HIH Casualty & General Insurance Ltd v FAI General Insurance Co Ltd

[1997] FCA 272

CATCHWORDS

INSURANCE  - Professional indemnity policy of insurance in connection with assured's practice as an accountant - whether negligent advice in connection with practice as an accountant or as investment adviser - whether accounting and investment aspects of business distinguishable.

HIH CASUALTY AND GENERAL INSURANCE LIMITED & ORS
v FAI GENERAL INSURANCE CO LIMITED

NG 487 of 1996

Davies, Wilcox & Branson JJ
10 February 1997
Sydney

IN THE FEDERAL COURT OF AUSTRALIA      )   
  )  
NEW SOUTH WALES DISTRICT REGISTRY     )  No G 487 of 1996
  )     
GENERAL DIVISION  )     
  )     

BETWEEN:               HIH CASUALTY AND GENERAL INSURANCE LIMITED & ORS

Appellant

AND:  FAI GENERAL INSURANCE CO LIMITED

Respondent

Coram:           Davies, Wilcox & Branson JJ.
Date:              10 February 1997
Place:              Sydney

MINUTES OF ORDER

THE COURT ORDERS THAT: 

1. The appeal be dismissed.

2. The appellant pay the respondent's costs. 

Note:              Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA      )   
  )  
NEW SOUTH WALES DISTRICT REGISTRY     )  No G 487 of 1996
  )     
GENERAL DIVISION  )      
  )     

BETWEEN:               HIH CASUALTY AND GENERAL INSURANCE LIMITED & ORS

Appellant

AND:  FAI GENERAL INSURANCE CO LIMITED

Respondent

Coram:           Davies, Wilcox & Branson JJ.
Date:              10 February 1997
Place:              Sydney

REASONS FOR JUDGMENT

Davies J:  This is an appeal from a judgment of Sackville J.  Proceedings had been commenced by W.J. Drayton, N.M. Drayton, B.W. Drayton and R. Drayton against Mr J.L. Martin and two others with whom we are not concerned.  In those proceedings the Draytons claimed that Mr Martin had been their accountant and/or investment adviser and had owed a duty of care to them which had been breached when Mr Martin advised them to enter into
a certain cash flow management programme which involved the taking out of an insurance policy with National Mutual.

There were a number of cross-claims in the proceedings joining, inter alia, HIH Casualty and General Insurance Limited ("HIH") and FAI General Insurance Company Limited ("FAI"), with each of whom Mr Martin had a professional indemnity policy.  The principal proceedings were settled on the basis of judgment for the Draytons in the sum of $292,000.  FAI accepted liability and sought contribution from HIH.  It was that issue with which his Honour dealt.

The policy issued by HIH was a policy which provided insurance in respect of claims made against the assured in connection with the assured's practice.  "The Practice" was defined as "the professional business of practising as an accountant undertaken by the Assured".  "Professional business" was defined to include "advice given or services performed of whatsoever nature". 

The FAI policy covered claims made against the insured in respect of a profession defined to mean, inter alia, "Life insurance agents and/or life insurance consultants ... and Sale and/or service of investment-related products financial and/or investment related advice in the capacity as an Authorised Representative of a Dealer or Investment Advisor ...".

Mr Martin had held a proper authority under the Corporations Law from two security advisers, one of which was a company named Inscorp Financial Services Corporation. It is not in dispute that Mr Martin was accountant and investment adviser to the Draytons and it
is not in dispute that the advice given with respect to the cash flow management programme was advice of the type that one might expect to have been given by an accountant. 

The case put by counsel for HIH was that Mr Martin carried on two businesses, that of accountant and that of investment adviser.  Counsel referred to the fact that the Draytons had first dealt with Mr Martin, when he was managing director of a company, providing advice in relation to securities, and thus had dealt with him in that capacity.  Mr Martin had subsequently left the employment of the company and, after doing so, had continued to advise the Draytons on investment matters and had also undertaken accountancy work for them.

Counsel pointed to the fact that Mr Martin had kept separate accounts for the accountancy part of his work and for the work which he did as investment adviser.  Counsel relied upon the fact that, when Mr Martin worked as an accountant, he usually used a letterhead which described him as an accountant.  When he did work as an investment adviser, he usually used a letterhead which at the relevant time was the letterhead of Inscorp Financial Services Corporation.

Counsel relied upon the fact that, when Mr Martin wrote to the Draytons in relation to accounting matters such as tax returns, he used his accounting letterhead whereas, in respect of the subject transaction, Mr Martin wrote several letters on the Inscorp letterhead.  Reliance was also placed on the fact that most of Mr Martin's remuneration rewards from his dealings with the Draytons came from his work as an investment adviser.  Such remuneration came from commissions, his commission in respect of the subject transaction being $54,000, which was not disclosed to the Draytons.  Mr Martin appears to have charged the Draytons in respect of accounting matters only for the preparation of annual accounts and the preparation of tax returns.

Counsel for HIH also relied upon the two separate insurances.  He submitted that there had been two separate businesses and that the negligent advice given by Mr Martin in fact was given in the course of Mr Martin's business as an investment adviser. 

The trial judge, however, rejected the view that, in respect of the Draytons, Mr Martin carried on two separate businesses.  His Honour examined this matter in considerable detail at pages 328 and 331.  It seems to me that there was no error in his Honour's finding that the advice given by Mr Martin in the subject case was given in respect of an overall business, and certainly not solely with respect to the business of investment.  I reach this conclusion having regard to the points which his Honour made, to the fact that the advice was given in relation to two relatively new businesses which had been established by the Draytons, and to the fact that the advice related to the setting up of a cash management scheme, a scheme which had both tax and financial management benefits.

His Honour, referring inter alia to the evidence of Mr Martin, found that, in respect of the Draytons' affairs, the accounting and investment aspects of the advice given were inextricably interwoven.  I need not go into the matter in any further detail.  It seems to me that his Honour approached the correct issues and referred to the principal evidence.  His findings were undoubtedly correct.

The fact that there were two policies does not involve the conclusion that this matter must fall only within one and not the other.  The claim as made involved both aspects of the functions which Mr Martin carried on.  It involved both his relationships as accountant and as investment adviser.  It therefore fell within the description of the HIH policy, namely as being advice given in connection with Mr Martin's practice as an accountant.  His Honour therefore ordered and gave judgment for the appropriate contribution.  In my opinion the appeal should be dismissed.

WILCOX J:   I agree.  During the course of submissions Mr Meagher SC referred to the relevant provisions of the policy and put some submissions concerning their proper construction.  I do not think there is any difference between the construction suggested by him and that adopted by the learned trial judge.  The judge appreciated that a claim would lie against the appellants for contribution only if liability was incurred in connection with Mr Martin's practice as an accountant, as distinct from any separate practice he may have undertaken as an investment adviser.

The question for his Honour was one entirely of fact, namely whether liability did arise out of his practice as an accountant.  He found it did.  In contesting that finding, Mr Meagher took us to a number of aspects of the evidence but I have to say that consideration of those matters tended only to confirm my impression that the summary of the matter set out by the trial judge at page 331 of the appeal book was entirely correct.

As his Honour said, it was Mr Martin's work as accountant for the Draytons in connection with the tractor business that provided the impetus for his recommendation that they participate in what his Honour called the "tax driven cash flow plan".  That this is the position is borne out by Mr Martin's evidence at page 89 of the appeal book in which he sets out his version of his initial discussion with Mr William Drayton which generated Mr Drayton's interest in the investment plan.  Mr Martin says he told Mr Drayton that the plan "might help to reduce your tax liability.  You still have a large amount of money on deposit and you could have tax problems this year and in the future."  He then enlarged on the virtues of the plan. 

I think a simple way of testing whether the liability arose out of Mr Martin's practice as an accountant would be to ask what would have been his position if, after referring the Draytons in general terms to the plan, and recommending it as something for their consideration, he had sent them off to an entirely independent investment adviser who completed the negotiations and signed them up on the plan.  Would Mr Martin have been liable?  In my view he undoubtedly would have been.  I say this because it is quite plain that the plan was only a useful acquisition for the Draytons if the otherwise assessable income of the tractor business was sufficient to support the interest payments that would be required, and indeed to make the incurring of those payments worthwhile.  It is clear it was not.  At the relevant time the tractor business was operating at a loss and there was nothing to indicate that, in future, it would receive profits of the dimensions necessary to require consideration of a plan such as this.

In other words, the scheme was fundamentally flawed from the outset.  Mr Martin, as the Draytons' accountant, should have known this.  In my opinion, if he had recommended this plan in general terms and sent them off to an investment adviser he would have been

negligent and liable as their accountant.  He surely cannot be in a better position because he also acted as investment adviser. 
Mr Martin's own phrase, describing his two roles as being "inextricably interwoven", which was accepted the learned trial judge in the passage to which I have drawn attention, is amply justified by the evidence.  In my view the judge's finding was not only correct; it was inevitable, on the material that was put before him.  I agree with the presiding judge that the appeal should be dismissed.

BRANSON J:   I agree that the appeal should be dismissed for the reasons given by Justice Davies and Justice Wilcox.

I certify that this and the preceding 6 pages
are a true copy of the reasons for judgment of
the Court.

Associate:

Date:  10 February 1997

Counsel for the appellant:  A.J. Meagher SC with E. Collins

Solicitors for the appellant:  Ebsworth & Ebsworth

Counsel for the respondent:  S.R. Donaldson

Solicitor for the respondent:  Tress Cocks & Maddox

Date of hearing:  10 February 1997

Date of judgment:  10 February 1997