Waiver of subrogation – Where to now?
Oct 2016 |
Introduction
The two authorities of National Oil Well (UK) Ltd v Davy Offshore Ltd1 and Woodside Petroleum Development Pty Ltd v H & RE & W Pty Ltd2 are conflicting in relation to the effect of a ‘waiver of subrogation’ clause in a contractors’ all risk policy of insurance.
In the National Oilwell case, the English Court considered that the waiver clause was confined to claims for losses which are insured for the benefit of the party claimed against. However, in the Woodside Petroleum case, the Full Court of the Supreme Court of Western Australia, in declining to follow National Oilwell on the point, held that there was no basis for limiting the ambit of the waiver clause to the cover provided, ie the court rejected the argument that the waiver was commensurate with cover.
These authorities were considered by Mackenzie J of the Queensland Supreme Court in GPS Power Pty Ltd & Ors v Gardiner Willis Associates Pty Ltd.3
GPS Power
In that case, his Honour concluded that he should apply Woodside Petroleum as representing the current state of the law on the subject. As the bulk of the claim had been pursued on the basis of a subrogated claim, his Honour concluded that such a claim was unable to be brought because of the provisions of the subrogation clause which provided that, in the event of the insurer indemnifying or making a payment to any insured(s), the insurer shall not exercise any rights of subrogation against any other insured(s).
The decision went on appeal to the Queensland Court of Appeal which confirmed the decision at first instance by 2-1 majority.4
The policy in question on that appeal was in respect of work carried out on the Gladstone Power Station in relation to which the respondent had performed design and engineering functions.
The appellant suffered loss as a result of damage to the power station, which was caused by the respondent’s negligence. Most of the loss was recovered by the appellants under an insurance policy, but the respondent was sued by the appellants for the whole loss. As to that part of the loss which was covered by the insurance policy, the suit was brought by way of subrogation.
The policy contained a definition of the expression ‘the Insured’. The respondent fell within that definition because it was a consultant. The definition concluded however:
‘‘This definition of ‘the Insured’ shall exclude consultants but only in respect of such consultant’s professional duty of care to other persons and/or parties included in this definition of ‘the insured’."5
The respondent contended that it was an insured because it was in certain circumstances entitled to be indemnified under the policy; whereas the appellants contended that, prima facie, under the definition of ‘the Insured’, the respondent was excluded and the limitation on the exclusion did not apply to it, because it was not entitled to be treated as ‘the Insured’ in respect of its capacity as a person owing a professional duty of care to other persons included in the definition – the appellants being such persons.
The subrogation provisions in the policy of insurance denied the insurer the right to exercise ‘any rights of subrogation against any other insured(s)’ – ‘other,’ that is, than an insured which had received a payment (ie the appellants), and they provided that the insurer waive any rights arising by subrogation against ‘any insured ... described by (the) policy’.6
As de Jersey CJ7 noted, the question for determination by the court was whether it should, in a sense, transpose the limitation on the insurance cover available to the respondent in that capacity as an ‘Insured’ party, into the operation of the subrogation provisions. As his Honour observed, the point arose because the definition of ‘the Insured’ placed the respondent into that category only for matters other than ‘in respect of (its) professional duty of care to other’ insured entities, with the payment made to the appellants having arisen from the respondents’ breach of their professional duty.
The majority judgment
Williams J, who delivered the leading majority judgment, regarded the definition of who is an ‘insured’ as not being concerned with the extent of the interest insured, but rather thought that as long as there was some liability insured against, the definition operated to encompass the party described as an ‘insured’.
His Honour was of the view that given that the definition was one which was said to apply for the purpose of the policy, it must be adopted throughout unless the context clearly indicated otherwise. His Honour considered that if A and B were each insured under the same policy of insurance with respect to a loss, it would be meaningless for the insurer to think in terms of subrogation with respect to a claim against B consequent upon paying out a claim made by A. Accordingly, when the clause spoke of not exercising any rights of subrogation ‘against any other insured’ it must realistically be referring to a situation where the ‘insured’ was not insured by the policy with respect to the particular loss in question. His Honour considered that the subrogation clause could only have operation where, as was the situation in that case, the respondent was caught by the expression ‘the insured’ but the loss in question was one in respect of which it was not covered by the policy.
Williams J noted that a lot of the difficulty in the present case may have arisen from the fact that an exclusion of losses arising ‘in respect of such consultant’s professional duty of care to other persons and/or parties included in this definition’8 meant that much (perhaps almost all) potential liability was excluded. His Honour thought, however, that the fact that the extent of risk covered by the policy was in small compass did not mean that the party described as an ‘insured’ lost that character simply because liability of the insurer was so limited.
Noting that had the insurer wished the definition of ‘the insured’ to encompass only the parties described insofar as they were insured against the particular risk, it would have been easy for the definition to say so in express terms, Williams J held that the waiver must extend to parties described in the definition as ‘insured’ even though not insured against the particular loss in question. Accordingly, it followed that the insurer was not entitled to bring the action against the respondent relying on the principle of subrogation.
In his judgment, Williams J noted that the result may ‘at first blush’ be thought to be rather unusual. His Honour, however, could see reasons why the large number of parties affected by a works undertaking (such as that involved in the present case) and an insurer might consider that such a position had commercial advantages.
De Jersey CJ agreed with the reasons of Williams J, noting that the result of the case depended on the construction of the contract of insurance and that there was not any sufficient reason to depart from a literal construction. His Honour thought it was significant that the interests of certainty favour easy identification of an ‘insured’ entity for the purposes of the waiver of rights arising by subrogation. Like Williams J, his Honour also considered that had the parties wished to limit the provisions as the appellants contended, the parties could, with ease, have done so expressly and with complete clarity.
The dissenting judgment
Pincus JA dissented. His Honour observed that, insofar as the Woodside Petroleum case decided that a clause providing for waiver of subrogation rights should be given its ordinary meaning and should not be read down so as to confine its operation in the way suggested by the National Oil Well case, that he would, unhesitatingly, follow that view. Pincus JA also thought it sounder, as a matter of policy, to favour a construction enhancing, rather than restricting, the scope of the waiver.
His Honour was however, attracted to the argument that if one applies that part of the definition of ‘the insured’ which sets out the extent to which a consultant is within ‘the insured’, then the waiver could not cover the respondent. His Honour thought that the respondent’s argument required acceptance of the view that if a party is, in any capacity or for any purpose, an insured, it is an insured for all purposes.
Pincus JA thought that if that were so, and the respondent were given temporary insurance under the policy, it being contemplated that after a period of, say, a month it would take out its own insurance, it would have the benefit of the waiver clause whenever the events giving rise to the relevant suit occurred.
The writer would observe that this, with the greatest respect, is unconvincing, as clearly a party’s right to take the benefit of cover can be subject to temporal limitations. Be that as it may, his Honour, in concluding that the appeal should be allowed, saw no conceptual difficulty in the parties agreeing that a consultant should be treated as an insured under the policy for one purpose but not for another.
Larson - Juhl Australia
The case of Larson – Juhl Australia LLC v Jaywest International Pty Ltd9 concerned the purported exercise of rights of subrogation, in respect of a claim paid under the Business Interruption Section of an ISR policy. The insurer brought proceedings in the Supreme Court in the name of the plaintiff against the vendors and the guarantors of the sale of a business. The Plaintiff relied on warranties in the contract of sale and alleged misleading and deceptive conduct, contrary to the relevant sections of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1989 (Qld).
The defendants relied on the waiver of subrogation clause in the policy. The vendors were co-insureds under that policy in respect of their own stock in trade (which had remained on the premises) but were not otherwise covered. The policy did not cover the vendors and guarantors in respect of liabilities for breaches of warranty or for misleading and deceptive conduct.
The waiver of subrogation clause read as follows:
The insurer shall waive any rights and remedies or relief to which it is or may become entitled by Subrogation against:
- any Co-insured (including its directors, officers and employees);
- any corporation or entity (including its directors, officers and employees) owned or controlled by any insured or against any co-owner of the property insured.
The defendants relied upon this clause as a complete defence and this was the subject of a separate question referred to the Master.
The decision at first instance
Master Macready, in turning his attention to the scope and effect of the waiver of subrogation clause, considered that the effect of the decision of the Full Court of Western Australia in Woodside, and that of the decision of the Queensland Court in GPS Power Pty Ltd v Gardiner Willis Associates Pty Ltd,10 was that there was no doubt that in respect of cases concerning project insurance, the decision of Coleman J in National Oilwell should not be followed insofar as the judge in that case confined the effect of the waiver to claims for losses which were insured for the benefit of the party claimed against under the policy.
Noting that an essential part of the reasoning in Woodside,11 both at first instance and on appeal, was that co-insurance and waiver of subrogation are different concepts, the Master sought to construe the effect of the waiver clause independently from the co-insurance aspect. Accordingly, contrary to the position in relation to co-insurance, he saw no reason to confine the reasoning of the Full Court in the Woodside case, insofar as it related to the operation and effect of the waiver clause, to a project construction case.
The Master considered that, logically, a restriction upon the extent of a waiver of a right of subrogation can only arise by varying the person in favour of whom there is a waiver, or the nature of the claims that are waived.
As the words of the waiver should normally be construed in accordance with their ‘plain, ordinary and popular sense’, the Master thought that it was difficult to determine a mechanism for restricting the expressed waiver, posing the question:
Is it to be a limitation on the nature of the claims that are waived expressed:
- as a temporal limitation;
- as to the nature of the cause of action; or
- as to the facts upon which the cause of action is based?
The Master considered that none of these limits flowed from a consideration of the terms of the policy or the circumstances of the insurance.
The decision on appeal
In a short judgment, the New South Wales Court of Appeal considered that the construction adopted by the Master of the waiver of subrogation clause of the relevant policy of insurance was correct.12
As the decision of the Full Court of the Supreme Court of Western Australian in Woodside had since been followed by the Court of Appeal in Queensland in GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd,13 the appellant’s counsel did not challenge those decisions, but submitted that they were distinguishable because both were concerned with contractors’ all risk policies intended to cover all relevant parties in a major construction project, which was not the case in the present appeal.
The appellant’s counsel’s first submission was that the clause should be construed as being coextensive with the cover provided under the policy. In rejecting this argument, the court observed that it was self defeating as it would only mean that the insurer would become entitled by subrogation to rights and remedies in respect of damage for which the policy responds. If it did not respond, then the insurer would not be liable and no question of subrogation would arise.
As to the appellant’s counsel’s further submission that the Master should have read down the clause in question, the Court of Appeal could not see how it would, on ordinary principles of construction, be entitled to make the implications sought in the appellant’s submission. Observing that the duty of the court is to construe the language of the clause fairly and simply without making any extensive or extravagant implications, the court considered that there was nothing to confine the generality of the words ‘shall waive any rights and remedies or relief’.
Standard Publishing House
In Standard Publishing House v Chen GIO General v Allianz Australia Insurance14 McDougall J had cause to consider whether the waiver of subrogation clause contained in the insurer’s ‘Business Pack’ policy afforded an answer to the subrogated claim brought by that insurer in the name of a lessee against a lessor.
In that case, counsel for the defendant insurer submitted that anyone entitled to indemnity under any section of the policy was for all purposes a ‘co-insured’. Counsel submitted that the expression ‘co-insured’ was directed simply at the identification of those against whom the insured waived its right of subrogation, not with the extent of their interest insured.
In support of this counsel relied on the three intermediate appellate decisions of Woodside Petroleum Development Pty Ltd v H & R – E&R – E& W Pty Ltd;15 GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd16 and Larson-Juhl v Jay West.17
As was observed by McDougall J18 what the insurer waived were ‘any rights and remedies or relief to which [it was or might] become entitled by subrogation against …any co-insured’. Having determined that the waiver of subrogation clause itself required one to look beyond the general provisions applicable to all sections of the policy, McDougall J19 found that as a matter of construction of the policy, the lessor was a ‘co-insured’ for the purposes of the waiver of subrogation clause.
Having concluded thus, McDougall J considered it unnecessary to discuss in detail the three decisions upon which counsel for the defendant had relied. The Judge did however record20 that in his view the conclusion which he had reached, as a matter of construction of the policy, was consistent with the reasoning in each of those decisions:
‘In particular, and adapting [sic] the language of Ipp J (with whom Malcolm CJ and Pidgeon J agreed in Woodside at 391 – 392, the waiver of subrogation clause should not be limited so as to be ‘commensurate with cover’: that is to say, limited to claims in respect of losses against which the co-insured was entitled to be indemnified. That proposition is supported also by the reasoning of Williams J (with whom de Jersey CJ agreed) in GPS Power at [39], [40].’
His Honour went on to observe:21
‘Further, in this context, I note that if the waiver of subrogation were held to be co-extensive with the entitlement to indemnity under the policy, then it would be unnecessary, for the reasons given by Ipp J in Woodside at 392-393, by Williams J in GPS Power at [47] and by Handley JA (with whom stein JA and Ipp AJA agreed) in Larson – Juhl at [15]. One would not impute to the parties to an insurance contract the intention to strike a bargain, as to waiver of subrogation, that was devoid of application.’
Accordingly, the position in multiple jurisdictions and in respect of both property and liability insurance appears to be consistent as to the effect of a party being an ‘Insured’ or a ‘co-insured’ as it relates to their ability to benefit from a waiver of subrogation clause.
Having regard however to the recent decision of McDougall J in Thiess Pty Ltd and John Holland Pty Ltd v Parsons Brinckerhoff Australia Pty Ltd,22 the circumstances in which a party will be found to be an ‘Insured’ so as to take the benefit of such a clause would appear to be attendant with a degree of uncertainty.
Thiess John Holland
That case arose out of the collapse during the course of construction of the Lane Cove Tunnel Project, and the proceedings ultimately devolved to a dispute between Thiess John Holland and PSM the third defendant. One of the issues for the Court’s determination was whether Thiess John Holland was precluded from recovering all or parts of its loss from PSM on the basis of any waiver of rights of subrogation by its insurers under the relevant policies of insurance and if so, what part?
As is set out in the judgment23 there were two relevant insurance policies (one a construction risk the other a legal liability policy) and the plaintiff had been indemnified in respect of at least some of the losses the subject of its claim under both policies.
PSM however said that it was an ‘Insured’ under each of those policies, and was thus entitled to the benefit of the waiver of subrogation clause in each. PSM also said that because it was an insured, enforcement of the right of subrogation would be pointless.24
The ‘Insured’ under the Construction Risks Policy was defined to include all ‘…sub-contractors of any tier but not… architects and consultants as regards their activities performed off-site and design work performed on site’.25 The policy contained a waiver clause in ‘blanket’ terms, save for a carve out in respect of Vitiating Acts (a concept not therein applicable).
McDougall J found that PSM was a subcontractor.26 His honour stated:27
‘In my view, the definition of ‘Insured’ in the Construction Risks Policy makes it clear that consultants such as PSM may be ‘subcontractors’. …Clearly enough, architects and consultants will be insured as ‘sub-contractors’, so long as their non-design activities are performed on site, or their design obligations (if any) are performed off site. There can be no doubt that PSM would fall within the generic definition of ‘consultant’.
While this observation is undoubtedly correct, the writer observes that the performance of design activities on site should not preclude a consultant being an ‘Insured’ provided their activities off-site included the performance of design obligations.
McDougall J said:28
‘…I do agree that the relevant obligations of PSM were design obligations…The design was not something fixed immutably at the commencement of the project. It was something to be assessed and, if necessary, modified, as the project progressed. PSM’s obligations under its Consultancy Agreement… gave it a role in that ongoing process of design.’
Then the Judge stated:29
‘Of necessity, part at least [writer’s emphasis] of those obligations had to be performed on site.’
The writer further observes that statement would clearly seem to leave open the possibility that the balance of PSM’s design obligations were in fact performed off site.
Notwithstanding this, his Honour concluded that as ‘…the duties for breach of which it is being sued are properly characterised as design duties…’ [which his Honour found occurred on site], PSM was not an ‘Insured’ under the Construction Risks Policy and accordingly not entitled to take the benefit of the waiver of subrogation clause.
Analysis of the Thiess John Holland decision
The basis for the decision on the waiver of subrogation issue in the Thiess John Holland case is in the writer’s view respectfully somewhat unclear for these reasons.
McDougall J confirmed in his earlier Judgment in Standard Publishing House, that the waiver was not commensurate with cover. Accordingly PSM’s ability to take the benefit of the waiver clause absent it having committed a Vitiating Act, was to be determined solely by reference to whether or not it was an ‘Insured’ under the policy.
Although his Honour found that PSM was not in fact an ‘Insured’ and therefore was not entitled to the benefit of the waiver clause, he did so having regard to whether ‘...the duties for breach of which it is being sued, are properly characterised as design duties’. The fact that ‘part at least’ of those duties were performed on site, should not respectfully mean that PSM for that reason alone was not (or ceased to be) an ‘Insured’.
In the GPS case, to which his Honour seemingly referred with approval in Standard Publishing House, Williams J, who delivered the leading majority judgment, regarded the definition of who is an ‘Insured’ as not being concerned with the extent of the interest insured, but rather thought that as long as there was some liability insured against, the definition operated to encompass the party described as an ‘Insured’.
Even if one were to regard the definition under consideration by McDougall J in the Thiess John Holland case as seeking to encompass only the parties described insofar as they were insured against a particular risk (‘as regards their activities…’ etc.) it seems to the writer that if there were some activities in respect of which PSM was entitled to indemnity (their design obligations performed off site), then consistent with prior authorities PSM should have been found to have been an ‘Insured’ and should have been entitled to take the benefit of the waiver of subrogation clause contained within the policy.
There may be two possible basis to seek to reconcile the prior authorities with the finding in the Thiess John Holland case that PSM was not an ‘Insured’.
The first is if the reference to ‘their activities performed off-site and design work performed on site’ was thought to preclude a consultant being an ‘Insured’ in all circumstances other than when they undertook activities on site that did not involve design work.
That does not however appear to be the way in which McDougall J approached the clause, as his Honour stated:
‘Clearly enough…consultants will be insured as ‘subcontractors’, so long as their non-design activities are performed on site, or their design obligations (if any) are performed off site.'
The second is if one were to regard his Honour’s statement, ‘Of necessity, part at least of those obligations had to be performed on site’ as leaving open the possibility that all ‘design work’ was in fact performed on site, or that at the least it had not been demonstrated by PSM that its design obligations also extended to their activities off site.
Having regard however to PSM’s contractual obligations set out in the body of the judgment, it seems hard to envisage that none of their design activities would have been performed off site.
The writer understands that the decision has not been appealed.
.....
1 [1993] 2 Lloyds Rep 582.
2 (1999) 20 WAR 380.
3 [2000] QSC 75.
4 GPS Power Pty Ltd & Ors v Gardiner Willis Associates Pty Ltd [2001] 2 Qd R 586.
5 Ibid 593.
6 Ibid 592.
7 Ibid.
8 Ibid 598.
9 [2000] NSWCA 524.
10 [2000] QSC 075.
11 Woodside Petroleum Development Pty Ltd v H & R, E & W Pty Ltd (1999) 20 WAR.
12 [2001] NSWCA 260.
13 [2001] 2 Qd R 586.
14 [2012] NSWSC 1544.
15 (1999) 20 WAR 380.
16 (2001) 11 ANZ Insurance Cases 61-482.
17 (2001) 11 ANZ Insurance Cases 61-499.
18 Standard Publishing House v Chen GIO General v Allianz Australia Insurance [2012] NSWSC 1544 [52].
19 Ibid [55].
20 Ibid [59].
21 Ibid [60].
22 [2016] NSWSC 173.
23 Ibid [521 - 524].
24 Ibid [524].
25 Ibid [525].
26 Ibid [531].
27 Ibid [532].
28 Ibid [533].
29 Ibid [534].
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