BOQ caught out on insurance policy clause

A judgment handed down in the Supreme Court of New South Wales this week involving the Bank of Queensland (Bank of Queensland Ltd v AIG Australia Ltd [2018] NSWSC 1689) highlights just how critical the wording of claim aggregation clauses can be in insurance policies in determining how many deductibles apply where companies are faced with “related” multiple claims, multiple losses and multiple wrongful acts.  This is especially critical where companies face class actions.

In this case, the bank’s policy wording was not sufficient and the Court found that up to 192 deductibles, one for each of the class action claimants, applied. With a $2M deductible for each claim, this meant that the bank was effectively uninsured.

The take away is that it is vital for companies to review their policy wordings and, in particular, aggregation clauses, to ensure they have the cover they think they are buying and so that only one deductible applies when there are multiple claims and losses. This is especially important given class actions frequently involve hundreds or thousands of individual but related claims.  It is also relevant to those formulating such claims so that they do not end up with a defendant that is effectively uninsured.

Decision background and summary

The Bank of Queensland case involved the bank and a finance company conducting a deposit facility for customers and their financial advisors. One of the financial advisers used the deposit facility to perpetrate a fraud and siphoned off tens of millions of dollars.

The deposit holders brought a class action in the Federal Court of Australia against the bank and the finance company alleging a range of wrongful acts including breach of fiduciary duty, breach of contract and knowing assistance in the fraudster’s scheme. The class action did not go to trial but was settled for by a payment of $6 million by each defendant. That settlement settled all of the actions of group members including 192 claimants who had registered to participate in the settlement.

The subsequent question for determination arose in separate proceedings between the bank and its insurers as to how many deductibles of $2million each were to apply, that is, would it just be 1 deductible or multiple deductibles.

This turned on an analysis of the claims made and how the “wrongful acts” were characterised, what “claims” were being settled and whether the losses arose out of, were based on, or were attributable to, a series of wrongful acts.

The insurance policy provided cover for the insured for all losses resulting from any claim made for any wrongful act. The policy contained an aggregation clause which provided that “all claims arising out of, based upon or attributable to one or a series of wrongful acts shall be considered to be a single claim”. There was also then what was described as a “disaggregation” clause which stated “conversely, where a claim involves more than one unrelated wrongful act each unrelated wrongful act shall constitute a separate claim”.

The judge first determined that the class action was only one “claim” even though it was brought by the applicant on its own behalf and on behalf of the group or class members.  Oddly though, with 192 group members having registered to participate in the settlement, he said that in addition, there were 192 separate “claims” made and which were being settled and so multiple deductibles would apply.

However, if he were wrong on this, and there was just one “claim”, his further analysis for the purposes of the disaggregation clause, which he said focussed on “wrongful acts”, meant that there were still multiple deductibles to apply.

The judge noted that there were various categories of wrongful acts alleged in the proceeding including breach of contract in relation to email instructions, multiple unauthorised withdrawals implementing the fraudster’s instructions, breach of fiduciary duty and knowing assistance in the fraudsters wrongdoing or conduct for which the defendants were alleged to be “legally responsible”.

Were then all of these allegations and instances of wrongful conduct sufficiently connected or related for the purposes of the policy?

The judge looked at other seminal decisions in this area including the House of Lords decision in Lloyds TSB in 2003 which was authority for the proposition that the purpose of an aggregation clause was to enable two or more separate losses covered by a policy to be treated as a single loss for purposes of application of the deductible.  For this result, they needed to be linked by a “unifying factor” of some kind. The judge emphasised that the cases directed that careful attention needed to be given to the precise words used by the parties in the particular policy. The Judge looked at previous cases which had talked about a “series” of events and cases which looked at whether events were “related”. His Honour concluded that those cases did not assist here as the clause in this policy was sufficiently different.

Stevenson J in this case decided that the policy wording meant that the unifying factor chosen by the parties for the aggregation clause was the “wrongful act” as opposed to the “loss” or the “source or cause” of the loss.

His Honour found that the wrongful acts in this case were the various purported withdrawals made from the deposit accounts. He said even though each of the wrongful acts may be said to be similar in nature and possibly had some characteristics in common, each was a separate act, made on different occasions, from different accounts, causing loss to different parties and in response to different and separate purported instructions. While some of the withdrawals could be seen as related, not all of the impugned withdrawals could be said to share such a logical or causal relationship. He said that they may share a common factor in that they occurred within the broader fraudulent scheme perpetrated by the fraudster but this factor was more remote than the related “wrongful act” required by the policy wording. The overarching fraudulent practice was not at the level at which the unifying factor was to be determined. His Honour concluded that he did not see how the transactions had a sufficient degree of similarity nor an “integral relationship” such as to constitute them as a “series” of transactions nor the necessary “causal” or “logical” “interconnection” to constitute them as being a “series of related” wrongful acts.

He found multiple “claims” had been made against the bank, those claims did not arise out of nor were they based on or attributable to a relevant series of wrongful acts and the disaggregation clause meant that multiple deductibles applied. At $2M for each deductible, this was a $4million loss for the bank but it could easily have been nearly a $400 million problem.

It will be interesting to see whether the bank appeals this somewhat contrarian decision. One is driven to consider that the outcome in this case was perhaps not what the parties originally intended when the insurance policy was written.