The leading authority on the application of section 11 of the Insurance Law Reform Act 1977 is New Zealand Insurance Co Limited v Harris1. A recent High Court decision applies an interesting approach to the application of the section.
In Harris, the Court of Appeal said section 11 contemplates a two stage test:
1 Was the exclusion so defined because 'the happening of such events or circumstances was in the view of the insurer likely to increase the risk of loss occurring'?
2 Was the loss caused by or contributed to by the happening of these events or circumstances?
If the answer to both questions is 'yes', the exclusion can be applied to exclude the claim.
In the recent High Court decision of Hall v FP North2, Associate Judge Abbott considered this two stage test in the light of an exclusion and an endorsement under a professional indemnity policy.
FP North recommended an investment portfolio to the claimants. The claimants lost their money in the investments because all the companies involved in the portfolio went into receivership or the creditors agreed to moratoriums.
FP North held a professional indemnity policy with QBE. As FP North was insolvent, the claimants sought leave to bring an action directly against QBE. The claimants said that QBE was liable to indemnify FP North in respect of the claim under its professional indemnity policy.
QBE said that the claimants' claims were excluded by two terms of the policy:
- An insolvency exclusion, excluding indemnity for 'claims relating directly or indirectly, attributable to or in consequence of the insolvency of any financial institution or fund manager', and
- An investment adviser's endorsement, excluding claims 'alleging, arising out of, based upon...depreciation, or failure to appreciate in value, of any investments...'
Associate Judge Abbott looked into the first limb of the Harris two stage test and found that section 11 did not apply to the insolvency exclusion or the investment adviser's endorsement because:
1 Neither the exclusion nor the endorsement defined events or circumstances that were likely to increase the risk of liability arising in the first place. The insolvency of a financial institution and the depreciation in value of investments were not matters which were likely to increase the risk of FP North's liability. They were only relevant to the measure of loss that resulted. They did not increase the risk that FP North would act in a way that increased its risk of liability to the claimants.
2 The exclusion and endorsement defined the scope of cover under the policy in the first place rather than events or circumstances which affected a liability that was otherwise covered.
For completeness, Associate Judge Abbott then looked into the second limb of the Harris two stage test. He found that even if the first limb did apply, section 11 did not save FP North's claim because the alleged liability was caused or contributed to by the insolvency or depreciation of the investments.
The decision walks a fine line between a term of a policy that defines the scope of cover in the first place, and one that applies a limitation or exclusion within that cover. Where the dividing line between these two is is unclear.
1  1 NZLR 10.
2 21/05/09, Associate Judge Abbott, HC New Plymouth, CIV-2008-443-324.
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