Syndicates liable under PI policy

by Resolve Editor Kate Tilley

Four Lloyd’s syndicates have been found liable under a professional indemnity policy for negligent advice given by an insured financial advice company’s authorised representative.

The syndicates, with Arch Underwriting as the lead respondent, argued an exclusion clause meant they did not have to indemnify EP Financial Services (EPFS), but Queensland Supreme Court Justice Thomas Bradley found the syndicates could not rely on the clause because it was ambiguous and should have been rewritten to express their intentions clearly.

EPFS clients Michiyo Tanabe and her company Mickks Pty Ltd had sought to recover financial losses suffered from acting on advice given them by Jonathan Bonnett as an authorised representative of EPFS from 15 January 2013 to 18 September 2013.

The clients’ action against Mr Bonnett and EPFS was settled out of court. EPFS then claimed against its PI policy, written by underwriting agency Dual Australia Pty Ltd on the syndicates’ behalf, for the settlement sum and associated legal costs of the client proceedings.

Mr Bonnett’s advice included a recommendation the clients invest in Millinium Capital Managers Ltd (MCML), which they did, and consequently suffered an unspecified financial loss.
 

Advice negligent

MCML was not contained in EPFS’s approved product list at the time. The parties agreed Mr Bonnett’s advice was negligent and in breach of a duty of care owed to the clients.

They also agree the only issue in dispute was the application of the exclusion clause and its effect on the syndicates’ liability to indemnify.

The policy wording said the syndicates would cover claims against the insured “resulting from the conduct of any consultant, subcontractor, agent or authorised representative in the professional business of the insured and for whose acts, errors or omissions the insured is liable”.

The wording also said the policy “will not cover the consultant, subcontractor, agent or authorised representative”.

The exclusion clause also said the insured was not covered for claims or liability “directly or indirectly based on, attributable to, or in consequence of any financial products or instruments not contained in the insured’s approved product list at the time the advice was given”.
 

Single contract

Ron Ashton QC, for EPFS, one of seven companies listed as insureds under the policy, argued it was a composite policy, covering each of the insureds for their respective insurable interests, even though the policy was a single contract.

He said the rights and obligations of different insureds under the same composite policy could be exercised independently of each other, unless there was an express or implied term to the contrary. The single policy was for convenience.

Mr Ashton argued the exclusion clause should be read as operating to exclude a claim by Mr Bonnett, as an authorised representative and an employee who provided the impugned advice, but not to exclude a claim by EPFS for its liability to the clients for the advice given by Mr Bonnett in those capacities.

Mr Ashton said the subject of the exclusion clause was advice on financial products not contained in the insured’s approved product list, but EPFS, as a corporate entity, could not give such advice itself.

Justice Bradley said Mr Ashton argued “the exclusion applies to those insured individuals who give the advice, being the principals, partners, directors, and employees of [EPFS]. If any of those insureds gave advice about products not on the applicant’s approved product list, then a claim by that insured would be excluded … However, a claim by [EPFS] for [its] liability for the advice given by another insured, would not be so excluded”.
 

Businesslike interpretation

Simon Couper QC, for the syndicates, said the policy ought to be “given a businesslike interpretation, paying attention to the language used by the parties in its ordinary meaning, and to the commercial, and where relevant, the social purpose and object of the contract, in the context of the surrounding circumstances”.

Justice Bradley found EPFS, as an ASFL holder, was responsible for the conduct of its representatives, and thus was liable for Mr Bonnett’s acts, errors and omissions as an authorised representative and as an employee.

In the policy wording, the syndicates agreed to provide cover to EPFS for any claim against it resulting from the conduct of any authorised representative, but the clause did not extend cover to Mr Bonnett for any claim made against him as an authorised representative.

“Construing the policy requires consideration of the language used, the commercial circumstances it addresses, and the objects it is intended to secure. Any particular provision, such as the exclusion clause, should be construed to give a congruent operation to the various components of the whole policy,” Justice Bradley said.
 

Composite policy

“In a composite policy, use of the same expression ‘the insured’ in the exemption clause to refer to the person not afforded cover and also to the person responsible for the approved product list presents a lack of clarity.”

He said use of the word ‘insured’ alone in the exclusion clause “gives rise to uncertainty or even ambiguity”.

While the exclusion applied to any claim by Mr Bonnett for indemnity under the policy, it was “not clear that it applies to a claim by [EPFS] for an indemnity for its statutory liability for Mr Bonnett’s conduct in giving the advice to the clients about MCML”, Justice Bradley said.

Given the lack of clarity in the exemption clause, the argument should be resolved in EPFS’s favour. “In the context of an insurance policy, exemptions should be clear so the contract as a whole can serve its commercial purpose,” Justice Bradley said.

EP Financial Services Pty Ltd v Arch Underwriting at Lloyd’s Ltd & Ors [2021] QSC 347 judgement 16/12/21