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[1974] HCA 3
High Court of Australia
1974-07-01
Stephen JJ, Menzies J, Helsham J
Original judgment source is linked above.
High Court of Australia Menzies, Gibbs and Stephen JJ. Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3
ORDER Order of the Supreme Court of New South Wales varied by omitting the second declaration therein contained and substituting therefor a declaration that:Upon the true construction of the said policy the making by the plaintiff of any admission, offer, promise or payment in the actions referred to in the summons filed herein would constitute a breach of condition 2 (a) of the said policy notwithstanding that the defendant has elected not to take over and conduct the defence or settlement thereof. Otherwise appeal dismissed with costs.
Upon this appeal from the declaratory orders made by Helsham J. in the Supreme Court of New South Wales, the appellant challenges in two respects his Honour's construction of an insurance policy issued by the respondent to the appellant. In the policy the insured's business is described as "Chemists and Druggists (Wholesale)". The sum insured is stated to be £50,000 ($100,000). The policy is called a "Public Risk Policy". It contains a number of exclusions from liability including (j) as follows:
Claims arising directly or indirectly out of or caused by or in connection with goods sold, supplied or delivered or goods upon which repairs adjustments or work has been carried out or directed to be carried out, after such goods have passed from the actual physical custody of the Insured or of any person in the direct service of the Insured. There is, however, an indorsement forming part of the policy which, so far as is relevant, is as follows: Notwithstanding Exclusion (j) of the within Policy it is hereby expressly declared and agreed that this Policy shall extend to indemnify the Insured in respect of all sums for which he shall become legally liable arising out of death, illness or bodily injury to any person occasioned during the continuance of this Policy by negligence or by breach of any condition or warranty as to absence of vice implied by law or which would in the absence of express agreement be implied by law in connection with goods sold, supplied or delivered by the Insured, his servants or agents during any period of insurance hereunder whether such goods were manufactured by the Insured or not and whether such condition or warranty is also expressed or not This indemnity, however, is subject to a number of limitations, including the following proviso: Provided further that the total liability of the Company under this endorsement for all compensation payable
(a) to any claimant or number of claimants in respect of or arising out of any one occurrence or in respect of or arising out of all occurrences of a series consequent on or attributable to one source or original cause and
(b) during any one period of insurance shall, inclusive of all costs, charges and expenses be limited to £50,000.
Subject also to the terms, limitations, exclusions and conditions of this Policy.
His Honour having construed this limitation made the following declaration:
Upon the true construction of policy of insurance PR/10319 granted by the defendant to the plaintiff the total of any liability of the defendant to indemnify the plaintiff in respect of all claims in respect of or arising out of death, illness or bodily injury occasioned during any one period of insurance by the ingestion of the drug "Thalidomide" is limited to $100,000.
(a) The Insured shall not without the consent in writing of the Company make any admission, offer, promise or payment in connection with any accident or claim, and the Company if it so desires shall be entitled to take over and conduct in the name of the Insured the defence or settlement of any claim.
(b) The Company shall be entitled to prosecute in the name of the Insured, at its own expense and for its own benefit, any claim for indemnity or damages or otherwise.
(c) The Company shall have full discretion in the conduct of any proceedings in connection with any claim and the Insured shall give all information and assistance as the Company may require in the prosecution, defence or settlement of any claim.
His Honour having considered this condition made the following declaration:
Upon the true construction of the said policy the entry by the plaintiff without the consent in writing of the defendant into any settlement of the actions referred to in the Summons filed herein which involves the making by the plaintiff of any admission, offer, promise or payment would constitute a breach of Condition 2 (a) of the said policy notwithstanding that the defendant has elected not to take over and conduct the defence or settlement thereof.
These two declarations the insured challenges. It contends, as to the first, that it is entitled to a declaration -
that upon the true construction of Policy of Insurance PR/10319 and in the events which have happened the Plaintiff is entitled to an indemnity in respect of One hundred thousand dollars ($100,000.00) for each claimant who succeeds in an action against the Plaintiff arising out of the use or ingestion of the drug "Thalidomide". It contends, as to the second, that it is entitled to a declaration - that upon the true construction of Policy of Insurance PR/10319 the Plaintiff is not in breach of Condition 2 (a) thereof if it settles without the consent of the Defendant proceedings which the Defendant has elected not to take over and conduct.
The facts are that the insured supplied the market in New South Wales with "Distaval" tablets which it imported from the overseas manufacturer. These tablets contained the drug "thalidomide". This drug, if ingested by a pregnant woman, may or will have harmful effects upon the foetus of her unborn child. There are a number of actions pending against the insured for damages for negligence brought by or on behalf of the children born with deformities alleged to have been brought about by the mothers' ingestion, while pregnant, of "Distaval" tablets distributed by the insured. The damages claimed in these actions in one period of insurance exceed $250,000. The manufacturer of the "Distaval" tablets which the insured supplied - which is a co-defendant with the insured in the actions brought - has, it seems, offered to provide $1,200,000 in or towards a settlement of all claims with which the insured is concerned.
It is in the setting which I have described that the contentions of the insured in relation to the construction of the policy fall to be considered.
The proviso in question in the indorsement limiting the total liability of the insurer does not warrant the statement made in the description of the policy that the sum insured is £50,000 ($100,000). The relevant portion of the provision means no more than that the total liability during one period of insurance is limited to £50,000 ($100,000) as compensation payable to claimants in respect of or arising out of any one occurrence or all the occurrences "of a series consequent on or attributable to one source or original cause". There could of course be a number of different occurrences to each of which the limitation would apply but total liability under the policy could exceed £50,000 ($100,000) in a period. The question here is whether the liability (if any) of the insured to those claiming damages for the deformities alleged to have been due to the thalidomide ingested by pregnant mothers in the form of "Distaval" tablets which the insured had put upon the market is properly to be described as in respect of or arising out of occurrences "of a series consequent on or attributable to one source or original cause". If so, the limit of liability in any one period of insurance for such occurrences is £50,000 ($100,000) as Helsham J. decided.
In the circumstances stated the "occurrences" with which we are concerned are, I am disposed to think each deforming of a foetus so that the child was later born with deformities. It may be, as counsel for the insured contended, that the relevant occurrences are the various births of deformed children. Whichever view may be taken of the "occurrences" they were attributable to one source, namely, the thalidomide in the "Distaval" tablets supplied to the market by the insured and taken by the mothers-to-be of the deformed claimants.
Is then each such occurrence (whether it be the deformation itself or the birth with deformities) an occurrence "of a series" attributable to one source? The word "series" does, I think, normally carry with it the notion of a sequence with some connexion between the items in the sequence. Here whatever connexion there is between the occurrences is to be found in what constitutes the further requirement, viz., that they are attributable to one source. The problem is do they form a series? Prima facie I think not. It is probably true that no two of the relevant occurrences happened at the one time so that it may be taken for granted that they occurred one after another, but I do not regard that as itself sufficient to constitute them occurrences in a series, see Attorney-General v. Cohen [1] . The numbers 1, 2 and 3 are a series of numbers because they are in a particular order, but I would not regard the numbers 7, 16 and 100 as a series of numbers because they are in no discernible order. It seems to me that order is the characteristic of a series and there is no order in the occurrences here under consideration. The difficulty with the phrase here is to attribute any particular meaning to it, other than the unlikely one, that it merely excludes occurrences happening at the one time. This is so because the element of connexion between occurrences which could perhaps constitute them a series does not depend upon the word "series" itself, that is, that they are attributable to one source. This is dealt with expressly. To reject the construction that the phrase "occurrences in a series" means no more than any number of occurrences not happening at the one time does, it must be conceded, leave the words "in a series" with problematical positive significance. Nevertheless because I am not satisfied that the occurrences with which we are here concerned are occurrences in a series simply because they happened one after the other, I find myself unable to agree with the first declaration made by Helsham J. Had the object of the insurer been simply to limit its liability to £50,000 ($100,000), except in the event of contemporaneous occurrences attributable to one source and giving rise to claims against the insured, it could have done so very much more simply than by the words which have been used. See the discussion in Welford, Accident Insurance 2nd ed. (1932), pp. 447-448, of the methods of limiting liability.
Accordingly, I consider that the insured is entitled to the following declaration, viz. Upon the true construction of policy of insurance PR/10319 the plaintiff is entitled to an indemnity for any sum not exceeding $100,000 for which the insured is liable during any one period of insurance arising out of the death, illness or bodily injury to any person occasioned by the plaintiff's negligence in or in connexion with its sale, supply or delivery of "Distaval" tablets.
The second declaration is based upon a construction of condition 2 (a) of the policy, which may go beyond that condition. The declaration relates to the insured entering into a particular kind of settlement without the consent in writing of the insurer, but the condition relates simply to making, without such consent, "any admission, offer, promise or payment in connection with any accident or claim". However the point of substance is clearly the construction of the condition.
The contention of the insured depends upon limiting the operation of the first part of the condition by linking it to the second in such a way that the first part has no operation if the insurer declines to take over and conduct the proceedings against the insured. The basis for such a linking of the two parts of the condition is perhaps best stated simply by asking why otherwise do the two parts appear as one condition. The validity of the contention, however, must depend upon the language of the condition as a whole.
The second part of the condition is an authority not a requirement. It assumes a claim against the insured by a third party and authorizes the insurer to take over and conduct either or both of two activities: (1) the defence of the claim; and (2) the settlement of the claim. If the insurer exercises the authority given to it there is conferred upon it "full discretion in the conduct of any proceedings in connection with" therewith (cl. 2 (c)) and the insured is obliged to give "all information and assistance as the Company may require in the prosecution, defence or settlement of any claim" (cl. 2 (c)).
The first part of condition 2 (a) is expressed quite generally. It clearly enough applies without any qualification as soon as an accident, which may give rise to liability, happens. It continues to apply when a claim is made by a third party against the insured and the insurer's election arises. It obviously continues to apply if the election is exercised and the insurer takes over and conducts the defence or the settlement of the claim. At this stage, however, some qualification is necessary in relation to the making of admissions for it would be beyond reason to read the condition as breached if, in answering forensic questions either by interrogatories or in the witness-box, what the insured answered could be treated as an admission. Such a qualification is, I think, to be made whether or not the insurer has taken over the defence of the claim. In short, there would be no breach of the condition in the answering of forensic questions. If there should be an action upon the claim which results in a judgment against the insured the condition would cease to operate in respect of a claim resolved by that judgment and the payment of the judgment could not be in breach of the condition. The condition is only against payments "in connection with any accident or claim". Upon judgment the third party's claim disappears. It seems to me, therefore, that the first part of the condition is in terms applicable whether or not the insurer takes over the defence of a claim in respect of which an action is brought and that there is no basis for restricting its application if the insurer does not take over and conduct the defence to a claim.
The effect of such a construction is that the insurer not having taken over the conduct of the defence of the actions brought, the insured in conducting the defence cannot do certain things without the consent of the insurer. In General Omnibus Co. v. London General Insurance Co. [1] Hanna J. regarded such an effect as "quite inconsistent with the circumstances under which the insured has to defend his own action" [1] and construed a similar condition to the one now before the Court as meaning that the consent of the insurer to acts such as admissions, promises or settlements was not required where the insurer had elected not to take over the defence of an action. In my opinion, this decision fails to take into account the fact that the action does not concern the insured alone but also the insurer who may be liable to indemnify the insured depending upon the outcome of the action. This interest exists whether or not the insurer takes over the defence. There are many cases in which an insured may wish to settle an action but in which the insurer considers that no liability will arise because the action can be successfully defended. Under the contract between them, the insurer can refuse to consent to the insured making payments in settlement of claims. This condition does not prevent an insured, at the risk of loss of indemnity, from making a settlement independently of his contract of insurance.
The condition is a common one upon which it might be expected that there would be guiding authority. In America, the courts have permitted an insured to make a settlement without the consent of the insurer in spite of a policy condition prohibiting such a settlement in cases where the insurer has declined to take over the defence, even though the insurer was under no obligation to take over the defence so long as the insured can establish that the settlement was reasonable and that the insurer would otherwise be liable: see Corpus Juris Secundum vol. 45, s937b, Brinkman v. Western Automobile Indemnity Association [2] and Bituminous Casualty Corporation v. Walsh & Wells Inc. [3] . I can see no warrant in the terms of this condition for adopting such an interpretation.
The insured may make a reasonable settlement where the insurer breaches the contract by denying liability and refusing to defend or settle: see General Omnibus Co. v. London General Insurance Co. [1] and the dictum of Lord Esher M.R. inCaptain Boyton's World's Water Show Syndicate Ltd. v. Employers' Liability Assurance Corporation Ltd. [1] But such is not the case here for the insurer has not repudiated its obligations and is not, so far as I can see, in breach of its obligations. By acting as it has it may be that the insurer is forcing the insured to defend claims that it would prefer to settle at the partial expense of the insurer. However it seems to me that the condition is directed to giving the insurer such an advantage for its own protection.
In these proceedings there has been no argument upon the question whether in the circumstances the refusal of the insurer to give its consent in writing to the insured making any admission, offer, promise or payment in connexion with any claim lacks bona fides or is unreasonable and, if so, whether the insurer is under an obligation to consent. These are important questions of law depending upon findings of fact which have not been made and which require full consideration after argument. In my opinion, the declaration sought does not raise these questions and upon them I express no opinion. I would vary the second declaration to make it clear that all that is being decided is that condition 2 of the policy applies notwithstanding that the insurer has elected not to take over and conduct in the name of the insured the defence or settlement of the claims made against the insured so that other questions relating to the construction of the condition will remain open if and when they arise for decision.
I have had the opportunity of considering the reasons for judgment prepared by my brother Stephen. I agree that the first of the declarations made by the learned primary judge should be affirmed. On the assumptions properly made by the learned primary judge, any compensation payable by the appellant to the various claimants would be in respect of, or would arise out of, a number of occurrences of the one kind, which followed one another in temporal succession, and which constituted "occurrences of a series" within the meaning of the policy notwithstanding that they did not take place in any progressive order. I need add nothing to what my brother has written on this aspect of the case.
The difficult question whether the second declaration was correctly made depends on the proper construction of condition 2 (a) of the policy, which is in the following terms:
The Insured shall not without the consent in writing of the Company make any admission, offer, promise or payment in connection with any accident or claim, and the Company if it so desires shall be entitled to take over and conduct in the name of the Insured the defence or settlement of any claim. The respondent contends that this condition contains two distinct provisions - a prohibition directed to the insured and the grant of a privilege in favour of the insurer - and that the prohibition continues to bind the insured whether or not the insurer avails himself of the privilege. It is unnecessary to consider what construction would be placed on the words of the first part of condition 2 (a) if they appeared in a policy which contained no provision equivalent to that which is made by the second part of the condition. The words must be construed in their present context, and the fact that the two parts of condition 2 (a) appear in one paragraph, and indeed in one sentence, strongly suggests that they are not unconnected, and that the former provision is intended to give efficacy to the latter. In other words, the very form of condition 2 (a) leads, in my opinion, to the conclusion that the object of prohibiting the insured from making any admission, offer, promise or payment without the consent in writing of the insurer is to prevent the insured from prejudicing the conduct by the insurer of the defence or settlement of any claim. If this is so it would appear to follow that it was not intended by the condition that the insurer, having declined to take over and conduct the defence or settlement of a claim, should nevertheless be able to control the manner in which the insured conducted its defence or settlement.
This view of the effect of the condition is supported by a consideration of the consequences that would flow from a construction of the words of its first part that placed no qualification upon their generality, for in the event of an ambiguity in the instrument it is proper to give it a construction that would avoid irrational consequences that it is unlikely that the parties intended. The words of the first part of the condition, literally interpreted, would forbid an insured to pay the amount of a judgment obtained against him upon a claim unless he obtained the written consent of the insurer to the payment. Although the plaintiff's cause of action against the insured would merge in the judgment once it was obtained, the payment of the amount of the judgment would remain a payment "in connection with any accident or claim" within the ordinary meaning of those words. But even if in some way it were possible as a matter of construction to avoid this result, the words of the first part of the condition, unless understood as ceasing to have effect once an insurer had elected to take no part in the conduct of the defence of a claim, would operate so as most seriously to hamper an insured in the defence of a claim which the insurer had left him to conduct. In the ordinary course of legal proceedings it will often be prudent, and will sometimes be necessary, for a party to make an admission, offer, promise or payment in connexion with the claim upon which the proceedings are based. A defendant, acting reasonably, may make admissions in his pleadings or in response to a notice to admit, and may be obliged to make admissions in response to interrogatories or to questions put in cross-examination. Not infrequently a defendant will regard it as wise to pay moneys into court or to make a payment in settlement of a claim which he has been advised is unanswerable. Sometimes circumstances may call for a party to make an offer or promise as to the future conduct of the litigation. It would seem quite unlikely that the parties to the policy intended condition 2 (a) to have so unreasonable an operation as, for example, to prevent the insured from making an admission in answer to an interrogatory without first obtaining the written consent of the insurer. No doubt the principle that the insurer could not refuse his consent arbitrarily and in complete disregard of the interests of the insured would to some extent mitigate the inconvenience of the condition, but the insured would remain in the position that he would be required from time to time to seek the consent of the insurer to the taking of quite ordinary steps in the action, with damaging consequences if the insurer procrastinated in giving his decision on a request for consent. However, the only possible justification for placing upon the words of the first part of the condition any construction that would render them inapplicable to admissions, offers, promises or payments made in the course of legal proceedings is, in my opinion, that the first part of the condition is in aid of, and ancillary to, the right given to the insurer by the second part; the only indication in the policy that the first part of condition 2 (a) has not a completely general operation is to be found in the second part of the condition. In other words, the condition will apply to an admission, offer, promise or payment made in the course of legal proceedings unless the first part of the condition is understood as having no operation once the insurer has elected to allow the insured to conduct the defence of a claim. This circumstance supports the view that the two parts of the condition are not independent and distinct.
Although there have been decisions dealing with the position which arises when an insurer in breach of his contract has refused to take over the defence of a claim or has denied liability under the contract, the only judicial discussion which I have seen as to the effect of a provision similar to condition 2 (a) is in the Irish case ofGeneral Omnibus Co. Ltd. v. London General Insurance Co. Ltd. [1] . There the policy contained a condition which read as follows:
No admission, promise or payment shall be made by the insured without the written consent of the Company, which shall be entitled, if it so desires, to take over and conduct in the name of the insured the defence and settlement of any claim, or to prosecute in his name for its own benefit any claim or indemnity for damages or otherwise against any third party, and shall have full discretion in the conduct of any proceedings or in the settlement of any claim, and the insured shall give all information and assistance as the Company may require, failing which, benefit under this policy will be forfeited. In that case the insurer having wrongfully repudiated liability under the policy, the insured, without the consent of the insurer, settled an action brought against him by a third party. It was held by Hanna J., and on appeal by the Supreme Court, that the above condition afforded no answer to an action brought by the insured against the insurer on the policy. The decision was rested on two grounds, one of which, that the insurer had repudiated liability under the policy, has no relevance to the present case. However, the majority of the Court also held, as a matter of construction, that the condition was inapplicable where the insurer had refused to take any part in defending the action. The trial judge, Hanna J., said [1] : Finally, what is the effect of condition 2? It is concerned, in my opinion, with the taking over by the Insurance Company of the proceedings on behalf of the insured, and its intendment is that nothing is to be done by the insured to prejudice the main right of the insurer, so that, if the Insurance Company has to contest the case, the insured is not to make any "admission, promise, or payment without the written consent of the Company". I cannot accept the arguments contra, for this condition is quite inconsistent with the circumstances under which the insured has to defend his own action. In the Supreme Court, Murnaghan J., with whose reasons Kennedy C.J. expressed agreement [2] , said [3] : In my opinion the meaning of the condition is that the insured must not do anything which will prejudice the Insurance Company in conducting the defence of the action, if the Company desires to take over the defence. In my opinion the clause has no application to a case such as the present where the Insurance Company has refused to take any part in defending the action, and it does not debar the insured from settling the case when it has come into Court for final determination. That decision is, of course, not binding upon this Court, but the remarks there made by the learned judges as to the effect of a condition which so far as material is indistinguishable from condition 2 (a) accord with my own views on the question. In my opinion the object of the first part of condition 2 (a) is to prevent the insured from doing anything that would prejudice the insurer in the conduct of the defence or settlement of a claim, or, in other words, is intended to protect the right given to the insurer by the second part of the condition. On the proper construction of the condition, where the insurer elects not to avail himself of that right, and repeatedly refuses to take any part in the conduct of the defence or settlement of a claim, the prohibition contained in the first part of the condition ceases to be applicable. With great respect to those who take a different view, I have therefore concluded that the second declaration was wrongly made and to that extent I would allow the appeal. 1. [1936] I.R. 596. 2. [1936] I.R., at p. 601. 3. [1936] I.R., at p. 608. 4. [1936] I.R., at p. 619. Stephen J.
This is an appeal from the Equity Division of the Supreme Court of New South Wales. The present appellant applied by summons for declarations as to its rights under a policy of insurance issued to it by the respondent and on the hearing of that summons Helsham J. made two declarations concerning the construction of the policy; it is with those two declarations that this appeal is concerned.
The first declaration declared that the total of any liability of the respondent insurer to indemnify the appellant insured in respect of all claims in respect of or arising out of death, illness or bodily injury occasioned during any one period of insurance by the ingestion of the drug "thalidomide" was limited to $100,000.
By the second declaration it was declared that the entry by the insured, without the insurer's written consent, into any settlement of certain actions brought against it and which involved it in making any admission, offer, compromise, promise or payment would constitute a breach of condition 2 (a) of the policy, notwithstanding that the insurer had elected not to take over and conduct the defence or settlement of those actions. The actions in question are being brought on behalf of infant plaintiffs, alleging injury following their mothers' consumption of "thalidomide" during the pregnancy preceding their respective births.
Before turning to the facts it is necessary to describe the relevant terms of the policy of insurance the subject of these declarations. This policy, originally issued in September 1960 and subsequently extended from time to time, is entitled a "Public Risk Policy". By its terms the insurer agreed to pay to or on behalf of the insured -
all sums for which the Insured shall become legally liable by way of damages in respect of
Accidental death of or accidental bodily injury to any person and/or accidental damage to property arising out of an accident happening during the continuance of this policy and caused as described in the Schedule under the heading "Events to which this policy applies". The policy was also expressed to indemnify the insured in respect of legal costs which it might incur and this portion of the policy concluded by providing that "any sum to which the liability of the Company is expressed to be limited as hereinafter provided shall be inclusive of" the legal costs earlier referred to.
The reference to the heading "Events to which this policy applies" is to a portion of the policy consisting of a short statement of events, followed first by a proviso limiting liability to specific sums in respect of specified events and then by ten lettered paragraphs containing exclusions from liability on the part of the insurer, expressed to operate "except so far as the Company shall by endorsement hereon or by memoranda attached hereto have agreed to extend the indemnity".
One of those exclusions, that contained in par. (j), is one familiar in the case of public risk policies; it excludes liability to indemnify in respect of claims arising in connexion with goods sold or worked upon after those goods have left the actual physical custody of the insured. In other words it excludes from indemnity the general area of products liability insurance.
However, the effect of this particular exclusion was then nullified by the inclusion, before issue of the policy, of an indorsement which was "to be included in and read as part of" the policy itself. That indorsement read in part as follows:
Notwithstanding Exclusion (j) of the within Policy it is hereby expressly declared and agreed that this Policy shall extend to indemnify the Insured in respect of all sums for which he shall become legally liable arising out of death, illness or bodily injury to any person occasioned during the continuance of this Policy by negligence or by breach of any condition or warranty as to absence of vice implied by law or which would in the absence of express agreement be implied by law in connection with goods sold, supplied or delivered by the Insured, his servants or agents during any period of insurance hereunder whether such goods were manufactured by the Insured or not and whether such condition or warranty is also expressed or not. The indorsement also contained a proviso excluding liability in certain instances and with that proviso this appeal is not concerned. The indorsement then concluded with a further proviso directly relevant to the first of the two declarations the subject of this appeal and which read as follows: Provided further that the total liability of the Company under this endorsement for all compensation payable
(a) to any claimant or number of claimants in respect of or arising out of any one occurrence or in respect of or arising out of all occurrences of a series consequent on or attributable to one source or original cause and
shall, inclusive of all costs, charges and expenses be limited to £50,000. The indorsement was expressed to be subject to the terms, limitations, exclusions and conditions of the policy.
Condition 2 of the policy, which was one of eight conditions in the policy, all of which were in a form not unusual in the case of indemnity policies, is directly relevant to the second declaration made by Helsham J. It read as follows:
(a) The Insured shall not without the consent in writing of the Company make any admission, offer, promise or payment in connection with any accident or claim, and the Company if it so desires shall be entitled to take over and conduct in the name of the Insured the defence or settlement of any claim.
(b) The Company shall be entitled to prosecute in the name of the Insured, at its own expense and for its own benefit, any claim for indemnity or damages or otherwise.
(c) The Company shall have full discretion in the conduct of any proceedings in connection with any claim and the Insured shall give all information and assistance as the Company may require in the prosecution, defence or settlement of any claim.
The appellant, described in the policy as "Chemists and Druggists (Wholesale)", distributed in Australia, from 1st August 1960 to the end of November 1961, the drug "thalidomide" under the trade name "Distaval". It is now, together with its parent company in the United Kingdom, a defendant in a number of actions brought on behalf of infants. Generally speaking, the allegations disclosed in those proceedings are that "Distaval" contains ingredients having harmful effects on the foetus of unborn children if consumed by mothers during pregnancy, that the various grievous physical disabilities of which each plaintiff complains are the result of the mother having consumed "Distaval" during pregnancy, that as the distributor of "Distaval" the appellant knew or ought to have known of its harmful effects and that it negligently failed to warn those mothers, their medical advisers and the chemists who supplied "Distaval", of its harmful effects, whereby the plaintiff infants have been permanently injured.
It was following the institution of these actions against it that the insured sought declarations against the insurer, which had failed to admit any liability to indemnify under the policy.
The insured had, from May 1971 until July 1973, engaged in a lengthy exchange of correspondence with the insurer, the details of which need not be recounted; so far as presently relevant, the course of events was that the insurer, having in May 1971 declined liability in respect of the first claim made by an infant plaintiff because of late notification of the claim, in July 1971 stated that it was not prepared to accept any obligation to indemnify in respect of other subsequent claims and, instead, and entirely without prejudice, sought further information from the insured. Finally, after much pressure from the insured, the insurer, in July 1973, set out in some detail its attitude to the claim for indemnity. It stated that it had not elected to take over or conduct the defence or settlement of any of the actions instituted by infant plaintiffs and that it did not concede the insured's legal liability nor that conditions entitling the insured to indemnity had otherwise been fulfilled. It refused consent to the insured making any admission, offer, promise or payment and warned that were it to do so it would attract the operation of condition 2 (a) of the policy. It asserted that only if and when the insured became legally liable by way of damages to any particular claimant would it consider whether indemnity would be given; reference then followed to the resolution of differences as to indemnity by arbitration under a clause of the policy.
It was necessary, in the proceedings before Helsham J., for certain assumptions to be made concerning the circumstances of the claims which have been made against the insured but which have not, as yet, reached the trial stage. His Honour accordingly assumed for the purposes of his judgment that all injuries complained of were due to the ingestion of "Distaval", that its ingredients did not alter, that the insured obtained all supplies of that product from the same source, that all tablets were identical in their characteristics and their effect was always the same, in all cases working to bring about the mischief in the same way.
Upon these assumptions his Honour concluded that the effect of the indorsement to the policy was to limit the insurer's liability to a total sum of $100,000 in respect of the claims of all infant plaintiffs; hence the form of the first declaration.
In the case of policies which provide indemnity over a period it has long been the practice of insurers to impose an upper limit upon their liability in the case of each event which may occur, during the period of cover, giving rise to a liability to indemnify. Much litigation has ensued where one mishap has resulted in injury to many, the question being whether, as the insurer contends, the one limit of liability to indemnify applies to the mishap as a whole and, thus, to all claims flowing from it, or rather to each individual claim, as the insured would have it. This is just such a dispute but here the limitation clause is expressed in terms more detailed than in most reported cases.
The debate has, as a rule, concerned the meaning of the particular noun, usually "accident" or "occurrence", employed to describe that to which the limit is to apply, and whether it refers to the mishap itself or to the injury or death of each person involved in it; whether, in other words, it looks at the matter from the viewpoint of the insured or of the injured victim.
In South Staffordshire Tramways Co. v. Sickness and Accident Assurance Association [1] a limit of "£250 in respect of any one accident" in a policy indemnifying against liability for "accidents caused by vehicles" was held to apply to each of the claims of some forty injured passengers in one of the insured's trams which overturned; it was not the overturning of the tram but the injury to each passenger to which the words "one accident" applied; as Bowen L.J. said [1] , "one accident" meant one accident to the person.
In the recent case of Forney v. Dominion Insurance Co. Ltd. [2] Donaldson J. attributes to this interpretation given by the Court of Appeal to "accident" what he describes as the subsequent use in policies of the word "occurrence" rather than "accident" when an insurer seeks to limit liability in respect of any one mishap, regardless of the number of persons injured thereby. In Allen v. London Guarantee and Accident Co. Ltd. [3] , the limitation of liability referred to claims "in respect of or arising out of any one accident or occurrence" and Phillimore J., following the South Staffordshire Case [1] , held that where two were injured in the one incident for which the insured was responsible there were two "accidents"; however there was, he said, only one "occurrence"; thus the limitation of liability applied to the total of the two separate claims by those who were injured as a result of that one occurrence. The many decisions of United States courts on the subject are annotated in vol. 55 of the American Law Reports, 2nd ed. (1957), p. 1300.
In the present case the relevant limitation of liability clause, contained in the proviso to the indorsement, refers to "occurrence" and not to "accident", the latter being more likely to operate favourably to the interests of an insured. Moreover the maximum amount is not expressed to be applicable merely to "any one occurrence"; instead still further protection is afforded to the insurer, first by the reference to several claimants in respect of the one occurrence and secondly because claims in respect of two or more occurrences are nevertheless made subject to the one maximum amount of $100,000 so long as they form a series and are consequent on, or attributable to, one source or original cause.
The proviso must, of course, be read in its context in the indorsement; the compensation payable to claimants of which it speaks must refer to sums for which the insured becomes legally liable arising out of death, illness or bodily injury to any person and which is occasioned as set out in the opening words of the indorsement. So the limit of liability which the proviso creates is one applicable to sums of that nature which become payable to one or more claimants in respect of or arising out of either one occurrence or all occurrences of a series if those occurrences be consequent on or attributable to the one source or original cause.
Quite apart from authority I would not regard the word "occurrence" in this context as apt to refer to the death of a victim or to his illness or injury but rather to the mishap causing such death, illness or injury and this is borne out by the contemplation of the proviso that there may be a number of distinct claimants although only one occurrence. In Forney's Case Donaldson J. regarded the policy's contemplation that a number of claims might arise out of one occurrence as indicating that "occurrence" there meant the mishap, not its consequences [1] . So do I; although in the case of a victim's death there may be several dependant claimants yet, generally speaking, the existence of several claimants will predicate the existence of several persons injured, made sick or killed, and is thus inconsistent with an interpretation of "occurrence" in the singular as referring to these happenings rather than to the mishap which gave rise to them. Moreover the contrary construction ignores the effect which the opening words of the indorsement give to the words "all compensation" in the proviso. If expanded in the light of those opening words "all compensation" must mean "all sums for which the insured shall become legally liable arising out of death, illness or bodily injury to any person occasioned by negligence or by breach of condition or warranty as to absence of vice in connection with goods sold supplied or delivered". If "all compensation" bears this meaning the words of the proviso which follows, "in respect of or arising out of any one occurrence", will not refer back to a victim's death, injury or illness but rather to the event causing that death, injury or illness.
I accordingly conclude that the occurrence or occurrences spoken of in the proviso refer to mishaps in which victims suffer death, injury or illness and not to that which they suffer.
This conclusion is at variance with the view of Helsham J. who regarded the infant victims' deformities as relevant occurrences. However, as will appear, I nevertheless arrive at the same conclusion as did his Honour, although by a different road.
Whether or not an occurrence is the mishap or its consequences, as manifested in the victim's injuries, it seems clear that in the present case there was no one occurrence in respect of which or arising out of which compensation may become payable to all these infant claimants. Only if the links in the chain of causes be traced as far back as the act on the part of the insured in distributing "Distaval" can one event common to each claimant be found and the proviso should not, I think, be construed as including such a remote cause within the meaning of "occurrence".
Accordingly the insurer must seek to rely upon that part of the proviso which extends its operation to several occurrences, which, if they form a series having one source or original cause, will still serve the insurer's purpose in confining the extent of its liability to the one sum of $100,000.
The facts of the present claims are, as yet, largely conjectural; it was this that gave rise to the need, felt by Helsham J., to proceed upon the basis of certain assumptions. Even those assumptions fall short of supplying the necessary factual basis in the very special facts of this case. If this were a vehicle indemnity policy the occurrence would be the collision as a result of which the third party victim suffered his injuries. I find elusive the equivalent of a collision in the present case. Is it the ingestion of the drug by the pregnant woman, the accumulation within her body of harmful constituents of the drug, the taking effect of these constituents upon the foetus, the subsequent malformed development of the foetus within the womb, the birth of the malformed infant or some combination of two or more of these events? Merely to state these possible factors as I have may be to reveal a lack of understanding of the operation of the drug and its effects; that would not be surprising in view of the absence of evidence on the topic. These difficulties are, of course, not unexpected when, before the facts are known, it is sought to determine how a written instrument may operate in relation to those as yet undetermined facts. The difficulties can, I think, in this instance, be avoided, if not overcome. Whatever may prove ultimately to be the relevant "occurrences" in these cases they will, I think, because of the nature of the assumptions made by Helsham J., be found all to be attributable to the one "source or original cause". Whether that be a quite remote one, such as the distribution of a drug containing a dangerous ingredient, or some more proximate one (and this will, of course, depend upon the prior identification of what is the relevant occurrence), it will, I think, necessarily prove to be the same cause in the case of each injured infant. No other outcome appears possible, given the assumptions which are to be made. Thus whatever the "occurrences" may prove to be, the proviso will apply if they be occurrences "of a series".
The meaning of "series" in the proviso is, I think, that of a number of events of a sufficiently similar kind following one another in temporal succession. By the express words of the proviso, relevant occurrences must have "one source or original cause" and must, by the operation of par. (b) of the proviso, occur within a relatively short time span. Since any number of distinct events will, unless by coincidence they occur simultaneously, necessarily occur in a temporal sequence, the only remaining attribute of the concept of a "series" to be satisfied is that the events should be, in a sufficient degree, similar in nature.
The characteristic of the similarity of events which may form a series I take from those dictionary meanings of series which refer to the concept of being "of one kind" or of having some "characteristic in common" - Shorter Oxford English Dictionary; in Attorney-General v. Cohen [1] , it was said of the term "series of transactions" in revenue legislation that mere contiguity of time or place was not enough, some "integral relationship" between the transactions must exist; and see Reg. v. Kray [1] and Reg. v. Ludlow [2] .
In the present case it seems that although the precise nature and extent of the injuries of the various infants may differ, the precedent events were in each case the same; all involved the ingestion by a pregnant woman of "Distaval", of which the insured was the wholesale marketer in Australia, with, it is to be assumed, consequent harmful effects upon the foetus, produced in each case in the same way by its content of "thalidomide", resulting in deformity on birth of the infant. The assumptions required to be made themselves produce, to my mind, the necessary similarity called for in any "series" of events.
In at least one reported decision upon the construction of an insurance policy the question of the existence of a "series" of events has arisen directly for decision. In Richardson Construction Co. v. London and Lancashire Guarantee and Accident Co. [1] a liability indemnity policy contained a limit of $1,000 "for any one accident or series of accidents arising out of one cause". Pile-driving operations extending over three months had caused damage to four dwellings each in different ownership and the owners of each recovered, either by judgment or by settlement out of court, substantial sums against the insured. The insured contended that the limit was to be applied to each claim against it, each being a distinct accident, and not to the total of those claims. In the Ontario Supreme Court, Mackay J. considered a number of English decisions, including the South Staffordshire Case [1] and Allen's Case [2] , and, finding that there had occurred four separate and distinct accidents occurring at different times and all from the one cause, vibrations, concluded that they constituted a "series of accidents" so that the limit of $1,000 was applicable to the total.
Two decisions of the U.S. Court of Appeals for the Fifth Circuit, Anchor Casualty Co. v. McCaleb [3] and Saint Paul-Mercury Indemnity Co. v. Rutland [4] , while concerned with the construction of a clause in a liability indemnity policy setting a maximum liability for "each accident" without reference to the word "series", do provide instances, in a similar context, of the judicial use of the word "series" and "series of events" in the same sense as I would give to it in the present instance.
In my view the first declaration was correctly made by Helsham J., although I would regard the occurrence or occurrences to which the proviso refers not as the injuries suffered by the infant claimants but rather as the relevant events precedent to that injury, each of which had the same source or original cause and formed, with the others, a series of occurrences such as is referred to in the proviso.
In conclusion on this aspect I note that E. A. Heppell in a passage of his work Products Liability Insurance (1967), a text principally directed to the British insurance industry, refers to what he describes as the usual form of clause limiting liability in respect of any one accident as containing the phrase "any occurrence or series of occurrences arising from one source or original cause". He attributes to that phrase the effect of limiting to the specified maximum sum the insurer's liability for all compensation payable in respect of injury and damage resulting from one act of negligence by the insured: at p. 33. The passage is of interest as showing that elements of the wording of the present proviso are of current common use in products liability insurance.
The second declaration is concerned with the interpretation of condition 2 (a) of the policy. The appellant insured contends that the declaration is erroneous and that the restraints imposed upon it by the condition do not apply if the insurer elects not to take over the conduct of the defence to claims against the insured; alternatively it is contended that the withholding of consent by the insurer must be subject to an implied term that it may not be withheld unreasonably.
Condition 2 (a) appears to be a clause in common use in insurance policies but its operation and effect, although much litigated in the United States, is the subject of very little English or Australian authority. Any declaration as to its construction is likely to affect indirectly persons other than those who are parties to this appeal.
In these circumstances it is not irrelevant to note some features peculiar to insurance against risks of third party liability and in relation to which condition 2 (a) is of special significance. Policies insuring against such risks and which combine an upper limit of indemnity with a prohibition upon settlement of claims by the insured without the insurer's concurrence, as does the present policy, are very likely to give rise to conflicts of interest as between insurer and insured whenever a claim is made against the insured in excess of that upper limit of indemnity. The insured will be anxious to settle the claim at a figure within that limit; the insurer, however, will gain little from a settlement close to the limit and may prefer to have the case fought out rather than have it settled on such terms. An immediate conflict of interests then arises.
Where settlement for less than the upper limit of indemnity appears unattainable and the third party's case is a strong one the insurer's immediate financial interests would be better served if he could successfully resist the insured's claim to indemnity instead of accepting liability to indemnify and conducting an inauspicious defence. Condition 2 (a), as interpreted in the present declaration, may afford to an insurer a means of attaining this result; if the insured is anxious to settle and the insurer, while refusing to take over the conduct of the defence, withholds its consent to a settlement, a breach of the condition against settlement without consent may be procured and subsequent liability to indemnify may be avoided. An insured's anxiety to settle will, of course, be acute if his entitlement to indemnity is in doubt and will in any event be substantial if the likely amount of any judgment against him far exceeds the limit of his entitlement to indemnity under the policy.
To appreciate that by the present declaration there is conferred upon an insurer, who has declined either to defend a claim or to acknowledge any liability to indemnify in respect of that claim, a power arbitrarily to withhold consent to a settlement is to be struck by the far-reaching consequences of the construction of condition 2 (a) which the present declaration involves. Those consequences are, if anything, exacerbated when the particular policy, unlike the prevailing forms of American and Canadian policies - see Williston on Contracts, 3rd ed., vol. 7, p. 422, and Harvard Law Review, vol. 67 (1954), p. 1137, n. 1 - does not oblige the insurer to defend actions against the insured. The present policy, like other policies which have come before English courts, allows the insurer to stand by, neither accepting nor declining liability; it also casts upon him no obligation to defend claims made against the insured. The terms of the declaration would permit it at the same time to refuse consent to any proposed settlement, while warning the assured that to settle would constitute a breach of condition.
This construction of condition 2 (a) is prone to leave the insured in a dilemma; if he defends the action brought against him a verdict much in excess of the insurer's limit of liability may result and the insurer may ultimately turn out not to be liable to indemnify; if he settles the action, albeit for a reasonable sum, the insurer may then rely, as the present insurer has said it will, upon the fact of that unauthorized settlement as a breach of condition excusing it from all liability to indemnify.
This, then, is the insured's dilemma in the present case. It is by no means an uncommon one and variations of it have been the subject of many decided cases in the United States. Ever since the leading case of St. Louis Dressed Beef and Provision Co. v. Maryland Casualty Co. [1] in which Holmes J. delivered the judgment of the Court, it has been well established that where an insurer wrongfully denies liability to indemnify and fails to defend the action brought against the insured the latter may make a reasonable settlement of that action and then recover against the insurer - later cases appear in the annotation in American Law Reports, vol. 142 (1943), p. 812 and its supplements. A like view was taken by the Appellate Division of the Alberta Supreme Court in Chamberlain v. North American Accident Insurance Co. [1] ; the judgments in the Appellate Division refer to both English and American authority for the proposition that the insurer's repudiation of liability to indemnify prevents it from relying, by way of defence to the insured's action against it, upon the insured's prudent settlement of the third party's claim against him. In Stevenson v. Reliance Petroleum Ltd. [1] , a decision of the Supreme Court of Canada, only one member of the Court, Locke J., found it necessary, because of the view he took on other aspects of the case, to consider the effect of the insured's conduct in agreeing to consent judgments in settlement of certain of those claims despite the insurer's specific warning that to do so would contravene the conditions of the policy prohibiting settlement by the assured. He treated the insurer's failure to investigate the claims, to conduct the defence and to pay resultant judgments as breaches of the contract of insurance: these breaches he described as amounting to waiver of its right to insist upon compliance by the insured with the relevant conditions of the policy and relied for that purpose on the authorities upon which the judgments in Chamberlain's Case [1] were founded.
These United States' and Canadian decisions were concerned with policies which obliged the insurer to defend claims made against the insured; the insurer's failure to do so was found to be a clear breach of an important contractual obligation. The position in this case is otherwise. By the present policy the insurer undertakes to indemnify the insured only in respect of "all sums for which the Insured shall become legally liable by way of damages" in respect of specified happenings; not until the insured becomes subject to a relevant liability will the insurer, for the first time, be subject to any obligation to indemnify the insured under the policy and at no time will it be under an obligation to defend actions brought against the insured by third parties. It has a right, but no obligation, to undertake the defence of such actions. In Post Office v. Norwich Union Fire Insurance Society Ltd. [2] , the policy was in terms somewhat similar to those of the present policy; by it the insurer agreed to "indemnify the insured against all sums which the insured shall become legally liable to pay as compensation in respect of loss of or damage to property." It was held that the right to indemnity only arose upon the liability of the insured to the injured person being established by judgment of the court, award of an arbitrator or by agreement between the insured and the third party - per Lord Denning M.R. [1] and per Salmon L.J. [1] , each approving of a statement to the like effect by Devlin J. in West Wake Price & Co. v. Ching [2] . The Post Office was the injured third party and Potter & Company Ltd. the insured and of the rights of the insured Salmon L.J. said [3] :
It is quite true that if Potters in the end are shown to have been legally liable for the damage resulting from the accident to the cable, their liability in law dates from the moment when the accident occurred and the damage was suffered. But whether or not there is any legal liability and, if so, the amount due from Potters to the Post Office can, in my view, only be finally ascertained either by agreement between Potters and the Post Office or by an action or arbitration between Potters and the Post Office. It is quite unheard of in practice for any assured to sue his insurers in a money claim when the actual loss against which he wishes to be indemnified has not been ascertained. I have never heard of such an action and there is nothing in law that makes such an action possible. 1. [1967] 2 Q.B. 363. 2. [1967] 2 Q.B., at pp. 373-374. 3. [1967] 2 Q.B., at pp. 377-378. 4. [1957] 1 W.L.R. 45, at p. 49. 5. [1967] 2 Q.B., at p. 377.
In the present case the insurer is thus on good legal ground in asserting, as it has in correspondence, that as yet no obligation to indemnify has arisen; no event against which it is to indemnify has occurred, the insured not yet having become legally liable for any sum by way of damages. Accordingly, its failure to admit liability to indemnify can in no view amount to any breach of contract. Moreover, since it is under no obligation under the policy to take over and conduct the defence of any claim against the insured its failure to do so is likewise no breach of the policy capable of excusing the insured from observance of the terms of condition 2 (a).
Does it then follow that the effect of the first limb of condition 2 (a) is that assigned to it by the second declaration, the insured being left to make the best way it can out of its dilemma? Since the declaration deals only with the construction of condition 2 (a) the answer must, I think, be "Yes". However in my view the declaration tells but half the story; the consent to which condition 2 (a) refers is not one which the insurer may arbitrarily withhold. Its power of restraining settlement by the insured must be exercised in good faith having regard to the interests of the insured as well as to its own interests and in the exercise of its power to withhold consent the insurer must not have regard to considerations extraneous to the policy of indemnity.
It will be necessary to say more concerning this duty of good faith and its consequences and to indicate the authorities which support its existence. Before doing so I should state briefly my reasons for rejecting a construction of the first limb of condition 2 (a) which would make it inapplicable where the insurer elects not to defend a claim against the insured.
The body of United States' and Canadian case law to which I have referred is distinguishable; those cases on examination all turn upon the fact that under the form of policy there in question a refusal to defend is a breach of contract, variously characterized as a repudiation entitling the insured to disregard the condition against settlement or as a waiver of that condition or as giving rise to an estoppel. As already mentioned, such a contention is not open in the case of the present policy, which does not impose any obligation upon the insurer to defend. It is noteworthy that none of the North American authorities which I have read seeks to justify an unconsented-to settlement by the insured on any ground of construction of the policy; the prohibiting condition is assumed to be applicable whether or not the insurer defends and only by recourse to the consequences of the insurer's breach of contract is the insured's settlement justified.
There is only one authority of which I am aware which lends some support to a construction of condition 2 (a) favourable to the insured. In General Omnibus Co. Ltd. v. London General Insurance Co. Ltd. [1] it was held that a condition very similar to condition 2 could not be relied upon by an insurer who had denied liability in respect of a particular third party claim which the insured had subsequently settled on reasonable and proper terms. The policy, unlike the common North American form, imposed no obligation upon the insurer to defend; the primary judge, Hanna J., read the relevant condition as being concerned
with the taking over by the Insurance Company of the proceedings on behalf of the insured, and its intendment is that nothing is to be done by the insured to prejudice the main right of the insurer, so that, if the Insurance Company has to contest the case, the insured is not to make any "admission promise, or payment without the written consent of the Company". I cannot accept the arguments contra, for this condition is quite inconsistent with the circumstances under which the insured has to defend his own action. [1] However the judgment goes on to describe the insurer, which had not only refused to take over the defence of an action but had also specifically denied any liability to indemnify, as being "debarred from relying on such a condition as a condition precedent" and the decision must, I think, be understood in the light of the breach of contract on the insurer's part in denying liability to indemnify. On appeal to the Supreme Court of the Irish Free State Kennedy C.J. and FitzGibbon and Murnaghan JJ. delivered separate judgments; each affirmed this aspect of the decision of Hanna J. Murnaghan J. said [1] : In my opinion the meaning of the condition is that the insured must not do anything which will prejudice the Insurance Company in conducting the defence of the action, if the Company desires to take over the defence. In my opinion the clause has no application to a case such as the present where the Insurance Company has refused to take any part in defending the action, and it does not debar the insured from settling the case when it has come into Court for final determination. His Honour drew no distinction between a wrongful refusal to indemnify, which is what in fact occurred, and an election not to exercise its right to take over the insured's defence, nor was it, in the circumstances, necessary for him to do so. The Chief Justice [1] , adopted these views of Murnaghan J.; FitzGibbon J. on the other hand relied upon what he regarded as the insurer's waiver, by its conduct in declining liability to indemnify, of its right to be consulted in the settlement of any claim. It was, he thought, the clearest case of waiver by conduct. This case cannot, in my view, provide any authority in a case where the insurer is not in breach of contract. 1. [1936] I.R. 596. 2. [1936] I.R., at p. 601. 3. [1936] I.R., at p. 619. 4. [1936] I.R., at p. 608.
The terms of condition 2 (a) appear to me to be unambiguous in their imposition of an unqualified restraint upon specified acts by the insured unless consented to by the insurer; among these acts is "payment in connection with any accident or claim" and, although it is possible to conceive of a settlement which does not involve a defendant in any "admission, offer, promise", "payment" must needs be involved in any settlement. It was argued that "payment" cannot refer to satisfaction of a judgment by an insured who, following his insurer's election not to defend, has had judgment entered against him. While this may be so it does not justify the giving of no meaning to "payment"; the term is appropriate to apply to payment under a settlement and should be so interpreted.
The fact that "settlement" does not occur in the first limb of condition 2 (a) but does appear in the second limb affords no aid to the appellant insured; the first limb is concerned with particular acts by the insured rather than with transactions; the "conduct of the defence or settlement of claims" is in marked contrast to the prohibited single acts, to "make any admission" etc. It would seem to me to have been inappropriate as a matter of drafting to have added to these four prohibited acts the entire transaction comprehended by "settlement". Its omission is readily explained by the fact that a prohibition of the four acts will also effectively prohibit a settlement.
The position of the first limb of condition 2 (a), preceding the subsequent grant of power to the insurer to take over the defence of a claim, is in itself an obstacle to any construction limiting its operation. The prohibition must clearly apply to the initial period after a claim is made and before the insurer has had the opportunity of deciding whether or not to take over the defence; it must also apply if the insurer does elect to defend. I can discern no ground, whether based upon the giving of business efficacy to the contract or upon the contra proferentes doctrine, for restricting it to these two cases; it will, I think, apply equally when the insurer elects not to take over the defence, whatever may be the position should the insurer go further and wrongfully repudiate liability to indemnify.
It is for these reasons that I have concluded that the second declaration appearing in the order of Helsham J. should not be disturbed on appeal.
However it is important that the making of this second declaration should not be thought to confer any arbitrary power of refusal of consent upon the insurer. On the contrary I regard the power of the insurer as so hedged around with safeguards for the legitimate interests of the insured as to result in a situation in which the insured may be little worse off as a result of the declaration than it would have been had it been held that it might settle claims without the insurer's consent.
Where conflicts of interest arise as between an insured and an insurer, as they frequently will where an indemnity against liability to third parties is limited to a maximum amount, the insurer must exercise its powers under the policy with due regard for the interests of the insured. Perhaps because of the rather different way in which the granting of cover for third party automobile claims has developed in the United States as compared with the United Kingdom or Australia, there appear to be very few instances in the latter jurisdictions in which the courts have had to consider this aspect of liability insurance. One is, however, provided by Groom v. Crocker [1] . In that case the policy, by condition 2, entitled the insurer to "absolute conduct and control" of proceedings against the insured. Sir Wilfred Greene M.R. said in the course of argument [1] that the insurer had a duty to each person it insured; this was, in the context, a reference to a duty unrelated to its duty to indemnify. Then in his judgment [1] his Lordship said that insurers must throughout act "in what they bona fide consider to be the common interest of themselves and their assured" and may not allow their judgment to be influenced by the hope of some ulterior advantage. This was a case in which the insurer, for reasons of its own flowing from an agreement it had reached with another interested insurer, had, while fully indemnifying the assured, committed him to an admission of negligence without consulting him. It had done so knowing that the insured was justified in his denial that he had been negligent and it did so with the intention that judgment should be given against him, as it was. This was all part of its agreement with the other insurer. Scott L.J. examined the true measure of the insurer's right under the policy to control proceedings and said of condition 2 that the right of absolute control which it conferred upon an insurer was [2] :
subject to certain implied boundaries and limitations. It was not one which they would be entitled to exercise arbitrarily. They were bound to exercise a real discretion upon each question as it arose in the conduct of the defence, making each decision after due consideration of the circumstances of the particular case; not, of course, consulting the wishes of the assured as if he were an uninsured person, but taking their decisions with their minds on the facts of the particular allegations made against him, whilst not forgetting their own rights arising from the bargain expressed in the policy . MacKinnon L.J. referred to possible conflicts of interests as between insurer and insured when employing the one solicitor to defend a third party's claim and, in that context, described condition 2 as [3] : "subject to an implied term that the solicitor who is selected by the society" (the insurer) "shall act reasonably in the interests both of the assured and the society." Reference may also be made to Beacon Insurance Co. v. Langdale, per Slesser L.J. [4] . 1. [1939] 1 K.B. 194. 2. [1939] 1 K.B., at p. 198. 3. [1939] 1 K.B., at p. 203. 4. [1939] 1 K.B., at p. 223. 5. [1939] 1 K.B., at p. 226. 6. [1939] 4 All E.R. 204, at p. 206.
In Hansen v. Marco Engineering (Aust.) Pty. Ltd. [5] , Fullagar J. had occasion to refer to Groom v. Crocker [6] and to the different measure of the insured's interest as compared with that of the insurer where a policy is subject to a limit of indemnity. In Club Motor Insurance Agency Pty. Ltd. v. Swann [7] , Dean J. referred to the duty of an insurer to safeguard the interests of the insured as well as its own, also referring to Groom v. Crocker [1] .
The implied obligation imposed upon the insurer to have regard to more than its own interests when exercising its rights and powers under the contract of insurance is perhaps most clearly to be seen in the well established doctrines of the United States courts. Those courts have for many years had to deal with cases arising under automobile third party risks insurance policies conferring upon the insured indemnity only for a limited amount and have had before them questions of conflicts of interest, especially where failure to make a settlement with a claimant at a figure near the upper limit of the insurer's liability to indemnify has arisen. It has been held that an insurer must act in good faith towards the insured and must have regard to his interests both in the defence of actions against the insured and in their settlement. As the Court of Appeals of New York, then presided over by Cardozo C.J., said in Best Building Co. v. Employers' Liability Assurance Corporation [1] :
That the insurance company in the handling of the litigation or in failing to settle is liable for its fraud or bad faith is conceded and has been repeatedly stated in all the cases bearing on the subject. and see generally annotation in American Law Reports, 2nd ed. (1955), vol. 40, at p. 168, Williston on Contracts 3rd ed., vol. 7, par. 914, the review of cases contained in Cardinal v. State [2] , the recent case of Gordon v. Nationwide Mutual Insurance Co. [3] , in which the insurer's duty of good faith and fair dealing is closely analysed in the judgments. 1. (1928) 247 N.Y. 451, at p. 453; 160 N.E. 911, at p. 912. 2. (1952) 304 N.Y. 400, at pp. 410-411; 107 N.E. 2d 569, at p. 573. 3. (1972) 30 N.Y. (2d) 427; 334 N.Y.S. 2d. 601.
This duty of good faith and fair dealing must, I think, not only control the actions of an insurer who has taken over its insured's defence but will apply equally to the insurer's exercise of its power of granting or withholding consent to the making of admissions etc. even if it elects not to take over the defence.
The nature of the proceedings before Helsham J., concerned as they were only with a point of construction and not involving any investigation of the merits of the particular settlement which the insured was anxious should be effected with infant plaintiffs, makes it quite inappropriate on this appeal to seek to judge the insurer's refusal of consent to settlement. It would I think be improper for the insurer to refuse its consent to an otherwise proper and reasonable settlement if it did so not because there were reasonable prospects of a defence to claims succeeding but rather because, remote as those prospects might appear, they seemed to it preferable to a settlement involving it in payment up to the full amount of its limit of liability. To refuse consent in such a case, thereby exposing the insured to the probability of a judgment against it for an amount much in excess of the limit of liability, would be substantially to disregard the proper interests of the insured. On the other hand the insurer might quite properly refuse consent to a settlement which was attractive to the insured not because of an objective evaluation of the prospects of a successful defence but rather because it would avoid the adverse publicity of a trial or would enable the insured to share in, and require its insurer to share in, a liability which properly should be wholly borne by its parent company, the supplier of the allegedly harmful drug.
No doubt the limit of liability to indemnify and its relationship to the amount likely to be awarded against an insured will be an important factor in considering the propriety of any refusal of consent to a settlement. The insurer necessarily ceases to have any interest in that part of an award in excess of the limit of liability but the insured is vitally interested in that excess. In the form of policy in use in the United States, which appears commonly only to prohibit settlement by the insured at the cost of the insurer, it has been held in a number of cases that the insured may, without breach of condition, settle that portion of a claim in excess of the limit of liability: Traders & General Insurance Co. v. Rudco Oil & Gas Co. [1] and the annotation [1] as later supplemented.
The second declaration produces, I have said, a result little less favourable to the assured than would a declaration that the consent of the insurer to any settlement was unnecessary; in the latter event the insured would nevertheless be required to have regard to the proper interests of the insurer and could not claim indemnity under the policy in respect of amounts payable under a settlement which did not reflect, by its terms, a reasonable evaluation of the prospects of a successful defence to a third party's claim. Such a settlement might also be attacked upon the distinct ground that the amount payable under it by the insured was not within the cover of the policy, not being an amount for which the insured became legally liable within the terms of the indorsement to the policy but being rather, at least to a significant extent, moneys paid for reasons extraneous to the risks insured against. Thus, by way of illustration only, the facts might justify a conclusion that the moneys had been paid to avoid adverse publicity or to relieve the insured's parent company of part of its liability for manufacture of a dangerous product, neither of which would be within the risks insured against.
In its letter of 27th July 1973 the insurer has used language which may suggest, perhaps unintentionally, that it has decided to withhold consent to any form of settlement whatever of the claims of the infant plaintiffs; if this is in fact the insurer's attitude it would seem to be inconsistent with its duty to have due regard to the interests of the insured and thus properly to evaluate each proposal of settlement that may be made to it in the light of the prospects of a successful defence against the claims.
I would add that in considering the terms of the second declaration I have confined my attention to those claims against the insured for which the insurer has not denied liability to indemnify. One claim, relating to the child, Laura Anne Thompson, has been the subject of a specific denial of liability upon the ground of late notification of the claim but the summons in these proceedings does not seek any declaration in respect of that claim. Were it ultimately to be established that the insurer was not entitled to deny liability in respect of that claim and was in breach of contract in doing so I would not necessarily regard the terms of the present declaration as applicable to her case. It would, in any event, be inappropriate to deal, on this appeal, with this quite speculative aspect; what might be the consequences of a bona fide and reasonable settlement by the insured of that one claim without the insurer's consent is a question for another day.
I would dismiss this appeal subject to a variation of the form of the second declaration as indicated in the judgment of Menzies J.
Distillers Co Bio-Chemicals (Aust) Pty Ltd
Ajax Insurance Co Ltd