In CHU Underwriting Agencies Pty Ltd v Wise  WASCA 123, the Western Australian Court of Appeal has provided some useful reminders to insurers of the need to ensure that any settlement agreement binds all parties to whom the insurance cover extends – that is, including by application of section 48 of the Insurance Contracts Act 1984 (Cth) (ICA).
When participating in settlement negotiations, insurers should be careful to ensure that they clearly indicate that the settlement is to bind all parties (to the extent that this is possible in the circumstances), and not just the contracting insured.
The respondents were registered proprietors of specified lots in a strata plan registered in respect of property located in Exmouth, Western Australia. The strata company entered into a contract of insurance with the insurer in 1998. In March 1999, property and fixtures within the strata plan were damaged by Cyclone Vance. The insurer indemnified the strata company for the cost of repairing the damage in the amount of $87,600 less excess.
In 2001, the strata company and Mr Wise (a registered proprietor of one of the lots on the strata plan) commenced proceedings against the insurer. In June 2002, the strata company and the insurer entered into a settlement agreement. Pursuant to the terms of the settlement agreement, judgment was entered in favour of the strata company for $16,800.
In 2004, two other proprietors of lots on the strata plan were added as third and fourth plaintiffs in the proceedings. The court was required to consider:
- Whether the proprietors of lots on the strata plan were entitled to bring claims against the insurer under section 48 of the ICA on the basis that they are persons specified or referred to in the contract of insurance as persons to whom the insurance cover provided by the contract extends?
- If the answer to the first question is yes, on the proper construction of the contract of insurance and the settlement agreement, are the registered proprietors prevented from maintaining any claim against the insurer arising out of the contract of insurance on the grounds that all claims that any person was entitled to bring against the insurer for damage to any property or damage to common property were finally settled by the settlement agreement and judgment entered for the strata company?
Were the registered proprietors persons to whom the insurance cover extended?
The strata company and the insurer were the only parties to the insurance contract. The registered proprietors contended that they were entitled to claim under the insurance policy pursuant to section 48 of the ICA. Sub-sections 48 (1) and (3) relevantly provide:
(1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person’s loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract.
(3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured.
The insurance contract covered eight different types of insurance. The proprietors sought to claim under the building and common area contents policy. The insuring clause in the policy provided:
We agree to indemnify You in respect of ACCIDENTAL LOSS or DAMAGE to Your Building and Common Area Contents occurring during the period of insurance….
The term “You, your and yours” was defined so as to include the “Body Corporate, Corporation, Owners Corporation, Plan or Company named in the Schedule including, but limited to the interest therein of Proprietors, Members, Owners or Shareholders”. The special benefits for the policy included loss of rent and the cost of temporary and emergency accommodation.
The Court of Appeal upheld the trial judge’s determination that the definition of “You” was intended to indicate that the proprietors were persons to whom the insurance cover was extended. The Court of Appeal noted:
Ordinarily, the interests of all could and would be covered by proceedings taken by the strata company…However, it is possible that a majority of Proprietors and the strata company do not wish to litigate…A person with a joint property interest is not prevented from taking legal proceedings because not all joint interest holders agree to be plaintiffs.
In addition, the Court of Appeal acknowledged that if the cover did not extend to individual proprietors, the proprietors would not be protected against public liability claims against them as holders of the current property. That is, the policy would only cover the strata company. The Court of Appeal stated that this was a “compelling contextual and commercial basis for inferring a contractual intention that the insurance cover extend to Proprietors in relation to the common property”.
Did the settlement agreement bind the registered proprietors?
The insurer raised four arguments in support of its proposition that the effect of the settlement agreement and the entry of judgment was that the proprietors were prevented from pursuing the balance of their claims in the proceedings:
- as the registered proprietors are privies of the strata company, they are prevented from pursuing their claims under the doctrines of res judicata (where an action has been brought and judgment has been given, no other proceedings can be commenced or maintained in relation to the same cause of action) and cause of action estoppel. The Court of Appeal held that there is no privity between joint contractors or joint promisees simply because of that relationship, although a judgment for the full amount of the loss against a joint contractor or joint promisee would be a bar to action against the others;
- sub-section 48(3) of the ICA: The Court of Appeal held that ss 48(3) applies to an action under, or by virtue of the existence or terms of, the insurance contract. It does not alter the general law of res judicata, cause of action estoppel or circumstances where a judgment against one joint insured prevents the continuation or commencement of a claim by a co-insured.
- the proprietors and the strata company are joint promisees and judgment in favour of the strata company brings the remaining proprietors’ claims to an end: The Court of Appeal held that the settlement agreement entered into with the strata company and the conduct of the strata company and the insurer clearly showed that it was contemplated that the proprietors would continue to pursue their claims against the insurer. The parties to the settlement deed were not accepting the settlement sum in full satisfaction of the loss or damage they allegedly incurred. Accordingly, there was no reason why the general law applicable to joint tortfeasors would not apply to joint contractors or promisees;
- section 33 of the Strata Titles Act 1985 (WA), which enables the proprietors of lots in a strata plan, who are jointly entitled to take legal proceedings, to commence proceedings in the name of the strata company. Under section 33, any judgment in such proceedings takes effect as if it were a judgment given or made in favour of or against the proprietors. However, in this case, there was always at least one proprietor who was a party to the proceedings. Accordingly, the strata company could not rely on section 33 in order to bring proceedings. The strata company had brought the proceedings in its capacity as a party to the insurance contract.
This case indicates that when settling claims, insurers should, to the extent possible, ensure that:
- they clearly indicate during the settlement discussions that they intend that any settlement should bind all parties to whom the insurance cover extends, not just the contracting party; and
- terms of settlement are carefully drafted to ensure that they bind all parties to whom the insurance cover extends, particularly where proceedings have been commenced (or are likely to be commenced) by a number of parties;
Insurers should also consider including an indemnity from the insureds who are party to the settlement deed, indemnifying the insurer in respect of future actions by other insureds not party to the settlement deed in respect of the loss which is the subject of the settlement so as to synthetically transfer the risk of future actions to those insureds party to the settlement deed.
Of course, it may not be possible to identify all parties to whom the insurance cover extends, for example, where insurance cover is expressed to extend to a fluctuating class of persons.