The answer that first comes to mind is, 'When the underlying policy(s) are exhausted.'
Well, it is sometimes not that simple.
In the recent decision of The Hancock Family Memorial Foundation Ltd v Lowe  WASCA 38, this question came under close examination by the Court which held that for cover to be triggered under the excess policy under consideration, two requirements must be satisfied:
- the insured's liability to the third party must be established for an amount exceeding the underlying insurance or otherwise admitted by the underlying insurer, and
- the underlying insurer must have confirmed indemnity.
This is an important decision for the insurance industry, in particular for corporate insureds, as case law on the construction of excess policies is rare.
All insureds should be examining their excess policy wordings in conjunction with the primary wording, for all insurances, but especially for commercial insurances such as D&O to ensure they work.
The case highlights the importance of the precise language used and guides insurers in relation to policy drafting.
- Mr Fieldhouse, a solicitor, provided legal services to Mr Hancock and companies under Mr Hancock's control, including The Hancock Family Memorial Foundation Ltd (Foundation).
- The Foundation alleged that Mr Fieldhouse acted for both the Foundation and Mr Hancock in relation to a sale of shares, and breached his contractual and tortious duties.
- Mr Fieldhouse held primary insurance through the Fund.
- Mr Fieldhouse died in November 2007.
- The Foundation sued his excess insurers under section 51(1) of the Insurance Contracts Act 1984 (Cth) (ICA), but did not sue Mr Fieldhouse's estate or LawCover (as section 51 did not apply to LawCover, there being no contract of liability insurance between it and Mr Fieldhouse).
- Section 51 of the ICA permits a third party claimant to sue an insurer directly where the insured has died or cannot be found.
- The Foundation argued that paragraphs 2 and 3 of Condition C were satisfied.
Was the excess insurer liable to pay?
McLure P (Newnes JA and Beech J agreeing) of the Court of Appeal in Western Australia held that none of the three paragraphs of Condition 3 were satisfied, and as such the Foundation could not rely upon section 51 of the ICA to recover from the excess insurers.
Condition C of the excess policy
Condition C of the excess liability policy examined in Hancock provided that the excess insurers were only liable where the underlying insurers 'have paid or have admitted liability or have been held liable to pay the full amount of their indemnity'. Condition C, therefore, required at least one of three below matters to be satisfied:
- Underlying insurers have paid the full amount of the indemnity; or
- Underlying insurers have admitted liability to pay the full amount of the indemnity; or
- Underlying insurers have been held liable to pay the full amount of the indemnity.
Relevantly, the statutory fund administered by LawCover (Fund) was considered an underlying insurer, and LawCover had confirmed indemnity in writing to the insured. However, LawCover disputed that the insured was liable to the third party.
Paragraph 2 of Condition C - admission of liability to pay full amount of indemnity?
The Foundation submitted that this was satisfied because LawCover had agreed to indemnify Mr Fieldhouse, even if that indemnity was conditional on a finding of liability of up to the full amount of the indemnity. In the alternative, the Foundation argued that LawCover's grant of indemnity, together with the finding sought in the proceedings that Mr Fieldhouse was liable to the Foundation for an amount greater than the full amount of indemnity under the Fund, meant that paragraph 2 would be satisfied when the Court finds Mr Fieldhouse was liable.
McLure P held that, consistent with the 'nature and purpose' of excess liability insurance, paragraph 2 required the underlying insurers to have admitted both the fact and full extent of the insured's liability. Her Honour considered that it was clear that LawCover, in granting Mr Fieldhouse indemnity, did not admit the fact or extent of his liability to the Foundation. Indeed, LawCover 'hotly contested' the Foundation's claim. Even if Mr Fieldhouse were held liable in the proceedings before the Court, paragraph 2 would not be satisfied as LawCover still would not have admitted liability to the full extent, and neither Mr Fieldhouse's estate nor LawCover would be bound by the judgment, as they were not parties to the proceedings.
Paragraph 3 of Condition 3 - finding of liability to pay full amount of indemnity?
McLure P considered that paragraph 3 required a binding determination of liability by a court. As LawCover and Mr Fieldhouse's estate were not parties to the proceedings, there could not be any binding determination of liability. Her Honour rejected the Foundation's argument that section 51(1) of the ICA required paragraph 3 to be read down to include a finding that binds only the excess insurers. For her Honour, that would otherwise reverse the relationship intended by excess insurance.
An attempt to contract out of the ICA?
The Foundation argued that if Condition C were not satisfied because neither Mr Fieldhouse nor LawCover were parties to the proceedings, then that would be allowing the contracting out of section 51 of the ICA, which is prohibited by section 52 of the ICA. McLure P rejected the argument. Her Honour considered that Condition C did not, in terms or effect, prevent a person from claiming against the liability insurer of a deceased insured. In this case, the Foundation's claim failed because section 51(1) had no application to the Fund or LawCover. McLure P stated that Condition C 'goes to the heart of the nature of an excess liability policy' and the legislature cannot have intended to, through section 51, fundamentally alter the nature of the contractual relationship between an insured and his excess insurers in the event that an insured dies.
Key takeaway points
While this decision involved an unusual set of circumstances (the primary liability insurance was not provided under a contract of liability insurance), there are a number of key takeaways:
- There is a unique relationship between an excess insurer and an insured, and the courts will take that into account.
- Clauses such as Condition C require liability to the third party in excess of the limit of the underlying policy, as well as indemnity to the insured, to have been fully accepted by or determined against the underlying insurer before an excess insurer is required to step in. This type of condition varies from excess policy to excess policy – close scrutiny to each condition is critical.
- The fact that the effect of a clause in an insurance contract is to prevent an action under section 51 of the ICA in certain circumstances does not necessarily mean that the clause attempts to contract out of the ICA for the purposes of section 52.
- If you rely upon section 51(1)(c) to recover against an excess insurer, you should also include the insured's estate (or the underlying insurer) so it is bound by any determination of liability, where liability is not admitted.