In this edition
Westpoint fallout snares insurer
Mr Andy Chan, a financial planner and authorised representative of Quantum Securities Pty Ltd (later renamed as Minox Securities Pty Ltd), convinced a number of investors to invest in financial products offered by companies in the now-failed Westpoint group. The investors had sued Quantum alleging breaches by Chan of numerous sections of the Corporations Act; some of which rendered Quantum vicariously liable for Chan’s breaches, whether or not it would be liable under the general law.
Quantum had a “Professional Indemnity Policy” and a “Financial Institutions Policy” from QBE Insurance (Australia) Ltd that were in force at the relevant time. The investors applied for leave to proceed directly against QBE under s.6 of the NSW Law Reform (Miscellaneous Provisions) Act.
The application was dismissed at first instance because it was found certain exclusion clauses in both policies applied to deny Quantum cover under the policies.
The investors appealed.
The relevant exclusion in the professional indemnity policy excluded cover for claims related to:
“any financial or investment product that at the time the actual or alleged act, error or omission occurred is not listed on the Approved Product List of the entity which has issued the Insured with a proper authority to deal in financial products ... (Approved Product List shall mean written document outlining the financial products that have been investigated, assessed and approved for dealing by a Financial Services Licensee)”.
The investments recommended by Mr Chan were not on Quantum’s approved product list at the relevant time.
Delivering the Court of Appeal’s unanimous judgment, Justice Handley noted that the professional indemnity policy was a composite one, covering both Mr Chan and his then-employer, Quantum. Both were therefore “insureds” for the purpose of the policy. The relevant provisions of the Corporations Act made Quantum vicariously liable for Mr Chan’s recommendations, even though it might not have been liable on traditional common law tests. That, subject to any exclusion, brought the claim within the scope of the insuring clause in the policy.
In relation to the exclusion, the entity that had issued the approved product list was Quantum. It had issued the list to Mr Chan, not to itself and accordingly it could not be the “Insured” referred to in the exclusion. Although the exclusion clearly applied to deny indemnity to Mr Chan, it had no application to Quantum as the entity issuing the approved product list and a separate “Insured”.
The Court of Appeal however found that the trial judge had been right to find that the exclusion in the financial institutions policy applied to deny cover under that policy.
Accordingly, the appeal was allowed in relation to the professional indemnity policy and they were entitled to bring a claim directly against QBE in relation to that policy.
Zhang v Minox Securities Pty Ltd [2009] NSWCA 182
Court declines to re-write loan exclusion clause
Knightsbridge Managed Funds (KMF) was the responsible entity for a registered managed investment scheme known as the Clifton Partners Finance Mortgage Scheme. The investment strategy of the Scheme was essentially to make loans secured by mortgages over property.
In early 2000, Ashmere Cove Pty Ltd had advanced $100,000 as part of a Scheme loan totalling $850,000 to Fieldmont Holdings Pty Ltd, and that loan was to be managed by KMF. The balance of the loan was advanced by other investors in the Scheme and was repayable on 30 November 2000. It was secured by a second registered mortgage over various parcels of land.
Shortly after 14 February 2000 however, the investors (by agreement) discharged the existing second registered mortgage over the land and Fieldmont granted a new second registered mortgage to secure the loan, as well as further advances from other investors in the Scheme, to secure a total of $1.1 million.
That revised loan was repayable on 5 November 2000. It was not repaid; and apart from some $27,000, Fieldmont did not repay any of Ashmere’s $100,000 or the interest on that amount. Fieldmont was subsequently wound up and the first mortgagee of the land, National Australia Bank, sold it. There was no return to Ashmere from either of those actions.
KMF however held an insurance policy with Suncorp Insurance and Employers Reinsurance. A claim was made on the policy, but the insurers declined indemnity to KMF, relying on the endorsement to the policy that excluded indemnity for any claim made against KMF, or any claim by KMF for indemnity under the policy directly or indirectly arising out of the non-repayment of any loan which was originated or managed by KMF.
The insurers contended that the claims arose directly or indirectly out of the non-repayment of the loan to Fieldmont, which loan was originated or managed by KMF.
The matter came before Justice Barker for determination of two preliminary questions:
- Whether Ashmere’s claims that relied on misleading and deceptive conduct under the Corporations Act were within the scope of the policy; and
- Whether Ashmere’s claims were excluded from cover by the endorsement relied on by the insurers.
On the first issue, the policy provided that its indemnity included cover for any “unintentional breach of the Trade Practices Act 1974 (Commonwealth), the Fair Trading Act 1987 (NSW), the Fair Trading Act 1985 (Victoria), or similar legislation enacted by any state or territory of Australia”.
The question was whether the Corporations Act provisions were “similar legislation”. The insurers contended they were not, because the policy was intended to refer to other “consumer protection” legislation, such as the Fair Trading Act of another State; but not the Corporations Act.
Justice Barker however found there was “no logical, textual or contextual reason” for confining the term “similar legislation” in the way contended by the insurers. Having regard to the intent of the Corporations Act provisions, they were “similar legislation” and therefore the claim based on those provisions fell within the indemnity provided by the policy.
On the second question, the insurers relied on an endorsement to the policy that contained the following exclusion:
“There is no indemnity for any Claim made against You, or any claim by You for indemnity under this Policy directly or indirectly arising out of:
1. ...
2. the non repayment of any loan which was originated or managed by You.”
Justice Barker quoted the well-known cases concerning the interpretation of exclusion clauses, and in particular, that the policy had to be given a commercial construction and not one that was “strained”. Based on the “plain words” of the policy, it was apparent that the claim by Ashmere fell within the terms of the exclusion. The claim arose out of the non-repayment of the loan by Fieldmont, which was a loan that was managed by KMF.
It was contended that to give effect to the exclusion would render cover under the policy practically “illusory”. While Justice Barker noted that the exclusion would significantly limit the scope of the policy’s cover, there were nonetheless a number of different types of claims that remained covered even with the endorsement in place. It was not the court’s place to “re-write” the plain terms of the exclusion to bring about the outcome contended for.
Accordingly, on the second question, Justice Barker decided Ashmere’s claim was excluded by the terms of the exclusion clause.
Ashmere Cove Pty Ltd v Beekink [2009] FCA 564
Broker’s duties “extended” to premium funder
A broker ordinarily owes duties only to the client when placing insurance. However, that general proposition can be displaced in some circumstances. In a recent case in the Victorian Court of Appeal, a broker has been found to owe duties to an insurance premium funder.
The broker, Miller & Associates, acted on behalf of Consolidated Timber Holdings in seeking to secure funding for a premium of almost $4 million. They approached BMW Australia Finance in October 2000 about the possibility of BMW funding the premium. BMW sent its standard application form which requested details of the underlying insurance policy. Details were provided by Miller in the form of a certificate that suggested that the underlying insurance was property insurance and was cancellable.
Due to an “administrative error”, funding was agreed to when BMW’s requirements had not been met. Despite some reservations within BMW that they were bound by that agreement, the arrangement was “undone”. Miller then opened another round of discussions with BMW about funding the premium. They sent a bundle of documents to BMW which included the underlying policy. The certificate for that policy was in a similar form to the certificate provided earlier and again appeared to be cancellable property insurance. The policy document however made it clear that the insurance was “cost of production” insurance and was not cancellable without the consent of the insurer. The evidence was that BMW’s representatives had “glanced” at the certificate and (despite the policy numbers being different) thought it was the same as the earlier certificate. They did not examine the policy itself.
On that basis, and subject to some altered terms, BMW agreed to fund the premium. Consolidated Timber paid two instalments, but then defaulted.
BMW sued Miller alleging misleading and deceptive conduct in breach of the Trade Practices Act and negligence on the part of Miller in the information it provided about the underlying policy. At trial, BMW’s claim failed; and it appealed to the Court of Appeal.
In a split 2-1 decision, the court decided that Miller had engaged in misleading and deceptive conduct in relation to the policy information. It was also found that Miller owed BMW a duty of care.
Delivering the leading judgment for the majority, Justice Robson found that BMW had relied on Miller to provide it with accurate information about the underlying policy and that Miller knew or ought to have known that the information would be relied on in coming to a decision about whether to fund the premium or not. Evidence from an independent broker established that premium funders relied on brokers to tell them if there was “something unusual” about the underlying policy.
As the element of reliance (which is essential to founding a duty of care in cases of so-called “pure” economic loss) had been established, it was found that Miller owed a duty of care and had breached it by not fully explaining the “true nature” of the policy and by providing a certificate which communicated that it was something other than what it really was.
Accordingly, Justice Robson and Justice Neave allowed the appeal and entered judgment for BMW on both the Trade Practices Act and negligence claims. BMW’s judgment was however reduced by 40% for its own negligence in not examining the policy provided. Justice Ashley however, in dissent, would have dismissed the appeal and upheld the trial judge’s finding that BMW were “the authors of their own misfortune”.
The case illustrates the complexity and difficulty of “pure” economic loss claims and the interaction between legislative and common law principles in the area. Further action on this particular matter would not be unexpected.
BMW Australia Finance Limited v Miller & Associates Insurance Broking Pty Ltd [2009] VSCA 117
Driving misrepresentations not “fraud”
In June 2006, Benjamin Roth purchased a Ferrari vehicle and approached Dawes Underwriting for insurance cover. After answering some questions over the phone, he was quoted a premium and asked for “the paperwork to be issued”. Documents were subsequently sent to him confirming “interim cover” and asking him to complete a proposal form.
In the proposal form, he answered “no” to a question asking whether his licence had been cancelled, suspended or refused in the preceding 10 years. He also stated that he had had one previous claim in the past 5 years involving someone reversing into his vehicle while parked; and that he had received a fine for using his mobile phone while driving in 2003.
In fact, he had several traffic offences (mainly speeding fines) in the preceding 10 years, had his license suspended in 2002, and had 5 claims in the preceding 5 years although none were his fault.
In September 2006, he was driving the Ferrari when it was extensively damaged in a collision. He claimed on Dawes, who declined the claim based on what it asserted were fraudulent misrepresentations in the proposal form.
Mr Roth sued Dawes and the action was defended on the basis of the misrepresentations, which Dawes contended were fraudulent. The trial judge found in Mr Roth’s favour, deciding that Dawes had not proved fraud in relation to the misrepresentations; and that if the true situation had been known, Dawes would still have insured him on the same terms under its “second chance” underwriting guidelines. Dawes appealed.
Giving the Court of Appeal’s unanimous judgment, Justice Macfarlan noted authorities which establish that fraud can be established by reckless behaviour, where information is given “without caring whether [it is] true or false”. However, to amount to fraud, that recklessness had to be such that it could be said that Mr Roth had “no honest belief in the truth of the representation”.
The evidence indicated that when completing the proposal form, Mr Roth had disclosed matters that were inconsistent with his phone conversation. These matters were not investigated by Dawes despite the inconsistency. In addition, the trial judge had accepted Mr Roth’s evidence that he had completed the proposal form hurriedly and had misunderstood some of the questions.
Since it was open to the trial judge to accept that evidence, it followed that it was open to the trial judge to conclude that the misrepresentations were the result of carelessness rather than fraud. Justice Macfarlan commented that the test for fraudulent misrepresentation presented a “high hurdle” to an insurer seeking to establish it; noting:
“It is true that the test represents a ‘high hurdle’ but that is of the nature of an allegation of fraud which involves a mental element not required in the case of carelessness or negligence.”
In addition, the evidence established that Dawes had “second chance” underwriting guidelines which allowed policies to be issued to persons (such as Mr Roth) who would not normally qualify for cover. It was of significance to those guidelines that all Mr Roth’s previous claims were in circumstances where he was not the “at fault” party. In addition, the trial judge had found that Dawes’ CEO had been “far more interested in obtaining the premium than he was in rigorous review of information provided by [Mr Roth] and/or the risk”.
As a result, it was open to the trial judge to have found that Dawes would have insured Mr Roth even if the misrepresentations had not been made.
The appeal was accordingly dismissed.
Dawes Underwriting Australia Pty Ltd v Roth [2009] NSWCA 152
