The recent Victorian Supreme Court decision of Oz Minerals Holdings Pty Ltd v AIG Australia Ltdhighlights the importance for both insurers and insureds to consider carefully the scope of proposed exclusion clauses when their insurance policies are being negotiated and agreed. This decision reaffirms that exclusion clauses are to be construed objectively, according to their natural and ordinary meaning and with regard to the nature and commercial objects of the contract, but without straining to find ambiguity in the words used, if the meaning of those words is clear.

Background

The dispute followed a court approved scheme of arrangement on 20 June 2008 and the merger of two companies which became Oz Minerals Ltd (Oz Minerals) and Oz Minerals Holdings Pty Ltd (Oz Minerals Holdings). As a result of the merger, Oz Minerals acquired all issued shares in Oz Mineral Holdings.

In February 2014, a representative proceeding was commenced in the Federal Court of Australia against Oz Minerals alleging breach of continuous disclosure requirements under the Corporations Act 2001 (Cth) and a series of misrepresentations. All of the wrongful conduct was alleged to have occurred prior to the merger.

In response to the representative proceeding, Oz Minerals commenced contribution proceedings against Oz Mineral Holdings on 19 June 2014. Consequently, Oz Mineral Holdings claimed upon its D&O insurer to indemnify it against any liability arising from the contribution claims.

Exclusion

The insurer denied liability to indemnify on the basis that the contribution claims were excluded by a Major Shareholder and Board Position Exclusion clause in the policy, which provided as follows:

“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.” [emphasis added]

Neither of the conditions for operation of the exclusion clause were satisfied as at the date of the merger.

Both conditions for the operation of the exclusion clause were satisfied as at the time the contribution claims were brought.

Arguments

Oz Minerals Holdings argued that:

  • The exclusion clause was only intended to exclude claims by claimants who satisfied the conditions at the time of the alleged wrongful acts, which in this case was before the merger.
  • It made no commercial sense to assess the conditions for the operation of the exclusion clause as at the time the claims were brought, because such an interpretation was inconsistent with the purpose of the policy – being to provide cover against liability for wrongful acts.

The insurer argued that:

  • The words of the exclusion clause (taking into account the “claims made” structure of the policy and the use of both present and past tense words (“present shareholder… who.. has” and “past shareholder…who had”)) unambiguously indicate an intention that it should operate at both the time of the alleged wrongful acts and the time the contribution claims were brought.
  • There was no commercial nonsense or inconvenience attaching to the insurer’s construction which could justify a departure from the unambiguous meaning of the words. To the contrary, the exclusion clause served the commercial purpose of protecting the insurer from the risk of misuse of confidential information and the forensic advantages that an arms-length claimant would not enjoy.

The decision

The court preferred the insurer’s construction of the exclusion clause on the basis that it was grammatical and accorded with the structure of the policy and that the commercial rationale suggested by the insurer was objectively reasonable. The court found that the insured’s construction was contrary to authority because it required a strained approach to find ambiguity in the exclusion clause.

Accordingly, the court held that the exclusion clause applied to exclude claims where the conditions of the clause were satisfied either at the time of the wrongful acts or the time the claims were brought.