The recent NSW Court of Appeal decision in Allianz Australia Insurance Ltd v Bluescope Steel Ltd17 provides useful guidance on a little known, and often overlooked, provision - s18 of the Insurance Act 1902 (NSW) (the Act). Section 18 excuses policy breaches by an insured where the insurer has suffered no prejudice. The decision examines the meaning of “prejudice” and when a lost opportunity may be prejudicial to an insurer.
Youden Richard Jackson was a bricklayer employed by BlueScope Steel Ltd (BlueScope). In the late 1950s and early 1960s he worked on a site in Newcastle owned by BHP Billiton Ltd (BHP) where he was allegedly exposed to asbestos. Mr Jackson was diagnosed with mesothelioma in November 2005 and claimed against both BHP and BlueScope on 5 July 2006.
As the result of a deed between them, BlueScope was indemnified by BHP for the claim subject to BlueScope using all reasonable endeavours to pursue insurance coverage. BlueScope held a workers compensation policy with Allianz (the Policy). BHP and BlueScope retained common representation despite the apparent conflict of interest between BHP (to maximise BlueScope’s insured liability) and BlueScope (given its insurer’s interest in minimising BlueScope’s liability).
Following a bedside hearing on 12 July 2006, BlueScope notified Allianz of the claim on 14 July 2006. BlueScope again contacted Allianz on 19 July, asking Allianz to assume conduct of the claim. Allianz advised that it was not inclined to take over conduct of the proceedings. BlueScope formally notified Allianz of its claim for indemnity on 25 January 2007. On 9 May 2007, Allianz declined indemnity. Allianz subsequently advised the declinature was due to a breach of condition 2 of the Policy – that the insured notify Allianz of any claims as soon as practicable.
Prior to the further hearing of Mr Jackson’s claim, BlueScope sought Allianz’s instructions regarding anticipated settlement negotiations. Allianz declined to respond. At the hearing, BlueScope settled Mr Jackson’s claim against it. BHP also settled the claim against it by judgment in its favour, precluding any later claim for contribution by Allianz.
Excusing the breach
BlueScope cross-claimed against Allianz for the amount of the settlement.18 In response, Allianz raised the following issues supporting its declinature.
- BlueScope breached condition 2 by not advising of the claim as soon as practicable
- This meant Allianz suffered prejudice by being denied the opportunity to participate in the bedside hearing
- BlueScope also breached condition 3 of the Policy – that BlueScope not enter into any settlement or incur the expense of litigation without the prior written approval of Allianz
- BlueScope breached its obligation of utmost good faith – BlueScope, in sharing legal representation with BHP, had prejudiced Allianz as the parties had a conflict of interest and the questions asked by joint counsel for BHP and BlueScope at the bedside hearing achieved a result completely favourable to BHP and prejudicial to Allianz.
The primary judge found that BlueScope had breached condition 2 of the Policy but also found that s18(1) of the Act applied to excuse the breach. Section 18(1) provides:
18 Powers of court in relation to insurance contracts
- In any proceedings taken in a court in respect of a difference or dispute arising out of a contract of insurance, if it appears to the court that a failure by the insured to observe or perform a term or condition of the contract of insurance may reasonably be excused on the ground that the insurer was not prejudiced by the failure, the court may order that the failure be excused.
Section 18 of the Act, rather than s54 of the Insurance Contracts Act 1984 (Cth), was considered as the policy in dispute was a statutory workers compensation policy.19
In holding that s18 applied to excuse the breach, the primary judge found that Allianz had not been prejudiced. While Allianz had argued that the breach of condition 2 resulted in it being unable to cross-examine Mr Jackson at his bedside hearing, the prejudice was no more than “theoretical”. In highlighting the lack of prejudice, the primary judge noted that due to Mr Jackson’s state of wellbeing his evidence, while not of entirely no value, was uncertain and unreliable.20
His Honour also held that, having rejected the claim for indemnity, Allianz had no entitlement to be consulted in relation to condition 3. However, no further findings were made on this issue.
BlueScope was held to have not breached its duty of utmost good faith and was adjudged to have been entitled to act as a “prudent uninsured” on the basis of Allianz rejecting indemnity and refusing to take over defence of the proceedings without justification. The primary judge appeared to also imply that Allianz was contractually obliged to confirm indemnity and conduct the defence of the claim. Accordingly, judgment was entered in favour of BlueScope.
An “irretrievable” or “theoretical” error?
Allianz’s appeal was limited by s32 Dust Diseases Tribunal Act 1989 (NSW) and s48(2)(f) Supreme Court Act 1970 (NSW) to errors of law.
Allianz argued that the primary judge had misinterpreted s18 of the Act in excusing BlueScope’s breach of condition 2 of the Policy. Allianz referred to the use of the term “irretrievable prejudice” by the primary judge as indicative of a misapplication of s18(1).
All of the judgments of the Court of Appeal pointed out that the context in which “irretrievable” was used as an adjective prior to “prejudice” was in reference to Allianz’s own submissions and addressing that assertion by Allianz.21 Accordingly, it was held that the test was not misconceived by the primary judge and this ground of appeal failed. Ward JA referred to the relevant prejudice being “real (not speculative or theoretical) prejudice” as referred to in McPherson and Davies Shopfitters Pty Ltd v Mercantile Mutual Insurance Ltd.22
Another contention by Allianz was that despite the comments of the primary judge that the prejudice to Allianz was only “theoretical”, it had suffered real prejudice due to it being denied the opportunity to attend Mr Jackson’s bedside hearing and to cross-examine Mr Jackson.
There was no dispute that Allianz would have had a representative at the bedside hearing and would have questioned Mr Jackson. The point turned on whether the nature of the evidence which Allianz may have been able to draw from cross-examining Mr Jackson was such that Allianz being denied the opportunity would qualify as “real” prejudice.
The Court of Appeal referred to the primary judge’s findings of fact in relation to Mr Jackson’s evidence. Ward JA noted that “the window of opportunity to obtain any cogent evidence from Mr Jackson at the bedside hearing can only have been small” and that even early in Mr Jackson’s cross-examination (when he may have given his most cogent evidence) he was “by no means expansive” regarding questions put to him and“expressed uncertainty” about a number of matters. Mr Jackson had also contradicted the contents of his sworn affidavit evidence.
Basten JA concluded that the judge was required to make an evaluation of prejudice, based on the evidence and that it was open for the primary judge to satisfy himself that no prejudice was caused. Accordingly, there was no error of law.23 Ward JA went further in stating that given the transcript and the primary judge’s findings, any evidence from topics Allianz may have wished to explore with Mr Jackson “was not likely to be particularly reliable and was unlikely to have been clear”. Accordingly, the opportunity of cross-examination lost by Allianz and the evidence it may have been able to draw from Mr Jackson was of “uncertain value”. As the opportunity lost was no more than speculative in value, it could not be said there was “real” prejudice.24
Having found no prejudice on the facts, it was open to the primary judge to excuse BlueScope’s breach under s18 of the Act. The Court therefore unanimously held that Allianz’s appeal on this ground should fail.
Nevertheless, Allianz’s appeal was partially successful on other grounds resulting in the remission of the matter to the Tribunal for further consideration.
Of particular relevance, the Court of Appeal held the primary judge erred in law in finding that Allianz was contractually obliged to take over conduct of BlueScope’s defence. Ward JA referred to Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd25 noting that generally there is “no obligation to defend claims made against the insured”. Similarly, the Court also held that Allianz’s obligation to indemnify BlueScope only arose when BlueScope was legally liable to pay damages. Accordingly, a denial of indemnity in line with Allianz’s legal rights did not amount to dispensation of BlueScope’s obligation under condition 3.
Further, the Court held that the primary judge had not made the necessary findings to hold that BlueScope was able to dispense with its obligation to comply with condition 3 or that Allianz had correspondingly waived that condition. The Court referred to Peter Turnbull v Mundus Trading,26 which provides that a plaintiff may be dispensed from performing a condition by express or implied intimation from the other party that it is useless to perform, or otherwise requesting that the condition not be performed. However, the necessary findings to apply this test had not been made. Accordingly this question was remitted to the Tribunal for consideration. As the primary judge did not deal with whether the breach of condition 3 should also be excused by s18 of the Act, that question was also remitted.
Into the Breach
This decision highlights the issues faced by insurers in resisting attempts by insureds to employ s18 to cure policy breaches. Most importantly, the insurer must establish that any asserted prejudice is “real” and not merely theoretical.
Section 18 has the potential to apply to a range of circumstances, particularly as prompt notification and insurer consent to settlement are standard conditions of most insurance policies. An inability to promptly assess or minimise loss may well result in prejudice. However, in such circumstances it is important that the insurer can demonstrate that the prejudice suffered is more than speculative and/or uncertain.
Despite s18, and s54 of the ICA for that matter, insureds should remain vigilant in promptly informing their insurers of any potential claims and complying with all policy conditions. Insureds cannot take for granted that the insurer will not be prejudiced.