ZURICH AUSTRALIAN INSURANCE LIMITED -v- METALS & MINERALS INSURANCE PTE LTD [2007] WASC 62 (16 March 2007)

3 Speno entered into a contract with Hamersley to carry out work for Hamersley which was undertaken by, among others, Shaun Nolan and Damien Oatway, both of whom were employees of Speno. The contract entered into by Hamersley and Speno ("the Hamersley-Speno Contract") required, amongst other things, the following:

(a) That Speno arrange its public liability insurance to include Hamersley's interest as a principal; and

(b) That Speno be solely liable for and indemnify and hold harmless Hamersley against common law liability for personal injury to Speno's employees engaged in the contract works and arising from the performance of the works.

4 Speno and Zurich entered into a contract of insurance ("the Speno Policy") to provide Hamersley with the public liability insurance required under the Hamersley-Speno Contract. Although the position of one of the parties is that this particular contract of insurance is, in fact, a contract between Zurich, as insurer, and Hamersley, as insured, for simplicity of reference I have described it as the Speno Policy on the basis that Speno arranged the policy with Zurich. The description does not reflect a view on the nature of any party's involvement in the policy. The maximum liability of Zurich under the Speno Policy was $2 million.

5 Hamersley had entered into a contract of insurance with MMI ("the Hamersley Policy") which provided public liability insurance cover for Hamersley. Under the policy MMI agreed to indemnify Hamersley against, amongst other things, any liability to pay damages for personal injury occurring in connection with Hamersley's business. The maximum liability of MMI under the Hamersley Policy was $200,000.

6 Each of these contracts and policies were in force on 24 May 1995 when Nolan and Oatway were injured while employed by Speno and performing work carried out by Speno under the Hamersley-Speno Contract. The accident which caused the injuries to Nolan and Oatway were caused as a result of the negligence of Hamersley.

7 Nolan and Oatway instituted separate proceedings in the District Court against Hamersley alleging negligence and seeking damages for their injuries (respectively "the Nolan action" and "the Oatway action"). Hamersley admitted negligence and sought indemnity from Speno under the Hamersley-Speno Contract for its liability in respect of Nolan and Oatway's damages claims. Speno claimed against Zurich pursuant to the Speno Policy. Speno and Zurich were joined as the third and fourth parties respectively to the Nolan proceedings. At a later point, Hamersley also claimed directly against Zurich under the Speno Policy.

8 After trial and an appeal in the Nolan action, it was ordered that:

(a) Hamersley pay Nolan the sum of $1,110,186.35; and

(b) Speno and Zurich indemnify Hamersley in respect of that sum.

9 Of the issues raised on the appeal in the Nolan action, a number related to obligations of indemnity and contribution between Zurich and Speno and between Speno and Hamersley arising from the terms of the Speno Policy and the Hamersley-Speno Contract. Speno appealed against the order that it must indemnify Hamersley on the basis that the clause of the Hamersley-Speno Contract requiring Speno to ensure that all necessary insurances are taken out include Hamersley as co-insured, prevented the indemnity clause of the contract from applying where Hamersley is entitled to the benefit of the insurance arranged by Speno. That argument found no favour with the Full Court and the order that Speno indemnify Hamersley remained in effect: Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291 per Ipp J at 312, per Malcolm CJ at 300 and Wheeler J at 325.

10 Another issue addressed on appeal was Zurich's liability to indemnify Speno. It was held that Zurich was not so liable because the policies issued to Speno did not indemnify it against that liability. Speno's argument that Zurich's denial of liability to indemnify Speno was a breach of Zurich's duty of good faith was rejected by the Full Court: per Malcolm CJ (at 306), per Ipp J (at 311, 313), per Wheeler J (at 328 - 329).

11 Zurich maintained that it was entitled to a contribution from Speno on the basis that Speno's liability to indemnify Hamersley under the Hamersley-Speno Contract was a co-ordinate liability to Zurich's obligation to indemnify Hamersley under the Speno Policy. The decision of the Full Court was that Zurich was not entitled to a contribution from Speno because the liability of Speno was not co-ordinate with that of Zurich: per Wheeler J (at 327), per Malcolm CJ (at 300) and per Ipp J (at 312). One aspect of the reasoning behind that conclusion was that Zurich's liability arose from a contract of insurance and Speno's did not: per Ipp J (at 312). It was held that the use of the word "indemnity" in the Hamersley-Speno Contract did not convert an ordinary contractual provision into an insurance policy or place the contractual provision on the same footing as an insurance policy: per Wheeler J (at 327).

12 As a result of judgments and agreed settlements in the Nolan and Oatway proceedings and as a result of the indemnity under the Speno Policy, Zurich paid $1,110,186.30 in damages to Nolan, $25,000.00 in damages to Oatway in settlement of his claim, interest and the legal costs of trial and appeal to a total of $1,259,969.07 ("the indemnified amounts").

13 Zurich then commenced proceedings in this court, action CIV 1679 of 2002 ("the Zurich action"), against MMI claiming a contribution from MMI on a rateable proportion for the indemnified amounts paid by Zurich, calculated either on the maximum potential liability method or the independent actual liability method. The basis of Zurich's claim is that, as MMI is liable to indemnify Hamersley for its liability to Nolan and Oatway under the Hamersley Policy, which is the same liability that Zurich has already indemnified Hamersley for, Hamersley is doubly insured for its liability to Nolan and Oatway, and Zurich is therefore entitled to a contribution.

14 In its defence, MMI relies on a clause in the Hamersley Policy headed "Special Clause" which provides that, in the event of Hamersley being indemnified under insurance coverage effected on Hamersley's behalf by a third party such as a contractor, the insurance afforded by the Hamersley Policy is for excess insurance over the applicable limit of indemnity of the underlying insurance policy. Consequently, MMI denies that Hamersley is doubly insured and that Zurich is entitled to a contribution from MMI. Further, MMI pleads that the relief Zurich seeks is not available in equity because, as MMI can subrogate Hamersley's rights against Speno, Zurich's claim circumvents the effect of Zurich's agreement to waive its rights of subrogation against Speno.

15 MMI, exercising a right of subrogation, caused to be issued out of the District Court in action number 1583 of 1996 ("the Nolan action") a Writ of fieri facias ("fi.fa") to be executed against Speno. Shortly after, the defendant's third party proceedings in the Nolan action were referred to this Court. Speno's response to MMI was to issue a Chamber Summons to strike out the Writ of fi.fa or stay its execution until the hearing of the Zurich action.

16 MMI then commenced proceedings in this court, action CIV 2243 of 2003 ("the MMI Action"), seeking a declaration that it is entitled to recover from Speno in the event that Zurich becomes entitled to a payment from MMI by way of contribution in the Zurich action. Speno's response to MMI's claim, inter alia, is to assert that Hamersley has no remaining liability to Nolan in respect of which it can seek to be indemnified and consequently has no remaining right which can be the subject of execution against Speno and no remaining right to claim an indemnity against Speno under the Hamersley judgment. As a result, Speno maintains that there is no right against Speno to which MMI can be subrogated and it would therefore be an abuse of process for MMI to seek execution against Speno in the name of Hamersley.

17 I will deal with each of the individual actions in turn, although some issues requiring determination are common to more than one action. With respect to certain issues, the need to determine them is dependent on findings made in relation to other issues. However, because of the potential for appeals, I propose to determine every issue raised at the hearing.

18 In this action, Zurich seeks a declaration that Hamersley was doubly insured by Zurich and MMI, under the Speno and Hamersley policies respectively, in relation to the liability of Hamersley to Nolan and Oatway. Zurich further seeks payment from MMI by way of contribution calculated on the maximum potential liability method or, alternatively, on the independent actual liability method.

19 MMI's defence to the Zurich claim is that MMI acknowledged under a clause of the Hamersley Policy with the primary heading "Special Clause" and a secondary heading of "Underlying Insurance" ("the underlying insurance clause") that it was customary for Hamersley to effect, or for other parties (including contractors) to effect on Hamersley's behalf, insurance coverage specific to a particular project, agreement or risk that was not specifically effected to be insurance excess to the Hamersley Policy. This underlying insurance clause provides that, in the event of Hamersley being indemnified under insurance coverage effected on its behalf with respect to a particular project, in respect of a claim for which indemnity is available under the Hamersley Policy, the insurance afforded by the Hamersley Policy is excess insurance over the applicable limit of indemnity of the underlying insurance policy. If that proposition is accepted, then there is no double insurance and no right in Zurich to a contribution from MMI. In reply, Zurich pleads that the underlying insurance clause relied on by MMI is rendered void by s 45 of the Insurance Contracts Act 1984 (Cth) ("the IC Act") and cannot be relied upon.

20 MMI further pleads that the relief sought by Zurich is not available in equity because of the following matters:

1. Speno's liability under the judgment in the Nolan action is further to the indemnity clause in the Hamersley-Speno Contract;
2. The Speno Policy includes a clause under which Zurich waives any rights of subrogation it has against Speno and cannot subrogate Hamersley's rights against Speno under the judgment;
3. MMI is entitled to subrogate to Hamersley's rights against Speno under the judgment and enforce against Speno an indemnity equalling any contribution MMI is ordered to make to Zurich;
4. Zurich's claim against MMI therefore purports to circumvent the effect of Zurich's agreement to waive its rights of subrogation against Speno.

21 MMI maintains that, as a claim for contribution is a claim for equitable relief, as a result of these factors it would be inequitable for Zurich to make such a claim. This defence to Zurich's claim was referred to at the hearing as the "equitable bar to contribution" defence. In reply to this plea, Zurich denies that the Speno Policy contained a clause by which Zurich waived its rights of subrogation against Speno and further denies that there was any agreement to waive its rights of subrogation against Speno.

22 Finally, in its defence, MMI denies that any contribution to which Zurich may be entitled should be calculated on the maximum potential liability method of apportionment.

23 It is not disputed that when Nolan and Oatway were injured by Hamersley's negligence on 24 May 1995, Hamersley was insured against that risk by Zurich: see Speno Rail Maintenance Australia Pty Ltd (supra) per Malcolm CJ (at 306), per Ipp J (at 309), per Wheeler J (at 324). It is also the case that, under the Hamersley Policy, MMI agreed to indemnify Hamersley against, among other things, such sums as Hamersley became legally liable to pay arising out of personal injury in connection with Hamersley's business. The policy related only to personal injury occurring between certain dates but the injury to Nolan occurred within those dates so that particular qualification presented no bar. Therefore, Zurich contends that the respective insurance policies of Zurich and MMI insure the same risk and hence their liabilities are co-ordinate, which is the basis in equity for contribution. MMI submits, as noted above, that, by virtue of the underlying insurance clause in the Hamersley Policy, the Hamersley Policy operates as an excess policy over the limit of indemnity under the Speno Policy and hence the liabilities are not co-ordinate.

24 The decision of the High Court in Albion Insurance Co Ltd v Government Insurance Office of NSW [1969] HCA 55; (1969) 121 CLR 342 is referred to by Zurich as authority for the proposition that where there are co-ordinate liabilities there is a right to contribution. The oft cited statement of principle of the majority in Albion Insurance Co Ltd (supra) is in these terms (per Barwick CJ, McTiernan and Menzies JJ (at 345)):

"There is double insurance when an assured is insured against the same risk with two independent insurers. To insure doubly is lawful but the assured cannot recover more than the loss suffered and for which there is indemnity under each of the policies. The insured may claim indemnity from either insurer. However, as both insurers are liable, the doctrine of contribution between insurers has been evolved ... The doctrine, however, only applies when each insurer insures against the same risk, although it is not necessary that the insurances should be identical."

25 In the same case, Kitto J noted that the same point in regard to accident insurance is made by saying that each policy must insure the same person against the very loss that in the event he has sustained, or the very liability that in the event he has incurred: (at 350).

26 In the present case, it is not the general principle which is in dispute. As the majority observed in Albion Insurance Co Ltd (supra) (at 347):

"It seems to us that it is not the principle but the application of the principle which has given rise to the problem that now falls for decision."

27 MMI correctly observes that, absent an obligation in both MMI and Zurich to indemnify Hamersley in respect of its liability to Nolan and Oatway, there can be no entitlement to contribution: see Speno Rail Maintenance Australia Pty Ltd (supra) (at 325) per Wheeler J. MMI maintains that it has no obligation to indemnify Hamersley against its liability to Nolan and Oatway because of the operation of the underlying insurance clause in the Hamersley Policy which is in these terms:

"Underlying Insurance

Underwriters acknowledge that it is customary for the Insured to effect, or for other parties (including joint venture partners, contractors and the like) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk.

In the event of the Insured being indemnified under such other Insurance effected by or on behalf of the Insured (not being an Insurance specifically effected as Insurance excess of this Policy) in respect of a Claim for which Indemnity is available under this Policy, such other Insurance hereinafter referred to as Underlying Insurance, the Insurance afforded by this Policy shall be Excess Insurance over the applicable Limit of Indemnity of the Underlying Insurance, but subject always to the terms and conditions of this Policy.

In the event of cancellation of the Underlying Insurance or reduction or exhaustion of the Limits of Indemnity thereunder, this Policy shall:

(i) in the event of reduction pay the excess of the reduced underlying limit

(ii) in the event of cancellation or exhaustion continue in force as underlying insurance

but subject always to the terms and Conditions of this Policy."

28 MMI's position is that the combined effect of Hamersley's entitlement to an indemnity under the Speno Policy and the underlying insurance clause is that the Hamersley Policy operates as an excess policy over the limit of indemnity under the Speno Policy. Consequently, the respective liabilities of Zurich and MMI are not co-ordinate but sequential as Hamersley would not have been entitled to indemnity under the Hamersley Policy until the limit of Zurich's liability of $2 million had been reached. As the indemnified amounts are less than $2 million, Zurich is not entitled to contribution from MMI.

29 The decision of the Court of Appeal of New South Wales in Australian Eagle Insurance Co Ltd v Mutual Acceptance (Insurance) Pty Ltd (1983) 3 NSWLR 59 is referred to in support of MMI's interpretation of the effect of the underlying insurance clause. In that case, the leading judgment was written by Priestley JA, with whom Hutley AP agreed, as did Mahoney JA who provided additional reasons. The facts were that the owner of a house damaged by fire was insured under a householder's policy with the respondent ("Mutual"), pursuant to which Mutual paid the owner $47,700 in respect of the fire damage. The owner also had a home insurance policy with the plaintiff ("Eagle") in respect of the same building. Mutual sought a contribution from Eagle of one half of the amount paid to the owner on the basis that Eagle was a co-insurer with respect to the same risk. The central question before the Court was whether Eagle could properly be so described in circumstances where the Eagle policy, which indemnified the owner to a limit of $25,000, included under the heading "General Exclusions" the following clause:

1. any loss of damage or liability which is insured by or but for the existence of this policy would be insured by any other policy or policies except in respect of any excess beyond the amount which would have been payable under such other policy or policies had this insurance not been effected."

30 Priestley JA considered and applied the decision of the New Zealand Court of Appeal in State Fire Insurance General Manager v Liverpool and London and Globe Insurance Co Ltd [1952] NZLR 5 (at 29) where Hutchison and Cooke JJ, who wrote a joint judgment, construed the "excess" clause according to its terms, rather than in accordance with what was described as difficult to reconcile principles set out in a number of English cases, most of which dealt with the situation where both policies contained an "excess" clause. Hutchison and Cooke JJ read the clause as showing that the insurer was not indemnifying the person against the same risk as the primary insurer. They held that the policy with the "excess" clause placed no obligation on the insurer to indemnify the insured until the insured's own insurer had first been called upon for the indemnity provided by its policy and then claimed contribution. At that point, the insured's own insurer must take the "excess" clause as it finds it.

31 Priestley JA concluded that the Eagle policy, according to its terms, provided indemnity against damage due to fire to a limit of $25,000 until the owner obtained the other insurance policy at which point the "excess" clause operated to exclude any indemnity to the owner except to the extent of any excess as defined by that clause: (at 65). His Honour further considered that similar considerations applied to the Eagle policy as those acted upon by Hutchison and Cooke JJ in State Fire Insurance General Manager (supra) which provided a guide to, and a basis for, reaching a conclusion opposite to that reached in the English cases: (at 71). The decision of the Court was that Mutual was not entitled to contribution as Eagle was not indemnifying the owner against the same risk: (at 71 - 72).

32 Atkin LJ in Re Calf & Sun Insurance Office [1920] 2 KB 366 at 382 protested that one case of construction of an insurance policy should not be treated as an authority in another unless the language and the circumstances are substantially identical. However, in my view, the terms of the relevant portion of the underlying insurance clause in the Hamersley Policy are sufficiently similarly worded to the "excess" clause in State Fire Insurance General Manager (supra) to entitle this Court to reach the same conclusion as to its effect. In any event, I believe that the natural meaning of the wording of the underlying insurance clause in the Hamersley Policy leads to the same result.

33 In fact, it is common ground between the parties that in order for an entitlement to contribution to arise, their liabilities must be co-ordinate. Neither party cavils with the fundamental propositions in Albion Insurance Co Ltd (supra) (at 345 - 346; 352) and in the decision of the Full Court in Speno Rail Maintenance Australia Pty Ltd (supra) and also in numerous other decisions on this issue.

34 It is also common ground that if the Hamersley Policy is made into an excess policy by the underlying insurance clause, then the two liabilities will not be co-ordinate, they will be sequential with Zurich being liable for the first $2 million.

35 The dispute arises from the fact that the decision in Australian Eagle Insurance Co Ltd (supra) was made prior to the passing of the IC Act, which includes s 45, which is in these terms:

"45 'Other insurance' provisions

(1) Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.

(2) Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first-mentioned contract."

36 Zurich denies that the Hamersley Policy is a true excess of loss policy. It is said that the clause is too general: it speaks in futuro; it lacks definition; and it fails to avoid the mischief s 45 is designed to prevent. According to Zurich, for the Hamersley Policy to be a true policy of that type, MMI must bring the policy within s 45(2) of the IC Act which Zurich asserts MMI is unable to do. Therefore, Zurich's position, as pleaded, is that the underlying insurance clause in the Hamersley Policy is void by virtue of the operation of s 45(1) of the IC Act and, as such, cannot be relied upon by MMI.

37 The merit in Zurich's contentions is dependent on categorising the Hamersley Policy as a true excess of liability policy which in turn depends on whether the underlying insurance clause offends s 45(1) and, if it does, whether it is "saved" by s 45(2).

38 Counsel for Zurich submits that the meaning and purpose of s 45 is plain. I am not convinced that is so. For example, the expression "the insured has entered into some other contract of insurance" immediately raises consideration of the ways in which an insured can come to be covered by another insurance contract and whether it can be said that in all such cases that the insured "entered into" the other contract of insurance. Fortunately, in the event that the Court did not, without more, share Zurich's view that the meaning of s 45 is clear on its terms, counsel for Zurich invited the Court to consider the history behind this particular enactment, including the position in the insurance industry prior to the enactment which is said to have prompted the inclusion of s 45 in the IC Act. In that regard, the Court was invited to consider the available extrinsic material which is said to address these issues and assist in the ascertainment of the meaning of the section. Section 15AB(2)(e) of the Acts Interpretation Act 1901 (Cth), which is the authority to refer to extrinsic material, provides that extrinsic material includes explanatory memoranda relating to the Bill containing the provision, or any other relevant document, that was provided to the members of either House of Parliament by the Minister. The latter material would include the content of the Australian Law Reform Commission ("ALRC") Report on Insurance Contracts (No 20, 1982) ("the ALRC Report"), which is expressly referred to in the Explanatory Memorandum relevant to the IC Act. In the circumstances of this matter, I note that s 15AB requires regard to be had to the desirability of persons being able to rely on the ordinary meaning conveyed by the text of a provision taking into account its context in the Act and the purpose or object underlying the Act: s 15AB(3)(a). That part of the section is consistent with the proposition put on behalf of Zurich that the meaning of s 45 is plain. It also addresses the competing submissions about whether or not it is appropriate to rely, in interpreting s 45, on decisions that define terms found in other provisions which are also found in s 45(1) of the IC Act.

39 Zurich contends that the underlying exclusion clause on which MMI relies to defeat Zurich's claim for contribution is of the same type as those which caused considerable problems prior to the enactment of s 45. It is said that "other insurance clauses" were a device commonly used by insurers to attempt to avoid liability under the policy whilst retaining the premium: see ALRC Report at [279]. Examples of other such devices were the "no other insurance" clause which excluded cover in the event that the insured obtained other insurance covering the same loss, and "rateable contribution clauses" restricting cover to a rateable proportion in the event of insurance under another policy. Another type of clause mentioned by Zurich was the "notice clause" which excluded cover if the insurer was not given notice of another policy covering the same loss. One of the potentially adverse consequences of clauses of this type is that, in the event of insolvency of the other insurer, the insured is only partially insured or not insured at all.

40 Chapter 11 of the ALRC Report which is headed "Other Insurance and Contribution", addresses the various problems which may arise where overlapping or co-extensive insurance policies are taken out. The ALRC states that entering into overlapping or co-extensive policies with different insurers is a common occurrence which may occur accidentally or intentionally. It is said that, where overlapping or co-extensive insurance is taken out intentionally, the reason may be to protect against the risk of insolvency of the first insurer or, in some cases, to make a profit out of insurance by ensuring that there is double insurance covering the same loss: at [279]. In circumstances where the doctrine of contribution was developed to prohibit an insured from obtaining or retaining a double benefit, it seems to me that overcoming the potential for double insurance by way of an "excess" clause is a solution, the adverse effects of which almost wholly outweigh the adverse effects of an insured insuring himself against the same risk twice. I appreciate that in some situations the fact of double insurance may be unknown but I believe my point remains valid and, in any event, there are other less potentially onerous methods of overcoming the risk of there being double recovery.

41 The ALRC concluded that there was no substantial justification for any of the various types of "other insurance" clause (at [289]) and identified the criticisms which can be levelled at such clauses, each of them significant, in my view. The first criticism was that this type of clause converts a policy into an excess policy without appropriate reduction in the premium. Another criticism is that, if the other insurance is insufficient to cover the loss, the insured has to make claims against both insurers.

42 The ALRC also noted the potential for the application of "other insurance" clauses to be further complicated by the existence of similar or contrasting provisions in the second policy: (at [281]). Reference is made in the ALRC Report to the English authorities referred to but not followed by the New South Wales Court of Appeal in Australian Eagle Insurance Co Ltd (supra). The English authorities are described by the ALRC as "difficult to follow and impossible to reconcile": (at [282]). The ALRC considered the New Zealand authority of State Fire Insurance General Manager (supra), noting that the approach in that case was consistent with principle although inconsistent with the decision in one of the English cases, Austin v Zurich General Accident and Liability Insurance Company Ltd [1945] KB 250. However, the ALRC acknowledged that in State Fire Insurance General Manager (supra) the Court was not faced with the problem of reconciling two indemnity clauses which might, on a particular construction, result in the absurdity that cover was provided under neither.

43 Finally, reference was made in the ALRC Report (at [286]) to the then most recent decision in National Employers Mutual General Insurance Association Ltd v Haydon [1979] 2 Lloyd's Rep 235 where a professional indemnity policy contained an extension covering claims made after the policy expired, provided that notice was given during the currency of the policy of the occurrence giving rise to the claim. The policy also contained an "excess" clause. After the policy expired, the insured effected cover with another insurer which provided retroactive cover but excluded liability arising from an occurrence notified under, and therefore covered by, prior insurance. The first insurer paid on the claim but sought contribution from the second insurer. The trial Judge held that both clauses were ineffective and that each insurer was liable to contribute to the loss. On appeal, the decision was reversed: National Employers Mutual General Insurance Association Ltd v Haydon [1980] 2 Lloyd's Rep 149. The ALRC considered that the problem with the state of the authorities was compounded by the fact that some relevant provisions had yet to be accorded judicial scrutiny: (at [287]).

44 It is not surprising, in view of what the ALRC describes as the "confusion of the authorities", that the recommendation made was for legislative intervention. The ALRC's recommendation identified the adverse effect of "other insurance" clauses on the interests of the insured and noted that such clauses have little independent value for insurers that could not be achieved in ways which did not disadvantage the insured. Not surprisingly then, the recommendation made was that 'other insurance' clauses should be rendered ineffective. The ALRC expressed its views in the following terms (at [289]):

"The Commission is concerned with the effect of 'other insurance' clauses on the interests of the insured. Insureds are detrimentally affected by uncertainty over the effects of individual provisions and combinations of different provisions. More important is the fact that some 'other insurance' clauses have the effect of limiting the insurer's liability to its insured. In such a case, the insured's protection may be compromised or lost. While they affect the interests of insureds in this manner, 'other insurance' clauses have little independent value for insurers. To the extent that they are intended as protection against fraud, they are ineffective. At most, such a clause might operate as a disincentive to claiming the same loss twice under different polices. The same effect could be achieved by a clear warning to the insured that he is entitled to claim, under the policy concerned and under any other insurance, no more than his actual loss. To the extent that 'other insurance' clauses are designed to ensure that an insurer becomes aware of the existence of other insurance so that it may claim contribution in the event of a loss, the same aim could be achieved by asking appropriate questions in the proposal and claim forms. A request in the proposal form for details of other insurance would also give the insurer the opportunity of assessing any significant degree of over-insurance and deciding whether to accept the proposal. There is no substantial justification for any of the various types of 'other insurance' clause. As they may cause the insured's reasonable expectation to be defeated, all forms of 'other insurance' provisions should be rendered ineffective. If more than one insurance is in effect in respect of the same risk, the insured should be entitled to recover the whole of his loss from any one of the insurers, which should then be entitled to obtain contribution from the others."

45 The ALRC emphasised that its recommendations would have no effect on layered policies in the field of co-insurance. It also identified two exceptions to the recommendation. The first exception was in relation to the true excess liability policy covering an insured's liability over and above that covered by another insurance which is specifically identified in the excess policy. The second exception was restrictions on the scope of the cover afforded by a policy in order to exclude liability which is also covered by an insurance made compulsory under statute: (at [290]).

46 Based on the content of the ALRC report, Zurich contends that s 45 seeks to achieve an entirely different purpose than other sections of the Act. It seeks to strike down clauses which historically gave rise to problems such as where a situation of double insurance might be created accidentally. However, it is submitted that s 45 would only achieve that purpose if it covered all situations in which the insured comes to be covered by a policy of insurance, including where a policy is taken out by another, naming Hamersley as principal. To read s 45 in any other way would be to defeat the purpose of the provision.

47 Further Zurich submits that s 45 is intended to be beneficial to insureds and to achieve justice as between insurers: that is, the purpose of the section is to avoid the ill that allows insurance companies to avoid liability simply because there are two policies in place covering the same loss, irrespective of the circumstances by which that came about.

48 That the ALRC's recommendations were accepted, at least in relation to the exceptions, is apparent from the Explanatory Memorandum to the Insurance Contracts Bill which referred to the intended effect of the clause in these terms:

"148. Where two or more contracts of insurance provide cover in respect of the same loss insurers will be able to claim contribution from one another in respect of the loss (ALRC para 289). It is appropriate that an insurer should be able to exclude liability which is also covered by compulsory insurance eg workers' compensation or third party insurance. It is also appropriate that he can exclude liability where the policy is a genuine excess policy (ALRC para 290)."

49 I accept that the ALRC considered that all forms of "other insurance" clause which have the effect of limiting or removing the insurer's liability to the insured should be "rendered ineffective" and made that recommendation. It is similarly clear that the ALRC considered that only those clauses that fall within the two stated exceptions from that recommendation should be exempt from the general prohibition.

50 The evidence of the Explanatory Memorandum indicates that the latter aspect of the ALRC's recommendation was accepted. It is difficult to envisage a circumstance where, following an ALRC report, the recommended exceptions to a prohibition are adopted but the prohibition itself is not. At the very least, one would expect the Explanatory Memorandum to explain why the recommendation of a complete prohibition on clauses of this type was not adopted. Consequently, one can reasonably expect s 45(1) to have been intended to have the effect recommended by the ALRC and the provision should be construed with that intention in mind. Of course, it is then necessary to consider whether the way in which the clause was drafted did indeed achieve that aim and whether the clause is capable of being construed as creating a prohibition on all "other insurance" provisions.

51 Counsel for Zurich referred the Court to two cases which are said to assist in the construction of s 45. The first such case is Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd v Zurich Australian Insurance Ltd, unreported; DCt of Qld; 1 May 1992 per Robin DCJ. Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) is one of the few cases directly dealing with an underlying insurance clause, the effect of s 45 and the consequence of a conflict between such a clause and s 45. For that reason, I propose to consider the decision in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) in some detail.

52 In Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra), the second plaintiff, Carlingford, by an insurance policy described as the CIC policy, agreed to indemnify AW Edwards Pty Ltd and its subsidiaries, one of which was the first plaintiff, Austress. Austress, as contractor, entered an agreement with Remm Pty Ltd to supply and install rock anchors in connection with the construction of the Myer Centre. The defendant, Zurich, issued a policy of insurance in respect of the construction of the Myer Centre ("the Zurich Policy"). Austress, in execution of the sub-contract work, caused damage to a sewer main owned by the Brisbane City Council and Remm undertook certain rectification works in relation to the sewer main and incurred costs.

53 Austress became legally liable to the Council in respect of the damage and, under the sub-contract, Austress became legally obliged to indemnify Remm for the costs of the rectification work. Austress made a claim under the CIC policy for indemnity in respect of its liability to Remm and the Council. Carlingford paid a total of $136,528.31 (the amount of damage less the deductible) to Remm and the Council in settlement of their respective claims. No contribution was paid by Zurich whose policy showed the insured to include Remm but no other interested party and created liability only for an amount in excess of $100,000.

54 The CIC policy included Claims Provision 3, which provided that Carlingford would not be liable in respect of the occurrence except for any excess beyond the amount payable under another policy of indemnity or insurance "in favour of or effected by or on behalf of the Insured applicable to the occurrence" which was claimed by Carlingford to result in Zurich being liable for the amount in excess of $100,000. Zurich contended that Claims Provision 3 was rendered void by s 45 of the IC Act.

55 In his reasons for decision, Robin DCJ noted (at 5) that the parties seemed to be ad idem that the policy came within the regime of the Act and, therefore, s 45 caught Claims Provision 3 in so far as it sought to limit the Carlingford's liability by reference to "indemnity or insurance ... effected by or on behalf of the Insured".

56 After referring to the terms of s 45, Robin DCJ noted (at 6) his acceptance of the submission made on behalf of Zurich that s 45(2) must be construed as requiring the reference to "other insurance" to be specific, as opposed to a description in general words capable of extending to the other insurance, if the provision is to survive being struck down by s 45(1). He added (at 6):

"It seems to be the underlying notion is that the insured and the insurer have tailored their own bargain to take account of the impact of other contracts."

Robin DCJ concluded that s 45(2) did not apply in the circumstances of the case.

57 As Carlingford disputed that s 45(1) applied to its policy, Robin DCJ then considered the proper construction of that subsection and identified the question for resolution as being whether the provision, which he considered to have the effect of limiting Carlingford's liability, did so "by reason that the insured has entered into some other contract of insurance". His Honour refuted (at 6 - 7) the proposition that this expression extended to every situation in which insurance may exist of which the insured may obtain the benefit, although having nothing to do with (and perhaps having no knowledge of) it being effected. In doing so he rejected the underlying proposition that an insured who benefits from, but is not named in, a policy can be said to have "entered into some other contract of insurance" having regard to various provisions of the IC Act which seek to eliminate any concept of lack of privity between insurer and named insured precluding or limiting the benefit to the insured of a policy entered into. The provisions relied upon were s 48, s 56 and s 76. Robin DCJ referred to s 11(9) of the IC Act which is in the following terms (at 8):

" ... A reference in this Act to the entering into of a contract of insurance includes a reference to -

(a) the making of an agreement by the parties to a contract of insurance to renew, extend or vary that contract; or

(b) the reinstating of a previous contract of insurance"

and concluded that "[a]nything brought in under that 'inclusive' definition must ... exhibit privity". Consequently, Robin DCJ formed the view (at 8) that he could not conclude that s 45(1) struck down Carlingford's clause on the basis that Austress had "entered into" the Zurich policy. As his Honour observed (at 8):

"It would have been a simple matter for the draftsman to adopt language referring to other insurance, by whomsoever effected. It is not lightly to be assumed that merely because a policy of insurance may inure to the benefit of a person, it was effected by or 'entered into' on behalf of that person: Stretch v State Insurance General Manager (1984) 3 ANZIC 60-577, at 78,467-6B."

58 With respect to Robin DCJ's reliance on s 11(9) of the IC Act, I do not share his Honour's view that the section indicates that the expression "the entering into of a contract of insurance" is necessarily limited in meaning to entering into a contract of insurance by the parties to that contract. In my view, s 11(9) simply broadens the concept of an insurance contract to include agreements to extend or vary the contract in the case of life insurance contracts and to extend the meaning of any other contract of insurance to making an agreement to renew, extend or vary the contract. The meaning of a contract of insurance is also extended to include the reinstatement of any previous contract of insurance. To include reference to the parties to such contracts is only to state the obvious: that the only persons entitled to renew, vary, agree to renew, extend or reinstate a contract are the parties to that contract. I do not accept the proposition that s 11(9) in any way addresses whether the expression "the insured has entered into some other contract of insurance" may include a contract entered into by another which indemnifies the insured and applies the contract to him as if a separate policy had been issued to him as an insured under the policy.

59 Further, with respect to Robin DCJ, neither do I share the view that Stretch v State Insurance General Manager (1984) 3 ANZ Ins Cas 60-577, at 78,467-6B, is authority for the proposition that it cannot be assumed that merely because a person may benefit from an insurance policy, it was effected by or 'entered into' on behalf of that person. In that case, the vendors of a property, subject to a contract to sell, insured the property. The purchasers had also insured the property by obtaining a cover note which was expressed to insure both the vendors and the purchaser against fire. The vendors were advised that the purchaser had taken out a cover note but were not advised that they were named as an insured in the cover note. The property was severely damaged by fire at a time when the contract of sale had become unconditional but settlement had not taken place. The vendors' insurers sought to rely on a condition in the policy which said that if, at the time of any loss, there was any other insurance covering such loss, the insurer would not be liable for more than its rateable proportion. The Court held that a true case of double insurance requires, inter alia, both policies to have been effected by or on behalf of the same insured or with his authority. As the vendors had not authorised the cover note or been made aware that it was named in it, there was no double insurance and there could be no reliance on the "other insurance" clause: per Eichelbaum J at 78,468(L)

60 In my view, the decision in Stretch (supra) is authority only for the proposition that, where another insurance policy is taken out by a third party to the benefit of or in the name of the insured under the primary policy, authorisation by the insured of the other insurance policy is a pre-requisite for there to be double insurance. I do not believe the decision adds anything to the issue of whether a policy was "entered into" by a person if it was arranged by a third party to the benefit of the person, other than, if it is to be relied upon as the basis of a contribution, the policy arranged by the third party must have been authorised by the person.

61 However, it does not follow from the fact that I take a different view of two of the matters relied upon by Robin DCJ in reaching his conclusion on this issue, that I believe his ultimate decision to be flawed as a result. Other factors were also taken into account, some of which are dealt with later in these reasons.

62 Robin DCJ considered (at 9) that Carlingford's actions were exactly what the Act envisaged in that Carlingford paid out Austress in full (subject to its "deductible") so that Austress' maximum expectations had been fulfilled and then sought contribution from Zurich, as permitted by s 76(3), or an equivalent recovery by a process of subrogation.

63 Robin DCJ expressed his conclusion in the following terms (at 9):

"In the end, I have concluded that s 45 operates by reference to the language of the limitation of the insurer's liability and what its effects may be as a matter of interpretation or logic, rather than by reference to whether the prescribed effect stands to arise in the particular circumstances of an individual claim."

64 The next question considered by Robin DCJ (at 5 - 6) was whether the presence of the descriptive phrase "Insurance ... effected by or on behalf of the Insured" in the Claims Provision suffices to render the provision entirely void so that the insurer gains no protection from the words which would limit its liability where any other "indemnity or insurance in favour of ... the Insured" applies. This question is of particular relevance in this case as the "underlying insurance clause" in the Hamersley Policy extends to policies entered into "on behalf of" Hamersley. Robin DCJ's answer to that question was this (at 9):

"What s 45(1) renders void is 'the provision' which has the defined 'effect'. I cannot detect there any legislative intention that the provision be saved so far as it may have other effects. It follows that the provision is void, so that the insurer may not take advantage of any 'effect' among others it may have which is not caught by s 45(1). Somewhat ironically, the way in which the insured might have saved the situation may have been to replace the words 'or effected by or on behalf of' by '(not being a Policy effected by or on behalf of)'. The provision being void, the second plaintiff was liable to indemnify the first plaintiff in full, subject to its 'deductible'."

65 According to Robin DCJ (at 9), the striking down effected by s 45(1) was absolute and complete and was not limited to what is necessary to implement the policy of the Act in the circumstances of a particular claim.

66 Counsel for Zurich concedes that not all aspects of the decision in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) support Zurich's contentions. Certainly, Zurich's construction of s 54(1) is at odds with Robin DCJ's comments (at 8) that it would have been a simple matter to achieve the result that all "underlying insurance" clauses other than those required by law and those which specify the other insurance are prohibited and hence it could not be established that such a result was intended. Zurich maintains its position that s 45 would only achieve its purpose if it covered all situations in which the insured comes to be covered by a policy of insurance, including where a policy is taken out by another, namely Hamersley as principal.

67 However, Zurich does rely on some of the conclusions drawn by Robin DCJ in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra). Counsel for Zurich notes that the point being advanced in that case, and also in this case by MMI, is that Hamersley did not enter into the Speno Policy, Speno did. Zurich maintains that, as s 45(2) does not apply, MMI's "underlying insurance clause" is void because, although it refers to other insurance effected on behalf of the Insured, it also includes insurance effected by the Insured. One is arguably included in the definition but the other is definitely included in it and hence MMI's clause is void.

68 Zurich maintains that, when you look at the ALRC Report and consider what is sought to be achieved by prohibiting underlying insurance clauses, nothing could be plainer than that all of these kinds of provisions were to be avoided, including those that created an excess policy where the insured benefited from a policy taken out or entered into by another. I accept that to be the case, particularly because an insured may be unaware of such a policy. Zurich emphasised that the Court is entitled to have regard to what the ALRC says because of s 15AA of the Acts Interpretation Act 1901 (Cth). Section 15AA is headed "Regard to be had to purpose or object of Act" and states:

"1. In the interpretation of a provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not promote that purpose or object."

69 Applying that principle it is useful to also consider the preamble to the IC Act which is in these terms:

"An Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly, and for related purposes."

70 In East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400, Gleeson CJ, in delivering the leading judgment of the NSW Court of Appeal, and in addressing the application of s 54 of the IC Act, concluded that the language should not be read narrowly: (at 403). Gleeson J relied on the terms of the long title to the IC Act in making the following obiter observation on the construction of s 54 (at 403 - 404):

"In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s 54 depends on matters of form ...

The Act, in its long title, is described as an act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds, and other members of the public and so that the provisions included in such contracts, and the practices of the insurers in relation to such contracts, operate fairly. It would hardly be consistent with the purposes thus described to construe the language of s 54 in such a way as to make its operation depend upon the choice that is made between various available drafting techniques."

71 In Kelly v New Zealand Insurance Company Ltd (1996) 9 ANZ Insurance Cases 61-317 at 76,517, Owen J, with whom Kennedy and Steytler JJ agreed) agreed with the tenor of the dicta of Gleeson CJ in East End Real Estate Pty Ltd (supra). Owen J observed that s 54 was a remedial provision which should be given a liberal interpretation. He accepted that the courts must review an impugned insurance transaction according to substance rather than form. However, Owen J noted that each case must be judged on its own facts: (at 76,517).

72 I consider the reference in East End Real Estate Pty Ltd (supra) to a fair balance between the interests of the insurers, insureds and other members of the public is consistent with a result which may not fully overcome the ills identified by the ALRC but, nevertheless, strikes a fair balance between competing interests.

73 Zurich maintains that the clear purpose of s 45 is to remove these types of provisions by removing the benefit of them other than in the situations envisaged in s 45(2). It is said that, in order for the section to work and not be emasculated, the term "insured" has to be given the construction contended by Zurich, that is, the reference to the "Insured" is a reference to the Insured under the policy. If read in that way then s 45 operates to achieve the reform that was plainly intended.

74 Underlying Zurich's interpretation of s 45(1) is a reliance on the definition of "insured" and "insurer" in s 11 which is stated to include "a proposed insured" and "a proposed insurer", respectively. As s 11 commences with the words "In this Act, unless the contrary intention appears", Zurich maintains that the definition applies as no contrary intention is evident in the wording of s 45. However, it must be noted that a contrary intention may appear from the fact that the particular definition does not "fit" within the section in that it is inconsistent with the balance of the provision or may change the meaning of the provision to something which was clearly not intended by the legislature. Here, of course, Zurich maintains that the inclusion of the words in the definition operates to achieve that intention.

75 Zurich also emphasises that the IC Act made wide-ranging changes to the law of insurance in a number of areas: s 21 with non-disclosure; s 13 by implying a term into contracts of insurance whereas previously it had operated as a principle of law; s 76 with respect to contribution between insurers; s 48, third party beneficiary right to recover. It is said that a whole range of disparate and different ills were addressed by the IC Act and it is necessary to look at each of the provisions and the purpose of the provisions in order to understand what Parliament meant by using that particular word in a particular context.

76 It is for all these reasons that Zurich maintains that s 45(1) operates to make void any "excess" clause, whether the other contract of insurance was entered into by the insured or whether the insured has the benefit of a contract between a third party and another insurer. On that basis, the underlying insurance clause in the Hamersley Policy is said to be void. Even if the primary proposition is not accepted, Zurich maintains that the Hamersley Policy is void because it is the provision which is void, not that part of it which offends s 45(1).

77 In Zurich's argument, it is only if MMI can bring itself within s 45(2) that it avoids the consequences. The contract described in s 45(2) is said by Zurich to be a true "excess of liability" policy, the test for which is whether the contract carrying with it the primary liability is "specified" in the "excess of liability" policy. However, as there is no specificity in the MMI underlying insurance clause's reference to "such other Insurance effected by or on behalf of the Insured in respect of a Claim for which Indemnity is available under this Policy" Zurich suggests that MMI is not entitled to the advantage of s 45(2).

78 Zurich contends that the Hamersley Policy contains a clear example of what is meant by "specified" in s 45(2). The Court was taken to the Hamersley Policy and to "Insuring Agreement A - Combined Public and Products Liability", in particular to the "Exclusions" which include the following paragraph:

"Notwithstanding this Exclusion (1) this Insuring Agreement (A) shall indemnify the Insured in accordance with the terms, conditions and endorsements of the Overseas Employers' Liability Insurance issued by American Home Assurance Company Policy Number MG69898 Limit of Indemnity A$5,000,000 (the Underlying Insurance) with which this Policy shall run concurrently;

PROVIDED THAT

Underwriters shall be liable only for sums in excess of the Limit of Indemnity provided by the Underlying Insurance."

79 This is an example of the level of specification said by Zurich to be necessary for an underlying insurance clause to fall within s 45(2). I accept that the level of specificity in this paragraph would satisfy s 45(2). However, I do not accept that an underlying insurance clause which did not specify the other insurance to that degree would not come within s 45(2).

80 It is in this context that the second authority on which Zurich primarily relies is to be considered. Zurich referred the Court to the decision in HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd & Anor [2000] NSWCA 281; (2000) 11 ANZ Insurance Cases 61-477 as part of the answer to that question. In that case, Pluim Constructions Pty Ltd ("Constructions") carried out building work at the Mingara Recreation Club. Associated companies of Constructions, including Pluim Commercial Landscapes Pty Ltd ("Landscapes") were also involved in the project. K, an employee of Landscapes, was injured whilst assisting Constructions to remove debris from the site using Landscape's bobcat. Constructions was found to have breached its duty of care to K and damages were assessed against it.

81 Constructions filed third party notices against the insurers claiming indemnity and contribution under various insurance policies. The Pluim group were insured with HIH Casualty and General Insurance ("HIH") against public liability risk. The Club had effected public liability insurance with Commercial Union Assurance Group ("CU") on behalf of Constructions in respect of personal injury which arose out of the execution of the building works. HIH admitted its obligations under the policy to indemnify Constructions, subject to its right to rely on various provisions of its policy, including Condition 7, which dealt with principal-arranged insurance, and exclusion 4(a). HIH relied on its "other insurance" exclusion in its policy and contended that Constructions liability to K was covered by the CU policy. HIH also submitted that under Condition 7 it could escape liability if CU was liable under its policy. Alternatively, HIH contended that there was double insurance, although no claim for contribution was pleaded between the insurers. CU denied liability to Constructions, relying upon various exclusions including one which dealt with injuries in connection with motor vehicles. At first instance, it was held that Condition 7 of HIH's policy was rendered void by s 45(2) of the IC Act because the CU policy was not "specified" in the HIH policy. It was also held that the CU policy did not respond to Constructions claim.

82 On appeal, the majority, which included Handley JA and Foster AJA, concluded (at [73] and [80]) that cl 7 in the CU policy did not apply to Constructions claim for indemnity in respect of K's damages. Consequently, the CU policy did respond to Constructions claim and it had double insurance from CU and HIH. In relation to the balance of the issues before the Court of Appeal, the majority, who indicated that they had had the advantage of reading in draft form the reasons for judgment of Mason P, said this (at [73]):

"We agree generally with his Honour except as to the meaning of the exclusion in cl 6(b) of the [CU Policy]."

83 Mason P found that the CU policy did not respond to Constructions' claim (at [28]) as a result of which it was unnecessary for him to address HIH's submission that the cover of the HIH policy was withdrawn because of the operation of Condition 7 of the HIH policy. However, as the issue was fully argued, he decided to make some remarks on the topic: (at [29]). On that basis, Mason P's conclusions on the validity of HIH's "underlying insurance clause" were obiter dicta. However, the fact that Handley JA and Foster AJA who took the opposite view in relation CU's liability, agreed with Mason P's reasons on this particular issue, provides those reason with greater status than a mere obiter comment.

84 Condition 7 of HIH's policy was headed "PRINCIPAL-ARRANGED INSURANCE" and was in the following terms (at [30]):

"In the event of the named Insured entering into an agreement with any other party (who for the purpose of this clause is called 'the Principal' pursuant to which the Principal has agreed to provide a policy of insurance which is intended to indemnify the named Insured for any liability arising out of the performance of the Works then the Company(ies) will (subject to the terms and conditions of this Policy) only indemnify the names Insured for such liability not covered by the policy of insurance provided by the Principal."

85 Counsel for Zurich describes Condition 7 of the HIH policy as being in a different form but with a similar intent to the policy condition in the MMI contract. I understand that submission to mean that the MMI policy similarly attempted to deal with the situation where companies such as Hamersley require the many and varied sub-contractors with which it contracts to arrange public liability insurance to include Hamersley's interest as a principal and to indemnify Hamersley against any personal injury claim made by the sub-contractor's employees.

86 It was acknowledged by the parties in HIH Casualty & General Insurance Ltd (supra) that the effect of s 45(1) of the IC Act was to render void Condition 7 unless s 45(2) was found to apply: (at [32]). The primary judge held that the language of Condition 7 was too general and not of sufficient specificity to satisfy s 45(2), a view which Mason P considered to be correct: (at [33]). The issue then became one of determining whether the words "the policy of insurance provided by the Principal" in Condition 7 were sufficient to specify the CU policies for the purposes of s 45(2).

87 Mason P then referred to the ALRC Report and its conclusions and made specific mention of the ALRC's mention of the mischief involved in "other insurance" clauses which limit an insurer's liability (at [34]):

"Such clauses were said to fall into three main classes (par 281). The first class covers provisions which purport to exclude liability altogether in the event of other insurance. The insured's sole recourse is to the other insurer. The second comprises provisions which limit the insurer's liability to a rateable proportion of the loss. In that event the insured must bring two actions. Even then the insured may suffer an overall loss if the other insurance is insufficient or if the claim against the other insurer is defective. The third class covers provisions which limit the liability of the insurer to any amount by which the loss exceeds the amount recovered or recoverable from the insurer. Such a provision converts a policy into an excess policy without appropriate reduction in the premium."

88 Reference was then made by Mason P to the ALRC's conclusion that there was no substantial justification for any of the classes of "other insurance" clauses since they all may cause the insured's reasonable expectations to be defeated: (at [35]).

89 Mason P noted (at [35 - 36]) that the ALRC recommended that all forms of "other insurance" clauses should be rendered ineffective and that the recommendation was later embodied in cl 46 of the Draft Bill amended to the ALRC Report which subsequently became s 45 of the IC Act.

90 Zurich contended that there is no difference in substance between the clause that MMI relies on and the clause relied on in the HIH case. Emphasis was placed by counsel on the use of the terms "futurity, contingency and lack of specificity". Despite the fact that the underlying insurance clause in the Hamersley Policy refers to specific contracts, it is said that it does so in the broadest, most general, most contingent and futuristic way. There is no specificity or identification sufficient to avoid the mischief that Parliament sought to overcome where two insurers would stand back and require the insured to sue them both.

91 As noted above, MMI's interpretation of both aspects of s 45 differs markedly from that of Zurich. According to MMI, s 45 only has the effect of limiting or excluding the liability of the insurer "by reason that the insured has entered into some other contract of insurance". Section 45(1) does not make void other insurance provisions where the insured is entitled to the benefit of a policy "entered into" by another.

(i) follows from the words expressly used in s 45(1);

(ii) is consistent with the distinction between a party to an insurance contract on the one hand and a person entitled to the benefit of that contract, on the other. In support of that proposition, reliance is placed on Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107.

(iii) Is consistent with the distinctions expressly drawn in s 48 of the IC Act between the person who is a party to an insurance contract and a person to whom the benefit of the contract extended: see CE Heath Casualty & General Insurance Ltd v Grey & Ors (1993) 32 NSWLR 25 at 43 - 46; GIO Australia Ltd v P Ward Civil Engineering Pty Ltd (2000) NSWSC 371 at [11]; s 11(9) and s 56 of the IC Act.

(iv) Is consistent with the principal rationale of the ALRC recommendation which led to s 45, viz avoiding the defeat of the insured's reasonable expectations (at [289]).

93 MMI submits that, as is clear from the wording, s 45 applies to contracts of a certain kind: that is, contracts of general insurance. Further, it is said to make void provisions of a certain kind: that is, a provision in a contract of general insurance which has the effect of limiting or excluding the liability of the insurer. The term "liability", in the phrase "the liability of the insurer" in s 45(1), is said to be a key word in the proper understanding of the operation of the section and, counsel submits, the Court will need to determine the meaning of the term in the context of s 45(1). MMI submits that there are two principle views on the meaning of "liability" in this context. The first is that it means a potential or contingent liability, the sort which the insurer takes on when it first issues the insurance contract. The events insured against may or may not come to pass but there is a potential liability. The second meaning that can be given to the word is what counsel refers to as an "actual liability", the liability which accrues when the event which has been insured against occurs, so that the insurer has then been called on to meet the obligation to indemnify which it assumes on the payment of the premium and the entry into the contract.

94 Counsel for MMI refers to the view expressed by Professor Sutton on the issue (Sutton, "Insurance Law in Australia" (supra) at [12.22]) but for the purpose of refuting the Professor's opinion. It is said that the author does not cite any authority and the explanation given involves, at least in counsel's view, a non sequitur. Professor Sutton states:

"It is the liability of the insurer which is affected, and thus must refer to the insurer's potential liability [as to the possible meanings of the word 'liable' and its cognate 'liability' see Heath Underwriting & Insurance (Aust) Pty Ltd v SGIC (SA) (1983) 34 SASR 1 at 6] under the contract rather than any actual liability already incurred, for the section refers to 'a provision included in a contract of general insurance', that is, to a term agreed upon when the contract is entered into, at which stage the insurer's liability will be only a potential one. In any event, the mischief at which s 45 is aimed is clearly shown in the Report of the Australian Law Reform Commission to be the harm likely to be suffered by an assured by the use of limitation clauses seeking to restrict the potential liability of the insurer where other insurance has been effected."

95 MMI's position is that the meaning of "liability" in s 45(1) is an actual liability, the liability which accrues when the event insured against occurs. It is said that, if read in that way it enables the section to work in a way which is practical. Further, according to counsel for MMI, the clearest indication within s 45(1) that the word "liability" is referring to an actual liability are the words that follow it: "... limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance". Emphasis is placed on the fact that the section does not say "or may enter into". The use of the past tense "has entered into" is said to support MMI's interpretation. The use of the past tense is said to be significant because it indicates that the section is speaking to an event which has already occurred at the time that the effect of the provision has been considered.

96 Counsel maintains that if the word "liability" is read as a potential liability but the following words are still in the past tense, then it reads as if it is being considered the very moment after the contract was first entered into, then the section would only catch those other policies of insurance which had already been entered into as of that moment. But if one reads it as though its referring to an actual liability, then it catches not only the other insurance contracts which have been entered into at the moment of creation of the first but those which have been entered into subsequently up to the moment when the accrued liability comes into existence.

97 Further, MMI's proposition that "liability" means actual liability is said to be supported by the wording of s 45(2). If the term "liability" as it appears in s 45(1) meant potential liability then one would need to be construing the balance of s 45(1) as referring not only to contracts already entered into, but contracts which may be entered into during the life of the first policy. If that is so, then the contract of insurance referred to in s 45(2) will have to be "specified in the first mentioned contract by reference to class description as opposed to any specific policy".

98 Counsel for MMI maintains that the interpretation that MMI presses on the Court would actually give s 45 a greater operation than would otherwise be the case because one would have to ignore the words in the past tense. However, counsel notes that it seems unlikely that the section is intended to refer to only those contracts which had been entered into at the moment that the first contract came into existence as that would significantly circumscribe the operation of s 45(1).

99 According to MMI, another indicator that the section is referring to an actual liability are the words "has the effect of limiting or excluding". The fact that "limits or excludes" is not used is said to suggest that the operation of the section involves looking at the effect of the provision in the circumstances which have accrued or in the circumstances which have occurred.

100 The final indicator put forward by MMI is the use of the words "by reason that". They are said by counsel for MMI to be words of causation and questions of causation are questions of fact to be dealt with in retrospect so that one can examine the facts.

101 MMI submits that these factors lead to the conclusion that s 45(1) is speaking to actual liabilities and should, therefore, be read as rendering void a provision which has the effect of excluding or limiting the actual liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance.

102 None of the features on which MMI relies persuade me that the term "liability" should be interpreted as meaning an actual rather than a potential liability or indeed that the term must be construed as meaning one or the other. Indeed I do not consider that further defining the term "liability" assists in the proper construction of the provision. If the meaning of s 45(1) is considered as if the validity of the provision were under consideration, that is, when a claim is made on the policy or the claim is the subject of litigation, there would be no need to include the words "or may enter into". That is because, at the time of consideration of the provision, the "other contract of insurance" will necessarily have been entered into. Similarly, the fact that the past tense is used in s 45(1) will also be consistent with this approach. Viewed in that way, the section would apply to "other contracts" entered into both before and after the contract with the "other insurance" provision. It may well be that, where contracts are entered into after the contract with the relevant clause was executed, it will be more difficult to establish that the latter contract was intended to be a true "excess" policy. However, it should not follow that the section does not have so wide a scope.

103 In my view, both parties have tended to approach the interpretation of particular words and phrases used in s 45(1) in a manner consistent with a particular outcome and, in doing so, have lost sight of the natural meaning of the words and the fact that, when it comes to legislative drafting, there can be different ways of saying exactly the same thing. I consider that the only phrase included in the section which requires consideration as to its actual meaning is "by reason that the insured has entered into some other contract of insurance". Whether that expression includes contracts of insurance entered into by a third party in which "the insured" is a beneficiary and a principal is something that requires further consideration.

104 According to MMI, that question must be answered in the negative because Hamersley has not entered into any other contract of insurance. Hamersley did not enter into the Speno Policy as even Zurich accepts by virtue of its plea in par 2 of the Statement of Claim that the policy was entered into by Speno. Hamersley has the benefit of the Speno Policy but, as counsel for MMI submits, and which I have referred to above, s 45(1) does not seek to make void provisions which limit or exclude the liability of an insurer because the insured has the benefit of some other policy. On this issue, MMI is ad idem with Robin DCJ in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) (at 8) where he observed that it would have been a simple matter for the draftsman to adopt language referring to other insurance, by whomsoever effected, if it had been the intention to extend the operation of s 45(1) to contracts other than those entered into by the insured.

105 The interpretation upon which MMI relies is said to be consistent, not only with the wording of the section, but also with the decision of the High Court in Trident General Insurance Co Ltd (supra). The facts of that case can be shortly stated. An insurer under a public liability insurance policy agreed to indemnify a company against all sums that it should become liable to pay in respect of injury to persons at specified building sites. "The insured" was defined to include the company's contractors. A person who was injured as a result of the negligence of one of the company's contractors, which was not a contractor when the policy issued, recovered damages against the contractor. The High Court held, by majority, that the contractor, although not a party to the insurance contract, was entitled to enforce the indemnity against its liability to pay the damages: per Mason CJ and Wilson J (at 123 - 124). The basis of the entitlement was that contractors were the intended beneficiaries of the contract.

106 Prior to the decision in Trident General Insurance Co Ltd (supra), the position at common law was that a third party could not sue upon a contract and that a stranger to the consideration could not maintain an action at law upon it: at 115. The Court of Appeal allowed the third party plaintiff to succeed in its claim because it considered that the law should allow an intended beneficiary to sue on a policy when commercial convenience and practice demanded it. Moreover, the Court expressed a belief that the development of the common law should proceed in parallel fashion with statutory reforms, enabling non-party beneficiaries to sue on policies of insurance: (at 113). In so doing, the Court of Appeal declined to follow the position at common law as it stood at that time.

107 On appeal, the High Court took the same approach: see Mason CJ and Wilson J who formed part of the majority together with Toohey and Gaudron JJ). Although the reasoning of those judges in the majority differed slightly, the judgment of Mason CJ and Wilson J reflects the considerations giving rise to the decision to modify the existing position at common law. In dismissing the appeal and allowing the third party to maintain an action against the insurer, the Court acknowledged that there was much substance in the criticisms directed at the traditional common law rule: (at 118 - 119). It also noted the an alternative method of conferring on a third party a right to sue on a policy of insurance was the device whereby the Court recognised the existence of a trust. However, although this approach produced greater consistency of outcome, there remained cases where the third party was left without a remedy: (at 121). Consideration was also given to the policy considerations justifying the privity and consideration rules which operate together to preclude an action being brought by a third party: (at 121 - 122). Also, attention was given to the terms of the various statutory provisions, including s 48 of the IC Act, which allowed a third party to sue: (at 123). The observation made was that there were a variety of statutory responses to the problem: (at 123). Ultimately, it was held that the principled development of the common law required that it recognised that where an insurance policy is expressed to indemnify the insured and a third party, the third party is entitled to enforce the indemnity: (at 123 - 124). I should add, in order to emphasise the relevance of the decision, that the Court allowed the third party to enforce the indemnity despite the doctrine of privity; the third party did not succeed because it was found to be a party to the insurance contract simply because it stood to benefit from the contract.

108 It is apparent that the decision in Trident General Insurance Co Ltd (supra) was made after the IC Act was passed. Therefore, as counsel for MMI observed, it cannot be said that the IC Act was giving effect to that decision. However, it is correct to say that the common law drew a distinction between the rights of someone entitled to the benefit of a contract on the one hand and the person who was a party to it on the other.

109 Counsel for MMI noted that there is an express recognition of that distinction in s 48 of the IC Act, which also appears in Pt V Div 2 of the IC Act, which contains general provisions relating to insurance contracts. Section 48(1) gives the right to a person who is not a party to a contract of general insurance a right to recover the amount of the person's loss from the insurer in accordance with the contract, providing the person is "specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends". Section 48(2) and s 48(3) apply the respective rights and obligations of parties to a contract to the insurer and to the person on whom is conferred the right to recover as if a party. As counsel correctly notes, what s 48 does is to confer by statute the right which was subsequently recognised at common law by the High Court in Trident General Insurance Co Ltd (supra).

110 Counsel for MMI further submitted that the notion of entry into a contract is an important concept for the purposes of the IC Act and maintained that where s 45(1) referred to "entered into a contract" it was doing so advisedly. Support for this proposition is said to be found in s 21 which highlights the importance of the notion of entry into a contract in the context of the insured's duty of disclosure of relevant matters. Under s 21, an insured has a duty to disclose all relevant matters to the insurer "before the relevant contract of insurance is entered into". In that context, "entered into" clearly means entered into by the insured. MMI also relies on s 28, which deals with remedies for non-disclosure and misrepresentation with respect to contracts of general insurance. According to counsel for MMI, this is another example of where entry into a contract is important as a concept in the Act. Section 56 was also cited as another example although counsel for MMI conceded that this section is directed more to the notion of the party to the contract being different from the person entitled to the benefit rather than the notion of entry into the contract. Although s 56 draws the distinction between parties and third parties, for myself, I do not find it of any assistance in determining the meaning of the expression "entered into" in s 45. In s 21 and s 28, the references to entering into the contract are simply used to identify the point at which the required disclosure is to be made. Those sections, in my view, say nothing about whether the expression can be extended to the situation under consideration.

111 MMI also relies on s 11(9) of the IC Act, which is said to address the issue more directly and to identify those who can be said to enter into a contract of insurance for the purposes of the IC Act. The interpretation placed on this section by MMI is that, where the expression "entered into" is used in the IC Act, it means entered into by the insured and not by a third party. As I have noted above, when considering the same proposition made by Robin DCJ in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra), I do not accept that s 11(9) sheds any light on the scope of the expression "entered into" in the context of s 45(1) of the IC Act.

112 MMI also relied on the decision in CE Heath Casualty & General Insurance Ltd (supra) for its submission that s 45(1) does not make void "other insurance" provisions where the insured is entitled to the benefit of a policy "entered into" by another.

113 The case of CE Heath Casualty & General Insurance Ltd (supra) arose from the failure of the Compass group of companies. Arrangements had been made with CE Heath Casualty & General Insurance ("CE Heath") for insurance cover in respect of loss suffered as the result of "wrongful acts" by, inter alia, directors and possibly former directors of the relevant companies. That insurance was intended to cover the loss suffered in that regard both by Compass and by the directors. It had been alleged against the directors that they were guilty of wrongful acts of the kind in question and the director brought proceedings to establish that they were entitled to the benefit of the insurance cover. CE Heath claimed it was entitled to avoid the policy or policies because, at the time the cover was effected, the defendants had knowledge of facts which, if revealed to CE Heath, would have affected the insurance and neither Compass nor the directors revealed those facts.

114 The principal point on which the case turned was whether or not the directors were themselves party to the contract or whether it was necessary for them to rely on s 48 in order to claim under the policy. The majority decided that the directors were parties to the contract and, as counsel for Zurich correctly observed, all that was said thereafter was obiter dicta. Clarke J said (at 43):

"... I agree with the conclusion reached by Mahoney JA that the directors, and not Compass, were parties to the [Directors and Officers] Policy ... If I have correctly understood the submissions of the parties that conclusion disposes of the appeal. However, in view of the detailed argument which took place before the Court it is appropriate that I express my conclusions on the question whether, assuming that the directors were not parties to the D/O policy, the non-disclosure by Compass of material facts constituted a partial or complete defence to claims made by the directors and other relevant officers for indemnity under that policy."

115 Clarke J addressed that issue by first considering s 48 of the IC Act and observing (at 43) that the evident intent of the section was to overcome what was known as the indemnity principle and its relationship in the insurance context with the contractual doctrine of privity. Clarke J noted (at 43) that the operation of the principle generally precluded recovery by the insured of losses suffered by third parties and the contractual doctrine of privity. In reaching his conclusion on the issue, Clarke J called in aid the Explanatory Memorandum accompanying the Insurance Contracts Bill, the relevant paragraphs of the ALRC Report and the decision of the High Court in Trident General Insurance Co Ltd (supra) at 118 per Mason CJ and Wilson J.

116 That portion of the judgment of Clark J on which MMI rely is this:

"The first observation which should be made is that the Act in using the words 'insurer' and 'insured' is talking about the parties to the contract of insurance or the persons proposing to enter into the contract. There is, in my opinion, a clear dichotomy drawn in the Act between a party and a person who is not a party but who is entitled to benefit under the policy. Accordingly where s 21 speaks of the duty of an insured to disclose the matters set out in s 21(1) it is talking about the party who proposes to enter into a contract of insurance in the context of those provisions in the Act which spell out the consequences of the failure by a person who has entered into the contract to comply with that duty. A similar approach is taken in those sections which deal with misrepresentation."

117 Clarke J considered it was important to take to take sufficient account of the words actually used in the relevant section and added that (at 47):

"... despite its economy of language, the subsection says in plain words that the insurer is to have the same defences to a claim by the named person as it would have in an action by the insured".

He considered that the approach of the learned trial Judge would lead to the result that the defence of fraudulent non-disclosure, open to an insured and entitling the insurer to avoid the contract, would not be available in an action by the named person. Consequently, the insurer would not have the same defences against a person suing under the right accorded by s 48(1) as it would have against the insured.

118 Clarke J proceeded to deal with the difficult question of the consequence, when a person enters into a contract of insurance and another person has the benefit of it, of a non-disclosure by one or the other. He considered s 21, s 28 and s 48 in the context of the non-disclosure point to which he was referring.

119 On behalf of Zurich, it is said that MMI have seized on the words of Clarke J in CE Heath Casualty & General Insurance Ltd (supra) to support the proposition that "insured" means a party to the contract. However, Zurich maintains that s 48 and the decision in CE Heath Casualty & General Insurance Ltd (supra) is confined to a specific aspect of contracting, the duty to disclose, which is a duty which you would usually place on the person contracting.

120 According to Zurich, MMI misconceives what Clarke J said in that case. Counsel emphasised that Clarke J was not talking generally about every section of the IC Act, the IC Act being an Act which deals with a vast array of quite disparate problems. Clarke J is said to there be giving to the words "insurer" and "insured" in the context of s 21, s 28 and s 48, the meaning to be given to them in that context, having regard to the purpose sought to be achieved by Parliament and having regard to the mischief which is sought to be overcome. According to counsel, when consideration is given to the broad reforms intended to be imposed by the IC Act, it is apparent that disparate mischief is sought to be avoided.

121 Zurich's counsel suggests that to apply to s 45 the meaning attributed to the term "insured" in other sections, without having regard to the mischief that is sought to be avoided and the purpose that is sought to be achieved by the IC Act, is to read the words in a judge's reasons as though they were words in an Act of Parliament. Another analogy would be to read the definition determined by Clarke J as the meaning of the word for all purposes, at least for all purposes within the IC Act, without giving consideration to whether it would be appropriate to do so in all circumstances. Counsel submits that the words are to be read having regard to the purpose for which they are used: Mills v Meeking [1990] HCA 6; (1990) 169 CLR 214 (at 235).

122 Counsel for MMI conceded that Clark J was dealing with issues arising from nondisclosure and in the immediately preceding paragraph he says so expressly. However, counsel noted that the language used by Clarke J in the paragraph on which MMI relies is not confined to nondisclosure cases. Clarke J expressed himself in general terms and not in terms specific to s 56. Counsel for MMI accepted Zurich's proposition that a judgment which interprets a word or phrase for the purposes of a section in an Act cannot be said to be determining the meaning of the word or phrase for the purpose of every section of the Act. MMI refutes the proposition that that is what it is doing. However, MMI submits that when one looks at the way in which Clarke J expressed himself, it can be said that his interpretation was intended to have a wider operation than the section of the Act being considered. The portion of Clarke J's judgment on which MMI relies is expressed in terms of the meaning of the terms in the Act rather than simply in the section itself. Further, he refers to the terms of s 21 as illustrating the distinction and, indeed, to other sections of the IC Act.

123 Zurich maintains that when Div 2, in which s 45 and s 48 are found, is considered, it is apparent that it deals with such disparate subjects as interim contracts of insurance, instalment contracts of general insurance, arbitration provisions, interim contracts of insurance, other insurance provisions, pre-existing defects or imperfections. In other words, Div 2 contains a vast array of controls and protections. The range of matters dealt with in Div 2 clearly reflects the title of the Division: "General provisions relating to insurance contracts". Accordingly, it is said that it is necessary to look at each provision having regard to the mischief that each provision was intended to deal with and not assume that words such as "insure", "insurer", "insured" and "party entitled to a benefit", defined in the context of particular provisions, had a set meaning everywhere they are to be found in the IC Act.

124 Generally speaking, I accept the propositions put on behalf of Zurich. However, I believe that the interpretation in other contexts of the words used in s 45 does assist in identifying the meaning of those terms for the purposes of s 45. Further, irrespective of whether the comments of Clarke J in CE Heath Casualty & General Insurance Ltd (supra) are addressed in relation to a different provision of the IC Act, it remains the fact that his Honour's comments do relate to an interpretation said to be applicable to the Act as a whole and that is a factor to which appropriate weight should be given.

125 The next authority to which MMI referred is also a non-disclosure case which is an area in which determinations of whether third parties have obligations are necessarily going to arise. In GIO Australia Ltd (supra) the insured, M, who held a motor vehicle policy with GIO allowed his partner, S, to drive his car. The vehicle collided with and caused damage to a vehicle owned by W. S did not have a licence at the time. Under the policy GIO was obliged to indemnify M in relation to certain defined events. The first was for legal liability for loss of or damage to property other than the insured vehicle. The indemnity extended to any person driving the vehicle with M's consent. Another defined event was loss or damage to M's vehicle. Following the accident M made a claim for the damage to his vehicle and GIO met the claim. W commenced proceedings against S for the cost of repairing the damage to his vehicle. S did not defend the claim and default judgment was entered against her. S made a claim on the policy relying on the extended cover provided. GIO declined to indemnify her on the basis that she was an unlicensed driver and therefore, came within the exclusion.

126 Simpson J held (at [10]) that S was a person to whom s 48 of the IC Act referred and she would, in appropriate circumstances, be entitled to recover from GIO. However, s 48 does not purport to create an extension of the terms of the contract of insurance, other than to provide standing to claim to a person to whom the policy expressly applies but who is not, in terms, a party to the policy. Under s 48(3), GIO was entitled to rely on any defence the insurer would have against the insured and hence was entitled to rely on the exclusion relating to unlicensed drivers: (at [10]).

127 Significantly, for MMI's purposes, Simpson J also held (at [11]) that S was "not 'a person who has entered into a contract of insurance' within the meaning of s 6 of the Law Reform (Miscellaneous Provisions) Act 1946". Simpson J said (at [11]):

"She is a person who was entitled, in appropriate circumstances, to the benefit of the contract of insurance entered into by [M], but she is not herself such a person. It does not seem to me that s 48 of Insurance Contracts Act alters that position; as I have already observed, s 48 would give her standing to recover under policy but her right to recover is in accordance with the terms of the policy only."

128 MMI also relies on the decision in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra). Counsel commented that the fact that the issue has not previously been dealt with in the courts is probably because the correct application of s 45(1) really has not been given close attention. Certainly, in most of the cases there was no dispute between the parties as to the correct application of, at least, s 45(1). As I have noted, in my view, this action is the result of an attempt by both parties to read more into the provision than the natural wording of it allows.

129 In particular, MMI relies on the conclusion of Robin DCJ, expressed as follows (at 8):

"It is not lightly to be assumed that merely because a policy of insurance may inure for the benefit of a person it was effected by or "entered into" on behalf of that person".

130 However MMI submits that this Court should not follow Robin DCJ's decision that the whole of the relevant clause is void by operation of s 45 because it contained, in addition to other situations not covered by s 45, a reference to insurance effected by the insured.

"In the end, I have concluded that s 45 operates by reference to the language of the limitation of the insurer's liability and what its effects may be, as a matter of interpretation or logic, rather than by reference to whether the prescribed effect stand to arise in the particular circumstances of an individual claim."

In my view, what his Honour is there saying is that one must look at the nature of the clause and then look to the precise terms of s 45, irrespective of the outcome in the particular case.

132 Counsel for MMI submits that Robin DCJ has not considered what is logically the first step: the liability that is being reduced or diminished by this provision. MMI's position is that, until one has identified that liability, one cannot go to the next step and ask whether the provision has the effect of limiting or excluding that liability. As I have indicated, I do not accept that such an analysis advances the proper construction of s 45(1).

133 On the basis that s 45(1) renders void "the provision" which has the defined "effect" Robin DCJ determined (at 9) that the insurer may not take advantage of any "effect" not covered by s 45(1). It is this "all or nothing" approach to which MMI objects. Counsel for MMI submits that not only does Robin DCJ pass over what MMI says is the key word, the meaning to be given to the word "liability", but he also fails to ask in the circumstances of the other insurance clause being considered in that case, whether or not it as capable of being read distributively, so that s 45(1) might have the effect of rendering the provision void in one of its applications but not in another.

134 According to counsel for Zurich, MMI's analysis of the decision in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) fails to pay any regard to the underlying purpose and mischief sought to be dealt with by s 45. It is said that, if the submission on behalf of MMI is to be accepted then, based on what ALRC said (at [279]), one of the most common forms of the other insurance provisions arising will escape the effect of s 45.

135 Zurich rejects the distributive approach to construction urged on the Court by MMI on the basis that s 45 was intended to render void all other insurance clauses. It is said that, whether s 45(1) is read distributively or not, the intention of Parliament was to render void all such other insurance clauses and it is s 45(2) that controls, limits and excludes the extremely narrow categories where subs (1) will not operate to avoid the provision.

136 MMI submits that the underlying insurance clause in the Hamersley Policy can easily be read in a distributive sense: namely, a clause which relates to contracts entered into by the insured and a clause relating to contracts entered into on behalf of the insured. According to MMI, the fact that policy was drafted with more economical expression, including both situations in the one paragraph, should not lead to the anomalous situation that both situations, one of which does not offend the IC Act, should be precluded from having the intended effect. I accept that it would be a very technical result.

137 While I agree that the clause can be read distributively, rendering the provision void in so far as it concerns contracts effected by the insured, but not in so far as it concerns contracts entered into on behalf of the insured, is a result which is difficult to accept in view of the precise wording of s 45(1) and the conclusion of Robin DCJ in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra). I do accept that the result is being determined by the technical expression used in the contract rather than the substance of the matter, which is something that the law attempts to avoid.

138 Counsel for MMI recognises that decision in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) is against MMI on the effect of s 45(1) in the circumstances of MMI's underlying insurance clause, but emphasises that this Court is not bound by the decision in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra).

139 I have formed the view that the effect of the underlying insurance clause is that the Hamersley Policy operates as an excess policy in two circumstances: firstly, where Hamersley has effected or entered into another insurance policy covering the same area of risk and, secondly, where another insurance policy covering the same area of risk has been effected on behalf of Hamersley. I consider the second circumstance to reflect the situation where a third party organises insurance cover of that type to the benefit of Hamersley. I consider that the expression "on behalf of Hamersley" must have the latter meaning because if it were to mean insurance arranged by an agent there would be no legal difference between that situation and Hamersley having effected the insurance itself. There is nothing controversial in these conclusions.

140 I consider the appropriate approach to the interpretation of s 45(1) to be to give the words of the section their natural meaning when considering the effect of the underlying insurance clause, in circumstances where an insured has either entered into another contract of insurance covering the same risk or where the insured has the benefit of another contract of insurance taken out by a third party which covers the same risk. In those circumstances the underlying insurance clause, in my view, clearly has the effect of limiting or excluding the liability of the insurer under the contract because it converts a policy which indemnifies the insured for the whole of the loss to a policy which insures the insured for any excess over the applicable limit of indemnity of the underlying insurance policy.

141 However, such a provision is void only where the insured has "entered into" the underlying insurance policy. I accept without reservation that the recommendation of the ALRC was to prohibit an insurer, in all circumstances other than the stated exceptions, from converting an insurance policy into an excess only policy. I also accept that the evidence points toward that being the Parliamentary intention. Further, interpreting s 45 in a way which protects an insured from the effects of underlying insurance clauses, whether the underlying insurance was effected by the insured or on behalf of an insured, is consistent with the purpose of the Act as reflected in the long title and the approach to statutory interpretation to provisions of this type identified in authorities such as East End Real Estate Pty Ltd (supra) and Kelly (1996) (supra). It is also the case that the criticisms that the ALRC levelled at excess clauses are equally applicable to contracts where the insured has the benefit of but is not a party to the contract, as it is to contracts taken out by the insured itself.

142 Nevertheless, in my view, the only way in which to achieve that result is to give to the expression "the insured has entered into" and the words of which it is comprised, a meaning they simply do not have; that is, I believe I can achieve that interpretation only by manipulating the English language to confer a meaning that is inconsistent with the natural and proper meaning. The Concise Oxford Dictionary definition of "enter into" is to "engage in (conversation, agreement, inquiry etc); to bind oneself by (recognizances, treaty, contract)". When one considers the words "enter into" in the phrase "the insured has entered into", it is evident that it involves the insured himself carrying out the activity and, in the relevant context, being the party to the insurance policy. I do not accept that the particular words employed are consistent with the arrangement involved in the Speno Policy, notwithstanding the status of Hamersley under that agreement as an insured. Further, I am not persuaded that it is appropriate to adopt any of the "devices" suggested by either party to achieve the particular result. Therefore, I accept the construction determined by Robin DCJ in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) although for different reasons.

143 The final issue with respect to subsection (1) is whether, as MMI submits, the underlying insurance clause can be read in a distributive sense with the result that so much of the clause which does not offend s 45(1) remains valid. For the reasons to which I have already referred, while I accept that the underlying insurance clause does address two different circumstances, it is the case that, as Robin DCJ noted, the clear words of s 45(1) is that it is the provision which is void; the provision being the underlying insurance clause in the Hamersley Policy. As I have already noted, I accept that this is a technical result which arises simply because of economical drafting. However, it remains the case, as I have noted, that the available material indicates that it was the ALRC's recommendation, which to all intents and purposes appears to have been accepted by the legislature (although it does not appear to have been successfully translated into legislation) that all types of "other insurance" clauses should be prohibited. On that basis, although the result is technical, it is not necessarily inconsistent with the intention behind the implementation of s 54.

144 Essentially, I believe that s 45(1) requires amendment to achieve the purpose which I accept was intended by the legislature acting on the recommendation of the ALRC.

145 With respect to the correct interpretation of s 45(2), MMI's position is that the subsection does not prescribe the way in which a contract of insurance is to be specified and nor does it refer to a minimum requirement before a contract can be said to be specified. A contract may be "specified" by name, policy number, parties, or MMI submits, by class or description. Where the second contract is not in existence at the time of creation of the first, the specification will necessarily have to be by description of the class of policy.

146 Counsel for MMI submitted that if the word "liability" in s 45(1) meant potential liability then one would need to be construing the balance of s 45(1) as referring not only to contracts already entered into but contracts which may be entered into during the life of the first policy. If the proposition is that that is somehow caught by s 45(1) then the reference to those later policies necessarily will be by reference to class description as opposed to any specific policy. Where it is contemplated that such a policy will be entered into in the not too distant future and the identity of the insurer, the terms and the policy number are known, it might be possible to provide greater specification in that situation. However, in most cases people, at the time they enter into the contract, are not going to know enough about the later contract to confer on it a more precise description.

147 The question for the Court is whether or not the Zurich policy is specified in the sense required by s 45(2). MMI's submission is that it is sufficiently specified and, further, that s 45(2) effectively leaves it up to the parties own expression of their bargain to be looked at to see whether or not there has been a specification. I accept MMI's submission that there is a whole range of ways in which parties in a given contract might choose to specify something. However, if one looks at the purpose of the section and looks at the term "specified" it would, in my view, in some way have to identify a specific contract of insurance or class of contract rather than talking about a contract in the sort of terms that are used in the underlying insurance clause in the Hamersley Policy which is, in my view, particularly general in that it simply refers to "insurance coverage" effected by the Insured or other parties involved in particular, though unspecified, projects. Counsel conceded that the wording was "somewhat" general but nevertheless submitted that there is a sufficient specification. In view of the history of the provision, one might anticipate that the provision requires greater specificity than a mere class of contract. In effect, however, the description in the underlying insurance clause only identifies a class which is itself particularly broad: that is, a class of contract taken out by the insured or other parties in varying types of relationships with the insured who are involved in a specific but unidentified project and which covers a specific but unidentified project.

148 Counsel for MMI submitted that the question to be asked is: How have the Insurer and the Insured gone about identifying the contract and within the context and confines of that contract does that meet the degree of specificity which is required by s 45(2) of the IC Act? Counsel maintained the submission that you can specify by reference to class and relied on a passage in the judgment of Mason P in HIH Casualty & General Insurance Ltd (supra) which is the only authority of which counsel was aware which addressed the question of whether specification by way of class is sufficient.

149 Mason P turned his attention to the exceptions to the principle embodied in s 45(1) and referred (at [37]) to the ALRC Report and to the recommendation as to exceptions (at [54] of the Summary of Recommendations) and the reasons behind them (at [290] of the ALRC Report). Reference was also made by Mason P to the Explanatory Memorandum explaining cl 45 of the Bill which I have outlined in full earlier in these reasons: (at [38]). Finally, his Honour referred to and quoted from the academic literature which was said by him to reveal a spectrum of opinion as to the meaning and application of the word "specified" in s 45(2).

150 The first reference to the academic literature is to Sutton, "Insurance Law in Australia" 3rd ed Law Book Co, Sydney, 1999 which is said to suggest (at 982) that s 45(2):

"... refers to the situation where contract A provides cover in relation to a loss that is not covered by contract B and contract B is specified in contract A. In that case, the section has no application to contract A. What constitutes specification is not defined but it must mean that contract B need not be precisely named but must be sufficiently described so as to be capable of identification, and the requirement of specification makes it clear that only true excess liability policies are intended to be exempted from the operation of s45(1)."

151 The second extract from academic literature is from Derrington and Ashton, "The Law of Liability Insurance" Butterworths, Sydney, 1990 at 378 which takes a slightly narrower view of s 45(2) and is as follows (at [40]):

"Because of the purpose of s 45, it is most probable that the specification of the policy to which it is to be an excess is so general that it would not meet the requirement of sub-s(2) which would except it from the general avoidance which sub-s(1) visits upon conditions relating to other insurance. [sic] Otherwise, the scope of the section is obviously intended to be far-reaching by its reference to the result, so that it may well be found to apply to all such conditions and provisions except those in an excess policy that is related to a specific and named policy."

152 The final extract from academic literature is taken from Kelly and Ball, "Insurance Legislation Manual" 3rd ed (1995) at 132 and states (at [41]) that "specified" means that the actual contract must be identified in the excess policy - otherwise the excess policy would not be a "true excess policy".

153 Having considered the ALRC Report, the Explanatory Memorandum and extracts from academic literature, Mason P considered the only judicial decision on the issue at that time: the decision of Robin DCJ in Austress-PSC Pty Ltd and Carlingford Australia General Insurance Ltd (supra) that the reference to "other insurance" must be specific, as opposed to a description in general words capable of extending to other insurance: (at 6). Mention is also made by Mason P of Robin DCJ's view that the underlying notion is that the insured and the insurer have tailored their own bargain to take account of the impact of other contracts: (at 6).

154 Ultimately, Mason P considered that it was unnecessary to seek the definitive meaning of the subsection, although the policy of s 45(1) suggested to him that the exception in s 45(2) should be construed narrowly, as some of the writers suggest: (at [44]). His Honour concluded that, even on the approach suggested by Professor Sutton, Condition 7 of the HIH policy did not specify a (emphasis added) contract of insurance such as the CU Construction Policy: (at [44], [46]). However, Mason P did refer to the reasoning behind his conclusion when he made the following observations (at [45]):

"Here there was no identification of any particular policy with any particular insurer. The type of insurance which the proprietor was obliged to take out was described in the building contract in terms of the broadest generality and with no reference to conditions or exclusions. The HIH policy is not in form or substance a type of layered insurance or excess insurance. The fact that 'a policy of insurance' would be 'principal-arranged' only emphasises its futurity, contingency and lack of relevant specificity."

However, Mason P did note that it may be that a contract of insurance need not actually have been formed and/or commenced before it is capable of being specified within s 45(2). He added that it is possible that a clearly defined class of insurance such as "X's standard Construction Policy with an excess of Y" would suffice. His Honour preferred to reserve his position on these possibilities: (at [48]).

155 MMI relied on this paragraph despite the fact that the conclusion drawn was that the relevant clause, although in very similar terms to the underlying insurance clause in the Hamersley Policy, was considered to be insufficiently specified. I accept the proposition that, if you intend the clause to specify a contract which is not yet in existence, precise details cannot be given. However, it seems to me that you can do more that talk in the very general terms of the clause here being considered. It will be necessary to specify the other policy in such a way that it is clearly understood which policy or which group of policies are being referred to and the purpose of the policy is known, so as to make it clear that the policy under consideration was indeed intended to be a true excess of liability contract in those circumstances.

156 Counsel for MMI conceded that the form of class to which the Judge referred in HIH Casualty & General Insurance Ltd (supra) was more precise than we have here but, nevertheless, the decision can be relied upon as an indication that specification by class is sufficient. I accept that proposition but consider that if the contract cannot be clearly specified then the class of contract should be.

157 Reliance was also placed on the dictionary definition of the words "specific" and "specify". In the Macquarie Dictionary, the definitions of "specific" are these:

(1) having a special application, bearing, or reference; specifying, explicit, or definite;

(3) peculiar or proper to something, as qualities, characteristics, effects etc;

The meaning MMI confers on the word "specified" is capable, at least as a matter of dictionary definition, of including "kind" as opposed to something more precise.

158 The definitions of "specify" in the Macquarie Dictionary are these:

According to counsel for MMI, definition (2) is consistent with the submission being put as to the appropriate meaning for the word "specify" in s 45(2).

159 In written submissions, MMI says that s 45(2) does not prescribe the way by which a contract of insurance is to be specified. Three ways in which a contract may be specified are identified:

(2) by class (HIH Casualty & General Insurance Ltd (supra)); and

160 Essentially, MMI submits that, when one considers the natural meaning of the term "specify" and if it is accepted that a contract may be specified by class, there is in the underlying insurance clause in the Hamersley Policy a sufficient description to satisfy s 45(2).

161 MMI also emphasises that the reference in the underlying insurance clause is to a policy which is effected by the insured itself or which is effected by a party with whom the insurer has contractual relations and is effected by that party for the benefit of the insured as an identified entity and not just as a member of an unascertained class: not just any principal but this principal. It is also said that the words in parentheses "(not being an insurance specifically effected as insurance excess of this policy)" is another facet or feature which narrows the class. I accept that, in that way, it does remove one type of "other insurance" but it is a very obvious one which, in my view, does not particularly, or sufficiently, narrow the field. MMI further submits that it has to be insurance which will respond to a claim for which indemnity is available under this policy.

162 There is one particular submission made by MMI which is of considerable force. It is that, given the specification is going to be something that varies according to the parties' expression of their bargain, one might expect it to vary according to the factual matrix in which the parties are negotiating and in which they are bargaining. The example given was that it might be one thing for CE Heath in the HIH Casualty & General Insurance Ltd (supra) case to be issuing a policy to one small builder with a limited range of contracts in any one year. It might be another thing, however, for an insurer to be issuing an insurance policy, as this one is, to the entire CRA group which has vast operations worldwide with numerous subsidiaries, many of which are also engaged in vast operations of an immense kind and engaging, one might surmise quite regularly, in arrangements with subcontractors or service providers in which there might be these other insurance arrangements. The task in such a context of having to identify by name, number, insurer or in some other more specific way would be unduly onerous, if not impossible, in view of changing contractual arrangements. However, it could be said that in those circumstances it is particularly necessary to specify the policy, at least to some extent, so that it can be ascertained whether the policy with the underlying insurance clause was indeed intended to be an "excess" policy.

163 As a result of these circumstances, MMI maintains that s 45(2) has to be read in a practical way. The factors which are said to vary the degree of precision with which other contracts are specified are said to be these:

(i) the number of "primary" insureds named in the policy;

(ii) the nature and size of the businesses conducted by those insureds;

(iv) the extent to which the primary insureds may be expected to enter into arrangements which provide alternative insurance cover;

(v) the practical difficulties of identifying by name and policy number a particular policy; to put the proposition a different way, the extent to which it is reasonable to specify a second policy by reference to class.

164 I concede it would indeed be difficult to identify with any greater specificity than as to class in the circumstances which apply to Hamersley. In that regard it is necessary in considering the extent of specification to also consider the acknowledgement in the first paragraph of the underlying insurance clause which says:

"Underwriters acknowledge that it is customary for the insured to effect, or for other parties (including joint venture partners, contractors and the like) to effect, on behalf of the Insured, insurance coverage specific to a particular project, agreement or risk."

165 Having considered the purpose of s 45(2) and keeping in mind that the requirement that the other insurance policy be specified is designed to ensure that the relevant clause is a true "excess" clause, I have formed the view that the underlying insurance clause in the Hamersley Policy insufficiently specifies the other insurance contract for it to be "saved" by s 45(2). In particular, I share the opinion of Mason P in HIH Casualty & General Insurance Ltd (supra) that broad wording of this type is inadequate. However, I do not accept some of the opinions referred to and considered by Mason P in his judgment that for a policy to be specified it must be identified by name, policy number or insurer. Whilst I accept MMI's submission that it is possible and indeed, in relation to contracts entered into subsequently, necessary to identify the other policy by class, I mean by that that it is not necessary to identify a particular policy. However, it remains necessary to provide sufficient information concerning the class to be able to identify the policies within that class as providing the primary cover, with the policy with the "excess" clause providing cover for loss over and above the limit of the other policy.

166 As Mason P observed in HIH Casualty & General Insurance Ltd (supra) (at [48]), which is the only authority of which counsel was aware which addressed the question of whether specification by way of class is sufficient (at [48]):

"It may be that a contract of insurance need not actually have been formed and/or commenced before it is capable of being specified within s 45(2). And it is possible that a clearly defined class of insurance such as 'X's standard Construction Policy with an excess of Y' would suffice."

167 Counsel for MMI, in its broad interpretation of the underlying insurance clause, relied on the extensive and varied nature of Hamersley's interests. In my view, they are the very factors which require some greater level of specificity than the fact that Hamersley enters into arrangements including joint ventures, sub-contracts and other commercial arrangements under which it is "customary" for insurance coverage to be taken out by other parties. That information, in my view, says absolutely nothing about the nature of the insurance to be provided by MMI under the Hamersley Policy.

168 I am not required to identify the way in which an arrangement of the type entered into between Hamersley and Speno should properly be specified in order to fall within s 45(2), but I would not have thought it was particularly difficult to consider the various classes of contracts requiring the other party to obtain insurance to Hamersley's benefit, to ascertain the identifying criteria in relation to each class of contract.

169 For the reasons which I have outlined, I am satisfied that the underlying insurance clause in the Hamersley Policy is in breach of s 45(1) and is not saved by s 45(2). On that basis, the clause is void and MMI cannot rely on it to allege that its liability is not co-ordinate with that of Zurich.

170 Although raised as a defence to the Zurich action against MMI, the plea that the duty of utmost good faith owed to Speno by Zurich debars Zurich from claiming contribution from MMI was argued by counsel for Speno. Speno was granted leave to intervene in the Zurich action on the basis that if MMI is liable to pay contribution to Zurich it would be entitled to exercise rights of subrogation in Hamersley's name to recover the amount of that contribution from Speno. MMI adopted the submissions made by Speno on this issue.

171 The duty of good faith is said to arise in this action because, in the Nolan action, both Zurich and Speno were ordered to indemnify Hamersley. Speno's concern is that, if MMI is ordered to contribute to the award of damages to Nolan, MMI will seek to subrogate itself to any right Hamersley may have against Speno. This is because Hamersley has a right to pursue Speno for an indemnity to which MMI can subrogate itself. Speno submits that the Court does not have to be satisfied that such action will be taken, only that there is a possibility of it occurring.

172 In that way, it is said by Speno, Zurich's claim for contribution will achieve a result that it could not itself achieve directly against Speno: to compel Speno to pay a sum in respect of the damages award to Nolan. Speno submits that this will be achieved despite the fact that both Speno and Hamersley were indemnified by Zurich in respect of claims such as that made by Nolan, that Speno was an insured under the Speno Policy and, Zurich agreed to waive its right of subrogation against Speno and Hamersley. Zurich's conduct in creating a situation which will allow MMI to attempt to recover from Speno, by subrogation, any amount of contribution it is required to pay, is said to be sharp practice and in breach of Zurich's duty of utmost good faith.

173 The proposition that Speno and Hamersley were indemnified by Zurich in respect of claims such as that made by Nolan cannot pass without comment. It is the case that Zurich indemnified Speno and Hamersley for legal liability for personal injury to persons arising out of the business conducted by Speno. However, as noted above, the policy containing the indemnity contains an employer's liability exclusion clause. Therefore, whilst Zurich did agree to indemnify Speno for claims of damages for personal injury, it did not agree to indemnify Speno for claims alleging personal injury to one of its employees, which Nolan was.

174 Counsel for Zurich also refutes the proposition that Zurich agreed not to exercise its right of subrogation. The waiver of subrogation clause is said to be for the benefit of Hamersley, not for the benefit of Speno. According to Zurich, the clause does include a waiver of the right of subrogation but only in respect of the specified contracts; that is, where there is a principal insured extension.

175 Speno's response to that submission is that it confines the clause in a way that the terms of the clause do not. Speno submits that all that the reference to the particular contract does is to identify those particular circumstances in which Zurich has agreed to waive its right of subrogation. It has agreed to waive that right generally although only in respect of the particular contracts which are identified in cl 3. The waiver of subrogation is both in favour of Speno and Hamersley.

176 According to Speno, the effect of the waiver of subrogation clause was that Zurich undertook to indemnify Hamersley and Speno in relation to third party claims arising out of Speno's business and Zurich undertook to bear fully that loss, including that Zurich will waive any right of subrogation that we might have which would have the effect of ameliorating the loss. Therefore, if discharging the duty requires Zurich to put Speno's interests about its own then that is the consequence of the policy and the underlying arrangements, the terms of which they were well aware at the time.

177 Having considered the wording of cl 3, in particular the reference to the situation where the insured has contracted to hold the principal harmless, it appears to me that the waiver of subrogation is intended to achieve that purpose. That is, nothing under the policy should result in the principal being liable to pay any amount. I have difficulty in accepting that waiver of the right of subrogation in relation to the principal would prevent the principal from being held harmless. However, subrogation to Speno's rights might affect Hamersley's position. On that basis, in the absence of some authority with respect to the proper construction of a term such as this, I believe that the provision operates to waive subrogation with respect to Speno. That means that Zurich, in relation to the Nolan claim is not entitled to subrogate to Hamersley's rights and recover against Speno. I have no evidence as to all the purposes for which the Endorsement was intended or about the way in which the Endorsement came into being to conclude that the provisions in the Endorsement relate only to the principals under the contracts.

178 Notwithstanding Zurich's position, Speno submits that Zurich is not entitled to recover any sum from Speno on account of the amount that it has paid to Nolan in discharge of its obligation to indemnify Hamersley, whether directly in its own name by claiming contribution or indirectly, by subrogation through Hamersley. The fact that Zurich, on Speno's case, has waived its right to subrogation but then claimed against MMI, is described as Zurich giving with one hand and taking away with another. Speno maintains that this prohibition of Zurich's otherwise lawful actions is not an anomalous outcome as Zurich agreed to indemnify Speno and Hamersley in relation to claims such as that made by Nolan.

179 It is apparent that Speno's submission is based on a combination of the following factors:

(i) that Zurich agreed under the Speno Policy to indemnify Speno and Hamersley for legal liability for personal injury to persons arising out of the business conducted by Speno;

(ii) that the waiver of subrogation clause in Speno's policy with Zurich applied in circumstances where Speno was obliged under a contract to hold the other party to the contract ("the Principal") harmless for the Principal's negligence.

(iii) That in the Nolan action Zurich failed in a claim for contribution from Speno.

180 Consequently, on Speno's submission, Zurich cannot subrogate itself to any right that Hamersley may possess against Speno, as Speno was its insured. As I have indicated, in my opinion, Zurich can not subrogate itself to any right that Hamersley may possess because it has waived that right, not because Speno was its insured.

181 Zurich's response to this aspect of the defence to its claim is that it treats the doctrine of subrogation and the equitable right to contribution interchangeably. Zurich emphasises that it is apparent from the statement of claim that the Court is being asked to consider two quite separate and distinct legal remedies. The first is the remedy of contribution which Zurich seeks and the second is MMI's subrogation to the rights of Hamersley in claiming against Speno. As counsel for Zurich notes, although I do not believe it is a matter for dispute, the two concepts could not be more different.

182 Zurich maintains that it discharged by performance its obligations under the contract of insurance by indemnifying Hamersley. As a result, there inured for Zurich's benefit a right of contribution from a co-insurer. Zurich maintains that in pursuing the right to contribution from a co-insurer it is not acting towards the other party to the contract in respect of any matter arising under or in relation to the contract. Zurich submits it is simply taking advantage of the principle identified in Albion Insurance Co Ltd (supra) which confers on an insurer in Zurich's position, a right to contribution from an insurer under a co-ordinate liability to make good the same loss. Therefore, Zurich is relying on a right given to it by the general law as a result of the performance by Zurich of its legal obligations under the contract. This, Zurich submits, it is entitled to do without regard to the impact that it might have on Speno.

183 Zurich's counsel asserts that Speno's submission overlooks the following very basic facts:

(1) That when Speno contracted with Hamersley, for its own commercial purposes, it agreed to indemnify Hamersley and was in the Nolan action judged to be liable to indemnify Hamersley. In that regard, if Speno suffers a disadvantage it is one of its own making.

(2) That Speno declined to insure against contractual liability. It sought and obtained from Zurich insurance against legal liability arising from personal injury and not from any contractual obligations it might seek to undertake. Therefore, the two legal obligations are separate and distinct.

184 Zurich notes that it was as a consequence of the policies arranged by Speno, that Hamersley came to be insured as a principal for loss arising from personal injury, property damage and certain other liabilities in connection with its business or products but the policy as it applied to Speno did not include liability for personal injury to Speno's employees. Consequently, the policies Speno obtained from Zurich responded in favour of Hamersley and not in favour of Speno in the particular circumstances of the Nolan action. Zurich maintains that it is of no consequence that out of the same facts arises Speno's contractual obligation to indemnify Hamersley.

185 According to Zurich, Speno's assertion that the duty of utmost good faith owed to it by Zurich precludes Zurich from exercising its right to contribution is said by Zurich to proceed on the basis of three fundamental misconceptions. The first is that Speno is, in this action, the insured to whom a duty of good faith is owed. The second misconception under which Speno is said to labour is that Zurich's obligation was to indemnify Speno in respect to the claims of Nolan and Oatway. The third misconception is that the duty of good faith is an amorphous duty owed to an insured which extends beyond the confines of the contract.

186 It can be seen that this defence, as argued by Speno, and the response to it by Zurich raise a number of issues requiring resolution. A number of those issues, if resolved in Zurich's favour, would bring an end to this defence. However, in the event that I may be wrong in relation to one or more of such issues, and because of the strong likelihood of an appeal, I propose to determine each issue.

(1) The relevant provisions of the Speno Policy and the Hamersley-Speno Contract

187 Before addressing the propositions on which Speno relies in its allegation that Zurich's claim is in breach of a duty of good faith owed to Speno, I will set out the relevant provisions of Zurich's Combined General Liability Insurance Policy ("CGL policy") as it applies to both Speno and Hamersley and also to the relevant provisions of the Hamersley-Speno Contract.

188 The clauses of the Hamersley-Speno Contract relevant to Speno's argument are cl 37 and cl 38. Under cl 37, Speno was obliged to indemnify and keep indemnified Hamersley against all claims and liabilities arising at common law and caused by the performance of the works. Clause 38 required Speno to effect and maintain throughout the term of the contract various insurances including public liability and property damage insurance covering, relevantly, all claims and liabilities in respect of any injury to or death of any person however caused. The insurances were also required to include a cross-liability clause whereby the insurer waives all express or implied rights of subrogation they may have against Hamersley.

189 Under the CGL policy, subject to the payment of or agreement to pay the premium set out in the Schedule, Zurich agreed with the Insured to provide insurance subject to the exclusions, provisions, definitions, conditions and limits of liability set out in the policy or its endorsements. The Schedule attaching to and forming part of the CGL policy in the name of Speno identifies the insured as Speno, the class of business as "Combined General Liability" and the interest insured as "[l]egal liability for personal injury to persons or loss of or damage to property of others arising out of the products and business of the Insured". As noted above, the limit of liability for public liability is $2 million for any one occurrence.

190 As to the coverage of the policy, Zurich undertook to pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay for compensation in respect of personal injury, property damage and advertising liability as a result of an occurrence happening in connection with the Insured's business or products. The exclusions included personal injury to any person arising out of or in the course of the employment of such person in the service of the Insured. The standard conditions of the policy include the following:

"7. SUBROGATION

The Insured and any other person indemnified by this Policy shall, at any time at the request and expense of the Company, permit all reasonable steps required to enforce any rights to which the company would be entitled on payment of or making good any loss under this Policy. If the company recovers an amount greater than the Company's outlays in respect of the Insured's claim any excess amount will be paid to the Insured."

191 The CGL policy also contains a cross-liability clause which states that for the purpose of the policy each of the parties comprising the Insured shall be considered as a separate legal entity and the word "Insured" shall apply to each party as if a separate policy had been issued to each of the said parties but nothing herein contained shall operate to increase Zurich's limits of liability set out in the Schedule. It is the effect of this clause which is central to the resolution of the competing views on whether Zurich's conduct breaches a duty of good faith owed to Speno.

192 One of the exclusions to the CGL policy is liability for personal injury to any person arising out of or in the course of the employment of such person in the service of the insured.

193 The Endorsements to the CGL policy attach to and form part of the policy. Clause 3 relates to the insured's contractual liability and states:

"It is hereby declared and agreed with effect from 31 December 1994 where the Insured is required by a Principal by warranty or agreement under a written Contract to hold the Principal harmless for their negligent acts and omissions in respect of that specific Contract, the Company agrees to waive their right of subrogation but only in respect to those specific Contracts noted below, in the Schedule or endorsed hereon and always limited to the said Contract's terms, conditions, limitations and exclusions of indemnity and the terms, conditions, limitations and exclusions of the Policy, whichever are the narrower."

194 Among the contracts that are noted on the policy and subject to the Endorsement is the rail grinding contract with Hamersley.

195 This is the "waiver of subrogation clause" on which Speno relies. I do not believe the construction of this clause is in dispute other than as to the identity of the insured for relevant purposes.

2. The distinction between contribution and subrogation

196 As I have noted above, Zurich maintains that the right to claim contribution is a right conferred by law that is independent of the insurance contract and hence in pursuing a claim to contribution any unintended effect on an insured under the contract does not arise under or in relation to the contract. The need to consider the nature of the right to contribution also arises out of Zurich's allegation that Speno's proposition elides the two rights.

197 The law in relation to contribution has been dealt with at some length earlier in these reasons. The principles of subrogation are considered in detail in the next part of these reasons. However, I believe it would assist to re-state the basic propositions and consider these two fundamental principles of insurance law in this particular context.

198 The High Court in Albion Insurance Co Ltd (supra) addressed the nature and operation of the doctrine of contribution. Kitto J (at 349), in addressing these issues, also referred to the origins of the doctrine, noting that it began as a rule of marine insurance and was extended to other kinds of indemnity insurance by later decisions of the House of Lords. According to "MacGillivray's Insurance Law", 4th ed, 1953 at [1651], Lord Mansfield in Newby v Reed [1746] EngR 596; (1763) 96 ER 237 and Godin v London Assurance Co [1758] EngR 138; (1758) 97 ER 419 brought together two principles. The first, a principle applicable at law no less than in equity, was that persons who are under co-ordinate liabilities to make good the one loss must share the burden pro rata. The second was that since a policy of marine insurance is a contract of indemnity only, an insured may not be more than fully indemnified for the loss. The right to contribution was also considered to be a general principle of justice accepted by both law and equity, although one which operated more effectually in a court of equity (at 350 - 351). Kitto J also observed (at 352) that the right of contribution arises from the fact that each contract is a contract of indemnity and covers the identical loss that the identical insured has sustained.

199 The Court was also referred to the case of Sydney Turf Club v Crowley [1971] 1 NSWLR 724 in which the Sydney Turf Club ("STC") had an employers' indemnity policy with the Australian Jockey Club ("AJC") which had an insurance fund and was a licensed insurer under the Workers' Compensation Act 1926 (NSW). Under that Act, a stable hand engaged in riding work on STC premises was deemed to be a worker. The AJC undertook to indemnify STC in respect of liability both under and independently of the Act for injury to any worker. The STC also had a public liability policy with GIO whereby GIO undertook to indemnify the STC against liability to pay damages for negligence at common law causing bodily injury to third parties, but excluding claims in respect of bodily injury to any person arising out of or in the course of the employment of such person in the service of the insured, the STC.

200 S was injured when riding a pony and leading a racehorse for training and exercise purposes at an STC racetrack. STC made the racetrack available for the purposes of training and exercising racehorses. S claimed damages from the STC and the STC claimed indemnity from both insurers. The AJC denied liability. GIO, though not admitting liability, accepted service of the writ issued against the STC and undertook the defence of the action without prejudice to its right of indemnity by AJC. S recovered a verdict against the STC for breach of its duty as invitor to him as invitee and GIO indemnified the STC in respect of this verdict. An action was brought by GIO suing in the name of the STC against Crowley, representing the AJC to recover the amount paid by GIO to the STC. There was an issue at trial and on appeal as to which of the insurers were actually at risk depending on whether or not S was a worker and was injured in the course of his employment. Ultimately, it was determined that the claim by S was covered by both policies.

201 The Court of Appeal held that the action at law by GIO against the AJC must fail as the proper claim was one in equity for contribution. Jacobs JA (at 730) addressed this issue by first considering some of the principles relating to indemnity insurance, in particular the principle that an insured can recover no more than the amount required to indemnify him. Also, reference was made to the principle that if the insured has recovered the whole of the loss from one insurer then it is a defence at law to another insurer to allege that fact. Jacobs JA noted (at 730) that contribution in equity between insurers was an entirely separate problem which was of no concern to the Court because of the way in which the claim had been brought. Reference was made by Jacobs JA to "an apparent exception" to these principles being applied at first instance in Austin v Zurich General Accident and Liability Insurance Company Ltd (supra) at 730. However, on appeal it was made clear by the majority that the case was not one of subrogation at all but rather one of contribution. Mason JA also concluded (at 734) that the action was misconceived because the insured has recovered his loss.

202 In reaching that decision, Mason JA set out in clear terms the precise nature and effect of the doctrine of subrogation (at 734 - 735):

"Where an insurer is subrogated to the rights of the insured against a third party, the insured does not acquire an independent cause of action in his own right. He succeeds to the insured's cause of action against the third party, in this case a right of action on the policy issued by the Jockey Club. That right of action remains in all respects unaltered; it is brought in the name of the insured and it is subject to all the defences which would be available if the action had been brought by the insured for his own benefit. Thus payment in full by the Government Insurance Office on account of the risk is a defence to the action by the appellant against the Jockey Club and it is no answer to that defence that the action is brought for the benefit of the insurer.

In truth there was no relevant right in the appellant to which the Government Insurance Office could become subrogated. Once the insured was paid in full by that insurer, the insured had no cause of action which he could enforce against the Jockey Club on its policy either for his own benefit or for the benefit of the other insurer. The Government Insurance Office could, in an action in its name, recover a pro rata contribution from the Jockey Club as an insurer against the same risk under the doctrine of contribution (Albion Insurance Co Ltd v Government Insurance Office of NSW), but that is not the present proceeding. The present action has its origin in a failure to distinguish between the doctrine of subrogation and that of contribution."

203 It is apparent from these references that the doctrines of contribution and subrogation are disparate concepts. In particular, it is apparent that an action claiming contribution is an action brought by the insurer in its own right and is not an action under the contract. Further, and significantly, the right to seek contribution is not a right arising under the contract although it is because the insurer has met its obligations under the contract that it may exercise the right to a contribution.

204 Speno rejects the proposition that it is eliding the distinction between subrogation and contribution. Counsel for Speno maintains that its submission involves considering the effect of Zurich exercising its right to contribution. Speno submits that, in the totality of the circumstances including the relationship created by the insurance policy, the consequence of exercising a right to contribution is to expose Speno to a risk of a detriment. It is that which is said to constitute the breach of good faith.

205 In view of the nature of the right to contribution, acceptance of Speno's proposition depends on establishing that the insurer's duty of good faith to the insured extends to actions taken by the insurer, independent of the insurance contract, which indirectly adversely affect the interests of the insured. Whilst that statement of the underlying features of the defence identifies the difficulties facing Speno in establishing the defence, it is the case that Speno's position would be strengthened by a finding that it is the insured under the contract under which Zurich has indemnified Hamersley. Further, it remains to be seen whether the scope of the duty of utmost good faith extends so far.

206 It is apparent from the statements as to the source of the duty that, in order to resolve this issue, it is necessary to properly identify the exact nature of the relationship between Zurich and Speno and Zurich and Hamersley as evidenced by the terms of the CGL policy, the Schedule, in particular the cross-liability clause, and the Endorsement which includes the Hamersley-Speno Contract.

207 The significance is that, according to the terms of s 13 of the IC Act, on Speno's construction Zurich, Speno and Hamersley would each owe a duty to the others. Consequently, the effect of Zurich's action in seeking contribution would have to be considered in the context of Zurich owing a duty of good faith under the contract of insurance. On Zurich's construction, Zurich would owe a duty to Speno under one contract and Zurich would owe a duty to Hamersley under another. As Zurich's indemnity arose under the contract with Hamersley, no duty was owed to Speno. Consequently, the duty which is said to have been breached would be a duty owed to a third party, if a duty is owed in such circumstances. In my opinion it would be difficult to establish that the right to claim contribution could be undermined by reason of a duty owed to a third party.

208 Therefore, the proper construction of the cross-liability clause is essential to Speno's proposition that Zurich owed to Speno a duty to indemnify Hamersley. Speno's position is that the Schedule to the CGL policy in the name of Speno identifies the interest insured as:

"Legal liability for personal injury to persons or loss of or damage to property of others arising out of the products and business of the Insured".

Therefore, under the policy, Zurich promised Speno that Zurich would indemnify it for legal liability for personal injury to persons arising out of the business conducted by Speno. The policy was then extended by a certificate of currency and insurance (although this document was not put before the Court, it was not in dispute) to cover Hamersley so that the promise contained in the policy by Zurich was a promise to indemnify Speno and Hamersley for legal liability for personal injury arising out of the business of Speno which, consequent upon the execution of the Hamersley-Speno Contract, included the performance by Speno of that contract.

209 Speno accepts that the effect of the policy was not to indemnify it in respect of any contractual liability that it might have to Hamersley arising out of the Hamersley-Speno Contract. However, Speno argues that, having promised Speno that it would indemnify Hamersley for a claim such as that made by Nolan, that being a promise that it made to Speno as its insured, it cannot now take steps which would have the effect (accepting for this argument that there is a right in MMI to make a claim against Speno) of Speno having to make a payment to MMI. That is, according to counsel for Speno, Zurich cannot institute steps which would have the effect of requiring Speno to make a payment in respect of the very liability for which Zurich promised Speno it would indemnify Hamersley.

210 Even putting to one side the proposition that the circumstances by which Hamersley came to be insured involved a promise by Zurich to Speno to indemnify Hamersley, it is unclear to me how Zurich's conduct has the effect, in practical terms, of removing or avoiding the indemnity to Hamersley. In my view, that would be the only way that it could be said that Zurich's actions are a breach of good faith owed to Speno. As noted above, the right to contribution does not destroy or diminish the indemnity which was provided. It is a separate legal and equitable right.

211 Speno maintains that it is the liability of Hamersley to Nolan which is the liability that enlivens the right to contribution which is now being sought by Zurich, and it is that liability that one focuses on in relation to the question of unconscionability or good faith. Zurich is now asking the Court to make an order which, it is said, would expose Speno to a risk of having to make a payment in respect of that very liability which Zurich promised Speno. It is the exposure to the risk which is said to be sufficient to enliven the duty of good faith on which Speno relies. Authority for that proposition can be found in the decision of Stephen J in Distillers Company Bio-Chemicals (Australia) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1 (at 31).

212 Speno's counsel also submits that, to focus simply on the contractual indemnity as between Speno and Hamersley and make the obvious point that the insurance policy did not respond to that indemnity, as Zurich suggests, is to focus on one small element of the relationship and to ignore the arrangements effected by the insurance policy. Speno also maintains that it is not relevant to say that Zurich has discharged its obligations to Speno by indemnifying Hamersley. The obligation of good faith continues because the claim arises in relation to the contract of insurance between Speno and Zurich. I accept that the duty continues. However, where the claim has proceeded to trial and the appropriate orders made, any duty with respect to the Nolan action must come to an end when Zurich did what it contracted to do, and ordered to do, which was to indemnify Hamersley.

213 Zurich's submission is that its policy should be construed as if each insured had had issued to it a separate policy of insurance. Hence, Zurich's promise to indemnify Speno is an aspect of a separate and distinct contract to Zurich's promise to indemnity Hamersley and one which did not respond to the particular claim. As to Speno's submission that there was a conflict between Speno and Zurich because of Zurich's exercise of its legal right to contribution exposed Speno to a payment, Zurich's response was that there may well be, but not because of anything to do with the insurance policy in relation to which the claim for contribution is being made because Speno was not a party to the insurance policy; it was only a third party.

214 However, Speno maintains that Zurich indemnified Hamersley under a policy of insurance made with Speno where Speno was the contracting party and Hamersley a third party insured. In support of this construction Speno relies on the fact that, in the Nolan action, Zurich failed in its claim for contribution from Speno. I have difficulty in seeing how the decision in Speno Rail Maintenance Australia Pty Ltd (supra) provides any support for Speno's construction of the Speno Policy.

215 In Speno Rail Maintenance Australia Pty Ltd (supra), Zurich claimed, inter alia, that any liability it might have to indemnify Hamersley was a co-ordinate liability with Speno's liability to indemnify Hamersley pursuant to cl 37 of the Hamersley-Speno Contract. Therefore, Speno would be liable to contribute any amount Zurich had to pay to Hamersley. The Court made a number of findings including that, whilst Zurich was liable to indemnify Hamersley under the general liability policy, it was not liable to indemnify Speno. Speno was liable to indemnify Hamersley under the Hamersley-Speno Contract, notwithstanding that it had effected the required insurance, but Zurich was not entitled to contribution from Speno in relation to its liability to Hamersley. The basis of the finding that Zurich was not entitled to a contribution from Speno was that their respective liabilities were not co-ordinate, being intrinsically different in character. Zurich's liability arose from a contract of insurance, a contract of a peculiar character, whereas Speno's arose out of a works and services contract: see Wheeler J (at 325 - 326); Ipp J (at 312 - 313).

216 On the appeal, Speno had argued that Zurich was not entitled to contribution under an insurance policy where Speno was also an insured under that policy. Speno's proposition was that it would be inconsistent with equity and the insurer's duty of good faith for the insurer to recover contribution from its own insured when the insured has paid the policy premium. The reaction of Wheeler J (at 325) to that proposition was that it was not clear to her why it would not be open for Zurich to recover from Speno by way of contribution, merely because Speno was an insured under the general liability policy. Her Honour explained (at 325 - 326):

"Speno was not insured under the policy in respect of this occurrence, since the employer's liability exclusion applied in respect of this occurrence, since the employer's liability exclusion applied in respect of it, so that the policy did not respond so far as Speno was concerned. The relevant 'insured' was Hamersley, which was the insured claiming pursuant to the policy ... Speno may have paid the policy premium in respect of Hamersley's insurance pursuant to that policy, but it was for Hamersley's benefit, not its own. Rather, Zurich would in this context be seeking to recover contribution from Speno as a third party liable to indemnify Hamersley under the separate contract, being the works and services contract. It appears to me that questions of equity and good faith cannot arise in this context merely because as a matter of fact the premium has been supplied by Speno."

217 It seems to me, that if Wheeler J considered that exercising a right of contribution against Speno did not give rise to questions of equity and good faith, it is difficult to see how those issues might arise when seeking a right of contribution against another insurer. The adverse result to Speno in either situation is the same. Only in the former situation it is a certainty rather than a mere possibility.

218 I have indicated above that Speno submitted that Zurich was under an obligation to indemnify Speno in respect to the claims of Nolan and Oatway, however, the obligation of Zurich to indemnify Speno does not extend to personal injury to Speno employees and both Nolan and Oatway were Speno employees. In making that distinction, Zurich's counsel also relies on the decision in Speno Rail Maintenance Australia Pty Ltd (supra) where Wheeler J concludes (at [160]), as is apparent from the above extract from her Honour's judgment, that Speno was not insured under the general liability policy in respect of the occurrence in which Nolan was injured because the employer's liability exclusion applied. Of course, the employer's liability exclusion applied to both Speno and Hamersley, however, Nolan and Oatway were not Hamersley's employees; they were employees of Speno.

219 Wheeler J was not called upon to determine the question of whether the legal effect of the agreement between Zurich and Speno was that there existed a contract of insurance between Zurich and Speno in which both Speno and Hamersley had the benefit or whether there were two policies, one between Zurich and Speno and one between Zurich and Hamersley. However, there are aspects of her reasons which I consider to support the latter construction rather than the former (at [160]). For example, Hamersley is described as "the relevant 'insured' which was the insured claiming pursuant to the policy" and the fact that Speno paid the policy premium in respect of Hamersley's insurance under that policy was said to be for Hamersley's benefit, not for Speno's. Therefore, according to Wheeler J, the fact that Speno paid the premium did not make it a party to the insurance agreement between Zurich and Hamersley nor did it give Speno rights vis-à-vis that agreement.

220 Zurich maintains that the construction for which it contends is apparent from the terms of cl 14 of Zurich's CGL policy, the "Cross-Liability" clause, which states that, for the purpose of the policy, each of the parties comprising the insured shall be considered as a separate legal entity and the word "Insured" shall apply to each party as if a separate policy had been issued to each of the said parties. Consequently, in this action the Court is dealing with a policy between Zurich and Hamersley. The fact that Speno paid the premium and that Speno was also named as an insured under the CGL policy is said to be of no relevance. The fact that the legitimate pursuit of rights arising from that policy has an adverse impact on a person or entity insured by Zurich under another policy is said by Zurich to be simply an unintended consequence of the exercise of those rights.

221 Support for Zurich's construction of the cross-liability clause can also be found in the judgment in Speno Rail Maintenance Australia Pty Ltd (supra). In considering a submission by Speno limiting the meaning of the clause, Wheeler J considered (at 321 - 123) the meaning and effect of the cross-liability clause. In rejecting the proposition (at 322) that the only purpose of the cross-liability clause was to limit the effect of a particular clause in the policy, Wheeler J concluded:

"Rather than the cross liability clause being intended to limit the effect of the joint insured clause, it is my view that, if anything, the intention of the policy is the other way around; that is, notwithstanding that each of the insured is to be considered as a separate legal entity and as having a separate policy, misrepresentation or non-disclosure by one will affect the insurance of the other."

222 Wheeler J also rejected (at [144]) the proposition that to substitute the word "Hamersley" as the insured at all points would be vastly to expand the risk of the policy, she considered that this submission could not stand with the condition attached to the insurance of Hamersley as principal in paragraph (c), the effect of which was to ensure that Hamersley was insured as principal only in respect of liability arising out of the performance by Speno of the contract. Despite conceding (at [146]) that some of the clauses are inapplicable to Hamersley and others distinguish between Speno as an insured and Hamersley as a Principal, Wheeler J considered (at [147]) that probably the majority of the clauses in the contract were capable of applying to Hamersley and Speno in respect of separate policies deemed to be issued to them pursuant to the cross-liability clause. Her Honour's conclusion (at [148]) was that the effect of the cross-liability clause would appear to require that the reference to the "Insured" in the employer's liability exclusion be read as a reference to Hamersley where the claim is made by Hamersley in respect of its interest.

223 Counsel for MMI submitted that, when considering Zurich's submission on the effect of the cross-liability clause (cl 14), the Court should have regard to the six opening words: "For the purpose of this policy". MMI maintained that, on this basis, the cross-liability clause should not be construed as deeming each insured as having a separate contract. However, I do not accept that the use of what are common introductory words detracts from the conclusion drawn by Wheeler J in Speno Rail Maintenance Australia Pty Ltd (supra). Despite several inconsistencies which arose from the construction, she still formed the view that the effect of the cross-liability clause was to deem Hamersley and Speno to be issued with separate policies.

224 I consider the effect of the cross-liability clause to be as Zurich submits. I have formed that view by giving the words in the policy their natural meaning. I have considered the propositions that were put to Wheeler J in Speno Rail Maintenance Australia Pty Ltd (supra) and take a similar view that, although a number of provisions are not consistent with that construction, they are not sufficient or sufficiently significant to overcome what I consider to be the obvious construction of the cross-liability clause. Further, I consider this construction is supported by the fact that most clauses are capable of applying both to Speno and Hamersley in respect of separate policies. I do not accept that simply because the insurance cover, the purpose of which was to indemnify Hamersley, was arranged by Speno and paid for by Speno, it is anything other than a policy between Zurich and Hamersley. Those factors were simply requirements of Speno under the Speno-Hamersley contract: the price Speno was prepared to pay to obtain the contract. As I have indicated, I believe this construction is supported by the decision in Speno Rail Maintenance Australia Pty Ltd (supra). Most importantly, I am unable to accept Speno's underlying premise that the circumstances by which Speno complied with its contractual obligation to effect insurance can be described as a promise made by Zurich to Speno for Zurich to indemnify Hamersley. Certainly Zurich agreed to Speno's request to provide indemnity insurance to Hamersley. However, in my opinion the only "promise" to Speno was to put the insurance in place; there was no promise to Speno to indemnify Hamersley. Once the insurance policy issued any obligation which Zurich's may have had to Speno was fulfilled.

225 For these reasons, as Speno was not a party to the insurance contract between Zurich and Hamersley, I have concluded that if any duty is owed to Speno, it is as a third party who is also an insured of Zurich.

226 The Speno Policy is subject to the provisions of the IC Act. Section 13 and s 14 address the duty of utmost good faith in relation to contracts of insurance and are in these terms:

"13. The duty of the utmost good faith

A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith.

1. Parties not to rely on provisions except in the utmost good faith

(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision.

(2) Sub-section (1) does not limit the operation of section 13.

(3) In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise."

227 Speno relies on the words "in relation to" in its submission that it is owed by Zurich a duty of utmost good faith with respect to Hamersley's claim under the Speno Policy as a result of Nolan's claim in negligence for damages. This proposition is expressed by Speno in terms of Zurich's claim for contribution only arising because Zurich indemnified Hamersley under a policy of insurance made with Speno (Speno being the contracting party and Hamersley a third party insured). In this regard, s 14(1) of the IC Act provides that, if reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision. The first observation which can be made is that the action taken by Zurich was not in reliance on a provision of the contract.

228 Speno also seeks to rely on the decisions of CE Heath Casualty & General Insurance Company (supra) at 36 - 40 per Mahoney JA and Wyllie v The National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324.

229 Wyllie (supra) involved a group life assurance policy taken out by the trustees of an employee superannuation fund. The trust deed empowered the trustee to effect policies of insurance or assurance to insure any risk and liabilities of the fund and to provide for all or any part of the benefit which may become payable from the fund. A retired employee made a total disablement claim after suffering a stroke. The plaintiff, the employee, initiated proceedings against the Fund when the insurer declined the claim. The basis of the claim was that the Fund breached its duty to act in good faith in declining the claim. The plaintiff relied upon an implied term of the policy that the insurer would act fairly and reasonably in determining the disablement claim. In the alternative, the plaintiff contended that the insurer had a duty to act fairly and reasonably in determining the question: (at 336). The defendant insurer did not admit the implied term or the existence of the duty. However, in its written submissions the insurer submitted that its only obligation was to act fairly and in good faith in the discharge of the obligation to determine the claim but was not subject to the rules of procedural fairness that might apply in a court: (at 337).

230 The factual circumstances also raised the issue of the plaintiff's status; whether he was entitled to sue the insurer directly or derivatively as the beneficiary of the benefit of the promise under the conversion option offered by the policy. As the contract was one of life insurance rather than general insurance, s 48 of the IC Act did not apply: (at 338). Further, as the plaintiff was not a party to the contract of insurance, s 13 was not available to the plaintiff in support of his claim of a breach of the duty of good faith.

231 Hunter J concluded (at 339) that the insurer was under a duty to the plaintiff to act with utmost good faith in the assessment of his claim. It was also held that the insurer was under an implied obligation to the plaintiff, in forming an opinion as to the plaintiff's disability, to act fairly, in good faith and reasonably, having due regard for the interests of the plaintiff. Having reached that conclusion, Hunter J set out the reasoning behind it: (at 339 - 341). Relying on the decisions in Trident General Insurance Co Ltd (supra), Edwards v Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 and, in particular, the statements of Mahoney JA in CE Heath Casualty & General Insurance Company (supra) at 37 - 38, which are summarised below, Hunter J concluded that the duty was owed to the plaintiff whether his status was that of a party entitled to sue the insurer directly or indirectly as the beneficiary of the benefit of the promise under an option offered by the policy: (at 339 - 340).

232 Hunter J also observed (at 340) that where s 13 of the IC Act imports a duty into a contract of insurance upon parties to the contract to act with the utmost good faith towards each other "in respect of any matter arising under or in relation" to the contract, it is extremely difficult to see how such a duty is not extended as an "incident of the relationship" in respect of a third party in the position of the plaintiff: (at 340). However, Hunter J noted that the practical consequences of that conclusion were slight in view of the fact that he accepted the plaintiff's argument that the insurer's obligation to assess the claim in good faith was an implied term of the agreement: (at 340). The decision of McLelland J in Edwards (supra) at 77,536 was cited extensively in support of this conclusion.

233 I should note that I do not consider this comment of Hunter J in Wyllie (supra) to provide support for the proposition that a duty of good faith is owed to third parties generally or, in particular to a third party in the position of Speno. The third party in Wyllie (supra) was a person entitled to sue the insurer directly as the beneficiary under the policy.

234 In Edwards (supra), McLelland J relied on the decision in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra) in deciding that, in the exercise of powers affecting the interests both of itself and the claimant, the insurer is under a duty of good faith and fair dealing which requires it to have due regard for the interests of the claimant, a duty considered to be analogous to the duty of a mortgagee in exercising a power of sale of mortgaged property. Further, McLelland J held (at 341) that in the field of insurance it was well established that where under a contract of insurance an element of the insurer's liability is expressed in terms of the satisfaction or opinion of the insurer, the insurer is obliged to act reasonably in considering and determining the matter.

235 Ultimately, Hunter J held (at 343) that the insurer failed to act reasonably, fairly or in good faith in the assessment of the plaintiff's claim.

236 In CE Heath Casualty & General Insurance Company (supra), Mahoney JA considered the application to third parties of the principle of good faith in the context of a failure to disclose (at 36 - 40). In that case, the Court of Appeal determined the issue of whether a person covered by a contract but not a party to it was under an obligation of pre-contract disclosure. Mahoney JA acknowledged the existence of the principle of utmost good faith and referred to the historical basis for the principle: (at 36 - 37). His Honour noted that the principle of utmost good faith has long been applied to all classes of insurance, noting that it dates back, at least, to the decision in Carter v Boehm [1766] EngR 157; (1766) 97 ER 1162 where Lord Mansfield made the following statement (at 1164):

"... Insurance is a contract of speculation.

The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist ...

The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet the under-writer is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, at the time of the agreement ...

Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary."

237 It can be seen that in this early enunciation of the principle, the context was the provision of misleading information or a failure to properly inform. The obligation of disclosure was on the insured and arose from the nature of the contract of insurance including the relationship between insurer and insured, and the obligation to act in good faith which arises from that relationship. However, in CE Heath Casualty & General Insurance Company (supra), the principle was not limited to the insurer and the insured.

238 Mahoney JA held (at 37) that the principle of utmost good faith is not limited to those who under the general law are actual parties to the contract of insurance. It extends also to others "who are necessarily involved in the insurance". However, it is clear that Mahoney JA was not there determining that the principle applies to all persons "necessarily involved in the insurance". His Honour identified two classes of cases in which the duty would apply to a third party. The first was in what Mahoney JA described as "trust cases" and the second was with respect to "benefit cases". Mahoney JA considered (at 37) that it would be surprising if a third party was not the subject of a duty of good faith where the insurer contracts for insurance of the insured and the insured holds the benefit of the contract of insurance on trust for the third party. His Honour also decided (at 37 - 38) that the same principle extended to "benefit cases" where contracts were commonly entered into for estate planning purposes and with a view to conferring benefits upon third persons, revocable at the wish of the proponent party to the policy.

239 However, Mahoney JA considered (at 38) that the view that the operation of the principle of good faith is not limited to those who, at law, are parties to the contract of insurance flows from the nature of the principle itself. He described it as a broad principle applicable to the making of insurance contracts and the performance of them. In reaching that conclusion, Mahoney JA relied on the decision in Khoury v Government Insurance Office of New South Wales [1984] HCA 55; (1984) 165 CLR 622 where it was established (at 637) that the principle was not based on the doctrine of implication of terms but was "an incident of the relationship" of insurance. Although Mahoney JA did emphasise (at 38) that there were limits to what the principle requires.

240 Each of the cases to which Mahoney JA referred in this context dealt with the duty of good faith with respect to disclosure. However, in deciding that the duty of good faith operates not merely in relation to the making of a contract of insurance but also to aspects of the performance of it, reliance was placed on the decision in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra) which did not involve disclosure but the exercise of a right under the contract of insurance.

241 In Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra), a public risks insurance policy issued to a distributor of drugs provided a limit on the total liability of the insurer for all compensation payable arising out of any one occurrence or number of claimants in respect of any one occurrence attributable to one source or cause. The policy further provided that the insured:

"... should not without the consent in writing of the insurer make any admission, offer, promise or payment in connection with any accident or claim, and the insurer 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".

242 A number of actions for damages for negligence in relation to a certain drug were pending against the insured. Following the institution of these actions the insured sought declarations against the insurer that it had failed to admit any liability to indemnify under the policy. The insurer had not elected to take over or conduct the defence or settlement of the action and did not concede the insured's legal liability nor that the conditions entitling the insured to indemnity had been fulfilled. Further, it refused to consent to the insured making any admission, offer, promise or payment. The insurer 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.

243 One aspect of the appeal dealt with the interpretation of the contractual term prohibiting admissions or settlement by the insured without the consent of the insurer. This part of the case is relevant to this action in so far as the insured contended that the withholding of consent by the insurer must be subject to an implied term that it may not be withheld unreasonably. In addressing this issue, Stephen J (at 23) referred to "some features peculiar to insurance against risks of third party liability". His Honour considered (at 23) that insurance policies which combine an upper limit on indemnity with a prohibition on settlement of claims by the insured without the insurer's concurrence 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 the upper limit of indemnity. I will not refer to those conflicts because they are obvious and not of the precise nature as that which is said to arise in this action.

244 Stephen J held (at 26) that the insurer was not acting in breach of the relevant provision by failing to admit liability to indemnify. However, his Honour considered that whether or not there was a breach of the provision was only part of the story because he regarded the power of the insurer as being "hedged around with safeguards for the legitimate interests of the insured": at 29. He said (at 26 - 27):

"... the consent ... 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."

245 Support for this view was said by Stephen J to be found in Groom v Crocker [1939] 1 KB 194 where Sir Wilfred Green MR expressed the view (at 198) that the insurer had a duty to each person it insured which was a duty unrelated to its duty to indemnify and concluded (at 203) that insurers must 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. In Groom (supra) (at 223), Scott LJ reached the same conclusion that certain entitlements under the policy could not be exercised arbitrarily. The insurer was bound to exercise a real discretion after due consideration of the circumstances including the effect on the insured.

246 As to the balance of the Court in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra), Menzies J considered (at 10) that whether in the circumstances the refusal of the insurer to give its consent in writing to the insured lacked bona fides or was unreasonable were important questions of law which depended on findings of fact which had not been made and which required full consideration after argument. For those reasons Menzies J declined to decide the issue. However, it is apparent that his Honour considered that the exercise of the right by the insurer should be reasonable and made in good faith. Gibbs J (at 14) reached a different interpretation of the relevant clause, finding that the prohibition on the insured only applied where the insurer elected to take over and conduct the defence of the claims. However, in reaching that decision, Gibbs J referred (at 12) to the principle that "the insurer could not refuse his consent arbitrarily and in complete disregard of the interests of the insured". To that extent only, Gibbs J was in agreement with Stephen J.

247 A consideration of Groom (supra) indicates that the Court in that case, as in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra), was considering the constraints, if any, on the insurer in exercising a right conferred under the policy. In Groom (supra), the insurer's conduct arose in the context of a legal action arising from an accident involving the respondent's vehicle where the driver of the other vehicle was solely to blame and in which the respondent's brother had been injured. The respondent was insured against third party risks with F Society, the insurer. It was a condition of the policy that F Society, if it so desired, was entitled to have absolute conduct and control of any proceedings brought against the insured. The owner of the other vehicle was insured by M company. That company and the F Society agreed that their total liability in the brother's action and another entirely unrelated action should be borne in equal shares. As part of that the agreement, the appellants, F Society's solicitors, on the instructions of F Society and unknown to the respondent, entered a defence in which the respondent admitted negligence. Both F Society and the appellants knew that the respondent has not been guilty of negligence.

248 The Court held that F Society were not entitled under the policy to require the respondent to admit negligence and that the appellants in admitting negligence by the respondent acted in breach of their contractual duty to him as his solicitors. The appellants argued that making an admission, without the consent of the respondent for whom they acted, of allegations they did not believe to be true and which would damage the client's reputation, in order to enable F Society to obtain for themselves a pecuniary advantage, was not a breach of duty because of the policy provision referred to above. The Court took an entirely and unanimously different view.

249 Sir Wilfrid Green MR described the key issue as whether the admission of negligence was one which in the circumstances the insurers were entitled under the policy to require the assured to make. He was firmly of the view that it did not. Sir Wilfrid Green MR described the effect of the relevant provision in these terms (at 203):

"The effect of the provisions in question is, I think, to give to the insurers the right to decide upon the proper tactics to pursue in the conduct of the action, provided that they do so in what they bona fide consider to be the common interest of themselves and their assured."

Acting out of a desire to obtain for themselves some advantage outside the litigation in question and with which the assured had no concern, was not considered to meet this obligation: (at 203).

250 Scott LJ similarly considered that the validity of the defence raised by the appellants that they acted on the instructions of F Society depended on "the true measure of the society's rights under the policy to give instructions": (at 222). Scott LJ held that the scope of the right under the relevant condition was subject to certain implied boundaries and limitations and was not one that the Society was entitled to exercise arbitrarily. He said (at 223):

"They were bound to exercise a real discretion upon each question 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 - namely, that in return for his indemnity their assured allowed them freedom to deal with the pecuniary risk to which they were exposed as economically for themselves as they could without bringing into the account extraneous considerations wholly foreign to the subject matter of the insurance between him and them."

251 Scott LJ had no difficulty in concluding that the respondent would have legal ground for complaint on the established facts: he considered those facts did not leave room for doubt that F Society's conduct was wholly outside the field of discretion entrusted to it under the relevant policy provision: (at 223 - 224).

252 McKinnon LJ stated that he agreed with the balance of the Court: (at 226). However, his own conclusions were at all times expressed in the context of the solicitor-client relationship rather than the obligations of the insurer with respect to the insured. He considered that the condition in the policy conferring on F Society absolute conduct and control of all or any proceedings against the assured was subject to an implied term that the solicitor who is selected by the society must act reasonably in the interests both of the assured and the society: (at 226). McKinnon LJ described in the following terms the obligation on the solicitor in the context of acting as solicitor for the assured but being appointed by the society to protect its interests (at 227 - 228):

"If in regard to any question of tactics in conducting the litigation the solicitor has reason to discern a conflict, or possible conflict, of interest between the society and the assured, it is the duty of the solicitor to inform the assured of the matter. If the assured then insists on a course that the society disapproves, it can refuse to conduct or control the proceedings any longer, and leave the assured to do so at his own risk ..."

253 That portion of the judgment in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra) on which Speno specifically relies is in the judgment of Stephen J (at 31) where he recognised an implied obligation on the insurer to act in good faith towards the insured and to have regard to more than the insurer's own interests when exercising its rights and powers under the contract.

254 While in the Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra) case it is clear that the interests of the insured are to be given consideration by the insurer when exercising a right under the contract, expressed by Stephen J as a "duty of good faith and fair dealing", the facts of that case are not on all fours with this action, in particular, as I have found that Speno was not a party to the insurance contract.

255 Zurich describes Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra) as "replete with references" by Stephen J to discretions and powers under the policy. It is said that Stephen J does not turn his attention to rights of property that inure to the insurer as a result of discharge of performance. Further, counsel for Zurich disputes that Groom (supra) is a good faith case and refers to the decision of Chesterman J in Re Zurich Australian Insurance Ltd (1999) 10 ANZ Ins Cas 61-429 to support the conclusion that Groom (supra) in fact dealt with contractual obligations. I accept that was certainly the approach taken in McKinnon J. Chesterman J (at [61]) deals with the decision in Groom (supra) and makes the following point (at [65]):

"The court held that the solicitor was liable for breach of duty in contract only and that the solicitor had broken his contract of retainer to act with reasonable care. What is important for present purposes is that the policy on which the solicitor relied to justify his admission of negligence was construed not to entitle the insurer, and therefore the solicitor, to act in disregard of Mr Groom's interest."

256 On behalf of Speno it is submitted that the obligation to have due regard to the interests of the insured will ordinarily operate where the insurer is dealing with third parties; for example, by way of compromising or defending claims or bringing suits against them. It is in those situations, it is said, that the interests of the insured and the insurer are likely to conflict in such a away that an insurer, acting solely out of self-interest, may harm the interests of its insured. Support for that proposition is said to be found in Re Zurich Australian Insurance Ltd (supra) a decision of a single Judge of the Supreme Court of Queensland, Chesterman J (at [82] - [86]).

257 In Re Zurich Australian Insurance Ltd (supra), the plaintiff sued a hospital for alleged negligence causing personal injury while she was an in patient. The hospital had public liability insurance with GRE Insurance Ltd ("GRE") which was later replaced as insurer by Zurich Australia Insurance Ltd ("Zurich") and succeeded to all its rights and obligations contained in the policy. Condition 3 of the policy basically provided that Zurich would pay the hospital all sums which the hospital was required to pay to compensate for bodily injury occurring during the period of insurance to a limit of $200,000. Upon paying the limit of indemnity Zurich was under no further liability in connection with the claim except for costs, charges and expenses recoverable from the hospital or incurred by Zurich, or the hospital with Zurich's written consent, prior to the date of such payment.

258 In accordance with the policy, Zurich conducted the hospital's defence of the proceedings but when it became apparent that the hospital would be liable for substantial legal costs as well as damages in excess of $200,000 if the claim was successful, Zurich purported to exercise its rights under Condition 3 and walk away from the liability by giving the hospital a cheque for $250,000; $200,000 being the amount of the maximum liability and $50,000 being Zurich's estimate of the plaintiff's costs against the hospital up to the date the cheque was tendered. The hospital refused the cheque on the basis that it did not accept that Zurich could walk away from the defence of the proceedings or leave the hospital unprotected against any costs order.

259 The hospital also argued that it was a breach of the insurer's duty to act with the utmost good faith to its insured for Zurich to rely on Condition 3 so as to decline indemnity for the hospital's costs of defending the claim or any costs that the hospital might be ordered to pay the plaintiff. As the policy was entered into in 1972, it was prior to the enactment of the IC Act in 1984.

260 Chesterman J held that Zurich was never under an obligation to pay for the hospital's defence. It was a matter of Zurich's discretion as to whether it did so. Condition 3 allowed Zurich to bring the defence to an end, once started. However, Zurich was obliged to indemnify the hospital against any costs awarded to the plaintiff: (at [122]).

261 In addressing the issue of whether Zurich acted in breach of the duty of good faith to the insured, Chesterman J first considered the content and scope of the duty, observing that its nature outside the IC Act was obscure: (at [35] - [36]). Reference was first made to the ALRC Report (at [328]) which describes the duty of utmost good faith as a common law requirement that insurer and insured act in the utmost good faith towards each other; in my view, a singularly unhelpful definition. The ALRC does recognise, as I have noted above and as does Chesterman J (at [37]), that the principle is usually recognised in connection with the duty of disclosure. The decision of Stephen J in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra) is relied upon as authority for the view that, in principle, the duty should apply equally to other aspects of the insurance relationship. The ALRC does acknowledge that there was no reported decision (at that time) applying the duty to the payment of claims.

262 Chesterman J noted (at [37]) that, in the context of disclosure, the duty is to disclose material facts. The duty is not to act in good faith. It is because the relationship between the insurer and the insured is one "of the utmost good faith" that the duty to disclose arises but the duty is described in more specific terms than to act in good faith. Chesterman J acknowledged (at [38]) that a similar phenomenon could be seen in relation to other incidents of the contract of insurance, giving the example of the requirement of good faith from both insurer and insured as providing the rationale for construing policies of insurance in favour of the insured where ambiguity arises. Other examples are given from which Chesterman J concluded (at [40]) that, in each instance, the relationship, that of good faith, was not itself expressed in terms of an obligation but is the basis for implying a more specific duty.

263 Close scrutiny was given by Chesterman J to the obiter remarks of Stephen J in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra), expressing the view (at [46]) that Stephen J was the only member of the Court to consider the question of good faith. Chesterman J's analysis of the authorities and materials which Stephen J referred to and considered, in particular those from the United States, led him to the view (at [59]) that:

"... the American experience is an uncertain, and for that reason, unhelpful guide to the content or ambit of the duty of good faith in contracts of insurance".

264 A consideration of Groom (supra) (at [61] - [68]) drew the comment that:

"... the matter was dealt with not on the basis of some supervening or overriding duty of good faith but by implying limitations on the manner in which the power given to the insurer by the relevant condition in the policy could be exercised".

It is apparent from the above analysis of the judgments in Groom (supra) that that is so.

265 Chesterman J (at [69]) referred to an extract from "Insurance Law in Australia" 2nd ed, by Professor Sutton in which the author attempts to define the term "good faith" and to the two decisions of this court, Kelly v New Zealand Insurance Company Ltd (1993) 7 ANZ Ins Cas 61-197 and on appeal (Kelly (1996) (supra)) in which the Full Court quoted the relevant passage of Professor Sutton's work in finding that there had been no breach by an insurer of the duty to act in good faith in that there had been no dishonest, capricious or unreasonable conduct by the respondent. His Honour then observed (at [72]):

"I have difficulty comprehending what useful role the obligation can play in relation to powers or discretions conferred on one of the parties to a contract if the essence of the obligation is to act honestly. A dishonest exercise of a power is no exercise of the power at all. Dishonesty encompasses use of the power for a collateral or ulterior purpose or motive. The law of contract does not require a separate doctrine of good faith to provide a remedy in such a case."

266 The overall conclusions drawn by Chesterman J after the various analyses to which I have referred are contained in the following, somewhat lengthy, extract from his reasons (at [82] - [86]):

"I have concluded, as a result of my review of the cases and articles, that there is not, as the hospital submits, a separately existing independent general duty to act in good faith which would circumscribe Zurich's exercise of the choice given it by Condition 3. Consistent with what I understand to be the principles of the law of insurance and the nature of the relationship between an insurer and an insured, that it requires good faith from each to the other, there is an implied limitation in any term of a policy which confers rights or powers on the insurer that they be exercised with due regard for the interests of the insured where those interests conflict with the insurer's.

This approach is supported by Groom and, I think, by Stephen J in Distillers. His Honour expressly approved Groom and, though referring to a 'duty of good faith and fair dealing', his Honour also referred to 'the implied obligation imposed upon the insurer to have regard to more than its own interests when exercising its right and powers under the contract ...'. The approach is also consistent with the obligations to disclose material facts, minimise loss and produce clear policy wordings. In each instance it is the nature of the relationship which impels the imposition of the duty.

The central problem remains. What is 'due regard' for the interests of the insured? ... One can say with confidence that due regard will depend upon the nature of the right being exercised and the circumstances in which it comes to be exercised but that is not to say very much. To my mind an important factor is that the parties have agreed by formal written contract to confer on one of them, the insurer, a discretion, the exercise of which will or may occur in circumstances where their interests are opposed. In other words ... the contract indicates a mutual intention that the insured be placed, to a certain extent, in the insurer's hands in relation to the exercise of the power.

Importantly the implied limitation that an insurer will exercise rights with due regard for the interests of the insured has little application with respect to a condition which operates only as between the insurer and the insured. Condition 3 expressly confers upon the insurer the right to act in a way which can only be inimical to the insured's interests. An implied term can scarcely overcome this express agreement by the insured that the insurer may act to its detriment.

The situation is different, as the cases illustrate, where an insurer is empowered by the policy to deal with third parties either by way of compromising or defending claims or bringing suits against them. The interests of insurer and insured, which may be different, are affected by the outcome of the action or defence. One can readily see how the insurer should be mindful of its insured's position when defending, suing or compromising. But the capacity of the insurer to injure the interests of the insured pursuant to a term that only operates between insurer and insured and which expressly authorises the conduct is of a wholly different category."

Ultimately, Chesterman J concluded that the duty had no application to the exercise of the powers contained in Condition 3 and hence, in exercising the right given by Condition 3, Zurich was not acting without due regard for the insured's interests: (at [88]).

267 However, Chesterman J considered (at [73]) that s 13 of the IC Act brought a change to the law. A different view was reached by the Full Court of the Supreme Court of WA in Kelly (1996) (supra) to which Chesterman J referred in his reasons, as I have noted above. In Kelly (1996) (supra), the issue arose in the context of a claim under a home and contents policy where the respondent, the insurer, refused to indemnify the appellant, the insured, for the loss of various antiques through theft. It was not in issue that the appellant was insured with the respondent. The respondent's position was that the appellant was limited in its entitlement to a fixed amount by reason of the terms and conditions of Item 5 of that part of the policy that dealt with contents. Under Item 5 recovery was limited to a maximum of $5,000 for claims arising out of any one event. However, if the insured wished to extend the cover (at no extra cost) he needed to provide the insurer with a list specifying each item valued over $1,000. The appellant had not provided such a list; however, the respondent had accepted the premium for an increased level of insurance than for the previous year.

268 Owen J, who wrote the leading judgment, and with whom Kennedy and Steytler JJ agreed, referred to the duty to act in utmost good faith in these terms (at 76,512):

"The duty of parties to an insurance contract to act towards one another with utmost good faith has long been a fundamental principle of Insurance Law. It is also recognised in s 13 of the Act: see Sutton: 'Insurance Law in Australia' (2nd ed). In this case it was not in dispute that the parties were bound by a duty to act in good faith. The issue was whether, in the circumstances, the respondent had discharged that duty by accepting a higher premium for an increased level of cover without at the same time notifying the appellant of the ramifications of item 5."

269 Owen J's reference in this extract from his judgment to the way in which good faith relates to the contract of insurance is substantially in accordance with the views expressed by Chesterman J in Re Zurich Australian Insurance Ltd (supra).

270 Owen J further observed (at 76,518-9) that, at common law, contracts of insurance are described as contracts uberrimae fidei or contracts of good faith, the precise definition of which was said to depend on the legal context in which it is used but includes notions of fairness, reasonableness, honesty, community standards of decency and fair dealing. The references cited in support of that interpretation, Sutton, "Insurance Law in Australia" 2nd ed and the New Zealand decision of Vermulen v SIMU Mutual Insurance Association (1987) 4 ANZ Ins Cas 60-812 were considered by Chesterman J in Re Zurich Australian Insurance Ltd (supra) (at [69] - [71]) and led him to make the following observation (at [71]):

"I do not find these formulations of any assistance in determining with any degree of clarity or specificity what is the nature and extent of the duty to act in good faith imposed upon an insurer (and an insured) after the contract has been made. A multiplicity of synonyms and rhetorical appeals to 'honesty', 'fairness', 'decency' or lack of caprice merely cause confusion."

271 Further, contrary to Chesterman J's view (at [73]) that s 13 of the IC Act brought a change to the law, Owen J observed (at 76,519) that by s 13 of the IC Act the common law duty of good faith was now an implied term in every contract of insurance. However, after setting out the terms of s 13 and the effect of s 12, and with reference to the issue under consideration, Owen J stated (at 76,519) that the duty of good faith does not require that the parties make further disclosure after the contract has been entered into. As I have already noted, the authorities do support the view that a duty of disclosure arises where the relationship between the insurer and the insured is one of the utmost good faith. Insofar as the statement made by Owen J is confined within that context, there is no conflict between the views of Chesterman J and the WA Full Court. I believe it is also of significance that the existence of the duty in the general terms identified was not in dispute between the parties (at 76,512).

272 Ultimately, Owen J concluded (at 76,520) that there was no dishonest, capricious or unreasonable conduct by the respondent but added that it was not necessary for a party to point to conduct of any particular degree of seriousness in order to establish a breach of the duty. However, in the case under consideration Owen J was of the view that there was nothing that could be sheeted home to the respondent that could be said to offend "the essential element of honesty" that he considered to be at the heart of the good faith principle. The appeal was dismissed.

273 It is clear that Owen J considered that the element of honesty was the gravamen of the duty. As I have noted above, this was the very element that caused Chesterman J to observe (at [72]) that "[t]he law of contract does not require a separate doctrine of good faith to provide a remedy" in the case of a dishonest exercise of a power. I believe that there is a tenable argument that the existence of an overriding duty of good faith in relation to contracts of insurance has become a useful way of addressing and remedying any conduct that has an adverse impact on the insured.

274 The Court of Appeal of this State again considered the issue of the duty of good faith in the context of insurance contracts and also in the particular context of the conduct of an action in Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd [2005] WASCA 106; (2005) 30 WAR 290. The appeal was from a discretionary interlocutory decision of the trial Judge to allow an amendment to an insurer's defence in a third party action. The facts are somewhat complex but can best be summarised as follows.

275 F sued W and others for personal injuries arising out of a collision between two vessels during sea trials. W claimed indemnity under an insurance policy with L. L denied liability for the claim on the basis of an exclusion clause in respect of claims by employees or other person in, on or about the insured vessel. L settled a claim by W under the same insurance policy for damage to the vessels involved in the collision. After F commenced proceedings against W, W commenced third party proceedings against L seeking indemnity under the insurance policy. After the matter had been listed for hearing but before the trial commenced, F sought to amend the statement of claim to allege a breach of statutory duty against W for having the vessels fitted with certain radio equipment required by law. W consented to the amendment. L applied to amend its defence to allege that W's policy did not respond to the claim as W had not satisfied a warranty in the policy that it would comply with all statutory obligations. L was granted leave to amend by the trial Judge. While the hearing of the third party proceedings were pending, W sought and obtained leave to appeal against the decision allowing the amendment. W argued that L was not entitled to rely upon the breach of warranty defence for a number of reasons not relevant to this action but one of which was by reason of L's duty of utmost good faith.

276 The duty of utmost good faith on which the appellant relied was the statutory duty in s 23 of the Marine Insurance Act 1909 (Cth) ("the MI Act"). Although the consequences of a breach of the duty are different as between the MI Act and the IC Act, the statement of the duty is the same. However, the consequence of a breach under the MI Act is that the contract may be avoided. Such an extreme consequence may well colour the interpretation and application of the duty.

277 Steytler P, who wrote the leading judgment, first noted that the duty was mutual, before questioning whether the duty extended into the litigation of the claim: (at [66]). Steytler P noted that it had been held that, as regards both the common law duty and the statutory duty, that the duty extends at least up to and including the making of the claim. After noting that there is a view that the courts have shown no anxiety to apply the doctrine beyond the stage where a claim is made, Steytler P observed (at [66]) that the suggested limitation may be doubtful in liability insurance where the need for good faith may continue in dealings with the insured's claim for indemnity. A number of the cases referred to in this part of the judgment would support that view. If one accepts that a duty of the type alleged exists, then, in my view, there are strong arguments in favour of its continuation while determining the claim. However, once there is litigation between the insurer and the insured, the way in which the duty is applied may need to alter.

278 In describing the nature and content of the duty, Steytler P relied on the decision in Kelly (1996) (supra) and on the authorities cited in that case, including the decision in Vermulen (supra) (at 74,983) to the effect that the duty has as an essential (but not necessarily sufficient) element the notion of honesty. The decision of Stephen J in Distillers Company Bio-Chemicals (Australia) Pty Ltd (supra) was also cited. Curiously, the decision of Chesterman J in Re Zurich Australian Insurance Ltd (supra) was cited in support of the existence and nature of the duty despite the fact that Chesterman J made it clear in his analysis that he doubted the interpretation subsequently given to Stephen J's judgment as supporting the view that there is in relation to contracts of insurance a separately existing independent general duty to act in good faith: (at [83]). Further, it was the reference in Vermulen (supra) to the essential obligation of honesty with which Chesterman J had the greatest difficulty: (at [70], [72]).

279 Steytler P also referred (at [66]) to Derrington and Ashton, "The Law of Liability Insurance" 2nd ed, 2005 and the authors' view that good faith has generally come to mean fair dealing in which the one party puts the interest of the other at least at the same level of protection as his or her own. As with Sutton and others, Derrington and Ashton appear to have accepted the existence of the duty and its nature without conducting the critical analysis undertaken in Re Zurich Australian Insurance Ltd (supra) which might call into question, at least the way in which the duty is expressed. It would seem that it is this uncritical acceptance of expressions used in judgments, where the concept of a duty of good faith is considered in differing contexts, which has led to the adoption of a duty of good faith in the IC Act as an overarching obligation in all aspects of the dealings between an insurer and its insured.

280 Difficulties necessarily arise where the insurer is attempting to enforce a right in a contract voluntarily entered into by the insured, where to do so will have an adverse impact on the insured. Steytler P in Wiltrading (WA) Pty Ltd (supra) noted that nothing in the duty can prevent an insurer from acting reasonably in its own interests or to its own advantage in a respect or respects contemplated by the policy itself: (at [67]). Problems often also arise in relation to litigation following a claim for indemnity. As the context of the duty in Wiltrading (WA) Pty Ltd (supra) was a contract of marine insurance, Steytler P, considered (at [69] - [74]) a number of English authorities in that area which also involved a statutory duty of good faith.

281 One such case was Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (The "Star Sea") [2003] 1 AC 469. In The "Star Sea", the defendants argued for a requirement of fair dealing and disclosure by the insured to the insurer even after litigation between them had commenced. Lord Clyde (at 481) found the "idea of a requirement for full disclosure superseding the procedural controls for discovery in litigation" to be "curious and unattractive, and one which would require to be soundly based in authority or principle". His Lordship decided that a "flexible construction" of the concept of utmost good faith should be adopted as the "substance of the obligation which is entailed can vary according to the context in which the matter comes to be judged": Wiltrading (WA) Pty Ltd (supra) (at [70]).

282 Lord Hobhouse (at 494) also considered that the content of the obligation to observe good faith varies and has a different application in different situations. He went on to consider (at [503] - [505]) whether the obligation of good faith and disclosure continues to apply unqualified once the parties are engaged in hostile litigation before the courts and concluded that once the parties are in litigation it is the procedural rules which govern the extent of the disclosure which should be given in the litigation, not s 17 as such, though s 17 may influence the Court in the exercise of its discretion: Wiltrading (WA) Pty Ltd (supra) (at [71]). Lord Scott also concluded (at 511) that the content of the duty of utmost good faith was not the same after the contract as before. His Lordship also expressed the view that the duty owed by an insured in relation to a claim was limited to a duty of honesty: (at 515); Wiltrading (WA) Pty Ltd (supra) (at [72]).

283 The dicta of the House of Lords in The "Star Sea" was endorsed by the Court of Appeal in Agapitos v Agnew [2002] EWCA Civ 1327; [2003] QB 556 where Mance LJ said (at 578) that the policy considerations which led Lord Hobhouse to restrict the statutory duty to the pre-litigation period militated strongly in favour of a similar restriction of the duration of the common law duty.

284 In Wiltrading (WA) Pty Ltd (supra), Steytler P concluded (at [77]) that the issue of whether the insurer was precluded by his duty to act in good faith from amending its defence did not require determination in the course of urgent interlocutory proceedings. Prior to reaching that conclusion, he expressed the view (at [75]) that there was a very powerful argument that the duty of good faith is superseded or exhausted by the rules of litigation once litigation has commenced. Steytler P also observed that the content of the obligation might vary, or have a different application in different situations and might be thought to depend on the individual circumstances of the case, including the issues of knowledge and conduct and also upon the proper application of the rules of litigation.

285 In this case Speno is entitled to seek to rely on the terms of s 13 and any principle requiring the insurer to act in good faith in relevant circumstances that can be gleaned from the authorities to which I have referred. I have already adverted to Speno's claim that s 13 implied into a contract of insurance an obligation on each party to act in good faith, specifically, "in relation to" the contract. In my opinion, the term "in relation to" must be confined in a practical way. Unfortunately, the expression can be as wide or as narrow as the circumstances require. However, I believe that when it comes to placing an obligation on a party to act in good faith, where potentially the interests of one party may be placed above those of the other party, there is a strong argument in favour of a narrow interpretation. It is not possible or necessary to describe the circumstances in which conduct may be said to be "in relation to" a contract of insurance. However, I am not persuaded that the right to seek contribution, the obligation to indemnify being fulfilled, is "in relation to" the contract. In any event, as I have concluded that Speno was not a party to the contract, the provisions of s 13 do not apply.

286 Notwithstanding that the concept of utmost good faith has come to be applied almost as a matter of course in all types of insurance contracts, I believe Chesterman J's analysis in Re Zurich Australian Insurance Ltd (supra) shows that the nature and scope of the duty has in many cases been misconstrued. Further, the practice of repeating short statements of the duty and its content from texts or from other judgments, has contributed to that result. Indeed, these short statements of the duty have been utilised with such frequency in determining the rights of the parties to insurance contracts that the existence of the duty and its application to all aspects of the insurance contract has become so well established that its existence as an implied condition of contracts of insurance has been enshrined in legislation.

287 The content of the duty has been variously described. It is said to include honesty, fairness, decency and lack of caprice. It has also been said to require fair dealing. The duty has also be held to contain an "essential element of honesty". Lord Scott in Manifest Shipping Co Ltd (supra) considered the duty to be limited to a duty of honesty. However, Steytler P in Wiltrading (WA) Pty Ltd (supra) considered honesty to be an essential element but not necessarily sufficient. Lord Clyde in Manifest Shipping Co Ltd (supra) considered that a flexible construction of the concept of utmost good faith was required.

288 It is also apparent from a number of the authorities to which I have referred that the content of the duty may vary according to the stage of the claim, in particular with respect to rights in relation to the conduct of any proceeding relating to the claim: see CE Heath Casualty & General Insurance Ltd (supra) (at 90). Steytler P in Wiltrading (WA) Pty Ltd (supra) considered that the duty of good faith was superseded or exhausted by the rules of litigation once litigation commenced. Taking that statement to its logical conclusion might well lead to a conclusion that a subsequent right of contribution was similarly outside the application of such a duty.

289 On any consideration of the authorities it would seem that honesty has become the defining aspect of the duty although perhaps not the only aspect. To my mind a duty to act honestly and fairly is as much as a duty of this nature should require, although I question whether this adds anything of substance to general contractual principles.

290 Zurich relied on the decision in Re Zurich Australian Insurance Ltd (supra) and the general treatment of the concept of good faith which I have outlined in detail above. In particular, Zurich adopts the views of Scott LJ in Groom (supra) (at 223), which are outlined above and referred to in Re Zurich Australian Insurance Ltd (supra), and which Zurich submits recognise that when a discretion or a power is given to an insurer, it is one that has to be exercised with due regard to the rights of both of the parties to the insurance contract and cannot be exercised arbitrarily by the insurer in its own interests, paying no regard to the consequences to the insured. However, as Zurich emphasises, the insurer is not required to subordinate its rights entirely to that of the insured.

291 In addition, counsel for Zurich refers to Chesterman J's approach to the question of the application of the duty where the relevant clause confers a power on the insurer to involve itself in the conduct of the defence. Chesterman J stated (at 74,842):

"The hospital, when it made the contract, agreed that Zurich should have that power [on paying either all sums which the insured was required to pay in compensation or the maximum amount of indemnity Zurich was under no further liability under the policy in connection with the claim except for costs], which, whenever it was exercised, would leave the hospital having to pay for its own defence. The exercise of the discretion will always disadvantage the insured and benefit the insurer financially. The interests of the insurer and insured will always be opposed if the power is exercised. The condition gives the insurer the right to act in its own self-interest."

"Where the estoppel is said to arise from an insurer's conduct of litigation on behalf of an insured there will be material disadvantages if the insured loses a real chance of doing better fro the litigation than the result achieved by the insurer. A mere possibility that the insured might have done better is insufficient. See Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Insurances Cases 61-235 at p 75, 654 per Handley JA."

292 Zurich also relies on the views expressed by Chesterman J (at [88]) where his Honour rejected the view that the hospital was prejudiced by Zurich's decision to discontinue funding its defence and noted that there was no suggestion that the hospital could not defend the action with as much skill and chance of success as Zurich might have done. In relation to the application of a duty of good faith, his Honour observed:

"It will have to pay itself but this, as I say, is what the clause expressly contemplates. In exercising the right given by Condition 3, Zurich, in my opinion, is not acting without due regard for the insured's interests. I do not believe the duty has any application to the exercise of powers such as those contained in condition 3."

293 Counsel for Zurich interprets the decision in Re Zurich Australian Insurance Ltd (supra) as saying that it is necessary to look at the policy of insurance and look also at the underlying arrangements which give rise to the policy of insurance. In this case, it is said, Speno agreed to indemnify Hamersley. It did not ask or attempt to secure from Zurich a contractual obligation on Zurich's part to indemnify it in respect of that liability. Therefore, having regard to the bargain between Speno and Hamersley on the one hand, and Speno and Zurich (and by principles of extension, Hamersley) on the other, the liability under the contractual indemnity is to Speno's account. Zurich firmly rejects the proposition that it will be in breach of any duty of good faith if Speno suffers because Zurich exercises a right given to it by law arising out of, but relevantly unconnected with, Zurich's insurance obligation. Zurich maintains that any adverse consequence which may affect Speno arises from the contract it made with Hamersley.

294 Zurich also maintains that Speno misconceives the nature of the duty of good faith as an amorphous duty owed to an insured which extends beyond the confines of the contract. Counsel for Zurich submits that the argument based on the duty of good faith fails to understand that the duty of good faith informs the contract between the insurer and the insured and places limitations on the conduct of both parties in relation to that contract.

295 Speno maintains, in accordance with the views of Chesterman J in Re Zurich Australian Insurance Ltd (supra) that the obligation to have due regard to the interests of the insured will ordinarily operate where the insurer is dealing with third parties; for example, by way of comprising or defending claims or bringing suits against them. According to Speno, it is in those very situations that the interests of the insurer and the insured, as Speno maintains it is, are likely to conflict in such a way that an insurer, acting solely out of self-interest, may harm the interests of the insured: Re Zurich Australian Insurance Ltd (supra) (at [82] - [86]).

296 Speno submits that Zurich's pursuit of its interest in claiming contribution can only harm those of Speno. Consequently, the only way in which Zurich can act with utmost good faith towards Speno is by not pursuing its claim. Some notional deference to the duty is said not be enough.

297 Putting to one side for the moment other impediments to Speno's claim of breach of duty, in my opinion it is this fact, this " all or nothing" result, which raises doubts as to whether the duty extends to these circumstances. In essence, the duty as contended for by Speno requires Zurich to place Speno's interests above its own. That would make the duty of good faith a very onerous duty indeed, particularly where the "price" of such a duty is an insurance premium.

298 I concede that there are statements in the authorities which support particular aspects of the competing submissions. However, I am unable to conclude that any duty of good faith could or should prevent Zurich from seeking contribution from an insurer with co-ordinate liability as is the case with MMI. As I have indicated, although I accept that Zurich had waived its right to subrogation with respect to Speno, it did so in the context of the contract of insurance between Zurich and Speno. Further, as Speno was not, in my view, a party to the policy between Zurich and Hamersley, despite the fact that Speno arranged for the insurance cover and paid for it, no duty to Speno arose in relation to a claim by Hamersley under the policy. Consequently, the relationship between Zurich and Speno was one of insurer and third party, who happens also to be an insured of Zurich under a policy which covers the work in which Hamersley's negligence arose. In those circumstances I do not accept that Zurich owed Speno any duty at all with respect to these proceedings.

299 Even if I am in error in relation to any of the underlying findings, I do not believe the duty of good faith would preclude an insurer from seeking contribution from another insurer, a separate and distinct legal and equitable right, simply because, as a result of a commercial contract to provide services, its insured undertook an obligation to indemnify a co-insured but chose not to insure against that obligation being called upon. Even in circumstances where in relation to that other contract, the insured has obtained a waiver of subrogation, it is the case that the effect of which the insured complains is the result of the exercise of subrogation by another insurer.

300 Further, on any interpretation of the authorities on the duty of good faith, it requires Zurich to act honestly and fairly which involves considering the interests of Speno but not subjugating its own interests to those of Speno. I am not persuaded that the duty of good faith requires Zurich to refrain from seeking contribution from another insurer in any of the circumstances of this matter.

301 For these reasons I believe that none of the defences raised have been made out and Zurich is entitled to contribution from MMI.

302 Having found that Zurich is entitled to a contribution from MMI, it is necessary to determine the amount of MMI's contribution. The method of contribution, however, is also the subject of dispute. The methods of determining contribution which have been used by the courts are the maximum potential liability method and the independent actual liability method. However, the Court is not bound to use either method as the approach to take in a particular case is a matter of discretion: see Government Insurance Office of New South Wales v Crowley [1975] 2 NSWLR 78 per Helsham J at (84 - 85) where it is clear that the method is discretionary although there is no precise statement to that effect.

303 As to the nature of the primary methods of calculation, in Drayton v Martin (1996) 67 FCR 1 (at 37 - 38) it was said that under the maximum potential liability method, the contribution of the insurer having the lesser liability is limited to the proportion that its maximum liability bears to the aggregate of maximum liabilities under both policies: (at 37). Under the independent actual liability method, the contributions are assessed according to the proportions that the independent liability of each insurer, if it were the only insurer, bears to the total of such independent liabilities: (at 38).

304 Zurich's contention is that principles of natural justice and equity (in the sense of reason, justice and law) inform the right to contribution and, in order to do equity, to achieve a reasoned, just and lawful accommodation of the interests between Zurich and MMI, the Court should apply a principled approach to contribution that will visit upon MMI the larger proposition of the burden of the relevant judgments.

305 In support of the proposition that principles of natural justice equity are applied in determining the amount of contribution between co-insurers, Zurich refers to the decision of GRE Insurance Ltd v QBE Insurance Ltd [1985] VicRp 9; [1985] VR 83. In that case, the owner of a building sold it under a terms contract requiring the purchaser to insure the building in the name of the vendor and purchaser. QBE Insurance Ltd ("QBE") issued at the request of the purchaser, a cover note in the names of the vendor and purchaser subject to the terms of its fire policy. On the following day, unknown to the purchaser, the vendor took out a cover note with GRE Insurance Ltd ("GRE") in the names of the vendor and purchaser, subject to its standard fire policy. Each policy required the insured to give notice to the insurer of any other insurance. A failure to give such notice would result in all benefit under the policy being forfeited. Each policy also contained a contribution clause which provided that if there be other insurance the insurer should not be liable to pay any more than its rateable proportion. In QBE's policy this was Condition 10. The vendor did not notify GRE that the property was also insured by QBE. When a fire damaged the property, GRE claimed that its policy was forfeited. QBE paid the insured the amount of the loss. QBE then sued GRE for contribution but later amended its claim to add the vendor and the purchaser as plaintiffs and to add a claim based on subrogation. The judge at first instance found for QBE on the claim for contribution.

306 On appeal, the issue of the failure to give notice was determined, by majority (Anderson J dissenting) on a basis not relevant to this action, with the result that the GRE cover was not forfeited. The remaining issues were the effect of the contribution clause in each policy, particularly in circumstances where QBE had paid the whole amount of the loss despite being obliged only to pay a rateable proportion, as well as the appropriate method of calculating the amount of contribution.

307 As a result of the finding that the GRE cover was not forfeited, Murray J started from the position that there was in existence a double insurance. His Honour construed Condition 10 as having the effect, as between insurer and insured, of limiting the insurer's liability to a rateable proportion of the loss. Consequently, if the insured had sued either the appellant or the respondent under their respective cover notes, the insured could have obtained judgment only for the amount held to be the rateable proportion of the insurer payable under its cover note: (at 94). In circumstances where QBE had voluntarily paid the entire amount, Murray J considered that two questions arose: (at 95). First, when an insured has been paid the full amount of his loss, the question is whether there is any right left in him he can enforce, not against a party who causes the loss, but against another insurer despite the ordinary principle that in no circumstances is an insured entitled to more than one indemnity. In effect, the issue to be resolved was whether there was any right left in the insured which the respondent could enforce by way of subrogation. The court held that no right remained. The second question for resolution was whether an insurer who voluntarily pays more than it is liable to pay under its policy can recover contribution from a co-insurer.

308 As to the issue of the voluntary payment of the full amount and its impact on the claim for contribution, Murray J held (at 96) that the Court ought not to hold that the presence of the rateable proportion clause in the respondent's policy prevents it from paying the claim in full and pursuing its equitable right of contribution. His Honour considered that in the present case such a conclusion would be inequitable in the extreme. GRE did not succeed on its denial of liability and if it could now succeed on the basis that QBE was not entitled to contribution simply because it paid out the whole loss it would be profiting by its own wrong in wrongly denying primary liability: (at 96).

309 On the issue of the correct method to be adopted in calculating the rateable proportion which the appellant and the respondent should contribute, Murray J agreed with the reasons and the conclusion of McGarvie J: (at 97). McGarvie J decided (at 104) that the independent actual liability method of determining contribution was the appropriate one on the basis that it seemed only just that the amount which has been paid should be borne in proportion to the burden of liability which that payment lifted from the respective insurers. However, his Honour did note that, in some cases, there may be other considerations which lead a court to allocate the burden in some other way. However, it is McGarvie J's reasoning on which Zurich relies in citing this case as authority.

310 His Honour expressed the view that in a technical sense QBE had waived reliance on Condition 10, which it was entitled to do because it was a condition solely for its benefit. However, although it waived the condition by choice, once it did, the payment it made was a payment under the contract of insurance: (at 102). In relation to the obligation to contribute, McGarvie J stated (at 103):

"I regard the considerations of reason, justice and equity which underlie the right to contribution, as requiring GRE to contribute in respect of payments made by QBE beyond its rateable proportion. GRE had agreed to indemnify the insured to the extent of its rateable proportion. The insured could have chosen to sue GRE for that amount. QBE did nothing to impose any liability on GRE towards the insured. The payment by QBE above its rateable proportion freed GRE from liability to the insured for its rateable proportion. In making payment honestly and reasonably, in circumstances in which it would have been liable if GRE, as it claimed, was not liable, QBE has freed GRE of the liability which in fact it had."

311 However, McGarvie J did note (at 103) that a right depending on justice and equity will not be awarded where it would bring about injustice. In particular circumstances it would be open to a court to deny or limit the right, if justice required that.

312 In relation to contribution, McGarvie J first decided (at 103) how the rateable proportions of the insurers were to be ascertained and what were their respective amounts. His Honour observed, quoting from Bell, "Contribution in Fire Insurance", 1935 (at 175) that the expression "rateable proportion" means the amount that, in the absence of a rateable proportion clause, a court would require the insurer in question to bear, upon a working out of rights of contribution. However, McGarvie J considered (at 103) that it would be "wholly circular" to seek to work out the amount of the rateable proportion, starting from the amount of the rateable proportion. He noted (at 103):

"The words 'rateable proportion' have come over the years to have in this context the meaning I give them. In deciding on contribution a court is entitled, on looking at the relevant considerations 'to apportion the loss in a way that does justice amongst those liable to meet it: Government Insurance Office of New South Wales v Crowley ... '."

313 Zurich also referred the Court to the decision of Helsham J in Government Insurance Office of New South Wales v Crowley (supra). The relevant facts of the case were that by a public liability policy GIO indemnified the Sydney Turf Club ("STC") against liability, inter alia, for bodily injury caused by negligence in the course of carrying out its business. The cover included costs and expenses incurred in connection with litigation. At the relevant time the cover stood at $2 million for any one accident.

314 Under an employers' indemnity policy the Australian Jockey Club ("AJC") obtained common law cover to a maximum of $40,000 for any one claim. The policy provided that, in the event that the Turf Club was liable to pay compensation at common law up to an amount of $40,000 then the Insurer shall indemnify the Turf Club against all sums for which it was liable.

315 The GIO defended an action by a stable hand against the STC for damages for negligence causing personal injury and paid the amount of judgment of $41,225 and taxed costs amounting to $2,543.36. The GIO sought a declaration that it was entitled to contribution from Crowley, representing the AJC, in the proportion of one half. The AJC cross-claimed on the basis that the contribution should be calculated according to the proportion which the cover of each insurer bore to the total aggregated cover.

316 Before determining the appropriate amount of contribution Helsham J made the following statement of principle (at 82 - 83):

"The basis of contribution between indemnity insurers goes back a long way. Its origins are adverted to in Albion Insurance Co Ltd v Government Insurance Office (NSW) and in particular in the judgment of Kitto J in that case. But in essence the law is based upon the fundamental proposition that all persons liable to satisfy the same debt must contribute towards its payment in a way that is equitable when it has been discharged by one of them 'on a principle of law that must exist in all countries that where several persons are debtors, all shall be equal': per Lord Redesdale in Stirling v Forrester [(1821) 4 ER 712 at 719], ie, based on reason, justice and fairness. This seems to me to entitle a court when faced with a problem of contribution to take into consideration all matters which go towards ensuring that there is a just result. So, for example, in cases of contribution among sureties, the insolvency of one can be a circumstance entitling the court to adjust the contribution only among the remainder, at least where the matter is being dealt with in Equity."

317 It is the case that in Albion Insurance Co Ltd (supra), in addition to referring to the origins of the requirement for contribution between indemnity insurers, Kitto J (at 351) considered the principle to be founded in doctrines of equity in the sense of reason, justice and law. However, Kitto J also considered the way in which the principle was to be applied. He said (at 352):

"What attracts the right of contribution between insurers, then, is not any similarity between the relevant insurance contracts as regards their general nature or purpose or the extent of the rights and obligations they create, but simply the fact that each contract is a contract of indemnity and covers the identical loss that the identical insured has sustained; for that is the situation in which 'the insured is to receive but one satisfaction' ... and accordingly all the insurances are 'regarded as truly one insurance': Sickness and Accident Assurance Association Ltd v General Accident Assurance Corporation Ltd [(1892) 29 Sc Lr 836 at 837]."

Kitto J further observed (at 349 - 350) that "a principle applicable at law no less than in equity is that persons who are under co-ordinate liabilities to make good the one loss ... must share the burden pro rata". Applying these principles, the insurers in Albion Insurance Co Ltd (supra) were obliged to each contribute half of the total amount of damages.

318 In Government Insurance Office of New South Wales v Crowley (supra), the defendant maintained that the apportionment of the loss should be fixed by reference to the aggregate cover with each insurer contributing pro rata according to his proportion of the aggregate. However, Helsham J made the following statement in answer to that proposition (at 84):

"This may do justice and equity in a case where the amount of the cover bears some direct relationship to the amount of the loss, such as where each policy relates solely to the loss in question. But in many cases that will not be so, and the present case is one. Neither insurance policy in the present case related solely to the loss suffered; each indemnified against a wide range of events, with each amount of cover fixed no doubt by reference to what was being indemnified against, and both covering almost fortuitously as it were, and indeed contrary to the assertions of both insurers, the particular loss that occurred. In no way would the respective amounts of the insurance cover present any basis for adjusting in any fair manner what proportion each should bear of the loss."

319 In relation to the statements to which the Court had been referred in cases such as Albion Insurance Co Ltd (supra) and Commercial & General Insurance Co Ltd v Government Insurance Office (NSW) (1973) 129 CLR 374 (at 376), Helsham J said (at 84) that he did not believe that these statements were intended to indicate that aggregating the insurance and making a pro rata apportionment was the approach to be adopted in all cases. His Honour took the view that the statements were only intended to refer to the general principle that where there is double insurance each insurer will ordinarily have to bear some proportion of the loss. Helsham J considered that, in order to work justice and equity, there were only two methods to be considered: one of requiring an equal contribution and the other the one that had been applied in American Surety Co of New York v Wrightson (1910) 103 LT 663. Neither policy was specific in the sense that it related solely to the loss in question, however, one policy, unlimited so far as the total extent of the cover was concerned, placed a limit on the actual liability for the event which occurred. The other policy, although limited as to total amount, placed no limit up to that amount on the actual liability of the insurer. Ultimately, the apportionment was based upon the actual liability for the loss, that is, the limit on the actual liability for the event in one case, and the total amount of damages in the other: that is $40,000 as opposed to $43,768.

Zurich submitted that the approach taken in Government Insurance Office of New South Wales v Crowley (supra) need not be applied in this case. Section 76 of the IC Act preserves in statutory form the common law principles relating to contribution between insurers but does not identify the appropriate method of determining contribution. Section 76 is in the following terms:

"S76: Contribution between insurers

(1) When 2 or more insurers are liable under separate contracts of general insurance to the same insured in respect of the same loss, the insured is, subject to subsection (2), entitled immediately to recover from any one or more of those insurers such amount as will, or such amounts as will in the aggregate, indemnify the insured fully in respect of the loss.

(2) Nothing in subsection (1) entitles an insured:

(a) to recover from an insurer an amount that exceeds the sum insured under the contract between the insured and that insurer; or

(b) to recover an amount that exceeds, or amounts that in the aggregate exceed, the amount of the loss.

(3) Nothing in this section prejudices the rights of an insurer or insurers from whom the insured recovers an amount or amounts in accordance with this section to contribution from any other insurer liable in respect of the same loss."

320 Zurich maintains that the Court is entitled to have regard to what was recommended by the ALRC with respect to the appropriate method of determining contribution, despite the fact that, as can be seen, it was not adopted by Parliament in enacting s 76 of the IC Act.

321 In the ALRC Report the issue of quantum was addressed and a hybrid approach suggested. The ALRC first referred (at 179) to the two main competing methods of apportionment: the first method involving determining the maximum potential liability (the policy limit of cover) of each insurer and the second involving determining the independent actual liability of each insurer in respect of the loss which has in fact occurred. The ALRC then stated (at 179 - 180):

"Under an apportionment according to the total of the maximum potential liabilities of the two insurers, the same proportions are used to determine the respective contributions of the insurers throughout the range of possible claims. The result is that the liability of the insurers is scaled evenly, in the same proportion to the total amounts of cover, from the smallest possible loss to a loss which equals or exceeds the total of the sums insured. On the other hand, under an apportionment according to the total of the independent actual liabilities of the two insurers, their independent liability will be equal and each will bear one-half (and not a relatively small and a relatively high proportion respectively) of any loss up to a claim which equals the amount of the policy with the lower limit."

322 The ALRC then referred to Government Insurance Office of New South Wales v Crowley (supra), to the various criticisms referred to by the Court, and then suggested a compromise on the two standards which, as I have noted, was not adopted by Parliament in enacting the IC Act. However, as counsel for Speno noted, the ALRC report appears to proceed on the assumption that it was, at the time of the report, considered no longer appropriate for liability policies to adopt the maximum potential liability method. In a number of the authorities referred to hereunder the Court expressed concern about applying the maximum potential liability method other than in relation to property insurance. The ALRC in its report explain why that approach was no longer considered appropriate and went on to comment that neither should it be applied in relation to property insurance which the ALRC considered to be the residual area where such an approach might still, on the authorities, be regarded as appropriate.

323 As I have noted, Zurich contends for the maximum potential liability approach on the basis of justice, equity and fairness. The considerations that are said to require the application of that approach are these:

(1) Co-ordinate liabilities are shared pro-rata. That is, the rate at which the insurers held themselves as willing and ready to accept from the insured or in respect of the insured on one policy. In the case of Zurich, the amount is $2 million and in MMI's case it is $200,000. The observations of Kitto J (at 349 - 350) in Albion Insurance Co Ltd (supra), which have been referred to above, and also those of the Court of Appeal in Sydney Turf Club (supra) (at 734) are relied on in support of that proposition.

(2) Property and risk insurances are, relevantly, both policies of indemnity; therefore, the principles derived from one area (in this area of discourse) should inform the other. Again, the decision in Albion Insurance Co Ltd (supra) is cited as supporting this proposition.

(3) However, I note that in Government Insurance Office of New South Wales v Crowley (supra) Helsham J noted (at 83) that the practice of apportioning loss by way of contribution according to the proportion that each cover bears to the total aggregated cover follows the rule that is applied as the result of s 80(1) of the Marine Insurance Act 1906 (Imp), which was also adopted as the rule in fire insurance policies. Helsham J considered that the approach would work equitably in the case of most insurances of specific property but he did not regard it as being a rule of law to be applied necessarily in such a case or in any other case.

(4) The two insurances are treated as one insurance for the purpose of adjusting rights. The authority for this proposition is Commercial & General Insurance Co Ltd v Government Insurance Office of New South Wales (supra) (at 379). However, the statement was made by the Court to explain why the insurer who satisfies the indemnity is entitled to contribution from the other insurer.

(5) The legislature decided against a variant of the independent actual liability method after recommendations to adopt that approach in a carefully considered report.

(6) As I have noted above, the ALRC considered the maximum potential liability approach to be inappropriate for both indemnity insurance and property insurance. In my view, the significance of the fact that the legislature determined not to adopt the ALRC's approach must be considered in light of the fact that it elected not to legislate on the method by which respective contributions are assessed. On that basis, I do not accept that support can be found for the application of the maximum potential liability method on the basis of the legislature's decision not to adopt a variant of the competing method.

(7) Neither policy is specific to the risk that came home but is general in its cover: see Government Insurance Office of New South Wales v Crowley (supra).

(8) Neither policy employs sub-limits relevant to particular classes of risk, an approach commonly seen in policies with high limits of cover. This is said to be an important indication but no authority was cited to support it.

(9) MMI's policy is specific to Hamersley, and therefore capable of adjustment for premium in a more certain and effective way.

(10) Zurich's policy is non specific to Hamersley and incapable of premium adjustment, or calculation, by reference to Hamersley specific criteria.

(11) Hamersley's negligence gave rise to the loss and fairness dictates that the more specific policy should respond proportionately higher, if there is a principled basis for doing so.

These last three items are addressed in more detail later in these reasons.

324 Zurich considers that item (5) above is a powerful point in its favour. Helsham J in Government Insurance Office of New South Wales v Crowley (supra) (at 83 - 84) considered that, in the context of the case before him, this factor militated against the method of taking the aggregate of the cover and then fixing the rateable contribution by reference to it. The independent actual liabilities approach was adopted. However, Zurich contends that Government Insurance Office of NSW v Crowley (supra) was a case in which the amount that was in issue was only marginally more than the policy that was lower in value and, on that basis, it can be seen why such an approach would have appeal. It is said by Zurich that when you have a situation, as in this case, where neither policy is specific to the loss but is general in its cover and where there is a substantial difference in the amount of cover, the pro rata approach is indicated.

325 Counsel for Zurich maintains that fairness dictates that, if an insurer receives a premium relevant to the acceptance of a very high cover, then when loss occurs, that should be taken into consideration in determining how much of the loss the insurer should absorb compared to an insurer that has contracted to provide insurance limited to a lesser amount. The following maxim was said to encapsulate the appropriate approach to contribution in such circumstances: The greater the limit; the greater the premium. The greater the premium; the greater the benefit. The greater the benefit; the greater the burden.

326 Although the approach to contribution of balancing burden against benefit is conceded by Zurich not to be conclusive, it is said to be an indicator of the proper approach. Another indicator, and one which is said to be of greater relevance, is that neither policy includes sub-limits relevant to particular classes or risk, an approach commonly seen in policies with high limits of cover.

327 A further factor which Zurich submits should be considered in determining the method of calculation of contribution is that MMI's policy is specific to Hamersley, a company the operations of which the insurer was able to, and no doubt did, have regard in determining whether it would accept the risk and in determining the terms of the policy and the premium. Therefore, it is said, MMI could have adjusted the premium in a more certain and effective way than Zurich was able to do because of the circumstances by which Hamersley became an insured under the Speno Policy. The Speno Policy is not specific to Hamersley and not open to premium adjustment by reference to criteria specific to Hamersley. The final factor on which Zurich relies is that it was Hamersley's negligence which gave rise to the loss.

328 Although neither policy is specific to the risk that materialised, the Hamersley Policy is said to be the more specific of the two policies and MMI's contribution should be proportionately higher if there exists a principled basis for such a result. That basis is said by Zurich to be the maximum liability.

329 Hamersley was the specific insured under the MMI policy and fairness dictates that the more specific policy should respond proportionately higher if there is a principal basis for doing so, and there is; it is the maximum potential liability approach.

330 Zurich submits that one or more of the factors outlined above may provide the basis for applying some variant of the two principal methods of calculation, providing that the approach is principled and not arbitrary and results in a just, fair and lawful outcome. Reference is made by counsel for Zurich to the fact that it is implicit in the judgment of Helsham J (at 84 - 85) that his Honour recognises that there is a discretionary element in determining the method, and therefore the amount, of contribution. Counsel also relies on the following extract from Sutton, "Insurance Law in Australia" (supra) (at 1001):

"Whatever method of calculation of contribution is advocated, it appears that, in practice, where an instance of double insurance emerges, often quite inadvertently, insurers will share the common liability on an equal basis, unless there is some very good reason why this course should not be adopted. An example of equality not being equity might be the case where one co-insurer has a low maximum figure of liability compared with those of the fellow insurers. The alternative approach is for insurers to enter into contribution agreements which set out precisely what method is to be adopted for calculating the rate of contribution in the case of double insurance."

331 MMI accepts that the exercise of apportionment between insurers under co-ordinate liabilities should be based on reason, justice and fairness. MMI also accepts that, where dual insurance exists, the co-ordinate liabilities should be shared in a way which is equitable, usually pro rata: see Government Insurance Office of New South Wales v Crowley (supra) per Helsham J at (82 - 83) and Albion Insurance Co Ltd (supra) at (349 - 350).

332 However, counsel for MMI submits that the application of the maximum potential liability method of apportionment in this action would produce a gross distortion of reason, justice and fairness because Zurich would bear only $12,473.79 (or close to that amount) of the total liability which is described as "not much of a risk for its premium". It is said that Zurich ought not be able to take advantage of the enormous limit of liability in the MMI policy, a limit from which counsel for Zurich suggests the conclusion may be drawn that it must have been determined by reference to risks other than liability for personal injury to employees within Australia. MMI submits that it is apparent that the Hamersley Policy extends to a vastly greater range of risks than does the Speno Policy. Therefore, it is said, the two policies cannot really be compared because they differ so markedly in scope. As was the case in Government Insurance Office of New South Wales v Crowley (supra), neither policy in the present action relates solely to the loss suffered. MMI's position is that, as the indemnified amount is within the limit of each policy, the sensible as well as fair and equitable approach is to share the loss and to share it equally.

333 With respect to Zurich's argument that the premium for the Hamersley Policy was more readily capable of adjustment in the circumstances relevant to it, MMI responds by asserting that the argument works against Zurich rather than in its favour. It is said that, under the Hamersley Policy, Hamersley was only one of many insured so the risks which Hamersley might incur bore a relatively small influence on the setting of the premium. However, MMI points out that Hamersley was specifically named in the Speno Policy in the Endorsement. Therefore, Zurich knew when it entered into that policy that it was providing insurance for this very risk, not the risk to Nolan but the risk of liability arising in Hamersley to employees of Speno. Zurich knew that it was insuring Hamersley with respect to a confined and relatively limited area of risk. Consequently, it is Zurich rather than MMI that had the capacity to adjust the premium to take account of that specific risk. MMI submits that, if specificity is considered to be a significant, even dominant, factor, then the Speno Policy is more specific to the risk than the Hamersley Policy.

334 Similarly, Zurich's proposition that, as it was Hamersley's negligence which caused the loss and as the Hamersley Policy is more specific, it is fair that MMI should carry more of the burden, is said by MMI to in fact work against Zurich. This is because, as noted above, MMI suggests that the proposition more accurately states Zurich's position under the Speno Policy.

335 With respect to Zurich's proposition that the maximum potential liability method is appropriate in this case, counsel for MMI notes that the method has been rejected, in the case of liability insurance, both in Australia and in Great Britain and further notes that it is difficult to find a contemporary application of this approach: see Government Insurance Office of New South Wales v Crowley (supra), Drayton v Martin (supra) (at 37 - 38); Commercial Union Assurance Co Ltd v Hayden (1977) QB 804 (at 815 - 816) per Cairns LJ and (at 822) per Lawton LJ. MMI further submits that, as I have noted above, the approach has also been criticised in the ALRC report (at [294]) on the basis of its apparent lack of legal or other principle. The ALRC expressed the view that it appears unlikely that the maximum potential liability method will be applied in relation to liability insurance.

336 In Drayton v Martin (supra), Sackville J referred to and adopted the principle of contribution stated in Albion Insurance Co Ltd (supra) and the rationale underlying the principle that all persons liable to satisfy the same debt must contribute to its payment equitably: (at 38). His Honour also noted that the Court should take into consideration all matters which go towards ensuring a just result. Sackville J further stated that the cases demonstrate that there is no rule of law that the maximum potential liability method must be applied. His Honour referred to the extract from the judgment of Helsham CJ in Government Insurance Office of New South Wales v Crowley (supra) (at 84) which relates to this issue and is set out above. Sackville J determined (at 38) as the appropriate course in the circumstances, one of which was that neither policy related solely to the loss sustained, that the "amount which has been paid should be borne in proportion to the burden of liability which that payment lifted from the respective insurers": GRE Insurance Ltd (supra) (at 104).

337 In Commercial Union Assurance Co Ltd (supra), the Court of Appeal considered the appropriate method of apportionment in relation to two policies, both of which included a rateable proportion clause which operated in the event that at the time of any claim arising there was any other insurance covering the same risk. The defendant interpreted the rateable proportion clause on the basis of the proportion which the limit of potential liability provided by the policies bore to each other. The plaintiffs contended that an insurer's "rateable proportion" should be calculated by reference to the independent liability of each insurer if he had been the only insurer and that on that basis the defendant's rateable proportion would only be less than one half when the claim exceeded the defendant's independent liability.

338 Allowing the appeal, the Court held (at 811) that neither construction put before the Court was preferable to the other. The rateable proportion clause was considered to be equally capable of either construction and to be given the meaning more likely to be intended by reasonable businessmen: (at 815) per Cairns LJ; (at 819) per Stephenson LJ. However, an assumption by the insurers of an equal level of risk up to the lower of the two maximum liability limits was more realistic than an intention to use those limits, inserted to protect the insurer from exceptionally large claims, to adjust liability in respect of claims within the limits of both policies: (at 816) per Cairns LJ.

339 Reference was also made (at 811) to the trial Judge's conclusion that there appears to be no settled basis for contribution under liability insurance, as opposed to property insurance. Cairns LJ stated (at 814) that he was not persuaded that the same basis should apply to liability insurance as to property insurance. His Honour observed that in property insurance the insurer insures the property for a stated sum, which is normally supposed to represent the value of the property, whereas in liability insurance there is no corresponding "value" to which the limit (if any) of the insurer's liability is related. A similar view was expressed by Stephenson LJ (at 819) and by Lawton LJ (at 822).

340 Lawton LJ stated (at 822) that, where there are two insurers with differing upper limits for claims, the inference to be drawn is that they were both accepting the same level of risk up to the lower of the limits. In that case, Lawton LJ considered that "a rateable satisfaction" would be an equal division of liability up to the lower limit. The burden of meeting that part of the claim above the lower limit would then fall upon the insurer who had accepted the higher limit.

341 MMI's submission is that, if contribution is ordered, for the reasons which I have just outlined, the apportionment should be by the independent actual liability method and should take account of the excess of $50,000 applicable to the Hamersley Policy. In the written submissions, MMI identified the amount to be paid under this method if contribution were to be ordered as $579,994.53. However, at the hearing of the appeal, counsel for MMI suggested that, if MMI are liable to contribute, it would prefer to have an opportunity to come back to the Court with some specific figures as an error in the calculation had already been identified.

342 It is apparent from the authorities that the apportionment of liability between insurers with co-ordinate liability is a matter of discretion. However, the discretion must be exercised reasonably and fairly so as to achieve a just and lawful accommodation of the competing interests of the two insurers. In achieving that aim the Court is entitled to take into account all matters which go towards ensuring that the result is equitable. Despite the fact that the authorities generally acknowledge two methods of determining contribution, the maximum potential liability method or the independent actual liability method, I accept that the Court is entitled to apply some variant of these two methods if there are particular circumstances which make it necessary to depart from the principal methods in order to achieve a just result.

343 With respect to the maximum potential liability method, I am satisfied from the material referred to above that this method has been rejected on any number of occasions, both in Australia and Great Britain, with respect to liability insurance, and is not an appropriate method for determining contribution in a case such as this. None of the matters raised by Zurich persuade me to a contrary view. Indeed, I found MMI's rebuttal of many of them to be far more compelling. In particular, I believe that the factors referred to by MMI in relation to which of the two policies is more specific to Hamersley to outweigh those put forward by Zurich. Further, I accept MMI's submission that the application of the maximum potential liability method of apportionment in this action would produce a gross distortion of reason, justice and fairness because Zurich would bear so little of the total liability. Finally, none of the matters raised persuade me that I should apply a variant of the independent actual liability method.

344 For these reasons, MMI's contribution to Zurich is to be calculated on the basis of the independent actual liability method. In accordance with MMI's request, which I understand was not opposed by Zurich, I propose to allow the parties time to agree upon the figure before I carry out the relevant calculation.

345 Therefore Zurich is entitled to contribution from MMI in relation to the judgment in the Nolan action in an amount to be agreed between the parties provided it is calculated on the basis of the independent actual liability method.

346 As the issue for resolution is the same in both actions, it is convenient to address them together.

347 In the event that Zurich is entitled to payment from MMI by way of contribution, MMI seeks in this action a declaration that it is entitled to exercise its rights of subrogation, in Hamersley's name, against Speno so as to recover the whole of its liability to Zurich, including costs. MMI seeks a further declaration that it is entitled to execute, to the extent necessary, the Writ of fi.fa issued in the Nolan action against Speno.

348 The basis of Speno's obligation to meet MMI's liability to Zurich, as pleaded in the statement of claim, is Speno's obligation under the Hamersley-Speno Contract to arrange its public liability insurance cover to include Hamersley's interest as a principal and to indemnify Hamersley against all liability arising at common law in respect of personal injury arising out of the contract works to any person employed by Speno.

349 In the statement of claim, the public liability insurance required under the Hamersley-Speno Contract is described as a contract of insurance entered into by Zurich and Speno. In its defence, Speno qualifies that statement by pleading that Hamersley was an insured under the Speno Policy and that the Speno Policy was entered into in fulfilment of the obligation to arrange insurance cover for Hamersley.

350 MMI acknowledges, in the statement of claim, that Zurich has indemnified Hamersley under the Speno Policy for Hamersley's liability to Nolan and Oatway and has paid the indemnified sums. Speno's responsive plea is that in the Nolan action both Zurich and Speno were ordered to indemnify Hamersley, describing this as the Hamersley Judgment. Speno further pleads that Hamersley is not entitled to enforce the Hamersley Judgment against Speno, whether on its own account or by the exercise of a right of subrogation by MMI. This is because Nolan has been paid all amounts to which he is entitled under the judgment in his favour and because, under the Hamersley Judgment, Hamersley has been fully indemnified by Zurich in respect of its liability to Nolan arising from the judgment in the Nolan action. Certain matters considered by Speno to be relevant to this issue are specifically pleaded in the defence and are summarised as follows:

(i) Hamersley's causes of action for an indemnity from Speno and Zurich have merged in the Hamersley Judgment;

(ii) Hamersley's right under the Hamersley Judgment has been satisfied and the obligation of Speno and Zurich to indemnify Hamersley has been discharged;

(iii) Hamersley has no remaining liability to Nolan in respect of which it can seek to be indemnified;

(iv) Hamersley, for these reasons, has no remaining right under the Hamersley Judgment which can be the subject of execution against Speno;

(v) For these reasons, there is no right against Speno to which MMI may be subrogated and it would be an abuse of process to seek execution in the name of Hamersley against Speno.

351 Apart from the admissions made in the pleadings, the Court was also provided with a statement of agreed facts. Essentially, there are no factual disputes between the parties with respect to this issue and, therefore, I do not intend reproducing the agreed facts in these reasons other than in so far as I have already done in recounting matters of background.

352 At the heart of the conflict between the two parties is the issue of whether, in circumstances where Zurich has fully indemnified Hamersley, MMI can bring an action against Speno to recover the amount of its liability by way of contribution to Zurich. The resolution of that issue will also resolve the issue of MMI's right to enforce the Nolan judgment by execution. As with the Zurich action, the basic principles which underlie the conflict between the parties are not in dispute. It is the application of them which requires resolution.

353 As is apparent from the summary of the pleadings in the MMI Action that, in defending MMI's claim, Speno relies on the fact that, although in the Nolan action both Zurich and Speno were ordered to indemnify Hamersley, Zurich has paid the judgment sum awarded to Nolan and, therefore, Hamersley's judgment for an indemnity has been satisfied. As MMI can only be subrogated to whatever rights Hamersley has against Speno, and as there is nothing remaining for which Hamersley is entitled to be indemnified, any attempt to issue a writ of execution against Speno would be an abuse of process.

354 The rights contended for by MMI are twofold. The first is the right to seek recovery by declaration or other means of the whole of MMI's liability to Zurich, including costs. The second is the right to enforce that part of the judgment in the Nolan action that granted to Hamersley an indemnity from Speno by the issue of the Writ of fi.fa.

355 On Speno's argument, for MMI to exercise those rights, it must be established that the rights exist in Hamersley notwithstanding that Hamersley has been fully indemnified by Zurich for all amounts owed by Hamersley under the judgment in the Nolan action. MMI's position is that the right of subrogation entitles an insurer who has indemnified an insured to exercise and enforce every right of the insured by which the loss in respect of which the indemnity was granted may be reduced. The judgment of Brett LJ in Castellain v Preston (1883) 11 QBD 380, which is described as one of the seminal judgments in the area of the law of subrogation, is said to support that proposition. It is the application of the aspect of the doctrine which entitles an insurer to exercise the rights of the insured which is contentious.

356 It is apparent that a resolution of the dispute between the parties involves a consideration of the nature and scope of the doctrine of subrogation and also an understanding of the effect of the judgment in the Nolan action on the rights of Hamersley as against Zurich and Speno.

357 MMI submits that, by subrogation, it is entitled, not only to make a claim which the insured may make, but also to execute a judgment which the insured has obtained and which remains unsatisfied.

358 The facts upon which MMI bases its right to claim against Speno are that, in the Nolan action, both Speno and Zurich were held liable to indemnify Hamersley in respect of the judgment sum. Zurich was held liable as an insurer to indemnify Hamersley pursuant to the Speno Policy. Speno was held liable to indemnify Hamersley under the Hamersley-Speno Contract. Zurich has indemnified Hamersley in respect of the judgment sum but Speno has not. Counsel for MMI correctly notes that Hamersley could have enforced the judgment against either or both Zurich and Speno. Further, the judgment does not contain a stay of enforcement of indemnity against one in the event of indemnification by the other. Neither does the judgment indicate that one indemnity should be enforced in preference to another, notwithstanding that Speno's obligation was found to be a primary obligation, and the obligation of Zurich to be a secondary obligation: see Speno Rail Maintenance Australia Pty Ltd (supra) per Wheeler J (at 327).

359 The essence of the Full Court's reasoning in Speno Rail Maintenance Australia Pty Ltd (supra) and that of the House of Lords in Caledonia North Sea Ltd v Norton (No 2) Ltd (in liq) [2002] 1 Lloyd's Rep 553 is that the obligation of the contractual indemnifier is a primary liability and the obligation of the insurer is a secondary liability. Therefore, if the insurer pays claims made against the insured in circumstances where the insured is entitled to a contractual indemnity, then there is a primary obligation which remains undischarged. That is because the fulfilment of the secondary obligation is conditional on the failure of the primary obligation. The fact that liability to Hamersley comprises a primary and secondary obligation is the rationale behind MMI's view that there is no co-ordinate liability and hence a right of subrogation exists.

360 MMI maintains that, in the absence of a stay of enforcement or a statement of priority of enforcement, the only basis upon which Speno could argue that the payment by Zurich discharged its liability under the judgment was if it were a joint judgment. As MMI rightly observes, the Nolan judgment cannot be a joint judgment because Zurich and Speno were not found to be jointly liable; there were separate causes of action which gave rise to their respective liabilities. The latter proposition I accept, the first proposition requires further consideration.

361 MMI points out that, where Hamersley has been indemnified by Zurich, the existence of the right of subrogation precludes the possibility of Hamersley being unjustly enriched. This would appear to paraphrase the principle in Castellain (supra), considered more fully hereunder, where Brett LJ stated (at 388) that, in order to carry out the fundamental rule of insurance law, preventing an insured from being unjustly enriched, the doctrine of subrogation entitles the insurer to the advantage of every right of the insured.

362 The propositions on which Speno's defence to the action rests are these:

1. An insurer may only be subrogated to those rights available to the insured.
2. If a cause of action is lost to the insured it is also lost to the insurer.
3. Hamersley's causes of action for indemnity merged into the judgment and Hamersley's rights are now found in the judgment rather than in the pre-existing causes of action or the basis upon which the judgment was pronounced.
4. Hamersley's rights under the judgment have been satisfied. It has been indemnified and the judgment has therefore been discharged. Hamersley, it is said, has no existing rights against Speno and, in particular, no right to issue a writ of execution against Speno. Consequently, there is no right to which MMI can be subrogated because it takes its insured as it finds it.

363 Speno maintains that the point that is established in Castellain (supra) is that the purpose of subrogation is to ensure that the insured is fully indemnified but does not receive more than a full indemnity: that it is not unjustly enriched. There are two ways in which the law does that. The first is by allowing the indemnifier what might truly be called a right of subrogation to the existing rights that the indemnified party may have against third parties which can in any way diminish the loss which was suffered by the indemnified party. The second way in which the law achieves that result is that if independently the indemnified party has pursued the claim itself and has recovered a benefit by that action, then it is obliged to account for that to the indemnifier. Speno's point is that it is still incumbent on MMI to establish that Hamersley retains a right which MMI may exercise by subrogation. I accept that to be so.

364 Speno does not dispute that, on the appeal in the Nolan action, the Full Court considered the obligation of the contractual indemnifier, Speno, to be the primary obligation. Counsel for Speno took the Court to that part of the decision of the Full Court in Speno Rail Maintenance Australia Pty Ltd (supra), where Wheeler J (with whom Ipp J agreed) concluded (at 327 [167]) that it is generally appropriate to regard the insurance as a secondary obligation. Counsel also referred the Court to Caledonia North Sea Ltd (supra), in particular the judgment of Lord Mackay (at 565 - 567) where, having noted that the Supreme Court of Western Australia followed the decision of the Inner House in the case before him, Lord Mackay concluded that:

"these cases show that general liabilities incurred in tort or delict, or in contract will be primary while the liability of the indemnity insurer of the injured party will be secondary."

365 Counsel for Speno adds to the principle the qualification "as long as the judgment is not fulfilled". As I understand it, Speno suggests that the distinction between primary and secondary liabilities dissolves when the insured is indemnified pursuant to either liability. Speno's submission must be that the qualification is implicit because I could not find in the judgment any reference to such a qualification. Neither is there anything in the judgment to suggest that Lord Mackay was intending to so qualify his statement. Having considered the judgment of Lord Mackay, I have formed the view that if Speno is to rely on such a qualification, authority for it must be found elsewhere.

366 Speno submits that, as Zurich has fulfilled its obligation to indemnify Hamersley, Hamersley's causes of action for an indemnity from Speno and Zurich have merged in the Hamersley Judgment. It is for that reason that the judgment is said to govern the rights between the parties; because the cause of action has, in effect, "disappeared". Consequently, on Speno's argument, the distinction between primary and secondary obligations ceases to have significance. This is said to be because once the party that has the benefit of the judgment has been indemnified, that brings that party's interest to an end and also brings to an end that party's right to execute. As the cause of action is lost to the insured then it is also lost to the insurer who is entitled to do no more than enforce the right of the insured. Any right of subrogation must be a right to be subrogated to Hamersley's rights under the judgment, not its rights under the contract made between Hamersley and Speno. It is said that the effect is that there is now, on the judgment, a co-ordinate liability. The result is that there are two parties each of which are obliged to indemnify Hamersley and they are, therefore, on equal footing.

367 In support of the proposition that a cause of action merges in the judgment, reliance was placed on various statements of the doctrine of res judicata. In Spencer Bower and Turner, "The Doctrine of Res Judicata", 2nd ed Butterworths, London, 1969 (at 358 [427]) once the cause of action merges in the judgment, the cause of action is said to "[lose] its individual vitality and disappears as an independent entity".

368 The authors of Res Judicata, in this early edition of the text to which the Court was referred, express the doctrine on which Speno relies in somewhat quaint terms (at 358). However, it can be summarised (and modernised) to state, relevantly, that any cause of action which results in a judgment where relief is granted to the plaintiff or any other party to the proceedings, is merged in the judgment as soon as pronounced and disappears as a separate entity and cannot be the subject of a further action for the same or similar relief. The action can, of course, be revived following an appeal.

369 The statement of the rule in "Halsbury's Laws of Australia", LexisNexis, 2003 at [190 - 45] is to substantially the same effect and provides that where an action has been brought and judgment has been entered in that action, no other proceedings may be maintained on the same cause of action. If the cause of action was held to exist, so that judgment was given upon it, it is said to be merged in the judgment and no longer has an independent existence. Res judicata is a defence to a claim in a legal proceeding which, if made out, is a complete bar to the claim. The claim may be struck out or the action stayed or dismissed on the ground that it discloses no cause of action or that its maintenance is an abuse of process. There is no discretion in a court to allow the second action to proceed where the cause of action has merged in the judgment in the prior proceedings because the cause of action will have been extinguished by the first judgment.

370 Speno also relied on the decision in Buckland v Palmer [1984] 1 WLR 1109. In that case the plaintiff, the owner of a motor vehicle damaged in a collision with another vehicle, the owner of which, the defendant, believed he was insured, made a claim on her insurance and was advised that as the insurer and the insured of the other vehicle had a "knock for knock" agreement, the plaintiff's insurer would meet the cost of the claim except for the first 50 pounds. The plaintiff sued the other driver for the 50 pounds and 5 pounds court fees. The defendant paid the amount sought into court, indicating that he wished to make a counterclaim. The plaintiff accepted the money whereupon her action became stayed. The plaintiff's insurers, on becoming aware that the defendant was not in fact insured at the time, initiated an action in the plaintiff's name by subrogation, claiming the balance of the costs of repairing the vehicle. The defendant brought an action to strike out the claim as an abuse of process of the Court.

371 Sir John Donaldson MR (at 1114 - 1115) referred to the wider issues including, on the one hand, the public interest in avoiding any possibility of two courts reaching inconsistent decisions and in there being finality in litigation and on the other hand, the public interest in seeing that justice is done. The Master of the Rolls also noted that it is an abuse of process of the Court to bring two actions in respect of the same cause of action. Consequently, he held that if the first action has proceeded to judgment the cause of action is extinguished by merger, with the consequent effect of frustrating any further claim. He ordered that the second claim brought in the name of the plaintiff be struck out: see also Griffiths LJ (at 1116).

372 I consider the decision in Buckland v Palmer (supra) to be in accordance with the principles relating to cause of action estoppel and, as such, a complete answer to any attempt on the part of Zurich or Hamersley to revisit the matters raised in the action. However, I am not persuaded that these statements of principle have any application in the particular circumstances of this case where two separate and distinct obligations have been found to exist, one of which has been satisfied and the other which has not been satisfied.

373 Reliance is placed on the decision in Ex parte Fewings (1883) 25 Ch D 338 per Cotton LJ (at 348), per Lindley J (at 353) where a creditor brought an action under a contract which entitled him to a stated interest rate, although he did not claim an entitlement to the contractual interest rate. The Court held that the debt was confined, by reason of the cause of action having merged into the judgment, to interest on the judgment sum at the statutory rate rather than the contractual rate, as the judgment put an end to the defendant's liability to pay under the contract. Cotton LJ said (at 349 - 350):

"In my opinion that contention is unfounded, for, so soon as judgment was obtained it put an end to the liability under the covenant to pay the [principal sum] and the debt became due on the judgment, not under the covenant ... But that covenant is now at an end; The liability under it for the [principal sum] is gone, it is merged in the judgment, and it cannot be said that, notwithstanding that the covenant to pay the [principal sum] is gone there is a separate covenant to pay interest at 5 per cent."

374 Speno submits that it follows from the decision in Ex Parte Fewings (supra) the position as between Hamersley, Speno and Zurich is now governed by the judgment, even though the judgment may reflect a substantive change in the position of the parties as a consequence. The principle is said to be best summarised in the judgment of Lindley LJ (at 353) where he said:

"Now it may be technical, but it is well settled, that, if there is a debt secured by a covenant, and judgment is recovered on the covenant, the debt on the covenant merges in the judgment debt. In point of law the [principal sum] is no longer payable under the covenant, it is payable under the judgment; the covenant to pay interest is gone, and the judgment bears interest only at [the statutory rate]."

375 In my view, the application of these principles to the facts of this case would result only in the position that if, following the judgment, Zurich paid the amount necessary to indemnify Hamersley, the payment was made under the judgment and not under the policy, and any issue in relation to the payment would be governed by the terms of the judgment rather than the terms of the policy. I am not persuaded that once Zurich's liability to Hamersley is met, the nature of Speno's liability changes and there no longer exists a primary liability to Hamersley. At least, I can find no support for that proposition in the texts or the authorities cited and I do not see any reason why it should be so.

376 Counsel for Speno referred to the decision in Sydney Turf Club (supra). However, in my view, that decision does not support Speno's proposition; it simply indicates the outcome of the action in the event that the underlying proposition of co-ordinate liability resulting from the judgment is accepted by the Court.

377 Speno maintains that it is not only as a consequence of the merger of the cause of action into the judgment that no action can be brought to enforce Speno's primary liability, it also results from the way in which the judgment is expressed. The form of the order is said to be critical. I cannot accept that to be the case. Often the form of the orders which flow from the reasons for decision result from on the spot drafting which may not be optimum. Other times it reflects the terms of minutes of orders which are produced to the Court in circumstances where the Court and the opposing party have little time to reflect on them. Counsel for MMI expressed the view that the form of words used to express an order should not determine the rights between the parties. Although there are clearly some limitations on that broad statement, in the absence of an authority precisely on point, I am not prepared to accept that Hamersley's rights, and hence MMI's rights, depend upon the wording of the judgment rather than the decision underlying the judgment.

378 With respect to Speno's proposition that the cause of action has merged into the judgment, MMI has no disagreement as a statement of principle. However, MMI submits that the principles of res judicata say nothing at all about the enforcement of an action or the enforcement of a judgment already obtained. Counsel maintained that it is a doctrine about whether a cause of action may be further pursued; it is not about the satisfaction of the judgment obtained by pursuing that cause of action. MMI notes that Halsbury's Laws is silent as to the enforcement of judgments already obtained. This is also apparent from a later edition of the text by Spencer, Bowen and Turner, "The Doctrine of Res Judicata", 3rd ed Butterworths, London, 1996 (at [392]):

"Res judicata has a twofold operation. It estops the parties to a decision from afterwards controverting any issue thereby decided and it bars the party who has obtained relief from seeking it again ... The rule as to merger may be stated as follows: any person in whose favour an English judicial tribunal of competent jurisdiction has pronounced a final judgment, civil or criminal, is precluded from afterwards recovering before any English tribunal a second judgment against the same party on the same cause of action".

379 Although counsel did not specifically refer to the balance of the paragraph, it does say that "in cases of former recovery what is not allowed is a second action for the relief previously granted". Buckland v Johnson [1854] EngR 592; (1854) 15 CB 145 (at 153) is cited as authority for this proposition.

380 In Buckland v Johnson (supra), Jervis CJ held (at 383) that a judgment of a court of record changes the nature of that cause of action, and prevents it being the subject matter of another suit, and "the cause of action, being single, cannot afterwards be divided into two".

381 Counsel for MMI also relies on the following statement of Spencer, Bowen and Turner (1996) (supra) as to recovery (at [398] and [399]):

"A former recovery is established by proof that the party against whom the plea is set up, in previous litigation as plaintiff, counterclaimant or the like, obtained a judgment for relief on the same cause of action ... 'Recovery' means recovery of the relief granted; it does not mean satisfaction. The cause of action is merged in the judgment when pronounced; what happens afterwards is irrelevant."

382 MMI submits that Hamersley's cause of action against Speno merged in the judgment which it obtained against Speno but that judgment against Speno has not been satisfied. The only judgment which has been satisfied is the judgment obtained against Zurich. Satisfaction of the Zurich judgment does not satisfy the Speno judgment.

383 As I have indicated above, I am not persuaded that the principle of res judicata has any application to the judgment against Speno; in particular, I do not accept that the principle creates the situation that Speno no longer has a primary liability to indemnify Hamersley. However, that does not dispose of Speno's defence to the claim because Speno also alleges that the mere fact of payment of the judgment sum prevents recovery against Speno. Rather than being a separate proposition, this is, in effect, another aspect of Speno's primary proposition.

384 Any suggestion that MMI is entitled to recover from Speno any part of that amount paid to Hamersley to indemnify it against the Nolan judgment is refuted by Speno relying on the decision in Clissold v Cratchley [1910] 2 KB 244. In Clissold (supra) a solicitor sued out a Writ of fi.fa on an order in favour of his client, unaware that the debt had been paid at the country office of the solicitor, prior to the writ being issued. The Court unanimously held that when the total amount ordered by a judgment has been paid, the judgment is at an end and no longer has any force or effect. Consequently, there being no existing judgment, the writ of execution was void ab initio: per Vaughan Williams LJ (at 249 - 250); per Fletcher Moulton LJ (at 150) and per Farwell LJ (at 250). See also Cubitt v Gamble (1919) 35 TLR 223 (at 224). Speno relies on the decision in Clissold (supra) in submitting that there is in this case no judgment in respect of which the writ can be issued. That is because the judgment has been discharged and the writ is void ab initio. In Clissold (supra) and Cubitt (supra) there was only one plaintiff, one defendant and a single judgment to satisfy. The issue between MMI and Speno arises from the fact that there were two relevant judgments, only one of which has been satisfied. In those circumstances, I do not believe that these authorities are of relevance other than in relation to the very basic proposition that once a judgment is satisfied no enforcement proceedings can lie. Therefore, the Court would have to accept that the effect of Speno's cause of action merging into the judgment resulted in there being a single co-ordinate liability to indemnify Hamersley before Zurich's payment to Hamersley would provide a bar to this action and before the Writ of fi.fa would be void. As I have indicated, I do not believe that the principles of res judicata extend that far.

385 Speno's proposition that indemnification by Zurich disentitles Hamersley, and hence MMI by subrogation, from enforcing its contractual indemnity against Speno, is said by MMI to be an inaccurate statement of insurance law. MMI maintains that it is entitled to enforce by subrogation the rights already established by the judgment. MMI relies on the proposition that it is no answer by a third party who is liable for the loss to say to an insured that it has already been indemnified by its insurer. That it is wrong in principle is said to be apparent from the decision in Sydney Turf Club (supra) where Jacobs JA made the following statement in relation to the rights of subrogation and the availability of a defence to a third party who is liable to the insured where insurance has been granted (at 730):

"It is necessary to pause now and to consider some of the principles relating to indemnity insurance. A public liability policy and employer's liability policy are essentially insurances of indemnity. That being so any insured can recover no more than the amount required to indemnify him. If he has recovered the whole of the loss from one insurer then it is a defence at law to another insurer so to allege. ... The legal defence that the insured has already been indemnified is only available when the insured seeks to be indemnified in the strict sense twice over."

386 It is apparent from this statement that, as counsel for MMI contends, the payment by Zurich by way of indemnity of Hamersley would only be available to Speno as a defence if Speno was in the position of an insurer.

387 I am satisfied that none of the matters on which Speno relies prevent MMI from exercising its right of subrogation. However, the next issue requiring resolution is the rights which may be exercised under that principle. This issue requires a consideration of the principle of subrogation.

388 As MMI's entitlement to bring the action against Speno is said to be based on the right of subrogation, counsel for MMI referred the Court to a number of authorities which explain the nature and scope of the right. Particular reliance was placed on the statement of Brett LJ in Castellain (supra) where the right of subrogation was defined in the widest possible terms (at 388):

"In order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used, that is to say, the insurer must be placed in the position of the assured. Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished."

The fundamental principle of insurance law to which Brett LJ refers in his definition of subrogation is this (at 386):

"The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in a case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance ..."

These passages fully explain Brett LJ's description of the doctrine of subrogation as a proposition adopted for the purpose of carrying out the fundamental rule.

389 Bowen LJ expresses the principle of subrogation (at 402) in this way:

"That a person who wishes to recover for and is paid by the insurers as for a total loss, cannot take with both hands. If he has a means of diminishing the loss, the result of the use of those means belongs to the underwriters ... where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss."

390 Therefore, on the authority of Castellain (supra), if an action taken by an insurer has the effect of more than fully indemnifying the insured, then the doctrine of subrogation cannot provide the lawful justification for the action.

391 It is because of this fundamental principle that, despite the width of the definition of subrogation, Brett LJ also concluded (at 389) that:

"if upon the happening of the loss there is contract between the assured and a third person, and if that contract is immediately fulfilled by the third person, then there is no right of action of any kind into which the insurer can be subrogated. The right of action is gone; the contract fulfilled."

The same position arising in tort would result in there being no right of action existing into which the insurer could be subrogated.

392 Similarly, as Barwick CJ noted in SGIO v Brisbane Stevedoring Pty Ltd [1969] HCA 59; (1969) 123 CLR 228 (at 240):

"It is settled law that an insurer who has paid the amount of a loss under a policy of indemnity is entitled to the benefit of all the rights of the insured in the subject matter of the loss and by subrogation may enforce them."

393 The then Chief Justice of the High Court added a further fundamental principle (at 241):

"It is also settled law that an insured may not release, diminish, compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under his right of subrogation."

394 In Buckland v Palmer (supra), Griffiths LJ stated (at 1116) that an insurer who pays his insured under a comprehensive policy and then seeks under this right of subrogation to recover that sum in the name of his insured can have no greater rights against the tortfeasor than those of his insured: see also Simpson & Co v Thompson (1877) 3 AC 279 (at 284). The corollary of that proposition is that indemnification by an insurer of its insured does not provide a defence to a third party who is liable to the insured in respect of the same loss: see Sydney Turf Club (supra) (at 730).

395 It can be seen from this recitation of authority that the doctrine of subrogation was adopted for the purpose of ensuring that an insured is never more than fully indemnified. It is also evident that if the insurer is exercising the rights of the insured, an insurer may only be subrogated to those rights available to the insured. Conversely, if a cause of action is lost to the insured it is also lost to the insurer. In practical terms, the effect of the doctrine is that any amount obtained from an action brought by an insurer by subrogation is offset against the amount paid by the insurer by way of indemnity.

396 MMI's position is that the right of subrogation extends to the exercise of rights to reduce the loss for which the insured was indemnified. Support for MMI's position is said to be found in the judgment of Brett LJ in Castellain (supra) and in AFG Insurance Ltd v Mayor Councillors and Citizens of City of Brighton [1972] HCA 70; (1972) 126 CLR 655.

397 In AFG Insurance Ltd (supra) the appellant relied on Brett LJ's statement of the right of subrogation in Castellain (supra) which is set out above. Mason J held (at 663 - 664) that the remarks of Brett LJ say no more than that there passes to the insurer such rights of the insured as may be necessary to ensure that he recovers no more than a full indemnity in respect of the loss. Mason J also noted (at 663) that the doctrine of subrogation comes into operation when the insurer meets his liability under the policy by making payment to the insured in respect of his loss. The insurer is then subrogated to the relevant rights of the insured.

398 Reliance was also placed by MMI on the decision in Sydney Turf Club (supra) and, in particular, on the statement of Jacobs JA (at 730), set out above, where it is said that the insured may sue at law any person who is liable to make good to him over the damage which he has suffered and in respect of which he is insured whether that liability arises from tort or from contract. If the insured has already been indemnified by his insurer then the insurer is subrogated to the insured's right against the party primarily liable in contract or in tort for the amount of the damage. That of course is a reference to the situation where, although the insured has been indemnified, the insured retains a right of action against the person or entity that is responsible for the loss. This point is made plain in the judgment of Mason JA in Sydney Turf Club (supra) where his Honour states (at 734):

"Where an insurer is subrogated to the rights of the insured against a third party, the insured does not acquire an independent cause of action in his own right. He succeeds to the insured's cause of action against the third party, in this case a right of action on the policy issued by the Jockey Club. That right of action remains in all respects unaltered; it is brought in the name of the insured and it is subject to all the defences which would be available if the action had been brought by the insured for his own benefit. Thus payment in full by the Government Insurance Office on account of the risk is a defence to the action by the appellant against the Jockey Club and it is no answer to that defence that the action is brought for the benefit of the insurer.

In truth there was no relevant right in the appellant to which the Government Insurance Office could become subrogated. Once the insured was paid in full by that insurer, the insured had no cause of action which he could enforce against the Jockey Club on its policy either for his own benefit or for the benefit of the other insurer."

Mason JA went on to note that the GIO could, in its own name, recover a pro rata contribution from the Jockey Club as an insurer against the same risk under the doctrine of contribution but that is not the action that was brought by the appellant.

399 It is clear from this statement and the decision in Sydney Turf Club (supra) that, where the insured has been fully indemnified, no right remains to which MMI may be subrogated against another insurer. That, of course, is not a complete answer to MMI's action because, although Speno is obliged to indemnify Hamersley the obligation arises from a clause in a contract to provide services and not from a contract of insurance.

400 The case of Commercial Finance Corp Ltd v Merchants Casualty Insurance Co [1931] 1 DLR 212 (confirmed on appeal in [1931] 4 DLR 210) is said by MMI to be an illustration of the application of the principles on which MMI relies in circumstances that are somewhat similar. Counsel for MMI referred to the decision of Garrow J at first instance who, having ruled that the negligent third party was liable to the plaintiff company for the loss which it had sustained, in an amount to be determined, considered the actions brought by the insurance companies against the third party: (at 225). He said (at 226):

"I'm unable to hold, therefore, that there is any direct right of contribution over, as between the credit company and the insurance companies. I do not know, however, that it is of much importance, because undoubtedly, upon payment of the plaintiff's claim as now or hereafter ascertained, the insurance companies are entitled to stand in the shoes of the plaintiff as against the retail credit company."

Garrow J further ruled that each of the insurance companies upon payment was to be subrogated to the rights of the plaintiff as against the third party. MMI cited this case as an example of a plaintiff being entitled to recover both against the negligent third party and as against the insurers.

401 In considering the significance of this decision it is important to identify the relevant facts. Insurance policies from two different companies, covering consecutive periods of liability, provided against loss through wrongful conversion of motor cars on which the assured had advanced money. The assured agreed with a third party that the third party should supply him with information as to the whereabouts and condition of the cars. The third party was negligent in the discharge of its duty, as a result of which the cars or their proceeds were converted and a claim was made by the assured against the insurers. In an action by the insurers against the third party and on an appeal by the third party it was held, contrary to the third party's submission, that each insurer was entitled to be subrogated to the rights of the assured against the third party (with respect to loss occurring during the relevant periods of risk), even though the happening of the risks against which the insured was to be indemnified gave rise to different causes of action from those on which the assured might establish his claim against the third party.

402 In reaching its decision, the Appellate Division of the Ontario Supreme Court considered the doctrine of subrogation and its application in the circumstances before them. Hodgins JA (with whom Middleton JA and Grant JA agreed) quoted from the decision in National F Insurance Co v McLaren 12 OR 682, where Boyd C provided the following view on subrogation (at 687):

"The doctrine of subrogation is a creature of equity not founded on contract, but arising out of the relations of the parties. In cases of insurance where a third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principle of securing full indemnity to the insured, on the one hand, and on the other of holding him accountable as trustee for any advantage he may obtain over and above compensation for his loss."

403 This statement of the principle is essentially the same as that of Brett LJ in Castellain (supra), only expressed differently.

404 Another case referred to and quoted from by Hodgins JA (at 235) is Burnand v Rodocanachi Sons & Co 7 AC 333, in particular the judgment of Lord Blackburn. The quotation lays down the doctrine of subrogation as a general rule of law (at 339):

"Where there is a contract of indemnity (it matters not whether it is a marine policy, or a policy against fire on land, or any other contract of indemnity) and a loss happens, anything which reduces or diminishes that loss reduces or diminishes the amount which the indemnifier is bound to pay; and if the indemnifier has already paid it, then, if anything which diminishes the loss comes into the hands of the person to whom he has paid it, it becomes an equity that the person who has already paid the full indemnity is entitled to be recouped by having that amount back."

Having considered these statements of principle together with various authorities from the Canadian Court of Appeal, Hodgins JA dismissed the third party's appeal against the plaintiff and the insurance companies on the question of subrogation.

405 The right of the insurer, by subrogation, to enforce a right by which the loss may be reduced is also evident from the statements of principle in Insurance Commission of Western Australia v Kightly [2005] WASCA 154; (2005) 30 WAR 380. Steytler P (at [26]) described the principle in these terms:

"The doctrine of subrogation is founded upon equitable principles: ... It prevents the insured from making a double recovery, once from the insurer and once from the tortfeasor (in a tort case) in circumstances in which the insurer has undertaken to indemnify the insured against actual financial loss. It does that by giving two rights to the insurer. First, it gives to the insurer the right to require the insured to pursue any remedy available against the tortfeasor for the benefit of the insurer. Second, it gives to the insurer the right to recover from the insured any benefit received by the insured in diminution or extinction of the loss against which the insured has been indemnified,"

406 Steytler P also referred (at [48]) to the decision of the High Court in Transport Accident Commission v CMT Construction of Metropolitan Tunnels [1988] HCA 46; (1988) 165 CLR 436 (at 442) where the principle of subrogation was said by Wilson, Dawson, Toohey and Gaudron JJ to rest on the proposition stated in Castellain (supra) that an insured shall be fully indemnified but shall never be more than fully indemnified. In that context, Steytler P referred (at [50]) to the decision of the House of Lords in Napier v Hunter [1993] AC 713 where Lord Templeman said (at 738) that an insurer entitled to subrogation has an enforceable equitable interest in the damages payable by the wrongdoer and hence the insured person is guilty of unconscionable conduct if he does not provide for the insurer to be recouped out of the damages awarded against the wrongdoer. Of course, an insured who has been fully indemnified is also obliged to account for moneys paid to him or her by another insurer but that is not a matter that arises in this case.

407 It can be seen that there is a wealth of authority on the nature and scope of the doctrine of subrogation. Without question, an insurer may by subrogation assert any right which exists in the insured. Where the insured has been indemnified by another insurer, an insurer cannot by subrogation bring an action against the other insurer because the insured's right to recover from the other insurer was extinguished when the insured was indemnified by the other insurer.

408 However, in this case, although Hamersley has been indemnified by Zurich, there remains a judgment against Speno to indemnify Zurich based on a finding that Speno was under a primary obligation to indemnify Zurich. Where MMI has been required to contribute to the indemnity met by Zurich, there is, in effect, a portion of the judgment sum for which Speno was also liable and primarily liable, which has not been met by Zurich. Instead it has been met by Hamersley's insurer, MMI, against whom there is no judgment. Therefore, the entitlement of MMI to recover against Speno depends on the extent to which an insurer is entitled to recover by subrogation against a third party.

409 In the headnote to the report of the decision in Commercial Finance Corp Ltd (supra), the decision on appeal includes the following statement (at 213): The true test of the right to subrogation is whether the enforcement of the right would diminish the insurer's loss. I was unable to find such a broad statement in any of the judgments. However, of the authorities cited by the Court, there are a number of references to the issue of diminishing the insurer's loss in Castellain (supra). Brett LJ refers to diminishing the loss in the following terms (at 389 - 390):

"I go further and hold that if a right of action in the assured has been satisfied, and the loss has been thereby diminished, then, although there never was nor could be any right of action into which the insurer could be subrogated, it would be contrary to the doctrine of subrogation to say that the loss is not to be diminished as between the assured and the insurer by reason of the satisfaction of that right."

410 Cotton LJ (at 393) states that, in order to ascertain the amount of loss, everything received by the insured and which diminishes the loss must be taken into account. It is this diminished amount which is the amount to be paid by the insurer under the indemnity: see also at 396.

411 I understand Brett LJ to be emphasising the existence of the rights in the insurer pursuant to the doctrine of subrogation. The fact that the loss has been diminished by satisfaction of a right of action in the assured does not remove or undermine that right, it simply means that in those circumstances the insurer cannot subrogate to the right in the assured because it has been met. Further, the diminution of loss referred to in Castellain (supra) was a reference to receipt by the insured of moneys which represented part of the value of the property, the full value having already been paid to the insured pursuant to the insurance policy. In Commercial Finance Corp Ltd (supra), the rights to which the insurer would subrogate were rights under a judgment and a judgment which had not been satisfied as this one had been. Therefore, the existing right which would then be pursued by way of subrogation was a right to pursue the claim for damages, a right in the insured rather than the insurer.

412 It is apparent that the diminution of the loss referred to in the various authorities is not the insurer's loss: it is the loss of the insured. However, where the insured has been fully indemnified, in accordance with the prohibition on an insured being more than fully indemnified, the amount obtained in diminution of the insured's loss is retained by the insurer to offset the amount paid under the policy. Nevertheless, I consider that referring to diminution of the insurer's loss, whilst that may indeed be the practical effect, has the potential to create a misunderstanding about the true nature of subrogation. This is because it is fundamental to the doctrine of subrogation that it is the right of the insured to reduce its loss which is being exercised by the insurer, not the insurer's right.

413 It is clear on these authorities that an insurer is entitled by subrogation to bring an action against a third party for the purpose of reducing or diminishing the insured's loss which the insurer is bound to pay as a result of its obligation to indemnify the insured. Therefore, the success of MMI's action depends upon the circumstances in which an insured who is the tortfeasor or who has been in breach of a contract or was the defendant in some other cause of action, may recover from another any part of the damages awarded. In the authorities to which I have referred, the action by subrogation is almost always exercising the right of an insured who is entitled to claim rather than being claimed against. Secondly, as was the position in Commercial Finance Corp Ltd (supra), the cases in which an insurer has been held to be entitled by subrogation to bring an action against a third party are all cases where the third party caused or contributed to, or was in some way responsible, for the loss.

414 In Speno Rail Maintenance Australia Pty Ltd (supra) Wheeler J, in considering the decision of Lord Sutherland in Caledonia North Sea Ltd (supra), addressed (at 327) the situation where an action is brought by subrogation against a third party who was obliged under contract to provide the insured with an indemnity. Wheeler J noted, in the context of considering whether Speno's obligation was primary or secondary, that Lord Sutherland observed that the fact that a party chooses to insure against the possibility of non-recovery under the indemnity clause cannot affect the contractual obligations. Wheeler J made the following comment (at 327):

"It appears to me that that observation is equally applicable to this works and services contract where Hamersley required in effect that certain insurances be taken out or indorsed for the benefit of Hamersley. It seems to me that a rather similar view of the relationship between indemnity and insurance clauses, in the context of a lease, was taken by the Court of Appeal of Victoria in Buller Ski Lifts Ltd v Mount Buller Alpine Resort Management Board [2000] VSCA 31 [8], per Phillips JA where the court observed that the need for insurance cover recognises 'the commercial possibility of insolvency or some other obstacle standing in the way of the lessee meeting the call for an indemnity, when made'. This too appears to regard the indemnity provision as primary."

415 With respect to her Honour, I am not convinced that in Buller Ski Lifts Ltd (supra) (at [16]) Phillips JA did form such a view. However, it is the case that the decisions in Speno Rail Maintenance Australia Pty Ltd (supra) and in Caledonia North Sea Ltd (supra) make it clear that an action may be brought by subrogation against a third party who was obliged under contract to provide the insured with an indemnity.

416 I consider the decision of Lord Cairns LC in Simpson & Co (supra) conclusively and succinctly identifies the proposition which entitles MMI to succeed against Speno (at 284):

"Where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss."

417 Therefore, relevant to the facts in this case, as Hamersley was entitled to call on the contractual indemnity from Speno before calling on the indemnity under the insurance policy, Hamersley retains a right to seek from Speno an indemnity for that amount of the judgment sum that has been paid by MMI by way of contribution.

418 Putting to side for one moment recovery of any portion of the judgment sum, counsel for MMI also submits that even if Speno's argument is valid, it could not have application to payments made other than in respect of the judgment sum. The payments which are said to lie outside Speno's argument are these:

1. $25,000 paid in settlement of the Oatway proceedings;
2. $9,000 paid for legal costs of the Oatway proceedings;
3. $2,115.08 paid for interest on the damages award to Nolan;
4. $4,292.64 paid for interest on the judgment in favour of Nolan;
5. $12,000 paid for the agreed appeal costs of Nolan;
6. $97,375 paid for the agreed trial costs of Nolan.

419 Speno accepted that the reasoning it applied did not apply to the payment made to Oatway. However, Speno maintained that these amounts had also been paid and hence Hamersley had no liability to Oatway either. In view of the findings I have made, any of these amounts which comprise part of the judgment sum to which MMI is required to contribute should properly be met by Speno. As to any remaining amounts, the relief sought is a declaration of a right in MMI to exercise rights of subrogation to recover the whole of its liability to Zurich, including costs. Insofar as any of the above amounts do not form part of MMI's liability to Zurich, including costs, they fall outside the scope of the relief sought.

420 It is clear from the reasons I have given that I am satisfied of the following propositions:

(1) A full indemnity from one insurer precludes the insured from seeking an indemnity from another insurer.

(2) The insurer that has paid the indemnity may seek contribution from the insurer that has not.

(3) The insurer required to contribute may recover, by subrogation, the amount of the contribution from a third party who is liable in respect of the same loss.

(4) A third party is liable in respect of the same loss if the third party has contributed to the loss or has a primary obligation to indemnify the insured against the loss.

(5) The insurer required to contribute may, by subrogation, enforce the judgment against the third party required to indemnify the insured to the extent of the contribution.

(6) Where a judgment includes a primary and a secondary obligation to indemnify an insured, payment of the judgment sum by the party with the secondary obligation does not satisfy the secondary obligation unless the judgment so provides.

421 The consequence of these findings is that there will be judgment for the plaintiff in the MMI Action. The chamber summons in the Nolan action will be dismissed.