Australia: Common Meaning Of Term Of Exclusion Clause Prevented Indemnity Being Available

Insurance Update

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 rights).

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 ineffective.

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 [1986] and Done v Financial Wisdom Ltd [2008], 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 insurance policies:

  • the onus of establishing that an exclusion clause applies is on the insurer
  • 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 exclusion clause.

Trustees Executors Limited v QBE Insurance (International) Limited

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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