Common intent – no policy rectification if you can’t prove it
The Full Court of the Federal Court overturned a decision to rectify a D & O liability policy to provide Side C cover up to $50M instead of $10M, thus limiting cover available in respect of shareholder class action claims made against the insured.
- Whether the insured’s UK placing broker, Price Forbes, intended that the Side C (entity securities liability) Coverage was subject to a sub-limit of $10 million or $50million
- Whether the relevant Lloyd’s underwriting syndicates, Argo Managing Agency Ltd (Argo) and Vibe Syndicate Management Limited (Vibe), intended that the Side C Coverage was subject to a sub-limit of $10 million or $50million
- Whether the primary judge erred in rectifying the relevant policies to provide Side C cover of up to $50 million in order to reflect the common commercial intention of each of the relevant parties.
Quintis Limited (Quintis), was a sandalwood plantation investment company subject to a deed of company arrangement. Two shareholder class actions were brought against it alleging that Quintis and others engaged in conduct in breach of various statutory duties, causing loss and damage for which the class action applicants and group members sought compensation. A settlement in principle in respect of those proceedings had been agreed, but the application for settlement approval was adjourned to allow the correct value of any responsive insurance policies (being the only asset of value held by Quintis), to be determined.
The decision at trial
It was agreed that, when entering into the relevant policies in 2016, Quintis intended the coverage layers to include $50 million in entity securities liability (‘Side C’) cover, and instructed its Australian producing broker (PSC) to this effect. However, at trial, the primary judge concluded, on its proper construction, the relevant policy only afforded Side C cover up to a ‘sub-limit’ of $10 million. Notwithstanding that conclusion, the primary judge went on to determine, the proper construction of the policies did not reflect the parties’ common intention and, on that basis, made orders to the effect the policies should be rectified to reflect Side C cover of $50 million.
The issues on appeal
The Lloyd’s placing broker (Price Forbes) and the Argo & Vibes Lloyd’s syndicates appealed the findings as to their intentions with respect to the applicable limit for the Side C cover. There was no appeal as to the proper construction of the relevant policies, nor as to the principles underlying the equitable remedy of rectification.
The Decision on appeal
The Full Court repeated the relevant principles which apply when considering rectification of a commercial contract (such as a policy of insurance), and, citing previous High Court authority, noted that:
“For relief by rectification, it must be demonstrated that, at the time of the execution of the written instrument sought to be rectified, there was an “agreement” between the parties in the sense that the parties had a “common intention”, and that the written instrument was to conform to that agreement. Critically, it must also be demonstrated that the written instrument does not reflect the “agreement” because of a common mistake”.
Before proceeding on a very comprehensive review of the evidence, the Full Court noted the way in which the matter proceeded before the primary judge, specifically, that all of the evidence was documentary, and none of the parties called any witnesses. It also specifically noted that a general misunderstanding of the coverage being sought on the part of some participants leading up to, and also at, the time the relevant policies were entered into, does not lead to a conclusion that there was a consensus amongst them as to the coverage. For example, in this case, the fact that two participants (Quintis and PSC- the Australian placing broker) intended that the coverage layers include a total of $50 million Side C cover did not necessarily lead to a conclusion that other participants (Price Forbes, Argo and Vibe) held a similar or common intention. In other words, a mutual mistake or misunderstanding as to what each party intends is not sufficient to establish a common intention such as to justify the grant of the equitable remedy of rectification.
The Full Court then undertook an assessment of the parties’ intentions by (comprehensively) reviewing the relevant documentary evidence.
Upon completion of that review, the Full Court concluded the primary judge had fallen into error in his treatment of the relevant evidence. Specifically, it was determined that, on an overall weighting of the evidence, it could not be established, to the requisite standard, that all parties intended the policies to provide Side C cover of $50 million.
Based on that conclusion, the Full Court ruled there was no common intention available on the evidence sufficient to displace the written terms of the policies which, according to the uncontested finding of the primary judge, provided Side C cover of $10 million.
Implications for you
This case demonstrates the evidential burden to be overcome in establishing an insurance policy (or other commercial contract) ought to be rectified. Also, the case highlights the importance of clear and direct communication about important policy considerations such as coverage limits, in order to avoid uncertainty which often results in lengthy and costly disputes.