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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY
CIV 2005-485-1814
BETWEEN
HER MAJESTY'S ATTORNEY-
GENERAL SUING IN
RESPECT OF THE
MINISTRY OF AGRICULTURE AND
FORESTRY
Plaintiff
AND AON NEW ZEALAND LIMITED
Defendant
Hearing: 4 - 11 February
2008
Appearances: Mr Brown QC and Mr Hancock for the Attorney General
Mr Withnall QC, Mr Macdonald and Ms Labao for
AON New
Zealand Ltd
Judgment: 10 April 2008 at 12.30 pm
JUDGMENT OF MALLON J
Contents
Introduction..........................................................................................................................................
[1]
Issues ...................................................................................................................................................
[5]
Background ..........................................................................................................................................
[6]
Duties AON owed to MAF ................................................................................................................
[52]
No causation: because AJS circumstance would have been specifically excluded?..........................[61]
No causation: because
AJS claim not within insuring clause? ........................................................ [100]
No causation: because AJS claim
excluded by malice exclusion? .................................................. [134]
Failure to prove reasonableness of loss claimed?
............................................................................ [155]
Estoppel ...........................................................................................................................................
[158]
Result ...............................................................................................................................................
[168]
Costs ................................................................................................................................................
[173]
HER MAJESTY'S ATTORNEY-GENERAL SUING IN RESPECT OF THE MINISTRY OF AGRICULTURE
AND FORESTRY V AON NEW ZEALAND LIMITED HC
WN CIV 2005-485-1814 10 April 2008
Introduction
[1] This is a claim by the plaintiff ("MAF") against its insurance broker
("AON"). It arises out of a claim for damages brought by Alan Johnston Sawmilling
Ltd ("AJS") against MAF. MAF and AJS agreed to
settle the AJS claim. The
settlement required MAF to pay to AJS $1,092,375. MAF sought indemnity from its
insurer ("QBE"). QBE declined
indemnity and this declinature was upheld by the
Court of Appeal. MAF now claims against AON the settlement sum paid to AJS
together
with the costs in unsuccessfully pursuing indemnity for that sum from QBE.
QBE (or its predecessor)1 was the professional
indemnity insurer for MAF
[2]
(and its predecessors)2 for the period 30 June 1996 to 30 June 2002. The AJS claim
arose during this
period. Cover was declined by QBE on a number of grounds, but
the only ground considered by the Court of Appeal concerned the effect
of a change
in the policy wording that applied for the policies in place on and after 30 June 1999.
That change created a transitional gap in cover for a circumstance which was or
ought to have been notified as a potential
claim under the earlier policies (prior to the
changed wording) where the actual claim for damages or compensation was made in
a
subsequent year (when the policies with the changed wording were in place). The
AJS claim was caught by this transitional gap in
cover.
[3] AON, or its predecessor, acted as insurance broker for MAF (and its
predecessors) throughout the time that insurance
was arranged with QBE. It did not
advise MAF that the changed policy wording gave rise to the transitional gap. MAF
claims against
AON for breach of contract, negligence, breach of fiduciary duty and
breach of the Fair Trading Act 1986. MAF also says that AON
is estopped from
1
For convenience, this judgment refers only to QBE rather than its predecessor, HIH Casualty and
General
Insurance (NZ) Ltd, although for most of the period the insurer was HIH rather than QBE.
2
On or about 15 September 1999, with
effect from 1 March 1998, the Ministry of Forestry merged
with the Ministry of Agriculture and Fisheries to become the Ministry of
Agriculture and Forestry.
Except where it is necessary to specifically refer to one or other of the Ministries that existed before
the merger, this judgment generally refers to MAF.
taking a position contrary to that which it took when MAF was pursuing indemnity
from QBE.
[4] AON accepts it owed a duty of care (in contract and/or in tort) which it
breached by failing to bring the transitional
gap to MAF's attention. It denies that it
breached any fiduciary duty and says that the Fair Trading Act does not add anything
to
MAF's claim. AON says that its breach of duty did not cause any loss to MAF. It
says that this is because, irrespective of the transitional
gap, the AJS claim would
have been declined by QBE in any event. It raises a number of reasons why cover
would have been declined.
It also says that MAF has failed to prove the
reasonableness of the loss it claims against AON.
Issues
[5] The
issues that arise are:
a) What duties did AON owe to MAF;
b) Would the AJS claim have been declined
by QBE irrespective of the
transitional gap because:
i) QBE would have excluded the AJS claim
from cover had it
received notice of the AJS circumstance when MAF first
became aware
of it?
ii) The AJS claim was not within the insuring clause?
iii) The AJS claim was within
the malice exclusion?
c) Has MAF proven that its loss is reasonable?
d) Is AON estopped from now raising
any defences because of the
position it took in relation to MAF's claim against QBE?
Background
Applications
by AJS to Minister
[6] The AJS claim against MAF arose out of changes to the Government's
control on the milling of indigenous
forest and the export of indigenous timber and
timber products. From 1 July 1993 this milling and export was prohibited unless
carried
out in accordance with a sustainable forest management plan. This
prohibition was effected by the introduction of a new
Part IIIA to the Forests Act
1949. This prohibition expressly did not apply to indigenous timber from land
permanently reserved under
the South Island Landless Maori Act ("SILMA") 1906
(previously referred to as the South Island Landless Natives Act 1906).
[7]
The exclusion of SILMA land from the prohibition meant that the export of
indigenous timber and timber products from this land
continued on a more or less
routine basis. The export of indigenous timber took place pursuant to an earlier
general export approval
authorised by the Minister of Customs under the Export
Prohibition Regulations 1953. Export of indigenous woodchips was approved
pursuant to individual applications for approval.
[8] In September 1995 AJS applied for approval to export indigenous woodchips
sourced from SILMA lands.
Consent was withheld pending a review of the
exemption of SILMA land from the prohibition under Part IIIA of the Forests
Act.
Meanwhile AJS continued to log forest blocks on SILMA land pursuant to contracts
with SILMA owners. The chip logs were stock-piled
at various sites though the cut-
over forest.
[9] In July 1996 Cabinet reviewed Government policy and agreed that further
export
of indigenous woodchips from SILMA land should remain suspended while
the Government negotiated with SILMA landowners "on their aspirations
for their
land, and the relationship between these aspirations and the Government's
indigenous forest policy goal (of achieving sustainable
management of all private
indigenous forest in New Zealand, including the remaining indigenous forest on
SILMA lands)". AJS was
advised of this decision in July 1996.
[10] On 1 October 1996, pursuant to the Customs Export Prohibition Order 1996,
the responsibility
for approving the export of indigenous timber and timber products
was transferred from the Minister of Customs to the Minister of
Forestry.
Regulation 4, which prohibited the export of indigenous timber and timber products
without the consent of the Minister,
was promulgated.
[11] On 17 October 1996 AJS sought approval to export indigenous sawn timber.
On 29 October 1996 AJS lodged
a further application for approval to export
indigenous woodchips and sawn timber.
[12] Mr Jebsen, a senior policy analyst employed
by the Ministry of Forestry,
prepared briefing papers for the Minister of Forestry in respect of the applications.
In the briefing
papers the competing relevant considerations (excluding issues
around the conventions applying to decisions of a "caretaker" Government,
as was
the position at that point) were seen as being that:
a) Government policy was for the sustainable management
of all private
indigenous forest including in SILMA land; and
b) There was a "duty to act fairly".
[13] As to the latter, Mr Jebsen advised the Minister that the delay in advising AJS
of the policy relating to sawn timber, and
failing to consult AJS on that policy, could
be seen as procedurally unfair. As a result of the delay AJS would have incurred
harvesting
costs, stockpiled sawn timber and may also have entered into new
contracts for harvesting SILMA land. There was also a concern that
AJS may have
legitimately expected of approval and that this may have arisen due to an error in
approving an August 1996 shipment.
For these reasons Mr Jebsen advised the
Minister that a decision to decline the application "could well be successfully
challenged on judicial review".
[14] Mr Jebsen also identified that declining or delaying the decision could
potentially cause
a severe financial impact on AJS. Mr Jebsen's recommendation
was that the Minister take a pragmatic approach and approve the application.
In
accordance with that recommendation the Minister approved the sawn timber
application. AJS was advised of this by letter dated
29 November 1996.
[15] The decision on the application to export woodchips was deferred by the
caretaker Minister for consideration
by the new Minister of Forestry. Mr Jebsen
provided a briefing paper dated 10 December 1996 for the new Minister of Forestry.
In
this paper Mr Jebsen set out the case for and against approval. The case against
approval was that approval would conflict with Government
policy to bring all
private indigenous forest under sustainable management and would undermine
national and international commitments
under conventions signed by New Zealand.
Further, opening up the export of woodchips would give SILMA owners a major
commercial advantage
over other forest owners and act as a major disincentive to
SILMA landowners to adopt sustainable management of their forest.
[16] The case for approval was that "there could be dire financial consequences"
for AJS and the loss of local employment if approval
was not granted. It was
considered likely that AJS would seek a judicial review. Two potential grounds
were identified. One ground
was that AJS might contend that up to 1 July 1996 it
had a legitimate expectation that the woodchip trade would restart. The other
ground
was that AJS could argue that the suspension of the woodchip trade in 1996 was
unfair because it was imposed without consulting
AJS. The paper further stated:
AJS Ltd may also seek compensation in respect of its inability to fulfil
contracts
with land owners and any liability and loss of earning that this
would cause ... Earlier legal advice on this issue suggested
that the Crown
would be unlikely to be liable for compensation in such circumstances.
[17] The recommendation was to decline
approval to the application to export the
woodchips. In accordance with that recommendation the woodchip application was
declined
by letter dated 13 December 1996 addressed to AJS's solicitors. On that
day the Minister of Forestry altered the conditions of approval
under Regulation 4 to
make them identical to those applying to products subject to Part IIIA of the Forests
Act.
Judicial review
decision
[18] On 25 June 1997 AJS commenced proceedings for judicial review. This
proceeding sought to set aside the Minister
of Forestry's decision of
13 December 1996 to decline AJS's application and an order quashing Regulation 4
as invalid.
[19] The
High Court found that, by promulgating Regulation 4 and the conditions
for approval under that regulation, the Executive sought to
remove or defeat the
exemption provided for SILMA land under Part IIIA of the Forests Act. This was
because the effect of Regulation
4 and the conditions was to subject SILMA lands to
the sustainable management regime. The High Court considered this to be a plain
case of the Executive making a regulation repugnant to Parliament's expressed
intention to exempt SILMA lands from that regime. Consistent
with this, the High
Court also held this to be contrary to the Bill of Rights Act 1688 (of England).
[20] The High Court further
held that the Regulations had been made with
improper or irrelevant purposes. The purpose of the Customs and Excise Act 1996
(pursuant
to which the Regulation was promulgated) was to control the export of
produce from New Zealand. Promoting the sustainable management
of forests on
SILMA lands and improving Government's negotiating position with SILMA
owners were considered by the Court to be remote
and unconnected with that
purpose.
[21] As a result of these findings the High Court declared Regulation 4 to be
illegal. The
High Court's decision was delivered on 9 June 1999 ("the judicial
review decision").
AJS damages claim
[22] On 5 June 2002
AJS issued proceedings against Her Majesty's Attorney-
General (sued in respect of the Ministry of Agriculture and Forestry, the
New Zealand Customs Service and/or the Minister of Food, Fibre, Biosecurity and
Border Control). Three causes of action were alleged:
a) Unlawful interference with business the suspension of woodchip
exports in September 1995, the Cabinet
decision of 1 July 1996, the
promulgation of Regulation 4 and the conditions for approval, and the
refusal
of AJS's application were unlawful and were calculated and
intended to cause loss to AJS and the landowners "by devaluing
the
timber resource on the lands and thereby improving the defendant's
negotiating position regarding
payments of compensation for loss or
diminution of the right to utilise the resource";
b) Misfeasance
in public office the suspension of woodchips in
September 1995, continuing the suspension in July 1996, the
promulgation of Regulation 4 and the conditions for approval, and
refusing to approve AJS's application were unlawful.
The
defendant's unlawful actions were made "either knowing that its
actions were without lawful authority,
or with reckless disregard as to
whether they were with lawful authority, and with intent to damage
the
economic interests" of AJS and SILMA landowners; and
c) Negligence the defendant owed AJS a duty to exercise reasonable
care not to injure AJS's business by introducing measures drastically
affecting its business without
lawful authority, and without adequate
notice, so as to enable AJS to reorganise its business to cope with the
changes. This duty of care was breached by imposing the unlawful
prohibition on the export of woodchips and
sawn timber without any
adequate notice to AJS.
[23] On each cause of action AJS claimed special damages of $2,545,312.53
and
other damages as its alleged losses from the suspension of the woodchip trade. The
proceedings were settled at a mediation on
27 August 2003. The Attorney-General
agreed to pay AJS $1,087,375 plus GST if any. In accordance with this settlement
on 1 September
2003 MAF paid to AJS $1,092,373 being the agreed settlement sum
plus interest and costs. MAF sought indemnity from QBE for this loss
under the
professional indemnity cover provided by QBE (see [43] to [50] below).
The insurance arrangements
[24] QBE provided
"professional indemnity/errors and omissions" insurance to
MAF (or its predecessors) under successive 12 month policies from 30 June
1996 to
30 June 2002. Throughout that time AON (or its predecessor) arranged the
insurance on MAF's behalf. For some of that
period the Ministry of Agriculture and
Fisheries was also being advised by another broker as to its insurance risks and
needs. However,
as the trial developed, AON sought to place no significance on the
role of the other broker, and accordingly the role of the other
broker as compared
with AON's role need not be discussed further.
[25] In the lead-up to renewal AON would discuss with MAF (or
its predecessors)
whether there had been any changes in the business. AON would raise whether there
were areas that MAF might consider
insurance. Any contingent liabilities would be
discussed. AON would come back to MAF with draft policies and work through
them with
MAF. Then the policies would be finalised with QBE. There were a
number of policy wording changes during the period of insurance.
The changes that
were relevant to the Court of Appeal's decision upholding QBE's decision to decline
indemnity (see [48] to [50]
below) were made for the policy in place between 30
June 1999 to 30 June 2000 and these changes were retained in the policies in
place
for subsequent years.
Notification of "circumstances"
[26] All of the policies required MAF to give notice "as soon as
practicable" (or
words to similar effect) of circumstances "which could give rise to a claim". Notice
of circumstances in relation
to AJS was given by MAF to AON via a MAF
contingent liabilities schedule annexed to the proposal completed on 29 July 1999 by
MAF
for the 1999/2000 policy period.
[27] The contingent liabilities schedule was a document kept by the legal services
division
of MAF with input from each business group. Accounting would use the
collated information for accounting purposes.
Included in the schedule annexed to
the 1999/2000 proposal were the following items:
Date Ref Correspondent
Nature How Date Amt GAAP Amt 99/00 00/01 01/02
Rec'd Party
of Resolved Resolved 30 30 30 $(000) $(000) $(000)
Dispute
and June June June
$ amount 1998 1999 1999
$(000) $(000) $(000)
...
1999 SILNA Compensation
Pending 0 Non- Non- Non- 0 0
landowners and for export
quantif quantif quantif
other affected controls on
iable iable iable
parties SILNA forests
and Crown
indigenous
production
forests
...
1996
F98/ A Johnston Loss of income Still 500 500 500 500 0 0
43
Sawmilling Ltd from export pending
beech chip
forest
[28] The cover to the schedule explained that MAF produced two figures for
contingent liabilities:
One is for our annual accounts and meets the requirements of Generally
Accepted
Accounting Practice (GAAP). This generally means we have had
formal advice of a claim against the Ministry.
The second shows potential
claims, ie where we have an indication that claims are pending.
[29] Although the contingent liability schedule was annexed to the proposal, the
proposal did not otherwise
refer to the AJS claim. The proposal asked MAF if any
claims had ever been made against MAF to which MAF answered
"yes". The
proposal asked for particulars of any such claims to which MAF answered "refer to
the listing
that AON Risk Services holds". The proposal also asked MAF if it was
aware of any circumstances which could give rise
to a claim against it. To this
question MAF answered "Previously notified to AON".
[30] Mr Capes,
who was employed by the Ministry of Agriculture and Fisheries
and who became the MAF director of legal services from
September 1999 (ie. after
this particular contingent liability schedule was prepared), discussed the contingent
liability schedule in his evidence. He said that he had been unable to ascertain origin
of the inclusion
of the AJS claim in the contingent liability schedule. Mr Jebsen, the
senior analyst advising the Minister of Forestry
on the AJS export applications, says
it is possible that he was the source of this information although he could not
specifically recall providing this information. Despite a diligent search of MAF
records, no originating documents
or statements were located to enable the source of
the information to be identified.
[31] In the absence of specific information
about how the AJS circumstance came
to be included in the contingent liability schedule, Mr Capes gave general evidence
about the
schedule. He said that the "Ref" column in the contingent liability
schedule indicated whether a file had been opened. Initials
under the "Ref" column
indicated which lawyer was holding the file. The non-quantifiable compensation for
SILMA landowners and other
affected parties indicated that it was anticipated that a
sum of money, not quantifiable, could be paid to the SILMA landholders
not to cut
down trees. The absence of lawyer's initials noted in the "Ref" column, indicated to
Mr Capes that this was not a legal
matter.
[32] It was put to Mr Capes in cross-examination that the schedule indicated that
somebody within MAF had identified
the potential for a claim by AJS for half of a
million dollars as at the end of 30 June 1998 and that the claim had been first
received in 1996. Mr Capes did not accept that. He said that the reference
to
"F98/43" was a reference to a legal file. He said that the absence of initials indicated
that this matter had not been included
in the schedule by a lawyer. He also said that
the "Date Received" of 1996 appeared to him to be a guess at when the matter first
arose. He accepted that the inclusion of $500,000 under GAAP generally indicated
that formal advice of a claim against the Ministry
had been made but this was not
always the case. He also accepted that the schedule had been signed off by Mr Larry
Fergusson who
was the director of legal services for MAF prior to Mr Capes.
Mr Capes confirmed that legal services would have seen all the matters
listed in the
schedule under "Legal Proceedings and DisputesNon Departmental" before it was
submitted to AON.
[33] There is
some conflicting evidence as to whether QBE received the
contingent liability schedule with the 1999/2000 proposal. Mr
Morrison, the
underwriter at QBE, could not recall receiving it. Ms Woodman, the claims manager
for QBE, said that despite an exhaustive
search QBE had not located any copy of the
document and that the first she saw the document was when it was disclosed by
MAF on discovery.
The 1999/2000 proposal was sent by AON to QBE by fax. The
number of pages referred to on the fax cover sheet suggests that the
contingent
liability schedule may not have been annexed.
[34] On the other hand, Mr Bell, an AON representative, signed an affidavit
in the
proceeding brought by MAF against QBE (discussed below [45] to [50]) stating
that notice of the AJS circumstance had been
given with the 1999/00 proposal. This
was also the position he took in correspondence with QBE. QBE, for its part, did not
take issue
with that in the proceeding MAF brought against it. Mr Bell did not give
evidence in this trial. Given this, I proceed on the basis
that the position was as
stated in Mr Bell's affidavit and as accepted by QBE in MAF's proceeding against it.
[35] There is no
evidence establishing that the circumstance was referred to by
MAF before its appearance as a contingent liability as at 30 June
1998 and 30 June
1999 in the schedule annexed to the 1999/2000 proposal. It was not referred to in
subsequent years when the policies
were renewed.
[36] This is consistent with MAF's treatment of the circumstance in its financial
accounts. MAF correspondence
indicates that AJS was not shown as a contingent
liability in the financial statements for the year ended 30 June 1996, 30 June 1997,
30 June 2000 and 30 June 2001. The 30 June 1997 financial statements did,
however, refer to a compensation scheme as follows:
Indigenous Forest Policy Adjustment Assistance
In July 1990, new export regulations were promulgated banning the
export
of indigenous timber and timber products from unsustainably managed
forests. In August 1990, an adjustment assistance
scheme was established to
consider commercial loss arising from the export ban. The Ministry of
Forestry administers
this scheme. Expenditure was incurred in 1996/97
negotiating settlement of one of the remaining claims.
[37] The only other
reference that has been found is in financial statements for the
eight months ended 28 February 1998 (which is just prior to the
effective date of the
merger between the Ministry of Forestry and the Ministry of Agriculture and
Fisheries). In those financial
statements the statement of contingent liabilities states:
The Ministry has a potential non-quantifiable liability relating
to a dispute
over an export beech chip forest. At 30 June 1997 the Ministry had no
contingent liabilities.
[38]
With the merger of the Ministry of Forestry with the Ministry of Agriculture
and Fisheries the insurances were also merged.
This required a declaration
concerning potential risks. In response to that requirement on 20 April 1998 MAF
advised AON that in March 1998 personal declarations
from all Ministry of Forestry
senior managers confirmed that they knew of no potential risks that "may give rise to
a potential claim"
under the professional indemnity policy.
[39] Neither the commencement of the judicial review proceeding nor the judicial
review
decision were notified by MAF to QBE.
Notification of claim
[40] The AJS damages proceeding was served on MAF on 12 June 2002.
It was
notified to AON on 10 October 2002. Mr Capes was unable to say why there was
this delay in notifying the claim.
[41] Mr
Capes said that the damages claim in June 2002 was "a complete surprise
and shock". Mr Capes did not think that a damages claim was
contemplated either
before or after the judicial review decision. He said this was for two reasons. First,
it was not expressly indicated
by AJS even though AJS had access to legal advice
throughout. Secondly, once Regulation 4 had been struck down by the High Court
AJS could continue with its business.
[42] Mr Capes accepted in cross-examination that he did not actively go and seek
advice
from within the Ministry (or elsewhere) to determine AJS's circumstances.
He therefore did not consider whether AJS had suffered
loss through funding costs
and deterioration of logs during the period of suspension. He assumed that the
judicial review proceeding
was the end of the matter unless AJS indicated otherwise.
He accepted that others in the Ministry may have known more than he. That
must
have been so because Mr Capes also said he did not become aware of the judicial
review proceeding until just before or just
after the merger of the two ministries. As
that occurred on 15 September 1999, that was several months after the judicial
review
decision was given.
MAF's claim against QBE
[43] QBE declined indemnity for the AJS damages claim by letter dated 28
February
2003. In this letter QBE advised that the applicable policy was that for the
period 30 June 2001 to 30 June 2002. This was because
the statement of claim was
served on MAF on 12 June 2002 and MAF had advised QBE that this was the first
notification to MAF of AJS's
claim. QBE advised that, even if the claim was within
the insuring clause of the 2001/02 policy, the claim was declined because:
a) Exclusion 3, which excluded indemnity for a claim arising from
malicious conduct, would apply;
b) Exclusion 6(b), which excluded a claim arising from circumstances
known to the insured as likely to give
rise to a claim, applied because
on receipt of the judicial review decision on 9 June 1999 MAF knew
or
should have known of circumstances which might give rise to a
claim; and
c) Exclusion 9, which excluded
claims arising from MAF exercising a
statutory power, also applied.
[44] AON advised MAF that it did not agree
with QBE's declinature. By letter
dated 12 May 2003 AON, on behalf of MAF, advised QBE that it believed there was
little merit in
the reasons given by QBE for its declinature and that the costs of
instigating action against QBE had been approved by Cabinet. This
letter was
followed by a letter from AON to QBE on 7 July 2003 in which AON set out a
detailed response as to why the grounds for
declinature were not accepted. Further
correspondence followed between AON and QBE with QBE maintaining the claim
was not covered
and AON maintaining that it was. MAF and its legal advisers were
involved in reviewing this correspondence.
[45] On 29 January
2004 MAF commenced proceedings against QBE seeking
indemnity for the settlement sum paid to AJS and the legal costs in defending
that
claim ("the MAF/QBE proceeding"). MAF contended that it had notified QBE of
the AJS circumstance under the 1998/1999 policy
and that it was covered by that
policy. Alternatively it contended that it had cover under any of the succeeding
policies in place in 1999/2000, 2000/2001, 2001/2002 and 2002/2003.
[46] The
statement of defence filed by QBE raised the following defences:
a) The 1998/99 policy did not apply because the AJS
claim was not
made during the period of insurance;
b) The 1999/2000, 2000/2001 and 2002/2003 policies
did not apply
because the claim was not first made during these policy periods;
c) Exclusion 6 under
the 1999/2000, 2000/2001, 2001/2002 and
2002/2003 policy applied;
d) The claim was outside the insuring
clause under the 1999/2000,
2000/2001, 2001/2002 and 2002/2003 policies;
e) Exclusion 3 under the 1999/2000,
2000/2001, 2001/2002 and
2002/2003 policies applied;
f) Exclusion 9 under all policies applied;
g) The AJS claim was made against three parties (the Attorney-General
in respect of MAF, the New Zealand
Customs Service and the
Minister of Food, Fibre, Biosecurity and Border Control), only one of
which
(MAF) was the insured under the policy;
h) The policy deductible would need to be deducted from the claim if
QBE was obliged to indemnify MAF.
[47] QBE applied for summary judgment against the Crown. In the High Court
this application
was unsuccessful. QBE appealed and the Court of Appeal found in
its favour.
[48] The Court of Appeal held that the 1998/99 policy
did not apply. This was
because this policy provided cover for any "claim" made against MAF and reported
to QBE during the period
of the policy. "Claim" was defined as meaning a "demand
for compensation made by a third party against the Insured". When the AJS
matter
was notified to QBE via the contingent liabilities schedule annexed to the 1999/2000
proposal, there was notice of a circumstance
which could give rise to a claim, but
there was no "claim" as defined under that policy.
[49] The policy wording changed for
the policy period commencing on
30 June 1999. Like the 1998/1999 policy, this policy provided cover for a "claim"
first made against
MAF and reported to QBE during the period of the policy.
However, a new condition 5 and a new exclusion 6 were added. Condition 5
provided that if a circumstance notified by MAF to QBE during the policy period
subsequently became a claim, then the claim was deemed
to have been made during
the policy under which the circumstance was notified. Exclusion 6 excluded
indemnity for any claim
notified or arising out of circumstances notified under a
previous policy or arising out of circumstances which were known or ought
to have
been known to MAF prior to the policy period. Neither of these provisions were
present in the policies in place prior to
this. These provisions remained in the
policies after 30 June 1999 (ie. 1999/2000, 2000/2001, 2001/2002 and 2002/2003).
The Court
of Appeal held there was no cover for AJS under these policies. The AJS
claim was or should have been notified as a circumstance
prior to the changed policy
wording. This meant that cover was excluded by the later policies.
[50] The effect of the changed
policy wording was to create a transitional gap for
circumstances notified under the earlier policies which became claims during
the
period of the later policies which contained exclusion 6 and condition 5. The AJS
claim fell within this gap in cover. The result
was that MAF was not entitled to
indemnity from QBE despite having paid QBE premiums across the years and
despite having reported
the AJS claim as a circumstance likely to give rise to a claim
during these years. While the Court of Appeal viewed this result as
"unattractive", it
was satisfied that MAF had no arguable case and accordingly MAF's claim against
QBE was dismissed. Leave to appeal
the Court of Appeal's decision was declined
by the Supreme Court.
[51] Because QBE was successful in resisting MAF's claim for indemnity on the
basis of the transitional gap
in the policies, none of the other defences raised by QBE
were determined by the Court. Following the Court of Appeal's dismissal
of MAF's
claim against QBE, MAF brought this proceeding against AON.
Duties AON owed to MAF
[52] It is not in dispute that
an insurance broker has a duty to carry out the terms
of its engagement with reasonable care and proper skill: Cee Bee Marine v Lombard
Insurance Co Ltd [1990] 2 NZLR 1 at 4. This duty of care is an implied term of the
contract between the broker and the insured and also arises in tort: see Jackson
&
Powell on Professional Liability (6ed 2007) at 16-012 and 16-014. In addition, since
an insurance broker is the agent of the insured,
the broker is the insured's fiduciary
and accordingly owes a fiduciary duty to the insured not to put him or herself in a
position
of conflict: Jackson & Powell at 16-016.
[53] In summary, the first and second causes of action (in contract and tort
respectively)
allege that, when arranging MAF's insurance, AON failed to act with
reasonable skill, care and diligence by failing to take steps
to avoid the transitional
gap.
[54] The third cause of action alleges that AON breached fiduciary duties by:
a)
Failing to take all reasonable steps to safeguard the interests of MAF
in AON's dealings with QBE; and
b)
Failing to disclose to MAF any gaps or deficiencies in the terms
proposed for the insurance.
[55] The fourth
cause of action alleges that, in breach of s 9 of the Fair Trading
Act, AON made misleading representations by representing that
there was
satisfactory insurance covering claims arising out of circumstances already notified.
[56] MAF contended that the policy
changes that led to the transitional gap were
initiated by AON. No representative from AON gave evidence at the trial before me.
However Mr Bell, an AON representative, swore an affidavit in relation to MAF's
claim against QBE (discussed above [45] to [50]).
In that affidavit Mr Bell said
that policy wordings were generally prepared by AON rather than QBE. He said that
often the insurer
will intervene to require certain wording to be included and he
believed that was what occurred in the case of the changes made between
the
1998/1999 and 2002/2003 policies. He said that exclusion 6 was a QBE requirement
and was a common requirement of all liability
insurers.
[57] Mr Morrison, the QBE underwriter, also provided affidavit evidence in
MAF's claim against QBE. In that evidence
he says that he received revised policy
wording from AON and that "he requested a couple of minor unrelated changes and
then agreed
to the wording". Mr Morrison gave evidence at the trial before me. He
was cross-examined on this statement. He was not completely
clear about what
changes he requested. He thought, however, that he may have requested the
"extended reporting provision" (by
which he seems to have been referring to
condition 5) and other changes including the malice exclusion (discussed below at
[134]
to [154]). Mr Morrison said that exclusion 6 and condition 5 were common
clauses in professional indemnity policies in 1996 and remain
so today. Mr Sloan,
an expert insurance broker called by MAF, confirms this.
[58] It is not necessary to determine whether it
was AON or QBE that initiated the
changes. That is because AON accepts it owed a duty in contract and tort to advise
MAF of the transitional
gap that the changed wording gave rise to. Had MAF been
advised that the proposed new wording would give rise to a transitional gap
it can be
inferred that MAF would have wanted to avoid the transitional gap. It follows that
AON would have been asked to seek policy
wording that avoided the transitional
gap. I consider that the duty to advise on and/or endeavour to avoid the transitional
gap is
contractual and tortious rather than fiduciary.
[59] Although this was not how it was pleaded, in closing submissions
Mr Brown
QC (for MAF) submitted that a fiduciary duty arose at the point in time
that AON realised there was a transitional gap in the wording.
I agree that there was
a fiduciary duty at this point. That is because QBE's declinature on the basis of the
transitional gap put
AON in a position of conflict. It had been involved in the
drafting and finalising of the changed wording (whether the changes were
entirely at
AON's initiative or not). It knew or ought to have known that if QBE were correct
to decline indemnity for the AJS claim on this basis then MAF had
a potential claim
against AON. MAF does not claim damages for this breach (as by this time the
absence of cover under the policy
had already occurred), but contends that it is
relevant to its estoppel defence (discussed below at [158] to [167]).
[60] I do
not consider the fourth cause of action because it does not add anything
to the acknowledged tort and contract breaches. MAF has
not suggested that it does.
No causation: because AJS circumstance would have been specifically
excluded?
Submissions
[61]
AON says that MAF can only succeed against it if QBE would have agreed
to cover the AJS circumstance had it been properly notified.
It says that QBE would
not have done so. It says that MAF did not call anyone from QBE to say that QBE
would have so agreed and that
QBE's evidence is to the contrary. AON develops
this submission as follows:
a) MAF was required to notify the AJS matter
as a circumstance in 1996
and/or on various dates prior to 30 June 1999;
b) If MAF had given the required
notice at any time prior to 30 June
1999 Ms Woodman, the QBE claims manager, would have sought
advice
from Mr Ring QC;
c) If Mr Ring's advice had been sought he would have advised QBE to
insert a specific
"AJS circumstance" exclusion;
d) If Mr Ring had given this advice, Mr Morrison and Ms Woodman
would
have amended the policy terms to exclude the AJS
circumstance.
[62] MAF says that it was not required to give
notice of the AJS circumstance
until the judicial review judgment. It says that notice was given then. It says that
even if notice
should have been given earlier QBE would not have excluded cover
for the AJS circumstance.
[63] AON and MAF are agreed that AON
carries the burden of establishing, on
the balance of probabilities, that the AJS circumstance would have been excluded as
AON alleges.
When was MAF required to notify the AJS circumstance?
[64] The obligation under condition 3 of the 1996/97 policy was to give
written
notice "as soon as practicable" of "knowledge of circumstances which could give
rise to a claim against it". The policies
for the period from 1997 to 30 June 1999
contained a similar obligation.
[65] In FAI General Insurance Co Ltd v McSweeney (1999)
10 ANZ Ins Cas 61-
443 at 75,033-4, the Court considered a policy condition requiring notice of
circumstances which "may give rise
to a claim". The Court said that this required
notice of circumstances that:
would, as at the time of the proposing of the
insurance, immediately
suggest to a reasonable person in the proponent insured's position who
reflected upon those
known circumstances, that the bringing of a claim
against the insured in respect of them was a "definite risk"; or a "real
possibility" or "on the cards". Perhaps the notion of the "springing to mind"
of the making of a claim also appropriately
expresses the shade of meaning
intended.
[66] I accept the submission of Mr Withnall QC (for AON), supported by this
case,
that the test is an objective one, requiring notice when a reasonable person in
the insured's position would consider that there
was a reasonable possibility of a
claim. Notice is not required if the possibility of a claim is remote or unlikely.
However, providing
there is a real or definite risk of a claim, notice is required even
if the claim is not probable.
[67] In declining leave to
MAF to appeal the Court of Appeal decision in the
MAF/QBE proceeding, the Supreme Court commented "we consider that, on receipt
of
Wild J's judgment, the Ministry undoubtedly had knowledge of circumstances
that could well give rise to a claim for damages or compensation
against it". The
Supreme Court did not express any view on whether an obligation to notify arose
earlier than this, and nor did the lower Courts.
[68] In 1996, as
is set out in Mr Jebsen's briefing papers, MAF knew that:
a) AJS may have entered into contractual commitments with
a legitimate
expectation that future export approvals would be given;
b) Declining AJS export approval
could well be successfully challenged
on judicial review on the basis of a failure to consult and/or a breach
of a legitimate expectation;
c) AJS was reliant on the wood chip export trade to enhance profitability
and without it the company could fail;
d) AJS had engaged solicitors to represent it;
e)
In addition to seeking judicial review, AJS might also seek
compensation for its inability to fulfil contracts with
landowners and
any liability and loss of earnings that this would cause.
[69] Additionally, as is recorded in
the judicial review judgment (Alan Johnston
Sawmilling Ltd v The Governor-General & Ors HC WN CP140/97 9 June 1999):
Government
legal advisers, both in Forestry and the Crown Law office,
consistently acknowledged the risk of legal challenge which Regulation
4
presented, as opposed to Parliament repealing the exemption in
s67A(1)(b)(i) Forests Act 1949 if that was its intention.
[70] Mr Withnall submitted that from these facts a reasonable person in MAF's
position would have appreciated in 1996 that there
was a reasonable possibility of a
claim. Consistent with this, the contingent liability schedule prepared in or about
June 1999 referred
to "1996" as the "Date Received" (refer [27] above). AON
further says that on or very shortly after 28 May 1997 MAF knew AJS had
filed its
judicial review proceeding. And by 9 June 1999 MAF had received the judicial
review judgment finding that Regulation 4,
under which AJS' woodchips application
had been declined, was ultra vires.
[71] MAF submits that in 1996 it was aware of the
potential for a judicial review
claim, but not a damages claim. Any judicial review was seen as likely to be based
on procedural
grounds and considerable efforts were made to accommodate and act
fairly towards AJS. MAF recognised that compensation might be sought,
but it
envisaged the possibility of a request for assistance rather than a legal claim.
[72] I consider that AON's submission
has the benefit of hindsight. It is now
known that in 1996 the circumstances that arose gave rise to the later damages claim.
It
is easy to say now that MAF ought to have foreseen the damages claim as a
reasonable possibility. For there to be a damages claim,
AJS would need to establish
first, that MAF's decision to decline the woodchips application was unlawful in
some way and, secondly,
that this unlawful action would give rise to a cause of
action for which damages could be claimed. MAF appreciated this was at least
a
possibility because it sought advice from Crown Law about this. Crown Law's
advice was that such a claim was unlikely to be successful.
[73] The obligation was to give notice of a circumstance which could give rise to
a claim. A claim that is unlikely to be successful
is still relevant to the insurer's
assessment of the insured risk. This is because, apart from indemnifying the insured
for any damages
that may be ordered, the policies provided cover for the costs and
expenses of defending the claim. However, the advice from Crown
Law that a claim
would not succeed was relevant to whether a claim was a reasonable possibility.
Effectively, Mr Jebsen wanted to
know if there was a risk of a compensation claim
and the advice from Crown Law was that there was no basis for such a claim.
[74]
There is nothing else to indicate that MAF considered a claim for
compensation to be a reasonable, real or definite risk as opposed
to a remote
possibility. At that stage, in so far as Mr Jebsen's briefing papers disclose, the
grounds of judicial review proceedings contemplated would not obviously
give rise
to causes of action for which damages could be claimed. The grounds on which the
judicial review proceeding in fact was
brought were different. The evidence before
me does not establish that MAF considered in 1996 that these grounds were a
reasonable
possibility. The passage from the judicial review judgment I have
referred to (at [69] above) does not indicate the basis on which
the legal advisers saw
this as a risk. The only other evidence I was referred to (by Mr Ring in his evidence)
was a draft cabinet
paper which included the following:
119. Should Ministers not seek to remove this exemption, but choose to
cease approving further woodchip shipments, then a regulatory
amendment will be required to the Customs Act 1966.
120. Crown Law advises that the current Customs export regulations
which would be used to effect any decision
to ban the woodchip
trade could be ultra vires. Crown law suggests that should the
Government decide
to ban or restrict the trade in the absence of
applying the relevant provisions of the Forests Act to SILMA lands,
then appropriate regulatory amendments should be made to the
Customs Act to give certainty to the decision.
121. Customs advises that the new Customs and Excise Act which
replaces the existing Customs Act 1966 is
due to come into force on
July 1 1996. The Ministry of Forestry is recommending that
regulations under
this Act provide the Minister of Forestry with
powers which are similar to those under the Customs Act 1966
which at the same time would give the Minister of Forestry the
power to approve additional indigenous timber
exports on conditions
determined by him/her on a case by case basis. The Ministry
believes these regulations
should eliminate this legal uncertainty.
[75] It is not clear to me that this indicates a view that Regulation 4 would be ultra
vires. Rather, it seems to be saying that the pre-July 1996 position may be ultra
vires but that the Government's intention of banning
woodchip export could be
achieved by appropriately drafted regulations under the post-July 1996 legislation.
The paper then goes
on to consider the risk of judicial review based on a legitimate
expectation that the export of woodchips would continue.
[76]
I therefore find that MAF was not required to notify QBE in 1996. I consider
MAF was required to notify QBE in May 1997 when the
judicial review proceeding
was filed. At this point the risk of challenge to the Minister's decision declining
approval to the export
of wood chips had materialised. The challenge was not on the
basis that Mr Jebsen identified in the 1996 briefing papers, but on
the basis that
Regulation 4 and the conditions of approval issued under that regulation were ultra
vires and made with an improper
purpose. A reasonable person in the position of
MAF would have sought advice on the prospects of this proceeding succeeding and
therefore
ought to have known that there was a reasonable possibility that it would
succeed. MAF also knew that it was likely that AJS had
suffered loss from the
export ban. If the judicial review proceeding succeeded a reasonable person in the
position of MAF ought to
have known that there was a reasonable possibility that a
damages claim would be brought.
[77] Consistent with this, someone
within MAF (presumably sourced from
Mr Jebsen) seems to have identified an unquantifiable liability to AJS as possible as
at February
1998 (refer [37] above). By this stage, the judicial review proceeding
had been filed (on 28 May 1997) but not determined. As at
30 June 1998 (refer [27]
above), this potential liability had been assessed at $500,000. On the evidence
before me, nothing had changed between the filing of the judicial
review proceeding
and the February 1998 accounts, nor between February 1998 accounts and June
1998, to warrant any change in the
assessment of the liability.
[78] As at 30 June 1999 the potential liability had been assessed, in accordance
with GAAP, as a
contingent liability of $500,000. By this time the judicial review
judgment has been delivered. AON's view as stated to MAF and Crown
Law in
April 2003 was that MAF should have notified a circumstance when the judicial
review decision was released in June 1999. AON
said:
Usually, judicial reviews in themselves are not necessarily always an
insurance issue but in this case the finding
was clearly that MAF had acted
illegally and it would have been prudent at that stage to conclude that the
Plaintiff
would likely follow the decision up with a claim for compensation.
Had we received a copy of the Judicial Review at that time,
we certainly
would have insisted upon a potential notification being made by MAF before
the expiry of the "days of
grace" during which notification is required to be
made, ie. 21 days after 30 June 1999 (Refer Policy Condition 5 Claims
Notification). In this case, Doug Graham completed and signed the proposal
on the 29 July 1999, 8 days after the
expiry of the days of grace.
Aon received the completed 1999/2000 Professional Indemnity Proposal and
MAF's Contingent
Liabilities Schedules (copies attached), although no
formal claim was notified at that time or until October 2002.
[79]
Ms Woodman, the QBE claims manager throughout the relevant period, had
a similar view to that expressed by AON. She said that a
successful judicial review
claim, finding that the Minister had acted wrongly, would necessarily give rise to a
claim for damages
with almost no successful defence and in respect of which the
insurer would be exposed. She considered that there would be
a notifiable
circumstance prior to the decision, but by the time of the decision "it must have been
apparent even to the Minister
that this was really a claim".
[80] As the Supreme Court said, by this time MAF had knowledge of
circumstances that could well
give rise to a claim. However, if the judgment gave
rise to knowledge of circumstances, then that knowledge must also have existed
when the judicial review proceeding was lodged at that point it ought to have been
apparent that the proceeding might well succeed.
[81] I therefore consider that MAF was required to notify QBE of the AJS
circumstance on or about the date that the judicial
review proceeding was served. At
that time the policy in place was that for the period 30 June 1996/30 June 1997.
What QBE would
have done
[82] The next step in this part of AON's defence is to determine what QBE would
have done had notice been given in
or about May 1997 (or indeed at any time prior
to the change to the new policy wording commencing on 30 June 1999).
[83] Mr Morrison
was the underwriting manager at QBE from 1991 to 2001. He
issued the cover for MAF for the years 30 June 1996 to 30 June 2001. Mr
Morrison
says that the underwriting and claims departments were in constant communication
about potential claims and underwriting
issues. When circumstances were notified
to the underwriter they would be passed immediately to the claims department.
Mr Morrison
said that if the AJS circumstance had been notified in 1996 it would
have been highly relevant to the assessment of MAF's risks at
the next policy
renewal. He says that if Ms Woodman had strongly recommended that he consider
ways of ensuring that QBE was not exposed
to the AJS circumstance he would have
done so. He considers that he would have inserted a "no AJS circumstance"
exclusion at the
next renewal. He also says that a dishonesty/malice exclusion would
have been included. He says that he would have also considered including exclusion
6 and condition 5 in the policy.
[84] Ms Woodman confirmed Mr Morrison's evidence that notification of a
circumstance would be passed from the underwriter to
her and that the insured would
be requested to provide full information of that circumstance. She says that if the
AJS circumstance
had been notified in 1996 then she would have instructed Mr Ring
to advise QBE on that circumstance. Mr Ring was QBE's primary legal
adviser in
1996. (Mr Ring was subsequently instructed when MAF sought indemnity for the
AJS claim.) Ms Woodman says that if Mr Ring
had advised her that MAF's conduct
had caused significant loss to AJS and that MAF was continuing in that conduct she
would have
been concerned to limit or eliminate QBE's exposure. She says that she
would have suggested to Mr Morrison that he impose, at the
least, a "no AJS
circumstance" exclusion at the next renewal. She also considers that she would have
suggested more extensive amendments
to the policy including the condition 5,
exclusion 6 and malice exclusion that were incorporated in the policy from 1999
onwards.
[85] Mr Ring confirms that if QBE had been notified in 1996 of the AJS
circumstance he would have expected QBE to instruct him.
Had he been instructed
in respect of a notification of a circumstance in 1996 Mr Ring says that he would
have wanted, and would have
expected to have received, the relevant documents in
relation to AJS as well as the 1996 policy wording. Mr Ring said that with this
information he would have:
a) concluded the circumstance was not covered under the 1996 policy
because
no claim for compensation had at that point been made;
b) considered the prospect of a judicial review proceeding was
high;
c) considered that, if the judicial review proceeding was successful, there
was also a high probability
that AJS would issue further proceedings
seeking compensation. That would be a "claim" under the policy and,
even if ultimately unsuccessful, defence costs would be incurred;
d) advised QBE that it could avoid liability
altogether by declining to
renew the policy or renewing on revised terms which excluded this
potential
liability.
[86] On the face of it, this course of conduct seems unfair. The 1996/1997 policy
(and the 1997/1998 and 1998/1999
policies) require circumstances to be notified.
QBE is saying that if, as required, MAF notified QBE of the AJS circumstance then
QBE would have amended the policy to exclude from cover any claim arising from
that circumstance. Potentially QBE could do this for
all circumstances, in which
case MAF would be paying premiums for no cover when claims arose from those
circumstances. Once a circumstance
is notified to an existing insurer, a new insurer
would also be likely to exclude cover for that circumstance. Mr Sloan,
an
experienced insurance broker called by MAF, went as far as to say that it would have
been impossible for MAF to have obtained
cover from a new insurer for the AJS
circumstance once notified to QBE.
[87] Mr Ring said that the effect of QBE's and his evidence
was not that all
notified circumstances could and would be excluded before they materialised into
claims for which QBE would be liable.
He said that the wording of the earlier
policies (1996-1999) provided cover for notified circumstances that later became
claims,
providing the insured did not change insurers. A circumstance notified in
one policy year would be covered if and when it became
a claim, and was notified as
a claim, in a later policy year.
[88] Mr Ring said that, although a circumstance would not normally
be excluded
by the insurer before it became a claim, this would have been appropriate in respect
of the AJS circumstance.
Mr Ring said that his understanding was that the
suspension, and then ban, on AJS exporting indigenous forest products was to put
pressure on the SILMA owners
in negotiations. He viewed the suspension and the
ban as a deliberate course of conduct carried out with that purpose. Any claim
for
losses from SILMA owners or affected parties as a result of the suspension and ban
would therefore arise as a result of a calculated
course of conduct rather than a
fortuity. Conceptually, he said, insurance is for fortuities not calculated courses of
conduct. What
is more, QBE would not be able to force MAF to settle the AJS
claim or to alter its stance on the export approval. That was because,
in the absence
of a claim, QBE did not have the right under the policy to assume conduct and
control of the matter.
[89] Ms Woodman's
view was similar. She said that an insurer that had been on
risk continuously would not normally exclude a particular notified circumstance
from cover if it became a claim. But here, as she saw it, there were two Crown
Ministers "continuing to act knowingly illegally for
the purposes of bettering their
negotiating position and at any point it was within their power to step back from it
and the claim
wouldn't have existed". She considered that the Crown was effectively
reducing its compensation exposure in anticipated negotiations
with SILMA owners
at QBE's expense if QBE indemnified the Crown for the AJS claim.
[90] Similarly, Mr Morrison says that it is
not the purpose of professional
indemnity cover to provide insurance cover for intentional unlawful conduct or
deliberate conduct
which would knowingly cause loss. He says that if MAF's
conduct would cause loss that MAF could readily prevent he would have been
concerned to limit or eliminate QBE's exposure for any potential later claim.
[91] AON says that the evidence of Ms Woodman,
Mr Morrison and Mr Ring
stands unchallenged. AON refers to the evidence from Mr Sloan that QBE could
have acted in the way it says
it would have, and that no other insurer was likely to
have agreed to insure the AJS circumstance if MAF had sought to change insurers.
And, if QBE would have excluded cover for the AJS circumstance from
30 June 1997 if it had been notified in 1996, AON says that it
is a matter of inference
that QBE would also have excluded cover for the AJS circumstance if QBE had been
advised of it prior to
30 June 1999.
[92] I do not think it is accurate to say that the evidence of Ms Woodman,
Mr Morrison and Mr Ring was unchallenged.
It is correct that it was not directly put
to them that they would not have acted in the way they said they would.
Nevertheless,
the bases for their conclusions about what they would have done were
challenged.
[93] One basis on which the evidence was challenged
concerned Mr Morrison's
view of how the 1998/1999 policy (and therefore the 1996/1997 and 1997/1998
policies) worked. Mr Morrison's
view, as set out in an affidavit in the MAF/QBE
proceeding, was that he viewed the 1998/1999 policy as a "traditional claims made
and notified policy". He explained that by that he meant that if circumstances were
notified during the 1998/1999 policy, and a claim
were made in a later policy year,
then the claim would be deemed to have been made and notified under the
1998/1999 policy. Mr
Morrison had this view although he recognised that the
1998/1999 policy did not contain a deeming provision similar to condition
5 in the
1999/2000 and subsequent policies. Mr Morrison was asked in cross-examination if
he would have adopted the same view in
the previous policy years (ie. 1996/97 and
1997/98). He agreed that he would have.
[94] Mr Morrison's view differs from Mr Ring's
(see [85] to [88] above).
However, Ms Woodman and Mr Morrison are agreed that Mr Morrison is likely to
have been the initial contact
point for the notification of a circumstance. If
Mr Morrison considered that the existing policy would have applied to the
notified
circumstance there was no reason for him to take any steps to seek to exclude that
circumstance from cover under later policies.
[95] MAF also challenges
the QBE evidence about what it would have done on
the basis that, when the circumstance was notified via the 1999/2000 proposal,
there
was in fact no reaction from QBE. There is no evidence that Mr Morrison advised
Ms Woodman of the circumstance. There is no
evidence that Ms Woodman (or
anyone else at QBE) requested further information from MAF. There is no evidence
that QBE requested
advice from Mr Ring. There is no evidence that any policy
wording change was considered as a result of the AJS circumstance.
[96]
AON sought to distinguish what QBE did when it received the contingent
liability schedule with what would have occurred if "proper"
notice of the AJS
circumstance had been given before 30 June 1999. AON said that it suited QBE in
the MAF/QBE proceeding to accept
that notice had been given when MAF sent the
contingent liability schedule to AON. I agree with MAF that it is not now open to
AON
to contend that notice by way of the contingent liability schedule was not
proper notice under the 1998/1999 policy and that therefore
QBE's non-reaction to
this notice is not evidence of how QBE would have reacted if the AJS circumstance
had been notified earlier.
That is because in the MAF/QBE proceeding AON
maintained to QBE that it had forwarded the schedule to it. No AON witness was
called to give any different evidence at this trial. QBE, for its part, had accepted in
its statement of defence in the MAF/QBE proceeding
that notice was given in the
1998/1999 year.3
[97] AON submitted that when notice was given via the contingent liability
schedule
AON/QBE were amending the policy terms in a way that would mean that
the later policies would not apply to the circumstance in any
event. On this basis
AON says that QBE's non-reaction is not evidence of how it would have reacted if
notified earlier when the earlier
policy wording applied. I agree that Mr Morrison
would not have been concerned about notifications under the earlier policy wordings
in drafting/agreeing to the amended wording to apply from 1999/2000 (and
subsequently). Nevertheless QBE's non-reaction to a
circumstance assessed as
giving rise to a potential liability of $500,000 is evidence that Mr Morrison does not,
as a matter of course,
refer circumstances to Ms Woodman and/or that she does not,
as a matter of course, refer notified circumstances to Mr Ring.
[98]
While it is possible that events would have unfolded as QBE now says, the
evidence has the advantage of hindsight. QBE, if fully
informed and if acting
cautiously and prudently, might well have acted in this way. But it may also have
done nothing, as it did
when it received the contingent liability schedule. I consider
3
Although the notice was given after the expiry of the 1998/1999
policy year there was no prejudice
to QBE arising from the late notification and so, in accordance with the Insurance Law Reform
Act, it
was viewed as having been given in the 1989/1999 year.
that the "Equiticorp exclusion" referred to by QBE and Mr Ring in
support of their
evidence is not a sufficiently similar example from which it can be inferred that a
"no AJS circumstance" exclusion
would have been included here. The "Equiticorp
exclusion" seems to have been included in different circumstances where, as
Ms Woodman
explained, a new insured was seeking insurance.4 Ms Woodman and
Mr Morrison did not provide other examples more comparable to the
present, and
Mr Ring accepted that he had never given advice to QBE to include this kind of
circumstance specific exclusion. Even
if Mr Ring had given this advice, QBE would
have also needed to consider whether it ought to include such an exclusion against an
existing insured (as opposed to a new insured) and also whether it was necessary (for
example, whether changes to the insuring clause
and the malice exclusion would
suffice).
[99] On the balance of probabilities I consider that, if the AJS circumstance had
been notified in May 1997 or
any time prior to 30 June 1999, QBE would not have
taken action to specifically exclude any claim arising from that circumstance.
Accordingly this defence is not made out.
No causation: because AJS claim not within insuring clause?
Submissions
[100] AON
submits that its actions were not causative of any loss to MAF because
the AJS claim was not within the relevant insuring clause.
This would mean that
even if the policy wording had not been altered in a way that gave rise to the
transitional gap MAF would not
have had cover for the AJS claim.
[101] The insuring clause of the 1999/2000, 2000/2001 and 2001/2002 policies
provided cover "for
all sums which the Insured shall become liable to pay" for
claims "by reason of any act, error, omission or conduct constituting
a breach of
4
See Equiticorp Industries Group Ltd (In Statutory Management) & Ors v Hawkins & Ors (1994) 7
ANZ Insurance Cases 61-207.
professional and/or fiduciary and/or statutory duty committed or omitted ... by the
Insured in the conduct of their business ...
specified in the Schedule" (my emphasis).
In contrast the 1996/1997, 1997/1998 and 1998/1999 policies provided cover for "all
sums
which the Insured shall become legally liable to pay" for claims "arising out of
any act, error or omission ... in the conduct of
the Insured's business ... as specified
in [the] Schedule".
[102] AON submits that the AJS claim was not within the insuring clause
of the
1999/2000 policy because the claim did not arise by reason of any breach of a
professional, fiduciary or statutory duty. MAF
did not owe any fiduciary or statutory
duty and AJS did not allege this. AON says that the claim did not involve a breach
of a professional
duty either. AON submits that insurance cover for legal liability
caused by MAF's wrongful performance of its non-professional functions
may be
covered under the Commercial General Liability insurance. To be covered the loss
must be caused by an unexpected and unintended
event. That was not the case with
AJS because it was expected that the export ban achieved under the regulations
would cause AJS
loss.
[103] MAF submits that AON has not pleaded this defence. Without prejudice to
this, MAF says that the 1999/2000 policy extended
the coverage previously provided
under the earlier policies. It submits that "constituting a breach of professional
fiduciary and/or
statutory duty" in the insuring clause of the 1999/2000 policy
qualifies only "conduct" and does not also qualify "any act, error
or omission".
Alternatively, it submits that having regard to the purpose of the insurance, and the
definition of MAF's "business"
in the Schedule to the policy, the advice given to the
Minister by Mr Jebsen was "professional" advice within the terms of the cover.
As a
further alternative, MAF submits that the claim is within the run-off cover and that
because of this the insuring clause of
the 1999/2000 policy does not apply.
Not pleaded
[104] AON says that it is for MAF to show that its claim would have been within
the terms of the policy. AON submits that as MAF had the burden of proving that it
would have obtained insurance that covered the
AJS circumstance, it was for MAF
(and not AON) to plead this.
[105] In support of this submission AON relied on TBI Pty Ltd v AON
Financial
Planning Ltd [2004] VSC 40; (2004) 13 ANZ Insurance Cases 61-601. In that case an insured made
a claim against its broker for a damages claim that the insured settled that was not
covered by the
professional indemnity insurance that the broker had arranged on the
insured's behalf. One of the issues raised was whether the insured
or the broker had
the burden of proving that insurance that covered the claim would have been
obtained. The Supreme Court of Victoria
held that on general principle "the plaintiff
should bear the onus of proving the availability of such insurance to the ordinary
civil standard".
[106] The Court went on to consider the broker's defence that part of the claim
made against the insured in that
case would have been within the insurance that
could have been obtained and part of the claim would not. The Court noted that the
insured had pleaded that the broker's default in arranging professional indemnity
cover was causative of its loss. The Court said
(at [247] to [248]):
I consider that it was for the defendant to positively raise by its defence, if it
so desired,
an allegation that the amount paid in the Fletcher settlement was
not in respect of the notionally insured risk. That is so
although it was for
the plaintiff to prove that the notional policy would have responded. Absent
an issue so raised,
the compromise of the Fletcher claims, proved by tender
of the Terms of Settlement in this proceeding, stood in proof of a
legal
liability incurred by the plaintiff and falling within the insuring clause of the
notional policy, and also a
legal liability falling outside that clause. The
former was on the face of it a liability for the full amount of the settlement,
notwithstanding that the same might be said of the latter. It is pointless to
speculate about the course of evidence
had the defendant pleaded the issue,
or whether the defendant could have established that which it might have
pleaded.
In all, then, if the plaintiff had established that it would probably have been
insured after 30 September 1996, it
would have satisfied me that the Fletcher
settlement in an amount of $5M and up to $5M in costs fell within the scope
of the notional policy. It was not for the plaintiff to negative all exclusions
contained in the notional policy. The defendant
did not establish that any
exclusion would have operated in favour of the insurer, and so to its
advantage.
[107]
I agree with what is said in TBI. As a matter of general principle an insured
must prove that the broker's negligence caused its
loss. Where the negligence is the
failure to obtain insurance it is for the insured to prove that insurance covering the
claim
could have been obtained ("the notional policy"). It is then for the broker to
prove that the claim would have been excluded under
the notional policy. That is
consistent with the burden of proof on an insurer to establish that an exclusion clause
in a policy
applies.5
[108] The question of burden does not, however, completely answer the question of
pleading. The requirements as to pleadings
are dealt with by the High Court Rules.
Rule 130 of the High Court Rules requires the defendant to:
a) Either admit
or deny the allegations of fact in the statement of claim;
b) Plead any affirmative defence intended to be relied
upon (an
affirmative defence being something relied on by the defendant in
defending the claim
that raises material going beyond that alleged by
the plaintiff in the statement of claim as answered by the statement
of
defence6);
c) Give such particulars of time, place, amounts, names of persons,
nature and dates of instruments, and other circumstances as may
suffice to inform the Court, the plaintiff, and
any other parties of the
defendant's defence.
[109] In this case MAF's statement of claim against AON did not specifically plead
that the AJS claim was within the insuring
clause of any particular policy. Instead it
pleaded that, through AON's actions or omissions in arranging new policy wording
(condition
5 and exclusion 6), there was a transitional gap in respect of notified
circumstances which included the AJS claim. It pleaded that
as a result of the
5
MAF referred to authority to the effect that it is for the broker to prove that the insurer would have
repudiated liability on the grounds relied on by the broker. In this case the evidence establishes that
QBE did repudiate liability
on the grounds relied on by AON. What is not established by the earlier
course of events is whether QBE's repudiation would have
been upheld on any of these grounds other
than the transitional gap ground. Some authority referred to by MAF suggests this then
becomes a
loss of a chance claim by the insured. However, neither party argued the case as a "loss of a chance"
and I therefore do
not consider this further.
6
McGechan on Procedure at HR130.16(1) and (2).
transitional gap MAF suffered loss. This loss was
pleaded as being the sum MAF
paid to AJS pursuant to the settlement reached with AJS and associated legal and
other costs.
[110]
The statement of defence responds to this pleading as follows:
Change to the policy
15 It admits that on or
around 28 September 1999 the defendant and the
insurer arranged to introduce the new clauses into the wording of the
policy. It otherwise denies paragraph 15 and says further other
clauses that were introduced to the
policy at that time independently
entitled the insurer to decline any subsequent AJS claim. In
particular:
15.1 Exclusion 3 excluded any loss caused by the plaintiff's
malicious conduct;
15.2 Exclusion 1.11 of the 30 June 1998 to 1999 policy and
exclusion 9 of the 30 June 1999 to
2000, 30 June 2000 to
2001, 30 June 2001 to 2002, and 30 June 2002 to 2003
policies
excluded any loss caused by the plaintiff's unlawful
exercise of statutory powers.
[111] The statement of
defence denies the general allegation in the statement of
claim that AON's actions are causative of MAF's loss. A number of affirmative
defences are pleaded. They include a "no causation" affirmative defence, but this
relates only to the defence discussed above ([61]
to [99]). There is no specific
pleading that there was no causation because QBE would have been independently
entitled to decline
the AJS claim as being outside the insuring clause of any
particular policy.
[112] AON's statement of defence contrasts with QBE's
defence in the MAF/QBE
proceeding. In that proceeding QBE's statement of defence included as an
affirmative defence that the AJS
claim was not within the insuring clause of the
1999/2000, 2000/2001, 2001/2002 and 2002/2003 policies because the AJS claim
did
not allege or involve any breach of professional, fiduciary or statutory duty by
MAF.
[113] I consider that AON should have included
a similar pleading in its defence if
it intended to rely on this. MAF had pleaded that AON's breach gave rise to the
transitional
gap and resulted in MAF's loss. This was denied by AON and the
particulars relied on for this denial did not include that the AJS
claim would have
been outside the insuring clause of the relevant policy. The issue now raised
advances matters beyond those
alleged by MAF in the statement of claim and
responded to by AON in the statement of defence. It was necessary for AON to
plead that
a further reason why the insurer would have been entitled to decline
indemnity was that the claim was not within the insuring clause.
This was necessary
in order to inform the Court and MAF of what was in issue.
[114] That, however, is not the end of the matter. I consider that AON should be
entitled to rely
on this ground provided that MAF has not suffered prejudice by the
failure to plead it. Although MAF says that it is prejudiced,
it does not suggest that
there was any additional or different evidence it would have called had this ground
been pleaded. Nor did
it point to any other particular prejudice from the lack of
pleading. This ground of defence was first raised at the conclusion of
MAF's
opening submission. MAF did not require an adjournment or a ruling either at that
time or in the course of the trial. MAF was
able to and has responded to the
substance of the submission. Accordingly, I consider the substance of the
submission should
be determined.
Which policy?
[115] MAF has established on the balance of probabilities that insurance for claims
arising from
notified circumstances was available from QBE (either under the
wording of the earlier policies or under the wording of the later
policies). Either
way, on the balance of probabilities I find that QBE would have agreed that a
transitional gap should not exist
for claims arising from notified circumstances. The
questions then are which policy would have applied to the AJS claim and would
the
claim have been within the insuring clause of that policy.
[116] If AON had noticed the transitional gap created by the changed
wording the
following might have occurred:
a) One possibility is that an extension may have been provided so that
any circumstance previously notified under the earlier policy wording
would have cover under the policy
wording that applied when the
notice of circumstance was given. (This was Mr Morrison's view of
how the
1996/1997 and 1998/1999 policies worked refer [93]
above.) That would mean that the 1996/1997 policy wording (if
the
circumstance was notified in May 1997 when the judicial review
proceeding was commenced) or the 1998/1999
policy (if the
circumstance was notified on or about 8 June 1999 when the judicial
review decision was
given) would be relevant;
b) An alternative possibility is that exclusion 6 in the later policies would
expressly not have applied to circumstances notified under the earlier
policies. That would mean that a claim in
respect of a previously
notified circumstance would be covered under the policy in existence
when it
was eventually made. In this case that would mean that the
AJS claim would be covered under the 2001/2002 policy because
the
claim was made on 5 June 2002;
c) A further alternative is that, if the transitional gap had been
identified
and steps were taken to avoid that gap, QBE may have accepted the
AJS circumstance as being
notified as part of the 1999/2000 renewal.
In that case the 1999/2000 policy would respond under the new
(condition 5) wording.
[117] As I have said, AON first raised the issue that the AJS claim was outside the
insuring clause
at the conclusion of MAF's opening submission. It was raised at that
time in the form of a statement of issues provided to me and
to MAF. This statement
of issues referred to the AJS claim not being within the insuring clause in the
1999/2000 to 2002/2003 policies.
By the time of its closing submissions AON
referred only to the wording in the 1999/2000 policy. AON did not rely on the first
alternative
and so I do not consider this further. It is not clear to me why AON
limited its closing submissions to the 1999/2000 policy (the
third alternative) when
the relevant policy may have been the 2001/2002 policy (as per the second
alternative). However, whether
the second or third alternative was the most likely
does not matter because the insuring clause (and the malice exclusion which is also
relied on by AON refer [134] to [154] below) are the same
in the 1999/2000 and
2001/2002 policies.7 This insuring clause in these policies is set out above (refer
[101]).
Covered by insuring
clause of 1999/2000 or 2001/2002 policy?
[118] I do not accept MAF's first argument that "constituting a breach of
professional
and/or fiduciary and/or statutory duty" qualifies "conduct" but does not
qualify "act, error or omission". Accepting that Mr Morrison's
view of the meaning
of the insuring clause was not directly relevant to what the clause meant as a matter
of legal construction,
Mr Brown referred to Mr Morrison's evidence in cross-
examination that the 1999/2000 policy was wider than the earlier wording (refer
[101] above). I consider that "conduct" in the later policy wording added to "act,
error or omission" in the earlier wording by making
it clear that the coverage
extended to an on-going act, error or omission. To that extent the cover was
extended.
However, in my view "constituting a breach of professional and/or
fiduciary and/or statutory duty" qualified the type of act,
error, omission or conduct
that was covered. If it were meant only to qualify "conduct" then I consider it would
have needed to say
"by reason of any act, error or omission or by reason of any
conduct constituting a breach of professional and/or fiduciary and/or
statutory duty".
[119] The AJS proceeding had three causes of action: unlawful interference with
AJS' business, misfeasance in
public office and a common law duty of care. The
causes of action concern acts, errors, omissions in the conduct of MAF's business
as
described in the Schedule. They do not concern any alleged fiduciary or statutory
duty. The question is whether they concern a
breach of professional duty.
7
This policy wording was annexed to MAF's statement of claim against QBE and Ms Woodman's
affidavit
in that proceeding accepted that this policy wording applied in the period between 1999/2000
and 2001/2002.
[120] AON referred
to GIO General Ltd v Newcastle City Council (1996) 134 ALR
605 (CA) at 615 (reversed by Newcastle City Council v GIO General Ltd (1997) 191
CLR 84 (HCA) on other grounds). In that case an issue
arose as to whether the
Council's certification of a defective building pursuant to a statutory requirement to
inspect and certify
was a "professional" duty. It was held that the source of the duty
was not determinative. Rather, a duty to inspect/certify was a
"professional" one
because it involved the provision of services or advice according to a discipline or
profession.
[121] AON says
the AJS claim did not concern a breach of a professional duty
because MAF did not provide any services or advice to AJS; MAF was
not retained
by AJS in any way; there was no benefit to AJS from MAF's advice to the Minister;
and MAF's conduct and the Minister's
decision did not involve any skills of a
particular discipline. AON says that it is "nonsense to say that in its legislative
function
(whether passing statute law or subordinate legislation) the Crown owes a
professional duty to those adversely affected".
[122]
MAF says that Mr Jebsen's advice is "professional" advice to the Minister. It
involved a senior analyst with knowledge and expertise
advising the Minister. MAF
also says that the advice, and the subsequent action of the Minister based on that
advice, is within MAF's
business as described in the Schedule. That business is
described as being "Government department providing a range of services including
policy advice, regulations and service to the agriculture, horticulture and forestry
services". MAF says that if this claim is not
covered then the insurance would apply
to very little of the business of MAF.
[123] MAF's submission is similar to the decision
in Suncorp Metway Insurance
Ltd v Landridge Pty Ltd [2005] VSCA 223; (2005) 13 ANZ Insurance Cases 61-660. In that case a
tenant of premises managed by a real estate agent tripped in a hole in the floor of the
premises. The tenant alleged
that the real estate agent had breached a common law
duty of care to the tenant. The real estate agent settled the claim brought
by the
tenant and sought indemnity from its professional indemnity insurer. The policy
covered claims "for breach of a professional
duty by reason of any act, error or
omission committed or alleged to have been committed by the Insured in the conduct
of the Business".
The "Business" was identified in the schedule to the policy as that
of a real estate agent. Three kinds of "business and professional
activities" were
listed. One of those listed activities was "residential property management".
[124] The Victoria Supreme Court
recognised that not everything done by the real
estate agent is to be described as carrying on a profession. However, unless the
listed core activities of the real estate agent's business were to be regarded as
carrying on a profession, the policy would afford
no significant protection. The
policy should be construed so as to make commercial sense. The Court held that the
tenant's claim
against the real estate agent was covered because it concerned the
negligent performance of the real estate agent's activities and
so constituted a breach
of a professional duty, and that it did not matter that the agent had no retainer with
the tenant.
[125]
I agree with Suncorp that the policy must be construed so that it makes
commercial sense. I also agree that the definition of business
in the Schedule is
relevant in determining the type of act, error, omission or conduct that might
constitute a breach of professional
duty. I also agree with the discussion in Suncorp
that a common law breach of a duty of care can give rise to a breach of a
professional
duty and that a retainer is not required. However, every act, error,
omission or conduct in the course of MAF's business as described
in the Schedule
will not necessarily constitute a professional, statutory or fiduciary duty. Those
words, which were first added
in the 1999/2000 policy, must have been intended to
have some meaning. I consider that the insuring clause contains two qualifications.
One is that the act, error, omission or conduct must occur in the course of MAF's
"business" as described in the Schedule. The second
qualification is that the act,
error or omission or conduct in the course of MAF's business must constitute a
breach of a professional,
fiduciary or statutory duty. (A similar view was taken in
FAI General Insurance Co Ltd v Gold Coast City Council (1992) 2 Qd R 341.)
[126] An unlawful interference with AJS' business and misfeasance in public
office, arising from acting unlawfully under legislation
and/or by enacting and acting
pursuant to ultra vires regulations, does not fit comfortably within what would
ordinarily be considered
to be the provision of service or advice according to a
discipline or profession even taking into account that here the business
included
"regulations". However, I do not need to decide whether the first and second causes
of action of the AJS claim concerned
a breach of a professional duty, because in my
view the third cause of action did.
[127] The third cause of action of the AJS claim
alleged that:
[a]rising out of the relationship between the Ministry of Forestry and the
Plaintiff and, in particular,
the knowledge by the Crown of the particular
characteristics of the Plaintiff's business, its dependence upon the export
woodchip trade, and the Plaintiff's reliance on the special skill and
knowledge of the Ministry of Forestry to advise
it in relation to its rights in
pursuing the export trade for unsustainably harvested timber and timber
products, the
Defendant owed the Plaintiff a duty to exercise reasonable care
not to injure the Plaintiff's business by introducing measures
drastically
affecting its business without lawful authority, and without adequate notice,
so as to enable the Plaintiff
to reorganise its business to cope with changes.
[128] It further alleged:
That in breach of its said duty the defendant,
by imposing unlawful
prohibition on the export of the woodchips and also sawn timber, imposed
severe and unlawful restrictions
on the plaintiff's business, without any or
any adequate notice, and thereby injured the plaintiff's business.
[129] It can
be seen that this cause of action pleads that:
a) A duty was owed to AJS;
b) The duty arose (in part)
because of AJS' dependence "on the special
skill and knowledge of the Ministry of Forestry to advise it in relation
to its rights"; and
c) The Ministry of Forestry breached its duty by taking unlawful action
without adequate notice.
[130] The cause of action concerned advice to AJS. That advice was given in the
conduct of MAF's
business. It was "professional" advice in that it required special
skill and knowledge (as per GIO). I consider that it was not necessary
that AJS
retain MAF or pay MAF for this advice in order for it to be "professional" (as per
Suncorp). A professional duty (ie.
a duty arising out of the special skill and
knowledge of the insured) arises because of the nature of the advice, service or
conduct
undertaken and not because of its source (statutory, contract or at common
law). To confine professional duty to one arising under
a retainer or for which there
was payment could deprive the professional indemnity policy cover of any real
scope.
[131] Mr Withnall
referred to MAF's contingent liability schedule as illustrating
that there are a whole range of MAF's activities that would still
be covered.
Examples from that schedule included "alleged denigratory remarks by MAF
officials relating to standards in a factory",
"alleged unnecessary testing for toxins in
Queen Scallops", "alleged failure to follow protocol on importing horses from
Australia",
"defamation and breach of duty of care over quarantine goats", "breach
of duty of care by MAF over export of live deer to Korea",
"negligent call of
mussels from Big Glory Bay" and "unnecessary quarantine of horses". It is not
clear, however, that any of these
examples involved a retainer or payment.
[132] AON did not make submissions as to the position if I found that one cause of
action
was within the insuring clause but others were not.8 In particular it did not
submit that MAF was not "liable to pay as damages"
(as required by the insuring
clause) the settlement sum because MAF was not in fact "legally" liable under the
third cause of action.9 It must therefore be
taken as accepting that the settlement sum
was paid in respect of the third cause of action in the alternative to the first and/or
second causes of action and without distinction. That is, the settlement sum was
payable because of the third cause of action and
was therefore a liability falling
within the insuring clause, irrespective of whether it was also payable because of the
first and
second causes of action. That was the view taken of the settlement
discussed in the TBI case (see [106] above) and I agree
with it.
8
If it had wanted to make this submission then prejudice from the failure to plead this would have
arisen see TBI
at [106] above.
9
See for example the discussion of this issue in K Sutherland "An Uneasy Compromise" (1998) 9 ILJ
257 and G Pynt
"I'm a Lumberman. Are you OK?" (2006) 17 IJL 183.
Conclusion
[133] This defence fails because AON has not established that the
claim was
outside the insuring clause of the relevant policy (or policies). It is therefore not
necessary to consider MAF's submission
concerning the run-off cover in the
1999/2000 policy.
No causation: because AJS claim excluded by malice exclusion?
Submissions
[134] AON submits that its actions were not causative of MAF's loss because the
malice exclusion in the relevant policy would have
excluded cover for the AJS
claim. AON says that the judicial review judgment confirms that MAF's unlawful
actions were actuated by
improper motives. Those improper motives were to
improve MAF's bargaining position with SILMA landowners and to remove the
competitive advantage which SILMA landowners had over the owners of indigenous
forests were who required to log in a sustainable
manner. AON submits that acting
with improper motives is sufficient to trigger the malice exclusion, and that an intent
to harm is
not required.
[135] Alternatively AON says that MAF's actions were with intent to harm. AJS'
first cause of action alleged that
MAF's unlawful actions were calculated and
intended to cause loss. AJS' second cause of action alleged that MAF acted
unlawfully
knowing its actions were without lawful authority or with reckless
disregard as to whether they were lawful "and with intent to damage
the economic
interests" of AJS and the SILMA landowners. AON says that all the causes of
action sought to recover the same loss,
were caused by the same unlawful acts and
were all tainted by the same malicious intent (that is, knowing or being reckless that
harm would ensue).
[136] MAF submits that AON was required to, but did not, plead this as an
affirmative defence. MAF says that
the reference to the exclusion at paragraph 15 of
the statement of defence (refer [110] above) is insufficient. It says that this
pleading
was responding to the pleading in the statement of claim which set out the changes to
the policy wording that gave rise
to the transitional gap and was not asserting this as
an affirmative defence.
[137] Without prejudice to the pleading point, MAF
submits that the relevant
policy would not have contained the malice exclusion. MAF further submits that if
the relevant policy contained
the malice exclusion then MAF's loss was not wholly
or partly caused by malicious act. It refers to the dictionary definition of
malice as
being a desire to injure, active ill-will or the kind of evil intent which constitutes the
aggravation of guilt. It says
that a high threshold of wrongful conduct is required. It
says that the judicial review judgment regarded the improper purpose pleading
as
equivalent to the irrelevant consideration pleading. It says that an irrelevant
consideration in administrative law is
a considerable distance short of dishonesty or
fraud. It also says that an improper purpose is by no means synonymous with an
improper
motive that constitutes malice. It says that the judicial review judgment
made no finding of dishonesty, fraud or an active desire to injure. It says that the
Government's policy
was intended to achieve important and meritorious
conservation purposes and that there was a strong concern to do the right thing
by all
parties, including AJS. It submits that MAF recognised that compensation to
affected parties might be required, but it
did not contemplate potential liability
arising out of tort proceedings.
Procedural point
[138] I consider that AON is not precluded
from defending the claim on the basis
that the malice exclusion would have applied. While a model pleading would have
set this out
as a specific affirmative defence (as per the QBE defence in the
MAF/QBE proceeding) the pleading was adequate to inform MAF and
the Court that
AON intended to defend the claim on the basis that the insurer would have been
entitled to decline the claim because
the malice exclusion applied.
Relevant policy
[139] AON's statement of issues referred to the malice exclusion in the 1999 to
2003 policies. AON's closing submissions, as with the submission concerning the
insuring clause, proceeded on the basis that the
1999/2000 policy was the relevant
one. However the malice exclusion in the 1999/2000 policy is the same as the
malice exclusion in
the 2001/2002 policy so the particular policy (as between the
later policies) that would have applied does not matter.
[140] MAF
submits that if AON had been alert to the transitional gap then it is
likely that future claims would have been covered by reference
to the policy that
applied when they were notified. Here the AJS circumstance was accepted as being
notified under the 1998/99 policy.
That policy did not have the malice exclusion.
[141] If AON had been alert to and taken steps to avoid the transitional gap, then
I
consider it more likely than not that the relevant policy (ie. the notional policy
referred to above [107]) would have contained
the malice exclusion. Mr Sloan
viewed the earlier policies as "very flexible" and "less restrictive" than the later
policies.
Mr Morrison believes that he required that the malice exclusion be
included in the 1999/2000 policy (which was retained in the subsequent
policies) and
that this was part of a number of changes QBE was applying to policies of a similar
type at this time. Mr Morrison
apparently did not appreciate that there was a
transitional gap because his view was that the earlier policies would apply (see [93]
above). However, if AON had pointed out the transitional gap and asked
Mr Morrison to address this before the 1999/2000 policy
wording was finalised, it
would have been in QBE's interest to apply the less flexible/more restrictive terms to
the previously notified
circumstances if they became claims. That is, it would have
been in QBE's interests to agree to cover them but under the new policy
wording. I
proceed on the basis that the relevant policy would have contained the malice
exclusion.
Meaning of "malicious"
[142]
The malice exclusion (under the 1999/2000 policy and the 2001/2002 policy)
excluded claims "for loss wholly or partly caused by a
dishonest, fraudulent,
criminal (whether actual or constructive) or malicious act or omission of the Insured
(except as provided
for in Extension 2)".
[143] Counsel referred to Mead v Allianz Australia Ltd [2006] NSW SC 366 as to
the meaning of "malicious". In that case the Court needed to determine whether a
liquidator's claim for indemnity under an
insurance policy was excluded by an
exclusion for claims "directly or indirectly based upon, attributable to, or in
consequence of
any dishonest, fraudulent, malicious, or reckless act or omission".
The Court reviewed various authorities and concluded (at para
51):
I am of the view that the expression "malicious" in cl 21(a) of the Policy
should be construed in the context
in which it appears taking its colour from
the words and expressions within the clause. This is a clause excluding the
insurer's liability for the intentionally wrongful or wilful acts or omissions of
the insured. The concepts of dishonesty
and fraud and wilful violations and
breaches seem to me to suggest that the insured's conduct that disqualifies
him
from indemnity must be intentional. I am of the view that a "malicious"
act or omission referred to in cl 21(a) of the Policy
relevant to the issues in
this case is an act or omission done or made for the predominant purpose of
inflicting harm
or damage to another person.
[144] For AON it is submitted that the reasoning in this case was flawed, and that
the case can be
distinguished from the present one. It is said that in this case the
surrounding words of the exclusion do not require any intent
to harm. It is said that
"dishonesty" in the context of a professional indemnity insurance policy does not
require proof of intention
to deceive (McCann v Switzerland Insurance Australia Ltd
[2000] HCA 65; (2001) 11 ANZ Insurance Cases 61-479 (HCA)); "dishonest" and "fraudulent" are
interchangeable (Commissioner of Inland Revenue v Bhanabhai [2006] 1 NZLR
797); and "criminal" is qualified by the phase "whether actual or constructive".
[145] Various cases in various contexts have considered
the meaning of malice:
Malice in its ordinary or common sense means spite, ill will or the like, whereas
malice in a legal sense
may mean a wrongful act done intentionally without just
cause or excuse: see for example Trobridge v Hardy [1955] HCA 68; (1955) 94 CLR 147 at 162
(referred to in Mead at [39]); Nishina Trading Co Ltd v Chiyoda Fire Marine
Insurance Co Ltd [1996] 2 QB 449; and Jeffery v Associated National Insurance Co
Ltd [1984] 1 Qd R 238 at 249.
[146] The meaning of "malicious" in the later policies in this case must be
interpreted in light of its context.
That context is an exclusion clause in a
professional indemnity policy that covers breaches of professional, fiduciary or
statutory
duties. That exclusion also excludes dishonest, fraudulent and criminal
(whether actual or constructive) conduct. I consider that
in this context something
more than a deliberate or intentional act that causes harm is required. The clause
seems to me to be directed
to excluding liability for certain kinds of intentional
wrongdoing or criminal acts. Insurance is intended to cover fortuities
but not
intentional wrongdoing or criminal acts.10 I consider that in this context "malicious"
was not intended to be confined to
its ordinary or common meaning, but was
intended to exclude a deliberate wrongful act intended to harm a third party or with
reckless
indifference that harm to a third party would result.
[147] I agree with MAF that the finding of "acting for an improper purpose"
in an
administrative law sense is different from a malicious act or omission in terms of the
exclusion. Some decisions made under
statute with an improper purpose will be
malicious, but others will be an unintentional misapplication of the statutory
power.11
Insurance for the latter is insurance against a fortuity and so the reason for
excluding malicious conduct does not apply.
[148]
In the judicial review decision the improper purposes of the power to make
regulations under the Customs and Excise Act were found
to be promoting and
sustaining the management of forests on SILMA lands and improving the
Government's negotiating position with
SILMA. There is nothing in that finding
that indicates any bad faith, as opposed to an unintentional or mistaken
misapplication of
the statutory power. The judicial review judgment refers to the
10
See MacGillivray on Insurance Law (10ed 2003) at 14-2 and
14-34.
11
See for example the discussion in Joseph Constitutional v Administrative Law in New Zealand (3ed
2007) at 22.2.1 and
22.2.2.
Government's legal advisers "consistently acknowledging the risk of legal challenge
which Regulation 4" presented. However,
the judgment does not state whether that
risk was assessed as arising because Regulation 4 was considered to be outside the
proper
purposes of the Customs and Excise Act, or because of the concerns around
process identified by Mr Jebsen in the briefing papers.
In my view the judicial
review judgment does not establish that the loss was wholly or partly caused by a
malicious act or omission.
[149] There is nothing else in the material before me to indicate that the improper
purposes were known to be such (refer [75]
above). The evidence establishes only
that when MAF/the Minister acted to suspend and then ban the export of woodchips
it knew that:
a) AJS might claim lack of consultation and breach of a legitimate
expectation;
b)
AJS might suffer loss from the suspension and ban but, while that loss
might give rise to a non-legal compensation/assistance
claim, it was
not thought (as per the Crown Law advice) that it would give rise to a
legal liability
for damages;
c) The loss suffered by AJS (and SILMA landowners) by the suspension
and ban would be
helpful to the Government in moving the SILMA
land to sustainable management.
[150] In my view this evidence falls
short of establishing any improper motive
falling within the "malicious act or omission" exclusion.
[151] That leaves the settlement
of the AJS claim does that establish that the AJS
claim was for loss wholly or partly caused by a malicious act? I agree that liability
arising from the second cause of action would fall within the exclusion. Knowledge
that the actions taken were unlawful and an intent
to harm were pleaded in that cause
of action and this intent or reckless indifference as to harm is an essential ingredient
of that tort.12 The same might be said
about the first cause of action.13 However, the
same cannot be said about the third cause of action. That cause of action is for
breach of a duty of care by introducing measures without lawful authority and failing
to give adequate notice to AJS (see [22](c)
above). It is concerned with the failure to
take reasonable care not to harm AJS. Knowledge of the unlawfulness of
the
prohibition on export and an intent to harm (or recklessness) is not pleaded and it is
not an essential element of that cause
of action. It does not involve intentional
wrongdoing in the sense that I consider the malicious conduct exclusion is intended
to
cover.
[152] The settlement sum was not attributed to any particular cause of action. I do
not think it can be said that because
one or two causes of actions alleged "malicious"
conduct and one did not that the loss was "wholly or partly caused by a malicious
act
or omission" so that the exclusion applied. The settlement sum is at best evidence
only that MAF considered the payment should
be made because of one or more of
the pleaded causes of action. It is not evidence that the settlement was paid because
of the first
and/or second causes of action (which probably were claims for loss
caused partly by a malicious act or omission).
[153] AON accepts
that it has the burden of proving that the exclusion would have
applied. Because neither the judicial review judgment nor other evidence
before me,
nor the settlement (based on pleadings alleging some acts or omissions within the
exclusion and some acts or omissions
outside the exclusion) establish that the loss
(the payment to AJS and the associated legal costs) was caused wholly or partly by
a
malicious act, AON has not discharged its burden.
[154] AON's submission went on to address whether an extension in the policy
would have extended cover to the AJS claim despite the malice exclusion. It is not
necessary for me to consider those submissions
because in my view the malice
exclusion in the 2001/2002 policy (or the 1999/2000 policy) does not apply.
12
See Todd The
Law of Torts in New Zealand (4ed 2005) at 805.
13
See Todd at 551.
Failure to prove reasonableness of loss claimed?
Submissions
[155] AON submits that the 1999/2000 policy only covered sums which MAF (as
the insured) was liable to pay. Indemnity under the
policy would not have covered
the liability of another government entity. AJS' damages claim was against MAF,
the New Zealand Customs
Service and the Minister of Food, Fibre, and Biosecurity
and Border Control. Customs was in control of timber exports for 12 out
of the 46
months in which AJS incurred losses. On that basis AON submits that it is
appropriate that Customs contribute to
at least one-third of AJS' losses. That would
leave two-thirds of the settlement sum as the amount for which indemnity could have
been claimed. From that two-thirds, $75,000 would have been deducted (being the
amount of MAF's policy deductible).
[156] MAF submits
that it (or its predecessor) was responsible for the advice and
implementation of the policy and the regulations that were the subject
of the AJS
damages claim. It would have been futile to have claimed contribution from
Customs and the Minster of Food, Fibre,
Biosecurity and Border Control because
they in turn could have claimed back from MAF. MAF accepts that it would have
been required
under the insurance policy to bear the first $75,000 of its losses and
that this sum should therefore be deducted from its claim
against AON.
My view
[157] Mr Jebsen's evidence was that Customs relied on the advice of the Ministry
of Forestry. That evidence
was not challenged. It is consistent with the position set
out in the judicial review judgment. I consider that, if Customs had contributed
to
MAF's settlement with AJS, Customs would have been entitled to claim contribution
from MAF on the basis that it relied on MAF's advice and implemented the policy
for which
MAF was responsible. I therefore accept MAF's argument that in
agreeing to pay the settlement sum to AJS it would have been
futile to have sought
contribution from the other defendants named in the AJS damages claim. There is
agreement that the claim
against AON is reduced by the insurance deductible of
$75,000. To that extent only the claim against AON is reduced.
Estoppel
Submissions
[158] MAF says that AON owed a fiduciary duty to honestly and fully inform MAF
as to AON's assessment of the various
grounds of declinature relied on by QBE and
to acknowledge its error in allowing the transitional gap to occur. It says that instead
it reassured MAF that QBE was not justified in its stance and encouraged and
assisted MAF in bringing the proceeding against QBE.
It says that AON is now
estopped from taking as against MAF the very points which it encouraged MAF to
challenge when raised by QBE.
[159] Mr Brown acknowledges that it is not clear which kind of estoppel
(convention/agreement, representation/conduct or election)
is the applicable one.
But looked at as a whole he says, in effect, that it would now be unconscionable to
allow AON to raise these
points. If it is necessary to show detriment then Mr Brown
says that a frank acknowledgement from AON at the outset would have led
to both
AON and QBE being sued in the same proceeding. They would have then been "at
each other's throats" as to the source of the
policy wording changes. Instead, in this
proceeding, QBE has given evidence in support of AON's position. It is further said
that
MAF would not have shared its legal advice with AON if AON had frankly
acknowledged its error and its assessment of the QBE declinature.
[160] AON submits that no estoppel arises. It says that in making statements to
QBE on MAF's behalf it was acting in its broker
advocacy role. It says that it made
these statements to assist MAF in pursuing its claim against QBE and not to induce
MAF to change
its position. The only loss that AON could have caused by its
statements was the legal cost in pursuing QBE. However, Crown Law was
acting
for MAF when it decided to proceed against QBE. In these circumstances, there was
no reasonable reliance by MAF on AON's statements
or conduct, no detriment
suffered by MAF as a result and no unconscionability in AON now raising the points
it now makes against
MAF.
My view
[161] AON did not inform MAF of its error in allowing the transitional gap to arise.
In statements to MAF, and to
QBE on MAF's behalf, it took the position that QBE
should not decline the claim. This stance is likely to have provided some
encouragement to MAF to pursue QBE. However MAF was also receiving legal
advice from Crown Law. Crown Law's view was that, if QBE
declined indemnity,
"MAF has tenable grounds for commencing a legal proceeding against QBE". The
reasons for this view were set out
in a legal opinion dated 20 June 2003. A copy of
that opinion was provided to AON.
[162] Given Crown Law's advice, irrespective
of AON's encouragement, it is more
likely than not that the claim against QBE would have proceeded. MAF does not
suggest otherwise.
If AON had disclosed that it was potentially at fault in allowing
the transitional gap to occur it also seems likely that MAF would
have joined AON
to the proceeding and would not have disclosed its legal advice to AON.
[163] Nevertheless, looked at in terms
of unconscionability or overall justice (as
Mr Brown proposed), I consider that AON's actions should not now prevent it from
raising
the arguments that the QBE policies would not have provided indemnity even
if there were no transitional gap. Even if AON had been
joined as a defendant to the
claim against QBE, both AON and QBE would have had the incentive to raise the
same arguments that AON
now raises against MAF. Whether AON and QBE would
have disputed amongst themselves who was responsible for the transitional gap is
not material. Even if that were QBE, AON had
a duty to notice and advise of the
gap before the policy became effective.
[164] Further, no detriment arose from MAF disclosing
its legal advice to AON.
That advice was consistent with the position AON took on MAF's behalf with QBE.
The advice discusses when
MAF notified QBE of the claim but does not concede
that earlier notification ought to have been given (as is now raised by AON) and
works off documents available to AON in any event. There is nothing else in that
advice that gave AON knowledge that it otherwise
would not have had about MAF
and MAF's claim against QBE or AON.
[165] A difference between what occurred, and what would have
occurred had
AON disclosed its error to MAF when QBE declined indemnity, is that the claim
against AON was delayed. In my view that
does not give rise to unconscionability
such that AON should now be prevented from raising defences that would otherwise
have been
available to it had it been sued at an earlier time. Interest can be (and is in
this case) claimed for the period that MAF has been
out of pocket.
[166] In terms of the traditional categories of estoppel, in my view this is not an
estoppel by convention because
the statements made by AON to QBE and MAF did
not give rise to an agreement between AON and MAF upon which any transaction
proceeded
or their relations would be governed.14 Rather, they were unilateral
statements made by AON as to its view, which MAF
and its advisors separately
agreed with. Further, the MAF/QBE proceeding proceeded because of MAF's own
decision to pursue it and
not on the basis of an agreed position as between MAF and
AON. It is not an estoppel by representation or conduct15 because reliance
to MAF's
detriment is not present. It is not an estoppel by election16 because there was no
election made as between two alternative
and mutually exclusive courses of action
the decision to proceed against QBE only has not prevented MAF from also
proceeding against
AON.
[167] For these reasons, I would not have found in favour of MAF on this part of
the case had I found against MAF on the various
defences raised by AON.
14
Laws of NZ "Estoppel" at [70] and G S Bower The Law Relating to Estoppel by Representation:
The
Original Text (4ed 2004) at I.2.8.
15
Laws of NZ "Estoppel" at [36] and G S Bower The Law Relating to Estoppel by Representation:
The Original Text (4ed 2004) at I.2.2.
16
Laws of NZ "Estoppel" at [71] and G S Bower The Law Relating to Estoppel by Representation:
The Original Text (4ed 2004) at I.2.12.
Result
[168] The result is that MAF has established its claim against AON. AON's failure
to notice that the policy wording would give rise to a transitional gap in cover and to
take steps to avoid that gap caused MAF loss.
That is because it is likely that cover
would have been available from QBE for a claim arising from a previously notified
circumstance.
That cover is likely to have applied to the third cause of action in the
AJS claim as being within the insuring clause and AON has
not established that the
loss claimed was excluded by the malice exclusion. I consider that it is not likely
that QBE would have
specifically excluded the AJS circumstance before it became a
claim.
[169] MAF has established that the settlement sum was reasonable
even though the
claim was also brought against two other government entities. That is because MAF
was responsible for the conduct
that gave rise to the loss and therefore the other two
government entities would have been entitled to claim back from MAF their
share of
any settlement payment.
[170] AON makes no other challenge to the sum claimed by MAF as damages.
Accordingly, MAF is entitled
to judgment against AON in the sum of $1,262,523.05
which is made up as follows:
(a) Settlement sum paid by MAF to AJS on 1
September $1,092,375.00
2003
Less policy deductible of $75,000 $75,000.00
$1,017,375.00
(b) Legal costs and disbursements in defending the AJS
claim and achieving
a mediated settlement $122,653.00
(c) Legal costs in contesting QBE's declinature $122,495.05
$1,262,523.05
[171] In addition, MAF claims interest on the sum
$1,215,028 from 1 September
2003 to the date of trial at 7.5% (pursuant to s 87 of the Judicature Act 1908) and
thereafter until
the judgment is satisfied at a daily rate of $250 (pursuant to r 538 of
the High Court Rules). The claim for interest on $1,215,028
is a claim for interest
on the settlement sum of $1,092,375 and the legal costs and disbursements in
defending the AJS claim and
achieving a mediated settlement of $122,653.
[172] MAF is entitled to interest and I do not understand AON to contest the rate
of
interest claimed nor the period over which it has been claimed. (I note that there is
no real issue of delay in pursuing the claim
against AON because this claim was
brought almost immediately after the Supreme Court's decision declining MAF
leave to appeal the
Court of Appeal's decision.) Accordingly AON is ordered to pay
interest for this period and at this rate. However the s 87 Judicature
Act interest is
payable on $1,140,028 (being the settlement sum less the $75,000 deductible and
plus the legal costs in defending
and settling the AJS claim) and not $1,215,028
because if MAF had indemnity for the AJS claim it would have had to pay the first
$75,000 of the settlement sum. (Judicature Act interest was not claimed on the legal
costs in contesting QBE's declinature.)
Costs
[173] MAF initially sought costs on a 2B basis. In its closing submissions MAF
referred to a number of late concessions made by
AON which MAF submitted gave
rise to substantial unnecessary cost and time. In my view additional costs over and
above category 2B
costs is not appropriate. The concessions, although made late,
enabled the trial to be conducted efficiently. I accept that if these
concessions had
been made earlier some lesser cost and time may have been required in preparing the
proceeding for trial, but I consider
this is adequately met by a 2B order. If there is
any other issue about costs or if the parties are unable to agree the calculation
of the
costs they may submit memoranda.
Mallon
J
Solicitors:
DLA Phillips Fox, PO Box 160, Auckland (ph: 09 303 2012, fax: 09 303 2311)
Crown Law, PO Box 2858, Wellington (ph:
04 472 1719, fax: 04 473 3482)
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