High Court strict interpretation of section 45 qualified by Queensland Supreme Court decision

Feb 2011 |

Nicholas v Wesfarmers Curragh Pty Ltd [2010] QSC 447

Further to the High Court's decision in Zurich Australia Insurance Limited v Metals & Minerals Insurance Pty Limited [2009] HCA 50 ("Zurich") (discussed in our March 2010 newsletter), the scope of section 45 of the Insurance Contracts Act 1984 has again been considered by the Queensland Supreme Court.

Section 45 of the Insurance Contracts Act 1984 (Cth) ("ICA") renders void the operation of 'other insurance' provisions of general insurance contracts and states:

"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 … the provision is void."

In Zurich, the High Court confirmed that the words "entered into" in section 45 only refer to actual insureds named in the contract of insurance, and not beneficial third parties named in the policy. The Supreme Court of Queensland has now clarified that those words will extend to named insureds in a contract of insurance, notwithstanding that the insurance contract was effected by an agent or parent company on their behalf.

Facts

A claim for damages was brought against both Wesfarmers Curragh Pty Ltd ("Curragh") and G&S Engineering Services Pty Ltd ("G&S").

Curragh, despite having its own insurance (which may have responded to the claim), sought indemnity under G&S's insurance policy on the basis it was a "Principal" to which that policy expressly extended cover.

G&S's insurer declined Curragh's claim on the basis of an "other insurance" clause in its policy, which stated:

"Where allowable by law, this Policy is excess over and above any other valid and collectible insurance and shall not respond to any loss until such times as the limit of liability under such other primary and valid insurance has been totally exhausted."

In reliance on this clause, G&S's insurer claimed that Curragh's own policy was "valid and collectible insurance" and therefore G&S's policy only operated as an excess layer, after Curragh's insurance was exhausted.

Curragh argued that the clause was void on the basis it was contrary to section 45, being an "other insurance" provision.

However, G&S's insurer contended that Curragh's policy was not a policy "entered into" by Curragh within the meaning of the section, and which therefore did not apply. It relied on evidence that Curragh's parent company Wesfarmers Limited ("Wesfarmers") had negotiated and procured the policy on behalf of itself and its wholly owned subsidiaries (including Curragh), and the Zurich decision.

Section 45

The court was required to determine:
1.  Whether the "other insurance" clause in G&S's insurance policy was void by reason of the operation of section 45(1); and
2.  If it was not void:
(a) did it exclude Curragh's policy from the category of "valid and collectible insurance"?; or
(b) should the G&S's insurance policy be construed as if the condition did not exist?

The court was not ultimately required to proceed beyond the first question, which was determined in the affirmative.

Findings

The court commenced by distinguishing Zurich on the basis that it applied to situations where the insured was a beneficial third party to the "other insurance policy", while in this case, Curragh was a named insured and a party to the policy, notwithstanding that Wesfarmers had procured it on Curragh's behalf.

The court held that entry into the contract of insurance by Wesfarmers on Curragh's behalf should be viewed as an entry into that contract by Curragh itself for the purposes of section 45, for two reasons.

1. Firstly, the relationship between Wesfarmers and Curragh was properly characterised as that of agent and principal, and no legal distinction is made between a transaction effected through an agent as opposed to one effected directly by the principal.

If the application of section 45 was confined to policies which were entered into directly by an insured party and not through an agent, its operation would become contingent upon a matter irrelevant to the statutory intention. The court referred to the ALRC Report on Insurance Contracts (No 20, 1982) which identified that the mischief section 45(1) was intended to avoid, was the prospect of an "other insurance" clause rendering a primary layer policy an excess layer policy without an appropriate reduction to the premium.

The court stated in this regard, "Parliament can hardly have intended to ignore entirely commercial convenience and practice", recognising that it is common place for insurance to be effected through brokers or other agents.

2. Secondly, the High Court majority in Zurich indicated a willingness to extend the meaning of the words "entered into" in appropriate circumstances, notwithstanding they found in that case that the phrase could not extend to include beneficial third parties.

The court therefore found that entering into a contract of insurance by a parent company on behalf of itself and subsidiaries was an "entering into" the contract of insurance by the subsidiary, for the purposes of section 45(1).

The court also clarified that there is no requirement that the party seeking to benefit from section 45(1) (Curragh), must have entered into the policy under which it is seeking indemnity (i.e. the G&S policy containing the other insurance clause).

Conclusion

It is therefore necessary when relying on section 45(1), to ensure that the beneficiary of the other insurance policy has a proximate relationship with the party who effected that policy (such as parent and subsidiary or agent and principal) such that it can be said to have "entered into" the other insurance policy itself.

However, there is no requirement that the beneficiary must have "entered into" the policy containing the "other insurance clause" and no proximate relationship with the party who effected that insurance is necessary.