The NSW Supreme Court has confirmed that contracts of
reinsurance are subject to the beneficial operation of section 18B
of the NSW Insurance Act 1902 - and that exclusions and limitations
have a precise meaning separate to the scope of cover (Westport
Insurance Corporation v Gordian Runoff Limited  NSWSC
The policy, the reinsurance treaties, and the arbitrators
Gordian Runoff wrote a Directors & Officers (D&O)
liability run off policy for FAI. Westport then wrote excess of
loss reinsurance treaties over three layers for Gordian Runoff.
Gordian Runoff asked Westport to expand the reinsurance cover to
include D&O policies written for up to three years.
So far, so good.
A dispute then arose, so the reinsured and reinsurer went to
arbitration. A key issue in the arbitration was the effect of
section 18B of the Insurance Act.
According to the NSW Government when it was introduced, section
18B was intended to allow a court to permit an insured person to
remain indemnified in the face of clause in an insurance contract
that specifically excludes or limits the liability of the insurer,
where there is no connection between the loss and the event or
circumstances triggering an exclusion or limitation.
The arbitrators considered that the agreement made at Gordian
Runoff's request to extend cover for D&O policies to
include those issued for up to three years was a
"limitation" or "exclusion" of others, and that
triggered section 18B.
And why the arbitrators were wrong
In effect, the arbitrators' view meant that the three-year
time period in the reinsurance treaties was irrelevant - the
reinsurers were bound to provide cover to Gordian for any D&O
policy, of any length, so long as the claim for which Gordian
Runoff sought indemnity was made and notified in the first three
years of the policy.
This would have the effect of making policies outside the agreed
class of business covered by the reinsurance treaties, said the NSW
Supreme Court, and that could not be right.
The fundamental error made by the arbitrators was that they
conflated the scope of cover with the exclusions or
The parties defined the agreed scope of cover - D&O policies
with periods of insurance up to three years. As the Court said,
"The definition of cover was an exercise in inclusion... A
scope of cover for a reinsurance treaty, defined by reference to
the period of underlying policies to be issued by the reinsured, is
no different to a scope of cover defined by any other
An exclusion or limitation is something that only becomes an
issue once the class of business has been determined. It explains
"the circumstances where, although a policy issued by the
insurer is within the class of business of the reinsurance treaty,
the happening of a particular events or the existence of a
particular circumstance has the effect of excluding or limiting the
reinsurer's obligation to indemnify the insurer for any claims
arising under that policy."
Implications for insureds and reinsurers
This is the latest case tackling the application of the NSW
Insurance Act to reinsurance and arbitration agreements (starting
with the decision in HIH v Wallace, which we looked at
It's clear that reinsurers and reinsured alike will need to
take the Insurance Act into consideration in their dealings in New
The decision is also a timely reminder of the distinction
between the scope of cover on the one hand and exclusions and
limitations on the other, and that courts will apply that
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The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
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