The Commonwealth Steel Company Limited v BHP Billiton Marine & General Insurance Limited  NSWSC 1445 case concerned the ability of Commonwealth Steel (Insured) to claim on a captive insurer operated by BHP (Insurer) to cover certain insured entities, each of which were (or had formerly been) part of the BHP Group, in respect of their liability to their employees.
The decision turned upon a constructional choice as to whether the indexation clause contained in the Policy applied to:
- the excess (deductible) payable by the Insured; or
- the limit of liability payable by the Insurer above the excess.
If the indexation clause applied to the excess, then the amount of the excess (after indexation) payable by the Insured exceeded the amount of the Insured’s loss, thereby defeating its claim.
In the present case, Court was required to interpret the excess provisions of the policy which included the following clauses:
- the limit and excess clause in the policy wording:
‘This Policy is only to pay the excess of $125,000 (indexed in accordance with attached Stability Clause). Ultimate Net Loss in respect of each disaster (hereinafter termed “the Primary Limit”) up to a further $920,000 in respect of each and every disaster, unlimited in all’
- an endorsement to the policy which replaced the above limit and excess clause:
‘The sum insured under the policy shall be $1,000,000 but the Insured will pay the first $125,000 (indexed in accordance with the attached Stability Clause) of each and every disaster unlimited in number in each policy year.’
- the terms of the Stability Clause:
(a) It is the intention of this Policy that the Primary Limit shall retain its relative value to that which exists at March 31, 1976.
(b) At the time of payment of any claim, the change in relative monetary value shall be ascertained from the Table of Average Weekly Earnings per Employed Male Unit - Australia - seasonally adjusted, as published in "Wage Rates and Earnings" by the Australian Bureau of Statistics.
(c) The Primary Limit shall be increased or decreased in proportion to the difference between the Average Weekly Earnings figure at March 31, 1976 and at the time of payment of any claim. The Average Weekly Earnings figure at the date of payment of the claim shall be that for the quarter immediately preceding that during which the claim is settled.
(d) The time of payment of any claim for the purpose of this agreement shall be deemed as follows:
(i). Where no award is made by a court, the actual date upon which payment is made.
(ii). The date an award is made by a court, if no appeal is made, or if the Appeal Court reduces or leaves unchanged the original award.
(iii). The date an award is made by the Appeal Court if this increases the award made by the original court.
(iv). In the event of the Appeal Court not making an award the date of the final award made by the Court to which the case has been returned, if such final award is in excess of the original award.
(v). In the event of a loss being settled in more than one payment, any advance payment in respect of any claimant shall be added to the final or any subsequent payment to that claimant and the Average Weekly Earnings figure used at the time of the final payment shall be that employed to ascertain the Primary Limit to be borne by the Insurer in respect of all payments.’
The constructional choice to be made by the Court concerned the interpretation of was whether the words “(indexed in accordance with the attached Stability Clause)” [appearing in both the policy wording and the endorsement] refer to the $125,000 deductible or to the amount of the claim over and above that figure (to the upper limit of the Policy).
While the specific interpretation exercise was fact specific, in that it turned upon the (non-standard) wording of the Policy, the case provides a useful application of the rules of construction which govern the interpretation of commercial contracts (including insurance policies). Of particular interest was the restatement and application by Justice Hammerschlag of the role, within the interpretive exercise, of surrounding circumstances (commercial context and purpose) and external material.
His Honour noted:
‘Whether a phrase or expression in an agreement is ambiguous or susceptible to more than one meaning may be ascertained having regard to evidence of surrounding circumstances. Text, context and purpose may be taken into account without any anterior finding of ambiguity in making that assessment.’
‘Where, by reference to the contract alone (read together with instruments to which it may refer), the meaning is demonstrably not ambiguous, it is not appropriate to refer to external material. Where there is a constructional choice, recourse to events, circumstances and things external to the contract may be necessary to make it. Such recourse may be necessary and appropriate to enable the commercial purpose or object of the contract to be identified. That task is facilitated by understanding the genesis of the transaction, its background and context, and the market in which the parties are operating. Direct evidence of actual (subjective) intentions of the parties and evidence of their prior negotiations is inadmissible to be used as an aid to interpretation of a written contract’ [citations omitted]
His Honour held that it was appropriate to have regard to external material in considering the proper interpretation of the excess clause:
‘In my opinion, recourse can and should be had to circumstances and events external to the contract in making this constructional choice. Although, as much more fully appears below, the constructional choice could, I consider, be made without such recourse, particularly in light of the wording of the endorsement, the evidence which reveals the genesis and commercial object of the stability clause provides an additional layer of comfort that the choice which I consider is to be made is the correct one.’
Specifically, his Honour had regard to:
- the subject matter of the policy, being to insure the plaintiff against liability for personal injury sustained by its employees. In respect of which his Honour noted:
‘This type of claim can be made many years after a particular risk period covered by the Policy (the present case is an example) and given that it is an employee claim, it might in most cases be expected to have a relationship with the earnings of the employee at the date damages must be assessed.’
- the immediate commercial object of the Stability Clause which was to ensure that when a claim finally came to be determined – which could take years – the deductible would bear an economically rational relationship with the award.
- the words, grammar and syntax of the policy as to which his Honour noted:
in respect of the endorsement:
The parenthesised words (which are the same in both the attached wording and the endorsement) cannot, as used in the endorsement, sensibly be read as referring to anything except the $125,000.
The parentheses appear immediately after the $125,000 figure. As a matter of ordinary grammar, the parenthetical words qualify what immediately precedes them. The plaintiff’s construction requires them to be read as if inserted after the $1,000,000 figure. This requires the syntactical structure of the sentence to be tortured.’
in respect of the Stability Clause:
‘The defined term, Primary Limit, appears before the reference to the upper limit. It defines what precedes it not what succeeds it. In my view, it is the deductible.
Primary, in its ordinary meaning, means first. The Policy contains two limits. The first is a limit on what the insured must bear (i.e. the deductible). One does not proceed until this initial threshold is met. The second is the upper limit of the insurer’s obligation to indemnify. It is referred to as “a further $920,000”. It does not accord with common sense to refer to the secondary limit as the Primary Limit.
In my view, the word Insurer in para (d)(v) is a clear mistake and is to be read by the Court as corrected so as to read the Insured. The Primary Limit (which I have already found means the deductible) is appropriately described as “being borne by the Insured”. The words “in respect of all payments”, pertain to the deductible to be borne by the Insured which is the same in respect of each and every disaster. That is, all payments have the same deductible. On the other hand, the ultimate policy limit is a ceiling, which does not reflect the amount of any claim, let alone every claim for which the Insurer will be liable. It is unsurprising, given the general untidiness of the Policy, that such an error would creep in.’
Accordingly, the Court held that the Insurer was not required to indemnify the Insured because the whole of the claim fell within the (indexed) excess payable by the Insured.
The decision provides a useful reminder of the principles applicable to policy interpretation. Specifically, that, where the policy wording contains an ambiguity, the court may resolve that ambiguity by having regard to external material relevant to the court’s understanding the genesis of the transaction, its background and context, and the market in which the parties are operating. However, the court may not have regard to direct evidence of subjective intentions of the parties and evidence of their prior negotiations.
It was also notable that the Court commented that the Policy was ‘a somewhat untidy instrument’ containing errors in syntax and typographical errors. It may well be that, in the absence of such errors, the claim may not have proceeded as far as it did.