Going for broke - indemnity declined to insurance brokers for misappropriation of trust funds

18 August 2021

This case concerns a brokerage firm’s request for indemnity from its insurer, related to a significant sum that had been misappropriated from its trust account. Ultimately, it was unsuccessful as the firm had not complied with its duty of disclosure because the Court attributed the knowledge of its employee’s fraudulent conduct to the brokerage firm.

In Issue

This case concerns a claim for indemnity by All Class Insurance Brokers Pty Ltd (All Class), a brokerage firm that is now in liquidation.

All Class commenced proceedings in the Federal Court of Australia regarding its claim for coverage under a policy of insurance issued by Chubb Insurance Australia Limited (Chubb). All Class sought ‘Crime Coverage’ for a significant sum that had been misappropriated from its trust account.

The Court was required to consider:

  1. issues relating to non-disclosure;
  2. whether the person who misappropriated the funds could be classified as an employee of All-Class; and
  3. whether All-Class could be said to have suffered ‘loss’.

The background

Steadfast Group (Steadfast) facilitated All Class’ entry into numerous policies of insurance across the period 30 June 2008 to 30 June 2013.

In each proposal form and renewal, All Class was asked to disclose whether it was aware of any facts which might give rise to a claim and whether it was aware of any fraud or dishonesty by its principals or employees. All Class answered “no” to each of those questions.

On 28 January 2011, All Class received a letter addressed to Mr Bowmaker (its sole director, shareholder and company secretary) from FMK Chartered Accountants (FMK), who had conducted an audit of All Class’ financial accounts for the year ending 30 June 2010. In that letter, FMK set out several issues arising from the audit concerning All Class’ trust account. FMK concluded that the trust account had been overdrawn. No further action appears to have been taken against All Class in relation to the overdrawn account until March 2013.

On 1 March 2013, All Class was served with a Notice issued under s 33 of the Australian Securities and Investments Commission Act 2001 (Cth) concerning suspected contraventions of the Corporations Act 2001 (Cth). Shortly before this notice was issued, Mr Bowmaker had been admitted to hospital following a “major breakdown”.

Mr Bowmaker’s wife was appointed his power of attorney. At a point in time not defined, but after Mr Bowmaker’s admission to hospital, Mrs Bowmaker discovered that there was a “significant deficiency of funds” in All Class’ trust account. On 27 March 2013, Mrs Bowmaker submitted an ‘incident notification’ to Steadfast.

On 17 April 2013, All Class was placed into external administration. The appointed liquidator subsequently provided proof of loss to Chubb in relation to the claim. All Class claimed that, between June 2008 and March 2013, “somewhere between $1.66 million and $2.031 million had been improperly transferred to All Class’ office account”.

All Class sought coverage under a Forefront Portfolio Policy issued to it by Chubb for the period 30 June 2012 to 30 June 2013 (Policy). The relevant coverage section of the Policy provided:

The Company shall pay the Principal Organisation for direct loss of Money, Securities or Property sustained by an Insured resulting from Theft, fraud or dishonesty, committed by an Employee, whether acting alone or in collusion with others, which direct loss is Discovered during the Policy Period or Extended Discovery Period”.

All Class also sought coverage for “investigation costs”.

In determining the request for coverage, the Court identified three issues that had to be considered. First, whether All Class engaged in fraudulent non-disclosure so as to allow Chubb to avoid the policy or to reduce its liability to zero. Second, whether Mr Bowmaker was an Employee under the applicable Insuring Clause. Third, whether All Class sustained any direct loss so as to engage the insuring clause.

The decision at trial

The Court held that All Class was not entitled to indemnity under the Policy.

In dealing with the first issue:

  1. the Court rejected All Class’ submission that Steadfast was the relevant entity that owed a duty of disclosure and it was a third party beneficiary under s 48 of the Insurance Contracts Act 1984 (ICA), such that it did not owe a duty of disclosure. The Court found that Steadfast acted as an agent that arranged the Policy on All Class’ behalf. As such, All Class owed a duty of disclosure;
  2. the Court also rejected All Class’ submission that Chubb failed to ask it specific questions required by s 21A of the ICA that were relevant to its decision whether to accept the relevant risk, and that it also waived the duty of disclosure pursuant to s 22 by failing to inform All Class of that duty. The Court rejected the ‘s 21A argument’, because the Policy was not an eligible contract of insurance under that section. It rejected the ‘s 22 argument’ because Chubb had given notice of the duty to Steadfast, who acted as All Class’ agent;
  3. the Court found that Mr Bowmaker gave “plainly false” answers to the questions contained in the proposal forms and that there was non-disclosure. Furthermore, the Court held that this non-disclosure was fraudulent, as Mr Bowmaker knew that providing the correct answers would lead to any insurer declining cover due to his role as an insurance broker; and
  4. the Court held that Mr Bowmaker’s fraudulent conduct was characterised as knowledge of All Class that ought to have been disclosed to Chubb prior to the inception of the subject Policy period. The Court agreed with Chubb’s submission that disclosure was required as the director’s knowledge was attributable to All Class as he was the “directing mind and will” of All Class and the funds were misappropriated for its benefit.

In dealing with the second issue, the Court found that Mr Bowmaker should be considered an Employee under the Policy, as he was performing acts within the scope of the usual duties of an employee when transferring funds, which ultimately benefitted the company and did not amount to a direct loss for the purposes of the Policy.

The Court declined to make a finding regarding the third issue, on the basis that further factual investigation was required.

Implications for you

This decision illustrates the circumstances in which a Court will apply the “directing mind and will” principle first articulated in the decision in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 .

The decision also reinforces that:

  • when considering whether a company has knowledge of and a duty to disclose fraudulent conduct, it is important to consider if the fraudulent conduct benefited that company; and
  • when money is misappropriated for the benefit of the insured company, this defeats the purpose of the coverage provided pursuant to an employee theft clause.

All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited (No 2) [2021] FCA 782

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