It is common practice for insurers to offer policies of insurance where persons or entities other than, or in addition to, the named insured receive the benefits of the relevant insurance cover as additional insureds or third party beneficiaries.

Under the Insurance Contracts Act 1984 (Cth) (‘ICA’), a third party beneficiary to a contract of insurance has a right to recover from the insurer the amount of any loss suffered by the third party beneficiary, even though the third party beneficiary is not a party to the contract.[1]

The ICA defines “third party beneficiary” as a person who is not a party to the contract, but is specified or referred to in the contract as a party to whom the benefit of insurance cover extends.[2]

While the ICA has attempted to provide some certainty in relation to the status of third party beneficiaries, some confusion remains surrounding the rights and status of entities claiming entitlements under policies of general insurance.

Such confusion often stems from the wording of the contracts which underly this obligation – although similarly, the policy wording and its application can create confusion at times. Regardless, it is important for parties to be aware of the risks associated with both naming and not naming interested parties on policies of insurance.
 

Noting third party interests

Most mainstream business policies regard an ‘interested party’ as a third party beneficiary as defined by the ICA - and as such, afford the interested party the right to recover from the insurer.

However, the New South Wales Supreme Court decision of Simpson J in Perkins v Commonwealth Bank of Australia Ltd & Ors [2003] NSWSC 346 provides a good example of the potential pitfalls of agreeing to note the interests of third parties on policies of insurance. In that case, the Court was asked to consider the effect of clause 6.3 of an agreement which obliged a party to “effect and maintain insurance” in its name “with the Bank’s interest noted thereon”.

Her Honour noted that:

“Strictly speaking, the clause requires only what it says: that [the party] effect (relevantly) insurance against common law liability, in its own name, ‘with the Bank’s interests noted thereon.’… It seems to me that, without more, such a notation would give a third party no rights under the policy. The third party would not thereby be made a party to the policy and would not be entitled to cover under it.”

Having been referred to the wording of section 48 of the ICA, her Honour went on to say:  

“If clause 6.3 were to be interpreted as requiring… to do no more than note the Bank’s interest on the policy, it would be pointless so far as the Bank was concerned… I am nevertheless satisfied that the clause was intended by both parties to impose… the obligation to effect and maintain insurance that would indemnify the Bank… in respect of any common law liability that might be found against it.”

In finding that clause 6.3 created an obligation to effect insurance with the Bank noted on the policy ‘as a person to whom the insurance cover provided by the contract’, it was held that the mere noting of the Bank’s interest would not provide that protection - and therefore, that the insuring party had breached clause 6.3.

Accordingly, the Bank was entitled to claim damages against the insuring party for breach of contract.
 

Breach of contract - failure to note a third party beneficiary

As can be seen from the decision in Perkins, the failure to note the interests of a third party beneficiary on a policy of insurance in a manner compliant with the ICA can lead to significant and unintended consequences.

This issue was discussed in the case of Western Sydney Regional Organisation of Councils Group Apprentices -v- Statrona Pty Ltd t/as Recycle Auto Electrical; Commercial Union Workers Compensation NSW Ltd -v- Hannaford (2002) 12 ANZ.

In that case, Justice Mahoney stated:

“The evidence established a contract which obliged WSROC to effect insurance to indemnify Statrona against liability. If WSROC did not have such a policy, it was liable to Statrona for such damages as would, in effect, indemnify Statrona against its liability.

If it did have such a policy, Statrona would be entitled to claim under the policy for, in effect, such an indemnity. As it has not been established that there was a policy which would conform with WSROC’s promise to Statrona, Statrona was entitled to judgment on the relevant third party notice for the amount in question."

Accordingly, Statrona stands for the proposition that the measure of damages for the breach of a contractual obligation to effect insurance is the full indemnity that would have been available under the policy had it been effected. The Statrona decision was subsequently reinforced by Thiess Contractors Pty Ltd -v- Norcon Pty Ltd (2001) 11 ANZ Ins Cas 61-509; [2001] WASCA 364.
 

Liability assumed by contract

Another important consideration for parties negotiating third party interests is whether or not the subject policy contains an exclusion for contractually assumed liabilities.

Often, policies will either exclude obligations to insure and/or the damages which flow from the breach of contract for failing to do so. This can have significant consequences for both the contracting party and the third party beneficiary.

As an example, an insured to a personal injury claim might be covered in respect of its joint tortfeasor liability, but not covered in respect of any liability attributable to the intended third party beneficiary.

The consequences are twofold:

• the insured has an uninsured liability arising from a breach of contract for a failure to insure; and
• the third party has a liability to pay any damages awarded in the personal injury proceedings on a joint and several basis.

The above scenario is not uncommon - particularly within the context of construction cases, where it is often a condition of the contract that a Certificate of Currency be provided in compliance with the obligation to insure.

Either due to a lack of knowledge or inattention, the production of certificates merely noting the principal’s interest are accepted as proof of compliance.  When a claim is subsequently lodged after work is commenced, it is too late for the principal to attempt to remedy the deficiency with the policy.
 

Key takeaways

• Noting the interests of a third party may not comply with the provisions of the ICA which enliven a third party’s right to recover. The third party must be a party to whom the benefit of insurance cover extends. This is informed by the subject policy schedule and wording.
• Noting the interests of a third party may not discharge an obligation owed in contract to insure that party’s interests. This can lead to significant exposure for uninsured loss.
• Failing to properly inspect and understand a policy taken out by a contracting party may expose a principal to a liability which was otherwise intended to be covered by the contracting party’s policy.

If you have a query relating to any of the information in this article, or you would like to discuss a matter of your own, please don’t hesitate to get in touch with Holman Webb’s Insurance Group today.