Liberty Mutual Insurance Company v Kellogg Brown and Root Pty Ltd

Background

1. Australia Pacific LNG Gladstone Pipeline Pty Ltd is the project principal of the Pipeline Project.
2. By a document called "Main Pipelines Contract", Australia Pacific engaged the third and fourth defendants, McConnell Dowell Constructors (Aust) Pty Ltd and Consolidated Contracting Company Australia Pty Ltd, to perform works in respect of the Pipeline Project.
3. McConnell Dowell and Consolidated Contracting formed an unincorporated joint venture for this purpose. They have entered a submitting appearance in these proceedings.
4. It was a term of the Main Pipelines Contract that the joint venturers "effect and maintain" professional indemnity insurance with a level of cover of $20 million per individual claim and a $50 million aggregate limit; and that such insurance be maintained for six years after the issue of the "Final Certificate".
5. Ultimately, Australia Pacific and the joint venturers agreed that, instead of requiring the joint venturers themselves to "effect and maintain" such insurance, Australia Pacific would cause the PSPI Policy to be issued.
6. The insureds named in the PSPI Policy are Australian Pacific, the joint venturers, KBR and two other parties not relevant here. As I have mentioned, the term of the PSPI Policy is 10 years from 1 October 2012. Evidently, the parties considered this period to be equivalent to a period of six years from the date of issue of the Final Certificate under the Main Pipelines Contract.
7. The Main Pipelines Contract also required that the joint venturers ensure that every "Consultant" (which included KBR) itself "effect and maintain" professional indemnity insurance for six years after the issue of a "Final Certificate" under the Main Pipelines Contract.
8. Consistently with these provisions, in the subcontract of 1 September 2011 whereby the joint venturers retained KBR to provide engineering and other support services for the Pipeline Project, KBR agreed to "effect and maintain" a professional indemnity policy of not less than $20 million for any one occurrence and in the aggregate any one year; and that such insurance be maintained for not less than six years after the date of the completion of the "services" that KBR was to provide under the subcontract.
9. Pursuant to that obligation, and for the 12 month period commencing 1 April 2012, KBR effected a professional indemnity policy with Lloyd's Syndicate AFB 2623/623 Beazley. That policy was numbered GLOPR1201059/2. I will refer to it as the "2012 Lloyd's Policy".
10. For the following year, commencing 1 April 2013, KBR effected a further professional indemnity policy with the same Lloyd's Syndicate. This policy was numbered GLOPR1301059. I will refer to it as the "2013 Lloyd's Policy".
11. Each of the 2012 Lloyd's Policy and the 2013 Lloyd's Policy has a limit of US$15 million and a deductible of US$5 million for each claim. Each has an "Other Insurance" clause, to which I will return.
12. On 9 April 2014, Australia Pacific delivered to the joint venturers a Notice of Dispute alleging that, for various reasons, the pipeline was not fit for purpose.
13. On 23 April 2014, the joint venturers made a corresponding claim on KBR.
14. Arising from that claim, on 30 April 2014, KBR gave notice to Liberty of a claim under the PSPI Policy.
15. Liberty has not yet stated whether it accepts liability to indemnify KBR in respect of that claim, although it has made clear that it contends, by reason of cl 5.3 of the PSPI Policy, such liability is only in excess of the limit of indemnity KBR has under the policies it effected pursuant to its obligations under the Pipeline Project.
16. At some time during the life of the 2013 Lloyd's Policy, KBR notified Lloyd's of a claim under that policy arising from the claims made by Australia Pacific and the joint venturers.
17. It is common ground that such entitlement as KBR may have for indemnity from Lloyd's arises under the 2013 Lloyd's Policy, and not under the 2012 Lloyd's Policy.
18. KBR has not sought actively to pursue its claim for indemnity under the 2013 Lloyd's Policy. I understand that this is because it contends that the PSPI Policy is not an excess policy, and that it is entitled to indemnity under it in relation to the claims made against it in respect of the Pipeline Project. It may also be because the PSPI Policy has a deductible of $1 million, whereas the 2013 Lloyd's Policy has a deductible of US$5 million.

The PSPI Policy

1. As I have mentioned, cl 5.3 of the Policy provides: "The Policy is in excess of any Additional Insurance". [Emphasis in original]
2. Clause 6.8 provides: "6.8 Policy Interpretation & Construction The headings in the Policy are for descriptive purposes only and do not form part of the Policy for the purpose of its construction or operation. Words used in the singular shall include the plural and vice versa. For the meaning of any words in bold refer to the Schedule and Section 7 - Definitions." [Emphasis in original]
3. As the expression "Additional Insurance" appears in bold in cl 5.3, cl 6.8 directs attention to the Schedule for the meaning of the expression.
4. In the Schedule, adjacent to the words "Additional Insurance" appears the following: "Insurer Policy No. Policy Type Allianz Global Corporate & Specialty - Pacific 99-0002285-CGR Contract Works Insurance Zurich Australia Insurance Limited 372211219 LIA Third Party Liability Allianz Australia Insurance Limited 99-0002218-CMC Project Marine Cargo ACE Insurance Limited 02CL017088 Contractors Pollution Liability Lloyd's Syndicate AFB 2623/623 Beazley GLOPR1201059/2 Annual Professional Indemnity Lloyd's of London QM 1103769 Annual Professional Indemnity". [Emphasis added]

1. KBR contends that the PSPI Policy should be construed so as to mean that the six policies listed adjacent to the words "Additional Insurance" comprise an exhaustive list of the policies to which, by reason of cl 5.3, the PSPI Policy is in excess.
2. In particular, KBR contends that the PSPI Policy should be construed to mean that, so far as it is concerned, the only "Additional Insurance" to which the PSPI Policy sits in excess is the 2012 Lloyd's Policy.
3. The emphasised details under the headings "Insurer" and "Policy No" are those of the 2012 Lloyd's Policy. That policy does not respond to KBR's claim. The 2013 Lloyd's Policy, which may respond to KBR's claim, has a (slightly) different policy number.
4. KBR's construction would lead to extraordinary results.
5. For example, and leaving aside for the moment the reference to Lloyd's, the insurer of the first named policy (Contract Works Insurance) is stated to be Allianz Global. The evidence does not reveal who is named as insured under that policy, although there is no suggestion that KBR is one such insured. Presumably, one or more of the other insureds under the PSPI Policy is or are insured under the Contract Works policy.
6. As long as Allianz Global remains the insurer under the Contract Works policy, by reason of cl 5.3 of the PSPI Policy, Liberty's liability to indemnify the insureds under the Contract Works policy is in excess of those insureds' entitlements under the Contract Works policy.
7. But if for any reason Allianz Global ceased to be the insurer under the Contract Works policy, and even if that reason had no connection with the Pipeline Project, on KBR's construction of the PSPI Policy, Liberty would thereby cease to be in excess of the insureds' entitlements under the Contract Works policy, and would become primarily liable, concurrently with that of the new Contract Works insurer.
8. Further, on KBR's construction, the effect of the PSPI Policy is that Liberty's liability is in excess of the professional indemnity insurance that KBR effected during the first year of the PSPI Policy (the 2012 Lloyd's Policy), but not that effected in the following nine years of the PSPI Policy (in particular, the 2013 Lloyd's Policy but also all indemnity policies effected by KBR in later years pursuant to its obligations under the Pipeline Project).
9. It seems highly unlikely that the parties intended these results.
10. In the Schedule, the 2012 Lloyd's Policy is described by reference to the relevant Lloyd's Syndicate and its policy number. There is no ambiguity about those matters. They refer only to the 2012 Lloyd's Policy.
11. But that Policy is described as an "annual" professional indemnity policy.
12. The 2012 Lloyd's Policy had a term of one year from 1 April 2012. It contained no provision for renewal. Thus it was "annual" in the sense that it was "calculated over or covering a year" (Australian Oxford Dictionary (online)).
13. But there was no need for the parties to describe the 2012 Lloyd's Policy as being "annual" in that sense. If the parties intended that the Schedule have the meaning for which KBR contends (that is, to refer only to the 2012 Lloyd's Policy) the word "annual" would be otiose: it would, on that hypothesis, add nothing.
14. "Annual" can also mean "occurring once every year" (Australian Oxford Dictionary).
15. The 2012 Lloyd's Policy certainly did not "occur every year". It occurred only in one year.
16. The question arises as to what the parties meant by adding the word "annual" to what would otherwise have been an accurate description of the 2012 Lloyd's Policy.
17. To the extent that it is necessary to identify ambiguity in the text of the PSPI Policy to permit consideration of mutually known surrounding circumstances, I see this as such an ambiguity (cf Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633 (at [69]-[86]); Newey v Westpac Banking Corporation [2014] NSWCA 319 (at [89]); and Stratton Finance Pty Ltd v Webb [2014] FCAFC 110 (at [40])).

The mutually known surrounding circumstances

1. The PSPI Policy was a project specific indemnity policy. It was written to provide indemnity to the insureds for liability that they might incur during the Pipeline Project.
2. Thus, the insuring clause (cl 1.1) reads: "Liberty will indemnify the Insured against civil liability the Insured incurs in respect of a Claim arising from the performance of Professional Services in respect of the [Pipeline] Project." [Emphasis in original]
3. When it proposed to Liberty for the PSPI Policy, Australia Pacific provided Liberty with a copy of the Main Pipelines Contract.
4. In answer to a direct question in the proposal form, Australia Pacific disclosed that there was a requirement under that contract that professional indemnity insurance continue to be in force "beyond completion of the contractual maintenance period" and that such insurance was to be maintained for "6 years from the service of the Final Certificate" under that contract.
5. It was thus a fact mutually known to Liberty and the proposed insureds, that all of the insureds, including KBR, were by reason of their contractual obligations as participants in the Pipeline Project, obliged to effect and maintain professional indemnity insurance for that period; that is, for a period of approximately the same duration as the PSPI Policy itself.
6. Liberty called for copies of KBR's professional indemnity insurance and was provided with a Certificate of Currency for the 2012 Lloyd's Policy.
7. On 1 October 2012, Australia Pacific's insurance broker, Willis, prepared a Placing Slip.
8. That Placing Slip stated under the heading "Schedule of Additional Insurances": "The following insurances will be maintained during the Construction Phase of the Australia Pacific LNG - Main Pipelines Contract on behalf of the principal [Australia Pacific] and others." [Emphasis added]
9. One of the insurances listed, under the heading "Annual Professional Indemnity", was the 2012 Lloyd's Policy.
10. On 1 October 2012, Mr Christian Manning, on behalf of Liberty, signed the Placing Slip and returned it to Willis with a note "attached as discussed for our 30% participation".
11. KBR accepts that the subscription of a slip constitutes or evidences a contract of insurance between the particular insurer and the insured. Once the PSPI Policy was issued on 11 October 2012 it superseded that contract (Eagle Star Insurance Co Ltd v National Westminster Finance Australia Ltd (1985) 58 ALR 165 at 170; W I B Enright and R M Merkin, Sutton on Insurance Law, (4th ed 2015, Thomson Reuters) at 765 [9.560]).
12. Thus, as KBR submitted, the Placing Slip does not form part of the concluded contracts of insurance between Liberty and the various insureds, including KBR.
13. However, as Liberty pointed out, an antecedent agreement may be relied upon in interpreting a later instrument made pursuant to that agreement (for example, see Shanemist Pty Ltd v Denmac Nominees Pty Ltd [2003] QSC 373 at [17] and, generally, Lewison and Hughes, The Interpretation of Contracts in Australia, (2012, Thomson Reuters) at [3.05]).
14. The wording of the Placing Slip showed that the broker (the agent of the insureds) and Liberty appeared to have understood, mistakenly, that the 2012 Lloyd's Policy was one that KBR proposed to, and was able to, maintain throughout the construction phase of the Pipeline Project (whereas, in truth, it subsisted only for 12 months from 1 April 2012).
15. But what it also shows is that both the insured (through its agent, the broker) and the insurer contemplated that KBR would maintain a professional indemnity policy throughout the life of the Pipeline Project.

The proper construction of cl 5.3 of the PSPI Policy

1. The principles concerning the construction of commercial contracts were summarised by the High Court in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; HCA 7 (at [35]): "…this Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd [[2009] EWCA Civ 636 at [28]], unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties… intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'." [Footnotes omitted]
2. Applying those principles, and having regard to the "surrounding circumstances known" to the parties to the PSPI Policy, the conclusion to which I have come is that a reasonable business person in the position of the parties would have understood from: 1. the mutually known fact that the proposed insureds were contractually obliged to effect and maintain professional indemnity insurance during the Pipeline Project and for six years from its completion; 2. the mutually known fact that Liberty had, in its proposal form, made an enquiry directed precisely to that question and had called for, and been provided with, details of that insurance; 3. the terms of cl 5.3; and 4. the use of the word "Annual" in the Schedule (see [44] to [49] above); that the insurance under the PSPI Policy was to be in excess of the insurances effected and maintained in accordance with those contractual obligations (both during, and for six years after, the completion of the Pipeline Project; and thus in effect for the term of the PSPI Policy).
3. In those circumstances, a reasonable business person in the position of the parties would have understood that the list of insurance policies in the Schedule to the PSPI Policy was no more than a statement of the policies which each insured had, pursuant to their contractual obligations under the Pipeline Project, effected as at the inception date of the PSPI Policy (1 October 2012); and thus was a statement of the policies in excess of which the PSPI Policy would, on that date, take effect.
4. In my opinion, a reasonable business person in the position of the parties would not have understood the Schedule to constitute an exhaustive statement of all (and thus the only) policies in excess of which the PSPI Policy was to provide cover throughout its term.
5. That is because to attribute that understanding to the parties would attribute to them the intention that the PSPI Policy have the commercially inconvenient operation set out at [38] to [42] above.
6. In my opinion, reasonable business people in the position of the parties would not have intended that result.
7. For those reasons, my conclusion is that, on the proper construction of the PSPI Policy, "Additional Insurance" means such insurance of the kind particularised in the Schedule as the insureds were obliged to effect during the Pipeline Project.
8. I find that construction to be congruent with the terms of the Placing Slip (see [58] above).
9. I am prepared to make a declaration to that effect.
10. Although in oral submissions this was, in effect, the declaration Liberty ultimately sought, the declaration sought by Liberty in its summons was more ambitious.
11. That declaration was: "A declaration that, on the proper construction of the PSPI Policy, if the first defendant is insured against a loss under both: a. the PSPI Policy; and b. a KBR Annual PI Policy, then the plaintiffs are only liable to indemnify the first defendant under the PSPI Policy to the extent that that loss exceeds the limit of indemnity under that KBR Annual PI Policy. Where: c. The PSPI Policy means Policy No. PL-ME-SPC-12-503234 issued by the plaintiffs on or around 11 October 2012. d. KBR Annual PI Policy means any one of: i. Lloyd's Policy no. GLOPR1201059/2 [i.e. the 2012 Lloyd's Policy]; ii. Lloyd's Policy no. GLOPR1301059 [i.e. the 2013 Lloyd's Policy]; iii. each other annual professional indemnity policy insuring the first defendant in respect of claims made during a period falling wholly or partly between 1 October 2012 and 1 October 2022."
12. I am not prepared to make that declaration for a number of reasons.
13. The first is that it is not necessary to do so, bearing the mind the conclusion to which I have come as to the proper construction of the PSPI Policy.
14. The second is that, assuming I had jurisdiction, it is not appropriate that I do so.
15. That is because the proposed declaration posits a hypothetical circumstance in a number of ways.
16. First, the declaration is expressed to be conditional upon whether KBR is insured against loss under the PSPI Policy. That matter has not been determined and is not the subject of any relief sought in these proceedings. As I have set out, Liberty has not yet made a determination as to whether it will afford cover to KBR under the PSPI Policy.
17. Second, the declaration is also expressed to be conditional upon Liberty being entitled to indemnity under any one of the 2012 Lloyd's Policy, the 2013 Lloyd's Policy or any other annual professional indemnity policy effected by KBR during the life of the PSPI Policy.
18. It is common ground that KBR has made no claim on Lloyd's such as would enliven the 2012 Lloyd's Policy.
19. I have been informed that Lloyd's has confirmed indemnity to KBR under the 2013 Lloyd's Policy, subject to a series of reservations. One of those reservations is connected with the operation of an "Other Insurance" clause in that policy. I have not been informed of any dispute between KBR and Lloyd's about the "Other Insurance" clause or any other reservation Lloyd's has made concerning its liability to indemnify KBR. Neither seeks any relief about those matters, or any other matter arising from their relationship.
20. Liberty advanced submissions as to the proper construction of the "Other Insurance" clause in the 2013 Lloyd's Policy. KBR and Lloyd's, under protest that the question is at present hypothetical, responded to those submissions.
21. I do not think it appropriate for me to express any opinion about that matter in circumstances where I have construed the PSPI Policy as I have set out above, where there is no dispute between KBR and Lloyd's about the question and where Liberty is a stranger to the 2013 Lloyd's Policy.

Conclusion

1. I invite the parties to bring in short minutes to give effect to these reasons.
2. I will hear argument as to whether the declaration I propose to make in respect of the PSPI Policy should be binding on Lloyd's (which, obviously, is not a party to that policy but which did address submissions to me on its construction) and as to costs.

Amendments 10 November 2017 - [67] amended (addition of (4) in [67]) 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: 10 November 2017