Policy construction: the meaning of “third party claim” in a professional indemnity policy25 July 2017 | Insurance Issues
A case concerning the construction of an insuring clause in a "claims made" policy.
- Whether an entity associated with the insured was a “third party” within the context of the insuring clause of a claims made policy
- Principles of policy construction
A claim was brought by Treetops Lismore Pty Ltd against the insured, Malamit Pty Ltd (Malamit), for alleged negligence in the provision of project management services. The sole director of the insured, Mark Mitchell, was also a director and the sole shareholder of Treetops. Mr Mitchell and his wife were also the only shareholders of a company which wholly owned Malamit.
Malamit made a claim under the professional indemnity policy it held with WFI Insurance Ltd (WFI). The insuring clause provided that WFI would indemnify the insured for any “Claim” made against the insured during the policy period. “Claim” was defined as “any civil proceeding brought by a third party against the insured”. At clause 7.15, the policy specifically excluded cover in respect of any claim by, on behalf of, or for the benefit of any insured, subsidiary, or family member of the insured.
WFI declined the claim on a number of bases. Firstly, WFI contended that Treetops was not a “third party” and, therefore, there was no “claim” as required by the insuring clause. Secondly, WFI contended that the claimed liability was excluded by clause 7.15 because the claim was brought by or on behalf of an entity associated with the insured.
The Decision at Trial
The trial judge concluded that Treetops was a subsidiary within the meaning of exclusion 7.15, and that the claim was, therefore, excluded from cover. As a consequence of this, he also concluded that Treetops could not be regarded as a third party for the purposes of the insuring clause. His conclusions were challenged on appeal.
The Decision on Appeal
On appeal, the court disagreed with the trial judge’s construction of the insuring clause.
WFI had contended that, in the context of the insuring clause, the term “third party” referred to a claimant who was “separate from and unconnected with the insured”. Rejecting this contention, the Court of Appeal held that, in the context of this particular policy, the reference to “third party” in the insuring clause was a reference to someone who was not a party to the contract, someone who is not an insured under the contract, and also, crucially, to anyone other than the particular insured against whom the proceeding was brought (including persons insured under the policy).
Like the trial judge, the Court of Appeal construed the insuring clause by referring to exclusion 7.15. Their approach, however, was different to the trial judge’s. The Court of Appeal noted that a contract of insurance should be construed with a view to resolving inconsistencies and giving effect to all of its terms. Therefore exclusions ought to be construed on the basis that they “cut out something already included by the [insuring clause]”.
Clause 7.15 excluded from cover a claim by, on behalf of or for the benefit of any Insured (emphasis added). The premise of this exclusion was that a proceeding brought by one insured against another was a “Claim” that would otherwise have been within cover. The Court of Appeal noted that the insuring clause (and in particular, the expression “third party”) should be construed in accordance with that premise. That construction was only achieved if the term “third party” described any person other than the insured against whom the proceeding had been brought. The Court of Appeal distinguished its decision from decisions of other courts, where the term “third party” was construed in the context of an exclusion, and where the adoption of an alternative construction did not render an exclusion otiose. This ground of appeal was upheld.
Ultimately, however, the appeal was dismissed. The Court of Appeal upheld the trial judge’s decision that the claim against Malamit was brought by a “subsidiary” and was, therefore, excluded from cover by virtue of exclusion 7.15.
Implications for you
This case demonstrates the complexities involved when interpreting and construing policies of insurance. It serves as a reminder that contracts of insurance are to be construed as a whole, and that courts are unlikely to adopt what may otherwise seem to be a sensible construction of a policy if that construction renders other terms of the policy ineffective.