It is commonplace for insurance policies to include an exclusion for deliberate or wilful acts, or a condition precedent that an insured must exercise ‘all reasonable care’. Such clauses intend to incorporate into the policy a requirement for a certain standard of behaviour by the insured: failure to meet that standard renders the insured uninsured.

Two recent Supreme Court decisions from Victoria, Australia, and the United Kingdom have highlighted that the clauses will be construed in light of the commercial purpose of a policy, which presumes that foolish behaviour is intended to be insured. The facts of these cases are useful illustrations of this principle.

Condition(s) to take reasonable precautions and comply with statutes

In Noori v H & A Majestic Plumbing Pty Ltd & Ors [2021] VSC 63, the Supreme Court of Victoria, Australia, was tasked with interpreting a ‘Reasonable Precautions’ condition in a public liability policy.

The plaintiff, a plumber, was injured when a piece of guttering that he was carrying on scaffolding connected with overhead powerlines. The plumber sought to recover from various parties, including the company responsible for erecting the scaffolding, Dhillon Scaffolding. Dhillon’s insurer declined indemnity and was joined as a third party to the proceeding.

The insurer relied upon several conditions in the policy to refuse indemnity, including a condition entitled ‘Reasonable Precautions’ which (relevantly) stated:

“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…..

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

The insurer alleged that Dhillon breached Clause 16.1.1 because it failed to take all reasonable precautions to prevent personal injury to the plumber. Clause 16.1.4 was also breached because the manner in which the scaffolding was constructed did not comply with relevant statutory and regulatory requirements.

The insurer argued that the two parts of the condition should be interpreted differently. It accepted that Clause 16.1.1 was in the nature of a reasonable care clause but argued that the use of the phrase “shall comply” in clause 16.1.4 imposed an absolute obligation to comply with legislation.

The Supreme Court concluded that the entirety of clause 16.1 (including clause 16.1.4) was intended as a reasonable precautions clause. It noted that the commercial purpose of the policy was to provide indemnity for injuries that occurred in circumstances where legal responsibility for that injury lay with the insured. If the policy covered only injuries that occurred when the insured complied with all statutory and regulatory obligations, this would restrict cover to circumstances where the insured had been faultless. In such a circumstance, the policy would be largely pointless. Further, the Court considered that the requirement to follow ‘reasonable precautions’ was implicit in clause 16.1.4, given that the obligations created by legislation and regulations required only compliance which is reasonably practicable.

The Supreme Court acknowledged that ‘reasonable care’ clauses such as this are not breached by mere negligence. Instead, the insured must recognise that the danger exists and be reckless as to averting the danger. Given that Dhillon itself was not responsible for obtaining permits or completing the design of the scaffold, the Supreme Court was not satisfied that its actions or inactions were reckless.

Deliberate acts

In Grant v International Insurance Company of Hanover Limited [2021] UKSC 12 the Supreme Court considered the scope of an exclusion of ‘deliberate acts’ in a public liability policy.

After becoming heavily intoxicated at a bar, the plaintiff’s husband was restrained by a door steward, placed in a chokehold, and died of asphyxiation. The door steward was convicted of assault but acquitted of homicide. The plaintiff brought a claim seeking damages against the steward’s employer and its insurers.

Lower court’s decision

The lower court concluded that the exclusion for ‘deliberate acts’ in the public liability policy did not operate to exclude liability for the death of the deceased. It emphasised the importance of interpreting the policy in accordance with commercial common sense.

Given that the insured was in the business of providing security, the lower court considered that it was reasonable to expect that the policy would provide a degree of cover for liability for personal injury to third parties. This is precisely the type of claim to which the policy is intended to respond. That being the case, an overly literal interpretation of ‘deliberate acts’ would deprive the policy of a significant part of its obvious commercial purpose. Instead, the lower court concluded that the exclusion was intended to apply only if the particular outcome or objective was intended. Given that the steward did not intend to cause death or serious injury, the exclusion did not apply.

Supreme Court decision

The Supreme Court reached the same conclusion on appeal, although it differed slightly in its reasoning. The Court concluded that the phrase “deliberate acts” in the exclusion meant acts carried out with intent to injure. The Supreme Court rejected the insurer’s argument that the exclusion should extend to acts carried out recklessly as to whether injury would occur. The natural meaning of ‘deliberate’ acts is to consciously perform an act intending its consequence. This is a very different state of mind to recklessness.

Ultimately, the Supreme Court concluded that there was no evidence that the door steward intended to cause injury to the deceased. The remarks at sentencing (that the steward’s acts were “badly executed, not badly motivated”) were inconsistent with such an intention. The exclusion therefore did not apply.

Comment (Frances Jones)

Both cases are a helpful reminder of the importance of interpreting conditions and exclusions in light of the commercial purpose of the policy. If the circumstances of the claim are such that it is the kind of claim which the policy is intended to cover, then the policy terms will be read down, so that indemnity is afforded to the insured.

The decisions also usefully illustrate the importance of differentiating negligence from recklessness, and recklessness from deliberate acts.