Arch Underwriting at Lloyd’s Ltd on behalf of Syndicate 2012 & Ors v EP Financial Services Pty Ltd [2022] QCA 229

SUPREME COURT OF QUEENSLAND CITATION: Arch Underwriting at Lloyd’s Ltd on behalf of Syndicate 2012 & Ors v EP Financial Services Pty Ltd [2022] QCA 229 PARTIES: ARCH UNDERWRITING AT LLOYD’S LTD ON BEHALF OF SYNDICATE 2012 (first appellant) ARCH MANAGING AGENCY LIMITED ON BEHALF OF SYNDICATE 1955 (second appellant) LIBERTY MANAGING AGENCY LIMITED FOR AND ON BEHALF OF SYNDICATE 4472 (third appellant) UNDERWRITING LIMITED ON BEHALF OF SYNDICATE 3624 (fourth appellant) v EP FINANCIAL SERVICES PTY LTD ACN 130 772 495 (respondent) FILE NO/S: Appeal No 1007 of 2022 SC No 8289 of 2021 DIVISION: Court of Appeal PROCEEDING: General Civil Appeal ORIGINATING COURT: Supreme Court at Brisbane – [2021] QSC 347 (Bradley J) DELIVERED ON: 18 November 2022 DELIVERED AT: Brisbane HEARING DATE: 3 June 2022 JUDGES: Mullins P and McMurdo and Bond JJA ORDERS: 1. The appeal be allowed. 2. The orders made on 16 December 2021 and 31 January 2022 be set aside. 3. The claim be dismissed. 4. The respondent to pay the appellants’ costs of the appeal and the proceeding in the Trial Division. CATCHWORDS: INSURANCE – PROFESSIONAL INDEMNITY – EXCLUSIONS – where the respondent held professional indemnity insurance with the appellants as underwriters – where the respondent is a company which provides financial -- 1 of 9 -- 2 services and investment and financial planning advice – where an employee and authorised representative of the respondent provided negligent investment advice to clients of the respondent, advising them to invest in a financial product which was not on the respondent’s approved product list – where the clients commenced proceedings seeking damages – where the respondent claimed indemnity against its liability to the clients and for its legal costs of the clients’ proceeding from the appellant underwriters – where the claim for indemnity was refused by the appellants in reliance on an exclusion clause which excluded liability where the claim was based on advice given about a financial product or instrument not contained in the “INSURED’s approved product list” – whether the exclusion clause is ambiguous – whether the liability of the appellants is excluded Zhang v Minox Securities Pty Ltd [2009] NSWCA 182, cited Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd’s Syndicate 2003 (2018) 360 ALR 92; [2018] FCAFC 119, cited COUNSEL: R J Anderson KC for the appellants R S Ashton KC for the respondent SOLICITORS: Moray & Agnew for the appellants Colin Biggers & Paisley for the respondent [1] MULLINS P: I agree with McMurdo JA. [2] McMURDO JA: The respondent company, which I will call EPFS, provides financial services and investment and financial planning advice. It holds an Australian Financial Services Licence issued under s 913B of the Corporations Act 2001 (Cth). [3] Mr Jonathan Bonnet was an authorised representative of EPFS under Part 7.6, Division 5 of the Corporations Act. In 2013 Mr Bonnet gave financial planning advice to an individual and her company (“the clients”), which recommended that they invest in a company called Millinium Capital Managers Limited. That advice was given negligently. The clients acted upon it and suffered a resultant loss. They commenced proceedings, seeking damages from Mr Bonnet, EPFS and Millinium. EPFS paid $840,000 to the clients in settlement of their claim. [4] EPFS claimed indemnity against its liability to the clients, and for its legal costs of the clients’ proceeding, from the appellants who are its insurers. At all material times they were underwriters at Lloyds of London subscribing to the relevant contract of insurance which I will call the policy. Dual Australia Pty Ltd (“Dual”) acted as their agent. [5] The underwriters, through Dual, declined to indemnify EPFS upon the basis that the facts of the case engaged a certain exclusion in the policy. EPFS brought the present proceeding in the Trial Division, seeking declarations that the exclusion did not apply to it and that it was entitled to indemnity under the policy. In the judgment under appeal,1 EPFS was successful. It was declared that the relevant clause of the policy 1 EP Financial Services Pty Ltd v Arch Underwriting at Lloyd’s Limited & Ors [2021] QSC 347 (Judgment). -- 2 of 9 -- 3 did not exclude the insurers’ liability to indemnify EPFS for the claim by the clients and that the insurers were liable to indemnify it. [6] The issue is whether the judge misinterpreted the exclusion. There were no disputed facts and there was no other basis which was suggested for the insurers to decline to indemnify. For the reasons that follow, I have reached a different view from the primary judge and the liability of the insurers was excluded. The policy [7] The policy was made up of several documents, including those described by the judge as the Proposal, the Schedule and the Policy Wording.2 [8] The judge set out these relevant provisions of the Policy Wording: “Section 2: INSURING CLAUSE 2.1 WE agree to indemnify the INSURED for any CLAIM for compensation first made against the INSURED and reported to US during the INSURANCE PERIOD in respect of any civil liability resulting from any breach of professional duty by the INSURED in its conduct of its PROFESSIONAL BUSINESS. … 3.3 Consultants, Subcontractors, Agents and Authorised Representatives WE agree to provide cover in respect of any CLAIM 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. WE will not cover the consultant, subcontractor, agent or Authorised Representative. … Section 6: DEFINITIONS In the POLICY: … 6.11 INSURED means: (a) The person, partnership, company, SUBSIDIARY or other entity, specified as the INSURED in the Schedule; and (b) Any person who is during the INSURANCE PERIOD a principal, partner, director or employee 2 Judgment [6]. -- 3 of 9 -- 4 of the person, partnership, company, SUBSIDIARY or other entity specified as the INSURED in the Schedule, but only while acting in the course of the PROFESSIONAL BUSINESS. … 6.15 PROFESSIONAL BUSINESS means the PROFESSIONAL ACTIVITY set out in the Schedule. …” [9] In the Schedule, it was agreed that cl 3.3 of the Policy Wording should be interpreted in this way: “For the avoidance of doubt, a reference to ‘consultants, subcontractors or agents’ in Clause 3.3… includes a reference to a Credit Representative acting in such capacity.” [10] The Schedule defined “PROFESSIONAL BUSINESS” as: “Provision of financial product advice and dealing in a financial product as per AFSL no. 325252 only; portfolio administration services”. [11] EPFS was one of seven companies specified as the “INSURED” in the Schedule. [12] The relevant exclusion was in cl 7.20(a) of the Policy Wording, in the terms of that clause as inserted in the policy by cl 5 of the Schedule. The exclusion was in the following terms: “Section 7: EXCLUSIONS WE will not cover the INSURED, including for DEFENCE COSTS or other loss in respect of: … 7.20 Approved Product and Product Disclosure Any CLAIM or liability directly or indirectly based upon attributable to or in consequence of any: (a) financial products or instruments not contained in the INSURED’S approved product list at the time the advice was given unless the advice is in respect of switching from an existing product not in the INSURED’s Approved Product List to a product in the INSURED’S Approved Product List …”. [13] It is a common practice for entities carrying on a business such as that of EPFS to maintain an approved product list which defines the financial products for which their authorised representatives might provide to clients advice or other services. An approved product list is not required by legislation. Where an authorised representative 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. [14] The policy did not define the expression “INSURED’S approved product list”. However the expression was used more than once in the policy, more particularly, in the Proposal. The Proposal form, as prepared by Dual, required the companies which were to be insured to provide a “Current Approved Product List”, and under a heading -- 4 of 9 -- 5 “Risk Management”, the proposers answered a number of questions about the list. They answered “yes” to the question of whether they had an approved products list; they attached a document described as a “Research Policy” to explain the process by which a product was approved or recommended in their business; they said that their approved products list had not changed from the previous year and they explained the action they would take when a product or investment was removed from the list. Those references in the Proposal reflect the industry practice, which is that it is the licensee which approves certain products, according to research undertaken by, or available to it, as products which might be suggested or provided to clients. In that way, it would be appropriate to describe it as a licensee’s approved product list, and to understand the insured in the expression “INSURED’S approved product list” as a reference to the licensee. The reasons of the primary judge [15] The judge observed, as was uncontroversial, that EPFS was an “INSURED” under the policy, together with the other six companies named in the Schedule and each person who was a principal, partner, director or employee of EPFS or any of the other named companies.3 He found that EPFS was liable for Mr Bonnet’s acts, errors and omissions because Mr Bonnet was both an authorised representative and an employee4 and that although cl 3.3 of the Policy Wording provided that cover was not extended to a claim made against Mr Bonnet as an authorised representative, Mr Bonnet was an “INSURED” under the definition in cl 6.11(b) of the Policy Wording as an employee of EPFS.5 [16] The judge described that this was a composite policy, meaning that it was effectively many policies extending cover to a number of insureds for their several interests. He said that therefore “[t]he considerations relevant to construing a composite policy” applied to construing the exclusion clause. [17] The argument for EPFS was, and remains, that 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. The judge noted an argument for EPFS that the decision of the New South Wales Court of Appeal in Zhang v Minox Securities Pty Ltd6 involved a comparable exclusion clause in a composite policy. [18] In Zhang, the exclusion clause excluded the insurer’s liability in respect of any claim concerning:7 “any financial or investment product that at the time the actual or alleged act, error or omission occurred is not listed on the Approved Product List of the entity which has issued the Insured with a proper authority to deal in financial products…” [19] The judge regarded the clause in Zhang as different to that in the present case.8 He noted that the reasoning in Zhang was that as the only “entity” could have been the licensee, it could not have been “the Insured” within that clause.9 3 Judgment [32]. 4 Judgment [35]. 5 Judgment [36], [37]. 6 [2009] NSWCA 182. 7 Zhang at [19] (Handley AJA). 8 Judgment [47]. 9 Zhang at [2] (Hodgson JA) and [26] (Handley AJA). -- 5 of 9 -- 6 [20] The judge accepted the approach to construction of an insurance contract described in the judgment of Allsop CJ and Gleeson J in Todd v Alterra at Lloyds Ltd10 and that of Bond J (as he then was) in DMS Maritime Pty Ltd v Royal and Sun Alliance Insurance Plc.11 He was further guided by this statement by the Full Court of the Federal Court in Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd’s Syndicate 2003:12 “Necessarily, a policy of insurance is assumed to be an agreement which the parties intend to produce a commercial result … as such, it ought to be given a businesslike interpretation being the construction which a reasonable business person would give to it … The contract is naturally enough interpreted, in a temporal sense, as at the date on which it was entered into … The Courts frequently have regard to the contextual framework in which a contract is formed, to the extent to which it is known by both parties, to assist in identifying its purpose and commercial objective … It goes without saying that a construction that avoids capricious, unreasonable, inconvenient or unjust consequences, is to be preferred where the words of the agreement permit.” (Footnotes omitted.) Citing McCann v Switerzerland Insurance Australia Ltd13 and Wilkie v Gordian Runoff Ltd,14 the judge said:15 “It follows that 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.” (Footnotes omitted.) [21] Although the judge considered the clause in Zhang as different from the present one, he said that they had in common this feature, namely “that neither was drafted to make explicit whether it was to apply to the liability of the insured entity for conduct of an employee and to the liability of an insured employee for his or her own conduct.” The judge considered that the present clause presented “a similar lack of clarity” to that in Zhang.16 [22] The judge said that “[n]either construction put for the parties … could be characterised as unbusinesslike or uncommercial”.17 [23] In his view, in the context of this being a composite policy, the use of the word “INSURED” in the exclusion clause gave rise to “uncertainty or even ambiguity”.18 [24] After quoting from the judgment of McColl JA in Caine v Lumley General Insurance Limited,19 the judge expressed his conclusion that: 10 (2016) 239 FCR 12 at [35], [38], [40] and [42]-[44] set out in the Judgment at [31]. 11 [2018] QSC 303. 12 [2018] FCAFC 119 at [33]. 13 (2000) 203 CLR 579 at [22] (Gleeson CJ). 14 (2005) 221 CLR 522 at [15] (Gleeson CJ, McHugh, Gummow and Kirby JJ). 15 Judgment [45]. 16 Judgment [47]. 17 Judgment [48]. 18 Judgment [50]. 19 [2008] NSWCA 4 at [47]. -- 6 of 9 -- 7 “[i]t is appropriate that the lack of clarity in the exemption clause should be resolved in favour of [EPFS]. In the context of an insurance policy, exemptions should be clear so that the contract as a whole can serve its commercial purpose. In this way, it is possible to give the exclusion clause its natural and ordinary meaning, in the light of the Policy as a whole, giving due weight to the context in which it appears including the nature and object of the Policy, and, where appropriate, construing the exemption clause contra proferentem in the case of ambiguity.”20 [25] The judge added that his construction was supported by the terms of cl 7.22 of the Policy Wording as follows: “7.22 Financial Services and Australian Credit Licence Any CLAIM or liability directly or indirectly based upon attributable to or in connection with any: (a) financial services provided by the INSURED or any representative, authorised representative or other agent while without: (i) an Australian Financial Services Licence (AFSL) under Chapter 7 of the Corporations Act, including but not limited to the suspension or withdrawal of an AFSL; or (ii) an appropriate authorisation for the provision of those financial services under an AFSL … unless the INSURED, representative, authorized representative, … or agent is exempt from having an AFSL, or an authorization under the AFSL for the provision of those financial services … . For the purpose of this exclusion, ‘financial services’, ‘representative’, ‘authorised representative’ and Australian Financial Services Licence’ have the same meaning as given to those words in or for the purpose of Chapter 7 of the Corporations Act … .” The judge saw the exclusion within cl 7.22 as relevant because it was in terms which provided certainty, as compared with cl 7.20. He considered that this was an indication that the exclusion in cl 7.20 was not to apply to the licensee, for otherwise the parties would have employed the drafting used in cl 7.22. Consideration [26] By his reference to the contra proferentem rule, the judge appears to have considered that cl 7.20 was ambiguous. I respectfully disagree. Nor do I agree with his view that the use of the word “INSURED” gave rise to some uncertainty.21 [27] The word “INSURED” was unambiguously defined. A number of entities and persons were an “INSURED” as defined, including EPFS and Mr Bonnet. The judge 20 Judgment [55] citing Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510. 21 Judgment [50]. -- 7 of 9 -- 8 construed “INSURED” in this case as referring to Mr Bonnet but not to EPFS. Clause 7.20(a) must be interpreted in the context of Section 7 of the Policy Wording. Relevantly, the exclusion was in these terms: “WE will not cover the INSURED … in respect of: … 7.20 … Any CLAIM or liability directly or indirectly based upon attributable to or in consequence of any: (a) financial products or instruments not contained in the INSURED’S approved product list at the time the advice was given…” [28] The effect of the judge’s construction was that although other exclusions within Section 7 might apply to an insured licensee such as EPFS, cl 7.20 was susceptible to an interpretation that applied only to an “INSURED” who was not a licensee. [29] As the judge construed cl 7.20(a), the “INSURED’S approved product list” was in this case Mr Bonnet’s approved product list, but not his employer’s approved product list. In my opinion, that construction is inconsistent with the natural and ordinary meaning of cl 7.20(a), read in the light of the Policy as a whole. [30] The approved product list at the time when the advice was given was a list of the kind about which the insured licensees were asked, and for which they disclosed information, in the Proposal. There is no suggested ambiguity in what was meant in this clause by an approved product list, which is unsurprising having regard to the practice of licensees in businesses of this kind. 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. [31] I agree with the judge’s opinion that the construction for which the underwriters contended could not be characterised as unbusinesslike or uncommercial. As the Proposal demonstrated, the existence and actual use of an approved product list were considerations which were relevant to the extent of the risk for which cover was to be provided. The evident concern of the underwriters was that there should be an approved product list and that the financial advice to be covered by the policy should be limited to advice on products within the list. On the judge’s construction, however, the underwriters had agreed to indemnify a licensee for advice given on any product. [32] In my opinion, cl 7.20(a) did apply to EPFS as an “INSURED”. There is nothing in the drafting of cl 7.22 to suggest otherwise. [33] It was argued for EPFS that attention must be paid to that part of the clause which refers to advice being given. It is argued that in this case the advice was given by Mr Bonnet and not by EPFS, from which it is said to follow that EPFS could not be considered as the “INSURED” for the purposes of this clause. That argument cannot be accepted. As the judge observed, EPFS as the holder of a licence was responsible, as between it and the clients, for the conduct of Mr Bonnet, whether or not his conduct -- 8 of 9 -- 9 was within his authority.22 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. [34] Alternatively, if Mr Bonnet’s advice to the clients is not to be regarded as advice given by EPFS, the argument remains unpersuasive, for the reason that the text of the clause is not in terms such as “at the time the advice was given by the INSURED.” Conclusion and orders [35] I note here that there was an application for an extension of time for the commencement of this appeal. That application was made because the Registry had refused to accept the notice of appeal when it was filed more than 28 days from the date of the judgment. However that did not allow for Court holidays within that period and no extension was required.23 [36] I would order as follows: 1. The appeal be allowed. 2. The orders made on 16 December 2021 and 31 January 2022 be set aside. 3. The claim be dismissed. 4. The respondent to pay the appellants’ costs of the appeal and the proceeding in the Trial Division. [37] BOND JA: I agree with the reasons for judgment of McMurdo JA and with the orders proposed by his Honour. 22 Judgment [34] referring to Corporations Act 2001 (Cth), ss 917B to 917F and the definition of “representative” in s 910A as including an employee of the licensee. 23 That was neither disputed nor conceded by EPFS; but it did not oppose an extension if required. -- 9 of 9 --