In a significant decision for insurance contracts in various industries, the Full Court of the Federal Court of Australia has dismissed an appeal concerning the rights of a ‘third party beneficiary’ under an insurance policy. Insurers should take steps to ensure their policy wordings and policy schedules accurately reflect those they intend to cover. Otherwise, the scope of coverage may be wider than expected.

The drinks in question

In April 2018, a fire occurred at a warehouse owned by Admiral International Pty Ltd (Admiral). Admiral was insured under an Industrial Special Risks Policy (Policy) issued by CGU Insurance (CGU). MOS Beverages Pty Ltd (MOS Beverages) engaged in a business of importing alcoholic and non-alcoholic beverages into Australia. At the time of the fire, MOS Beverages stored beverages at the warehouse operated by Admiral. The goods were not otherwise insured. MOS Beverages sought to claim under the Policy as a third party beneficiary for the loss of stock as a result of the fire.

The first sip

At first instance, the critical question was a simple one: was MOS Beverages entitled to claim under the Policy between Admiral and CGU?

MOS Beverages maintained that it was a third party beneficiary. Section 11 of the Insurance Contracts Act 1984 (Cth) (the Act) defines a third party beneficiary as:

A person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends.

Section 48(1) of the Act provides:

A third party beneficiary under a contract of general insurance has a right to recover from the insurer, in accordance with the contract, the amount of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party to the contract.

The issues before the primary judge pertained largely to the proper construction of the Policy. In construing the Policy, the primary judge confirmed that insurance contracts must be interpreted with their commercial purpose and context in mind.[1] The relevant sections of the Policy were twofold. The first was the ‘Interest of Other Parties’ Clause, which provided:

The insurable interest of only those lessors, financiers, trustees, mortgagees, owners and all other parties specifically noted in the records of the Insured shall be automatically included without notification or specification; the nature and extent of such interest to be disclosed in event of damage.

The Policy also contained a number of endorsements. The endorsement headed ‘SALESXB4 Customers’ Goods’ relevantly provided:

The policy extends to insure goods belonging to the Insured’s customers at the Premises, to the extent that such goods are not otherwise insured.

Relying on the detailed records and import notices evidencing the precise arrangement between Admiral and MOS Beverages, the Chief Justice concluded at first instance that the requirement of notation was undemanding and:

… a reasonable businessperson would have understood the terms of the “Interests of Other Parties” clause to mean that owners of property insured under the Policy would have a direct avenue to claim against CGU, provided that their insurable interest was noted in the records of Admiral in some acceptable businesslike way, prior to the loss being sustained.[2]

The second tasting

CGU appealed to the Full Court of the Federal Court of Australia (Appeal). In the joint judgment handed down on 17 September 2021, Besanko and McKerracher JJ in the majority dismissed the Appeal.

In agreeing with the primary judge’s decision, the Court considered various related arguments proffered by CGU in support of its appeal and concluded that each must fail. CGU broadly argued the following:[3]

• MOS Beverages did not fall within any of the relevant classes described in the ‘Interests of Other Parties’ endorsement and allowing MOS Beverages to claim under the Policy would produce ‘absurd results’. However, the Court did not agree and considered MOS Beverages clearly fell within the class identified as ‘owner’ in the endorsement.[4]
• Interpreting the Policy in favour of MOS Beverages is not commercially sound for either Insurer or Insured. CGU argued that MOS Beverage’s interpretation would result in CGU covering indeterminate property without knowing whether it was dangerous or not. However, the Court found it was commercially sound noting that it is well-established that a bailee may insure the bailed goods to their full value, and that Admiral received commercial benefit out of the arrangement.
• CGU argued that MOS Beverage’s interpretation would render the SALESXB4 endorsement pointless if the ‘Interests of Other Parties’ clause covers customers’ goods stored at the warehouse. However, the Court held that the SALESXB4 endorsement was important as it provided a basis for s 48 of the Act to operate.
• MOS Beverage’s ‘insurable interests’ were not ‘specifically noted’ in Admiral’s records as required by the ‘Interests of Other Parties’ clause. CGU submitted that the mere mention of MOS Beverages in Admiral’s records was not sufficient to satisfy the clause or s 48(1) of the Act. However, the documents demonstrated that MOS Beverages kept goods or products at Admiral’s warehouse premises. This was sufficient; no specific register or formal record relating to the insurance was required.

Accordingly, the majority dismissed CGU’s appeal.

The aftertaste

This case serves as a timely reminder to clearly indicate in the policy who is intended to be covered. Endorsements that have not been reviewed for consistency with the policy wording may throw up some unexpected challenges. The case is one of a number where there has been contention around whether a person is a third party beneficiary covered by the policy so this is seemingly an area where insurers have room for improvement.

[1] MOS Beverages Pty Ltd v Insurance Australia Ltd trading as CGU Insurance [2020] FCA 1716.

[2] MOS Beverages Pty Ltd v Insurance Australia Ltd trading as CGU Insurance [2020] FCA 1716 [35].

[3] Insurance Australia Ltd trading as CGU Insurance v MOS Beverages Pty Ltd [2021] FCAFC 165 [35] – [52].

[4] Insurance Australia Ltd trading as CGU Insurance v MOS Beverages Pty Ltd [2021] FCAFC 165 [37].