Claims arising out of employment excluded under professional indemnity policy
The Supreme Court of Queensland was asked to determine a dispute between an insured and insurer over the construction of two exclusion clauses in a professional indemnity policy, and in particular the clauses’ application to an ACL claim made by certain of the insured’s former employees.
- The proper construction of two exclusion clauses in a professional indemnity insurance policy, and their application to an ACL claim connected with the insured’s role as an employer or prospective employer.
Corestaff NT Pty Ltd (Corestaff) was a labour on-hire business. In 2011 and 2012 Corestaff sent letters of offer to several individuals, including Alois Jack (Jack), a metal fabricator who resided in Papua New Guinea (PNG). Corestaff offered Jack a three year full-time employment contract as a metal fabricator on a mine site in Western Australia, for a salary of $115,000 plus superannuation. Jack accepted the offer, resigned from his job in PNG, and in 2012 moved to Australia to commence his employment with Corestaff.
Upon moving to Australia, Jack performed work for Corestaff (or associated entities) which was different to what was detailed in his offer letter. In November 2012 – only a few months into Jack’s employment contract - Corestaff terminated Jack’s employment and ceased making any payments to him.
In late 2018 Jack commenced proceedings against Corestaff as a representative of a class of individuals who had similarly received and accepted offer letters from Corestaff and had later had their employment terminated (Jack Class Action). Jack alleged that Corestaff made representations in its offer letter as to the employment arrangements it had made and would continue to make for him, which at the time of the offer letter it did not have reasonable grounds for making. Jack alleged that by sending the offer letter, Corestaff had engaged in conduct which was misleading or deceptive, or was likely to mislead or deceive, for the purposes of the Australian Consumer Law (ACL). Jack sought compensation for Corestaff’s alleged contravention of the ACL by reference to, inter alia, the income he would have earned if he had remained in PNG.
Corestaff sought indemnity in respect of the Jack Class Action under its professional indemnity policy with Insurance Australia Limited (Policy). Whilst there was a section in the Policy which provided employment practices liability cover, that cover was only available as an optional extension to the Policy and Corestaff had elected not to pay for it.
The insurer declined to indemnify Corestaff under the Policy in reliance on two exclusion clauses. The exclusion clauses provided that cover was not available for Claims or Covered Claims (as those terms were defined in the Policy):
- ‘based upon, directly or indirectly arising from or attributable to [Corestaff’s] liability as an employer’ (Employer Liability exclusion); or
- ‘arising out of or in respect of actual or alleged unlawful discrimination (or other unlawful act, error or omission) by any Insured against any Employee or employment applicant’ (Unlawful Discrimination exclusion).
In February 2012 Corestaff applied to the Supreme Court of Queensland for declarations in respect of the proper construction of the exclusion clauses, and their application to the ACL claim in the Jack Class Action. Justice Williams delivered the decision on 10 August 2021.
The decision at trial
Corestaff submitted that the Employer Liability exclusion did not apply to the Jack Class Action because the ACL claim arose out of conduct (ie, the representations) which had occurred when Jack was an applicant for employment, and not an employee. Corestaff submitted that the Jack Class Action therefore did not concern its ‘liability as an employer’, and that it was irrelevant that Jack (and the other represented claimants) had subsequently entered into employment contracts with it.
The Court disagreed. Williams J held that the Employer Liability exclusion applied to the ACL claim in the Jack Class Action because, inter alia:
- the words ‘based upon, directly or indirectly arising from or attributable to’ introduced a causal nexus which encompassed claims on a ‘broad spectrum’ of causation. That opening phrase extended ‘liability as an employer’ beyond claims which directly arose out of the actual employment relationship; and
- the ACL claim made in the Jack Class Action arose where individuals entered into employment contracts and commenced employment with Corestaff in reliance on its representations. It was Corestaff’s termination of the employment relationship which gave rise to the loss. Her Honour considered that there was a clear nexus with Corestaff having ‘liability as an employer’, in that the employment relationship was a key material fact giving rise to the cause of action. If there had been no employment relationship, the cause of action would fail.
As to the Unlawful Discrimination exclusion, the insurer argued that the words in parentheses ‘(or other unlawful act, error or omission)’ which followed the words ‘unlawful discrimination’ had the effect of excluding cover for alleged unlawful acts, errors, or omissions, and not just unlawful discrimination. The insurer submitted that Corestaff’s alleged contravention of the ACL was an unlawful act, error, or omission, and that the exclusion therefore applied to the Jack Class Action.
The Court, however, determined that the Unlawful Discrimination exclusion did not apply. Her Honour observed that:
- if the Unlawful Discrimination exclusion was construed to exclude any conduct which was unlawful, it would render the words ‘unlawful discrimination’ largely superfluous, and would be contrary to the clear structure of the clause by rendering unlawful discrimination a mere example;
- the preferred construction was one which gave operational work to the words ‘unlawful discrimination’, and gave the words in parentheses the work of clarifying that the liability for unlawful discrimination arose whether that occurred by way of a positive act or omission; and
- whilst the ACL claim in the Jack Class Action arguably arose out of an ‘unlawful act, error or omission’ in a general sense, it did not arise out of or in respect of unlawful discrimination.
Having determined that the Employer Liability exclusion applied, the Court held that Corestaff’s application was unsuccessful.
Implications for you
When interpreting insurance policies, careful consideration must be given to the wording and structure of each clause and the breadth of any phrase relevant to causality. With respect to claims-based policies in particular, all of the elements of the cause of action underpinning the notified claim should be taken into account when considering whether a policy may respond.