Premature claim and double insurance thwart policyholder

Cautionary tale for policyholders on double insurance

The New South Wales Court of Appeal has recently affirmed a decision handed down last year¹ in which an insurer successfully denied indemnity for a claim on the basis that (1) proceedings had been commenced prematurely and (2) the policyholder’s loss had already been extinguished by indemnity provided under another responsive insurance policy.²

Key takeaways for policyholders

• Failure to carefully consider ‘double insurance’ issues at the time of purchasing insurance can lead to significant shortfalls in coverage, inefficient use of premium and unrecoverable costs associate with a coverage dispute. At the very least, a policyholder should seek to establish at an early stage of any claim or loss all of the potentially applicable insurance policies, so that this can inform the insurance claim strategy and maximise the available coverage.
• Any general reliance by insurers on this decision to compel production of privileged documents prior to indemnity being granted is misplaced - the Court took care to restrict its findings to the somewhat unusual facts of this case.

Background

In 2003, Jalgrid Pty Ltd and Dramatic Investments Pty Ltd (the Partnership) purchased an aircraft from Lambert Leasing Inc (Lambert). The Partnership leased the aircraft to Lessbrook Pty Ltd (Lessbrook). In May 2005, the aircraft crashed causing the death of the two pilots and 13 passengers on board. The relatives and dependants of the deceased brought proceedings in the United States against Lambert and the Partnership (amongst others) (US Proceedings).

Lambert claimed under an insurance policy issued by Global Aerospace Underwriting Managers Limited (Global) to SAAB AB and its subsidiaries (which included Lambert), in respect of the US Proceedings. Global indemnified Lambert in respect of both defence costs (from 2008 onwards) and ultimately a settlement (in 2015, after the first instance decision had been handed down) in connection with the US Proceedings.

The Global policy contained an ‘other insurance’ clause which purported to reduce Global’s liability where another insurance policy covered the same risk. In 2008, Lambert and Global became aware of an aircraft liability insurance issued by QBE Insurance Ltd (QBE) to Lessbrook which described Lambert, SAL and the Partnership as ‘Additional Insureds’ and Lambert claimed against QBE in respect of the US Proceedings. In response to the claim, QBE relied on a similar ‘other insurance’ clause in the QBE policy, and sought further information pursuant to a co-operation clause to satisfy itself as to Lambert’s compliance with certain conditions precedent in the policy.

Judgment

Failure to comply with co-operation obligation

The QBE policy required Lambert to ‘give all information, do all things, provide signed statements, provide all documents, records and things, and assist the insurers and their agents in any other way in the investigation and in connection with any proceeding or inquiry as [QBE] or its agents or representatives may require’. This is a common form of co-operation clause.

Pursuant to this clause, QBE requested copies of 24 underwriters’ reports (Reports) provided by Lambert’s US counsel to Global in relation to the US Proceedings, to investigate whether conditions precedent to cover relating to airworthiness and compliance with US aviation regulations at the time of sale had been met. Lambert was unwilling to provide the Reports to QBE because of the risk that privilege in the Reports may be waived, and the plaintiffs in the US Proceedings may be able to obtain them.

The primary judge accepted QBE’s contention that whether or not the conditions precedent had been met could not be determined until Lambert provided the Reports to QBE. However, the judge also determined in favour of Lambert that that QBE was “entitled to insist on the provision by Lambert only of what it is reasonable to require” and that it was not reasonable to require production of the Reports “whilst [Lambert] is at risk of losing the privilege it has for the reports”. As the Reports had not been disclosed, the Judge held it was not appropriate for the Court to determine on a final basis whether the conditions precedent had been met.

The Court of Appeal held that the proceedings against QBE were premature in circumstances where Lambert had failed to comply with its duty to co-operate and permit QBE to consider the application of the conditions precedent. In doing so, the Court of Appeal rejected Lambert’s submission that it could never be unreasonable to withhold privileged material, and held that the wording of the clause was at least sufficiently broad to require the production of privileged documents where there was no longer any arguable prejudice to the insured in their production (as was the case here because the US Proceedings had concluded).

‘Other insurance’ issue

The key issues in relation to the ‘other insurance’ clauses in the Global policy and QBE policy were:

• whether section 45 of the Insurance Contracts Act 1984 (Cth) (ICA) applied to the policies such that one of them was primary to the other; and
• if not, what the consequences were for Lambert’s claims under each policy.

The Court of Appeal agreed with the primary judge (applying the approach of the High Court in Zurich v MMI³ that for section 45 of the ICA to apply, Lambert must have “entered into” the policy i.e. been the party which contracted with the relevant insurer. The Court of Appeal held that Lambert had not ‘entered into’:

• the QBE policy primarily because being named as an “Additional Insureds” (together with 19 other parties) in the QBE policy (as opposed to the “the Insured”) made clear it was a third party beneficiary of the policy; and
• the Global policy, primarily because on its proper construction, the correct inference to draw was that subsidiaries held an insurable interest but were not contracting parties.

Another factor the Court considered relevant was that there was no evidence (for either policy) that Lambert (1) was involved in any way in the negotiation of the terms of the contract or (2) paid for any part of the premium.

As a result of this finding, neither ‘other insurance’ clause operated to place one of the policies in priority to the other, and Lambert had double insurance in relation to its liability so because Global had fully indemnified Lambert, there was no loss or liability which Lambert could claim from QBE.

Global may have had a claim for contribution against QBE (if the QBE policy, in fact, responded to Lambert’s losses), but that contribution claim was not pursued as part of the proceedings.

This article was written by Mark Darwin, Partner and Guy Narburgh, Special Counsel, Sydney

Endnotes

1. Lambert Leasing Inc. v QBE (Insurance) Ltd [2016] NSWCA 254.
2. Lambert Leasing Inc. v QBE (Insurance) Ltd (No 2) [2015] NSWSC 750; see also Herbert Smith Freehills’ Policyholder Insurance Highlights 2015 here for a related decision on ‘pay to be paid’ clauses (Lambert Leasing Inc. v QBE (Insurance) Ltd (No 2) [2015] NSWSC 1196).
3. Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391.