Rouleston Clarke Pty Ltd (In Liquidation) v FAI General Insurance Company Limited
[1999] TASSC 150
•22 December 1999
[1999] TASSC 150
CITATION:Rouleston Clarke Pty Ltd (In Liquidation) v FAI General Insurance Company Limited [1999] TASSC 150
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
JURISDICTION: ORIGINAL
FILE NO/S: 1765/1997
DELIVERED ON: 22 December 1999
DELIVERED AT: Hobart
HEARING DATE: 31 August 1999
JUDGMENT OF: Evans J
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.
Goddard & Smith v Frew [1939] 4 All ER 358; West Wake Price & Co v Ching [1957] 1 WLR 45; MGICA Limited v United City Merchants (Australia) Limited & Anor (1986) 4 ANZ Insurance Cases 74,340; Zurich Australian Insurance Ltd & Ors v Fruehauf Finance Corporation Pty Ltd (1993) 7 ANZ Insurance Cases 78,007, followed.
Aust Dig Insurance [4]
REPRESENTATION:
Counsel:
Plaintiff: W J Martin QC, C R Doherty
Defendant: D M B Derham QC, C McCauley
Solicitors:
Plaintiff: Toomey Maning & Co
Defendant: Shaun McElwaine
Judgment Number: [1999] TASSC 150
Number of paragraphs: 30
Serial No 150/1999
File No 1765/1997
ROULESTON CLARKE PTY LTD (In Liquidation) (ACN 009 548 805)
v FAI GENERAL INSURANCE COMPANY LIMITED (ACN 000 327 855)
REASONS FOR JUDGMENT EVANS J
22 December 1999
The plaintiff conducted a financial planning and investment advisory business. An employee of the plaintiff, Peter Badger, converted to his own use negotiable instruments of a value of $685,728.06 which he had received from clients of the plaintiff. The defendant held the plaintiff insured pursuant to a professional indemnity insurance policy. The plaintiff has claimed indemnification from the defendant under the policy in respect of claims arising from Mr Badger's misconduct. The parties are in dispute about the defendant's liability to the plaintiff. They seek the determination of a number of questions on the basis of the following agreed facts:
"1The Defendant issued a policy of professional indemnity insurance to the Plaintiff ('the Policy'). The Policy schedule is dated 5 August 1994. [The material portions of the policy and the schedule are set our below].
2The Policy period was from 1 May 1994 to 1 May 1995.
3The Policy includes a Dishonesty Extension and a Fidelity Extension.
4In the event that the Plaintiff is entitled to indemnity pursuant to the Dishonesty Extension, the limit of indemnity is $1,000,000.00, in aggregate, for all claims.
5In the event that the Plaintiff is entitled to indemnity under the Fidelity Extension, the limit of indemnity is $250,000.00, in the aggregate, for all claims.
6The Policy excess stated in the Policy is the sum of $5,000.00 for each claim.
7At all material times the Plaintiff was a licensed dealer in securities.
8The Plaintiff dealt in managed funds and term deposits. It did not deal in equities. Its license did not permit it to do so.
9Peter Badger ('Badger') commenced employment with the Plaintiff in March 1989.
10At the time of commencing his employment with the Plaintiff Badger had an established investment and superannuation practice and was considered by the Plaintiff and others to be a senior person in his field with a broad client base.
11Badger was employed by the Plaintiff to develop new clients for the Plaintiff.
12Badger worked for the Plaintiff solely on commission.
13For the first two years of his employment with the Plaintiff Badger used an office within the Plaintiff's premises. Thereafter he often worked from home or travelled.
14Badger at all material times held a proper authority from the Plaintiff as a securities licensee to act as a securities representative pursuant to the Corporations Law.
15Badger kept filing cabinets for documents relating to his own clients, including the Clients, which were separate from cabinets kept by the Plaintiff for documents relating to other clients.
16Peter Badger was required by the Plaintiff, as a term of his employment, to comply with office procedures set out in a procedures manual and only to deal with investments which were on a recommended list maintained by the Plaintiff.
17The procedures maintained by the Plaintiff for investments on behalf of clients were as follows:
(a) Having given advice to a client about a suitable investment and obtained instructions from a client to invest in a particular fund, the Plaintiff would ask the client to provide a cheque to the Plaintiff payable directly to the trustee of the nominated managed fund;
(b) The Plaintiff maintained a trust bank account, but it usually ensured the monies received from the clients were made payable directly to the investment trustee manager rather than to it;
(c) After receipt of the cheque, a receipt from a receipt book, noting the amount of the investment and the fund involved, would be issued to the client. Two copies of the receipt were processed by the Plaintiff. One copy was kept in the receipt book and one copy was retained by the Plaintiff's accounts department. The original receipt was provided to the client.
18The persons listed in [paragraph 24 hereof] ('Clients') were Clients of the Plaintiff during the period when Badger was employed by the Plaintiff.
19Badger had, over the period of time, gained the confidence of clients of the Plaintiff, including the Clients, who had money to invest and those people sought advice from him concerning the investment of that money.
20Badger converted to his own use negotiable instruments provided by the Clients to him as an employee of the Plaintiff for the purpose of investment.
21Badger used three methods to carry out the conversion of negotiable instruments referred to in paragraph 20 as follows:
(a) Badger accepted cheques from some of the Clients made payable to 'Permanent Trustee Australia Ltd or bearer/order' or variations of this name and crossed 'not negotiable'. Some of the Clients signed application forms for various trusts or friendly societies and were led to believe by Badger that the money paid by them to Badger would be deposited into those investments. Badger issued receipts purportedly issued by the Plaintiff to some of the clients. To do this he removed receipts from unused or rarely used receipt books and did not place copies of the receipts on the files pertaining to the Clients or provide copies to the Plaintiff. The cheques payable to Permanent Trustee Australia Ltd were then paid to Badger's personal MLC account, which was an account in the name of Permanent Trustee Australia Ltd as trustee of the MLC Cash Management Trust. Those Clients defrauded in this way were Ainsley, Dermoudy, Doering, Harding, Hawes, Martin, McDiarmid-Williamson, Newman and Self;
(b) If a Client had funds to invest made up of more than one cheque, Badger accepted cheques from the Client and issued a receipt from one of the Plaintiff's receipt books which were available to him. In completing the receipt, Badger placed a form of partition between the original and the carbon copy. The placement of the partition prevented part of the text which appeared on the original receipt from being duplicated onto the carbon copy. Badger thereby issued an original receipt to the client which acknowledged receipt of a greater amount of money than the carbon copy receipt. The cheques, receipt of which was not recorded in the Plaintiff's receipt book, were generally made out to Permanent Trustee Australia Ltd or variations of that name and were deposited in Badger's own MLC Cash Management account. The money paid to Badger by Van Engen was dealt with in this manner.
(c) Badger fraudulently altered a cheque given to him by Mr and Mrs Featonby for investment. Mr and Mrs Featonby gave Badger a cheque for the sum of $20,000.00 drawn on the MLC Cash Management trust account with the National Australia Bank, payable to Permanent Trustee Australia Ltd. Badger altered the cheque by the addition, after the name of the payee, of the words 'Howard Mort Trust'. Badger prepared his own application for investment in the Howard Mortgage Trust and used the cheque received from Mr and Mrs Featonby for his initial deposit. Permanent Trustee Australia Ltd was trustee of the Howard Mortgage Trust.
22Following investigations undertaken by the Tasmanian Police, Badger was charged and convicted on 1 April 1996 of theft offences relating to the conversion of negotiable instruments referred to in paragraph 20. He was sentenced to a term of imprisonment.
23As a result of the conversions referred to in paragraph 20 each of the Clients has suffered loss.
24The Clients have made claims against the Plaintiff arising out of the losses referred to in paragraph 23 ('Claims').
25The Claims amount to a sum in excess of $250,000.00.
26Particulars of the Claims are [as follows]:
Creditor
Amount of Proof Admitted
Mrs Izetta Joy Ainsley
$13,000.00
Mr Horst Karl Benecke
$44,938.00
Mrs Elaine Dermoudy
$20,191.16
Mr Edwin James Featonby
$20,000.00
Hildegard Frommhold
$4,771.60
Mr Laurence Edward Harding
$20,000.00
Mrs Shirley Margaret Hawes
$22,051.99
Mrs Mary Levinia Martin
$133,000.00
Mr Michael Barwick Newman
$291,523.97
Mrs Lynette June Self
$5,000.00
Mr William Van Engen and Mrs Eef Van Engen
$62,500.00
Mrs Sybil June McDiarmid-Williamson
$24,975.34
Ms Helen Woodrow
$13,576.00
Mr Thomas George Doering
$10,200.00
$685,728.06
Mr Newman has also submitted a claim for interest.
27From time to time clients asked Badger for evidence of their investments. He provided to them:
(a) Falsified documents prepared by Badger purporting to be Client Portfolio Statements issued by the Plaintiff showing investments as having been made on behalf of the clients to whom the documents were issued which had not been made; and
(b) Regular interest payments to some of the Clients drawn from deposits standing to the credit of Badger's own MLC Cash Management account, or his account at the National Australia Bank.
28All of the Clients have lodged formal proofs of debt with the liquidator of the Plaintiff, and these formal proofs of debt have been admitted by the liquidator of the Plaintiff.
29The liability of the Plaintiff arising from the proofs of debt referred to in paragraph 28 constitutes the losses sustained by the Plaintiff arising out of the conversion by Badger of negotiable instruments to his own use.
30The Defendant was aware of the nature of the Plaintiff's practice and that the conduct of the Plaintiff's professional practice as tax agents included its business of financial planners and investment advisers.
31The Plaintiff in the periods during which the Clients suffered the losses referred to in paragraph 23 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:
"PROFESSIONAL INDEMNITY POLICY
Whereas the Insured, (as defined herein and named in the Schedule hereto) has made to FAI General Insurance Company Limited (hereinafter called 'the Company'), a written proposal containing particulars and statements which it is hereby agreed are the basis of this contract and are to be considered as incorporated herein and have paid the premium stated in the Schedule for the following indemnity during the period of cover or during any further period for which the Company may accept payment for renewal of this Policy.
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 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."
Material portions of the Schedule are:
"NAME OF INSURED: | ROULESTON NOMINEES PTY LTD T/AS |
RISK NO: | 001 |
TYPE OF INSURANCE: | PROFESSIONAL INDEMNITY |
PERIOD OF COVER: | FROM 4.00 PM ON 1.5.1994 to 4.00 PM 1.5.1995 |
GEOGRAPHICAL LIMIT: | WORLD WIDE EXCLUDING USA/CANADA |
DESCRIPTION OF RISK: | TAX AGENTS |
| INDEMNITY LIMIT OF INDEMNITY ANY ONE CLAIM | $1,000,000 |
| LIMIT OF INDEMNITY IN THE AGGREGATE | $1,000,000 |
| DISHONESTY LIMIT | $1,000,000 |
| FIDELITY LIMIT | $ 250,000 |
| LIBEL AND SLANDER LIMIT | $1,000,000 |
| OUTGOING PRINCIPALS LIMIT | $1,000,000 |
| POLICY EXCESS EACH CLAIM | $ 5,000 |
| POLICY EXCESS EACH CLAIM (IN RESPECT OF TAXATION WORK) | $ 1,000 |
PREMIUM
STAMP DUTY
$3000.00
$ 240.00
$3240.00"
The questions for determination are:
"(a)On a proper construction of the Policy, is the Plaintiff entitled to be indemnified for the Claims:
(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?"
Approach
My task in construing the policy is to ascertain the objective intention of the parties in relation to the issues before me 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 Limited v United City Merchants (Australia) Limited & Anor (1986) 4 ANZ Insurance Cases 74,340 at 74,349 and 74,350. The interpretation of the clauses in dispute is to be determined by construing each clause 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 & Ors v Fruehauf Finance Corporation Pty Ltd (1993) 7 ANZ Insurance Cases 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 and Hartford Fire Insurance Company [1963] VR 458 at 463. The policy having been proffered by the defendant is subject to the contra proferentem rule of construction. This is a rule of last resort and a principle for construction to remove ambiguities only when other more rational approaches fail; MGICA Limited v United City Merchants (Australia) Limited & Anor (supra) at 74,350.
General
The defendant concedes that each client made one claim only against the plaintiff and that each claim was first made against the plaintiff during the period of cover provided by the policy and was referred by the plaintiff to the defendant during that period.
By insuring cl 1(a), the defendant relevantly agreed to indemnify the plaintiff against claims for breach of professional duty in the conduct of the practice by reason of any negligence of the plaintiff or an employee. The cover is subject to Exclusion (b) which denies cover for dishonest acts of the plaintiff or its employees. In brief, the combined effect of these provisions is to cover the plaintiff in relation to claims arising from the negligent conduct of the practice excluding claims for dishonest conduct.
By Extension 4, the defendant relevantly agreed to indemnify the plaintiff against claims for a breach of professional duty arising out of or contributed to by the dishonest conduct of an employee excluding claims for the loss of negotiable instruments.
By Extension 5, the defendant relevantly agreed to cover the plaintiff in relation to the loss of negotiable instruments for which the plaintiff is legally liable in consequence of the dishonest conduct of an employee.
In broad terms, the plaintiff is provided with professional indemnity cover by insuring cl 1(a), dishonesty cover by Extension 4 and fidelity cover by Extension 5. The limit on the plaintiff's professional indemnity cover is $1,000,000, as is the limit on its dishonesty cover. The limit on its fidelity cover is $250,000 which is substantially less than the total amount of the claims. The plaintiff contends that the defendant is obliged to indemnify it in relation to the claims under its professional indemnity cover or its dishonesty cover. The defendant denies this and says that the plaintiff's only entitlement in relation to the claims is under the fidelity cover which is capped at $250,000.
Is the plaintiff entitled to be indemnified against the claims pursuant to insuring cl 1(a)?
Mr Badger converted to his own use the negotiable instruments he received from the clients. Clearly, by doing so, he acted dishonestly. As a result of his conduct, the clients have suffered loss and that loss is the subject of the claims made by the clients against the plaintiff. It is agreed that during the period when the clients suffered the losses, the plaintiff failed to take reasonable care to ensure that money paid to employees of the plaintiff was invested and was not stolen. Against this background, the plaintiff says that the clients can all claim their losses from the plaintiff on the basis of the plaintiff's negligence. For this reason, the plaintiff says that the claims are covered by insuring cl 1(a). The defendant denies cover under the clause on the ground that the losses flow from the dishonest conduct of the plaintiff's employee, Mr Badger.
Authorities on the scope of clauses equatable with insuring cl 1(a) contained in professional indemnity insurance policies have held that they do not cover liability incurred as a result of the dishonest conduct of an employee. Such a liability is normally the subject of a fidelity policy, not an indemnity policy; Goddard & Smith v Frew [1939] 4 All ER 358 and West Wake Price & Co v Ching [1957] 1 WLR 45. In this case, resort does not need to be had to authorities to hold that cl 1(a) does not provide cover in relation to claims for an employee's dishonesty. Exclusion (b) expressly provides that such claims are not covered.
A pathway by which the clients can establish liability is the plaintiff's negligence. For this reason, the plaintiff says the claims are covered by insuring cl 1(a) and they are not excluded from cover as being claims for the dishonest conduct of its employee, Mr Badger. This contention equates the word "claim" in Exclusion (b) with the cause of action in negligence which potentially underpins it. This is a misconception; the cause of action and the claim are not one and the same. The claim cannot be identified with the cause of action and the formulation of the claim by the party making it cannot be decisive of the rights and liabilities of the parties to the insurance policy; West Wake Price & Co v Ching (supra) at 55 and 57 and Murphy & Allen v Swinbank; Swinbank v Cleary [1999] NSWSC 934.
Definition 2 provides that the expression "claim" shall mean the demand for compensation made by a third party against the insured. This does not advance the situation. My task is to determine what each claim is for in order to establish whether it falls within Exclusion (b). In making that determination, it is necessary to focus on the facts which give rise to the claim and not the form in which the claim is asserted; Australia and New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd [1962] Ll R 241 at 255 and Government Insurance Office of New South Wales v Council of the City of Penrith [1999] NSWCA 42 at [59].
The question for my determination in relation to each claim is whether it is denied cover by Exclusion (b) as being a "claim … for … dishonest, fraudulent …, criminal or malicious … acts or omissions … of the Insured's … employees"?
In many instances it can be very difficult to identify with confidence what a claim is for. That difficulty is absent here. Each claim is for the loss the particular client suffered as a result of Mr Badger's conduct. That conduct is of the essence of each claim. Without it, no clients would have suffered loss and there would be no claims. That the claims may be advanced on the basis of the plaintiff's negligence does not conceal the fact that the essential nature of each claim is that of a claim for loss suffered because of the dishonest conduct of the plaintiff's employee. To allow the plaintiff to circumvent Exclusion (b) because negligence is one of the causes of action which can be pursued against it would almost render Exclusion (b) nugatory. In most situations where loss results from the dishonesty of a partner, director or employee, it would be possible to craft a cause of action in negligence against the insured.
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).
Is the plaintiff entitled to indemnification pursuant to Extension 4: Dishonesty?
Cover under the dishonesty extension is available to the plaintiff as that extension is specified in the schedule to the policy. Relevantly, the cover is indemnification in respect of claims for damages for breach of professional duty arising out of or contributed to by the dishonest conduct of employees. I have no doubt that this encompasses claims such as those that have been made against the plaintiff. The defendant does not suggest otherwise. What the defendant relies on to deny liability is the proviso to the dishonesty extension, which is:
"This extension excludes claims for loss of money, negotiable instruments, bearer bonds or coupons, stamps, bank or currency notes."
The plaintiff contends that the word "loss" in the proviso refers to physical loss and not loss in the sense of failing to account. It is not entirely clear to me what the plaintiff means by physical loss. What is clear is that the plaintiff submits that the loss of the benefit of a negotiable instrument as a consequence of another person converting it to his or her use is not a loss within the meaning of that word as used in the proviso. As I understand the argument advanced on behalf of the plaintiff, it is that in the circumstances that I have just described the negotiable instrument has not been physically lost. It continues to exist and can be located. Whilst the person entitled to the benefit of the negotiable instrument has lost that benefit, the instrument itself has not been physically lost.
In construing the proviso, it is to be borne in mind that it relates to claims for damages for the loss of specified items. Claims for damages are only made where a financially measurable loss has been suffered. Whilst the physical loss of some of the specified items, such as bank or currency notes, will cause a financial loss, that is not always the case with some of the other items such as negotiable instruments. When a negotiable instrument is physically lost, for example, destroyed or mislaid, it may readily be replaced without any financial loss. It is when the negotiable instrument is converted to the use of another that financial loss is suffered. This suggests that loss means more than physical loss. Support for this suggestion comes from a consideration of the conduct which must give rise to the loss referred to. That conduct is the "dishonest, fraudulent, criminal or malicious conduct of employees". Whilst physical loss of the items referred to can arise from conduct of this description, the sort of loss which is more readily linked to this sort of conduct is a detriment or disadvantage arising from the appropriation of the specified item to the use of an employee.
Further light is thrown on the meaning of loss in the proviso by the use of the same word in the fidelity extension in conjunction with similar words to those contained in the dishonesty extension and its proviso. Insofar as the fidelity extension provides cover for, "any loss of money, negotiable instruments, bearer bonds or coupons, stamp, bank or currency notes … for which the Insured is or are legally liable … sustained in consequence to any dishonest or fraudulent act or omission of any employee", it is clear that it provides cover in relation to claims excluded from cover under the dishonesty extension by its proviso.
Unlike the dishonesty extension, the fidelity extension is not confined to, "claims for damages for breach of professional duty", that is, claims on the insured by a third party. The fidelity extension provides the insured with cover in relation to claims for the loss of the insured's own property in the circumstances there specified. As to such claims, the fidelity extension provides the insured with cover "against any loss of money, negotiable instrument, bearer bonds or coupons, stamp, bank or currency notes … belonging to the Insured … sustained in consequence to any dishonest or fraudulent act or omission of an employee". It is clear that by these words the parties intended that if an employee of the insured dishonestly appropriated any of the specified items to his or her own use, the resultant loss to the insured would be covered. I am quite unable to accept otherwise. Such, however, would not be the case in relation to negotiable instruments if the plaintiff's contention is correct and the meaning of "loss" was confined to physical loss. On the plaintiff's argument it would not be covered under the fidelity extension as the negotiable instrument would not have been physically lost. The loss would not be covered under the dishonesty extension as that extension does not encompass claims by the insured for the loss of its own property.
In support of its contention that "loss" should be construed narrowly, the plaintiff submits that if loss is construed so widely as to encompass the fraudulent conduct of employees, the proviso to the dishonesty extension will deny that extension any real coverage. I do not accept that this is so. The application of the proviso is confined to specified items. There are many circumstances in which loss can arise out of or be contributed to by the dishonest, fraudulent, criminal or malicious conduct of employees unrelated to those specified items.
The plaintiff also submits that differences between the limit placed on the cover provided by the dishonesty extension, $1,000,000, and the limit placed on the cover provided by the fidelity extension, $250,000, indicate that the fidelity extension was only intended to apply to the physical loss of the specified items. I am unpersuaded by this. It seems to me that as the dishonesty extension is (subject to its proviso) at large and the fidelity extension is confined to the specified items, it is logical to have a lower limit on the fidelity extension. It may also be that the premiums applicable to the different extensions played a part in the plaintiff's decision about the limits.
I reject the plaintiff's contention that "loss" should be construed as meaning a physical loss which does not encompass a loss arising from Mr Badger's conversion of the clients' negotiable instruments to his own use. The meaning of loss includes detriment or disadvantage from being deprived of the benefit of any of the specified items regardless of whether they have been physically destroyed or mislaid. The detriment suffered as a consequence of Mr Badger's conduct is such a loss. I accordingly conclude that as a consequence of the proviso to the dishonesty extension, the claims are excluded from cover by that extension.
Is the plaintiff entitled to indemnification pursuant to Extension 5: Fidelity?
For the reasons I have given in explaining why the claims are denied cover by the proviso to the dishonesty extension, I am satisfied that the claims are covered by the fidelity extension.
In Zurich Australian Insurance Ltd & Ors v Fruehauf Finance Corporation Pty Ltd (supra), the Court was called upon to consider the scope of a clause providing fidelity cover in relation to "loss of money or negotiable instruments or goods". The Court rejected a submission that the word "loss" should be given a narrow meaning. It might be suggested that the Court's refusal to embrace a narrow meaning for loss in that case provides some support for the approach I have taken. I have not however relied on that decision in reaching the conclusions that I have expressed as there are a number of differences between the policy under consideration in that case and the policy I am considering. Each policy must be construed in the light of its own terms and circumstances.
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?
Insuring cl 4 expressly requires the payment of an excess "in respect of each claim made against the insured". An excess is accordingly payable in respect of each separate claim made by the clients against the plaintiff. See also Haydon v Lo & Lo [1997] 1 WLR 198 and Junemill Ltd (in Liq) v FAI General Insurance Co Ltd (1997) 9 ANZ Insurance Cases 61,377.
In arguing that only one excess was payable, the plaintiff called in aid that part of Definition 2 which provides:
"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."
That provision does not assist the plaintiff. There is no evidence before me that any one act or omission of Mr Badger has resulted in more than one of the claims. A necessary inference from the agreed facts is that different acts of Mr Badger precipitated each claim.
Conclusion
I answer the questions for my determination:
(a) (i) No.
(ii) No.
(iii) Yes.
(b)An excess is payable by the plaintiff pursuant to cl 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.
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3
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