Contractual Insurance Clauses – Is Erect Safe still good law?Oct 2019 | Insurance
It is often the case in multi-party claims that a contractual relationship will exist between one or more defendants or third parties. Where those arrangements are reduced to writing, the contract will almost invariably contain insurance and indemnity provisions. Occasionally, the insurance provision will provide that one party is to take out liability insurance for the benefit of the other party. The scope of this obligation has proved in the past to be fertile ground for disputes.
While there are well-established rules for construing contracts in a commercial context, the application of these rules to the interpretation of insurance clauses is often controversial, largely due to the fact-specific nature and purpose of each contract and the claim circumstances.
It is often argued, based on the decision of the New South Wales Court of Appeal in Erect Safe Scaffolding (Australia) Ply Limited v Sutton,1 that the scope of the insurance covenant should be limited by reference to the scope of the indemnity provision in the contract. This argument was recently considered by the District Court of Western Australia in Garnett v Qantas Airways Limited.2
On 4 November 2012, the plaintiff was a passenger on a Qantas flight from Perth to Karratha. The plaintiff disembarked the Boeing 737 aircraft at Karratha airport via the rear stairs and followed a path across the tarmac to the terminal. As the plaintiff approached a lighting tower, his left foot struck the corner of a raised concrete plinth at its base causing him to trip and fall.
The first defendant was Qantas. Karratha Airport was owned and occupied by the second defendant, the City of Karratha (Karratha). Karratha had the exclusive responsibility for the erection of and alterations to any structures airside, including placing permanent barriers around the plinth and painting it.
The third defendant (Skystar) contracted with Qantas to provide ground handling services at Karratha Airport and employed a number of staff, including ground handlers, for that purpose. Skystar was responsible for the marshalling of passengers disembarking from aircraft to the terminal building.
Karratha and Skystar entered into a lease for office space in the airport terminal for a period of five years commencing 1 June 2012.
Clauses 6.1 and 6.2 of the lease dealt with insurance and indemnities as follows:
- The Lessee occupies the Premises at the risk of the Lessee in all respects.
- Except to the extent caused or contributed to by the Lessor, the Lessee releases and agrees to indemnify the Lessor and keep the Lessor indemnified from all costs, claims, actions, proceedings, demands, expenses, judgments, damages or losses of any kind including any relating to loss of life of or personal injury to any person or damage to any property (wherever occurring) resulting from or attributable to anything occurring on or in the vicinity of the Premises by any act, neglect, default or omission by the Lessee or any of the Lessee's Employees and Visitors.
- Throughout the Term the Lessee must effect and keep current a public insurance office approved by the Lessor [acting reasonably], on behalf of the Lessee and the Lessor for their respective rights and interests;
- a policy to cover the Lessee's fixtures, fittings plant and equipment and stock in the Premises to their full insurable value against all usual risks against which in the opinion of the Lessor from time to time a tenant should ordinarily insure;
- a policy to cover all plate glass in the Premises against damage or destruction for its full replacement value;
- a public liability policy of not less than $10,000,000 ... in respect of any one occurrence;
- a policy of employee's indemnity insurance in respect of the Lessee's employees; and
- a policy of motor vehicle insurance and third party cover in respect of the Lessee's vehicles.'
[bold emphasis added]
Karratha, in a counterclaim against Skystar, pleaded that, pursuant to cl 6.2(1)(c) of the lease, Skystar was obliged to effect a public liability policy on behalf of both Skystar and Karratha for their respective rights and interests. Karratha claimed Skystar had breached the obligation by failing to take out a public liability policy as required and sought damages for breach of contract for an amount equivalent to any liability Karratha may be found to have to the plaintiff and costs.
Skystar argued against this on two bases. First, when interpreting the insurance clause, regard should be had to the indemnity clause, which expressly did not cover Karratha for liabilities caused or contributed to by Karratha. Skystar referred to Erect Safe in support of its position.
Karratha, on the other hand, argued that the clauses should be read separately and the intent of the insurance clause was to cover both parties, including for their own negligence.
Secondly, Skystar argued that the rights and interests referred to in cl 6.2 were limited to the rights and interests of Karratha pursuant to the lease. The lease was concerned with the lease of an office space within the airport terminal, and did not extend to the tarmac or the area where the plaintiff's accident occurred.
Against this, Karratha argued that the permitted purpose for the lease was for 'ground handling, office and ramp functions'. The ground handling and ramp functions were also carried out airside, and it was always understood by the parties that Skystar employees would be engaged to perform their duties on parts of the airport not contained within the demised premises.
Accordingly, it argued, the only reasonable basis for construing the insurance clause was that it was intended to cover Karratha in respect of all Skystar operations at the airport, including in areas not part of the demised premises. In support of its argument, Karratha referred to clauses 6.2(1)(d) and (e), which required Skystar to effect employees' indemnity insurance and motor vehicle insurance; the argument presumably being that because those requirements extended to activities beyond the demised premises, so to did the public liability insurance clause.
The Court began by reaffirming the well-established principle of objectivity when construing contracts. That is, 'the construction of a written contract is concerned with ascertaining what a reasonable person would have understood the parties to mean'.3 Put another way, the question is not what the parties intended to say but what they actually said.4
It then turned to considering Erect Safe and other decisions specifically dealing with the interpretation of insurance clauses in contracts. Erect Safe concerned a principal contractor’s claim for cover under a subcontractor’s policy pursuant to an insurance covenant in the subcontract. As with the lease agreement in Garnett, the indemnity and insurance provisions sat side by side in the contract.
McLellan CJ in Erect Safe said:5
'The approach taken in each of these decisions is that, in the absence of express words, the obligation under an insurance clause in a contract which is provided to support an indemnity clause will not require the subcontractor to maintain insurance against loss occasioned by the Head Contractor's negligence.' [bold emphasis added]
The Court then turned to the New South Wales Court of Appeal decision of GIO General Ltd v Centennial Newstan Pty Ltd.6 GIO also concerned a claim for cover by a principal under a subcontractor’s policy but, unlike in Erect Safe, the principal was successful in establishing an entitlement under the subcontractor’s policy.
In GIO, it was submitted on behalf of the contractor that the insurance clause was required to be construed in the same manner as in Erect Safe. In addressing this argument, Gleeson JA stated:7
'[t]he statement of McLellan CJ in Erect Safe was not to be understood as a statement of principle, but merely an observation concerning the 'approach' taken in a number of authorities when construing the obligation under an insurance clause which is provided to support an indemnity clause. His Honour's observation was also qualified by the need to have regard to the express words of the insurance clause under consideration.'
There were a number of distinguishing features in GIO, including that the insurance clause in the contract was supplemented by a special insurance obligation in the regulations, and the scope of the insurance obligation was broader than the indemnity in so far as it covered a wider range of beneficiaries. For those and other reasons, the Court of Appeal considered that Erect Safe was not determinative of the construction issue in that case.
In both Erect Safe and GIO, it was agreed that a contractual clause under consideration must be construed having regard to the contract as a whole. In applying this principle of construction, the Court in Garnett noted that clause 6.1 did not contain the only indemnity. A second indemnity was contained in clause 10.3, which provided:
- The Lessee must indemnify the Lessor, against any cost, expense, loss or other liability resulting from:
- any damage to the Premises or other property; or
- the death of, or injury to, any person, caused by the presence of Contamination, Pollution or Environmental Harm in on or under the Premises caused or contributed to by the act, neglect or omission of the Lessee.'
[bold emphasis added]
On a plain reading of the lease, the Court considered that because cl 6.1 was immediately adjacent to cl 6.2 and under the heading ‘Insurances and Indemnities’, and there was a second indemnity at cl 10.3, cl 6.1 was not to be read on a stand-alone basis. The Court held, in accordance with the reasoning in Erect Safe, that because the indemnity in cl 6.1 did not extend to claims arising from Karratha’s own negligence, the insurance obligation in cl 6.2 was also limited in the same way.8
The Court then considered the commercial purpose of the contract, which involved the lease of premises inside the airport terminal. It held that the 'rights and interests' referred to in cl 6.2 were limited to the rights and interests of Karratha pursuant to the lease, and the insurance obligation did not extend to an occurrence outside the demised premises, in this case on the tarmac.9
For these reasons, Karratha’s claim for cover under Skystar’s policy failed.
While the Court in Garnett followed the reasoning in Erect Safe, as stated in GIO, the approach in Erect Safe is not a principle of construction. The question of whether or not an insurance covenant is intended to support, and be construed by reference to, a contractual indemnity will depend on a range of factors, including the specific wording of the clauses under consideration, the contract as a whole, and the commercial purpose of the contract.
The fact that an insurance clause may sit next to an indemnity clause in the contract will not, in itself, result in a construction consistent with Erect Safe. Other decisions concerning indemnity and insurance provisions sitting adjacent to each other have resulted in different outcomes.10
If, for example, the scope of the insurance obligation is broader than the indemnity, then it may be difficult to argue that the two should be read together. To demonstrate the point, if an insurance obligation extended to benefiting subcontractors but the indemnity did not, it would be difficult to argue, in response to a claim for cover by a subcontractor, that the insurance obligation was limited to supporting an indemnity that did not benefit subcontractors.
A Court will strive to give meaning to a clause that is consistent with the other provisions in a contract.11 It is therefore important to consider the contract as a whole. Clues, for lack of a better word, as to the intended meaning of a clause (judged objectively) may be found in different parts of the contract. In Garnett, this was a second indemnity clause. Another example is a clause dealing with the proportionate payment of a policy excess.
As demonstrated in Garnett, it is also necessary to consider the scope and commercial purpose of the contract. In GIO it was observed that is not uncommon for a building contract between a principal and head contractor to provide that one of them will take out a policy of insurance indemnifying all parties who may be involved in the works.12 A contract in a construction context could therefore potentially be construed differently to a similarly worded contract in a different context, for example, a lease agreement as in Garnett.
So, the question is not so much whether Erect Safe remains good law, but whether the approach taken in Erect Safe is the correct approach to interpreting an insurance provision. The answer to this is likely yes, but only in specific circumstances.
1  NSWCA 114.
2  WADC 89.
3 Garnett v Qantas Airways Limited  WADC 89  citing Buss JA in Westina Corporation Pty Ltd v BGC Contracting Pty Ltd  WASCA 213 .
4 Samways v WorkCover Queensland  QSC 127 , citing A Treatise on Deeds (1906) by Robert Frederick Norton; see also Henry v CSBP Ltd  WADC 1  citing McLure P in Hancock Prospecting v Wright Prospecting (2012) 45 WAR 29 .
5 Garnett v Qantas Airways Limited  WADC 89 .
6  NSWCA 13.
7 Ibid .
8 Garnett v Qantas Airways Limited  WADC 89 .
9 Ibid .
10 See for example Henry v CSPB  WADC 1 and Pillinger v Lismore City Council  NSWSC 447.
11 GIO General Ltd v Centennial Newstan Pty Ltd [2014 NSWCA 13  citing Fitzgerald v Masters (1956) 95 CLR 420, 437; Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99, 109; Sigiriya Capital Pty Ltd v Scanlon  NSWCA 401  per Leeming JA (Meagher JA and Sackville AJA agreeing); and  citing Chapmans Ltd v Australian Stock Exchange Ltd  FCA 474; 67 FCR 402, 411.
12 GIO General Ltd v Centennial Newstan Pty Ltd  NSWCA 13  and .
This article may provide CPD/CLE/CIP points through your relevant industry organisation.