The recent decision of Weir Services Australia Pty Limited v AXA Corporate Solutions Assurance [2017] NSWSC 259 is a cautionary tale for insureds seeking to preserve cover when settling third party claims.

In order to succeed against the insurer, an insured must prove the existence and quantum of the insured’s liability to the third party. While settlement agreements can be sufficient to prove liability,  the Cap and Collar agreement in this case was not.

Weir breaches
Weir was retained by Phil Gold Processing and Refining Corp (Phil Gold) to undertake refurbishment work of a semi-autogenous grinding mill (SAG Mill) to be used for gold processing. The work included welding. Once completed, the SAG Mill was recommissioned and began operating in April 2009. However, on 10 July 2011 the SAG Mill failed when Weir’s welding work disintegrated.

By around October 2011, Weir was aware of the serious failure of the SAG Mill but did not notify its insurer (AXA).

In December 2013, Phil Gold brought arbitration proceedings against Weir for breach of contract and misleading or deceptive conduct. It was only then that Weir notified AXA.

AXA denied indemnity under both an Australian policy, governed by the laws of New South Wales, and a global policy, governed by English law (Weir’s global policy claim was strictly in the alternative and, as English law cannot cure late notification, cover was ultimately unavailable).

The cap and collar
In December 2015, before the final arbitral award, Weir and Phil Gold entered into a Cap and Collar agreement, without AXA’s consent, whereby:

  • Phil Gold’s maximum recovery from Weir was capped at USD10,725,000 (the Cap); and
  • Weir would pay Phil Gold a minimum fixed amount of USD2,000,000 whatever the outcome of the arbitration (the Collar).

In January 2016 the tribunal dismissed Phil Gold’s claim. Weir therefore paid the Collar amount and sought indemnity from AXA for this amount and its defence costs. AXA denied the claims.

The Australian policy covered amounts Weir was legally liable to pay by way of compensation. Weir argued that the Cap and Collar agreement was effective to determine Weir’s liability to pay Phil Gold compensation. Weir further alleged that AXA was estopped from denying indemnity as AXA had agreed/represented that it would accept the settlement as representing Weir’s liability.

AXA argued that until the final arbitral award there was no obligation to indemnify as Weir’s liability had not been determined. The final award subsequently found that Weir had no legal liability to Phil Gold and so there was no cover. Further, the Cap and Collar agreement was not a settlement of the type which the courts can and do regard as establishing the existence and quantum of an insured’s liability. It was essentially a commercial arrangement capping Phil Gold’s recovery.

Decision – No pot of Gold
Justice Hammerschlag dismissed Weir’s claims for the following reasons.

Firstly, the insured enforcing an indemnity under a policy for a liability to a third party bears the onus of demonstrating the actual existence and quantum of that liability. However, Weir did not prove its liability to Phil Gold. Instead, Weir sought to establish liability and quantum on the basis of the Cap and Collar agreement.

Secondly, the authorities establish that an insured can rely on a reasonable settlement as establishing the existence and quantum of a liability to a third party if, inter alia:

  1. the insured enters into an arrangement with a third party claimant to pay an amount in respect of a liability to which, if found, the policy would have responded; and
  2. the amount of the settlement is reasonable having regard to the relevant circumstances at the time. Relevant circumstances can include the position in which the insured finds itself as a result of the denial of indemnity and what it might have been held liable to pay if there had been a contest leading to a judgment or arbitral award.

Weir’s claim did not meet the above requirements. The Cap and Collar established no more than the agreed consideration for capping Phil Gold’s recovery. The agreement did not identify the nature of any underlying liability of Weir to Phil Gold. Weir could not rely on the Cap and Collar agreement to establish liability and quantum, particularly since the final determination by the Tribunal in fact exonerated Weir from liability entirely.

Don’t get collared
It is important to remember that a settlement between an insured and a third party claimant without the insurer’s consent does not automatically bind the insurer. The insured retains the burden of proving the liability and that it falls within the terms of the policy.

If an insurer’s consent cannot be obtained, it is vital that the settlement represents a reasonable compromise of what the insured’s liability would have been if a final judgment or award was obtained. An independent legal opinion on prospects and quantum may assist in this regard.

While cap and collar agreements can be useful in certain circumstances, they do not necessarily describe the nature of the insured’s liability or represent a reasonable quantification of any assumed liability. Insureds should always carefully consider the merits of such agreements and how they may affect a potential insurance recovery.