Proper construction of insurance contract demonstrates insured not required to prove underlying legal liability
The importance of construing policy terms was recently reinforced by the Federal Court in a case where ambiguity arising from policy terms gave rise to the Court’s decision that an insurer was liable to indemnify even where it was not aware of and did not consent to a settlement between its insured and a third party.
- The proper construction of an insurance policy where an insured enters into a settlement agreement with a third party without the consent of the insurer.
- The utility of granting declaratory relief on discretionary grounds where the proposed relief does not engage with the issue of whether there is any specific ‘Civil Liability’ or ‘Loss’, and where such relief should not be used to resolve the entirety of the disputed construction issues.
The National Australia Bank (NAB) commenced an action in the Federal Court of Australia seeking a number of declarations with respect to the construction of an insurance policy issued by Nautilus Australia (Nautilus). The cause of action arose as a result of actions taken by Clydesdale Bank, a subsidiary of NAB until 2013, in paying remediation to customers in the United Kingdom following the mis-selling of Interest Rate Hedging Products over a number of years. In November 2016 and again in November 2017, NAB submitted claims to Nautilus and the reinsurers, seeking coverage in relation to the remediation scheme, ultimately asserting an entitlement to over £357 million in remediation payments. Nautilus and the reinsurers sought to decline NAB’s claim on several grounds, including that the claim for reimbursement of the remediation amounts was not a ‘Civil Liability’, and the payment of remediation was not a ‘Loss’ as defined, and that insurer’s consent had not been obtained. In consideration of the construction issues, the reinsurers maintained that the definitions of ‘Civil Liability’ and ‘Loss’ required proof of an underlying liability, in that the insured needed to establish a legal liability to pay damages or compensation independent of any settlement agreement.
These issues were initially dealt with in a detailed interlocutory judgment, National Australia Bank Limited v Nautilus Insurance Pte Ltd (No 2)  FCA 1543.
The Decision at Trial
The Policy provided that, in order to obtain coverage, NAB needed to prove: (a) a ‘Loss’, (b) resulting from ‘Civil Liability’, (c) arising out of the provision of ‘Financial’ or ‘Professional Services’, (d) resulting in a ‘Claim’, and (e) being a claim ‘First Made’ against the ‘Insured’ during the policy period.
The Court considered the construction of the Policy to be relatively narrow. In considering both NAB’s and reinsurers’ interpretations, it was determined that contextually NAB’s construction of ‘Civil Liability’ was consistent with the reading of the General Conditions as a whole, and harmonious with the definition of ‘Loss’ (in its reference to settlements). It was therefore accepted that ‘Civil Liability’ was properly construed as not requiring proof of an underlying legally enforceable obligation to a third party independent of an agreement with the third party in settlement of the claim.
NAB had sought declaratory relief: it was held that on a proper construction of the Policy, a declaration was appropriate but on terms which demonstrated that it is unnecessary to satisfy: (a) the definition of ‘Civil Liability’; or (b) the definition of ‘Loss’, for the Assured (as defined) to establish that it was legally liable to the third party independently of the legally enforceable obligation to pay arising under the settlement agreement relied on to establish ‘Civil Liability’ under the Policy.
Implications for you
In passing we note that an insured’s failure to observe policy terms (for example, by failing to obtain consent prior to settling the matter) is usually remedied by section 54 of the Insurance Contracts Act to the extent that there may be any prejudice suffered by insurers. In the circumstances of this appeal, however, this question was not necessary to be considered by the Court. The policy terms in this instance were not unusual. However, this decision serves as another reminder that insurers require very clearly worded policy triggers and limits to give effect to Underwriters’ intentions; failure to observe this will mean the risk of adverse Court determinations on policy construction.