As it is a requirement (in the absence of an available exemption) for persons carrying on a financial services business in Australia to hold an Australian Financial Services Licence (“AFSL”) which in turn relevantly requires the AFSL holder to effect professional indemnity insurance, a recent NSW Court of Appeal decision in Zhang v Minox Securities Pty Ltd  NSWCA 182 provides useful guidance on the application of a common exclusion clause in professional indemnity insurance policies which operates by reference to “approved product lists”.
QBE insured Quantum and its authorised representatives under a composite professional indemnity policy and a financial institutions policy. Mr Chan was an authorised representative of Quantum and in that capacity procured investments in the failed Westpoint group. This investment was not on Quantum’s “approved product list”.
The investors sued Quantum for their loss and applied to join QBE as Quantum’s insurer. To be successful in that application required the court to be satisfied, among other things, that there was an arguable case the insured was entitled to be indemnified.
QBE successfully opposed the investors application at first instance on the basis that exclusion clauses meant that neither the professional indemnity policy nor the financial institutions policy responded. The investors appealed.
The Court of Appeal agreed that an exclusion clause in the financial institutions policy meant that the professional indemnity policy, not the financial institutions policy, covered financial planning claims. That left the professional indemnity policy. The Court of Appeal’s decision is of interest because of the finding on the following clause which relevantly excluded cover for:-
“any financial or investment product that … is not listed on the Approved Product List of the entity which has issued the Insured with a proper authority to deal in financial products”.
The Court decided that whilst this exclusion meant the policy did not respond to a claim brought against Chan, the position was different for Quantum. The Court held that it is common in composite policies covering a number of insureds for exclusion clauses operate distributively so as to deny cover to one insured but not to another. It was accepted that the purpose of the exclusion was to deny cover to authorised representatives acting outside their authority (such as Chan), “but not to deny cover to innocent employers such as Quantum”. Indeed, Hodgson JA said that it was non-sensical to suggest that Quantum could have issued an Approved Product List to itself.
The Court therefore concluded that the exclusion had no application to Quantum as the entity issuing the Approved Product List and a separate Insured such that the investors were able to join QBE.
Many professional indemnity policies held by AFSL licence holders contain a similarly drafted exclusion. This decision has the potential to lead to an uplift in the number of claims seen by insurers and financial service providers arising out of investments in products not on approved product lists.
This decision also reinforces, to both insurers and insureds, that the terms of exclusion clauses in policies covering two or more insureds need to be carefully drafted. In particular, the insureds such clauses are intended to encompass should be made evident by clear drafting.