A recent judgment from the New South Wales Court of Appeal considers the interrelationship between the insuring clause and an exclusion in a professional indemnity insurance policy and provides some practical guidance on the construction of policy wordings.
- This judgment provides some useful practical guidance with respect to some frequently encountered definitions and concepts and the overarching relationship between the insuring clause and exclusions in an insurance policy.
- The decision also confirms established principles relevant to the approach that Australian courts will take to the construction of an insurance policy.
WFI Insurance Limited (WFI) issued a professional indemnity insurance policy (Policy) to Malamit Pty Ltd (Malamit) and Blue Dolphin Racing Pty Ltd (Blue Dolphin) in respect of the provision of project and development management services.
In July 2008, Malamit contracted with Treetops Lismore Pty Ltd (Treetops) to provide project management services in relation to the Lismore Business Park Development. Treetops was the trustee for the Lismore Business Park Unit Trust. Mark Mitchell was the sole director of Malamit. He was also sole director of Treetops and owned all of the shares in Treetops. Mr Mitchell and his wife owned the two shares in Blue Dolphin, which wholly owned Malamit.
In July 2010, there was a landslip at the Lismore Business Park. Treetops commenced a civil proceeding against its consulting engineers and Malamit. WFI denied indemnity to Malamit in respect of Treetops’ claim.
The Policy wording
In the insuring clause of the Policy, WFI agreed to indemnify the Insured for any Claim for compensation in respect of any civil liability resulting from any breach of professional duty by the Insured in its conduct of its Professional Business.
Claim was defined in the Policy as meaning any civil proceeding brought by a third party against the Insured for compensation.
The definition of Insured extended beyond Malamit and Blue Dolphin to include present and former directors of present and former principals, partners, directors or employees of the Insured.
The Policy contained an exclusion which provided that it would not cover loss in respect of any Claim:
- by, on behalf of or for the benefit of any Insured;
- by, on behalf of or for the benefit of any Subsidiary; or
- by, on behalf of or for the benefit of any Family Member of the Insured.
Subsidiary was defined in the Policy as any entity which by virtue of any applicable legislation or law is deemed to be a Subsidiary of the Insured or in which the Insured owns or controls, directly or indirectly 50% of the issued voting shares of such entity.
WFI denied that it was liable to indemnify Malamit for two reasons:
- First, Treetops was not a third party within the definition of Claim and accordingly the insuring clause did not respond; and
- Secondly, the Claim against Malamit was excluded from cover as it was brought:
by Treetops, a Subsidiary of an Insured, Mr Mitchell, who was a director of Malamit and owned all of the issued voting shares in Treetops;
on behalf of or for the benefit of an Insured, Mr Mitchell; and
for the benefit of Family Members of an Insured, Mr Mitchell, namely his spouse and children who were shareholders or ultimate shareholders in companies which were unitholders in the Lismore Business Park Unit Trust.
First instance decision
The primary judge accepted WFI’s contentions that the claim against Malamit was brought by a Subsidiary and was therefore excluded from cover. The primary judge also considered that, as a consequence, Treetops could not be regarded as a third party for the purposes of the Policy, meaning the insuring clause was not triggered. Malamit appealed the decision.
Was Treetops a third party?
The court described the Policy as a composite policy under which Malamit and Blue Dolphin were each severally insured under the insuring clause as an insured and party to the contract. In addition, two further groups of persons were indemnified, namely present and former principals, partners, directors or employees of the Insured. Reading the definition of Claim into the insuring clause, the Court noted that the insurer’s promise is to indemnify an Insured for any civil proceeding brought by a third party against the Insured with the requisite character and during the relevant policy period. The Court found that the reference to “third party” in the insuring clause could be to someone who is not a party to the contract, to someone who is not an Insured under the contract or to anyone other than the particular Insured against whom the proceeding is brought.
The court found that consideration of the material exclusion made plain the sense in which the term “third party” is used in the Policy. The court referred to the general principle that in construing a contract of insurance, “preference is given to a construction supplying a congruent operation to the various components of the whole”. In other words, as far as possible, the contract should be construed with a view to resolving inconsistencies and giving effect to all of its terms.
The court described how the exclusions narrow the scope of cover described by the insuring clause. It followed that the exclusions were to be construed on the basis that they “cut out something already included by the general recitals and provisions”. In support of that construction, the court referred to the exclusion clause under consideration which excluded from cover a claim by, on behalf of or for the benefit of any Insured. Its premise, as a provision intended to remove particular claims from cover, is that a proceeding brought by one Insured against another (whether either is a party to the contract of insurance or not) is a Claim that would otherwise be within cover. The court said that the expression “third party” should be construed in accordance with that premise. This would only be achieved if “third party” describes any person other than the Insured against whom the proceeding has been brought, which is the third of the possible meanings of “third party” as referred to above.
Accordingly, the court found that the claim by Treetops against Malamit, being one of the named insureds, was brought by a third party within the insuring clause.
Was the claim brought by a Subsidiary?
The primary judge found that Mr Mitchell, the sole director of Malamit, owned all of the shares in Treetops. Accordingly he was an Insured and Treetops was a Subsidiary.
The court rejected Malamit’s argument to the effect that the Claim had in effect been brought by Lismore Business Park Unit Trust, which was not controlled by Mr Mitchell and therefore was not a Subsidiary. The court also rejected an argument that the reference in the exclusion to “the Insured” in the definition of Subsidiary was a reference only to the named insureds, Malamit or Blue Dolphin.
In doing so, the court considered the likely purpose of the exclusion. It said that in an insurance policy which indemnifies several Insured engaged in the conduct of a professional business, the exclusion clause removes from cover claims made against the Insured by, on behalf of or for the benefit of an Insured, or any Subsidiary or Family Member of an Insured. The court considered that the purpose in doing so is presumably to avoid the risk of collusion or assistance between the Insureds in relation to such claims by excluding them from cover.
The court considered that the expression “any Insured” in the exclusion in the context of a claim made against one Insured must mean any other Insured and encompasses persons answering that description by reason of the extended definition. The court found that in the same context, the expression “any Subsidiary” describes any company or other legal body which answers that description in relation to any insured. The court said that this construction gives effect to the evident intent of the exclusion in relation to claims for compensation against one Insured in which another Insured, or any Subsidiary or Family Member of an Insured, has a financial interest.
Accordingly, the court found that the claim against Treetops was excluded from cover because it was brought by a Subsidiary of an Insured, namely Mr Mitchell.
Was the claim brought on behalf of or for the benefit of an Insured or Family Member?
While unnecessary to do so, the court considered the other limbs of the exclusion which WFI had sought to rely on in support of its denial of indemnity.
The court noted that the claim against Malamit was made by Treetops as trustee for the Lismore Business Park Unit Trust. At the time Malamit was joined to its proceeding against the engineers, Mr Mitchell did not hold any units in the Trust directly. Rather, he and members of his family held shares in companies which directly or indirectly held units in the Trust. Consequently, the court found that neither Mr Mitchell nor members of his family enjoyed any beneficial interest, direct or indirect, in the claim against Malamit or in its potential proceeds.
The court considered it was not sufficient that as a result of the bringing of the claim some benefit, however small and indirect, might flow to another insured or family member. The court considered that the claim must be brought for that person’s benefit, which would be the case if the proceeds were to be paid to or at the direction of that insured or family member.
It followed that the claim by Treetops could not be characterised as being brought for the benefit of an Insured or Family Members.