Australia: Beware the bold: interpreting defined terms in insurance contract

Insurance Quarterly Newsletter

Contractual interpretation – insurance contracts – defined terms – bolded terms defined to have special meaning – where term appears unbolded, it is to be interpreted in accordance with natural and ordinary meaning In the recent decision of Cruise Oz Pty Ltd v AAI Ltd,1Justice Carmody of the Supreme Court of Queensland considered whether an insurance agreement covered flood damage sustained at a trade show. In resolving this dispute, His Honour considered:

  1. whether showgrounds constitute "your premises" for the purposes of the exclusion clause under section 3 of the agreement; and
  2. the process for determining the "most favourable clause" where a "Two Section Exclusion Clause" in the agreement prescribed that, where two or more insuring clauses might respond to the relevant claim, the most favourable clause will apply.

This decision provides a cautionary illustration that, where an insurance agreement defines bold terms to have a specific or technical meaning, it will be difficult to establish that unbolded terms should not be interpreted in accordance with their natural and ordinary meaning.

Background facts

Cruise Oz Pty Ltd (the applicant) and Vero Insurance (the respondent), entered into an insurance agreement on 12 June 2013. On 26 and 27 March 2014 the applicant exhibited 15 caravans at the Mudgeeraba Showgrounds for a trade show. On 27 March, part of the showgrounds were submerged during significant rain causing substantial damage to 3 vehicles, and causing the other 12 to be written off. The respondent in large part, declined the claims under both s 1(A) and s 3 of the agreement. The responded submitted that the claim under s 3 should be rejected on the basis of the definition of "your premises," and because s 1(A) was the more favourable claim under the Two Section Exclusion Clause, s 3 could not apply.

The decision on appeal

The correct meaning of "your premises"

The term "your premises" was defined in the definitional schedule to the policy in broad terms that would extend the exclusion of cover to the vehicles while situated at the showgrounds. However, the interpretative clause of the policy prescribed that all words in bold had the definition prescribed in the definitional schedule. "Your premises" was not bolded in the relevant paragraph of the policy and in the absence of that, Carmody J "inferred that any words which are not in bold do not possess a special defined meaning". He concluded that "your premises" ought be afforded its natural and ordinary meaning which would not extend to the showgrounds: [27].

The respondent argued that the failure to bold "your premises" was a mistake. This argument was rejected by the Court on the basis that there was insufficient evidence there was no unconscionable conduct by the applicant which would justify fundamentally modifying the agreement for a unilateral mistake, and using the natural meaning did not make the agreement uncommercial or inequitable: [28]-[29].

The Court held that the natural and ordinary meaning of "your premises" includes at least a stable, durable and continuous occupation of a building or part of a building that houses a business. Therefore the trade show was not within the natural and ordinary meaning of "your premises." The respondent was unsuccessful in arguing that such an interpretation was uncommercial, or that "your premises" should be interpreted in the same way in both s 1(A) and s 3, or that premises could be construed to include a trade show: [35]-[38].

The "Two Section Exclusion Clause"

The most favourable clause for an insurance claim should be determined with reference to the nature and circumstances of the claim: [46]-47]. A clause that allows some recovery is much more favourable than a clause that permits a large recovery but is excluded in the circumstances by an exclusion clause: [47]. Section 1(A) could not be considered the more favourable clause as the flood damage exclusion clause made it unlikely to succeed. Moreover, the two section exclusion clause is only relevant where two sections apply, and in this circumstance only s 3 applies: [48].

The Court also held that the part payments made under s 1(A) do not preclude the applicant from claiming under the more favourable clause of s 3: [52].

Implications for the interpretation of insurance contracts

In an insurance document where only bolded terms are defined to have a specific or technical meaning, it will be difficult to establish that unbolded terms should not be given their natural and ordinary meaning. Evidence of the insurer's subjective intention to the contrary may not be sufficient to show a common intention of the parties.

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