Insurance is seen by most as a necessary evil. Most businesses probably discuss the scope of their insurance cover with their broker, let the broker decide on (and arrange) the required policies, pay the premiums annually, and then forget about it. But if someone makes a claim against you, and you call upon an insurance policy for protection, things could get complicated.
Our insurance law expertise has been sought by clients to deal with a variety of issues when a claim is made against a business. Sometimes it is as simple as asking the insurer to indemnify the client against that claim, and stalling the claimant’s lawyers while the insurer considers its position. At the other extreme, what do you do in response to an outright refusal by the insurer to indemnify against a claim?
In this blog, we consider a recent case of ours involving a refusal of indemnity by two workers’ compensation insurers in two different states.
A family business in the Granite Belt region of Queensland operated farms on both sides of the border, but the owners’ principal farm, where they lived, was in Queensland. The business hired a worker (also resident in Queensland), but his employment was performed principally on a farm in NSW. He later alleged a back injury at work, lodged a WorkCover Queensland application for compensation (which was accepted) and WorkCover paid him statutory benefits. When benefits were ceased, the worker engaged solicitors to pursue a common law claim for damages against his employer.
In the pre-litigation phase, the worker’s solicitors served the claim on both the employer and WorkCover Queensland. WorkCover then informed the employer and the worker’s solicitors that because the worker was injured in NSW, it was not liable to indemnify the employer; the worker’s claim should be dealt with by the employer’s NSW insurer (the employer held workers’ compensation insurance policies in both states). The employer gave notice to the NSW insurer but, since the worker was still insisting that WorkCover Queensland was the relevant insurer (after all, WorkCover had paid him statutory benefits for his injury), it was not surprising that the NSW insurer equally refused an indemnity to the employer.
The employer was then served by the worker’s solicitors with a District Court Claim for damages well in excess of $100,000. Their attitude seemed to be that it was irrelevant whether the employer’s pockets were deep enough to pay the damages sought; the worker would take what he could get from the business if an insurer did not step in.
That was where things stood when we were instructed to act for the defendant employer. Informal approaches were quickly made to both insurers (to try and persuade one of them to indemnify), but were unsuccessful – each maintained its initial position. However, the employer could not be uninsured against the claim; one of the two would eventually have to indemnify the employer, but how to achieve that result before the employer had incurred significant legal costs (possibly all the way to a trial) in defending the plaintiff’s claim and also fighting the two insurers?
We recommended that the employer issue third party proceedings against both insurers, at the same time as the employer filed a defence to the worker’s claim – the two insurers were forced into formal litigation (with its accompanying legal costs) from the very beginning. Both insurers then knew that the District Court, after a trial, would order that one of them was required to indemnify the employer – which would involve the losing insurer paying the plaintiff’s damages (and possibly also his legal costs), the legal costs of the employer and the other insurer, and also its own legal costs. Commercial commonsense from insurers means that, if they know the fight will be far more expensive than granting an indemnity – especially if, at the end of the day, the insured must succeed – then they will grant indemnity rather than engage in litigation. Within four months of the commencement of litigation, the NSW insurer agreed to indemnify the defendant employer and take over its defence of the worker’s claim – and also agreed to pay the employer’s legal costs of having to litigate against the insurer to get that result.
The moral of the story is that, if two potential insurers each refuse to indemnify a policy holder against a claim, mere talk will almost certainly get you nowhere. If commercial commonsense prevails, the prospect of litigation at the earliest opportunity should see insurers re-evaluate their positions – and usually sooner rather than later – to avoid even higher legal costs. In our client’s case, it did incur its own legal expenses up front, but only over a short period, and most of those costs were then recovered from its insurer.
A far more serious question is what would happen if the employer only held one workers’ compensation insurance policy (perhaps the broker was not fully aware of the cross-border nature of the employer’s business, or the business originally operated only in one state but slowly expanded into the other state, and no one thought about the changing implications for its insurance cover)? In that event, Murphy’s Law would probably apply – the policy you needed was the one you didn’t have, and the damages claimed might be large enough to force the business into liquidation or bankruptcy.
This tale does not apply just to farmers on the Granite Belt. Interstate transport and courier delivery businesses, and any business on the Gold Coast that uses its own staff to collect/deliver goods and services across the border, are just two examples of employers who could find themselves in the same predicament we have just discussed. Proper risk management says the employer must investigate the need for workers’ compensation policies in all states where its employees might find themselves working.
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