In brief - Subcontractor negligence covered by contractor's liability insurance policy through contract arrangements
In the case GIO General v Centennial Newstan, the NSW Court of Appeal unanimously found that a labour hire company was contractually obliged to obtain insurance cover for a coal mining company to which it supplied workers.
Erect Safe Scaffolding (Australia) Pty Ltd v Sutton  NSWCA 114 downplayed
It is very relevant to insurers who are asked to meet these kinds of insurance obligations created by their insureds.
The case is a good example of when a court will enforce a contractual term of this nature and what a court will look for in order to make that kind of finding. It also downplays the Erect Safe Scaffolding case which is often (incorrectly) asserted as standing for an absolute principle that insurance clauses merely support contractual indemnity clauses.
The primary judge held that under the terms of the relevant contract, the contractor was obliged to obtain negligence cover for its principal. The Court of Appeal unanimously agreed.
Worker supplied by labour hire company injured in accident at coalmine
Centennial Newstan Pty Ltd ("Centennial") operated a coalmine near Newcastle. In 2008, Centennial entered into an agreement with Longwall Advantage Pty Ltd ("Advantage") for the supply of labour by Advantage to Centennial to perform work at Centennial's coal mine. One such person supplied by Advantage to Centennial was Mr McDonald.
On 10 September 2008, Mr McDonald was injured when his leg was crushed while working at the mine. He brought proceedings against each of Centennial, Advantage and a related company, Longwall Labourforce. (Longwall Labourforce employed Mr McDonald, but for the purpose of this article that fact is not relevant.) The primary judge found that the acts and omissions which caused the incident were the sole responsibility of the mine operator Centennial.
Contractor obliged to obtain negligence cover for its principal
Advantage maintained a Combined Business Policy of insurance with GIO General Ltd (GIO). Although the court found Centennial liable, Centennial sought indemnity for its liability to Mr McDonald under Advantage's policy with GIO, claiming that it had the benefit of the policy.
The single issue raised in the appeal was whether Advantage was contractually obliged to obtain insurance cover for Centennial's own liability to Mr McDonald.
Common extension of definition of “Insured” opens door for broader insurance obligations to third parties
GIO’s policy contained a very common form of wording in its insuring clause, which extended the definition of "insured" to include:
A person to whom Advantage was “obligated by virtue of any contract or agreement to provide insurance such as afforded by this Policy... but only to the extent required by such contract or agreement”.
Therefore, the contracts Advantage had been entering into became relevant to GIO to the extent that Advantage’s commercial contracts contained an obligation on Advantage to effect insurance on behalf of others.
Contractual indemnity clause contains no express requirement for contractor to obtain insurance for its principal’s negligence
In this part of the dispute, Advantage had two obligations which came under scrutiny. The first was a contractual indemnity in favour of Centennial and the second was a clause which required Advantage, in effect, to ensure its public liability policy covered Centennial.
Relevantly, there was no express requirement on Advantage to arrange insurance for Centennial’s own negligence. These kinds of clauses are commonplace and an equally common reaction of insurers asked to honour them is that they do not provide cover for a principal or subcontractor’s own negligence.
Contractual indemnity in favour of coal mining company
In broad terms Clause 8.1, contained in the Standard Conditions of Contract, required Advantage to indemnify Centennial against liability in two situations:
- The first was where there had been injury to or death of any of Advantage's personnel which was not caused by Centennial's negligence or breach of contract.
- The second was where there had been injury or death of any person caused by the negligence of Advantage.
Accordingly clause 8.1 left Advantage exposed to claims in respect of injury or death where Centennial had been negligent (amongst others).
Insurance obligation contained in separate terms and conditions incorporated by contract between parties requires contractor to effect insurance cover for its principal
The contract between Advantage and Centennial also incorporated Centennial's Standard Contractors Site Regulations. Clause 43.2.2 of the Site Regulations ("the SIR clause") provided as follows:
Special Insurance Requirements
43.2.2 Unless otherwise agreed in writing by [Centennial], public and product liability policies must note [Centennial] 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.
Insurer argues that labour hire company's insurance policy does not cover principal's negligence
Relying on McClellan CJ's statements in Erect Safe Scaffolding (Australia) Pty Ltd v Sutton  NSWCA 114
(at ), GIO argued that the insurance obligations in clause 8.3 of the Standard Conditions were provided in aid of the indemnities provided in clause 8.1 and should not be interpreted in a manner which required Advantage to obtain insurance in respect of loss occasioned by the negligence of Centennial.
In Erect Safe Scaffolding McClellan CJ said:
...in the absence of express words, the obligation under an insurance 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.
GIO also asserted that the words "respective liabilities of each of those parties" in the SIR clause referred to liabilities in respect to the indemnities under the contract and contended that the words "third parties" did not include employees or agents of Advantage.
It was further submitted that the words "respective liabilities" in the SIR clause ought to be read down as being confined to where Advantage or its subcontractors had been negligent, and did not include liabilities caused by Centennial's own negligence to either Advantage, or a subcontractor of Advantage, or third parties.
GIO also contended that the special insurance clause did not impose any freestanding obligation on Advantage to obtain insurance for the benefit of Centennial, but instead assumed the existence of public and product liability policies of insurance which provided cover to Centennial.
Contract wins - Erect Safe Scaffolding not to be taken as a general point of principle
The court determined that the obligations to maintain insurance in clauses 8.3 and 8.4 were supplemented by the special insurance requirements in the Site Regulations and that the SIR clause was not inconsistent with the Standard Conditions of Contract.
In the court's view, it was "readily apparent" that the indemnities provided in clause 8.1 were narrower than the cover to be arranged under the SIR clause and the cover provided by that clause was not to be taken as merely in aid of the indemnities provided in clause 8.1.
Further, in the court's view, the SIR clause, which elsewhere provided a separate indemnity to Centennial, would be superfluous if the clause merely secured the indemnity afforded by Advantage to Centennial under clause 8.1.
The court held that the SIR clause required Advantage to arrange cover under its public and product liability policies for the insurable interests of Centennial and all subcontractors of Advantage, and that Centennial and all subcontractors of Advantage would receive insurance cover of the same character as the public and product liability insurances provided for in clauses 8.3 and 8.4.
The court reasoned that the relevant public liability cover which Advantage was required to maintain for the benefit of Centennial and all subcontractors of Advantage, was cover for the "respective liabilities of those parties to each other and to third parties". The court considered that the reference to "those parties" is a reference to the "interested parties" which encompassed Advantage, Centennial and all subcontractors of Advantage with an insurable interest in Advantage's public liability policy. Accordingly the court held that the "respective liabilities" of Advantage, Centennial and all subcontractors of Advantage was the liability of those parties to each other whenever Advantage was supplying labour to Centennial.
In dismissing GIO's argument that the court should follow the earlier Court of Appeal decision in Erect Safe Scaffolding, the court observed that the words of McClellan CJ (quoted above) were:
...not to be understood as a statement of principle but merely an "approach" taken in a number of authorities when construing the obligation under an insurance clause which is provided to support an indemnity clause.
Insurance obligation will not be read down as a matter of course
GIO General v Centennial Newstan is a reminder that a court will determine contractual cases on their facts in light of the terms of the contractual agreements entered into between the parties. In doing so the court will have regard to the contract as a whole and read those terms, if possible, in a way that renders them harmonious with one another.
It is also clear that the comments in Erect Safe Scaffolding are not to be taken as a principle applicable to all contracts - as is so often asserted - and that insurance and indemnification obligations can operate separately. It is not the case than an insurance obligation will be read down as a matter of course and these obligations must be looked at very carefully. Expect numerous dual insurance issues where expanded definitions of "insured" are used.
This article first appeared in the June/July 2014 edition of Insurance & Risk Professional.