.5%. Consent orders were made on 9 September 2010.

On 31 January and 2 February 2011, the judge heard each of the respective third party and contribution proceedings.

On 2 September 2011, the judge delivered reasons for judgment in relation to the third party proceedings by or against the Council, Kane and Lumley in both the principal proceeding and the VWA Proceeding. The judge held that:

(a) the Council was not entitled to indemnity or contribution from Kane for its liability in the principal proceeding or the VWA proceeding pursuant to the construction contract;[8]
[8]Reasons [36]-[40].

(b) Kane was not entitled to indemnity or contribution from the Council for its liability in the principal proceeding or the VWA proceeding pursuant to the construction contract;

(c) the Council was, however, entitled to indemnity from Lumley for its liability to Threlfall in the principal proceeding and the VWA proceeding pursuant to the insurance contract.[9]

[9]Reasons [65].

On 28 June 2012, the Court delivered further reasons for judgment in relation to the third party proceedings in both the principal proceeding and the VWA proceeding. Those further reasons addressed: (a) a question of whether an Excess was payable by the Council upon its making claims under the insurance contract; and (b) costs.

It is only the third party proceedings brought by the Council against Lumley that are the subject of the present appeals.

No appeal is raised by the Council or Kane from the dismissal of their respective claims for indemnity or contribution under the construction contract or Wrongs Act 1958 (Vic).

Lumley indemnified Kane in respect of the principal proceeding, and conducted the defence and the related proceedings on its behalf.

The Council’s claim for indemnity

The main question which arises on these appeals is whether Lumley has any, and, if so, what liability under the insurance contract to indemnify the Council in respect of the latter’s obligation (a) to indemnify the VWA for its statutory payments to Threlfall in the VWA proceeding and (b) to pay its portion of the damages to Threlfall in the principal proceeding.[10]
[10]Under contracts of general insurance, a person who is not a party to the contract has the right to recover under the contract if the person “is specified or referred to in the contract”; Insurance Contracts Act 1984 (Cth) ss 11(6), 48. For the position at law, see Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107.

By third party notice dated 30 August 2010 in the principal proceeding,[11] the Council (as the first defendant in that proceeding) claimed against Lumley (as the third party in that proceeding) that it was a term of the insurance contract that Lumley would indemnify the Council for all sums which the Council should become legally obligated to pay as compensation for personal injury happening during the period of insurance as a result of an occurrence which arose in connection with the business and activities of the Council.
[11]Served pursuant to leave granted on 27 August 2010.

By third party notice dated 30 August 2010 in the VWA proceeding,[12] the Council (as the first defendant in that proceeding) made corresponding allegations against Lumley (as the second third party in that proceeding) in respect of its obligation, if any, to indemnify the VWA.
[12]Ibid.

In its statement of claim attached to its third party notice against Lumley in the principal proceeding, the Council alleged:

(a) under the insurance contract, Lumley agreed to indemnify Kane and the Council against liability for injury arising out of construction activities carried out by the Council;

(b) it was a term of the insurance contract that Lumley would indemnify the Council for all sums for which it became liable in respect of injuries sustained in connection with the business activities of the Council;

(c) Threlfall’s injury was sustained in the course of such activities;

(d) Lumley is liable to indemnify the Council pursuant to the insurance contract against Threlfall’s claim.

Similar allegations were made in the Council’s statement of claim attached to its third party notice against Lumley in the VWA proceeding.

The terms of the construction contract

As indicated above, the construction contract was dated 15 December 2005.

Pursuant to cl 1 of the construction contract, ‘The Works’, together with several other documents, comprised and evidenced the contract between the parties. Clause 2 defined ‘The Works’ more precisely in an appendix to the construction contract.[13]
[13]Clause 1.1 of the Construction Contract provides
It is agreed that –
…
1.2 The Works
…
Together comprise and evidence the Contract between the parties.
Clause 2 contains definitions. If provides: ‘In this Formal Instrument of Agreement: … “The Works” means the document contained in Appendix C.’

Pursuant to cl 19 of the terms of the construction contract, Kane was obliged to take out a public liability policy of insurance in the joint names of the Council and Kane ‘which covers (the Council, Kane), the Superintendent and all subcontractors employed from time to time in relation to the work under the Contract for their respective rights and interests and covers their liabilities to third parties’.

Clause 17 of the construction contract provided:

17 DAMAGE TO PERSONS AND PROPERTY OTHER THAN THE WORKS
17.1 Indemnity by Contractor
The Contractor shall indemnify the Principal against –
(a)loss of or damage to property of the Principal, including existing property in or upon which the work under the Contract is being carried out; and
(b) claims by any person against the Principal in respect of personal injury or death or loss of or damage to any property,

arising out of or as a consequence of the carrying out by the Contractor of the work under the Contract, but the Contractor’s liability to indemnify the Principal shall be reduced proportionally to the extent that the act or omission of the Principal or employees or agents of the Principal may have contributed to the loss, damage, death or injury.
Clause 17.1 shall not apply to –
(i)the extent that the liability of the Contractor is limited by another provision of the Contract;
(ii)exclude any other right of the Principal to be indemnified by the Contractor;
(iii)things for the care of which the Contractor is responsible under Clause 16.1;
(iv)damage which is the unavoidable result of the construction of the Works in accordance with the Contract; and
(v) claims in respect of the right of the Principal to construct the work under the Contract on the Site.
17.2 Indemnity by the Principal

The Principal shall indemnify the Contractor in respect of damage referred to in Clause 17.1(iv) and claims referred to in Clause 17.1(v).

Clause 19 of the construction contract provided:[14]
[14]See also the identical provision contained in the Australian Standard General conditions of contract (AS 2124-1992), cl 19.

19 PUBLIC LIABILITY INSURANCE
Alternative 1
Before the Contractor commences work, the Contractor shall take out a Public Liability Policy of insurance in the joint names of the Principal and the Contractor which covers the Principal, the Contractor, the Superintendent and all subcontractors employed from time to time in relation to the work under the Contract for their respective rights and interests and covers their liabilities to third parties. The policy shall also cover the Contractor’s liability to the Principal and Principal’s liability to the Contractor for loss of or damage to property (other than property required to be insured by Clause 18) and the death of or injury to any person (other than liability which is required by law to be insured under a Workers Compensation Policy of insurance).
The Public Liability Policy of insurance shall be for an amount in respect of any one occurrence not less than the sum stated in the Annexure and, unless otherwise specified elsewhere in the Contract, shall be effected with an insurer and in terms both approved in writing by the Principal which approvals shall not be unreasonably withheld. The policy shall be maintained until the Final Certificate is issued under Clause 42.8.

Clause 40 of the construction contract provided for ‘Variations’. Clause 40.1 provided:

The Superintendent may direct (Kane) to –
(a) increase, decrease or omit any part of the work under the Contract; …

Under the construction contract, Kane had been originally obliged to perform work only within the certain designated areas of the town hall.[15]
[15]It seems that the area in the gallery was designated ‘G24, G25 and G26’. The relevant area was visually depicted in an exhibit tendered in the proceeding.

The September 2007 variation

By Project Instruction dated 21 September 2007, Burns Bridge, as the Project Manager of the Council, issued Variation Order No. 082 to Kane. The Variation Order included ‘Revisions to Scope of Works to G24, G25, (and) G26 …’.

The effect of Variation Order No. 082 was to delete, from the scope of the ‘Works’, the work which Kane had been entitled to perform in the gallery.[16]
[16]In other words, Kane was directed to withdraw from the area coloured yellow depicted in the exhibit referred to in the footnote above.

By letter dated 25 October 2007, Kane advised Burns Bridge that ‘the Gallery Areas G24, 25 & 26 will be ready for handing back to the client on 19 November 2007’.

The findings in the principal proceeding

At trial, the following matters about the circumstances in which Threlfall suffered injury were not in issue:[17]

·that Kane constructed the hoarding to prevent the Council employees and the public entering the construction site;
·that Kane cut the doorway in the hoarding;
·that Kane left the step-over in place so as to give the doorway structural integrity.

[17]Reasons [31].

The judge made several findings which are not challenged in the appeals. Before the handover, the door in the hoarding had been used for several purposes.

The judge said:

[16] I accept that at some time before Threlfall’s injury on 21 November 2007, the gallery area was handed back to Port Phillip. This meant that Kane retreated behind a constructed barrier and ceased construction work in the gallery. Thereafter, no Kane workers remained in the gallery. The purpose of the handing back of the gallery was to enable Port Phillip to undertake construction works in the gallery using another contractor, TBS.
[17] Before the handover, the doorway had been used for several purposes:
·It was used as a potential emergency exit in the event of the occurrence of some hazard.
·It was used for a short period of time before Threlfall’s injury as a means for one of the Kane employees to deliver bricks to another floor of the Town Hall via a lift nearby.
·To enable another Kane employee to isolate a fire alarm on the “council side” of the doorway.

[18] The door had a padbolt on the Kane side which was padlocked at night. The lock was removed during the day but the padbolt remained secured. This was on the “Kane side” of the area. The purpose of this was to ensure that Port Phillip employees and the general public could not get access into the construction works being carried on in the gallery area during the day.
[19] Kane knew that after the handover, access could be gained to the gallery by tradesmen from another contractor to finish construction works in the gallery. After the handover, a Mr Nott (an employee of Port Phillip appointed as the manager of the construction works) told a Kane employee, Mr Gray, when Mr Gray had enquired as to what to do with the hoarding, to leave it in place. Mr Gray then took the padbolt off the Kane side, and replaced it on the Port Phillip side.[18]

[18]Reasons [16]-[19] (footnotes omitted).

On 21 November 2007, Threlfall tripped on the step-over within the hoarding in the gallery.

At the time that Threlfall suffered his injury, Kane was carrying out works under the construction contract elsewhere in the town hall.

The Certificate of Final Completion of the construction works undertaken by Kane at the town hall was issued on 12 June 2009.

The Council’s claim for indemnity under the construction contract

As indicated in [21] above, one of the matters that arose in the principal proceeding was the third party claim by the Council for indemnity against Kane under the construction contract. The judge held that the Council was not entitled to indemnity or contribution from Kane for its liability in either proceeding.

It is important to understand how the judge resolved the Council’s indemnity claim against Kane under the construction contract, because it informed his resolution of an issue which arose under the insurance contract, namely, whether, on the assumption that Threlfall’s injury had to arise in connection with the ‘Business and Activities’ of Kane, it had done so. This issue became the subject of the Council’s notice of contention in the appeal.

The jury had apportioned liability between the defendants, including the Council, which was held to be 35% liable, and Kane, which was held to be 5% liable. In the Council’s third party claim, the question was whether Kane was liable to indemnify the Council under the construction contract in respect of the Council’s 35% share of the damages payable to Threlfall.

The Council’s claim was based on clause 17.1 of the construction contract. See [34] above.

The judge drew a distinction between the basis upon which the Council had been held liable to Threlfall and the basis upon which Kane was liable to indemnify the Council. The former was governed by the principles of negligence; the latter was governed by the clause 17.1 of the construction contract.

Clause 17.1 provided that Kane should indemnify the Council in respect of ‘claims by any person against (the Council) in respect of personal injury … arising out of or as a consequence of the carrying out by (Kane) of the work under the Contract.’ The judge held that that phrase required ‘a causative link to be established between the injury suffered and the carrying out of the works under the contract in the manner described’.[19] The judge found that, apart from there being a temporal link, there was no ‘discernible and rational link between the claim, and the carrying out of the contact’.[20] He said:

[32] However, as to whether the injury suffered by Threlfall was causatively related to Kane’s work under the contract, regard must be had to the surrounding circumstances. Firstly, the injury was not caused by any inherent defect in the door or the hoarding. Secondly, Kane had left the area by the time the injury occurred, at the behest of Port Phillip, and was no longer carrying out any construction works in that area. Thirdly, I accept the evidence of Kane that its employee was told by Mr Nott of Port Phillip to leave the hoarding in place with the doorway as it was. Fourthly, the injury was not caused by the doorway or the step-over itself, but rather the use to which Threlfall and TBS put it, under the direction, express or implied by Port Phillip. That included the carrying in of pieces of plasterboard through the doorway and over the step-over. Fifthly, when Kane was in occupation of the area, the hoarding and the door were used for very different, and limited, purposes. Sixthly, that change of use, at the direction of Port Phillip, was the cause of the injury to Threlfall, rather than the structure itself.
[33] Accordingly, in my view, it was not the “works under the contract” which was the cause of injury, but rather the change of use for which the works under the contract were put. Had the doorway and step-over been used in the manner for which it was designed and constructed by Kane, including that it remained padlocked or locked from the inside, it is difficult to see how any injury could have occurred to Threlfall. The situation is analogous to a piece of plant or machinery being left at premises under construction. If used in an appropriate manner, it presents no hazard. If used in an inappropriate or negligent manner, for example with the removal of a guard of a saw, it presents as a hazard.
[34] … Although the finding of the jury was based in tort, the finding against Kane, under general principles of negligence, indicates there was only a very modest liability in tort to be attributed to Kane. While the determination in the present application is in contract, the finding by the jury adds to the argument that there was no causative link between Kane’s carrying out of its work under the contact and Threlfall’s injury. The jury may have found (as particularised in paragraph 18(d) of the Amended Statement of Claim) that Kane had an obligation under general negligence principles to remove the step, despite the advice of Mr Nott that it remain, in the knowledge that it was possible other workmen may enter the area. It is difficult to see how, upon the evidence presented to the jury, the plaintiff could have succeeded on any of the other pleaded particulars of negligence. Considering the issue of causation from the perspective of the parties at the time of the execution of the contract, I am not satisfied there is the causative link between the construction works carried out by Kane, and Threlfall’s injury.[21]
[19]Reasons [29].
[20]The judge referred to Australian Paper Plantations Pty Ltd v J & E M Venturoni [2000] VSCA 71; Reasons [34].
[21]Reasons [32]-[34].

The insurance contract

At the time of the construction contract and construction works, Lumley had agreed to indemnify Kane and others against all legal liability for third party bodily injury arising out of the construction works and activities of Kane.

As is not infrequently the case with major insurance contracts, the agreement comprises several documents that are to be read together. At the hearing of this appeal, the Council and Lumley agreed that the insurance contract between Lumley and Kane was contained in the following documents:

(a) The construction contract.

(b) Annual Contract Works & Third Party Liability Floater dated 23 August 2007 endorsed on behalf of Lumley on 29 August 2007 (Placing Slip).

(c) Annual Contract Works, Plant and Equipment and Third Party Liability Insurance Policy (Policy).

(d) Willis Australia Limited Insurer Closing (Closing).

(e) Contract Works Policy.

The Policy and the Placing Slip have several definitions and clauses that overlap.

The terms of the insurance contract
Insuring clause

Section 3 of the Policy contains the insuring clause.[22] Relevantly, it provides:
[22]The policy component of the insurance contract contained 3 sections. Only Section 3 is relevant.

The Insurer(s) hereby agree, subject to the limitations, Exclusions, terms and Conditions hereinafter mentioned that they will:
1.Pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as compensation for:
(a) Personal Injury; or
...

that happens during the Period of Insurance as a result of an Occurrence which arises in connection with the Business and Activities of the Insured and Insured Contracts,
provided that …

The Placing Slip has a corresponding ‘Covering’ clause.

The insured

Under the Policy, the ‘Insured’ is defined as follows:

Insured means:
(a)The Insured named in the Schedule and subsidiary companies (referred to as the Contractor); and/or
…
(c)Principals and/or owners; and/or
…
(f)Any other company of which the Insured assumes management together with all other parties for whom the Insured is required under Insured Contracts to provide insurance protection, are also included as an Insured.

But in relation to (a) to (f) above only in respect of the Business and Activities of the Insured.

The Schedule to the Policy has a further definition of ‘The Insured’:

Insert Insured (as Contractor) and others as defined as Insured herein together with other interested parties as may be required to be insured by Insured Contracts for their respective rights, interests and liabilities.

Under the Placing Slip, ‘Name of Insured’ is defined as:

Kane Constructions Pty Ltd … (and various other Kane companies)
… and others as defined as Insured together with all other interested parties as may be required to be designated as insureds by Insured Contracts, for their respective rights, interests and liabilities.

Business

Under the Policy, ‘Business’ and ‘Construction Operations’ are defined as:

Business
The Business and Activities of the Insured stated in the Schedule includes all the Insured’s businesses, occupations and/or activities noted in the Schedule.
For the avoidance of doubt, this definition includes:
(a)the provision of canteen, social, sports, welfare organisation or child minding, first aid, fire or ambulance services;
(b)private work undertaken by employees of the Insured for any director or senior executive of the Insured;
(c)notwithstanding the Business and Activities of the Insured detailed in the Schedule of this Policy, this Policy shall apply in respect of activities previously undertaken by the Insured but now discontinued;
(d)plant and equipment owners, operators and hirers, property owners, property occupiers, lessees, lessors and all incidental and associated operations trades and activities; and
(e)the Construction Operations.

Construction Operations
Construction Operations means all Insured Contracts entered into between parties comprising the Insured (including principals and/or owners and/or Sub-Contractors) in respect of which the Contractor is contractually obligated to effect insurance and/or work of every description carried out by or for the Contractor.

Business and Activities of the Insured

Under the Placing Slip, the ‘Business and Activities’ of the Insured were defined as follows:

Builders, Construction Contractors, Project Managers, Construction Managers, Building Maintenance, Property Development & Investment, Retirement Village Owners & Managers, Plant Hirers & Owners, Property Owners, Managers and Occupiers
and otherwise as defined in the policy, namely:
(a)the provision of canteen, social, sports, welfare organisation or child minding, first aid, fire or ambulance services;
(b)private work undertaken by employees of the Insured for any director or senior executive of the Insured;
(c)notwithstanding the Business and Activities of the Insured detailed in the Schedule, the Policy shall apply in respect of activities previously undertaken by the Insured but now discontinued;
(d)plant and equipment owners, operators and hirers, property owners, property occupiers, lessees, lessors and all incidental and associated operations trades and activities; and
(e)Construction Operations which means all Insured Contracts entered into between parties comprising the Insured (including principals and/or owners and/or Sub-Contractors) in respect of which the Contractor is contractually obligated to effect insurance and/or work of every description carried out by or for the Insured.

Insured Contracts

Despite its capitalization in the Section 3 Insuring Clause, the phrase ‘Insured Contracts’ is not separately defined in the Policy.

The Placing Slip contains the following:
Contracts Insured: Contract Works & Maintenance Period
All contracts commenced by the Insured after 4.00pm on 1 September 2007
The parties were agreed that the term in the Placing slip provided the content to the phrase ‘Insured Contracts’.

It was not in dispute that the construction contract was an ‘Insured Contract’ within the Section 3 Insuring Clause.

Excess

The Policy also contains the following provision:

Excess Provision
Liability shall not attach to Insurer(s) until the loss or damage in respect of any Occurrence exceeds the amount stated as Excesses in the Schedule and then Insurer(s) shall only be liable for the Sums Insured or Limits of Liability stated in the Schedule.

The Schedule contains the following:

Excesses
…
Section 3: Third Party Liability
…
$Amount for all third party Personal Injury claims arising out of each and every Occurrence.

The Placing Slip provides:

Excesses
Section 3
Third Party Legal Liability
…
(ii) Third Party Bodily Injury
Each and every occurrence $50,000

The Policy also contains the following provisions:

Other Insurance
It is encumbent upon the Insured to notify the existence of, and full details of, any other insurance which does, or may, insure any Personal Injury or Property Damage being claimed for under this Policy.
Cross Liability
Each of the parties comprising the Insured shall for the purposes of this Policy be considered as a separate and distinct unit and the words “the Insured” shall be considered as applying to each of such persons in the same manner as if a separate Policy had been issued to each of them in their name alone and the Insurer(s) waive all rights of subrogation or action which they may have or acquire against any of such persons.
Provided that nothing in this clause shall be deemed to increase the Limit of Liability under this Policy in respect of any one Occurrence.
Occurrence
For Sections 1 and 2 of this Policy, Occurrence means an event, or continuous or repeated exposure to conditions, which results in loss of and/or damage to and/or destruction of property, provided the Insured neither expected nor intended that such loss would result.
For Section 3 of this Policy, Occurrence means an event, or continuous or repeated exposure to conditions, which the Insured did not expect or intend.
Sub Contractors
Sub contractors means those persons (incorporated or not) engaged by the Contractor, Joint Ventures, principals and/or owners.
Persons (incorporated or not) engaged by Sub Contractors (and so on and so forth) are also Sub Contractors for the purpose of this definition.

Issues for resolution at trial

The judge identified three issues for resolution:

(a) whether the Council was an ‘Insured’ under the contract of insurance given that Kane had been removed from the area;

(b) whether the construction contract was an ‘Insured Contract’ under the contract of insurance; and

(c) whether the incident was an ‘Occurrence’ within the meaning of the contract of insurance.

The judge held:

The Lumley policy is a policy taken out between Kane and Lumley so as to cover works throughout Victoria, even Australia, undertaken by Kane during the insured period. Its clear intention is to afford cover not only to Kane, but to a range of other persons with whom Kane would have some association in the course of its construction activities. To that end, the definition of “insured” in the definition section of the policy necessarily encompasses a wide range of persons as insureds. In my view, Port Phillip satisfies the description of “principals and/or owners” in sub-paragraph (c) of the definition. Even if that were not the case, Port Phillip would fall under sub-paragraph (f) of the definition as a party “required under Insurance Contracts to provide insurance protection”. If regard is then had to the definition of “business and activities”, which constrains the definition of “insured”, I am not satisfied that Port Philip’s business and activities falls to be defined as “the Construction Operations”. In my view, it falls within sub-paragraph (d) of the definition as “… property owners, property occupiers … and all incidental and associated operations, trades and activities; …”. So read, Port Phillip falls in the definition of “insured”, and the tripping incident giving rise to Threlfall’s injury falls within the business and activities of Port Phillip, that is as a property owner and/or occupier; alternatively as “incidental and associated” operations.[23]
[23]Reasons [64] (footnotes omitted).

Notice of Appeal

In each of its notices of appeal, Lumley makes three principal contentions:

(a) the Council was not an ‘Insured’ in respect of the incident in which Threlfall was injured;

(b) the construction contract was not an ‘Insured Contract’ in respect of the gallery in the Town Hall;

(c) the Council’s liability to Threlfall was not a Personal Injury that happened during the Period of Insurance as a result of an Occurrence which arises in connection with the Business and Activities of the Insured and Insured Contracts.

In its notice of appeal in respect of the VWA proceedings, Lumley further contended that the judge erred and ought to have held, upon the proper construction of the insurance contract, that one Excess was payable per claim by each Insured who was a claimant for indemnity under their separate contract(s).

Notice of Contention

The Council has filed a notice of contention. It arises only on the hypothesis that, for the Council to have a right to indemnity under the insurance contract, the occurrence of Threlfall’s injury had to arise in connection with the Business and Activities of Kane. The judge held that, in that event, no causative link was established between the construction works carried out by Kane and Threlfall’s injury. For that reason, no indemnity was payable. For its part, the Council relies on the fact that, notwithstanding what the judge said, the jury found that Kane was liable in negligence and that all parties, including all the third parties, were bound by the jury’s finding. Certainly, Kane has not challenged the finding that it was liable in negligence.

Issues in the appeal

The parties identified the following substantive issues for determination in the appeals, including by the Council’s notice of contention, as whether the judge erred in holding that:

(a)the Council was entitled to indemnity under the insurance contract;
(b)the construction contract between the Council and Kane was an insured contract under the insurance contract in so far as works were undertaken by TBS in the gallery after Kane had handed that area back to the Council;
(c)the event in which Threlfall sustained his injury was an ‘occurrence’ which arose ‘in connection with’ the business and activities of an ‘insured’;
(d)the principles stated in Petrofina (UK) Ltd v Magnaload Ltd[24] supported the decision that the Council was entitled to indemnity;
(e)no Excess was payable by the Council despite its making claims for indemnity under the insurance contract in each of the proceedings.

[24][1984] 1 QB 127.

Contentions of Lumley

Lumley said that, when Kane’s work in the gallery was deleted from the construction contract, (a) the Council ceased to satisfy the definition of ‘Insured’ under the insurance contract, (b) no Occurrence arose in connection with the ‘Business and Activities of the Insured’ and (c) the construction contract was no longer an ‘Insured Contract’ in relation to the works to be performed in the gallery by TBS.[25] It said that, when the insurance contract was given a business-like interpretation,[26] ‘its terms should be construed conformably with how a reasonable person would have understood them, giving due attention to the objects which it was intended to secure’. Parties to a ‘construction works policy’ intended ‘that their requirement for third party (and other) liability cover should retain an ambulatory quality’. Participants in a project who ‘come and go or (are) replaced’ will be covered depending on the scope of works as varied from time to time. Once the Council removed the gallery from the works under the construction contract, the cover did not extend to any activities that it performed or required to be performed in that area.
[25]TBS was not a sub-contractor of Kane.
[26]Lumley referred to McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579, 589 [22]; Westfield Management Ltd v AMP Capital Property Nominees Ltd (2012) 247 CLR 129, 139 [27]; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, 176 [40].

In so far as work continued in the gallery, ‘the construction contract ceased to be the contractual source of any relationship between Kane as Contractor and Council as Principal in respect of any works’ in the gallery.[27] Thus, after the variation on 21 September 2007,[28] Threlfall’s injury did not arise as the result of an Occurrence which arose in connection with the Business and Activities of the Insured and an Insured Contract. Moreover, as a result of the gallery being removed from the works, it could not be said that there was a sufficient causal nexus within the insuring clause for liability to be engaged. True, the construction of the hoarding and the step-over by Kane may have been an essential condition of Threlfall’s injury but that was not, as the judge found, sufficient to establish the discernible or rational link mandated by the insuring clause.
[27]During the hearing of the appeal, Lumley contended that the construction contract had ceased to be an ‘Insured Contract’ in so far as it related to work in the gallery from the moment that Kane had complied with the Council’s direction and handed over the gallery.
[28]See [38] above.

As for its contention that the Council was no longer an ‘Insured’ in respect of work in the gallery, Lumley referred to that part of the judge’s reasons which is extracted at [72] above. Lumley said that those reasons had not considered all relevant parts of the phrase ‘Insured means’ in the Policy. True, the definition embraced all sorts of office (including categories (c) and (f) into which the judge held the Council fell). But, said Lumley, all those offices were constrained by the sentence at the end of the definition: ‘But in relation to (a) to (f) above only in respect of the Business and Activities of the Insured’. The definition embraced the various offices referred to, but only in respect of the Business and Activities of Kane.[29]
[29]See [58] above.

Lumley contended that the judge had ‘erroneously employed’ definitions of ‘Insured’ to conclude that, ‘if Council fell within the general description of “property owners, property occupiers”, then it acquired some wholesale right to public liability’ after Kane handed back the gallery to the Council. A similar error was identified in the use of the definition ‘… all other parties for whom the Insured is required under Insured Contracts to provide insurance protection’.

In its written submissions, Lumley said:[30]

In each case, the essential errors were in not holding that: (a) the term Insured bore a different connotation in different parts of the insurance contract; (b) the general description of the Insured was constrained by the context in which the term was used; (c) Kane was not required under[31] an Insured Contract to provide insurance protection for occupiers liability happening after construction works had been completed or, in this case, Gallery was handed back to Council; (d) the event constituting the Occurrence had not been caused by Kane; (e) Kane was not in the relation qua Contractor to Council qua Principal under the construction contract for the performance of any works in the Gallery after it had been handed back to Council.

[30]Appellant’s Outline of Submissions, S APCI 2012 0137, February 2013, [21].

[31]Compare Jam Factory Pty Ltd v Sunny Paradise Pty Ltd [1989] VR 584, 586-587.

In particular, Lumley contended that the judge’s application of Petrofina (UK) Ltd v Magnaload Ltd[32] was misplaced. It was accepted that Petrofina supports the commercial objective of minimising litigation during the pendency of a project, the ‘better approach’ is to focus on the proper construction of the particular insurance contract, particularly the text of the insurance clause having due regard to the context, general purpose and object of such insurance.[33]
[32][1984] 1 QB 127.
[33]Lumley referred to Certain Lloyd’s Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 87 ALJR 131, 138 [24]; 293 ALR 412, 418 [24] (French CJ and Hayne J).

The Council’s contentions

The Council contended that it was an Insured in so far as it was a ‘principal’ (under the construction contract) or an ‘owner’ (of the Town Hall). It said that it, therefore, fell within the phrase ‘others as defined as Insured’[34] and, thus, was an Insured under the insurance contract. Alternatively, the Council fell within (f) of the definition of Insured in the Policy.[35] The injury to Threlfall happened during the period of insurance. Kane continued to perform works under the construction contract at the Town Hall until 12 June 2009.[36]
[34]See the definition in the Schedule to the Policy ([59] above) and in the Placing Slip ([60] above).
[35]See [58] above.
[36]See [46] above.

The definition of Insured is subject to the proviso that it is ‘only in respect of the Business and Activities of the Insured’.[37] These were defined[38] to include ‘(d) … property owners, property occupiers … and all incidental and associated operations trades and activities’. That approach, it is said, was confirmed by the Cross Liability clause[39] which requires the Business and Activities of the Insured to be read with the Council as the Insured. And, the injury to Threlfall was an ‘Occurrence’.[40] Lumley had admitted that the construction contract was an Insured Contract at the time of the variation involving the hand over of the gallery by Kane back to the Council. Lumley’s contention that Kane ‘ceased to be obliged to insure (the) Council for that area …’ cannot be correct as Kane continued to carry out construction works under the contract until the issue of the Certificate of Final Completion on 12 June 2009. The event occurred in connection with that contract as the hoarding and step-over had been constructed by Kane as part of the works.
[37]See [58] above.
[38]Both in the Policy ([61] above) and in the Placing Slip ([62] above).
[39]See [70] above.
[40]Ibid.

The Council argued that the contention of Lumley that the provisions of the insurance contract are to have an ambulatory construction was erroneous for three reasons: (a) it was contrary to the parol evidence rule in so far as it purported to interpret the insurance contract by reference to the construction contract; (b) it was not logical as the insurance contract was taken out by Kane in respect of a ‘vast number of projects’; it was not specific to the Town Hall project; (c) but, if recourse to the construction contract is permitted, then Kane ‘was to cover, inter alia, the Council as Principal “in relation to the work under the Contract for their respective rights and interests and covers their liabilities to third parties”‘.[41] The injury was in relation to the work and it occurred while the Policy was required to be maintained.[42]
[41]See [35] above.
[42]Until the issue of the Final Certificate on 12 June 2009.

Finally, the Council said that Lumley’s contention that the term ‘Insured’ has different connotations in different parts of the insurance contract, so that what is required by the connection to the Business and Activities of the Insured is a connection to the Business and Activities of Kane, is inconsistent both with the definition of Insured (which includes the Council)[43] and the Cross Liability clause.[44]
[43]See [58] above.
[44]See [70] above.

Notice of Contention

As indicated in [52] above, the judge found that, in the event that the injury had to arise in connection with the Business and Activities of Kane (and, thus, out of its construction activities), it had not done so. He found that ‘it was not the “works under the contract” which was the cause of the injury, but rather the change of use for which the works under the contract were put’.[45]
[45]Reasons [33].

By its notice of contention, the Council said that, in reaching this conclusion, the judge was in error as the jury had ‘specifically found that there was negligence on the part of Kane which was a cause of Threlfall’s injury’. It had assessed Kane’s liability at 5%. All parties, including the third parties (such as Kane) were bound by the jury’s findings that Kane was liable in negligence.[46] Therefore, it was not open to the judge to find that there was no connection between Kane’s Business and Activities and the occurrence of Threlfall’s injuries.
[46]The Council referred to County Court Civil Procedure Rules 2008 (Vic) O 11 (Third Party Procedure); Stewart v Sydney County Council [1973] 1 NSWLR 444; Vosten v Commonwealth [1989] 1 Qd R 693, 700.

Lumley said that the notice of contention should be dismissed as a question of causation ‘cannot be properly answered without first enquiring about the context in which it arose’. Kane’s construction of the hoarding and the step-over did ‘no more than afford TBS and (the) Council the opportunity of exposing Threlfall to injury’. Thus, no discernible or rational link was established to satisfy the causal requirement in the insuring clause[47] ‘between the incident, Kane’s Business and Activities and an Insured Contract’.
[47]See [56] above.

Analysis

In resolving the present appeal, particular attention must be given to (a) the rules which govern the construction of insurance contracts, (b) the definition of ‘Insured’ and (c) the phrase which ‘arises in connection with the Business and Activities of the Insured and Insured Contracts’ that appears in the Section 3 Insuring Clause.

The general principles that govern the construction of contracts, particularly insurance contracts, are not in dispute. These have been referred to recently by McColl JA in Horsell International Pty Ltd v Divetwo Pty Ltd,[48] and I gratefully adopt her summary of them.[49]
[48][2013] NSWCA 368
[49]Ibid [151]-[157].

Was the Council ‘the Insured’ within the meaning of ‘Insured’ in the Policy

During the appeal, the Council argued that the references to ‘Insured’ in the insuring clause[50] and the several references to ‘Insured’ in the definition of ‘Insured’[51] embraced not only Kane but also the Council, and, for that matter, others who were engaged on the project at the town hall during the period of cover.
[50]See [56] above.
[51]See [58] above.

The difficulty in the present case arises from the economy of language used in the insurance contract to describe the persons entitled to the benefits it confers. Kane paid the premium; obviously it was the insured party. But, the draftsperson of the insurance contract chose to describe all the persons who had the benefit of the insurance contract by inserting, in the definitions section of the Policy, a heading ‘Insured’, followed by the words ‘Insured means’, after which were named all the persons entitled to benefit from the insurance contract. In doing so, the definition itself deployed the ‘Insured’, the very word it was purporting to define. The question for interpretation is whether, where the word ‘Insured’ appears within the body of that definition, it refers only to Kane, or to all of the persons that it is seeking otherwise to bring within the definition?

The judge accepted the Council’s contention that ‘the definition of “insured” in the definition section of the policy necessarily encompasses a wide range of persons as insureds’.[52] He held that the Council satisfied ‘the description of “principals and/or owners” in sub-paragraph (c)’; alternatively, it ‘would fall under sub-paragraph (f) of the definition as a party “required under Insurance Contracts to provide insurance protection”‘.[53] On appeal, Lumley contended that this interpretation would have the effect of putting Lumley on risk for all the activities of the Council during the period of insurance, including those unconnected with the works in the Town Hall.
[52]Reasons [64] (footnotes omitted); See [72] above.
[53]Ibid.

In my opinion, while the definition of ‘Insured’ does include a series of persons other than Kane, it does so in restricted circumstances. As will have been noticed, the definition commences as follows: ‘(a) The Insured named in the Schedule and subsidiary companies (referred to as the Contractor)...’.[54] The Schedule provides ‘Insert Insured (as Contractor) and others as defined as Insured herein together with other interested parties as may be required to be insured by Insured Contracts for their respective rights, interests and liabilities’. Having identified a series of persons (other than, but including, the ‘Insured’), the definition concludes with the words ‘But in relation to (a) to (f) above only in respect of the Business and Activities of the Insured’.
[54]See [58] above.

The last reference to ‘Insured’ must be a reference to Kane alone. There is nothing to disturb the presumption that, where the same word is used on more than one occasion in the same clause, its meaning in each such use will be univocal.[55] And, in the Section 3 Insuring Clause, the same phrase (‘the Business and Activities of the Insured’) appears. For this reason, while it is true that indemnity under the insurance contract is capable of extending to persons who hold the offices described in (a) to (f) of the definition, that capacity is first constrained by the final words in the definition. That constraint is carried over into the insuring clause itself where there is a further constraint effected by the phrase ‘and Insured Contracts’. It is these constraints that operate to prevent Lumley being at risk for all the other liabilities that the Council may attract during the period of the insurance contract that are dehors the Business and Activities of Kane and which have nothing to do with the construction contract.
[55]Walsh v Alexander (1913) 16 CLR 293, 312 (Isaacs J); Patti v Belfiore (1958) 100 CLR 198, 205.

For these reasons, I disagree with the judge that the Council answered the description of ‘Insured’ in the definition in the Policy.

Did the injury ‘arise in connection with the Business and Activities of the Insured and Insured Contracts’?

It will be recalled that the jury found that each of the Council and Kane bore part of the liability in negligence for Threlfall’s injury.[56] However, the judge decided that, notwithstanding the finding of the jury, Kane was not liable, under cl 17.1 of the construction contract to indemnify the Council.[57] Although the matter is not entirely clear from his reasons, it appears that the judge assumed that, if the description of the ‘Insured’ was confined to Kane (which, I think, is the case), cover could not be extended to the Council ‘given Threlfall’s injuries did not arise as a result of Kane’s construction activities’.[58]
[56]See [18] above.
[57]See [52] above.
[58]Reasons [50].

The judge held that the indemnity clause in the construction contract only operated where the injury had been caused by Kane and he found, pace the finding of the jury that Kane was negligent in causing the injury to Threlfall (albeit to a very modest extent) that, given the direction to Kane to vacate the gallery, Kane had not been a cause of the injury to Threlfall in the sense postulated by cl 17.1 of the construction contract.

In my opinion, the judge may have conflated the question whether Kane was under an obligation under cl 17 of the construction contract[59] to indemnify the Council with the question whether Lumley was under an obligation to indemnify the Council under the Section 3 Insuring Clause[60] in the insurance contract. The words of relation employed in the construction contract differ from those contained in the insurance contract. In the former, there is an obligation to indemnify in respect of ‘claims by any person against [the Council] in respect of personal injury … arising out of or as a consequence of the carrying out by [Kane] of the work under the Contract’. In the latter, Lumley is to indemnify the Council for ‘all sums which the Insured shall become legally obligated to pay as compensation for (a) Personal Injury … that happens during the Period of Insurance as a result of an Occurrence which arises in connection with the Business and Activities of the Insured and Insured Contracts.’ (Emphases added).
[59]See [34] above.
[60]See [56] above.

The judge considered that the question which arises under cl 17 of the construction contract may be designated as a ‘causation’ issue: the phrase, he said, ‘requires a causative link to be established between the injury suffered and the carrying out of the works under the contract in the manner described’.[61] I would not wish to disagree with that designation.
[61]Reasons [29].

However, the issue which arises under the Section 3 Insuring Clause is more a ‘connection’ or a ‘relationship’ issue. It may even be the case that Lumley is liable to indemnify some beneficiary of the insurance contract notwithstanding that there was no negligence by Kane. That will be so provided that all the ‘connections’ or the ‘relations’ identified in the Section 3 Insuring Clause are satisfied, particularly the connection to Kane’s ‘Business and Activities’ and to ‘Insured Contracts’.

The Section 3 Insuring Clause requires analysis of the phrases (a) ‘happens … as a result of an Occurrence’, (b) ‘arises in connection with’, and (c) ‘the Business and Activities of [Kane] and Insured Contracts’.[62]
[62]See [56] above.

The first question is: did Threlfall’s injury ‘happen … as a result of an Occurrence’? In respect of Section 3 of the Policy (which contains the relevant insuring clause for personal injury), the definition of ‘Occurrence’ is broad. It means an ‘event … which the Insured did not expect or intend’.[63] The answer to the first question is ‘yes’.
[63]See [70] above.

The second question is: whether that event was one that ‘arises in connection with the Business and Activities of Kane and Insured Contracts’? Both the Council and Lumley agreed that the phrase ‘the Business and Activities of [Kane] and Insured Contracts’ conveyed a single idea: the ‘and’ was conjunctive. The entitlement to indemnity required satisfaction of both elements in the phrase.

It was agreed that the construction contract was an ‘Insured Contract’ and that, as cl 19 of the construction contract obliged Kane to effect public liability insurance, the work under the construction contract answered the description of the ‘Business and Activities of Kane’.[64] The critical question thus became: whether Threlfall’s injury was one that ‘arises in connection with’ the construction contract?
[64]See the relevant definitions in [61] and [62] above.

It is to be borne in mind that ‘(t)he High Court of Australia has said that “(we live) in a society which has been almost revolutionised by a growth of all forms of insurance.” Therefore, it is argued, there should be a liberal approach to the construction of a contract of insurance and to any enabling statutes behind it’.[65] Thus, ‘(t)he process of construction begins with the insuring clause, and within this paradigm it will be read broadly and exclusions and limiting provisions will be read narrowly’.[66]
[65]See Derrington & Ashton, The Law of Liability Insurance (LexisNexis Butterworths Australia, 3^rd ed, 2013) [3-5] (footnotes omitted).
[66]Ibid [3-6] (footnotes omitted).

The phrase ‘arises in connection with’ is, as I have suggested a relationship phrase; it is not a ‘causal’ phrase save in the most attenuated sense.[67] It seeks to relate one thing (here: the Occurrence) with another (here: ‘the Business and Activities of Kane and Insured Contracts’). It will take its meaning from the context in which it is used.[68] It is used in the insuring clause in a public liability contract taken out by a contractor that has dozens of projects underway throughout Australia in which a variety of persons will be involved, some obviously at risk of claims for liability from others.
[67]Macedonian Teachers’ Association of Victoria Inc v Human Rights and Equal Opportunity Commission (1998) 91 FCR 8, 30 (Weinberg J).
[68]See Derrington & Ashton, The Law of Liability Insurance (LexisNexis Butterworths Australia, 3^rd ed, 2013) [3-140].

In Horsell International Pty Ltd v Divetwo Pty Ltd,[69] the Court was considering an insuring clause that provided ‘as a result of a Claim(s) both first made against the Insured and notified to [Liberty] during the Period of Insurance for Injury and/or Damage in connection with the Insured’s Business’. The Policy Schedule provided that the ‘Insured’s Business’ was ‘[a]s defined in the policy wording under “Scuba Diving”. The policy wording defined ‘Scuba Diving’.
[69][2013] NSWCA 368.

Dive Two conducted a scuba diving business. Mr William Todd, the sole director of Dive Two, was navigating a vessel owned by Dive Two when it collided with a fishing boat driven by Mr Lane. Mr Lane was seriously injured. At the time of the accident, Mr Todd was engaged in a recreational boat trip. Mr Lane commenced proceedings against Dive Two and Mr Todd for negligence. Dive Two and Mr Todd cross-claimed against Liberty Mutual Insurance Company (Liberty) seeking an indemnity against their liability to Mr Lane under a policy of insurance between Dive Two and Liberty. In the event that the policy was found not to respond, Dive Two and Mr Todd cross-claimed against the insurance broker that placed the policy, Horsell International Pty Ltd (Horsell), for damages commensurate with any award to Mr Lane. Mr Lane’s claim was settled and judgment was ordered against Dive Two and Mr Todd. The cross-claims were then litigated. The primary judge dismissed the cross-claim against Liberty on the basis that the policy did not respond, but upheld the alternative claim against Horsell for damages for negligence and breach of contract. Horsell appealed against this decision contending the policy did apply and, in any event, that it did not act negligently or in breach of contract. By way of cross-appeal, Dive Two and Mr Todd submitted that, if Horsell’s appeal as to the construction of the policy was upheld, they were entitled to be indemnified by Liberty.

In respect of the construction of the policy, McColl JA said:

[169] Going to the second construction issue, her Honour was correct, in my view, in concluding (…) that the activity which gave rise to the claim had to be “in connection with the Insured’s Business”.
[170] The phrase “in connection with” in the insuring clause is a relational term, whose operation will depend upon the context in which it appears: R v Khazaal [2012] HCA 26; (2012) 86 ALJR 884 (at [31]) per French CJ; see also in Kostas v HIA Insurance Services Pty Ltd [2010] HCA 32; (2010) 241 CLR 390 (“Kostas”) (at [24]) per French CJ. It is a “‘prepositional phrase’ of indefinite content” (Kostas at [24]), but may be said to be of considerable width, satisfied by a link or an association summed-up in the phrase “having to do with”: Elkateb v Lawindi (1997) 42 NSWLR 396 (at 402) per Giles CJ Comm D; see also Derrington & Ashton (at [3-122]).
[171] Nevertheless, while the words “may have a very wide operation they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the statutory provision in which they appear”: Hatfield v Health Insurance Commission (1987) 15 FCR 487 (at 491) per Davies J; referred to with approval by Spigelman CJ (with whom Grove and Sully JJ agreed) in R v Orcher [1999] NSWCCA 356; (1999) 48 NSWLR 273 (at [31]).
[172] The question that remains in a particular case is what kind of relationship will suffice to establish the connection contemplated by the statute: Taciak v Commissioner of Australian Federal Police (1995) 59 FCR 285 (at 295) per Sackville J. However, the relationship must be relevant, so that “usually a remote connection would not suffice”; the “sufficiency of the connection or association will be a matter for judgment which will depend, among other things, upon the subject matter of the enquiry, the legislative history, and the facts of the case”: HP Mercantile Pty Ltd v Commissioner of Taxation [2005] FCAFC 126; (2005) 143 FCR 553 (at [35]) per Hill J (Stone and Allsop JJ agreeing).
[173] As the primary judge accepted (…), and the parties did not controvert, statements made about the meaning of the phrase “in connection with” in a statutory context, also apply to the interpretation of commercial contracts: see Thomas v State of New South Wales [2008] NSWCA 316 (at [19] - [21]) per Campbell JA; Fraser v The Irish Restaurant & Bar Company Pty Ltd [2008] QCA 270 (at [43]) per Muir JA.
[174] The relational words “in connection with” also operate to widen the ambit of the cover beyond the activities expressly referred to in the insuring clause while, at the same time, requiring, as the primary judge found, that an activity must have a connection with the insured’s business before it comes within the terms of the Policy.
[175] As I have said, the primary judge accepted the interpretation of the insuring clause for which Liberty contended. In summarising Liberty’s submissions, her Honour recorded (…) the matters of background knowledge it relied upon as relevant to the question of construction. Her Honour did not explicitly take those matters into consideration, although to have done so is consistent with her conclusion that the activity the subject of the claim had to be “in connection with the Insured’s Business”.
[176] The matters of background knowledge were relevant to understanding the commercial circumstances the Policy addressed and the objects it was intended to secure, at least to the extent that they may be regarded as knowledge common to both parties to the policy: see Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 (at [10]) per Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ; Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337 (at 352) per Mason J (Stephen and Wilson JJ agreeing). However, it is not apparent that Dive Two would have had knowledge of the matters of background knowledge Liberty relied upon. Further, even though it knew the Policy was arranged through PADI for its members to cover claims arising out of its business activities, as I explain later in these reasons when dealing with Horsell’s liability, it was wrongly advised as to the ambit of the Policy’s cover. I would not accordingly take the matters of background knowledge Liberty relied upon at trial into account in determining the ambit of the insuring clause.
[177] However absent those matters of background knowledge, and taken in the context of the Policy as a whole, the relationship contemplated by the words “in connection with” is at least that the activity which gives rise to the claim made against the insured must, at least, have to do with the insured’s business.
[178] On the primary judge’s findings of fact, the trip in which the plaintiff was injured bore no such connection. It is not to point, as both Mr Donaldson and Dr Birch argued, that the trip was of the sort Dive Two could have engaged in as part of its business or that an asset of the business was used and one of its employees was engaged on the trip. Mr Todd was not engaged in any function associated with Dive Two’s business at the time of the trip. The mere fact he was using Dive One did not convert a social engagement into a business activity: cf RAA-GIO Insurance Ltd v O’Halloran; Australian Kitchen Industries Pty Ltd v O’Halloran [2007] SASC 245; (2007) 98 SASR 123 (at [30]) per Duggan J (Nyland and Kelly JJ agreeing); special leave refused: RAA-GIO Insurance Ltd v O’Halloran [2007] HCATrans 688.[70]

[70]Ibid [169]-[178].

The reach of the ‘prepositional phrase’ may be further illustrated by Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd.[71] In Speno, the relevant relationship phrase was ‘arising out of the performance by the insured’. (It might be thought that ‘arising in connection with’ connoted an even looser association). Speno had an agreement with Hamersley under which Speno conducted maintenance operations on a railway line operated by Hamersley. Speno employed one Nolan to carry out grinding works. Nolan was driving a vehicle (the HIRail) along the railway when employees of Hamersley negligently switched the points at a siding which caused the vehicle to derail with the result that Nolan suffered injuries. Nolan sued Hamersley, which admitted negligence. Hamersley brought a third party claim against Speno pursuant to an indemnity clause in their agreement. Speno had two insurance polices with Zurich Australian Insurance Ltd (Zurich). In both policies, Hamersley had been named as an insured; in one of them, Hamersley was named as a ‘principal’. The insurance for a principal was ‘in respect of his liability arising out of the performance, by the insured (ie Speno) … of any contract or agreement for the performance of work for such principal to the extent required by such contract or agreement … (emphasis added).’ Hamersley claimed an indemnity directly against Zurich pursuant to these policies. Zurich argued that the scope of cover did not extend to Nolan’s injuries as these injuries did not arise out of the performance by Speno of the relevant contract, but instead arose out of the negligent operation by the employees of Hamersley of the points at the siding.[72] The argument was rejected.
[71](2000) 23 WAR 291.
[72]The facts are taken from the head note to the report.

Malcolm CJ said

In the language of the policy, the question to be determined was not whether the liability to Mr Nolan was caused by the performance by Speno of the contract, but whether the liability of Hamersley to Nolan arose out of the performance by Speno of the contract with Hamersley. In Dickenson v Motor Vehicle Insurance Trust (WA) (1987) 163 CLR 500 at 505 Mason CJ, Wilson, Brennan, Dawson and Toohey JJ said:
“Whether or not the appellant’s injuries were actually caused by the use of a motor car, it is sufficient to say that they arose out of such use. The test posited by the words ‘arising out of’ is wider than that posited by the words ‘caused by’ and the former, although it involves some causal or consequential relationship between the use of the vehicle and the injuries, does not require the direct or proximate relationship which would be necessary to conclude that the injuries were caused by the use of the vehicle: see State Government Insurance Commission (SA) v Stephens Bros Pty Ltd [(1984) 154 CLR 552 at 555, 559].”

In my opinion, Mr Nolan’s journey on the HIRail was something being done in the course of the performance of the contract by Speno. It follows that the negligent incident giving rise to liability occurred in the course of Speno’s performance of the contract. The injury to Mr Nolan occurred in the course of such performance. In my view, this was enough to establish that Hamersley’s liability was one “arising out of” the performance by Speno of the contract. It follows that Zurich was bound to indemnify Hamersley in respect of its liability to Mr Nolan and this particular ground of appeal fails.[73]

[73](2000) 23 WAR 291, 298 [11]-[12].

Ipp J said:

It is important to appreciate that the question that falls for determination is not one of causation at common law, but rather whether on the facts Hamersley was relevantly an insured within the meaning of words used in the policy. According to the policy, the question to be determined is simply whether Hamersley’s liability to Nolan arose out of the performance by Speno of Contract HS1243. The answer to this question does not depend on common law principles of causation.
It is true that the negligent act that gave rise to liability was the operation of the switches while the HIRail was travelling on the rail track, and not some aspect of Speno’s performance of Contract HS1243. But the incident giving rise to liability occurred in the course of Speno’s performance of the contract. That is to say, the HIRail was on the track and Nolan was in the HIRail only because Speno required them to be in those places so as to enable it to perform the contract. There is undoubtedly a causal link between Hamersley’s liability and the performance by Speno of the contract, namely, the presence of the HIRail (with Nolan in it) on the tracks at the very moment the switches were negligently operated.
The words “arising out of” are well recognised as being of broad import. Further, in the context of an insurance policy, there is no reason to construe them narrowly. It is difficult to conceive of any situation where Hamersley could incur a liability arising out of the performance by Speno of its contract (within the meaning of cl 5(c)) in circumstances different in principle to those in the present case. Despite valiant attempts by Mr Pullin to give examples of this kind, none was persuasive.
Here we have a situation where Nolan was injured in carrying out the duties Speno was obliged to perform under Contract HS1243, in circumstances that rendered Hamersley liable. In my opinion, as a matter of the ordinary meaning of the English language, that liability arose out of the contract. In my opinion, the learned judge was correct in the conclusion to which he came and I would not uphold this ground of appeal.[74]

[74]Ibid 308-309 [65]-[68].

Wheeler J said:

In the present case, I have no difficulty with Zurich’s proposition that the relevant negligent act or omission was the switching of the switches or points by the Hamersley employee. However, in doing so, Hamersley breached its duty of care which was owed to those travelling on the railway that it operated. It was by reason of Speno’s performance of the contract that Mr Nolan, Speno’s employee, was travelling on the railway. His presence was directly related to and formed part of the performance of the contract, and in that sense the duty, which was one ingredient of Hamersley’s liability, “arose” out of the performance of the contract by Speno.[75]

[75]Ibid 319 [131].

In the present case, certain matters are undeniable:

(a)the construction contract, to which Kane was a party, was an ‘Insured Contract’ for the purposes of the insurance contract;
(b)the construction contract related initially to the gallery;
(c)Kane worked in the gallery;
(d)Kane built the hoarding in the gallery as part of its obligation under the construction contract;
(e)in building the hoarding, Kane constructed the step-over that was the proximate cause of Threlfall’s injury;
(f)when it handed the gallery back, Kane asked the representatives of the Council what should be done with the hoarding; and
(g)in accordance with the representative’s direction, Kane left the hoarding and step-over in place when it handed the gallery back to the Council.

Just as Hamersley’s liability arose out of the performance by Speno of its contract, so, it seems to me, the Council’s liability to compensate the VWA and to pay damages to Threlfall arose in connection with the Business and Activities of Kane and Insured Contracts.

The fact that, in leaving the hoarding in place, Kane was following direction from a representative of the Council could not operate to sever the relationship created by the insuring clause.

It might have been different if work in the gallery had never been designated as part of the scope of works under the construction contract; if Kane had not built the hoarding and the step-over. Had all these things been done in an area which formed no part of Kane’s responsibilities and by a third party whose relationship with the Council was uninformed or unaffected by any relationship between the Council and Kane, there may not have been a sufficient relationship or connection between the occurrence and the Business and Activities of Kane and Insured Contracts.

Accordingly, Threlfall’s injury should be said to have arisen in connection with Kane’s Business and Activities and Insured Contracts, and, for that reason, the Council was entitled to an indemnity under the insurance contract.

The finding of the jury that Kane was negligent

When it is recalled that the jury found that Threlfall’s injury was caused, in part, by Kane’s negligence, the matter is, it seems to me, even clearer. During the appeal, there was discussion as to the proper analysis of the jury’s finding that Kane’s negligence had been a cause of Threlfall’s injury. The trial judge speculated as follows: ‘The jury may have found (as particularised in paragraph 18(d) of the Amended Statement of Claim) that Kane had an obligation under general negligence principles to remove the step, despite the advice of Mr Nott that it remain, in the knowledge that it was possible other workmen may enter the area. It is difficult to see how, upon the evidence presented to the jury, the plaintiff could have succeeded on any of the other pleaded particulars of negligence’.[76] The Council referred to several other particulars in paragraph 18 that, it said, could just as readily support and explain the jury’s finding. The truth is that the jury’s finding is, as with most such findings, opaque. The critical thing is that it found that Kane shared some of the responsibility for Threlfall’s injury. Once that finding was made, it became clear that the Occurrence referred to in the Section 3 Insuring Clause had arisen in connection with Kane’s ‘Business and Activities and Insured Contracts’.
[76]Reasons [34].

Conclusion on the primary issue

In one sense, Lumley’s description of the insurance contract as ‘ambulatory’ was apt. Plainly, the insurance contract was intended to confer benefits upon persons to be involved in the work at the town hall (and, for that matter, on other projects throughout Australia with which Kane had a connection ) who had not been identified when the insurance contract was made. But, once Lumley was on risk, it was not able to deliver itself from that risk as readily as third parties were capable of imposing that risk upon it.

For these reasons, the appeal should be dismissed. It will be seen that the Council’s success has depended on two grounds. The first is the very breadth of the prepositional phrase ‘arising in connection with’ in the insuring clause. The second depends upon the notice of contention. Once the jury found that, during the period of the insurance, Kane negligently caused Threlfall’s injury, it should have been obvious that there was an ‘Occurrence’ that ‘arises in connection with the ‘Business and Activities (of Kane) and Insured Contracts’. The Council’s success has not depended upon accepting its argument that every reference to the ‘Insured’ in the insurance contract is a reference not only to Kane, but also to the Council.

Separate excesses?

Having decided that the Council was entitled to indemnity under the insurance contract, the judge held, in a separate ruling,[77] that no excess was payable by the Council upon its making a claim for indemnity on Lumley in both Threlfall’s claim for damages in the principal proceeding and in the claim by VWA in the VWA proceeding.[78] Lumley has also appealed that finding. It contended that, on the proper construction of the insurance contract, one Excess was payable per claim by each Insured who was a claimant for indemnity under their separate contract(s). In doing so, it refers particularly to the phrase ‘name alone’ in the cross liability provision.[79] That provision, it said, is intended to make clear that cover is extended to designated persons severally and that such separate cover is subject to the same terms and conditions as those which apply to the contracting party.
[77]Threlfall v TBS Building Services & Ors and VWA v City of Port Phillip & Ors (Ruling) [2012] VCC 981, delivered on 28 June 2012.
[78]See the definition of ‘Excess Provision’ in [67] above.
[79]See [70] above.

For its part, the Council said that the cross liability provision does not actually create multiple policies. Even after the application of that provision, the excess provision remains defined by reference to an Occurrence. As there was a single occurrence (Threlfall’s injury), there is to be a single excess. Whereas Lumley appealed to common sense to support its preferred construction (one should not have the benefit of the indemnity without the burden of the excess), the Council similarly appealed to common sense: if a claim were made on multiple partners, an insurer could, by applying an excess to each individual partner, eliminate all cover for partnership claims below the level of the aggregate of each excess.

In my opinion, the argument for the Council should be accepted. The obligation to meet the Excess is not defined by reference to the number of the ‘Insured’. As the Council has pointed out, there is no reference to the ‘Insured’ in the Excess provision.[80] Rather, the obligation is defined by reference to each ‘Occurrence’. The Excess Provision provides that Lumley’s liability ‘shall not attach … until the loss or damage in respect of any Occurrence exceeds the amount stated as Excesses in the Schedule’. The Schedule provides for ‘$Amount for all third party Personal Injury claims arising out of each and every Occurrence’. Similarly, under the placing slip, ‘Excesses’ for ‘Section 3 Third Party Legal Liability’ was ‘(ii) Third Party Bodily Injury Each and every Occurrence $50,000’. In this case there was only one Occurrence: the injury suffered by Threlfall. It was accepted that Kane had already paid a $50,000 excess in respect of its claim in relation to the injury to Threlfall. The cross-liability provision does not operate to create separate policies, nor to deem that there are separate policies.[81]
[80]Respondent’s Outline of Submissions, S APCI 2012 0138, 8 March 2013, [6].
[81]Appellant’s Outline of Submissions, S APCI 2012 0138, February 2013, [24].

Conclusion

Lumley’s appeal should be dismissed.

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12 December 2013