Insurance – construction of policy

Todd v Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15


21 …The one contentious issue was the proposition, contained in paragraph 13 of the insurers’ written submissions, that was adhered to by the insurers in oral address, that in case of any doubt as to the proper construction of an insuring clause of a policy of indemnity insurance (which this was), the doubt should be resolved in favour of the insurers.  This proposition was said to rest on the High Court authority of Ankar Proprietary Limited v National Westminster Finance (Australia) Limited [1987] HCA 15; 162 CLR 549 at 561; Chan v Cresdon Proprietary Limited [1989] HCA 63; 168 CLR 242 at 256; Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; 217 CLR 424 at 433-437 [17]-[23] and 452-453 [68]-[71]; and Bofinger v Kingsway Group Limited [2009] HCA 44; 239 CLR 269 at 292 [53].

22 The proposition rests on a syllogism: (1) the settled principle in Australia governing the interpretation of contracts of guarantee and indemnity is that a doubt as to the construction of a provision in such a contract should be resolved in favour of the surety or indemnifier; (2) insurance (at least this insurance) is a contract of indemnity; therefore, (3) the principle in (1) applies to this contract.

23 The proposition was accepted by Rothman J in Miskovic v Stryke Corporation Pty Ltd t/as KSS Security (No 2) [2010] NSWSC 1495; (2011) 16 ANZ Ins Cas 61-873 at [12]-[13] where, in dealing with an insurance contract, his Honour said:

In relation to insurance contracts, which are, by definition, contracts of indemnity, some other rules apply.

24 His Honour then went on to express the settled principle, most recently restated in Bofinger at [53], in terms of (1) in [22] above.

25 With the utmost respect to Rothman J, we cannot agree.  That the notion of indemnity is present in many contracts of insurance (though not all: see, for example, sickness and accident, life insurance, and agreed value policies – British Traders’ Insurance Company Limited v Monson [1964] HCA 24; 111 CLR 86 at 92-93; and Wallaby Grip Limited v QBE Insurance (Australia) Limited [2010] HCA 9; 240 CLR 444 at 457 [30]) does not make contracts of insurance arrangements of a kind to which the principle expressed by the High Court applies.  The kinds or classes of contract to which the principle in Ankar, Chan, Andar and Bofinger is concerned are of a different character to insurance, including indemnity insurance.  They concern making good a creditor by way of secondary or primary financial accommodation.

30 In Andar, at 435 [20], Gleeson CJ, McHugh, Gummow, Hayne and Heydon JJ referred to the discussion of the United States’ law in Ankar, and quoted the following statement in Chapman v Hoage 296 US 526 at 531 (1936), expressing the United States’ position:

One who engages in the business of insurance for compensation may properly be held more rigidly to his obligation to indemnify the insured than one whose suretyship is an undertaking uncompensated and casual.

31 Their Honours continued:

In Ankar, this Court declined to adopt the distinction in the United States cases. No party in the present case has sought to dispute Ankar. Moreover, in any consideration of the law in the United States it is important to note that the mere circumstance that a surety undertakes its obligations for consideration or profit does not automatically result in the characterisation of that surety as “compensated”. Rather, the expression “compensated surety” appears to be directed toward corporations whose regular business is the writing of surety agreements and who, as a result, are able to assess the risk involved under each agreement and charge compensatory premiums accordingly. So much was made clear by the Restatement of the Law of Security promulgated in 1941. This defined the expression to mean:

“[A] person who engages in the business of executing surety contracts for a compensation called a premium, which is determined by a computation of risks on an actuarial basis.”

Other sureties, whether strictly gratuitous or whether receiving some pecuniary advantage, whose surety contracts were occasional and incidental to other business, did not fall within the definition of a “compensated surety”. It follows that the present case falls outside the approach adopted in the United States with respect to compensated sureties.

32 The distinction which the High Court declined to adopt in Ankar was the distinction between compensated and uncompensated sureties. No consideration was given in either Ankar or Andar to the proper interpretation of an insurance contract. Chapman v Hoage is not authority for the application of the doctrine of strictissimi juris to an insurance contract. Rather, it is authority for the obverse: that the doctrine does not apply to a compensated surety. Nor can the reference to Chapman v Hoage, in explaining the distinction between Australian and United States’ law, justify the application of the doctrine of strictissimi juris to an insurance contract.  Nor can the reference be interpreted as a refusal on the part of the High Court to draw a distinction between insurance contracts and indemnities, as suggested in Miskovic.

33 Following Ankar, in Tricontinental Corporation Ltd v HDFI Ltd (1990) 21 NSWLR 689 at 694-695, Kirby P compared the United States’ approach to interpretation of the corporate compensated surety’s contract:

to that adopted in the contracts of insurance with which Australian and English law have been long familiar…The positions of an insurer and of a corporate compensated surety are, of course, different. Insurance liability is generally expressed in terms of purely chance happenings. Compensated sureties, on the other hand, typically assume obligations which depend upon the foreseeable actions of the persons named. But both insurers and corporate compensated sureties have opportunities of investigation and evaluation of risks to exert control or influence over the terms of their contract. Each accepts payments which represent a pre-assessed commercial evaluation of the risks which they agreed to assume.

In his judgment in Andar, his Honour said nothing to suggest that an insurance contract should be construed in favour of the insurer.

34 Finally, we disagree with the observation in Miskovic at [13] that the principle of strict construction of contracts of suretyship depends upon the contra proferentem rule. A consideration of at least equal significance is the historical position of the surety, which may be contrasted with that of an insurer. In Tricontinental at 693, Kirby P said:

Most legal systems have regarded the surety as a favoured debtor: see Holdsworth, History of English Law (1924) at 298. The common law has traditionally demonstrated a solicitude to the surety because the surety typically accepts a dangerous obligation, depending upon the defaults of others, and usually assumes the obligations gratuitously. Originally, the surety was typically a friend or relative of the principal, lending the surety’s credit to the principal without compensation for doing so. This is often the case still. A variety of defences were developed by the law to an action on the contract or bond of suretyship designed to protect the surety. Equity would assure the surety relief by enjoining an action at law where a principal had deviated in the subsisting obligation without the surety’s assent cf Rees v
 (1795) 2 Ves Jun 540; 30 ER 765. It was the very precariousness of the position of the typical surety which led courts of equity to seek ways to free the surety from liability considered unjust. Such solicitude produced the doctrine of strictissimi juris by which the surety could escape liability if some provision in the contract had not been strictly complied with.

35 The nature or character of a contract of insurance is “elusive” to define: Parkington M et al, MacGillivray and Parkington on Insurance Law (8th ed, Sweet & Maxwell, 1988) [1] at 1.  The working definition given over 100 years ago by Channell J in Prudential Insurance Company v Commissioners of Inland Revenue [1904] 2 KB 658 at 663-664 remains the foundation of analysis: for a monetary consideration (the premium) the person (the underwriter) agrees to pay to the other (the insured) a sum of money or some benefit upon the occurrence of one or more specified events.  Other relationships could well fit such a simple mould.  One needs, however, before identifying or characterising the contract as one of insurance, to elaborate upon each element – premium, promise to pay, sum of money or other benefit, upon a specified event – not by way of further definition, but by reference to the purpose and character of the arrangement to share the risk of, or spread the loss from, unhoped-for, but possible, contingencies that may or may not happen (in life insurance, as to timing of an ultimately certain contingency).

36 The categorisation or characterisation of contracts of guarantee, of indemnity and of insurance, requires, above all, an understanding of their purpose and nature.  All, at one level, contain an element of indemnity; all can be said at one level of abstraction to be contracts of indemnity (subject to the qualification expressed earlier as to different types of insurance).  But each has a relevant difference from the other; and contracts of guarantee and indemnity, for the operation of the principle in Ankar, are to be categorised and characterised as quite different from contracts of insurance.

37 Each of a guarantee and an indemnity has the object or purpose of making good the financial position of a creditor of someone other than the guarantor or indemnifier.  The two categories do this by different means: the guarantor as surety assumes a secondary obligation to the primary obligation of the principal debtor.  In a contract of indemnity the indemnifier is primarily liable to the creditor, not collaterally.  This difference in character, ascertained by construction, is important in the identification of the parties’ mutual rights and obligations.  But both are a species of financial accommodation to support the credit risk of the principal debtor and to hold the creditor harmless.

38 A contract of insurance has the object or purpose of sharing the risk of, or spreading loss from, a contingency.  Relevant to its character as insurance will be how the contract came to be effected, its nature and purpose and how it is to be performed: see generally Seaton v Heath; Seaton v Burnand [1899] 1 QB 782 at 792-793 (Romer LJ).

39 The protection of the guarantor or indemnifier by the principle of construction referred to in Ankar had its origin in the nature and common circumstances of the formation of contracts of guarantee: Tricontinental at 693-694.  The importance of how the contract of guarantee commonly comes about can be seen in the judgment of Bayley B in Nicholson v Paget (1832) 1 C & M 48 at 52; 149 ER 309 at 311, cited in Andar 217 CLR at 433 [18].

40 Ultimately, of course, such tasks of categorisation or characterisation depend on the context, in particular, the purpose of the enquiry.  From the nature, character and purpose of insurance there is no reason, and no precedent, for according an insurer the tenderness accorded to guarantors and indemnifiers as reflected in the general principle recently restated in Bofinger 239 CLR at 292 [53].

41 With respect, the proposition in Miskovic is wrong.