AMP General Insurance (NZ) Limited v Lance Hugo Trading As Hugo Auto Services

A public liability policy contained a condition that the insured 'must not make or give any admission, offer, promise, payment or indemnity'.

“You must not make or give any admission, offer, promise, payment or indemnity.”

Section 11 of the Insurance Law Reform Act 1977 prevents an insurer from avoiding liability based on a breach of a policy condition if the insured proves on the balance of probabilities that the loss was not caused or contributed to by the breach.

“...the insured shall not be disentitled to be indemnified by the insurer by reason only of such provisions of the contract of insurance if the insured proves on the balance of probabilities that the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of such events or the existence of such circumstances.”

The inquiry under s11 involves a two-step process: first, whether the circumstances increase the risk of the loss, and second, whether the loss was in fact caused or contributed to by those circumstances. The onus of proof rests on the insured.

“Section 11 contemplates a two step inquiry where the contract of insurance excludes or limits the insurer’s liability on the happening of certain events or the existence of certain circumstances. The first is to determine whether the insurer’s liability has been so defined because the happening of the events or the existence of the circumstances was in the view of the insurer likely to increase the risk of occurrence of the loss... Even where the purpose of the limitation is entirely legitimate the insured is not necessarily disentitled to be indemnified. That is for consideration at the second step. The inquiry there is whether the loss in respect of which the insured seeks to be indemnified was caused or contributed to by the happening of the events or the existence of the circumstances. The onus of proof rests on the insured and the answer turns on the objective assessment of the Court or Arbitrator, not on the subjective view of the insurer.”

In the context of a liability insurance claim and an alleged admission by the insured, the 'loss' for the purpose of the s11 inquiry is the insured's liability to pay the judgment sum arising from the third party's claim.

“The loss in respect of which Mr Hugo sought to be indemnified by the AMP General is his liability to pay the judgment sum arising from Tahuna Transport’s claim against him. The question becomes: was that liability caused or contributed to by any admission by Mr Hugo?”

For an admission to have caused or contributed to the loss (the liability judgment), it must have contributed to the outcome of the case against the insured, not merely prejudiced the insurer's negotiating position or affected the course of litigation.

“The right in question is to be free from liability to the insured where the insured’s admission causes or contributes to the liability established against the insured. It is not a right to be protected against the risk of proceedings against the insured or a right to negotiate freely. The admission must cause or contribute to the insured’s loss, not the risk of that loss.”

The inquiry under the second step of s11 is an objective one into whether the admission caused or contributed to the insured's loss, not a subjective inquiry into the insurer's state of mind or its litigation strategy.

“The second step of the enquiry under s11 is concerned with an objective enquiry as to whether the admission relied upon, caused or contributed to the insured’s loss. It is not concerned with an enquiry into a plaintiff’s subjective state of mind as to why it brought a proceeding or an inquiry into the indemnifier’s ability to settle, an equally subjective subject matter.”