Australia: What sets a contract of insurance apart from other contracts?

Key Points:

Contracts of insurance attract a unique set of principles of interpretation, and are subject to a comprehensive regulatory regime.

Characterising a contract as one of insurance has significant consequences. Among other things, the contract will be subject to a comprehensive regulatory regime, its operation and effect may be altered by legislation such as the Insurance Contracts Act 1984 (Cth), the insurer under the contract must be authorised to enter into it and, in the event of a dispute over the terms of the contract, it will be interpreted in accordance with a set of principles which may not apply to other contracts.

Despite these consequences, the difference between a contract of insurance and other contracts of indemnity is not always apparent on the face of the document itself. Sometimes you need to consider the circumstances in which the contract is formed. Even then, there may still be some uncertainty as to the proper characterisation of the contract.

In Todd v Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15, the Full Court of the Federal Court of Australia considered these issues in the context of an insurer arguing that, in the case of any doubt as to the proper construction of an insuring clause of a policy of indemnity insurance, the doubt should be resolved in favour of the insurers. This principle was said to rest on various High Court authorities in the context of contracts of indemnity.1 The insurer argued that it similarly ought to apply to a contract of indemnity insurance.

The Court held that the principle did not apply to contracts of insurance. In doing so, the Court restated some of the factors which help to distinguish contracts of insurance from similar types of contracts. They also made clear the reasons why contracts of insurance attract a unique set of principles of interpretation.

What is a contract of insurance?

Many contracts of insurance are, in essence, promises by the insurer to indemnify the insured against specified types of loss, damage or liability. Similarly, many commercial contracts will include a promise by one party to indemnify the other against specified types of loss, damage or liability. What distinguishes a contract of insurance from others is a combination of factors. The relevance and weight to be given to each factor depends upon the nature of the contract and the particular circumstances in which it is entered.

The starting point in characterising a contract of insurance is typically the century-old definition given by Justice Channell in Prudential Insurance Company v Commissioners of Inland Revenue [1904] 2 KB 658 at 663-664. That definition requires that for monetary consideration (the premium), a person (the insurer) agrees to pay to the other (the insured) a sum of money or some benefit upon the occurrence of one or more specified events. As a general rule, there are very few contracts of insurance that fall outside of that definition. However, that definition also captures a number of other types of contracts which are not properly characterised as insurance.

In Todd, Chief Justice Allsop and Justice Gleeson said that it is then necessary to elaborate upon each of the elements in this definition, being the premium, promise to pay, sum of money or other benefit, upon a specified event. However, this should not be done by way of further definition. It should be done by reference to the purpose and character of the arrangement to share the risk of, or spread the loss from, unhoped-for, but possible, contingencies that may or may not happen. This inquiry helps distinguish between:

  • a contract of guarantee or an indemnity, each of which has the object or purpose of making good the financial position of a creditor of someone other than the guarantor or indemnifier; and
  • a contract of insurance, which has the object or purpose of sharing the risk of, or spreading loss from, a contingency.

Matters relevant to the characterisation of a contract of insurance will include:

  • how the contract came to be effected;
  • the nature of the contract; and
  • how the contract is to be performed.

Insurers are in the business of providing indemnities – they provide indemnities for reward, calculated in part by reference to the risk assessment of whether the relevant contingent event will occur. An indemnity which is provided in exchange for a fee that is commensurate with the risk of the indemnity is more likely to be characterised as insurance. This is even more so if the indemnifier is in the business of providing such indemnities.

Different factors become relevant when characterising contracts of insurance in different circumstances. For instance, in distinguishing a contract of insurance from a warranty given in connection with goods or services, the extent to which the indemnifier has control over whether or not a contingency may eventuate is more likely to be a relevant factor. On the other hand, in distinguishing a contract of insurance from an investment annuity, the extent to which payments will continue to be made regardless of any contingency is more likely to be a relevant factor. The factors to take into account in characterising a contract as insurance will largely depend upon the particular circumstances in which the contract is made.

Why is it important to correctly identify a contract of insurance?

The most important reason to identify correctly when you are entering into or dealing with a contract of insurance is the regulatory consequences that follow. Carrying on insurance business in Australia without the required authorisations can expose an organisation to significant penalties and reputational damage.

The risk of inadvertently carrying on insurance business frequently arises in connection with contracts which closely resemble contracts of insurance, eg. certain extended warranty products. Reducing this risk requires that careful consideration be given to the regulatory regime that applies to contracts of insurance in both the preparation of documents and the sales process.

In the Todd case, there was a different reason why the distinction was important.

The principles to apply in the interpretation and construction of a contract of insurance are well known. The decision in Todd highlighted the fact that those principles are not always the same as other types of contracts.

In Todd, Chief Justice Allsop and Justice Gleeson stated that the rule of strict construction applies to contracts of suretyship by which one person (the surety) agrees to answer for some liability of another to a third person. The key distinction when compared to insurance is that the rule applies to uncompensated (but not compensated) sureties. The position of an insurer in the business of providing indemnities for reward is vastly different to an uncompensated surety. Accordingly, the principle has no application to a contract of insurance, even if that contract includes an indemnity from the insurer.

The effect is that, where there is any doubt as to the proper construction of an insuring clause of a policy of indemnity insurance, that doubt will not always be resolved in favour of the insurer.


1See, for example, Ankar Proprietary Limited v National Westminster Finance (Australia) Limited [1987] HCA 15 and, most recently, Bofinger v Kingsway Group Limited [2009] HCA 44.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.