The Construction and Rectification of an Insurance Policy in Australia – Construction
Introduction
With the developing swell of litigation looking at the construction and, if appropriate, rectification of insurance policies caught up in the Covid-19 epidemic, two recent decisions of the Federal Court of Australia provide a useful contribution to the analysis of the principles in Australian insurance law of policy construction and rectification.
These cases concern the same set of facts placed against the background of the notorious Side C of Management Liability Policies. Due to their relative complexity, I intend to spread my analysis across two articles.
This article will cover the question of policy construction – how do we read a term or terms of a policy? How do we make sense of it all?
Background
Quintis Ltd (‘Quintis’) was a sandlewood plantation investment company. Its management liability insurers comprised various Lloyd’s underwriting syndicates subscribing to certain primary and excess policies.
Upon learning that it, amongst others, had breached its statutory obligations, its investors brought two class actions against Quintis.
During the prosecution of those class actions, a fundamental issue emerged as to the limit of indemnity available to Quintis and therefore, the investors, under the ‘Entity Securities Liability optional extension’ (conventionally known as ‘Side C cover’).
Quintis and its investors contended that as a matter of intention (hence rectification) and construction, the limit of indemnity was $50million. The Insurers contended that as a matter of construction the limit was $10million and that rectification was not available.
The magic trick? The Schedule says that the limit for ‘Entity Securities Liability’ is $10million!
Policy Construction
The Court concluded that as a matter of construction of the relevant wording and Schedule, the limit of indemnity for the Side C coverage was $10million.
The Court acknowledged as its starting point the principles of construction about which I have previously written. Even though there are important aspects of evidence and perspective to recognise in this exercise, the key point in Australian law is that: -
‘A clause in an insurance policy must be considered in the context of the policy as a whole, and the policy must be set in its surrounding circumstances or factual matrix, including, if excess policies are involved, the broad scheme of insurance cover intended to provide layers of insurance against the same risk’
The Court’s finding against Quintis that as a matter of construction the sublimit for the Side C cover was $10million was built upon the following: -
Plain Reading - The plain reading of the schedule allocated to Side C a limit of $10million and that reading extended up through the excess lawyers.
Businesslike Interpretation - This plain reading addressed the language used by the parties in ‘a prudent businesslike way’.
Ambiguity - While not accepting that the relevant terms of the wording and Schedule were ambiguous, there was no admissible evidence which would resolve any ambiguity in a way different to the Court’s plain reading of those terms
And then, finally, contra proferentum -
‘Even if (the Court) was to accept that the Relevant Insurers were the proferens in the transaction (a questionable submission given that the insurance policies were drafted and presented by Price Forbes to the Relevant Insurers: cf Halford v Price (1960) 105 CLR 23 (at 30 per Dixon CJ with whom Menzies J agreed and at 34 per Fullagar J), the contra proferentem rule is but one of a number of rules of contractual construction. Although it was traditionally the case that the contra proferentem rule applied strongly in insurance contracts, the rule is one of last resort, to apply only when ambiguity remains after all other avenues of construction have been exhausted. That view accords with the established position that the process of construing insurance contracts is governed by ordinary principles of contractual interpretation. Hence, even if there was ambiguity in the contract, (the Court is) not of the view that the contra proferentem rule assists Quintis.’
It followed that on their proper construction, relevant policy terms did not provide, as Quintis and its investors had advocated, Side C cover of up to $50 million.
Key Point
So, at this point in these cases, Quintis and its investors are on the back foot. The principled reading of the relevant terms limits reveals that the available indemnity is $10million.
So how is that the Court ultimately found against the insurers. As we will see next week – rectification.
The key point is that construction and rectification are completely different processes, potentially, generating different outcomes.
The names of the cases are Quintis Ltd (Subject to Deed of Company Arrangement) v Certain Underwriters at Lloyd’s London Subscribing to Policy Number B0507N16FA15350 [2021] FCA 19 and Quintis Ltd (Subject to Deed of Company Arrangement) v Certain Underwriters at Lloyd's London Subscribing to Policy Number B0507N16FA15350 (No 2) [2021] FCA 327 (6 April 2021)