Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

‘Where it is clear that the allegations in the pleadings against the assured fall outside the insuring agreement or are excluded by an applicable exclusion, the duty to defend does not arise. Importantly, if the insurers assert that they are not liable under the policy so that they are not liable for defence costs, and they lose at the hearing on defence costs, they are not estopped from relying on their substantive defence to liability under the policy at a later stage. It would seem that there is nothing to prevent the insurers from seeking at this stage a final order that it is not under any obligation to indemnify the assured, by reason of a coverage or other defence for substantive claim: this was so held in Silbermann v CGU Insurance Limited.’ 542 It is instructive to read the judgment of Jackson J in Bank of Queensland Ltd v Chartis Australia Insurance Ltd, 543 where the insured’s application for declaratory relief in respect of the extension of defence costs was refused because the facts on which such a determination was to be based were not established. If some allegations in the pleading are covered but a dispute arises as to whether others are covered, then there is a duty to defend in full, with the Court to allocate the costs after the trial between the insured and the uninsured portions of the loss, subject to the following caveat. If the facts in relation to the insured and uninsured components of the claim are separate, then no obligation arises to defend the uninsured claim. The test is ‘whether the two claims arise from the same actions and have caused the same harm so that the uninsured claim can be said to be derivative.’ 544 Further, as was seen in McCarthy v St Paul Insurance Co Ltd, 545 the obligation to indemnify in respect of defence costs, where there are multiple causes of loss, including the dishonesty exclusion, will not arise if that obligation to indemnify might tend to result in ‘inconvenient and obviously unintended results’. The proper construction of professional indemnity policies in this context was given detailed consideration by Jackson J in the Supreme Court of Queensland in the Bank of Queensland decision, 546 whose reasoning was endorsed on appeal. 547 That case arose out of proceedings instituted against the Bank of Queensland by ASIC and Barry and Deanna Doyle, in which it was alleged that the Bank had engaged in unconscionable conduct, in contravention of the ASIC Act and the FTA (Qld), by entering into home loan contracts, a mortgage, and making certain credit advances to the Doyles.

These allegations arose out of the fact that the Doyles were sold investment schemes promoted by the infamous Storm Financial Limited in Townsville.

The Doyles incurred significant liabilities to the Bank from the investment advice provided to them by Storm. As Storm was insolvent and its directors impecunious, the Doyles and ASIC sought to implicate the Bank in the multitude of allegations of nefarious conduct advanced against Storm.

The Bank sought indemnity from its insurer in respect of the claim. The insurer denied the claim for indemnity based on an exclusion in cl 3.9 of the policy, which provided that:

542 See pages 23–24 of Professor Merkin’s article. Robert Merkin, ‘Directors’ and Officers’ Insurance and the Global Financial Crisis’ (speech delivered at the Australian Insurance Law Association Geoff Masel Memorial Lectures, November 2009). 543 [2012] QSC 319. 544 See JAS v Gross (1998) 231 AR 228. 545 (2007) 157 FCR 402.

546 Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2012] QSC 319. 547 Bank of Queensland Ltd v Chartis Australia Insurance Ltd [2013] QCA 183.

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