Who’s on first?
For anybody with any knowledge of the duo comedy of Abbott and Costello, the title of this article should have the reader fondly remembering the famous skit about the outfield of a fictional baseball team.
However, in some insurance circles, the title of this article may have the reader not fondly remembering the time when their client was not covered under a policy of insurance or their policy of insurance unfortunately extended cover to an unintended risk.
This article raises practical considerations which should be identified by insurers, and their customers, when covering or assuming a risk where multiple parties may be exposed to a liability. In particular, reference is made to the fairly recent New South Wales Supreme Court decision of Mie Force Pty Ltd v Allianz Australia Insurance Limited, where the Court was required to determine which parties were covered under one party’s policy of insurance.
The facts
Rhino Commercial Stripouts (Rhino) contracted with Rohrig Pty Ltd (Rohrig) to undertake structural demolition works at a hotel. Rohrig, as principal contractor, held a Construction Risks policy of insurance (the policy) with Allianz Australia Insurance Ltd (Allianz).
Rhino operated a demolition business and had no employees. Rhino sourced its workers from Mie Force Pty Ltd (Mie Force), a company which employed workers who could be procured by other entities. Mr Ryan Murphy was the controlling mind of both Rhino and Mie Force.
On the date of the incident, employees of Mie Force were undertaking the demolition works when a fire caused damage to neighbouring properties. Recovery proceedings were commenced by the registered proprietors of properties neighbouring the hotel, and proceedings were also commenced by the hotel.
Policy coverage
Allianz accepted that Rhino was covered by the policy by virtue of Rhino being a “subcontractor” as that term was used in the definition of “Named Insured”. Therefore, Allianz defended the proceedings on behalf of Rhino.
Mie Force also sought a policy indemnity in relation to the proceedings from Allianz. Allianz refused to extend policy coverage to Mie Force. As a result, this litigation commenced.
Mie Force’s arguments
Mie Force argued that it fell within the definition of “Named Insured” because:
- The term “subcontractor” includes a sub-subcontractor (i.e. Mie Force was a subcontractor of Rhino and a sub-subcontractor of Rohrig); and / or
- Mie Force was an agent of Rhino, a subcontractor.
Decision of New South Wales Supreme Court
Legal principles
The decision provides helpful commentary regarding the manner in which a court shall interpret a policy of insurance in the case of a dispute. For instance, the Court stated:
- The policy of insurance and policy schedule must be read together.
- Like any other commercial contract, a policy of insurance is to be given a business-like interpretation.
- Interpreting a policy of insurance is an objective task which requires attention to the language used by the parties, the commercial circumstances which the document addresses and the objects which it is intended to secure.
- Preference should be given to the construction supplying a congruent operation to the various components of the whole.
- A court cannot attribute a different meaning to words used in a policy of insurance simply because a meaning may cause a hardship on one of the parties.
Sub-subcontractor argument
The Court made direct reference to the definition of “Insured” as contained in the policy, as well as construing the policy document as a whole. The Court therefore held that the definition of “subcontractor” did not include “sub-subcontractor” because:
- The definition of “Named Insured” was intended to include legal entities which had a direct legal relationship with Rohrig.
- If a broader meaning of “Named Insured” was intended, it would render other parts of the definition a nullity.
- In any event, the policy was drafted such that it would provide cover to sub-subcontractors in certain circumstances as detailed in the policy.
Agent argument
The Court again considered the policy and identified that the term “agent” was not defined in the policy. As a result, the Court stated it is a question of construction as to what was intended by the extension of cover to persons falling within that definition.
As expected, the parties diverged on whether the word “agent” used in the policy meant an agent as understood in its stricter legal meaning (i.e. a person who can legally bind a principal) or in a more colloquial meaning (i.e. any person who simply performs functions for others).
The Court ultimately adopted a practical construction of the word “agent”. As Mie Force was contracted by Rhino to solely provide labour and Rhino gave directions and instructions to Mie Force’s employees, the Court considered Mie Force was not authorised to perform Rhino’s contractual obligations and Mie Force was not doing Rhino’s work on its behalf.
Conclusion
Allianz was not required to extend policy coverage to Mie Force because it was not a Named Insured.
Practical considerations
The decision highlights a number of issues which arise when a claim emanates from an incident involving a number of parties, and those parties then wish to retrospectively assess the relevant risks and interpret key documents (e.g. building contracts, work orders and policies of insurance).
As a result, the following considerations are timely reminders for insurance underwriters and brokers when assessing risks in commercial contexts:
- Parties to an agreement should understand their roles, and act in accordance with those roles.
- Parties should not assume, or incorrectly understand, their roles and thus improperly define their roles.
- Contracts should carefully describe the parties’ roles.
- Any policy of insurance linked to the risks stemming from the contracts and/or the parties’ roles should use terminology consistent with the contracts and parties’ roles.
- Prior to selling or buying a policy of insurance, it is imperative to understand the factual matrix, the likely risks and the parties’ roles.
- Whether the parties are contractually obligated to take out insurance cover for other parties.
- Whether, as a result of the factual matrix and the parties’ roles, a party has unintentionally agreed to take out insurance cover for another party.
- Prior to undertaking works, an Insured should not assume they will be afforded insurance cover pursuant to a policy effected by another party.
More information
If you have any queries or would like further information, please contact:
David Giacomantonio
Consultant
M: 0418 154 138
E: dgiacomantonio@pageseager.com.au
