The Bank of Queensland (BOQ) was unsuccessful in its appeal to the Queensland Court of Appeal to have Chartis Australia Insurance Ltd (Chartis) pay defence costs under a FinancialGuard Professional Services Insurance Policy (the policy). In reaching this decision, the Court of Appeal said that insurance policies should be given a “businesslike interpretation”.
Some of you will remember the Supreme Court decision in this matter, but to recap the facts of the case, BOQ was a respondent in Federal Court of Australia proceedings brought by the Australian Securities Investment Commission, Barry Doyle and Deanna Doyle. The Doyles were caught by the Storm Financial Collapse. In the Federal Court proceedings, the applicants alleged that by BOQ entering into an investment home loan and two refinance contracts with the Doyles, BOQ breached an express term of the loan contracts or engaged in asset lending and unconscionable conduct. The applicants in the Federal Court proceedings, amongst other things, sought a declaration that BOQ engaged in unconscionable conduct and was joint and severally liable to the Doyles in relation to Storm Financial Ltd’s misrepresentations and breaches of contract.
BOQ notified its insurer, Chartis, of the claim and allegations in the Federal Court proceedings. Chartis refused to indemnify the bank relying on exclusion clause 3.9 of the policy which provided:
“The Insurer shall not be liable to make any payment for Loss:
arising out of, based upon or attributable to any actual or alleged:
(i) loan, lease or extension of credit except to the extent such Claim arises out of a Wrongful Act in the administration of such loan, lease or extension of credit; or
(ii) collection, foreclosure, or repossession in connection with any actual or alleged loan, lease or extension of credit”.
BOQ argued that even if clause 3.9 operates to exclude Chartis’ liability to pay, on behalf of BOQ and each Insured Entity, any “Loss” (being damages, judgment or settlement in the Federal Court proceedings), it does not exclude Chartis’ liability to pay Defence Costs resulting from the claims made in those proceedings. This argument was based on the exclusion clause not specifically referring to Defence Costs but only referring to “Loss”.
The indemnity clause of the policy provided:
“1. Insuring Agreement
The Insurer shall pay on behalf of each Insured all Loss and Defence Costs resulting from any Claim first made during the Policy Period for any Wrongful Act.”
Clause 6.6 of the policy then provided in relation to advance payment of defence costs:
6.6 Advance Payment of Insured Defence Costs
Except to the extent the Insurer has denied indemnity for any Claim, the Insurer shall advance Defence Costs in excess of the Retention, if applicable, promptly after sufficiently detailed invoices for those costs are received by the Insurer.
BOQ argued that although it is not entitled to advance payment of defence costs under clause 6.6 because indemnity had been denied, it is still entitled to be paid such Defence Costs under clause 1.
The Court of Appeal agreed with the primary judge and said that as a commercial contract, a policy of insurance should be given a business like interpretation. The Court said that a contract has to be considered in whole, since the meaning of any one part of it may be revealed by another part. If the words used are not ambiguous, the court must give effect to them, notwithstanding the result may appear unreasonable, unless the literal meaning would lead to an absurd result. The Court also said that where there are two possible constructions, the preferred construction is the one which “will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust”.
BOQ’s argument that it was entitled to be paid defence costs relied upon the opening words of clause 3, that is, “The Insurer shall not be liable to make payment for Loss”. Chartis said that if BOQ’s construction of the policy is correct, then there would in effect be two policies. The first would indemnify the bank for “Loss” (in the form of a damages award, judgment or settlement). The second would be a form of legal costs insurance which extended to the costs of defending virtually any claim brought against the bank. Such unlikely commercial results do not accord with a businesslike interpretation and would lead to unintended and absurd results.
The Court agreed with the insurer and looked to avoid an absurd result involving the creation of two polices of insurance within the one policy document.
The Court held that in construing the policy as a whole it is appropriate to:
(a) have regard to clause 6.6 and conclude that it contemplates that a denial of indemnity on the basis of an exclusion, such as clause 3.9, affects the payment of Defence Costs;
(b) observe that the opening words of clause 3, viewed in isolation, support the bank’s construction;
(c) note that otherwise the policy tends to treat liability to pay “Loss and Defence Costs” under the insuring clause as subject to the same provisions in the policy, rather than deal with liability to pay Loss and a liability to pay Defence Costs differently;
(d) seek to resolve inconsistency between literal reading of clause 3 and other provisions of the policy;
(e) have regard to the subject matter of the policy, which in essence is insurance against liability for the bank’s professional services and the costs of defending claims that asserted such a liability; and
(f) give the policy a businesslike interpretation, and, in choosing between competing constructions prefer the construction that avoid an unlikely commercial result.
This decision highlights the care that must be taken when drafting insurance policies, but that in construing them Courts must always look at the whole policy and take a business like interpretation.