ANNUAL REVIEW OF INSURANCE & REINSURANCE LAW 2006 ANNUAL REVIEW OF INSURANCE & REINSURANCE LAW 2006 LAW &REINSURANCE INSURANCE OF REVIEW ANNUAL 10050 Insurance cover.indd 1 1/03/2007, 4:26:42 PM For further information about In surance & Reinsurance Law, please contact: SYDNEY MELBOURNE Andrea Martignoni, Editor Louise Jenkins Ph: +61 2 9230 4485 Ph: +61 3 9613 8785 [email protected] [email protected] Oscar Shub, National Practice Group Leader Lynne Jensen Ph: +61 2 9230 4305 Ph: +61 3 9613 8567 [email protected] [email protected] Michael Quinlan Prue Campton Ph: +61 2 9230 4411 Ph: +61 3 9613 8741 [email protected] [email protected] Dean Carrigan PERTH Ph: +61 2 9230 4869 Jenny Thornton [email protected] Ph: +61 8 9488 3805 John Morgan [email protected] Ph: +61 2 9230 4953 [email protected] HONG KONG John Warde Simon McConnell Ph: +61 2 9230 4892 Ph: +852 2840 1202 [email protected] [email protected] John Edmond BANGKOK Ph: +61 2 9230 4287 Adam Lunn [email protected] Ph: +662 679 1333 BRISBANE [email protected] John Baartz Ph: +61 7 3334 3254 [email protected] Andrew Buchanan Ph: +61 7 3334 3244 [email protected] This publication is available online at http://www.aar.com.au/pubs/ari/index.htm For more information about Allens Arthur Robinson’s Insurance & Reinsurance practice, including pub li ca tions recent experience and current team details, please go to: www.aar.com.au/services/insur We would very much like your feedback on this Review. If you would like further information about our regular forums on Insurance & Reinsurance Law, please contact our Business Development Manager Ashley Bleeker (+61 3 9613 8020). 10050 Insurance cover.indd 2 5/03/2007, 3:54:13 PM ANNUAL REVIEW OF INSURANCE & REINSURANCE LAW 2006 Also available online at: http://www.aar.com.au/pubs/ari/index.htm © Allens Arthur Robinson 2007, Australia Written and published by Allens Arthur Robinson Deutsche Bank Place, 126 Phillip Street, Sydney NSW 2000 The summaries in this Review do not seek to express a view on the correctness or otherwise of any court judgment. This publication should not be treated as providing any defi nitive advice on the law. It is rec om mend ed that readers seek specifi c advice in relation to any legal matter they are handling. PREFACE 2006 is the ninth year of publication of the Allens Arthur Robinson Annual Review of Insurance and Reinsurance Law. It is interesting to compare the kind of insurance issues which are concerning the courts today with those which prevailed in 1998, when this publication fi rst commenced. There are fewer cases dealing with the interpretation of some of the most signifi cant provisions of the Insurance Contracts Act, such as section 54 and the provisions relating to non disclosure and misrepresentation. The Insurance Contracts Act is now about 23 years old, and most of its signifi cant provisions have been well ventilated through the courts. The insurance industry still awaits the outcome of proposals for reform put forward several years ago. More recently, regulation of the insurance industry has been focused at a level far beyond the insurance contract itself. This review reports on the new APRA prudential standards which came into effect on 1 October 2006. They directly impact upon how an insurer’s business is managed at many levels, and impose obligations on the board to put appropriate policies and procedures in place. They also impact upon reinsurance management and reinsurance strategy. At the same time, in an environment of increased regulation, we are seeing more regulatory based litigation, some of which is reported in this Review. 2006 has also continued to see the conduct of directors and offi cers under scrutiny. Those of you who are directors or offi cers or insurers or reinsurers of directors' and offi cers' risks may be interested in the 2nd edition of the Allens Arthur Robinson Directors’ Duties During Insolvency book which was published by Thompson Lawbook Co in late 2006. This Review also contains several cases which deal with the scope of operation of traditional statutory forms of insurance in particular, workers' compensation. They illustrate how complex questions can arise where various forms of statutory cover interact, or where there are other sources of compensation for an injury. I would like to thank all those who contributed articles to this publication, and in particular Jenni Priestley, Laila Ragupathy, Jason Silverii, John Savic and Kelly Royle, each of whom offered critical assistance in both the content of the publication and in assuring critical deadlines were met. I would also like to thank the following persons who edited particular sections of the Review: Dean Carrigan – Legislative and Regulatory Developments Mark Lindfi eld – Civil Liability Simon McConnell – Asia Section Andrea Martignoni Editor ALLENS ARTHUR ROBINSON INSURANCE & REINSURANCE The Australian insurance environment is one of the most highly regulated insurance markets in the world – partly due to the collapse of a number of major Australian-based insurance companies in recent years. The complex regulatory maze means that insurance and reinsurance organisations need legal advisers who can quickly identify the critical issues, apply the law and deliver advice that is both commercial and in plain English. Allens Arthur Robinson (AAR) has been servicing clients in Australia for more than 180 years and the Asia Pacifi c region for the past three decades. AAR is one of the largest and most highly regarded law fi rms in the Asia Pacifi c region, with 189 partners and more than 600 other legal staff. We provide a full range of commercial legal services to many of the region’s leading corporations and government organisations, including more than half of Australia’s, and more than a dozen of the world’s, top 100 companies (among them a large number of national and international insurance and broking companies and Lloyd’s syndicates). Our leading insurance and reinsurance practices offer clients a team of specialists who can quickly identify the critical issues and regulatory risks and offer practical and commercial solutions. We are known internationally for our expertise in all aspects of insurance law, including corporate, regulatory and contentious matters. We have more than 20 years’ experience representing London-based insurance syndicates in claims in Australia. More recently, we have also expanded in Asia, with a dedicated insurance and reinsurance team based in Hong Kong. It was pleasing to see that in 2006 our insurance and reinsurance practice was recognised with the receipt of the ANZIIF award for Insurance and Reinsurance Law Firm of the Year. We offer the full range of insurance and reinsurance services, including advice on government policy, and regulatory and legislative matters and conduct of large, high-value and complex litigation. National Practice Leader Oscar Shub Partner, Sydney Ph: +61 2 9230 4305 [email protected] John Baartz Partner, Brisbane Michael Ball Partner, Sydney Matthew Barnard Partner, Hong Kong Ph: +61 7 3334 3254 Ph: +61 2 9230 4973 Ph: +852 2840 1202 [email protected] [email protected] [email protected] Partner, Brisbane Partner, Sydney Partner, Sydney Andrew Buchanan Ph: +61 7 3334 3244 Dean Carrigan Ph: +61 2 9230 4869 John Edmond Ph: +61 2 9230 4287 [email protected] [email protected] [email protected] Partner, Melbourne Partner, Bangkok Partner, Sydney Louise Jenkins Ph: +61 3 9613 8785 Adam Lunn Ph: +662 679 1333 Andrea Martignoni Ph: +61 2 9230 4485 [email protected] [email protected] [email protected] Partner, Hong Kong Partner, Sydney Partner, Sydney Simon McConnell Ph: +852 2840 1202 John Morgan Ph: +61 2 9230 4953 Michael Quinlan Ph: +61 2 9230 4411 [email protected] [email protected] [email protected] Partner, Perth Partner, Melbourne Partner, Sydney Jenny Thornton Ph: +61 8 9488 3805 Annette Hughes Ph: +61 3 9613 8430 Matthew Skinner Ph: +61 2 9230 4038 [email protected] [email protected] [email protected] CONTENTS General insurance law 1. Appropriate choice of law for a claim under a policy 13 Quinlan v Safe International Försäkrings AB 2. When does dishonesty make a claim a fraudulent claim? 15 Insurance Manufacturers of Australia v Heron 3. Liability of insurer where notifi cation of circumstances by insured is inadequate 17 Kernaghan v Corrections Corporation of Australia Staff Superannuation Pty Ltd & Ors 4. Insurer’s liability to indemnify costs incurred without its consent 20 Manufacturers Mutual Insurance Ltd v Murray River North Pty Ltd & Anor 5. Indemnity for settlement sum agreed by an insurer under a liability policy 22 Enterprise Oil Limited v Strand Insurance Company Limited Construction of insurance policies 6 Excluding cover for liability arising out of construction work 25 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Limited 7. Business interruption claims and the meaning of ‘closure’ of premises 27 Cat Media Pty Ltd v Allianz Australia Insurance Ltd 8. Vicarious liability for the dishonest actions of an employee 29 Ffrench v Sestili & Sestili v Triton Underwriting Insurance Agency P/L 9. Product liability insurance and economic loss 32 Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd 10. Variation of a policy and the requirement for writing 34 Green v AMP Life Limited 11. Meaning of ‘contamination’ in a perils exclusion 36 Gunns Forest Products Ltd v North Insurances Pty Ltd & Anor 12.