Written by Matthew Cooper
Dual insurance, also known as double insurance or overinsurance, refers to a situation in which the insured takes out more than one policy covering the same loss. Where dual insurance exists such that Insurer X and Insurer Y cover the same loss, but the insured claims all (or most) of the loss from Insurer X, the equitable principle of contribution allows Insurer X to recover a proportionate contribution from Insurer Y in certain circumstances. Dual insurance therefore represents both a risk and an opportunity to insurers.
A claim for contribution is an often overlooked avenue of recovery where other claims may be unavailable. Having said that, it is often a complicated avenue of recovery, which ultimately depends on the proper construction of each policy. In a settlements context, it can provide an opportunity to limit exposure where other arguments may offer none. This article has been written with the intent of providing a sufficient understanding of dual insurance and claims for contribution to allow readers to identify scenarios in which dual insurance may arise and analyse the basic requirements to succeed in a claim for contribution against another insurer.
What is Dual Insurance?
At common law, it is generally defined as arising where two (or more) insurers cover the same interest, against the same risks.1 As such, for dual insurance to exist, the policies must cover the same subject matter and the same interest.
Whether the policies cover the same subject matter ultimately hinges upon the construction of each policy. For example, in a matter involving a consignment of cigarettes insured under a transit policy which had been loaded onto a truck, and a separate fire-insurance policy covering stock-in-trade at the insured’s factory, it was held that, on the proper construction of the policies, the consignment was not stock-in-trade and there was therefore no claim for contribution against the fire insurer.2
Generally, it is clear whether the same interest is covered as the same insured will be entitled to be indemnified under both policies for the same loss. When determining this, the nature of the claim is irrelevant – the question is simply whether the policies cover the same loss. To illustrate, there can be dual insurance between a policy covering a claim for personal injury under the Motor Accidents Compensation Act 1999 (NSW) and a worker’s compensation policy.3
Importantly, in the marine context, the concept is specifically defined by the Marine Insurance Act 1909 in section 38(1):
“Where two or more policies are effected by or on behalf of the insured on the same adventure and interest or any part thereof, and the sums exceed the indemnity allowed by this Act, the insured is said to be overinsured by double insurance.“
Contribution
The right of contribution operates to protect insurers from situations of paying more than their fair share of a loss in a situation where another insurer should also be liable.
Section 76 of the Insurance Contracts Act 1984 (Cth) deals with contribution between insurers. In particular, subsection (1) states:
“When 2 or more insurers are liable under separate contracts of general insurance to the same insured in respect of the same loss, the insured is, subject to subsection (2), entitled immediately to recover from any one or more of those insurers such amount as will, or such amounts as will in the aggregate, indemnify the insured fully in respect of the loss.”
It is important to remember that in a claim for contribution, Insurer X cannot recover the whole of the liability from Insurer Y – the insurers who are subject to common liability must share the liability on a pro-rata basis.
A simple way of determining whether Insurer X can claim for contribution from Insurer Y is to ask:
- Do both insurer’s share a common liability (i.e., do both policies respond to the loss)?
- If the insured were to be paid under both policies, would payment be made twice in respect of the same loss?4
In order to succeed in a claim for contribution an insurer must establish that:
- they were liable under the policy at the date of loss;
- that they have paid the insured pursuant to that policy; and
- that the insurer which they are claiming against was also liable under their policy at the date of loss, and has not paid under that policy.
The onus rests on the insurer bringing the claim to prove the above elements. This can present difficulties pre-litigation in assessing whether a claim for contribution might exist, where the other insurer refuses to provide a copy of the relevant PDS or policy wording.
It should also be noted that, as the right of contribution is an equitable principle, policy terms cannot restrict the right of contribution. Further, the policy terms of one insurer cannot, of course, bind another insurer who is not a party to that contract.
Some insurers may make reference to “other insurance clauses” contained within their policies, which purport to exclude or limit their liability to the mutual insured where other insurance exists, in order to completely deny or limit their liability to a claim for contribution. In this respect, it is important to note that section 45 of the Insurance Contracts Act 1984 (Cth) operates to render such “other insurance clauses” as void. Section 45(1) reads as follows:
“Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.”
As such, the only occasion where such an argument may have teeth, is where the mutual insured did not “enter into” the policy of insurance, for example, where the insured entity is a named beneficiary on the policy. In that scenario, as the insured did not themselves enter into the contract of insurance, section 45 does not apply.5
What is Pro-Rata?
When determining the pro-rata burden of each insurer, the Court may consider any relevant matter in order to reach a fair result. Historically, there have been several different methods of determining this amount. The Australian Law Reform Commission considered the fairest of these methods was the “common liability” method6. This calculates the respective liabilities of the insurers as follows:
- first, each insurer is equally liable up to the limit of the lower-value policy; and
- second, the surplus over the lower-value policy is to be borne by the higher-value policy.
Summary
While dual insurance is a complex area, it is important to be familiar with the concept to ensure all insurers have paid an equitable amount for the insured’s loss.
In circumstances where there could be multiple policies covering the same loss, insurers should pay careful attention to whether dual insurance may apply.
Where both insurers share a common liability, it can provide opportunities to claim a right of contribution in both recovery and settlement contexts, where other more typical routes of obtaining a recovery or limiting exposure may fail.
Should you wish to discuss any of the above, please contact Jessica Woods on 03 9947 4516 or one of the Ligeti Partners team members on 03 9947 4500.
- Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342, 345-346. ↩︎
- Boag v Economic Insurance Co Ltd [1954] 2 Lloyd’s Rep 581. ↩︎
- Zurich Australian Insurance Ltd v GIO General Ltd (2011) 16 ANZ Insurance Cases 61 – 880. ↩︎
- Australian Eagle Insurance Co Ltd v Mutual Acceptance (Insurance) Pty Ltd [1983] 3 NSWLR 59 (CA). ↩︎
- Zurich Australian Insurance Ltd v Metals and Minerals Insurance Pte Ltd (2009) 240 CLR 391. ↩︎
- Australian Law Reform Commission, Insurance Contracts (ALRC Report 20) (1982), [296]. ↩︎
