Clear and precise drafting is essential when it comes to setting out the scope of cover provided under an insurance policy. This is especially significant in the professional indemnity and directors’ and officer’s insurance space where policies often seek to include or exclude complex legal and commercial relationships.
The advantage of clearly defining the parties’ intention in a professional indemnity policy was recently highlighted by the New South Wales Court of Appeal in Malamit Pty Ltd v WFI Insurance Ltd  NSWCA 162 (Malamit). In that case, the insurer was able to avoid indemnity for a loss in excess of $3.2 million thanks to the clear language contained in an insured versus insured exclusion clause.
From the (Tree)top down: Untangling corporate relationships
Malamit concerned an appeal from the decision of Sackar J in Malamit Pty Ltd v WFI Insurance & Ors  NSWSC 1306. The case involved a claim by Malamit Pty Ltd (Appellant) on a professional indemnity policy held with WFI Insurance Ltd (Respondent). The policy covered the Appellant for civil proceedings “brought by a third party” against an insured. The definition of an insured under the policy included present and former directors of the named corporate insureds, being the Appellant and Blue Dolphin Racing Pty Ltd (Blue Dolphin). However, the policy excluded cover for:
(a) Any CLAIM by, on behalf of or for the benefit of any INSURED;
(b) Any CLAIM by, on behalf of or for the benefit of any SUBSIDIARY; or
(c) Any CLAIM by, on behalf of or for the benefit of any FAMILY MEMBER of the INSURED unless the FAMILY MEMBER is acting without any prior direct or indirect solicitation or co-operation from the INSURED,
Irrespective of the capacity in which the CLAIM is brought.
The Appellant ran a project management business. In 2008 the Appellant contracted with Treetops Lismore Pty Ltd (Treetops) to provide project management services for a development in Lismore. Treetops was also the trustee of the Lismore Business Park Unit Trust (Trust).
At all relevant times, Mark Mitchell was a director of Treetops and the sole director of the Appellant. He also held shares in Blue Dolphin, which wholly owned the Appellant. Further, Mr Mitchell and members of his family held shares in the corporate unitholders of the Trust.
In 2010 a landslip occurred at the site the Appellant was providing project management services for. As a result, Treetops brought a claim against its managing engineers, who in turn joined the Appellant to the proceedings a concurrent wrongdoer.
The Appellant made a claim on its professional indemnity policy which was denied.
At first instance, Sackar J found that the Respondent was entitled to refuse indemnity because Treetops, as trustee, was not a “third party” within the insuring clause and separately, the proceeding was brought “by” a subsidiary (Treetops) of an insured (the director-shareholder of the Appellant). The Appellant appealed against that decision.
The questions for determination on appeal were:
- Whether the proceedings against the Appellant were brought by a “third party”?
- Whether the claim was brought “by” a “subsidiary” for the purposes of clause 7.15?
- Whether the claim against the Appellant was “on behalf of” or “for the benefit of” an “INSURED” or “FAMILY MEMBER” within the meanings given under the policy?
A subsidiary by another name would smell as sweet
The primary judgment on appeal was delivered by Meagher JA with whom Bathurst CJ and Beazley P agreed.
In regard to the first question, Meagher JA noted at  that the description “‘third party’ generally refers to someone who is not a party to the arrangement or who has no interest in the subject matter.” In the present case, the insurance policy was issued to the Appellant, Blue Dolphin and present and former principals, partners, directors or employees of those companies. Citing the High Court case of Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522, his Honour observed at  that the descriptor “third party” had to be considered in light of the policy as a whole, including the relevant exclusion clauses.
The exclusion of “a claim by, on behalf of or for the benefit of any INSURED” under clause 7.15(a) made it clear that the premise of the policy was to exclude proceedings brought by one insured against another. Therefore, the expression “third party” had to be read in light of this intention. That is, a “third party” for the purposes of the policy is any person other than the insured against whom proceedings are brought. This is the case despite the fact the claim was brought by a trustee connected with the insured under the policy.
Accordingly, Sackar J’s findings on this point were overturned by the Court of Appeal.
The next question on appeal was whether Treetops brought a claim as a subsidiary of an insured for the purpose of the exclusion contained in clause 7.15(b).
Treetops commenced proceedings in its capacity as trustee of the Trust against the Appellant. The term “subsidiary” is defined under clause 6.19 of the policy as any corporate entity in which the insured owns or controls 50% of the issued voting shares. At all relevant times, Mark Mitchell was the sole director of the Appellant; acted in the course of its project and development business; and owned all of the shares in Treetops. As such, Mark Mitchell was an insured and Treetops a subsidiary within the meaning of clause 6.19.
The fact that Treetops brought its claim in its capacity as trustee made no difference to this conclusion in Meagher JA’s opinion. Importantly, in reaching this conclusion, Meagher JA relied on the words “irrespective of the capacity in which the CLAIM is brought” contained at the end of exclusion clause 7.15, as evidence of the parties’ intention. It is questionable whether the Court would have been as quick to dismiss the issue of the capacity in which Treetops brought its claim had this clear intention not been evidenced in the policy wording.
As the Court of Appeal accepted Treetop’s claim was a claim excluded under the policy, the appeal was dismissed.
Despite this, Meagher JA went on to consider the final question concerning whether Treetop’s claim was brought by or on behalf of a family member of the insured.
The Respondent argued that Mr Mitchell and his family stood to gain an indirect benefit if Treetops’ claim succeeded. This indirect benefit, even in the absence of a monetary benefit, should suffice to satisfy the “for the benefit of” requirement under clause 7.15(c). This argument was rejected by the Court of Appeal. As Treetops made its claim as trustee for the Trust, Mr Mitchell and members of his family did not enjoy any direct or indirect beneficial interest. This is because, as Meagher JA pointed out, units held in a trust do not confer any equitable interest in assets held at law by another: see Macaura v Northern Assurance Co Ltd  AC 619 cited in support of this position by Meagher JA.
Take away message
It is a moot point whether the Respondent would have succeeded in the appeal had the words “irrespective of the capacity in which the CLAIM is brought” not been included in exclusion clause 7.15. In any event, the inclusion of these words plainly had a significant bearing on the Court of Appeal’s final decision. The decision, therefore, acts as a useful reminder for insurers when considering the scope of cover provided under a policy. Clear language should be adopted by the insurer to ensure that there can be no confusion as to what is covered under the terms of the policy.
The decision in Malamit also highlights the need to consider the purpose of exclusion clauses and where they fit in terms of a policy as a whole. Exclusion clauses operate to “cut out something already included by the general recitals”: Lake V Simmons  AC 487, at 507 (per Viscount Sumner).
However, exclusion clauses do not operate in a vacuum and will be read in a manner which gives “congruent operation” to the policy as a whole. Care must, therefore, be taken in drafting an exclusion clause to ensure that any terms used fit within the boarder language and purpose of the overall policy. Any inconsistency in the drafting of an exclusion clause is likely to result in that clause being given a more limited operation than the insurer may have anticipated.