The correct approach to interpretation of contracts of insurance – a fundamental reminder
We review the judgment of the Full Federal Court of Australia in Todd v Alterra at Lloyds Ltd  FCAFC 15.
Mr Todd was an authorised representative of The Salisbury Group Pty Ltd (Sailsbury), which held an Australian Financial Services Licence. A financial services errors and omissions insurance policy was underwritten by Alterra at Lloyd’s (and others) and provided indemnity to certain named insureds.
Clients of Mr Todd sued Sailsbury, Mr Todd and another person, alleging that Mr Todd gave negligent investment advice which they relied upon to their detriment. On the first day of the hearing, settlement was reached, but the issue of Mr Todd’s claim against Underwriters remained to be decided.
Underwriters argued that the policy did not respond to cover liability for the losses suffered by Mr Todd’s clients. The issue between Underwriters and Mr Todd concerned the interpretation of the insuring clause, whether Mr Todd was an “Insured”, and the application of endorsements and exclusions.
Decision at first instance
The court set about interpreting the policy where the insuring clause limited cover to losses arising from “a Claim alleging an act, error or omission of the Insured in the performance of Professional Services”. The term “Professional Services” was defined in an endorsement to mean “Financial planning encompassing advice on approved investment products”.
Relevantly, the phrase “approved investment products” was not defined. The trial judge found in favour of Underwriters, concluding that “approved investment products” was understood to mean those products listed on the Approved Product List. Notably, only one of the products recommended by Mr Todd was on the Approved Product List.
The trial judge held that the policy did not respond to cover liability for the losses suffered by clients of Mr Todd.
Decision of the Full Federal Court
The substantive issue for consideration by the Full Federal Court was the proper method of interpretation and construction of the insurance policy. Underwriters argued that any doubt as to the proper construction of an insuring clause of a policy of indemnity insurance should be decided in their favour.
Underwriters relied upon various High Court of Australia authorities for the proposition that insurance contracts are contracts of indemnity to which certain rules of interpretation apply. One of those rules is that if there is any doubt as to the proper construction of a provision in a contract of guarantee or indemnity, that doubt should be resolved in favour of the indemnifier.
The Full Federal Court did not agree with this approach. The Court recognised that, although indemnity is present in many contracts of insurance, a distinction can be drawn between insurance contracts and contracts of guarantee and indemnity, as the latter concern making good a creditor by way of financial accommodation. Conversely, the object of contracts of insurance is to allocate risk.
The Court also noted that contracts of insurance have certain contractual requirements including insurable interest and utmost good faith.
In light of the above observations, the Court concluded that the High Court authorities relied upon had no application to contracts of insurance. In a joint judgment, Chief Justice Allsop and Justice Gleeson concluded (at paragraph 40):
From the nature, character and purpose of insurance there is no reason, and no precedent, for according an insurer the tenderness accorded to guarantors and indemnifiers…”
The consequence of the Court’s approach was that Mr Todd was entitled to be indemnified for the consequences of the settlement.
The proposition advanced by Underwriters seems startling at first, but had the support of the judgment of Rothman J in Miskovic v Styke Corporation Pty Ltd (No.2)  NSWC 1495. The Full Federal Court expressly stated, however, that the proposition in Miskovic is wrong.