In Trustees Executors Limited v QBE Insurance (International) Limited (HC Auckland, CIV 2009-404-1165), the High Court was asked to interpret the Securities Exclusion in QBE's policy. This decision is a good example of the High Court applying the plain and ordinary meaning of words and not artificially reading down an exclusion clause.
Trustees Executors Limited (TEL) provided investment administration services and mortgage lending as part of its business. TEL managed the TOWER Mortgage Plus Fund (the Fund).
In 2007, 16 loans made by the Fund were in default. These loans were made outside the approved loan criteria agreed between TOWER and TEL. TEL agreed with TOWER that it would make good any losses by investors as a result of the unauthorised lending.
TEL had a Professional Indemnity Policy (Policy) with QBE. TEL made a claim against this Policy for the settlement sums paid or to be paid to TOWER. QBE said that the Policy did not cover this liability because of the Securities Exclusion in the Policy.
The Securities Exclusion provided that there was no cover for: 'any Claim or Claims arising from or contributed to by depreciation (or failure to appreciate) in value of any investments, including but not limited to, property, shares, securities, commodities, currencies, options and futures or derivative transactions, or as a result of any actual or alleged misrepresentation, advice, guarantee or warranty provided by or on behalf of the insured as to the performance or characteristics of any such investments.'
TEL sought a declaratory judgment that the Securities Exclusion did not apply to the facts of this case.
The dispute was primarily about the meaning of the word 'depreciation' (or failure to appreciate) in the exclusion clause.
TEL said that this phrase refers only to a loss of an investment caused by market fluctuations or as a result of a mixture of market fluctuations and negligence by the insured. QBE said the relevant words cover any loss in the value of investments including any loss arising from the negligence or contractual breach of the insured whether together with, or independent of, a loss caused by market fluctuation.
In its interpretation, the High Court noted that the words of a contract should have their ordinary meaning, unless the context clearly requires otherwise. The High Court also noted that in relation to exclusion clauses:
- The onus of establishing that an exclusion clause applies is on the insurer.
- Exclusion clauses should be narrowly construed.
- Ambiguities are generally to be construed against the insurer if they have drafted the Policy.
The High Court was satisfied that:
- The ordinary meaning of 'depreciation' is a loss of, or diminution in, value.
- There is nothing in the context of the Securities Exclusion in which the word appears or in the insurance contract itself or in commercial common sense which requires a different meaning.
- The word 'depreciation' (or failing to appreciate) does not have any special meaning in an insurance contract or in the context of the Policy.
- Applying the technical accounting definition of depreciation was inappropriate.
There was nothing unusual about a policy like this that covers all of the insured's (TEL's) business, not just the lending activity, and for the Policy to exclude indemnity for loss of value of investments, however caused. As the mortgage lending activity was only a small proportion of TEL's business, the application of the exclusion did not result in the policy lacking business efficacy.
The Securities Exclusion clause applied to exclude TEL's claims.
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