Reliance on Approved Product List exclusion garners the Court’s disapproval

A recent decision of the Supreme Court of Queensland in EP Financial Services Pty Ltd v Arch Underwriting at Lloyd’s Limited & Ors [2021] QSC 347 highlights the importance of careful and specific drafting of policy wordings, to ensure the parties’ intentions are achieved.

Background

The applicant, a financial planning firm holding an AFSL for the provision of financial product advice, was insured under a policy of professional indemnity insurance (Policy) with the respondent insurers.

An employee (and AR) of the applicant provided negligent investment advice to the applicant’s client, to invest in a managed investment fund. Acting on that advice, the client suffered loss.

The client commenced proceedings against the applicant and its employee. The applicant settled those proceedings on confidential terms (although involving payment of a settlement sum) and made a claim for indemnity under the Policy for the settlement sum and associated legal costs of defending the client’s proceedings.

The respondents declined to indemnify the applicant, relying on an exclusion in the Policy relating to products on the applicant’s Approved Product List, in the following terms:

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

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;”

It was not in dispute that the managed fund recommended to the client was a financial product, and it was not contained in the applicant’s approved product list at the time the advice was given.

The applicant commenced proceedings against the respondents seeking declarations regarding the operation of the exclusion clause and the respondents’ liability to indemnify it.

Decision

The Court found that on its proper construction, the exclusion clause did not exclude the respondent’s liability to indemnify the applicant.

That finding turned on two issues.

Joint or composite policy

The first issue was whether the Policy was to be construed as a joint or composite policy.

Where multiple parties are insured under the same policy, it may be described as either a joint or composite policy. A joint policy will exist where multiple insureds have the same interest in the subject matter of the insurance, and the insurer’s obligation is to indemnify them jointly in respect of a joint loss. A common example is joint owners of property.

In that scenario, the insureds’ rights stand and fall together, and the conduct of one insured giving rise to a breach of the policy will ordinarily also disentitle an innocent co-insured to cover.

On the other hand, where the parties have different interests in the subject matter of the insurance, it will be construed as composite. The parties under a composite policy are insured for their respective insurance interests, and the rights and obligations of different insureds under the same composite policy can be exercised independently of each other, unless there is an express or implied term to the contrary.¹

In that case, any one insured’s entitlement to indemnity must be determined separately from the others, and the conduct of one insured in breach of the policy will not usually deprive an innocent co-insured to cover. A common example is an owner and mortgagee of property.

Justice Bradley accepted the applicant’s contention that the applicant’s and its employee’s respective interests differed, and that the Policy was to operate on a composite basis, reasoning that:

1. The employee was an insured (in his capacity as an employee) for claims resulting from a breach of professional duty by him in the provision of financial product advice under the applicant’s AFSL; whereas
2. The applicant was insured not only for claims resulting from a breach of professional duty by it, but also for any claim resulting from the conduct of its AR’s for which the applicant is liable (the Policy did not however extend cover to the employee in his capacity as an AR).

Operation of the exclusion

Having determined the Policy to operate on a composite basis, his Honour then proceeded to construe the operation of the exclusion itself.

The applicant submitted that the exclusion should be limited in its operation to the employee who provided the impugned advice, and not to the applicant itself for its liability to the client for that advice.

That was said to be the case because the subject of the exclusion clause was advice on financial products not contained in the applicant’s approved product list. The applicant maintained that it did not provide the approved product list to itself but to its insured representatives, and so on its proper construction the exclusion was only intended to apply to those insured individuals who act outside their normal authority by giving advice about products not on the applicant’s approved product list.

His Honour readily accepted that the exclusion applied to any claim by the employee for indemnity for advice provided to the client, but considered it unclear whether it also applied to a claim by the applicant for indemnity for its liability for the employee’s advice, for two reasons.

Firstly, the clause was not drafted to make explicit whether it was to apply to the liability of the insured entity for conduct of an employee and to the liability of an insured employee for his or her own conduct. The use of the expression “the INSURED” in the exclusion to refer to the person not afforded cover (the employee) and also to the person responsible for the approved product list (the applicant) lacked sufficient clarity.

In a similar vein, Bradley J observed that the exclusion referred to “advice” without specifying whether it encompassed advice provided by persons other than the insured who is making the claim under the policy. That was relevant in the present context because the applicant’s liability was not limited to advice given by it but extended to advice given by the employee, whereas the relevant liability of the employee was confined to advice he had given.

His Honour concluded that it was appropriate that this lack of clarity in the exclusion be resolved in the applicant’s favour, with the result that the exclusion did not deprive the applicant from cover.

Key Takeaways

The decision is a useful reminder of the importance of carefully reviewing the wording of any exclusions to ensure they achieve the parties’ desired outcome.

That onus very much really rests on insurers, as the proposer of a policy wording, with Justice Bradley observing that a reasonable businessperson in the position of the parties to a professional indemnity policy would understand each exclusion to operate in clear terms and not to operate to alter the extent of cover in ways not clearly expressed in the clause. That is generally consistent with existing principle that exclusion clauses will be construed strictly against an insurer, with any ambiguity being resolved contra proferentem in an insured’s favour.²

Sufficient uncertainty existed in this case to warrant those principles being applied and the exclusion being construed narrowly and in the applicant’s favour, as only applying to those who provided the relevant advice.

His Honour helpfully observed that greater certainty could have been achieved by extending the operation of the exclusion to “advice provided by the insured or any representative, authorised representative or agent.” That, it was said, would have more clearly excluded claims made by one insured arising from advice provided by another.

¹ Federation Insurance Ltd v Wasson (1987) 163 CLR 303.

² Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510.