What constitutes an insured’s failure to take ‘reasonable precautions’?
- Published 28.04.2021
Insurers are unable to deny indemnity in reliance upon policy terms requiring their insured to take reasonable precautions, unless it can be shown that the insured’s actions were at least reckless in response to a conscious realisation of the relevant danger posed. Proof of mere negligence or failure to take care will be insufficient to breach the condition.
Breaches of laws and/or regulations expressly referred to in a liability policy do not alone warrant a denial of indemnity, as such a strict liability would be against the commercial purpose of these policies.
The VSC heard and made a determination in third party proceedings with respect to the insured defendant’s entitlement to coverage under its liability insurance policy prior to the commencement of the plaintiff’s claim, in reliance on the objects set out in section 9 of the Civil Procedure Act (VIC) 2010. Her Honour Justice Forbes proceeded on this basis following agreement by all parties that the resolution of this issue would increase the prospects of settlement of the overall proceedings. Insurers should, in future, be prepared to lead evidence and to make submissions as to indemnity questions prior to the hearing of a principal proceeding.
In late 2015, an apprentice plumber electrocuted himself after making contact with overhead electrical powerlines while working on scaffolding. Two of the named defendants to the proceedings commenced by the plumber included companies involved in the construction and erection of the scaffolding. The first scaffold company (Western Scaffold Pty Ltd), responsible for the manner in which the scaffolding was constructed, sub-contracted the services of a second scaffold company to erect the scaffolding onsite, Dhillon Scaffolding Pty Ltd (the Insured).
Dhillon Scaffolding’s insurer, having denied indemnity under its public liability policy in relation to the plumber’s claim, was joined as a third party to the proceeding.
Reasons for indemnity refusal
The policy required the Insured to comply with an Australian Standard (AS/NZ 4576:1998) which contains guidelines for scaffolding, including the identification of hazards such as proximity to powerlines, and also contained a general condition to comply with all statutory requirements.
Therefore, the insurer asserted that breaches of these guidelines/regulations enlivened the policy exclusion for liability arising out of deliberate, conscious or intentional disregard of the need to take all reasonable steps to prevent personal injury.
The insurer also relied on a condition requiring the Insured to take all reasonable precautions to prevent personal injury.
The Court noted the commercial purpose of the policy was to provide cover for injuries for which the Insured was legally responsible. The potential for a finding that there was a lack of care by an Insured was found to underpin the commercial purpose of the policy given that legal responsibility involves establishing a breach of duty by the Insured. Her Honour determined that if an insurer only accepted risk for injuries that occurred when the Insured acted in accordance with all statutory and regulatory obligations, this would in effect mean coverage was only for ‘no fault’ circumstances of injury. She did not accept this proposition as this would make it difficult to see circumstances in which liability to pay damages for personal injury under the policy could ever arise.
Breach of AS/NZ 4576
Much of this Australian Standard is informational in providing ‘practical guidance’ and referring to obligations under various legislation. The obligations created by this legislation only require compliance as is ‘reasonably practical’. Therefore, the Court considered that the incorporation of these guidelines into the policy imposed no greater obligation for compliance than that imposed by the existing reasonable precautions clause.
The Court held that clauses requiring an insured to take reasonable precautions are not breached by action that amounts to negligence. Rather, they are only enlivened when an insured has actual recognition that a danger exists, and is at least reckless as to averting the danger. This test is a subjective one.
The Insured relied on Western Scaffold to design the scaffold’s manner of construction and obtain the relevant permits (which were never obtained). The guidelines and regulations do not address which contractor is required to obtain the necessary permits. The Insured knew of, and expressed concerns to Western Scaffold as to the risk posed by the scaffold’s close proximity to powerlines. These concerns were not acted upon. The Insured admitted that it did not undertake a risk assessment and was not aware of the relevant Australian Standard and regulations that were breached.
In these circumstances, the Court was not satisfied that the Insured’s actions or inactions were deliberate in subjectively realising the danger they posed. Therefore, her Honour concluded that the exclusion was not enlivened and the insurer was found not to be entitled to refuse indemnity.
Failure to notify insurer
The insurer also submitted that the Insured’s failure to notify it of the incident, and the associated WorkSafe prosecution, prejudiced its ability to investigate the matter in a timely fashion and be involved in the prosecution (in which the Insured plead guilty and was convicted). However, no evidence of any actual prejudice was provided. The Court held that these circumstances did not lead to an inference of prejudice, especially where there was already a timely and independent investigation undertaken by WorkSafe.
The case confirms that courts will first and foremost consider the commercial purpose of any insurance policy in assessing the applicability of relevant exclusion clauses and conditions, including whether a reason for denial conflicts with the nature of risk accepted by the insurer in issuing the policy.
A clause requiring the taking of ‘reasonable precautions’ will only be enlivened when the insured’s conduct demonstrates an element of recklessness or a deliberate courting of risk.
An insurer must also lead clear evidence to satisfy a court that it was prejudiced by an insured’s delay in notifying it of an occurrence relevant to the claim.