In the recent case of Todd v Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400)1 the Full Federal Court of Australia considered the construction of an insuring clause in a professional indemnity policy.
The case involved an appeal from a decision of the Federal Court which held that a financial services errors and omissions insurance policy did not respond to cover losses suffered by the clients of a financial advisor. The issue was whether, on proper interpretation and construction, the policy responded to the claim.
The Full Federal Court was required to consider the definition and construction of the following two phrases:
- What is an “approved investment product”.
- What is the meaning of “encompassing” in the context of “financial planning”.
The Full Federal Court held that the primary judge erred in applying a narrow construction to the phrase “approved investment product” to mean only investments contained in an Approved Product List disclosed by the insured to the insurer. The Full Federal Court considered that the phrase was to be given its natural meaning, as a reasonable person would have understood it, meaning products that were approved by the licensee from time to time.
The Full Federal Court then considered whether the phrase “financial planning” contained in the definition of professional services was limited by the provision of services “encompassing advice on approved investment products”. The Full Federal Court held that the term “encompassing” meant “including” so that the insuring clause covered all aspects of financial planning, as long as the financial planning included advice on approved investment products.
Accordingly, the Full Federal Court found that:
- The insuring clause was triggered by the insured giving negligent investment advice resulting in a claim for losses suffered by its clients.
- The insurer was required to indemnify the insured in respect of the claim.
- A contract of insurance is not a contract of guarantee or indemnity, and the ambiguity as to the scope of cover will not be interpreted narrowly in favour of the insurer.
Australian Courts adopt a number of different approaches when interpreting and construing the meaning of words and phrases in different clauses and contracts.
In ordinary commercial contracts, the Courts will adopt a process of interpretation and construction based on the objective view of a reasonable person, having regard to the context in which the contracting parties entered into the agreement. In circumstances where there is ambiguity, the Courts will apply the contra proferentem rule which requires the preferred meaning to be one that reads against the party who proposed or drafted the clause or contract.
In contracts of guarantee or indemnity, however, the Courts have accepted that any ambiguity should be construed narrowly in favour of the guarantor or the party providing the indemnity.
The decision in Todd confirms that the Courts’ approach to interpreting and construing contracts of insurance will differ from the approaches used for ordinary commercial contracts or contracts of guarantee or indemnity. While contracts of insurance are often mistaken for contracts of indemnity or guarantee (as both provide indemnity from one party to another) provisions of contracts of insurance are often mandated by statute and are subject to principles of utmost good faith.
However, parties are free to agree what is covered under a contract of insurance and, in particular, the insuring clause which determines the initial ambit of cover, to which the normal rules of construction will ordinarily apply in the event of a dispute as to the intention of the parties.
It is important to carefully consider the intention of the parties and the proposed scope of cover when entering into contracts of insurance. While the application of insuring clauses will generally be construed in favour of an insured, the Courts may find that a claim falls outside the scope of cover in the absence of any ambiguity or statutory interpretation requirements.