Proportionate liability and Insurance policies: Don’t contract out of Proportionate liability
What is proportionate liability?The objective of proportionate liability is to ensure that liability rests with all defendants in proportion to their contribution to the plaintiff loss.What happened prior to proportionate liability legislation?In circumstances of economic loss or property damage, where two or more defendants were found liable to have caused the same type of loss, the traditional approach was that each defendant would typically be found to be jointly and severally liability to the plaintiff for the whole amount.   No matter the degree of liability, those with the deepest pockets (or most comprehensive insurance policies) were left to indemnify the loss. Often one defendant may be insolvent and so the other would be left to pay for the loss.

Proportionate liability legislation has been enacted in various formats in Australian Jurisdictions; however it is important to note that whilst the legislation is not uniform, personal injury claims are usually expressly excluded from proportionate liability legislation.   Courts are able to apportion liability between concurrent wrongdoers in claims for economic loss or property damage, but may not necessarily do so in Personal Injury claims, in these circumstances it can still be the ‘deepest pockets’ that carry the responsibility.

It is important to make the point not to ‘Contract Out’ of Proportionate liability.   If a contract contains indemnity clauses that do not reflect proportionate liability principles or does not preserve the operation of the legislation, the parties can be ‘deemed’ to have contracted out of the legislation. This can happen for example if a party agrees it will be liable for the acts or omissions of its subcontractors. Other obligations and clauses in a contract where the parties can be taken to have “contracted out” of the legislation include warranties, guarantees, indemnities, releases, “hold harmless” clauses and obligations to maintain insurance.

Because the proportionate liability legislation is statute law, insurers will not deny a claim where the liability of the insured is apportioned in accordance with the legislation, however if the parties ‘contract out’ of the proportionate liability legislation, there is an argument that one party has agreed to assume greater liability to indemnify the other party in a way that is not consistent with their liability at law.

Whilst the outcome depends very much on the clauses contained in the contract and the facts of each case, there is a risk that the insurer will not pay a claim if the insured has agreed to contract out and this has extended their legal liability beyond what it would have been at law.

A case in point

A Geotechnical / structural engineer signed a service agreement with a Principal which contained a clause that the proportionate liability legislation be excluded in relation to any claim arising out of or in connection with the services provided under the agreement.   Further, to the extent that the Proportionate Liability Legislation cannot be excluded, the clause also provided that the Geotechnical / structural engineer, as the service provider be solely liability for any negligence or wrongdoing of any sub-contractor and that his company be solely liable for any loss arising out of the negligence or wrongdoing of any sub-contractor.

The Geotechnical / structural engineer utilised the services of a sub-contractor in relation to the survey work for the project which related to a new housing estate. Errors in the survey work lead to ineffective design and the Principal held the Geotechnical / Structural engineer responsible for the surveyors work and sought to rely on the Proportionate liability exclusion within the service agreement to make the Geotechnical / Structural engineer liable for the surveyor.

Usually an insurance policy will exclude a claim where the insured has entered into a contract that changes their legal liability so it is different to what would have applied at law.   This is referred to as a ‘contractual liability’ or an ‘assumed liability’ exclusion and is normally found in professional indemnity and other legal liability policies.

An example of a Contractual Liability exclusion is as follows:

“this policy shall not provide indemnity to the Insured for any Claim or Claims arising directly or indirectly from:

 –          Contractual Liabilities

Any liabilities relating to a duty or obligation assumed by the Insured by way of warranty, guarantee, contract, indemnity or hold harmless agreement unless such liability would have attached to the Insured notwithstanding such assumed duty or obligation.”

Insurers relied on the operation of this exclusion on the basis that the Geotechnical / structural Engineer signed the service agreement containing the proportionate liability legislation and took responsibility for the sub-contracted Surveyors work. Indemnity was declined in relation to any liability imposed even if other errors arose from the Geotechnical / Structural engineer as Insurers relied on the common law ‘Wayne Tank’ Principle, where there are two or more proximate causes of loss, but one of those causes is the subject of an exclusion, the insurer is not liable to indemnify the insured for the loss, notwithstanding the fact that the other cause of the loss is not an excluded cause and falls within the ambit of policy coverage.

In this case the Insured was not able to argue against the Principal as the Surveying work was at the seat of the errors, however depending on the scenario and contract, courts have pointed out that exclusion clauses in insurance policies are construed against the insurer and that commercial contracts, such as insurance contracts, should be interpreted in a common sense way to give the contract a “sensible, commercial operation”. This is the more difficult path to travel.

Do not contract out of Proportionate Liability legislation. You may end up responsible for all losses and not be able to rely on your Insurance policy to provide cover for losses.  Certain states do not allow you to contract out of Proportionate Legislation and other states are silent as to the matter, but you don’t want to wait for a court action to find out the ruling as to whether Proportionate Liability legislation will be upheld or not to reduce your responsibility.

This general advice and comments are provided in the capacity as your insurance broker and should not be construed as legal advice.  Separate legal advice relating to the interpretation and implication of this article for your individual circumstances should be obtained.

Sara Mithen is Claims Administrator at Austbrokers Countrywide

LLB B.Com (Ins Eco), Fellow ANZIIF (CIP), Dip. F.S (Brok)