Zurich Australian Insurance Limited v Metals & Minerals Insurance Pte Ltd
[2007] WASC 62
•16 MARCH 2007
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL
CITATION: ZURICH AUSTRALIAN INSURANCE LIMITED -v- METALS & MINERALS INSURANCE PTE LTD [2007] WASC 62
CORAM: JOHNSON J
HEARD: 22 OCTOBER & 18 DECEMBER 2003
DELIVERED : 16 MARCH 2007
FILE NO/S: CIV 1679 of 2002
BETWEEN: ZURICH AUSTRALIAN INSURANCE LIMITED
Plaintiff
AND
METALS & MINERALS INSURANCE PTE LTD
Defendant
FILE NO/S :CIV 1277 of 2003
BETWEEN :SHAUN PATRICK NOLAN
Plaintiff
AND
HAMERSLEY IRON PTY LTD (ACN 004 558 276)
DefendantSPENO RAIL MAINTENANCE AUSTRALIA PTY LTD
Third PartyZURICH AUSTRALIAN INSURANCE LIMITED
Fourth PartyACN 009 064 162
Fifth Party
FILE NO/S :CIV 2243 of 2003
BETWEEN :METALS AND MINERALS INSURANCE PTE LTD
Plaintiff
AND
SPENO RAIL MAINTENANCE AUSTRALIA PTY LTD
Defendant
Catchwords:
Indemnity insurance - Right to contribution arising from double insurance - Effect of "underlying insurance" or "excess" clauses - Effect of s 45 Insurance Contracts Act on underlying insurance clauses - Equitable bar to contribution - Duty of utmost good faith - Waiver of right of subrogation - Method of assessing amount of contribution - Maximum potential liability method - Independent actual liability method - Res judicata - Effect of principle where there exists a primary and secondary obligation to indemnify - Subrogation
Legislation:
Acts Interpretation Act 1901 (Cth), 15AA, 15AB
Insurance Contracts Act 1984(Cth), s 13, s 14, s 45
Result:
CIV 1679 of 2002: Judgment for the plaintiff
CIV 2243 of 2003: Judgment for the plaintiff
CIV 1277 of 2002: Application to strike out Writ of fi.fa dismissed
Category: A
Representation:
CIV 1679 of 2002
Counsel:
Plaintiff: Mr J E Maconachie QC & Mr G C Richards
Defendant: Mr R C White QC & Mr M L Williams
Solicitors:
Plaintiff: Srdarov Richards Burton
Defendant: Phillips Fox
CIV 1277 of 2003
Counsel:
Plaintiff: Mr Y Radic
Defendant: Mr R C White QC & Mr M L Williams
Third Party : Mr N Corboy SC & Mr S F Popperwell
Fourth Party : Mr J E Maconachie QC & Mr G C Richards
Fifth Party: No appearance
Solicitors:
Plaintiff: Separovic & Associates
Defendant: Phillips Fox
Third Party : Pynt & Partners
Fourth Party : Srdarov Richards Burton
Fifth Party: No appearance
CIV 2243 of 2003
Counsel:
Plaintiff: Mr R C White QC & Mr M L Williams
Defendant: Mr N Corboy SC & Mr S F Popperwell
Solicitors:
Plaintiff: Phillips Fox
Defendant: Pynt & Partners
Case(s) referred to in judgment(s):
AFG Insurance Ltd v Mayor Councillors and Citizens of City of Brighton (1972) 126 CLR 655
Agapitos v Agnew [2003] QB 556
Albion Insurance Co Ltd v Government Insurance Office of NSW (1969) 121 CLR 342
American Surety Co of New York v Wrightson (1910) 103 LT 663
Austin v Zurich General Accident and Liability Insurance Company Ltd [1945] KB 250
Australian Eagle Insurance Co Ltd v Mutual Acceptance (Insurance) Pty Ltd (1983) 3 NSWLR 59
Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd v Zurich Australian Insurance Ltd, unreported; DCt of Qld; 1 May 1992
Buckland v Johnson (1854) 15 CB 145
Buckland v Palmer [1984] 1 WLR 1109
Burnand v Rodocanachi Sons & Co 7 AC 333
Caledonia North Sea Ltd v Norton (No 2) Ltd (in liq) [2002] 1 Lloyd's Rep 553
Carter v Boehm (1766) 97 ER 1162
Castellain v Preston (1883) 11 QBD 380
CE Heath Casualty & General Insurance Ltd v Grey & Ors (1993) 32 NSWLR 25
Clissold v Cratchley [1910] 2 KB 244
Commercial & General Insurance Co Ltd v Government Insurance Office (NSW) (1973) 129 CLR 374
Commercial Finance Corp Ltd v Merchants Casualty Insurance Co [1931] 1 DLR 212
Commercial Union Assurance Co Ltd v Hayden (1977) QB 804
Cubitt v Gamble (1919) 35 TLR 223
Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1
Drayton v Martin (1996) 67 FCR 1
East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400
Edwards v Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113
Ex parte Fewings (1883) 25 Ch D 338
GIO Australia Ltd v P Ward Civil Engineering Pty Ltd (2000) NSWSC 371
Godin v London Assurance Co (1758) 97 ER 419
Government Insurance Office of New South Wales v Crowley [1975] 2 NSWLR 78
GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83
Groom v Crocker [1939] 1 KB 194
HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd & Anor (2000) 11 ANZ Insurance Cases 61‑477
Insurance Commission of Western Australia v Kightly (2005) 30 WAR 380
Kelly v New Zealand Insurance Company Ltd (1993) 7 ANZ Ins Cas 61-197
Kelly v New Zealand Insurance Company Ltd (1996) 9 ANZ Insurance Cases 61‑317
Khoury v Government Insurance Office of New South Wales (1984) 165 CLR 622
Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (The "Star Sea") [2003] 1 AC 469
Mills v Meeking (1990) 169 CLR 214
Napier v Hunter [1993] AC 713
National Employers Mutual General Insurance Association Ltd v Haydon [1979] 2 Lloyd's Rep 235
National Employers Mutual General Insurance Association Ltd v Haydon [1980] 2 Lloyd's Rep 149
National F Insurance Co v McLaren 12 OR 682
Newby v Reed (1763) 96 ER 237
Re Calf & Sun Insurance Office [1920] 2 KB 366
Re Zurich Australian Insurance Ltd (1999) 10 ANZ Ins Cas 61-429
SGIO v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228
Simpson & Co v Thompson (1877) 3 AC 279
Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291
State Fire Insurance General Manager v Liverpool and London and Globe Insurance Co Ltd [1952] NZLR 5
Stretch v State Insurance General Manager (1984) 3 ANZ Ins Cas 60‑577
Sydney Turf Club v Crowley [1971] 1 NSWLR 724
Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR 436
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
Vermulen v SIMU Mutual Insurance Association (1987) 4 ANZ Ins Cas 60‑812
Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290
Wyllie v The National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324
JOHNSON J: Of the three matters before the Court, two actions were commenced by Writ of Summons issued out of this Court seeking various forms of relief. The third action is an action for damages for personal injuries which was commenced in the District Court and transferred to this Court for the purpose of determining the defendant's third party proceedings. The connection between these actions is best explained by setting out the background circumstances and the nature of the various actions.
Background
Zurich Australian Insurance Limited ("Zurich") and Metals & Minerals Insurance Pte Ltd ("MMI") are both insurance companies. Speno Rail Maintenance Australia Pty Ltd ("Speno") is a company operating as rail grinding contractors. Hamersley Iron Pty Ltd ("Hamersley") carries on the business of mining, manufacture, transportation and loading of iron ore.
Speno entered into a contract with Hamersley to carry out work for Hamersley which was undertaken by, among others, Shaun Nolan and Damien Oatway, both of whom were employees of Speno. The contract entered into by Hamersley and Speno ("the Hamersley‑Speno Contract") required, amongst other things, the following:
(a)That Speno arrange its public liability insurance to include Hamersley's interest as a principal; and
(b)That Speno be solely liable for and indemnify and hold harmless Hamersley against common law liability for personal injury to Speno's employees engaged in the contract works and arising from the performance of the works.
Speno and Zurich entered into a contract of insurance ("the Speno Policy") to provide Hamersley with the public liability insurance required under the Hamersley‑Speno Contract. Although the position of one of the parties is that this particular contract of insurance is, in fact, a contract between Zurich, as insurer, and Hamersley, as insured, for simplicity of reference I have described it as the Speno Policy on the basis that Speno arranged the policy with Zurich. The description does not reflect a view on the nature of any party's involvement in the policy. The maximum liability of Zurich under the Speno Policy was $2 million.
Hamersley had entered into a contract of insurance with MMI ("the Hamersley Policy") which provided public liability insurance cover for Hamersley. Under the policy MMI agreed to indemnify Hamersley against, amongst other things, any liability to pay damages for personal injury occurring in connection with Hamersley's business. The maximum liability of MMI under the Hamersley Policy was $200,000.
Each of these contracts and policies were in force on 24 May 1995 when Nolan and Oatway were injured while employed by Speno and performing work carried out by Speno under the Hamersley‑Speno Contract. The accident which caused the injuries to Nolan and Oatway were caused as a result of the negligence of Hamersley.
Nolan and Oatway instituted separate proceedings in the District Court against Hamersley alleging negligence and seeking damages for their injuries (respectively "the Nolan action" and "the Oatway action"). Hamersley admitted negligence and sought indemnity from Speno under the Hamersley‑Speno Contract for its liability in respect of Nolan and Oatway's damages claims. Speno claimed against Zurich pursuant to the Speno Policy. Speno and Zurich were joined as the third and fourth parties respectively to the Nolan proceedings. At a later point, Hamersley also claimed directly against Zurich under the Speno Policy.
After trial and an appeal in the Nolan action, it was ordered that:
(a)Hamersley pay Nolan the sum of $1,110,186.35; and
(b)Speno and Zurich indemnify Hamersley in respect of that sum.
Of the issues raised on the appeal in the Nolan action, a number related to obligations of indemnity and contribution between Zurich and Speno and between Speno and Hamersley arising from the terms of the Speno Policy and the Hamersley‑Speno Contract. Speno appealed against the order that it must indemnify Hamersley on the basis that the clause of the Hamersley‑Speno Contract requiring Speno to ensure that all necessary insurances are taken out include Hamersley as co‑insured, prevented the indemnity clause of the contract from applying where Hamersley is entitled to the benefit of the insurance arranged by Speno. That argument found no favour with the Full Court and the order that Speno indemnify Hamersley remained in effect: Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291 per Ipp J at 312, per Malcolm CJ at 300 and Wheeler J at 325.
Another issue addressed on appeal was Zurich's liability to indemnify Speno. It was held that Zurich was not so liable because the policies issued to Speno did not indemnify it against that liability. Speno's argument that Zurich's denial of liability to indemnify Speno was a breach of Zurich's duty of good faith was rejected by the Full Court: per Malcolm CJ (at 306), per Ipp J (at 311, 313), per Wheeler J (at 328 ‑ 329).
Zurich maintained that it was entitled to a contribution from Speno on the basis that Speno's liability to indemnify Hamersley under the Hamersley‑Speno Contract was a co‑ordinate liability to Zurich's obligation to indemnify Hamersley under the Speno Policy. The decision of the Full Court was that Zurich was not entitled to a contribution from Speno because the liability of Speno was not co‑ordinate with that of Zurich: per Wheeler J (at 327), per Malcolm CJ (at 300) and per Ipp J (at 312). One aspect of the reasoning behind that conclusion was that Zurich's liability arose from a contract of insurance and Speno's did not: per Ipp J (at 312). It was held that the use of the word "indemnity" in the Hamersley‑Speno Contract did not convert an ordinary contractual provision into an insurance policy or place the contractual provision on the same footing as an insurance policy: per Wheeler J (at 327).
As a result of judgments and agreed settlements in the Nolan and Oatway proceedings and as a result of the indemnity under the Speno Policy, Zurich paid $1,110,186.30 in damages to Nolan, $25,000.00 in damages to Oatway in settlement of his claim, interest and the legal costs of trial and appeal to a total of $1,259,969.07 ("the indemnified amounts").
Zurich then commenced proceedings in this court, action CIV 1679 of 2002 ("the Zurich action"), against MMI claiming a contribution from MMI on a rateable proportion for the indemnified amounts paid by Zurich, calculated either on the maximum potential liability method or the independent actual liability method. The basis of Zurich's claim is that, as MMI is liable to indemnify Hamersley for its liability to Nolan and Oatway under the Hamersley Policy, which is the same liability that Zurich has already indemnified Hamersley for, Hamersley is doubly insured for its liability to Nolan and Oatway, and Zurich is therefore entitled to a contribution.
In its defence, MMI relies on a clause in the Hamersley Policy headed "Special Clause" which provides that, in the event of Hamersley being indemnified under insurance coverage effected on Hamersley's behalf by a third party such as a contractor, the insurance afforded by the Hamersley Policy is for excess insurance over the applicable limit of indemnity of the underlying insurance policy. Consequently, MMI denies that Hamersley is doubly insured and that Zurich is entitled to a contribution from MMI. Further, MMI pleads that the relief Zurich seeks is not available in equity because, as MMI can subrogate Hamersley's rights against Speno, Zurich's claim circumvents the effect of Zurich's agreement to waive its rights of subrogation against Speno.
MMI, exercising a right of subrogation, caused to be issued out of the District Court in action number 1583 of 1996 ("the Nolan action") a Writ of fieri facias ("fi.fa") to be executed against Speno. Shortly after, the defendant's third party proceedings in the Nolan action were referred to this Court. Speno's response to MMI was to issue a Chamber Summons to strike out the Writ of fi.fa or stay its execution until the hearing of the Zurich action.
MMI then commenced proceedings in this court, action CIV 2243 of 2003 ("the MMI Action"), seeking a declaration that it is entitled to recover from Speno in the event that Zurich becomes entitled to a payment from MMI by way of contribution in the Zurich action. Speno's response to MMI's claim, inter alia, is to assert that Hamersley has no remaining liability to Nolan in respect of which it can seek to be indemnified and consequently has no remaining right which can be the subject of execution against Speno and no remaining right to claim an indemnity against Speno under the Hamersley judgment. As a result, Speno maintains that there is no right against Speno to which MMI can be subrogated and it would therefore be an abuse of process for MMI to seek execution against Speno in the name of Hamersley.
I will deal with each of the individual actions in turn, although some issues requiring determination are common to more than one action. With respect to certain issues, the need to determine them is dependent on findings made in relation to other issues. However, because of the potential for appeals, I propose to determine every issue raised at the hearing.
The Zurich action
In this action, Zurich seeks a declaration that Hamersley was doubly insured by Zurich and MMI, under the Speno and Hamersley policies respectively, in relation to the liability of Hamersley to Nolan and Oatway. Zurich further seeks payment from MMI by way of contribution calculated on the maximum potential liability method or, alternatively, on the independent actual liability method.
MMI's defence to the Zurich claim is that MMI acknowledged under a clause of the Hamersley Policy with the primary heading "Special Clause" and a secondary heading of "Underlying Insurance" ("the underlying insurance clause") that it was customary for Hamersley to effect, or for other parties (including contractors) to effect on Hamersley's behalf, insurance coverage specific to a particular project, agreement or risk that was not specifically effected to be insurance excess to the Hamersley Policy. This underlying insurance clause provides that, in the event of Hamersley being indemnified under insurance coverage effected on its behalf with respect to a particular project, in respect of a claim for which indemnity is available under the Hamersley Policy, the insurance afforded by the Hamersley Policy is excess insurance over the applicable limit of indemnity of the underlying insurance policy. If that proposition is accepted, then there is no double insurance and no right in Zurich to a contribution from MMI. In reply, Zurich pleads that the underlying insurance clause relied on by MMI is rendered void by s 45 of the Insurance Contracts Act 1984 (Cth) ("the IC Act") and cannot be relied upon.
MMI further pleads that the relief sought by Zurich is not available in equity because of the following matters:
1.Speno's liability under the judgment in the Nolan action is further to the indemnity clause in the Hamersley‑Speno Contract;
2.The Speno Policy includes a clause under which Zurich waives any rights of subrogation it has against Speno and cannot subrogate Hamersley's rights against Speno under the judgment;
3.MMI is entitled to subrogate to Hamersley's rights against Speno under the judgment and enforce against Speno an indemnity equalling any contribution MMI is ordered to make to Zurich;
4.Zurich's claim against MMI therefore purports to circumvent the effect of Zurich's agreement to waive its rights of subrogation against Speno.
MMI maintains that, as a claim for contribution is a claim for equitable relief, as a result of these factors it would be inequitable for Zurich to make such a claim. This defence to Zurich's claim was referred to at the hearing as the "equitable bar to contribution" defence. In reply to this plea, Zurich denies that the Speno Policy contained a clause by which Zurich waived its rights of subrogation against Speno and further denies that there was any agreement to waive its rights of subrogation against Speno.
Finally, in its defence, MMI denies that any contribution to which Zurich may be entitled should be calculated on the maximum potential liability method of apportionment.
1. Right to contribution
It is not disputed that when Nolan and Oatway were injured by Hamersley's negligence on 24 May 1995, Hamersley was insured against that risk by Zurich: see Speno Rail Maintenance Australia Pty Ltd (supra) per Malcolm CJ (at 306), per Ipp J (at 309), per Wheeler J (at 324). It is also the case that, under the Hamersley Policy, MMI agreed to indemnify Hamersley against, among other things, such sums as Hamersley became legally liable to pay arising out of personal injury in connection with Hamersley's business. The policy related only to personal injury occurring between certain dates but the injury to Nolan occurred within those dates so that particular qualification presented no bar. Therefore, Zurich contends that the respective insurance policies of Zurich and MMI insure the same risk and hence their liabilities are co‑ordinate, which is the basis in equity for contribution. MMI submits, as noted above, that, by virtue of the underlying insurance clause in the Hamersley Policy, the Hamersley Policy operates as an excess policy over the limit of indemnity under the Speno Policy and hence the liabilities are not co‑ordinate.
The decision of the High Court in Albion Insurance Co Ltd v Government Insurance Office of NSW (1969) 121 CLR 342 is referred to by Zurich as authority for the proposition that where there are co‑ordinate liabilities there is a right to contribution. The oft cited statement of principle of the majority in Albion Insurance Co Ltd (supra) is in these terms (per Barwick CJ, McTiernan and Menzies JJ (at 345)):
"There is double insurance when an assured is insured against the same risk with two independent insurers. To insure doubly is lawful but the assured cannot recover more than the loss suffered and for which there is indemnity under each of the policies. The insured may claim indemnity from either insurer. However, as both insurers are liable, the doctrine of contribution between insurers has been evolved … The doctrine, however, only applies when each insurer insures against the same risk, although it is not necessary that the insurances should be identical."
In the same case, Kitto J noted that the same point in regard to accident insurance is made by saying that each policy must insure the same person against the very loss that in the event he has sustained, or the very liability that in the event he has incurred: (at 350).
In the present case, it is not the general principle which is in dispute. As the majority observed in Albion Insurance Co Ltd (supra) (at 347):
"It seems to us that it is not the principle but the application of the principle which has given rise to the problem that now falls for decision."
MMI correctly observes that, absent an obligation in both MMI and Zurich to indemnify Hamersley in respect of its liability to Nolan and Oatway, there can be no entitlement to contribution: see Speno Rail Maintenance Australia Pty Ltd (supra) (at 325) per Wheeler J. MMI maintains that it has no obligation to indemnify Hamersley against its liability to Nolan and Oatway because of the operation of the underlying insurance clause in the Hamersley Policy which is in these terms:
"Underlying Insurance
Underwriters acknowledge that it is customary for the Insured to effect, or for other parties (including joint venture partners, contractors and the like) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk.
In the event of the Insured being indemnified under such other Insurance effected by or on behalf of the Insured (not being an Insurance specifically effected as Insurance excess of this Policy) in respect of a Claim for which Indemnity is available under this Policy, such other Insurance hereinafter referred to as Underlying Insurance, the Insurance afforded by this Policy shall be Excess Insurance over the applicable Limit of Indemnity of the Underlying Insurance, but subject always to the terms and conditions of this Policy.
In the event of cancellation of the Underlying Insurance or reduction or exhaustion of the Limits of Indemnity thereunder, this Policy shall:
(i)in the event of reduction pay the excess of the reduced underlying limit
(ii)in the event of cancellation or exhaustion continue in force as underlying insurance
but subject always to the terms and Conditions of this Policy."
MMI's position is that the combined effect of Hamersley's entitlement to an indemnity under the Speno Policy and the underlying insurance clause is that the Hamersley Policy operates as an excess policy over the limit of indemnity under the Speno Policy. Consequently, the respective liabilities of Zurich and MMI are not co‑ordinate but sequential as Hamersley would not have been entitled to indemnity under the Hamersley Policy until the limit of Zurich's liability of $2 million had been reached. As the indemnified amounts are less than $2 million, Zurich is not entitled to contribution from MMI.
The decision of the Court of Appeal of New South Wales in Australian Eagle Insurance Co Ltd v Mutual Acceptance (Insurance) Pty Ltd (1983) 3 NSWLR 59 is referred to in support of MMI's interpretation of the effect of the underlying insurance clause. In that case, the leading judgment was written by Priestley JA, with whom Hutley AP agreed, as did Mahoney JA who provided additional reasons. The facts were that the owner of a house damaged by fire was insured under a householder's policy with the respondent ("Mutual"), pursuant to which Mutual paid the owner $47,700 in respect of the fire damage. The owner also had a home insurance policy with the plaintiff ("Eagle") in respect of the same building. Mutual sought a contribution from Eagle of one half of the amount paid to the owner on the basis that Eagle was a co‑insurer with respect to the same risk. The central question before the Court was whether Eagle could properly be so described in circumstances where the Eagle policy, which indemnified the owner to a limit of $25,000, included under the heading "General Exclusions" the following clause:
"This policy does not cover:
2.any loss of damage or liability which is insured by or but for the existence of this policy would be insured by any other policy or policies except in respect of any excess beyond the amount which would have been payable under such other policy or policies had this insurance not been effected."
Priestley JA considered and applied the decision of the New Zealand Court of Appeal in State Fire Insurance General Manager v Liverpool and London and Globe Insurance Co Ltd [1952] NZLR 5 (at 29) where Hutchison and Cooke JJ, who wrote a joint judgment, construed the "excess" clause according to its terms, rather than in accordance with what was described as difficult to reconcile principles set out in a number of English cases, most of which dealt with the situation where both policies contained an "excess" clause. Hutchison and Cooke JJ read the clause as showing that the insurer was not indemnifying the person against the same risk as the primary insurer. They held that the policy with the "excess" clause placed no obligation on the insurer to indemnify the insured until the insured's own insurer had first been called upon for the indemnity provided by its policy and then claimed contribution. At that point, the insured's own insurer must take the "excess" clause as it finds it.
Priestley JA concluded that the Eagle policy, according to its terms, provided indemnity against damage due to fire to a limit of $25,000 until the owner obtained the other insurance policy at which point the "excess" clause operated to exclude any indemnity to the owner except to the extent of any excess as defined by that clause: (at 65). His Honour further considered that similar considerations applied to the Eagle policy as those acted upon by Hutchison and Cooke JJ in State Fire Insurance General Manager (supra) which provided a guide to, and a basis for, reaching a conclusion opposite to that reached in the English cases: (at 71). The decision of the Court was that Mutual was not entitled to contribution as Eagle was not indemnifying the owner against the same risk: (at 71 ‑ 72).
Atkin LJ in Re Calf & Sun Insurance Office [1920] 2 KB 366 at 382 protested that one case of construction of an insurance policy should not be treated as an authority in another unless the language and the circumstances are substantially identical. However, in my view, the terms of the relevant portion of the underlying insurance clause in the Hamersley Policy are sufficiently similarly worded to the "excess" clause in State Fire Insurance General Manager (supra) to entitle this Court to reach the same conclusion as to its effect. In any event, I believe that the natural meaning of the wording of the underlying insurance clause in the Hamersley Policy leads to the same result.
In fact, it is common ground between the parties that in order for an entitlement to contribution to arise, their liabilities must be co‑ordinate. Neither party cavils with the fundamental propositions in Albion Insurance Co Ltd (supra) (at 345 ‑ 346; 352) and in the decision of the Full Court in Speno Rail Maintenance Australia Pty Ltd (supra) and also in numerous other decisions on this issue.
It is also common ground that if the Hamersley Policy is made into an excess policy by the underlying insurance clause, then the two liabilities will not be co‑ordinate, they will be sequential with Zurich being liable for the first $2 million.
The dispute arises from the fact that the decision in Australian Eagle Insurance Co Ltd (supra) was made prior to the passing of the IC Act, which includes s 45, which is in these terms:
"45 'Other insurance' provisions
(1)Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.
(2)Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first‑mentioned contract."
Zurich denies that the Hamersley Policy is a true excess of loss policy. It is said that the clause is too general: it speaks in futuro; it lacks definition; and it fails to avoid the mischief s 45 is designed to prevent. According to Zurich, for the Hamersley Policy to be a true policy of that type, MMI must bring the policy within s 45(2) of the IC Act which Zurich asserts MMI is unable to do. Therefore, Zurich's position, as pleaded, is that the underlying insurance clause in the Hamersley Policy is void by virtue of the operation of s 45(1) of the IC Act and, as such, cannot be relied upon by MMI.
The merit in Zurich's contentions is dependent on categorising the Hamersley Policy as a true excess of liability policy which in turn depends on whether the underlying insurance clause offends s 45(1) and, if it does, whether it is "saved" by s 45(2).
Counsel for Zurich submits that the meaning and purpose of s 45 is plain. I am not convinced that is so. For example, the expression "the insured has entered into some other contract of insurance" immediately raises consideration of the ways in which an insured can come to be covered by another insurance contract and whether it can be said that in all such cases that the insured "entered into" the other contract of insurance. Fortunately, in the event that the Court did not, without more, share Zurich's view that the meaning of s 45 is clear on its terms, counsel for Zurich invited the Court to consider the history behind this particular enactment, including the position in the insurance industry prior to the enactment which is said to have prompted the inclusion of s 45 in the IC Act. In that regard, the Court was invited to consider the available extrinsic material which is said to address these issues and assist in the ascertainment of the meaning of the section. Section 15AB(2)(e) of the Acts Interpretation Act 1901 (Cth), which is the authority to refer to extrinsic material, provides that extrinsic material includes explanatory memoranda relating to the Bill containing the provision, or any other relevant document, that was provided to the members of either House of Parliament by the Minister. The latter material would include the content of the Australian Law Reform Commission ("ALRC") Report on Insurance Contracts (No 20, 1982) ("the ALRC Report"), which is expressly referred to in the Explanatory Memorandum relevant to the IC Act. In the circumstances of this matter, I note that s 15AB requires regard to be had to the desirability of persons being able to rely on the ordinary meaning conveyed by the text of a provision taking into account its context in the Act and the purpose or object underlying the Act: s 15AB(3)(a). That part of the section is consistent with the proposition put on behalf of Zurich that the meaning of s 45 is plain. It also addresses the competing submissions about whether or not it is appropriate to rely, in interpreting s 45, on decisions that define terms found in other provisions which are also found in s 45(1) of the IC Act.
Zurich contends that the underlying exclusion clause on which MMI relies to defeat Zurich's claim for contribution is of the same type as those which caused considerable problems prior to the enactment of s 45. It is said that "other insurance clauses" were a device commonly used by insurers to attempt to avoid liability under the policy whilst retaining the premium: see ALRC Report at [279]. Examples of other such devices were the "no other insurance" clause which excluded cover in the event that the insured obtained other insurance covering the same loss, and "rateable contribution clauses" restricting cover to a rateable proportion in the event of insurance under another policy. Another type of clause mentioned by Zurich was the "notice clause" which excluded cover if the insurer was not given notice of another policy covering the same loss. One of the potentially adverse consequences of clauses of this type is that, in the event of insolvency of the other insurer, the insured is only partially insured or not insured at all.
Chapter 11 of the ALRC Report which is headed "Other Insurance and Contribution", addresses the various problems which may arise where overlapping or co‑extensive insurance policies are taken out. The ALRC states that entering into overlapping or co‑extensive policies with different insurers is a common occurrence which may occur accidentally or intentionally. It is said that, where overlapping or co‑extensive insurance is taken out intentionally, the reason may be to protect against the risk of insolvency of the first insurer or, in some cases, to make a profit out of insurance by ensuring that there is double insurance covering the same loss: at [279]. In circumstances where the doctrine of contribution was developed to prohibit an insured from obtaining or retaining a double benefit, it seems to me that overcoming the potential for double insurance by way of an "excess" clause is a solution, the adverse effects of which almost wholly outweigh the adverse effects of an insured insuring himself against the same risk twice. I appreciate that in some situations the fact of double insurance may be unknown but I believe my point remains valid and, in any event, there are other less potentially onerous methods of overcoming the risk of there being double recovery.
The ALRC concluded that there was no substantial justification for any of the various types of "other insurance" clause (at [289]) and identified the criticisms which can be levelled at such clauses, each of them significant, in my view. The first criticism was that this type of clause converts a policy into an excess policy without appropriate reduction in the premium. Another criticism is that, if the other insurance is insufficient to cover the loss, the insured has to make claims against both insurers.
The ALRC also noted the potential for the application of "other insurance" clauses to be further complicated by the existence of similar or contrasting provisions in the second policy: (at [281]). Reference is made in the ALRC Report to the English authorities referred to but not followed by the New South Wales Court of Appeal in Australian Eagle Insurance Co Ltd (supra). The English authorities are described by the ALRC as "difficult to follow and impossible to reconcile": (at [282]). The ALRC considered the New Zealand authority of State Fire Insurance General Manager (supra), noting that the approach in that case was consistent with principle although inconsistent with the decision in one of the English cases, Austin v Zurich General Accident and Liability Insurance Company Ltd [1945] KB 250. However, the ALRC acknowledged that in State Fire Insurance General Manager (supra) the Court was not faced with the problem of reconciling two indemnity clauses which might, on a particular construction, result in the absurdity that cover was provided under neither.
Finally, reference was made in the ALRC Report (at [286]) to the then most recent decision in National Employers Mutual General Insurance Association Ltd v Haydon [1979] 2 Lloyd's Rep 235 where a professional indemnity policy contained an extension covering claims made after the policy expired, provided that notice was given during the currency of the policy of the occurrence giving rise to the claim. The policy also contained an "excess" clause. After the policy expired, the insured effected cover with another insurer which provided retroactive cover but excluded liability arising from an occurrence notified under, and therefore covered by, prior insurance. The first insurer paid on the claim but sought contribution from the second insurer. The trial Judge held that both clauses were ineffective and that each insurer was liable to contribute to the loss. On appeal, the decision was reversed: National Employers Mutual General Insurance Association Ltd v Haydon [1980] 2 Lloyd's Rep 149. The ALRC considered that the problem with the state of the authorities was compounded by the fact that some relevant provisions had yet to be accorded judicial scrutiny: (at [287]).
It is not surprising, in view of what the ALRC describes as the "confusion of the authorities", that the recommendation made was for legislative intervention. The ALRC's recommendation identified the adverse effect of "other insurance" clauses on the interests of the insured and noted that such clauses have little independent value for insurers that could not be achieved in ways which did not disadvantage the insured. Not surprisingly then, the recommendation made was that 'other insurance' clauses should be rendered ineffective. The ALRC expressed its views in the following terms (at [289]):
"The Commission is concerned with the effect of 'other insurance' clauses on the interests of the insured. Insureds are detrimentally affected by uncertainty over the effects of individual provisions and combinations of different provisions. More important is the fact that some 'other insurance' clauses have the effect of limiting the insurer's liability to its insured. In such a case, the insured's protection may be compromised or lost. While they affect the interests of insureds in this manner, 'other insurance' clauses have little independent value for insurers. To the extent that they are intended as protection against fraud, they are ineffective. At most, such a clause might operate as a disincentive to claiming the same loss twice under different polices. The same effect could be achieved by a clear warning to the insured that he is entitled to claim, under the policy concerned and under any other insurance, no more than his actual loss. To the extent that 'other insurance' clauses are designed to ensure that an insurer becomes aware of the existence of other insurance so that it may claim contribution in the event of a loss, the same aim could be achieved by asking appropriate questions in the proposal and claim forms. A request in the proposal form for details of other insurance would also give the insurer the opportunity of assessing any significant degree of over-insurance and deciding whether to accept the proposal. There is no substantial justification for any of the various types of 'other insurance' clause. As they may cause the insured's reasonable expectation to be defeated, all forms of 'other insurance' provisions should be rendered ineffective. If more than one insurance is in effect in respect of the same risk, the insured should be entitled to recover the whole of his loss from any one of the insurers, which should then be entitled to obtain contribution from the others."
The ALRC emphasised that its recommendations would have no effect on layered policies in the field of co‑insurance. It also identified two exceptions to the recommendation. The first exception was in relation to the true excess liability policy covering an insured's liability over and above that covered by another insurance which is specifically identified in the excess policy. The second exception was restrictions on the scope of the cover afforded by a policy in order to exclude liability which is also covered by an insurance made compulsory under statute: (at [290]).
Based on the content of the ALRC report, Zurich contends that s 45 seeks to achieve an entirely different purpose than other sections of the Act. It seeks to strike down clauses which historically gave rise to problems such as where a situation of double insurance might be created accidentally. However, it is submitted that s 45 would only achieve that purpose if it covered all situations in which the insured comes to be covered by a policy of insurance, including where a policy is taken out by another, naming Hamersley as principal. To read s 45 in any other way would be to defeat the purpose of the provision.
Further Zurich submits that s 45 is intended to be beneficial to insureds and to achieve justice as between insurers: that is, the purpose of the section is to avoid the ill that allows insurance companies to avoid liability simply because there are two policies in place covering the same loss, irrespective of the circumstances by which that came about.
That the ALRC's recommendations were accepted, at least in relation to the exceptions, is apparent from the Explanatory Memorandum to the Insurance Contracts Bill which referred to the intended effect of the clause in these terms:
"148. Where two or more contracts of insurance provide cover in respect of the same loss insurers will be able to claim contribution from one another in respect of the loss (ALRC para 289). It is appropriate that an insurer should be able to exclude liability which is also covered by compulsory insurance eg workers' compensation or third party insurance. It is also appropriate that he can exclude liability where the policy is a genuine excess policy (ALRC para 290)."
I accept that the ALRC considered that all forms of "other insurance" clause which have the effect of limiting or removing the insurer's liability to the insured should be "rendered ineffective" and made that recommendation. It is similarly clear that the ALRC considered that only those clauses that fall within the two stated exceptions from that recommendation should be exempt from the general prohibition.
The evidence of the Explanatory Memorandum indicates that the latter aspect of the ALRC's recommendation was accepted. It is difficult to envisage a circumstance where, following an ALRC report, the recommended exceptions to a prohibition are adopted but the prohibition itself is not. At the very least, one would expect the Explanatory Memorandum to explain why the recommendation of a complete prohibition on clauses of this type was not adopted. Consequently, one can reasonably expect s 45(1) to have been intended to have the effect recommended by the ALRC and the provision should be construed with that intention in mind. Of course, it is then necessary to consider whether the way in which the clause was drafted did indeed achieve that aim and whether the clause is capable of being construed as creating a prohibition on all "other insurance" provisions.
Counsel for Zurich referred the Court to two cases which are said to assist in the construction of s 45. The first such case is Austress‑PSC Pty Ltd and Carlingford Australia General Insurance Ltd v Zurich Australian Insurance Ltd, unreported; DCt of Qld; 1 May 1992 per Robin DCJ. Austress‑PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) is one of the few cases directly dealing with an underlying insurance clause, the effect of s 45 and the consequence of a conflict between such a clause and s 45. For that reason, I propose to consider the decision in Austress‑PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) in some detail.
In Austress‑PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra), the second plaintiff, Carlingford, by an insurance policy described as the CIC policy, agreed to indemnify AW Edwards Pty Ltd and its subsidiaries, one of which was the first plaintiff, Austress. Austress, as contractor, entered an agreement with Remm Pty Ltd to supply and install rock anchors in connection with the construction of the Myer Centre. The defendant, Zurich, issued a policy of insurance in respect of the construction of the Myer Centre ("the Zurich Policy"). Austress, in execution of the sub‑contract work, caused damage to a sewer main owned by the Brisbane City Council and Remm undertook certain rectification works in relation to the sewer main and incurred costs.
Austress became legally liable to the Council in respect of the damage and, under the sub‑contract, Austress became legally obliged to indemnify Remm for the costs of the rectification work. Austress made a claim under the CIC policy for indemnity in respect of its liability to Remm and the Council. Carlingford paid a total of $136,528.31 (the amount of damage less the deductible) to Remm and the Council in settlement of their respective claims. No contribution was paid by Zurich whose policy showed the insured to include Remm but no other interested party and created liability only for an amount in excess of $100,000.
The CIC policy included Claims Provision 3, which provided that Carlingford would not be liable in respect of the occurrence except for any excess beyond the amount payable under another policy of indemnity or insurance "in favour of or effected by or on behalf of the Insured applicable to the occurrence" which was claimed by Carlingford to result in Zurich being liable for the amount in excess of $100,000. Zurich contended that Claims Provision 3 was rendered void by s 45 of the IC Act.
In his reasons for decision, Robin DCJ noted (at 5) that the parties seemed to be ad idem that the policy came within the regime of the Act and, therefore, s 45 caught Claims Provision 3 in so far as it sought to limit the Carlingford's liability by reference to "indemnity or insurance … effected by or on behalf of the Insured".
After referring to the terms of s 45, Robin DCJ noted (at 6) his acceptance of the submission made on behalf of Zurich that s 45(2) must be construed as requiring the reference to "other insurance" to be specific, as opposed to a description in general words capable of extending to the other insurance, if the provision is to survive being struck down by s 45(1). He added (at 6):
"It seems to be the underlying notion is that the insured and the insurer have tailored their own bargain to take account of the impact of other contracts."
Robin DCJ concluded that s 45(2) did not apply in the circumstances of the case.
As Carlingford disputed that s 45(1) applied to its policy, Robin DCJ then considered the proper construction of that subsection and identified the question for resolution as being whether the provision, which he considered to have the effect of limiting Carlingford's liability, did so "by reason that the insured has entered into some other contract of insurance". His Honour refuted (at 6 ‑ 7) the proposition that this expression extended to every situation in which insurance may exist of which the insured may obtain the benefit, although having nothing to do with (and perhaps having no knowledge of) it being effected. In doing so he rejected the underlying proposition that an insured who benefits from, but is not named in, a policy can be said to have "entered into some other contract of insurance" having regard to various provisions of the IC Act which seek to eliminate any concept of lack of privity between insurer and named insured precluding or limiting the benefit to the insured of a policy entered into. The provisions relied upon were s 48, s 56 and s 76. Robin DCJ referred to s 11(9) of the IC Act which is in the following terms (at 8):
" … A reference in this Act to the entering into of a contract of insurance includes a reference to -
(a)the making of an agreement by the parties to a contract of insurance to renew, extend or vary that contract; or
(b)the reinstating of a previous contract of insurance"
and concluded that "[a]nything brought in under that 'inclusive' definition must … exhibit privity". Consequently, Robin DCJ formed the view (at 8) that he could not conclude that s 45(1) struck down Carlingford's clause on the basis that Austress had "entered into" the Zurich policy. As his Honour observed (at 8):
"It would have been a simple matter for the draftsman to adopt language referring to other insurance, by whomsoever effected. It is not lightly to be assumed that merely because a policy of insurance may inure to the benefit of a person, it was effected by or 'entered into' on behalf of that person: Stretch v State Insurance General Manager (1984) 3 ANZIC 60‑577, at 78,467‑6B."
With respect to Robin DCJ's reliance on s 11(9) of the IC Act, I do not share his Honour's view that the section indicates that the expression "the entering into of a contract of insurance" is necessarily limited in meaning to entering into a contract of insurance by the parties to that contract. In my view, s 11(9) simply broadens the concept of an insurance contract to include agreements to extend or vary the contract in the case of life insurance contracts and to extend the meaning of any other contract of insurance to making an agreement to renew, extend or vary the contract. The meaning of a contract of insurance is also extended to include the reinstatement of any previous contract of insurance. To include reference to the parties to such contracts is only to state the obvious: that the only persons entitled to renew, vary, agree to renew, extend or reinstate a contract are the parties to that contract. I do not accept the proposition that s 11(9) in any way addresses whether the expression "the insured has entered into some other contract of insurance" may include a contract entered into by another which indemnifies the insured and applies the contract to him as if a separate policy had been issued to him as an insured under the policy.
Further, with respect to Robin DCJ, neither do I share the view that Stretch v State Insurance General Manager (1984) 3 ANZ Ins Cas 60‑577, at 78,467‑6B, is authority for the proposition that it cannot be assumed that merely because a person may benefit from an insurance policy, it was effected by or 'entered into' on behalf of that person. In that case, the vendors of a property, subject to a contract to sell, insured the property. The purchasers had also insured the property by obtaining a cover note which was expressed to insure both the vendors and the purchaser against fire. The vendors were advised that the purchaser had taken out a cover note but were not advised that they were named as an insured in the cover note. The property was severely damaged by fire at a time when the contract of sale had become unconditional but settlement had not taken place. The vendors' insurers sought to rely on a condition in the policy which said that if, at the time of any loss, there was any other insurance covering such loss, the insurer would not be liable for more than its rateable proportion. The Court held that a true case of double insurance requires, inter alia, both policies to have been effected by or on behalf of the same insured or with his authority. As the vendors had not authorised the cover note or been made aware that it was named in it, there was no double insurance and there could be no reliance on the "other insurance" clause: per Eichelbaum J at 78,468(L)
In my view, the decision in Stretch (supra) is authority only for the proposition that, where another insurance policy is taken out by a third party to the benefit of or in the name of the insured under the primary policy, authorisation by the insured of the other insurance policy is a pre‑requisite for there to be double insurance. I do not believe the decision adds anything to the issue of whether a policy was "entered into" by a person if it was arranged by a third party to the benefit of the person, other than, if it is to be relied upon as the basis of a contribution, the policy arranged by the third party must have been authorised by the person.
However, it does not follow from the fact that I take a different view of two of the matters relied upon by Robin DCJ in reaching his conclusion on this issue, that I believe his ultimate decision to be flawed as a result. Other factors were also taken into account, some of which are dealt with later in these reasons.
Robin DCJ considered (at 9) that Carlingford's actions were exactly what the Act envisaged in that Carlingford paid out Austress in full (subject to its "deductible") so that Austress' maximum expectations had been fulfilled and then sought contribution from Zurich, as permitted by s 76(3), or an equivalent recovery by a process of subrogation.
Robin DCJ expressed his conclusion in the following terms (at 9):
"In the end, I have concluded that s 45 operates by reference to the language of the limitation of the insurer's liability and what its effects may be as a matter of interpretation or logic, rather than by reference to whether the prescribed effect stands to arise in the particular circumstances of an individual claim."
The next question considered by Robin DCJ (at 5 ‑ 6) was whether the presence of the descriptive phrase "Insurance … effected by or on behalf of the Insured" in the Claims Provision suffices to render the provision entirely void so that the insurer gains no protection from the words which would limit its liability where any other "indemnity or insurance in favour of … the Insured" applies. This question is of particular relevance in this case as the "underlying insurance clause" in the Hamersley Policy extends to policies entered into "on behalf of" Hamersley. Robin DCJ's answer to that question was this (at 9):
"What s 45(1) renders void is 'the provision' which has the defined 'effect'. I cannot detect there any legislative intention that the provision be saved so far as it may have other effects. It follows that the provision is void, so that the insurer may not take advantage of any 'effect' among others it may have which is not caught by s 45(1). Somewhat ironically, the way in which the insured might have saved the situation may have been to replace the words 'or effected by or on behalf of' by '(not being a Policy effected by or on behalf of)'. The provision being void, the second plaintiff was liable to indemnify the first plaintiff in full, subject to its 'deductible'."
According to Robin DCJ (at 9), the striking down effected by s 45(1) was absolute and complete and was not limited to what is necessary to implement the policy of the Act in the circumstances of a particular claim.
Counsel for Zurich concedes that not all aspects of the decision in Austress‑PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) support Zurich's contentions. Certainly, Zurich's construction of s 54(1) is at odds with Robin DCJ's comments (at 8) that it would have been a simple matter to achieve the result that all "underlying insurance" clauses other than those required by law and those which specify the other insurance are prohibited and hence it could not be established that such a result was intended. Zurich maintains its position that s 45 would only achieve its purpose if it covered all situations in which the insured comes to be covered by a policy of insurance, including where a policy is taken out by another, namely Hamersley as principal.
However, Zurich does rely on some of the conclusions drawn by Robin DCJ in Austress‑PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra). Counsel for Zurich notes that the point being advanced in that case, and also in this case by MMI, is that Hamersley did not enter into the Speno Policy, Speno did. Zurich maintains that, as s 45(2) does not apply, MMI's "underlying insurance clause" is void because, although it refers to other insurance effected on behalf of the Insured, it also includes insurance effected by the Insured. One is arguably included in the definition but the other is definitely included in it and hence MMI's clause is void.
Zurich maintains that, when you look at the ALRC Report and consider what is sought to be achieved by prohibiting underlying insurance clauses, nothing could be plainer than that all of these kinds of provisions were to be avoided, including those that created an excess policy where the insured benefited from a policy taken out or entered into by another. I accept that to be the case, particularly because an insured may be unaware of such a policy. Zurich emphasised that the Court is entitled to have regard to what the ALRC says because of s 15AA of the Acts Interpretation Act 1901 (Cth). Section 15AA is headed "Regard to be had to purpose or object of Act" and states:
"1.In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object."
Applying that principle it is useful to also consider the preamble to the IC Act which is in these terms:
"An Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly, and for related purposes."
In East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400, Gleeson CJ, in delivering the leading judgment of the NSW Court of Appeal, and in addressing the application of s 54 of the IC Act, concluded that the language should not be read narrowly: (at 403). Gleeson J relied on the terms of the long title to the IC Act in making the following obiter observation on the construction of s 54 (at 403 ‑ 404):
"In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s 54 depends on matters of form …
The Act, in its long title, is described as an act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds, and other members of the public and so that the provisions included in such contracts, and the practices of the insurers in relation to such contracts, operate fairly. It would hardly be consistent with the purposes thus described to construe the language of s 54 in such a way as to make its operation depend upon the choice that is made between various available drafting techniques."
In Kelly v New Zealand Insurance Company Ltd (1996) 9 ANZ Insurance Cases 61‑317 at 76,517, Owen J, with whom Kennedy and Steytler JJ agreed) agreed with the tenor of the dicta of Gleeson CJ in East End Real Estate Pty Ltd (supra). Owen J observed that s 54 was a remedial provision which should be given a liberal interpretation. He accepted that the courts must review an impugned insurance transaction according to substance rather than form. However, Owen J noted that each case must be judged on its own facts: (at 76,517).
I consider the reference in East End Real Estate Pty Ltd (supra) to a fair balance between the interests of the insurers, insureds and other members of the public is consistent with a result which may not fully overcome the ills identified by the ALRC but, nevertheless, strikes a fair balance between competing interests.
Zurich maintains that the clear purpose of s 45 is to remove these types of provisions by removing the benefit of them other than in the situations envisaged in s 45(2). It is said that, in order for the section to work and not be emasculated, the term "insured" has to be given the construction contended by Zurich, that is, the reference to the "Insured" is a reference to the Insured under the policy. If read in that way then s 45 operates to achieve the reform that was plainly intended.
Underlying Zurich's interpretation of s 45(1) is a reliance on the definition of "insured" and "insurer" in s 11 which is stated to include "a proposed insured" and "a proposed insurer", respectively. As s 11 commences with the words "In this Act, unless the contrary intention appears", Zurich maintains that the definition applies as no contrary intention is evident in the wording of s 45. However, it must be noted that a contrary intention may appear from the fact that the particular definition does not "fit" within the section in that it is inconsistent with the balance of the provision or may change the meaning of the provision to something which was clearly not intended by the legislature. Here, of course, Zurich maintains that the inclusion of the words in the definition operates to achieve that intention.
Zurich also emphasises that the IC Act made wide-ranging changes to the law of insurance in a number of areas: s 21 with non-disclosure; s 13 by implying a term into contracts of insurance whereas previously it had operated as a principle of law; s 76 with respect to contribution between insurers; s 48, third party beneficiary right to recover. It is said that a whole range of disparate and different ills were addressed by the IC Act and it is necessary to look at each of the provisions and the purpose of the provisions in order to understand what Parliament meant by using that particular word in a particular context.
It is for all these reasons that Zurich maintains that s 45(1) operates to make void any "excess" clause, whether the other contract of insurance was entered into by the insured or whether the insured has the benefit of a contract between a third party and another insurer. On that basis, the underlying insurance clause in the Hamersley Policy is said to be void. Even if the primary proposition is not accepted, Zurich maintains that the Hamersley Policy is void because it is the provision which is void, not that part of it which offends s 45(1).
In Zurich's argument, it is only if MMI can bring itself within s 45(2) that it avoids the consequences. The contract described in s 45(2) is said by Zurich to be a true "excess of liability" policy, the test for which is whether the contract carrying with it the primary liability is "specified" in the "excess of liability" policy. However, as there is no specificity in the MMI underlying insurance clause's reference to "such other Insurance effected by or on behalf of the Insured in respect of a Claim for which Indemnity is available under this Policy" Zurich suggests that MMI is not entitled to the advantage of s 45(2).
Zurich contends that the Hamersley Policy contains a clear example of what is meant by "specified" in s 45(2). The Court was taken to the Hamersley Policy and to "Insuring Agreement A ‑ Combined Public and Products Liability", in particular to the "Exclusions" which include the following paragraph:
"Notwithstanding this Exclusion (1) this Insuring Agreement (A) shall indemnify the Insured in accordance with the terms, conditions and endorsements of the Overseas Employers' Liability Insurance issued by American Home Assurance Company Policy Number MG69898 Limit of Indemnity A$5,000,000 (the Underlying Insurance) with which this Policy shall run concurrently;
PROVIDED THAT
Underwriters shall be liable only for sums in excess of the Limit of Indemnity provided by the Underlying Insurance."
This is an example of the level of specification said by Zurich to be necessary for an underlying insurance clause to fall within s 45(2). I accept that the level of specificity in this paragraph would satisfy s 45(2). However, I do not accept that an underlying insurance clause which did not specify the other insurance to that degree would not come within s 45(2).
It is in this context that the second authority on which Zurich primarily relies is to be considered. Zurich referred the Court to the decision in HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd & Anor (2000) 11 ANZ Insurance Cases 61‑477 as part of the answer to that question. In that case, Pluim Constructions Pty Ltd ("Constructions") carried out building work at the Mingara Recreation Club. Associated companies of Constructions, including Pluim Commercial Landscapes Pty Ltd ("Landscapes") were also involved in the project. K, an employee of Landscapes, was injured whilst assisting Constructions to remove debris from the site using Landscape's bobcat. Constructions was found to have breached its duty of care to K and damages were assessed against it.
Constructions filed third party notices against the insurers claiming indemnity and contribution under various insurance policies. The Pluim group were insured with HIH Casualty and General Insurance ("HIH") against public liability risk. The Club had effected public liability insurance with Commercial Union Assurance Group ("CU") on behalf of Constructions in respect of personal injury which arose out of the execution of the building works. HIH admitted its obligations under the policy to indemnify Constructions, subject to its right to rely on various provisions of its policy, including Condition 7, which dealt with principal‑arranged insurance, and exclusion 4(a). HIH relied on its "other insurance" exclusion in its policy and contended that Constructions liability to K was covered by the CU policy. HIH also submitted that under Condition 7 it could escape liability if CU was liable under its policy. Alternatively, HIH contended that there was double insurance, although no claim for contribution was pleaded between the insurers. CU denied liability to Constructions, relying upon various exclusions including one which dealt with injuries in connection with motor vehicles. At first instance, it was held that Condition 7 of HIH's policy was rendered void by s 45(2) of the IC Act because the CU policy was not "specified" in the HIH policy. It was also held that the CU policy did not respond to Constructions claim.
On appeal, the majority, which included Handley JA and Foster AJA, concluded (at [73] and [80]) that cl 7 in the CU policy did not apply to Constructions claim for indemnity in respect of K's damages. Consequently, the CU policy did respond to Constructions claim and it had double insurance from CU and HIH. In relation to the balance of the issues before the Court of Appeal, the majority, who indicated that they had had the advantage of reading in draft form the reasons for judgment of Mason P, said this (at [73]):
"We agree generally with his Honour except as to the meaning of the exclusion in cl 6(b) of the [CU Policy]."
Mason P found that the CU policy did not respond to Constructions' claim (at [28]) as a result of which it was unnecessary for him to address HIH's submission that the cover of the HIH policy was withdrawn because of the operation of Condition 7 of the HIH policy. However, as the issue was fully argued, he decided to make some remarks on the topic: (at [29]). On that basis, Mason P's conclusions on the validity of HIH's "underlying insurance clause" were obiter dicta. However, the fact that Handley JA and Foster AJA who took the opposite view in relation CU's liability, agreed with Mason P's reasons on this particular issue, provides those reason with greater status than a mere obiter comment.
Condition 7 of HIH's policy was headed "PRINCIPAL‑ARRANGED INSURANCE" and was in the following terms (at [30]):
"In the event of the named Insured entering into an agreement with any other party (who for the purpose of this clause is called 'the Principal' pursuant to which the Principal has agreed to provide a policy of insurance which is intended to indemnify the named Insured for any liability arising out of the performance of the Works then the Company(ies) will (subject to the terms and conditions of this Policy) only indemnify the names Insured for such liability not covered by the policy of insurance provided by the Principal."
Counsel for Zurich describes Condition 7 of the HIH policy as being in a different form but with a similar intent to the policy condition in the MMI contract. I understand that submission to mean that the MMI policy similarly attempted to deal with the situation where companies such as Hamersley require the many and varied sub-contractors with which it contracts to arrange public liability insurance to include Hamersley's interest as a principal and to indemnify Hamersley against any personal injury claim made by the sub‑contractor's employees.
It was acknowledged by the parties in HIH Casualty & General Insurance Ltd (supra) that the effect of s 45(1) of the IC Act was to render void Condition 7 unless s 45(2) was found to apply: (at [32]). The primary judge held that the language of Condition 7 was too general and not of sufficient specificity to satisfy s 45(2), a view which Mason P considered to be correct: (at [33]). The issue then became one of determining whether the words "the policy of insurance provided by the Principal" in Condition 7 were sufficient to specify the CU policies for the purposes of s 45(2).
Mason P then referred to the ALRC Report and its conclusions and made specific mention of the ALRC's mention of the mischief involved in "other insurance" clauses which limit an insurer's liability (at [34]):
"Such clauses were said to fall into three main classes (par 281). The first class covers provisions which purport to exclude liability altogether in the event of other insurance. The insured's sole recourse is to the other insurer. The second comprises provisions which limit the insurer's liability to a rateable proportion of the loss. In that event the insured must bring two actions. Even then the insured may suffer an overall loss if the other insurance is insufficient or if the claim against the other insurer is defective. The third class covers provisions which limit the liability of the insurer to any amount by which the loss exceeds the amount recovered or recoverable from the insurer. Such a provision converts a policy into an excess policy without appropriate reduction in the premium."
Reference was then made by Mason P to the ALRC's conclusion that there was no substantial justification for any of the classes of "other insurance" clauses since they all may cause the insured's reasonable expectations to be defeated: (at [35]).
Mason P noted (at [35 ‑ 36]) that the ALRC recommended that all forms of "other insurance" clauses should be rendered ineffective and that the recommendation was later embodied in cl 46 of the Draft Bill amended to the ALRC Report which subsequently became s 45 of the IC Act.
Zurich contended that there is no difference in substance between the clause that MMI relies on and the clause relied on in the HIH case. Emphasis was placed by counsel on the use of the terms "futurity, contingency and lack of specificity". Despite the fact that the underlying insurance clause in the Hamersley Policy refers to specific contracts, it is said that it does so in the broadest, most general, most contingent and futuristic way. There is no specificity or identification sufficient to avoid the mischief that Parliament sought to overcome where two insurers would stand back and require the insured to sue them both.
As noted above, MMI's interpretation of both aspects of s 45 differs markedly from that of Zurich. According to MMI, s 45 only has the effect of limiting or excluding the liability of the insurer "by reason that the insured has entered into some other contract of insurance". Section 45(1) does not make void other insurance provisions where the insured is entitled to the benefit of a policy "entered into" by another.
It is said that this construction:
(i)follows from the words expressly used in s 45(1);
(ii)is consistent with the distinction between a party to an insurance contract on the one hand and a person entitled to the benefit of that contract, on the other. In support of that proposition, reliance is placed on Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107.
(iii)Is consistent with the distinctions expressly drawn in s 48 of the IC Act between the person who is a party to an insurance contract and a person to whom the benefit of the contract extended: see CE Heath Casualty & General Insurance Ltd v Grey & Ors (1993) 32 NSWLR 25 at 43 ‑ 46; GIO Australia Ltd v P Ward Civil Engineering Pty Ltd (2000) NSWSC 371 at [11]; s 11(9) and s 56 of the IC Act.
(iv)Is consistent with the principal rationale of the ALRC recommendation which led to s 45, viz avoiding the defeat of the insured's reasonable expectations (at [289]).
MMI submits that, as is clear from the wording, s 45 applies to contracts of a certain kind: that is, contracts of general insurance. Further, it is said to make void provisions of a certain kind: that is, a provision in a contract of general insurance which has the effect of limiting or excluding the liability of the insurer. The term "liability", in the phrase "the liability of the insurer" in s 45(1), is said to be a key word in the proper understanding of the operation of the section and, counsel submits, the Court will need to determine the meaning of the term in the context of s 45(1). MMI submits that there are two principle views on the meaning of "liability" in this context. The first is that it means a potential or contingent liability, the sort which the insurer takes on when it first issues the insurance contract. The events insured against may or may not come to pass but there is a potential liability. The second meaning that can be given to the word is what counsel refers to as an "actual liability", the liability which accrues when the event which has been insured against occurs, so that the insurer has then been called on to meet the obligation to indemnify which it assumes on the payment of the premium and the entry into the contract.
Counsel for MMI refers to the view expressed by Professor Sutton on the issue (Sutton, "Insurance Law in Australia" (supra) at [12.22]) but for the purpose of refuting the Professor's opinion. It is said that the author does not cite any authority and the explanation given involves, at least in counsel's view, a non sequitur. Professor Sutton states:
"It is the liability of the insurer which is affected, and thus must refer to the insurer's potential liability [as to the possible meanings of the word 'liable' and its cognate 'liability' see Heath Underwriting & Insurance (Aust) Pty Ltd v SGIC (SA) (1983) 34 SASR 1 at 6] under the contract rather than any actual liability already incurred, for the section refers to 'a provision included in a contract of general insurance', that is, to a term agreed upon when the contract is entered into, at which stage the insurer's liability will be only a potential one. In any event, the mischief at which s 45 is aimed is clearly shown in the Report of the Australian Law Reform Commission to be the harm likely to be suffered by an assured by the use of limitation clauses seeking to restrict the potential liability of the insurer where other insurance has been effected."
MMI's position is that the meaning of "liability" in s 45(1) is an actual liability, the liability which accrues when the event insured against occurs. It is said that, if read in that way it enables the section to work in a way which is practical. Further, according to counsel for MMI, the clearest indication within s 45(1) that the word "liability" is referring to an actual liability are the words that follow it: "… limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance". Emphasis is placed on the fact that the section does not say "or may enter into". The use of the past tense "has entered into" is said to support MMI's interpretation. The use of the past tense is said to be significant because it indicates that the section is speaking to an event which has already occurred at the time that the effect of the provision has been considered.
Counsel maintains that if the word "liability" is read as a potential liability but the following words are still in the past tense, then it reads as if it is being considered the very moment after the contract was first entered into, then the section would only catch those other policies of insurance which had already been entered into as of that moment. But if one reads it as though its referring to an actual liability, then it catches not only the other insurance contracts which have been entered into at the moment of creation of the first but those which have been entered into subsequently up to the moment when the accrued liability comes into existence.
Further, MMI's proposition that "liability" means actual liability is said to be supported by the wording of s 45(2). If the term "liability" as it appears in s 45(1) meant potential liability then one would need to be construing the balance of s 45(1) as referring not only to contracts already entered into, but contracts which may be entered into during the life of the first policy. If that is so, then the contract of insurance referred to in s 45(2) will have to be "specified in the first mentioned contract by reference to class description as opposed to any specific policy".
Counsel for MMI maintains that the interpretation that MMI presses on the Court would actually give s 45 a greater operation than would otherwise be the case because one would have to ignore the words in the past tense. However, counsel notes that it seems unlikely that the section is intended to refer to only those contracts which had been entered into at the moment that the first contract came into existence as that would significantly circumscribe the operation of s 45(1).
According to MMI, another indicator that the section is referring to an actual liability are the words "has the effect of limiting or excluding". The fact that "limits or excludes" is not used is said to suggest that the operation of the section involves looking at the effect of the provision in the circumstances which have accrued or in the circumstances which have occurred.
The final indicator put forward by MMI is the use of the words "by reason that". They are said by counsel for MMI to be words of causation and questions of causation are questions of fact to be dealt with in retrospect so that one can examine the facts.
MMI submits that these factors lead to the conclusion that s 45(1) is speaking to actual liabilities and should, therefore, be read as rendering void a provision which has the effect of excluding or limiting the actual liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance.
None of the features on which MMI relies persuade me that the term "liability" should be interpreted as meaning an actual rather than a potential liability or indeed that the term must be construed as meaning one or the other. Indeed I do not consider that further defining the term "liability" assists in the proper construction of the provision. If the meaning of s 45(1) is considered as if the validity of the provision were under consideration, that is, when a claim is made on the policy or the claim is the subject of litigation, there would be no need to include the words "or may enter into". That is because, at the time of consideration of the provision, the "other contract of insurance" will necessarily have been entered into. Similarly, the fact that the past tense is used in s 45(1) will also be consistent with this approach. Viewed in that way, the section would apply to "other contracts" entered into both before and after the contract with the "other insurance" provision. It may well be that, where contracts are entered into after the contract with the relevant clause was executed, it will be more difficult to establish that the latter contract was intended to be a true "excess" policy. However, it should not follow that the section does not have so wide a scope.
In my view, both parties have tended to approach the interpretation of particular words and phrases used in s 45(1) in a manner consistent with a particular outcome and, in doing so, have lost sight of the natural meaning of the words and the fact that, when it comes to legislative drafting, there can be different ways of saying exactly the same thing. I consider that the only phrase included in the section which requires consideration as to its actual meaning is "by reason that the insured has entered into some other contract of insurance". Whether that expression includes contracts of insurance entered into by a third party in which "the insured" is a beneficiary and a principal is something that requires further consideration.
Sir John Donaldson MR (at 1114 ‑ 1115) referred to the wider issues including, on the one hand, the public interest in avoiding any possibility of two courts reaching inconsistent decisions and in there being finality in litigation and on the other hand, the public interest in seeing that justice is done. The Master of the Rolls also noted that it is an abuse of process of the Court to bring two actions in respect of the same cause of action. Consequently, he held that if the first action has proceeded to judgment the cause of action is extinguished by merger, with the consequent effect of frustrating any further claim. He ordered that the second claim brought in the name of the plaintiff be struck out: see also Griffiths LJ (at 1116).
I consider the decision in Buckland v Palmer (supra) to be in accordance with the principles relating to cause of action estoppel and, as such, a complete answer to any attempt on the part of Zurich or Hamersley to revisit the matters raised in the action. However, I am not persuaded that these statements of principle have any application in the particular circumstances of this case where two separate and distinct obligations have been found to exist, one of which has been satisfied and the other which has not been satisfied.
Reliance is placed on the decision in Ex parte Fewings (1883) 25 Ch D 338 per Cotton LJ (at 348), per Lindley J (at 353) where a creditor brought an action under a contract which entitled him to a stated interest rate, although he did not claim an entitlement to the contractual interest rate. The Court held that the debt was confined, by reason of the cause of action having merged into the judgment, to interest on the judgment sum at the statutory rate rather than the contractual rate, as the judgment put an end to the defendant's liability to pay under the contract. Cotton LJ said (at 349 ‑ 350):
"In my opinion that contention is unfounded, for, so soon as judgment was obtained it put an end to the liability under the covenant to pay the [principal sum] and the debt became due on the judgment, not under the covenant … But that covenant is now at an end; The liability under it for the [principal sum] is gone, it is merged in the judgment, and it cannot be said that, notwithstanding that the covenant to pay the [principal sum] is gone there is a separate covenant to pay interest at 5 per cent."
Speno submits that it follows from the decision in Ex Parte Fewings (supra) the position as between Hamersley, Speno and Zurich is now governed by the judgment, even though the judgment may reflect a substantive change in the position of the parties as a consequence. The principle is said to be best summarised in the judgment of Lindley LJ (at 353) where he said:
"Now it may be technical, but it is well settled, that, if there is a debt secured by a covenant, and judgment is recovered on the covenant, the debt on the covenant merges in the judgment debt. In point of law the [principal sum] is no longer payable under the covenant, it is payable under the judgment; the covenant to pay interest is gone, and the judgment bears interest only at [the statutory rate]."
In my view, the application of these principles to the facts of this case would result only in the position that if, following the judgment, Zurich paid the amount necessary to indemnify Hamersley, the payment was made under the judgment and not under the policy, and any issue in relation to the payment would be governed by the terms of the judgment rather than the terms of the policy. I am not persuaded that once Zurich's liability to Hamersley is met, the nature of Speno's liability changes and there no longer exists a primary liability to Hamersley. At least, I can find no support for that proposition in the texts or the authorities cited and I do not see any reason why it should be so.
Counsel for Speno referred to the decision in Sydney Turf Club (supra). However, in my view, that decision does not support Speno's proposition; it simply indicates the outcome of the action in the event that the underlying proposition of co‑ordinate liability resulting from the judgment is accepted by the Court.
Speno maintains that it is not only as a consequence of the merger of the cause of action into the judgment that no action can be brought to enforce Speno's primary liability, it also results from the way in which the judgment is expressed. The form of the order is said to be critical. I cannot accept that to be the case. Often the form of the orders which flow from the reasons for decision result from on the spot drafting which may not be optimum. Other times it reflects the terms of minutes of orders which are produced to the Court in circumstances where the Court and the opposing party have little time to reflect on them. Counsel for MMI expressed the view that the form of words used to express an order should not determine the rights between the parties. Although there are clearly some limitations on that broad statement, in the absence of an authority precisely on point, I am not prepared to accept that Hamersley's rights, and hence MMI's rights, depend upon the wording of the judgment rather than the decision underlying the judgment.
With respect to Speno's proposition that the cause of action has merged into the judgment, MMI has no disagreement as a statement of principle. However, MMI submits that the principles of res judicata say nothing at all about the enforcement of an action or the enforcement of a judgment already obtained. Counsel maintained that it is a doctrine about whether a cause of action may be further pursued; it is not about the satisfaction of the judgment obtained by pursuing that cause of action. MMI notes that Halsbury's Laws is silent as to the enforcement of judgments already obtained. This is also apparent from a later edition of the text by Spencer, Bowen and Turner, "The Doctrine of Res Judicata", 3rd ed Butterworths, London, 1996 (at [392]):
"Res judicata has a twofold operation. It estops the parties to a decision from afterwards controverting any issue thereby decided and it bars the party who has obtained relief from seeking it again … The rule as to merger may be stated as follows: any person in whose favour an English judicial tribunal of competent jurisdiction has pronounced a final judgment, civil or criminal, is precluded from afterwards recovering before any English tribunal a second judgment against the same party on the same cause of action".
Although counsel did not specifically refer to the balance of the paragraph, it does say that "in cases of former recovery what is not allowed is a second action for the relief previously granted". Buckland v Johnson (1854) 15 CB 145 (at 153) is cited as authority for this proposition.
In Buckland v Johnson (supra), Jervis CJ held (at 383) that a judgment of a court of record changes the nature of that cause of action, and prevents it being the subject matter of another suit, and "the cause of action, being single, cannot afterwards be divided into two".
Counsel for MMI also relies on the following statement of Spencer, Bowen and Turner (1996) (supra) as to recovery (at [398] and [399]):
"A former recovery is established by proof that the party against whom the plea is set up, in previous litigation as plaintiff, counterclaimant or the like, obtained a judgment for relief on the same cause of action … 'Recovery' means recovery of the relief granted; it does not mean satisfaction. The cause of action is merged in the judgment when pronounced; what happens afterwards is irrelevant."
MMI submits that Hamersley's cause of action against Speno merged in the judgment which it obtained against Speno but that judgment against Speno has not been satisfied. The only judgment which has been satisfied is the judgment obtained against Zurich. Satisfaction of the Zurich judgment does not satisfy the Speno judgment.
As I have indicated above, I am not persuaded that the principle of res judicata has any application to the judgment against Speno; in particular, I do not accept that the principle creates the situation that Speno no longer has a primary liability to indemnify Hamersley. However, that does not dispose of Speno's defence to the claim because Speno also alleges that the mere fact of payment of the judgment sum prevents recovery against Speno. Rather than being a separate proposition, this is, in effect, another aspect of Speno's primary proposition.
Any suggestion that MMI is entitled to recover from Speno any part of that amount paid to Hamersley to indemnify it against the Nolan judgment is refuted by Speno relying on the decision in Clissold v Cratchley [1910] 2 KB 244. In Clissold (supra) a solicitor sued out a Writ of fi.fa on an order in favour of his client, unaware that the debt had been paid at the country office of the solicitor, prior to the writ being issued. The Court unanimously held that when the total amount ordered by a judgment has been paid, the judgment is at an end and no longer has any force or effect. Consequently, there being no existing judgment, the writ of execution was void ab initio: per Vaughan Williams LJ (at 249 ‑ 250); per Fletcher Moulton LJ (at 150) and per Farwell LJ (at 250). See also Cubitt v Gamble (1919) 35 TLR 223 (at 224). Speno relies on the decision in Clissold (supra) in submitting that there is in this case no judgment in respect of which the writ can be issued. That is because the judgment has been discharged and the writ is void ab initio. In Clissold (supra) and Cubitt (supra) there was only one plaintiff, one defendant and a single judgment to satisfy. The issue between MMI and Speno arises from the fact that there were two relevant judgments, only one of which has been satisfied. In those circumstances, I do not believe that these authorities are of relevance other than in relation to the very basic proposition that once a judgment is satisfied no enforcement proceedings can lie. Therefore, the Court would have to accept that the effect of Speno's cause of action merging into the judgment resulted in there being a single co‑ordinate liability to indemnify Hamersley before Zurich's payment to Hamersley would provide a bar to this action and before the Writ of fi.fa would be void. As I have indicated, I do not believe that the principles of res judicata extend that far.
Speno's proposition that indemnification by Zurich disentitles Hamersley, and hence MMI by subrogation, from enforcing its contractual indemnity against Speno, is said by MMI to be an inaccurate statement of insurance law. MMI maintains that it is entitled to enforce by subrogation the rights already established by the judgment. MMI relies on the proposition that it is no answer by a third party who is liable for the loss to say to an insured that it has already been indemnified by its insurer. That it is wrong in principle is said to be apparent from the decision in Sydney Turf Club (supra) where Jacobs JA made the following statement in relation to the rights of subrogation and the availability of a defence to a third party who is liable to the insured where insurance has been granted (at 730):
"It is necessary to pause now and to consider some of the principles relating to indemnity insurance. A public liability policy and employer's liability policy are essentially insurances of indemnity. That being so any insured can recover no more than the amount required to indemnify him. If he has recovered the whole of the loss from one insurer then it is a defence at law to another insurer so to allege. … The legal defence that the insured has already been indemnified is only available when the insured seeks to be indemnified in the strict sense twice over."
It is apparent from this statement that, as counsel for MMI contends, the payment by Zurich by way of indemnity of Hamersley would only be available to Speno as a defence if Speno was in the position of an insurer.
I am satisfied that none of the matters on which Speno relies prevent MMI from exercising its right of subrogation. However, the next issue requiring resolution is the rights which may be exercised under that principle. This issue requires a consideration of the principle of subrogation.
As MMI's entitlement to bring the action against Speno is said to be based on the right of subrogation, counsel for MMI referred the Court to a number of authorities which explain the nature and scope of the right. Particular reliance was placed on the statement of Brett LJ in Castellain (supra) where the right of subrogation was defined in the widest possible terms (at 388):
"In order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used, that is to say, the insurer must be placed in the position of the assured. Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished."
The fundamental principle of insurance law to which Brett LJ refers in his definition of subrogation is this (at 386):
"The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in a case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance …"
These passages fully explain Brett LJ's description of the doctrine of subrogation as a proposition adopted for the purpose of carrying out the fundamental rule.
Bowen LJ expresses the principle of subrogation (at 402) in this way:
"That a person who wishes to recover for and is paid by the insurers as for a total loss, cannot take with both hands. If he has a means of diminishing the loss, the result of the use of those means belongs to the underwriters … where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss."
Therefore, on the authority of Castellain (supra), if an action taken by an insurer has the effect of more than fully indemnifying the insured, then the doctrine of subrogation cannot provide the lawful justification for the action.
It is because of this fundamental principle that, despite the width of the definition of subrogation, Brett LJ also concluded (at 389) that:
"if upon the happening of the loss there is contract between the assured and a third person, and if that contract is immediately fulfilled by the third person, then there is no right of action of any kind into which the insurer can be subrogated. The right of action is gone; the contract fulfilled."
The same position arising in tort would result in there being no right of action existing into which the insurer could be subrogated.
Similarly, as Barwick CJ noted in SGIO v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228 (at 240):
"It is settled law that an insurer who has paid the amount of a loss under a policy of indemnity is entitled to the benefit of all the rights of the insured in the subject matter of the loss and by subrogation may enforce them."
The then Chief Justice of the High Court added a further fundamental principle (at 241):
"It is also settled law that an insured may not release, diminish, compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under his right of subrogation."
In Buckland v Palmer (supra), Griffiths LJ stated (at 1116) that an insurer who pays his insured under a comprehensive policy and then seeks under this right of subrogation to recover that sum in the name of his insured can have no greater rights against the tortfeasor than those of his insured: see also Simpson & Co v Thompson (1877) 3 AC 279 (at 284). The corollary of that proposition is that indemnification by an insurer of its insured does not provide a defence to a third party who is liable to the insured in respect of the same loss: see Sydney Turf Club (supra) (at 730).
It can be seen from this recitation of authority that the doctrine of subrogation was adopted for the purpose of ensuring that an insured is never more than fully indemnified. It is also evident that if the insurer is exercising the rights of the insured, an insurer may only be subrogated to those rights available to the insured. Conversely, if a cause of action is lost to the insured it is also lost to the insurer. In practical terms, the effect of the doctrine is that any amount obtained from an action brought by an insurer by subrogation is offset against the amount paid by the insurer by way of indemnity.
MMI's position is that the right of subrogation extends to the exercise of rights to reduce the loss for which the insured was indemnified. Support for MMI's position is said to be found in the judgment of Brett LJ in Castellain (supra) and in AFG Insurance Ltd v Mayor Councillors and Citizens of City of Brighton (1972) 126 CLR 655.
In AFG Insurance Ltd (supra) the appellant relied on Brett LJ's statement of the right of subrogation in Castellain (supra) which is set out above. Mason J held (at 663 ‑ 664) that the remarks of Brett LJ say no more than that there passes to the insurer such rights of the insured as may be necessary to ensure that he recovers no more than a full indemnity in respect of the loss. Mason J also noted (at 663) that the doctrine of subrogation comes into operation when the insurer meets his liability under the policy by making payment to the insured in respect of his loss. The insurer is then subrogated to the relevant rights of the insured.
Reliance was also placed by MMI on the decision in Sydney Turf Club (supra) and, in particular, on the statement of Jacobs JA (at 730), set out above, where it is said that the insured may sue at law any person who is liable to make good to him over the damage which he has suffered and in respect of which he is insured whether that liability arises from tort or from contract. If the insured has already been indemnified by his insurer then the insurer is subrogated to the insured's right against the party primarily liable in contract or in tort for the amount of the damage. That of course is a reference to the situation where, although the insured has been indemnified, the insured retains a right of action against the person or entity that is responsible for the loss. This point is made plain in the judgment of Mason JA in Sydney Turf Club (supra) where his Honour states (at 734):
"Where an insurer is subrogated to the rights of the insured against a third party, the insured does not acquire an independent cause of action in his own right. He succeeds to the insured's cause of action against the third party, in this case a right of action on the policy issued by the Jockey Club. That right of action remains in all respects unaltered; it is brought in the name of the insured and it is subject to all the defences which would be available if the action had been brought by the insured for his own benefit. Thus payment in full by the Government Insurance Office on account of the risk is a defence to the action by the appellant against the Jockey Club and it is no answer to that defence that the action is brought for the benefit of the insurer.
In truth there was no relevant right in the appellant to which the Government Insurance Office could become subrogated. Once the insured was paid in full by that insurer, the insured had no cause of action which he could enforce against the Jockey Club on its policy either for his own benefit or for the benefit of the other insurer."
Mason JA went on to note that the GIO could, in its own name, recover a pro rata contribution from the Jockey Club as an insurer against the same risk under the doctrine of contribution but that is not the action that was brought by the appellant.
It is clear from this statement and the decision in Sydney Turf Club (supra) that, where the insured has been fully indemnified, no right remains to which MMI may be subrogated against another insurer. That, of course, is not a complete answer to MMI's action because, although Speno is obliged to indemnify Hamersley the obligation arises from a clause in a contract to provide services and not from a contract of insurance.
The case of Commercial Finance Corp Ltd v Merchants Casualty Insurance Co [1931] 1 DLR 212 (confirmed on appeal in [1931] 4 DLR 210) is said by MMI to be an illustration of the application of the principles on which MMI relies in circumstances that are somewhat similar. Counsel for MMI referred to the decision of Garrow J at first instance who, having ruled that the negligent third party was liable to the plaintiff company for the loss which it had sustained, in an amount to be determined, considered the actions brought by the insurance companies against the third party: (at 225). He said (at 226):
"I'm unable to hold, therefore, that there is any direct right of contribution over, as between the credit company and the insurance companies. I do not know, however, that it is of much importance, because undoubtedly, upon payment of the plaintiff's claim as now or hereafter ascertained, the insurance companies are entitled to stand in the shoes of the plaintiff as against the retail credit company."
Garrow J further ruled that each of the insurance companies upon payment was to be subrogated to the rights of the plaintiff as against the third party. MMI cited this case as an example of a plaintiff being entitled to recover both against the negligent third party and as against the insurers.
In considering the significance of this decision it is important to identify the relevant facts. Insurance policies from two different companies, covering consecutive periods of liability, provided against loss through wrongful conversion of motor cars on which the assured had advanced money. The assured agreed with a third party that the third party should supply him with information as to the whereabouts and condition of the cars. The third party was negligent in the discharge of its duty, as a result of which the cars or their proceeds were converted and a claim was made by the assured against the insurers. In an action by the insurers against the third party and on an appeal by the third party it was held, contrary to the third party's submission, that each insurer was entitled to be subrogated to the rights of the assured against the third party (with respect to loss occurring during the relevant periods of risk), even though the happening of the risks against which the insured was to be indemnified gave rise to different causes of action from those on which the assured might establish his claim against the third party.
In reaching its decision, the Appellate Division of the Ontario Supreme Court considered the doctrine of subrogation and its application in the circumstances before them. Hodgins JA (with whom Middleton JA and Grant JA agreed) quoted from the decision in National F Insurance Co v McLaren 12 OR 682, where Boyd C provided the following view on subrogation (at 687):
"The doctrine of subrogation is a creature of equity not founded on contract, but arising out of the relations of the parties. In cases of insurance where a third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principle of securing full indemnity to the insured, on the one hand, and on the other of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss."
This statement of the principle is essentially the same as that of Brett LJ in Castellain (supra), only expressed differently.
Another case referred to and quoted from by Hodgins JA (at 235) is Burnand v Rodocanachi Sons & Co 7 AC 333, in particular the judgment of Lord Blackburn. The quotation lays down the doctrine of subrogation as a general rule of law (at 339):
"Where there is a contract of indemnity (it matters not whether it is a marine policy, or a policy against fire on land, or any other contract of indemnity) and a loss happens, anything which reduces or diminishes that loss reduces or diminishes the amount which the indemnifier is bound to pay; and if the indemnifier has already paid it, then, if anything which diminishes the loss comes into the hands of the person to whom he has paid it, it becomes an equity that the person who has already paid the full indemnity is entitled to be recouped by having that amount back."
Having considered these statements of principle together with various authorities from the Canadian Court of Appeal, Hodgins JA dismissed the third party's appeal against the plaintiff and the insurance companies on the question of subrogation.
The right of the insurer, by subrogation, to enforce a right by which the loss may be reduced is also evident from the statements of principle in Insurance Commission of Western Australia v Kightly (2005) 30 WAR 380. Steytler P (at [26]) described the principle in these terms:
"The doctrine of subrogation is founded upon equitable principles: … It prevents the insured from making a double recovery, once from the insurer and once from the tortfeasor (in a tort case) in circumstances in which the insurer has undertaken to indemnify the insured against actual financial loss. It does that by giving two rights to the insurer. First, it gives to the insurer the right to require the insured to pursue any remedy available against the tortfeasor for the benefit of the insurer. Second, it gives to the insurer the right to recover from the insured any benefit received by the insured in diminution or extinction of the loss against which the insured has been indemnified,"
Steytler P also referred (at [48]) to the decision of the High Court in Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR 436 (at 442) where the principle of subrogation was said by Wilson, Dawson, Toohey and Gaudron JJ to rest on the proposition stated in Castellain (supra) that an insured shall be fully indemnified but shall never be more than fully indemnified. In that context, Steytler P referred (at [50]) to the decision of the House of Lords in Napier v Hunter [1993] AC 713 where Lord Templeman said (at 738) that an insurer entitled to subrogation has an enforceable equitable interest in the damages payable by the wrongdoer and hence the insured person is guilty of unconscionable conduct if he does not provide for the insurer to be recouped out of the damages awarded against the wrongdoer. Of course, an insured who has been fully indemnified is also obliged to account for moneys paid to him or her by another insurer but that is not a matter that arises in this case.
It can be seen that there is a wealth of authority on the nature and scope of the doctrine of subrogation. Without question, an insurer may by subrogation assert any right which exists in the insured. Where the insured has been indemnified by another insurer, an insurer cannot by subrogation bring an action against the other insurer because the insured's right to recover from the other insurer was extinguished when the insured was indemnified by the other insurer.
However, in this case, although Hamersley has been indemnified by Zurich, there remains a judgment against Speno to indemnify Zurich based on a finding that Speno was under a primary obligation to indemnify Zurich. Where MMI has been required to contribute to the indemnity met by Zurich, there is, in effect, a portion of the judgment sum for which Speno was also liable and primarily liable, which has not been met by Zurich. Instead it has been met by Hamersley's insurer, MMI, against whom there is no judgment. Therefore, the entitlement of MMI to recover against Speno depends on the extent to which an insurer is entitled to recover by subrogation against a third party.
In the headnote to the report of the decision in Commercial Finance Corp Ltd (supra), the decision on appeal includes the following statement (at 213): The true test of the right to subrogation is whether the enforcement of the right would diminish the insurer's loss. I was unable to find such a broad statement in any of the judgments. However, of the authorities cited by the Court, there are a number of references to the issue of diminishing the insurer's loss in Castellain (supra). Brett LJ refers to diminishing the loss in the following terms (at 389 ‑ 390):
"I go further and hold that if a right of action in the assured has been satisfied, and the loss has been thereby diminished, then, although there never was nor could be any right of action into which the insurer could be subrogated, it would be contrary to the doctrine of subrogation to say that the loss is not to be diminished as between the assured and the insurer by reason of the satisfaction of that right."
Cotton LJ (at 393) states that, in order to ascertain the amount of loss, everything received by the insured and which diminishes the loss must be taken into account. It is this diminished amount which is the amount to be paid by the insurer under the indemnity: see also at 396.
I understand Brett LJ to be emphasising the existence of the rights in the insurer pursuant to the doctrine of subrogation. The fact that the loss has been diminished by satisfaction of a right of action in the assured does not remove or undermine that right, it simply means that in those circumstances the insurer cannot subrogate to the right in the assured because it has been met. Further, the diminution of loss referred to in Castellain (supra) was a reference to receipt by the insured of moneys which represented part of the value of the property, the full value having already been paid to the insured pursuant to the insurance policy. In Commercial Finance Corp Ltd (supra), the rights to which the insurer would subrogate were rights under a judgment and a judgment which had not been satisfied as this one had been. Therefore, the existing right which would then be pursued by way of subrogation was a right to pursue the claim for damages, a right in the insured rather than the insurer.
It is apparent that the diminution of the loss referred to in the various authorities is not the insurer's loss: it is the loss of the insured. However, where the insured has been fully indemnified, in accordance with the prohibition on an insured being more than fully indemnified, the amount obtained in diminution of the insured's loss is retained by the insurer to offset the amount paid under the policy. Nevertheless, I consider that referring to diminution of the insurer's loss, whilst that may indeed be the practical effect, has the potential to create a misunderstanding about the true nature of subrogation. This is because it is fundamental to the doctrine of subrogation that it is the right of the insured to reduce its loss which is being exercised by the insurer, not the insurer's right.
It is clear on these authorities that an insurer is entitled by subrogation to bring an action against a third party for the purpose of reducing or diminishing the insured's loss which the insurer is bound to pay as a result of its obligation to indemnify the insured. Therefore, the success of MMI's action depends upon the circumstances in which an insured who is the tortfeasor or who has been in breach of a contract or was the defendant in some other cause of action, may recover from another any part of the damages awarded. In the authorities to which I have referred, the action by subrogation is almost always exercising the right of an insured who is entitled to claim rather than being claimed against. Secondly, as was the position in Commercial Finance Corp Ltd (supra), the cases in which an insurer has been held to be entitled by subrogation to bring an action against a third party are all cases where the third party caused or contributed to, or was in some way responsible, for the loss.
In Speno Rail Maintenance Australia Pty Ltd (supra) Wheeler J, in considering the decision of Lord Sutherland in Caledonia North Sea Ltd (supra), addressed (at 327) the situation where an action is brought by subrogation against a third party who was obliged under contract to provide the insured with an indemnity. Wheeler J noted, in the context of considering whether Speno's obligation was primary or secondary, that Lord Sutherland observed that the fact that a party chooses to insure against the possibility of non‑recovery under the indemnity clause cannot affect the contractual obligations. Wheeler J made the following comment (at 327):
"It appears to me that that observation is equally applicable to this works and services contract where Hamersley required in effect that certain insurances be taken out or indorsed for the benefit of Hamersley. It seems to me that a rather similar view of the relationship between indemnity and insurance clauses, in the context of a lease, was taken by the Court of Appeal of Victoria in Buller Ski Lifts Ltd v Mount Buller Alpine Resort Management Board [2000] VSCA 31 [8], per Phillips JA where the court observed that the need for insurance cover recognises 'the commercial possibility of insolvency or some other obstacle standing in the way of the lessee meeting the call for an indemnity, when made'. This too appears to regard the indemnity provision as primary."
With respect to her Honour, I am not convinced that in Buller Ski Lifts Ltd (supra) (at [16]) Phillips JA did form such a view. However, it is the case that the decisions in Speno Rail Maintenance Australia Pty Ltd (supra) and in Caledonia North Sea Ltd (supra) make it clear that an action may be brought by subrogation against a third party who was obliged under contract to provide the insured with an indemnity.
I consider the decision of Lord Cairns LC in Simpson & Co (supra) conclusively and succinctly identifies the proposition which entitles MMI to succeed against Speno (at 284):
"Where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss."
Therefore, relevant to the facts in this case, as Hamersley was entitled to call on the contractual indemnity from Speno before calling on the indemnity under the insurance policy, Hamersley retains a right to seek from Speno an indemnity for that amount of the judgment sum that has been paid by MMI by way of contribution.
Putting to side for one moment recovery of any portion of the judgment sum, counsel for MMI also submits that even if Speno's argument is valid, it could not have application to payments made other than in respect of the judgment sum. The payments which are said to lie outside Speno's argument are these:
i.$25,000 paid in settlement of the Oatway proceedings;
ii.$9,000 paid for legal costs of the Oatway proceedings;
iii.$2,115.08 paid for interest on the damages award to Nolan;
iv.$4,292.64 paid for interest on the judgment in favour of Nolan;
v.$12,000 paid for the agreed appeal costs of Nolan;
vi.$97,375 paid for the agreed trial costs of Nolan.
Speno accepted that the reasoning it applied did not apply to the payment made to Oatway. However, Speno maintained that these amounts had also been paid and hence Hamersley had no liability to Oatway either. In view of the findings I have made, any of these amounts which comprise part of the judgment sum to which MMI is required to contribute should properly be met by Speno. As to any remaining amounts, the relief sought is a declaration of a right in MMI to exercise rights of subrogation to recover the whole of its liability to Zurich, including costs. Insofar as any of the above amounts do not form part of MMI's liability to Zurich, including costs, they fall outside the scope of the relief sought.
It is clear from the reasons I have given that I am satisfied of the following propositions:
(1)A full indemnity from one insurer precludes the insured from seeking an indemnity from another insurer.
(2)The insurer that has paid the indemnity may seek contribution from the insurer that has not.
(3)The insurer required to contribute may recover, by subrogation, the amount of the contribution from a third party who is liable in respect of the same loss.
(4)A third party is liable in respect of the same loss if the third party has contributed to the loss or has a primary obligation to indemnify the insured against the loss.
(5)The insurer required to contribute may, by subrogation, enforce the judgment against the third party required to indemnify the insured to the extent of the contribution.
(6)Where a judgment includes a primary and a secondary obligation to indemnify an insured, payment of the judgment sum by the party with the secondary obligation does not satisfy the secondary obligation unless the judgment so provides.
The consequence of these findings is that there will be judgment for the plaintiff in the MMI Action. The chamber summons in the Nolan action will be dismissed.
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