By Frazer Hunt, Partner, Maurice Lynch, Special Counsel and Diana Lee, Law Graduate
The Federal Court decision of Swashplate Pty Ltd v Liberty Mutual Insurance Company t/as Liberty International Underwriters (2020) 381 ALR 648 highlights the importance of contractual construction where multiple contractual insurance documents are involved. This article discusses four primary ramifications for underwriters to consider when drafting policies and the risk of unintended consequences when the policy includes standard wordings by reference.
The broker arranged an insurance facility for the insured, Swashplate, where insurers agreed to issue single transit insurance for helicopters to insureds represented by the broker as well as the premiums that were payable for each transit. The terms of the facility were recorded in a master slip which incorporated a policy wording with the Institute Cargo Clauses (A) 1.1.09 by reference and certain other conditions and exclusions.
In 2018, Swashplate purchased a helicopter in the US. Swashplate organised shipment of the helicopter to Sunshine Coast and requested its broker to arrange insurance for the transit of the helicopter. A placement slip was provided by the broker to Liberty which reflected the master slip, except for a few additional terms, including the ‘period of insurance’. The placement slip was accepted by Liberty.
The helicopter was damaged in transit. The parties agreed that the cause of the damage was insufficiency or unsuitability in the way the helicopter was packed for transit. Swashplate made a claim under the policy which was rejected on the basis that the policy excluded loss or damage caused by insufficiency of packing before the ‘attachment’ of the insurance. Liberty relied on the placement slip to contend that the ‘attachment’ occurred after the insured transit had commenced. As the packing occurred before the transit, Liberty argued that it was not liable for the damage to the helicopter.
Swashplate relied on the master slip to argue that the insurance applied for the whole transit and the period of Static Cover extension, being five days before the loading. As this period included the packing period, Swashplate argued it was entitled to indemnity under the insurance policy.
At first instance, the Court found that Swashplate was not entitled to indemnity. Swashplate appealed to the Full Court of the Federal Court who upheld the appeal, finding in favour of Swashplate.
Key market ramifications from Swashplate
1. Importance of reading contractual documents as a whole
In Swashplate, the Court again made clear that when construing an insurance contract, it is necessary to read the contractual documents as a whole, giving effect where possible to all provisions. This is not always an easy task, particularly in circumstances such as in Swashplate, which involved a master slip, placement slip, standard form ICC(A) clauses and email correspondence, all of which needed to be considered.
For example, by reading all contractual document as a whole, the Court found that “Period of insurance” in the master slip was not the period of insurance as defined by when risks would attach. Rather, it referred to the duration of a facility between the underwriters and brokers, under which insurance could be placed by the issue of a placement slip on agreed terms for a single helicopter transit. Further, the Court found that clause 4.3 of the ICC(A) excluding cover for loss or damage caused by insufficient packing did not apply during transit. This was because the master slip included a condition requiring cargo to be professionally packed, stowed, carried and overseen by a qualified aircraft engineer. This meant that the policy was intended to cover damage due to insufficient packing during transit, and only damage during the process of packing would be excluded.
2. The need to expressly state when one document varies another
The Court also affirmed the importance of expressly stating when one document is intended to vary the terms of another document. For example, if a placement slip or policy schedule seeks to amend the terms of ICC(A), its terms must expressly state this.
This is highlighted in Swashplate when the Court found that an email purporting to state that insurance cover began from 19 May 2018, which is when transit began, did not have contractual force as it used the words “bound with effect” instead of “commence” or “attach from”. At paragraph  to , the Court held:
“Again, the language used does not specify that the cover is to commence or attach from 19 May 2018. Rather, the email refers to cover ‘bound with effect from’ that date. This is a statement that could establish when the agreement was to be taken to have been made, a date which had significance for the purposes of cl 11 of the ICC(A)…
Therefore… the content of the email from Ms Baker…is not contractual in character.”
Accordingly, it is important to expressly state that a term has been varied in contractual documents and to use unambiguous language when doing so. Further, if an underwriter would like to vary the terms of a policy, they need to give consideration as to the interaction of all the documents comprising the contract as a whole in order to avoid unintended consequences
3. Courts seek to commercially construe contracts
The Court made clear that it would not construe the contract of insurance in a manner which it considered had the consequence of denuding the insurance of its primary commercial character, which is insurance for the risks attendant with the whole of a voyage. However, Courts do not always correctly commercially construe contracts which is the process of determining the meaning of contractual terms by assessing what a reasonable businessperson would have meant those terms to mean. There are risks that Courts could attempt to commercially construe a contract without true regard to the market in which that contract was concluded. In Swashplate, relevant commercial considerations in the context of marine cargo policies which do not appear to have been considered by the Court in its commercial construction are as follows:
- Marine cargo insurance policies generally always exclude loss or damaged caused by insufficient packing; and
- It seems reasonable that the time a marine cargo policy would commence would be the time in the jurisdiction in which the cargo is located, not the location of where it is the policy is placed.
The effect of the decision on underwriters is that if they are to amend terms of a standard form cover, they need to prepare a bespoke clause which does that expressly. Whether this is always and option is questionable in circumstances where the policy is:
- one where the parties have specifically agreed a commencement date for a policy;
- has a low value premium; and
- is fixed quickly without detailed consideration of policy terms or the choice of words used in email correspondence.
4. Where ICC(A) applies, commencement of cover may start from the first movement of goods
Swashplate also provides a reminder that if the ICC(A) applies, the commencement of cover may begin with the first movement of the goods, not the time of entry into the contract. This is due to the operation of clause 8.1 of the ICC(A), which states that “Subject to Clause 11 below, this insurance attaches from the time the subject-matter insured is first moved in the warehouse”. Clause 11 states the insured must have insurable interest in order to recover. Underwriters should be mindful of these clauses to correctly determine when insurance cover begins.
Swashplate highlights the importance of considering all contractual documents as a whole and using clear, unambiguous language, even in email correspondence. Underwriters should take heed of these primary ramifications from Swashplate when drafting contractual documents to ensure that unintended consequences are avoided.
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