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Risk in Context

Interpreting Broad Exclusions in Insurance Contracts

Posted by Kate Pert 09 April 2018

Interpreting Broad Exclusions in Insurance Contracts

Court rulings can often provide useful insight on how exclusions in policies may be interpreted. In one recent case, the Court was asked to consider the impact of a broad insolvency exclusion in a liability policy. 

The clause excluded “any claims, liability, loss, costs or expenses…Arising out of or relating directly or indirectly to the insolvency or bankruptcy of the Insured or of any insurance company, building society, bank, investment manager, stockbroker, investment intermediary, or any other business, firm or company with whom the Insured has arranged directly or indirectly any insurances, investments or deposits…

The claim arose out of advice given by the insured, a financial adviser, to the claimants to invest in financial instruments that subsequently became insolvent. The insured then went into liquidation and the claim was brought against the insurer under the Third Parties (Rights against Insurers) Act 1930. The question for the Court was whether losses arising from these two investments were covered under the professional indemnity policy. 

The insurer argued the exclusion was intentionally broad in order to exclude losses where the insured had arranged an investment that was a causative factor in the insolvency of an underlying entity. They argued that the use of “arising out of” and “relating directly or indirectly to” meant that the insolvency did not need to be the proximate (that is, primary) cause of the loss. The judge held that the insolvency would need to be a significant contributing factor to the claim, liability, or loss, rather than an incidental issue.

For example, even if the proximate cause of the loss to the client was the insured failing to sufficiently investigate the issuing company, if the issuer became insolvent this would nonetheless trigger the exclusion if it significantly contributed to the loss. This may seem like a surprising result given that the policy was intended to provide third party liability cover for negligence.  

What Can We Learn From This Case?

The Court’s ruling reinforces the message that even the most restrictive exclusion may not be construed against the insurer. The judge instead followed what was considered to be the “clear and unambiguous” drafting of the clause and concluded that this interpretation simply defined the risk which the insurer was prepared to accept.

This decision has emphasised the need for insureds to consider the impact of the exclusion on the scope of the whole risk, not just the sole situation it is apparently intended to exclude. Phrases such as “relating to directly or indirectly” may be interpreted broadly, even in exclusions.

You should therefore consider the following:

  • Even if a clause is broad, keep in mind that exclusions can drastically narrow the cover.
  • Check for broad or ambiguous wording in exclusions and seek clarification on what the insurer intended to exclude if necessary.
  • Do not assume that ambiguity will be resolved against the insurer, even if it is providing standard terms.

Related to:  Claims

Kate Pert

Advocate in Complex Claims and Disputes