Insurance – excess liability insurance – construction of excess policy wordings – action brought against excess policy insurers under s51(1) of the Insurance Contracts Act 1984
This is an important decision concerning the construction of excess policy wordings. The courts will look closely at the conditions precedent to a grant of indemnity under an excess policy, which conditions will vary from contract to contract. This is a unique case given that the policy was provided under a legislative scheme.
From 1972, Mr Fieldhouse provided legal services to Lang Hancock and companies under Mr Hancock's control, including Hancock Prospecting and the Hancock Family Memorial Foundation (Foundation). In 1991, Mr Hancock sold his share in Hancock Prospecting to the Foundation for $20 million. Mr Fieldhouse acted for Mr Hancock on the sale. In 1995 the Foundation commenced proceedings against Mr Fieldhouse claiming that Mr Fieldhouse acted for both Mr Hancock and the Foundation in the sale and Mr Fieldhouse breached his contractual and tortious duties to the Foundation in failing to advise that the share was worthless or of nominal value, or in failing to advise the directors of the Foundation to get independent legal and accounting advice. The Foundation sought damages of $20 million.
Under the Legal Profession Act 1987 NSW, Mr Fieldhouse was required to hold professional indemnity insurance approved by the Attorney General. He was also required to contribute to the Solicitors Mutual Indemnity Fund (Fund) established by the Legal Practitioners Act 1898 (NSW) and administered by LawCover. In addition, Mr Fieldhouse held $10 million top up cover provided by Lloyd's Syndicates for any liability that exceeded his indemnity from his primary insurance.
Mr Fieldhouse was insured under a Master Policy with HIH, FAI, GIO and Sun Alliance entered into by the Law Society on behalf of insurable solicitors. Under the Master Policy, claims of up to $1.1 million are met by the insurers when the aggregate amount of claims for the year exceeds $58 million. That aggregate was not met and therefore Mr Fielding had to look to the Fund to indemnify him in respect of the first $1.1 million of the claim against him, and to the Lloyd's policy for any excess, up to $10 million. LawCover granted indemnity to Mr Fieldhouse and notified the Foundation of that indemnity in a letter dated 4 June 2008. LawCover did not admit that Mr Fieldhouse was liable to the Foundation but instead defended the claim.
Mr Fieldhouse died intestate in November 2007. The Foundation's causes of action against Mr Fieldhouse terminated at common law but survived against his estate under s4(1) of the Law Reform (Miscellaneous Provisions Act 1941 (WA). The Foundation sought and was granted an order under s51 of the Insurance Contracts Act 1984 (Cth) joining representatives of the Lloyd's Syndicates as defendants. Section 51 permits a claimant to sue an insurer directly where the insured has died. There had been no payment from the Fund of the full amount of any indemnity payable to Mr Fieldhouse, and in the absence of any judgment against Mr Fieldhouse's estate or LawCover, there would be no such payment in the future. The parties agreed that the insurers under the Master Policy are Underlying Insurers. The parties did not challenge the finding of the trial judge that the Fund is also an Underlying Insurer.
The Lloyd's Syndicates relied on Condition C in the policy schedule, which provides:
Underwriters shall only be liable in respect of the indemnity herein given after the Underlying Insurers have paid or have admitted liability or have been held liable to pay the full amount of their indemnity provided always that the liability of Underwriters under the indemnity herein given shall be limited to the amount payable in respect of each and every claim in the period of insurance stated in the Schedule. It is a condition of this Policy that the Underlying Insurances shall be maintained in full effect during the currency of this Policy.
The trial judge found there were three alternative conditions in Condition C and that it was a condition precedent to the obligation to indemnify under the Lloyd's policies that at least one of the three specified conditions be met:
- The Underlying Insurers have paid the full amount of the indemnity;
- The Underlying Insurers have admitted liability to pay the full amount of the indemnity;
- The Underlying Insurers have been held liable to pay the full amount of the indemnity.
The Foundation argued that condition 2 of Condition C was satisfied because LawCover admitted liability to indemnify Mr Fieldhouse. The trial judge found that on the proper construction of the policy that condition was not satisfied. The trial judge also held that the third condition was not satisfied, as the words 'have been held liable' mean 'have been determined by a court to be liable', which could not happen because neither LawCover nor Mr Fieldhouse's estate were before the court.
The Foundation appealed, arguing that the trial judge erred in his construction of Condition C. The Foundation also argued that if Condition C could not be satisfied because neither Mr Fieldhouse nor LawCover were parties to the proceeding, then Condition C is void under s52 of the Act because it permits the contracting out of s51.
The Court of Appeal held:
- the purpose of Condition C was to make the existence of the liability to indemnify under the Lloyd's policies conditional upon Mr Fieldhouse establishing both the fact and the amount of the Fund's liability to indemnify Mr Fieldhouse's liability for the loss which was the subject of the claim by the Foundation;
- by its grant of indemnity, LawCover did not admit that Mr Fieldhouse was liable to the Foundation for its loss (in fact it hotly contested the claim), only that the loss was a kind covered by the policy;
- condition 2 of Condition C required the Underlying Insurers, including the Fund, to have admitted both the fact and the full extent ($1.1 million) of Mr Fieldhouse's liability to the Foundation, which they had not done;
- the trial judge's construction of condition 3 of Condition C was correct: as LawCover and the estate were not parties to the proceedings, any determination of liability would not be binding, and to read down the condition so that it would only be necessary to make a determination of liability binding against the Lloyd's Syndicates would reverse the intended relationship between the primary and excess insurers;
- as none of the three preconditions to Condition C was satisfied, the Foundation could not rely on s51 of the ICA to recover against the Lloyd's Syndicates; and
- Condition C did not, by its terms or its operation, exclude, restrict or modify s51 of the Act. S51 had no application to the Fund, the NSW Law Society or LawCover, but that was a consequence of the scope of s51, not of Condition C. Condition C went to the heart of the nature of an excess liability policy and it could not have been the intention of the legislature in enacting s51 to fundamentally alter the nature of the contractual relationship between an insured and his excess insurers in the event the insured died.