‘Cap and Collar’ agreement not a ‘reasonable settlement’ capable of binding the insurer

Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018]

In its recent judgment the NSW Court of Appeal (NSWCA) upheld Hammerschlag J’s decision in Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2018] and, by doing so, provided guidance in respect of a number of important interpretation issues regarding liability insurance policies.

Notably, the NSWCA confirmed that a ‘cap and collar’ agreement entered into by an insured and a third party was not binding on the insurer and further considered the definition of ‘occurrence’ in the context of a broadform liability policy.

Facts

Weir Services (‘Weir’) provided engineering and other related services. AXA Corporate Solutions Assurance (‘AXA’) was its insurer. Weir held three policies with AXA: 1) the Australian Policy (a broadform liability policy) and 2) two global liability policies issued by AXA in 2011 and 2013.

Weir was retained by Phil Gold processing and Refining Corp to perform refurbishment work on a semi-autogenous grinding mill (‘the SAG Mill’) to be used in a mineral processing facility in the Philippines. This included welding. The SAG Mill commenced operation in mid-2009 however, it failed in July 2011 due to the disintegration of Weir’s welding work.

In December 2013 Phil Gold commenced arbitration proceedings against Weir, claiming substantial damages for repair and business interruption. Before the final arbitral award was determined, Phil Gold and Weir entered into a ‘cap and collar’ agreement which provided:

  • If Phil Gold was awarded damages in the arbitration, the maximum it could recover would be US $10.725M (the cap); and
  • Weir would pay Phil Gold a fixed sum of US $2M regardless of the outcome of the arbitration (the collar).

The arbitration tribunal eventually dismissed Phil Gold’s claim. Weir paid the collar amount and sought indemnity from AXA for this amount, as well as defence costs.

Under the Australian policy, Weir sought to characterise its claim as one for property damage and also argued that the cap and collar agreement was effective to determine its liability to pay Phil Gold. Under the global policy, Weir relied on both the products liability and professional indemnity sections.

Supreme Court Decision

His Honour Justice Hammerschlag rejected Weir’s claim and made the following findings in relation to the Australian policy:

  1. The ‘cap and collar’ agreement established no more than the agreed consideration for capping Phil Gold’s recovery. It was not a settlement agreement establishing liability and quantum with any certainty;
  2. The failure of the circumferential weld was not an ‘occurrence’ within the meaning of the policy;
  3. Because there was no ‘occurrence’, legal expenses incurred by Weir in the arbitration were not covered by the policy;
  4. The policy excluded ‘professional services’, which would have defeated any entitlement by Weir in any event.

As far as global policy was concerned, his Honour found that Weir’s claim was not covered by either the product liability section (failed welding was not a product), or the professional indemnity section. Finally, there was a late notification, which was a breach of a condition precedent to AXA’s liability.

Weir Services appealed Hammerschlag J’s decision in relation to the Australian policy.

New South Wales Court of Appeal Decision

Was the Cap and Collar agreement a legal liability covered by the policy?

The leading judgment was delivered by Barrett AJA, with whom Meagher J agreed. His Honour found that the agreement between Weir and Phil Gold was not a ‘reasonable settlement’. According to his Honour, an insured liability of Weir was not crystallised, ascertained and determined by the agreement. It was the arbitral award alone that would have crystallised Weir’s liability to compensate Phil Gold and in this case, the tribunal determined that Weir did not have any liability.

Meagher JA added that the collar agreement did not fall within the insuring clause, as it was not an amount that Weir was legally liable to pay by way of compensation for physical damage to property.

White JA dissented on this point, finding that the cap and collar agreement, combined with the arbitral award did crystallise Weir’s liability for property damage. His Honour was of the view that the fact that the contract of indemnity existed meant that the insurer was bound by the liability arising from a reasonable settlement which depended on an award.

Was there an ‘Occurrence’?

The central issue on this point was whether the failure of the welding could be considered an ‘occurrence’, or an event that caused property damage. The NSWCA found that although welding failures could be considered an ‘occurrence’, they could also amount to damage. This blurred the ‘strict dichotomy between occurrence and damage’ (Barrett AJA at [97]).

On this basis Barrett AJA found that Hammerschlag J correctly concluded that a welding failure was not an ‘occurrence’, because this was itself damage which precluded the event being isolated as an ‘occurrence’.

However, White J again disagreed and found it was ‘natural and not illogical’ to say that the mill was damaged from the fractured welds.

Was Weir entitled to claim defence costs?

Barrett AJA opined that Hammerschlag J should have found that Weir was able to recover its defence costs. Faulty workmanship by Weir amounted to an occurrence, because there was a continuing state of affairs that resulted in disintegration and further damage and there was no intention or expectation by Weir that damage would occur. This was, of course, subject to any relevant exclusions under the policy.

Was AXA entitled to exercise its exclusion clauses?

The NSWCA affirmed Hammerschlag J’s conclusion that any liability Weir may have had to Phil Gold was excluded by the professional services exclusion. This was on the basis that Weir had been contracted by Phil Gold to exercise professional care, skill and judgment. Therefore, the professional services exclusion clause would have defeated a claim for costs and expenses in any event.

Summary

The judgment provides useful guidance on what constitutes an ‘occurrence’ and the application of a ‘professional services exclusion’ in the context of welding services. Most importantly, it sets out circumstances which define whether or not a settlement agreement reached between a third party and an insured will be recoverable under an insurance policy.