Qualifications on professional advice
Professional indemnity insurers will breathe a sigh of relief after the NSW Court of Appeal found that qualified advice from an accountant on tax issues was not negligent and did not amount to misleading conduct.
Leda Pty Ltd wanted to acquire shares in two companies which owned a unit trust. As part of that process, the company sought advice from an accountant, Mr Weerden (a partner of Price Waterhouse and a tax specialist) on the impact that the acquisition of these shares would have on its income tax. One key issue was whether previous losses of $39 million generated by the unit trust could be carried forward to set off against future assessable income. This was of particular relevance as the unit trust had also made a capital profit of $45 million.
Mr Weerden informed Leda that in order to give that advice, he would need to carry out a full due diligence review. Leda did not necessarily want to conduct a full review, so Mr Weerden then spoke with Leda’s financial controller where a “compromise” was reached. Despite not undertaking a full review, he gave some advice in a letter to Leda. That letter included details of the amount of losses available to be carried forward against future assessable income, and noted that losses that the Commissioner accepted as available to be carried forward could only be carried forward for seven years from the year in which they were incurred. Significantly, it also advised that if the Commissioner of Taxation considered the sole or dominant purpose of the acquisition was to obtain a tax benefit, the tax benefit could be denied under the anti-avoidance provisions of the Income Tax Assessment Act.
Leda acquired the shares, but the Commissioner of Taxation determined that the profit of $45 million was assessable income and that the losses of $39 million were thereby exhausted.
Leda sought damages from Mr Weerden for negligent advice and misleading conduct under the Fair Trading Act.
The trial judge found that Mr Weerden’s advice was negligent, because it should have been qualified to make it clear that he was expressing no opinion as to the availability of the tax losses. However, because of Leda’s own understanding of the issues, the advice did not materially contribute to its loss, and Leda’s claim was dismissed. Leda appealed to the NSW Court of Appeal.
In a unanimous decision the Court of Appeal dismissed Leda’s appeal. Delivering the leading judgment, Justice Hodgson noted that Mr Weerden had advised that due diligence needed to be undertaken, but had acted on a compromise position struck with the financial controller. In addition, his advice could not reasonably be understood as advising on the availability or deductibility of the losses, and was accordingly not negligent.
In any event, even if he had been negligent, causation had not been proved. Leda was aware of the risk that the Commissioner of Taxation might treat the profit as assessable income. It was also plainly aware that Mr Weerden had not conducted a due diligence review and so was in no position to advise it properly. As a result, Leda could not have reasonably relied on the letter of advice.
Having concluded that Mr Weerden had not been negligent, the court went on to find that, for the same reasons, there was no misleading conduct on Mr Weerden’s part, and therefore that the Fair Trading Act claim also failed.
While not directly relevant to the decision given the result on the primary issues, the court indicated that if Leda had succeeded, it would have considered whether, as a matter of public policy, Leda should be refused relief because its dominant purpose in the transaction was to obtain a tax benefit by unlawful means.
Leda Pty. Limited v. Weerden & Anor. [2007] NSWCA 174
Theft of money is “property damage”
Ms Sestili owned a personal care business. She was engaged to provide a carer for Ms Ffrench (who was a quadriplegic) and assigned Ms Brown to be her personal carer. In her position as carer, Ms Brown became aware of the PIN number for Ms Ffrench’s bank account. She used the PIN number to withdraw substantial sums from Ms Ffrench’s account using ATMs. After two hearings, Ms Sestili was found vicariously liable for the theft of the money by her employee. She held a public liability policy with Triton Underwriting, and claimed on that policy for indemnity against Ms Ffrench’s claim. Triton was found liable in the Supreme Court, but appealed to the Full Court.
On the appeal, Triton relied on two primary arguments. The first was that the indemnity in the policy for “property damage” was limited to “loss of tangible property”. Triton argued that what Ms Brown had done was to convert intangible property (represented by the account balance) to her own use, and therefore the theft did not amount to a loss of “tangible property”. The second was that the theft did not occur “in connection with” Ms Sestili’s business as required by the policy.
On the “tangible property” point, Triton’s argument foundered on a factual issue. The difficulty for the insurer was that Ms Brown had actually withdrawn cash from ATMs. Cash was certainly tangible property capable of being stolen. Delivering the leading judgment, Justice Debelle noted that the insurer’s argument focussed on the relationship between Ms Ffrench and her financial institution, when the real issue was what happened to the cash after it left that institution.
In relation to the second argument, the court noted the long-accepted proposition that the words “in connection with” had a “wide connotation”, merely requiring some relationship between the two things. Since the court had found (on appeal by Ms Sestili) that the actions of Ms Brown were sufficiently connected with her employment to make Ms Brown vicariously liable, that was sufficient to establish that the liability arose “in connection with” Ms Sestili’s business.
As a result, the appeal by Triton was dismissed and it was liable to indemnify Ms Sestili.
Ffrench v Sestili [2007] SASC 241
“All reasonable precautions”
Brescia Furniture owned a showroom and warehouse in Ashfield. In March 2005, the building was destroyed by fire. Brescia was insured by QBE Insurance under an Industrial Special Risks policy. Following the fire, Brescia claimed on the policy. QBE denied indemnity and Brescia sued.
QBE’s refusal to indemnify hinged on two main arguments – firstly that Brescia had failed to take “all reasonable precautions” to prevent the loss as required by the policy; and secondly that Brescia’s claims for loss of stock and business interruption were overstated and therefore “fraudulent” within the meaning of s.56 of the Insurance Contracts Act.
In relation to the “all reasonable precautions” argument, it is necessary to relate a little history. Brescia had, as part of its business, conducted French polishing, which necessarily involved using flammable products. The French polishing was carried out in the basement of the building. Over the years, the business had been the subject of complaints by nearby residents, who complained about the fumes emitted by the process. In 2004, it came to Brescia’s notice that they required a filtration system to address the fumes being created. A new system was installed, which required new ducting leading to the roof, which bypassed the old ducting system. This new system required Council approval. Brescia consulted with the Council on the system, but did not obtain the required approval.
On the day of the fire, an employee was directed to seal up the old ducting vent. When he inspected it, he found that a metal grille had been welded in place over the duct. He decided, having spoken to one of the owners, to cut the grille off using an angle grinder. It was common ground that sparks from the angle grinder had ignited flammable residues in the old ducting system, leading to the fire.
In the NSW Supreme Court, Justice Hammerschlag held that the test to be applied was whether the insured had deliberately courted a risk by taking no or inadequate measures to avoid it. The test is a subjective one to be determined from the perception of the insured.
After examining the evidence surrounding the installation of the new system and the events leading up to the fire, Justice Hammerschlag concluded that the directors of Brescia had not deliberately courted a risk of fire. As a result, the “all reasonable precautions” clause did not operate to deny the claim.
In relation to the “fraud” allegation, Justice Hammerschlag noted that this arose out of the claim for damages in the legal proceedings. Following QBE’s denial of indemnity, Brescia had treated the policy as having been breached by QBE and elected to sue for damages for that breach. As such, it had never in fact “claimed” the relevant amounts from QBE – it had merely sued for damages. Section 56 of the Insurance Contracts Act made a distinction between a “claim” and “proceedings in relation to a claim”. It followed that the proceedings themselves could not be the “claim” that was referred to, and Brescia’s proceedings for damages were not a “claim” within the meaning of s.56.
Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd [2007] NSWSC
Home away from home
A late-night visit to a workplace has nearly proved very costly for an Adelaide man, but instead his home insurer will foot the bill.
Mr O’Halloran was out with friends when he met a woman. He invited her back to his house, but on the way, they stopped at his workplace. They smoked cigarettes in the office, butting them out in a coffee mug. Mr O’Halloran then put the butts in a wastepaper basket. They later ignited (after Mr O’Halloran had left), causing considerable damage to the workplace and adjacent buildings.
Mr O’Halloran held a home insurance policy with RAA-GIO, which included public liability cover. He claimed indemnity against liability for damage arising out of the fire, but the insurer declined. At trial, Mr O’Halloran succeeded, and RAA-GIO then appealed against that ruling.
In the Full Court of the South Australian Supreme Court, RAA-GIO relied on two exclusions to the policy. The first excluded cover arising out of the “ownership, possession or use” of any building other than the insured building (i.e. the home), while the second excluded liability arising out of any “business, trade or profession” carried on by the insured person.
The insurer argued that Mr O’Halloran’s visit to the workplace was a “use” of premises and that the fire arose out of that use. Delivering the leading judgment of the Full Court, Justice Duggan found that the reference in the exclusion to “use” had to be read in the context of the words “ownership” and “possession”. In that context, the word “use” connoted some element of control. Since his presence there was not related to his work, it followed he could not be exercising any kind of right associated with control of the premises, and the exclusion therefore did not apply.
Equally, since his visit to the premises was entirely a “private” one in the sense that Mr O’Halloran’s presence there was not required by his employer or by any aspect of his work, it followed that the fire did not arise out of a “business, trade or profession” being carried on by him.
In the result, the insurer’s appeal was dismissed.
RAA-GIO Insurance Ltd v O'Halloran [2007] SASC 245
It’s not what you know…
Does an insured have to actually “know” about so-called “known circumstances” for the purposes of a professional indemnity policy? In other words, is the test a subjective one, focussing on the particular insured; or an objective one, requiring reference to a hypothetical “reasonable insured”. A recent decision from the NSW Court of Appeal indicates that the subjective test seems to hold sway.
The insured, Mr Porthouse, was a barrister. He had given advice to a client who was injured while doing community service in relation to a claim for personal injuries against the Crown. Changes to the Workers Compensation Act however had meant that the claim might not be sustainable. The point had been raised in the personal injuries claim in 2003. Although the client had obtained a verdict, the Crown had appealed that verdict on the basis that the amendments applied to the claim. In April 2004, the appeal was listed for hearing in July 2004.
In May 2004, Mr Porthouse applied for renewal of his professional indemnity policy with CGU Insurance. The renewal form asked: "Are you aware of any circumstances, which could result in any Claim or Disciplinary Proceedings being made against you?" He answered “No”. The policy as issued by CGU excluded cover for “known circumstances”, which extended to circumstances an insured “knew” before the inception of the policy “might result in someone making an allegation against an Insured in respect of a liability, that might be covered by this Policy”; and those that “a reasonable person in the insured’s professional position would have thought” might have the same effect.
The Crown’s appeal was upheld in August 2004, and a claim for professional negligence was made against Mr Porthouse in March 2005. He claimed indemnity against the claim from CGU. It resisted the claim on the basis of “known circumstances” exclusion. At trial, Mr Porthouse succeeded in his indemnity claim. CGU appealed.
On appeal, CGU focussed heavily on the “reasonable person” aspect of the exclusion clause. The question of whether the clause required a subjective or objective test split the court. In the result, Justice Hodgson and Chief Justice Young favoured the subjective test, while Justice Hunt dissented, instead favouring the objective test.
Delivering the leading judgment for the majority, Justice Hodgson noted that the combination of terms such as “would have thought”… “might result in… an allegation” that “might be covered” by the policy raised ambiguity. The terms covered such a range of possibilities, that the proper approach was to construe the clause contra proferentem against the insurer.
In addition, Justice Hodgson concluded that the trial judge had not erred in applying a subjective test. The term “reasonable person” was qualified by “in the professional position” of the insured. The clause directed attention to that “professional position” and required a finding that a reasonable person in that position “would” have thought something, not “may well have thought” it. Conclusions about whether a reasonable person “would” have thought something can be approached by considering what an actual person did think and asking if this was unreasonable, so long as it did not distract attention from the ultimate question, whether a reasonable person in the insured’s position “would have thought” it.
Since the trial judge had found that Mr Porthouse had not acted unreasonably in answering “No” to the question on the renewal form, it followed that the insurer had not established that a reasonable person in the same position “would have thought” otherwise.
In dissent however, Justice Hunt indicated that the test was an entirely objective one. Justice Hunt would have found that the trial judge had erred; and that a reasonable person in Mr Porthouse’s professional position would, on reflection, have contemplated the real possibility that the client would, at the very least, make an allegation of negligence against him should the Crown’s appeal succeed (which was always a real possibility).
The majority view favouring the subjective test prevailed however, and CGU’s appeal was dismissed.
CGU Insurance Ltd v Porthouse [2007] NSWCA 80
In brief
When an insured fails to disclose relevant information on a proposal for life insurance, s.29 of the Insurance Contracts Act allows the insurer to avoid the policy in certain circumstances. Under the section, the insurer must establish it would not have been prepared to enter into a contract of life insurance with the insured on any terms. In a recent case, the insured conceded non-disclosure, but argued that the section required the insurer to establish that it would not have entered into a policy as at the date the actual policy was entered into. The NSW Court of Appeal has rejected that notion, and found that s.29 does not impose a time limit on the insurer’s notional decision not to enter into a life insurance policy with the insured on any terms.
Davis v Westpac Life Insurance Services Ltd [2007] NSWCA 175
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