Australia: Courts likely to take strict approach to excess insurance policy wordings

In brief - Excess policy not triggered in Hancock v Fieldhouse

In the case Hancock Family Memorial Foundation Ltd v Fieldhouse (No. 5) [2013] WASC 121 (Hancock), the Supreme Court of WA held that based on the specific policy wording, an excess policy is not triggered in circumstances where the underlying insurer has not paid out, admitted liability or had a court determine the underlying insurer's liability under its policy.

Hancock consistent with recent decision in USA

The position taken in Hancock is consistent with that of the United States Court of Appeals for the Second Circuit, as discussed in Ali v Federal Insurance Company, 2013 WL 2396046 ( 2d Cir. June 4, 2013) (Ali) where the Court held that excess policies could not be triggered because insolvent insurers sitting below would not - and obviously could not - pay.

These cases suggest that courts will employ a strict interpretation of wordings in excess policies even though it may produce unusual results for the insured.

Foundation brings proceedings against solicitor for negligent misstatement

Mr Langley Hancock controlled Hancock Prospecting Pty Ltd and wished to sell his share in Hancock Prospecting to the plaintiff, Hancock Family Memorial Foundation Ltd (the Foundation). Mr Hancock sold his share in Hancock Prospecting to the Foundation. The Foundation thereafter alleged that the price it paid for his share was far in excess of its actual worth.

Mr Fieldhouse was a solicitor who provided advice to both Mr Hancock and the Foundation regarding the sale of the share. The Foundation brought proceedings alleging negligent misstatement in the provision of advice with respect to its purchase of the share against Mr Fieldhouse, who later passed away.

LawCover grants indemnity but does not pay out limit of policy

At that time, the Legal Profession Act 1987 (NSW) required Mr Fieldhouse to have professional indemnity insurance. That statute established the Solicitors Mutual Indemnity Fund (Fund) which would pay claims like the one made against Mr Fieldhouse. The Fund worked in conjunction with a master insurance policy (Master Policy) taken out by the Law Society of NSW for the benefit of all its members.

The Master Policy would pay claims of up to $1.1 million, but only where the aggregate amount of claims for the year for all solicitors exceeded $58 million. Until the aggregate was reached (and it was clear that it did not reach $58 million in that year), the Master Policy would not respond. In that event, the Fund would respond. LawCover, the company administering the Fund, had granted indemnity but had not paid out the limit of its policy, as it had chosen to defend Mr Fieldhouse.

Foundation commences proceedings against excess insurer

In addition to the mandatory cover above, Mr Fieldhouse had taken out excess insurance with a Lloyd's syndicate which was intended to respond as set out in the insuring clause:

Underwriters shall only be liable in respect of the indemnity herein given after the Underlying Insurers have paid or have admitted liability or have been held liable to pay the full amount of their indemnity ...

The Foundation commenced proceedings against the Lloyd's syndicate pursuant to section 51(1) of the Insurance Contracts Act 1984 (Cth), which allows a third party to claim directly on an insurer where the insured is deceased.

It is in the above circumstances that the court in Hancock was asked to determine whether the Lloyd's excess policy responded to the Foundation's claim against Mr Fieldhouse absent payment of the full amount of the indemnity under either the Fund or Master Policy.

Court determines that Foundation not able to recover from excess insurer

The court held, based on the wording of the insuring clause, that the Lloyd's excess policy would only respond where the Fund and the Master Policy had either:

  • paid the full amount of their indemnity
  • admitted liability to the full amount of their indemnity, or
  • had been held liable to pay the full amount of their indemnity.

Both parties conceded that neither the Fund nor the Master Policy had paid the full amount of their indemnity.

Additionally, the court held that a strict interpretation of "admitted liability" had the effect of meaning "admitted liability to pay the full amount of their indemnity" and that a grant of indemnity by the Fund did not amount to an admission to pay the full amount of its indemnity.

Furthermore, the court found that "held liable to pay" should be construed as meaning "have been determined by a court to be liable". As neither the Fund nor Master Policy were joined to proceedings, there was no determination by the Court that the Fund or Master Policy were liable.

Accordingly, the court held that the Foundation was not able to recover against the Lloyd's syndicate, as the requirements above had not been satisfied.

Excess insurer avoids obligation to pay in Ali v Federal Insurance Company

In a slightly different context, the United States Court of Appeals for the Second Circuit in Ali held that an excess insurer could avoid its obligation to pay under a general liability policy in circumstances where the insurer of an underlying policy became insolvent - based on unique policy wording.

Directors of bankrupt company face legal action and try to access excess insurance

In Ali, the appellants were the former directors and officers of Commodore International Limited, the now-defunct computer maker. Prior to filing for bankruptcy, Commodore purchased a tower of insurance policies designed to protect its directors from liability.

The directors were sued and sought cover from the insurers for the defence costs and liability arising from the suit. However, since the time those policies had been issued, a number of the excess insurers had ceased operations and could not respond.

The directors sought declaratory judgment against Federal Insurance Company, one of the excess insurers which was still solvent, and various other solvent excess insurers in the tower (collectively, the Excess Insurers) for a determination that their policies:

...are triggered once the total amount of [the Directors'] defense and/or indemnity obligations exceeds the limits of any insurance policies underlying their respective policies, regardless of whether such amounts have actually been paid by those underlying insurance companies (emphasis added).

The United States District Court for the Southern District of New York considered the Excess Insurers' policy wordings and held that "coverage does not attach until there is payment of the underlying losses" (emphasis added). The Second Circuit Court of Appeals heard an appeal from that decision and agreed with the District Court.

Excess Insurers had no obligation to pay because underlying insurers had not paid

The express language of the excess policies in Ali state that excess liability coverage "shall attach only after all ... 'Underlying Insurance' has been exhausted by payment of claim(s)" (emphasis added).

Therefore, the court held that in circumstances where the plain language of the insurance contracts specifies that the coverage obligation is not triggered until the payments exceed the limits of the underlying insurance policies, the District Court was correct to deny the declaration sought by the directors, as no payments has been made by the insolvent insurers.

The result was that the excess insurance policies were not triggered and the Excess Insurers had no obligation to pay, despite the amount of the claims made against the directors having exceeded the attachment point of the excess policies.

Narrow interpretation of insuring clause wordings by courts

In both Hancock and Ali, the respective courts took a narrow interpretation of the respective insuring clause wordings. In Hancock, the excess insurer did not have to respond because there had been no payment, admission or determination of the liability of the underlying insurer. Similarly, in Ali, the excess policies could not be triggered because an insolvent insurer sitting below would not - and could not - pay.

In Hancock, the result was that a third party claimant was restrained from recovering under the policy and left with little recourse. Likewise, in Ali, the insured was left in a position without cover simply because an underlying insurer had become insolvent. (The court did not consider whether the insured could have itself paid out the limits of the insolvent underlying insurance polices in order to access the excess policies and neither do we here.)

Insurers and insureds should consider wordings of excess policies carefully

The decisions in Ali and Hancock show that some courts take a strict approach when it comes to interpreting conditions which trigger coverage under excess policies and serve as a warning to both excess insurers and insureds alike. It would be prudent for all parties to consider their excess policy wordings carefully to make sure that there is an understanding as to how the excess policy is triggered.

It is important to note that the decision in Hancock is pending an appeal. Insureds and insurers should be alert to any developments with Hancock as it may impact the liability of excess insurers.

Kemsley Brennan Paul Spackman Jun Zhou
Insurance and reinsurance
Colin Biggers & Paisley

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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