Liability update: Contractual obligations to insure - what are you actually underwriting?
Insurance eBulletin - 26 May 2014
Contracts for the supply of labour commonly contain indemnity clauses in favour of the principal in the event that it incurs liability arising out of the performance of the contract. Such contracts often include a term requiring the person providing the indemnity to take out insurance to effectively 'back-up' their indemnity.
A recent decision of the NSW Court of Appeal1 examined the obligations of a labour-hire contractor to take out insurance extending cover to its principal. While the contractual indemnity clause quite clearly excluded liabilities of the principal caused by its own negligence, the clauses in the contract relating to the contractor's obligations to insure were not so clear.
The Court found that the contract required the contractor to maintain public liability insurance covering all liabilities of the principal arising out of the performance of the contract, including liability arising from its own negligence.
As the insurance policy extended to persons that the contractor was obliged to insure, the insurer was found liable to indemnify the principal for a more extensive liability than it may have bargained for.
In September 2008, a worker was injured at a coal mine operated by Centennial Newstan Pty Ltd (Centennial). His services had been provided to Centennial under a labour-hire agreement (Agreement) with Advantage Pty Ltd (Advantage). The Agreement was a one page document, but it incorporated other documents by reference including:
- 'Centennial Standard Conditions of Contract' (Standard Conditions); and
- 'Attachment 1 - Centennial Standard Contractors Site Regulations' (Site Regulations)
Each document contained a section concerning Indemnities and Insurance.
Clause 8 of the Standard Conditions relevantly provided:
8.1 You must indemnify Centennial and agree to hold and save Centennial harmless from all claims for:
(a) injury to or death of any of your personnel, except to the extent that a claim for such injury or death arises as a result of the negligence of Centennial or a breach of this contract by Centennial; [emphasis added] … 8.3 You and your Personnel must maintain workers compensation insurance as required by applicable Laws and public liability…
Clause 43 of the Site Regulations relevantly provided:
43.2.2 Unless otherwise agreed to in writing by the Principal, public and product liability policies must note the Principal and all subcontractors as interested parties and must cover the respective liabilities of each of those parties to each other and to third parties. The policy must cover each indemnified party to the same extent as it would if each of the parties had a separate policy of insurance. [Emphasis added]
Clause 43.5 of the Site Conditions provided that in the event of any inconsistency between clause 43 and the "provisions of any Contract", the provisions of the Contract were to prevail2.
Advantage duly took out a Combined Business Insurance Policy with GIO which included public liability cover. Centennial was not named in the policy but the persons covered by the public liability section of the policy included those to whom Advantage was 'obligated by virtue of any contract or agreement to provide insurance such as is afforded by this Policy; but only to the extent required by such contract or agreement'. [Emphasis added].
The litigation between GIO and Centennial arose as a result of the worker obtaining a judgment in the District Court against Centennial, Advantage and its related entity and an order that Centennial contribute 100% of the damages. Centennial called on Advantage to indemnify it under the Agreement and also claimed to be entitled to cover under the GIO policy. It was unsuccessful against Advantage but succeeded against GIO. GIO appealed.
It was conceded that clause 8.1(a) did not require Advantage to indemnify Centennial for its own negligence. The Court of Appeal found that clause 8.3, on its own, did not require Advantage to arrange cover for Centennial's negligence either.
Centennial argued however that clause 43.2.2 was not limited to insurance supporting the indemnity in clause 8.1(a) and contained a broader obligation to insure which included liabilities arising from the performance of the Agreement caused by its own negligence.
GIO put forward a number of arguments that clause 43.2.2 did not require Advantage to arrange cover for Centennial's negligence, including the following:
Clause 43.2.2 contained no additional obligation to insure Centennial and was referable to clause 8.3. That clause in turn supported the contractual indemnity in clause 8.1(a) which did not extend to Centennial's negligence.
The phrase 'respective liabilities' should be interpreted as not including all possible liabilities of each party to the Agreement and was instead confined to where only Advantage or its subcontractors were negligent.
If cause 43.2.2 did create a broader obligation, this was inconsistent with the narrower obligation to insure in the Standard Conditions. Since the Agreement created a hierarchy in the case of inconsistency, and the Standard Conditions were ranked higher than the Site Regulations, then cl 43.2.2 would not prevail.
Express words were required to create an obligation to indemnify and insure against a principal's negligence (as in Erect Safe Scaffolding v Sutton3).
Justice Gleeson (who delivered the leading judgement) rejected these arguments. Justice Gleeson emphasised the need for all provisions of the Agreement to work harmoniously. Consequently, clause 8 had to be read in conjunction with other indemnity clauses contained in the Agreement - namely cl 43.2.2.
Justice Gleeson found that the obligations and liabilities in clause 43 were different to those referred to in clause 8. Clause 43.2.2 was phrased more widely and created a broader obligation that required cover even in the event of Centennial's own negligence. This wider obligation supplemented the obligation created by the indemnity clause in the Standard Conditions. As such, this was not inconsistent with the Standard Conditions.
Justice Gleeson also rejected GIO's argument that the insurance clause in the Agreement should be construed in the same manner as in Erect Safe. In that case, Chief Justice McClellan referred to a number of previous decisions and stated:
The approach taken in each of these decisions, is that, in the absence of express words, the obligation under an insurance clause in a contract which is provided to support an indemnity clause will not require the subcontractor to maintain insurance against loss occasioned by the head contractor's negligence.
Justice Gleeson stated that this should not be taken to be a statement of principle 'but merely an observation concerning the "approach" taken in a number of authorities'. His Honour distinguished Erect Safe from the present dispute as the terms of the agreement were 'quite different'.
The result was that the obligation imposed on Advantage by the Site Regulations was to insure Centennial, without any limitation as to its own negligence. As such, the contract required Advantage to insure Centennial for its liability to the worker, and the policy therefore responded.
The Court of Appeal effectively viewed clause 43 as a not uncommon provision in a contract between a principal and contractor requiring one or other to take out insurance indemnifying all the parties involved in work on the principal’s site for liabilities arising from the performance of the contract. While the decision can be confined to its facts, two notable points arise from it.
First, the emphasis on the point that indemnity and insurance clauses in a contract must be read within the context of the particular contract as a whole so that the words of each clause are, if possible, construed harmoniously.
Second, the Court of Appeal's view that the decision of Erect Safe should not be taken as a statement of principle concerning obligations to insure a principal. This means that, unlike 'hold harmless' clauses, express words may not always be required in order for a principal's negligence to be the subject of the obligation to insure. Indeed, an obligation to insure may require express exclusion of the principal's negligence if that is what is intended.
Where it is intended to extend coverage to a third party, the possibility of double insurance should also be considered and the restrictions on the validity of 'other insurance' clauses by virtue of s 45 Insurance Contracts Act 1984 (Cth) should be borne in mind.
Kate Clark | Special Counsel
David Burke | Graduate
1 GIO General Ltd v Centennial Newstan Pty Ltd  NSWCA 13
2 'Contract' was defined in cl 3.3 of the Site Regulations as 'the written agreement between the Principal and Contractor…and includes any amendments to it and/or annexures and schedules…'
3 (2008) 72 NSWLR 1.
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