Exclusions and limitations have a precise meaning separate to the scope of cover, according to the High Court's latest decision on exclusion clauses. The decision in Westport Insurance Corporation v Gordian Runoff Ltd  HCA 37 gives valuable guidance on when exclusions and limitations in insurance policies will – and won't – be allowed to operate via section 18B of the NSW Insurance Act 1902.
What was the policy?
Gordian Runoff wrote a seven-year Directors & Officers (D&O) liability run-off policy for FAI. Westport then wrote excess of loss reinsurance treaties over three layers for Gordian Runoff. Gordian Runoff asked Westport to expand the reinsurance cover to include D&O policies written for up to three years. Did any of the reinsurance treaties cover the FAI policy, which covered claims made and notified to Gordian within an extended period of seven years?
A key issue in the dispute was the effect of section 18B of the Insurance Act 1902 (NSW). Section 18B was intended to allow a court to permit an insured person to remain indemnified in the face of clause in an insurance contract that specifically excludes or limits the liability of the insurer, where there is no connection between the loss and the event or circumstances triggering an exclusion or limitation.
When the dispute went to arbitration, the arbitrators said that the FAI policy was outside the terms of the reinsurance treaties. Nonetheless, the agreement to extend cover for D&O policies to include those issued for up to three years was a "limitation" or "exclusion" of others, and that triggered section 18B.
In effect, this meant that the three-year time period in the reinsurance treaties was irrelevant. So long as the claim for which Gordian Runoff sought indemnity was made and notified in the first three years of the policy, the reinsurers were bound to provide cover to Gordian for any D&O policy, of any length.
How does section 18B operate with limitations and exclusions?
The High Court was given two issues to consider:
- first, what triggers section 18B?
- secondly, what sort of connection is required between the loss and the trigger for the limitation or exclusion?
Section 18B marks off exclusions and limitations from the content of the "contract of insurance". In this case, the FAI policy was outside the terms of the reinsurance treaties. The treaties excluded "policies issued for periods longer than 36 months". There could therefore be no three-year claims within the terms of the reinsurance treaties, because they were made under a policy to which the treaties didn't apply.
The treaties did not exclude or limit the reinsurers' liability to indemnify Gordian by reason of the circumstance that the FAI policy had the seven year period, so that Gordian thereby was disentitled to what otherwise would have been its right to indemnity under the treaties. As a result, section 18B didn't apply, and the reinsurers were off the hook.
As for the connection required, the High Court said it did not have to decide this issue. It did however indicate some support for Justice Allsop's views in the NSW Court of Appeal: "the definition of cover was excluded or limited by reference to the circumstances of underlying policies of insurance with reporting periods of more than 3 years. That limitation was inserted because the circumstance, in the view of reinsurers, was likely to increase the risk. There was a policy of such a description. That policy gave rise to the claims. In that sense the loss can be seen to be caused by the circumstance: the existence of an underlying policy with an extended reporting period."
So what does this mean for insureds?
This continues the High Court's sensible and commercial approach to insurance law. It will be interesting to see how the Court deals with similar remedial provisions, such as section 54 of the Insurance Contracts act, in the future
For treaties of reinsurance, this decision doesn't matter, as the Insurance Regulations 2009 (NSW) now exempt reinsurance contracts from section 18B. But it still is an important one on the nature of exclusions and limitations, both for insureds and insurers.
First, the High Court's decision means that it is harder to use section 18B to get around exclusions and limitations if the contract of insurance doesn't actually cover something in the first place, which was what happened here.
Secondly, it suggests that it will take a hard look at the connection between the loss and the event or circumstances triggering an exclusion or limitation, and could take an expansive view of that connection. As a result, it could be even harder for insureds to use section 18B.