Quintano v B W Rose Pty Limited  NSWSC 793
The NSW Supreme Court upheld an insurer's denial of an insurance broker's claim for indemnity for defence costs giving a relatively expansive construction to the relevant policy exclusion clause.
The plaintiff sued for traumatic brain damage suffered when he was shot in the head in a nightclub operated by the first defendant (BWR).
BWR sought indemnity or contribution from its broker. The broker had arranged a liability policy for BWR via another intermediary with an off-shore insurer which was later wound up, rendering BWR practically uninsured for the plaintiff's claim. In the meantime, the intermediary had also ceased to operate. BWR alleged that the insurance had been negligently placed with an unregistered overseas insurer, and that the broker had failed to advise BWR of the relevant risks. Although BWR's loss was ultimately attributable to the off-shore insurer's insolvency, its claim against the broker did not explicitly refer to it.
In turn, the broker claimed against its professional indemnity insurers. The insurers declined indemnity in reliance upon an exclusion clause in the policy excluding any claim:
- the insolvency of any insurer or reinsurer or
- any breach of the Assured's duty to advise on the suitability ..... of any insurer or reinsurer utilised' (emphasis added).
BWR's cross-claim against the broker was eventually discontinued following the liquidation of BWR prior to trial. The broker therefore did not incur any liability on BWR's cross-claim.
However the broker maintained the crossclaim against the underwriters seeking to recover defence costs the broker had incurred before the discontinuance of BWR's claim against it.
The broker submitted that the exclusion could operate only if the insolvency of the insurer or the failure to advise on the suitability of the insurer was the proximate cause of the claim. It submitted that was not how the claim against it was framed.
The Court held that the exclusions applied. The Court held that a claim can 'arise from' another matter if the matter is one of various underlying facts which, if they exist, together justify the claim. The Court held further that, where the policy excluded cover for claims arising from a specified matter, it was not necessary on the proper construction of the subject policy exclusion for that matter to be proven, and it was sufficient that the existence of that matter was asserted, expressly or implicitly, by the claim.
The Court considered each limb of the clause.
Insolvency exclusion – whether claim arose from insolvency
The Court distinguished the term "arising from" from the phrase "caused by", holding that the former requires some causal connection between the claim and the specified mater, but that the requisite nexus between the two is satisfied by a less proximate relationship than the former.
It was held that a claim will "arise from" a matter if it originates in, springs from, or has its foundation in that matter, so that the matter is one of the underlying facts that, if they exist, together justify the claim. The Court likened a cause of action arising from underlying facts, proof of which found the cause of action, with a claim arising from underlying facts that, if established, justify the claim.
The Court applied the long-standing principle that the form of a claim is not determinative. It held the claim against the broker originated in, sprang from, or had its foundation in, the off-shore insurer's insolvency and as such the claim arose from the insolvency and the relevant exclusion clause operated to exclude the claim from cover.
Suitability exclusion – whether claim arose from breach of duty to advise on suitability
In light of the Court's findings, it was not necessary that he consider whether the second limb of the exclusion applied, namely whether the broker was in breach of its duty to advise on the suitability of the offshore insurer. The Court nevertheless considered the issue. It said that the claim would be excluded under this limb.
The broker submitted that its breach of duty would never be objectively established as BWR's claim against it had been discontinued. It submitted that a claim cannot arise from a matter if the matter does not objectively exist. Accordingly, it argued the underwriters could not prove that the claim was within the exclusion. These submissions were grounded on other provisions in the policy which had been drafted to arguably distinguish between an actual and an alleged state of affairs. The Court acknowledged that there was some force to this submission, but held that no such distinction was made in the drafting of the subject exclusion.
The Court looked at the structure and purpose of the policy, and the exclusion as a whole. The policy covered liability, and defence costs, for claims in respect of civil liability 'incurred or alleged'. Having also regard to the Court's construction of the term "arising from", it stated it was not necessary that the matter alleged objectively exist. It was enough that its existence is asserted, expressly or implicitly, by the claim. It was sufficient that an allegation of breach of duty was made to exclude cover for the claim. The exclusion was not dependent upon the breach being established.
The question of whether objective proof of matters referred to in a policy exclusion is required often involves difficult questions of construction. This decision highlights the importance of the purpose of a policy of insurance as a whole, in construing the scope of what risks are covered.
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.