21 December 2018

Court conducts appraisal of ‘prudent lending’ clause in valuer policy

Professional indemnity insurance policies usually require a valuer to include in his or her report a ‘prudent lender’ clause.

A valuer, MMJ Real Estate (valuer), was sued by a lender, Bank of New York Trust (lender), for an allegedly negligent valuation. The valuer’s report did not contain the prudent lending clause, and the valuer’s professional indemnity insurer declined indemnity on this basis.

The insurance issue was heard separately by the Supreme Court of New South Wales and determined on 14 December 2018.

The relevant exclusion read as follows:

“The insurer will not be liable to indemnify the Insured for any Loss… directly or indirectly arising out of… attributable to or in consequence of:

(ix)    any valuation undertaken by… the Insured for any lender, that is not an Authorised Deposit-Taking Institution supervised by the Australian Prudential Regulatory Authority (APRA) unless the following “Prudent Lender Clause” is included in any such valuation report…”

The lender was not an ‘Authorised Deposit-Taking Institution’ supervised by APRA. It was agreed between the parties that the absence of the clause did not cause the loss.

The insurer argued that the exclusion was clear and:

  • does not require a causal connection between the loss and the absence of the prudent lender clause; and
  • the scope of cover provided by the policy requires the prudent lender clause to be included in the report for the policy to trigger.

The valuer argued that due to ‘critical introductory words’ in the exclusion (‘attributable to or in consequence of’), the exclusion only applied where the absence of the clause was causative of the loss.

The Court held that the exclusion could only apply where the absence of the prudent lender clause caused the lender’s loss.  The words ‘attributable to or in consequence of’ were critical and required the absence of the prudent lender clause to be causative of the loss for the exclusion to apply.  There was no ambiguity in the language of the exclusion.

Key takeaways

While the valuer succeeded in this instance, it is an important reminder for valuers to ensure the prudent lender clause is included in reports to prevent an indemnity dispute.  The decision turned on the particular wording of the exclusion and different policy wording may result in a different outcome (subject to Section 54 considerations).

BNY Trust Company of Australia Limited v MMJ Real Estate (WA) Pty Ltd (No 2) [2018] NSWSC 1938

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Leigh has significant experience and expertise in general insurance litigation acting for most major Australian insurers as well as a number of English insurers and underwriters.

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