Contribution

By Steve Nance

Contribution between two policies applies when both policies tick all the right boxes, these boxes being that the same loss is covered against the same asset which is damaged, owned by the same insured and the like. Easily put, if two policies cover the same loss, then contribution can apply between the policies.

To avoid any confusion, this is addressed in Section 76 of the Insurance Contracts Act. It is quite clear. If there are two policies, then the insured is able to pick which policy he wishes to claim against, and once the insured is indemnified, then that insurer has a right of contribution against any other insurance which may have provided cover.

This is commonly encountered in construction policies, specifically as most construction policies cover a number of parties, either specifically or otherwise. As to who was covered, of course, will depend on the definition of “the Insured” under the policy. This in turn can sometimes depend on the “tier” of the party who has purchased the insurance. For example, a “Principals” policy will often include the Principal/Owner, the main contractor, subcontractors, and others. The main contractor’s policy is likely to do likewise, though may not include sub-contractors. However an annual contract works policy for, say, a plumbing subcontractor may only cover the plumber themselves. There may be cover for “Principals”, but maybe not to subcontractors. It is therefore important to look at who is covered under each policy when looking at the aspect of contribution.

The next thing to look at is  the insured property that is covered under each policy. For instance, the plumber’s policy will only cover the plumber’s works. The main contractor’s policy, however, will cover all of the works, including that of the electrician, plumber, Carpenter, concrete, and the like. From the standpoint of the main contractor’s policy, therefore, a number of applications for contribution would need to be made for any particular claim where multiple trades assets have been damaged.

This brings us to the interesting point of when contribution would not apply. Let’s say the main contractor’s policy has a “DIC” (Difference in Conditions) clause which, still commonly, says that if there is another policy of insurance (whether specified as being undertaken by a Principal or not) exists, then the policy will only act in excess of or as a difference in cover and/or difference in excess policy to that other policy. Ah yes, the discussions I’ve had.

Section 45 of the Insurance Contracts Act renders such “other insurance” clauses void, except if the other insurance is specified. This in turn raises the issue as to what the term “specified” means. There are a number of texts by various authors, and also a case from the New South Wales Court of Appeal, being HIH v Pluim. In this case the judge rightly pointed out that the second contract of insurance may not even have been formed at the time the first one was taken out, and as such could not be specified in any detail. He suggested 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.

It seems from this that other means of satisfying Section 45 could include anything from specifying a policy number (of the other policy) to providing a brief description of that policy.

What is unlikely to satisfy Section 45 would be broad terms which do not indicate to a reasonable person that the author was aware of the existence of the other policy. Such possibly could include terms such as “any Principals policy”, or perhaps even “any policy that may have been purchased by the Principal of the XYZ project”, this being more a stab in the dark as opposed to specifying the policy which is known to exist.

Maybe one way of getting around this is to include a clause of a general nature which refers to an attached schedule which in turn  specifies the various contracts to which the DIC provisions would apply. It would also help if you could be shown that the premium paid for the DIC contracts were less than the full cover contracts, otherwise any sceptic could infer the schedule was nothing but an attempt to prevent contribution.

Clearly the above is not legal advice, which should be obtained when drafting such clauses.