The global financial crisis has led to many claims being made on
financial advisers by investors who have suffered losses as a
result of a decrease in the value of their investments. This has in
turn led many financial advisers to seek indemnity under their
insurance policies for the investors' claims.
Trustees Executors Ltd (TEL) provided
investment administration services and mortgage lending. TEL is
trustee and manager of Tower Mortgage Plus Fund
(Tower) which primarily invests in mortgages. In
2007, 16 loans involving $33 million made by TEL on behalf of Tower
fell into arrears. The loans had been made by TEL outside the
approved loan criteria agreed to by Tower. In response to a claim
by Tower, TEL agreed to make good any losses which Tower incurred
as a result of the unauthorised lending. By mid-February 2008, TEL
had settled Tower's claim with its insurer's
consent (QBE) (subject to a reservation of
Subsequently TEL formally sought indemnity from QBE. While the
parties accepted that indemnity was prima facie available under the
operative clause of the policy, QBE denied indemnity on the basis
that the Securities Exclusion clause applied to exclude liability
for Tower's claim.
The Securities Exclusion provided:
"Notwithstanding anything to the
contrary stated in the Policy or endorsed thereon, it is hereby
declared and agreed that this Policy does not provide indemnity
against any Claim or Claims arising from or contributed to by
depreciation (or failure to appreciate) in value of any
investments, including but not limited to, property, shares,
securities, commodities, currencies, options and futures or
derivative transactions, or as a result of any actual or alleged
misrepresentation, advice guarantee or warranty provided by or on
behalf of the insured as to the performance or characteristics of
any such investments."
TEL sought a declaration from the NZ High Court that:
the words "depreciation (or failure to appreciate)"
in the Securities Exclusion refer only to a loss of an investment
caused by market fluctuations or as a result of a mixture of market
fluctuations and negligence by the insured
in the alternative, the exclusion clause did not apply because
Tower's claim was caused by TEL's negligence and
not by any fall in value of investments, or
in the further alternative, the Securities Exclusion did not
cover losses from unauthorised investments.
QBE asserted that the phrase "depreciation (or failure to
appreciate)" covers any loss in the value of investments.
The Court accepted this argument and found that the ordinary
meaning of the words should be applied and it was not
"inherently illogical or commercially absurd" to do so.
The Court also found that there was no basis in the policy
requiring a "special" meaning.
It is worth noting that the Court did consider the terms of the
policy in the context of the Insured's business.
Importantly, the Insured's mortgage lending activities (to
which the exclusion clause could apply) only made up a "modest
part of the plaintiff's business". Therefore, by
defining the words broadly, the Court did not render the policy
The Court found that while the cause of the loss of value of the
mortgages was the negligent actions of TEL, the demand for
compensation by Tower arose because of the loss of value. Support
for this view was found in the fact that there had been other
negligent unauthorised lending by TEL that Tower could not claim
for because no loss had been suffered.
In contrast to the decisions in Darlington Futures Ltd v
Delco Australia Pty Ltd  and Done v Financial Wisdom
Ltd , the NZ High Court found that there was nothing in
the language in QBE's policy that limited the meaning of
"investments" to authorised investments only.
In determining the above, the Court also noted several general
principles relating to the interpretation of exclusion clauses in
the onus of establishing that an exclusion clause applies is on
exclusion clauses should be narrowly construed, and
ambiguities are generally to be construed against the insurer
if they have drafted the Policy (contra proferentum).
The judgement of TEL v QBE supports the principle of
common usage interpretation of insurance policies even when the
result goes against an insured. Ironically, the result of the NZ
High Court's determination in this case was that, while it
held that exclusion clauses should be narrowly construed applying
the common meaning of "depreciation" to the Securities
Exclusion, it resulted in giving a wide application of the
Trustees Executors Limited v QBE Insurance (International)
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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