FAI General Insurance Company Limited v Australian Hospital Care Pty Ltd B23/2000

The High Court of Australia considered an appeal by FAI General Insurance Company Limited (FAI) against a decision of the Full Federal Court concerning the interpretation of a professional indemnity insurance policy. The dispute arose from a claim made by Australian Hospital Care Pty Ltd (AHC) against its professional indemnity insurer, FAI, following a class action brought against AHC by patients alleging negligent treatment at its hospitals. AHC sought indemnity from FAI for the costs incurred in defending the class action.

The central legal issue before the High Court was whether the professional indemnity policy issued by FAI to AHC covered the costs incurred by AHC in defending the class action, notwithstanding that the policy contained a clause excluding liability for claims arising from "any dishonest, fraudulent, criminal or malicious act or omission." The High Court had to determine the proper construction of this exclusion clause and its application to the allegations made in the class action.

The High Court, by majority, held that the exclusion clause did not operate to deny indemnity for the defence costs. The majority reasoned that the exclusion applied to the insured's own conduct, not to the allegations made by third parties in a claim. They found that the class action alleged negligence on the part of AHC, and while such negligence might, in some circumstances, involve dishonest, fraudulent, criminal, or malicious acts or omissions, the mere allegation of negligence did not automatically trigger the exclusion. The policy was intended to cover defence costs even where the allegations, if proven, might fall within an exclusion. Therefore, FAI was obliged to indemnify AHC for its defence costs.