The Hidden Costs of Buying Insurance – Overlaps in Cover
Tanner De Witt Legal Update, September 2005
The recent Hong Kong Court decision in Dragages et Travaux Publics (HK) Ltd v RJ Wallace highlights the problems caused when insurance policies overlap. Although the case itself relates to the construction industry, it is highly relevant to property managers and anyone else who purchases insurance (particularly third party liability and EC insurance) from more than one insurer.
The MTRC appointed Dragages as its contractor. During construction, a bridge collapsed and 6 workers died. These workers were employed by Dragages’ subcontractors. The Contract required MTRC to take out a Contractor’s All Risks and Third Party Liability insurance to cover the Government, the MTRC, Dragages and its subcontractors. The Contract also required Dragages to take out Employees Compensation insurance for its own and its sub-contractors’ employees. Dragages claimed against both insurers. Although the Employees Compensation Insurers accepted the claim, the Third Party Liability insurers rejected it and Dragages sued them.
The Third Party Liability insurers argued that:
- an exclusion applied to exclude claims for liability for death or injury to employees of ‘the Insured Party’; AND
- as the subcontractors were insured under the Policy, the claim was excluded.
It is usual for third party liability policies to exclude liability to employees.
Dragages argued that the employees were employed by its subcontractors and not by Dragages and therefore the exclusion did not apply.
The Court agreed with Dragages and allowed the claim.
The Court said that the exclusion should be interpreted within the wording of the entire policy. Dragages’ insurance policy contained what is known as a ‘cross liability clause’. This states that, as more than one company is insured under the policy, each ‘Insured’ is to be considered as a separate and distinct party. Therefore the phrase ‘employees of an Insured’ within the exclusion relates only to the employees of the party making the claim and not to employees of other parties. Dragages was making the claim and as the persons who died were employees of a subcontractor, the policy did not exclude a claim by Dragages for its liability to them.
The case confirms that courts interpret insurance policies on their ordinary and natural meaning. Although the intention of the exclusion could have been to exclude liability for death or personal injury of any employee of any of the Insureds, the clause was not worded in that way. Interpreting the exclusion in the light of the cross liability clause meant that only claims for death or injury to employees of the party actually making the claim were excluded.
The Dragages decision is a timely reminder of two issues caused by an overlap of insurance cover. These are that firstly when there is an overlap, the result is likely to be confusion and disputes, which means expensive legal fees and requires management and administrative time. Secondly at the very least an overlap means that the Insured is paying twice for the same insurance cover.
Ultimately the confusion caused by overlapping insurance policies is preventable. Policies are often difficult to read and Insureds are advised to seek advice either from their broker or lawyer before purchasing insurance to ensure that the insurance policies coincide rather than overlap. Seeking advice on the wording of insurance policies will mean savings both in unnecessary premiums and the obvious and hidden costs of a dispute.