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PERTH, Australia -- Entities named as additional insureds on Australian policies face little risk of successful subrogation by insurers after a loss, Australian legal experts say.
Australian courts generally have rejected insurers' attempts to recover from additional named insureds that may have contributed to a loss, according to speakers at the Australian Insurance Law Assn.'s annual conference in Perth, Western Australia, Sept. 2-4.
In a session on insurers' rights to recover on behalf of policyholders, Perth barrister Geoffrey Hancy said Australian courts tend to prevent insurers from exercising subrogation rights against "co-insureds" because subrogation actions increase litigation and because insurers, by accepting premiums, assume the risk of loss.
Mr. Hancy said he discourages insurers from subrogation actions against co-insureds because failure is "almost guaranteed." While the courts' reasons for rejecting such subrogation actions vary and there is therefore "no simple solution," it is rare for an insurer to win a case.
The subrogation problem generally arises in construction all-risk policies, which frequently include many insureds, Mr. Hancy said. Construction all-risk policies are common in Australia for large infrastructure projects.
An example is a case involving Woodside Offshore Petroleum Pty. Ltd., which is under appeal in the Western Australian Supreme Court, Mr. Hancy noted. The trial judge found that an oil platform's insurers could not take action against the platform designers because the policy wording meant the designers also were insured under the policy (BI, March 13, 1995).
The Australian courts have yet to implement a simple rule, as U.S. courts have done, Mr. Hancy said. In the United States, an insurer that pays a loss to one insured under the policy cannot recover from an additional insured on the same policy that was at fault for the loss, unless there was intent or fraud on the co-insured's part, he noted.
But Mr. Hancy said decisions in Australia "point in the same direction." Insurers have no rights to recover from additional insureds under a joint policy in which the interests of all insured parties are the same, he said. A right to subrogation against co-insureds does exist, however, in composite polices, where the interest of "the guilty co-insured in the insured property, or liability, is different from the interests of other insureds," he said.
In a construction all-risks policy, for example, the builder and subcontractors' interests differ from those of the project owner. The owner has property interests in the building, while the builder and subcontractors may have property interests in material on site but not yet used in construction. The builder has a possessory title to the building; subcontractors have no property interest in the building or construction work but have an economic interest in it.
Martin Davies, an insurance law professor at the University of Melbourne, said insurers' failure to distinguish between the doctrines of subrogation and contribution -- the right, taken by the insurer in its own name, to recover a share of the loss -- can "derail recovery litigation comprehensively. Contribution action is generally taken against another insurer that may also indemnify the same loss, but it can be against another party that, perhaps under a contract, has an obligation to indemnify for a loss. Subrogation is taken in the insured's name after the insurer has indemnified the insured; it can recover only for the insured's losses.
He told the conference that a case in Scotland last year, Elf Enterprise (Caledonia) Ltd. vs. London Bridge Engineering Ltd., one of seven test cases arising from the 1988 Piper Alpha oil rig explosion, illustrates the problem. After 381 trial days, defense counsel for the rig contractors raised, for the first time, the issue of whether subrogation was the correct action.
The insurers' case, taken on behalf of the rig's owners under subrogation rights, was dismissed.
The defense argued successfully that there was no right to subrogation action, which sought full recompense, because the owners had been indemnified in full for their loss and there was therefore no loss that the insurers could pursue on their behalf. Instead, the insurers should have taken action in their own name, seeking a contribution from the contractors.
Mr. Davies said a similar argument would succeed in the Australian courts. The trap insurers fell into with Elf was to assume that contribution applied only in cases where multiple insurers share the risk on a pro rata basis, he said.
Australian insurers have made the same "fatal mistake," with the same result, he said. Mr. Davies warned that subrogation will seldom result in complete recovery for the insurer. "If an insurer enforces its contractual right to use the insured's name to pursue an indemnity from a third party, that third party can proceed directly back against the insurer for a ratable contribution to the same loss."
Chris Chapman, a partner in the Wellington, New Zealand, law firm of Buddle Findlay, agreed that insurers' long-standing belief that the subrogation right includes a right of full recovery from any party that might be considered to have indemnified the insured is "not soundly based." He told the conference that where there are doubts about subrogation rights, an insurer could contemporaneously issue a claim for contribution.
He said defendants in subrogation or contribution claims will look carefully at risk allocation agreements with the insured. Hold-harmless agreements may prevent insurers from taking any action, Mr. Chapman said.
Policyholders need to make insurers aware of any contracts that allocate risks, he noted, or the insurer may be able to "avoid" a policy, or to act as though no policy contract existed, on the basis of material non-disclosure.
Elf Enterprise (Caledonia) Ltd. vs. London Bridge Engineering Ltd., unreported, Court of Session (Outer House), Sept. 2, 1997.