Clarifying the operation of exclusions in composite Professional Indemnity Policies

A recent decision from the Supreme Court of Queensland has considered the construction of an Approved Product exclusion in a financial advisors professional indemnity policy. The issue for the Court to consider was whether the exclusion applied to both the Australian Financial Services Licence (AFSL) holder and their Authorised Representative (AR) or just the AR. The Court determined in favour of the Insured that the Policy was a composite professional indemnity policy. Therefore the exclusion only applied to the AR and not his employer. Clyde & Co partner Matthew Pokarier considers the decision and its implication below.

Background

The insured is a firm of financial advisers and holds an Australian Financial Services Licence. One of its authorised representatives was Mr Jonathan Bonnett. Mr Bonnett provided negligent financial advice to a client who suffered a financial loss. The investment that Mr Bonnett recommended was not on the Insured's list of approved financial products. Subsequently, the client commenced legal proceedings against Mr Bonnett and the insured to recover their financial loss. The insured settled the proceedings and then sought an indemnity under their professional indemnity policy for the settlement and the associated legal costs. The insurers refused indemnity, arguing that Mr Bonnett's investment advice was an unapproved product and the Approved product exclusion in the policy applied to exclude the claim. The Insured commenced proceedings in the Supreme Court of Queensland, seeking a declaration that the exclusion did not apply.

Policy Wording

The Insuring clause under the Policy provided cover as follows:

[Clause 3.3] WE agree to provide cover in respect of any CLAIM against the INSURED resulting from the conduct of any consultant, subcontractor, agent or Authorised Representative in the PROFESSIONAL BUSINESS of the INSURED and for whose acts, errors, or omissions the INSURED is liable.

WE will not cover the consultant, subcontractor, agent or Authorised Representative.

The term ‘INSURED’ was defined at clause 6.11 of the Policy Wording:

INSURED means

(a) The person, partnership, company, SUBSIDIARY or other entity, specified as the INSURED in the Schedule; and

(b) 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, but only while acting in the course of the PROFESSIONAL BUSINESS

Finally, the Policy contained the following exclusion:

Section 7: EXCLUSIONS

WE will not cover the INSURED, including for DEFENCE COSTS or other loss in respect of...

7.20 Approved Product and Product Disclosure

Any CLAIM or liability directly or indirectly based upon attributable to or in consequence of any:

(a) Financial products or instruments not contained in the INSURED’S approved product list at the time the advice was given;”

Issues

The only issue was whether the exclusion applied to the insured. The Insured argued that the Policy should be interpreted as a composite policy that provides coverage for multiple insureds with separate interests. Consequentially any exclusion denying coverage to one Insured preserves it for another; therefore, the exclusions should only apply to Mr Bonnett. The insurers argued that the Policy wordings should be given a business-like interpretation and that the exclusion should be applied to all Insured.

Judge’s Consideration

The Judge accepted that the Policy did provide composite cover. This was because the interests of the insured and Mr Bonnett were separate, and both could be considered insured under the policy given the binary definition of insured. As the policy provided composite cover, any exclusion must allow for a harmonious construction to the whole Policy. The Judge confirmed that the difficulty in interpreting the exclusion clause was that it was unclear as to whether the use of the word "the INSURED" referred to the person responsible for the approved product list (the insured) or the Authorised representative (Mr Bonnett). In considering the opposing construction, the Judge accepted that the fact the Policy provided composite cover was an important factor in determining the intention of the cover, as allowing for PI coverage for each insured unless an exception clearly limited coverage. In this case, the ambiguity contained in the exclusion clause as to the identity of the “INSURED” meant that the construction should favour the applicant's instruction. This conclusion was further supported when considered in line with the Policy Schedule and an endorsement that specifically excluded any claim connected to providing financial services provided by an authorised representative without appropriate authorisation under an AFSL. When compared with exclusion 7.20, which did not add the additional words “authorised representative", it highlighted that exclusion 7.20 did not apply to the Insured. The Insurers would have drafted the Approved Product exclusion consistent with the endorsement if it had.

Analysis

The case provides a valuable reminder when interpreting professional indemnity wordings to consider whether the policy operates as a composite policy and to consider whether the Policy provides coverage to multiple parties. 

The case demonstrated the complexity associated with the interpretation of insurance coverage and the importance of not considering an exclusion clause in isolation but constructing its meaning by reference to the policy as a whole and the commercial purpose of the contract. When interpreting exclusions clauses in professional indemnity policies, special attention should be placed on considering whether the use of catch-all definitions such "the Insured" correctly reflects the underwriting intention

The case also highlights the difficulties associated with using endorsements without considering how such "bolted on" text may affect the overall interpretation of the policy. Underwriters should ensure that they check whether amendments to the policy through endorsements allow for consistency meaning across the whole Policy.

If you wish to discuss the impact of this decision further, don't hesitate to get in touch with Clyde & Co partner Matthew Pokarier.