A win for insurers and a warning for brokers
Insurance eBulletin - 12 November 2013
In Horsell International Pty Ltd v Divetwo Pty Ltd,1 the New South Wales Court of Appeal re-affirmed the correct approach to interpreting an insuring clause in a public liability policy and a criminal acts exclusion. The Court of Appeal confirmed that many criminal acts exclusion clauses may not be triggered by the mere fact that an incident causing loss has resulted in a criminal conviction of the insured.
This case also emphasises that any time an insurance broker provides an explanation of a policy to someone who comes within the definition of "Insured Person", the broker may be at risk of being responsible for loss if the policy does not cover that person following an incident. This risk exists not only where there are misrepresentations of the policy coverage but also where an insufficient explanation of the policy was given.
- The accident
- The argument
- The policy
- The broker
- Notes for insurers
- Notes for brokers
- Further information
One afternoon in July 2006, a scuba-diving vessel collided with a fishing boat (the Accident). The driver of the fishing boat suffered considerable injuries and the driver of the scuba-diving vessel was charged and convicted of the offence of "dangerous navigation" under the Crimes Act 1900 (NSW).
The driver of the scuba-diving vessel was the director of a company called Divetwo Pty Ltd (Dive Two), which owned the vessel and operated a scuba-diving business. At the time of the Accident, the director of Dive Two was taking his wife and two other couples on a sightseeing tour along the Myall River.
When the fishing boat operator sued Dive Two, it sought indemnity under an insurance policy held with Liberty Mutual Insurance Co. That policy had been arranged by the insurance broker, Horsell International Pty Ltd.
Liberty contended the claim did not fall within the insuring clause of the policy as the Accident did not occur in connection with Dive Two's business, and if this position was incorrect, there was in any event an operative policy exclusion for dishonest, fraudulent or criminal acts.
Dive Two disagreed with the indemnity approach, joining Liberty to the proceedings started by the injured fishing boat driver. Dive Two brought a further cross-claim against Horsell, on the basis that if the policy did not respond, the broker was negligent in failing to inform Dive Two about the limits of the policy.
There were three principal issues considered by the Court of Appeal:
- Whether the insuring clause covered the conduct.
- Whether the criminal conviction activated the exclusion clause.
- If Liberty did not have to provide indemnity, whether Horsell had negligently advised Dive Two about the coverage provided by the policy.
The insuring clause required Liberty to pay claims for “Injury and/or Damage in connection with the Insured’s Business”. Paragraph 4 of the Policy Schedule provided that the “Insured’s Business” was “[a]s defined in the policy wording under ‘Scuba Diving’”. “Scuba Diving” had a wide definition that included things that were not usually associated with that activity, like “bird watching… jungle and/or bush walking, fishing… [and] beach games”. However, it did not expressly say these activities needed to be conducted as part of, or in connection with, Dive Two's business.
The Court of Appeal found that the ordinary meaning of the phrase “Insured’s Business”, even though it appeared to be defined exclusively as “Scuba Diving”, imported a restriction on the operation of the policy to only those “Scuba Diving” activities conducted in connection with Dive Two's business.
The Court also reiterated that, while the words "in connection with" may have "a very wide operation, they do not usually carry the widest possible ambit, for they are subject to the context in which they are used, to the words with which they are associated and to the object or purpose of the [clause] in which they appear."
In this case, the argument that the boat was the same boat used by the business and the Accident occurred in the same place that the business was usually conducted in was not sufficient to establish that the Accident occurred "in connection with" Dive Two's business. The Accident occurred during a social engagement, not a business activity.
However, the insurer lost in relation to the exclusion clause. That clause stated that the policy "does not cover liability directly or indirectly caused by, arising out of or in any way connected with… [a]ny alleged or actual fraudulent, dishonest, malicious, wilful or criminal act or omission of the Insured...".
The Court of Appeal found that the phrase "criminal act or omission" is not necessarily satisfied by a conviction for an offence. The criminal act must be an intentional criminal act rather than a negligent or dangerous one. This was for two reasons. First, the words that preceded the phrase "criminal act or omission" were all concerned with intentional activity and so the phrase had to be read in light of that. Second, if the exclusion covered negligent activity, it would significantly limit the operation of the policy which is principally designed to protect a business against negligent activity of its employees and directors.
The Court of Appeal cautioned that the insurer has to precisely identify the nature of the criminal act to warrant denying coverage under the policy in order to ensure that the criminal act for which the insured was convicted was an intentional act. The Court also said that "the fact that the insurer would have been aware of the courts' approach to …[such] exclusion clauses… yet left the exclusion clause in a form which it knew may be read [the same] way…" justified the conclusion that the insurer should "bear the burden of the courts' continuing to apply that construction".
As the policy did not apply to the Accident, Dive Two pressed its claim for negligence and breach of contract against Horsell. The Court held there was an unwritten contract between the two and a duty of care in the circumstances.
The broker had been retained by an organisation called PADI, which had members that conducted scuba diving lessons and activities. PADI and Horsell arranged a master policy with Liberty for PADI and its members. The insuring clause was in the master policy, which was never provided to Dive Two (a member of PADI). Some of the communications to members describing the policy were from PADI and some were prepared and distributed by Horsell. Those communications appeared to be unqualified and, specifically, did not mention that the insurance covered only those activities conducted in connection with the Insured's Business. For example, Horsell sent out brochures which described the policy as covering "liability of watercraft up to 12 metres in length" and also had the following under the heading "Common Questions":
"Does the public liability policy cover the liability of the dive boats we own and operate?
Only if the vessel is under 12 metres in length. Most boat policies have a separate liability coverage. Horsell International can arrange insurance for vessels over 12 metres in length."
Also, when Dive Two made a Boat Quote Request to Horsell, under the heading "Advise any Non Diving Related Activities", the director of Dive Two wrote "Bush Walkers, Sight Seeing". In response, Horsell provided a quote which stated:
"Please note that we have not quoted Liability for the vessel as the PADI Watertight Policy provides coverage for Liability for vessels up to 12 metres in length for activities associated with Diving, Swimming, Sightseeing, Whale Watching and Fishing."
The Court of Appeal agreed with the trial judge that Horsell was obliged to clarify the cover sought by Dive Two in light of the Boat Quote Request and the brochures. The Court of Appeal reiterated that the duty of care owed by brokers involves the following:
- Taking reasonable steps to obtain a policy which clearly meets the client's needs and is suitable for the client.
- A broker must use reasonable care and skill to procure the cover that the customer has asked for; either expressly or by implication. If the broker cannot obtain what is required, it must report in what respects it has failed and seek the customer's alternative instructions.
- The broker's duty of care does not extend to expounding the law to the insured, but it does extend to pointing out the legal pitfalls for the insured where these might arise in the course of effecting valid insurance cover.
Other obligations owed by brokers are neatly summarised in paragraphs 235 to 238 of the judgment.
Insurers should be aware of the following:
- Contextual matters that seek to explain how the insuring clause was intended to operate are less important than the express words of the insuring clause.
- Even where a policy defines a term, the term itself can add meaning based on the ordinary understanding of its words. The term "Insured's Business" was defined in the policy as, "[a]s defined in the policy wording under ‘Scuba Diving’". As summarised above, the Court of Appeal found that the definition of "Scuba Diving" did not wholly determine the meaning of "Insured's Business" and that the term had its own meaning based on the words "Insured's" and "Business".
- Criminal acts exclusion clauses need to be carefully worded if the insurer is looking to avoid liability for reckless or dangerous conduct that results in a criminal conviction. Unless the insurer specifically states that the policy excludes contraventions of particular legislation, the policy may still respond unless the insurer can prove that the insured acted intentionally.
Brokers should be aware of the following:
- Even where your retainer is with a primary insured person, you may owe a duty of care to other secondary insured persons by your conduct and communications with them. Further, your obligations to other insured persons that you deal with may be the same as or similar to those you owe the Policyholder. This is so even where the Policyholder provides services to members that include procuring and explaining the insurance policy designed for its members.
- Brochures that explain the policy's coverage are not protected by disclaimers that they are "for illustration purposes only and is subject to the full terms, conditions and exclusions of the policy wordings." Your duty of care is wider than merely informing the insured; it also requires you to clarify ambiguous meanings and explore the needs of the client.
1  NSWCA 368
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