An unsuccessful appeal against a denial of indemnity in relation to the outcome of arbitration proceedings after a ‘cap and collar agreement’ was entered into to limit risk.
- What amounts to an occurrence causing property damage and whether a ‘cap and collar agreement’ on the outcome of arbitration proceedings meant that there was no legal liability.
Weir Services Australia Pty Ltd (Weir) held a broadform liability policy, which covered personal injury and property damage caused by an “occurrence” in connection with Weir’s business (the Policy). The policy was effected with AXA Corporate Solutions Assurance (AXA).
Phil Gold Processing and Refining Corp (Phil Gold) retained Weir in connection with the refurbishment of a semi-autogenous grinding mill (the Mill). Two years after the refurbishment of the Mill, a circumferential weld disintegrated and one of the end plates partially detached from the drum causing extensive damage to the Mill. Phil Gold alleged this damage was caused by Weir.
In December 2013, Phil Gold commenced arbitration proceedings against Weir seeking damages. As a commercial solution to limit both parties’ exposure to the outcome of the arbitration, the parties entered into a cap and collar agreement (the agreement) prior to determination. The agreement had two fundamental terms: first, if Phil Gold was awarded damages its recovery would be limited to US$10.725M (the Cap) and secondly, Weir would pay Phil Gold a fixed amount of US$2M (the Collar) regardless of the decision in the proceedings. The arbitration tribunal ultimately found that Weir had no liability to Phil Gold. The consequence of this finding was that Weir had to pay the Collar and also its own substantial costs of the arbitration.
Weir sought cover under the policy, in respect of its requirement to pay the Collar and its costs. AXA denied indemnity in respect of both amounts and Weir commenced proceedings against AXA for breach of contract.
The Decision at Trial
The trial judge dismissed Weir’s claims for coverage of the Collar amount and Weir’s costs in respect of the arbitration proceedings. Weir appealed.
The Issues on Appeal
The main issues of appeal were where:
- the agreement had caused Weir to be legally liable to pay compensation
- Weir had established that an “Occurrence” had resulted in “Property Damage”
- whether the professional services exclusion would have been engaged in any event.
The Decision on Appeal
The Court of Appeal dismissed the appeal.
The majority of the Court of Appeal agreed with the trial judge that the agreement did not cause Weir to be “legally liable” to pay money to Phil Gold “by way of compensation”. This was because Weir’s obligation to make payment of the Collar was due to the agreement, not any liability. In other words, Weir would not have had any liability but for the agreement. Because of these findings on “legal liability”, the majority of the Court of Appeal also found that the agreement was not a reasonable settlement of the claim.
In respect of the principal issue of whether the failure of the weld could be said to be an “Occurrence” that resulted in “Property Damage”, the majority of the Court of Appeal concluded the trial judge was correct and held that the failure of the weld (being an observable change in its physical circumstances) was damage itself rather than an “event” causing damage (i.e. an “Occurrence”). That is, the “Occurrence” itself could not be the damage.
The Court of Appeal held that the trial judge should have determined that AXA was liable to pay Weir’s reasonable costs in defending the arbitration proceedings, as it found that Weir’s faulty workmanship was an “Occurrence”. This was because there was a continuing state of affairs created by Weir’s performance of the refurbishment work that caused the “Property Damage”.
However, the professional services exclusion defeated Weir’s claim for indemnity for the costs of the arbitration in any event, as Weir was contracted by Phil Gold to provide engineering services. The Court of Appeal found this amounted to professional services and the exercise of care, skill and judgment in the provision of those services.
Implications for you
This case illustrates how difficult it can be to distinguish damage (and the failure of the weld being an observable change in its physical circumstances) from an event that causes damage (i.e. an “Occurrence” pursuant to the policy). The case also demonstrates the potential pitfalls of entering into commercial risk allocation agreements, which can in certain situations vitiate insurance cover.