Ordinarily, the intentions of insurers and insureds as to the terms of cover available under any insurance policy are to be interpreted solely from the written terms of the policy as they appear on the page.
This is sometimes called the “four corners rule“, meaning that it is not permissible to go outside the boundary of the words on the page in trying to interpret the policy (such as asking the policy underwriter to say what he or she actually intended in drafting a particular clause).
There are some exceptions to this rule which insurers need to bear in mind when making coverage decisions based on the policy wording and schedule. One such exception is where it can be proved that both the insurer and insured had an intention as to the inclusion of a particular entity as an insured, or the wording of a particular term, but the policy documents do not in fact reflect that intention.
If both parties agree that the policy documents do not reflect their common intention, this can be easily resolved by re-issuing the policy documents in the correct form.
However, in a situation where coverage is disputed by the insurer based upon the contents the policy documents, the insured may say that the policy documents do not reflect the common intention of the parties. The insured can apply to the Court for an order seeking rectification of the policy to reflect what it says was in fact the common intention of insurer and insured.
In order to have a policy rectified, it must be established that the parties formed and continued to hold a “single corresponding intention on the point in question” and that this intention “continued to exist in the minds” of both parties right up until the moment the policy came into force. Accordingly, if there were negotiations between the insurer and insured in the lead up to policy inception which resulted in the insurer changing its original intention as to the terms of cover, rectification will not be available to the insured.
A fertile ground for rectification is where the insured argues that the policy documents fail to name an entity which was in fact intended by both insurer and insured to be covered by the policy.
In Laksamana Pty Ltd & Ors v Co-operative Insurance Co of Australia1, four companies operating under different names, making up the John Hughes Motor Group, sold cars from 10 different properties. The broker for the Group had mistakenly only identified one of the members of the Group to the insurer. The broker gave the insurer the details of each property, but not the details of the other individual owners of each property. The policy named a single company as the insured. The Western Australian Supreme Court was satisfied that despite the insurer’s submissions to the contrary, the parties had intended to extend cover under the policy to all the companies in the Group and ordered rectification of the policy accordingly.
Similarly, in Austcan Investments Pty Ltd v Sun Alliance Insurance Ltd & Anor2, rectification of an insurance policy was granted by the Full Court of the Supreme Court of South Australia so that an additional insured party was added to the policy. This case again involved several properties owned by a group of companies. One of the properties was insured in the name of one particular company in the group but it was not the company that actually owned it. The Court held that there was evidence indicating a willingness by the insurer to insure whichever of the companies in the group owned the particular property. The policy was rectified so that the actual owner of the property was included as an insured.
In situations therefore where a coverage decision is based upon a particular entity not being a named insured under a policy, it is advisable for insurers to review their underwriting files to ensure that the policy documents as originally drawn can fairly be said to have reflected the true common intention of the parties as to the extent of cover.
This article was written by Keith Thomas, Partner.
1(1984) 3 ANZ Ins Cas 60-570
2(1992) 7 ANZ Insurance Cases 60-116