Commonwealth Steel Company Limited v BHP Billiton Marine & General Insurance Limited

History of the policy and its wording

1. The Broken Hill Proprietary Company Limited (BHP) is, and at all material times has been, a publicly listed mining giant with multiple subsidiaries.
2. During the period of risk under the Policy, both the plaintiff and the defendant were subsidiaries of BHP. BHP held about 85% of the plaintiff. Officers of BHP exercised real authority over the plaintiff's management. A department within BHP known as Group Insurances acted as the procurer of the group's insurance policies.
3. In the early 1970s, following a feasibility study undertaken by BHP, its board of directors authorised the formation of a wholly owned subsidiary insurance company, through which all insurances arranged on behalf of BHP and its subsidiaries would be placed and which would in turn arrange for risks to be reinsured on world markets, after allowing for suitable retentions to be underwritten by the insurer.
4. The defendant was established in October 1972 as this 'captive' insurer. Its chairman was Mr J.F. Rich, a director and Executive General Manager Finance of BHP. Its other initial directors were the Treasurer and Chief Legal Officer of BHP. Mr Ross Bovill, a BHP employee, became its underwriter. The defendant did not have any employees. BHP charged it a monthly management fee for the services of employees who were seconded to work for it.
5. On 21 November 1973 the defendant issued an insurance policy (designated number L73/H0141) covering the plaintiff's liability to employees. That policy contained the following provision: This Policy is only to pay the excess of A.$100,000 ultimate net loss in respect of each disaster (hereinafter termed "the Primary Limit") up to a further A.$100,000 in respect of each and every disaster, unlimited in all.
6. No stability clause was attached. This policy expired on 31 March 1976.
7. In 1976, Mr John McBain was the senior insurance officer in the BHP Group responsible for the defendant.
8. On 22 January 1976, Mr McBain wrote to the Australian Insurance Commissioner saying, amongst others, the following: Since the incorporation of Hematite in 1972 a rationalization programme of the Group's insurance has been undertaken and briefly this has resulted in the following major changes. *** Firstly, being a new Captive, seeking reinsurance in London and other international markets we found that we were required to demonstrate a degree of faith in the overall operation and accept a higher than normal retention if we were to obtain adequate protection. *** There are other areas of the treaty which will need further review and of these perhaps the Excess Common Law segment is the most important. To a large degree we are in the hands of reinsurers but we expect, that in April next, they will lay down certain conditions in respect of this particular class. We envisage higher deductable levels to the client, and certainly the imposition of an indexed deductible.
9. Mr McBain produced a paper dated 19 February 1976 for consideration by the board of directors of the defendant at a meeting on 25 February 1976. What he wrote included: In the case of Excess Common Law the deductible of $100,000 will be increased as from next renewal to $125,000, but I doubt that this alone will be sufficient for reinsurers. The trend in this class of insurance is for indexed deductibles, so that when the case finally comes to court or is settled the deductible has some relationship to the award, and this I think is the course of action we will have to adopt.
10. Both the letter to the Australian Insurance Commissioner and Mr McBain's paper were apparently considered by the defendant's board of directors on 25 February 1976. The board approved Mr McBain going to London to participate in treaty renewal negotiations.
11. On 11 June 1976, Mr McBain prepared a paper for consideration at a board meeting of the defendant on 30 June 1976. It reported on treaty renewals with reinsurers. In relation to the reinsurance of accident insurance, he said the following: Some difficulty was encountered in renewing this treaty, and in fact the only two Lloyds underwriters involved declined to re-participate similarly the Skandia cancellation did not assist. In any event the treaty was finally placed on the basis that the insureds generally bear the first $5,000 of each and every loss in respect of claims for third party property damage and that the deductible in respect of the Excess Common Law claims be $125,000 each event and indexed to date of settlement.
12. Mr McBain left BHP in mid-1976 and Mr Alan Reynolds took over a new role designated as Manager Corporate Insurance Services, which role encompassed management of all group insurances. His authority and responsibility extended throughout BHP and subsidiaries and included directing and controlling the activities of the defendant, including the issue of insurance policies. He communicated with officers of group members about their insurance needs from time to time. The terms of policies issued by the defendant were determined by the terms on which he and his staff could negotiate reinsurance. There was generally limited negotiation with group members about the terms of cover or prices. He and his staff acted on the basis that they had authority to bind BHP and its subsidiaries to insurance policies which reflected the best terms they could negotiate, taking into account retention and cost.
13. Mr Bovill says that he had occasion to haggle with Group Insurances over the terms or price of particular policies, but cannot recall any instance where Group Insurances outright rejected terms proposed by the defendant.
14. On 17 March 1977, Mr Bovill sent a memorandum to the Senior Officer Group Insurances (presumably Mr Reynolds) referring to a visit by Mr McBain to London in 1976, and enclosing clause wording for a claims indexation clause which he had received. The enclosed clause bore a striking resemblance to the stability clause. It was headed "Australian Deductible Only Stability Clause", and provided that the deductible of the Company shall be increased or decreased in relation to the Average Weekly Earnings figure.
15. By an endorsement dated 10 May 1977, a Primary Limit Stability Clause (on precisely the same terms as what ultimately became the stability clause) was incorporated into policy L73/H0141 with effect from 31 March 1976. A copy of that policy, with the endorsement, was provided to the plaintiff by the Senior Insurance Officer Group Assurances on 6 June 1978.
16. The Policy was issued on 10 May 1977. On 1 May 1978, the endorsement, to have effect from 31 March 1978, was made.
17. The plaintiff is no longer a BHP subsidiary.

The claim

1. The plaintiff ran a steel mill at Waratah, near Newcastle, in New South Wales.
2. From 1978 to 2004, the plaintiff employed Mr Jack Kozaczynski at the steel mill, initially as a labourer then as a second assistant furnace man and first assistant furnace man and lastly as an office worker. During his employment, Mr Kozaczynski was exposed to and inhaled asbestos fibres which caused or materially contributed to him suffering mesothelioma.
3. Mr Kozaczynski sued the plaintiff for damages in the Dust Diseases Tribunal of New South Wales. The plaintiff brought a cross claim for contribution against Wallaby Grip (BAE) Pty Limited (in liquidation), which manufactured a range of asbestos products. Mr Kozaczynski was exposed to those products during the course of his employment by the plaintiff.
4. The plaintiff settled Mr Kozaczynski's claim by paying him $650,000 and its cross claim against Wallaby Grip by receiving $227,500. There is no issue that the settlements were reasonable. The plaintiff incurred legal costs of $76,661.00 in meeting and settling the claims.
5. The plaintiff duly paid Mr Kozaczynski and Wallaby Grip duly paid its contribution to the plaintiff.
6. Mr Kozaczynski died shortly afterwards.
7. The plaintiff suffered a loss of $499,661 being the amount it paid plus its legal costs less what it recovered from Wallaby Grip.
8. The plaintiff claims indemnity under the Policy from the defendant for its loss.
9. The defendant denies indemnity, arguing that the $125,000 excess is to be adjusted in accordance with the stability clause. If so adjusted, the deductible as at May 2016 is $1,060,750, which exceeds the plaintiff's claim.

the arguments

1. Mr J.C. Kelly SC with Mr S.H. Hartford Davis of counsel appeared for the plaintiff.
2. They argue that: 1. the phrase "(indexed in accordance with the attached Stability Clause)" does not relate to or qualify the figure of $125,000, but rather the excess of that figure in the sense of the amount over and above it which the Policy will cover; and 2. the subject of the provision is the amount over and above the deductible of $125,000 which the Policy is going to pay, not the deductible of $125,000 which the Policy is not going to pay.
3. They rely on para (d)(v) of the stability clause, which refers to "the Primary Limit to be borne by the Insurer in respect of all payments" (emphasis added). They argue that this must be the upper limit because this is borne by the Insurer, whereas the deductible is borne by the Insured.
4. Mr D. McLure SC with Mr N. Olson of counsel appeared for the defendant.
5. They argue that: 1. the words "(indexed in accordance with the attached Stability Clause)", where they appear in both the attachment and the endorsement, qualify and refer to the $125,000 deductible; 2. Primary Limit means the deductible; and 3. the reference to Insurer in para (d)(v) of the stability clause is erroneous, and is to be read as Insured.
6. In support of this construction they rely on the background to, genesis of and purpose of the stability clause which they say shows that it was to index the deductible to enable the defendant to obtain reinsurance.

construction principles

1. The Policy is a commercial contract and must be given a business-like interpretation. This requires attention to the language used by the parties, the commercial circumstances which the contract addresses and the objects which it is intended to secure. Preference is given to a construction supplying a congruent operation to the various components of the whole: Wilkie v Gordian Runoff Ltd (2005) 222 CLR 522 at 528 [15]; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 at 589 [22]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117.
2. Whether a phrase or expression in an agreement is ambiguous or susceptible to more than one meaning may be ascertained having regard to evidence of surrounding circumstances. Text, context and purpose may be taken into account without any anterior finding of ambiguity in making that assessment.
3. Where, by reference to the contract alone (read together with instruments to which it may refer), the meaning is demonstrably not ambiguous, it is not appropriate to refer to external material. Where there is a constructional choice, recourse to events, circumstances and things external to the contract may be necessary to make it: Mount Bruce Mining v Wright Prospecting at 116-7 [48]-[49] per French CJ, Nettle and Gordon JJ. Such recourse may be necessary and appropriate to enable the commercial purpose or object of the contract to be identified. That task is facilitated by understanding the genesis of the transaction, its background and context, and the market in which the parties are operating.
4. Direct evidence of actual (subjective) intentions of the parties and evidence of their prior negotiations is inadmissible to be used as an aid to interpretation of a written contract: Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 597 at 606; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 - 353; Bahr v Nicolay [No 2] (1987) 164 CLR 604 at 617.
5. The function of a Court of construction is to ascertain what the parties meant by the words which they have used. For this purpose, the grammatical and ordinary sense of the words is to be adhered to unless they lead to some absurdity or to some repugnance with the rest of the instrument, in which case the ordinary sense of the words may be modified so as to avoid that inconsistency, but no further: Watson v Phipps (1986) 60 ALJR 1 at 3.
6. As part of the process of construction, the Court may read an obvious mistake in the written expression of the intention of the parties as corrected: Fitzgerald v Masters (1956) 95 CLR 420 at 426 - 7; Automobile Fire and General Insurance Co of Australia Ltd v Davey (1936) 54 CLR 534 at 542; Westpac Banking Corp v Tanzone Pty Ltd (2000) 9 BPR 17,521; St Edmundsbury and Ipswich Diocesan Board of Finance v Clark (No. 2) [1973] 1 WLR 1572; see too Lewison & Hughes, The Intepretation of Contracts in Australia, Law Book Co. 2012 para [9.02] and the authorities cited there.

decision

1. In my opinion, the defendant's construction is correct.
2. The constructional choice to be made is whether the words "(indexed in accordance with the attached Stability Clause)" refer to the $125,000 deductible or to the amount of the claim over and above that figure (to the upper limit of the Policy).
3. In my opinion, recourse can and should be had to circumstances and events external to the contract in making this constructional choice. Although, as much more fully appears below, the constructional choice could, I consider, be made without such recourse, particularly in light of the wording of the endorsement, the evidence which reveals the genesis and commercial object of the stability clause provides an additional layer of comfort that the choice which I consider is to be made is the correct one.
4. The defendant was established to be a bespoke captive in-house insurer through which insurance for the group, including its co-subsidiary, the plaintiff, would be channelled. It reinsured against the risks which it undertook in that capacity. This was the market in which it, and for that matter, the plaintiff, were relevantly operating.
5. The Policy insured the plaintiff against liability for personal injury sustained by its employees. This type of claim can be made many years after a particular risk period covered by the Policy (the present case is an example) and given that it is an employee claim, it might in most cases be expected to have a relationship with the earnings of the employee at the date damages must be assessed.
6. The immediate commercial object of the stability clause was to ensure that when a claim finally came to be determined (by judgment or settlement) - which could take years - the deductible would bear an economically rational relationship with the award. This object was born of the need to address the commercial circumstances that reinsurers required it.
7. However, whilst recourse to this material supports the defendant (the plaintiff did not submit to the contrary - its submissions were restricted to the availability of this material to be used), in my opinion an examination alone of the text of the instruments, without recourse to external material, reveals that the defendant's construction is the correct one in any event.
8. The plaintiff's principal argument is directed to the words of the attachment. It pays no, or no sufficient, regard to the endorsement which amended the excess clause and sum insured.
9. The endorsement contains no reference "to the excess of $125,000" upon which the plaintiff so heavily relies.
10. The language of the endorsement leaves no room for the plaintiff's contention that the parenthesised words refer to the amount beyond $125,000 which the Policy is to pay.
11. The endorsement provides that the sum insured is $1,000,000 but the insured will pay the first $125,000 (indexed in accordance with the stability clause).
12. The parenthesised words (which are the same in both the attached wording and the endorsement) cannot, as used in the endorsement, sensibly be read as referring to anything except the $125,000.
13. The parentheses appear immediately after the $125,000 figure. As a matter of ordinary grammar, the parenthetical words qualify what immediately precedes them. The plaintiff's construction requires them to be read as if inserted after the $1,000,000 figure. This requires the syntactical structure of the sentence to be tortured.
14. There are further factors which support the defendant's construction.
15. The defined term, Primary Limit, appears before the reference to the upper limit. It defines what precedes it not what succeeds it. In my view, it is the deductible.
16. Primary, in its ordinary meaning, means first. The Policy contains two limits. The first is a limit on what the insured must bear (i.e. the deductible). One does not proceed until this initial threshold is met. The second is the upper limit of the insurer's obligation to indemnify. It is referred to as "a further $920,000". It does not accord with common sense to refer to the secondary limit as the Primary Limit.
17. In my view, the word Insurer in para (d)(v) is a clear mistake and is to be read by the Court as corrected so as to read the Insured. The Primary Limit (which I have already found means the deductible) is appropriately described as "being borne by the Insured". The words "in respect of all payments", pertain to the deductible to be borne by the Insured which is the same in respect of each and every disaster. That is, all payments have the same deductible. On the other hand, the ultimate policy limit is a ceiling, which does not reflect the amount of any claim, let alone every claim for which the Insurer will be liable. It is unsurprising, given the general untidiness of the Policy, that such an error would creep in.

conclusion

1. The plaintiff's claim must be dismissed, and I so order.
2. I will hear the parties on costs should this be necessary. They are to notify my associate within seven days whether any party contends that any order other than that the plaintiff pay the defendant's costs of the proceedings is appropriate, in which event the matter can be relisted for argument. If no notification is received, the order will be that the plaintiff should pay the defendant's costs of the proceedings.
3. The exhibits are to be returned.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 24 October 2017