Claim for rectification of Side C sublimit cover: each excess layer to be individually considered

22 February 2021

In Issue

  • A claim for rectification of a Side C sublimit under a multilayered Directors’ and Officers’ liability programme has been determined by Justice Lee in the Federal Court of Australia. A $10 million sublimit for Side C cover was recorded in the policy schedules, however rectification of the policies that comprised its primary, first and second excess layers was sought by Quintis. The common intention of the parties to include a $50 million Side C cover sublimit was necessary in determining the rectification claim.

The background

A shareholder class action was brought against Quintis Ltd (Subject to Deed of Company Arrangement).

A claim was then brought against Quintis’ Directors’ and Officers’ liability programme insurers, which sought rectification of Investment Managers Insurance policies, such that the $10 million sublimit for Side C cover in the policy schedules would instead provide a $50 million sublimit.

The decision of the Federal Court

Justice Lee reaffirmed the rule for contractual rectification. Justice Lee said it must be demonstrated that at the time of the execution of the written contract sought to be rectified, that there was an ‘agreement’ between the parties, that the parties had a common intention, the written contract was to conform to that agreement and that the contract did not reflect ‘agreement’ due to a common mistake.

Justice Lee did not accept that only the 2016 to 2017 primary layer policy was required to be rectified in order for the $50 million sublimit to take effect across the programme. As such, the common intention of each excess layer insurer was required to be established in order for rectification to apply to the first and second excess layer policies. As the programme was placed with Lloyd’s, it was necessary to establish that this intention was also held by the placing broker and each subscribing syndicate within the primary, first and second excess layers.

His Honour examined discovered documents, and documents produced under subpoena, to determine the common intention question. The Court concluded that a common intention of a $50 million sublimit for Side C cover could be established for the placing broker, and upheld the insured’s claims for rectification against one of three subscribing insurers on the first excess layer and one of seven insurers on the second excess layer of the 2016 to 2017 programme. The claims against the other subscribing insurers (including the primary insurers) failed.

Justice Lee ultimately invited the parties make submissions as to the specific question of relief in light of the Court’s reasons for its decision.

Implications for you

Rectification disputes can be intricate, expensive and involve a high evidentiary threshold. A dispute can be prevented by recording the terms of the agreement clearly. This is particularly relevant when preparing policy documentation for multilayered programmes. If an order for rectification is sought then common intention will likely need to be proved against the excess insurers, regardless of whether rectification is available in respect of a primary layer policy.

Quintis Ltd (Subject to Deed of Company Arrangement) v Certain Underwriters at Lloyd's London Subscribing to Policy Number B0507N16FA15350 [2021] FCA 19

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