21 February, 2016
In this publication, we have pulled together the insurance cases from the past 12 months which are most relevant for corporate policyholders. Although cases considering insurance policies can turn on their specific context and the words of the relevant contract, there are some common threads which emerge from the cases included in this update.
First, there were a number of cases where insurers sought to avoid policies based on allegations of fraudulent misrepresentation or non-disclosure. Although most attempts to avoid the coverage failed because the insurer could not prove it would otherwise have issued different policy terms and conditions, it is a timely reminder that policyholders need to be mindful of their disclosure obligations and have processes in place before inception or renewal to identify any material facts and circumstances.
Second, it has become clear that the duty to act with utmost good faith under s 13 of the Insurance Contracts Act 1984 (Cth) does not provide policyholders with any statutory rights or remedies over and above those in the policy itself. It does not mean that the insurer must put the policyholder's interests ahead of its own, nor does it prevent an insurer putting the policyholder to proof on difficult claims.
Third, another case has reinforced the high burden of proof that insurers must overcome if they are to decline insurance coverage based on allegations of the breach of the general obligations on policyholders to take reasonable precautions to avoid risks of loss. Despite this burden, we have seen insurers argue this defence several times in recent claims.
Finally, insurance policies are contracts and will be interpreted according to the normal principles of contractual interpretation. That means the words of the policy will be considered in light of the commercial purpose of the insurance contract. It is important to ensure that the words of the policy clearly reflect the intention of the parties.
In addition, last year we saw one of the first cases where a cyber liability policy came under judicial scrutiny in the US. We are yet to see any reported cases on cyber risk insurance in Australia, although as the threat and awareness of cyber risk increases, the development and purchase of cyber liability insurance products follows, so it is only a matter of time before the Australian courts will be asked to rule on cyber coverage.
We hope the 2015 Insurance Highlights provides insurance buyers and brokers with insights into some important trends and considerations relevant to renewal and claims. Please contact a member of our Insurance Team if you would like to discuss any of the cases in more detail.
FAIR PRESENTATION OF THE RISK REQUIRED BEFORE INSURERS WILL BE FOUND TO HAVE WAIVED DUTY OF DISCLOSURE
Hitchens v Zurich Australia Ltd (2015) 18 ANZ Insurance Cases
Facts
In December 2004, Mr Hitchens and Zurich Australia Limited (Zurich) entered into two life insurance policies which provided
income protection and cover in case of permanent disablement.
In September 2007, Mr Hitchens severed three fingers and a small section of his thumb. He claimed this caused him to be
permanently disabled and to suffer from psychological problems such that it was unlikely he would ever be able to work in an occupation similar to that in which he was previously employed.
Zurich initially made payments to Mr Hitchens under the policies, but after discovering that Mr Hitchens had failed to disclose a number of pre-existing medical conditions, Zurich reduced the payments in November 2007 and ceased them entirely in May 2008. In August 2010, Zurich purported to avoid the policies on the ground of fraudulent misrepresentation and non-disclosure.
Mr Hitchens subsequently commenced proceedings against Zurich, claiming that Zurich had waived the duty of disclosure as it was on notice of a number of issues relating to his health and medical history and failed to make inquiry of medical practitioners who had treated him. He further contended that in any event, Zurich had repudiated the contract by ceasing payments and Mr Hitchens had accepted that repudiation so there was no longer a contract on foot for Zurich to avoid.
Decision
(Supreme Court of New South Wales)
Justice White held that Zurich was entitled to avoid the policies.
His Honour held that Mr Hitchens had failed to disclose a number of medical issues in his proposal form and had therefore failed to comply with his duty of disclosure. The issue then became whether Zurich was precluded from avoiding the insurance contract on the basis that it had waived any non-disclosure, whether the non-disclosure was fraudulent or whether the agreement had been repudiated.
On the issue of waiver, His Honour held that there can only be waiver if the insurer, at any relevant time, knew there had been material non-disclosure or that it had the right to avoid the policies. Mr Hitchens’ obviously incomplete answer in respect of the last doctor he attended did not put Zurich on notice of other matters, such as the nature or frequency of the pain medication that Mr Hitchens had been taking or his concealment from doctors that he was obtaining prescriptions for the same drugs from other doctors. These were unusual matters and Zurich was not required to ‘be a detective’. That is, as there was not a fair presentation of the risk to Zurich, Zurich was not put on notice that there were material matters relevant to its decision whether or not to accept the risk and so its failure to make further inquiries did not amount to a waiver of the duty of disclosure.
On the question of fraud, Justice White found that Mr Hitchens’ failure to satisfy his duty of disclosure was deliberate and that he knew that the answers were false or misleading. His Honour accepted that Mr Hitchens expected the insurer to make further inquiries, but considered that he had deliberately completed the form in a way that would minimise that risk. On this basis, Zurich was entitled to avoid the policies on the grounds of fraudulent misrepresentation and fraudulent non-disclosure.
On the question of repudiation, His Honour held that the facts did not indicate that Zurich had repudiated the contract. Further, His Honour stated that even if that premise were established it would not mean that the contract ceased to exist for all purposes; the termination would have discharged the parties from future performance, but it would not have avoided the contract ab initio. Accordingly, there were no reasons for precluding Zurich from avoiding the contract from its inception on discovering the grounds that entitled it to allege fraudulent misrepresentation and non-disclosure.
His Honour concluded that by avoiding the policies from their inception, Zurich was entitled to recover the payments made to Mr Hitchens under the income protection policy to the extent they exceed the premiums paid, although Zurich did not file a cross-claim to recover this amount.
LESSONS FOR POLICYHOLDERS
Before an insurer will be taken to have waived disclosure of a material fact, there must be a fair presentation of the risk. Policyholders cannot rely upon the absence of further inquiry from the insurer as ground for waiving disclosure unless the risk is first presented in a fair and honest manner.
Even where an insurance policy is repudiated, and that repudiation is accepted thereby terminating the contract, the termination will discharge the parties from future performance, but does not avoid the contract ab initio. There is no reason an insurer could not then avoid the contract from its inception on discovering grounds that entitled it to allege fraudulent misrepresentation and non-disclosure.
UNDERSTAND HOW STANDARD EXCLUSIONS MIGHT IMPACT
YOUR PARTICULAR CIRCUMSTANCES
Oz Minerals Holdings Pty Ltd v AIG Australia Ltd (2015) 18 ANZ Ins Cases 62-064
Facts
On 20 June 2008, two mining businesses, Zinifex Limited and Oxiana Limited, merged. As a result of this merger, Oxiana, which was re-named OZ Minerals Limited (OZ Minerals), became the sole shareholder of OZ Minerals Holdings (the former Zinifex) (OZ Minerals Holdings).
In February 2014, a representative proceeding was brought against OZ Minerals for breaching disclosure requirements and for a series of misrepresentations which occurred before the merger. In June 2014, OZ Minerals sought contribution from OZ Minerals Holdings. OZ Minerals Holdings then claimed indemnity from its insurer, AIG Australia Ltd (AIG). AIG denied indemnity, arguing that the claim was excluded because the claimant (OZ Minerals) owned more than 15% of the defendant, so the claim allegedly fell within the Major Shareholder exclusion clause in the policy.
Issue
The issue in the case was one of timing and when one considered the application of the Major Shareholder criteria – was it when the wrongful act occurred (2008, when the entities were unrelated) or at the time of the claim (when they were related)?
The Major Shareholder exclusion stated:
‘The Insurer shall not be liable to make any payment under this policy in connection with any Claim brought by any past or present shareholder or stockholder who had or has:
(i) direct or indirect ownership of or control over 15% [or] more of the voting shares or rights of the Company or of any Subsidiary; and
(ii) a representative individual or individuals holding a board position(s) with the Company.’
At the time of the wrongful acts in 2008, OZ Minerals did not satisfy either of these limbs. However, at the time the claim was made, OZ Minerals satisfied both limbs.
OZ Minerals Holdings argued that the policy wording was ambiguous and should be interpreted to only exclude claims by a shareholder holding the threshold percentage of shares at the time of the wrongful act and at the time of claim (i.e. both limbs).
AIG argued that the policy wording was clear and that it excluded claims by a major shareholder which held the relevant shares either at the time of the wrongful act or at the time of the claim.
Judgment
(Supreme Court of Victoria)
Justice Hargrave held that the claim was excluded by the Major Shareholder exclusion clause and accordingly AIG was not liable to indemnify OZ Minerals Holdings.
His Honour reiterated that it was necessary to construe the policy in accordance with the usual contractual principles and that it is not the Court’s task to search for ambiguity in a contractual term. The Court must consider what reasonable people would have understood the words to mean, having regard to all of the words of the agreement.
Having regard to these principles, His Honour preferred the construction put forward by AIG that satisfaction of either limb would mean the exclusion applied, for three reasons.
(1) First,AIG’sconstructionwasgrammatical. OZ Minerals Holdings’ interpretation relied on reading 'had or has' as 'had and still has', which His Honour found to be inconsistent with how the policy dealt with past and present tenses.
(2) Second, AIG’s construction accorded with the structure of the policy. The policy was a ‘claims made’ policy rather than an ‘occurrence based’ policy. A wrongful act on its own is insufficient to trigger indemnity; the policy required both a wrongful act and a claim, the latter within the policy period. Construing the exclusion clause in the context of the policy as a whole, Justice Hargrave found the present shareholding of the Major Shareholder making the claim to be relevant and arguments for its exclusion justified.
(3) Third, AIG’s suggested commercial rationale was objectively reasonable. While the overarching purpose of the policy was to provide cover to the company’s directors and officers, His Honour found that the insurer should be protected from co-operation between the claimant shareholder and the insured to maximise the loss claimed by the insured. Further, AIG argued that the exclusion clause was also intended to prevent misuse of the insured company’s confidential information for the claimant’s forensic advantage. Their concern about this matter was also apparent in one of the General Provisions in the policy.
The Court dismissed OZ Minerals Holdings' claim for coverage. On 17 December 2015, the Victorian Court of Appeal upheld the decision.
LESSONS FOR POLICYHOLDERS
This case serves as a reminder that it is important to carefully consider what claims are being excluded by the exclusion clauses when entering into any insurance policy. For D&O insurance, especially after M&A activity, policyholders should consider whether the intention is for the policy to exclude claims by major shareholders at the time of the wrongful act or at the time the claim is made (or both).
Courts will not strain themselves to find ambiguity in contracts and exclusion clauses in insurance policies are no exception to this rule. They will be construed in light of the policy as a whole and having regard to the commercial purpose of the policy (including whether it is a claims made policy or occurrence based).
HIGH BAR FOR INSURERS SEEKING TO AVOID COVERAGE FOR FAILURE TO TAKE REASONABLE PRECAUTIONS
Hammersley v National Transport Insurance (2015) 18 ANZ Ins Cases 62-065
Facts
In July 2008, Andrew Hammersley, an employee of Kellara Transport Pty Ltd (Kellara), was towing a trailer along the East Tamar Highway in Tasmania. The trailer held a number of items, including a Caterpillar excavator. As a result of the additional items in the trailer, the excavator’s boom was not in the lowest possible position, as was the usual practice for transportation of an excavator.
Mr Hammersley attempted to drive under a railway overpass, but the excavator was too high and it collided with the overpass. The State of Tasmania owned the overpass and sued Mr Hammersley and Kellara for damages for negligence. Mr Hammersley and Kellara claimed on their insurer, National Transport Insurance, but the claim was declined on grounds that Mr Hammersley was reckless and driving the vehicle in an unroadworthy condition.
First instance
(Supreme Court of Tasmania)
The trial judge dismissed the claim against the insurer, holding that the insured vehicle was carrying a load in excess of that for which it was licensed and in excess of that permitted by law. A loss caused in these circumstances was excluded by the policy, unless the overloading was accidental. The policy defined ‘accident’ as ‘an unintended, unforeseen, unlooked-for happening or mishap, which is not expected or designed’.
The primary judge held that the overloading was not an accident, finding that the liability was excluded and upheld the declinature of the claim.
Decision on appeal
(Full Court of the Supreme Court of Tasmania)
Chief Justice Blow (with whom Porter and Pearce JJ agreed) overturned the decision on appeal, ruling against the insurer on all 3 exclusions relied upon in the defence.
First, the Court held that the overloading was accidental. The Chief Justice held that in order to establish the overloading was not accidental, the trial judge needed to make a finding that the event was actually expected or foreseen and that it had been obvious to the naked eye. His Honour held that as there had been no finding as to Mr Hammersley’s state of mind to rule on what he expected or had foreseen, liability was not excluded.
Second, it held that the vehicle was not being used in an unsafe or unroadworthy condition, since the load did not affect the ability of the driver to control the vehicle. As the handling of the vehicle was unaffected, it was not being used in an ‘unsafe or unroadworthy condition’, and the exclusion did not apply.
Finally, the Court considered the broader allegation that the loss was caused by recklessness, that is, by a ‘reckless failure to comply with any statutory obligations and by-laws or regulations…’
It was not controversial that Mr Hammersley had contravened regulations. However, His Honour held that such contraventions were not reckless, because ‘for insurance purposes, recklessness ordinarily involves a recognition that a danger exists, and indifference as to whether or not it is averted’, citing Diplock LJ’s definition of ‘reckless’ in Fraser v B N Furman (Productions) Ltd [1967] 1 WLR 898.
His Honour held that although the overloading was a ‘case of appalling inadvertence’, it was not reckless. His Honour held that there was no basis for concluding that Mr Hammersley foresaw, and was recklessly indifferent to, the possibility of any collision.
The appeal was therefore allowed and coverage was reinstated.
LESSONS FOR POLICYHOLDERS
This case confirms that the bar for an insurer seeking to exclude liability on the basis of a lack of reasonable precautions remains a high one.
This case also reiterates the fact that the commercial purpose of a policy such as this one is to provide the insured with an indemnity against liability for the consequences of any negligence, and a court will not readily find that the policyholder’s conduct deprived it of the commercial purpose of the insurance policy.
INSURER’S DUTY OF UTMOST GOOD FAITH LIMITED BY THE POLICY COVERAGE
Matton Developments Pty Ltd v CGU Insurance Limited (No 2) (2015) 18 ANZ Ins Cases 62-061
Facts
Matton Developments Pty Ltd (Matton) hired a crane and a crane operator to G & M Panel Constructions Pty Ltd. The crane and its operator were tasked with lifting and placing concrete tilt panels as part of the construction of a factory in Queensland.
On 1 February 2009, the crane’s boom collapsed, causing damage to the crane such that it was beyond economical repair. Matton claimed under its Contractors and Plant Insurance Policy issued by CGU Insurance Limited (CGU). The evidence established that the crane had been set up on a slope in contravention of the manufacturer’s guidelines and the relevant Australian Standards.
CGU refused to indemnify Matton on the basis that the damage was not ‘accidental, sudden and unforeseen’ as required by the policy and was excluded by operation of exclusions relating to the requirements as to the use of the crane.
Issues in dispute
The parties agreed a set of issues for determination, including:
(a) Whether the loss or damage was ‘accidental, sudden and unforeseen’ and, if so, whether any of the exclusions applied;
(b) Whether s54 of the Insurance Contracts Act (the Act) operated to forgive the act or omission and prohibit CGU from refusing the claim as the breach itself did not cause the crane to fall over; and
(c) The scope of the duty of utmost good faith implied into the policy by s 13 of the Act.
Decision
(Supreme Court of Queensland)
Justice Flanagan found in favour of CGU, dismissing the claim.
As a preliminary point, His Honour held that the crane collapsed as a result of the structural overload due to the crane being operated on a 7 degree slope in conjunction with the carrying of a 39.2 tonne load. The operation of the crane in this manner was in contravention of the manufacturer’s guidelines and in contravention of the relevant Australian Standards.
(a) Whether the policy responded to the claim and, if so, whether any of the exclusions applied
In respect of the first issue, His Honour held that on the proper construction of the policy, it did not respond to the claim. The policy responded to material damage in circumstances where the loss or damage was ‘accidental, sudden and unforeseen’ and where the crane was ‘located in the manner in which it was designed to be used’ and while the crane was ‘in use in the manner in which it was designed to be used’. His Honour considered the correct test for establishing whether the loss or damage was ‘accidental, sudden and unforeseen’ was a subjective test on the part of the insured with an objective qualification. The ‘objective qualifications’ are where there has been a deliberate acceptance of the risk or where an assured ‘embarks on a foolhardy venture’ where the loss or damage was ‘the almost inevitable consequence’. His Honour held that in the present case, the damage was
not accidental, sudden or unforeseen on the part of the crane operator nor the plaintiff (in the absence of evidence from the representative of the plaintiff).
His Honour held that, even if the policy did respond to the claim, the exclusion clauses for lack of reasonable precautions would apply in light of the manner in which the crane was being used.
(b) Whether s54 of the Act operated to forgive the act or omission and prohibit CGU from refusing the claim as the breach itself did not cause the crane to fall over
Having regard to the factual findings in respect of the cause of the collapse, His Honour held that Matton could not sustain an argument under s54 of the Act that ‘no part of the loss’ was caused by the operation of the crane in the manner in which it was being used.
(c) The scope of the duty of utmost good faith implied into the policy by s13 of the Act
His Honour held that the duty of utmost good faith requires an insurer to ‘act in accordance with commercial standards of decency and fairness, and with due regard to the insured’s interests, but will not require the insurer to put the interests of the insured above its own’. It does not equate to a fiduciary duty. It does not impose a statutory duty over and above the implied duty. An insurer is entitled to make further enquiries, put an insured to proof if suspicious and decline indemnity if appropriate.
LESSONS FOR POLICYHOLDERS
The duty of utmost good faith applies to both insureds and insurers in their dealings with each other. However, it does not give a policyholder any further rights than the coverage which exists in the policy and it will not prevent an insurer from putting the policyholder to proof if suspicious of a claim or require an insurer to put the interests of others above its own.
THERE IS NO AUTOMATIC NEED TO PAY A CLAIM BEFORE THE INSURER IS OBLIGED TO INDEMNIFY
Lambert Leasing Inc v QBE Insurance Ltd (No 2) (2015) 18 ANZ Ins Cases 62-081
Facts
In 2003, Jalgrid Pty Ltd and Dramatic Investments Pty Ltd (the Partnership) purchased an aircraft from Lambert Leasing Inc (Lambert). The Partnership leased the aircraft to Lessbrook Pty Ltd (Lessbrook).
Under the terms of the aircraft purchase agreement, the Partnership was required to maintain aircraft liability insurance, which covered Lambert and its related companies and indemnified Lambert in respect of any future claims resulting from the Partnership’s use or operation of the aircraft. Lessbrook obtained aircraft liability insurance from QBE Insurance Ltd (QBE). Under the QBE Policy, Lessbrook was described as ‘the insured’ and Lambert, SAL and the Partnership were named as ‘additional insureds’.
In May 2005, the aircraft crashed causing the death of the two pilots and 13 passengers on board. The relatives and dependants of the deceased brought proceedings in the United States against Lambert and the Partnership (amongst others) (US Proceeding).
Lambert made a claim under the QBE Policy for indemnity in respect of any liability it may have in the US Proceeding. There was no issue with Lambert being an additional insured, but QBE claimed that, under the QBE Policy wording, Lambert first needed to pay an amount in the US Proceeding before it could be indemnified.
The ‘pay to be paid’ issue
Clause 3.1 of the QBE Policy provided that QBE would indemnify Lambert:
‘in respect of all sums which the Insured shall become legally liable to pay, and shall pay, as compensatory damages (including costs awarded against the Insured).’
QBE argued that there were two preconditions that needed to be satisfied before it was required to provide indemnity to Lambert:
1 that Lambert has been found liable to a claimant (or has at least settled the proceedings because of its liability); and
2 that Lambert has first paid the amount as determined or agreed with the claimant.
Lambert disagreed and submitted that in the event that QBE’s interpretation was correct, QBE should be prevented from relying on it by reason of the duty of utmost good faith.
Decision
(Supreme Court of New South Wales)
Justice Rein held that Lambert was not required to ‘pay (first) to be paid’ by QBE.
In coming to this conclusion, Justice Rein adopted a purposive approach by considering the commercial realities and purpose of aviation insurance policies such as the QBE Policy. His Honour found that it would be ‘entirely surprising’ for an insured to have to pay the costs of a significant claim following an aviation crash before it could recover such costs from the insurer. If that was the case, there was a real risk that the insured could not pay such costs out of its own pocket, which could lead to the insured becoming insolvent. This would absolve the insurer from having to provide any payment under the policy. His Honour noted that the insurance contemplated by policies such as the QBE Policy was designed to avert such risks of an insured’s financial ruin and that QBE’s contentions were inherently inimical to the concept of insurance.
However, it was a precondition that Lambert be at least liable to pay the claimant (whether through an imposition of liability by a Court or through an agreement for settlement of a claim) before QBE became liable to pay Lambert. QBE would then be required to pay the money to Lambert so it could pay the claimant or pay the amount to the claimant directly on Lambert’s behalf.
Justice Rein did not find it was necessary to determine whether QBE’s reliance on clause 3.1 of the policy was a breach of its duty of good faith.
On the question of costs, his Honour also considered whether QBE was entitled to indemnity costs pursuant to a Calderbank offer that QBE had made to ‘walk away’. His Honour held that the ‘walk away’ offer made by QBE did not amount to a genuine compromise and QBE was not entitled to indemnity costs.
LESSONS FOR POLICYHOLDERS
Although there is no legislative prohibition under Australian law which precludes ‘pay to be paid’ clauses in insurance contracts, this case shows the difficulties in drafting and enforcing a provision that would in many instances defeat the purpose of insurance. If an insurer requires a claim to be paid before it will reimburse the policyholder, it must use the clearest language possible to reflect this intention.
This case also serves as a reminder that an offer to settle pursuant to the relevant court rules or a Calderbank offer must contain a genuine offer of compromise if it is to form the basis for an order to be entitled to indemnity costs. An offer to ‘walk away’ will not usually satisfy this test.
MAKE SURE D&O DEFENCE COSTS ARE NOT ERODED BY EARLIER CLAIMS
Ransley v Chubb Insurance Company of Australia Ltd (2015) 18 ANZ Ins Cases 62-078
Facts
Mr Ransley was a former director of Doyles Creek Mining Pty Ltd (DCM). DCM had obtained a Directors and Officers Liability policy from Chubb Insurance Company of Australia Ltd (Chubb).
Mr Ransley was called to give evidence in an inquiry conducted by the NSW Independent Commission Against Corruption (ICAC Inquiry) over the granting of an exploration licence. He claimed under the D&O policy for his costs of legal representation in respect of the ICAC Inquiry.
Chubb was content to cover the claim, but contended that, having regard to the $2 million limit of indemnity and the $1.25 million it had already paid toward the other directors' costs, the maximum it was liable to pay was
$750 thousand.
Issues for consideration
By clause 7 of the policy, Chubb’s liability was limited as follows:
'The Company’s maximum liability for Loss on account of each Claim, whether covered under one or more Insuring Clauses, shall not exceed the Limit of Liability for each Loss set forth in Item 2(a) of the Schedule.'
Loss is defined in the policy (relevantly) as:
‘the amount which an Insured becomes legally liable to pay on account of any covered Claim…’
Item 2(a) of the Schedule stated the relevant limit was $1 million although Chubb accept additional cover was available, taking the total coverage available to $2 million.
Chubb argued that its maximum aggregate liability for all claims in relation to the ICAC Inquiry was $2 million. As it had already paid out approximately $1.25 million, it was only liable to pay up to $750 thousand to Mr Ransley.
The Court considered two questions separately from and prior to all other questions:
1 What was Chubb’s maximum liability under the policy in respect of each claim made by an insured under the insuring clause?
2 What was Chubb’s maximum aggregate liability under the policy in respect of claims made by insureds under the insuring
clause?
Decision
(Supreme Court of New South Wales)
Justice Ball found in favour of Chubb.
His Honour rejected Mr Ransley’s submission that the policy should be interpreted as providing indemnity of up to $2 million in respect of each director. Mr Ransley had submitted that the word “Loss” had a defined meaning which must be applied to interpreting clause 7, but His Honour held that it would make no grammatical sense to substitute the definition of Loss in this case.
That is, should Mr Ransley’s submission be adopted, the clause would read that ‘the Company’s maximum liability for [the amount which an Insured becomes legally liable to pay on account of any covered Claim] on account of each Claim…’, which makes no sense. His Honour held that Loss in this case was an abstract noun,
made specific by the words ‘on account of each Claim’.
His Honour also contended that Mr Ransley’s interpretation did not sit easily with other parts of clause 7 or the Schedule. The Schedule identifies the limit in respect of each Loss, rather than each Insured, making it apparent that the limit was intended to apply by reference to loss rather than by reference to an insured. If Mr Ransley’s interpretation was preferred, his Honour reasoned that the aggregation clause would be irrelevant to the limit imposed by the first paragraph of clause 7.
His Honour also noted that it made commercial sense to limit the cover available for formal investigations in circumstances where the policy was intended to cover loss in respect of Wrongful Acts as well as formal investigations. By construing the limit in this way, the aggregate limit of indemnity for Loss of $5 million would not be exhausted by legal expenses in respect of formal investigations.
LESSONS FOR POLICYHOLDERS
It is important when including limits in an insurance policy that it is clear whether the limit applies in aggregate or in respect of each claim. This case highlights the importance of avoiding the situation where the aggregate losses of the other directors and officers erodes the limit of cover available for another director or officer who makes a claim later than the earlier claims.
“MORAL” OR CHARACTER RISKS OF POLICYHOLDER CAN BE RELEVANT TO RISK
Stealth Enterprises Pty Limited v Calliden Insurance Limited (2015) NSWSC 1270 Facts
Stealth Enterprises Australia Pty Limited (Stealth) owned and operated ‘The Gentleman’s Club’ brothel in ACT. The brothel’s premises were insured for fire and business interruption under a policy with Calliden Insurance Ltd (Calliden).
On 1 January 2012, there was a fire at the brothel which damaged the property and caused business interruption to the brothel. Stealth made a claim under its policy.
Calliden claimed that Stealth had failed to disclose that Mr Baris Tukel (the sole director of Stealth) and his brother Mr Fidel Tukel (the brothel manager) were associated with the Comancheros bikie gang, and also that the brothel was no longer registered under the Prostitution Act 1992 (ACT). On that basis, Calliden denied indemnity on grounds of both fraudulent and innocent non-disclosure (in the latter case claiming that it would not have issued the policy at all so its liability should be reduced to nil).
Issues in dispute
The issues for determination were:
(a) whether the Tukels’ association with the Comancheros was a matter relevant to the decision of the insurer whether to accept the risk;
(b) whether a reasonable person in Stealth’s position would know that to be relevant; and
(c) whether Calliden would have issued and/ or renewed the policy had it known of the bikie association and non-registration of the brothel.
Decision
(Supreme Court of New South Wales)
Justice Schmidt held that Calliden was entitled to deny indemnity on the basis of the non-disclosure. In relation to the 3 issues,
Her Honour found:
(a) As to whether the Tukels’ association with the Comancheros was relevant to the risk, Her Honour held that it was a matter of common knowledge that the Comancheros are a bikie gang and that bikie gangs are known to engage in activity which may result in property damage or personal injury. She found that it would accordingly be relevant to the decision of the insurer whether to accept the risk.
(b) Having established the matter was relevant to risk, Her Honour considered whether a reasonable person could be expected to know that membership with the Comancheros was relevant to Calliden’s decision. Her Honour held that given what was known by Stealth itself and also what was a matter of common knowledge as at 2010 about the activities of the Comancheros, a reasonable person could be expected to know the matter was relevant. It was no excuse to Stealth that there was no specific question asked about bikie gang membership; s21 of the Insurance Contracts Act (the Act) imposed a duty on an insured to disclose
relevant matters.
Her Honour held, however, that the non-disclosure was not fraudulent. Even though there had been a non-disclosure, the evidence of fraud was not clear and cogent such as to result in a finding of fraud. As the non-disclosure was innocent, Calliden needed to establish that it had been prejudiced by the non-disclosure.
(c) In respect of whether Calliden would have issued and/or renewed the policy, Her Honour accepted the evidence of the brokers and Calliden’s underwriting guidelines to support a finding that Calliden would not have entered into the policy had the matters been known. Having regard to the non-disclosures, Calliden was entitled to reduce its liability under the policy to nil pursuant to s28(3) of the Act.
DIRECTORS ARE LIKELY TO BE NON-EXECUTIVE DIRECTORS UNLESS MANAGEMENT AUTHORITY IS CONFERRED
AIG Australia Ltd v Jaques (2015) 18 ANZ Ins Cases 62-056
Facts
Mr Jaques was a director of Australian Property Custodian Holdings Limited (APCHL), which held a management liability policy with AIG Insurance Limited (AIG). Under the policy, AIG indemnified insured persons (including Mr Jaques) for claims made against them during the policy period for a wrongful managerial act. Executive directors were insured for losses up to $5 million, while non-executive directors were insured for an additional $1 million (i.e.$6 million in total).
During the policy period, AIG was notified of claims made against Mr Jaques for wrongful managerial acts. Mr Jaques sought indemnity for the higher limit as a non-executive director. AIG was only prepared to offer the lower level of cover on the basis that Mr Jaques was an executive director at the relevant time. The Court had to consider the factors relevant to whether Mr Jacques was an executive or non-executive director as there was no definition of either term in the policy.
First instance
(Supreme Court of Victoria)
The trial judge gave judgment in favour of Mr Jaques, holding that he was a non-executive director and therefore entitled to the benefit of the additional policy limit. As there was no definition in the policy which offered assistance, the trial judge considered:
(a) the general legal principles concerning interpretation of insurance policies and judicial comment on the nature of the roles of executive and non-executive directors; and
(b) evidence in a number of different categories, such as the business and structure of APCHL, Mr Jaques’ employment with APCHL, and the fees received and tasks carried out by Mr Jaques.
AIG appealed the decision, claiming that the language used by the company itself indicated that Mr Jacques was an executive director.
Decision on appeal (Victorian Court of Appeal)
The Victorian Court of Appeal dismissed the appeal and affirmed the decision that Mr Jaques was a non-executive director.
It held that the trial judge’s decision was consistent with the authorities and had given appropriate weight and consideration to the factual matters raised by AIG on appeal. The Court agreed that a director is necessarily a non-executive director in the absence of any further authority conferred upon him or her by the company. The Court also agreed that a director is an executive director if they are ‘performing executive functions in the management and administration of the company’, whereas non-executive directors are usually independent of corporate management.
INSURANCE COVER FOR LIABILITY ARISING FROM CYBER ATTACKS
A number of US cases have held that coverage for data breaches is not available under typical general liability policies because the data breach did not amount to bodily injury or property damage and the ‘hack’ itself was not a breach of the right to privacy in circumstances where the hackers had not published the data.
In Columbia Casualty Company v Cottage Health System, coverage was declined under a cyber liability policy on grounds that the policyholder had allegedly failed to continuously implement procedures and risk controls which it had represented existed in its application for insurance. The case has been sent off for ADR so no decision on the merits has been made. However, this case serves as another warning to policyholders about the importance of accurate disclosure on policy applications and proposal forms.
In Travelers Property Casualty Company v Federal Recovery Services, the United States District Court in Utah had to consider whether a claim was covered by a cyber insurance policy.
A short summary of the decision is set out below.
Facts
Federal Recovery Services (Federal) was in the business of providing processing, storage, transmission, and other handling of electronic data for its customers. Federal obtained a CyberFirst policy from Travelers Property Casualty Company (Travelers).
Federal provided services to Global Fitness Holdings LLC (Global Fitness), by which it stored billing information from Global Fitness’ customers and collected the membership fees. When Global Fitness entered into an asset purchase agreement with LA Fitness, it agreed to transfer all of the billing information to LA Fitness and directed Federal to do so. Federal provided some data, but without several critical pieces of the information requested and, when Global Fitness pursued the information, Federal withheld the data and issued ‘vague demands for significant compensation’ to Global Fitness.
Global Fitness brought a number of claims against Federal and Federal claimed under its cyber insurance policy with Travelers, demanding that Travelers defend the claim by Global Fitness.
Travelers refused to defend Federal on the basis that the claims brought by Global Fitness were not claims under the policy and therefore did not enliven the duty to defend. The policy covered circumstances where loss was caused by ‘errors and omissions wrongful act’, whereas the claims by Global Fitness alleged knowledge, wilfulness and malice.
Decision
Justice Stewart held in favour of Travelers, finding that to trigger Travelers’ duty to defend, the allegations by Global Fitness needed to sound in negligence. These claims did not.
Federal filed a counter claim against Travelers for, among other claims, a breach of good faith. Earlier this year, the District Court of Utah held that the claim for the breach of good faith would go through to trial.
LESSONS FOR POLICYHOLDERS
General liability policies are unlikely to cover cyber risks and cyber insurance will not cover all breaches associated with data issues. As with all policies, it is important for policyholders to understand what is and is not covered by the policy being purchased.
For further information, please contact:
Mark Darwin, Partner, Herbert Smith Freehills
mark.darwin@hsf.com
