Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

CHAPTER 12 – ALLOCATION OF LOSS

Allocation-of-loss clauses emphasise that an insurer is only liable to indemnify loss covered by the policy.

If a claim comprises various losses and costs, only some of which are covered, the policy typically requires the insured and insurer to act in good faith to attempt to agree on a fair allocation of insured and uninsured loss and costs. In the absence of an agreement, this would be determined by a QC or senior counsel. The decision of Vero Insurance Ltd v BaycorpAdvantage Ltd 579 considered that an allocation clause in such terms (involving agreement on a fair and proper allocation of loss) was an agreement to agree and was therefore unenforceable, being void for uncertainty. There was no other relevant allocation provision in the policy in that instance that remained effective. The consequence was that the insured, one of several related defendants to underlying proceedings, all with joint legal representation, was entitled to indemnity for the entirety of legal costs incurred defending the proceedings, notwithstanding the legal costs also benefited the uninsured defendants. If an allocation clause contains other provisions that, if construed objectively, continue to limit cover to that part of the total loss that can be attributed to an insured party or insured component of the claim, without being an agreement to agree, it may still be effective at allocating loss. A common example is where cover is limited to liability (or defence costs) incurred solely and exclusively by an insured or in respect of a covered claim. Depending on the wording of the provision, an allocation assessment should be based on each party’s relative legal and financial exposure to the claim, and the benefits obtained by the parties from the defence of the claim. For example, an insured may be alleged to have been both negligent and fraudulent. As we have seen, an advancement of defence costs may be available, even though fraudulent conduct is excluded, until such time as there is a finding or admission of fraud. If an adverse finding on the issue of fraud is made, an allocation will be necessary unless the insured can prove the defence costs were attributable to defending the allegations of negligence (to which the policy did respond) and were not increased by reason of the allegations of fraud. 580 In McCarthy v St Paul International Insurance Co Ltd, 581 the claim against the insured comprised both insured and uninsured (fraud) components. Relying on the well-known Wayne Tank 582 principle, the insurer argued that as there were two proximate causes of the loss, one of which was covered by the insuring clause but the other expressly excluded, there was no liability at all for defence costs. On the wording of the policy in question, however, the Court considered the claims to be separable, with the result that defence costs were payable for the insured aspects of the claim (and where the costs were attributable to both the insured and uninsured components). Vero v Baycorp considered this principle in the context of an insured and uninsured defendant. In that case, defence costs were incurred on behalf of the insured directors and uninsured company. The Court noted that where an insured would have incurred the same costs (e.g. in preparing pleadings, statements and obtaining expert evidence) regardless of whether there was an additional uninsured party, the insurer is required to pay the entirety of the costs without contribution from the uninsured party.

579 (2005) 23 ACLC 199. 580 John Wyeth v Cigna [2001] Lloyd’s Rep IR 420. 581 (2007) 157 FCR 402. 582 Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd [1974] QB 57.

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