Liberty Mutual Insurance Company t/as Liberty International Underwriters v Valerio Enrico Zanotto (2011) NSWDC 202

Legal Directions

Introduction

Publication of this 2011 decision of the NSW District Court has been restricted. Its recent (mid-May) release discloses a case that concerned the interpretation of the wording ‘final judgment or adjudication’ in an exclusion clause of a directors and officers insurance policy. Such ‘final judgment or adjudication’ wording is commonly found in exclusion clauses for fraud or dishonesty, or in advancement of defence costs clauses in insurance policies.

Background

Valerio Zanotto (the ‘Insured’), a councillor with Wollongong City Council, was insured by Liberty Mutual Insurance Company (the ‘Insurer’) under a Directors (Councillors) and Officers Insurance Policy (the ‘Policy’).

The NSW Independent Commission against Corruption (‘ICAC’) is primarily an investigatory body to investigate, expose and prevent corruption involving public authorities and public officials.  It reports and makes recommendations to the NSW Parliament. It may also opine that a matter be referred to the Director of Public Prosecutions (‘DPP’) to obtain the Director’s advice about prosecution. Parliament decides whether such recommendations will be pursued. Importantly, the ICAC cannot find that a councillor is guilty nor has committed a criminal or disciplinary offence.

ICAC investigated allegations of dishonesty by the Insured and delivered a report in which it found that the Insured had engaged in corrupt conduct in that his conduct could constitute or involve a disciplinary offence within the meaning of certain sections of the Independent Commission against Corruption Act 1988 (the ‘ICAC Act’). The investigation led the Insured to make a claim upon the Policy (the ‘Claim’).

Relevantly, the ICAC Act imposes a limitation on the nature of ‘corrupt conduct’. Conduct will not amount to ‘corrupt conduct’ unless it could constitute or involve a criminal or disciplinary offence. However, the ICAC Act also provides that ICAC may find that a person has engaged in corrupt conduct only if satisfied that a person has engaged in conduct that constitutes or involves a criminal or disciplinary offence.

ICAC also recommended obtaining the advice of the DPP to prosecute the Insured. The DPP determined that the Insured should not be prosecuted.

The Insurer had advanced defence costs to the Insured for appearing before ICAC. The Insurer sought to recover the advancement of these costs from the Insured on the basis that the Policy excluded the Claim made against the Insured.

The Policy

The Policy provided that the Insurer shall pay on behalf of a director/officer any loss resulting from a wrongful act which the director/officer becomes legally obligated to pay on account of any claim first made against him during the policy period and reported to the Insurer during the policy period.

The Policy has an exclusion clause which provided that the Insurer is not liable under the Policy to pay for loss in connection with any claim arising out of, based upon or attributable to the fraud, dishonesty, or illegal acts of the director/officer determined by a final judgment or adjudication, within the claim proceedings or otherwise.

‘Claim’ is defined to include any official investigation, examination, administrative or regulatory proceeding regarding any specified wrongful act of an insured.

‘Wrongful act’ is defined to mean any actual, alleged, attempted or allegedly attempted error, misstatement, false or malicious intent, misleading statement, material omissions, act, omission, neglect, breach of duty, fraud, or breach of duty, by any director or officer.

Submissions

The Insured argued that exclusion did not apply because the ICAC findings in its report were not a ‘determination’ by a ‘final judgment or adjudication in the claim proceedings or otherwise’ so that the exclusion clause was triggered to exclude the Claim from cover under the Policy.

The Insured submitted that ICAC had made no finding of guilt (merely stating that the Insured’s conduct ‘could’ constitute a criminal or disciplinary offence) and the ICAC findings lacked ‘the quality of a final judgment’. The findings that his conduct ‘could’ have constituted or involved criminal or disciplinary offences could not amount to a ‘determination’ because such statements recorded a possibility.

Decision

Murrell DCJ held that the exclusion clause applied to the Claim so that the Insurer was entitled to recover the defence costs advanced to the Insured.

Her Honour decided that the expression ‘determined by final judgment or adjudication’ must mean ‘determined by final judgment or adjudication in the claim proceedings or otherwise of the relevant issue. (emphasis added by Her Honour).

Her Honour stated that in the proceedings before ICAC, the relevant issue for determination was whether alleged ‘corrupt conduct’ had occurred, is occurring or is about to occur. In its report, ICAC found that the Insured ‘engaged in corrupt conduct’, that being a final adjudication of the relevant issue before ICAC. The final adjudication of ‘corrupt conduct’ was based on findings of dishonesty in relation to the Insured’s conduct in the exercise of his official duties.

Her Honour considered ICAC’s core function under the ICAC Act in relation to a public inquiry into alleged ‘corrupt conduct’. Accordingly, by providing its report to Parliament, ICAC had finalised its core function in relation to the allegations of corrupt conduct by the Insured, and the matter was therefore ‘finally adjudicated’.

As ICAC had reported findings of corrupt conduct based on dishonesty, the exclusion clause applied and liability was excluded.

Conclusion

This case provides an interesting interpretation of ‘final judgment or adjudication’ in an exclusion clause for fraud or dishonesty. The Court considered the statutory functions and core purpose of an investigatory body in deciding what constitutes a ‘final judgment or adjudication’ in the context of those functions and purpose.

Authored by Ryan Lee, Special Counsel, Melbourne


Related Articles

Can defence costs extend to challenging the lawfulness of an underlying inquiry?

Legal Directions

Introduction In Hird v Chubb Insurance Company of Australia Ltd [2016] VSC 174, the Supreme Court of Victoria has ruled that…

Continue reading

FOFA predicted to push up premiums and prices: survey

Media Release

SYDNEY, 9 September 2013 – The recently introduced Future of Financial Advice reforms are more likely to drive up the cost…

Continue reading

Moray & Agnew adds new partner in Sydney

Media Release

Moray & Agnew has appointed a new partner in its Sydney office. Shayne Thompson, formerly an insurance partner at Middletons (now…

Continue reading