Australia: "Other Insurance" Clauses Revisited By Australian Court

This decision resolves competing case law on the application of Section 45 of the Insurance Contracts Act 1984 (Cth) (ICA) to "other insurance" clauses in contracts of general insurance. Insurers and insureds need to carefully consider the application of "other insurance" clauses, especially in circumstances where insurance is procured pursuant to a contractual obligation to indemnify or for the benefit of a subsidiary.

Background

In 2003 the appellants, Lambert Leasing, Inc. and SAAB Aircraft Leasing, Inc. sold an aircraft to Mackellar Mining Equipment Pty Ltd and Dramatic Investments Pty Ltd (the Partnership). The Partnership then leased the aircraft to Lessbrook Pty Ltd, trading as Transair.

On 7 May 2005 the aircraft crashed, tragically claiming the lives of all 13 passengers and 2 pilots. Relatives of the deceased commenced court proceedings in the United States seeking compensation from the appellants.

The appellants claimed on a policy of insurance with Global Aerospace Underwriting Managers Ltd (Global Policy), to which other insurers had also subscribed. The policy had been procured for the benefit of SAAB AB and its subsidiaries, which included the appellants. Global indemnified the appellants and met the cost of defending the US proceedings. 

Sometime later the appellants discovered the existence of an aircraft liability insurance policy with QBE in which they were described as "Additional Insureds". A claim was made on the QBE policy.

QBE declined to determine indemnity on the basis that the appellants had not provided material necessary to its determination of whether the conditions precedent to cover had been satisfied.

The appellants commenced proceedings against QBE and the Partnership in the Supreme Court of NSW. The appellants sought declarations that they were entitled to an indemnity from QBE under the policy and from the Partnership pursuant to the contract for sale of the aircraft.

At first instance,  the trial judge dismissed the proceedings, finding in part that Section 45(1) required an insured to have "entered into" both contracts of insurance.

Section 45 applies to "other insurance" clauses in contracts of general insurance and provides:

• A provision that limits or excludes the liability of the insurer to indemnify the insured by reason that the insured has entered into another contract of insurance that covers the same risk, not being a contract required to be effected by law, is void (section 45 (1)) (emphasis added).
• Section 45 (1) does not apply to a policy of insurance that provides cover in respect of some or all of a loss that is not covered in the first mentioned contract (section 45 (2)).

The trial judge disagreed with the decision of the Supreme Court of Queensland in Nicholas v Wesfarmers Curragh Pty Ltd & Ors ¹ where it was determined, with hesitation, that Section 45 did not require the insured to have "entered into" both contracts.

The appellants appealed and the proceedings came before their Honours Justices Ward, Gleeson and Payne of the NSW Court of Appeal for determination

NSW Court of Appeal decision

Both the Global Policy and the QBE Policy contained an "other insurance" clause that sought to limit the liability of the insurer where another insurance policy provided cover for the same risk.

Applying the High Court decision in Zurich Australia Insurance Ltd v Metals & Mineral Insurance Pty Ltd (Zurich)², the Court of Appeal agreed with the trial judge's determination that Section 45 required an insured to have "entered into" both contracts of insurance.

The Court of Appeal then considered whether the appellants had "entered into" the Global policy and the QBE policy. Again applying Zurich, the Court of Appeal held that only a contracting party can be considered to have "entered into" a policy within the meaning of Section 45.

The Court of Appeal determined that the appellants had not "entered into" the Global Policy or the QBE Policy. In reaching this conclusion, the Court of Appeal took into account the following factors:

Global Policy

• the policy described the appellants as "Additional Insureds" distinguishing them from the "Insured";
• the appellants were not involved in negotiating the terms of the contract; and
• the appellants had not contributed towards payment of the premium.

QBE policy

• although the Global Policy named SAAB AB and its subsidiaries both past and present as "Insureds" this did not of itself establish that the appellants "entered into" the policy;
• a future subsidiary cannot be considered a contracting party;
• policy coverage for terrorist related events did not extend to the appellants;
• the producing slip only recorded SAAB AB as the assured;
• the appellants were not involved in the negotiations of the policy terms; and
• the appellants had not paid any part of the premium.

It was common ground between the parties that should the Court of Appeal determine that Section 45 did not void the "other insurance" clause in the QBE Policy, then both the "other insurance" clauses cancelled each other out and the appellants could elect from which insurer they sought an indemnity.

The Court of Appeal, however, held that the appellants were prevented from recovering the same amount under the QBE Policy that they had already received under the Global Policy. The only available course of action was for Global to seek contribution from QBE.

Separately, the Court of Appeal determined that the appellants were not entitled to an indemnity from the Partnership under the contract for sale of the aircraft.

The proceedings were dismissed and the appellants were ordered to pay the respondents' costs of the proceedings.

Implications

• Section 45 requires the insured to have "entered into" both contracts of insurance.
• Only contracting parties will be considered to have "entered into" a contract of general insurance within the meaning of Section 45. The fact that a policy describes a party as the "insured" will not be the sole factor in determining if that party is a contracting party. Other factors include whether the party was involved in negotiating the terms of the contract or contributed to payment of the premium.
• Insurers and insureds need to carefully consider the application of "other insurance" clauses, especially in circumstances where insurance is procured pursuant to a contractual obligation to indemnify or for the benefit of a subsidiary.
• Where both policies of insurance contain "other insurance" clauses, neither of which are void under Section 45, then the two policies cancel each other out and the insured can elect from which insurer to claim indemnity.

Please do not hesitate to contact us to discuss the implications of this decision or if you require assistance with the application of "other insurance" clauses.

Footnotes

1 [2010] QSC 447

2 [2009] HCA 50

"Other insurance" clauses revisited by Australian court

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