Double Insurance: Subcontractor’s defence costs included in contribution after its liability settlement
- Published 14.05.2020
QBE Insurance Australia Limited v Allianz Australia Insurance Limited  FCA 589
Insurer 1 and Insurer 2 submitted for preliminary determination by the Federal Court of Australia two questions relevant to whether Insurer 1 had rights of contribution in respect of a settlement it had entered into (and its related defence costs) for the liability of a subcontractor it had covered under a broadform liability policy.
The settled claim occurred in litigation arising from damage to a property next to a building site. The builder was covered under a contract works policy issued by Insurer 2 and it successfully defended the litigation brought by the neighbours.
Insurer 1 claimed an entitlement to contribution against Insurer 2 because the contract works policy had cover extending to subcontractors. The dispute concerned interpretation of ‘the extent to which this insurance [the Insurer 2 policy] is required for such interest under the Insured Contract’. In the context of two contracts (the head contract and a subcontract), the dispute centred upon doubts raised by Insurer 2 about precisely what the “Insured Contract” was and about whether Insurer 1’s defence costs should be the subject of any contribution.
The somewhat strained and technical arguments raised by Insurer 2 in defence of the Insurer 1 claim for contribution were readily overcome by established principle and the commercial construction of the Insurer 2 policy as carefully explained by Allsop CJ in this case.
Similarly, the effort by Insurer 2 to avoid paying a contribution to the $700,000 in Insurer 1 defence costs was overcome by application of the principles underlying the right to contribution in cases of double insurance.
Allsop CJ held in this regard that the right to contribution:
- is a substantive principle based on natural justice and equity;
- is a form of prevention of unjust enrichment;
- applies to policies of indemnification of the insured;
- does not require that the insured first pay sums in its legal defence.
Of significance to contractor and construction disputes was one core feature of the Insurer 2 submissions expressly rejected by the Federal Court, which was the contention that it would be uncommercial to have two parties obliged under their contractual arrangements to take out liability insurance.
Last week Allsop CJ delivered his reasons after a preliminary hearing about questions submitted for determination. The questions concerned whether Insurer 2 as the insurer of the head contractor on a building site was also the insurer of a subcontractor.
The Insurer 2 policy was held by Southern Cross Constructions (ACT) Pty Limited (SX). An Insurer 1 broadform liability policy was held by the excavation sub-contractor SX had engaged, Pile & Bucket Pty Limited (P&B).
The excavation work with which P&B was involved was claimed to have caused damage to a neighbouring property. Insurer 1 settled the neighbours’ claim for property damage after incurring very significant defence costs. Under the settlement, Insurer 1 paid $826,854, including an allowance of $150,000 for legal costs. Insurer 1’s defence costs amounted to an additional $700,000.
SX defended the neighbours’ claim in the Supreme Court of NSW and had it dismissed.
There was then a dispute as to whether Insurer 2 was also the insurer of P&B, and if so, as to any rights of contribution available to Insurer 1 against Insurer 2 in respect of the settlement and Insurer 1’s defence costs.
Insurer 1 and Insurer 2 agreed upon two issues for the preliminary hearing:
(a) whether P&B was an ‘Insured’ within the meaning of the policy issued by Insurer 2, so as to entitle Insurer 1 to claim equitable contribution as a matter of principle; and
(b) whether any entitlement to contribution would extend to the costs incurred by Insurer 1 in the defence of the proceedings against P&B in all the circumstances.
Allsop CJ answered both questions in the affirmative.
Analysis of whether P&B was the Insured
The building contract was between QIG Property Development Pty Limited (QIG) and SX; a “Fixed Lump Sum Construct Contract” dated 25 March 2010 for almost $7 million (the head contract). The works involved the demolition of existing dwellings and the construction of a new residential building.
The insuring clause of the head contract (clause 17), which was taken from AS 4000-1997, required that public liability insurance be taken out by SX as the “Contractor”.
This was the first of two alternatives in the clause (the second alternative – which was not chosen – required QIG as the “Principal” to take out the insurance).
The chosen clause required SX to take out the liability insurance, so that cover was in place for the parties, the Superintendent and subcontractors from time to time, whenever engaged in WUC (i.e. works under contract).
The subcontract between SX and P&B specified (in its own clause 17) that SX as the “Main Contractor” would have public liability insurance. Again, this was the first of two alternatives presented by clause 17, which provided as follows in relation to the chosen alternative, and with reference to the WUS (‘WUS’ meant works under sub-contract):
Alternative 1: Main Contractor to insure
Before the date of acceptance of tender, the Main Contractor shall ensure that there is in force in relation to WUS, a public liability policy in the terms of the policy or proposed policy included in the documents on which the Subcontractor tendered or, if not so included, a copy of which was provided to the Subcontractor following receipt by the Main Contractor of a written request from the Subcontractor for a copy of the policy. The policy or proposed policy shall nominate or state the name of the insurer. The Main Contractor shall ensure that the policy is maintained while ever the Subcontractor has an interest in WUS and that all premiums are paid thereon.
SX had started work on the site in April 2010, at which time it had Insurer 2 as its contract works insurer. The renewal of the Insurer 2 policy was put in place on 25 June 2010. P&B then became a subcontractor to SX in July 2010.
The “insuring clause” of the Insurer 2 policy provided:
We will indemnify the Named Insured for all amounts which the Named Insured becomes legally liable to pay as compensation for Personal Injury and/or Property Damage occurring within the Territorial Limits as a result of an Occurrence in connection with the Named Insured’s Business described in the Schedule, up to the Limit of Liability.
We will also indemnify the Insured for all amounts which the Insured becomes legally liable to pay as compensation for Personal Injury and/or Property Damage occurring within the Territorial Limits as a result of an Occurrence in connection with the Insured Contracts described in the Schedule, up to the Limit of Liability. (my emphasis)
The dispute centred upon the issue of whether P&B fell within “the Insured” in the second paragraph of the insuring clause. While SX was the “Named Insured”, P&B was not a “Named Insured”.
The Insurer 2 “Defence Costs” provision followed the insuring clause and provided:
We will, in addition to the indemnity described above, pay:
all charges, expenses and legal costs incurred by Us and/or by the Insured with Our prior written consent in the investigation, reporting, settlement or defence of any claim for compensation in respect of which the Insured are entitled to indemnity under this Policy or if sustained would be so entitled;
The phrase “the Insured” was defined relevantly as follows:
“the Insured” means:
1. the Named Insured;
3. all sub-contractors to the entities noted in paragraphs 1. and 2. above (including their sub-contractors of any tier), but only whilst acting in the scope of their duties as sub-contractors in relation to the Insured Contract and only to the extent this insurance (or part of it) is required for such interest under the Insured Contract; (my emphasis)
The issue at the heart of the dispute concerned whether the Insurer 2 cover was required to extend to P&B, which was an issue that arose from, and turned upon, the operation of this phrasing: “the extent to which this insurance [the Insurer 2 policy] is required for such interest under the Insured Contract”.
And in turn this issue, according to Insurer 2 in the arguments it pursued in an attempt to escape Insurer 1’s claim for contribution, in effect led to a threshold question that can be framed as: To which contract was the expression “Insured Contract“ directing attention when there was both a subcontract and a head contract?
This claimed uncertainty was argued by Insurer 2 to result from the broad definition of “Insured Contract” in the Insurer 2 policy, which was as follows:
“Insured Contract” means the contract or agreement entered into by the Named Insured which gives rise to the Contract Works and includes any sub-contract or sub-agreement in connection with the contract or agreement, which;
1. does not have an estimated final contract value (including the sub contracts or sub agreements) that exceeds the Contracts Works Sum Insured at its commencement;
2. is of a contract type within the Allowable Categories; and
3. which does not have an Insured Construction Period greater than the Maximum Construction Period at its commencement.
For the purposes of any Sum Insured / Limit of Liability under this Policy, the Named Insured’s contract or agreement and the sub-contracts or sub-agreements referred to above are treated as one Insured Contract.
In a somewhat circular way, the phrase “Contract Works” was defined in the Insurer 2 policy to mean in effect the whole of the works described in the Insured Contract – remembering always, as noted above, that the expression “Insured Contract” was not confined to a single contract or subcontract, but could describe any of them, providing the qualifications at 1, 2 and 3 were met.
Insurer 1 submitted that whether or not the Insurer 2 policy was required “for such interest under the Insured Contract” was answered by looking to the head contract, and that in this respect cl 17 could not be clearer.
Insurer 2 submitted that the phrase “Insured Contract” for the purposes of paragraph 3 of the definition of “the Insured” meant the subcontract, which it was submitted, did not create a responsibility on SX to take out cover for the interests of P&B – see in this respect the terms appearing in Alternative 1 in cl 17 of the subcontract.
Insurer 1 also submitted that irrespective of whether it was the head contract or the subcontract that had a requirement for SX to insure its subcontractors’ interests, that sufficed for the purposes of paragraph 3 of the definition of “the Insured”.
Insurer 2 accepted that both the head contract and the subcontract fell within the definition of “Insured Contract”. Insurer 2 added in its submission, however, that it was necessary to have regard to both, in combination. It was submitted by Insurer 2 to be relevant in this regard that, for the purposes of sums insured and limits of liability, the head contract and its subcontracts were to be treated as one Insured Contract.
The Insurer 2 argument proceeded on the fraught basis that the Insurer 2 policy limits coverage to subcontracts to circumstances where the requirement to insure subcontractors’ interests is under ‘the Insured Contract’ as opposed to ‘an Insured Contract’. Insurer 2 argued that when one looked to the subcontract one saw that the subcontractor was to insure itself. And so Insurer 2 argued that the Insured Contract (which it contended was the subcontract) did not require this insurance (the Insurer 2 policy) for the subcontractor’s interests (for the purpose of paragraph 3 of the definition of “the Insured”).
This Insurer 2 position was also argued to be supported by:
- a comparison of the particular wording of the alternative forms of the insurance requirement in clause 17 of the subcontract – the second of which (not chosen) expressly included the requirement that the liability insurance extend to cover the interests of subcontractors;
- an alleged “conflict” between clause17 of the head contract and clause 17 of the subcontract;
- the terms of the subcontract and the “subcontract preliminaries” in its Annexure E, which required the subcontractor to provide the Main Contractor (SX) with ‘Certificates of Currency for all insurances the Subcontractor is required to effect under this Subcontract including but not limited to public liability and workers compensation insurance’.
Insurer 2 also submitted that there was no relevant obligation on SX to insure P&B for the purposes of the Insurer 2 policy; that P&B was required to insure (which it did) for liability insurance; and that it would be uncommercial to have two parties so obliged.
Allsop CJ rejected the Insurer 2 submissions.
His Honour rejected the construction arguments put forward by Insurer 2, including its attempt to elevate the significance of “Insured Contract” by preceding it with ‘the’.
His Honour held that the natural meaning of the definition of “Insured Contract” when read with paragraph 3 of the definition of “the Insured” means:
…a subcontractor to SX, if its interest (“such interest”) is required to be covered under the QIG/SX Contract (for QIG’s evident commercial interests), is an Insured. That is why “Insured Contract” includes a subcontract in relation thereto. There is no conflict posited at all. P&B is an insured, as SX is required by the QIG/SX Contract to insure it; and nothing in Alternative 1 in cl 17 of the SX/P&B Subcontract is to the contrary.
His Honour also rejected the attempt by Insurer 2 to find significance in the Insurer 2 policy prescription (in its special conditions) about subcontractor insurance, stating:
…provisions of the special insurer’s terms and conditions in the Closing Instructions document are not indicative, on their face, of removal of subcontractors from the definition of “the Insured”, but rather are indicative of a requirement that subcontractors’ insurances have a certain quality and a certain substance: that valid liability insurance be held for no less than $5 million (the Insurer 2 cover being $20 million) on terms acceptable to Insurer 2 or an identified broker on behalf of Insurer 2, and a deductible of $250,000.00 if such insurance was not preapproved. These are provisions protective of Insurer 2 on the hypothesis that cover is granted to subcontractors by the Insurer 2 policy; they are not provisions expressed or apparently designed to remove the Insurer 2 cover from a subcontractor for which the Named Insured (SX) had otherwise (in the Insured Contract, the QIG/SX Contract) promised to effect and maintain cover.
In providing his reasons, his Honour also included the observation that the Insurer 2 requirement that subcontractors have a policy gave Insurer 2 the comfort of co-insurance for any such subcontractor and an insurer (as here with Insurer 1) which would respond directly to the subcontractor.
Insurer 2 submitted that there could be no right of contribution in respect of Insurer 1’s defence costs of $700,000, as it conducted the defence and P&B had no liability for any of this and there was no indemnification by Insurer 1 of its insured, P&B.
Allsop CJ rejected this argument after noting that ‘[b]oth provisions as to defence costs were intimately connected with the grant of indemnity for liability to third parties’.
His Honour referred in this regard to well-established principle, concluding that this was a situation in which by reason of the payment of one insurer the other insurer was relieved of the obligation to pay the insured under its policy. His Honour added:
As a matter of principle, there is no basis for the proposition that the direct expenditure of money on costs by the insurer (as opposed to a reimbursement by the insurer of expenditure of money on costs by the insured) is otherwise than properly viewed as a subject of contribution.
The character of a provision for an insurer directly paying defence costs and of a provision providing for an insurer indemnifying an insured which has paid its own defence costs is the same: both are directed at the same risk – the costs of defence.
Here the duty to defend and the Defence Costs provision in the Insurer 1 policy are together part of a policy of indemnity. They should not be hived off as non-indemnificatory provisions for which contribution is not available.