When is a loss not a Loss? Federal Court examines insurance policy exclusions

ANZ sought indemnity for the settlement sums and defence costs arising from two class actions: Reilly v Australia and New Zealand Banking Group Ltd (No 5) [2023] ^[1] (Reilly) and O'Brien v ANZ [2025] ^[2] (O’Brien) class action proceedings. 

The settlements totalled $31,920,000 and $85,000,000 respectively. ANZ also sought cover for costs and expenses incurred in defending the proceedings. ^[3]

Although the underlying proceedings arose from ANZ’s consumer credit insurance products, loan protection products, motor vehicle finance products and dealer flex commission arrangements, the central issue was whether these liabilities fell within the policies’ definition of Loss and, if so, whether cover was excluded.  

In both proceedings, customers sought recovery of premiums, commissions, interest and other amounts alleged to have been improperly charged, retained or received. ^[4]

ANZ held three excess insurance policies. Apart from their respective limits of liability and identity of their underwriters, the second and third excess policies incorporated materially the same terms, conditions, exclusions and definitions as the first excess policy. ^[5]

Section 2 of the first excess policy provided cover for civil liability claims. Loss was defined to include liabilities for compensation, damages, restitution of a compensatory nature, settlements for financial loss and compensation orders. However, the definition expressly excludes ‘fees, commissions, or other charges paid or due to the Insured.’ ^[6]

Section 2 also contained Exclusion 11, which excluded cover for Loss arising from or connected with ‘the actual or alleged charging of excessive, undisclosed or otherwise improper profits, commissions, costs or other charges by the Insured.’ ^[7]

The policy defined defence costs and expenses as ‘reasonable professional fees, costs and expenses incurred in the investigation, defence, adjustment or appeal of civil liability claims, or in preparing for or otherwise responding to an inquiry.’ ^[8]

A key part of the judgment concerned the construction of the policy wording. 

The Honourable Justice Beach emphasised that insurance policies are to be construed by reference to their language, commercial context and purpose. The policy should be read as a whole and that a construction giving coherent operation to its provisions is to be preferred over a narrow or pedantic interpretation. ^[9]

His Honour noted that, while textual analysis is primary, contractual words must be construed in their context and commercial setting. Context may assist in determining whether language is truly plain and, where it is not, in resolving ambiguity. 

With reference to Mason J's ‘true rule’ in Codelfa Construction Pty Ltd v State Rail Authority  (NSW) (1982), ^[10] His Honour favoured a broader role for contextual analysis than some commentary has suggested, whilst maintaining that surrounding circumstances cannot be used to contradict clear policy language. 

His Honour further cautioned against a ‘sclerotic form of textualism’, preferring an approach that gives commercial purpose and context their proper role and preserves the ‘commercial vitality’ of the rule. ^[11]

His Honour added that the natural meaning of defined terms remains the starting point for construction and that labels used within a policy may assist in identifying the meaning of a defined concept. Having also said that contractual phrases should be construed as a whole, rather than by analysing individual words in isolation, and that insuring clauses and exclusions are to be interpreted together using the same principles of construction. Exclusions should not be construed so broadly that they substantially undermine the cover provided and are subject to the same principles of interpretation as any other policy provision. ^[12]

Having also considered the contra proferentem rule, His Honour noted that it permits genuinely ambiguous policy wording to be construed against the party seeking to rely upon it. However, the principle operates only as a rule of last resort, serving to resolve ambiguity rather than create it, and given that it could not be used against the underwriters in the present context given that ANZ’s broker had drafted the various terms. ^[13]

Having further stated that the application of an insuring clause or exclusion depends on the facts giving rise to the claim, rather than the manner in which the claim is formulated or pleaded. It is necessary to identify the true nature and substance of the claims arising from the alleged conduct and, where liability has not been established by a court, to characterise the liability that would have arisen had the facts asserted been found proven. ^[14]

ANZ also relied on the ejusdem generis rule, under which general words may be limited by reference to the specific words that precede them. 

His Honour treated the principle as a guide to interpretation only and emphasised that the meaning of the policy ultimately depends on the ‘intention of the parties, objectively ascertained’ from the policy wording read as a whole and in its context. ^[15]

Having applied those principles, His Honour concluded that premiums, commissions and interest could fall within the phrase ‘other charges’.

In ordinary language, both premiums and interest may properly be described as charges and found no commercial basis for treating premiums differently from the other amounts expressly excluded from the definition of Loss. ^[16]

Central to the court’s reasoning was the principle of indemnity, which is that insurance responds to an actual loss suffered by the insured. 

His Honour said that the carve-out from the definition of Loss reflected this principle.  Where the insured was legally required to repay premiums, it previously received, it does not suffer a net loss. Instead, it is returning money it was not entitled to receive or retain. ^[17]

His Honor concluded that the premiums, commissions and interest fell within the carve-out from the definition of Loss, either as commissions or as ‘other charges.’ 

As the claims sought the repayment of these amounts previously received by ANZ, the resulting liabilities did not constitute Loss and therefore fell outside the scope of cover. ^[18]

His Honour also found that, even if the settlements had constituted Loss, Exclusion 11 would have prevented cover.  

Given proceedings arose from allegations concerning excessive, undisclosed or otherwise improper charges, this therefore fell within the exclusion. ^[19]

His Honour also rejected ANZ's claim for defence costs and expenses. As the underlying claims were not covered Loss and, in any event, were excluded by Exclusion 11, no entitlement to indemnity arose in respect of these costs. ^[20]

The court made four key findings:

1. Settlement payments were not a covered Loss

The settlement sums represented the repayment of premiums, commissions, interest or other charges previously received by ANZ and therefore fell within the carve-out from the definition of Loss. ^[21]

2. Premiums and interest were ‘other charges’ 

The court rejected ANZ's argument that premiums and interest fell outside the phrase ‘ fees, commissions or other charges ’, finding that both could properly be characterised as ‘other charges’. ^[22]

3. Exclusion 11 would have prevented cover 

Even if the settlement payments constituted Loss, the court held they arose from allegations of excessive, undisclosed or otherwise improper charges and therefore fell within the scope of Exclusion 11. ^[23]

4. Defence costs were not recoverable 

As the underlying liabilities were not covered Loss and, in any event, were excluded under Exclusion 11, ANZ was not entitled to indemnity for its defence costs and expenses. ^[24]