Last week, the Victorian Court of Appeal handed down an important decision on the construction of a management liability policy

Joel Harris’s LinkedIn post:

Last week, the Victorian Court of Appeal handed down an important decision on the construction of a management liability policy, examining how liability policies respond to settlements — even where the underlying claim isn’t neatly monetary. The Court overturned the trial judge’s decision in favour of the insurer.

The insured operated a gaming venue. After its commercial relationship with the landowner collapsed, litigation followed. The landowner advanced not only an equitable compensation claim, but also allegations of fiduciary breach, unconscionability and ACL contraventions — along with claims seeking to unwind the lease, option and sale arrangements. The commercial consequences for the insured were severe: success on the counterclaim could have cost it the site and its $5m+ investment. At mediation, the dispute resolved globally. The insured agreed to purchase the land for $11m, cancel the share-option arrangement and exchange releases. It then sought indemnity under its AIG policy for the $1.97m difference from the original option price.

At trial, the judge held that the increased purchase price could not be apportioned across the various elements of the counterclaim, including the alternative equitable compensation claim. Because the settlement sum could not be “disaggregated”, the judge found it did not “result from” the equitable compensation claim — and therefore was not covered.

The Court of Appeal disagreed. It held that “Claim” included non-monetary claims such as rescission and injunctions; that “Loss” expressly included settlements; and that the policy did not require the insured to establish underlying liability separate from the compromise. The causal phrase “resulting from” required only a commonsense connection — and on the evidence, the increased purchase price was a reasonable response to the litigation risk as a whole.

This is a strong reaffirmation that where policies cover Loss “resulting from” a Claim, insurers may be required to indemnify reasonable settlements of all risks raised in a counterclaim — monetary or otherwise. Attempts to confine coverage only to strictly compensatory claims will face difficulty where the policy language and commercial context point the other way.

The Court also declined to follow the English decision in AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd, which suggests an insured must prove actual liability and cannot rely on a bona fide settlement. That case was distinguishable: the wording there lacked the express settlement coverage found in the AIG policy.

Finally, the Court’s guidance on reasonableness has broader significance across liability lines. The trial judge had focused narrowly on the equitable compensation claim. The Court of Appeal held the correct approach is to assess the global commercial risk — including rescission, injunctions, loss of the venue and almost $1 million in costs exposure — in determining whether the settlement fell within a reasonable range.

Blair’s reply:

Great post Joel Harris and an important decision for:

• management liability;
• and more particularly the broader cover often found in the Australian (here AIG) referencing settlements.

The AIG policy has lead to an outcome contrary to AstraZeneca extending a claim to what may have previously been considered uninsured.

Commercial litigators - when settling proceedings, at mediation or otherwise you need to understand how the policy may respond, what is a ‘Claim’ is not just circumstance related but policy definitions and conditions are critical!

This article is a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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• building disputes