The principles of contract interpretation are well established; however we have seen a recent trend of insureds, brokers and insurers seeking to challenge the meaning of an exclusion, by suggesting an interpretation not apparent on the face of the wording.
Parties often find themselves in a quagmire when their intentions are not properly reduced to writing. In interpreting clauses in dispute, a Court will look at the natural and ordinary meaning of the words used, in the context of the policy as a whole. As two recent cases demonstrate, if the intention of a party is not properly recorded, that party may find itself unable to rely on the clause as it thought it operated.
LIBERTY INTERNATIONAL UNDERWRITERS V THE SALISBURY GROUP PTY LTD (IN LIQ) & ORS  QSC
Liberty v Salisbury involved an exclusion which was allegedly intended to exclude claims from which the Insured (or his family or related entity) may benefit directly or indirectly, but which was drafted only to exclude claims “made by or on behalf of:
- one Insured against another Insured;
- a Subsidiary of the Named Insured against another Insured;
- any current or former spouse or partner, parent, child or sibling of any Insured against another Insured;
- any entity the Insured has a financial interest in; or
- any legal entity who has control directly or indirectly of more than 50% of the Named Insured’s equity or control of the board”.
In April 1995, the Weaver family created a discretionary trust, the Weaver Family Trust. The Trustee of the Weaver Family Trust was Treadstone Pty Ltd. The directors of Treadstone Pty Ltd were Mr Weaver’s wife and one son. The shareholders of Treadstone Pty Ltd were Mr Weaver’s 3 sons. The discretionary beneficiaries of the Trust were Mr Weaver, his wife, sons and other family members.
In or about 2005, Treadstone Pty Ltd, on behalf of the trust, engaged the services of Mr Weaver, who was an authorised representative of the Salisbury Group (Salisbury).
In 2013, Treadstone Pty Ltd, a trustee of the Weaver Family Trust, commenced proceedings against Salisbury, Mr Weaver and others.
Salisbury’s Personal Indemnity Insurer denied covered with respect to Mr Weaver’s claim on grounds that the claim was excluded by the ‘Related Entities Exclusion’ set out above.
The Insurer submitted that the parties intended that the clause exclude not only claims made by the persons/entities set out in the exclusion, but also on their behalf, and that the operation of the exclusion clause should not be defeated by the manner in which the Insured structured its business affairs.
The Court found that the words “on behalf of” in the exclusion contemplated some sort of representative capacity or agency in the making of a claim and that to suggest Treadstone Pty Ltd commenced these proceedings as representative or agent of the beneficiaries blurred the distinction between a trustee and an agent.
The Insurer argued that (d) applied to the claim because Mr Weaver had a financial interest in the Weaver Family Trust. The Court disagreed on the basis that a beneficiary under a discretionary trust may only compel the Trustee to act in accordance with the Trust, and could not compel payment to him.
The Court accepted that the Insurer intended to exclude claims whereby insureds (in this case, Mr Weaver) benefited directly or indirectly. However, in concluding that the insurer could not rely on the exclusion, the Court had regard to the plain and natural meaning of the words of the Policy. Notably, the Court observed that the Insurer could have specifically made reference in the exclusion to claims made by a trustee of a trust of which an insured or an insured’s family member were beneficiaries, but did not do so.
OZ MINERALS HOLDINGS PTY LTD & ORS V AIG AUSTRALIA LTD  VSC 185
In this case, the Court was asked to construe a major shareholder exclusion and, in so doing, was again asked to consider the relevant principles of contractual interpretation.
Representative proceedings were commenced against Oz Minerals Pty Ltd (Oz Minerals) relating to a 20 June 2008 Scheme of Arrangement. In turn, Oz Minerals commenced contribution proceedings against Oz Minerals Holdings Pty Limited (Oz Minerals Holdings) and its directors. Oz Minerals Holding sought indemnity under its D&O Policy.
The insurer denied indemnity pursuant to its “Major Shareholder and Board Position Exclusion” clause which stated:
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:
- 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 (First Condition)
- a representative individual or individuals holding a board position(s) with the Company. (Second Condition)
Neither of the First or Second Condition were satisfied at the date of the alleged Wrongful Act. At the time Oz Minerals’ claim was brought, both the First and Second were satisfied.
Oz Minerals Holdings asserted that the relevant date for the conditions was the time of the Wrongful Act. The Insurer claimed the relevant date was the time of the Wrongful Act, or at the time the claim was brought. Before undertaking its analysis of the two positions, the Court set out guiding principles, namely:
- the Court will not strain to find ambiguity in exclusion clauses;
- in giving contracts a businesslike interpretation, a contract must be construed so as to avoid the contract being commercially nonsense or inconvenient; and
- if a clause is unambiguous and does not lead to commercial nonsense or inconvenience, then it must be given its full effect, notwithstanding that it may be guessed or suspected that the parties intended something different.
The Court rejected the submissions by Oz Minerals Holdings and preferred the interpretation of the Insurer because it was in accordance with the structure of the Policy, made grammatical sense and the commercial rationale of the exclusion was objectively reasonable.
The Court rejected the insured’s proffered interpretation as it strained to find ambiguity and required the insertion of the word “still”, such that the clause would read: “any past or present shareholder or stockholder who had or still has…”
The moral of this story is: Check the wording – the wording is the master of the meaning.