A Cap and Collar agreement did not constitute a settlement for the purposes of insurance policies and the insurer was not liable to indemnify.

In Issue

  • Whether the terms of indemnity under a policy included cover for a “cap and collar’ agreement.
  • Whether an insured was entitled to defence costs of arbitration proceedings.
  • Whether late notification disentitles an insured to cover ( under English law).

Background

The plaintiff (Weir) was an Australian company. It was part of a global group which provided engineering and related services. The defendant (AXA) was its insurer. Weir held three insurance policies with AXA. The first was the Australian Policy, a broad form liability policy. The other two “Global” policies were identical liability policies issued in 2011 and 2013 by AXA (the Global Policy) and governed by the laws of England. Weir’s claim under the Global Policy was alternative to its claim under the Australian Policy, as the Global Policy operated under a difference in conditions basis.

Weir was retained by Phil Gold Processing and Refining Corp (Phil Gold), to perform certain welding work as part of the refurbishment of a semi-autogenous grinding mill (SAG Mill). Weir completed the work and approximately 2 years later the SAG Mill failed when the welding completed by Weir disintegrated.

On 4 December 2013, Phil Gold sued Weir in arbitration proceedings for damages for breach of contract and misleading or deceptive conduct. Before the arbitral tribunal issued its award, Weir and Phil Gold entered into a “cap and collar” arrangement, whereby Phil Gold agreed that if it was awarded damages, its maximum recovery from Weir would be capped at US$10,725,000 (the cap) and Weir agreed to pay Phil Gold a minimum amount of US$2,000,000 regardless of the outcome of the arbitral proceedings (the collar).

On 16 January 2016, the arbitral tribunal dismissed Phil Gold’s claim. Weir alleged that AXA was obliged to indemnify it for the amount paid to Phil Gold under the cap and collar agreement and for the costs of its defence in the arbitration. AXA denied indemnity in respect of both. Weir sued AXA.

Decision

The court found that in regards to the cap and collar claim, Weir did not demonstrate the actual existence and quantum of the liability nor establish that the liability fell within the terms of indemnity in the Policy on its proper construction. The cap and collar was viewed by the court as consideration for capping Phil Gold’s recovery, not as a settlement agreement establishing liability and quantum with any certainty.

In determining whether Weir was entitled to indemnity for defence costs, the court considered whether Phil Gold’s claim against Weir fell within the scope of cover. The court found that the welding work performed by Weir amounted to “professional engineering services” and was thus excluded by the Professional Services Exclusion contained in the Australian Policy.

In relation to the Global Policy, AXA argued that Weir failed to notify it as soon as practicable of “any event or circumstances that may give rise to a claim”. The court confirmed that the test of whether an insured is required to give such notice is an objective one – “requiring the insured to notify insurers as soon as it becomes aware of circumstances which would lead a reasonable person in its position to perceive a real possibility of a claim”. Applying English law, the court found that Weir had the requisite knowledge and that AXA was thus entitled to rely on the late notification defence. The court noted that under Australian law, the defence would fail by virtue of s54 of the Insurance Contracts Act 1984 (Cth). No equivalent legislation exists in England.

Implications for you

This decision will be of interest to insurers dealing with relevant indemnity considerations, particularly in regards to whether certain pre-judgement arrangements may be covered under a policy, the scope of professional services in regards to welding services and interpreting a policy under English law in NSW courts.