Rouleston Clarke Pty Ltd (In Liquidation) v FAI General Insurance Company Limited
[2000] TASSC 63
•8 June 2000
[2000] TASSC 63
CITATION:Rouleston Clarke Pty Ltd (In Liquidation) v FAI General Insurance Company Limited [2000] TASSC 63
PARTIES: ROULESTON CLARKE PTY LTD (In Liquidation)
(ACN 009 548 805)
v
FAI GENERAL INSURANCE COMPANY LIMITED
(ACN 000 327 855)
TITLE OF COURT: SUPREME COURT OF TASMANIA (FULL COURT)
JURISDICTION: APPELLATE
FILE NO/S: FCA 146/1999
DELIVERED ON: 8 June 2000
DELIVERED AT: Hobart
HEARING DATE: 21, 22 March 2000
JUDGMENT OF: Underwood, Crawford and Slicer JJ
CATCHWORDS:
Insurance - Policies of insurance - Construction - Dishonest conduct of employee - Whether indemnified under professional indemnity cover, dishonesty cover or fidelity cover - Objective intention of parties from consideration of the wording of the policy.
Wayne Tank and Pump Co Ltd v Employers' Liability Assurance Corporation Ltd [1974] 1 QB 57; Ford Motor Co of Canada Ltd v Prudential Assurance Co Ltd (1959) 18 DLR (2d) 273; Co-operative Fire & Casualty Co v Saindon (1975) 56 DLR (3d) 556; City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd [1985] 3 NSWLR 739, applied.
HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601, distinguished.
Aust Dig Insurance [4]
REPRESENTATION:
Counsel:
Appellant: W J Martin QC, C R Doherty
Respondent: D M B Derham QC, M W Thompson
Solicitors:
Appellant: Toomey Maning & Co
Respondent: Shaun McElwaine
Judgment Number: [2000] TASSC 63
Number of paragraphs: 41
Serial No 63/2000
File No FCA 146/1999
ROULESTON CLARKE PTY LTD (In Liquidation) (ACN 009 548 805) v
FAI GENERAL INSURANCE COMPANY LIMITED (ACN 000 327 855)
REASONS FOR JUDGMENT FULL COURT
UNDERWOOD J
CRAWFORD J
SLICER J
8 June 2000
Order of the Court
Appeal dismissed.
Serial No 63/2000
File No FCA 146/1999
ROULESTON CLARKE PTY LTD (In Liquidation) (ACN 009 548 805) v
FAI GENERAL INSURANCE COMPANY LIMITED (ACN 000 327 855)
REASONS FOR JUDGMENT FULL COURT
UNDERWOOD J
8 June 2000
I agree with the reasons for judgment of Crawford J. There is nothing I wish to add.
File No FCA 146/1999
ROULESTON CLARKE PTY LTD (In Liquidation) (ACN 009 548 805) v
FAI GENERAL INSURANCE COMPANY LIMITED (ACN 000 327 855)
REASONS FOR JUDGMENT FULL COURT
CRAWFORD J
8 June 2000
The respondent issued a policy of professional indemnity insurance to the appellant which, at all material times, carried on a financial planning, investment advisory and tax agent's business and was a licensed dealer in securities. By insuring cl 1(a), the respondent agreed to indemnify the appellant against any claims for compensation for breach of professional duty in the conduct of its business, by reason of any negligence committed by it or its employees. The policy limited the extent of the indemnity to $1,000,000 for any one claim or claims in the aggregate. Exclusion cl (b) expressly excluded from the indemnity any claim against the appellant for dishonest, fraudulent, criminal or malicious acts or omissions of the appellant or its employees, except to the extent provided in those extensions to the policy for which the policy's schedule stated limits of indemnity. Relevantly, the schedule provided a "dishonesty limit" of $1,000,000 and a "fidelity limit" of $250,000. As a result, extension cls 4 and 5 were brought into operation. Extension cl 4, a dishonesty extension, purported to delete exclusion cl (b) and to extend the terms and conditions of the policy to indemnify the appellant in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees, excluding however "claims for loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes". Extension cl 5, a fidelity extension, purported to indemnify the appellant against any "loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes" belonging to the appellant or for which the appellant was legally liable.
An employee of the appellant, Peter Badger, converted to his own use negotiable instruments entrusted to him in his capacity as an employee of the appellant, by 14 clients of the appellant, to a total value of $685,728.06. The appellant claimed to be indemnified by the respondent under the policy in respect of the claims of those clients to be compensated. Disputes arose between them concerning the extent of the respondent's liability under the policy and the appellant sued the respondent. An interlocutory order was made that certain questions be set down for hearing and disposed of before the trial of the action, the questions to be answered upon the basis of agreed facts. The questions were as follows:
"(a)On a proper construction of the policy, is the plaintiff entitled to be indemnified for the claims identified in paragraphs 14 and 17 of the plaintiff's Statement of Claim dated the 11th day of September 1997 (and the schedule attached thereto).
(i) pursuant to clause 1(a) of the insuring clauses of the Policy?
(ii) pursuant to extension 4, the Dishonesty Extension, of the Policy?
(iii) pursuant to extension 5, the Fidelity Extension of the Policy?
(b)On the proper construction of the Policy, is an excess payable by the plaintiff pursuant to clause 4 of the Policy in respect of each claim made by the former clients of the plaintiff, or do all of the claims for compensation made by the former clients of the plaintiff jointly constitute one claim under the Policy?"
The learned judge at first instance determined the following answers:
"(a) (i) No.
(ii) No.
(iii) Yes.
(b)An excess is payable by the plaintiff pursuant to clause 4 of the Policy in respect of each claim made by clients of the plaintiff in respect of which indemnity is given pursuant to the fidelity extension of the Policy."
Effects of that determination are that the appellant is entitled to be indemnified only under the fidelity extension cl 5 and the respondent's liability for all of the claims is capped at $250,000 and not $1,000,000, as would have been the case if the respondent had been liable to indemnify the appellant under insuring cl 1(a) or dishonesty extension cl 4. Another effect is that an excess of $5,000 will be payable by the appellant in respect of each of the 14 claims.
The appellant appealed from the determination upon the following grounds:
"1 That the learned Judge erred in law in concluding that the Plaintiff was not entitled to indemnity under insuring clause 1(a) of the policy or the Dishonesty Extension of the policy.
2 That the learned Judge erred in law in concluding … that the essence of each claim is that of a claim for loss suffered because of the dishonest conduct of the Plaintiff's employee and therefore exclusion (b) applies to deny the claims cover under insuring clause 1(a).
3 The learned Judge erred in law in concluding … that an excess is payable by the Appellant pursuant to clause 4 of the policy in respect of each claim made by clients of the Plaintiff."
The agreed facts included the following. The appellant dealt in managed funds and term deposits. The employee, Peter Badger, was considered by the appellant to be a senior person in his field and was employed, solely on commission, to develop new clients for the appellant. He worked partly from an office within the appellant's premises and also from home and he travelled. He was required by the appellant to comply with certain office procedures and only to deal with investments on a recommended list maintained by the appellant.
The procedures maintained by the appellant for investments on behalf of clients were that, having given advice to a client about a suitable investment and obtained instructions from the client to invest in a particular fund, the client was asked to provide a cheque to the appellant payable directly to the trustee of the nominated managed fund. Usually, moneys received from the client were made payable directly to the investment trustee manager and not to the appellant. After receipt of a cheque, a receipt from a receipt book, noting the amount of the investment and the fund involved, was issued to the client with two copies retained by the appellant. Over a period of time, Badger gained the confidence of the clients who had money to invest and who sought advice from him concerning its investment. He fraudulently converted to his own use negotiable instruments provided by the clients to him as an employee of the appellant for the purpose of investment. He carried out the conversions by three different methods:
1Having selected investments, some of the clients were persuaded by Badger to provide him with cheques payable to Permanent Trustee Australia Ltd which were crossed "not negotiable". Badger had a personal MLC account in the name of Permanent Trustee Australia Ltd as trustee of the MLC Cash Management Trust and he deposited the cheques into that account. He issued to the clients receipts from unused or rarely used receipt books without providing for copies of the receipts to be retained in the appellant's records.
2If a client had funds to invest made up of more than one cheque, Badger issued a receipt recording the cheques, but on the copies of the receipt, not all of them were recorded. Those not recorded on the copies were generally made out to Permanent Trustee Australia Ltd and deposited by Badger into his MLC account.
3On one occasion, a client's cheque payable to Permanent Trustee Australia Ltd was altered by Badger by the addition of words and he then converted the cheque by depositing it into an investment in his own name.
From time to time, clients asked Badger for evidence of their investments and he provided them with falsified documents. Some of the clients were provided with regular interest payments drawn from Badger's personal accounts.
Subsequently, Badger was charged and convicted for his fraudulent conversions of the negotiable instruments and he was sentenced to a term of imprisonment. As a result of the conversions, each of the clients suffered loss and they made claims against the appellant arising out of the losses.
The respondent was aware of the nature of the appellant's practice, that is to say, its business, as tax agents, financial planners and investment advisors.
Agreed facts included the following:
"31The Plaintiff in the periods during which the Clients suffered the losses … failed to take reasonable care [to ensure that money paid to employees of the plaintiff to be invested for was not stolen as particularised below]:
(a) Failing to implement any or any proper business system of supervision of receipts of moneys;
(b) Failing to check moneys received by Badger on behalf of the Plaintiff's clients for investment purposes;
(c) Failing to verify the investments of the Plaintiff's clients with the clients and the clients' bankers;
(d) Failing to verify the investments of the Plaintiff's clients with the company or entity to which the investment was supposed to be made;
(e) Allowing Badger to have full, free and unsupervised access to the Plaintiff's office premises at all times,
(f) Allowing Badger to have unrestricted access to the Plaintiff's computer without any audit trail including records of 'log in' or 'log out' times, record of documents produced, or record of alterations or amendments made to documents and records;
(g) Leaving receipt books stacked in Graham Rouleston's office not securely stored with no register, or other control maintained, enabling Badger to manipulate individual receipts and convert them for his own purposes;
(h) Maintaining no effective check on the numerical sequence of receipts; and
(i)Failing to adopt a Procedure Policy Manual which adequately provided policy and procedures concerning general controls, internal control of accountable documents, restrictions on access to individual components of the business and cash control procedures."
Material portions of the policy are:
"insuring clauses
the company agrees subject to the limitations, terms and conditions hereinafter mentioned or endorsed hereon:
1To indemnify the Insured against any claim or claims for compensation first made against the Insured during the period of cover specified in the Schedule and reported to the Company during the period of cover specified in the Schedule,
(a)for breach of professional duty in the conduct of the practice, (as defined herein and referred to in the Schedule) by reason of any negligence, whether by way of act, error or omission whenever or wherever the same was or may have been committed or alleged to have been committed on the part of the Insured or his or their predecessors in business or any person now or heretofore employed by the Insured or his or their predecessors in business or hereafter to be employed by the Insured during the subsistence of this Policy, in the conduct of the practice conducted by or on behalf of the Insured or his or their predecessors in business in their professional capacity as specified in the Schedule; and
…
4 In respect of each claim made against the Insured the amount of the excess specified in the Schedule shall be borne by the Insured at the Insured's own risk and the Company shall only be liable to indemnify the Insured for that part of any claim which is over and above the excess.
…
definitions
…
2 The expression 'claim' shall mean the demand for compensation made by a third party against the Insured but shall not include the Insured's costs and expenses. Where an act, error or omission results in more than one claim against the Insured which may be the subject of indemnity hereunder, all such claims shall jointly constitute one claim under this policy (but subject always to Insuring Clause 3 hereof).
…
exclusions
Except as provided for in those extensions for which limits are stated in the schedule this Policy shall not indemnify the Insured in respect of any claim against the Insured:
…
(b) for alleged or actual dishonest, fraudulent (both legal and equitable), criminal or malicious acts or omissions of the Insured or any of the Insured's partners, co-directors or employees (including directors in the case of companies) or predecessors in business;
…
optional extensions
The following extensions are available under this policy. However, they are not included in this Policy unless so specified in the schedule.
Each extension is subject to the terms, excess and limit of indemnity of this Policy except where the same may be varied by the extension. The inclusion of any extension shall not increase the limit of indemnity.
…Extension 4: Dishonesty
If a limit for this extension is specified in the Schedule Exclusion (b) is deleted and subject to the limitations, terms and conditions this Policy is extended to indemnify the Insured in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors. Provided that this Policy shall not provide indemnity to any person committing or condoning such dishonest, fraudulent, criminal or malicious act.
This extension excludes claims for loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes.
Extension 5: Fidelity
If a limit for this extension is specified in the Schedule the Company will, subject to the limitations, terms and conditions, indemnify the Insured against any loss of money, negotiable instruments, bearer bonds or coupons, stamp, bank or currency notes
(a) belonging to the Insured; or
(b) for which the Insured is or are legally liable
which the Insured shall, during the period of cover discover that he or they has or have sustained in consequence to any dishonest or fraudulent act or omission of any employee, apprentice, fellow partner or co-director committed in the course of the business activities of the practice."
I turn to the grounds of appeal. At the outset, I say, with respect, that I fully agree with all that fell from the learned judge at first instance in the course of his determination of the questions in this case. I will not repeat it all.
The first question for determination concerned whether, on a proper construction of the policy, the appellant was entitled to be indemnified for the claims pursuant to insuring cl 1(a) and the answer to that question appears clearly to be in the negative, for no other reason than the agreed facts are insufficient to establish that entitlement. Insuring cl 1(a) provided the appellant with an indemnity against claims for breach of professional duty by reason of any negligence. While it was an agreed fact that in the periods during which the clients suffered the material losses, the appellant failed, in the respects particularised, to take reasonable care to ensure that money paid to its employees for investment was not stolen, it was not an agreed fact, and therefore not established for the purposes of determining the first question, that the appellant's failure to take reasonable care caused the clients to suffer the losses. Without that link in the chain of facts to be proved, it cannot be determined that the appellant is entitled to be indemnified under insuring cl 1(a). However, no mention was made of this deficiency in the agreed facts by the learned judge in his reasons, nor do I recall it being raised at the hearing of the appeal, and having regard to the views I hold concerning the grounds of appeal, it is of no consequence if it is assumed, for the purposes of the appeal, that the necessary link of causation has been admitted by the respondent. I will make that assumption.
All of the following principles to be applied when interpreting a policy of insurance, were stated by the learned judge and are not in contention. The task in construing the policy is to ascertain the objective intention of the parties from a consideration of its wording. Regard must be had to the fact that it is a policy of insurance. It must be read in its commercial setting in such a way as to fulfil and not restrain its commercial purpose. MGICA Ltd v United City Merchants (Australia) Ltd (1986) 4 ANZ Ins Cas 74,340 at 74,349 and 74,350. Each clause in dispute is to be interpreted according to its natural and ordinary meaning, read in the light of the policy as a whole, thereby giving direct weight to the context in which the clause appears, including the nature and object of the policy. Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510. It is appropriate to resolve any ambiguity in the policy by reading it as a whole. Zurich Australian Insurance Ltd v Fruehauf Finance Corporation Pty Ltd (1993) 7 ANZ Ins Cas 78,007 at 78,011. In resolving ambiguities, a reasonable construction is to be preferred as representing the presumed intention of the parties. Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 at 463. As a rule of last resort and a principle for construction to remove ambiguities only when other more rational approaches fail, the policy is subject to the contra proferentem rule of construction, noting that the policy was proffered by the respondent to the appellant. Counsel for the appellant urged the Court to apply the contra proferentem rule, but in my opinion a rational approach to interpretation of the policy is all that is required to resolve the issues in this case.
If the appellant had not opted for the dishonesty and fidelity extensions, the policy would not have indemnified the appellant with respect to the claims of the clients in this case. It might be a matter for argument whether, without the provisions of exclusion cl (b), insuring cl 1(a) is sufficiently broad to provide indemnity in a case of fraudulent conversions by an employee, even if there was negligence on the appellant's behalf. Authorities such as Goddard & Smith v Frew [1939] 4 All ER 358 and West Wake Price & Co v Ching [1957] 1 WLR 45 suggest that the insuring clause would not indemnify the appellant in those circumstances. However, like the learned judge at first instance, I find it unnecessary to resort to those authorities. Exclusion cl (b) makes it clear that, without the dishonesty and fidelity extensions, insuring cl 1(a) does not indemnify the appellant in respect of claims directly arising out of fraudulent acts of employees, such as those of Badger. Claims of that nature are excluded. Whether or not, without the exclusion, insuring cl 1(a) does provide indemnity in the factual circumstances of this case, exclusion cl (b) operates to exclude the indemnity. Wayne Tank and Pump Co Ltd v Employers' Liability Assurance Corporation Ltd [1974] 1 QB 57 at 67, 69 and 75; Ford Motor Co of Canada Ltd v Prudential Assurance Co Ltd (1959) 18 DLR (2d) 273 at 278; Co-operative Fire & Casualty Co v Saindon (1975) 56 DLR (3d) 556 at 566; City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd [1985] 3 NSWLR 739 at 744.
In my view it is clear from the terms of dishonesty extension cl 4 that it was intended to extend the indemnity provided by the policy to circumstances which, but for the extension, would be excluded by exclusion cl (b). However, counsel for the appellant submitted that the terms of the policy, and particularly the opening words of dishonesty extension cl 4, must be given their literal meaning. The opening words of the extension clause state that if a limit for the extension is specified in the Schedule, as it is here, "Exclusion (b) is deleted" and the policy is extended to indemnify the insured in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees. It was submitted for the appellant that for the purposes of ascertaining the extent of the indemnity, the policy must therefore be read as if exclusion cl (b) has been deleted, that is to say, exclusion cl (b) must not be read or taken into account. When that has been done, so it was argued, there is nothing in the policy which excludes the operation of the indemnity provided by insuring cl 1(a) extending to the clients' claims in this case. If the losses suffered by the clients, for which they have claimed, were at least partly caused by a breach of professional duty in the conduct of the appellant's practice by reason of any negligence, insuring cl 1(a) operates, the appellant is entitled to be indemnified under the clause and the limit of the indemnity for any one claim, and in the aggregate, will be $1,000,000. There is a superficial attractiveness to the submission, but there are a number of reasons why it should be rejected.
The policy must be read as a whole. Its scheme is that there shall be no indemnity for fraudulent acts of employers "except as provided for in those extensions for which limits are stated in the Schedule". Those are the opening words of the exclusion section of the policy. The appellant having opted for the dishonesty and fidelity extensions and the limits for them having been stated in the Schedule, the exception came into operation, that is to say, the provisions of the dishonesty and fidelity extensions applied. If the appellant's argument is correct, the opening words of the exclusion section of the policy, so far as they refer to the dishonesty extension, do not mean what they say, for they do not in fact mean that except as provided in dishonesty extension cl 4 the policy shall not indemnify the insured in respect of any claim for fraudulent, etc, acts of employees. Instead, if the appellant's argument is correct, in the case of an election to have the dishonesty extension, insuring cl 1(a) will also operate to the benefit of the appellant in respect of any such claim. I have no doubt that such an interpretation was not intended.
Further, there is potential for an internal conflict in a policy with regard to the limits of the indemnity provided for by it. If say, an insured had selected a dishonesty limit of $500,000, it could confidently be assumed that the insured had considered whether it wanted dishonesty cover and, having decided that it did, chose $500,000 as the limit of the cover it wanted for claims based on dishonesty. Taking that aspect further, an insured might, for example, obtain indemnity to a limit of, say, $10,000,000 for the primary cover with a dishonesty extension to a limit of, say, $1,000, for which no doubt the additional premium could be expected to be very little. On the appellant's argument, in that way, $10,000,000 cover for many, and probably most, cases of dishonesty could be bought for a very small additional premium. It cannot be imagined that parties to this policy would expect that.
If dishonesty extension cl 4 operates, indemnity is then provided to an insured in respect of claims for breach of professional duty arising out of fraudulent acts of employees and insuring cl 1(a) has nothing additional to provide by way of cover in respect of such claims. The insured has no need for its indemnity to extend to fraudulent acts of employees. Further, if it was intended that the dishonesty extension cl 4 would extend the operation of the indemnity of insuring cl 1(a) to cases of fraudulent acts by employees, it might have been expected that the extension clause would have made that clear.
In my view, the words "Exclusion (b) is deleted" in the opening line of the dishonesty extension cl 4, were inserted merely to make it abundantly clear, even though it may have been unnecessary to do so, that the exclusion of an indemnity for dishonesty was not to apply and that instead the indemnity prescribed by the extension clause would apply.
HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 was relied upon by counsel for the appellant. However, I do not find that it assists the appellant. Sheller JA, with whom the other members of the Court of Appeal agreed, concluded at 612 that "where there are competing proximate causes and loss from one is insured against and none of the others is expressly excluded, the insured is entitled to recover". This is not such a case, in my opinion, for one of the causes which the appellant asserts was a proximate cause of the clients' losses was expressly excluded by the terms of the policy. The HIH case may also be distinguished, as it concerned the interpretation of legislation.
A further issue concerns which of dishonesty extension cl 4 and fidelity extension cl 5 provided the appellant with an indemnity in this case. By its terms, dishonesty extension cl 4 "excludes claims for loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes", whereas fidelity extension cl 5 indemnifies the appellant against any such loss if the money, etc, belonged to the appellant or if the appellant was legally liable for it.
The appellant contended that the word "loss" in the last two lines of the dishonesty extension and in the fidelity extension, referred to physical loss and not loss in the sense of failing to account. The learned judge at first instance disagreed and held that the meaning of "loss" included detriment or disadvantage from being deprived of the benefit of any of the items specified in the provision in question, regardless of whether they had been physically destroyed or mislaid. I respectfully agree with his Honour's conclusion and with all of his reasons for reaching it. There is little I can add which might be useful. I will, however, address the submission of counsel for the appellant, both at first instance and on appeal, that the operative part of dishonesty extension cl 4 has no work to do if loss of money, etc, is given so wide a meaning as to encompass failures to account and claims for damages arising out of the fraudulent conduct of employees, instead of the narrow meaning of physical loss. The learned judge rejected the submission and said that there are many circumstances in which loss could arise out of or be contributed to by the dishonest, fraudulent, criminal or malicious conduct of employees unrelated to the specific items excluded from the dishonesty extension. His Honour did not, however, explain what circumstances he had in mind. Some, however, were mentioned by counsel on the hearing of the appeal and some come to my mind, such as an employee deliberately and maliciously causing a client to pay excessive tax (the appellant carried on the business of tax agents) and an employee dishonestly, fraudulently or maliciously inducing a client to invest money in a risky venture or upon a false or misleading valuation. It may also be observed that the policy in question is undoubtedly a standard form of professional indemnity policy issued by the respondent to indemnify companies and firms which carry on a variety of businesses. When the variety of likely businesses requiring indemnity is considered, it is very easy to think of examples. For example, a business which frequently has the custody or care of the property of clients, other than money and negotiable instruments, etc, for example jewellery, would be indemnified under dishonesty extension cl 4 if an employee fraudulently converted that property. Further, it is, in my view, obvious that upon Badger converting a client's cheque, the client suffered a "loss of money" within the ordinary meaning of that expression. The word "loss" is a common expression in insurance policies which is used not to designate physical loss, but financial loss or damage.
The final question to be determined on the appeal concerns the excess payable by the appellant pursuant to insuring cl 4, which provided that "in respect of each claim made against the Insured the amount of the excess specified in the Schedule" ("policy excess each claim $5,000") "shall be borne by the Insured at the Insured's own risk and the Company shall only be liable to indemnify the Insured for that part of any claim which is over and above the excess". The learned judge held that an excess was accordingly payable in respect of each separate claim made by the clients against the appellant. He referred to Haydon v Lo & Lo [1997] 1 WLR 198 and Junemill Ltd (In Liq) v FAI General Insurance Co Ltd (1997) 9 ANZ Ins Cas 61,377.
Arguing that only one excess is payable, counsel for the appellant relied on definition cl 2:
"Where an act, error or omission results in more than one claim against the Insured which may be the subject of an indemnity hereunder, all such claims shall jointly constitute one claim under this policy."
The learned judge at first instance held that the provision did not assist the appellant because there was no evidence that any one act, error or omission of Badger resulted in more than one of the claims. To the contrary, his Honour thought that a necessary inference from the agreed facts was that different acts of Badger precipitated each claim. With respect, the learned judge was clearly correct.
Counsel for the appellant submitted that his client was entitled to indemnity under insuring cl 1(a) and that there was only one claim for the purposes of definition cl 2, because all of the claims resulted from the same failure, on the part of the appellant, to take reasonable care to insure that money paid to employees for investment was not stolen. With respect to counsel, the submission is fanciful. In any event, the liability to indemnify arises pursuant to fidelity extension cl 5 and not pursuant to insuring cl 1(a).
For these reasons I would dismiss the appeal.
File No FCA 146 of 1999
ROULESTON CLARKE PTY LTD (In Liquidation) (ACN 009 548 805) v
FAI GENERAL INSURANCE COMPANY LIMITED (ACN 000 327 855)
REASONS FOR JUDGMENT FULL COURT
SLICER J
8 June 2000
An employee unlawfully converted negotiable instruments received from clients of the Appellant which held a professional indemnity insurance policy issued by the respondent.
The appellant claimed indemnity under the policy for loss suffered by clients and contended that any excess provided for by the policy should be applied to the whole claim. The claim was made on the basis that the indemnity provided for loss occurring by dishonesty (Extension 4 with a limit of $1m) rather than breach of fidelity (Extension 5 with a limit of $250,000). The aggregate claim amounted to the sum of $685,278.
Negligence and breach of professional duty
The taking by the employee was dishonest. The appellant contends that since the defalcation was made possible by a failure of supervision and control systems that the loss was occasioned by negligence and thereby covered by the policy cl 1(a). However, the policy contained terms which both excluded, or extended to, certain events. The policy in relation to negligence and breach of duty relevantly provided:
"the company agrees subject to the limitations, terms and conditions hereinafter mentioned or endorsed hereon:
1 To indemnify the Insured against any claim or claims for compensation first made against the Insured during the period of cover specified in the Schedule and reported to the Company during the period of cover specified in the Schedule,
(a)for breach of professional duty in the conduct of the practice, (as defined herein and referred to in the Schedule) by reason of any negligence, whether by way of act, error or omission whenever or wherever the same was or may have been committed or alleged to have been committed on the part of the Insured or his or their predecessors in business or any person now or heretofore employed by the Insured or his or their predecessors in business or hereafter to be employed by the Insured during the subsistence of this Policy, in the conduct of the practice conducted by or on behalf of the Insured or his or their predecessors in business in their professional capacity as specified in the Schedule; and
…
4 In respect of each claim made against the Insured the amount of the excess specified in the Schedule shall be borne by the Insured at the Insured's own risk and the Company shall only be liable to indemnify the Insured for that part of any claim which is over and above the excess.
…
definitions
…
2 The expression 'claim' shall mean the demand for compensation made by a third party against the Insured but shall not include the Insured's costs and expenses. Where an act, error or omission results in more than one claim against the Insured which may be the subject of indemnity hereunder, all such claims shall jointly constitute one claim under this policy (but subject always to Insuring Clause 3 hereof).
…
exclusions
Except as provided for in those extensions for which limits are stated in the schedule this Policy shall not indemnify the Insured in respect of any claim against the Insured:
…
(b) for alleged or actual dishonest, fraudulent (both legal and equitable), criminal or malicious acts or omissions of the Insured or any of the Insured's partners, co-directors or employees (including directors in the case of companies) or predecessors in business;"
Those terms must be read together and recourse to the contra proferentem rule of construction should be had only if any reading of the document in a commercial context results in ambiguity (MGICA Limited v United City Merchants (Australia) Limited v Ann (1986) 4 ANZ Insurance Cases 74340, Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500). Exclusion cl (b) clearly excludes dishonest conduct. However, the appellant contends that Extension 4 of the policy which states:
"Extension 4: Dishonesty
If a limit for this extension is specified in the Schedule Exclusion (b) is deleted and subject to the limitations, terms and conditions this Policy is extended to indemnify the Insured in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest, fraudulent, criminal or malicious conduct of employees, fellow partners or co-directors. Provided that this Policy shall not provide indemnity to any person committing or condoning such dishonest, fraudulent, criminal or malicious act.
This extension excludes claims for loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes."
operates so as to remove the exclusion. In this case the cause of the loss was the dishonest conduct of an employee, not the negligence of the policy holder. The policy indemnifies the party "in respect of claims for damages for breach of professional duty arising out of or contributed by the dishonest … conduct of employees" which is a different concept to "cause of action". Negligence might invariably be found in acts of defalcation but the exclusion and extension claims ought not be read in a manner which renders their effect nugatory. There is a difference between a breach of duty by reason of negligence and one arising by defalcation (Goddard v Frew [1939] 4 All ER 358).
The combined effect of those clauses reflects the intention of the parties that certain events which might contain the elements of both negligence and dishonesty are to be dealt with in a particular manner. The extension excludes claims for "loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes". In this case, the appellant claimed indemnity for the loss of money caused by the dishonesty of an employee. The nature of the claims brought against the appellant by clients are based on breach of duty and negligence, but the claim against the insurer by the appellant was for "loss of money" occasioned by an act of dishonesty. The provisions of the policy comprised in cl 1(a) do not encompass a circumstance whereby a dishonest act gives rise to a claim which includes negligent supervision.
The term "loss of money" governs the consequence suffered by the insured which includes a claim based on an allegation of negligence. The reasoning of the learned primary judge was correct. His conclusion (150/1999) at par17 that:
"As the essence of each claim is that of a claim for loss suffered because of the dishonest conduct of the plaintiff's employee, Exclusion (b) applies to deny the claims cover under insuring cl 1(a)."
follows from that reasoning.
Fidelity
Extension 5 of the policy provided:
Extension 5: Fidelity
If a limit for this extension is specified in the Schedule the Company will, subject to the limitations, terms and conditions, indemnify the Insured against any loss of money, negotiable instruments, bearer bonds or coupons, stamp, bank or currency notes
(a) belonging to the Insured; or
(b) for which the Insured is or are legally liablewhich the Insured shall, during the period of cover discover that he or they has or have sustained in consequence to any dishonest or fraudulent act or omission of any employee, apprentice, fellow partner or co-director committed in the course of the business activities of the practice."
The extension which covers the "loss of money … for which the insured is or are legally liable" differs substantially from the "dishonesty" clause. The appellant is entitled to indemnity by reason of this clause because it is legally liable for a loss of money "sustained in consequence to … dishonest act(s)". Extensions 4 and 5 are optional and may be incorporated into the contract at the election of the insured. They provide for different circumstances. The appellant chose to insure for this eventuality for an amount less than that provided for Extension 4. It is difficult to discern circumstances (on the basis of the appellant's contention) in which the terms of cl 4 would not operate to cover events predicated by cl 5. It is easy to see how (as the respondent contends) the clauses considered together operate to cover different events.
Excess
The policy, cl 4, states in part:
"4 In respect of each claim made against the Insured the amount of the excess specified in the Schedule shall be borne by the Insured at the Insured's own risk and the Company shall only be liable to indemnify the Insured for that part of any claim which is over and above the excess.
If any claim made against the Insured involves more than one negligent act, error or omission, then the excess specified in the Schedule shall apply to each such negligent act, error or omission separately."
The definition of claim is provided in the following terms:
"2The expression 'claim' shall mean the demand for compensation made by a third party against the Insured but shall not include the Insured's costs and expenses. Where an act, error or omission results in more than one claim against the Insured which may be the subject of indemnity hereunder, all such claims shall jointly constitute one claim under this policy (but subject always to Insuring Clause 3 hereof).
3The expression 'limit of indemnity' shall mean the monetary limit for claims for which the policy indemnifies the Insured as stated in the Schedule and referred to in Insuring Clause 3 hereof. Costs and expenses are not included."
The claims brought against the appellant were made by 14 clients. Each claim resulted by an act or acts of defalcation by an employee. Each was to be determined in its own right. The loss suffered by each client might have arisen over a period of time by reason of different acts of defalcation, but such an eventuality was provided for by the terms of cl 2. But the provisions of cl 2 do not operate to make the sum of the claims "a single claim". The conduct of the employee resulted in loss to each client and it was the claim by each client which brought into effect the indemnity. The respondent is entitled to deduct the "excess" provided for in the policy.
Conclusion
The reasoning and conclusions of the learned primary judge were correct. The Notice of Appeal ought be dismissed.
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