QBE v Lumley: A restatement of contribution principlesAuthor : Gareth HorneConstruction and Contract Works
The decision of the Victorian Court of Appeal in QBE Insurance (Australia) Limited v Lumley General Insurance Limited  VSCA 124 (QBE v Lumley) highlights that basic principles of justice and the desire of the courts to prevent unjust enrichment underlie the concept of contribution in insurance law. The decision also serves as a practical reminder that double insurance issues will often arise in the context of building and construction risks.
Dabserv Pty Ltd (Dabserv), a tenant in commercial premises in Melbourne, contracted the fit out of its office to Probuild Constructions (Aust) Pty Ltd (Probuild). Commercial Interiors Australia Pty Ltd (Commercial Interiors) was sub-contracted by Probuild to undertake certain aspects of the fit out. During the course of the fit out an employee of Commercial Interiors accidentally dislodged and activated a flush sprinkler head in the ceiling of a meeting room causing damage to Dabserv’s property and the fit out works (the accident).
Probuild held a Contract Works, Plant and Equipment and Third Party Liability policy with Lumley General Insurance Limited (Lumley) (the Lumley Policy). The schedule to the Lumley Policy defined œInsured to include, among others, Probuild’s sub-contractors. Commercial Interiors held a Commercial / Retail / Industrial policy with QBE Insurance (Australia) Limited (QBE) (the QBE Policy). The definition of œInsured‘ in the broadform liability section of the QBE Policy included Commercial Interiors and œevery principal. Commercial Interiors did not know that it was covered under the Lumley Policy or that it was entitled to make a claim under the Lumley Policy.
On the day after the accident Probuild, through its broker, notified Lumley of the accident. Soon after, Commercial Interiors notified QBE of a claim arising from the accident. Some time later the adjustor appointed by QBE wrote to Lumley seeking clarification of whether the Lumley Policy would cover Commercial Interiors’ liability to Dabserv. Lumley responded to that letter by confirming that the Lumley Policy would cover Commercial Interiors’ liability, however, Lumley would be seeking contribution under the QBE Policy.
Probuild undertook the rectification works itself and was indemnified by Lumley for the costs of rectification after application of the deductible. QBE agreed that the costs of rectification were fair and reasonable. Lumley sought contribution from QBE in respect of the sum paid to Probuild for the costs of rectification, however, QBE refused to make a contribution. Lumley subsequently commenced proceedings against QBE seeking 50% of the sum paid to Probuild for rectification costs.
The decision at first instance
In his judgment at first instance Justice Pagone restated the principle in Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 that the issue of contribution involves an inquiry as to whether the payment of an insured’s claim for indemnity by one insurer will provide the other insurer with a defence to a like claim.
His Honour also cited with approval the decision of Sackville J in Drayton v Martin (1996) 9 ANZ Ins Cas 61-32 where it was held that an insurer seeking contribution from a co-insurer under an indemnity policy must establish that:
+ it is liable to indemnify the insured under its own policy;
+ it has made payment in respect of that liability;
+ the co-insurer is liable to indemnify the insured under its policy; and
+ the co-insurer has not made payment in respect of its liability to the insured.
In applying the principles in Drayton v Martin His Honour held that QBE was liable to make contribution to Lumley in respect of Lumley’s payment to Probuild.
Decision on appeal
QBE appealed the decision of Pagone J on 12 grounds. The principal issues in dispute included:
+ whether a claim for indemnity by Probuild under the Lumley Policy also amounted to a claim for indemnity by Commercial Interiors under the Lumley Policy;
+ whether Commercial Interiors was required to authorise or ratify cover being conferred on it under the Lumley Policy before double insurance could exist; and
+ whether the NSW Court of Appeal decision in AMP Workers Compensation Services (NSW) Ltd v QBE Insurance Ltd (2001) 53 NSWLR 35, that the time for determining whether there is double insurance is the time of the casualty, should not be followed in Victoria because that case involved issues of statutory law in New South Wales that do not apply in Victoria.
In its judgment the Court of Appeal also considered on whose behalf the rectification costs were paid by Lumley. The Court of Appeal upheld the decision at first instance and determined, on the facts, that Lumley’s payment of the rectification costs was made on behalf of Commercial Interiors to discharge its liability in tort to Dabserv.
In their joint judgment Neave JJA, Dodds-Streeton JJA and Kyrou AJA agreed with the finding at first instance that the claim for indemnity made by Probuild under the Lumley Policy also constituted a claim for indemnity by Commercial Interiors under the Lumley Policy. In particular, their Honours agreed with the reasoning of Pagone J that Probuild notified ˜the incident’ as a whole and, in circumstances where QBE was aware that Commercial Interiors’ liability to Dabserv was being treated as an insured risk under the Lumley Policy, it could be inferred that QBE acquiesced to Commercial Interiors having provided notification under the Lumley Policy.
The joint judgment noted that section 54 of the Insurance Contracts Act 1984 (Cth) (the ICA) would apply if it was ultimately held that Commercial Interiors was obliged to, but had not, notified Lumley of its claim for indemnity under the Lumley Policy. The effect would be that Lumley could reduce the amount payable under the policy in respect of the claim for any prejudice suffered. Their Honours held, on the facts of the case, that it was difficult to see what (if any) prejudice had been suffered by Lumley.
Ratification of cover
During the appeal QBE submitted that Pagone J erred in finding that Commercial Interiors did not have to authorise or ratify cover being conferred on it under the Lumley Policy. In particular, it was submitted that section 48 of the ICA and the decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 had the effect that Commercial Interiors had to take positive steps to œengage the Lumley Policy.
The joint judgment rejected QBE’s submission and held that neither the language nor the underlying purpose of sections 48 or 76 of the ICA required Commercial Interiors to ratify its inclusion as an insured as a pre-condition to enforcing its rights under the Lumley Policy.
Timing of double insurance
In AMP v QBE the NSW Court of Appeal held that the payment of a joint liability by one co-insurer cannot defeat the right of contribution, and therefore the right of contribution does not depend on the state of affairs that exist after a payment has been made. That led the court to the conclusion that the question of double insurance should be determined at the time of the casualty, in accordance with the principle outlined by the High Court of Australia in Albion.
The court in AMP v QBE also held that a co-insurer should not be allowed to be unjustly enriched simply because the insured decides to make a claim under the other co-insurer’s policy.
QBE submitted that the decision in AMP v QBE should not be followed for a number of reasons including that it involved law specific to New South Wales.
The joint judgment in QBE v Lumley disagreed with that submission and held that the question of double insurance should be determined at the time of the casualty giving rise to the insured’s loss or liability. In reaching that conclusion their Honours added that the approach adopted in AMP v QBE is consistent with the underlying rationale and purpose of principles of contribution because it:
+ prevents unjust enrichment of a co-insurer in circumstances where the insured fortuitously makes a claim for indemnity under a policy with the other co-insurer; and
+ removes the potential incentive to reject or delay payment of claims in the hope of avoiding contribution.
While the judgment of the Victorian Court of Appeal in QBE v Lumley does not change the law on double insurance, it clarifies that double insurance should be determined at the time of the casualty. The joint judgment also provides an effective and thorough restatement of the issue of contribution and its underlying equitable principles.
The dispute in QBE v Lumley arose in the context of building works being performed by a head contractor and its sub-contractor. While the judgments at first instance and appeal address very specific principles of contribution, the case provides a practical reminder to claims personnel that issues of double insurance will often arise in the context of building and construction risks. Insureds in the building and construction industries should also be alive to the possibility that they might be covered by a third party’s policy in the event of a claim.26/06/2009