We look at two recent court decisions, one in the Court of Appeal of Western Australia and the other in the High Court of New Zealand, where poor policy drafting led to policy interpretation disputes.
In both cases, the courts applied the law of contract interpretation to determine the dispute. However, clearer drafting by the insurers would probably have avoided the cost of fighting the court cases in the first place.
We summarise the two cases below.
Tokio Marine & Nichido Fire Insurance Co Ltd v Hans Bo Kristian Holgersson [2019] WSSCA 114
The head contractor on a residential construction site subcontracted the painting work to Holgersson. The head contractor held a construction policy with the insurer, Tokio Marine.
While Holgersson carried out the painting work, a fire broke out that caused substantial damage to the contract works.
Tokio Marine met the head contractor’s claim under the construction policy. It then pursued a subrogation action against the painter, Holgersson. Holgersson argued that it was insured under the construction policy also as a subcontractor, precluding Tokio Marine’s subrogation action against it.
The court considered as a preliminary question in the proceeding whether, properly interpreted, the policy insured Holgersson as a named insured or not.
The definitions section of the policy defined ‘named insured’ as follows (underlining added):
a) You
b) …
c) Additional Insured(s):
i. …
ii. …
iii. …
iv. all contractors and sub-contractors … not being You but being a legal entity with whom You have entered into a Contract and provided their interests are required to be insured jointly by You, and then only to the extent required by the terms set out in the Contract …
d) …
e) …
‘You’ was also defined as follows (underlining added):
… the Person(s) or legal entity named in the Schedule.
The parties agreed Holgersson did not qualify as Additional Insured(s). This was because the proviso did not apply; the terms of the head contract did not require the head contractor to insure the interests of Holgersson as sub-contractor.
If the matter had rested here, the contractual position would have been clear: objectively, the parties intended that a sub-contractor such as Holgersson was not to be covered because the terms of the head contract did not require it.
However, the schedule to the policy stated the persons defined as "you" included:
... all … Sub-Contractors.
This created a clear contradiction within the policy about whether Holgersson was a Named Insured’ the definition of You said it was, and the definition of Additional Insured(s) said it wasn’t.
The Court of Appeal resolved this by applying established contract law that says the terms of a contract that are specific to the parties override the terms of a contract that are in standard form. Here, the schedule was completed with the specific parties in mind whereas the definition of Additional Insured(s) was a standard part of the policy. This meant Holgersson was a ‘Named Insured’ and Tokio Marine could not subrogate and sue it.
NC Mathieson and others v Tower Insurance Limited [2020] NZHC 136
The insured’s house suffered significant damage in three successive earthquakes in the Canterbury sequence during 2010/2011.
The policy contained a warranty that said:
Warranted that the maximum sum insured is $455,000.
After the third earthquake, the house was still repairable but experts estimated that the cost to repair it, as at August 2, 2017, was slightly over $3 million plus GST.
While there were some issues about the basis of the insured’s entitlement under the policy, the primary dispute was whether the insured could claim the maximum sum insured of $455,000 once over the policy period or for each of the three earthquake events.
Another way of asking this is whether the maximum sum insured was available per event during the policy period or in the aggregate during the policy period.
A policy is for a fixed term of 12 months. By implication, a monetary limit in the policy is only available over that 12-month period. In order to overcome that implication, clear words are required. The usual way of stating this is to apply the sum insured ‘per event’.
The court noted that those two words were missing and so the objective intention of the parties must have been to apply the sum insured in the aggregate during the policy period.
Comment
Both decisions apply conventional contract interpretation law to determine arguments created by poor drafting.
In the Tokio Marine case, it appears whoever completed the Schedule did not appreciate that naming the sub-contractors in it potentially clashed with the standard definition of "Additional Insured(s)". In the NC Mathieson case, the addition of the words "in total during the period of insurance" after "$455,000" would probably have avoided the whole dispute.
Both decisions demonstrate the cost to insurers of not taking sufficient care with their policy drafting.
