[lg policy] Purpose and simple language take precedence

[Harold Schiffman]

Purpose and simple language take precedence

On 14 March 2019, the Supreme Court of Appeal (SCA) dismissed an appeal by
Centriq Insurance Company Ltd (Centriq) against a ruling of the Free State
High Court holding liable a financial advisor under a professional
indemnity insurance policy.

The SCA held that Centriq could not rely on an exclusion in the policy that
was at odds with its purpose, which was to indemnify a financial advisor
for breach in connection with negligent financial advice.

The financial advisor, Mr Jose Francisco Castro (the insured), had advised
a widow, Mrs Marisa Vogel Oosthuizen (Oosthuizen), to invest the proceeds
of her deceased husband’s policy in an amount of ZAR2 million in Sharemax
Investments (Pty) Ltd (Sharemax) in a property development scheme known as
"The Villa Retail Parks Holding 2". The villa was a yet to be completed
shopping complex, a fact that the insured did not draw to Oosthuizen’s
attention. The development failed following a Reserve Bank investigation,
which found that Sharemax was contravening the Banks Act 94 of 1990 by
taking deposits illegally.

Oosthuizen lost almost everything. She sued the insured, who in turn
claimed the indemnity from Centriq. The policy indemnified a financial
advisor from liability for “breach of duty in connection with [his]
business by reason of any negligent act, error or omission”. The exclusion
clause read as follows:

“The insurers shall not indemnify the insured in respect of any loss
arising out of any claim made against them:

In respect of any third party claim arising from or contributed to by
depreciation (or failure to appreciate) in value of any investments,
including securities, commodities, currencies, options and future
transactions, or as a result of any actual or alleged representation,
guarantee or warranty provided by or on behalf of the insured as to the
performance of any such investments. It is agreed that this exclusion shall
not apply to any loss due solely to negligence on the part of the
insured……in failing to effect a specific investment transaction in
accordance with the specific prior instructions of a client of the insured.”

Centriq relied on an exclusion clause that excluded it from having to
indemnify an insured member in respect of any third party claim arising
from or contributed to by depreciation in value of any investments, or as a
result of any representation as to the performance of any such investments.

The SCA confirmed the finding of the High Court that the investment was not
viable at all and that Oosthuizen’s complaint was neither that that the
investment had depreciated, nor performed inadequately, but rather that it
was not a safe investment having regard to her needs. The court remarked
that the onus rested on Centriq to bring the claim within the exception by
proving that Oosthuizen's investment initially had a material value which
then declined, without decline there is no depreciation and it did not
discharge the onus. On this score, the court held that:

“Depreciation usually refers to the diminishing of value over time and not
to an investment that is not capable of generating an appreciable value
from the beginning. So why does the clause refer to depreciation rather
than simply to any loss in value? The court *a quo* correctly considered
the language used as referring to the reduction in value resulting from
market or investment forces rather than the type of loss that occurred
here. This was also the construction the New Zealand Court of Appeal placed
on a similarly worded clause in *Trustees Executors Limited v QBE Insurance
(International) Limited*. It makes perfect commercial sense that insurers
would seek to protect themselves from claims arising from market
fluctuations of investments instead of any loss from whatever cause.

But even if we accept that depreciation may refer to simple loss of value
and not merely to gradual or partial loss, this part of the clause is
ambiguous or unclear because it could also refer to gradual or partial loss
from market or investment forces on the one hand or to total loss from
whatever cause on the other. That being so the clause should be
construed *contra
proferentem* so as to achieve a commercially sensible result, having regard
to the purpose of the contract, which was to indemnify the financial
adviser against legal liability. An interpretation that renders the purpose
of the indemnity nugatory hardly meets this yardstick and yields an
unrealistic and unanticipated result.”
The issues raised in this case are important for insurers who underwrite
financial advice on the one hand, and for financial advisors who seek to
indemnify themselves against the adverse consequences of their advice on
the other. The courts will interpret exclusion clauses in professional
indemnity policies restrictively, in particular, if the language used is
vague and unambiguous and goes against or its odds with the purpose for
which cover is sought. While the judgment re-emphasises the right to claim
against a professional indemnity policy, evidently every case will be
judged on its own merits.

*Also published in Engineering News and Business Essentials.*

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 Harold F. Schiffman

Professor Emeritus of
 Dravidian Linguistics and Culture
Dept. of South Asia Studies
University of Pennsylvania
Philadelphia, PA 19104-6305

Phone:  (215) 898-7475
Fax:  (215) 573-2138

Email:  haroldfs at gmail.com
http://ccat.sas.upenn.edu/~haroldfs/

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