Zhang & Anor v Minox Securities Pty Ltd; Liu & Ord v Minox Securities Pty Ltd & Ors  NSWCA 182 and Ashmere Cove Pty Ltd v Beekink  FCA 564 considered the extent to which exclusion clauses in insurance policies can be relied on, with varied results.
- Courts will give effect to broad exclusion clauses where the language is plain and clear. However, if there is any ambiguity in the exclusion clause, courts will interpret it in favour of the insured.
- Careful consideration should be given to composite policies as to whether exclusions are intended to be operative in relevant circumstances to all insureds regardless of fault.
ZHANG V MINOX
On 7 July 2009, the New South Wales Court of Appeal gave a group of investors (Investors) the green light to pursue claims against Minox Securities (Minox) and its insurer QBE Insurance (Australia) Limited (QBE).
The Investors were given financial advice by an employee of Minox (Mr Chan) about investing in companies in the ill-fated Westpoint Group. The Westpoint investments recommended by Mr Chan were not on Minox's 'Approved Product List' (Approved List). The Westpoint investments later failed and the Investors sustained financial losses.
Both the relevant Westpoint companies and Minox were in the process of being wound-up and accordingly there was little prospect of any recovery for the Investors from them. However, Minox did hold two insurance policies with QBE: a 'Financial Institutions' and a 'Professional Indemnity' policy (the Policies). These Policies were the only assets from which the Investors could potentially recover some of their losses.
Both Policies contained exclusion clauses which if operative, would deny indemnity to Minox and therefore effectively preclude any prospect of recovery for the Investors.
The exclusion clauses
The exclusion clause in the Financial Institutions Policy provided that QBE would not be liable to provide indemnity to the insured where the claim was:
'directly or indirectly based upon, or attributable to, or in consequence of the provision by or on behalf of the Insured of any advice usually provided by a Financial Planner'.
The Professional Indemnity Policy was a composite policy which provided cover to multiple insureds. This exclusion clause provided that there would be no cover to the insured where:
'any financial or investment product that at the time of the actual or alleged act, error or omission occurred is not listed on the Approved Product List of [Minox] ...'
The Investors initially applied to the New South Wales Supreme Court for leave to commence proceedings against QBE to enforce rights under the Policies and for leave to join QBE as a defendant. Justice Barrett dismissed the Investors' application on the basis that they did not have an arguable case that the Policies responded to any liability of Minox. The Investors appealed the decision to the New South Wales Court of Appeal.
The Court of Appeal considered whether the exclusion clauses were effective.
The Court upheld the exclusion clause in the Financial Institutions Policy and noted that its purpose was clearly to deny cumulative cover for the same claims under both Policies.
With regard to the exclusion clause in the Professional Indemnity Policy, the Court noted that Minox issued the Approved List and provided it to Mr Chan. The financial products which Mr Chan recommended to the Investors were not on the Approved List at the relevant time.
The Court of Appeal determined that the exclusion clause clearly applied to Mr Chan and denied him indemnity under the policy, as he had acted outside his authority by recommending products which were not on the Approved List. However, the Court found that the exclusion clause did not apply to Minox as a separate insured as it was an 'innocent' employer who was otherwise insured under the policy. The Court noted that it is common for composite policies to contain exclusion clauses which deny cover to one insured while preserving it for another.
ASHMERE V BEEKINK
On 2 June 2009, Justice Barker of the Federal Court of Australia upheld an exclusion clause and determined that a policy issued by Suncorp Metway Insurance Limited and Employers Reinsurance Corporation (the Insurers) did not respond to a claim being pursued against Knightsbridge Managed Funds Limited (in liq) (KMF).
KMF was the responsible entity for a mortgage scheme which was involved in making loans secured by mortgages over property and other items. In connection with this scheme, Ashmere Cove Pty Ltd (Ashmere) advanced $100,000 (as part of a larger loan) to Fieldmont Holdings Pty Ltd (Fieldmont). Fieldmont made minor repayments to Ashmere but failed to repay the majority of the loan.
Ashmere argued that KMF had improperly induced it to advance the funds to Fieldmont. As KMF was in liquidation, Ashmere sought coverage under KMF's insurance policy (the Policy) in order to maximise its chances of recovery.
The Insurers refused KMF indemnity on the basis of an exclusion clause endorsed on the Policy. This clause excluded indemnity for any claim against KMF:
'directly or indirectly arising out of the non-repayment of any loan which was managed by KMF'.
Ashmere argued that the exclusion clause should be interpreted in the context of the whole Policy and that by denying indemnity under the Policy, the Insurers were rendering the Policy 'illusory'.
The Insurers argued that the endorsements were terms specifically negotiated by the parties to suit their facts and circumstances. They also argued that it was the clear intention of KMF and the Insurers that the Insurers were not to be at risk in relation to unpaid loans.
Justice Barker said that as a matter of general principle, exclusion clauses should be construed consistently with the commercial purpose of the policy and in the context of the policy as a whole. In terms of the specifics of this case, Justice Barker stated that:
- While the cover was more limited than the claimants might have hoped, this did not provide a reason for ignoring the plain and obvious language of the clause.
- The fact the Policy did not respond to the applicant's claim did not mean the cover was 'illusory'.
Justice Barker found that the exclusion clause was effective in excluding any indemnity which might otherwise be available to KMF under the Policy. He also noted that the effect of accepting the claimants' case would be to rewrite the contract of insurance.
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