Australia: Where an insured cannot pay the policy excess. Will this permit the insurer to avoid liability for amounts beyond the excess?
Calliden Insurance Limited v Chisholm [2009] NSWCA 398 23 November 2009

In Brief

Where an insured is in liquidation and its insurer is sued direct, the insurer will generally be unable to rely on the insured's inability to pay the policy excess as grounds to avoid its liability for amounts above the policy excess.

Background

The plaintiff, Chisolm, was inured in the course of his employment in March 2007. He alleged that his injuries were caused by the negligence of an employee of a company called Employ (No 14) Pty Limited (Employ 14).

Employ 14 held a broad form liability insurance policy issued by the insurer which was in force for the relevant period. Liquidators were appointed to Employ 14 on 29 August 2007.

On 22 April 2009, the plaintiff sought leave under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 to commence proceedings against the insurer claiming damages for personal injury allegedly suffered by reason of Employ 14's negligence.

The insurer resisted the application for leave, primarily on the grounds that Condition 3 of the policy required the insured to pay an excess of $25,000 in respect of the plaintiff's claim as a condition precedent to the engagement of indemnity under the policy.

Conditions 3 of the policy provides:

"3. Excess

Where an Excess is shown in the Schedule or within Your Policy wording You or any other person insured must first bear the amount of the Excess for each and every claim arising out of the one event or occurrence before becoming entitled to cover under Your Policy. Where two or more different Excesses apply to an event or occurrence giving rise to a claim only the greatest of those Excesses shall be applied to the whole claim."

"Excess" is defined in the policy as:

"The amount the Insured first bears in relation to each claim caused by an Occurrence. The Excess applies to all amounts payable under this Policy."

In the Court below the primary Judge2 agreed with the plaintiff's argument that Condition 3 of the policy requires the insured to "bear" the specified excess but not to "pay" the amount as condition precedent to the insurer incurring liability under the policy. His Honour found the excess provision did no more than "relieve the insurer of liability to pay the first $25,000 of a claim" ³.

According to his Honour, this was consistent with the definition of Excess where the word "first" is to be read as referring to the first $25,000 of any claim made against the insured and made by the insured against the insurer.⁴

The Court of Appeal agreed with this reasoning but expanded on other reasons it concluded the insurer's arguments must fail.

Clause 2.3 of the policy "Cover Details" provided:

"2.3 Claims Excess

Where a claims excess is specified in the Schedule the Insured shall bear this amount for each and every claim."

The Court of Appeal held:

"There is nothing in the language of Clause 2.3 or in the definition of "Excess" to suggest that the insured is to pay the amount of any excess before the insurer becomes liable to indemnify the insured in respect of its legal liability to a third party suffering personal injury as provided by the Policy Schedule."

The Court of Appeal further found that Condition 3 was only directed to circumstances where multiple excesses applied to the circumstances of the loss or losses.

The insurer argued a primary purpose of the excess was so the insurer could avoid small claims which would otherwise remain the sole responsibility of the insured. The insurer submitted that the definition of Excess picked up defence costs and, if the insurer was required to meet defence costs in the case of an insolvent insured, that would see it incurring a loss in claims which would otherwise not exceed the excess.

In response to this submission the Court of Appeal held:

"...if the insured is in fact responsible to bear the first $25,000 of any defence costs, there is no commercial irrationality in the insured being and continuing to be responsible for the first $25,000 of those fees. The insurer can claim the sum from the insured and in the present circumstances that means prove in its liquidation.

"There is no qualification whatsoever to the insurer's clear obligation in the indemnity provisions to provide defence. Defence has to be undertaken. It is not predicated in turn on any payment of its nominated solicitors' costs incurred or to be incurred. In our view, the proposal use of Condition 3 to impose a pre-condition on that defence liability is not warranted by the words of the policy."

Finally, the Court of Appeal observed:

"... the policy does not say that it will not respond to a claim well within the levels of insurance if the insured be insolvent or unable to pay its excess. If a policy of insurance governed by the Insurance Contracts Act 1984 (Cth) were to contain such a clause one could anticipate an issue arising under the Insurance Contracts Act, s 37."

Section 37 of the Insurance Contracts Act 1984 provides:

"Notification of unusual terms

An insurer may not rely on a provision included in a contract of insurance (not being a prescribed contract) of a kind that is not usually included in contracts of insurance that provide similar insurance cover unless, before the contract was entered into the insurer clearly informed the insured in writing of the effect of the provision (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise)."

This is a clear indication by the Court of Appeal that it would consider a term of a policy "that it will not respond to a claim well within the levels of insurance if the insured be insolvent or unable to pay its excess" would be an "unusual term" within the meaning of s 37 and the Notification provisions of that section would likely apply.

Implications

Where an insured is in liquidation and its insurer is sued direct, the insurer will generally be unable to rely on the insured's inability to pay the policy excess as grounds to avoid its liability for amounts above the policy excess.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.