THE ORDER OF THINGS
Global Constructions Australia Pty Limited (in Liquidation)(“Company”) v AIG Australia Limited  FCA 98
Sometimes an insurance policy may offer more than one possible response to a claim for indemnity. If it does, the parties may fall into dispute about which response is to be applied.
This is a case about such a dispute.
The Company’s former general manger was a director of the Company. He had lent it money and was one of its shareholders. But he had acted fraudulently which caused the Company loss.
The Company made a claim for indemnity under the management liability policy which it held with AIG Australia Limited. The parties could not agree on how to calculate the amount payable under the policy so the Company looked to the Federal Court of Australia for the answer.
The factors in play were the Company’s direct loss as a result of the fraud, the value of the general manager’s loan to the company and shares, the limit of liability and any excess. The issue was in what order were they to be applied.
The Company started with the direct loss. From there it deducted the value of the loan and the shares.
DL – V > Limit.
As the result exceeded the limit of the insurer’s liability the amount payable was that limit less any excess.
The Insurer’s approach was different. It too started from the Company’s direct loss but then it applied the limit of liability. As the direct loss exceeded the limit, it adopted the limit. From the limit it deducted the value of the loan and the shares.
DL > Limit – V
As the value of the loan and shares was more than limit, deducting that value from the limit meant that there was nothing for the Insurer to pay.
So before the Court there was one claim for indemnity but two different approaches to calculating the amount payable by the Insurer yielding different outcomes.
Allsop CJ embraced the well established approach to policy interpretation, namely, a “business like interpretation with attention to the language used by the parties, the commercial circumstances which the document addresses and the object which it is intended to secure”.
The key point was that the limit of liability was just that, a limitation upon the Insurer’s liability. But you need to work out first what that liability was.
The Insurer included the limit in working out what the liability was. The Court held that the preferred approach was to work out the liability without taking the limit into account and, once that had been done, compare the result against that limit. It upheld the Company's approach.
A clue in the matter was that the approach preferred by the Insurer meant that the Company would receive nothing. While that may be the result of a legitimate interpretation of the policy, that sort of result flags a potential problem with the interpretation.