Clarity on applying "Reasonable Precautions" conditions to casualty claims

In Victorian personal injury claims involving breaches of OHS legislation, it is reasonably common to see employers and other third parties addressing WorkSafe investigations or prosecutions before personal injury claims are made.

So what impact does this have when non-employer companies make claims on their public liability insurance for the “worker to worker” injury claim that follows? In these circumstances, insurers need to closely consider whether policy conditions have been complied with, including “reasonable precautions” conditions and “Australian Standards” conditions. 

The recent decision of the Victorian Court of Appeal in Certain Underwriters at Lloyd's of London v Dhillon Scaffolding Pty Ltd [2022] VSCA 92 provides helpful guidance for insurers and claims managers regarding what “reasonable precautions” are. The judgement also considers what an insured must do to satisfy their onus that they have taken reasonable precautions.

Clyde & Co partner Darryl Smith and senior associate Kelly MacDonald consider the case in detail.

Background

The insured, Dhillon Scaffolding Pty Ltd (Insured), was a scaffolding company. In October 2015, an apprentice plumber was injured on scaffolding erected by the Insured when a piece of guttering he was carrying hit overhead powerlines. The apprentice brought a personal injury claim against the Insured. The Victorian WorkCover Authority also brought a recovery action.

The Insured was prosecuted by WorkSafe in relation to the incident.  The Insured pleaded guilty to a charge that it failed to ensure that a permit for the scaffold works had been obtained and that any scaffolding works in that zone were completed in accordance with such a permit.

The Insured made a claim for indemnity with its public liability policy insurer (Insurer).  The Insurer denied the Insured indemnity on the basis that the Insured failed to comply with two conditions precedent: one relating to compliance with statutory requirements and safety regulations and the other relating to compliance with Australian Standards.

Policy Wordings

The relevant sections of the Policy are as follows:

14. OBSERVANCE OF TERMS

The Insured must observe and comply with the terms and conditions of this Policy. Any term and condition of this Policy insofar as it relates to anything to be done or complied with by the Assured shall be a condition precedent to the Underwriter’s liability to make any payment under this Policy.

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16. GENERAL CONDITIONS

16.1 REASONABLE PRECAUTIONS

The insured at its own expense shall:

16.1.1 take all reasonable precautions to prevent Personal Injury or Property Damage and cease any activity which may give rise to liability under this Policy;

16.1.2 exercise care in the selection and supervision of employees;

16.1.3 as soon as possible after discovery cause any defect or danger to be made good or remedied and in the meantime shall cause such additional precautions to be taken as the circumstances require;

16.1.4 comply with all statutory requirements and other safety regulations imposed by any authority.

In addition, the Policy schedule included the following condition under the heading 'Conditions of Cover':

The Insured must comply with the Australian/New Zealand Guidelines AS/NZ 4576; 1995 

Judgement Below

The trial judge accepted that cl16.1 and the Schedule condition were reasonable precautions clauses. However, Her Honour found that the Insured did not breach the reasonable precautions conditions as she was not satisfied “that [the insured's] actions or inactions were a course of action deliberately adopted by him subjectively realising the danger it posed”.

Parties’ Submissions

The Insurer appealed on two grounds:

1. Clause 16.1.4 and the Schedule conditions were not reasonable precautions clauses.
2. The judge had erred in finding that the insured had taken reasonable precautions.

Were the Conditions Reasonable Precautions Clauses?

Regarding the reasonable precautions ground, the Insurer argued that although under the heading "Reasonable Precautions", no element of reasonableness was imported into cl 16.1.4 and that each of the subclauses was distinct and marked off with its own punctuation. The Insurer argued that the schedule conditions clause was expressed in absolute terms. The condition that an insured "must" comply with the guideline indicated a mandatory requirement. Instead, the Insurer argued that Her Honour should have considered and applied s54 of the Insurance Contracts Act 1984 (ICA).  

The Insured argued that the Insurer's construction would be inconsistent with the commercial purpose of the Policy because breaches would be coincident with the liability the Policy intended to cover. The Insured contended that the heading of clause 16.1 were consistent with the commercial purpose of the Policy, and each of the sub-clauses were reasonable precaution clauses. Further, it contended that the obligations created by the OHS legislation and regulations themselves required only reasonable practical compliance, and therefore reasonable precautions were implicit. Regarding the schedule conditions, the Insured contended that they were only guidelines without the force of law and based on regulations and legislation that only required reasonable care to be exercised.

Were Reasonable Precautions exercised?

The Insurer's submissions focus on the fact that the Insured bore the onus of proof in establishing that it had complied with the conditions. At trial, the Insured's evidence was that he had left the permit issue to the site supervisor and the other scaffolding company working on the job site. For the Insured to establish that he had taken reasonable precautions required more than raising the issue with the site supervisor and leaving it with him.

The Insurer submitted that this showed that the Insured was indifferent to whether the danger of electric shock existed.

The Insured submitted the judge's finding of no recklessness was sufficient to prove that he had taken reasonable precautions. There was nothing more the Insured could have done in the circumstances than bring the issue to the attention of the site supervisor. 

Determination of Appeal

The Court followed the NSW Court of Appeal's decision in Booksan Pty Ltd v Wehbe [2006] NSWCA 3 that the NSW equivalent of s34 of the Victorian OHS Act prevents an insurer from relying on a breach of the OHS Act to avoid coverage under an insurance policy. Section 34 provides:

Nothing in this Part is to be construed as—

(a) conferring a right of action in civil proceedings in respect of a contravention of a provision of this Part; or

(b) conferring a defence to an action in civil proceedings or otherwise affecting a right of action in civil proceedings; or

(c) affecting the extent (if any) to which a right of action arises, or civil proceedings may be taken, with respect to breaches of duties or obligations imposed by the regulations.

Although s34 does not prevent a defence based on the OHS legislation and regulations, the Court determined that it would be repugnant to the commercial purpose of the Policy to construe the cl16.1.4 as requiring absolute compliance with the regulations. Almost every finding of negligence in an industrial setting would also be considered a breach of the regulations. With respect to the schedule condition, the Court determined that requiring absolute compliance with a regulation, which is an informational rather than directive document, would not make any sense when considering the purpose of the Policy and, therefore, properly construed the obligation on the Insured was to take reasonable precautions to comply with the regulation.

Concerning the second ground, the Court of Appeal determined that Her Honour erred in her approach to the onus of proof. Her Honour did not make a positive finding that the Insured had taken reasonable precautions, but rather Her Honour was not persuaded that the Insured had not taken reasonable precautions. The Court considered that the Insured had not taken reasonable precautions in the circumstances. Instead, he had recognised the danger and raised the alarm but was indifferent to whether any action was taken. In this case, reasonable precautions should have entailed ensuring that someone had obtained the relevant permit and ensuring that any safety conditions were adhered to before erecting the scaffold. The Court, therefore, allowed the appeal on ground two.

Take Away Points

The case provides essential guidance for insurers and claims managers considering coverage under public liability insurance policies, including:

• The decision contains guidance which should give insurers more confidence when deciding whether or not to rely on a “reasonable precautions” condition.   However, as always, any coverage decision will depend on the facts of each case. 
• The decision helpfully illustrates the circumstances in which a Court will apply reasonable precautions conditions, and that while the Insured will not be required to show absolute compliance with regulations, it does require the Insured to take reasonable precautions – and in this case, raising the alarm but being indifferent to whether any action was taken were not reasonable precautions.
• Finally, the decision is a reminder that proof of compliance with a policy condition is on the Insured (and not the claims manager).  Claims managers should ensure that the Insured can satisfy the onus to the Insurer's satisfaction.