The liabilities arose from prior obligations that were excluded under the terms of the policy
The Federal Court ruled that a company is not entitled to insurance indemnity for employee claims over unpaid entitlements, as the liabilities stemmed from pre-existing obligations excluded under the policy terms.
The dispute arose after several employees pursued claims for unpaid wages, allowances, and other entitlements under employment contracts and statutory instruments. The claims were made during 2020 and 2021, leading the company to settle the disputes by making payments totalling more than $330,000 and incurring substantial legal expenses. The company sought reimbursement under its management liability policy.
The insurer rejected the claims, asserting that the policy did not cover the payments or associated legal costs. The company subsequently brought legal proceedings, seeking a declaration that the policy provided indemnity.
The Federal Court found that the claims were not for "compensation or damages" but instead for the payment of pre-existing obligations arising from employment contracts and statutory requirements. The payments were deemed to represent the company fulfilling debts it was already obligated to pay. Because the policy defined covered losses as those arising from actionable wrongs, the court concluded that the claims did not meet the criteria for indemnity.
The court also considered the policy’s exclusion clauses. These clauses excluded coverage for liabilities related to contractual obligations, business debts, and breaches of statutory employment obligations. The claims were determined to fall squarely within these exclusions, further precluding indemnity under the policy.
In its judgment, the court emphasized that liability insurance policies are not designed to function as performance guarantees for obligations owed by an insured party. The policy in question was intended to cover losses arising from specific wrongful acts, not unpaid entitlements that were already due.
The court dismissed the application for indemnity and ordered the company to cover the insurer's legal costs, highlighting the importance of understanding the scope and limitations of insurance policies.
