The Law of Liability Insurance: heavy but worthwhile reading

This book review was first published in Law Talk on 6 December 2013


A contract of liability insurance is a promise to the insured to provide cover by way of indemnity to the insured against the insured’s own loss because of his or her liability to a third party. If you keep double-clicking this basic proposition, you end up with a textbook, specifically the new, third, edition of The Law of Liability Insurance, a two volume work that apparently weighs more than some bicycles. It is a “must have” for any practitioner serious about practising in the area of liability insurance. Despite ostensibly being a specialist text, it also provides a useful general resource on the principles of insurance law.

The Law of Liability Insurance, or “Derrington” as it is more affectionately known, is the trusted handbook for any New Zealand practitioner delving into the subject of liability insurance. Emphasis is properly placed on the word “delve” when used in connection with the recently published third edition, because the act of physically diving into the work, or crouching behind it to avoid a colleague, is not completely beyond the realms of imagination. If size truly does make one great, then it should be noted that its 3437 pages trump McElroys’ copy of the authorised King James Version of the Holy Bible (both testaments, 1400 pages) and Leo Tolstoy’s epic novel of Napoleonic Russia, War and Peace (New American Library version, 1440 pages) put together. Asked to guess the weight of the two volumes*, a colleague volunteered “more than my bicycle” (a fancy carbon frame number, granted) and another, perhaps less familiar than others with weights and measures, volunteered “thirty kilograms” before quickly changing it to “ten.” One wonders whether it will become the liability insurance equivalent of Marcel Proust’s In Search of Lost Time; a book many people claim to have read, but few have actually finished. A feat your correspondent did not quite achieve, while attempting to acquit himself of the task of reviewing it as best he could in the time available. All of this is intended to raise a serious point about how information is best presented, and how technology can lend a hand. More about this later.

The Law of Liability Insurance, first published in 1990 and then again in 2005, was officially launched as a third edition in Brisbane on 20 November this year. The publishing information states that the recommended retail price for the hard copy book alone is AU$395, which if you think about in terms of a per word basis may make it one of the best value legal works ever produced. Firms wishing to save money should note that it is not possible to purchase only one of the two volumes by offering half of the price, if only for the functional reason that the index only exists in volume two.

The authors remind us that until about 1880, with the exception of marine insurance, liability insurance was considered to be against public policy and therefore legally of no effect. It was believed to remove the perceived deterrent to being negligent created by the possibility of loss through liability to a claimant. Thinking about this topic evolved. Ever since, the growth of liability insurance seems to have tracked the growth of the law of common law negligence. The authors note that after a rash of poisoning from cockroach poison in England, poison insurance for piemakers gained currency in the 1890s. Cover of this general kind gained increasing popularity “when snails were alleged to have a propensity to find their way into stone bottles of ginger beer, for which the manufacturer would be liable to any ultimate customer who might become shocked on this discovery.”

The Law of Liability Insurance is an Australian text produced by two Australian authors. It therefore has, without any embarrassment, a dominant Australian flavour, constructed within a framework of historic and modern English cases. The Australian focus is evident in the regular section heading Statutory Intervention which usually leads with the Australian Insurance Contracts Act 1984. This approach should not cause any difficulty for the New Zealand practitioner, who, fresh from reading the newly minted Trans-Tasman Proceedings Act 2010, will appreciate that a “blended” understanding towards many of the legal principles is helpful and in any event inescapable. Anyone familiar with CCH’s Australia and New Zealand Insurance Law series will appreciate this. The authors deliver a text that will no doubt happily sit on the shelves of Australian, New Zealand and indeed English law firms as a comprehensive survey of the legal principles in this area.

The authors also promise, and deliver, material from America, regarding which they say with characteristic flourish: “it is a crop too rich to be ignored, even though it be necessary to sort the grain out from the weeds. The abundant use of American authorities complements and enhances the usual suspects of English, Australian and New Zealand cases. An example is the reference in the United States to the principle that “the proper focus regarding issues of coverage under insurance contracts is the reasonable expectation of the insured.” This is an approach which has been disavowed in English cases: see Smith Tak Offshore Services v Youell & Ors [1992] 1 Lloyd’s Law Reports 154.

A further example is that in the United States a breach of duty of good faith must involve a conscious and deliberate act that unfairly frustrates the agreed common purpose and disappoints the reasonable expectations of the other party by denying the benefits of the contract. We are reminded that under American law the performance of all contracts is attended by obligations of utmost good faith in the discharge of all duties and the exercise of all rights.

Defining what constitutes a lack of good faith, and specifically when the duty exists, remains an open-ended topic, so thinking from other jurisdictions is certainly helpful. A tangent to this is Paul Michalik’s thought-provoking observation elsewhere that “the insurer’s side of the duty of good faith has no known content”**. So, a recharacterisation of the duty as having a higher threshold for breach is germaine when you consider that it may be a duty which rests solely on the shoulders of the insured and not the insurer.

The Law of Liability Insurance is not just about liability insurance. It contains a detailed and useful survey of basic insurance principles in chapters two, three and four: The Contract of Insurance, Construction (i.e., interpretation) and Utmost Good Faith and Disclosure which finishes on page 686. If you make it this far and read no further, you will have achieved a very good grounding in a lot of the basics. In this section, we are reminded of the nature of insurance.  It is a contract where the insurer contracts to indemnify the insured upon determinable contingencies. It is a loss distribution mechanism where the parties wager against the occurrence of a particular event (including a claim). The insurer insurers risks, not certainties. It is a commercial contract, but “with its own special baggage that often defies the application of pedestrian commercial law principles.”

Chapter three, Construction, begins with the dry understatement with regard to policy wordings: “not uncommonly their composition is less than ideal.” It goes on to canvas many topics, including forms of analytical reasoning in interpretation. It also contains a useful and detailed alphabetical list of particular expressions including “and”, a word without which a lot of litigation may have never occurred, and other potentially vexing phrases such as “arising from or out of”, “attributable to” and “in connection with.” The chapter also includes thoughtful observations such as that a dictionary does not necessarily provide a definitive meaning for a word, but rather a lexicon of potential meanings which will vary according to context.

A text book of three and half thousand pages raises the question of whether it is useful for it to have a “physical” form at all. On initial publication, the publisher made available to firms a garden-variety pdf of the text, which, due to its length, was just as unmanageable, because it took an age for anything to happen. It has since been subject to the rigours of conventional e-publishing, and will be available to firms as an e-book (or “Practitioner’s Book Online, “PBO”) within the publisher’s conventional on-line offering early next year. The PBO made available for this review was as ergonomic as any other and also presented a welcome respite to clinging to the physical volumes on the number 274 bus down Mt Eden Road.

More generally, the publisher, along with others no doubt, is looking at forms of “e-lending.” This is an intriguing idea, according to which a firm would have a licence to the e-book, and “lend” virtual copies of the book out to staff in accordance with its licence, who may each record their own individual annotations, which are then stored in the cloud. So, it seems that the future is – almost – here. In five years time all legal reading and research will be conducted from tablets, which, one should think, may be carried out comfortably on the bus- and even on a bicycle, with an appropriate level of care, and with suitable insurance in place. 

 * Weight: approximately 4.9 kilograms, both volumes, measured unscientifically on the uncalibrated family bathroom scales.

** Insurance Law- a Practical Guide, NZLS seminar paper, 2012.

Here’s a pdf: Law of Liability Insurance- heavy but worthwhile reading

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