Insurance policies

Legal conditions and “reasonable precautions” in insurance policies – what’s the difference?

The Victoria Court of Appeal recently concluded that compliance with statutory conditions is not an absolute requirement under a liability policy, as long as an insured has taken ‘reasonable care’.

In question

In the recent case of Certain Lloyd’s of London insurers v Dhillon Scaffolding Pty Ltd [2022] VSCA 92, the Court of Appeal had to determine how an insured can discharge the obligation to take “reasonable precautions” under a policy condition, in circumstances where a claim has been made on insurance policies. liability insurance for matters involving breaches of OSH legislation, and whether policyholders must also comply with legal requirements such as safety rules and Australian standards.

The background

Dhillon Scaffolding Pty Ltd (insured) is a scaffolding company. In October 2015, an apprentice plumber was transporting a piece of guttering on scaffolding erected by the insured, when he struck overhead power lines and was electrocuted (incident). Following the incident, the apprentice plumber brought an action for damages for bodily injury against the insured (common law proceeding). The Victoria Workcover Authority (VWA) has also started recovery proceedings against the insured (VWA proceedings). Worksafe also sued the insured in connection with the incident, and the insured pleaded guilty to a charge that he failed to ensure that a permit for the scaffolding work (permit) was obtained and that all scaffolding work in this area has been carried out in accordance with the permit.

Following the common law proceedings and the VWA proceedings, the insured made a claim on his liability insurance policy which was held with the underwriters of Lloyd’s of London (insurer). The insurer refused compensation on the grounds that the insured had not complied with two conditions of coverage of the policy, one relating to compliance with legal requirements and safety rules, and the other relating to compliance with Australian Standards (collectively, the Regulations).

However, the insured argued that she should be compensated because she had complied with a general condition of the policy, which stated that “the Insured, at his own expense, will take all reasonable precautions to prevent bodily injury or property damage and will cease any activity which may incur liability under this policy”. As a result, the insured joined the insurer as a third party in both the common law proceedings and the VWA proceedings.

The decision at trial

The trial judge concluded that the requirements of the policy to comply with the regulations fell within the realm of “requirements of reasonable care” and on this basis the question was whether the insured had taken reasonable care. In this regard, Her Honor Forbes J. was not convinced that the insured had not taken reasonable precautions since she had advised the site supervisor of the need to obtain the permit.

The insurer requested leave to appeal on two grounds. The first was based on the fact that the clauses of the policy relating to the regulations were not clauses of “reasonable care” and the second on the fact that the insured had not taken reasonable care.

The issues on appeal

The questions submitted to the Court of Appeal were whether the obligation to comply with the regulations was considered in connection with the clause of reasonable precaution and whether the insured had taken reasonable precautions.

The decision on appeal

The Court of Appeal followed the decision of the NSW Court of Appeal in Booksan Pty Ltd v Wehbe [2006] NSWCA 3. In Booksan, the NSW equivalent of section 34 of Victoria’s OHS Act was held to prevent an insurer from relying on a breach of the OHS Act to avoid cover under an insurance policy. On this basis, the Court of Appeal determined that it would undermine the business purpose of the policy if the requirement to comply with regulations required absolute compliance. Rather, the policy required the insured to take reasonable precautions to comply with these conditions.

However, the Court of Appeal allowed the appeal on the second ground, on the grounds that reasonable care would have meant that the insured had ensured that the relevant license had been obtained and that all safety conditions had been met before to erect the scaffolding (which had not been done).

Consequences for you

The recent Court of Appeal decision provides guidance to insurers and claims handlers on the practical implications of the requirement of “reasonable care” and other statutory terms in a liability policy when considering granting compensation. However, the Court of Appeal’s decision also illustrates that the requirement to comply with statutory regulations is not an absolute standard and will be considered based on the precautions that have been taken by an insured.

Certain Lloyd’s of London insurers v Dhillon Scaffolding Pty Ltd [2022] VSCA 92