- A recent NSW court of appeal decision has confirmed that section 45 of the Insurance Contracts Act 1984 (Cth)(ICA) will only render an “other insurance” clause void where the insured is a contracting party to both policies.
The tragic crash and unfortunate loss of fifteen lives following the sale of a plane from Lambert Leasing (a subsidiary of SAAB AB) to Lessbrook Pty Ltd led to a game of pointed fingers regarding the insurance arrangements.
Global Aerospace insured SAAB AB and its subsidiaries, QBE Insurance insured Lambert. When relatives of the deceased crew and passengers brought proceedings in the United States, Lambert claimed under the Global Aerospace policy.
The Global policy contained an “other insurance” clause which, as such clauses aim to do, was intended to reduce Global’s liability if another insurance policy covered the same risk. When it was discovered that under the QBE policy Lambert and others were “additional insureds”, Lambert tried to claim losses from the US proceedings on the QBE policy.
QBE sought to limit its liability by relying on an “other insurance” clause in its own policy, as well as requiring the cooperation of Lambert in order to satisfy the terms and conditions of the policy. On appeal, the Court of Appeal examined five points which had been raised in the first instance proceedings.
Did section 45 of the ICA render the QBE “other insurance” clause void?
Subject to some exceptions (if the other insurance is specified), section 45 of the ICA renders an “other insurance” clause void where an “insured” has “entered into” such other insurance. Since the decision of the High Court in Zurich, it has been clear that being a third party beneficiary of a policy (such as an additional insured) does not constitute entering into that policy. Accordingly, the “other insurance” clause in the Global policy was valid as Lambert had not entered into the QBE policy.
What Lambert argued (which has remained a point of debate since Zurich), is that despite being a third party beneficiary of the QBE policy it had entered into the Global Policy and therefore the “other insurance” clause in the QBE policy was void. This would effectively render the policy where Lambert was a mere beneficiary primary to the policy Lambert had actually entered into. To succeed, Lambert needed to establish that the reference to an “insured” in section 45 could include a third party beneficiary or be “plausibly extended” to include one. Support for this proposition could be found in the Queensland decision of Nicholas.
However, the Court agreed with the first instance judge that section 45 required that the insured must be a contracting party to both the insurance policies, and considered itself bound by the decision of the High Court in Zurich, which held that ‘entered into’ did not include a non-party who was merely entitled to a benefit under the policy, otherwise known as a third party beneficiary.
It is interesting that the court considered itself bound by the decision in Zurich. Although the narrow approach as to who constitutes an “insured” is consistent with recent authority in the context of other provisions of the ICA (e.g. ABN Amro) and arguably consistent with some comments of the High Court in Zurich, as noted above the decisive issue in Zurich was whether the insured had “entered into” the second policy, not the characterisation of the “insured”. Accordingly, any observations of the High Court were potentially obiter.
The Court ultimately concluded that for the other insurance clause to be relevant the party must have ‘entered into’ both contracts, rather than entering into one policy and merely being a beneficiary of the second policy (regardless of which way around).
In any event, as Lambert wasn’t involved in negotiating the Global policy, nor had it paid any premium, the Court didn’t think that Lambert could be said to have done anything warranting a finding that it had ‘entered into’ the Global policy either.
If not, did the two “other insurance” clauses cancel each other out?
Whilst the Court concluded that since section 45 had no application both “other insurance” clauses were valid, they also determined that the “other insurance” clauses would cancel each other out, such that whichever insurer ultimately paid would be able to seek contribution from the other insurer.
Did payments made under the Global Aerospace policy preclude a claim for indemnity under the QBE policy?
Yes. The Court confirmed that an insured is unable to claim indemnity from both insurers, instead they must claim indemnity from whichever insurer they prefer and then leave it to the insurers to allocate contribution. The Court specifically noted that the attempt by Global to have the Deed characterised as a ‘limited recourse loan’ did not alter this position.
Were the appellant aircraft lessors entitled to indemnity from the aircraft owners arising out of their “use or operation” of the aircraft?
An indemnity term of the contract of sale, subject to the law of Virginia, required the ‘use’ of the aircraft as a precondition to liability. The word ‘use’ did not have any special meaning under Virginian law. The Court determined that ‘use’ did not include the leasing or paying for the maintenance of an aircraft as it did not demonstrate sufficient control.
Rein J at first instance had also ruled that the proceedings had been commenced prematurely. On appeal, the Court determined that as QBE was entitled to require the production of documents and that as the appellants were afraid that disclosure of these reports to QBE would affect their position in the United Sates proceedings, the court was correct to say that the proceedings had been commenced prematurely.
For the briefest of moments the Court looked at section 13 of the ICA as to the duty of good faith and considered whether QBE had been ‘fence sitting’, but the Court ultimately eschewed any mental gymnastics on the topic to state that QBE was entitled to await appropriate documentation to consider the claim
The takeaway point from all this is confirmation of the limited application of section 45; a provision of the ICA many assumed effectively did away with “other insurance” clauses. With “other insurance” provisions rising from the wreckage so to speak, the Court had now clarified the rule:
An “other insurance” clause in your policy remains effective unless you are a contracting party to both policies. If both policies have “other insurance” clauses they cancel each other out and you can take your pick under which policy you claim.
Simple, right? Or at least, that’s where it will stay until the High Court decides to look more closely at the issue (which may be soon if Lambert is granted special leave).