What takes priority – the schedule or the policy wording?
Dec 2019 | InsuranceIntroduction
An insurance contract is typically formed after a process of negotiations, which may involve the issuing of a quotation by the underwriter and the completion of a policy proposal by the contracting insured. The proposal will contain various information about the contracting insured, including the entities to be covered, which enables the insurer to assess the risk exposure and the cover to be provided.
The insurance contract itself will almost invariably comprise a standard policy wording and a specifically tailored policy schedule. However, the potential problem with having a standard form policy wording combined with a tailored policy schedule is it can lead to inconsistencies within the insurance contract.
When this occurs, questions can arise as to what takes priority – the schedule or the policy wording – and what weight is to be attached to pre-contract documents such as the proposal.
These issues were recently considered by the Western Australian Court of Appeal in Tokio Marine & Nichido Fire Insurance Co Ltd v Hans Bo Kristian Holgersson trading as Holgersson Complete Home Service.1
The Facts
In or about February 2015, the McMurrays engaged Mosman Bay to undertake renovation works at their property. Mosman Bay subcontracted the painting works to Holgersson.
On 16 January 2016, while the renovations works, including the interior painting, were being carried out, a fire broke out at the McMurrays' property, causing substantial damage to the property.
At the time of the incident, Mosman Bay held cover with Tokio Marine & Nichido Fire Insurance Co Ltd (Tokio) pursuant to an annual projects and legal liability insurance policy (Tokio policy).
The McMurrays brought proceedings against a number of parties, including Tokio. After granting indemnity to Mosman Bay, Tokio, in the exercise of its rights of subrogation, required Mosman Bay to maintain proceedings against Holgersson.
A preliminary question arose as to whether or not, on its proper construction, Holgersson was also an insured under the Tokio policy, which, it argued, prevented Mosman Bay from suing it.
The Tokio policy
The primary judge found that the Tokio policy comprised the policy wording, being a 24 page, standard form document, a one page schedule, and a certificate of currency.
On appeal, the parties agreed that the certificate of currency was not a contractual document and the appeal proceeded on the basis that the policy comprised the policy wording and schedule only.
In the definitions section of the policy wording, ‘Named Insured’ was defined as follows:
'a) You
b) Your personal representatives
c) Additional Insured(s):
(a) any principal; orβ¨
(b) the head contractor; or
(c) the project manager; or
(d) all contractors and sub-contractors but excluding manufacturers and suppliers.
not being You but being a legal entity with whom You have entered into a Contract and provided their interests are required to be insured jointly by You, and then only to the extent required by the terms set out in the Contract, and only in respect of work performed as a part of the Project.
d) Any officers, committees or members of Your canteen, sports, social and welfare organisations and any member of Your fire, first aid, medical or ambulance services whilst acting in their capacity as such and in respect of activities associated with the Project, and acting performed within the scope of their duties in their respective capacity.
e) Any legal identity identified by name in the Schedule as having a financial, legal, or equitable interest in the Project, but only in respect of the insurance provided under Section 1 and only to the extent of such financial, legal, or equitable interest.
The Named Insured(s) as outlined above shall represent the entire group as described unless otherwise specified in the Schedule.' [bold emphasis added]
‘You, Your, Insured’ was defined to mean 'the Person(s) or legal entity named in the Schedule.' [bold emphasis added]
The relevant insuring clause provided:
'We agree (subject to the terms, Claims Conditions, General Conditions, Exclusions, Definitions and Limits of Liability incorporated herein) to pay to You or on Your behalf all amounts You shall become legally liable to pay as compensation in respect of:
1.1 Personal Injury; and/or
1.2 Property Damage; and/or
1.3 Advertising Injury;
Happening during the Policy Period within the Geographical Limits and caused by or arising out of an Occurrence in connection with the Project'. [bold emphasis added]
Also of relevance was Condition 3 (‘Cross Liabilities’), which provided:
'This insurance extends to indemnify:
3.1 Each of the parties comprising the Named Insured…' [bold emphasis added]
As Mosman Bay was not required by contract to take out cover for the benefit of Holgersson, subsection ‘c’ of the definition of ‘Named Insured’ had no application. The issue, therefore, was whether or not Holgersson fell within subsection ‘a’, which, by virtue of the definition of ‘You, Your, Insured’ in the policy wording, meant a person or legal entity 'named in the Schedule'.
The policy schedule relevantly stated:
'INSURED: Mosman Bay and all Principals, Contractors, and Sub-Contractors.' [bold emphasis added]
Despite their capitalisation in the policy schedule, the terms 'Principals, Contractors, and Sub-Contractors' were not defined in the policy.
Primary judgment
The primary judge identified, as the primary issue for resolution, the relationship between the definition of 'You' in the policy wording and the description of ‘Insured’ in the schedule.
The primary judge rejected Tokio's contention that 'named' in the definition of ‘You, Your, Insured’ in the policy wording necessarily meant named by proper noun, because it failed to give meaning to the inclusion of the words 'all Principals, Contractors, and Sub-Contractors' in the schedule.2
While the primary judge accepted, as Tokio contended, including all principals, contractors and subcontractors in the meaning of ‘You’ appeared to render subsection ‘c’ of the definition of ‘Named Insured’ unnecessary, his Honour identified numerous other provisions in the 'boiler plate provisions' of the Tokio policy that plainly had no application to the project in question.3
His Honour noted that, as an insurance policy, the Tokio policy should be given a business-like interpretation, requiring attention to the commercial objects it was intended to secure. The construction advanced by Tokio was not, in his view, a commercial interpretation.4
In arriving at this conclusion, the judge considered comments in past decisions to the effect that, where numerous different sub-contractors were engaged, their was convenience from everybody's point of view in allowing the head contractor to take out a single policy covering the whole risk.5
Accordingly, the primary judge found that Holgersson was covered under the Tokio policy.
Appeal Decision
On appeal, Tokio's primary contention was that on a proper construction of the Tokio policy, the words, 'and all Principals, Contractors, and Sub-Contractors' in the stipulation of ‘Insured’ in the schedule should be treated as having no content or operation.6
There were two primary reasons for this. First, the phrase did not amount to ‘naming’ those parties in the schedule, and secondly, its inclusion was so antithetical to the terms of the policy wording it must be considered an error. In this regard, it relied, in part, on the terms of the policy proposal, which sought insurance in terms of the policy wording with no mention of cover extending to principals, contractors, and sub-contractors.
The Court of Appeal rejected Tokio’s contentions. The Court stated it was generally reluctant to construe a contract in a manner that rendered a provision or part of the contract superfluous, but when comparing a pre-printed set of terms (as in the policy wording) with terms drawn for the specific contract (as in the policy schedule), that reluctance carried more weight when construing the latter.7
The Court referred to its decision in Black Box Control Pty Ltd v TerraVision,8 in which it outlined the general principles of contract construction which had emerged from decisions of the High Court, and reaffirmed, among other things, the principle of objectivity in construing contracts and the need to consider the contract as a whole and the relevant background context facts.
As to Tokio’s reliance on the policy proposal, the Court stated:9
'An instrument is not to be construed by tracing through the communications or negotiations preceding its making with a view to ascertaining which such communications led to inclusion, within it, of the clause or phrase the construction of which is in issue. The process of construction involves the search for the meaning of what the parties said in the instrument, not a search for what the parties meant to say.' [bold emphasis added]
While it was accepted that extrinsic evidence may assist in identifying the commercial purpose or object of the contract, the terms of the policy proposal were of little assistance in this regard.
After concluding that there was no obvious error, the Court of Appeal dismissed the appeal, finding that all principals, contractors and subcontractors were within the definition of ‘You’, therefore, Holgersson was covered under the Tokio policy.
Conclusion
The summary of construction principles set out in Black Box Control Pty Ltd v TerraVision provides a useful reference guide when considering construction issues. Below is the summary of those principles:10
'….
- The process of construction is objective. The meaning of the terms of an instrument is to be determined by what a reasonable person would have understood the terms to mean.
- The construction of a contract involves determination of the meaning of the words of the contract by reference to its text, context and purpose.
- The commercial purpose or objects sought to be secured by the contract will often be apparent from a consideration of the provisions of the contract read as a whole. Extrinsic evidence may nevertheless assist in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding of the genesis of the transaction, its background, the context and the market in which the parties are operating.
- Extrinsic evidence may also assist in determining the proper construction where there is a constructional choice, although ... the question of whether matters external to a contract can be resorted to in order to identify the existence of the constructional choice has not been determined.
- If an expression in a contract is unambiguous and susceptible of only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning.
- To the extent that a contract, document or statutory provision is referred to, expressly or impliedly, in an instrument, that contract, document or statutory provision can be considered in construing the instrument, without any need for ambiguity or uncertainty of meaning.
- There are important limits on the extent to which evidence of surrounding circumstances (when admissible) can influence the proper construction of an instrument. Reliance on surrounding circumstances must be tempered by loyalty to the text of the instrument. Reference to background facts is not a licence to ignore or rewrite the text. The search is for the meaning of what the parties said in the instrument, not what the parties meant to say.
- There are also limits on the kind of evidence which is admissible as background to the construction of a contract, and the purposes for which it is admissible. Insofar as such evidence establishes objective background facts known to the parties or the genesis, purpose or objective of the relevant transaction, it is admissible. Insofar as it consists of statements and actions of the parties reflecting their actual intentions and expectations it is inadmissible. Such statements reveal the terms of the contract which the parties intended or hoped to make, and which are superseded by, or merged into, the contract.
- An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience. However, it must be borne in mind that business common sense may be a topic on which minds may differ.
- An instrument should be construed as a whole. A construction that makes the various parts of an instrument harmonious is preferable. If possible, each part of an instrument should be construed so as to have some operation.
- Definitions do not have the same substantive effect. A definition is not to be construed isolation from the operative provision(s) in which the defined term is used. Rather, the operative provision is ordinarily to be read by inserting the definition into it.'
βββIn this decision, the central principle under consideration was the preference to construe each part of a contract so as to give it some operation. Where this was not possible, preference was given to parts that were drawn for the specific contract as opposed to pre-printed terms. For that reason, the policy schedule took priority over the policy wording.
It is important to bear in mind, however, that in different circumstances, a different outcome could follow. This will depend largely on a consideration of the contract as a whole and the commercial context in which it was formed. Extrinsic evidence, such as the policy proposal may play only a limited part in the enquiry. To the extent that any such evidence is said to reflect the parties’ actual intentions, that evidence will be inadmissible.
1 [2019] WASCA 114.
2 Tokio Marine & Nichido Fire Insurance Co Ltd v Hans Bo Kristian Holgersson trading as Holgersson Complete Home Service [2019] WASCA 114 [34].
3 Ibid [36].
4 Ibid [37].
5 Ibid [37].
6 Ibid [42].
7 Ibid [50].
8 [2016] WASCA 219.
9 Tokio Marine & Nichido Fire Insurance Co Ltd v Hans Bo Kristian Holgersson trading as Holgersson Complete Home Service [2019] WASCA 114 [61].
10 Ibid [51].
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