ILJ_Article_Oct_06[1]

‘Less is more’: Providing for waiver of
subrogation rights in contract works
insurance policies
Mark Sarakis*
Introduction
The drafting of ‘waiver of subrogation’ clauses in construction works
insurance policies is not without its pitfalls. This is of particular significance
where the policy is one of ‘several insurance’ of a number of insureds and in
respect of various and differing insurable interests.
Express provision for a right of subrogation in a contract of insurance is not
necessary for its existence. To make the contract of insurance meaningful, the
law will automatically imply a term into the policy prohibiting the insurer
from recovering the amount of the indemnity from its insured. For this reason,
inserting a ‘waiver of subrogation’ clause into a policy of several insurance
may have far-reaching and unintended consequences for the insurer. Careful
consideration thus needs to be given as to whether such a clause is necessary
and, if so, how it should be worded. This is to ensure that it gives precise effect
to the actual intentions of the parties, particularly those of the insurer.
What the right of subrogation entails
The right of subrogation is common to all contracts of indemnity.1 It arises by
operation of the law, but — significantly — it can be modified or extinguished
by the terms of the insurance contract itself.2 It allows an insurer — having
indemnified an insured for its loss — to ‘step into the shoes’ of the insured,
and to sue the third party wrongdoer for recovery of the loss in the insured’s
name. The action is by the insurer in the insured’s name, with the wrongdoer
being entitled to raise any defence to the insurer’s action that it would be
entitled to raise against the insured.3
There is some debate as to whether this right arises under the common law
as an implied term of contracts of indemnity, or whether it is an equitable
doctrine. In Hobbs v Marlowe,4 Lord Diplock was of the view that the right
arises exclusively as an implied term of the insurance contract under the
common law, but this exclusivity was rejected in Lord Napier and Ettrick
v Hunter5 in favour of the view that equity also played a role by intervening
* Legal Counsel, KONE Elevators Pty Ltd. This article is based upon a paper prepared for the
Master of Construction Law at the University of Melbourne.
1 D St L Kelly and M Ball, Principles of insurance law in Australia and New Zealand,
www.lexisnexis.com, 9.0010.
2 F Marks and A Balla, Guidebook to Insurance Law in Australia, 3rd ed, CCH Australia,
1998, pp 503–4.
3 Agip Petroleum Co Inc v Gulf Island Fabrication Inc 920 F Supp 1318 at 1326.
4 [1977] 2 All ER 241 at 255.
5 [1993] AC 713.
237

to compel the insured to assist the insurer in the exercise of the right. It is
submitted that this latter, more ‘holistic’ view of the concept is regarded as the
better one.6
The right of subrogation rests on the twin concepts of indemnity and unjust
enrichment. An insured may recover no more than its loss, and a wrongdoer
may not be unjustly enriched at the expense of the insurer who has
indemnified the insured for the loss.7 Accordingly, if the insured recovers the
loss both under the insurance policy and from the wrongdoer, the insurer can
recoup the indemnity from the insured. Similarly, by exercising its rights of
subrogation, the insurer can sue the wrongdoer to recover the loss from the
wrongdoer.8 The law regards the contract of insurance between insurer and
insured as res inter alios acta, and the wrongdoer is not entitled to rely on the
insurer’s indemnification of the insured’s loss to escape its liability.
Conversely, too, the insurer may not rely on the insured’s right of recovery
from the wrongdoer to deny its own liability to indemnify the insured.9
Subrogation in the context of composite insurance
If an insurer were able to sue its own insured in respect of an indemnified loss,
it would make a mockery of the very concept of insurance. As the court
remarked in Agip Petroleum Co Inc v Gulf Island Fabrication Inc (hereafter,
Agip),10 to allow the insurer to subrogate to its own insured ‘would permit an
insurer, in effect, to pass the incidence of the loss, either partially or totally,
from itself to its own insured, and thus avoid the coverage which its insured
purchased’.11 This is true whether the insured is the principal insured or any
member of another class of insured under the policy. There is thus no right of
subrogation against a sole insured, and also no right of subrogation against
multiple insureds under a ‘joint insurance’ policy — that is, a policy under
which two or more insureds have insured a joint insurable interest, such as
jointly-owned property.
The basic prohibition against subrogation will also be implied by law where
the insurance policy is one of ‘several insurance’, covering the respective
rights and interests of several insureds under a single policy — that is, a policy
under which the various insureds have different insurable interests in the
subject matter of the policy.12 These varying interests may be interests
different in time, subject matter or as to the class of persons entitled to the
benefit of cover. Policies of ‘several insurance’ may have a number of intricate
layers. Depending on such factors as the circumstances of the loss, they might
include a number of insureds in respect of certain losses, and then exclude
them again in respect of others.
6 Kelly and Ball, above n 1, 9.0040; Marks and Balla, above n 2, p 504.
7 Marks and Balla, above n 2, p 501.
8 The wrongdoer is, however, entitled to raise any defence to the insurer’s subrogated action
that it would be entitled to raise against the insured.
9 Kelly and Ball, above n 1, 9.0010.1–5; Marks and Balla, above n 2, p 502.
10 Above n 3.
11 Ibid, quoting from Taylor v Bunge Corporation 845 F 2d 1323 at 1329 and St Paul Fire &
Marine Ins Co v Murray Plumbing & Heating Corp 65 Cal App 3d 66 at 135.
12 See generally Commonwealth Construction Co Ltd v Imperial Oil Ltd, below n 22, para 7.
238 (2006) 17 Insurance Law Journal

Where the policy indemnifies an insured against an insurable loss, the
insurer will not be able to subrogate against any of the other insureds
whenever those insureds are insured under the policy for that loss. One may
then ask what of the situation where the insured remains an insured overall
under the policy but is, in fact, not insured for the particular loss arising?
The question of what, in such circumstances, the practical effect is of a
widely worded, general waiver of subrogation clause has come before
Australian courts several times and before the English courts once.13 The
position under English law is currently that an express waiver of subrogation
rights is only co-extensive with cover under the policy. This approach has
been rejected in Australia in favour of a plain-meaning interpretation of such
a clause.
National Oil Well v Davy Offshore Ltd
In National Oil Well v Davy Offshore Ltd (hereafter, National Oil Well),14 the
plaintiffs (hereafter, NOW) sued the defendants (hereafter, DOL) on unpaid
invoices rendered in relation to a contract (hereafter, the works contract) for
the supply of a sub-sea wellhead completion system. DOL brought a
counter-claim for defective parts that was, essentially, a subrogated claim
brought by its insurer for recovery of the indemnity it had paid to DOL for the
loss. Among others issues, the court had to decide whether NOW was entitled
to the benefit of cover under DOL’s construction works insurance and, if so,
whether NOW was then entitled to plead waiver of subrogation against the
insurer’s subrogated claim.
The definition of ‘Other Assureds’ under the policy included:
Any other company, firm, person or party (including but not limited to contractors
and/or subcontractors and/or suppliers) with whom the [Principal] Assureds . . . have
entered into agreement(s) and/or contract(s) in connection with the subject matters
of this Insurance, and/or any works activities, preparations etc, connected
herewith.15
The relevant portion of the subrogation clause read as follows:
Underwriters agree to waive rights of subrogation against any Assured and any
person, company or corporation whose interests are covered by this policy and
against any employee, agent or contractor of the Principal Assureds . . .16
Under the policy, read with the works contract, NOW — if entitled to any
benefit under the policy to begin with — was only insured for loss in respect
13 National Oil Well v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582; Woodside Petroleum
Developments Pty Ltd v H & R — E & W Pty Ltd (1997) 18 WAR 539; Woodside Petroleum
Developments Pty Ltd v H & R — E & W Pty Ltd [1999] WASCA 1024; GPS Power Pty Ltd
v Gardiner Willis Associates Pty Ltd [2000] QSC 75; GPS Power Pty Ltd v Gardiner Willis
Associates Pty Ltd [2000] QCA 495; Larson-Juhl Australia LLC v Jaywest International Pty
Ltd [2000] NSWSC 524; Larson-Juhl Australia LLC v Jaywest International Pty Ltd [2001]
NSWCA 260. National Oil Well has been applied in the case of BP Exploration Operating
Co Ltd v Kvaerner Oilfield Products Ltd [2005] 1 Lloyd’s Rep 307, but the facts of this case
were that ‘other assureds’ were entitled to cover that was co-extensive with that of the
principal assured.
14 [1993] 2 Lloyd’s Rep 582.
15 Ibid, 588.
16 Ibid, 591.
‘Less is more’: Providing for waiver 239

of the goods up to the time of delivery. The loss had been incurred after
delivery, and NOW was thus not insured for the loss under the policy.17
In claiming an entitlement to the benefits of the policy, NOW contended
that, as DOL’s subcontractor, it was by definition an insured under the
policy.18 NOW was also a party to the contract of insurance, either because
NOW had authorised DOL to conclude the contract as its agent, or if such
authority was absent at the time of contracting, because NOW had
subsequently ratified DOL’s entering into the contract. NOW, as a
subcontractor, also had an insurable interest in the defective equipment
forming the subject of DOL’s claim. The decision in Petrofina (UK) Ltd
v Magnaload Ltd (hereafter, Petrofina)19 was authority for the existence of
such an interest, and also for the right of a subcontractor having such an
interest to rely on its status as a co-insured to defeat a subrogated claim — a
right reinforced by the waiver of subrogation clause in the policy. Even if
NOW had no insurable interest in the subject matter of the claim, it was
entitled to rely on the waiver of subrogation clause to defeat the insurer’s
claim.20
Finding that NOW was by definition a co-assured under the policy, and it
being common ground that NOW was a party to the contract of insurance,
Colman J moved on to consider the issue of whether NOW was insured under
the policy for the loss suffered as a result of its wrongdoing. His Honour found
that the terms of the works contract required DOL to insure NOW under the
policy only until the time of delivery of the goods, despite the fact that the
policy provided cover to DOL and others beyond this point.21 The loss was
incurred after delivery, so NOW was not insured against it.
The last argument advanced by NOW, in an effort to defeat DOL’s action,
was that NOW was entitled to rely on the waiver of subrogation clause,
despite the fact that NOW was not insured for the loss. Counsel for NOW, in
arguing for an extension of the waiver of subrogation clause beyond the cover
NOW enjoyed under the policy, referred to a Supreme Court of Canada
decision in the matter of Commonwealth Construction Co Ltd v Imperial Oil
Ltd (hereafter, Commonwealth Construction)22 and the Petrofina23 case. These
cases both recognised the need for such construction works insurance policies
to cover the various co-insured project participants as against one another, so
that the insurance effectively neutralised the risk of inter-participant
litigation.24
The underlying theme in the reasoning of the authorities on this point is that
the principal of a construction project has an interest in ensuring that the
project proceeds expeditiously. It is thus in the interests of this progress that
relations between the various participants in the project remain productive and
17 Ibid, 597–8.
18 As a subcontractor, NOW fell within the category of an ‘Other Assured’, as defined in the
policy.
19 [1983] 2 Lloyd’s Rep 91.
20 National Oil Well, above n 14 at 592.
21 Ibid, 593.
22 69 DLR (3d) 558 (1977).
23 Above n 19.

co-operative. In order to ensure this, and also that no disruptive and
adversarial disputes arise between participants in the event of one causing loss
to another or to the principal, the principal takes out a composite insurance
policy that covers all participants against one another. As described by De
Grandpre J in Commonwealth Construction,25 the purpose of such a policy:
. . . is to provide to the owner the promise that the contractors will have the funds
to rebuild in the case of loss, and to the contractors, the protection against the
crippling cost of starting afresh in such an event, the whole without resort to
litigation in case of negligence by anyone connected with the construction, a risk
accepted by the insurers at the outset. This purpose recognises the importance of
keeping to a minimum the difficulties that are bound to be created by the large
number of participants in a major construction project, the complexity of which
needs no demonstration. It also recognizes the realties of industrial life.26
In the Petrofina case, Lloyd J had the following to say in elaboration of this
purpose:
In the case of a building or engineering contract, where numerous different
sub-contractors may be engaged, there can be no doubt about the convenience from
everybody’s point of view, including, I would think, the insurers, of allowing the
head contractor to take out a single policy covering . . . all contractors and
sub-contractors in respect of the loss of or damage to the entire contract works.
Otherwise each sub-contractor would be compelled to take out his own separate
policy. This would mean, at the very least, extra paperwork; at worst it could lead
to overlapping claims and cross claims in the event of an accident. Furthermore, . . .
the cost of insuring his liability might in the case of a small sub-contractor, be
uneconomic . . . he might well have to decline the contract.27
A key feature of such a policy and one that supports the overall purpose of
ensuring inter-participant peace — the so-called ‘commercial purpose’
identified by Colman J28 — is the waiver of subrogation clause. This clause
ensures that the commercial purpose is not defeated by the insurer instituting
disruptive and adversarial subrogated proceedings against any project
participant.
NOW thus argued that the imperatives of this commercial purpose dictated
that the waiver must necessarily extend beyond the mere extent of NOW’s
cover. The Court rejected this argument; permitting such an operation of the
waiver of subrogation clause would effectively place the insurers in the same
position in relation to NOW as if the loss sustained had been fully insured
under the policy. The insurance would then, in effect, be extended to cover
losses that had never been insured for NOW’s benefit.29 According to Colman
J, ‘[s]uch a consequence would indeed be remarkable. The policy would limit
cover with one hand and indirectly by waiver of subrogation remove the limit
by another hand’.30 His Honour noted that the wording of the waiver of
subrogation clause stated that the waiver operated in favour of ‘any Assured
25 Commonwealth Construction, above n 22.
26 Ibid, para 35.
27 Petrofina, above n 19 at 96.
28 In referring to the purpose described by De Grandpre J in Commonwealth Construction,
above n 22, para 35.
30 Ibid.

and any person, company or corporation whose interests are covered by this
policy’. This, he held, confined the effect of the waiver clause to claims that
were insured for the benefit of the party being claimed against, meaning that
an insured did not qualify for the benefit of the waiver clause merely because
it was a party to the contract of insurance. This benefit was only available for
insured losses.31
The policy further provided that:
The interests of “Other Assureds” shall be covered throughout the entire policy
period (irrespective of contract periods) subject to full coverage as herein, unless
specific contract(s) contain provisions to the contrary, in which event, insurance
hereunder for such specific contract(s) shall be limited accordingly.32 (emphasis
added)
The court concluded, therefore, that the cover, which the parties intended for
NOW under the works contract was of a more limited scope than what, was
otherwise available under the policy. This same intention to limit must thus
also limit the more general commercial purpose and any waiver of subrogation
supporting such purpose.33
Colman J did not address the problem posed to his finding by what might
be said to be the clear and express wording of the waiver clause. He did,
however, pause to consider the argument that the interpretation so placed on
the waiver effectively made it redundant, in that all it then did was no more
than to restate the implied term prohibiting an insurer from suing its own
insured in express terms.34 In the end, he dismissed this argument as
‘unconvincing’.35
The same issues were to come before an Australian court a few years later
in the matter of Woodside Petroleum Developments Pty Ltd v H & R — E & W
Pty Ltd (hereafter, Woodside 1).36
The Woodside cases
The Woodside cases involved defective design work executed pursuant to a
convoluted design arrangement involving a number of subcontractors and
guarantors of those subcontractors’ performance.
After the various subcontracts relating to the design arrangement had been
concluded, the principal, Woodside Petroleum Developments Pty Ltd,
procured a construction all risks policy insuring both the project and the
various subcontractors performing work on the project. Under the policy, read
with the various subcontracts, the defendants enjoyed either limited cover or
no cover at all. Notably, they were not insured for the loss that subsequently
occurred.37
31 Ibid.
32 Ibid, 593.
33 Ibid, 604.
34 Ibid, 603.
35 Ibid.
36 (1997) 18 WAR 539; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/
L2/71/10/82ef2/85560?f=templates&fn=bwaltmain-j.htm&2.0#JD_BC9706737.
37 Ibid, para 13.

The policy contained a waiver of subrogation clause whereby the insurer
agreed:
. . . to waive rights of subrogation against any Assured and any person, including
visitors, experts and VIP’s etc, Company, Firm or Corporation whose interests are
covered by this Policy and against any employee, agent or contractor of the
Principal Assured or any individual agent, firm or affiliate or corporation for whom
the Principal Assured may be acting or with whom the Principal Assured may have
agreed prior to any loss to waive subrogation, including but not limited to
helicopters, supply boats, etc, existing installation(s) and tugs and/or other vessels
and craft and their owners and/or charterers and/or insurers. The foregoing shall not
apply in respect of operations not connected with the project.38 (emphasis added)
After indemnifying the plaintiffs for the loss, the insurer brought a subrogated
claim against the various defendant design subcontractors and guarantors. In
defence of the claim, the defendant subcontractors pleaded the waiver of
subrogation clause.
Relying on National Oil Well as authority, the plaintiffs argued that the
waiver was co-extensive with cover, in that the various defendants were only
entitled to rely on the waiver to the extent that their interests were insured
under the policy. If they were not insured for a particular kind of loss
occurring, then they were not entitled to plead the waiver clause in defence of
subrogated proceedings for recovery of that loss.39
Before considering the plaintiffs’ argument that the waiver was only
co-extensive with cover, the court considered a number of questions, namely:
(i) Whether the defendants fell within the definition of an insured party
under the policy;
(ii) Whether the defendants had an insurable interest in the goods the
subject of the loss; and
(iii) Whether, as parties not privy to the insurance contract, the defendants
were entitled to enforce the policy.
The definitions of insured parties in the policy read as follows:
Principal Insureds
(1) Woodside Petroleum Ltd and/or
(2) Parent and/or Subsidiary and/or Affiliated and/or Associated and/or
Inter-related Companies of the above.
(3) Project Managers, if any.
Other Assured
(4) Contractors and any other Company, Firm, Person or Party (including but not
limited to Contractors and/or Subcontractors and/or Suppliers) with whom
the Assured(s) in (1), (2), (3) or this para (4) have, or in the past had, entered
into agreement(s) in connection with the subject matters on Insurance and/or
any works, activities, preparations etc. connected therewith.
Applying the ordinary rules of interpretation, Anderson J found that, while
none of the defendants fell within the definition of ‘Principal Insureds’, they
all fell within the definition of ‘Other Assureds’.40 Following the decisions in
38 Ibid, para 18.
39 Ibid, para 63.
40 Ibid, para 17.

Co-operative Bulk Handling Ltd v Jennings Industries Ltd41 and the
Petrofina42 case, the insurable interests of subcontractor and other parties, in
the position of ‘Other Assureds’ not privy to the insurance contract, had been
recognised.43
The court noted the decision of the High Court in Trident General
Insurance Co Ltd v McNiece Bros Pty Ltd (hereafter, Trident),44 where the
High Court had recognised an exception to the rule of contractual privity in
respect of insurance policies that allowed a person not party to the contract of
insurance to enforce a benefit in their favour under it.45
The plaintiffs argued, however, that Trident was authority for the
proposition that the parties to the insurance contract must have intended to
extend the benefits of the insurance policy to non-party insureds, and that
there had been no intention to do so in the present case.46 Anderson J was not
persuaded:
In my opinion, the policy evinces an intention that by force of the policy itself the
benefits provided by the policy will be available to all [insureds] . . . Therefore, I am
of the opinion that each of the defendants is entitled to the benefit of the full scope
of cover provided by the terms of the policy.47
His Honour also found that the references in the judgment in Trident to an
ostensible requirement that the partying receiving the benefits had to have
knowledge of the benefits, and thus to have relied on them, were not part of
the new rule propounded by the court. Rather, they were merely a statement
of the considerations justifying the rule.48
As to the allegation that the waiver of subrogation had to be seen as only
being co-extensive with cover, His Honour saw two obstacles standing in the
path of this argument succeeding. Firstly, he found that the natural meaning of
the words of the waiver clause did not allow for such an interpretation; that is,
the clause amounted to a blanket waiver of subrogation and was not limited
in any way. Secondly, since subrogation would be impossible against an
insured to the extent that they are insured under the policy, the argument
rendered the clause redundant. His Honour remarked that ‘[t]he courts do not
readily come to the conclusion that the parties to a contract intended to agree
on a functionless term’.49 He thus dismissed the plaintiffs’ claim.50
On appeal the matter came before the Full Court of the Supreme Court of
Western Australia in Woodside Petroleum Developments Pty Ltd v H & R —
41 (1995) 8 ANZ Ins Cas 61-286; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/
L2/71/10/ad330/b03a3?f=templates&fn=bwaltmain-j.htm&2.0#JD_BC9504122; (1996) 9
ANZ Ins Cas 61-355; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/
L2/71/10/9aaee/9cb55?f=templates&fn=bwaltmain-j.htm&2.0#JD_BC9606029.
42 Petrofina, above n 19.
43 Woodside 1, above n 36, para 21.
44 (1988) 165 CLR 107; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/
L2/65/3/460c8/46e4e?f=templates&fn=bwaltmain-j.htm&2.0#JD_BC8802625.
45 Woodside 1, above n 36 at 45.
46 Ibid, 23.
47 Ibid, 40.
48 Ibid, 45.
49 Ibid, 64.
50 Ibid, 82.

E & W Pty Ltd (hereafter, Woodside 2).51 Satisfied that a waiver of subrogation
rights was sufficient to extinguish such rights, that the respondents fell within
the definition of ‘Other Assureds’ and were thus — theoretically — entitled to
rely on the waiver clause, the court then considered whether the clause
actually offered any protection to the respondents.52
The appellants again submitted argument that, following National Oil
Well,53 a waiver of subrogation should be co-extensive with cover. As such,
the design contract, read with the policy, meant that some of the respondents
were insured only to a limited extent and the remainder not at all. The
respondents, not being covered by the policy in respect of the loss that
occurred, were thus not entitled to plead the waiver of subrogation clause.54
The appellants again argued that, unlike the insurer’s right of subrogation
that arose by mere existence of the policy, the extent of cover and waiver of
subrogation were benefits under the policy.55 The policy contained a clause to
the effect that:
Where the benefits of this insurance have been passed to an Assured by contract the
benefits passed to the Assured shall be no greater than such contract allows and in
no case greater than the benefits provided by this insurance.56
Thus, if the works contract did not extend cover or, particularly, the benefit of
the waiver of subrogation to the respondents, then the respondents could not
claim that benefit. There would be, in effect, no privity of contract between the
parties — both in respect of cover and the ability to plead the waiver of
subrogation clause in defence of the insurer’s subrogated claim.57
Ipp J noted that the effect of this argument was that the right of subrogation
was ‘to be regarded as independent and separate’ from the waiver of
subrogation.58 Its purpose was to separate the right of subrogation as far as
possible from the waiver of subrogation. Therefore, on this ‘contractual
benefit’ argument, while full and unrestricted rights of subrogation came into
existence along with the policy in the usual manner, the benefit of the waiver
of subrogation (as with all other benefits of the insurance) was subject to all
the qualifications imposed by the policy read with the works contract.
Furthermore, these benefits were also subject to the limitations imposed by
law on parties seeking to enforce contracts to which they were not privy. The
appellants argued that these benefits were intended only for the principal
insureds, and not for the ‘Other Assureds’.59
His Honour took a contrary view, finding that the commercial purpose of
the policy justified the extension of the benefits to the ‘Other Assureds’. The
waiver clause had the direct effect of limiting the insurer’s rights of
subrogation, and had to be construed as providing commercial benefits to
51 [1999] WASCA 1024; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/
L2/71/10/558cd/686ee?f=templates&fn=bwaltmain-j.htm&2.0#JD_BC9900998.
52 Ibid, paras 1–43.
53 Above n 14.
55 Ibid, 12.
56 Ibid, 27.
57 Ibid, 12.
58 Ibid.
59 Ibid.

‘Other Assureds’. His Honour considered that the waiver prevented the right
of subrogation from arising in the first place. It could thus not be said that the
right would first arise and then only later be subjected to a partial limitation
by the waiver. The right of subrogation and the waiver thereof were
inextricably linked. To this extent, it was thus not possible to claim that cover
and waiver of subrogation were inseparable concepts.60
The court noted that the line of reasoning followed in National Oil Well had
not been followed in the United States and had, in fact, been expressly rejected
in Agip.61 The court also referred to the American case of Marathon Oil Co v
Mid Continent Underwriters (hereafter, Marathon),62 where Judge Rubin of
the United States Court of Appeals had stated the view held in the United
States courts, namely that ‘[t]he addition of a waiver-of-subrogation clause
reinforces the provision implied by law, that the clause is not merely
redundant, particularly when . . . “all subrogation” is waived’.63
Referring to the wording of the waiver clause, the court concluded that
‘[t]he scope of the waiver expressed in these terms is extraordinarily wide’,
and that the clause expressly extended the scope of the waiver of subrogation
to persons who were not entitled to cover. Any interpretation of the clause so
as to confine it to the extent of cover would have the effect of nullifying the
clear intention of the clause and would also be contrary to its ordinary
meaning.64 Furthermore, such a wide waiver, and which included parties to
the project that were not insured, supported the ‘commercial purpose’65 of the
project insurance.
The court thus rejected the decision in National Oil Well in favour of the
American line of reasoning; the respondents were thus entitled to plead waiver
of subrogation to defeat the insurer’s claim.66
The American case law
The reasoning adopted by the American authorities is worth brief
examination. Significantly, these authorities were not referred to in National
Oil Well, which is the principal authority for the argument that a waiver of
subrogation clause is to be interpreted as being only co-extensive with cover
enjoyed under the policy.
The two principal cases considered by the court in Woodside were the
Marathon67 and Agip68 cases. These cases are illustrative of the rejection by
American courts of the notion that waiver of subrogation clause — in the
absence of express, restrictive terms to that effect in the policy — is
co-extensive of cover, and their preference for a plain-meaning interpretation
according to the terms of the waiver clause.
60 Ibid, 14.
61 Agip, above n 3 — see discussion below.
62 (1986) 786 F 2d 1301.
63 Ibid 1303–4.
67 Above n 62.
68 Above n 3.

In Marathon, a loss was incurred for which the additional insured was not
covered under the policy. The policy contained a waiver of subrogation clause
that waived ‘all subrogation’ against any additional insured. The insurer
argued that the waiver was to be interpreted as being co-extensive with cover.
Judge Rubin remarked that such an interpretation would render the waiver
meaningless. His Honour concluded that the addition of an express waiver of
subrogation clause could not otherwise than add to the term implied by law,
in that it expressly extended the waiver to include, not only a waiver
co-extensive with cover, but also a waiver of ‘all subrogation’ rights.69
In Agip, the loss caused by the additional insured occurred outside of the
period of cover available to it, although the principal was indemnified by the
policy for the loss. The additional insured pleaded the waiver of subrogation
clause in defence of the insurer’s subrogated claim. The insurer asserted that
the waiver was co-extensive with cover and explicitly cited National Oil Well
as authority.
In reaching its conclusion, the court noted several rules of interpretation of
insurance contracts (and contracts generally) that favoured upholding and
giving effect to the plain meaning of a clause not tainted by ambiguity — even
if the outcome might be harsh on the insured.70 Judge Crone then reviewed the
American authorities that he was bound to follow, including Marathon, and
concluded that these took the opposite view to National Oil Well. The court
thus rejected the argument that the waiver was co-extensive with cover.71 His
Honour remarked that where an insurer ‘is contemplating subrogation against
its own insured [it] must state such intent in clear and unequivocal language
in the policy’.72
GPS Power Pty Ltd v Gardiner Willis Associates Pty
Ltd
The issues arose in Australia again in the matter of GPS Power Pty Ltd
v Gardiner Willis Associates Pty Ltd (hereafter, GPS 1).73 The defendant (and
additional insured) was a firm of consulting engineers that had negligently
caused loss through a breach of its professional duty of care.
This case was, however, somewhat different from the others. The definition
of ‘insured’ in the policy excluded consultants (such as the defendant) in
respect of their professional duty of care owed to other insureds.74 The works
contract had, in fact, required the defendant to provide its own professional
indemnity insurance.75 The defendant, however, remained insured for other
purposes even though, given the defendant’s brief, these purposes were
exceedingly limited.76
69 Ibid, 1302–4.
70 Agip, above n 3 at 1325.
71 Ibid, 1329–30.
72 Ibid, 1326.
73 [2000] QSC 75; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/L2/67/6/
383b3/46370?f=templates&fn=bwaltmain-j.htm&2.0#JD_.
74 Ibid, para 14.
75 Ibid, 6.
76 See the Court of Appeal’s comments in GPS 2, below n 79, para 51.

Although the defendant had been excluded from cover for the loss, the court
found that the defendant had ‘nevertheless remained insured for some purpose
under the policy’ and was thus entitled to the benefit of the waiver clause.77
The court considered the findings in National Oil Well and Woodside,
including the discussion of the American authorities in Woodside, and
concluded that Woodside represented ‘the current state of the law on the
subject’ and should thus be applied.78
The Queensland Court of Appeal in GPS Power Pty Ltd v Gardiner Willis
Associates Pty Ltd (hereafter, GPS 2)79 dismissed the subsequent appeal by a
majority of two judges.
The court considered the waiver of subrogation section of the policy, which
provided — in essence — that in the event of the insurer indemnifying one
insured in respect of a loss, it waived all rights of subrogation against any
other insured that had caused the loss.80 Referring to the insurer’s argument
that the defendant/respondent was not an insured (as defined by the policy) for
the loss arising, Williams J (with whom De Jersey CJ agreed) stated that the
definition of ‘insured’ had nothing to do with the extent of cover an insured
might enjoy under the policy, but rather which parties fell within that
definition. The definition was not confined to only those that the insurer had
actually indemnified for a loss, but included anyone that ‘had the right to
claim indemnity pursuant to the policy with respect to some loss’. It should
also operate throughout the policy unless the context clearly indicated
otherwise.81
Once it had been determined that the respondent was an ‘insured’ for
purposes of the policy, one then had to consider the waiver of subrogation
clause in the light thereof. The clause read as follows:
In the event of the insurers indemnifying or making a payment to any insured(s), the
insurers shall not exercise any rights of subrogation against any other insured(s) . . .
[and] agree to waive any rights and remedies or relief to which they may become
entitled by subrogation against . . . [a]ny insured named or described in this policy
. . .82
The insurer thus undertook to the respondent that it ‘would not exercise any
rights of subrogation against’ it and, further, the insurer agreed ‘to waive any
rights and remedies [of] subrogation’ against it as an ‘insured named and
described in [the] policy’.83 The waiver was in no way connected to an actual
benefit of cover, as would be the limit of the implied waiver of subrogation.
Instead, it was extended to merely any party ‘named or described in [the]
policy’ — a wider scope of waiver than would be extended by the implied
waiver.
The court was thus led to the same conclusion reached by all of the prior
authorities (with the exception of National Oil Well), namely, that a waiver of
77 GPS 1, above n 73 at 20.
78 Ibid, 24.
79 [2000] QCA 495; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/L2/67/6/
383b3/3b19c?f=templates&fn=bwaltmain-j.htm&2.0#JD_BC200007553.
80 Ibid, para 31.
81 Ibid, 39–40.
83 GPS 2, above n 79 at 39–40.

subrogation clause was entirely redundant and meaningless if the
interpretation to be placed on it was that it merely restated the waiver already
implied by law; that is, that a waiver of subrogation rights is co-extensive with
cover. Thus, said Williams J:
When the clause speaks of not exercising any rights of subrogation ‘against any
other Insured(s)’ it must realistically be referring to a situation where the ‘Insured’
is not insured by the policy with respect to the particular loss in question. [The
waiver clause] can only have operation where, as is the situation here, the
respondent is caught by the expression “the Insured” but the loss in question is one
in respect of which it is not covered by the policy.84
While the effect of this interpretation may initially seem unusual, it did serve
the ‘commercial purpose’ of the project and the project insurance.85
Larson-Juhl Australia LLC v Jaywest International Pty
Ltd
The New South Wales Supreme Court was next to consider the issue in the
matter of Larson-Juhl Australia LLC v Jaywest International Pty Ltd
(hereafter, Larson-Juhl 1).86
The litigation had resulted from a sale of business. As a result of defects in
the premises at which the business was being conducted that rendered them
unusable, the plaintiff suffered loss of profits due to business interruption.
The parties had all been insured under an industrial special risks policy, in
terms of which the insurer had indemnified the plaintiff for the loss. The policy
contained a blanket waiver of subrogation clause. The insurer brought
subrogated proceedings against the defendants for breaches of warranties
contained in the sale of business agreement, as to the structural integrity of the
premises housing the business, under the Trade Practices Act 1974 (Cth) and
the Fair Trading Act 1987 (NSW). The policy did not insure the defendants
against this particular liability. The defendants pleaded the waiver clause in
defence of the subrogated proceedings. In what was later described by the
Court of Appeal as a ‘careful judgment’,87 the plaintiff’s claim was dismissed
by Master Macready at first instance.
The plaintiff had relied upon National Oil Well as authority for its argument
84 Ibid, 44.
85 Pincus JA dissented. He disagreed on when the definition of the ‘Insured’ applied, holding
that it should be applied at the relevant time and to the respondent in the capacity that it
acted in at that time. Therefore, the respondent was not an ‘Insured’ at the time of the loss
and thus not entitled to invoke the benefit of the waiver of subrogation clause (ibid 19–20).
On this test, however, a waiver of subrogation can never be more than co-extensive with
cover. It also takes no account of the specific wording of the waiver clause or the issue of
the redundancy of the express waiver clause.
86 [2000] NSWSC 524; http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/
L2/66/4/b3745/d6a55?f=templates&fn=bwaltmain-j.htm&2.0#JD_BC200003266.
87 Larson-Juhl Australia LLC v Jaywest International Pty Ltd [2001] NSWCA 260;
http://www.butterworthsonline.com/lpBin20/lpext.dll/bw/L2/66/4/6fdf5/8cb70?f=templates
&fn=bwaltmain-j.htm&2.0#JD_BC200104864, para 9.

that the waiver of subrogation clause should be construed as being
co-extensive with cover.88
Having considered the judgment of Colman J in National Oil Well, the court
cautiously noted that, although the Full Court of Western Australia in
Woodside had not followed the decision, it had to be determined whether the
Court had done so because it had overruled the decision or merely considered
it to be inappropriate on the facts of Woodside.89 Clearly, if — as was the case
in Woodside — the policy was one covering construction project risks, then
the Woodside decision would need to be followed.90 The judgment initially
appeared to suggest that the nature and subject of a policy might allow for the
distinguishing of cases on their facts, potentially leaving it open for the
National Oil Well decision to be followed. Later, however, the court concluded
that the reasoning in Woodside was ‘basic to insurance law’, and that it thus
saw ‘no reason to confine it to project construction cases’.91 The court then
proceeded to review the authorities discussed above, as well as the terms of
the waiver clause. It noted that, as with the clauses in the other cases, the
waiver in question was ‘in the widest possible terms unrestricted to the subject
matter of the insurance and prima facie it would cover all five defendants’.92
The court found that the waiver clause could only be restricted in two ways,
namely:
(i) by restricting the persons in whose favour the waiver is granted; and/or
(ii) by restricting the nature of the rights/claims that are waived.93
In relation to the first restriction, the defendants were expressly included in the
definition of the insureds in whose favour the waiver had been granted. In
relation to the second restriction, the insurer had agreed not to exercise any
rights of subrogation against any insured.94
In deciding the nature of the claims potentially excluded by the waiver, the
clause had to be interpreted according to its ordinary meaning. In giving effect
to that ordinary meaning, unreasonable outcomes were to be avoided —
unless there was no other possible interpretation that could be attached to the
clause.95 In that the insurer had waived ‘any rights of subrogation’, the court
held that this was the interpretation to be applied to the waiver. Although the
ordinary interpretation given to the waiver was ‘surprising’, the court did not
think the outcome of this interpretation was unreasonable — given the
commercial purpose of the policy.96
Even if the result had been unreasonable, the court held that it was difficult
to find a way to restrict the express terms of the waiver, as it did not permit
any such restrictions. The court was not entitled to divine an intention on the
88 Larson-Juhl 1, above n 86, paras 18 and 40.
89 Ibid, 19.
90 Ibid, 34.
91 Ibid, 36.
92 Ibid, 28.
93 Ibid, 41.
94 Ibid, 33.
95 Ibid, 41–43; citing Wilson v Harvey Trinder (NSW) Pty Ltd (1973) 2 NSWLR 870.
96 Ibid, 37–45.

part of the parties that was outside of the scope of the express words of the
policy.97
The matter went on appeal to the New South Wales Court of Appeal in
Larson-Juhl Australia LLC v Jaywest International Pty Ltd (hereafter,
Larson-Juhl 2), where the appeal was unanimously dismissed.98
The appellant argued that the waiver clause did not apply to the appellant’s
pleaded causes of action, namely for breach of contractual warranties and
deceptive conduct, and was thus only co-extensive with cover.99
To avoid this contention being defeated by the adverse prior authorities, the
appellant attempted to distinguish the case at hand from these authorities on
the basis that they dealt with contractors’ all risks policies. Despite the
somewhat unusual circumstances of the subrogated claim, and the equally
unusual circumstances in which the waiver of subrogation had been invoked,
the court saw no reason to treat the facts of this particular case differently to
those of the prior authorities (even though these dealt with contractors’ all
risks policies), so as to find that the waiver was co-extensive with cover.100
The appellant’s second contention was a mere restatement of its first
contention, albeit in slightly different form. The second contention was that
the court ought to limit the waiver for the reason that the liability, in respect
of which the waiver had been pleaded, was not a liability insurable under the
policy. The waiver thus provided the respondents with a form of protection
that was beyond the parties’ contemplation at the time of the sale of the
business.101
The court rejected this contention, as it would have required the court to
strain the interpretation of the clause. Handley JA noted that:
. . . the duty of this Court is to construe the language of the clause fairly and simply
without making any extensive or extravagant implications. Under the clause the
insurer agrees that it “shall waive any rights and remedies or relief” and there is
nothing to confine the generality of these words. It seems to me this Court should
give the clause its ordinary meaning and if this is done it covers the causes of action
pleaded by the appellant.102
Which is the better approach?
It is difficult to counter the argument that none of the insurers in these cases
can logically have intended to waive their rights of subrogation in respect of
the losses that occurred. Economic rationality would dictate that the insurer
must have intended a waiver that was co-extensive with cover. One might
have been able to argue there may have been no intention of a waiver
co-extensive with cover on the facts of National Oil Well and the Woodside
cases. But on the facts of the Larson-Juhl cases and — most certainly — on
the facts of the GPS cases, this argument is weak. In the GPS cases there was
a clear intention to exclude professional indemnity claims from the cover
97 Ibid, 44–47.
98 Larson-Juhl 2, above n 87.
99 Ibid, paras 10 and 14.
100 Ibid, paras 13 and 15.
101 Ibid, 16.
102 Ibid, 18.

provided by the works policy, and to require the professional consultant to
insure against these under its own professional indemnity policy.103
Surely it is therefore unjust that the defendants in these cases should have
been allowed to raise provisions of the policy to defeat claims the policy
provided no protection against? As a general rule, it can hardly be said that
this was what the parties, let alone the insurer, had actually intended. There is
arguably more room — and it is certainly more just and equitable — in finding
that waivers of subrogation should be co-extensive with cover.
This ‘co-extensivity’ argument is most likely to have motivated the
judgments of Colman J in National Oil Well and Pincus JA in GPS 2,104 and
to have been behind the caution of Master Macready in Larson-Juhl 1. As
Colman J quite correctly points out in National Oil Well, to find that a waiver
of subrogation rights is not co-extensive with cover, leads to a situation where
the waiver clause — instead of the insuring clause — creates or extends cover
to losses that the insurer could hardly have intended to insure105 — a
‘remarkable’ consequence indeed!106
One might argue that too much has been made of the ‘commercial purpose’
of such policies,107 and which seems to have been a fairly significant
motivating factor of the decisions in Commonwealth Construction, Woodside
2, GPS 2 and Larson-Juhl 1. Many construction all risks policies are largely,
and often entirely ‘off-the-shelf’ products. It can thus hardly be said that the
insurer issuing such a policy actively intended to give up its rights of
subrogation in accommodating the ‘commercial purpose’ of a particular
project, and that this is what all the other parties understood and intended?
Due to high insurance costs and the effect of claims histories on premiums,
it is not uncommon under most construction contracts in Australia today that
each party must provide its own construction works insurance — even where
the principal maintains an umbrella policy. The fact that procuring
construction works insurance may be uneconomic for a subcontractor rarely
brings about any sympathy from the head contractor. Inconvenience, excess
paperwork and the potential for overlapping claims are even lesser concerns.
Rarely, if ever, do modern construction contracts explicitly restrict or
regulate insurers’ rights of recovery, thus leaving open the prospect of an
indemnifying insurer subrogating against the loss-causing third party. Further,
many of these contracts frequently provide dispute resolution mechanisms that
allow for disputes to be run and resolved parallel to the progress of the project
— thereby ensuring that these disputes do not lead to delays and obliging the
disputants to continue working co-operatively on site.
It might even be argued that the present commercial relationship that
prevails on construction sites regards liabilities of this kind as part of the
general risks of a construction project — for example, the incidence of
liquidated damages. These liabilities are both expected and incurred from time
to time, and do not necessarily lead to a breakdown in relationships on site.
104 Above, n 85.
105 National Oil Well, above n 29.
106 Ibid, above n 30.
107 Ibid, above n 28.

The level of financial and other commitment to a project frequently means that
it is not an option for participants to allow a dispute to lead to a suspension
or failure of the project. The attitude thus mutually adopted by participants is
that they will get the job done now and fight over the dispute once the project
has been completed. It thus cannot be said that inter-participant peace,
delivered by means of a construction works policy, is necessary for progress
of the works.
Perhaps the ‘commercial purpose’, which may have driven principals
historically to insure all participants so as to avoid disruption of the project,
is an anachronism in the modern Australian construction industry?
But the issue of ‘commercial purpose is, in any event, a red herring. This
is because the ‘co-extensivity’argument fails to address the issue that has been
crisply identified by the American and Australian courts. The issue is that the
defendant’s right to raise a waiver of subrogation depends entirely on the
wording of the waiver of subrogation clause, most often — but not necessarily
— read with the definition of the insured.108 It has nothing to do with
contractual benefits, circuitry of action or pervasive interests, and everything
to do with what the clause itself says.
The two aspects of the approach taken by the American and Australian
courts aptly illustrate this. The first relates to the express wording of the
waiver clause, and what the plain meaning conveyed by the clause is. The
second is the interface of the express clause with the waiver implied by law,
and what is to be understood from the inclusion of an express term in the face
of the one already implied by law.
The express wording of the clause
The ordinary rules of contractual interpretation apply to interpretation of an
insurance contract. The courts will thus look to the wording of the clause and
apply these rules to it.109 The courts will, generally, attempt to avoid
unreasonable results in giving commonsense effect to the parties’ intention, as
embodied in ordinary meaning of the words used.110 However, the rule of
interpretation that is applied is the one that gives effect to the objective
intention expressed by these words, and not the subjective — or actual —
intention that might be implied by logic or from the surrounding
circumstances.111 That it would be illogical and unreasonable for the insurer
to have waived all its rights of subrogation is of no consequence if the words
of the clause say otherwise. To this extent, logic and commonsense must bow
to the black letter of the drafting.
In interpreting a policy of insurance, the courts will usually interpret that
108 See, for example, the waiver clause in the Woodside cases that extended the waiver
considerably beyond the parties insured under the policy, above n 38.
109 Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520;
http://www.butterworthsonline.com/cgi-bin/urjlink.pl?qstring=asf19868601440.
110 J W Carter and D J Harland, Contract Law in Australia, 4th ed, LexisNexis Australia, 2002,
para 704.
111 Ibid 703, and generally.

policy liberally in favour of the insured;112 clauses such as waivers of
subrogation will be interpreted so as to enhance their effect, rather than that
they are read down.113 Following the Woodside decisions, it will be an
interpretation that is not dependant on the extent of cover114 — provided, of
course, the insured is actually an insured for some purpose under the policy.
Therefore, and leaving aside potential issues of operable mistake and
rectification, if an insurer inserts a clause into a policy stating that it waives
‘all rights of subrogation’ against a named class of persons, it will be taken to
have done just that. The courts will not impose any limitations not explicitly
stated in the terms of the policy, and — specifically — they will not confine
application of the waiver of subrogation to the limits of cover. As De Jersey
CJ noted in GPS 2, ‘[t]here is the additional consideration, also significant on
my analysis, that had the parties wished to limit the provisions [of the waiver],
the parties could have done so expressly, and with complete clarity’.115 A
blanket waiver of subrogation rights is, therefore, exactly that.
The inference drawn from the inclusion of an express
waiver of subrogation clause
The second aspect to the American and Australian judicial approach to express
waiver of subrogation clauses, is the interface of the express clause with the
waiver implied by law.
As has been stated, in order to give efficacy to the contract of insurance, the
law implies a term to the effect that the insurer will not have rights of recovery
against its own insured for a loss caused to another, and where the insurer has
indemnified the loss. The loss-causing insured has, after all, bought insurance
against the eventuality of having to make good the loss.
The implied waiver of subrogation is thus co-extensive with cover, and the
question may be asked — quite validly — what the intention of the parties is
if they have opted to incorporate an express waiver of subrogation clause into
the policy? Subject to what the parties may put into that clause (for example,
careful drafting may result in the exact restatement of the implied right and no
more), the inference that must be drawn is that the parties intended at the very
least to supplement (or restrict — depending on the wording) the effect of the
implied waiver. The implied waiver is thus ousted from the policy and is
replaced by the terms of the express clause.
To find, in effect, as Colman J did in National Oil Well, that an express
waiver of subrogation is only ever co-extensive with cover results in the
express waiver clause becoming entirely redundant. In the words of Anderson
J in Woodside 1, ‘[t]he courts do not readily come to the conclusion that the
parties to a contract intended to agree on a functionless term’.116
In arriving at the intention of the parties in opting for an express waiver
clause, the courts will apply the principles of contractual interpretation
112 Gibbs CJ quoting from Halsbury’s Laws of England, 4th ed, Butterworths, vol 25, 1993, para
594, n 1 in Australian Casualty Co Ltd v Federico, above n 109.
113 GPS 2, above n 79, 14.
114 Larson-Juhl 1, above n 86 at 35.

discussed above in giving effect to the plain meaning of the clause.
If the plain meaning to be garnered from the words of the clause is that all
rights of subrogation are waived against a named group of people, then that is
the intention to which the courts will give effect. This is because the inclusion
of the express clause in the policy will have ousted the implied waiver. In the
words of Anderson J, ‘it follows that if the parties to the contract of insurance
expressly exclude subrogation from their contract by an express waiver there
is simply no room in the contract for the implied terms which constitute that
right . . . To the extent that the express waiver occupies the ﬁeld, there is no
“subrogation”’.117
Conclusion
Clearly, the parties to an insurance contract — and the insurer particularly —
need to give careful consideration to the extent of rights of subrogation when
determining the policy wording.
The implied waiver of subrogation will always ensure that an insurer cannot
subrogate against its own insured and limit the insurer’s exposure, in that it
will only ever be co-extensive with cover. Therefore, if the reason for
providing for an express right of subrogation is merely to restate the implied
waiver out of an abundance of caution, great care will need to be taken to
make sure the waiver does not go beyond this. It may arguably be wiser to
simply fall back on the implied right rather than make an unintended, and
potential ruinous error in draftsmanship. When it comes to drafting waiver of
subrogation clauses, insurers would be well advised to remember the old
adage that ‘less is more’.
117 Ibid, 55.

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