The Queensland Court of Appeal considered an insurer’s decision to decline indemnity in reliance on an exclusion clause contained in a professional indemnity insurance policy which was held to be ambiguous at first instance.
In issue
- The correct construction of an exclusion clause in a professional indemnity insurance policy in respect of advice given by an insured’s employee to invest in a financial product that was not on the insured’s approved product list.
The background
EP Financial Services Pty Ltd (EPFS) held an Australian Financial Services Licence to provide financial services and investment and financial planning advice. Mr Bonnet was an authorised representative and employee of EPFS and gave negligent financial planning advice to an individual and her company (the clients). The clients acted upon the negligent advice which recommended that they invest in a company called Millinium Capital Managers Limited and suffered a resultant loss. The clients commenced proceedings against Mr Bonnet, EPFS and Millinium. EPFS paid $840,000 to the clients in settlement of their claim.
EPFS claimed indemnity against its liability to the clients and for its legal costs from its insurer, Underwriters at Lloyd’s of London subscribing to the relevant policy (Policy). Dual Australia Pty Ltd (Dual) acted as their agent. The Underwriters, through Dual, declined to indemnify EPFS in reliance on an exclusion clause in the Policy to the effect that coverage did not extend to any claim related to financial products or instruments not contained in the insured’s approved product list. An investment in Millinium, as recommended by Mr Bonnet as an authorised representative and employee of EPFS, was not on the insured’s approved product list.
The Policy was described as a 'composite' policy because it was effectively many policies extending cover to a number of insureds for their several interests. The relevant provisions of the policy wording granted cover in respect of any civil liability claim against the 'insured', including claims resulting from the conduct of any authorised representative for whose acts, errors, or omissions the 'insured' was liable. The term 'insured' was defined under the Policy as ‘the company specified as the insured in the Schedule and any person who was an employee of the company specified as the insured in the Schedule’. EPFS was one of seven companies specified as the 'insured' in the Schedule.
Relevantly, the expression 'Insured’s approved product list' was not defined in the Policy, however, it was referred to multiple times in the Proposal. The Proposal form, as prepared by Dual, required the companies which were to be insured to provide a 'Current Approved Product List' and attach a document described as a 'Research Policy' to explain the process by which a product was approved or recommended in their business. This process reflected industry practice, which is that it is the licensee which approves certain products as products which might be suggested or provided to clients. Accordingly, it would be appropriate to describe it as a licensee’s approved product list, and to understand the reference to insured in 'Insured’s approved product list' as a reference to the licensee.
EPFS brought proceedings in the Supreme Court of Queensland seeking declarations that the exclusion did not apply to it and that it was entitled to indemnity under the Policy.
The decision at trial
The trial judge correctly observed that EPFS was an 'insured' under the Policy and that EPFS was liable for Mr Bonnet’s negligence because he was also an 'insured' under the Policy as its employee.
EPFS argued that the exclusion clause should be read as excluding a claim for indemnity by Mr Bonnet, but not as excluding a claim for indemnity by EPFS.
The trial judge considered the exclusion clause to be ambiguous as it was unclear whether the exclusion was to apply to the liability of the insured entity for conduct of an employee and to the liability of an insured employee for his or her own conduct. Further and in the context of the Policy being a 'composite policy’, the trial judge also considered that the use of the word 'insured' in the exclusion clause gave rise to uncertainty or ambiguity.
The trial judge concluded that the lack of clarity in the exemption clause should be resolved in favour of EPFS.
The issues on appeal
On appeal, the court considered whether the trial judge had misinterpreted the exclusion.
The decision on appeal
On appeal, the Court of Appeal disagreed that the exclusion clause was ambiguous or that the use of the word 'insured' gave rise to uncertainty. It was the Court of Appeal’s view that 'insured' was unambiguously defined in the Policy to include a number of persons and entities, including EPFS and Mr Bonnet. The Court of Appeal concluded that the trial judge erred in the construction that the 'Insured’s approved product list' was Mr Bonnet’s approved list, but not his employer’s approved product list. Instead, the Court of Appeal found that the 'Insured’s Approved Product List' could be described as both the licensees’ approved product list, in that it was created and distributed by the licensees, and the employees’ approved product list, in that it was the list issued to the employee to be used by them when giving advice.
In reaching its decision, the Court of Appeal considered the purpose for which the Underwriters required the existence and use of an approved product list. It observed that the list was relevant to the extent of risk for which cover was to be provided, and that the trial judge’s construction was inconsistent with this purpose as it meant that the Underwriters had agreed to indemnify a licensee for advice given on any product.
The Court of Appeal ultimately allowed the appeal, and ordered that the claim by EPFS for a declaration granting indemnity be dismissed.
Implications for you
This case demonstrates the importance of referring to the defined terms in a policy to give meaning to the policy provisions. It is also a useful reminder for insurers to consider the purpose intended to be achieved when drafting the terms of a policy.
