Gordian wrote professional indemnity insurance. One of the
policies written by Gordian was in favour of FAI Insurance. In the
latter part of 1998 FAI was taken over by Winterthur, and FAI
negotiated a run-off policy with Gordian, under which Gordian would
for a period of seven years indemnify FAI for all claims arising
out of wrongful acts committed before 31 May 1999.
The run-off policy was entered into on 23 December 1998 and
attached on 1 January 2000. Up to December 1998 Gordian was
reinsured under an excess of loss treaty subscribed to by Westport.
In the renewal negotiations in December 1998 Gordian indicated that
it had written policies for two or three years and sought the
reinsurers' approval to include in the renewed treaty capacity
to write multi-year contracts. Westport said that it would do so
and that "up to three years is acceptable". Westport then
renewed the reinsurance treaty with Gordian, and this applied to
claims made on policies attaching from 1 January 1999 to 3 March
The Gordian-Westport treaty contained an arbitration clause
under which disputes were to be determined by arbitration in NSW.
Claims were made against Gordian under the FAI run-off treaty and
these were notified to Westport. At this point Westport became
aware of the seven-year FAI insurance, and it contended that it
faced liability only under policies which ran for a maximum of
three years. In fact, all but one of the claims made under the FAI
insurance fell within three years from the date of the policy, but
Westport nevertheless denied liability for all claims under the FAI
insurance on the ground that the treaty did not apply to any
underlying policy capable of lasting longer than three years.
The arbitrators held that the FAI insurance fell outside the
treaty but that the effect of section 18B of the Insurance Act 1902
was to allow Gordian to recover for any claims falling within three
years, on the basis that its breach of the treaty had not caused
Westport any loss. The High Court by a majority overturned the
award, holding that the arbitrators had not given full reasons so
that there was manifest error on the face of the award and there
was also error of law in applying section 18B to a case where there
was no coverage. Heydon J, dissenting, upheld the award but on the
basis that the arbitrators had erred in holding that the treaty did
not include the FAI insurance in the first place.
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Contractors and principals should ensure they have appropriate insurance coverage instead of relying on indemnity clauses.
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