Insurer escapes advance defence costs after non-disclosure
September 12, 2018
Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd’s Syndicate 2003  FCAFC 119
On 17 May 2017, the Australian Federal Police arrested nine people, including Jason Onley and Adam Cranston (the Applicants), in raids arising from alleged conspiracy to defraud the Australian Tax Office (ATO). The raids were highly publicised due to the scale of the alleged fraud and because Mr Cranston is a son of the (then) deputy commissioner of taxation at the ATO, who has since been charged separately with allegedly abusing his position as a public official.
The Applicants are directors of a company, Synep Pty Ltd (Synep). On 1 June 2016, Synep acquired 100% of the shares of Plutus Payroll Australia Pty Ltd (Plutus). From 1 July 2016, these two companies were named as insureds under a policy that provided management liability cover for the period 1 July 2016 to 1 July 2017 (the Policy).
Criminal charges laid against the Applicants alleged that the fraudulent conduct occurred between 1 June 2016 and 17 May 2017 ‒ that is, the conduct alleged commenced at least one month prior to the entry into the contract of insurance. The allegations were to the effect that the Applicants had conspired with other persons, being each other, with the intention of dishonestly causing loss to the ATO.
The Policy contained a general insuring clause that provided cover for defence costs incurred in defending civil and criminal proceedings. The general insuring clause contained an advance costs extension concerning defence costs with a ‘final adjudication’ clause (Advancement Extension). The Policy also relevantly included exclusions for loss arising from any wrongful act committed by the insured with wilful, reckless, dishonest, fraudulent, malicious or criminal intent.
The Applicants sought indemnity for defence costs pursuant to the Advancement Extension. The Applicants argued that the effect of the Advancement Extension was that the insurer was prevented for any purpose from relying on the nature of the allegations made against them, until an admission, judgment or adjudication.
The insurer declined indemnity on various grounds, including that the Applicants had breached their obligations under section 21 of the Insurance Contracts Act (1984) (Cth) (ICA) to disclose matters known to be relevant to the decision of the insurer whether to accept the risk proposed, such as the nature of the business model adopted by Plutus and Synep. The insurer relied upon section 28 of the ICA, which allows an insurer, under certain circumstances, to avoid the contract where the insured has failed to comply with the duty of disclosure, or made a misrepresentation to the insurer before the contract was entered into and such failure or misrepresentation was fraudulent. The insurer submitted that clear words were required to restrict its entitlement to rely upon non-disclosure.
The Court of Appeal assessed whether, in the circumstances of the case, there was anything in the terms of the Policy or any other reason which prevented the respondent from exercising its rights or from relying on remedies under Part IV of the ICA. The Court found the answer to be ‘No’.
In making the above determination, the Court relevantly found:
- the Applicants failed to show that the cover provided by the Advancement Extension did not require compliance with the duty of disclosure. This was an essential obligation, the extension of which would need to be supported by clear words and the contract as a whole;
- although the Applicants’ conduct had not been the subject of any admission, judgment or adjudication, the insurer was entitled to rely on ‘neutral’ matters which showed the manner in which the Applicants had carried out their business;
- the Applicants were not entitled to escape the consequences of their fraudulent non-disclosure, as public policy prevented this; and
- as the Applicants failed to establish their construction arguments, they could not claim any waiver by the insurer by reason of its entering into a contract containing the Advancement Extension.
Despite its findings, the Court sought to limit the impact of its decision by observing that insurers must still have a real or substantial ground for alleging non-disclosure.
This decision reiterates the significance of an insured’s duty of disclosure, as evidenced by the extent of the remedies available to an insurer under section 28 of the ICA. It also demonstrates that advanced defence costs extensions do not diminish these remedies unless there are clear words to this effect, in particular in relation to fraudulent non-disclosure.
Further information / assistance regarding the issues raised in this article is available from the author, Jonathan Markowitz, Lawyer.
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