Exclusion found to operate to deny indemnity: XL Insurance Co SE v BNY Trust Company of Australia Limited [2019] NSWCA 215

2 September 2019, Supreme Court of New South Wales, Court of Appeal – Bell P, Gleeson JA and Emmett AJA

MMJ Real Estate (WA) Pty Ltd (MMJ) conducted business as a realtor and property valuer. In late 2010, BNY Trust Company of Australia (BNY) retain MMJ to provide valuations in respect of certain strata lots in Rockingham. These valuations were prepared and signed on behalf of MMJ by its director, Mr Hosking, and reviewed and counter-signed by an employee, Mr Volk.

Relevant Policy

XL Insurance Company SE (XL) issued a professional indemnity insurance policy to MMJ, which provided indemnity against legal liability arising from any civil cause of action for any compensatory damages or claimant’s costs incurred by MMJ, Mr Volk and Mr Hosking in respect of:

  • Any legal proceedings or demand against the insured for compensation arising from the performance of:
  • Real estate agency services;
  • Property valuation services;
  • Property management services; and
  • Project management services.

The policy contained an exclusion (ix) in the endorsement, which excluded liability for valuations undertaken for any provider of financial security that was not an authorized deposit-taking institution (ADI) supervised by APRA unless the valuation report included a “prudent lender clause”.

Here: BNY was not an ADI and the property valuations prepared by Messrs Hosking and Volk did not include a prudent lender clause.

Commencement of Proceedings

BNY incurred a loss, commencing proceedings against MMJ, Mr Volk and Mr Hosking (collectively, the insured). BNY’s allegation was that, in breaching MMJ’s retainer and the duty of care owed to it, the insured had failed to exercise the care and skill of a reasonably competent property valuer.

The insured cross claimed against XL, seeking declarations that the insurer was liable to indemnify them in respect of any liability that they had to BNY and the costs incurred in defending the proceedings.

Primary Judgment

The primary judge declared that XL was liable in accordance with the terms and conditions of the policy to indemnify the insured in respect of any liability they had to BNY. Her Honour found that although the words of the endorsement were ambiguous, she was satisfied that on the proper construction of exclusion (ix), a causal link was required between the absence of the prudent lender clause, and the loss in respect of which indemnity was claimed.

What was appealed?

XL’s submissions on appeal

XL asserted various errors by the primary judge in her approach to the construction of exclusion (ix), particularly that:

  1. The exclusion operated to exclude cover for “loss” as defined in the policy where the valuation was undertaken for lenders who were not an ADI and which did not include a prudent lender clause;
  2. No ambiguity was introduced into exclusion (ix) by the “introductory words” in the endorsement or their relationship to the subject matter of exclusion;
  3. The subject matter of exclusion (ix) was valuations that had been undertaken for lenders who were not ADIs; it was not defined by reference to any quality or characteristic of an error or omission by any of the insureds; and
  4. It was the identity of the ultimate client of the insured, and the different risk profile which that client presented, that was the mischief to which the exclusion was directed.

Findings on Appeal: Per Gleeson JA (with whom Bell P agreed)

Reliance of Exclusion (IX)?

XL was entitled to rely upon the exclusion to deny indemnity to the insured and to refuse to pay their defence costs of the proceedings, as it applied to exclude cover for “loss” where a valuation was undertaken by or on behalf of the insured for a non-ADI lender and the valuation did not include a prudent lender clause. – [109], [110]

Construction of Exclusion (IX)

  • Policy was a commercial contract, and thus construing it involved identifying the imputed intention of the parties, by reference to the contractual text construed in the light of its context and purpose. – [47]
  • A causal relationship between the subject matter of the clauses that followed the endorsement and the “loss” the subject of the claim for indemnity was postulated by the introductory words “directly or indirectly arising out of, based upon, attributable to or in consequence of”. – [62]
  • Given that it was not the purpose of the exclusion to guard against “loss” arising out of a claim against the insured by an ADI lender, the exclusion was given a distributive effect where a valuation was undertaken for both an ADI lender and a non-ADI lender by limiting the exclusion to such valuations insofar as the valuation was undertaken for a non-ADI lender. – [86]
  • Courts will not usually make a declaration as to the liability of an insurer to indemnify an insured in circumstances where the liability of the insured to a claimant had not yet been established by judgment – the proper basis was found in the agreed facts and answers to the separate questions. – [114], [116]