OZ Minerals Pty Ltd (formerly Zinifex Ltd) (OZ Minerals), an Australian mining company, and four of its directors or officers were refused indemnity under a Directors & Officers insurance policy (D&O policy) in respect to a claim for alleged wrongful acts committed during Oz Minerals’ merger with Oxiana Ltd.

Background

By a joint media announcement made on 3 March 2008, OZ Minerals and Oxiana Ltd announced that they intended to merge their mining businesses by a scheme of arrangement. The scheme of arrangement was approved by the Court on 20 June 2008. A representative proceeding was commenced by a shareholder in the Federal Court against OZ Minerals, alleging a breach of continuous disclosure requirements under section 674 of the Corporations Act 2001 (Cth) (the Act), as well as a series of misrepresentations (the proceedings). As a result of the proceedings, OZ Minerals commenced a contribution claim against the plaintiffs, the former directors of OZ Minerals on 19 June 2014 (contribution claims).

The plaintiffs claimed that AIG Australia Ltd (AIG) was obliged to indemnify them against any liability arising from the contribution claims under a D&O policy issued to OZ Minerals for the benefit of its directors and officers. The relevant policy also contained an extension to cover OZ Minerals for breaches relating to corporate securities, including section 674 of the Act.

Material terms of the policy

The D&O policy contained an extension to cover OZ Minerals for Security Claims.

It was agreed that each of the plaintiffs was an ‘Insured’ for the purposes of the policy, that the claim was made and notified within the policy period and constituted both a ‘Claim’ and a ‘Securities Claim’ as defined under the policy.

The policy covered claims made against Insureds in respect of defined Wrongful Acts allegedly committed after 1 September 2002 and notified during the Policy Period. Under the policy, Wrongful Act was relevantly defined to include:5

  1. actual or alleged wrongful acts or omissions by Insured Persons acting on behalf of the Company; and
  2. actual or alleged wrongful acts or omissions of the Company or Subsidiary ‘but solely in respect of a Securities Claim.’

However, the policy provided that if a merger occurred during the Policy Period, as was the case, then the policy would be automatically amended to apply only to Wrongful Acts occurring prior to the effective time of the merger. Accordingly, two endorsements were added on 28 July 2008:

  1. A ‘Run-Off Exclusion’ providing that AIG would not be liable in connection with any claim in respect of a Wrongful Act committed or allegedly committed after 20 June 2008; and
  2. A ‘Discovery Period Endorsement’ whereby AIG agreed to extend the Discovery Period under the policy for a premium of $600,000.

Effectively, the endorsements operated to extend the period in which claims could be made under the policy, but limited the cover to Wrongful Acts committed between 1 September 2002 to 20 June 2008 (the cover period).

Policy Exclusion

The primary issue in this proceeding was the question of the proper construction of a policy exclusion.

AIG denied liability under the policy, alleging that the claims were excluded by a ‘Major Shareholder and Board Position Exclusion’, as follows:6

The Insurer shall not be liable to make any payment under this policy in connection with any Claim brought by any past or present shareholder or stockholder who had or has:

  1. direct or indirect ownership of or control over 15% [or] more of the voting shares or rights of the Company or of any Subsidiary; and
  2. a representative individual or individuals holding a board position(s) with the Company.

His Honour found that at the time the contribution claims were bought, both conditions for the operation of the exclusion clause were satisfied. Neither conditions were satisfied before 20 June 2008.

Issues to be determined

His Honour considered that the central issue for determination was at which point(s) the plaintiffs were to be assessed against the conditions in the exclusion clause.

The plaintiffs alleged that exclusion clause was intended to exclude Claims by claimants who satisfy the conditions at the time of the alleged Wrongful Acts giving rise to the contribution claims, in this case before 20 June 2008. The plaintiffs contended that it made no commercial sense for the exclusion clause to require an assessment of the claimant against the conditions in the exclusion clause at the time a Claim is bought.7

AIG contended the words of the exclusion clause unambiguously disclosed an intention that the exclusion clause should operate at both the time of the alleged Wrongful Acts and the time the contribution claims were brought.8

Reasoning of his Honour

His Honour considered that it was necessary to construe the provision of the policy in accordance with the general principles of contractual interpretation and referred to often cited case law on point. He noted that “if an exclusion clause is reasonably open to two competing constructions, the preferred construction is the one that avoids capricious, unreasonable, inconvenient or unjust consequences.”9 Hargrave J referred to AIG’s submissions on point and noted if the words are “…unambiguous and do not give rise to commercial nonsense or commercial inconvenience, the Court must give effect to them, notwithstanding that it may be guessed or suspected that the parties intended something different.10 However, should the proffered construction produce a commercial nonsense or inconvenience, the Court must interpret the construction with reference to what the parties would have reasonably intended at the time the contract was made.

His Honour considered the proffered construction submitted by both parties and held that AIG’s construction should be preferred.

His Honour held AIG’s construction was grammatical, accorded with the structure of the policy and the commercial rationale was reasonable.11 Relevantly, AIG’s construction of the policy followed these steps:

The policy was a claims made policy. A Wrongful Act is not enough to trigger indemnity, as there must be both a Wrongful Act within the cover period and a Claim made in respect of the relevant acts within the Discovery Period;12

The conditions for the operation of the exclusion clause unambiguously apply to the time of both events, being the Wrongful Act and the Claim. The exclusion clause used both past and present tense. AIG submitted that the present tense words “present shareholder… who has” were intended to apply to the time the Claim is bought. However, the past tense words “past shareholder…who had” were not intended to have their literal meaning, as they would apply to any time before the policy was made. Instead, the parties agreed that these words were intended to apply at the time of the alleged Wrongful Acts giving rise to the Claim;13

There was no commercial nonsense or inconvenience attaching to its construction of the present tense words which could justify the Court departing from the unambiguous meaning of the words. AIG was able to provide examples to illustrate why the language it had used in the exclusion was reasonable to protect itself against risks, including:14

  1. a company benefitting from a claim made against it in circumstances where the claimant owns all of the company’s shares;
  2. misuse of confidential information by a claimant shareholder with a board representative; and
  3. a contribution claim where the company and a claimant shareholder may co-operate to maximise the culpability of the company and its insured directors so as to maximise the Loss to be indemnified.

Notably, his Honour held that “the relevant exclusion clause may apply in circumstances where none of the risks agreed by the parties or indemnified by Insurer materialise, either at the time of the Wrongful Act or at the time of the Claim. That does not, however, make it uncommercial to provide for such risks.”15

Hargrave J held that the plaintiffs’ construction was contrary to authority as it strained to find ambiguity in the exclusion clause, it was ungrammatical and inconsistent with the policy’s structure.16 His Honour rejected the plaintiffs’ submission that the limitation of cover to claims made within the Policy Period or the Discovery Period is merely an additional condition of cover. Instead his Honour contended that this was an essential condition to coverage, consistent with the use of past and present tense in the exclusion clause.17

Relevantly, his Honour referred to the decision in Mobbs v Powell.18 He noted that the case concerned an occurrence based policy. His Honour stated that “the application of the exclusion clause in that case to the time of the insured event giving rise to liability does not establish any general principle that exclusion clauses in insurance policies must be construed as applying only at the time of the event causing the loss which engaged the policy. Each case will depend on the words of the relevant exclusion clause, construed in the context of the policy as a whole.”19 In this instance, his Honour noted that there were two relevant events which must occur in order for AIG to indemnify the insured: first, an alleged Wrongful Act is to occur within the Cover Period and second, a Claim be brought within the Policy Period. Hargrave J considered that the decision in Mobbs v Powell was consistent with applying the exclusion clause at the time of both events if the language permitted, as it did in this instance.20

The proceedings were dismissed.

How this decision impacts Insurers

This decision confirms the current principles of policy interpretation, namely that the Court should give the policy a commercially sensible construction. It should not seek to find a strained interpretation of the words of a policy when those words are grammatically clear. Further, the principles require the Court to consider what a reasonable person in the position of the parties would have understood the words to mean.

However, this decision highlights the importance of effective and careful policy drafting to ensure that an intended temporal operation of a policy provision is clearly and unambiguously expressed.