Australia: Other Insurance clauses - rising like a phoenix?

Insurance Quarterly Newsletter

Lambert Leasing Inc and Another v QBE Insurance Ltd and Others [2015] NSWSC 750

Insurance Contracts Act 1984 – scope and application of s 45(1) "Other insurance" provisions – whether s 45(1) renders void 'other insurance' clause – court finds s 45(1) requires relevant insured to be the party who contracted with the insurer on whom claim is made and who is also a party to the second policy

  • The New South Wales Supreme Court considered whether an 'other insurance' clause was rendered void by section 45(1) of the Insurance Contracts Act 1984 (Cth) (ICA). The Court also considered when an insured relevantly "entered into" a contract of insurance by the application of section 45(1) of the ICA.
  • In finding that the other insurance clause was not rendered void by section 45(1) of the ICA the Court applied Zurich Australia Insurance Ltd v Metals & Minerals Insurance Pte Ltd2 (Zurich) and followed ABN AMRO Bank NV and Others v Bathurst Regional Council and Others3 (ABN AMRO) in a narrow reading of the statute, restricting the applicability of section 45(1) of the ICA to cases where an insured is a party to both the first and second contract of insurance. Further, the Court held that a person named as an insured under a contract of insurance is not by that mere fact a party to and does not necessarily thereby "enter into" a contract of insurance for the purposes of section 45(1) of the ICA.

An abundance of insurance

In 2003, the second and third defendants Jalgrid Pty Ltd and Dramatic Investments Pty Ltd (together the Partnership) purchased a Fairchild Metro 23 aircraft (Aircraft) from the first plaintiff Lambert Leasing Inc (Lambert) under an Aircraft Purchase Agreement dated 9 May 2003 (Purchase Agreement). The Aircraft was then leased by the Partnership to Lessbrook Pty Ltd (Lessbrook) under a Hire Lease Agreement dated 17 June 2003.

Under clauses 7.01 and 7.02 of the Purchase Agreement, the Partnership was required to maintain aircraft liability insurance for a period of two years from the date of execution covering Lambert and related companies (including the second plaintiff Saab Aircraft Leasing Inc (SAL)), and to indemnify Lambert in respect of any future claims resulting from the partnership's use or operation of the Aircraft.

Under the Purchase Agreement, Lessbrook entered into an insurance policy with the first defendant QBE Insurance Ltd (QBE) which named Lambert and SAL as "Additional Insureds" (QBE Policy). Lambert and SAL were also insured through their parent company SAAB A B, a Swedish company (SAAB). SAAB held an insurance policy with Global Aerospace Underwriting Mangers Limited (Global) in which Lambert and SAL were insured as subsidiaries of SAAB (Global Policy).

On 7 May 2005 the Aircraft crashed during a flight from Barnaga to Cairns killing all 13 passengers on board and the Aircraft's two pilots. Proceedings were brought in the United States by relatives of the deceased against Lambert and SAL and the Partnership, among others (US Proceedings). Lambert and SAL made a claim under the Global Policy for indemnity in respect of the costs of defending the US Proceedings and for any damages Lambert and SAL may become liable to pay, following which in 2007, Global took on the defence of the US Proceedings and paid all the costs incurred in its defence. In 2008, Lambert, at the instigation of Global, sought indemnity from QBE under both the QBE Policy and the Purchase Agreement, which was refused by QBE.

In refusing indemnity, QBE sought to rely on an 'other insurance' clause in the QBE Policy. Relevantly, clause 9 of the QBE Policy stated:

  1. If any claim under this Policy is also covered in whole or in part by another policy or would but for the existence of this Policy be covered by another policy, except to the extent that the amount of any liability exceeds the amount payable under such other policy or policies, provided always that the Insurers shall not be liable to pay any amount in excess of any relevant amount specified in the Schedule.4

In reply, Lambert argued that that the clause was rendered void by section 45(1) of the ICA, which states "where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance...the provision is void"5 (emphasis added). In the course of their submissions to the Court, Lambert and SAL argued that they were parties to each of the QBE Policy and the Global Policy.

What was the effect of the 'other insurance' clause?

Rein J closely considered the interpretation of "entered into" in section 45(1) of the ICA. In construing the meaning of those words, His Honour declined to follow Nicholas v Wesfarmers Curragh Pty Ltd & Ors (Curragh)where McMeekin J stated that section 45(1) did not need to discriminate as to the party who entered into the contract containing the other insurance clause.6

His Honour instead applied the principles contained in Zurich and held that an additional insured or someone forming part of a group identified as a genus are not parties to, and do not "enter into", a contract of insurance simply by being named as insureds.7 Accordingly, Lambert and SAL did not enter into the QBE Policy and were not parties to that insurance contract by virtue of being only named Additional Insureds for the purposes of section 45(1) of the ICA.8

On the question of the application of section 45(1) of the ICA, Rein J again declined to follow Curragh and instead followed the decisions in Zurich and ABN AMRO. His Honour stated that, following Zurich, section 45(1) of the ICA requires the relevant insured to be the party who contracted with the insurer on whom the claim is made and who is also a party to the second policy.9 Looking to ABN AMRO for further support on the narrow reading of section 45(1) of the ICA, His Honour rejected Lambert's submissions and held that Lambert was not a party to the QBE Policy since the evidence pointed to Lessbrook as the contracting party (who also did not enter into the Global Policy).10

The future of section 45(1) and the rise of the 'other insurance' clause

This decision is an illustration of the ongoing difficulties in resolving the scope and application of section 45(1) of the ICA in cases of double insurance. Despite the academic support behind Curragh, this decision confirms that the current position (as least in NSW) regarding the construction of section 45(1) of the ICA is that the relevant insured must be a contracting party to both the first and second insurance policies. Given the inconsistency with Queensland authority, the matter may well be destined for the High Court.

This has the potential to severely restrict the operation of section 45 and enliven many 'other insurance' clauses previously considered otiose. It will be interesting to see if 'other insurance' clauses effectively 'rise like a phoenix' (to quote Conchita Wurst) from the ashes of section 45.

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