INTERESTING DECISION ON ACCOUNTANTS PI COVER
February 17, 2017
Ritchie v Woodward (Executor of the Estate of the late Brian Patrick Woodward)  NSWSC 1715
The plaintiffs sued members of an accounting firm, BP Woodward & Associates, alleging professional negligence and misleading and deceptive conduct. The alleged conduct related to a number of unsuccessful investments made by the plaintiffs. It was alleged Mr Woodward, a partner of the firm, had been assisting the plaintiffs with their investments, largely in the hotel industry, including providing ongoing advice and bringing potential investments to their attention. Mr Woodward also allegedly encouraged the making of a number of loans which were never secured. The allegations against the other partners of the firm (collectively “the firm”) were that they had failed to appropriately monitor and report to the plaintiffs concerning the unsecured loans.
The firm held a professional indemnity policy with AIG, which denied coverage. The firm cross claimed against AIG, asserting they were entitled to be indemnified by AIG for any damages awarded to the plaintiffs and defence costs.
Emmett AJA ultimately dismissed the claims against the firm and its members, as His Honour did not consider that the claims for professional negligence or misleading conduct had been made out. His Honour also dismissed the cross claims against AIG. The judgment as it relates to the coverage issue is discussed below.
Cover under the policy was available only if the relevant wrongful act was committed solely in the performance of or failure to perform “professional services”. Professional services was defined by reference to a list of twelve specific areas of practice relating to accounting. This list included a number of areas of practice such as accounting and bookkeeping, audit, business valuations and other relevant practices associated with accounting. Investment advice was not included in the list.
Relevantly, the firm had submitted a proposal which included a statement setting out the gross income associated with a number of activities. No figure was allocated to the activity “Financial Planning / Investment Advice”.
The policy also included two relevant exclusion clauses which excluded any loss in connection with a claim arising out of, based upon, or attributable to the provision of Investment Advice, or any circumstance which, at the inception of the policy, may have been reasonably expected by the firm to give rise to a claim.
AIG denied coverage on the basis that:
- The policy was not engaged as the alleged conduct was not ‘professional services’ as defined in the policy;
- The alleged conduct was excluded by the policy as it arose out of, was based upon, or was attributable to either:
- Investment Advice; or
- circumstances that may reasonably have been expected by the firm to give rise to a claim prior to the policy inception.
Ultimately the first issue came down to whether the Court preferred the firm’s submission that “professional services” should be interpreted by reference to what services are typically provided by an accountant, or as AIG submitted, by reference to those areas of practice specifically listed in the policy definition.
The firm sought to characterise the conduct as services which would typically fall under a broad definition of the listed area of practice, “Accounting & Bookkeeping”. They said that the services subject to the claim involved due diligence, financial reporting and analysis, which, they said, are in the nature of “account”, “audit” and “bookkeeping” within the terms of the policy.
The plaintiffs also weighed in on the argument and took the view that the usual and ordinary meaning of the words “accounting and bookkeeping” was irrelevant. They said the more appropriate inquiry was what professional services are typically provided by accountants. The plaintiffs gave evidence that Mr Woodward had provided ongoing advice and services in relation to the investments, in the nature of monitoring the investments and reporting to the plaintiffs.
Therefore, the firm and the plaintiffs said that any loss was not caused as a result of investment advice, but rather as the result of a failure to monitor and report on the investments.
AIG contended that, if the parties wished to include such conduct in the policy, they could easily have done so. AIG also submitted that it was not enough to say that Mr Woodward had, for many years, been acting as the plaintiffs’ accountant. It said that one must look at the particular wrongful act which is said to engage the policy. Based on the evidence, AIG said that it could not be said that Mr Woodward was engaged solely in “professional services”.
His Honour found against the firm, noting:
The fact that the phrase “Accounting & Bookkeeping” is part of a list of specific and discrete practice areas such as “audit”, “business valuations”, “company secretarial work”, “forensic accounting” and “superannuation fund administration” services, tends against the adoption of the broad definitions of “accounting” services contended for by Tony Woodward…
His Honour considered that the phrase “accounting & bookkeeping” referred to professional services utilised in the preparation of accounts and the collation of raw data, rather than introducing a client to potential investments and subsequent monitoring of those investments. The work being done, or not being done, by Mr Woodward did not fall within any of the categories listed in the policy.
His Honour said this finding was supported by the clear intention that investment advice fell outside of the policy. This was made clear by the presence of the investment advice exclusion and the proposal submitted by the firm which made no allocation for financial planning / investment advice.
The “investment advice” exclusion clause
Similarly, the Court did not accept the firm’s submission that the conduct alleged against Mr Woodward was not “investment advice” of the type contemplated by the exclusion clause. The Court considered the term “investment advice” was apt to describe any encouragement given by Mr Woodward to the plaintiffs to acquire units in a trust or to lend money.
Importantly, His Honour noted that the phrase “arising out of” required a less proximate relationship to the advice than does the phrase “caused by” and established that the phrase “arising out of” would be satisfied if the claim originates in, springs from or had its foundation in that matter.
As such, even if the claim was not caused by the investment advice, it was still excluded as arising out of the investment advice.
Interestingly, His Honour considered that the exclusion clause was not applicable to the other partners of the firm. Since the allegations against the other partners were confined to a purported failure to inform the plaintiffs about the unsecured loans, rather than convey any opinion or evaluation of the investments, the allegations did not arise out of investment advice. However, this was a moot point, as the plaintiffs’ claims did not fall within the cover to begin with.
Prior circumstances exclusion
AIG also sought to rely on a prior circumstances exclusion clause. For the exclusion clause to apply, AIG was required to demonstrate that as of the date of inception of the policy, the firm had knowledge of circumstances that may give rise to a claim.
Along with other corroboratory evidence, AIG relied on the fact that prior to the inception of the contract, the partners of the firm were all aware that the plaintiffs had suffered loss as a result of failed investments, that the plaintiffs held Mr Woodward responsible for those losses, and that Mr Woodward had already declared bankruptcy as a result of the failed investments.
The firm said in response that, prior to policy inception, there had been no suggestion of the plaintiffs having retained lawyers and that the mere fact that the plaintiffs were disenchanted with Mr Woodward and/or the firm did not give rise to an expectation that a claim may be brought.
His Honour concluded that the exclusion clause relating to prior circumstances was inapplicable. As the nature of the services provided by Mr Woodward here constituted investment advice, there was no reason to believe that a claim relating to the covered professional services would be made, as distinct from one for loss resulting from poor investment advice.
The decision provides an interesting example of policy and exclusion clause interpretation. Importantly, it demonstrates that the use of exhaustive definitions of terms such as “professional services” can restrict policy application to the activities included in the definition.
Authored by Tim Daley, Lawyer, Melbourne.
May 23, 2017
Cam & Bear Pty Ltd v McGoldrick  NSWSC 1894 Introduction While the preparation of the financial statements of a Self-Managed…Continue reading
November 9, 2017
Introduction In 2012, the Corporations Act 2001 (Cth) (the Act) was amended [i] to include the Future of Financial Advice reforms…Continue reading
December 6, 2012
James G Oberg (Sales) Pty Ltd v Oberg  FCA 722 The implied undertaking of a party to litigation that it…Continue reading