ALLIANZ AUSTRALIA INSURANCE LIMITED & ORS v GENERALCOLOGNE RE AUSTRALIA LIMITED

LOWER COURT Supreme Court JURISDICTION : LOWER COURT SC 50128/01 FILE NUMBER(S) : LOWER COURT McClellan J JUDICIAL OFFICER :

• 4 - IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL 40569/03

SPIGELMAN CJ BEAZLEY JA BRYSON JA

24 NOVEMBER 2004 ALLIANZ AUSTRALIA INSURANCE LIMITED & ORS v GENERALCOLOGNE RE AUSTRALIA LIMITED Judgment 1 SPIGELMAN CJ: The Solicitors Liability Committee ("SLC") provided professional indemnity insurance for solicitors in Victoria, relevantly, for the calendar year 1990. The Third Appellant, Switzerland General Insurance Co Ltd ("SGI") entered into two policies of reinsurance with SLC. 2 The First and Second Appellants are assignees of SGI's relevant interests. The efficacy of the assignments was challenged unsuccessfully before McClellan J. This is an issue which the Respondent seeks to raise by way of a Notice of Contention. In view of the conclusion to which I have come, it is not necessary to consider the assignment issue. It is convenient hereinafter to refer only to SGI. 3 The first type of reinsurance between SGI and SLC was designated "for per claim excess of loss protection" and provided SLC with reinsurance cover of $400,000 including costs per claim paid by SLC where the claim against SLC exceeded the first $200,000 retained by SLC. The second type of reinsurance was designated "for limited aggregate loss protection" and provided SLC with reinsurance of $2 million for all claims when the aggregate loss of all claims paid by SLC for the period of risk (calculated on a defined basis) exceeded $10 million. 4 Noting that primary liability cover by SLC to solicitors was for $600,000 per claim plus costs and expenses, the first type of reinsurance between SGI and SLC operated as follows:

(a) SLC retained and met the first $200,000 of any one claim by a solicitor upon it, including costs;

(b) after the first $200,000 of any one claim retained and met by SLC, SGI met the next $400,000 of that claim, including costs;

(c) after the first $600,000, additional defence costs (made up of SLC's $200,000 including costs, SGI's $400,000 including costs and SLC's excess over $600,000 defence costs) of any one claim, the excess amount of the claim and a proportion of amount of defence costs would be met by another insurer if "top up" cover had been purchased by the solicitor. If no "top up" cover had been purchased, the solicitor would pay the claim other than defence costs to the extent that the claim and defence costs exceeded $600,000 and SLC would pay further defence costs even though the claim and defence costs exceeded $600,000. 5 The second type of reinsurance between SGI and SLC operated as follows:

(a) when the aggregate of all claims in the period of risk exceeded $10 million, SGI met the next $2 million, and

(b) because of the definitions in the reinsurance policy between SLC and SGI, in calculating the aggregate sum, SLC counted the first $200,000 inclusive of costs retained and met by SLC and the defence costs excess over $600,000 retained and met by SLC of any one claim. 6 SGI obtained reinsurance from the Respondent ("GCR") only with respect to the second type of reinsurance SGI provided to SLC. It is the construction and operation of this policy of reinsurance which is in dispute. 7 The reinsurance policy between SGI and GCR is in the form of a "facultative certificate" and comprises a combination of pre-printed and typed wording. Relevantly, the policy provides: "Original Insured Solicitors Liability Committee Amount Reinsured $1,000,000 any one claim and in all / $2,000,000 any one claim and in all XS $10,000,000 any one claim and in all. Interest Covered Legal Liability arising out of any negligent act, error or omission in a Professional capacity of Solicitors as per original wording. a) Excluding: reinstatement of Sum insured. b) In respect of aggregated claims in respect of S.L.C.'s $200,000 any one claim retention … Being a reinsurance of the ceding Company's Policy No. 30 UND 0060148 and subject to the terms and conditions thereof and settlement thereunder in the event of loss." 8 The reinsurance policy issued by SGI to SLC provided that the SGI "will pay to [SLC] the amount by which the ultimate net cost of incurred claims exceed Aust $10,000,000" with SGI having a "maximum liability" of $2 million. SLC's "ultimate net cost" was the cost of claims "for which [SLC] is liable". Accordingly, as between SGI and SLC, SLC could count the first $200,000 inclusive of costs retained by SLC and the defence costs amounts excess over $600,000 retained by SLC in determining when the $10 million aggregate was revealed. 9 The issue before this Court is whether, in the policy between SGI and GCR, the computation of the $10 million aggregate also includes defence costs in excess of $600,000 or whether it is limited to the $200,000 amounts retained by SLC. The issue turns primarily on the inclusion beside the heading "Interest Covered" in the facultative certificate of par (b) which, to repeat, states: "(b) In respect of aggregated claims in respect of S.L.C.'s $200,000 any one claim retention." 10 Absent those words it is clear, and the Respondent did not contend to the contrary, that the reinsurance offered by GCR to SGI would match precisely the reinsurance offered by SGI to SLC, i.e. that the computation of the aggregate would include defence costs in excess of $600,000. This would seem to follow naturally from the combined effect of the words beside "Amount Reinsured" which indicate that the reinsurance is of a proportionate kind (see Axa Reinsurance (UK) PLC v Field [1996] 1 WLR 1026 at 1033H-1034B) and the words "being a reinsurance of the ceding Company's policy No 30 UND 0060148 and subject to the terms and conditions thereof and settlement thereunder in the event of loss". 11 In this Court both parties proceeded on the basis that the facultative certificate was ambiguous in the sense required to consider the factual matrix of the written contract. (See Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352-353.) The trial judge, McClellan J investigated the factual matrix on this basis. 12 His Honour identified the difficulty of construction as arising from the tension between the reference to the "$200,000 any one claim" in (b) of the "Interest Covered" section of the certificate on the one hand and the references to "being a reinsurance of the ceding Company's policy" on the other hand, in a context in which the "Amount Reinsured" section of the certificate contains a reference to "$1,000,000 any one claim". 13 In my opinion it is not necessary to investigate the factual matrix but, as will appear below, McClellan J's analysis in that regard was correct and, if it were necessary to do so, I would reach the same conclusion. There are a number of reasons why I do not believe there is any relevant ambiguity on the face of the policy. 14 First, the words which appear to limit the exposure of GCR, in a manner narrower than SGI's obligations to SLC, are in a section entitled "Interest Covered". It is precisely in a section so described that one would expect to see words restricting liability. The inconsistent reference, if it be such, beside the heading "Amount Reinsured" - "$1,000,000 any one claim and in all" - appears in a section concerned with questions of quantification rather than extent of exposure. The alleged inconsistency, which I reject below, is only an indication. It has no operative effect. 15 Further, the weight to be given to the section of the certificate referring to the policy between SLC and SGI - the words " being a reinsurance of the ceding company's policy …" is limited by reason of the fact that those words occur in the preprinted part of the facultative certificate. When construing a contract which includes both preprinted words and words specifically chosen for the particular contract, greater weight must be given to the latter. (See the authorities discussed by K Lewison Interpretation of Contracts (2nd ed) London, Sweet & Maxwell, (1997) at par 8.10.) 16 Secondly, the section "Interest Covered" commences with a sentence identifying legal liability "as per original wording". That is clearly a reference to the policy between SGI and SLC. Up until then the "original wording" applies in terms. What appears thereafter is added by way of contradistinction to what went before. By this I include both par (a) concerned with reinstatement and par (b) referring to the aggregated claims and containing the $200,000 figure. 17 The structure of the section suggests that something is being done that may not be in accordance with the "original wording". The addition of the two subparagraphs after the comprehensive statement concluding with "original wording" does suggest an intention to differentiate the policy from the policy between SLC and SGI. 18 The contract between SLC and SGI did not permit reinstatement but that does not mean that there is no point in expressly providing that there will be no reinstatement in the GCR policy, if only for reasons of caution. Both (a) and (b) appear to me to be inserted for the purpose of stating the terms of the policy being effected, whatever may be the terms of the underlying policy. 19 Thirdly, the Appellants' contention that the words "$1,000,000 any one claim and in all" indicate the possibility of a single claim for $1 million should be rejected. If the two passages refer to different claims, there is no inconsistency between them. That is, in my opinion, the case. 20 The proper construction of the sentence appearing against the heading "Amount Reinsured" is that the word "claim" in these opening words should be understood as a reference to a claim by SGI on GCR, not by a solicitor on SLI or by SLC on SGI. The reference in the section "Interest Covered" to "SLCs $200,000 any one claim retention" is a reference to a claim by SLC on SGI. 21 The purpose of the sentence beside the heading "Amount Reinsured" is to identify both the maximum amount of GCR's liability and the proportionate relationship between GCR's exposure and SGI's exposure. SGI's exposure to SLC was for a maximum of $2 million in excess of $10 million. The words "in any one claim or in all", which appear in each of the three component parts of the formula, are descriptive rather than of operative effect. They do no more, in my opinion, than state, unnecessarily, that each component has a limit and that that limit could be used up in one claim. 22 It may very well have been contemplated that the nature of the claims process by solicitors upon SLC would be such that the computation of the total of $10 million, prior to SLC being able to claim on its reinsurance contract with SGI, and the further computation of an amount in excess of that $10 million that could be claimed, would be long and complicated. Accordingly, the actual claim made by SLC on SGI would be delayed with the result that, with respect to the whole year for which reinsurance was provided, there would in fact be only one claim by SLC on SGI and, therefore, only one claim by SGI on GCR. Accordingly, even though the aggregate of the $10 million and the excess was composed of a number of different claims of $200,000 or less, by the time a "claim" was made on GCR, they would have been added together. This explains the reference to "any one claim" in the opening words. 23 Finally, on the second page of the facultative certificate there is a section entitled "Special Conditions" which contains the following: "All loss settlements made by the Ceding Company provided they are within the terms, conditions and limit(s) of the original policy (IES) and within the terms, conditions and limit(s) of this reinsurance shall be binding upon the reinsurer." 24 This sentence contemplates that there can be differences between the original policy and the policy of reinsurance and that such differences can extend to "terms, conditions and limits". On the front page the sentence beside "Amount Reinsured" identifies a different limit of liability on the part of GCR than that on the part of SGI. However, the sentence in the section on "Special Conditions" contemplates the possibility of differences as to "terms" and "conditions", not only as to "limits". That can only be a reference to the section beside "Interest Covered" and the "Special Conditions" section. 25 Mr J Marshall SC, who appeared on behalf of the Appellants, submitted that the section beside "Interest Covered" should be understood as a general description of the commercial effect of the policy between SGI and SLC, the whole of which was to be reinsured by the policy between SGI and GCR. Occurring as it does, at a time before the policy between SLC and SGI actually issued, he submitted that the section outlined the critical elements of the underlying relationship. The prospect of exposure to liability for costs and expenses in excess of $600,000 in a particular case was so remote, indeed the Court was informed that it had never occurred except in this one insurance year, that it was not a pertinent part of a commercial summary description of the risk. Alternatively, he submitted that, if the "interest covered" was referable to the policy between SGI and GCR, it was not an exhaustive statement of that policy but only a summary description of the commercially significant scope of the risk. In either case, he submitted, the words should not be interpreted as having contractual effect. 26 For the reasons set out in [14]-[18] and [22]-[23], and for the following reasons, these submissions should be rejected. 27 As is often the case in an insurance policy the crucial wording of cover is short to the point of being cryptic. It is most unlikely, in my opinion, in so short a contract, for words to be inserted for the sole purpose of providing a summary description, as distinct from having some form of contractual effect. 28 In a contract of reinsurance which contains on its preprinted form a reference in the terms "being a reinsurance of the ceding Company's Policy No … and subject to the terms and conditions thereof and settlement thereunder in the event of loss", a significant purpose of a section entitled "Interest Covered" is precisely to identify the extent to which there may be any kind of diversion between the underlying policy being reinsured and the policy of reinsurance being issued. While it may be the case on this occasion that the underlying policy came into existence later, apparently in the same terms as prior years, that would not always be the case in the range of reinsurance contracts to which the preprinted form would apply. There had to be some scope for varying the terms and conditions from those provided in an underlying policy. The "Interest Covered" section is the logical place to find any such variation. 29 Furthermore, the reference to "interest" is a reference to the insurable interest of the company seeking reinsurance, referred to as the "ceding Company". That insurable "interest" is "covered" by the reinsurer. That the terminology had this purport is suggested in the words "original wording" in typescript. The word "original" suggests that there is a repetition or adoption of some other document incorporated by reference. That must be a reference to the "wording" of the underlying policy between SGI and SLC. The element of repetition or adoption indicates that the passage is not a summary of that policy, but is a statement relating to the policy between GCR and SGI.

30 On this analysis the words in par (b) should be given full force and effect, in accordance with their terms, as a statement of the cover being provided by GCR to SGI. 31 McClellan J found the factual background to be determinative. As both parties proceeded in this Court on the basis that it was appropriate to refer to that background, I will do so. 32 The first step is a written communication of 13 October 1989 in which, with an appropriate numerical adjustment, SGI stated the cover it was seeking in the following terms: "We provide reinsurance of $400,000 in excess of $200,000 in addition to an aggregate stop loss cover of $2m xs $10m during the Period of insurance. We would be obliged to receive your assistance with quotes on the aggregate stop loss …" 33 It may be observed that there was no reference to any liability with respect to the payment of costs in excess of $600,000. 34 At a meeting of officers of SGI and GCR on 19 October 1989, the contemporaneous handwritten note of the latter described the cover being sought by SGI in the following terms: "Require an aggregate stop loss protection in respect of the Committee's $200K only …". Furthermore, the note identified the subject matter upon which GCR quoted a premium in the following terms: "Aggregate claims incurred by the Law Committee in respect of their retained $200,000". 35 Both of these references support the case of the Respondent. In particular, the use of the word "only" is inconsistent with the suggestion that any cover was being provided for the liability with respect to costs in excess of $600,000. 36 McClellan J found with respect to the conversation of 19 October: "[25] … The request is plain. The aggregate loss was defined by reference to the first $200,000 retained by the Committee. The defendant had no knowledge of any potential liability of the Committee beyond this amount and I see no reason for it to assume that the situation was otherwise. [26] Both the amount of cover and the fact that there was to be no reinstatement was recorded by Mr Woolcock and expressly noted as 'quoted'. It is accordingly logical that these matters came to be requested as conditions of the ultimate agreement." 37 Mr Marshall submitted that his Honour erred in his finding that GCR had "no knowledge" of the further liability, because the SLC policy was made available before the facultative certificate issued. However, McClellan J was dealing with the time in October when the premium was fixed and the policy wording was effectively determined. His Honour's finding was entirely justified. 38 The next document that passed between the parties was a quote of 1 November 1989 which contained the relevant words appearing in the final facultative certificate. There was, however, one difference. The passage appearing against the words "Interest Covered", being the two matters identified as pars (a) and (b), does not appear beside the equivalent section of the quote, which was entitled "Interest Reinsured". It appears beside a section entitled "Special Conditions as per Reverse and Including". 39 As appears from the facultative certificate, set out above, there is no separate section on that certificate covering "Special Conditions as per Reverse and Including". There is, however, a set of "Special Conditions" which were also to be found on the reverse of the quote of 1 November 1989. 40 In the quote, the passages (a) and (b) are characterised as "Special Conditions". They are not contained in the "Special Conditions" on the reverse of the quote, but are incorporated by the use of the word "Including". There is, accordingly, in this quote, a clear distinction between the "Interest Reinsured", which came to be called "Interest Covered" in the certificate, and a "Special Condition". If the words in (b) are to be characterised as a "Special Condition", they are much more clearly identifiable as a modification in the contractual relationship between GCR and SGI of whatever may be the contractual relationship between SGI and SLC. Such a characterisation is also inconsistent with the suggestion that they comprised a non-exhaustive general description of either the policy being effected or of the underlying policy being reinsured. 41 The next document is a Cover Note of 11 December 1989 which includes under the column "Interest Reinsured" the whole of the passage which appears in the facultative certificate under the heading "Interest Covered". The terminology of "Amount Reinsured" is also the same. In the Cover Note there is a heading in the margin "Special Condition" not, as in the quote, "Special Condition as per Reverse and Including". In the typescript against "Special Condition" appears only "As per reverse hereof". As noted the passages (a) and (b) are typed against "Interest Reinsured". 42 The next relevant document is a proposal by SGI to GCR which employs different terminology. Against the word "Interest" there appears "Legal Liability Pursuant to the Legal Profession Practice Act 1958" and against the words "Reinsurance Of:" appears "$1,000,000 proportionate part of $2,000,000 in excess of $10,000,000". This does not assist in the construction of the certificate, other than to reinforce the conclusion that the words "$1,000,000 any one claim and in all" refer to a claim by SGI on GCR. 43 In my opinion, consideration of the factual background indicates that his Honour correctly construed the policy. 44 Mr Marshall SC sought to rely on some answers in cross-examination by the Respondent's underwriter to support the construction for which he contended. Further, he sought to challenge McClellan J's refusal to permit cross-examination about what the underwriter would have anticipated the underlying insurances would have provided. The underwriter was not a person authorised to make admissions. There was nothing to suggest that there was any relevant practice in the industry about which he could give expert evidence. The issue was a simple one of construction. The underwriter's understanding of what the words meant was irrelevant. None of this evidence was or would have been of assistance. 45 McClellan J made a costs order by which the Appellants were ordered to pay the Respondents' costs, save with respect to the other issue that arose in the proceedings concerning the validity of the assignment by GCR to the other Appellants. With respect to that issue his Honour ordered that the Respondent should pay the Appellants' costs. 46 By reason of the conclusion I have come to on the appeal it has not been necessary to deal with the Respondents' Notice of Contention on the efficacy of the assignment from SGI to the other Appellants. Nor did Mr G Inatey SC, who appeared for the Respondents, suggest that this Court should deal with the assignment issue for the purpose of determining the issue of costs. Indeed, the assignment issue arose only by way of Notice of Contention, not by way of cross-appeal. 47 It was submitted that his Honour erred in the exercise of his discretion to determine costs by failing to order that in the circumstances of a loss by the Respondent on the assignment issue, but victory on the construction issue, the Respondent was nevertheless entitled to the whole of its costs. The Respondent seeks leave to cross-appeal on the costs order. 48 In a separate judgment of 20 March 2003, McClellan J identified the basic principle that costs follow the event. His Honour referred to Pt 52 r 11 that that ought occur "except where it appears to the Court that some other order should be made". (Pt 52A r 11 is the same.) His Honour correctly identified the legal principle. The issue that arose on the assignment issue was sufficiently discrete for a special cost order to be made. I can see no proper basis for interfering with his Honour's exercise of the discretion to do so. 49 The appeal should be dismissed with costs. 50 BEAZLEY JA: I agree with Spigelman CJ. 51 BRYSON JA: I agree with Spigelman CJ.

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