Worldwide: Claims Made And Notified Under D&O Insurance Policy: Definition Of Class Of Business In A Reinsurance Treaty Is Not An ´Exclusion´ Or ´Limitation´ – Arbitral Award Overturned For Manifest Error Of Law

Last Updated: 20 April 2009
Article by Michael Mitchell

Westport Insurance Corporation & Ors v Gordian Runoff Limited [2009] NSWSC 245

In brief

Certain reinsurance treaties covered D&O policies with a duration of up to three years. The cedant sought indemnity under the treaties for certain claims made and notified within three years of the inception of the policy, even though the term of the policy was seven years. The cedant relied on section 18B(1) of the Insurance Act 1902 (NSW). The cedant succeeded before arbitrators but the award has been overturned by Einstein J on appeal.


In late 1998, the directors of FAI Insurance Limited negotiated a 7-year D&O liability run-off cover ("the FAI Policy") with the claimant ("Gordian"). The FAI policy incepted on 31 May 1999 and was to expire on 31 May 2006.

Gordian was the cedant to excess-of-loss reinsurance treaties. In December 1998 it negotiated an extension of this cover for policies in excess of 12 months. In April 1999, Gordian's broker confirmed that "your treaties provide reinsurance to cover original policy periods of up to three years"1.

Gordian received a number of claims under the FAI policy within 3 years of the inception of the policy. It sought indemnity for these claims under its reinsurance treaties. The respondents ("the reinsurers") denied indemnity as the FAI policy was for a term in excess of three years.

Gordian took its claim to arbitration2, praying in aid section 18B(1) of the Insurance Act 1902 (NSW). Section 18B(1) is set out in full at the end of this article, but essentially provides that an insurer cannot rely on a clause in the policy that limits or excludes the insurer's liability based on the happening of an event, where there is no connection between that event and the particular loss which is the subject of claim.3

The arbitrators found for Gordian, holding that claims on the FAI policy which were made and notified within 3 years of its inception were covered under the reinsurance treaties. The reinsurers appealed to a single judge of the Supreme Court of NSW.4

The Appeal

Einstein J set aside the arbitral award on the grounds that it displayed a "manifest error of law", in that the arbitrators incorrectly construed an agreement to extend cover for D&O policies to include those issued for up to three years as a "limitation" or "exclusion". He agreed with the reinsurers that the arbitrators' reasoning had the effect of inverting the obvious purpose of section 18B(1) and producing an unreasonable result.

Einstein J held that the effect of the parties' agreement was that the reinsurance treaty did not cover the FAI policy in the first place. As a consequence, the reinsurers were not contractually bound to indemnify Gordian in respect of any claims arising under the FAI policy. Although as a matter of semantics, the fact that the treaties did not cover policies in excess of three years could be characterised as an "exclusion" or "limitation", it would be a manifest error of law to do so, for a number of reasons, including:

  1. If the arbitrators' reasoning was correct, then the reinsurers would be bound to provide cover to Gordian for any D&O policy, of any length, so long as the claims for which Gordian sought indemnity were made and notified in the first three years of the policy. The reinsurers would be uncertain as to the extent of their exposure under the treaty.
  2. Conversely, Gordian would require separate reinsurance cover for all D & O policies issued by it where claims could be made and notified after the first three years.
  3. Different claims under the one policy might or might not fall within the treaty, which would contravene the pervasive principle that policies, not claims, are ceded to a contract of reinsurance.
  4. Proper principles of construction led to the conclusion:

"The grammatical, as well as the natural, sense of Section 18B(1), read as a whole, is that it is concerned with policy exclusions or limitations, which are triggered by a particular event or circumstance, where the loss claimed is causally unrelated to that event or circumstance. The section could not be concerned with the underlying scope of cover. That is because the scope of cover does not depend on the happening of an event or the occurrence of a circumstance. Nor is the scope of cover "triggered" by anything. It is qualitatively different from a policy exclusion or limitation which cuts back cover when triggered by the happening of an event or the existence of a circumstance.... The definition of cover was an exercise in inclusion."5

In defending the appeal, Gordian attempted to rely on section 22 of the Commercial Arbitration Act 1984 (NSW), which in turn refers to Article 33(2) of the UNCITRAL Arbitration Rules. Einstein J noted various authorities in relation to the latitude given to arbitrators (referring in particular to Handbook of Arbitration Practice, Bernstein, Sweet & Maxwell, 3rd Edition 1998, The Law of Reinsurance, O'Neill & Woloniecki, Sweet & Maxwell 2nd Edition, 2004, and remarks of Lord Denning MR in Eagle Star v Yuval [1978] 1 Lloyds Law Reports 357 at 362). However, Einstein J held in all the circumstances that "nothing in the arbitral tribunals powers to make a determination according to law or as 'amiable compositeur or ex aequo et bono' could or did permit the making of the fundamental error exposed below. Most particularly the approach taken by the arbitrators went outside the giving of a binding decision which could reflect the legitimate expectations of the parties at the time of entering into the contract".6

Section 18B(1) of the Insurance Act 1902 (NSW):

The terms of the section are as follows:

"Limitation on exclusion clauses

  1. Where by or under the provisions of a contract of insurance entered into, reinstated or renewed after the commencement of this section:
  1. the circumstances in which the insurer is bound to indemnify the insured are so defined as to exclude or limit the liability of the insurer to indemnify the insured on the happening of particular events or on the existence of particular circumstances, and
  2. the liability of the insurer has been so defined because the happening of those events or the existence of those circumstances was in the view of the insurer likely to increase the risk of loss occurring,

the insured shall not be disentitled to be indemnified by the insurer by reason only of those provisions of the contract of insurance if, on the balance of probability, the loss in respect of which the insured seeks to be indemnified was not caused or contributed to by the happening of those events or the existence of those circumstances, unless in all the circumstances it is not reasonable for the insurer to be bound to indemnify the insured."


1 The terms of the treaties were written over three layers with different retentions, being $10M xs $10M, $5M xs $5M and $3M xs $2M, however nothing turned on this.

2 Heard by a panel of three arbitrators under the Commercial Arbitration Act 1984 NSW (applying the UNCITRAL Arbitration Rules

3 The Insurance Act 1902 (NSW) applies to contracts of reinsurance but this was the first time that the application of section 18B(1) to reinsurance had been judicially considered. Note that the Insurance Contracts Act 1984 (Cth) does not apply to contracts of reinsurance (section 9(1)(a)), and therefore allows the relevant state insurance legislation to apply.

4 Appeals against decisions of commercial arbitrators on a point of law are permitted by section 38 of the Commercial Arbitration Act 1984 (NSW). However, it is difficult to succeed in such an appeal. In the spirit of comity the courts recognise that the policy of the Act is " promote the finality of arbitral awards even at the price of denying a party its usual entitlement to the determination fof the dispute by a court of law" Natoli v Walker (1994) 217 ALR 201 at [203] per Kirby P and see the Australian and international authorities cited therein.

5 Judgment at paras 92-93

6 Judgment at para 74

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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