Insuring the unintended: How ambiguous wording can shift the risk landscape

On 17 October 2025, the Western Australian Court of Appeal handed down its decision in AAI Limited trading as GIO v Pilbara Iron Company (Services) Pty Ltd [2025] WASCA 150, reinforcing the legal principles governing labour hire arrangements.

The judgment underscores the judiciary’s increasing willingness to recognise the transferability of vicarious liability to host employers. The judgment also serves as a salient reminder to insurers of the importance of clear and unambiguous policy wording, particularly where indemnity provisions extend to common law liability. In such cases, insurers may find themselves exposed to substantial indemnity obligations irrespective of whether the principal’s liability is direct or vicarious.

This article explores how such a decision might be approached under New South Wales jurisdiction, with reference to the exclusive vicarious liability doctrine affirmed in Mt Owen Pty Ltd v Parkes and the High Court’s reasoning in Bird v DP. It further considers the implications for insurers operating across Australia, where ambiguous policy wording can significantly increase the risk of unintended indemnity exposure.

Claim

The proceedings concerned a significant workplace injury claim arising from a collision at the West Angelas iron ore mine. The injured party, Graham Fussell, was a labour hire worker employed by WorkPac, operating a stationary haul truck at the mine when it was struck by a front-end loader driven by Mr Reidy, an employee of the site’s principal contractor, Pilbara Iron Company Services Pty Ltd (PICS). Mr Fussell commenced proceedings against PICS, alleging that Mr Reidy had negligently failed to maintain adequate clearance between vehicles for which PICS was vicariously liable.

In response, PICS initiated third party proceedings against WorkPac’s workers’ compensation insurer, AAI Limited trading as GIO, relying on the policy’s indemnity extension which purported to indemnify PICS against common law liability where an employee sustained injury while performing contracted work for PICS, and where the injury was caused or contributed to by PICS’ negligence.

The trial judge found PICS liable for Mr Fussell’s injuries and awarded damages of $1.1 million. Crucially, the court held that the policy extension operated in PICS’s favour, entitling it to indemnity from GIO for the full amount of the damages awarded.

Appeal

On appeal, GIO challenged both the primary judge’s finding of negligence and the scope of the indemnity under the workers’ compensation policy. GIO first contended that PICS had not been negligent, and the trial judge erred in adopting the assumption that a 3 metre clearance rule would have avoided the risk of injury, particularly absent of any practical guidance on its implementation in the operational context. GIO further alleged that PICS discharged its duty of care through existing protocols, including operator training and general safety instructions, and that the finding of negligence was erroneous.

GIO also contended that the policy extension was only enlivened by PICS in circumstances involving breach of a non-delegable duty by the principal, and not for vicarious liability of the principal for common law damages. In parallel, PICS cross-appealed, seeking indemnity for the legal costs incurred in defending the proceedings.

The Court of Appeal dismissed both the appeal and the cross-appeal, affirming the trial judge’s reasoning and conclusions. The Court confirmed that PICS, having the operational control over the site, including equipment layout, coordination and personnel supervision, owed a duty to implement a safe system of work, which extended to providing sufficient direction for vehicle clearance to prevent collisions.

Labour hire disputes in New South Wales

It is well established under New South Wales law that host employers may be held liable for breach of non-delegable duties to their employees pro hac vice, particularly where the host exercises substantive control over the worksite, safety protocols, and day-to-day supervision. In Mt Owen v Parkes, Basten AJA in his leading judgment found that transfer of control from a labour hire employer to the host employer will not meet the requisite threshold unless it is established that the host employer is also in control of the manner in which the work is performed[1]

The outcome in Pilbara may well have been similar under NSW law given the trend of finding vicarious liability where control has completely transferred to the host employer. Further, NSW Courts have suggested that labour hire workers, albeit acting as employees pro hac vice, are familiar with routine works and bear some responsibility to coordinate and communicate effectively during hazardous operations, potentially giving rise to a finding of contributory negligence in line with Leeming JA’s leading observations in De Martin & Gasparini[2].

Policy construction

With regard to the second ground of appeal, the Court found the term “Principal’s negligence” under the policy to be broad enough to encompass vicarious liability absent of direct fault. The Court referred to the principles addressed by the High Court in Bird v DP where it was affirmed that although vicarious liability is confined to genuine employment relationships, the term remains context-sensitive and capable of broader interpretation. The following observations were made:

• In light of the Bird v DP, true vicarious liability involves attribution of another’s liability to a defendant even where the defendant is free of fault, distinct from liability arising from a non-delegable duty, which imposes a direct obligation to ensure reasonable care is taken.
• Without extrinsic evidence regarding the negotiations or contractual arrangements between the parties, the Court must interpret the policy extension solely on its wording, which led to the conclusion that the ambiguous term of “principal’s negligence” was capable of encompassing both direct and attributed fault.

Similarly, the Court found that 'Common Law Liability' as defined in the primary policy made no distinction between liability for a principal’s breach of a non-delegable duty and a named insured’s vicarious liability of a worker. Accordingly, the Court found the term to be broad enough to include both, aligning with the commercial purpose of the policy and practical realities of labour hire arrangements where principals may be exposed to liability for acts committed by workers under their control.

What does this mean for insurers?

Insurers must be acutely aware of the implications of judicial interpretation of policy wording in the context of labour hire arrangements, particularly where host employers assume actual control of labour hire workers. It is essential that liability is clearly defined within the policy, as any ambiguity will likely be construed in line with the commercial realities of such arrangements, especially absent of extrinsic evidence of the parties’ intended scope of coverage.

To mitigate unintended exposure, insurers should regularly review cover extension clauses to ensure their intended meaning only captures an insurer’s intended risk. Clear drafting, supported by documented intent, is critical to managing risk, particularly where interpretation is to be determined in a vacuum. It is therefore critical that expectations and understandings between the labour hire company’s insurer and the principal contractor are thoroughly addressed to inform how liability is allocated in multi-party worksite arrangements.