Can a Side C claim change its spots? The Federal Court doesn’t think so…

The Federal Court of Australia (the FCA) recently found that when a Side C claim is made, the Side C retention applies, regardless of whether any other claims said to arise from the same facts and circumstances are made first in time.

In issue

• The Federal Court of Australia (the Court) recently handed down a decision, considering the operation of an aggregation clause in two policies, a Directors & Officers (D&O) policy and a Public Offering of Securities Insurance (POSI) policy (together, the policies), that stipulated different retentions for Side A, B and C covered risks.
• The central issue was whether a $2.5 million retention applicable for a first in time Side B 'Person Inquiry' claim (Side B claim), prevailed over a later notified Side C 'Securities' claim with a retention of $10 million (Side C claim), in circumstances where the two claims arose out of the same or logically connected facts and circumstances, such that they may be aggregated under clause 5.5 ‘related claims’ of the policies as 'a single' claim for the purpose of only one retention applying.

The background

In November 2020, ASIC initiated an investigation alleging that Nuix and its related company, Nuix SaleCo Limited (Nuix) made misleading or deceptive statements when reaffirming its prospectus for 2021 financial year forecasts in announcements to the ASX on 26 February 2021 and 8 March 2021 (ASIC investigation).

On or about June and July 2021, Nuix notified its insurer Berkshire Hathway (Berkshire) of certain circumstances that may reasonably be expected to give rise to a Side B claim relating to the ASIC investigation. In late 2021 and early 2022, three class actions were commenced against Nuix in the Supreme Court of Victoria (Securities Class Actions), together with proceedings commenced by ASIC against Nuix arising from the ASIC investigation (ASIC proceedings).

Throughout 2021 and 2022, Nuix sought confirmation from Berkshire that coverage would be provided in respect of the ASIC investigation, the Securities Class Actions and the ASIC proceedings.

The Policies

The D&O and POSI policies included a clause 6.2 retention clause (retention) drafted on similar terms, 'to apply to Loss resulting from each and every Claim, and the Insurer’s liability with respect to Loss covered by this Policy resulting from each and every Claim shall be excess of the applicable Retention'. Clause 3.32 of the policies specified the retention as any amount in the schedule being:

The policies also included the similarly worded related claims clause 5.5 (CL 5.5) expressed on the following terms:

Significantly, while CL 5.5 specified related claims as comprising a single claim for the purposes of the applicable retention, it did not specify what retention applied where there was a mix of Side B and Side C claims comprising a single claim, which was the central question for the Court to decide.

On 15 November 2022, Berkshire determined that under the POSI policy, the ASIC investigations engaged Side B Coverage, the Securities Class Actions engaged Side C Coverage, and together, constituted a single claim by reason of CL 5.5. On that basis, only one retention applied, being, the Side C retention of $10 million (being the scope and extent of the claims). Similarly, in relation to the D&O policy, Berkshire advanced the same position (claims). It is important to note that once CL 5.5 is trigged, 'All such claims constituting a single claim shall be deemed to have been first made on the earlier of the following dates… (i) the date on which a claim forming part of any such single claim was first made.'

The decision at trial

Nuix argued that as the ASIC investigation was the first-in-time claim made under the policy and triggered Side B coverage, the applicable retention was $2.5 million, despite being aggregated by way of CL 5.5 with the subsequent Side C Claim so as to constitute ‘a single’ claim which carried a higher retention of $10 million. Berkshire opposed that construction, arguing that the mere existence of the Securities Class Action triggered the Side C Coverage retention, even if aggregated with any claims that may trigger the lower Side B Coverage retention, and therefore, the Side C retention applied to the claim.

Relying upon accepted contract interpretation principles espoused in Star Entertainment Group Limited v Chubb Insurance Australia Ltd (2022) (Star), the Court considered that as the policy limited cover for loss arising from claims in excess of the retention with different levels of retention applying to different risks, it followed 'The higher the retention, the lower is the insurer’s risk and the lower will be the premium charged. Thus, a construction that maintains the efficacy of the retention agreed upon and which is reflected in the premium, is one that more properly accords with the parties’ intentions'.¹

Finding no ambiguity in the language of policy, the retention, or CL 5.5, the Court rejected Nuix’s position, reasoning that upon its construction, where its Directors conduct gave rise to a Side B Claim first in time against them, and then a later related Side C claim against the company such that they constitute a single claim by way of CL 5.5, this would have the effect of diminishing the $10 million Side C retention for securities risks, undermining its objective of conduct deterrence and premium pricing, as it could never apply upon Nuix’s construction.

The Court went further to determine that this could not have been the commercial intention of the parties, and is 'self-evidently, unsatisfactory, and has no commercial logic to it'² particularly, 'given the agreement of the parties that a substantial retention is to apply to a Securities claim is a patently important characteristic of the policies, and it would be passing strange were it able to be negated by the not unforeseeable circumstance that a related claim, which attracted the lower retention, was also made.'³

The Court reasoned that as CL 5.5 properly construed, deems all claims notified upon the same facts and circumstances, to arise simultaneously on the date on which a claim forming part of any such single claim was first made, it would be an 'unsupportable proposition that a single aggregated claim consisting of claims of different natures should be determined by the nature of the temporally first in time claim made.'⁴ This is because, neither the aggregation of, or the deemed time of any claim/s arising, has anything to do with the wholly different issue, as to what retention applied to certain risks under a group of diverse retentions.

Upon that interpretation of CL 5.5, the Court determined that the correct measure of the appropriate retention was the nature and extent of the covered risks comprising the claims aggregated by CL 5.5, not, first in time. Therefore, given the Securities Class Actions comprised the full extent of the claim, the $10 million Side C retention applied.

The Court accepted the reasoning in CIMIC Group Limited v AIG Group Limited [2022] NSWSC 999 (Cimic) as compelling and persuasive, because once CL 5.5 is triggered, it is only concerned with the application of one retention applying to a number of claims that may be able to be aggregated upon their factual nexus to one another and therefore, 'just because the Securities claim has been mixed with non-Securities claims, does not change the nature of the claim or the applicable retention available for Securities claims.'⁵

The Court therefore held that where a Side C claim is aggregated with other Side B claims that are causally or logically connected, the Side C retention applies regardless of when in time any other ‘related’ claims are made.

Implications for you

This decision suggests that a court may find that where Side C coverage is sought, and there is a higher specified retention said to apply to Side C claims, irrespective of the operation of any aggregation clauses that may aggregate a Side C claim with other ‘related’ claims, the Side C retention takes precedence in order to give full commercial effect to the policy. The Court's decision points to the commercial approach it is willing to take to preserve the utility and purpose of retentions set in respect of Side C risks, and the effect that has on the agreement between the parties in relation to their respective financial risks, including the pricing of premiums.

A key take away is that a court's approach to interpreting policies of insurance as commercial contracts, which are to be accorded a businesslike interpretation, to preserve the financial risks borne by both the insurer in setting its premium, and the insured in accepting that premium in exchange for accepting a corresponding retention for specific risks, relevantly, securities class actions.

That being the case, it is clear that a Side C claim cannot indeed change its spots…

Nuix Ltd v Berkshire Hathaway Specialty Insurance CO [2025] FCA 1002

¹ Nuix Ltd v Berkshire Hathaway Specialty Insurance CO [2025] FCA 1002, (Nuix) [85].
² Nuix at [97].
³ Nuix at [109].
⁴ Nuix at [94].
⁵ CIMIC Group Limited v AIG Group Limited [2022] NSWSC 999 in Nuix at [108].