Commonwealth Steel Company Limited v BHP Billiton Marine & General Insurance Limited

BEAZLEY ACJ: I have had the advantage of reading in draft the reasons of White JA. I agree with his Honour’s reasons and proposed orders. I also agree with the additional comments of Meagher JA.

MEAGHER JA: I agree with White JA that this appeal should be dismissed with costs. Subject to the following observations, which assume a familiarity with his Honour’s reasons, I do so for the reasons given by his Honour.

Commonwealth Steel’s claim is made under the policy issued by Hematite Insurances for the period 31 March 1978 to 31 March 1979. That policy insured BHP, Commonwealth Steel and one other BHP subsidiary against their common-law liabilities as employers. It was a renewal of policy no. EL76/A1898 issued for the period 31 March 1977 to 31 March 1978, which in turn was a renewal of a policy or policies including policy no. L73/H0141, first issued for the period 31 March 1973 to 31 March 1974. The critical issue concerns the meaning of the expression “Primary Limit” in the relevant policy wording and the “Primary Limit Stability Clause”, described by that wording as attached to it.

The sum insured under the 1977/1978 policy was $920,000 excess of $125,000. By an endorsement dated 1 May 1978, that sum insured was increased to $1 million. Commonwealth Steel’s argument that the indexing provision in the Stability Clause applies to that increased sum insured, rather than to the excess, relies on the language of both para (d)(v) in that clause and the provision of the 1977/1978 policy set out at [7] below. A variant of the latter first appeared in the 1973/1974 policy wording as follows (the sum insured being $100,000 excess of $100,000):

The primary judge was right to reject that argument. The extrinsic evidence as to the existence and terms of the earlier policies established that, from the outset, the insurance was described as “Excess”, rather than primary, “common law insurance”. In such insurance, the expression “Primary Limit” is apt to describe the limit of any underlying insurance or, where there is no underlying insurance, of the amount of the insured liability to be borne by the insured, which for that purpose is a self-insurer for that amount. By contrast, the sum insured under such a policy is neither the "Primary” insurance limit nor the limit of the first layer of excess insurance.

Reference to that extrinsic evidence was justified principally upon the basis that in their dealings the parties used the expression “Primary Limit” in one sense only, namely to refer to the amount in excess of which the insurance provided cover. The relevant principles are addressed in the authorities cited by White JA at [36], to which may be added the decision of Kerr J in Partenreederei M/S Karen Oltmann v Scarsdale Shipping Co Ltd (The Karen Oltmann) [1976] 2 Lloyd’s LR 708 at 712.

The corresponding provision in the 1977/1978 wording was as follows:

This provision introduced the reference to the “attached Stability Clause”, but did not in all respects faithfully follow the sentence structure of the earlier clause. Nevertheless, both the positioning of that reference immediately after the words “excess of $125,000” and the terms of para (a) of the Stability Clause, extracted by White JA (see [15] below), record an intention that indexation apply to the excess, not the sum insured. It follows that the reference to the “Insurer” in para (d)(v) of that clause must be treated as referring to the “Insured”. Any doubt about that being the position was removed by cl 2 of the 1 May 1978 endorsement (extracted in [17] below), which stated that the amount to be “indexed in accordance with the attached Stability Clause” was “the first $125,000” paid by the Insured (to the employee-claimant), rather than the “sum insured” of $1,000,000. For the reasons already stated, the reference to the Primary Limit in that Stability Clause does not contradict this conclusion.

WHITE JA: This is an appeal from orders made in the Equity Division (Hammerschlag J) on 24 October and 3 November 2017 that the appellant’s proceedings be dismissed with costs (Commonwealth Steel Company Limited v BHP Billiton Marine & General Insurance Limited [2017] NSWSC 1445).

The appellant (“Commonwealth Steel”) sought indemnity from the respondent under a contract of insurance called an Employers’ Indemnity Policy in Respect of Common Law Liability in respect of a loss it incurred in meeting a liability to pay damages to a former employee, a Mr Kozaczynski, as a result of his exposure to asbestos fibres in the course of his employment with Commonwealth Steel. Mr Kozaczynski commenced proceedings in the Dust Diseases Tribunal. The proceedings were settled. As a result of the settlement and after taking account of a contribution received from another tortfeasor and costs incurred, Commonwealth Steel suffered a total loss of $466,463. It claimed to recover that sum less a deductible of $125,000 from the respondent pursuant to the policy in force for a period of risk from 31 March 1978 to 31 March 1979.

At relevant times in the 1970s Commonwealth Steel was a subsidiary of the Broken Hill Proprietary Co Limited (“BHP”). BHP owned 85 per cent of the shares in Commonwealth Steel. The respondent, then called Hematite Insurances Pty Ltd (now BHP Billiton Marine & General Insurance Limited) (hereafter “Hematite Insurances”) was a wholly owned subsidiary of BHP. It was established to handle all insurances arranged on behalf of BHP and BHP subsidiaries and, in turn, arranged for risks to be reinsured after allowing for appropriate retentions for its own account. Commonwealth Steel is no longer a subsidiary of BHP.

There is no issue that the policy renewed on 28 April 1978 for the period from 31 March 1978 to 31 March 1979 responded to the claim, if the loss claimed by Commonwealth Steel was below the excess (or deductible) that Commonwealth Steel was required to bear itself. Commonwealth Steel claimed that the deductible was $125,000. If correct, it is common ground that judgment should have been entered for it in the sum of $341,463 plus pre-judgment interest.

A policy issued by Hematite Insurances on 10 May 1977 for the period from 4.00 pm on 31 March 1977 to 4.00 pm on 31 March 1978 provided relevantly as follows:

On 10 May 1977 Hematite Insurances issued an endorsement to the policy that stated: “It is hereby agreed and declared that with effect from March 31 1976, the attached Primary Limit Stability Clause incorporated in and forming part of the above policy [sic]”.

The attached Stability Clause provided:

A renewal certificate dated 28 April 1978 provided for renewal of cover for the period from 31 March 1978 to 31 March 1979. The “Sums Insured” under the heading “Sums Insured” in the renewal certificate stated “$1,000,000”.

An endorsement dated 1 May 1978 relevantly stated:

There was no “attached Stability Clause” separate from the attachment to the policy for the period from 31 March 1977 to 31 March 1978. Therefore, at the relevant time the material documents are the policy issued on 10 May 1977, the renewal of 28 April 1978, and the two endorsements of 10 May 1977 and 1 May 1978.

The issue is whether on the proper construction of the policy as in force for the period from 31 March 1978 to 31 March 1979, the deductible of $125,000 that was to be borne by the insured was to be indexed in accordance with changes in Average Weekly Earnings in accordance with para (c) of the “Primary Limit Stability Clause”, or whether the indexation provided for by that clause was of the limit of the insurer’s liability to pay a claim in respect of a disaster where the claim exceeded $125,000. In other words, the question is whether the indexation was an indexation of the deductible or of the limit of the insurer’s liability. It is not in dispute that if the $125,000 deductible (sometimes called an excess) is to be adjusted in accordance with the Stability Clause, the deductible as at May 2016 was $1,060,750. This exceeds Commonwealth Steel’s claim.

The primary judge found that on the proper construction of the policy without regard to extrinsic evidence upon which Hematite Insurances relied, the words “(indexed in accordance with attached Stability Clause)” in the policy referred to the $125,000 deductible and not to the “amount of the claim over and above that figure (to the upper limit of the Policy)”. Commonwealth Steel says that the choice is whether it is deductible that is to be indexed or the upper limit. It contends for the latter. The primary judge found for the former and said that extrinsic evidence as to the genesis and commercial object of the Stability Clause provided an additional layer of comfort to the constructional choice. Neither party contended that both the deductible and the limit of cover were indexed.

Commonwealth Steel’s submissions commenced by focussing upon the policy terms prior to their amendment by the endorsement, and in particular the third paragraph quoted at [13] above. Commonwealth Steel first focussed on the words “This Policy is only to pay”. It submitted that these words were apt to refer to the insurer’s obligation to pay and the words “only to” referred to the limit of the insurer’s obligation to pay. It then contended that what the insurer was to pay and the limit of its obligation to pay was the excess over $125,000 up to a further $920,000 and that it was that excess, up to $920,000, that was to be indexed in accordance with the Stability Clause. It did not dispute that the “ultimate net loss” in respect of each disaster that was to be paid was not itself capable of indexation. It submitted that the Primary Limit was the excess up to a further $920,000 that was thereafter to be indexed in accordance with the Stability Clause.

This construction was supported by the terms of the Stability Clause and, in particular, the terms of para (d)(v). Paragraph (a), that states that the Primary Limit was to retain its relative value to that which existed at 31 March 1976, could refer to the excess (that is, the deductible) of $125,000, an amount in excess of $125,000 up to the limit of $920,000 which could be called the Primary Limit, or both. Paragraph (d)(v) made it clear, so it was submitted, that the Primary Limit was a limit “to be borne by the Insurer” and therefore referred to the limit on the insurer’s liability to pay the Ultimate Net Loss (up to the limit so indexed) in excess of $125,000, that is, after allowance for the $125,000 deductible.

Commonwealth Steel submitted that this was the only construction consistent with the language used. It submitted that Hematite Insurances’ construction, that the primary judge upheld, depended upon the location of words in parentheses. That is, the words “(indexed in accordance with attached Stability Clause)” come after the figure of $125,000 rather than after the figure of $920,000. In a clause that was clearly poorly drafted, the words used, so it was said, should have primacy over the location of the phrases.

In relation to the endorsement dated 1 May 1978 (at [17] above) Commonwealth Steel submitted that Hematite Insurances’ construction depended upon the placement of the words in brackets, but what was important was that the thing to be indexed was to be indexed in accordance with the attached Stability Clause and the wording of the attached Stability Clause provided for the indexation of the Primary Limit and by reference to clause (d)(v), that could clearly be seen to be the amount to be borne by the insurer and therefore was the limit of the policy, not the deductible. That is, clause 2 of the Endorsement could be read as:

The initial policy issued on 21 November 1972 for the period from 31 March 1973 to 31 March 1974 is also potentially relevant. That policy also used the term “Primary Limit”. It said:

In no proper sense can the ultimate net loss be called a limit. The words in brackets “(hereinafter termed ‘the Primary Limit’)” either referred to the “excess of A$100,000”, meaning the deductible of A$100,000 or the “further A$100,000 in respect of each and every disaster”, that is, the limit of cover provided in respect of each disaster. The problem with the former construction is that the excess, that is deductible of A$100,000, is not a sum that the policy pays. It is a sum borne by the insured. The sense of the clause is that the policy is to pay the ultimate net loss in excess of $100,000 up to a further $100,000 in respect of each and every disaster, unlimited in all. However, it is ambiguous whether the primary limit is the deductible (often called an excess) or the limit of cover.

On the insurer’s case the clause meant “This policy is only to pay the ultimate net loss in respect of each disaster in excess of A$100,000 (hereinafter termed ‘the Primary Limit’) up to a further $100,000 in respect of each and every disaster, unlimited in all.”

On the insured’s construction the clause meant “This policy is only to pay the ultimate net loss in respect of each disaster in excess of A$100,000 up to a further $100,000 in respect of each and every disaster (hereinafter termed ‘the Primary Limit’), unlimited in all.”

Notwithstanding that the 1973 policy purportedly defined the term “Primary Limit”, that phrase was not used later in the policy. The use of the term “Primary Limit” in the 1973 policy is potentially relevant in determining the meaning of the same term in the 1977 policy and in the Stability Clause, but given the ambiguity in the expression in the 1973 policy, I do not think it is of assistance.

Hematite Insurances submitted that the endorsement dated 1 May 1978 not only amended but also replaced the “excess clause” which it correctly identified as the second clause of the 1977 policy. The natural reading of clause 2 of the endorsement is that it is the deductible of $125,000 that the insured will pay that is to be the sum indexed in accordance with the attached Stability Clause.

I do not read the endorsement as replacing the excess clause in the 1977 policy as distinct from amending it, as is stated in terms. Reading the two clauses together with the endorsement amending the excess clause, without regard to the Stability Clause, it is tolerably clear that it is the excess (meaning the deductible) that is to be indexed, and which is the Primary Limit.

If regard is not had to the excess clause in the 1977 policy, there is a lacuna because the Stability Clause referred to in the Endorsement states what is to be indexed is “the Primary Limit which is to retain its relative value to that which existed at 31 March 1976”. But if the excess clause in the 1977 policy wording had been replaced by the Endorsement the policy would nowhere refer to a Primary Limit. Therefore, the correct reading requires consideration of the endorsement as well as the 1977 policy with the Stability Clause.

Reading the Stability Clause by itself and without the assistance of other context, where the expression is used in paras (a) and (c) it could equally refer to the limit of cover as it could to the size of the deductible. That ambiguity would be resolved in favour of the insured by the terms of para (d)(v) that provides for the Primary Limit to be borne by the insurer. That produces a conflict with the prima facie meaning of the excess clause in the 1977 policy as amended by the Endorsement. The primary judge resolved this problem by concluding that the inclusion of the word “insurer” in para (d)(v) was a mistake for “insured”. That is a conclusion that can only be reached once the constructional choice has been resolved.

The ambiguities in the policy are resolved by a consideration of the extrinsic circumstances. Commonwealth Steel submitted that reading the policy documents as a whole and giving primacy to the words used, any ambiguity is resolved and surrounding circumstances could not be used to create uncertainty in the instruments once any asserted ambiguity was resolved by construction of the express words used, namely that the Primary Limit was to be borne by the insurer. That approach to the use of extrinsic circumstances is not consistent with this Court’s decision in Cherry v Steele-Park [2017] NSWCA 295 at [71]-[85] per Leeming JA (with whom Gleeson JA agreed and I also agreed on this point (at [1] and [123]-[124])). In any event, the policy documents are clearly ambiguous.

Some of the extrinsic circumstances relate to negotiations as to the terms of the contract. These can be used to show that the commercial aim or objective of the indexation introduced in 1977 and renewed in 1978 was to secure reinsurance that otherwise would not have been available and to secure such reinsurance on reasonable terms (Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46]-[51]; Victoria v Tatts Group Ltd [2016] HCA 5; (2016) 90 ALJR 392 at [51]). The reinsurers required the deductible to be indexed.

The second basis for use of the evidence is that it shows that where the parties used the phrase Primary Limit, they were referring to the deductible (Shore v Wilson (1842) 9 Cl & Fin 355 at 552, 556; 8 ER 450, 528-529; Macdonald v Longbottom (1857) 1 El & El 977; 120 ER 1177 at 983-984; 1179; Prenn v Simmonds [1971] 1 WLR 1381 at 1383-1384; Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 348-350; B & B Constructions (Aust) Pty Ltd v Brian A Cheeseman & Associates Pty Ltd (1994) 35 NSWLR 227 at 235, 236).

This is consistent with the parties’ treating the insureds as being self-insurers for, initially, the first $100,000, and later the first $125,000 of a loss, and using language that may have been lifted from a policy of reinsurance as providing insurance at a level above that primary layer. So understood, the words Primary Limit are referable to a deductible. Except in the context of reinsurance, there is no reason that the limit of insurance should be regarded as in any sense “primary”.

Hematite Insurances was established as a captive insurer for the BHP Group in October 1972. Mr Ross Bovill became its underwriter. Hematite Insurances did not have any employees. Rather, BHP charged it a monthly management fee for the services of Mr Bovill and other BHP employees who were seconded to work for Hematite Insurances. Hematite Insurances was established on the basis that it would carry all, or almost all, of BHP Group’s insurances. A department within the finance department of BHP called “Group Insurances” acted as the interface between Hematite Insurances and companies in the BHP Group. Mr Bovill said that the Group Insurances effectively acted as an insurance agent for Group companies. The position of manager of Group Insurances and manager of Hematite Insurances were both occupied by a Mr John McBain. From November 1976 Mr Alan Reynolds succeeded Mr McBain in both roles. Mr Reynolds deposed that he and his staff acted on the basis that they had authority to bind BHP and the subsidiaries to insurance policies that reflected the best terms they could negotiate, taking into account the retention through Hematite Insurances and the cost of reinsurance.

In 1976 it became apparent to the Group Insurances department that on the renewal of reinsurance treaties the reinsurers would require the excess common law deductible of $100,000 to be increased and indexed. On 22 January 1976 Mr McBain advised the Australian Insurance Commissioner that:

On 19 May 1976 Mr McBain reported to the directors of Hematite Insurances on the results of treaty negotiations that had recently been conducted in London. He advised that the Accident Quota Share Treaty (that is, quota share reinsurance) had been renewed subject to the following amendments being made to original policies “Excess Common Law – Deductible to be indexed to date of settlement.”

A report by Mr McBain to a board meeting of Hematite Insurances on 30 June 1976 on treaty renewals included the following:

Commonwealth Steel submitted that Mr McBain had left BHP before the policy was issued in May 1977 and there was nothing to connect or aggregate his knowledge with any other individual with capacity to bind Commonwealth Steel who was involved in the issuing of the policy in 1977 or its renewal in 1978. However, in oral submissions senior counsel for Commonwealth Steel correctly accepted that corporate knowledge once obtained is not lost by the departure of the officer or employee whose knowledge is attributed to the company (Fightvision Pty Ltd v Onisforou (1999) 47 NSWLR 473; [1999] NSWCA 323 at [244]). In any event Mr Reynolds succeeded Mr McBain in both roles.

On 17 March 1977 the underwriter of Hematite Insurances advised “senior Insurance Officer Group Insurances” (Mr Reynolds) that:

The wording attached to Mr Bovill’s memorandum was headed “Australian Deductible Only Stability Clause”. It provided:

An accompanying paper headed “Practical Application Of The Stability Clause” said:

On 10 May 1977 a Mr G P Dragon wrote to Mr Bovill in response to his memorandum of 17 March 1977 advising that Hematite Insurances agreed with the proposed wording and looked forward to receiving the endorsement incorporating the same. As noted above at [13]-[16], the policy and endorsement including the attached Stability Clause were issued on that day.

A conference was held on 3 March 1978 to deal with “Worker’s Compensation procedures” attended by, amongst others, Mr Alan Reynolds, and by representatives from BHP Newcastle, AIS Port Kembla, BHP Whyalla, Commonwealth Steel Co, and AWI. The minutes of the meeting deal with various matters of no present relevance, but include the following:

Commonwealth Steel submitted that this material established only that it was Hematite Insurances’ subjective intention that the deductible be indexed in order to procure reinsurance for the risk. It submitted that there was no evidence that Commonwealth Steel knew of these matters. It submitted that Hematite Insurances’ subjective commercial purpose was not known to or shared by Commonwealth Steel. It relied upon the minutes of the conference of Workers’ Compensation procedures of 3 March 1978 quoted at [47] above as evidence that Commonwealth Steel did not know that its deductible was indexed. But this meeting took place before the policy was renewed on 28 April 1978 for the period from 31 March 1978 to 31 March 1979. Moreover, knowledge of the provenance and commercial purpose of the Primary Stability Clause was held by at least the manager of BHP’s Group Insurance Department from 1976. As well as being manager for Hematite Insurances, the manager (Mr McBain and then Mr Reynolds) also acted for BHP and its subsidiaries in arranging the terms of their insurances with Hematite Insurances. The materials referred to above establish objective background facts known to both parties and identify the subject matter of the indexation provisions. They do not merely establish the actual subjective intentions and expectations of the parties (Codelfa Construction Pty Ltd v State Rail Authority of NSW at 352; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd at [50]). This evidence of extrinsic circumstances demonstrates clearly that the subject matter of the indexation provisions was the deductible, and not the limit of cover.

It follows that “insurer” should be read as “insured” in para (d)(v) of the Stability Clause. The primary judge’s construction of the policy was correct.

I would order that the appeal be dismissed with costs.