Malamit Pty Ltd v WFI Insurance Ltd

1. [1]

   BATHURST CJ: I have had the advantage of reading the judgment of Meagher JA in draft. I agree with the orders proposed by his Honour and with his Honour’s reasons.

2. [2]

   BEAZLEY P: I have had the advantage of reading the reasons of Meagher JA in draft. I agree with his Honour’s reasons and proposed orders.

3. [3]

   MEAGHER JA: This appeal concerns the construction of a professional indemnity insurance policy issued by the respondent (WFI) to the appellant (Malamit) and another insured in respect of the provision of project and development management services. That policy was issued for the period 31 October 2009 to 31 October 2010 and covered claims made and notified during that period.

4. [4]

   Treetops Lismore Pty Ltd (Treetops) commenced a civil proceeding against Malamit for alleged negligence in the provision of project management services. In separate proceedings, Malamit sought a declaration that it was entitled to an indemnity from WFI in respect of this claimed liability. In the alternative, it sought damages from its insurance brokers. WFI denies liability to indemnify Malamit in respect of that claim for two reasons. First, it is said that the claim is not brought “by a third party”, and therefore not a “CLAIM” to which the policy responds. Secondly, the claimed liability is said to be excluded because the claim is brought “by, on behalf of or for the benefit of” an entity or entities associated with the insured. Those entities include a “SUBSIDIARY” of the insured as that word is defined in the policy. The primary judge (Sackar J) held that WFI was entitled to refuse indemnity on each of these bases: Malamit Pty Ltd v WFI Insurance & Ors [2016] NSWSC 1306.

The insurance

1. [5]

   The policy was issued to Malamit and Blue Dolphin Racing Pty Ltd “ATF MA and LA Mitchell Investment Trust” (Blue Dolphin). By the insuring clause (cl 2.1), WFI agrees:

2. [6]

   The capitalised terms direct attention to the definitions section (cl 6), which relevantly provides:

3. [7]

   The Schedule identifies each of Malamit and Blue Dolphin as an INSURED.

4. [8]

   However, the exclusions section (cl 7) further provides that:

5. [9]

   Two further definitions are relevant to this exclusion:

The claim against Malamit

1. [10]

   On 1 July 2008, Malamit contracted with Treetops, the latter as trustee for the Lismore Business Park Unit Trust (Trust), to provide project management services in relation to the Lismore Business Park Development.

2. [11]

   At all relevant times, Mark Mitchell was a director of Treetops and the sole director of Malamit. He also held all of the shares in Treetops, and he and his wife held the two shares in the other insured, Blue Dolphin, which wholly owned Malamit.

3. [12]

   In July 2010, there was a landslip at the Lismore Business Park. On 19 August 2010, Malamit notified WFI of the circumstances of that landslip and the possibility of a claim being made against it. In 2014, Treetops brought a claim for damages in the Supreme Court against consulting engineers who were retained to carry out engineering work in relation to the development. On 31 October 2014, those defendants responded by denying liability, and alternatively contending that Malamit and others were concurrent wrongdoers within Civil Liability Act 2002 (NSW), Pt 4. On 21 January 2015, Treetops filed an Amended Summons joining Malamit as the fifth defendant in the proceedings. On 9 July 2015, WFI’s underwriting agent advised Malamit that liability to indemnify it in respect of Treetops’ claim was denied.

WFI’s grounds for denying liability

1. [13]

   In the proceeding before the primary judge, WFI denied liability on the following bases:

   1. (1)

      That Treetops was not a “third party” within the definition of “CLAIM”, and accordingly the insuring clause did not respond to the claim brought by it; and

   2. (2)

      That the CLAIM against Malamit was excluded from cover as it was brought:

The issues in the appeal

1. [14]

   The primary judge accepted that the claim against Malamit was brought by a SUBSIDIARY and thus excluded by the operation of cl 7.15(b). He also considered that, as a consequence, Treetops “could not be regarded as a third party for the purposes of the policy”: Judgment [53].

2. [15]

   These conclusions are challenged by grounds 1 and 2 of Malamit’s notice of appeal. Ground 1 challenges the primary judge’s construction of the reference to the “INSURED” in cl 6.19 as including a person who is only an insured by virtue of cl 6.11(b). By ground (a) of its notice of contention, WFI says that the primary judge was correct in concluding that Treetops was not a third party, even if it is not a SUBSIDIARY within cl 6.19.

3. [16]

   The primary judge rejected WFI’s reliance on the exclusion in cl 7.15(a) and (c). His Honour did not consider that Treetops’ claim could be said to be brought “on behalf of” or “for the benefit of” an INSURED (Judgment [106]) or “for the benefit of” the nominated members of Mr Mitchell’s family (Judgment [114]). These conclusions are challenged by grounds (b) and (c) of WFI’s notice of contention.

Consideration

1. [17]

   When used between parties to an arrangement or having an interest in a subject matter, and with reference to that arrangement or subject matter, the description “third party” generally refers to someone who is not a party to the arrangement or who has no interest in the subject matter. Under a contract of insurance, one party agrees to indemnify other persons against loss or liability. Those other persons may or may not be parties to that contract: Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; Insurance Contracts Act 1984 (Cth), s 48. Where an insurer promises to indemnify multiple insureds with respect to their distinct interests in the subject matter of the insurance, the policy is sometimes described as a composite contract. In such a contract, ordinarily the insuring clause is to be read as indemnifying each insured in respect of his, her or its respective interests, and that indemnity will not necessarily be affected by circumstances specifically pertaining to another insured: General Accident Fire & Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 at 404–405, 408 (Greene MR, Scott and Goddard LJJ agreeing); Federation Insurance Ltd v Wasson (1987) 163 CLR 303 at 310–311, 314 (Mason CJ, Wilson, Dawson and Toohey JJ), 318–319 (Gaudron J). This principle applies equally to professional indemnity insurance, where the relevant subject matter involves a form of liability to another person: see, for example, Arab Bank Plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262 at 272 (Rix J).

2. [18]

   The policy issued to Blue Dolphin and Malamit was a composite policy in this sense. Each was severally insured under the insuring clause as an insured and party to the contract. In addition, two further groups of persons were indemnified, namely present and former principals, partners, directors or employees of the INSURED (cll 3.1, 6.11(b)). As the insuring clause was limited to liability resulting from a breach of professional duty “by the INSURED in its conduct of its PROFESSIONAL BUSINESS”, the extension of cover to those natural persons was expressly restricted to where they were acting in the course of the PROFESSIONAL BUSINESS of a relevant insured partnership or company.

3. [19]

   Reading the definition of CLAIM into the insuring clause, the insurer’s promise is to indemnify an insured for “any civil proceeding brought by a third party” against that insured with the requisite character and during the relevant policy period. (It is not necessary to consider the basis on which the parties have agreed that the policy for the period 31 October 2009 to 31 October 2010 responds to the civil proceeding commenced against Malamit in November 2014.) That reference to a “third party” could be to someone who is not a party to the contract, to someone who is not an insured under the contract or to anyone other than the particular insured against whom the proceeding is brought.

4. [20]

   Consideration of the material exclusion (cl 7.15) makes plain the sense in which “third party” is used in this contract. As the plurality observed in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 at [16] (Gleeson CJ, McHugh, Gummow and Kirby JJ), in construing a contract of insurance, “preference is given to a construction supplying a congruent operation to the various components of the whole.” In other words, as far as possible, the contract should be construed with a view to resolving inconsistencies and giving effect to all of its terms.

5. [21]

   The structure of the policy is straightforward. The insuring clause (cl 2.1) describes the indemnity provided in general and (in the context of professional indemnity insurance) familiar terms. It is a “claims made and notified policy” which insures against proceedings brought in the period of insurance: cf. FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [23] (McHugh, Gummow and Hayne JJ). Various types of claim are then excluded from that indemnity. They are specified by reference to the insured’s prior knowledge of the claim or circumstances out of which the claim arises (cl 7.1); a characteristic of the claimed liability (cl 7.2); a characteristic of the circumstance or event giving rise to the claim (cll 7.3–7.14, 7.17); the nature of the breach of duty or obligation giving rise to the claim (cll 7.16, 7.18–7.19); and the identity of the person by, on behalf of or for whose benefit the claim is brought (cl 7.15).

6. [22]

   In this way, the exclusions narrow the scope of the cover described by the insuring clause. It follows, as Viscount Sumner observed in Lake v Simmons [1927] AC 487 at 507, that exclusions are to be construed on the basis that they “cut out something already included by the general recitals and provisions”. See also Wilkie at [32] where the focus was on what was “removed” by the relevant exclusion.

7. [23]

   Clause 7.15(a) excludes from the subject matter of cover “a CLAIM by, on behalf of or for the benefit of any INSURED” (emphasis added). Its premise, as a provision intended to remove particular claims from cover, is that a proceeding brought by one insured against another (whether either is a party to the contract of insurance or not) is a CLAIM that would otherwise be within “cover”. The expression “third party” should be construed in accordance with that premise. That is only achieved if it describes any person other than the insured against whom the proceeding has been brought, which is the third of the meanings referred to above.

8. [24]

   This conclusion is not contradicted by the decision in Chubb Insurance Company of Australia Ltd v Robinson (2016) 239 FCR 300; [2016] FCAFC 17, which was relied on by WFI and concerned the use of “third party” in a differently worded policy. That “Directors & Officers” policy insured against claims for acts and omissions occurring whilst the several insured were acting as directors and officers of a company in a defined group. Claims for “any actual or alleged act or omission” in the rendering of “any professional services to a third party” were excluded. The Full Court (Foster, Robertson and Davies JJ) held that this reference to “third party” meant “a person or entity which is outside” the relevant group of companies: Chubb v Robinson at [73], [79], [130]. The expression “third party” was in the exclusion and not in the insuring clause, and the adoption of that construction would not have rendered the exclusion otiose.

9. [25]

   The primary judge concluded that in the definition of CLAIM a “third party” is a person “who is not a party to the contract, not an insured as defined and not an associate for the purposes of cl 7.15”: Judgment [46]. That conclusion does not give effect to the principles referred to above or the premise on which cl 7.15(a) applies. WFI’s contention that the expression “third party” describes a claimant “separate from and unconnected with [the insured], not merely not being a party to the insurance contract” takes the matter no further. It follows that, to the extent ground 2 challenges the primary judge’s conclusion in this respect, it should be upheld. WFI’s contention ground (a) should be rejected.

10. [26]

    WFI submitted and the primary judge accepted that this exclusion applied. His Honour reasoned as follows. The relevant proceeding was brought by Treetops as trustee of the Trust against Malamit. By cl 6.19, a SUBSIDIARY as defined includes any corporate entity in which the INSURED owns or controls 50% of the issued voting shares. At all relevant times, Mr Mark Mitchell was the sole director of Malamit; acted in the course of its project and development management business; and owned all of the shares in Treetops. Accordingly, he was an INSURED within cl 6.11(b) and Treetops was a SUBSIDIARY within cl 6.19. As to the relevance of the proceedings being brought by Treetops as trustee, the concluding words of cl 7.15 (“irrespective of the capacity in which the CLAIM is brought”) made clear that, when considering whether a proceeding has been brought “by” a SUBSIDIARY, the fact that the proceeding is brought as trustee or agent or in some other capacity is to be disregarded: Judgment [48], [52], [53].

11. [27]

    This reasoning accepts that the expression “any SUBSIDIARY” in cl 7.15(b) describes any company which by the operation of cl 6.19 is a SUBSIDIARY of an insured. That remains so irrespective of whether the relevant insured entity is a corporation; whether that entity is the insured against whom the CLAIM to which the exclusion is said to apply is brought; and whether that entity is only an INSURED by virtue of cl 6.11(b).

12. [28]

    The appellant puts two arguments as to why the exclusion in cl 7.15(b) is not engaged. The second is directed to the last of these matters, which is also the subject of ground 1. No arguments were directed to the remaining two.

13. [29]

    The appellant’s principal argument is as follows. In cl 6.19, SUBSIDIARY is defined by reference to the word “entity”, rather than “person”. An entity may include a trust, although the trust is not itself a legal person. The reference to SUBSIDIARY in cl 7.15(b) requires identification of the entity to which cl 6.19 refers, whether or not a legal person. A claim made by a person in its capacity as trustee of a trust is a claim brought “by” the entity that is the trust. No voting entitlements in the Trust were held by Mr Mitchell. Accordingly, that trust was not a SUBSIDIARY of an insured, namely Mr Mitchell.

14. [30]

    The primary judge rightly rejected this argument: Judgment [51]. It has two fundamental difficulties. The first is that the insuring clause and the definition of CLAIM envisage a third-party claimant who brings proceedings to enforce a civil liability of the relevant insured to that claimant. The liability, if established, is necessarily to the third party as a person recognised at law. The Trust is neither the entity “by” whom the proceedings were brought nor the entity to which the insured would be liable. In each case that legal entity is Treetops. The second difficulty is that the “entity” referred to in cl 6.19 is an entity which either by legislation is capable of being “deemed to be a SUBSIDIARY” or which has “issued voting shares”. In either case, the reference is to a company or other entity having a legal personality.

15. [31]

    The appellant’s second argument accepts that Mr Mitchell was an insured under cl 6.11(b) because during the policy period he was a director of Malamit and acting in the course of its project management business. It is submitted, however, that the use of the definite article in cl 6.19 with reference to “the INSURED” indicates that the reference is to the insured as described in the Schedule, and not to any other person included within that definition by cl 6.11(b).

16. [32]

    It is useful at this point to consider the likely purpose of the exclusion in cl 7.15. In insurance which indemnifies several insured engaged in the conduct of a professional business, the clause removes from cover claims made against the insured by, on behalf of or for the benefit of an insured, or any subsidiary or family member of an insured. Its purpose in doing so is presumably to avoid the risk of collusion or assistance between the insureds in relation to such claims by excluding them from cover. Clauses 7.15(a) and (b) exclude any proceeding for compensation by “any INSURED” or “any SUBSIDIARY”. The expression “any INSURED” in the context of a claim made against one insured must mean any other insured and encompasses persons answering that description by reason of cll 6.11(a) or (b). In the same context, the expression “any SUBSIDIARY” describes any company or other legal body which answers that description by the application of cl 6.19 in relation to any insured. That construction gives effect to the evident intent of the exclusion in relation to claims for compensation against one insured in which another insured, or any subsidiary or family member of an insured, has a financial interest.

17. [33]

    Both the language of the exclusion and its evident purpose indicate that the enquiry as to whether a company or other body is a SUBSIDIARY is to be made by reference to whether cl 6.19 is satisfied with respect to any insured. It follows that appeal grounds 1 and 2 should be rejected and the appeal dismissed.

18. [34]

    I will consider briefly the remaining arguments made on behalf of WFI.

19. [35]

    WFI also argued that Treetops’ claim was made “for the benefit of” an INSURED or FAMILY MEMBER of the INSURED, and accordingly excluded by cl 7.15(a) or (c). The primary judge rejected this argument on the basis that the insurer had not proven that success in Treetops’ claim against Malamit would in fact lead to any distribution that would ultimately benefit Mr Mitchell or the members of his immediate family: see Judgment [61], [99]–[100], [102]–[103], [105]. In its written submissions on appeal, WFI contends that an indirect beneficial interest in the claim or its potential proceeds, even without proof of monetary benefit, should suffice to characterise a claim as “for the benefit of” Mr Mitchell or of members of his family.

20. [36]

    The short answer to this submission is that neither Mr Mitchell nor members of his family enjoyed any beneficial interest, direct or indirect, in the claim against Malamit or in its potential proceeds. That claim was made by Treetops as trustee for the Trust. When Treetops joined Malamit to its proceeding against the engineers, Mr Mitchell no longer held any units in the Trust directly. Instead, he and members of his family merely held shares in companies which directly or indirectly held units in the Trust. As the High Court (Dixon CJ, Kitto and Taylor JJ) observed in Charles v Federal Commissioner of Taxation (1954) 90 CLR 598 at 609, “a unit held under this trust deed is fundamentally different from a share in a company”. The latter, unlike the former, confers no equitable interest in assets held at law by another: Macaura v Northern Assurance Co Ltd [1925] AC 619 at 626 (Lord Buckmaster); cf. Baker v Archer-Shee [1927] AC 844 especially at 869–870 (Lord Carson). A share is a distinct bundle of statutory and contractual rights which in general only entitle the holder to the benefit of company assets upon a distribution or dissolution.

21. [37]

    This conclusion makes it unnecessary to attempt to articulate the limits of the phrases “on behalf of” or “for the benefit of”. Each describes a relationship intended to mark a claim which has been brought as covered or excluded, and to do so once the claim is made. The former would be satisfied if the proceeding for compensation was brought as agent for another insured. It is not sufficient to satisfy the latter that as a result of the bringing of the claim some benefit, however small and indirect, might flow to another insured or family member. The claim must be brought for that person’s benefit, which would be the case if the proceeds were to be paid to or at the direction of that insured or family member. A claim brought by the trustee of a unit trust does not answer that description considered from the perspective of a shareholder of a corporate unitholder in the trust. Accordingly, contention grounds (b) and (c) are dismissed.

A procedural question

1. [38]

   In the Court below, the issues between Malamit and WFI were dealt with separately and before any remaining issues in the proceeding: Uniform Civil Procedure Rules 2005 (NSW), r 28.2. Although parties to that proceeding, the second and third defendants – respectively, Malamit’s insurance broker, Arthur J Gallagher (Aus) Pty Ltd, and the employee of that broker with whom Malamit dealt, Martin Andrews – did not actively participate in the determination of those issues. The outcome of that determination was the entry of judgment in favour of WFI on the basis that it was not liable to indemnify Malamit.

2. [39]

   The broker defendants were not named as parties in the notice of appeal. In the course of the hearing in this court, directions were made requiring Malamit to apply to join the broker defendants and giving them an opportunity to make written submissions, both as to whether they should be joined and in relation to the issues in the appeal. To enable them to do the latter, they were provided with a copy of the transcript of the appeal hearing.

3. [40]

   UCPR, r 51.4(1) provides that each person who is “directly affected by the relief sought” in an appeal or who is “interested in maintaining the decision of the court below” must be joined as a respondent.

4. [41]

   By their written submissions, the broker defendants contend that it is not necessary that they be joined. They did not participate in the determination of the separate question and do not seek “to play any part in the appeal”. They accept that, if the appeal succeeds, Malamit’s claims against them will cease and to that extent that they “may” be affected by the outcome of the appeal. They do not, however, concede that they are persons “directly affected’ by the appeal.

5. [42]

   In my opinion, the broker defendants are “directly affected by the relief sought” in the appeal. Accordingly, they should have been joined as respondents and an order joining them should be made.

6. [43]

   An element of each of Malamit’s pleaded claims against those defendants is that WFI is not liable to indemnify it: Amended Statement of Claim, [12]. See also Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541 at 556 (Kirby P, Mahoney and Priestley JJA relevantly agreeing). That issue was decided by the primary judge favourably to Malamit in relation to its claim against the broker defendants, and the broker defendants were bound by it. As between Malamit and them, that determination was not decisive of the former’s claim: the judgment was interlocutory and the proceeding continues. Nevertheless, immediately following the determination of the separate question, the position was as described by Diplock LJ in Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630 at 642 (in a passage cited with approval by Mason CJ in O’Toole v Charles David Pty Ltd (1990) 171 CLR 232 at 246):

7. [44]

   The relief sought in the appeal is that WFI be declared liable to indemnify Malamit. If the appeal were successful and that relief granted, there would from the broker defendants’ perspective be no adverse determination of the insurer’s liability and they would be entitled to have the claims against them dismissed. Had the separate questions been determined favourably to Malamit and WFI appealed, the broker defendants would have been “interested in maintaining” that decision. In either case, their interest is in upholding or overturning a binding determination of an essential element of the causes of action against them.

8. [45]

   As noted earlier, the broker defendants make no additional submissions on the merits of Malamit’s appeal.

Conclusion

1. [46]

   Accordingly, the following orders should be made:

   1. (1)

      Arthur J Gallagher (Aus) Pty Ltd and Martin Andrews are joined as second and third respondents in the appeal.

   2. (2)

      Appeal dismissed.

   3. (3)

      The appellant pay WFI Insurance Ltd’s costs of the appeal.

   4. (4)

      The appellant pay the second and third respondents’ costs of the notice of motion that they be joined as parties to the appeal.