Liberty Mutual Insurance Company t/as Liberty International Underwriters v Valerio Enrico Zanotto

[2011] NSWDC 202

District Court

New South Wales

Medium Neutral Citation:	Liberty Mutual Insurance Company t/as Liberty International Underwriters v Valerio Enrico Zanotto [2011] NSWDC 202
Hearing dates:	29 November, 14 December 2011
Decision date:	16 December 2011
Jurisdiction:	Civil
Before:	MURRELL SC DCJ
Decision:	Judgment for the Plaintiff
Catchwords:	ICAC investigation Public official Finding of corrupt conduct Findings of fact Could constitute a criminal offence Insurance policy Wrongful act Final determination or adjudication in relevant proceedings
Legislation Cited:	Independent Commission Against Corruption 1988
Cases Cited:	McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579 Balog v Independent Commission Against Corruption [1990] HCA 28; (1990) 169 CLR 625
Texts Cited:	New South Wales, Parliamentary Debates, Legislative Assembly, 23 February 2005, 14133 (Frank Sartor) Explanatory Note, Independent Commission Against Corruption (Amendment) Bill 1990 (NSW) 1; New South Wales, Parliamentary Debates, Legislative Assembly, 21 November 1990, 10200 (Mr Dowd).
Category:	Principal judgment
Parties:	Liberty Mutual Insurance Company t/as Liberty International Underwriters (Plaintiff) Valerio Enrico Zanotto (Defendant)
Representation:	Counsel: Mr A Cheshire (Plaintiff) Mr S J Stanton (Defendant)   Solicitors: Colin Biggers & Paisley (Plaintiff) Kells Lawyers (Defendant)
File Number(s):	2010/103378

Judgment

1. Valerio Zanotto (the insured), a councillor with Wollongong City Council, was insured by Liberty Mutual Insurance Company (the insurer) under a "Directors (Councillors) and Officers Insurance Policy" (the policy) in relation to "a loss resulting from a wrongful act" (Exhibit A tab 1). The Independent Commission Against Corruption (ICAC) investigated allegations of dishonest conduct by the insured and others. The insured claimed under the policy for his costs of appearing before ICAC. The insurer advanced $87,863.54 in relation to the costs (the advance).

2. ICAC delivered its "Report on an Investigation into Corruption Allegations affecting Wollongong City Council Part Three" (the Report) in which it found that the insured had acted dishonestly and illegally (Exhibit A, tab 4). ICAC proposed that consideration be given to obtaining the advice of the Director of Public Prosecutions (DPP) with respect to the prosecution of the insured. The DPP determined that the insured should not be prosecuted (Exhibit 2).

3. Pursuant to exclusion clause 2.1 of the policy (extracted at par 15), the insurer claims reimbursement of the advance on the basis that ICAC found dishonesty or illegality on the part of the insured. The insured accepts that, if clause 2.1 applies to ICAC findings, he must repay the advance . He contends that clause 2.1 does not apply because an ICAC finding of dishonesty or illegality is not a determination "by a final...adjudication" within "claim proceedings" that invokes clause 2.1 of the policy. Inter alia, the insured relies on ICAC's statements that his conduct "could" constitute or involve a criminal or disciplinary offence and the absence of a finding that his conduct "did" constitute a criminal or disciplinary offence.

4. In determining whether the insurer can recover the advance under clause 2.1 of the policy, it is necessary to consider the powers and functions of ICAC, the nature of the ICAC findings, and the language of clause 2.1 in the context of the policy as a whole, with regard to the objects of the policy, and affording it a businesslike interpretation: McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579.

The ICAC Act

5. One of the principal objects of the Independent Commission Against Corruption Act 1988 (the Act) is to constitute ICAC "to investigate, expose and prevent corruption involving or affecting public authorities and public officials," including councillors: ss 2A and 3 (which, inter alia, defines "public official"). ICAC is "primarily an investigative body whose investigations are intended to facilitate the actions of others in combating corrupt conduct": Balog v Independent Commission Against Corruption [1990] HCA 28 at [17].

6. The expression "corrupt conduct" defines the scope of ICAC's investigatory jurisdiction. Section 8 broadly identifies the nature of the "corrupt conduct" with which ICAC is concerned. "Corrupt conduct" includes "any conduct of a public official that constitutes or involves the dishonest or partial exercise of any of his or her official functions" (s 8(1)(b)) and any conduct "that involves the misuse of information or material that he or she has acquired in the course of his or her official functions" (s 8 (1) (d)).

7. Section 9 imposes a limitation on the nature of "corrupt conduct". Conduct will not amount to "corrupt conduct" unless (relevantly) it " could constitute or involve" a criminal offence, a disciplinary offence or reasonable grounds for dismissal: s 9(1). (Emphasis added.) Section 9(1) must be read subject to s 13(3A), which provides that ICAC may find that a person has engaged or is engaging in corrupt conduct only if satisfied that a person " has engaged in or is engaging in conduct that constitutes or involves " a criminal (or disciplinary) offence (emphasis added). Subsection 3A was inserted for the purpose of requiring ICAC to be satisfied that a person had engaged in, or was engaging in, conduct that constitutes involved a criminal offence before making a finding of "corrupt conduct" in relation to conduct referred to in s 9(1); to address the concern that "it would be inappropriate to base (a finding of corrupt conduct) on the mere possibility of the existence of such conduct or of the commission of a criminal offence": New South Wales, Parliamentary Debates , Legislative Assembly, 23 February 2005, 14133 (Frank Sartor).

8. The principal functions of ICAC are set out in s 13 of the Act. They include the investigation of alleged corrupt conduct and the communication of the results of investigations to appropriate authorities: s 13(1)(a) and (c). Section 13 further provides:

"(2) The Commission is to conduct its investigations with a view to determining:

(a) whether any corrupt conduct, or any other conduct referred to in subsection (1) (a), has occurred, is occurring or is about to occur, and

(b)...

(3) The principal functions of the Commission also include:

(a) the power to make findings and form opinions, on the basis of the results of its investigations, in respect of any conduct, circumstances or events with which its investigations are concerned, whether or not the findings or opinions relate to corrupt conduct, and

(b) the power to formulate recommendations for the taking of action that the Commission considers should be taken in relation to its findings or opinions or the results of its investigations.

...

(5) The following are examples of the findings and opinions permissible under subsection (3) but do not limit the Commission's power to make findings and form opinions:

(a) findings that particular persons have engaged, are engaged or are about to engage in corrupt conduct,

(b) opinions as to:

(i) whether the advice of the Director of Public Prosecutions should be sought in relation to the commencement of proceedings against particular persons for criminal offences against laws of the State, or

(ii) whether considerations should or should not be given to taking of other action against particular persons,

(c) findings of fact."

9. Part 8 of the Act addresses the preparation of reports to Parliament. Where ICAC has conducted a public inquiry, it is required to prepare a report and furnish it to Parliament as soon as possible after the investigation: s 74(3) of the Act.

10. In Balog , the High Court considered the now repealed s 74(5) and concluded that ICAC had "no power to make findings as to the liability of an individual to conviction ..." (at [19]). As a consequence of the decision, the Act was amended to insert s 74A and s 74B. The purpose was to make it plain that ICAC could report a finding that a person had engaged in corrupt conduct, but could not report that a person had committed a criminal offence: Explanatory Note, Independent Commission Against Corruption (Amendment) Bill 1990 (NSW) 1; New South Wales, Parliamentary Debates , Legislative Assembly, 21 November 1990, 10200 (Mr Dowd). In relation to persons against whom substantial allegations have been made, s 74A states:

"(2) The report must include, in respect of each "affected" person, a statement as to whether or not in all the circumstances the Commission is of the opinion that consideration should be given to the following:

(a) obtaining the advice of the Director of Public Prosecutions with respect to the prosecution of the person for a specified criminal offence,..."

Section 74B limits the content of reports to Parliament. It provides:

"(1) The Commission is not authorised to include in a report under section 74 a statement as to:

(a) a finding or opinion that a specified person is guilty of or has committed, is committing or is about to commit a criminal offence or disciplinary offence (whether or not a specified criminal offence or disciplinary offence), or

(b) a recommendation that a specified person be, or an opinion that a specified person should be, prosecuted for a criminal offence or disciplinary offence (whether or not a specified criminal offence or disciplinary offence).

(2) A finding or opinion that a person has engaged, is engaging or is about to engage:

(a) in corrupt conduct (whether or not specified corrupt conduct), or

(b) in specified conduct (being conduct that constitutes or involves or could constitute or involve corrupt conduct),

is not a finding or opinion that the person is guilty of or has committed, is committing or is about to commit a criminal offence or disciplinary offence.

..."

11. The practical effect of these provisions is that ICAC is an investigator that reports and makes recommendations to Parliament. ICAC may opine that a matter should be referred to the Director of Public Prosecutions for the purpose of obtaining the Director's advice about prosecution, or that disciplinary action should be considered. Parliament decides whether such recommendations will be pursued. Inter alia, ICAC may investigate allegations of dishonest conduct by councillors. In any report, ICAC is entitled to make findings of fact. If it is comfortably satisfied that a councillor's dishonest conduct constitutes or involves a criminal or disciplinary offence, ICAC may find that the councillor has engaged in "corrupt conduct". In accordance with ss 9(1) and 13(3A), it is implicit in any such finding that ICAC is comfortably satisfied that the councillor has engaged in or is engaging in conduct that constitutes or involves a criminal (or disciplinary) offence.

12. ICAC cannot find that a councillor "is guilty" of or "has committed" a criminal or disciplinary offence. There are at least four reasons that it would be inappropriate for ICAC to make a finding in relation to criminality or disciplinary breach:

(1) ICAC is an investigating body, not a prosecuting or disciplinary authority. It is not the role of an investigator to make such a finding.

(2) ICAC has very broad powers in relation to the gathering of material (including an array of compulsory powers) and the material gathered by ICAC may be largely inadmissible in a court of law or disciplinary tribunal. (3) The criminal standard of proof does not apply to ICAC findings.

(4) Any finding of criminality by ICAC could tend to interfere with the due administration of justice in the event of a subsequent trial: Balog at [19].

The ICAC Report

13. In the Report, ICAC found as facts, that while a councillor, the insured had engaged in certain deliberate conduct, knowing that he should not do so:

"The Commission finds that Mr Zanotto engaged in corrupt conduct on the basis that:

(i) his conduct set out in finding of fact 1(a) is conduct of a public official that:

* constitutes or involves the dishonest exercise of official functions within the meaning of section 8 (1) (b) of the ICAC Act; and

* could constitute or involve a disciplinary offence, within the meaning of section 9 (1) (b) of the ICAC Act.

(ii) his conduct set out in finding of fact 1(b) is conduct of a public official that:

involves the misuse of information or material acquired in the course of his official functions, within the meaning of section 8 (1) (d) of the ICAC Act; and

could constitute or involve a disciplinary offence within the meaning of section 9 (1) (b) of the ICAC Act.

(iii) his conduct set out in finding of fact 2 is conduct of a public official that:

constitutes involves the dishonest exercise of official functions within the meaning of section 8 (1) (b) of the ICAC Act; and involves the misuse of information acquired in the course of his official functions, within the meaning of section 8 (1) (d) of the ICAC Act; and

could constitute or involve, within the meaning of section 9(1)(a) of the ICAC Act, the common law offence of misconduct in public office; and could constitute or involve a disciplinary offence, within the meaning of section 9 (1) (b) of the ICAC Act." (at pp 94-95)

14. It should be inferred that, insofar as ICAC recorded a finding that the insured's conduct "could" constitute or involve a criminal or disciplinary offence, ICAC was comfortably satisfied that the s 13(3A) requirement had been met, ie that the insured had engaged in conduct that constituted or involved a criminal (or disciplinary) offence.

The Policy

15. The policy provides:

"1. Insuring Agreement: In respect of any loss resulting from a wrongful act which a director(s)/ officer(s) becomes legally obliged to pay on account of any claim first made against him during the policy period and reported to Liberty during the policy period or discovery period, Liberty shall pay:

1.1 on behalf of the director(s)/ officer(s), the loss to which the director(s)/ officer(s) are not indemnified by the insured organisation; and

...

2. Exclusions: Liberty shall not be liable under this policy to make any payment for loss in connection with any claim:

2.1 arising out of, based upon or attributable to the fraud, dishonesty, or illegal acts of the director(s)/ officer(s) determined by a final judgment or adjudication, within the claim proceedings or otherwise, and which was material to the outcome of the judgment or adjudication -- the exclusion in this paragraph 2.1 applies to paragraph 1.1 only; or

...

10.Defence:... Any amount paid by Liberty prior to final determination of the loss shall be considered to be an advance only, any such amount which is subsequently determined as not being covered by this policy, shall be promptly repaid by the insured ...

29 Definitions: In this policy:

"claim" means: (1) any written claim or allegation against or in respect of a director(s)/ officer(s) which may result in a loss; or (2) any official investigation, examination, administrative or regulatory proceeding regarding any specified wrongful act of an insured.

...

29.3."defence costs" means that part of the loss consisting of reasonable and necessary costs, charges and expenses... incurred in investigating, defending, appealing or monitoring legal actions, claims, or proceedings with respect to a loss or possible loss.

...

29.14."loss" means ... including, but not limited to, damages, judgments, settlements, costs and defence costs but excluding fines, penalties, amounts uninsurable by law, and regular or overtime wages, salaries or fees of the directors, officers or employees of the insured organisation incurred in assessing, investigating, dealing with or assisting others to deal with the claim ...

...

29.24 "wrongful act" means any actual, alleged, attempted or allegedly attempted error, misstatement, false or malicious intent, misleading statement, material omissions, act, omission, neglect, breach of trust, fraud, or breach of duty, by any director(s)/ officer(s) ..."

Does Clause 2.1 of the Policy Apply?

16. The insured accepts that he was entitled to an advance for his defence costs of the proceedings before ICAC.

17. The entitlement arose because the "defence costs" were incurred in defending a "claim" falling within part (2), ie an "official investigation ... regarding (a) specified wrongful act of (the) insured," being an allegation of "corrupt conduct". The insured cannot both accept that he was entitled to an advance and argue that defence costs are payable only in respect of a " claim" that falls within part (1) of the definition of "claim", i.e. only where the relevant proceedings may result in damages or a similar outcome. Such an argument would mean that no one was entitled under the policy to recover their costs of defending allegations before ICAC. The insured must accept that defence costs are payable where the "claim" proceedings fall within part (2) of the definition of "claim", ie including where the nature of the "claim" is an official investigation.

18. The insured contends that the ICAC findings contained in the Report are not a "determination" "by a "final judgement or adjudication in the claim proceedings or otherwise," such as would invoke clause 2.1 of the policy, because ICAC made no finding of guilt (merely stating that the conduct of the insured "could" constitute a criminal or disciplinary offence) and the ICAC findings lack "the quality of a final judgment".

19. The expression "determined by final judgment or adjudication" must mean "determined by final judgment or adjudication in the claim proceedings or otherwise of the relevant issue " (emphasis added). In proceedings before ICAC, the relevant issue for determination is whether alleged "corrupt conduct" has occurred, is occurring or is about to occur: s 13(2) of the Act. In the Report, ICAC found that the insured "engaged in corrupt conduct," that being a final adjudication of the relevant issue before ICAC. The final adjudication of "corrupt conduct" was based on findings of dishonesty in relation to the insured's conduct in the exercise of his official duties.

20. Clause 2.1 of the policy uses the expression is "determined by final judgment or adjudication, in the claim proceedings or otherwise " (emphasis added). Where there has been a public inquiry into alleged "corrupt conduct", ICAC is required to furnish a report to Parliament: s 74, which contains appropriate recommendations, including recommendations in relation to persons against whom substantial allegations have been made: s74A(2) and (3). ICAC has other functions, including the assembly of evidence and the furnishing of reports to public authorities under s 14 of the Act, but the furnishing of a report to Parliament marks the finalisation of its core function. When it furnished the Report, ICAC finalised its core function in relation to allegations of corrupt conduct by the insured. In that way, the matter was "finally adjudicated."

21. The insured submits that findings that his conduct "could" have constituted or involved criminal or disciplinary offences cannot amount to a "determination" because such statements merely record a possibility. There are three answers to this submission. First, the Act prevents ICAC from recording that a person did commit a criminal or disciplinary offence. Second, a recorded finding that a person "could" have committed a criminal or disciplinary offence necessarily implies that ICAC is comfortably satisfied that the conduct did constitute or involve a criminal or disciplinary offence: s 13 (3A) of the Act. Finally, issues of criminality and disciplinary breach are only incidental to ICAC's determination or adjudication of the issue with which it is concerned, ie whether there was "corrupt conduct."

22. The exclusion of liability is consistent with the objects of the policy and affords it a businesslike operation. It could not have been intended that the policy would protect persons who suffered loss (including defence costs) as a result of established dishonesty.

16. As ICAC has reported findings of corrupt conduct based on dishonesty, clause 2.1 of the policy applies and liability is excluded. Judgment for the plaintiff. 

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Decision last updated: 16 May 2016