Clarifying how exclusions work in mixed professional liability policies: Clyde & Co

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A recent decision by the Supreme Court of Queensland considered building an approved product exclusion into a professional indemnity policy for financial advisers. The issue for the Court to consider was whether the exclusion applied to both the Australian Financial Services License (AFSL) holder and its Authorized Representative (AR) or only to the AR. The Court ruled in favor of the Insured that the Policy was a mixed professional indemnity policy. Therefore, the exclusion applied only to the RA and not to his employer. Matthew Pokarier, partner at Clyde & Co, discusses the decision and its implications below.

Fund

The insured is a financial adviser firm and holds an Australian financial services license. One of its authorized representatives was Mr. Jonathan Bonnett. Mr. Bonnett provided negligent financial advice to a client who suffered financial loss. The investment recommended by Mr. Bonnett was not on the list of financial products approved by the insured. Subsequently, the client sued Mr. Bonnett and the insured to recover their financial loss. The insured settled the proceedings and then sought compensation under its professional indemnity policy for the settlement and associated legal costs. The insurers denied indemnification, arguing that Mr. Bonnett’s investment advice was an unapproved product and that the exclusion of the approved product in the policy applied to exclude the claim. The insured brought proceedings in the Supreme Court of Queensland, seeking a declaration that the exclusion did not apply.

Policy Wording

The insurance clause of the policy provided the following coverage:

[Clause 3.3] WE agree to provide cover in respect of any CLAIM against the INSURED arising out of the conduct of any consultant, contractor, agent or authorized representative in the INSURED’S PROFESSIONAL ACTIVITY and for acts, errors or omissions for which the INSURED is responsible.

WE will not cover the consultant, sub-contractor, agent or authorized representative.

The term “INSURED” has been defined in clause 6.11 of the policy wording:

INSURED means

(a) The person, partnership, corporation, SUBSIDIARY or other entity named as INSURED in the Schedule; and

(b) Any person who during the POLICY PERIOD is a principal, partner, director or employee of the person, partnership, corporation, SUBSIDIARY or other entity designated as INSURED in the Annex, but only within the framework of PROFESSIONAL ACTIVITY

Finally, the policy contained the following exclusion:

Article 7: EXCLUSIONS

WE will not cover the INSURED, including DEFENSE COSTS or any other loss related to…

7.20 Approved Product and Product Disclosure

Any CLAIM or liability based directly or indirectly on attributable to or as a result of:

(a) Financial products or instruments not included in the list of approved products of the INSURED at the time the advice was given; »

Problems

The only question was whether the exclusion applied to the insured. The insured argued that the policy should be interpreted as a composite policy that provides coverage to multiple insureds with separate interests. Consequently, any exclusion refusing cover to one Insured preserves it for another; therefore, the exclusions should only apply to Mr. Bonnett. Insurers argued that the wording of the policy should be given a commercial interpretation and that the exclusion should apply to all insureds.

Judge’s consideration

The judge acknowledged that the policy provided mixed coverage. Indeed, the interests of the insured and Mr. Bonnett were distinct, and both could be considered insured under the policy given the binary definition of the insured. As the contract provides for composite cover, any exclusion must allow for a harmonious construction of the entire contract. The judge confirmed that the difficulty in interpreting the exclusion clause was that it was not clear whether the use of the word “the INSURED” referred to the person responsible for the approved list of products (the insured) or the authorized representative (Mr. Bonnett) . In considering the opposing interpretation, the judge conceded that the fact that the policy provided for composite coverage was an important factor in determining the intent of the coverage, as allowing PI coverage for each insured, unless there were clearly limited exceptions. In this case, the ambiguity contained in the exclusion clause as to the identity of the “INSURED” meant that the construction had to favor the education of the plaintiff. This finding was substantiated when reviewed in accordance with the Policy Schedule and an Addendum which specifically excluded any claims related to the provision of financial services provided by an Authorized Representative without proper authorization under an AFSL. Compared to exclusion 7.20, which did not add the additional words “authorized representative”, it emphasized that exclusion 7.20 did not apply to the insured. The insurers would have drafted the approved product exclusion in accordance with the endorsement had they done so.

To analyse

The case provides valuable reminder when interpreting professional indemnity wordings to determine if the policy operates as a composite policy and to determine if the policy provides multi-party coverage.

The case demonstrated the complexity of interpreting insurance cover and the importance of not considering an exclusion clause in isolation but of constructing its meaning with reference to the whole policy and the commercial object of the contract. When interpreting exclusion clauses in professional indemnity insurance policies, careful consideration should be given to whether the use of catch-all definitions such as “the Insured” correctly reflects the intention to subscribe

The case also highlights the difficulties associated with using endorsements without considering how such “bolted” text can affect the overall interpretation of the policy. Underwriters should ensure that they check to see if changes made to the policy through endorsements allow for consistent meaning throughout the policy.


If you would like to discuss the impact of this decision further, please do not hesitate to contact Matthew Pokarier, Partner at Clyde & Co.

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