June 2014

Insurer loses indemnity appeal

by Krystal Belcher, KT Journalism

The NSW Court of Appeal has rejected GIO General Ltd’s appeal against a District Court judgement requiring it to indemnify Newcastle mining company Centennial Newstan Pty Ltd.

Centennial’s law firm Winter Hilditch & Fotheringham partners Carolyn Willson and Lesley Woodmore said the decision was a reminder it was “not appropriate to simply read down an insurance clause by reference to an indemnity clause”.

They said careful drafting of insurance and indemnity clauses in commercial contracts was needed because each particular clause must be considered in its own unique context and in regard to the entire contract.

They said the interaction between indemnity and insurance clauses in commercial contracts often gave rise to disputes.

In the District Court, Centennial was found liable in negligence to Andrew William McDonald, who was employed by Longwall Labour Force Pty Ltd (LLF). 

Mr McDonald was injured on September 10, 2008, while working as a fitter and turner at Centennial's Fassifern coal mine.

Longwall Advantage Pty Ltd (LA), a company related to LLF, had entered into an agreement with Centennial to supply it with labour. LA supplied Mr McDonald’s services to Centennial under that agreement, which incorporated Centennial’s standard contract conditions and standard contractor’s site regulations.

Centennial made a claim against LA’s GIO policy.

GIO refused to indemnify Centennial, saying any obligation to indemnify was limited by the indemnity in clause 8.1 of the supply agreement, which did not extend to any direct liability of Centennial arising from its own negligence.

Clause 8.1 of the standard conditions provided LA indemnified Centennial for claims for injury or death to LA’s personnel; and LA indemnified Centennial for claims for any negligent act or omission by LA or its personnel relating to performance of the supply agreement.

LA was also obliged to maintain workers’ compensation, public liability and professional indemnity insurances under clauses 8.3 and 8.4.

In the Appeal Court, GIO argued Centennial was not insured because the insurance clause did not include a requirement to insure Centennial for liability for its own negligence.

But the Appeal Court rejected GIO’s submissions and upheld the District Court decision the insurer was liable to indemnify Centennial under LA’s policy.  

GIO’s arguments were founded principally on Erect Safe Scaffolding (Australia) Pty Ltd v Sutton (2008) NSWCA 114, in which the NSW Appeal Court considered a subcontract between Australand Constructions and Erect Safe Scaffolding.

As Australand’s liability arose from its own independent negligence (failing to maintain an appropriate safety regime for the site), not from Erect Safe’s performance of any of its contractual obligations, the indemnity clause was read down to reflect only the common law position of joint tortfeasors.

Ms Willson and Ms Woodmore said Erect Safe had often been used as a principle to limit the scope of all insurance clauses to support immediately adjacent indemnity clauses. “This simplistic approach ignores the need to view the clauses in context and against the whole of the agreement, as required by the rules of construction,” the partners said.

The court found Centennial’s supply agreement terms were quite different from those in Erect Safe and the obligation to maintain insurance was supplemented by the special insurance requirements and indemnity in the indemnity clause.

The court found the case distinguishable from Erect Safe because the indemnity and insurance clauses were not contiguous; the insurance clause required cover for the respective liability of Centennial and LA “to each other and to third parties”; and each party was to indemnify to the same extent it would if each of the parties had separate policies.

GIO accepted on appeal that if LA was contractually obliged to obtain insurance for Centennial’s own liability to Mr McDonald, then Centennial was an insured within the meaning of the policy.

The court determined the “special insurance requirement” clause was intended to provide cover to Centennial, all LA subcontractors and third parties, which would include liabilities arising in negligence. That was beyond the scope of the indemnity afforded to Centennial under clause 8.1.

That construction of the “special insurance requirement” clause was supported by the existence of the separate indemnity in the “failure to insure” clause which would have “no work to do” if the obligation to obtain cover for Centennial “merely secured the indemnity afforded under clause 8.1”.

The court found there was no inconsistency and the special insurance requirements in the site regulations were supplementary to provisions in the standard conditions.

In the District Court, Acting Judge Marks determined the indemnity in clause 8.1(a) of the supply agreement was not triggered because the injury arose because of Centennial’s negligence.

He found the “special insurance requirement” clause operated to require the policy to cover Centennial’s liability to pay damages arising out of its negligent acts or omissions.

Ms Willson and Ms Woodmore said the appeal decision reinforced the need for contracts to be construed with regard to their terms as a whole when considering indemnity and insurance clauses; the words of every clause must, if possible, be construed so as to render them harmonious with one another; and cases like Erect Safe were not to be used as a statement of principle to determine the construction of indemnity clauses.

(GIO General Ltd v Centennial Newstan Pty Ltd NSWCA 13, 12/2/2014)