Watts right? Workers compensation policies & contractual claims

The Court of Appeal has now confirmed that a workers compensation policy does not cover contractual claims.

Introduction

The situation often arises - especially in accidents on building sites – where the employer of an injured worker is sued not only because it breached its duty of care to the worker, but also because it is alleged to have breached a contract with another party.

There are many ways in which this could occur but a typical one would be where a builder contracts with, say, a formworker. The contract between the two companies contains an indemnity given by the formworker to the builder. An employee of the formworker is hurt in an industrial accident, and sues not only the formworker but also the builder. The builder in turn cross claims against the formworker, relying on the contract, as well as a breach by the formworker of all the usual duties of care owed by an employer to an employee.

"... unless they are careful, companies which give any contractual indemnity to another company may well find themselves funding that liability from their own pocket ..." However, the wording of the statutory policy issued to the formworker (and indeed to all other employers) pursuant to the Workers Compensation Act says that cover will only be granted by the insurer to the employer for all workers compensation payments, and for specified other payments as well.

The law since 1995

In 1995, the Court of Appeal decided Nigel Watts Fashion Agencies Pty Limited -v- GIO General Limited (1995) 8 ANZ Insurance Cases 61–235. In that case, the worker received workers compensation benefits from his employer. He then sued the landlord of the premises in which he was injured. The landlord cross-claimed against the plaintiff’s employer, relying on the terms of a lease. The employer in turn sought indemnity from its workers compensation insurer for that part of the claim which related to the breach of the lease provisions.

The Court of Appeal said that the landlord was entitled to rely on the lease provisions to obtain indemnity from the employer, but the employer could not recover from its workers compensation insurer that part of its liability which only arose because of the lease.

Since the Nigel Watts decision, WorkCover has tended to take the approach of denying liability entirely to its employer insureds when they are defending a claim in contract as well as tort. The employer then has to arrange its own legal representation, and often cross-claims against WorkCover to at least confirm that it can obtain indemnity for the tortious part of the claim.

Multiplex -v- Irving

It has been known for some while that the Court of Appeal was going to revisit its decision in Nigel Watts, and the facts in Multiplex Constructions Pty Ltd v Irving [2004] NSWCA 346 gave it a perfect vehicle to do so.

Irving was employed as a bricklayer by Fugen Holdings Pty Limited, and was injured while working on a Multiplex site. Irving chose not to sue Fugen but instead to simply sue Multiplex as the head contractor. Multiplex in turn cross claimed against Fugen, alleging both that Fugen’s negligence had contributed to Irving’s injuries, and that Fugen breached its contract with Multiplex, which contained various indemnities which operated in favour of Multiplex.

The trial judge found that Multiplex and Fugen were equally liable in negligence for Irving’s injuries. However, an indemnity was granted in favour of Multiplex from Fugen, pursuant to the contract.

Fugen then sought an indemnity under the relevant policy from its workers compensation insurer, Royal & Sun Alliance. The insurer acknowledged that it was liable for 50% of Fugen’s total exposure (being the 50% which arose due to Fugen’s negligence), but argued that it did not have to indemnify Fugen for the other 50%, which only arose because Fugen had given Multiplex an indemnity under the contract.

The Court of Appeal stated that Nigel Watts has been correctly decided. A close analysis of the wording of the statutory workers compensation policy showed that it did not provide cover in respect of liability for breach of contract, but it does provide cover in respect of liability for common law negligence. The Court of Appeal said that the workers compensation insurer should not be liable for any more than the damages set out in that Act; if the workers compensation insurer had to honour a contractual indemnity, then it would indeed end up paying a great deal more than its exposure under the Act.

Comment

To the extent that Irving only reinforces the decision in Nigel Watts it could be argued that the latest decision holds little significance.

To an extent, that is correct. Nevertheless, as mentioned earlier, this review of Nigel Watts by the Court of Appeal had been keenly awaited, and the decision is likely to reinforce WorkCover’s practice of declining indemnity to an employer where the claim is not only in negligence, but also in contract.

The real lesson from both Nigel Watts and Irving is to stress yet again how careful all companies should be when entering contracts. In many cases, the officer charged with contract administration does not give sufficient consideration to insurance implications, and yet there are grave dangers that a contractual indemnity will not be covered by any policy at all.

Many public liability policies (which come into force when the injured person is not an employee of the company holding the policy) will not cover contractual assumptions of risk. In other words, if the company takes on, by way of contract, a liability it would not otherwise have had, then its public liability policy will probably not respond to the claim. But if the injured person was an employee, then Nigel Watts and Irving say that the presence of an indemnity clause in a contract means that the insured will end up not only needing its own solicitor to handle the whole claim, but will also have to fund the contractual liability itself .

In short, unless they are very careful, companies which give any contractual indemnity to another company may well find themselves funding that liability from their own pocket, without the backing of any insurer. Great care is required when entering contracts.