6 April 2017

Spotlight on exclusion clauses as insurers caught unawares

Would the exclusions in your insurance policies stand up when put to the test? Insurers and insurance brokers need to be aware that many exclusion clauses in policies won’t have the effect that may have been intended when tested before a court or tribunal.

A recent case highlights the danger in relying on broad or vague terminology. Chubb Insurance Company of Australia vs Robinson FCAFC 17 (Chubb vs Robinson), focussed on a professional services exclusion in a “directors and officers” policy.

Professional services are commonly listed as exclusions in case the insured undertakes specialised services they may not be qualified or expected to provide: for example, if an engineer offers legal advice, this would understandably trigger a professional services exclusion clause. Insurers need to be protected against policy-holders taking unreasonable professional risks by offering services above and beyond their capabilities.

But an interesting situation of increasing prevalence is now muddying the professional services exclusion waters. We are seeing a trend where more jobs and duties are being considered “professions” for the purposes of professional indemnity cover, creating potential difficulties around interpretation.

Difficulties arise because insurers use “professional” as a broad term when giving cover. But courts will typically seek to give “professional” a narrow definition when taking away cover as an exclusion. Insurers can be caught unawares if they don’t understand the potential for misinterpretation.

Chubb v Robinson is a text-book example of differing interpretations on professional services. Chubb sought to recover a payout to Reed Constructions, which was contracted to build a high-rise in St Kilda, Melbourne. Mr Robinson, Chief Operations Officer of Reed Constructions, was responsible for providing statutory declarations to trigger progress payments for the project.

When Robinson’s company, Reed Constructions, went into liquidation, property developer 470 St Kilda Road sued Mr Robinson for giving a negligent or misleading stat dec for a payment. Mr Robinson sought cover under Reed’s D&O policy to fund his defence.

Chubb invoked the professional services exclusion, arguing that the profession, in this case, was project management. They asserted Robinson had exercised project management skills in certifying the payments and therefore should not be covered. The court accepted that in certain circumstances project management could count as a profession, but cast doubt on that categorisation in the context of the policy and the exclusion.

Critically to the interpretation, the court found that much of what Reed Constructions did day-to-day would trigger the exclusion if interpreted this way. They also found that Robinson was merely performing a routine task to complete a payment and that it was not an act of rendering highly skilled professional services. Chubb’s decline of indemnity was overturned and they were required to honour Robinson’s claim.

Chubb v Robinson hinged strongly on the interpretation, rather than the wording of the exclusion. While it’s perfectly reasonable to include a professional services exclusion, it will be interpreted narrowly and in the context of the business services involved. A professional services exclusion may have been relevant if Robinson had provided other, highly specialised services, such as engineering advice, delivered outside of his normal duties. But project management tasks can be regarded as an expected service in the context of a construction company.

Insurers and insurance brokers need to understand that professional services exclusions will not be all-encompassing. While their wording may seem broad at first blush, when put under scrutiny a court will apply a narrow definition relating to the context of the case. In Robinson’s case, project management was a perfectly reasonable and expected service for his company to be delivering, and not capable of triggering a professional services exclusion.

If insurers truly believe a more borderline professional service is better covered under separate professional indemnity insurance, then a specific reference to the profession or policy covering it can be made in the policy exclusions to remove any ambiguity for the Courts to read down.

Loose wording undoes financial services exclusions

Financial advice is a risky business and justifies tight insurance coverage. A recent case shows the importance of getting the wording correct when drafting exclusions.

In the case, Todd vs Alterra at Lloyds Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15, financial adviser Mr Todd was sued by clients for bad advice after several risky investments recommended by him performed badly. The clients reached a settlement with Todd, but his entitlement to indemnity against his insurer, Alterra, was an issue at trial.

Alterra relied on a coverage clause and complementary exclusion clause which sought to specify it would only cover advice encompassing “approved investment products” and would exclude advice relating to non-approved products.

This is a common exclusion in financial advisor cover, but the wording needs to be spot-on. Unfortunately for Alterra, the way this exclusion was worded could be interpreted in multiple ways, and this cast doubt on the meaning of “approved investment products”. In fact, the wording in the clause suggested advice may cover all aspects of financial planning, provided the planning contained some element of advice on approved investment products.

When drafting an exclusion along these lines, the wording needs to be specific. For example, it may be appropriate to exclude cover on advice provided outside the “approved product lists” of that firm. In this case, what constituted that list was not defined and left open to a Court to adopt a number of possible meanings.

Without strongly defined terminology, a court is highly unlikely to apply a harsh definition. If any ambiguities exist, and they cannot be resolved by context or commercial necessities the Court will be forced to apply a more generous view, in favour of the insured understanding that it may be interpreted in several ways.

Getting the words right requires rigorous consideration of any benefit of the doubt that could be given to an insured, and removing that doubt in the eyes of a court.