For policyholders seeking insurance cover, understanding how courts interpret policy wordings is critical. The approach courts take to construction and ambiguity often determines whether coverage is available, or whether the insured bears the loss.

In many coverage disputes, indemnification turns on the forensic scrutiny of semantics and grammar. In most cases, this assessment is the difference between millions of dollars of indemnity or financially crippling uninsured loss. Knowing how courts will interpret your policy will give you an advantage in a coverage dispute and expose gaps in your existing insurance cover.

1. Policy language is the paramount consideration

Australian courts have consistently emphasised that insurance policies must be given a businesslike interpretation. This means the construction that a reasonable business person would give to the policy, considering the commercial result the parties intended to achieve. Courts deciding coverage disputes will look first and foremost to the language the parties have agreed upon, interpreting it in the way that commercially minded parties would reasonably understand it. The Victorian Supreme Court of Appeal’s decision in Sayers Property Holdings Pty Ltd v AIG Australia Ltd [2025] VSCA 294 (Sayers) provides a timely reminder of this fundamental approach.

2. Why policy wording matters to your claim

Understanding how courts interpret key policy terms can determine whether your claim succeeds or fails, as coverage disputes frequently turn on the precise interpretation of those terms.

In Sayers, the insured commenced proceedings seeking specific performance of an option to purchase property. The insured settled the primary proceedings by agreeing to purchase the property for almost $2 million more than the original purchase price (Settlement Payment) and claimed the Settlement Payment as a "Loss" under its directors' and officers' policy (D&O Policy). In so doing, the insured asserted that the Settlement Payment was made to resolve a counterclaim against it in the primary proceedings for breach of fiduciary duty and unconscionable conduct. The insurer denied cover, alternatively characterising the Settlement Payment as a commercial price renegotiation rather than a covered Loss. The Court of Appeal rejected the insurer's position, finding that the Settlement Payment fell within the policy’s definition of Loss.

This finding turned on the construction of key policy terms. The policy defined a “Claim” to include proceedings “seeking compensation or other legal remedy”. The insurer argued that “other legal remedy” was confined to monetary relief and did not extend to the counterclaim, which primarily sought to set aside the property purchase agreement. On that basis, the insurer contended there was no covered Claim, and therefore no covered Loss.

The Court rejected this narrow construction, holding that the phrase “compensation or other legal remedy” extends beyond purely monetary claims. To confine it to damages would deprive the words “or other legal remedy” of any real work. The Settlement Payment therefore constituted a covered Loss and was indemnified under the D&O Policy.

Sayers demonstrates how otherwise insignificant drafting choices in policy wordings can have significant coverage consequences. Had the definition of Claim been limited to proceedings “seeking compensation”, the insurer’s argument may have prevailed. The inclusion of the additional words "or other legal remedy” proved decisive, determining whether the insured recovered approximately $2 million or bore the loss itself.

3. Common interpretation pitfalls in insurance policies

The Sayers decision illustrates several critical principles that apply across all types of insurance coverage disputes:

a. Broad definitions serve a commercial purpose

Courts give effect to expansive language in policy definitions. If words like "other legal remedy" or similar broad terms appear, they are generally interpreted to extend coverage rather than limit it. Attempting to read down such language to achieve the same effect as narrower wording renders the broader language meaningless.

b. Context matters

Courts consider insurance policies as a whole, examining how different clauses interact and what the overall scheme of coverage reveals about the parties' intentions. A clause cannot be read in isolation.

c. Exclusions must be explicit

If insurers wish to distinguish between categories of loss or limit coverage in particular ways, they must do so explicitly in the policy wording. Ambiguities or gaps in exclusion clauses are typically resolved in favour of the insured.

d. Commercial purpose guides interpretation

Courts prefer constructions that give the policy a commercially sensible operation and avoid making commercial nonsense of its terms. This means understanding what risks the parties intended to cover and what outcome reasonable business people would expect.

4. How to preserve your coverage rights

a. Understanding your coverage before disputes arise

Specialist insurance lawyers can help you understand precisely what your policy covers and identify potential gaps or ambiguities before a claim arises. Knowing how a court is likely to interpret your policy allows you to make informed decisions about risk management and potential exposures. We can also assist by reviewing your existing policies and working with you and your broker to negotiate coverage enhancements or improved terms when your insurance comes up for renewal.

b. Navigating claims and settlement strategically

When a claim arises that may trigger insurance coverage, the way in which notification, settlement negotiations and communications with insurers are managed can have a material impact on coverage outcomes.

Our team can support you throughout this process by:

• advising on and managing compliance with notification requirements and other policy conditions;
• assisting in the protection of your position where an insurer reserves its rights or declines coverage;
• advising on settlement strategy and structure to align with policy definitions and optimise potential recovery; and
• providing guidance on balancing commercial objectives with insurance coverage considerations.

c. Managing insurer relations and coverage disputes

Where insurers deny coverage or reserve their rights, timely and specialist advice is critical to protect your position and preserve recovery options.

We can assist by:

• assessing the insurer’s position by reference to policy wording, market practice and relevant case law;
• advising on whether, and how best, to progress settlement discussions or defend claims while coverage issues remain in dispute; and
• protecting your interests if coverage disputes escalate, including through formal dispute resolution or litigation.

d. Responding to regulatory investigations and non-monetary claims

As Sayers confirms, coverage extends beyond purely monetary claims where policy language is sufficiently broad. Claims seeking injunctions, regulatory remedies, or other non-monetary relief may well fall within policy definitions. Understanding this early allows directors, officers, managers, and companies to engage insurers appropriately when facing regulatory investigations, enforcement actions, or claims for equitable remedies. Our team can help by analysing whether regulatory investigations or non‑monetary claims fall within the scope of cover and advising on early engagement with insurers to protect coverage positions.

With coverage often turning on how a court construes a few key words, early specialist advice can be critical to protecting your insurance rights and maximising recovery under your insurance policy.

Please reach out at any time to discuss your insurance programs.