Victorian Supreme Court of Appeal confirms effect of ‘Reasonable Precaution’ clauses in insurance contracts: Lloyd’s of London v Dhillon Scaffolding Pty Ltd [2022] VSCA 92

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By Nieva Connell, Partner, Holly White, Lawyer & Zoe Vlahogiannis, Law Graduate

Background

In 2015, an apprentice plumber was injured on scaffolding erected by the Respondent, Dhillon Scaffolding Pty Ltd (Dhillon), when a metal item he was carrying struck an overhead powerline. The apprentice commenced personal injury proceedings against Dhillon; the Victoria WorkCover Authority also bought a recovery action. Dhillon held public liability insurance with underwriters at Lloyd’s of London (insurer) and made a claim on the policy, which was denied.

Relevantly, the insurance contract provided:

16.       General Conditions

16.1     Reasonable Precautions

Dhillon at its own expense shall:

16.1.4    comply with all statutory requirements and other safety regulations imposed by any authority. (clause)

Contained within the ‘Conditions of Cover’ of the policy, in a schedule forming party of the policy, was a condition that Dhillon must comply with ‘the Australian/New Zealand Guidelines AS/NZ 4576; 1995’ (condition).

The insurer denied indemnity on the grounds that Dhillon had breached the condition. The insurer relied upon the fact that when Dhillon was prosecuted by WorkSafe, it pleaded guilty to a charge that it failed to obtain a permit for scaffold works constructed in a “No Go Zone” (being a zone close to overhead powerlines) and failed to ensure works were completed in accordance with such a permit (a breach of the relevant Guidelines). The evidence before the Court was that Dhillon had raised the issue of the proximity of the power lines with the site supervisor, but taken it no further. The Court also accepted that had a permit been obtained, it may have contained conditions which addressed the risk of electrocution provided the conditions were observed when erecting the scaffolding (and its subsequent use).

The Court was asked to consider the proper construction of the policy to determine whether Dhillon had an absolute obligation to comply with the condition, or whether it was only required to take ‘reasonable precautions’ to comply as a result of the heading at 16.1.

Trial Decision

The trial judge found the condition was a ‘reasonable precaution’ requirement. She also found Dhillon had taken reasonable precautions.

Appeal

The insurer raised two grounds of appeal.

1. The clause and the condition were not ‘reasonable precaution’ clauses

The insurer submitted that despite the heading ‘Reasonable Precautions’ no element of reasonableness was imported into the clause, and the clause was differentiated from other clauses as mandatory due to the use of the word ‘must’.

Dhillon submitted the heading of the clause was consistent with the commercial purpose of the policy and there were obligations created by legislation and regulations which required only reasonable practical compliance and as such, reasonable precautions were implicit. The condition, they argued, was only a guideline and based on regulations and legislation that only required reasonable care to be taken.

The Court of Appeal held it would defeat the commercial purpose of the policy to construe the clause as requiring absolute compliance with regulations. It also found that it should follow the NSW Court of Appeal decision of Booksan Pty Ltd v Wehbe [2006] NSWCA 3, which has the effect that an insurer cannot rely upon a breach of an OHS Act to avoid coverage under a reasonable care condition.

The Court of Appeal decided that Dhillon had the obligation to (only) take ‘reasonable precautions’ to comply with the regulations.

2. The trial judge erred in finding Dhillon had taken reasonable precautions to prevent personal injury

The insurer submitted for Dhillon to have taken the reasonable precautions required, it should have done more than simply raise the permit issue with the site supervisor, and Dhillon had not discharged its onus of proof in establishing it had complied with the condition.

Dhillon submitted the Trial Judge’s finding that Dhillon was not reckless should satisfy the Court of Appeal there was no breach and that there was no evidence calling for a different conclusion.

The Court of Appeal found the Trial Judge had erred in her approach to Dhillon’s onus of proof by stating that she was not persuaded Dhillon had taken reasonable precautions, rather than being positively satisfied Dhillon had taken reasonable precautions.

The Court of Appeal found taking ‘reasonable precautions’ would have included ensuring the permit was obtained and therefore Dhillon had not discharged its burden of establishing it took reasonable precautions to comply with the condition. The appeal was allowed.

Lessons for Insurers

A number of take-away points can be taken from the decision:

  1. Even with careful drafting, and the use of an obligatory word such as “must”, the Court will look at the whole of the policy when interpreting it, and will seek to avoid a construction of a policy which robs it of commercial value.
  2.  A breach of an OH&S obligation will not automatically mean that a reasonable precautions condition has been breached.
  3. Courts will not permit an insured to simply raise a safety concern and take no further action, particularly when there is a risk of serious injury.

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