Double Insurance – escaping the perils of excess!
In this decision, delivered on 24 April 2019, Rees J in the NSW Supreme Court considered whether there was double insurance where an Insured held two public liability policies for the same risk, one containing an ‘excess clause’ and the other an ‘escape clause’. With little authority on this exact point, the Court applied basic principles of contractual interpretation and the ‘two-stage approach’, to find that there was no double insurance.
A worker, employed by Baulderstone, was injured when hit by a car. Baulderstone paid damages and claimed on its insurance. Baulderstone was insured by two public liability insurance policies, one from Allianz and one from Lloyd’s. Both covered the damages paid to the worker. Allianz paid out the claim and sought contribution from Lloyd’s.
The Allianz policy contained two ‘excess’ clauses. Clause 8.17 provided conditions of excess cover where Underlying Insurance was arranged and conditions where the Allianz policy would be deemed the Master Policy. It provided excess cover where Underlying Insurance indemnified the Insured or when payment was made under the Underlying Insurance up to the Underlying Limit. However, if the Underlying Insurance did not indemnify the Insured, the Allianz policy was deemed the Master Policy providing indemnity to the extent that Underlying Insurance did not. Underlying Insurance was defined as any policy “arranged by the Insured, that provided cover to an Insured for a risk, which save for the Underlying Insurance, would be covered by this policy”.
In addition, clause 8.20 provided excess cover “above any other valid and collectible insurance”, when the loss and limit of liability under such primary and valid insurance was exhausted.
The Lloyd’s policy included an ‘escape’ clause, which generally excluded cover for liability “which forms the subject of insurance by any other policy” and excluded contribution if the other policy responded.
Allianz submitted double insurance occurred as both policies contained clauses directing the Insured to other insurance. Firstly, the Lloyd’s policy was Underlying Insurance, under clauses 8.17 and 8.20 in the Allianz policy, leaving aside the impact of the Lloyd’s escape clause. Alternatively, leaving aside clauses 8.17 and 8.20, Baulderstone’s risk was liability that “forms the subject of other insurance by another policy”, under clause 10.5. The risk was that these two clauses would cancel each other out, as each clause considered the loss was covered elsewhere, it was covered nowhere. Allianz submitted that this was the case, and applying the reasoning in Weddell, both insurers were liable and Allianz was entitled to seek contribution from Lloyd’s.
Lloyd’s defence to the claim, was that the effect of the ‘escape clause’ meant this was not a double insurance as the Lloyd’s policy excluded cover and did not respond in circumstances where the Allianz policy covered the claim.
The Court considered whether the two clauses could be reconciled or whether they combined to create a situation of double insurance.
The Court, on a strict interpretation of the clauses at issue, found that this was not the case. The Lloyd’s ‘escape clause’ was sufficient to exclude cover under the Lloyd’s policy, as Baulderstone had a risk that ‘formed the subject of other insurance’. Therefore, as Underlying Insurance did not provide cover, clause 8.17(c) of the Allianz policy deemed the Allianz policy the Master policy.
The matter came before Rees J as a separate issue. However, as her Honour found in Lloyd’s favour, Allianz’s claim necessarily failed.
The two-stage approach requires the Court to examine each policy, rather than side by side and interpreting one policy with reference to the other.
Rees J found the relevant provision of the Lloyd’s policy was an ‘escape clause’, provided a general exclusion to cover under the Lloyd’s policy, as it did not cover liability which formed the ‘subject of insurance by any other policy’. Therefore, if Baulderstone had a risk that formed the subject of insurance by any other policy, being the Allianz policy, it was not covered by the Lloyd’s policy. Rees J found this could have occurred regardless of whether the other policy was claimed upon, responded to the claim or paid the claim. Rees J also decided that it was enough, under the Lloyd’s policy, that the other policy dealt with the particular form of liability, however this is subject to exclusions which result in the claim under the other policy not being paid. Although not material in this case, Her Honour appears to have left open the possibility that if the Allianz policy was found to exclude cover which meant Allianz did not pay out the claim, the Lloyd’s policy may respond.
The Court considered that, if the Allianz policy only included Clause 8.20, there may have been an issue of double insurance. However, as the Lloyd’s policy did not respond, the Court focused on clause 8.17. This clause was engaged if Underlying Insurance “has been arranged”. The Court took a broad approach stating the only requirement was that the Insured had arranged another policy, such as a public liability policy that on its face covered the same risk as the Allianz policy, regardless of whether that policy responded.
The Court relied on clause 8.17(c) to deem the Allianz policy as the Master Policy. As the Lloyd’s policy included the general exclusion for cover to a risk, which was also covered by the Allianz policy, the Allianz policy responded. Therefore, there was in truth, no double insurance in this instance. This interpretation meant Lloyd’s could escape from liability and contribution to Allianz and showed the strength of an escape clause over excess clause.
This recent decision gives guidance as to how an ‘excess clause’ and ‘escape clauses’ interact. It is as a useful example of the Court’s approach to interpreting insurance policies, where there is a risk that double insurance may arise and highlights the broad approach taken when other insurance exists. It appears that Courts will strictly interpret policies using the two-stage approach, which may avoid the conflict of double insurance. Where one policy is found to completely cover the risk, contribution may not be available if the other policy expressly excludes cover where there is other insurance.