It is commonly thought that where a liability insurer, of whatever type, appoints lawyers to represent an insured in a legal proceeding without an express reservation of rights, and in a way which tends to lead the insured into believing that indemnity has been granted by the insurer, that the insurer will not be entitled to subsequently refuse indemnity because of, for example, the application of an exclusion clause. Instead, the insurer will be taken to have ‘elected’ to grant indemnity and will not be permitted to resile from that election.
That position was pressed by an insured recently before a judge in the Supreme Court of Victoria, unsuccessfully.
The insured manufacturer was sued by a sub‑contract maintenance worker (who was employed by his own company). The insured referred the legal proceeding to the Victorian WorkCover Authority as the employer’s liability insurer. The VWA appointed solicitors to represent the insured and they did so for a sustained period. Initially, the injured man alleged that he was an employee of the insured but later withdrew that allegation.
The VWA declined indemnity on the basis that the injured man was not an employee of the insured and so the claim was not covered by employer’s liability insurance.
The judge rejected the insured’s argument that the VWA could not refuse indemnity because it was bound by an election to indemnify the insured, in the form of the appointment of solicitors who continued acting for the insured for about 18 months. The key factor was that the insurance did not cover the insured for liability to injury to a person who was not an employee of the insured. The judge decided that, in those circumstances, there was no proper basis for concluding that the VWA had made an election between two inconsistent rights: namely, accepting or denying an obligation to indemnity the insured pursuant to the policy.
The judge said that if the VWA did not have any liability to indemnify the insured pursuant to the policy, then it was not confronted with a choice between two inconsistent rights. There was no choice between a right to accept liability under the policy and a right to reject liability, because there never was any liability under the policy.
Moore v Tatura Milk Industries v Victorian WorkCover Authority.
While a representation might give rise to an estoppel or to a claim for misrepresentation, it will only amount to an election where the representation amounts to a choice between two inconsistent rights. When an insurance policy simply does not cover a claim, there is no choice between a right to accept liability under the policy and a right to reject liability.