It's the Policy wording stupid, again!

A recent decision confirms, which shouldn't really surprise anybody, that contractual interpretation is key to determining whether an insurance policy will respond to a "Claim" for "Loss" "resulting from" the Insured's legal liability to pay a settlement amount (Sayers Property Holdings Pty Ltd v AIG Australia Ltd [2025] VSCA 294).

A commercial dispute and a D&O Policy: the background to the Sayers decision

This case is set against the backdrop of a commercial dispute between Sayers Property Holdings Pty Ltd and Di Dio Nominees Pty Ltd. In 2017, Sayers commenced an action for specific performance of a contract for the sale of Di Dio's land in Tarneit pursuant to its exercise of an option to purchase the land. Sayers had leased the land from around 2012, constructing and then operating a gaming venue on the site.

Di Dio filed a counterclaim against Sayers and Di Dio's own accountant and adviser, Ori Salvalaggio, who failed to disclose that he was a director and 20% shareholder of Sayers. Di Dio alleged breach of fiduciary duty and unconscionable conduct and sought orders setting aside the lease agreement, the option to acquire the land and any contract of sale. In the alternative, Di Dio claimed equitable compensation.

The dispute between Sayers and Di Dio was settled at mediation. Crucially, one element of the settlement was that Sayers agreed to purchase the land from Di Dio for $11 million, which was approximately $2 million more than the previously agreed price of nearly $9 million. Sayers claimed this difference as a Loss under the Corporate Liability limb of its composite Directors and Officers insurance with AIG Australia Ltd.

AIG rejected this claim on the basis that there was no 'Loss' under the policy, as the settlement had no real connection with the pleaded claims against Sayers and instead involved a renegotiation of the price paid for the land on a commercial basis. Sayers sued AIG on the policy.

AIG's decision was initially upheld, but Sayers was successful on appeal, with the Victorian Court of Appeal reversing the first instance decision and finding that the amount claimed fell within the meaning of "Loss" under the policy and that the Insured was entitled to indemnity for it under the policy.

What's a "Loss" under the D&O Policy?

Sayers argued the primary judge had erred in:

• finding that the only Claim (as defined in the policy) relevant to the question of Loss (as defined) was the equitable compensation claim in the counterclaim, on the basis of an incorrect assumption that the parties were not in dispute on that point;

• failing to conclude that the Loss for which Sayers was legally liable under the settlement agreement "resulted from" all of the claims in the counterclaim;

• concluding that the settlement was not reasonable in all the circumstances;

• failing to assess and apply the legal principles, and to assess the relevant factors, by which reasonableness is determined; and

• failing to accept that the Loss was reasonable or to determine what amount was reasonable.

The first two grounds were essentially issues of construction turning on the terms of the insurance policy. On the first ground, the Court determined that non-monetary claims were captured by the reference to 'other legal remedy' in the definition of a Claim, rejecting AIG's narrow interpretation to the contrary. The Court also found that the definition of Loss extended to settlement amounts because such were explicitly included in the definition of Loss.

The second ground turned on whether the settlement was an amount which Sayers was legally liable to pay "resulting from" the counterclaim, as also required by the definition of Loss. The Court found that it was, based on the inclusion of "settlement" in the definition of "Loss", "mediation … proceedings" in the definition of "Claim" and consideration of the relevant authorities.

The remaining three grounds dealt with the reasonableness of the settlement amount, existing authority holding that to be covered a settlement must be bona fide, not made for any reason(s) irrelevant to the insurance, and reflect a reasonable evaluation of the prospects (assuming competent legal representation) of a successful defence to the third party's claim. The Court was satisfied that the settlement was a reasonable one in light of all relevant considerations, as it reflected Sayer's costs of settling the counterclaim and avoiding the risks to its business that the counterclaim represented.

Key takeaways

With this decision, the Victorian Court of Appeal has reaffirmed the primacy of explicit policy language, interpreted consistently with its plain meaning in the minds of ordinary commercial people, in the determination of what is recoverable "Loss" under liability policies.

Insurers wishing to distinguish between categories of loss (including loss in the form of legal liability) for the purpose of determining coverage, whether by exclusion or definition, must do so explicitly. Careful policy drafting is, as always, paramount.