In brief - Syntactical error in policy leaves insurer exposed to litigation
Insurance policies comprise promises, exclusions, conditions, endorsements and a schedule providing the relevant details of the policy which include, for example, the amount of any deductibles. In Commonwealth Steel Company Limited v BHP Billiton Marine & General Insurance Limited  NSWSC 1445
, the New South Wales Supreme Court considered the construction of a clause within an insurance policy, which made provision for indexation. The question before the Court was whether the indexation applied to the deductible under the relevant policy.
Commonwealth Steel Company's claim for indemnity under insurance policy denied
An employee of the Commonwealth Steel Company (the plaintiff) was exposed to and inhaled asbestos fibres during the course of his employment with the plaintiff. The employee sued the plaintiff. By way of settlement, the employee was to receive the sum of approximately $500,000 from the plaintiff. This sum included the plaintiff's cross-claim against the manufacturer of the asbestos materials and the employee's legal costs.
The plaintiff paid the employee the settlement sum. Shortly after, the employee died. The plaintiff consequently claimed an indemnity under its insurance policy for its loss (being approximately $500,000).
BHP Billiton Marine & General Insurance Limited denied indemnity on the basis that the $125,000 excess under the policy was to be adjusted in accordance with the Stability Clause and if so adjusted, the deductible would exceed the plaintiff's claim.
Insurance policy wording includes reference to indexing in accordance with attached Stability Clause
The insurance policy was described as an "Employers' Indemnity Policy in Respect of Common Law Liability", under which the defendant, BHP Billiton Marine & General Insurance Limited (a captive insurer) (insurer), agreed to indemnify the plaintiff (insured) against all sums for which the insured became liable for personal injury sustained by any employees in its immediate service (Policy).
The Schedule within the Policy described "THE RISK" as being Common law Liability Insurance "as per wording attached". The relevant "wording" provided:
This Policy is only to pay the excess of $125,000 (indexed in accordance with attached Stability Clause). Ultimate Net Loss in respect of each disaster (hereinafter termed "the Primary Limit") up to a further $920,000 in respect of each and every disaster, unlimited in all.
The endorsement under the Policy amends the excess and sum insured so that the sum insured, under the Policy, is $1,000,000 but the insured will pay the first $125,000 (indexed in accordance with the Stability Clause).
The Stability Clause provided:
(a) It is the intention of this Policy that the Primary Limit shall retain its relative value to that which exists at March 31, 1976.
(b) At the time of payment of any claim, the change in relative monetary value shall be ascertained from the Table of Average Weekly Earnings per Employed Male Unit - Australia - seasonally adjusted, as published in "Wage Rates and Earnings" by the Australian Bureau of Statistics.
(c) The Primary Limit shall be increased or decreased in proportion to the difference between the Average Weekly Earnings figure at March 31, 1976 and at the time of payment of any claim. The Average Weekly Earnings figure at the date of payment shall be that for the quarter immediately preceding that during which the claim is settled.
Does the indexation apply to the deductible?
The primary issue before the Court was whether the words "(indexed in accordance with the attached Stability Clause)" refer to the $125,000 deductible or the amount of the claim over and above that figure (to the upper limit of the Policy).
The insured argued that the deductible was fixed at $125,000 because the Stability Clause applied to, and affected, only the ultimate policy limit. In contrast, the insurer argued that, having regard to the genesis and purpose of the Stability Clause, the Stability Clause applied to the deductible and not the ultimate policy limit.
Having regard to the circumstances and events external to the contract, Hammerschlag J found that the immediate commercial object of the Stability Clause was to ensure that when a claim finally came to be determined, whether by way of judgment or settlement, the deductible would bear an economically rational relationship with the award. Hammerschlag J, (at ), observed that "[t]his object was born of the need to address the commercial relationship that reinsurers required it."
Further and having regard to the syntactical structure of the clause in question, the parenthesised words "(indexed in accordance with the Stability Clause)" appeared immediately after the $125,00 and, as a matter of ordinary language, such words must qualify what immediately precedes them.
On these bases, the Court held that the indexation applied to the deductible under the Policy and accordingly, the insured's claim was dismissed.
Insurers should be clear when constructing clauses in policies or risk litigation
This decision highlights an insurer's exposure to litigation where instruments contain syntactical and typographical errors. In highlighting this exposure, the court restates the principles of contractual construction and confirms that such an interpretative approach also applies to insurance policies.
Importantly, however, this decision provides an example of a captive insurance company successfully defending a claim for indemnity by a former subsidiary under a policy of employer's liability insurance issued in the 1970s.