War of the clauses

War of the clauses

Double insurance containing escape and excess exclusions remains a grey area, even as an appeal court tries to clear the air

By Bernice Han

A decision by the New South Wales Court of Appeal in November has again highlighted just how murky the waters can get when it comes to interpreting competing clauses in disputes sparked by double insurance.

By a 2 to 1 vote, the court decided Allianz has the right to seek an equal contribution from Lloyd’s for the $1.025 million injury payout it made to a road worker who was hit by a vehicle while on duty.

The ruling overturned an earlier verdict in the NSW Supreme Court last April. In that trial Justice Kelly Rees dismissed the Allianz case and awarded costs against it.

At the heart of the dispute was the varied interpretation of the “other insurance clauses” that were contained in the liability policies that Allianz and Lloyd’s had issued separately to cover contracting company Baulderstone Hornibrook when the incident occurred in 2009.

Baulderstone Hornibrook is the insured party in the Allianz policy that had been arranged by the Roads and Traffic Authority of NSW to cover construction risks for its contractors.

The worker, a subcontractor of Baulderstone Hornibrook, sustained serious injuries from the accident and commenced proceedings against the company.

Allianz indemnified the claim made by the worker and subsequently tried to recover half of what it had paid from the Lloyd’s-issued public and products/contract works liability cover that the parent company of Baulderstone Hornibrook had arranged for its subsidiary.

Here is where the complications arose: the Allianz policy contained an “excess” clause and the Lloyd’s policy carried a general exclusion – commonly referred to as an “escape” clause.

The Lloyd’s policy clause says it “does not cover liability which forms the subject of insurance by any other policy and this policy shall not be drawn into contribution with other insurance”.

Justice Rees determined the simple escape clause in the Lloyd’s policy meant there was no “underlying insurance” as defined by the Allianz cover.

“It is not a case where the Allianz policy would respond but does not by reason of the existence of the Lloyd’s policy.

“Rather, the Allianz policy specifically contemplates a scenario where there is another policy… which [also] provides cover for a risk but does not ultimately result in an indemnity for the insured because of the precise wording of that other policy.”

Allianz had maintained the Lloyd’s policy was “underlying insurance” within the meaning of its policy. Its policy provided that it would not respond to any loss “until such times as the limit of liability under… other primary and valid insurance has been totally exhausted”.

According to Allianz, the exclusions cancelled each other out, in which case both insurers would be liable and “the one who pays can claim contribution from the other”.

The Allianz position was supported by two of the three appeal judges, who ruled the clauses had the effect “of cancelling each other out,” meaning Allianz was entitled to seek an equitable contribution from Lloyd’s.

The overturning of the Supreme Court decision demonstrates the importance of using “clear language” in policy wordings, according to a commentary on the case by law firm Clyde and Co.

“The difference in opinion among the four judges shows that the issue of competing ‘other insurance’ clauses and double insurance remains a grey area open to interpretation,” it says.

“For underwriters and brokers, the case highlights the importance to carefully consider how specific definitions are used and to ensure that clear language is used with definitions to convey the parties’ intentions.”

According to Barry.Nilsson law firm, this is the first occasion when an appellant court has considered in detail the application of competing escape and excess clauses.

It says the case is significant because “it highlights the potential complexities arising from cases involving double insurance and the practical difficulties parties may face in giving effect to competing other insurance clauses”.