Professional Indemnity cover excluded – for liability as an employer

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By David Slatyer, Partner and Nica Manosca, Law Graduate

In Corestaff NT Pty Ltd v Insurance Australia Ltd [2021] QSC 195, Corestaff was unsuccessful in its application to seek declarations in respect of the proper construction of a professional indemnity insurance policy.

The policy was issued by Insurance Australia Ltd (IAL) and was held by Corestaff for the period between 30 June 2018 and 30 June 2019. It included a quotation schedule, which stated that the optional cover contained in the policy in relation to “Employment Practices Liability” is “Not Insured”. Corestaff had the opportunity to take out the extra optional cover but opted not to.

After thorough consideration of the construction of the policy, the Court ultimately decided that one of the exclusion clauses of the Policy applied.

Background Facts

Corestaff carried on a labour hire business in Australia. In 2012, Corestaff allegedly sent Offer Letters to several individuals offering them 3-year full-time employment. By making the representations in relation to employment arising from the Offer Letters, which were misleading or deceptive or likely to mislead or deceive, Corestaff allegedly engaged in conduct within the meaning of section 18 and in contravention of section 31 of the Australian Consumer Law 2010 (Cth) (ACL).

As a result, proceedings were commenced against Corestaff in the Federal Court of Australia, one of which is a Class Action regarding a claim for damages for breach of contract and/or an order for compensation pursuant to the ACL for misleading and deceptive conduct.

Corestaff contended that the alleged contravention of the ACL is covered by the Policy.

IAL contended that the ACL claims are excluded under the following relevant clauses:

  1. Clause 7.9(a): “based upon, directly or indirectly arising from or attributable to the Policyholder’s liability as an employer;”; and
  2. Clause 7.9(c): “arising out of or in respect of actual or alleged unlawful discrimination (or other unlawful act, error or omission) by any Insured against any Employee or employment applicant; or”

Construction of the Policy

Corestaff argued that clause 7.9(a) does not exclude coverage under the Policy for a claim made by an employment applicant, as opposed to an employee, for misleading and deceptive conduct, because the misleading conduct occurred prior to the subject person becoming an employee. Therefore, this could not be regarded as giving rise to liability “as an employer”. It would also be irrelevant that the applicants in the Class Action subsequently entered into contracts of employment.

With respect to clause 7.9(c), Corestaff contended that the exclusion extends only to conduct which involves or concerns unlawful discrimination and does not provide a broader exclusion for any unlawful conduct.

IAL, on the other hand, contended that clauses 7.9(a) and (c) exclude from cover under the Policy, claims of the nature of the ACL claim in the Class Action, and that Corestaff was liable because it became and was the employer of the applicants. IAL argued no civil liability existed until a cause of action accrued for damages, which could only accrue if a claimant was employed by Corestaff and subsequently terminated.  As a result, Corestaff’s liability has a causal relationship with its “liability as an employer” because the phrase “directly or indirectly arising from or attributable to” is wide language and forms the nexus to “liability as employer”.

IAL emphasised that any claim relating to employees or employment applicants was excluded, unless the additional cover in respect of “Employment Practices Liability” was taken out.  With respect to the proper construction of clause 7.9(c), IAL argued that the clause excludes contraventions of the ACL because it excludes unlawful acts, errors or omissions, not just unlawful discrimination.

Decision

The Court found that the words “… based upon, directly or indirectly arising from or attributable to” in clause 7.9(a) uses broad language in that it encompasses claims on a “broad spectrum” of causation and extends beyond claims which directly arise out of the actual employment relationship.

The Court considered that it was an integral part of the cause of action giving rise to the claim and the potential liability that in reliance on Corestaff’s conduct the applicants entered into a contract of employment which was subsequently terminated, giving rise to the loss. Therefore, the Court found that the exclusion in clause 7.9(a) would apply as a result of a clear nexus with Corestaff having liability as an employer.

The Court found that the exclusion in clause 7.9(c) does not apply because the construction of the clause which best accords with the text, context and the purpose of the clause is that the exclusion only extends to conduct which involves or concerns unlawful discrimination. If the clause was to be construed to exclude any unlawful act, it would flip the order of the clause, which then causes the words “unlawful discrimination” to become merely an example and would render it largely unnecessary.

The exclusion in clause 7.9(a) applies, whilst the exclusion in clause 7.9(c) does not. Despite the policy clearly setting out the various matters, which are excluded from cover unless additional cover is taken out, Corestaff ultimately did not take out the additional “Employment practices liability cover” provided in the policy.

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