In Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2012] QSC 319, Bank of Queensland (BoQ) and Chartis were parties to a professional services liability insurance contract under which Chartis was obliged to indemnify BoQ for certain losses and defence costs in an action arising from any of a defined list of ‘wrongful acts’.

ASIC and two BoQ customers brought proceedings against BoQ in connection with a number of contracts and mortgages connected with Storm Financial (the ASIC proceedings). BoQ notified Chartis of the proceedings, but Chartis maintained that an exclusion under the contract meant that BoQ was not covered.

BoQ applied for orders that included:

  1. a declaration that Chartis was obliged to indemnify BoQ in respect of any damages, judgment or settlement in respect of the ASIC proceedings; and
  2. a declaration that Chartis was obliged to indemnify BoQ in respect of any defence costs paid or payable in the ASIC proceedings.

Would Chartis be liable to indemnify for damages, judgments or settlements?

Chartis sought to rely on the operation of an exclusion (the lenders’ liability exclusion) under the policy for loss ‘arising out of, based upon or attributable to any actual or alleged loan’. BoQ responded by arguing that any loss would not fall within the lenders’ liability exclusion, and even if the loss did then it would fall within a proviso to the exclusion.

Chartis submitted that, in the circumstances, it would be inappropriate for the court to make a declaration on its liability because the declaration would be based on facts alleged in the ASIC proceedings that neither it nor BoQ accepted as true. As any judgment in those proceedings might not be based upon those facts, a declaration would be neither final nor determinative.

Jackson J referred to Bass v Perpetual Trustee Co Ltd (1999) 198 CLR 334 where the High Court held that a judicial determination should include “a conclusive and final decision based on a concrete and established or agreed situation which aims to quell a controversy. Thus, if a declaration is ‘not based on facts, found or agreed’, it will be ‘purely hypothetical’ and ‘at best … do no more than declare that the law dictates a particular result when certain facts in the material pleadings are established’”. In view of that principle, Jackson J refused to make a declaration on the operation and application of the lenders’ liability exclusion because any such declaration would be hypothetical.

Would Chartis be liable to pay defence costs even where cover was excluded?

A close analysis of several provisions of the contract revealed:

  1. All of the exclusions to Chartis’ liability were expressed to apply to damages, judgments and settlements, but made no reference to defence costs.
  2. One of the exclusions (the wrongdoing exclusion) excluded Chartis’ liability for losses arising from certain ‘wrongdoing’, if such wrongdoing had either been admitted or finally adjudicated.
  3. A clause providing for the advance payment of defence costs (the advance payment clause) required Chartis to advance defence costs to BoQ, unless Chartis denied indemnity in respect of the claim.
  4. However, the advance payment clause also provided that Chartis was not entitled to refuse to advance defence costs merely because it thought that the wrongdoing exclusion applied, unless the wrongdoing had been admitted or finally adjudicated.

Chartis submitted that the combined operation of those provisions tended to imply that it was not liable to indemnify BoQ for defence costs if an exclusion to indemnity applied. If correct, Chartis’ preferred construction would produce the result that it could not initially refuse to advance defence costs by relying on the wrongdoing exclusion, but it would be entitled to do so by relying on any of the other exclusions.

Jackson J largely accepted that submission by concluding that Chartis would not be obliged to pay defence costs where an exclusion applied. There were several reasons for this finding. First, the primary insuring clause was expressed to apply to defence costs. Second, it would be uncommercial for an insurer to be liable for defence costs in respect of a claim not covered under the policy. Third, aside from the absence of any reference to defence costs in the exclusion clauses, the form and substance of the policy did not distinguish between defence costs and other losses. Finally, the advance payment clause was inconsistent with the contrary construction.

Jackson J’s interpretation of the provisions meant that ‘the insurer would be entitled in a proper case to deny indemnity’ for a claim. In that circumstance, Chartis would not be obliged to advance or pay defence costs unless and until its denial of indemnity was determined as being unjustified. As Chartis had indeed denied indemnity, and again relying on the principle in Bass, Jackson J refused to make the declaration sought by BoQ because any such declaration would be hypothetical. A final and conclusive decision could only be made after Chartis’ denial of indemnity was adjudicated.

Conclusions

BoQ v Chartis is an example both of the need to take care in drafting, and of the approach the court will take where such care is not taken and textual inconsistency results. The contractual dispute arose only because the words ‘defence costs’ were not included at the beginning of the exclusion clauses. Jackson J sought to resolve the resulting inconsistency by adopting a ‘business-like interpretation’, examining the commercial circumstances and objectives to which the document related. The resolution of the inconsistency aimed to ‘render the relevant parts of the text all harmonious with one another in the context of the policy as a whole’.