FEDERAL COURT OF AUSTRALIA

A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 [2006] FCA 691

A & D DOUGLAS PTY LTD ACN 008 404 180, GRAHAM LESLIE ANDERSEN and HILARY ANDERSEN, YVONNE ELLEN ANDREW, DAVID WILLIAM ARMSTRONG, CHERYL LYNETTE BACKWELL and PHILIP ASHLEY RYAN (as executor of the Estate of ELSIE EDITH BACKWELL), HEINRICH BAUER and SABINE BAUER, DONALD BENGSTON, WILLIAM MALCOLM BRYDEN and MARGARET ANNE BRYDEN, FIONA MARY CAMPBELL (as trustee of the F CAMPBELL SUPERANNUATION FUND), FREDRIKA JANE CARSON, ROBERT JOHN CHARLES MCINTYRE (as executor of the Estate of ALAN STANSFIELD CHENEY), JAMES DAVID CLADINGBOEL and MARIAN ELSIE CLADINGBOEL, KENNETH BARRY DUNCAN and JOAN EDITH DUNCAN (as trustees of the DUNCAN FAMILY SUPERANNUATION FUND), LYNETTE KAY HAMATY, KEITH EDWARD HOLMES (as trustee of the MELZTNER TRUST), PATRICK FYSK HOWDEN, JILLIAN ANNE HUGHES, INFOTEC M.S. PTY LTD ACN 003 954 523, JOHN FRASER KENNEDY and VIVIAN JESSICA KENNEDY, MICHAEL COLIN MELLISH, WADE RICHARD MELLISH, ERIC JAMES MITCHELL and JULIE ANNE MITCHELL (as trustees of the MITCHELL RETIREMENT FUND), RONALD JOHN MOHR and MARGARET STEWART MOHR, ALLAN JOHN MORRISON and PATRICIA JOY MORRISON (as trustees of the A & P MORRISON PENSION FUND), DELIA MURDOCH, BRIAN CHRISTIAN NIELSEN, KAREN ROSE PARKER, PETER JOHN PERRING, KEITH PRINCE, ROBERT RITORZE, NICOLA SCOTT, NARELLE VIDA SHALLARD (as trustees of the C & N SHALLARD SUPERANNUATION FUND), IAN ARCHIBALD STEWART and DOROTHY STEWART, WARREN GEORGE TROTMAN and CARMEL MYNETTA TROTMAN (as trustees of the WGCM TROTMAN SUPERANNUATION FUND), W J & A M LUKE PTY LTD ACN 000 884 266, GRAHAM ROBERT WATT and PATRICIA ANNE WATT, ANNIE CATHERINE WEBB, DIETER HOLMAN (in his own right and as executor of the Estate of MILDRED HOLMAN, ALICE JOY TANGEY (in her own right and as executor of the Estate of KEVIN HERBERT TANGEY) v LAWYERS PRIVATE MORTGAGES PTY LTD ACN 010 556 751, JONATHAN JAMES McCARTHY, BRUCE MICHAEL DURIE, PHILIP ASHLEY RYAN and IAN ALEXANDER NEIL, ST PAUL INTERNATIONAL INSURANCE COMPANY LIMITED and QBE INSURANCE (AUSTRALIA) LIMITED ACN 003 191 035

QUD 113 OF 2005

DOWSETT J

26 MAY 2006

BRISBANE

REASONS FOR JUDGMENT

1                     I have elsewhere given my reasons for concluding that I should dispose of this matter ex tempore.  It calls for the construction of the covering clause of a policy of insurance between the cross-claimant (“MDRN”) and the first cross-respondent (“St Paul”).  Clause 2 of the policy provides:

‘On the terms and conditions herein contained the Insurer shall indemnify the Assured up to an amount not exceeding the Sum Insured against all loss to the Assured (including Related Costs incurred by the Assured and claimants costs) whensoever occurring arising from any claim or claims first made against the Assured during the Period of Insurance in respect of any description of civil liability whatsoever incurred in connection with the Practice, other than loss arising out of any circumstances or occurrence in respect of which the Assured is entitled to indemnity under any other insurance

provided that:

(a)       For the purposes hereof all claims arising from the same act or omission, whether made against one or more Assured, shall be regarded as one claim.

(b)       … ’

2                     In paragraph 1(f), the expression “Related Costs” is defined to mean:

‘… all costs and expenses incurred:

(i)        by the Assured with the insurer’s consent (such consent not to be unreasonably withheld); or

(ii)       by the Insurer,

in the investigation, defence or settlement of any claim or circumstances which may give rise to a claim against or notified by the Assured.’

3                     Such cover is subject to exclusions identified in cl 5.  In particular subcl 5(e) provides:

‘This insurance shall not indemnify the Assured in respect of any liability:

…

(v)       brought about by the dishonest or fraudulent act or omission of the Assured including any Partner or former Partner of the Assured or any person employed in connection with the Practice … .’

4                     In the present case, I have awarded damages to thirty-seven of the thirty-nine applicants who claim to have suffered loss resulting from the conduct of MDRN.  Two applicants have failed completely against MDRN.  In thirty-six of the thirty-seven cases the relevant conduct involved fraud by an employee of MDRN.  The other applicant succeeded on a ground which did not involve fraud.  MDRN submits that the exclusion clause operates only to exclude indemnity for damages awarded in connection with liability to third parties (and perhaps the costs of third parties which the insured is ordered to pay), but not costs incurred by the insured in defending the claim.  It is said that an indemnity for such costs is not an indemnity in respect of any liability in MDRN brought about by relevant fraudulent conduct.

5                     The insuring clause covers loss including Related Costs and claimants’ costs, provided that such loss:

·                arises from any claim relevantly made; and

·                is in respect of civil liability incurred in connection with the Practice.

6                     MDRN argues that the reference is to claimed, rather than actual, liability.  That may be so, but the distinction would only be significant if a claim were settled without resolution of the issue of liability.  The indemnity which is excluded by subcl 5(e) is presumably that imposed by cl 2 to the extent that it is for a loss ‘in respect of any liability … brought about by the dishonest or fraudulent act or omission.’  “Loss” includes Related Costs and claimants costs.  It seems likely that the word “Related” is used to describe the fact that the relevant outgoings were incurred in defending the claim. 

7                     For present purposes, the question is whether MDRN’s defence costs were in respect of any liability brought about by Mr Blackadder’s fraud.  Thirty-six claimants recovered damages incurred as the result of Mr Blackadder’s fraudulent conduct.  MDRN’s defence costs were incurred, in part, in defending those claims.  Those costs were part of the “loss” arising from the relevant claim and were in respect of civil liability incurred in connection with the Practice.  Subclause 5(e) excuses St Paul from indemnifying MDRN in respect of any loss (including defence costs) brought about by fraud.  To the extent that MDRN incurred costs in defending the claims arising out of Mr Blackadder’s fraud, they were in respect of a liability brought about by that fraud.

8                     St Paul asserts that subcl 5(e) operates to exclude its liability to indemnify MDRN for any of its defence costs.  It submits that its liability under cl 2 is limited to loss arising out of a claim, and that the exclusion under subcl 5(e) should be similarly construed so that there is no liability to indemnify for any loss arising from a claim if any part of that loss was bought about by fraud.  I reject that argument.  The subclause excludes indemnity only for loss brought about by fraud. 

Associate:

Dated:              2 June 2006