Insights

In brief - Aviation insurers battle over liability for claim defence costs

In the recent decision of the New South Wales Court of Appeal in Lambert Leasing Inc v QBE Insurance (Australia) Ltd [2016] NSWCA 254 (handed down on 9 September 2016) the Court decided that when two policies had an "other insurance" clause, the two clauses cancelled each other out and the insured was entitled to elect which policy under which it would pursue its claim.

Lessors of aircraft that crashed make insurance claim on two policies

The decision arose out of the tragic air crash involving an aircraft leased by its owners to Lessbrook Pty Ltd who traded as "Transair", which occurred at Lockhart River in May 2005 and which claimed the lives of 13 passengers and two pilots.

Two policies of insurance were involved:
  • a policy issued by Global Aerospace which insured the aircraft lessors Saab AB and its subsidiaries
  • a policy issued by QBE Insurance which insured the lessee, Lessbrook Pty Ltd

Each policy had a provision which sought to exclude liability in so far as there was cover under another policy of insurance.

A claim was made by the aircraft lessors under the Global Aerospace policy in relation to proceedings brought by relatives of the deceased crew and passengers in the United States arising out of the accident, and only after discovering the existence of the QBE policy some time later was a claim made on that policy.

Court of Appeal considers five issues

  1. Were proceedings brought in New South Wales seeking declarations regarding entitlement to indemnity under the QBE policy commenced prematurely?
  2. Did section 45 of the Insurance Contracts Act 1984 (Cth) (ICA) render the QBE "other insurance" clause void?
  3. If not, did the two "other insurance" clauses cancel each other out?
  4. Did payments made under the Global Aerospace policy preclude a claim for indemnity under the QBE policy?
  5. Were the appellant aircraft lessors entitled to indemnity from the aircraft owners arising out of their "use of operation" of the aircraft?

Were proceedings for a declaration premature?

The Court of Appeal upheld the decision at first instance of Rein J (Lambert Leasing Inc. v QBE Insurance Ltd [2015] NSWSC 750) that in circumstances where disclosure of certain reports to Global Aerospace was required before QBE could be required to define its position on indemnity, the proceedings for a declaration regarding indemnity were premature.

Effect of section 45 of the Insurance Contracts Act and application of "entered into"


Section 45 (1) of the ICA provides
(1) Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance…the provision is void.

Justice Rein had held that section 45 required that the insured must be a party to both the insurance policies and have "entered into" both contracts. 

The question arose on appeal whether the Court was bound by the earlier decision of the High Court in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50 which had held that the words "entered into" did not encompass a non-party insured who was entitled to a benefit under the policy. 

The Court of Appeal considered itself bound by that decision and then went on to find that the aircraft lessors had not "entered into" the QBE policy but were merely "additional insureds" under it.

Section 45 did not render the "other insurance" clause in the QBE policy void.

Did the two "other insurance" clauses cancel each other out?

The Court of Appeal concluded the two clauses cancelled each other out, both insurers are liable and the one who pays the claim can claim contribution from the other.

Did payment under the Global Aerospace policy preclude a claim under the QBE policy?

Reliance was placed on the High Court decision in Sydney Turf Club v Crowley (1972) 126 CLR 420 to conclude that QBE was entitled to succeed on the basis that the appellants could not recover the same amounts under the QBE policy as they had already been indemnified under the Global Aerospace policy, even though the indemnity had been documented as a limited recourse loan.

It did not, however, prevent a claim for contribution being made by Global Aerospace against QBE pursuant to section 76 of the ICA. No such claim had been made.

Claim for indemnity resulting from "use or operation" of aircraft

This claim by the lessors against the aircraft owners was based on an indemnity provision in the aircraft Purchase Agreement which was subject to the law of Virginia.

The appeal point focused on the meaning of "use" rather than of "operation". The Court of Appeal found that leasing an aircraft to a third party to operate the aircraft was not a "use" of the aircraft. A greater degree of control was necessary.

Amendments to section 45 to broaden its scope a possible consequence of decision

The decision is of most interest for its analysis of the "other insurance" provisions and their application in the light of section 45 of the ICA, and the effect of such provisions on named insureds who did not enter into the policy. It is conceivable that it could lead to a reconsideration of whether section 45 requires amendment to broaden its scope.
 

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​