Appeal court overturns indemnity decision

by Resolve Editor Kate Tilley

The Queensland Appeal Court has overturned a decision that found four Lloyd’s syndicates liable under a professional indemnity policy for negligent advice given by an insured financial advice company’s authorised representative.

Justice Thomas Bradley’s decision in the Queensland Supreme Court was covered in the March 2022 issue of Resolve.

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 Justice Bradley found the syndicates could not rely on the clause because it was ambiguous and should have been rewritten to express their intentions clearly.

He 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.

However, Appeal Court Justice Philip McMurdo, with whom Justices Debra Mullins and John Bond agreed, reversed that decision last November.

Negligent advice

Jonathan Bonnet was an authorised representative (AR) of EPFS and in 2013 advised some clients to invest in a company called Millinium Capital Managers Ltd. The advice was negligent. The clients acted on it and suffered a loss. They launched proceedings, seeking damages from Mr Bonnet, EPFS and Millinium. EPFS paid $840,000 to the clients in settlement of their claim.

Justice McMurdo said where an AR goes outside an approved product list, any liability of a licensee to its client is unaffected. “That is what occurred in this case: an investment in Millinium was not on the approved products list.”

EPFS had argued the exclusion clause should be read as excluding a claim for indemnity by Mr Bonnet, but not as excluding a claim for indemnity by EPFS.

Justice McMurdo disagreed that the exclusion clause and the definition of “insured” were ambiguous.

He said several entities and people were an “insured” as defined, including EPFS and Mr Bonnet.

Product list

“There is no suggested ambiguity in what was meant … by an approved product list. It is natural to describe that list as the licensees’ approved product list, created and distributed as it was by the licensees. At the same time, it could be naturally described as the employee’s approved product list, in that it was the list issued to the employee to be used by them when giving advice.”

He said EPFS, as the holder of a licence, was responsible for the conduct of Mr Bonnet, whether or not his conduct was within his authority.

Justice McMurdo said Justice Bradley’s interpretation would have meant the underwriters had agreed to indemnify a licensee for advice given on any product.

However, the licensee, as a corporation, provided financial services through its agents and employees, and advice given by an authorised representative and employee such as Mr Bonnet was advice given by EPFS.

Policy drafting

Commenting on the case, Hall & Wilcox special counsel Bridget Wall and senior associate Madelyne Inch said insurance policies always “stand and fall” on their drafting.

“Insurers should always be mindful about ensuring, where possible, appropriate phrases are defined, perhaps by reference to other material or documents,” they said.

The authors also said the case identified the importance of consistency.

Two clauses contained different references on to whom the exclusion would apply:

• cl 7.20 referred only to the ‘INSURED’
• cl 7.22 referred to ‘INSURED or any representative, authorised representative, or agent’, notwithstanding that the insuring clause had already excluded from cover any authorised representative and agent.

Ms Wall and Ms Inch said the Appeal Court came to the right conclusion about the policy terms and application of the contra proferentem rule, but the claim might have been avoided altogether if cl 7.20 had used the same terminology as cl 7.22.

While the Appeal Court ultimately did not consider there was ambiguity, they did consider supporting documents, including the proposal form prepared by the underwriters’ agent, Dual, in reaching its decision about what was the correct interpretation.

“This decision reflects the importance of ensuring the proposal form and what is being asked of the insured reflects ultimately what cover is (and isn’t) being provided for in the insurance policy,” Ms Wall and Ms Inch said.

Arch Underwriting at Lloyd's on behalf of Syndicate 2012 v EP Financial Services [2022] QCA 229