Abstract

The trigger of the Insolvency exclusion is the causal connection between the claim and the insolvency, rather than between the making of the claim and the insolcency.

The scope of the influence of a definition in a statute or commercial document.

Article

Insolvency Exclusion

AIG Australia Limited v Kaboko Mining Limited [2019] FCAFC 96 concerned an insolvency exclusion in a Directors and Officers policy. The insureds’ company, now subject to a deed of company arrangement under s 436A of the Corporations Act, claimed by its administrator that they had breached duties to act with due care and diligence in managing its affairs and to act in good faith in its best interests in relation to its defaults in the performance of certain contracts, leading to its insolvency. The Court confirmed the finding below that the exclusion did not preclude cover for the company’s claims.

The exclusion provided: The Insurer shall not be liable under any Cover or Extension for any Loss in connection with any Claim arising out of, based upon or attributable to the actual or alleged insolvency of the Company or any actual or alleged liability of the Company to pay any or all of its debts as and when they fall due. Relevantly, Loss was defined as an amount which the insured was legally liable to pay resulting from a claim made against the company. It should be noted that that the relevant focal point of the exclusion is the Claim and not the making of it.  

The insured Loss as defined was not what was claimed, but an amount for which the insured had a legal liability to pay resulting from a claim. That liability might be established by an adjudication or settlement, but it was the liability that was the Loss. Its scope would be determined by the extent of the claimant’s loss that was the subject of a Claim since the Loss must result from it.

Claim was defined by reference to matters, inter alia, such as a written demand or proceeding or an investigation. The definition focused upon the means by which claims of various kinds may be initiated or commenced and identified a point at which a Claim occurs. It was not expressed in terms of the act of bringing the claim or the reasons or motivations for it. The definition identified documents, such as a written demand or a court proceeding seeking compensation, or an event, an investigation or a raid or on-site visit by a regulator. It spoke of a demand or a civil proceeding for a specified act, error or omission. Thus, a claim was defined by reference to the identified act, error or omission, rather than to the reasons for making of the demand or bringing the proceedings.

That the commencement of an action is a means of making a claim does not mean that it is the claim. The concept of making a claim has two limbs. The commencement of the action is the making factor, which may have significance when temporal factors are relevant.  In this context, the claim is the underlying concept, the demanding of compensation, arising from the alleged misconduct in relation to the contracts, which the action was employed to enforce.

The commencement of an action is only one of many ways of making a claim, which demonstrates that the making of it is not identical  with the concept of the claim itself

Equally, that as a result of the company’s loss in respect of the contracts it was unable to pay its debts and therefore insolvent does not touch the fact that this part of the claim is confined to its loss from the alleged defective handling of the contract.  The insolvency arose out of that: the claim did not arise out of the insolvency.

The indemnity sought did not include that part of the company’s claim relating to its costs and losses relating to the deed of arrangement, or insolvent trading, to which the exclusion plainly applied and which, incidentally, exemplify its intended scope.  In contrast, the indemnity sought was limited to the insureds’ liability for the company’s losses that led to its insolvency. That liability was complete when the company suffed it losses from the alleged mishandling of the contracts and before its sequential insolvency

In seeking to have the exclusion applied the insurer argued that what caused the loss or damage claimed by the third party was separate from the question as to what caused the bringing of a Claim and separate again from the question whether the Loss which the insurer was said to be obliged to indemnify; and that itself arose out of, was based upon or was attributable to the actual or alleged insolvency.  In effect, it argued that the claim,the action, was brought only because the company suffered the loss, its liability, which led to its insolvency, and that this led to the claim against the insureds.  Thus, it said, the loss arose out of the indemnity.

This suffers from the reality that the claim against the insureds for which indemnity was disputed arose totally out of their alleged misconduct in the handling of the contracts, rather than the company’s insolvency. It would have been complete before the insolvency, and it would have been available to the company whether it became insolvent or not. This part of the action against them was merely a manifestation of the claim, an instrument of making and enforcing it. Whether the insolvency was a motivation for bringing it is irrelevant.

Much of the judgment concerned the effect of particular parts of the relevant language, but this was due to the insurer’s attempt to use that route in its supporting argument. The judgment’s reasoning is gnerally applicable to common expressions of the cover and this exclusion. The critical point ws that in substance the claim related to the claimant’s assertion of a right to compensation for harm done rather than the particular mode by which the claim is made or the motivation behind it.  This is hardly novel in principle, though of course it may be varied by the policy’s language.

Further on a separate issue, because of the basis of the company’s claim for the loss of business  opportunity, it did not arise out of the insolvency. It was alleged that it was the lack of further advances under the contract that contributed to that loss rather than because it could not pay for the opportunity.

 

Construction - Definitions

Definitions do not usually have substantive effect, and are not construed beyond the operative provisions to which they apply. They are read by inserting the definitions into them. The same principles apply to the construction of statutes and commercial instruments: Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 at [84], [103]) ; Bond v Chief Executive, Department of Environment and Heritage Protection [2017] QCA 180; [2018] 2 Qd R 112 at [11]; Halford v Price [1960] HCA 38; (1960) 105 CLR 23 at [32][33]; Rexel Electrical Supplies Pty Limited v Mentha (Administrator) in the matter of ACN 004 410 833 Limited (formerly Arrium Limited) [2018] FCAFC 229 at [143], [151]. It might be observed that should a definition affect the meaning of a provision in which the defined term is used, the effect of that affected provision may logically reflect on the construction of another provision in which the defined term is not used.