McConnell Dowell Sea Pty Ltd v Gerling Australia Insurance Co Pty Ltd
[2002] VSC 260
•28 June 2002
F
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST F5336
No. 2071 of 2001
| McCONNELL DOWELL SEA PTY LTD | Plaintiff |
| v | |
| GERLING AUSTRALIA INSURANCE CO PTY LTD (ACN 069 085 796) | Defendant |
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JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 11 JUNE 2002 | |
DATE OF JUDGMENT: | 28 JUNE 2002 | |
CASE MAY BE CITED AS: | McCONNELL DOWELL SEA PTY LTD v GERLING AUSTRALIA INSURANCE COMPANY PTY LTD | |
MEDIUM NEUTRAL CITATION: | [2002] VSC 260 | |
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CATCHWORDS: Insurance – Construction of Policy – First Party Cover or only Third Party Claims – Factual matrix – Question for Separate Determination – Rule 47.04.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr AC Archibald QC and Mr IG Waller | Clayton Utz |
| For the Defendant | Mr SW Kaye QC and Mr JPM de Koning | McCabe Terrill |
HIS HONOUR:
The Separate Question
By a writ issued on 14 August 2001, the plaintiff, McConnell Dowell S E A Pte Ltd, sued the defendant, Gerling Australia Insurance Co Pty Ltd, for a declaration that the defendant was liable to indemnify the plaintiff, under a contract of insurance, in respect of certain losses allegedly suffered by the plaintiff. The relevant contract of insurance was made between McConnell Dowell Corporation Limited ("MDCL"), and its subsidiary and associated companies, and the defendant on 31 July 1996 and was for the provision of umbrella liability insurance including professional indemnity insurance for the period between 30 June 1996 and 30 June 1997 ("the Gerling policy"). In the statement of claim filed on 14 September 2001, it was alleged that in or around April 1997 the plaintiff discovered that it had sustained significant losses in carrying out the construction of a gas transmission pipeline in Singapore for the Public Utilities Board of the Republic of Singapore. The losses were said to result from:
"(a) the loss or theft of certain computer equipment;
(b) the loss or theft of certain structural steel and scrap metal;
(c)significant over-expenditure and/or overpayments made by the Plaintiff to sub-contractors in respect of the laying of asphaltic concrete, the purchase of quarry products and the hiring of trucks and other equipment required for construction of the Project."
Liability was denied by the defendant on numerous grounds. One of the issues raised by the pleadings concerned the construction of cl. 5.1 of Part B of the Gerling policy. The defendant pleaded that under the Gerling policy it was only liable to indemnify the plaintiff against third party claims. This was denied by the plaintiff although it accepted that if the defendant's construction were correct, its claim must fail as the losses in respect of which it was suing were first party risks and not third party claims.
Initially, the defendant sought rectification of the policy to embody what it alleged was the contract it actually made with MDCL, namely, that there was no first party insurance cover. The plaintiff then applied to have the question of rectification tried as a separate question, on the basis that if rectification were granted its claim would be at an end. The plaintiff advanced a persuasive case that considerable expense might thereby be saved, because of the potential size and complexity of discovery of documents, in particular those relevant to the losses allegedly sustained by the plaintiff. Although the defendant opposed a separate determination of the question of rectification, after I made such an order, it successfully sought to add a further question to be considered at the separate determination hearing. This extra question concerned the proper construction of cl. 5.1 of Part B of the Gerling policy.
The separate determination of these questions came before Hansen J on 8 April 2002. At the start of the hearing, counsel for the defendant announced that the defendant was abandoning the rectification point. It did not oppose an order that its counterclaim be dismissed with costs. However, despite the fact that it had sought the addition of the construction question, the defendant opposed that matter proceeding on its own, arguing that it was inextricably linked to the rectification point. For reasons which it is not necessary to repeat now, Hansen J declined to proceed with the hearing of that question and referred the matter back to me. There was some suggestion that other defences raised could also be dealt with by way of separate questions, but although I directed that the parties confer in respect of other possible questions, no agreement was reached. The defendant continued to resist any further order for the determination of a separate question or questions, principally on the ground that these issues could not be determined without investigating the nature of the losses allegedly sustained by the plaintiff. Nevertheless, on 10 May 2002, I ordered pursuant to Rule 47.04 of the Supreme Court (General Civil Procedure) Rules 1996 that the following question in the proceeding be heard and determined separately:
"Whether having regard to such relevant evidence as may be adduced, upon a proper construction of clause 5.1 of Part B of the written contract of insurance referred to in paragraph 3 of the statement of claim, the policy only covers a claim or claims made against the insured by a Third Party."
The Gerling Policy
The front page of the Gerling policy was headed:
"McConnell Dowell Corporation Limited
Umbrella Liability Insurance
Including
Professional Indemnity Insurance
Policy Wording for the Period
30 June 1996 to 30 June 1997."
Page 1 contained the following:
"IN CONSIDERATION of the Insured named in the Schedule hereto paying or agreeing to pay to the Company who has hereunto subscribed its name the premium stated herein.
NOW WE THE COMPANY hereby agree to indemnify the Insured against liability in the manner and to the extent provided in each of the Insuring Agreements hereto subject always to the Limits of Liability, conditions, exclusions and other terms of the policy."
The relevant part of the Schedule was as follows:
"CLASS OF INSURANCE:
Umbrella Liability and Professional Indemnity
…
INSURED:
McConnell Dowell Corporation Limited and/or Subsidiary Companies and/or Associated Companies and/or Joint Ventures all as now or hereafter constituted, formed or acquired and where the Insured have an interest and/or have management control and/or have a responsibility to arrange insurance. This policy Part A only also insures the Insured's Principals and Main Contractors and all Sub-Contractors as additional Insured parties.
BUSINESS:
All business undertakings and activities of the Insured including, but not limited to, Civil, Pipeline, Structural, Mechanical, Electrical, Marine, Building and Instrumentation Engineering Contractors; General Contractors, Builders; Designs [sic][1] and Consultants; Importers, Exporters and Carriers; Project Managers; Structural Steel Fabricators; Industrial Painters; Site Erectors; Hirers of Plant and Equipment; Construction and Inspection and Maintenance; Electricity Power Station Construction, Servicing, Repair and Maintenance; Electricity Powerline Construction, Inspection and Maintenance; Communication Equipment Suppliers and Installers; Tree Trimmers and Ground Maintenance; Quarry Owners and Operators; Asphalt Bituminous Product Manufacturers, Suppliers and Layers and Vendors; Property Owners, Property Managers, Landlords, Tenants; and any other activity connected therewith or any other activity with which the Insured may become involved.
LIMIT OF LIABILITY:
Applicable to Part A – Umbrella Liability
(a) (a)$15,000,000 any one Occurrence
(b) A$15,000,000 in the aggregate during any one Period of Insurance in respect of Products Liability
…
Applicable in Part B – Professional Indemnity
A$10,000,000 any one claim and in the aggregate during any one policy period in excess of the Excess.
…
RETROACTIVE DATE:
Applicable to Professional Indemnity Policy Part B only – 29.10.92.
SELF INSUREDRETENTION:
1. Umbrella Liability – Policy Part A – Self Insured retention $100,000 each and every occurrence where there is no underlying insurance.
2. Professional Indemnity – Policy Part B - $100,000 each and every claim or series of claims arising from the one event inclusive of costs and expenses.
…"
[1]The parties agreed that this should have read "Designers"
Part A of the Gerling policy dealt with "Umbrella Liability", in respect of personal injury, property damage and advertising liability, as defined. Clauses 1 to 4 constituted Part A. Part B of the Gerling policy dealt with "Professional Indemnity". Clauses 5 to 10, which constituted Part B, were headed as follows:
"5. Insuring Agreements
6. Automatic Extensions Applicable to Policy Part B
7. Exclusions Applicable to Policy – Part B
8. Claims Conditions Applicable to Policy Part B
9. Conditions Applicable to Policy Part B
10. Definitions Applicable to Policy Part B".
Clause 11 contained "General Conditions Applicable to Policy Part A and B".
Clause 5.1 stated as follows:
"The Company agrees to indemnify the Insured against
(a)legal liability for any Claim first made against the Insured during the Period of Insurance and which is notified to The Company during the Period of Insurance in respect of any civil liability;
(b)for loss or expense sustained by them and first discovered and notified to The Company during the Period of Insurance;
whatsoever and howsoever incurred in the conduct of the Business as defined and stated in the Schedule and including the activities of any professional party employed or engaged or previously employed or engaged by the Insured."
By cl. 5.2 the defendant agreed:
"to pay, in addition to the Limit of Indemnity, the Costs and Expenses incurred with the written consent of The Company in the defence or settlement of any Claim covered by this Policy."
Clause 5.3 was concerned with the time within which the insured must "notify a Claim". Clause 5.4 provided that the cover was only "in respect of acts, errors or omissions committed or alleged to have been committed after the Retroactive Date". Clause 5 continued:
"For the avoidance of doubt, the following coverage is provided in accordance with, and subject to, the terms of this Policy."
Clauses 5.5 to 5.9 then set out a type of "coverage in respect of any Claim made against the Insured" for matters such as breach of contract, trade practices, libel or slander, infringement of intellectual property and a proportion of joint venture or partnership liability.
Included in cl. 10 were the following definitions:
" 'Claim' shall mean:
(a)the receipt by the Insured of any written or verbal notice of demand for compensation made by a third party against the Insured.
(b)any writ, statement of claim, summons, application or other originating legal or arbitral process, cross-claim, counterclaim or third or similar party notice served upon the Insured."
And
" 'Insured' shall mean:
(a)the person, persons, partnership, company, corporation or other entity specified as the Insured in the Schedule including their predecessors in business; and
(b)any person who is, during Period of Insurance, a principal, partner, director or Employee of the Insured; and
(c)any former principals, partners, directors or Employees of the Insured."
Construction of the Policy
Both parties agreed that the wording of cl. 5.1 of Part B of the Gerling policy was unfortunate and that its meaning was far from clear. They also agreed that the fact that there were two limbs in cl. 5.1 indicated that each was dealing with a different topic. This consensus did not extend, however, to what cl. 5.1(b) did encompass. Mr Archibald QC, who appeared with Mr Waller of counsel for the plaintiff, submitted that cl. 5.1 did provide cover in respect of matters other than claims by third parties because cl. 5.1(b) encompassed first party claims. Mr Kaye QC, who appeared with Mr de Koning for the defendant, submitted that cl. 5.1(b) was an adjunct to cl. 5.1(a). The "loss or expense" in cl. 5.1(b) was limited to a loss or expense sustained as a consequence of a legal liability for a claim made against the insured by a third party.
Clause 5.1 of Part B of the Gerling policy is certainly not well drafted and whatever construction is given to that clause, it will not be an easy task to decide the precise scope of the cover which it provides. However, it should be noted that, at this stage, I do not have to undertake that task. All I have to do, is to decide whether cl. 5.1 of the Gerling policy only covers a claim or claims made against the plaintiff by a third party.
Mr Archibald submitted that there were three avenues of analysis leading to identification of the correct answer to the question. His first approach was to look at the genesis or provenance of the policy in order to understand the work being done by cl. 5.1 – the factual matrix approach to construction. In support of this approach he referred me to the judgment of Mason J, as he then was, in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales[2], where his Honour said:
"… when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of contract, except insofar as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting."[3]
Mr Archibald also referred me to a passage from the speech of Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen[4], which was concurred in by a majority of the members of the House of Lords. His Lordship said:
"No contracts are made in a vacuum: there is always a setting in which they have to be placed. The nature of what is legitimate to have regard to is usually described as 'the surrounding circumstances' but this phrase is imprecise: it can be illustrated but hardly defined. In a commercial contract it is certainly right that the court should know the commercial practice of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."[5]
[2](1982) 149 CLR 337
[3](1982) 149 CLR 337 at 352
[4][1976] 1 WLR 989
[5][1976] 1 WLR 989 at 995-996
Mr Archibald commenced a survey of the antecedent policies by going first to the contract of insurance between "McConnell Dowell Constructors (Aust) Pty Ltd and as per proposal" and C E Heath Underwriting and Agency Services Ltd ("Heath") for the period from 29 October 1992 to 30 June 1993, which had been negotiated on behalf of the McConnell Dowell group by its broker, Sedgwick Limited ("Sedgwicks"). Under this policy, which was headed "Professional Indemnity Insurance. Design & Construct Risk", the insurer agreed:
"1. To indemnify the Insured against any claim or claims which may be made against them or any of them and which are notified to the Company during the period specified in the Schedule, for breach of professional duty in the profession stated in the Schedule, by reason of any act, error or omission whenever committed unless limited by the retroactive date stated in the Schedule or wherever the same was or may have been committed or alleged to have been committed on the part of the Insured in the conduct and execution of the Professional Activities and Duties as defined herein.
2. In addition to pay the costs and expenses incurred with the written consent of the company in defence or settlement of any such claim …"
The following was stated in cl. 1 of Special Provisions:
"1.It is understood and agreed that, where the Insured act in more than one capacity in the same project that is where they are, at the same time:
(a)Building or Project Owners and Contractors and Designers, or
(b) Contractors and Designers, or
(c) Building or Project Owners and Designers,
and the Insured in any of these capacities incur loss, damage or expense arising from any act, error or omission in connection with the professional activities as defined herein, the Company agrees to consider it as if a claim had been made against the Insured provided that such loss, damage or expense is not insured by any other policy.
'Designers' in the above context shall extend to include all those professional activities and duties defined in and insured by this policy."
In the Schedule to this policy, a number of possible extensions to the cover were listed. "Loss of Documents" was included, but others such as "Trade Practices Act" were not. Further, it should be noted that the commencement date of this policy, 29 October 1992, is the retroactive date in the Gerling policy.
Mr Archibald submitted that cl.1 of Special Provisions in this policy, by a deeming process, allowed the insured to recover, in the absence of a third party claim, for loss, damage or expense incurred by it in connection with its professional activities. This type of insurance cover, first party cover, was said to be well known to the insurance world by 1992.[6]
[6]See, for example, Wimpey Construction UK Ltd v Poole [1984] 2 Lloyd's Rep 499
The 1993-94 policy between "McConnell Dowell Constructors (Aust) Pty Ltd and as per proposal" and Heath was also headed "Professional Indemnity Insurance. Design & Construct Risk" and was very similar to its predecessor. However, the first insuring clause had been extended so that it now read:
"To indemnify the Insured against loss sustained by them or any of them and any claim or claims which may be made against them or any of them …"
Once again, there was an extension for "Loss of Documents" but not for "Trade Practices Act" coverage.
No reference was made to any policy held by the McConnell Dowell group in 1994-95, apparently because it was missing.
There was a policy between "McConnell Dowell Corporation Ltd and/or Subsidiary Companies" and Heath Insurance or HIH Casualty and General Insurance Limited for the 1995-96 year. This policy ("the HIH policy") was headed:
"Professional Indemnity Insurance. Applicable to Design & Construct, Construction Management and Project Management Activities."
The insuring clause in the HIH policy read as follows:
"We the Insurers hereby agree to indemnify the Insured up to but not exceeding in the aggregate the amount stated in the Schedule as The Sum Insured:
(a)for any sum or sums which the Insured may became legally liable to pay arising from any claim first made against them and notified to insurer;
(b)for loss or expense sustained by them and first discovered, and notified to insurers,
during the Period of Insurance stated in the Schedule caused by any act, error or omission in the conduct and execution of the Professional Activities and Duties as defined and stated in the Schedule by the Professional staff of the Insured or any professional party employed or engaged or previously employed or engaged by the Insured."
The HIH policy contained a number of Exclusions, including three which were stated to be "In Respect of Insuring Clause (b) Only". They were:
"13.Project cost overrun associated with a claim under this Policy unless a claim or potential claim has been notified to the Insurers within 6 months of the act, error or omission the basis of the claim having occurred.
14.Loss arising out of any tender process unless such tender was based on the completed and final design documentation.
15. Loss occasioned by inadequate costing of any contract."
There were other provisions of the HIH policy which related specifically to insuring clause (b). The Condition relating to "The Insured's Duties in the Event of Claim" required the Insured to give immediate written notice to the Insurers:
"(c)of any actual loss or exposure which senior management believes has been sustained by them and for which coverage is provided under Insuring Clause (b)."
Conditions 6 and 8 read as follows:
"6. Onus of Proof:
Where a claim is made under this Insurance in respect of Insuring Clause (b) the burden of proving such claim hereunder shall be upon the Insured.
…
8. Retroactive Date:
Where a retroactive date is specified in the Schedule, this insurance will not apply to claims:
(a)first made against the Insured by reason of any act, error or omission committed or alleged to have been and
(b) in respect of coverage under Insuring Clause (b) committed,
prior to the said retroactive date."
It was submitted on behalf of the plaintiff that all of these provisions showed that insuring clause (b) in the HIH policy was dealing with first party claims quite independently of any third party claim being made. I agree with that submission.
The plaintiff submitted that the importance of the wording of the HIH policy could be seen when one looked at the sequence of events leading to the issue of the Gerling policy. On 23 May 1996 a quotation request was issued by Sedgwicks on behalf of the McConnell Dowell group. The cover sought was "General Liability (Global)". On 28 May 1996 there was a further quotation request issued by Sedgwicks in respect of "Professional Indemnity Insurance". This contained an item "Quotation Requirements", which read as follows:
"Please Quote for Extensions:
1. Amendment for Dishonesty Exclusion
2. Fidelity
3. Trade Practices Act."
On 14 June 1996, the defendant sent a quotation to Sedgwicks, following a meeting between representatives of the defendant and Sedgwicks. Although it was expressed to be in respect of the quotation request dated 23 May 1996, it in fact dealt with both of the quotation requests issued by Sedgwicks. The quotation set out a limit of indemnity of $15,000,000 for both umbrella liability and professional indemnity. In respect of the item "Wording", it was stated:
"As expiring but subject to the following: …"
A number of exclusions were then listed. The following statement also appeared in the list:
"Professional wording as expiring".
On one copy of the quotation some handwritten notes had been added at the end of the item "Wording". The dot points read: "one reinstatement", "continuity clause", "civil liability wording" and "based on QBE wording".
This was followed on 24 June 1996 by a further quotation from the defendant, following a telephone conversation between representatives of the defendant and Sedgwicks. The details of the quotation are similar, although the limit of indemnity in respect of professional indemnity was now "$10,000,000 in excess of the self insured retention" and the premium reduced accordingly. Another change was that, although the two references to wording "as expiring" remained, the following sentence had been added at the end of the item "Wording":
"Wording in respect to the professional liability to be agreed."
On 27 June 1996 Sedgwicks sent liability placing slips to the defendant which were accepted by the defendant on the same day. These slips set out that the Class of Insurance was "Umbrella Liability inc. Professional Indemnity" which covered in respect of "Professional Indemnity":
"Claims made against the Insured during the period of insurance for any civil liability whatsoever and howsoever incurred in the conduct of professional duty in the Business all as defined in the Policy."
The item described by the marginal note "Policy Form" read as follows:
"1. Umbrella liability
As expiring or to agreed [sic].
2. Professional Indemnity
To be agreed based on civil liability wording."
The Special Conditions for professional indemnity included:
"*Policy to include continuity clause
*One automatic reinstatement to apply
…
*Policy to include Trade Practices coverage."
A draft of the policy was sent by Sedgwicks to the defendant on 18 July 1996. Clause 5.1 appeared in that draft in its final form. Following agreement on 22 July about certain irrelevant changes, a further draft was sent by Sedgwicks to the defendant on 30 July 1996. By facsimile dated 2 August 1996, the defendant's representative then confirmed that: "the revised wording for the umbrella and professional liability ….. is acceptable".
Counsel for the plaintiff submitted that what the factual matrix showed was that the Gerling policy was importing into its cover the subject matter of the cover of the expiring HIH policy, which extended to both third party and first party claims, but also adding to it something that was not in the expiring policy, namely the trade practices cover. This meant that in respect of claims by third parties, breach of professional duty was being extended into a more general civil liability cover, and that the wording of this civil liability cover was to be based on the wording used by QBE Insurance Limited.
Counsel for the defendant, on the other hand, submitted that I should be construing the Gerling policy itself and not looking at previous policies which had significant differences to the Gerling policy. Mr Kaye further submitted that if one examined the sequence of events it was noticeable that, whilst the defendant's quotation referred to the wording "as expiring", the liability placing slips subsequently sent by the plaintiff's broker omitted any such reference and described the professional indemnity in terms of "civil liability", which he submitted meant a claims made type of cover. This illustrated the dangers, he submitted, of looking at what in effect were the negotiations between the parties.[7]
[7]See Prenn v Simmonds [1971] 1 WLR 1381 at 1384-85 per Lord Wilberforce
Before turning to Mr Archibald's second approach to the question of construction, I propose to consider his third approach and some of the other submissions advanced by the defendant.
Mr Archibald's third approach was to consider in some detail the wording of the 1995-96 HIH policy and the wording of a standard form QBE policy which was in evidence before me. That policy was headed "Professional Indemnity Insurance Policy. Civil Liability" ("the QBE policy"). Mr Archibald described the HIH policy and the QBE policy as the progenitors of the Gerling policy. He submitted that a comparison of the wording of these three policies showed that the Gerling policy continued the first party cover from the HIH policy and added to it the more general civil liability wording from the QBE policy.
Mr Archibald carefully analysed the various differences between the wording of the policies, using as aids a comparison of the QBE civil liability wording with the Gerling insuring clause wording and a comparison of the HIH insuring clause wording with the Gerling insuring clause wording. It is obvious that the QBE civil liability wording formed the basis of cl. 5.1(a) of the Gerling policy. In particular, it introduced the concept of a "Claim". However, the QBE policy wording did not include anything resembling the wording of cl. 5.1(b), which appears to be based on the "expiring" wording in the HIH policy.
What is also apparent is that in addition much of Part B of the Gerling policy has come from the QBE policy. Clauses 5.2 and 5.3 are virtually word for word with cl. 1.2 and cl. 1.3 of the QBE policy. The same can be said about the "for the avoidance of doubt" statement and cl. 5.5 to cl. 5.9 of the Gerling policy and the "for the avoidance of doubt" statement and cl. 1.5 to cl. 1.9 of the QBE policy. Looking at the remainder of the two policies, it can be seen that cl. 6 of the Gerling policy is clearly based on cl. 2 of the QBE policy, cl. 7.1 to cl. 7.9 of the Gerling policy on cl. 4 of the QBE policy, cl. 8 of the Gerling policy on cl. 5 of the QBE policy, cl. 9 of the Gerling policy on cl. 6 of the QBE policy and cl. 10 of the Gerling policy on cl. 7 of the QBE policy. Indeed, the wording of the Gerling policy has followed the wording of the QBE policy so closely that cl. 8.4 has actually retained the word "QBE" instead of replacing it with "The Company". Clauses 9.1 and 9.2(c) have also retained the references to Insuring Clause B or Insuring Clause (b). When one examines the wording and marginal headings of cl. 6, cl. 1.1 and cl. 1.2 of the QBE policy, it can be seen that the references to Insuring Clause B or Insuring Clause (b) in the Gerling policy are not a reference to cl. 5.1(b) but to cl. 5.2. As Mr Archibald submitted, virtually all of the Gerling policy in respect of civil liability has come, with minimal changes, from the QBE policy.
On behalf of the defendant, Mr Kaye submitted that the structure of the Gerling policy as a whole, and cl. 5 in particular, revealed that it was intended to provide cover only in respect of legal liability for claims made against the insured. Unless cl. 5.1(b) was read in this way, he submitted, key fundamental provisions of the Gerling policy would be inoperable and other important provisions would be rendered inapplicable to a claim made in respect of cl. 5.1(b), which produced an absurd result. Mr Kaye also submitted that the better approach to construction of the Gerling policy was to concentrate on the final wording of the policy. How that wording came about was of only marginal relevance.
Mr Kaye drew attention to the wording of what he called "the operative insuring clause" at the commencement of the policy (see paragraph 6 above). He emphasised that by this clause the defendant agreed to indemnify the plaintiff "against liability" and submitted that this meant that the policy was intended to provide liability indemnity cover to the insured. Part A of the policy was designed to provide indemnity in respect of liabilities caused by "occurrences" and Part B provided cover for liabilities incurred by the insured on a "claims made" basis.
In my opinion, this submission overemphasises the importance of the general wording of the broad contractual agreement between the parties (Mr Kaye's "operative insuring clause"). This general statement of the obligation to indemnify is expressed to be:
"in the manner and to the extent provided in each of the Insuring Agreements hereto subject always to the Limits of Liability, conditions, exclusions and other terms of the policy."
Mr Kaye submitted that the operative insuring clause governed the policy and that these detailed provisions added "specificity to the nature of the indemnity provided". I do not agree with this submission. In my opinion, one should go to the particular insuring clauses themselves in order to discover the nature of the indemnity provided by each of them. The specific words of each insuring clause should be what govern the relationship between the insured and the insurer, rather than the general statement of that relationship.
Further, to suggest that the Gerling policy only provides cover against a third party claim ignores the loss of documents extension which includes but is not limited to loss of documents which are the property of the insured (see cl. 6.4). Clearly, the operation of that clause does not always depend upon a third party making a claim against the insured.
In developing the submission that key fundamental provisions of the Gerling policy would be inoperable if the plaintiff's construction were upheld, Mr Kaye referred to the "Limit of Liability" and "Self Insured Retention" provisions in the Schedule (see paragraph 7 above). He emphasised that both referred to a "claim" and submitted that if the plaintiff's submissions were correct, there would be no limit of liability in respect of the cover provided by cl. 5.1(b) and no excess applicable to the cover provided under cl. 5.1(b). Mr Kaye further submitted that the same result was reached when one applied the plaintiff's construction to cl. 9 of the Gerling policy.
There are difficulties in the use of the two concepts, the upper case "Claim" and lower case "claim", in the Gerling policy. It appears to me that the draftsperson has sought to draw a distinction between a "Claim", as defined in cl. 10, which is clearly some form of demand made against the insured, and a "claim", which generally can be read as meaning a demand by the insured on the insurer for indemnity (see, for example, cl. 6.4(b)). Other provisions, however, such as cl. 6.8, cl. 9.1, cl. 9.2 and cl. 9.3 show that the upper and lower case distinction has not been consistently applied. Nevertheless, reading "claim" in the way I have suggested makes perfect sense, in my opinion, of the "Limit of Liability" and "Self Insured Retention" provisions. Probably the only way then to make sense of cl. 9 is to ignore on occasions the use of the upper case in "Claim", but I do not need to decide this point finally at this stage.
Mr Kaye correctly identified numerous provisions in Part B of the Gerling policy which would not apply to the cover provided under cl. 5.1(b), if the plaintiff's construction of the Gerling policy is correct. This is because they are expressed to be "in respect of any Claim made against the Insured". Thus, for example, cl. 5.5 to cl. 5.9, all of the exclusions contained in cl. 7, and cl. 8.1 are inapplicable to cl. 5.1(b). This was said to be an extraordinary and irrational result.
It is not altogether surprising, in my opinion, that cl. 5.5 to cl. 5.9 relate only to paragraph (a) of cl. 5.1, particularly when it is understood that they have been carried over from the QBE civil liability policy. It is also not surprising that, as required by cl. 8.1, an insurer would want to be notified as soon as practicable of "any Claim made against the Insured". A claim under cl. 5.1(b) must be notified to the insurer during the period of insurance. The different nature of a Claim against the insured under cl. 5.1(a) compared with a claim by the insured under cl. 5.1(b) would explain the more onerous requirement.
What is more difficult to understand is why none of the exclusions would apply to the cover under cl. 5.1(b), if the plaintiff's construction is correct. Mr Kaye was entitled, in my opinion, to point to possible anomalies resulting from that construction. The cover under cl. 5.1(b) would arguably be exceedingly wide if it is not subject to any of the exclusions. This consideration would suggest that there is merit in the defendant's submission on this point.
Although it is not crucial to the outcome of the hearing, I should mention that I do not accept Mr Kaye's submission that if the plaintiff's construction is correct, the requirement in cl. 8.6(a) of the Gerling policy that the insured "use due diligence and do and concur in doing all things reasonably practicable to avoid or diminish any liability thereunder" is not applicable to cl. 5.1(b). Equally, part of cl. 8.6(b) could also be read as applying to the cover provided by cl. 5.1(b) – "The Insured shall frankly and honestly disclose to the Company all relevant information … to enable the Company to determine its liability under this Policy". There is no reason, in my opinion, to read either of these provisions as not applying to cl. 5.1(b).
Mr Kaye also submitted that there had been other significant changes made to the wording of the insuring clause in the HIH policy compared with what was now found in the Gerling policy. He argued that no longer was the insurer's liability to indemnify the insured limited to loss "caused by any error or omission in the conduct and execution of the Professional Activities and Duties as defined and stated in the Schedule by the Professional staff of the Insured". The quoted words are certainly not repeated in cl. 5.1(b) of the Gerling policy. This is an important point and lends considerable weight to the defendant's argument. On the other hand, it may be that some such limitation can be implied or read into cl. 5.1(b). Whether or not this is correct, must await decision on another day.
I return to Mr Archibald's second approach to identifying the correct answer to the question – examining the words of cl. 5.1(b) on their face but in the light of the surrounding provisions of the Gerling policy. In the end, this is what construction of the clause is all about.
The first difficulty in construing cl. 5.1(b) of the Gerling policy is that read literally it does not make grammatical sense. Applying the introductory words to paragraph (b) one is confronted by the following:
"The Company agrees to indemnify the Insured against … for loss or expense sustained by them and first discovered and notified to The Company during the Period of Insurance."
Mr Archibald submitted that the merging of the civil liability wording from the QBE policy with the wording of the HIH policy explained the inappropriate placement of the word "against" at the end of the introductory words. In the QBE policy the insuring clause read:
"QBE agrees to indemnify the Insured against legal liability for any Claim …"
whereas in the HIH policy paragraph (a) of the insuring clause provided that the Insurers would indemnify the Insured:
"(a)for any sum or sums which the Insured may become legally liable to pay arising from any claim first made against them and notified to Insurers, …"
Mr Archibald submitted that, by mistake, the word "against" had been retained in the introductory words in cl. 5.1 of the Gerling policy. This problem could be overcome, Mr Archibald submitted, either by disregarding the word "for" at the beginning of paragraph (b), or by moving the word "against" from the introductory words into paragraph (a) itself. Either way, both paragraph (a) and paragraph (b) of cl. 5.1 would then make sense.
Mr Kaye submitted that the word "for" in cl. 5.1(b) was in its right place. It was there for a purpose and was not simply a drafting error. As I understood the submission, Mr Kaye said that cl. 5.1 should be read as though the words "legal liability" appeared at the end of the introductory words so that each limb would then commence with the word "for". However, when I suggested to him that it did not make sense to talk about indemnifying the insured against legal liability for loss or expense sustained by the insured, Mr Kaye agreed. His answer was that the wording of cl. 5.1 was a poor attempt at expressing the idea that the insurer would indemnify the insured for loss or expense sustained by the insured as a consequence of legal liability. Thus, the defendant's proposed answer to the against/for dilemma still did not make sense of cl. 5.1(b).
In my opinion, the correct approach to construing this part of cl. 5.1 of the Gerling policy is to read the word "against" as part of paragraph (a). This is the simplest change required to make sense of the clause. Moreover, an examination of the wording of what I consider to be the clear sources of the two paragraphs of cl. 5.1 supports this reading (see paragraph 42 above).
The defendant's approach also requires that words such as "as a consequence of legal liability" be added after the words "for loss or expense sustained by them" in cl. 5.1(b). They would need to be added, in my opinion, when construing cl. 5.1 in the way sought by the defendant, not only to make sense of paragraph (b), but also because one is not driven to the conclusion that paragraph (b) is an adjunct of paragraph (a) unless that linkage is added. In my opinion, these words should not be read into paragraph (b) as suggested by the defendant.
The next point is what is meant by the words "loss or expense". It must be something different from "legal liability for any Claim" as otherwise there would have been no need for the separate paragraph in the insuring clause. But it cannot be read literally. As Mr Kaye correctly submitted, to do so would provide far wider insurance to the plaintiff then the cover which could, on any view, have been sensibly contemplated by the parties. Unless given appropriate limitation, the phrase "loss … whatsoever and howsoever incurred in the conduct of the Business" might mean any financial loss suffered by the insured on any project. Similarly, a literal and unlimited construction of the word "expense" would mean that any business expense incurred by the insured on any project would be covered. This cannot be a correct construction of cl. 5.1(b).
As stated above, Mr Kaye's answer was to construe cl. 5.1(b) as an adjunct to cl. 5.1(a), thus limiting "loss or expense" to that sustained as a consequence of a legal liability incurred by the insured. On the other hand, although it was not fully spelt out, the plaintiff's approach appeared to construe cl. 5.1(b) as limited to "loss or expense" sustained by the insured in one capacity as a result of its own breach of professional duty in another capacity. Both of these approaches would place some restriction on the words "loss or expense".
The next word which requires some examination is "them". In my opinion, there is really no doubt that this refers to "the Insured" in the introductory words. It is clear from the description of "the Insured" in the Schedule and the definition of the "Insured" in cl. 10 of the Gerling policy (see paragraph 6 above) that "the Insured" is a plural concept not singular. If support is needed for this conclusion, the wording of paragraph (a) of the insuring clause in the HIH policy makes it clear that "them" meant "the Insured". When the merging of the wording of the HIH policy and the wording of the QBE policy occurred, the link between "the Insured" and "them" in paragraph (a) of the insuring clause was lost. Nevertheless, in my opinion, "them" still means "the Insured" in cl. 5.1(b) of the Gerling policy.
The most important guide to the proper construction of cl. 5.1(b) is, in my opinion, the presence of the words "first discovered". One of the meanings of "discover" given by the Shorter Oxford Dictionary is "to obtain sight or knowledge of for the first time; to find out." In my opinion, one does not "first discover" a loss or expense arising out of a third party claim or a loss or expense sustained as a consequence of a legal liability incurred by the insured to a third party. One may, however, "discover" that one's own business has sustained "loss or expense". The insured learns of a third party claim by receiving a letter of demand or a writ. The insured knows about the loss or expense sustained as a consequence of a legal liability because it has been intentionally incurred following a claim by the third party. The words "first discovered" are not apt for these situations, but they are for the situation where the insured chances upon or realises that it has overlooked that it has been suffering loss from some internal problem. Mr Archibald submitted that "discovery" is something to do with your own affairs whereas third party claims are to do with the affairs of someone else who brings the claims to your attention.
Mr Archibald further submitted that the defendant's submissions did not deal with the words "first discovered". The adjunct argument simply ignored the point made by the plaintiff. The presence of the words "first discovered" is a strong indication, in my opinion, that the proper construction of cl. 5.1(b) of the Gerling policy is that it covers first party claims. Otherwise, it would not have been necessary to include the words "first discovered". This construction is consistent with the genesis of cl. 5.1(b) of the Gerling policy, which is to be found in paragraph (b) of the insuring clause in the HIH policy.
Conclusion
Whatever approach one adopts to the construction of cl. 5.1 of the Gerling policy, it is likely that the result will be unsatisfactory. The submissions on behalf of the defendant point to some serious problems with the plaintiff's construction and numerous difficulties are likely to be encountered when it comes to applying the clause to the actual circumstances of the dispute between the plaintiff and the defendant. Nevertheless, at this stage, all I have to do is to answer the question set down for separate determination. Doing the best I can to construe the words of cl. 5.1 themselves, assisted by an understanding of the factual matrix relating to the Gerling policy, I have concluded, for the reasons set out above, that the answer to the question set down for separate determination is "No". Clause 5.1 of Part B of the Gerling policy does not only cover a claim or claims made against the insured by a third party. This is because paragraph (b) covers first party claims.
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