By David Slatyer, Partner 

Background

This is the most recent case involving the question of contribution between two insurers, and determined by Justice Allsop in the Federal Court (insurance list).

QBE insured a subcontractor who was engaged by a principal contractor (Allianz’s insured) to perform excavation work for a construction.  The work caused damage to neighbours and they sued the principal and subcontractor.  The claim against the principal was dismissed, and the subcontractor (via QBE and its appointed solicitors) settled the claim for $676,854.14 plus $150,000 for costs.

QBE indemnified under the liability policy and paid the settlement to the plaintiff.  It also incurred a significant sum in defence costs, $700,000.00.

The Contribution Claim

Having discharged its liability to its insured, QBE brought proceedings against Allianz on the premise that it too was obliged to indemnify the subcontractor pursuant to Allianz’s policy with the principal.  QBE sought contribution from Allianz for the settlement sum, as well as the defence costs.

There were a number of points in the case, with these the main ones:

1. Whether the definition of “the Insured” in Allianz’s policy captured the subcontractor;
2. Whether the payment of defence costs by QBE was part of its indemnity to the subcontractor.

“The Insured”

We note that the subcontract required the principal to take out public liability policy in relation to the works, and the principal took out the Allianz policy.

This issue involved arguments about the wording of the definition of “the Insured” in Allianz’s policy and its application to the facts.  The definition included “all subcontractors…whilst acting in the scope of their duties…in relation to the Insured Contract and only to the extent this insurance is required … for such interest under the Insured Contract”.

“Insured Contract” was defined to mean, relevantly, the contract entered into by the principal which gives rise to the contract works and includes any subcontract.

Several technical arguments of interpretation and application were raised against the proposition that the subcontractor met the definition of “the Insured”, which submissions Allsop CJ regarded as having “difficulties”.  According to his honour, applying natural meaning of the provisions, the subcontractor was included in the definition of “the Insured”.

Accordingly, QBE was entitled to contribution from Allianz in respect of the settlement sum. Albion Insurance v GIO (NSW) was cited to confirm that “what attracts the right of contribution between insurers…is simply the fact that each contract is a contract of indemnity and covers the identical loss that the identical insured has sustained” (per Kitto J).

Defence costs

The question here was whether in appointing its own lawyers QBE “spent its own money” rather than indemnified the subcontractor for defence costs.

His Honour noted that the doctrine is informed and shaped by natural justice and “should not be defeated by too technical an approach” (citing HIH Claims Support v Insurance Australia Limited).

He found that in substance it is the same thing – the insured is indemnified against the risk of defence costs, in addition to its liability, with the two aspects of cover “intimately connected”.

Before QBE expended costs, both it and Allianz were liable to indemnify the subcontractor and to pay defence costs. As QBE did both, it relieved Allianz of the obligation to do both, thus being entitled to call upon contribution.