Did you approve it? Consideration of approved product exclusion clause in a composite policy. Make sure you are clear and consistent.

01 February 2022

The Supreme Court of Queensland considered the construction of an approved product exclusion in a professional indemnity policy held by a financial planning firm referable to the conduct of its employee and authorised representative.

In Issue

A financial planning firm holding an Australian Financial Services Licence (AFSL) for the provision of financial product advice (the applicant) was insured under a professional indemnity policy with the respondent insurer (respondent).

The respondent declined to indemnify the applicant relying on an exclusion in the policy relating to products on the applicant’s approved product list.

In issue was whether the respondent was entitled to rely on the exclusion clause in so far as it related to the applicant.

The background

An authorised representative (AR) and employee of the insured (employee) provided financial advice to a client who suffered a financial loss. The investment that caused the financial loss was not on the applicant’s list of approved financial products.

The client commenced proceedings against the applicant and the employee. The applicant settled the proceedings, then sought indemnity under its professional indemnity policy with the respondent for the settlement sum and associated costs.

The respondent refused to indemnify the applicant, arguing that the employee’s investment advice was an unapproved product and the approved product exclusion in the policy applied to exclude the claim.

While it was accepted that the exclusion applied to a claim for indemnity by the employee, the insured sought a declaration that the exclusion did not apply to it.

The decision at trial

The relevant exclusion provided as follows:

WE will not cover the INSURED, including for DEFENCE COSTS or for other loss in respect of:

7.20 Approved Product and Product Disclosure
Any CLAIM or liability directly or indirectly based upon attributed to or in consequence of any:
(a) Financial products or instruments not contained in the INSURED’S approved product list at the time the advice was given;”

Where multiple parties are insured under the same policy, it may be described as either a joint or composite policy.

A joint policy will exist when multiple insureds have the same interest in the subject matter of the insurance, and the insurer’s obligation is to indemnify them jointly in respect of a joint loss.

Conversely, where parties have different interests in the subject matter of the insurance, it will be construed as a composite policy. The parties under a composite policy are insured for their respective insurable interests, and the rights and obligations of different insureds under the same composite policy can be exercised independently of each other unless there is an express or implied term to the contrary: see Federal Insurance Ltd v Wasson (1987) 163 CLR 303.

The applicant argued that the policy should be interpreted as a composite policy and, accordingly, the exclusion applied to the employee only.

His Honour held that the policy did provide composite cover because:

  • The employee was an insured (in his capacity as an employee) for claims resulting from a breach of professional duty by him in the provision of financial product advice under the applicant’s AFSL.
  • The applicant was insured not only for claims resulting from a breach of professional duty by it, but also for any claim resulting from the conduct of its ARs for which the applicant was liable.

Having determined that the policy was a composite policy, His Honour then proceeded to consider the operation of the exclusion clause.

His Honour found that the lack of clarity in the exclusion clause should be resolved in favour of the applicant, and it was entitled to the declaration sought. His Honour noted:

  • In the context of an insurance policy, exclusions should be clear so that the contract as a whole can serve a commercial purpose.
  • In interpreting the exclusion clause, the difficulty that arose was whether the use of the word “the insured” referred to the person responsible for the approved product list (i.e., applicant) or the employee and AR.
  • The exclusion referred to “advice” without specifying whether it encompassed advice provided to persons other than the insured making the claim under the policy. That was relevant because the applicant’s liability was not limited to advice given by it, but extended to advice given by the employee. Conversely, liability of the employee insured was confined to advice they gave.

His Honour observed that greater certainty could have been achieved by extending the operation of the exclusion to include the words “advice provided by the insured or any representative, authorised representative or agent”.

His Honour noted that further support for his conclusion was found in an endorsement. Exclusion clause 7.22 had been deleted in its entirety, and replaced with an endorsement which specifically noted that it was intended to deal with financial services “provided by the INSURED or any representative, authorised representative or other agent”.

Implications for you

This case is a reminder about the importance of carefully reviewing the wording of any exclusions. The onus of establishing an exclusion operates rests with the insurer and, in the absence of clarity, any ambiguity will likely be resolved contra proferentem in an insured’s favour.

Sufficient uncertainty meant that the exclusion was narrowly interpreted and in the applicant’s favour, as only applying to those who provided the relevant advice.

The decision is also an important reminder that amendments to a policy wording via an endorsement ought be consistent with the policy as a whole.

EP Financial Services Pty Ltd v Arch Underwriting at Lloyd’s Limited & Ors [2021] QSC 347

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