Court of Appeal identifies inconsistency between insuring clause and exclusion clause
August 9, 2017
Malamit Pty Ltd v WFI Insurance Ltd  NSWCA 162
WFI Insurance Ltd (WFI) issued a professional indemnity policy (the Policy) to Malamit and Blue Dolphin Racing Pty Ltd as trustee for MA and LA Mitchell Investment Trust (Malamit).
WFI agreed to indemnify Malamit for any claim in respect of any breach of professional duty in its conduct of its professional business, namely project management. ‘Claim’ was defined as a civil proceeding brought by a third party.
Malamit contracted with Treetops Lismore Pty Ltd (Treetops), as trustee of a unit trust for the Lismore Business Park Unit Trust (the Trust), to provide project management services. At all relevant times, the sole director of Malamit, Mr Mitchell, was also the sole shareholder of Treetops.
After a landslip, Treetops sued Malamit for allegedly providing negligent project management services. Malamit sought indemnity from WFI under the Policy.
WFI declined cover on two grounds: being that Treetops was not a ‘third party’
vis-a-vis Malamit as required by the definition of ‘claim’ in the Policy such that the claim did not fall within the insuring clause, and also that even if denial on that basis was incorrect, the claim was excluded by clause 7.15, which excluded cover for any claim:
- by, on behalf of or for the benefit of any insured;
- by, on behalf of or for the benefit of any subsidiary; or
- by, on behalf of or for the benefit of any family member of the insured.
‘Insured’ was defined in the policy as:
The person, partnership, company, subsidiary or other entity, specified as the insured in the schedule; and
Any person who is during the insurance period a principal, partner, director or employee of the person, partnership, company, subsidiary or other entity specified as the insured in the schedule…
At first instance, Sackar J found that WFI was entitled to refuse indemnity on both grounds asserted by WFI as Treetops and Malamit were not third parties as contemplated by the insuring clause, and that as the claim was bought by a subsidiary of the insured, it was excluded by clause 7.15.
Malamit appealed. The key issues on appeal were whether the:
- proceeding against Malamit was brought ‘by’ a ‘third party’
- claim against Malamit was brought ‘by’ a ‘subsidiary’
- claim against Malamit was brought ‘on behalf of’ or ‘for the benefit of’ an ‘insured’ or ‘family member’ of an ‘insured’.
Was the proceeding against Malamit brought ‘by’ a ‘third party’?
Relevantly, the policy defined ‘claim’ as a civil proceeding brought by a ‘third party’ against the insured.
Reversing the decision of the NSW Supreme Court, the Court of Appeal found that Treetops was a ‘third party’ for the purposes of the insuring clause. In coming to this conclusion, the Court had regard to exclusion clause 7.15, noting that, as far as possible, a contract should be construed with a view to resolving inconsistencies and giving effect to all of its terms.
Reading the definition of ‘claim’ into the insuring clause, the Court considered the reference to ‘third party’ could have three possible meanings:
- someone who is not a party to the contract
- someone who is not an insured under the contract
- anyone other than the particular insured against whom the proceeding was brought.
Starting with the proposition that an exclusion removes cover for something which would otherwise be covered, the Court identified that the primary Judge’s decision would give rise to an inconsistency between the insuring clause and exclusion
Exclusion clause 7.15 excluded cover for a claim by ‘any insured’, its premise being that a proceeding brought by one insured against another is a claim that would otherwise be within cover (but for the exclusion). The Court considered the reference to ‘third party’ should be construed in light of this premise, which is only achieved by the third meaning identified above, that is, ‘any person other than the insured against whom the proceeding has been brought…’
As such, WFI’s refusal of indemnity on this ground was rejected.
Was the claim against Malamit brought ‘by’ a ‘subsidiary’?
Exclusion clause 7.15 (b) excluded cover for claims brought by ‘any subsidiary’, irrespective of the capacity in which the claim was brought. ‘Subsidiary’ as defined in the policy included any entity in which the insured owned or controlled 50% of the issued voting shares. Mr Mitchell at all relevant times was the sole shareholder of Treetops.
Additionally, while Mr Mitchell was the sole director of Malamit, he was not listed as an ‘insured’ on the schedule. Rather he was an ‘insured’ only by virtue of the definition of ‘insured’ in the policy.
Malamit advanced two arguments in this regard:
- a claim brought by a person in its capacity as trustee of a trust is a claim brought ‘by’ the Trust; and
- even if Mr Mitchell fell within the definition of ‘Insured’ under the policy, the use of the definite article ‘the Insured’ in the definition of ‘Subsidiary’ indicated that that the reference must be only to ‘the Insured’ named in the schedule, as distinct from any of the Insured as defined.
In relation to the first of these arguments, the Court considered that the primary Judge was correct in dismissing Malamit’s argument. On appeal, the Court identified two difficulties with Malamit’s submission.
The first difficulty was that the insuring clause and definition of ‘claim’ envisaged a third party bringing a claim against the Insured to enforce some civil liability. In this instance, any liability, if established, would be to Treetops and not the Trust. The Trust was not the entity by whom the proceeding was brought, nor the entity to whom the insured would be liable. That entity in both instances would be Treetops.
Secondly, the definition of ‘Subsidiary’ referred to an entity which either by legislation may be deemed a ‘Subsidiary’, or which had issued voting shares. In either event, the reference is to a company, or some other entity which has a legal personality (which the Trust did not).
In rejecting Malamit’s second argument, the Court noted that the evident purpose of the relevant exclusion was to avoid the risk of collusion or assistance between Insureds. As such, the expression ‘any insured’ in the context of the exclusion must mean any other insured and encompassed persons answering that description, and was not limited to those described in the schedule. The Court said further that the same reasoning be applied to ‘any subsidiary’ which must describe any entity answering that description.
As such, the Court upheld WFI’s refusal of indemnity and the appeal was dismissed.
Was the claim against Malamit ‘on behalf of’ or ‘for the benefit of’ an ‘insured’ or ‘family member’ of an ‘insured’?
Although the Court had already determined that WFI was entitled to decline indemnity, it briefly considered the final issue on appeal.
In short, the Court found that neither Mr Mitchell nor his family members enjoyed any beneficial interest, direct or indirect, in the claim against Malamit, as Mr Mitchell no longer held any units in the Trust. Rather, he and his family members merely held shares in companies which directly or indirectly held units in the Trust. The Court considered that in order to satisfy this exclusion clause, the claim would have to have been brought for the benefit of that person, which would only be the case were the proceeds to be paid to or at the direction of the family member. Accordingly, a claim brought by the trustee of a unit trust did not answer that description.
While WFI was ultimately successful in denying indemnity, this decision demonstrates how an inconsistency in terms can give rise to perhaps unintended results, so it is important to review the policy as a whole.
Authored by Tim Daley, Lawyer, Melbourne
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