Court confirms insurers’ reliance on exclusion clause in financial services professional indemnity policy

By Bridget Wall and Madelyne Inch

Undoubtedly, a policy of insurance will stand and fall on its drafting. In a recent decision, the Queensland Court of Appeal rejected the application of the contra proferentem rule, that is, the principle that where there is ambiguity in a contract, a clause will be construed against the party who put it forward and is seeking to rely on it. Ultimately, the Court found that there was no ambiguity when considering all surrounding circumstances and relevant documentation.

In this article, we examine the decision in Arch Underwriting at Lloyd’s Ltd on behalf of Syndicate 2012 & Ors v EP Financial Services Pty Ltd [2022] QCA 229.

Background: what happened?

The insured entity, EP Financial Services Pty Ltd (EPFS), provides financial services and investment and financial planning advice.

In 2013, Mr Bonnet, an authorised representative and employee of EPFS, gave financial planning advice to an individual and her company (Clients), which recommended that they invest in a company called Millinium Capital Managers Limited. That advice was given negligently. The Clients acted upon Mr Bonnet’s advice and suffered loss. The Clients commenced proceedings, seeking damages from Mr Bonnet, EPFS and Millinium. EPFS paid $840,000 to the Clients in settlement of their claim.

The policy

At the relevant time, EPFS maintained a professional indemnity insurance policy with underwriters at Lloyd’s of London (the Underwriters). EPFS was one of seven companies specified as the ‘INSURED’ in the policy schedule. By clause 3.3, the policy provided cover for a claim against an ‘INSURED‘ in respect of conduct by its authorised representatives, but the policy excluded cover for the authorised representatives themselves. Accordingly, and subject to the terms and conditions of the policy:

• EPFS was covered in respect of conduct by Mr Bonnet as an authorised representative;
• Mr Bonnet was not covered for his conduct as an authorised representative of EPFS; but
• because Mr Bonnet was also an employee of EPFS, the negligent provision by him of financial advice to the Clients was covered.

EPFS claimed indemnity against its liability to the Clients, and for its legal costs of the Clients’ proceeding, from Underwriters. Underwriters declined to indemnify EPFS because the policy contained an exclusion for any claim or liability based upon financial products not contained in the insured’s approved products list. It was accepted by all parties that an investment in Millinium was not on the approved products list. The exclusion provided:

‘Section 7: EXCLUSIONS

WE will not cover the INSURED, including for DEFENCE COSTS or other loss in respect of:
…
7.20 Approved Product and Product Disclosure

Any CLAIM or liability directly or indirectly based upon attributable 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 unless the advice is in respect of switching from an existing product not in the INSURED’s Approved Product List to a product in the INSURED’s Approved Product List …’

‘INSURED’s approved product list’ was not defined in the policy.

Trial outcome

The issue at trial was whether the ‘INSURED’s approved product list’ was a reference to Mr Bonnet’s approved product list or EPFS’. EPFS argued that the exclusion clause should be read as excluding a claim for indemnity by Mr Bonnet as an authorised representative, but not as excluding a claim for indemnity by EPFS.

The primary judge described the policy as a ‘composite policy’, meaning that it was effectively many policies extending cover to a number of different insureds for each of their respective and different insurance interests. The primary judge went on to say that the considerations relevant to construing a composite policy applied to construing its exclusion clauses. Meaning that the conduct of Mr Bonnet and his entitlement to indemnity was to be determined separately from the conduct of EPFS and its entitlement to indemnity.

The primary judge concluded that, in the context of this being a composite policy, the use of the word ‘INSURED’ in the exclusion gave rise to ‘uncertainty or even ambiguity’^[1]. Therefore, the exemption should be resolved in favour of EPFS in accordance with contra proferentem.

In support of his conclusion, the primary judge referred to another exclusion contained within the policy (cl 7.22) that excluded a claim or liability for any ‘“INSURED”, or any representative, authorised representative or agent‘ who operated without an Australian Financial Services Licence’ (emphasis added).

The primary judge saw the cl 7.22 exclusion as relevant because it was in terms which provided certainty, as compared with cl 7.20. He considered that cl 7.22 was an indication that the intention of cl 7.20 was for it to not apply to the licensee (EPFS), because otherwise the parties would have used the wording as drafted in cl 7.22.

As a result, the exclusion did not apply to EPFS and they were entitled to indemnity for advice given on any product, even if it was not included on the approved products list. The Underwriters appealed.

On appeal

The Court of Appeal respectfully disagreed with the trial judge that the:

• terms of the exclusion were ambiguous such that the contra proferentem rule should be deployed; and
• use of the word ‘INSURED’ gave rise to some uncertainty.

The word ‘INSURED’ was clearly defined. A number of entities and persons were defined in the policy as an ‘INSURED’, including EPFS and Mr Bonnet.

The Court said that the effect of the primary judge’s construction that the ‘INSURED’S approved product list’ was, in this case, Mr Bonnet’s approved product list but not EPFS’ ‘is inconsistent with the natural and ordinary meaning of cl 7.20(a), read in the light of the policy as a whole‘.

The Court of Appeal noted that the approved product list, at the time when the negligent advice was given by Mr Bonnet, was prepared by EPFS and disclosed in their insurance proposal form. The Court said the approved product list could be described as both EPFS’ approved product list and Mr Bonnet’s approved product list, because the list was to be used by employees (ie Mr Bonnet) when giving financial advice to clients.

The Court of Appeal also rejected EPFS’ argument that the advice was given by Mr Bonnet and not by them, therefore it did not follow that EPFS was the ‘INSURED’ for the purposes of this clause. On this point, the Court said the EPFS provided financial services through its agents and employees, and advice given by authorised representatives and employees, such as Mr Bonnet, was advice given by EPFS.

The Court of Appeal therefore allowed the appeal and dismissed the EPFS’ claim for indemnity under the policy.

Takeaways

As we mentioned at the start, a policy of insurance will, undoubtedly, stand and fall on its drafting. Insurers should always be mindful about ensuring, where possible, appropriate phrases are defined, perhaps by reference to other material or documents.

This case also identifies the importance of consistency. Clauses 7.20 and 7.22 contained different references as to who the exclusion would apply to:

• cl 7.20 referred only to the ‘INSURED’;
• cl 7.22 referred to ‘INSURED or any representative, authorised representative, or agent’ notwithstanding that the insuring clause 3.3 had already excluded from cover any authorised representative and agent.

While we ultimately think the Court of Appeal came to the right conclusion about the policy terms and the application of the contra proferentem rule, the claim might have been avoided altogether if cl 7.20 used the same terminology as cl. 7.22.

Further, while the Court of Appeal ultimately did not consider there was ambiguity, they did consider supporting documents including the Proposal form, as prepared by the Underwriters’ agent, DUAL, in reaching its decision about what the correct interpretation was. This decision reflects the importance of ensuring that the Proposal form and what is being asked of the Insured reflects ultimately what cover is (and isn’t) being provided for in the insurance policy.

[1] EP Financial Services Pty Ltd v Arch Underwriting at Lloyd’s Limited & Ors [2021] QSC 347 at [50].