Interpreting ‘resulting from’ and the reasonableness of a settlement: implications of global or ‘all-in’ settlements on insurance coverage

By David Chew and Simon Quenby

Sayers Property Holdings Pty Ltd and Oriano Salvalaggio v AIG Australia Ltd [2024] VSC 139

The Supreme Court of Victoria has provided guidance on the meaning of the causal connecting phrase ‘resulting from’ or like expression in insuring clauses of policies. It also confirmed courts will be reluctant to regard global or ‘all-in’ settlements, with multi-faceted reasons or motivations, to be capable of apportionment or allocation to a monetary claim for a covered loss, or to be a fair and reasonable settlement of such covered loss.

The decision has significant ramifications for insurers and insureds when seeking cover for settlements negotiated without prior consent of insurers or when coverage was reserved.

Facts

Sayers carried on a hospitality and gaming business from property situated at Tarneit, Victoria (property), which it developed and leased from Di Dio Nominees Pty Ltd (Di Dio). Relevantly, arrangements between Sayers and Di Dio were recorded in the following documents dated 15 March 2010 (transaction documents):

• an agreement to lease, which provided for a term of not less than 10 years with three further options to renew for terms of five years;
• an option agreement (land option), which gave Sayers an option to purchase the property from Di Dio for $8,925,140; and
• an option deed (share option), which gave Di Dio an option to purchase shares equivalent to 10% of the issued share capital in Sayers.

On 4 August 2015, Sayers gave notice to Di Dio of its intention to exercise the land option and on 22 October 2015, Di Dio gave notice to Sayers of its intention to exercise the share option. However, Di Dio subsequently notified Sayers it no longer wished to proceed with the sale of the property to Sayers.

The 2017 action

Sayers initiated the 2017 action against Di Dio to seek specific performance of the transaction documents to purchase the property. In response, Di Dio issued a defence and counterclaim against Sayers and one of Sayers’ directors, Oriano Salvalaggio. As against Sayers, Di Dio’s counterclaim primarily sought that the transaction documents be set aside or avoided. In the alternative, Di Dio sought equitable compensation against Sayers and Salvalaggio if the transaction documents were held to be enforceable. Di Dio alleged:

• Salvalaggio, a director of Sayers, was also an accountant who provided Di Dio and its director, Angelo Di Dio, with accounting services and was Angelo’s trusted adviser; and
• Salvalaggio failed to disclose his financial interest in Sayers to Angelo and both Sayers and Salvalaggio, through the conduct of Salvalaggio, breached their fiduciary duties owed to Di Dio and Angelo and engaged in unconscionable conduct.

Di Dio subsequently joined its former solicitors, Best Hooper, as a defendant to the counterclaim for alleged breaches of their professional duties related to advice provided on the transaction documents. Di Dio sought damages and/or equitable compensation if the transaction documents were held to be enforceable.

AIG was notified of Di Dio’s counterclaim against Sayers and Salvalaggio under Sayers’ 2016/2017 HospitalityEdge Policy with AIG (policy). The policy was in essence, a management liability policy, which covered to the insured entity, Sayers, and its directors and officers, in certain circumstances.

The 2017 action ultimately settled. As between Sayers, Salvalaggio and Di Dio, terms of settlement were agreed under Heads of Agreement dated 25 November 2019. The terms included Sayers increasing the purchase price for the property from the previously agreed price of $8,925,140 to $11 million, termination of the share option of Di Dio and parties bearing their own costs. Additionally, the parties released each other from all claims in the 2017 action. AIG maintained its reservation on coverage under the policy for the counterclaim against Sayers and didn’t consent to the terms of settlement between Sayers and Di Dio at mediation.

The 2021 action

By letter dated 20 January 2020, Sayers notified AIG it intended to claim under the policy for the settlement amount, comprising the difference between the new purchase price agreed for the property under the terms of settlement in the 2017 action of $11 million, and the previously agreed price for the property under the land option of $8,925,140, which roughly equated to $1.9 million (settlement amount).

In response, by letter dated 1 March 2020, AIG stated it had difficulty understanding the claim. AIG pointed out the terms of settlement achieved at mediation had no real connection with the pleaded claims against Sayers and  involved, among other things, a re-negotiation of the price paid for the property on a commercial basis.

Sayers and Salvalaggio subsequently initiated the 2021 action against AIG on 18 January 2021. Both sought reimbursement of their defence costs incurred in the 2017 action in full. Additionally, Sayers pressed its claim for the settlement amount, alleging AIG’s reservation on coverage for the settlement amount (pending clarification from Sayers) amounted to a declinature of coverage and breach of the policy. The defence costs claims eventually settled, leaving only Sayers’ claim for the settlement amount to be determined at trial.

The decision

Insuring clause

Justice Garde noted the insuring clause of the policy provided the ‘Insurer shall pay the Loss of any Company arising from Corporate Liability’.  Relevantly, the word ‘Loss’ was defined to mean any amount the Insured is legally liable to pay, including settlements, ‘resulting from’ a Claim. The word ‘Claim’ was, in turn, defined to include a counterclaim seeking compensation.

Justice Garde held the effect of the above defined-words was that the definition of ‘Loss’ could only relate to the claim for equitable compensation, as the other claims were non-monetary and didn‘t give rise to a legal liability to pay. Therefore, the two issues for determination were:

• whether the settlement amount ‘resulted from’ Di Dio’s counterclaim against Sayers for equitable compensation; and
• if so, whether the settlement amount was a reasonable settlement of the claim for equitable compensation.

Did the settlement amount ‘result from’ the equitable compensation claim?

Justice Garde reviewed the authorities on the meaning of the causal connecting phrase ‘resulting from’ or like expression in insuring clauses. His Honour held that a wider meaning than ‘proximate cause’ was required, but the analysis still required a common-sense evaluation of the causal chain. In conducting the analysis of the causal chain, His Honour held the settlement amount didn’t ‘result from’ Di Dio’s alternative equitable compensation claim against Sayers.  In holding in favour of AIG, Justice Garde accepted our submission for AIG that the counterclaim against Sayers was primarily for orders to set aside the transaction documents, and there was no real risk of the alternative claim for equitable compensation against Sayers. His Honour agreed if Sayers was successful, it would be granted specific performance, and the claim for equitable compensation may only conceivably lie against Salvalaggio or Best Hooper. Conversely, if Sayers was unsuccessful, then the transaction documents would be set aside.

Justice Garde also determined:

• the settlement amount was part of a global or ‘all-in’ commercial agreement between the parties, which was multi-faceted and effected a rearrangement of their legal, financial and property interests, and also settled the dispute between them in the 2017 action;
• it would be contrary to common-sense to ascribe the whole of the settlement amount to the claim for equitable compensation, thereby disregarding all the other benefits obtained by Sayers from the terms of settlement. It was also noted Sayers didn’t advance any fallback position if attribution of the whole of the settlement amount to the alternative equitable compensation claim was seen to be wrong; and
• in any event, approached as a matter of common-sense, the global or ‘all-in’ settlement was not apportioned or capable of apportionment. The terms of settlement made no mention of the equitable compensation claim and it wasn’t possible to allocate or apportion the settlement amount to the individual component parts of the settlement, or to disaggregate the settlement amount into constituent elements. It wasn’t possible to separate the value of the non-monetary claims from the value of the equitable compensation claim that might result in a Loss within the meaning of the policy.

Was the settlement amount reasonable?

The second issue technically didn’t have to be decided given His Honour held the settlement amount didn’t ‘result from’ Di Dio’s alternative equitable compensation claim, being the requirement to trigger the insuring clause of the policy.

However, Justice Garde went on to consider the issue in any event, confirming Sayers, as the insured, was the party who bore the onus of proving reasonableness based on an objective test. His Honour held it wasn’t open to conclude that the settlement amount was a fair and reasonable settlement of the monetary claim for equitable compensation against Sayers, noting:

• the claim for equitable compensation against Sayers was a small component of the 2017 action by comparison with all the other issues between Sayers and Di Dio. This distinguished the case from most liability insurance cases where the monetary liability of the insured is the sole or principal issue;
• there was little, if any, nexus between the equitable compensation claim against Sayers and the settlement amount paid by Sayers; and
• it wasn’t possible to allocate or apportion the settlement amount among all the different legal and commercial benefits Sayers obtained from the terms of settlement.