Interpreting insurance contracts is often contentious as coverage and exclusion clauses contain varying degrees of ambiguity. The case of Todd v Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400) [1] (Todd) considered whether a professional indemnity policy responded to cover losses suffered as a result of financial advice given for products not on an insured's Approved Products List.

Overview and lessons for insurers

In summary the court:

  • did not accept that the words “approved investments products” used in a coverage and exclusion clause meant only those investments contained in a licensees' Approved Product List.
  • considered the word "Encompassing" meant "containing" rather than "including", limiting the activities covered by the Policy to advice given on approved investment products and life insurance products.
  • found that insurance contracts differ from contracts of guarantee and indemnity and insurers are not entitled to have ambiguity in the interpretation of a clause resolved in their favour.

Insurers should consider the wording of any approved investment products exclusions they use, as in this case the phrase "approved investment products" was interpreted broadly to potentially include products that a licensee's management informally approved from time to time. This creates a risk for insurers as advice given on products that are not on an insured's Approved Products List may still be indemnified.

Background

Todd was an appeal from Sienkiewicz (As Trustee for the Sienkiewicz Superannuation Fund) v Salisbury Group Pty Limited (in Liquidation) (No 2)[2], where Robertson J of the Federal Court found that the policy in issue did not respond to cover the losses suffered by clients of a financial adviser. The Full Federal Court of Allsop CJ, Gleeson and Beach JJ were asked to consider:

  1. Whether the phrase "financial planning" in the definition of professional services was limited by the inclusion of "… encompassing advice on approved investment products"?
  2. What is an "approved investment product"?

Resolving ambiguity

Whilst the parties generally agreed on the principles to be applied in the interpretation and construction of the Policy the insurers contended that doubt should be resolved in their favour, relying upon a string of High Court authorities concerning general contracts of guarantee and indemnity where it is settled law that ambiguity is resolved in favour of the surety or indemnifier.

In a joint judgment, Allsop CJ and Gleeson J rejected the contention that this principle applies to contracts of insurance. The fundamental differences between contracts of insurance and contracts of guarantee or indemnity meant there was no reason for treating insurers with the same tenderness as guarantors and indemnifiers. Beach J agreed with this finding.

The Full Court interpreted the policy using standard principles.

Meaning of approved investment product

The court rejected Robertson J's finding at first instance that a reasonable person would understand the ordinary words "approved investment products" to mean investments contained in an Approved Product List. The natural meaning of the words "approved investment products" is those products approved by the licensee from time to time. In this regard their Honours refused to read further requirements into the simply expressed question of approval.

Meaning of encompassing

The financial planning activities the subject of the Policy were confined to "encompassing advice on approved investment products and life insurance products". Allsop CJ and Gleeson J found that the word "encompassing" in this context was taken to naturally connote "containing". This meant that the insuring clause covered all aspects of financial planning, provided the financial planning contained advice on approved investment products.

Beach J disagreed with this conclusion, finding that "encompassing" in this context meant "including". His Honour rejected the construction adopted by Allsop CJ and Gleeson J, and focused on the likelihood that an insured's financial planning activities would need to go beyond given advice on approved products and court include giving:

"…advice on asset classes and general asset allocation. It could include advice on overall market risk (factors that influence share market movements such as political, economic, taxation and legislative factors), domestic versus international factors (currency risk) and sector specific factors (commodity market risks for example). Such advice might not involve any advice on specific investment products, let alone approved specific products. …"

Beach J noted Allsop CJ and Gleeson J's construction was at odds with the regulatory setting, as s 912B of the Corporations Act 2001 (Cth) requires licensees to have adequate arrangements for compensating retail clients and the Corporations Regulations 2001 (Cth) requires licensee to hold adequate professional indemnity insurance. Importantly this statutory framework did not limit a licensees' role to providing services given on approved investment products.