A recent Federal Court judgment in which a denial of indemnity was upheld, provides valuable insight on the importance of correctly framing definitions to capture underwriters' and the insureds' intentions to avoid challenges to policy construction. The decision also demonstrates that section 54 of the Insurance Contracts Act 1984 will only go so far to assist an insured.
The primary proceedings underpinning the indemnity challenge were commenced against two financial advisers and the relevant corporate Australian Financial Services Licence (AFSL) holder in respect of financial product advice. The critical allegations in the proceedings were that the advice was inappropriate for the applicants' financial situation and risk profile. A claim for cover on a professional indemnity policy held in the AFSL's name was subsequently made by all three respondents but was denied at the threshold insuring clause level. This was primarily on the basis that the operative provisions of the Policy limited cover to losses flowing from a Claim alleging an act, error or omission in the performance of Professional Services, relevantly defined to mean, "financial planning encompassing advice on approved investment products".
The term "approved investment products" was not defined in the Policy, but the underwriters considered that the phrase was well understood by the insured, underwriters and broadly throughout the financial advice industry to mean those products on the AFSL's "Approved Product List" (APL). None of the products which were the subject of the primary proceedings appeared on an APL at the time the advice was provided, so cover was denied.
The applicants' claim against the financial advisers was settled on the eve of the trial with the respondent financial advisers conceding liability. The hearing before Robertson J was limited to the question of whether underwriters' indemnity position was correct.
A challenge to underwriters' construction
The key arguments put forward by the financial advisor respondent at hearing were that:
- the word "encompassing" in the definition of Professional Services was not a word of limitation and accordingly, conveyed the idea that what followed was included but did not fully make up "financial planning";
- the ordinary meaning of the term "financial planning" was broader than providing advice on financial products;
- the word "approved" in the definition of Professional Services was not limited to products on an APL and if that was the intention of the contracting parties, then the Policy would have made this express; and
- the ordinary contra proferentem rule should apply against underwriters.
Underwriters argued that:
- the word "financial planning" might describe a broad range of activities but the contracting parties added the words "encompassing advice on approved investment products" and in doing so intended to confine the scope of cover for advice on investment products to those that were "approved";
- "encompassing" should not be read as "including" and its ordinary meaning did not convey an intention to describe the types of investment and insurance product advice that was within cover in an open-ended or non-exhaustive fashion;
- insofar as "approved investment products" was not a defined term in the Policy, it meant what a reasonable person in the position of the parties would have understood it to mean; and
- the contra proferentem rule had no impact because the contract was negotiated between the broker and the insurers both of which were in the business of insurance.
His Honour found in favour of underwriters holding that relevantly Professional Services in this context meant financial planning being advice on approved investment products. In this respect, his Honour regarded this as the better construction largely because the word "approved" would otherwise be otiose.
As to the meaning of the word "approved" itself, Robertson J again agreed with underwriters that in order to be approved the investment products had to be on an Approved Product List. In forming this view his Honour relied heavily on the High Court's decision of Electricity Generation Corp v Woodside Energy Ltd (2014) 251 CLR 640, which provides that contracts are to mean what a reasonable person in the position of the parties would have understood it to mean, informed by the context in which the contract was entered into. In this case this included the proposal documentation submitted by the Insured to underwriters and which gained contractual effect through a broad definition of "Policy" and how the word "approved investment product" was understood to operate in the industry.
Does Section 54 offer any assistance?
The financial adviser respondent also pursued a creative section 54 argument. After inception of the policy the insured had agreed to adding an endorsement which excluded cover for non-approved products. The insured submitted that its conduct of agreeing to the endorsement was an "act that occurred after the contract was entered into" within the meaning of section 54.
Underwriters argued that the submission was misconceived as section 54 seeks to address circumstances in which a pre-existing contractual term enables an insurer to deny a claim by reason of the insured's post-contractual conduct, and was enacted in an attempt to cure a perceived mischief whereby insurers could deny indemnity in these circumstances. The Court agreed with underwriters' construction.
Importance of the judgment
The judgment is on the whole good news for underwriters as it confirms that the Courts will apply a reasonable and business-like interpretation to the construction of insurance policies where there are ambiguities and that section 54 will only go part of the way to assist an insured. It nonetheless highlights for insurers the importance of defining key terms in policies notwithstanding that there may be a common understanding as to their meaning.