By Sarah Fountain, Partner and Shawn Finnerty, Senior Associate

Nuix Ltd (Nuix) held a ‘Public Offering of Securities’ insurance policy (POSI Policy) and a ‘Directors & Officers Liability Insurance’ policy (D&O Policy) (collectively, Policies) issued by insurers led by Berkshire Hathaway Specialty Insurance Company.

Related claims were made against Nuix, the first of which engaged the Side B Coverage, which had a retention of $2.5 million.  The second engaged the Side C Coverage, which had a retention of $10 million.  The Policies did not specify which retention was to apply in circumstances where related claims were made that engaged both Side B and Side C Coverage.

The issue for determination was whether the applicable retention was the lower retention of $2.5 million or the higher retention of $10 million in circumstances where related claims against the insured engaged both Side B and Side C Coverage.

At first instance, the trial held that the applicable retention was the higher one of $10 million, as contended by the insurers.  The Court of Appeal agreed.

Background

In November 2020, Nuix and its related company issued a prospectus for the purposes of Chapter 6D of the Corporations Act 2001 (Cth).  The prospectus contained an offer involving an initial public offering to acquire fully paid ordinary shares in the capital of Nuix.

In May 2021, Nuix received a statutory notice from ASIC requiring its assistance in relation to an investigation into a third party.  In June 2021, Nuix was served with an affidavit disclosing that ASIC had commenced an investigation into Nuix.

In June or July 2021, Nuix notified the insurers of a circumstances that may give rise to a claim within the meaning of the Policies.

Three class actions were commenced against Nuix (and others) in the Supreme Court of Victoria in late 2021 and early 2022.  Subsequently, in September 2022, ASIC commenced proceedings against Nuix in the Federal Court of Australia.

Nuix sought indemnity under the Policies in respect of the class actions, the ASIC proceeding and defence costs incurred in the proceedings.

The insurers’ decision on coverage was:

• under the POSI Policy:
  • the ASIC investigations engaged Side B Coverage and the class actions engaged Side C Coverage;
  • together, the claims were to be aggregated under the policy;
  • the applicable retention was therefore $10 million.
• under the D&O Policy, there were two groups of claims, each of which was to be treated as a single ‘Claim’, one within Side B Coverage (attracting a retention of $2.5 million) and one within Side C Coverage (attracting a retention of $10 million). In the circumstances, the applicable retention was $10 million.

Nuix disputed the insurers’ position that the applicable retention was $10 million.

The Policies

Importantly, both Policies contained a ‘Related Claims’ clause.  In the POSI Policy, it provided:

More than one Claim involving the same Wrongful Act or Related Wrongful Acts of one or more Insureds, or with respect to an extradition proceeding or Insured Person Inquiry, arising from the same or related facts or circumstances or series of causally or logically related facts or circumstances, shall be considered a single Claim, and only one Retention shall be applicable to such single Claim.

All such Claims constituting a single Claim shall be deemed to have been first made on the earlier of the following dates: (i) the date on which a Claim forming part of any such single Claim was first made; or (ii) the date on which any such Wrongful Act, Related Wrongful Act or, with respect to an extradition proceeding or Insured Person Inquiry, such fact or circumstance, was notified under this\ Policy or any other policy providing similar coverage, regardless of whether such date is before or during the Policy Period. In no event shall a single lawsuit or proceeding constitute more than one Claim subject to more than one Retention.

(underlining emphasis added)

The ‘Related Claims’ clause in the D&O Policy was almost identical.

The term ‘Related Wrongful Acts’ was defined in both Policies as:

All Wrongful Acts that are logically or causally connected by any fact, circumstance, situation, event, transaction, cause or series of related facts, circumstances, situations, events, transactions or causes.

Both Policies contained a ‘Retention’ clause, which provided:

…

b) The Insurer’s liability with respect to Loss covered by this Policy resulting from each and every Claim shall be excess of the applicable Retention. The applicable Retention shall be borne by the Company uninsured under this Policy, and unless otherwise stated shall apply to all covered Loss.

…

Decision at First Instance

Nuix contended that the $2.5 million retention was applicable because the Side B Coverage claim arose first.  The insurers contended that the $10 million retention was applicable because it applied vis-à-vis the Side C Coverage claim, which was the larger of the aggregated claims.

The trial judge discussed nine considerations and stated that Nuix’s contention that the lower retention should apply because the Side B Coverage claim was made first would be “far from business-like and unlikely, on any objective view, to have been one intended by the parties”.  As to the varied retention levels, his Honour stated “where there are multiple related claims to which several retentions are applicable, it is more a natural conclusion that the larger will absorb the smaller. That does least violence to the parties’ clear agreement as to the different levels of retention”.  His Honour also observed that Nuix’s construction would have the unusual consequence that a higher retention for securities claims would rarely apply, which would undermine the deterrent object of the $10 million retention.

His Honour concluded that the appropriate construction of the Policies is that when Side C Claims are made, thereby calling upon the Side C Coverage, a single retention of $10 million is applicable.  That is so, regardless of whether any other related claims are also made, whether before or after the Side C Claim is made.

Appeal

On appeal, the sole issue for determination was whether the applicable retention is $2.5 million (as contended by Nuix) or $10 million (as contended by the insurers).

The Court of Appeal stated that there is no language in the Policies that expressly resolved the issue of construction, noting that they do not state which retention or to apply or set out a method of working out which retention is to apply.  That is, there was a ‘gap’ in the Policy.

The Court of Appeal preferred the insurers’ construction.  It held that Nuix’s construction operated in an arbitrary way, which was unlikely to have been intended, because on its construction, the applicable retention dependent entirely on which claim was made first.  The Court of Appeal observed that there was “no commercial logic” to why the retention should be $2.5 million if the Sie B Claim is made first and $10 million if the Side B Claim is made first.

The Court of Appeal considered the insurers’ construction to be “the more natural construction”, having regard to the nature of a retention and the agreed-upon retentions under the Policies.  It held that where the clause of the Policies do not expressly resolve the issue, it is more natural for the larger retention to apply in the event of related claims that engage both Side B Coverage and Side C Coverage.

The Court of Appeal dismissed Nuix’s appeal.

Key Takeaways

One common misconception when construing insurance policies is that where a policy is silent or ambiguous, it will be interpreted against the insurer’s interests.  This decision highlights that this is a misconception.  Here, it was “the more natural construction” that prevailed.

The decision is a good reminder of avoiding having ‘gaps’ in insurance policies, such as the one that existed here, which led to this (no doubt costly) dispute.