A major source of disputes between insurers and their insureds is the proper interpretation to be given to policies of insurance. More often than not these disputes arise because the relevant policy wording is unclear, lending itself to more than one interpretation. The recent decision of the New South Wales Court of Appeal in Metlife Insurance Ltd v RGA Reinsurance Company of Australia Ltd  NSWCA 56 is an example of where poor drafting of a policy of reinsurance resulted in a dispute involving over $50 million worth of claims. In another significant claim, the Supreme Court of New South Wales in Liberty Mutual Insurance Company v Kellogg Brown & Root Pty Ltd  NSWSC 1519 considered a policy of insurance that was also open to more than one interpretation.
Given the quantums involved, both claims serve a warning to brokers, insureds and underwriters about the importance of having clearly drafted policies of insurance and to the extent that there may be any ambiguity in proposed wordings, ensuring that these are resolved before the policy is entered into and significant claims are made.
Metlife Insurance Ltd v RGA Reinsurance Company of Australia Ltd  NSWCA 56
The dispute in this case focused on a clause in an addendum (number 4) to the parties’ ‘Automatic Group Life Reinsurance Treaty’ (Reinsurance Treaty). The purpose of the addendum was for RGA Reinsurance Company of Australia Ltd (RGA) to provide reinsurance to Metlife Insurance Ltd (formerly named Citicorp Life Insurance Ltd (Metlife)) for certain liabilities under a group life insurance policy (the ‘Blue Ribbon policy’), covering members of the NSW police force. Metlife had paid out over $50 million in claims under the Blue Ribbon policy to members of the police force, which arose out of pre-existing conditions. It sought reinsurance for these claims from RGA.
The Court noted that the Reinsurance Treaty was a complex document and on the available evidence, included various schedules and appendices that were illogically arranged. The particular disputed words in addendum 4 provided:
‘Claims Handling Limits: With respect to the settlement of reinsured claims of below the claims handling limit, RGA will follow METLIFE's claims settlement decisions. For amounts in excess of this RGA must preapprove all claim payments by METLIFE.
For a claim to be eligible for consideration under the reinsurance arrangement the initial event leading to or contributing to that claim must occur after the date of effect of the treaty [emphasis added in bold and referred to as the ‘initial event sentence']'.
RGA contended that the initial event sentence qualified its obligation to provide cover to Metlife in respect of claims made under the Blue Ribbon policy and on this basis, it was not liable to reinsure the claims paid for pre-existing conditions. Metlife, on the other hand, contended that the initial event sentence only related to the claims handling process (in part because this was the section of the policy where the clause was located). If RGA’s contention was accepted, a secondary issue arose for consideration; namely whether ‘the initial event leading to or contributing to that claim’ was a reference to the initial event leading to the death or incapacity of the police officer, or instead, the event leading to the claim being made under the MetLife policy.
The trial judge answered both questions in favour of RGA and in a detailed analysis of the text, context and purpose of the Reinsurance Treaty and addendum, the Court of Appeal came to the same conclusion, dismissing Metlife’s appeal. The Court found Metlife’s interpretation of the clause to be commercially improbable. It also rejected Metlife’s reliance on the ‘back to back presumption’ (i.e. reinsurance is presumed to be back to back with the underlying policy), noting that this principle will normally only apply where the reinsurance takes the form of a short form reinsurance slip (rather than a detailed addendum like this one).
The Court of Appeal was particularly scathing of the drafting of the Reinsurance Treaty with Emmett AJA noting that the documentation was ‘not something in which its author should have any pride’.
Liberty Mutual Insurance Company v Kellogg Brown & Root Pty Ltd  NSWSC 1519
This case involved the Australian Pacific LNG Gladstone Pipeline Project. Australia Pacific LNG Gladstone Pipeline Pty Ltd (Australia Pacific) had engaged McConnell Dowell Constructors (Australia) Pty Ltd and Consolidated Contracting Company Australia Pty Ltd (the joint venturers) to perform works in respect of the project and the joint venturers had contracted Kellogg Brown & Root Pty Ltd (KBR) to provide engineering and associated services.
Six insurers, led by Liberty Mutual Insurance Company (Liberty), had agreed to underwrite a project-specific indemnity policy (PSPI policy) for 10 years in which Australian Pacific, the joint venturers, KBR and two other parties, were provided with cover against civil liability in respect of claims arising from their performance of professional services in respect of the project. Clause 5.3 of the PSPI policy provided that ‘The Policy is in excess of any Additional Insurance’. Six policies were then listed in the Policy Schedule adjacent to the words ‘Additional Insurance’, including of relevance Policy No. GLOPR1201059/2. In accordance with its contract, KBR had obtained a professional indemnity insurance policy, underwritten by a Lloyd’s syndicate, for the 12 month period commencing 1 April 2012 (the said Policy No. GLOPR1201059/2 or the 2012 Lloyd’s policy). KBR had another professional indemnity insurance policy for the 12 month period commencing 1 April 2013, which was not listed in the PSPI policy schedule (2013 Lloyd’s policy).
In April 2014, Australian Pacific delivered a Notice of Dispute to the joint venturers in relation to allegedly defective work and the joint venturers made a corresponding claim on KBR. KBR notified Liberty and Lloyd’s of the claim, but only actively pursued a claim for indemnity against Liberty under the PSPI policy (likely because the deductible was $4 million less than the 2013 Lloyd’s policy). Liberty sought a declaration that, on the proper construction of the PSPI policy, if KBR was insured against a loss under both the PSPI policy and the Lloyd’s policy, Liberty was only liable to indemnify KBR under the PSPI policy to the extent that the loss exceeded the limit of indemnity under the Lloyds policy.
The ambiguity in this case arose because the 2013 Lloyd’s policy was not listed as Additional Insurance in the PSPI policy schedule. KBR contended that the list of six policies in the PSPI policy schedule was exhaustive and that the only Additional Insurance to which the PSPI policy sits in excess by reason of clause 5.4 of the PSPI policy was the 2012 Lloyd’s policy. The Court rejected KBR’s position and made a declaration to the effect that ‘‘Additional Insurance’ means ‘such insurance of the kind particularised in the Schedule as the insureds were obliged to effect during the Pipeline Project’.
Applying the test of what a reasonable business person would have known from Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, the Court found that KBR (and Australia Pacific) would have known that proposed insureds were contractually obliged to effect and maintain professional indemnity insurance during the entirety of the project and for six years from its completion. Further, a reasonable business person would have understood that the list of insurance policies in the PSPI policy schedule was no more than a statement of the policies which each insured, pursuant to their contractual obligations, had effected at the inception date of the PSPI policy. The declaration was narrower in its terms than that sought by Liberty, which posited a hypothetical circumstance and could not, therefore, be made.