I SAID IT BEFORE IM’A SAY IT AGAIN.
Recap on contractual & insurance policy interpretation from the Federal Court of Australia in Murray Goulburn Co-operative Co. Limited v AIG Australia Limited [2021] FCA 288
Amie Crichton & Joshua Carton
The Federal Court of Australia’s recent decision in the matter of Murray Goulburn Co-operative Co. Limited v AIG Australia Limited [2021] FCA 288 provides a useful re-statement of the principles of contract and policy construction.
What was the case about?
Murray Goulburn Co-Operative Co. Limited and MG Responsible Entity Limited (a wholly owned subsidiary of Murray Goulburn Co-Operative Co. Limited) sought declarations concerning the availability of indemnity under a commercial insurance policy issued by AIG Australia Limited, as follows:
on the proper construction of the definition of ‘Securities Claim’ in the policy, each of the claims made in two class action proceedings involving Murray Goulburn Co-Operative Co. Limited (the Webster and the Endeavour River class actions) satisfy the definition of ‘Securities Claim’ in the relevant policy;
certain endorsements and exclusions in the policy do not apply.
The policy was a Sides A, B, and C policy; Sides A and B providing cover for liabilities in respect of claims against directors & officers, and Side C covering, in general terms, liabilities in respect of securities claims made against the corporate insured entities.
The two class actions concerned allegations of misrepresentation and non-disclosure of material information to the ASX and the market, which caused loss to the applicants and group members in each proceeding. Both class actions have been settled with the Court’s approval.
What did the Court find?
The Court ultimately found for the applicants in that the policy issued by AIG responded to the claims made in the Webster and Endeavour River class actions.
While the findings turned on the specific circumstances of the policy wording and the underlying claim, the Court determined that:
Units offered in a unit trust were securities within the meaning of the Corporations Act 2001 (Cth).
The claims in the class actions were therefore Securities Claims (as defined in the policy).
The mutually known context in which side C cover was procured was the listing of the relevant unit trust on the ASX. Denying the description ‘Securities’ to the units would effectively denude the side C aspect of the policy; the Murray Goulburn entities would have received no value and AIG would have taken no substantive risk for the premium paid and obtained. A finding that the units were not a security within the meaning of the policy would deprive the Murray Goulburn entities of a significant portion of valuable cover under the policy, contrary to the commercial purpose and object of its placement.
Key learnings
The judgment provides an important restatement of the principles of construction of contracts and insurance policies, namely:
A policy must be read and constructed as a whole as at the date it was entered into. It should not be construed narrowly or pedantically. It should also not be construed capriciously.
A policy of commercial insurance is to be given a ‘businesslike interpretation’, that is, a construction that a reasonable business person would give to it.
Regard may be had 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.
The commerciality of a particular construction consistent with such a purpose or objective is preferable where it is implausible that the parties could be taken to have intended otherwise, such intention to be ascertained in accordance with objective contractual theory.
Exclusions must be read in light of the policy as a whole, given due weight to the context in which the clause appears, including the fact that the policy is designed to cover specific risks. An interpretation of an exclusive clause that would have the effect of circumscribing inappropriately the cover provided by the policy should not be adopted willingly.
The onus of proof concerning the application of the exclusion rests with the insurer.
The phrase ‘arising out of, based upon, attributable to’ necessitates the establishment of a causal connection between the subject matter of the clauses and the loss in respect of which indemnity is sought.
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