Federal Court of Australia

All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited (No 2) [2021] FCA 782

ORDERS

THE COURT ORDERS THAT:

1.    The amended originating application filed by the applicant on 18 October 2019 be dismissed with costs.

2.    Any application dealing with moneys held for security for costs be made within 14 days.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

ALLSOP CJ:

1    The applicant, All Class Insurance Brokers Pty Ltd (in liquidation), seeks indemnity under an employee theft clause of an insurance policy issued by a related entity of the respondent, Chubb Insurance Australia Limited. The alleged theft is said by All Class to have been carried out by its sole director, who was also the sole shareholder and company secretary, over a number of years. The alleged theft was the misappropriation of client trust moneys, much of which was paid into the working account of All Class, some of which appears to have been taken by the director.

2    All Class was, at all material times until its liquidation, an insurance broker. Mr Leroy Bowmaker was its sole director, shareholder and company secretary from 2007 until 27 February 2014. He was also the Managing Director of All Class from March 2002 until 27 March 2013. Mr Bowmaker was the sole responsible officer of All Class’ Australian Financial Services Licence (AFS Licence) and the sole key person identified in All Class’ Australian Credit Licence, until the Australian Securities and Investments Commission (ASIC) cancelled those licences on 6 May 2013.

3    All Class was a member of the Steadfast Group which was, and still is, a network of independent insurance brokers in Australia. Many of the members or affiliate insurance brokers who form part of the Steadfast Group, including All Class, are shareholders in Steadfast Group Limited. Members of Steadfast have access to products and services including improved policy wordings, broker services, access to Steadfast’s technology and triage support for challenging claims.

4    Steadfast arranged an annual group policy of insurance for the members of the network, providing coverage such as directors’ and officers’ liability insurance, trustee liability insurance and crime coverage insurance. Members had to opt-in to be covered by the policies arranged by Steadfast. As a member of the group, All Class participated annually in a number of Forefront Portfolio Policies (Number 93298628) from 30 June 2008 to 30 June 2013. It will be necessary to set out the terms of the policy which applied from 30 June 2012 to 30 June 2013 (the Policy) and the circumstances surrounding entry into the Policy in due course. The proper legal characterisation of Steadfast’s role in arranging the relevant policy is important. For the reasons set out later, Steadfast arranged the insurance as an agent for All Class, and for the other shareholders of Steadfast.

5    The policies were underwritten by Chubb Insurance Company of Australia Limited (in liquidation) (Old Chubb). In November 2016, this entity effected a scheme of arrangement with the respondent, Chubb, the terms of which included Chubb accepting liability to meet the liabilities of Old Chubb incurred in its insurance business. This proceeding was initially commenced against Old Chubb: see All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Company of Australia (in liquidation) [2019] FCA 928.

6    Old Chubb was first made aware of Mr Bowmaker’s fraudulent conduct on 27 March 2013 by his wife, who was appointed as Mr Bowmaker’s power of attorney after he was admitted to hospital in February 2013. Shortly thereafter, All Class was placed into external administration. Mr Vardy of SV Partners was appointed liquidator on 17 April 2013. On 31 October 2014, Mr Vardy provided a proof of loss to Old Chubb in relation to the claim. Since that date, Old Chubb and subsequently Chubb have issued requests for further information about the claim. There have been lengthy delays by Mr Vardy in responding to these requests.

7    This proceeding was commenced on 16 April 2019 by Mr Vardy on behalf of All Class. Chubb formally denied liability on 6 November 2020. The matter was listed for hearing on 9 and 10 November 2020 to determine the question of liability and whether the Policy responds to the claim. Questions of quantum were to be heard at a later date if All Class were successful in this stage of the proceeding.

8    For the purpose of the hearing, the parties agreed on a statement of agreed facts which was marked Exhibit A and a tender bundle of documents which was marked Exhibit B. All Class also tendered the applicable ASIC Regulatory Guide 126 Compensation and Insurance Arrangements for AFS Licensees and a bundle of emails sent by a former employee of All Class, Ms Snelling, which were marked Exhibits C and D respectively. Chubb tendered a letter from YPOL Lawyers to MCW Lawyers dated 6 November 2020, which was admitted and marked Exhibit 1. Chubb also read two affidavits of Mr Peter Kelaher sworn on 30 September 2020 and 10 November 2020. Mr Kelaher is Head of Property and Casualty at Chubb. He has been employed as an underwriter by Old Chubb and Chubb since about 2007. The documents exhibited to Mr Kelaher’s first affidavit were marked Exhibit PK1. Mr Kelaher was not cross-examined. Given the passage of time since relevant events, some documents which one would expect to be tendered were not available.

9    In its amended originating application dated 18 October 2019, All Class sought an order that Chubb pay it $2,054,732.99 or such other sum as the Court sees fit, interest upon the sum pursuant to s 57 of the Insurance Contracts Act 1984 (Cth) (the IC Act) and costs. In its amended concise statement of the same date, the sum of $2,054,732.99 was said to comprise of fraudulent payments amounting to $2,031,086.87 and expenses incurred by All Class in the course of investigating and establishing the existence and amount of loss.

10    The claim concerns a provision of the Policy which provides that Chubb will pay for direct loss sustained by an insured resulting from theft, fraud or dishonesty committed by an Employee where the direct loss is discovered during the term of the Policy. All Class in its amended concise statement claimed that the fraudulent misappropriations are a direct loss of money sustained by All Class resulting from fraud and dishonesty committed by Mr Bowmaker. In this respect, All Class claimed that Mr Bowmaker was an “Employee” under the Policy while engaged in the operation of the trust account, that being the usual duty of an employee. All Class alleged that the fraud was “discovered” (as that phrase is defined in the Policy and used in the insuring clause) by Mr Vardy shortly after his appointment as liquidator and Chubb was therefore obliged to make the payment for indemnity within a reasonable time after that date. In the alternative, All Class claimed that the payments should have been made within a reasonable time after provision of the liquidator’s report dated 13 April 2018, which was provided to Chubb on 1 May 2018.

11    All Class claimed that the payment for indemnity ought to have included the reasonable expenses incurred by Mr Vardy to investigate the existence and amount of the loss, which All Class said amounts to substantially more than the limit of $50,000.

12    Chubb claimed that it is entitled to avoid the Policy, to deny indemnity or, alternatively, to reduce its liability to nil under the Policy on three bases. First, Chubb alleged that All Class had a duty to disclose to Chubb and failed to disclose, either fraudulently or innocently, the fraudulent misappropriation. Chubb submitted that, as Mr Bowmaker was the guiding mind and will of All Class at all material times from at least 2008 and thus All Class had knowledge of the fraudulent payments. As a result, Chubb alleged that it is entitled to avoid the Policy pursuant to s 28(2) of the IC Act or, alternatively, it is entitled pursuant to s 28(3) to reduce its liability with respect to the claim to nil, being the position it would have been in had the misrepresentation not occurred.

13    Secondly, Chubb denied that Mr Bowmaker was an employee of All Class whilst engaged in the operation of All Class’ trust account and thus denied that the fraudulent payments were committed by an Employee within the meaning of the Policy. Chubb alleged that Mr Bowmaker as the guiding mind of All Class was acting as the company when he made the fraudulent payments. In this respect, it was Chubb’s position that Mr Bowmaker was not stealing from the company but was instead causing All Class to fraudulently misappropriate funds that were held in its trust account and to place them in the company’s working account.

14    Thirdly, and related to the second point, Chubb alleged that All Class sustained no direct loss from the theft or fraud, meaning that the relevant insuring clause was not engaged.

15    The parties were initially in dispute about who “discovered” the fraudulent payments for the purpose of the insuring clause. In its concise statement in response, Chubb had alleged that Mrs Bowmaker was a director of All Class from at least 27 February 2013 and, in particular, on the day on which she notified Steadfast of the discrepancies. Therefore, Chubb had claimed that the fraudulent payments were discovered at an earlier date than Mr Vardy’s appointment as liquidator. Chubb at [61] of its response to the amended concise statement further alleged that the claim was time barred pursuant to s 14 of the Limitation Act 1969 (Cth). These arguments were not pressed at the hearing.

16    There was some lack of clarity as to the total amount of funds improperly transferred from All Class’ trust account and the destination of those funds. All Class claimed that the total shortfall in the trust account at the time the liquidator was appointed was $2,031,086.87. By that time, according to All Class, between June 2008 and March 2013 a total of $8,111,047.38 had been transferred from All Class’ trust account to its general operating account, some of which were legitimate transfers, and a total of $369,953.21 had been transferred from the trust account to third parties other than those who were beneficially entitled to the funds, including payments directly to Mr Bowmaker and Mr Bowmaker’s superannuation fund. Chubb said that it is not clear on the evidence as to whether the third party transfers (that is, to accounts not belonging to All Class) were improper. Whilst this evidence can largely be dealt with in any hearing on quantum should All Class successfully establish liability for indemnity, it is important to note that a large proportion of the funds were inappropriately transferred to All Class’ office account in what appears to have been an (ultimately unsuccessful) attempt to keep the failing business afloat.

17    Before turning to the issues in dispute, it is necessary to set out in some detail the relationship between All Class, Steadfast and Old Chubb, the negotiations and disclosures made in the lead up to entry into the Policy, the terms of the Policy itself, and the circumstances surrounding the discovery of the fraudulent payments.

All Class’ relationship with Steadfast and the circumstances leading to entry into the Policy

18    All Class commenced operation as an insurance brokerage in February 2001. Mr Bowmaker was the Managing Director of All Class from 1 March 2002 until 27 March 2013. He was the sole director, shareholder and company secretary of All Class from 2007 until 27 February 2014. Prior to 2007, company records reveal that there were three other directors and shareholders of All Class in addition to Mr Bowmaker.

19    All Class first expressed interest in joining the Steadfast Group in April 2003. In the membership application form signed by Mr Bowmaker on 20 April 2003, Mr Bowmaker was recorded as the Managing Director and majority shareholder. The form recorded that one other person, a financial planner, held 45% of the shares in the company. The final page of the application form set out the fees and charges associated with Steadfast membership, which included a fee of $1000 for consideration for purchase of shares, a once-off $1500 joining fee, and an annual membership fee of $1500.

20    All Class was accepted as a member by the Steadfast board of directors on 6 May 2003. Mr Bowmaker was advised of this by letter dated 7 May 2003. The letter included information about membership, including provision of the Steadfast logo, which was encouraged to be fixed to all correspondence sent by All Class, and Steadfast merchandise including ties, compendiums and t-shirts. On 12 June 2003, Mr Bowmaker was issued with a share certificate for Steadfast, which was said to evidence All Class’ membership in the group.

21    From the evidence as a whole, and in particular from the description of Steadfast in document 34 of the Tender Bundle (Exh B), it can be concluded that Steadfast was not itself an insurance broker. Rather, it was a company in which insurance brokers, such as All Class, bought shareholding. Steadfast in its activities sought to bring advantages to its shareholders through scale, market access, services and distribution channels. In a letter to Mr Bowmaker of 17 April 2003 dealing with privacy and consent, Steadfast’s role and activities were explained as follows:

What we do

We collect personal information to be able to provide Member benefits and services and to facilitate adequate management of such benefits and service[s] on behalf of our members.

Other purposes include, helping to develop and identify products and services that may interest members, conducting market or customer satisfaction research, developing, establishing and administering alliances and other arrangements with other organisations in relation to the promotion, administration and use of our respective products and services.

…

If we do not obtain the personal information we need, we or any third parties we disclose the information to may not be able to provide appropriate services.

We may disclose information to third parties whom we believe are necessary to assist us in providing our services.

For example, in arranging and managing member benefits and services we may provide aggregated information to insurers, reinsurers, other insurance intermediaries, insurance reference bureaus, industry bodies and groups, as well as our advisers such as lawyers and accountants.

22    The evidence discloses that one of the services that Steadfast provided to its members was the arranging of insurance cover for members individually.

23    Mr Kelaher’s first affidavit sets out his recollection of the insurance arrangements put in place with Old Chubb by Steadfast on behalf of its members. The whole of Mr Kelaher’s first affidavit was objected to by All Class on the basis of relevance and [16]–[18] were objected to on the basis of hearsay. The objection on relevance was overruled. Paragraphs 16 to 18, referred to below, were allowed into evidence as summary expressions of Mr Kelaher’s personal observations of the process undertaken between Old Chubb and Steadfast when negotiating and entering into the Forefront Portfolio package each year, a process in which he took part as the referral underwriter for Old Chubb.

24    At [6]–[10] of his first affidavit, Mr Kelaher explained that Old Chubb had provided the Forefront Portfolio package to Steadfast since at least 2008. Steadfast used the services of an insurance broker, Mega Capital Pty Ltd, to arrange the cover on its behalf. However, the precise coverage sections and the terms of such coverage were negotiated between Old Chubb and Steadfast directly each year. Mr Kelaher explained that the Policy was a “network” insurance cover, stating at [11] of his first affidavit:

… although individual insurance cover was made available to each participating insurance broker member of the Steadfast Group, the cover was essentially arranged and negotiated between Old Chubb and Steadfast Group Ltd, the policy was issued to Steadfast Group Ltd and Steadfast Group Ltd paid the premium to Old Chubb. Individual insurance brokers in the Steadfast Group were not obliged to take out the cover, nor was Old Chubb obliged to issue cover for all brokers in the Steadfast Group.

25    Mr Kelaher set out at [13] of his first affidavit the general process by which Old Chubb undertook the renewal of the Steadfast Forefront Portfolio package each year:

a)    Old Chubb sent out a renewal notice to Steadfast Group Ltd and its broker (which was Mega Capital up to and including 2013);

b)    Old Chubb then engaged in discussions and communications with Mega Capital to receive renewal information and understand Steadfast’s requirements for the insurance placement;

c)    Old Chubb also had a meeting directly with Steadfast Group Ltd to discuss the insurance placement in more detail (including a discussion on pricing and potential terms and conditions of cover);

d)    Based on these communications with Steadfast Group Ltd and Mega Capital, Old Chubb determined the terms and conditions of the insurance coverage it was willing to offer for the Steadfast Group and the premium to be charged; and

e)    There were often further negotiations between Old Chubb on the one hand and Steadfast Group Ltd and Mega Capital on the other hand about the terms of the insurance coverage, until both sides were satisfied with the proposal.

26    At [14]–[18] of his first affidavit, Mr Kelaher explained that Steadfast would provide to Old Chubb each year a proposal form which included a disclosure questionnaire. The questionnaire included information related only to Steadfast itself, not its members. According to Mr Kelaher, Steadfast obtained renewal information from its members separately and, at a relatively early stage in the renewal process, Steadfast (either through its broker or directly) would notify Old Chubb of the brokers in its network who wished to be covered by the Forefront Portfolio package for the upcoming year. Mr Kelaher stated that this usually comprised a list of all members who would be participating. Mr Kelaher further explained that Steadfast would usually expressly communicate to Old Chubb the identities of the members who did not wish to participate, usually by express provision in the Placing Slips issued by Steadfast to Old Chubb at the conclusion of negotiations for the renewal. Steadfast also included in the Placing Slips in summary form “key information concerning claims made and disclosures from Steadfast Group members”. At [19] of his affidavit, Mr Kelaher stated that “Old Chubb relied on all the information referred to … above, and took it into account, in deciding the terms of the renewal of the Steadfast Forefront Portfolio package and the premium to be charged.”

27    The affidavit of Mr Kelaher sworn on 10 November 2020 and read on the second day of the hearing made clear that Chubb did not provide professional indemnity cover and Steadfast arranged this for members with another insurer.

28    The documents included in the Tender Bundle (Exh B) which relate to the taking out of the Policy in 2012 generally conform with the process described by Mr Kelaher in his first affidavit. However, some key documents which, based on Mr Kelaher’s account, one would expect to be in existence are missing from the bundle. Mr Kelaher explained at [4] of his first affidavit that he has been unable to locate all of the documents and records which he would have expected to have been in Chubb’s possession in relation to the Policy. Mr Kelaher believed this was due to the passing of time (some eight years) since the Policy was entered into, the merged operations of Chubb and Ace Insurance Group in 2016, which has meant that some archived material is no longer available, and changes in staffing which has meant that some documents are no longer available from the personal office files of some underwriting staff.

29    The Tender Bundle (Exh B) included proposal forms for “Steadfast Members Facility” for various years from 2008 for “Management Liability / Crime” and “erato – Professional Indemnity”. The forms came from a Steadfast website and appear to have been completed by someone on behalf of All Class, though most of the forms were not signed by an authorised representative. The forms commence with an “Important Notices” section, the first of which is titled “1. Disclosure of Relevant Facts” and sets out the duty of disclosure of insureds under the IC Act. As part of the duty of disclosure statement, the form stated: “You have the same duty to disclose those matters to the insurer before you renew, extend, vary or reinstate a contract of insurance”. Under the description of the duty of disclosure and the consequences of non-disclosure, the form stated:

Comment: the requirement of full and frank disclosure is of the utmost importance with this type of insurance. This is particularly the case in respect of anything which may be relevant to the risk for which you seek cover (e.g. claims, whether founded or unfounded), or to the magnitude of the risk.

30    Taking the 2008/2009 proposal form as an example, Section A described the “Insured Entities” and identified All Class, with Mr Bowmaker as the contact.

31    Section B, entitled Management Liability Crime, contained the following questions and responses (All Class’ answers in bold):

6. Are you applying for Management Liability/Crime? Yes

7. In the Last 5 Years, have there been any Claims made against the Company or its Directors or Employees which may have been covered under this policy if it were in force?    No

…

8. has any Director or Officer of the Company ever had proceedings (civil or criminal) instigated against them alleging Misconduct or Breaches of the Law in their capacity as a director or officer of a company? No

…

9. In the Last 5 Years, has the Company suffered any Direct Financial Loss exceeding $5,000 as a result of fraud or dishonesty committed by a staff member? No

…

10. After enquiry, are any of the Directors or Employees of the Company aware of:

a. any facts which might give rise to a Claim being made against the Company or its Directors or Employees which may be covered under this policy if it commences? No

…

b. any facts which would cause a reasonable person to think that the Company might suffer a Direct Financial Loss as a result of Fraud or dishonesty committed by a staff member?: No

32    Section C, titled ERATO Professional Indemnity, included the following questions and responses (All Class’ answers in bold):

28. Fidelity

a. Has the Company sustained any loss through fraud or dishonesty of any current or Former Principals or Employees? o [sic: No]

b. Is the Company aware of any reasonable cause for suspicion of any fraud or dishonesty on the part of any present or former Principals or Employees?     no

c. Is any Principal or Employee the sole signatory for any cheques or other negotiable instruments? Please give details or type “No”: Yes Principal based on size of business

d. How often are entries in your cash book checked with vouchers and reconciled with bank entries by a Principal? monthly

33    All Class completed another form entitled “Steadfast Group Ltd Proposal Form – Steadfast Shareholders Facility management Liability / Crime ERATO – Professional Indemnity” for 2009/2010. Questions 27 to 32 of that form were substantially similar to the questions outlined above. All Class answered “no” to all of these questions except the last, to which All Class answered “monthly”.

34    All Class completed a form entitled “Steadfast Shareholders’ Renewal Application for 2010/11 Professional Indemnity Insurance (ERATO) and Group Insurance for Management Liability / Crime” for policy year 2010/2011 which again contained the questions set out at [31] above and questions similar to those at [32].

35    Behind tab 9 of the Tender Bundle (Exh B) is a print-out of a page from the Steadfast website dated 22 June 2010. The website page shows the details for the Professional Indemnity Insurance obtained for 30 June 2010 to 30 June 2011. It stated that the “Group Policy has been renewed for 2010/11 with an additional policy layer of $50m excess of $50m subject to the following limits and sub-limits of liability”. The sub-limit for fidelity in respect of trust funds was $1,000,000 for any one claim. Under the heading Renewal Offer, it stated: “Your premium for 2010/2011: … $17,550.69”. Under the heading Summary of Cover, the “Insured” was listed as All Class. “Other Insureds” included: All Class’ predecessors in business; specified insureds nominated for cover and appointed by the Insured, including service companies, subsidiaries and employees; present or future Authorised Representatives and Distributors; past, present or future directors, employees, partners, contractors and consultants; and others as defined in the policy.

36    Under the heading “Certificate of Currency” the following appeared:

A Certificate of Currency in respect to the 2010/11 insurance period can be accessed from the Certificate of Currency tab as from 1 July, 2010.

37    Behind tab 11 of the Tender Bundle (Exh B) is a document described as “Steadfast Shareholders’ Renewal Application” dated 13 April 2011. As a result of the way in which the form had to be obtained from Steadfast’s records, the document was curiously headed “Steadfast Shareholders’ Renewal Application for 2020/21”. The parties are in agreement that this was the form completed by All Class for renewal in 2011/2012. It contained similar answers to earlier proposals. All Class answered “no” to the equivalent questions to those set out above at [31]. The questions under the heading “Fidelity” were answered as follows (answers by All Class in bold):

5.6     Is the Company(s) aware of any reasonable cause for suspicion of any fraud or dishonesty on the part of the present or former Principals or Employees? No

 5.7     Does the person preparing cheque requisitions also sign cheques? No

5.8     Is any Principal or Employee the sole signatory for any cheques or negotiable instruments? Yes

 5.9     Are payments made electronically using bank EFT facilities? Yes

 5.9     Details of EFT Payments

 5.9.1     Are dual authorities required to authorise payments? Yes

5.10     How often are entries in your accounting system checked with the supporting documents and reconciled to your bank Monthly

  5.11     How often are bank reconciliations reviewed by the Principal? Monthly

38    The documents prior to the taking out of the relevant 2012/2013 Policy and the evidence of Mr Kelaher are all consistent with and enable the clear inference (which I draw) that Steadfast acted on behalf of and for the benefit of its members in arranging for such of them as wished it insurance, including management liability and crime, but not professional indemnity, from Old Chubb. Another insurer or other insurers provided the professional indemnity cover. By 2012, All Class and Mr Bowmaker were aware that Steadfast would provide this service of arranging insurance cover for All Class, that All Class and Mr Bowmaker were under a duty to disclose to the insurer the matters specified in the IC Act, and that the mechanism for such disclosure was to inform Steadfast by truthful and accurate completion of the annual proposal form taken from Steadfast’s website. The natural inference and conclusion (which I draw) was that Steadfast was, and was understood and used by members such as All Class as, the agent of those members for the purposes of passing on information to the relevant insurer and was effecting the policy for the benefit of the member, here All Class.

39    On 18 April 2012, Mr Bowmaker on behalf of All Class completed a form titled “Steadfast Shareholders’ Offer of Insurance Application for 2012/13 Professional Indemnity Insurance (ERATO) and Group Management Liability / Crime Insurance”. As it appears in the tender bundle, the title of the form refers to the year 2019/20. In relation to the other documents these errors were explained as a function of the way in which the form had been obtained from Steadfast’s computer records in 2020 in response to a subpoena to produce documents. The parties agree that this form was created by Steadfast for completion by its members, and that Mr Bowmaker accessed the form via the Steadfast website.

40    On the first page of the Insurance Application form, under the heading “Important Notices”, was the following information about disclosure:

1. DISCLOSURE OF RELEVANT FACTS

A. Your duty of disclosure

Before you enter into a contract of general insurance with an insurer, you have a duty, under the Insurance Contracts Act 1984, to disclose to the insurer every matter which you know, or could reasonably be expected to know, is relevant to the insurer’s decision whether to accept the risk of the insurance and, if so, on what terms.

You have the same duty to disclose those matters to the insurer before you renew, extend, vary or reinstate a contract of insurance.

Your duty, however, does not require disclosure of a matter:

•    that diminishes the risk to be undertaken by the insurer

•    that is common knowledge

•    that the insurer knows or, in the ordinary course of business as an insurer, ought to know

•    as to which compliance with your duty is waived by the insurer.

B. Non-Disclosure

If you fail to comply with your duty of disclosure, the insurer may be entitled to reduce its liability under the contract in respect of a claim or may cancel the contract. If your non-disclosure is fraudulent, the insurer may also have the option of avoiding the contract from its beginning.

Comment: the requirement of full and frank disclosure is of the utmost importance with this type of insurance. This is particularly the case in respect of anything which may be relevant to the risk for which you seek cover (e.g. claims, whether founded or unfounded), or to the magnitude of the risk.

41    Under section 2 of the Important Notices, it was stated that the declaration was for a claims made and notified policy of insurance.

42    Under “Part 1. Insured Entities” Mr Bowmaker set out the details of All Class, including its Principal Office, AFS Licence Number, ABN and trading names. Mr Bowmaker is listed as the contact person.

43    Under Part 2, titled “Underwriting Information applicable to Management Liability / Crime and Professional Indemnity insurance”, All Class’ total base premium amount was stated to be $6 million and its total revenue was said to be $1.6 million. Question 2.7 asked for details of “the number of people and entities engaged by the Licensed Company as at the date the application form is completed”. All Class’ answer was as follows:

2.7.1 Shareholders and Directors:                        1

2.7.2 Management:                                2

2.7.3 Staff (Employees) who provide advice and deal in general insurance products, claims management, risk management and sales:                    3

2.7.4 Staff (Employees) who provide advice and deal in life risk, disability, income protection insurance and superannuation:                    0

2.7.5 All other Employees/ such as accounting functions, administration, clerks, secretaries, office assistants, etc:                        1

2.7.6 Authorised Representatives (Individual)                    0

2.7.7 TOTAL number of people:                         7

All staff were said to be based in New South Wales.

44    Part 3 was headed “Professional Indemnity – ERATO”. Under this Part, All Class gave details about the nature of its brokerage, including the types of insurance contracts it was authorised to issue under its AFS Licence. The answer to question 3.9 specified Mr Bowmaker as the sole Shareholder/Director and in response to question 3.10 Mr Bowmaker was specified as the only “Management personnel who [had] responsibility for the financial services provided” by All Class.

45    Part 4 was headed “Statements relating to Claim Circumstances – ERATO”. Mr Bowmaker answered “no” to questions concerning whether there had been any claims of negligence against All Class, whether any payments in settlement had been made or whether All Class, or its Principal, Authorised Representatives or Distributors were aware of any circumstances which may result in a claim being made against All Class or against any Principal.

46    Part 5 of the Insurance Application form was as follows (All Class’ answers in bold):

Part 5. Statements relating to Claim Circumstances – Management Liability/Crime

5.3     Other than the claim circumstances listed in the tables at questions 5.1 and 5.2, since 1st July 2015, have there been any claims made against:-

•    any insured Company or

•    their Directors or

•    employees

that may have been covered under this policy if it were in force?: No

…

5.4     Other than the claim circumstances listed in the table at question 5.2, has any

•    Director(s) or

•    Officer(s) of any insured Company

ever had proceedings (civil or criminal) instigated against them alleging Misconduct or Breaches of the Law in their capacity as a director or officer of any company?: No

 …

5.5     Other than the claim circumstances listed in the table at question 5.2, since 1st July 2015, has any insured Company suffered any Direct Financial Loss exceeding $5,000 as a result of fraud or dishonesty committed by a staff member?: No

If “Yes”, please provide full details including the name of the staff member(s), how the loss occurred, the amount of the loss and what measures were taken to prevent any similar loss occurring in the future in a separate Claims Addendum.

Fidelity

5.6     Is the Company(s) aware of any reasonable cause for suspicion of any fraud or dishonesty on the part of any present or former Principals or Employees?: No

 5.7     Does the person preparing cheque requisitions also sign cheques? No

5.8     Is any Principal or Employee sole signatory for any cheques or other negotiable instruments?: No

  5.9     Are payments made electronically using bank EFT facilities? No

5.10     How often are entries in your accounting system checked with the supporting documents and reconciled to your bank Weekly

 5.11     How often as bank reconciliations reviewed by the Principal? Weekly

47    Questions 5.1 and 5.2 were absent from the completed Insurance Application form. The parties agree that the reference to the date “1st July 2015” can be taken to have appeared as “1st July 2007” at the time Mr Bowmaker completed the form. The inclusion of 1st July 2015 in the printed copy of the form included in the Tender Bundle (Exh B) was explained by the parties as a function of the way in which the form had been obtained from Steadfast’s computer records in 2020 in response to a subpoena to produce documents.

48    Part 6 of the Insurance Application form asked whether insurances covered by the Application had been declined, cancelled by the Insurer or not renewed by the Insurer, to which All Class answered “no”.

49    The form concluded with a declaration and signature panel as follows:

DECLARATION

By submitting this form to Steadfast, the signatory declares:

1.     That the signatory is authorised to make this declaration on behalf of the person(s) and entities named at Question 1.1 above.

2.     That the information supplied in this declaration (and any attachments relating to it) is true and correct.

3.     That the signatory understands and acknowledges that the ERATO insurers rely on the information contained in the declaration (and any attachments relating to it).

4.     The signatory understands and acknowledges that the declaration (and any attachments to it) and any other information supplied to the ERATO insurers will be used to assess whether insurance will be offered and terms on which it will be offered.

5.     That there is no change, except as may be documented above, to the information contained in the last dated proposal for this insurance.

Name of Licensed Company    All Class Isnruance [sic] Brokers p/l

Title of Signatory                   M Director

Name of Signatory                 Leroy M Bowmaker

Date                                       18 Apr 2012 3:41:25 PM

50    There is no evidence to suggest that this form was provided by Steadfast or Mega Capital to Old Chubb. It contained information for the purposes of Old Chubb’s insurance cover and the professional indemnity cover of the other insurer. The terms of [18] of Mr Kelaher’s first affidavit permit the inference (which I draw) that such information was collected by Steadfast and passed on (relevantly) to Old Chubb. Such is the natural inference. Such would have been understood and expected by Mr Bowmaker.

51    The negotiation process between Old Chubb and Steadfast outlined in Mr Kelaher’s first affidavit is demonstrated in the emails between Old Chubb and Mega Capital included in the Tender Bundle (Exh B). On 20 April 2012, Mr Kelaher received an email from Mr Lowenstein of Mega Capital attaching what is described by Mr Lowenstein in the body of the email as a “Management Liability Insurance Application for Steadfast Group Ltd” and Steadfast’s 2010 and 2011 annual reports. The attachments were not included in the Tender Bundle (Exh B). Mr Lowenstein noted that the policy fell due for renewal on 30 June 2012 and stated “at this stage we have provided the 2011 Proposal Form, however would appreciate if you could provide your indicative terms by no later than Monday 30 April 2012”. Mr Lowenstein sent a follow up email on 30 April 2012, to which Mr Kelaher replied on 3 May 2012 stating that there was an upcoming meeting between Old Chubb and Steadfast and the indicative terms would be provided after this meeting. This is consistent with Mr Kelaher’s affidavit evidence to the effect that the policy terms were negotiated between Old Chubb and Steadfast directly.

52    After another follow up email from Mr Lowenstein on 15 May 2012, Mr Kelaher provided the indicative terms and policy wording to Mega Capital on 17 May 2012. Mr Kelaher requested that Mega Capital provide a “Management Liability Proposal Form” to Old Chubb “on binding”.

53    A proposal form for the 2012 Policy, titled “Forefront Portfolio Proposal Form”, was signed by Steadfast on 15 June 2012. The form was under the letterhead of Old Chubb. It requested that the “Statutory Notice”, which appeared on page 5 of the form, be read before completing the form. The Statutory Notice set out the duty of disclosure and the consequences of non-disclosure, pursuant to s 22(1) of the IC Act.

54    The following aspects of the Proposal Form are of note:

(a)    The name of the “Applicant” was specified as Steadfast.

(b)    Under Part C, the names of directors, the identity of shareholders and percentages of shares owned in the Applicant, and the Applicant’s audited Financial Statements for the past two years were stated to be “As per Annual Report”.

(c)    Under Part D, headed “Employment Practice Liability”, the total number of local employees was specified as 31.

(d)    Under Part F, internet liability coverage was sought for the website www.steadfast.com.au.

(e)    Part H dealt with Crime Coverage and included questions relating to the signing of cheques and handling of bank deposits. It is clear from the answers to these questions and the other questions in the Proposal Form that Steadfast was answering the questions on the basis of its own practice, not the practice of its members.

55    Part K of the Proposal Form contained a declaration and signature, which included the following:

The undersigned declares that to the best of his or her knowledge and belief that the statements set forth herein and all attachments and supplementary proposal forms hereto are true and immediate notice will be given should any of the above information alter between the date of this proposal and the proposed date of inception of the insurance. Although the signing of this proposal does not bind the undersigned on behalf of the Applicant or its directors, officers or other insured person to effect insurance, the undersigned agrees that this proposal and all its attachments and supplementary proposal hereto and the said statements herein shall be the basis of and will be incorporated in the policy should one be issued.

The undersigned on behalf of the Applicant and its directors and officers and any other person proposed for insurance, acknowledge that the Statutory Notice contained herein has been read and understood.

This section of the proposal must be signed by the APPLICANT’S CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE DIRECTOR OR MANAGING DIRECTOR ONLY.

56    It can be accepted that Steadfast was seeking to obtain insurance for itself.

57    Based on Mr Kelaher’s account of the renewal process which he says typically took place each year, it would be expected that Steadfast would have also provided a Placing Slip to Old Chubb before commencement of the Policy on 30 June 2012. A Placing Slip for renewal of the 2012 Policy was not included in the Tender Bundle (Exh B) nor the exhibit to Mr Kelaher’s affidavit. I infer that the Placing Slip for the Policy commencing in 2012 is one of the documents that Mr Kelaher has been unable to locate in his search of the records held by Old Chubb and Chubb.

58    Included in the exhibit to Mr Kelaher’s affidavit and the Tender Bundle (Exh B) were the Placing Slips for the Forefront Portfolio package policies commencing in 2011 and 2013.

59    The Placing Slip for the policy commencing in 2011 had the Steadfast logo in the top right corner and was titled “Placing Slip Forefront Portfolio: Management Liability / Crime Insurance”. The “Policyholder” was specified as “Shareholders of Steadfast Group Limited authorised to access the Steadfast Group products and services as per list provided” and SME Surveys Pty Ltd and Mirimar Underwriting Agency Pty Ltd. The parties were agreed that the latter two companies were not shareholders of Steadfast but were affiliated with the group. The limit of liability for the “Crime Section” was specified as $10,000,000. The primary form was said to be “as expiring policy number 93298628 issued 4 February 2009”. The Placing Slip did not identify Steadfast as an insured.

60    Under the heading “Information”, the disclosed revenue for the financial year ending 30 June 2010 was set out for “Licensed Companies”, “Subsidiary or Associate Companies”, and “Authorised Representatives”. The total revenue of the “Licensed Companies” and “Subsidiary or Associate Companies” was $595,488,739. Also under the heading “Information” were the names of the seven shareholders of Steadfast who had elected not to participate in the policy for that year.

61    Under the heading “Application Form Disclosures”, the form stated: “The following disclosures have been made in the application forms. Information relating to the disclosures is available on request.” Beneath this statement was a table with columns headed “Licensee Company”, “Q5.3 Claims Made”, “Q5.4 Misconduct”, “Q5.5 Other Claims” and “Q5.6 Fraud Losses”. The table contained the names of five insurance brokers, agreed by the parties to be shareholders of Steadfast, with the word “yes” in the relevant column relating to the type of disclosure made by each broker. Chubb submitted, and I accept, that the references to Q5.3, Q5.4, Q5.5 and Q5.6 are references to the questions included in the application forms completed by each shareholder. The wording of these questions in the Insurance Application form completed by All Class in 2012 is set out above at [46] above. The wording of these questions in the 2011 application form completed by All Class (which was included in the Tender Bundle (Exh B)) is identical to that contained in the 2012 Insurance Application form.

62    The 2011 Placing Slip concluded by specifying the premium amount, being $165,000 excluding GST and stamp duty. The insurer was specified as Old Chubb.

63    The Placing Slip for 2013, although titled “Renewal Submission”, was substantially in the same form as the 2011 Placing Slip, identifying “Policyholder” as in the 2011 Placing Slip (the shareholders of Steadfast), and including the list of shareholders who had elected not to participate and the specification of members and/or shareholders who had made disclosures in their application forms.

64    It is apparent from documents included in the Tender Bundle (Exh B) that the terms of the 2012 Policy, once entered into, were accessible by the shareholders and members of the Steadfast Group via the Steadfast website. Included in the Tender Bundle (Exh B) are printed copies of two webpages on the Steadfast website both dated 4 March 2013. The first webpage is described in the Index to the Tender Bundle (Exh B) as “Steadfast Notification of Forefront Portfolio Insurance Policy cover”. At the top of the webpage are the words: “Steadfast Group Management Liability / Crime Webpage Update – Provided by Steadfast for the benefit of Shareholders [who] completed and submitted the policy renewal application form.” The 2012 Policy wording and Policy schedule and endorsements were available to download from the webpage. The webpage also includes a summary of the Policy which provides details such as the limits and sub-limits of liability and deductibles, the retroactive date, and the extended (claim reporting) period. The limit is described as a “Shared Limit of $10 million aggregate for all Shareholders”. Counsel for Chubb submitted that the reference to a shared limit of $10 million meant that each insured was entitled to $10 million in the aggregate of liability coverage in and of itself, regardless of what cover was provided to other shareholders or insureds. I accept that submission and so find. Under the heading “Extension of the Named Insured” is the statement “Insured Persons also means an Authorised Representative or Individual Agent and a Corporate Authorised Representative Corporate Agent of an Insured Organisation”. Under the heading “Contact Details” it is stated that “all queries including notification of claim circumstances are to be directed to Steadfast”. Old Chubb is listed as the insurer for both Group Management Liability / Crime Insurance and Directors’ & Officers’ Costs & Expenses Insurance.

65    The second webpage has the heading “Group Insurances for Members”. The webpage states: “Click on the following links to access information relating to your application, the Insured entities and persons and wordings”. The website page states the following in relation to “Claim Notification Procedures”:

Initially, circumstances that may give rise to a claim under the Steadfast Group policy are to be advised to Peter Imeson [of Steadfast] on the below contact details.

Provide a summary of the circumstance, the date you became [aware] of the possible claim, the estimated loss amount and support[ing] documents.

Steadfast will provide notification of the potential claim circum[stances] to the Insurer with Instructions for the Insurer to deal with the Shareholder.

66    It ought be noted that included in the Tender Bundle (Exh B) are three invoices which appear to have been issued by All Class to itself in relation to the 2012 Policy underwritten by Old Chubb. The invoices are all dated 21 May 2012, the Insured is specified as All Class, and the period of cover is from 30 June 2012 to 30 June 2013. The coverage is specified to include that pertaining to crime, legal expenses and management liability. The premium to be paid is stated as nil. The existence of these invoices may be explained by a notice published on the Steadfast website in 2010 addressed to the Shareholders:

IMPORTANT NOTICE

Do not raise a tax invoice for the ERATO renewal premium in your broking system. The ERATO premium is a business expense, no different to any other business expense. Whilst the expense relates to insurance, it does not relate to a financial service that has been provided by the Licensed Company. Debits raised for the ERATO premium will have an impact on reports generated from your broking system including the Steadfast Report and the new APRA Form 701 report Intermediated Insurance Business.

If a record of the ERATO policy is required in your broking system, process a policy transaction with a NIL premium amount ($0.00).

67    The meaning of the acronym “ERATO” is somewhat unclear. On the first day of hearing, counsel for Chubb informed the Court that ERATO is “a professional indemnity program and error rectification service exclusively available to Steadfast brokers and their clients. The program involves resolving errors and omissions by Steadfast brokers with up to $100 million in cover. When an error is reported, the dedicated ERATO team steps in to quantify the client’s loss and resolve their claim.”

68    However, the phrase ERATO also appears to refer to a professional indemnity insurance policy taken out by Steadfast on behalf of its members, which was not underwritten by Old Chubb or Chubb. In this respect, on the second day of hearing All Class tendered a chain of emails and attachments commencing with an email from its former employee, Ms Snelling, to Macquarie Group dated 21 June 2011, which was marked Exhibit D. The email to Macquarie Group enquired as to “ERATO Premium Funding” for a total premium of $24,062.64. It is apparent from the chain of emails that Macquarie Group offered Steadfast members premium funding for their “Erato Professional Indemnity Premium”. Included with the bundle of emails is a print-out of a webpage on the Steadfast website as at 16 June 2011, titled “Professional Indemnity Insurance – ERATO”. The webpage sets out the details of All Class’ professional indemnity insurance policy for 2011/2012. The policy had a limit of $100 million for any one claim, limited to $214 million “in the aggregate inclusive of all reinstatements”. Under the heading “Fidelity” it states: “Fidelity cover is to apply on Difference-in-Conditions / Difference-in-Limits basis to the Group Management Liability / Crime Insurance Policy issued by Chubb Insurance Company of Australia Limited, Sydney”. The sub-limit of indemnity for “Trust Funds” was $1 million for any one claim. All Class’ share of the premium for this group policy is specified as $24,062.64 including stamp duty and GST. The webpage then sets out a summary of cover, including specifying All Class as the Insured and the Policy Form as “Civil Liability Insurance Brokers Professional Indemnity as amended and compliant with Corporations Law Reg 7.6.02AA”. Under the heading “Structure of ERATO 11”, the webpage lists a number of different insurers who each took a tranche of liability under the policy. Chubb is not listed.

Discovery of the fraudulent transactions and claim notification

69    In the course of its business as an insurance broker, All Class received from its clients payments for insurance policies arranged on their behalf. The payments were held in a trust brokerage account which was maintained pursuant to Div 2 of Pt 7.8 of the Corporations Act 2001 (Cth). The moneys paid by the clients were taken to be held on trust: Corporations Act, s 981H; Corporations Regulations 2001 (Cth), reg 7.8.05. Regulation 7.8.02 of the Corporations Regulations required that payments be made out of such an account only when: making a payment to or in accordance with the written direction of a person entitled to the money; defraying brokerage and other proper charges; or paying to the financial services licensee money to which the financial services licensee is entitled.

70    The parties were agreed that the balance of All Class’ trust account was negative on several occasions in the period 1 June 2008 to March 2013, and in particular in the period from 10 November 2010 to 14 November 2010. The parties also were agreed that moneys from the trust account were fraudulently misappropriated by Mr Bowmaker at various times in the period between 1 June 2008 and March 2013. Those fraudulent misappropriations were undertaken by Mr Bowmaker transferring funds from the trust account to All Class’ office account and to certain other accounts, some of which belonged to Mr Bowmaker in his personal capacity.

71    On 28 January 2011, All Class received a letter addressed to Mr Bowmaker from FMK Chartered Accountants, who had conducted an audit of All Class’ financial accounts for the year ending 30 June 2010. In that letter, FMK set out a number of issues arising from the audit, in particular concerning All Class’ trust account. FMK noted that the initial trust account bank reconciliation report they had received contained items which should not have appeared in the report. As a result, FMK were required to prepare a manual reconciliation of the trust account as at 30 June 2010. The discrepancies resulted in the reconciled balance of the trust account changing from $495,691 to negative $321,021. FMK concluded that the trust account was overdrawn, noting at page 2 of the letter:

It appears that this has arisen due to overpaid commissions, or instances where the system has allowed you to refund monies to clients prior to funds being received from the underwriters. We note that your trust accounting system should have built in controls that prevent these situations from occurring but for some reason the controls were not effective for those transactions.

72    FMK recommended that “instances of overpayments should be investigated and steps taken to recover shortfalls”. On pages 4 and 5 of the letter, FMK stated the following:

ASIC Reporting

We are required to report to ASIC any matters that come to our attention in relation to your Financial Services License. Paragraph 8 of the 2010 Audit Report mentions the following items:

•    Overdrawn Trust Bank Account

A trust account should never be overdrawn, as monies are only supposed to be paid out after monies have been received from the relevant party. However, as noted earlier, your trust account balance is overdrawn as at 30 June 2010.

Recommendation

We recommend that you consult your compliance auditor and/or ASIC directly as to whether this is a breach of your Financial Services License and whether it is required to be formally reported to ASIC.

Management Response

•    Deficiencies Within the Trust Accounting System

At numerous times throughout the course of the audit you notified us, or we became aware, of deficiencies with the information being produced by your trust accounting software. The financial impact of the known deficiencies, where possible, has been adjusted within the financial statements. However, it is also evident that when problems appear it often relates to earlier periods, and the problem may not have been evidence in earlier reports.

Based on the above, there is a possibility that there may be further deficiencies within the trust balances that relate to the current (or prior) financial year that may not appear until future periods. We have therefore reported this to ASIC.

73    The letter included a number of blank spaces under sub-heading “Management Response”. It is unclear whether Mr Bowmaker or any other manager of All Class ever provided a response. It is also unclear what steps were taken as a result of this letter, including whether FMK ever reported All Class to ASIC.

74    It appears that no further action was taken against All Class in relation to the overdrawn trust account until March 2013.

75    On or about 27 February 2013, Mr Bowmaker was admitted to hospital after suffering what is described by the parties as a “major breakdown”.

76    On 1 March 2013, All Class was served with a Notice issued under s 33 of the Australian Securities and Investments Commission Act 2001 (Cth) concerning suspected contraventions of ss 184, 912A and 1041G of the Corporations Act. The notice required production of all cheque books and MYOB electronic records pertaining to All Class’ trust account and general working account for the period of 30 August 2012 to 30 January 2013.

77    On 7 March 2013, Mr Bowmaker’s wife, Mrs Bowmaker, was appointed as his power of attorney. At some stage between Mr Bowmaker’s hospitalisation and 27 March 2013, Mrs Bowmaker discovered that there was a significant deficiency of funds in All Class’ trust account. On 27 March 2013, Mrs Bowmaker sent the following email to Mr Imeson, the Steadfast employee specified as the claims contact on the Steadfast website:

Incident Notification

27/2 – Principal suffered major breakdown and emitted [sic: admitted] to hospital, it has been diagnosed as ongoing mental illness.

Following this as Leroy Bowmaker was the sole director and RO immediate steps were taken for the interim with a replacement RO. During this process it was discovered insufficient funds where [sic] available in the trust account, it appears funds were used to keep company afloat following the United Petroleum legal case, Principal attempted all means to rectify issue however at this stage serve [sic: severe] depression and mental illness occurred.

Can you please submit the necessary claim to assist in this matter.

Mrs Bowmaker identified herself in the email as All Class’ Office Manager.

78    Steadfast notified Old Chubb of the discrepancies in the trust account on the same day.

79    On 5 April 2013, Mr Imeson (of Steadfast) advised Mrs Bowmaker that a claims examiner had been appointed by Chubb to manage the claim and requested a number of items to be provided to substantiate the claim.

80    On 17 April 2013, All Class was placed into external administration. Mr Vardy of SV Partners was appointed as liquidator on the same date.

81    On 31 October 2014, Mr Vardy provided a proof of loss to Old Chubb in relation to the claim. As explained above, further information has been requested by Old Chubb and subsequently Chubb on a number of occasions since that date, in particular they have requested further details about the amounts said to have been fraudulently misappropriated and the results of any tracing exercise. There have been lengthy delays by Mr Vardy in responding to these requests.

82    The parties were not in agreement as to the amount fraudulently misappropriated by Mr Bowmaker. There is lack of clarity as to the total amount of funds improperly transferred from All Class’ trust account, the destination of those funds and the purpose for which they were ultimately used. All Class claimed that the total shortfall in the trust account at the time the liquidator was appointed was $2,031,086.87. By that time, between June 2008 and March 2013, a total of $8,111,047.38 had been transferred from All Class’ trust account to its general operating account, some of which were legitimate transfers, and a total of $369,953.21 had been transferred from the trust account to third parties other than those who were beneficially entitled to the funds, including payments directly to Mr Bowmaker and Mr Bowmaker’s superannuation fund. On All Class’ case, between June 2008 and March 2013, somewhere between $1.66 million (if it is assumed that the entire $369,953 transferred to third parties was improper) and $2.031 million (if it is assumed that the entire $369,953 transferred to third parties was proper) was improperly transferred to All Class’ office account.

83    The email from Mrs Bowmaker to Steadfast on 27 March 2013 is the only evidence as to what the funds were used for and what ultimately happened to the funds. Chubb accepted that the majority of the funds went into All Class’ office accounts, but where they went from there and for what purposes they were used is unknown, except for what Mrs Bowmaker says in her email, namely that the funds were used to keep the company afloat. Though short and abbreviated, that evidence comes from the wife of the dishonest managing director. It conforms with the fact that over $8 million dollars was taken from the trust account, with most being put in the office account, and there being a shortfall of over $2 million. I find that a material and significant part of the funds wrongly and dishonestly removed from the trust account were placed into All Class’ office account by Mr Bowmaker for the purpose of supporting the business of All Class. It is not possible on the material provided to draw any conclusion as to how much of the funds were actually taken wrongfully from the company by Mr Bowmaker for his own benefit.

The Policy

84    The 2012 Policy contains nine sections: General Terms and Conditions; Directors & Officers Liability; Employment Practices Liability; Miscellaneous Professional Liability (not taken out as not available); Trustees Liability; Internet Liability; Statutory Liability; Crime Coverage; and Kidnap, Ransom & Extortion. Each section includes its own schedule, insuring clauses, extensions, definitions and exclusions.

85    The General Terms and Conditions Section of the Policy commences with a page of Declarations. Item 1 specifies the “Principal Organisation” as “Shareholders of Steadfast Group Limited authorised to access the Steadfast Group products and services [and] Mirimar Underwriting Agency Pty Ltd”. Item 2 specifies the Policy Period from 4:00pm on 30 June 2012 to 4:00pm on 30 June 2013. Item 3 provides that the Maximum Limit of Liability for the Liability Coverage Sections is $10,000,000. Item 4 indicates that all coverage sections were taken out except for the Miscellaneous Professional Liability Section. Item 5 provides for an Extended Reporting Period of 90 days with an additional premium of $41,250.00. Item 6 states there were nil endorsements.

86    Clause I of the General Terms and Conditions Section is as follows:

Except for these General Terms and Conditions or unless stated to the contrary in any Coverage Section, the terms and conditions of each Coverage Section apply only to that Coverage Section. The General Definitions apply to all Coverage Sections in addition to the any specific definitions that may apply in each Coverage Section. If any provision in these General Terms and Conditions is inconsistent or in conflict with the terms and conditions of any Coverage Section, the terms and conditions of such Coverage Section shall control for purposes of that Coverage Section. Any words in bold print in these General Terms and Conditions not defined herein shall have the meaning indicated in the definitions section of the relevant Coverage Section.

87    Clause II of the General Terms and Conditions Section contains definitions. “Insured” is defined in the General Terms and Conditions Section to mean “an Organisation and/or Insured Persons”. The following definition is provided for “Organisation”:

Organisation means, collectively, the Principal Organisation and any Subsidiary.

Organisation shall also mean a past, present or future Corporate Authorised Representative or Corporate Agent of an Organisation but only in respect of work performed within the scope of its duties in the conduct of the Organisation’s profession while a Corporate Authorised Representative of the Organisation, including associate subsidiary and related entities of the Organisation.

88    “Principal Organisation” is defined as “the organisation designated in Item 1 of the Declarations” (see [85] above).

89    “Corporate Authorised Representative” means:

an entity whose name has been advised to ASIC for inclusion on the ASIC Authorised Representative register and pursuant to Part 7.6 of the Corporations Act 2001 (Cth) is authorised in writing to advise and/or deal in financial products of the Organisation’s profession on behalf of an Organisation who holds an Australian Financial Services (AFS) licence.

90    “Corporate Agent” is defined as “an incorporated agent of the Organisation who is not a Corporate Authorised Representative of the Insured”.

91    “Insured Person” is defined as follows:

Insured Person shall have the meaning ascribed to that term in each Coverage Section. Solely with respect to any Liability Coverage Section, coverage for an Insured Person shall also include:

(a)     the lawful spouse or Domestic Partner of an Insured Person, solely by reason of such person’s status as a spouse or Domestic Partner or such spouse or Domestic Partner’s ownership interest in property which the claimant seeks as recovery for an alleged Wrongful Act of such Insured Person; or

(b)     the estate, heirs, legal representatives or assigns of an Insured Person who is deceased or against the legal representative or assigns of an Insured Person who is under a legal disability by reason of mental incapacity or is insolvent or bankrupt.

Insured Person shall also mean a past, present or future Authorised Representative, Distributor, Referrer or Individual Agent of an Organisation but only in respect of work performed within the scope of their duties in the conduct of the Organisation’s profession while an Authorised Representative, Distributor, Referrer or Individual Agent of the Organisation.

92    “Authorised Representative” is defined as:

a natural person authorised in writing by the Organisation pursuant to Part 7.6 of the Corporations Act 2001 (Cth), and not having been previously banned or suspended by the Australian Securities Industry Commission (ASIC), to advise and/or deal in financial products of the Organisation’s profession on behalf of an Organisation who holds an Australian Financial Services (AFS) licence.

93    “Distributor” is defined to mean “a natural person, Company, Partnership, Sole Trader or Trust authorised in writing by the Organisation pursuant to Class Order 05/1070 of the Corporations Act 2001 (Cth)”.

94    Clause XIV of the General Terms and Conditions Section is as follows:

XIV. Proposal – Representations

In Issuing this Coverage Section the Company has relied upon the statements, representations and information in the Proposal.

With respect to the Liability Coverage Sections only:

The Proposal shall be construed as a separate proposal for coverage for each Insured. No statement, representation or information provided in the Proposal by an Insured or knowledge possessed by such Insured shall be imputed to any other Insured for the purpose of determining if coverage is available under the Coverage Section.

The Company shall not avoid the relevant Coverage Section with respect to any Insured.

In the event of fraudulent misrepresentation or fraudulent non-disclosure at the time the relevant Coverage Section was entered into (a) by an Insured Person or, (b) with respect to any Claim under Insuring Clause 1.C of the Directors’ and Officers’ Liability Coverage Section or any of the other Liability Coverage Sections, by any chairman, managing director, chief executive officer, chief financial officer, in-house general counsel, company secretary or the holder of any equivalent position in any jurisdiction of an Organisation, then the Company shall have the rights available to it in accordance with section 28(3) of the Insurance Contracts Act 1984 (Cth), as amended, with respect to any Loss on account of a Claim made against such Insured based upon, arising from or in consequence of the fraudulent misrepresentation or fraudulent non-disclosure.

In the event of misrepresentation or non disclosure, [sic] other than fraudulent misrepresentation or non-disclosure, the Company waives all rights available to it pursuant to section 28(3) of the Insurance Contracts Act 1984 (Cth), as amended.

95    “Proposal” is defined in Clause II of the General Terms and Conditions as follows:

Proposal means all proposals, including attachments and materials incorporated therein, submitted by, or information disclosed by the Insureds to the Company for this policy or any policy issued by the Company of which this policy is a direct or indirect renewal or replacement. All such proposals, attachments and materials are deemed attached to, incorporated into and made a part of this policy.

96    The Coverage Section relevant to this dispute is the “Crime Coverage Section”, alternatively referred to in some parts of the Policy as the “Employee Theft Coverage Section”. Insuring Clause I(A) of that Section provides:

The Company shall pay the Principal Organisation for direct loss of Money, Securities or Property sustained by an Insured resulting from Theft, fraud or dishonesty, committed by an Employee, whether acting alone or in collusion with others, which direct loss is Discovered during the Policy Period or Extended Discovery Period.

97    “The Company” is defined in the Crime Coverage Section to mean Old Chubb. “Principal Organisation” is not defined in the Crime Coverage Section, and thus the definition provided in the General Terms and Conditions applies. That is, Principal Organisation includes each shareholder of Steadfast authorised to access the Steadfast Group products and services. The parties agree that All Class fell within this definition at all relevant times.

98    “Insured” is defined in the Crime Coverage Section to mean “an Organisation and, with respect to Insuring Clause [I(A)] only, any Superannuation Fund”. “Organisation” is not defined in the Crime Coverage Section and thus the definition in the General Terms and Conditions applies, being the definition set out at [87] above, including the Principal Organisation and any Subsidiary.

99    The term “Theft” is defined to mean “the unlawful taking of Money, Securities or Property to the deprivation of an Insured with respect to Insuring Clause [I](A)”. The terms “fraud” and “dishonesty” are not defined in the Policy.

100    The term “Employee” means a natural person:

(a)     while in the regular service of an Organisation in the ordinary course of such Organisation’s business whom such Organisation has the right to govern and direct in the performance of such service whether the Organisation compensates such person by salary, wages and/or commissions or whether such person is a volunteer;

(b)     who is an Executive while performing acts within the scope of the usual duties of an employee as described in paragraph (a) of this definition;

(c)    while in the service of any Superannuation Fund as fiduciary, trustee, administrator, officer or employee, or

(d)    assigned to perform duties within the scope of the usual duties of an Employee, as described in paragraph (a) of this definition, within Premises for an Organisation by any agency furnishing temporary personnel on a contingent or part time basis. However, this Coverage Section does not cover any loss caused by any such person if such loss is also covered by any insurance or sureties held by the agency furnishing such temporary personnel to an Organisation.

101    “Executive” is defined to mean “a natural person who is duly elected or appointed director or officer, or equivalent positions in any jurisdiction, of an Organisation”.

102    “Discovery” or “Discovered” is defined to mean:

knowledge acquired by an Executive or Insurance Representative of facts which would cause a reasonable person to believe a loss of the type covered by this Coverage Section has occurred or acts have taken place which may subsequently result in such loss. This includes loss sustained prior to the Inception date of this Coverage Section; loss which does not exceed the Deductible Amount as set forth in the Schedule; or loss which the exact amount or details of which are unknown. Discovery or Discovered shall not include knowledge acquired or possessed by an Executive or Insurance Representative whether acting alone or in collusion with an Employee or any other person, which is a participant in the Theft, fraud or dishonesty.

103    All Class also seeks indemnity under Insuring Clause I(J), which provides that the insurer “shall pay the Principal Organisation for Investigative Costs”. “Investigative Costs” are defined as:

reasonable expenses, (other than regular or overtime wages, Salary or fees of the company directors, officers or employees of an Organisation or office overheads, travel costs unrelated to a loss or other administration costs) incurred by an Organisation, with the Company’s prior written consent, to establish the existence and amount of any direct loss covered by this Coverage Section which are excess of the Deductible Amount applicable to such direct loss. …

104    The Schedule to the Section includes Limits of Liability for Insuring Clauses I(A) and I(J) of $10,000,000 and $50,000 respectively.

105    The Crime Coverage Section includes a number of other insuring clauses concerning coverage for theft by a third party on an Insured’s premises and in transit, and coverage for forgery, computer fraud, funds transfer fraud, counterfeit currency fraud and credit card fraud committed by a third party which results in an Insured sustaining a direct loss. Insuring Clause I(I) provides for “Client Coverage”, as follows:

The Company shall pay the Principal Organisation for direct loss sustained by a Client resulting from Theft, fraud or dishonesty committed by an Employee not in collusion with such Client’s directors or employees, including for the avoidance of doubt, temporary staff, or agents which direct loss is Discovered during the Policy Period or Extended Discovery Period.

106    The Crime Coverage Section contains a number of exclusions, including for “indirect or consequential loss or damage of any kind” and “Known Dishonesty”. “Known Dishonesty” is relevantly specified as:

(i)     loss caused by an Employee which is sustained by an Insured:

(a)     after an Executive or Insurance Representative becomes aware of a Theft, fraud or dishonesty committed by such Employee while employed with an Insured; …

107    Finally, Clause IX titled “Proof of Loss and Legal Proceedings” required that, upon Discovery, “the Principal Organisation will give written notice to the Company at the earliest practicable moment, and in no event later than ninety (90) days after such Discovery; [and] furnish a proof of loss with full particulars to the Company within six (6) months of such Discovery”.

108    It is unnecessary to discuss the content of the other coverage sections in any detail. It can be noted, however, that the Directors & Officers Liability Coverage Section contains three endorsements which also specify the “Insured” as “Shareholders of Steadfast Group Limited authorised to access the Steadfast Group products and services Miramar Underwriting Agency Pty Ltd”. The Name of Company is specified as Old Chubb, and the “Producer” is stated to be “Steadfast Underwriting Room”.

The issues

109    I have set out at [10]–[15] above the respective claims. Broadly speaking there are three issues concerning liability in dispute. The first issue is whether there was a relevant non-disclosure by All Class so as to enable Chubb to avoid the policy or to reduce its liability under the Policy to nil. The second issue is whether Mr Bowmaker was an Employee under Insuring Clause I(A). The third issue is whether All Class sustained any direct loss so as to engage the insuring clause. Relevant to at least the first and second of these issues is the question of whether Mr Bowmaker’s knowledge of the fraudulent payments can be attributed to All Class.

110    The question of non-disclosure was put by Chubb as fraudulent non-disclosure and in the alternative as innocent non-disclosure: para 56(e) of the response to the amended concise statement dated 31 October 2019 and para c) 2 of the insurer’s statement of position dated 13 June 2019.

111    No reply was filed by All Class.

112    Prior to the hearing the parties agreed a statement of agreed facts. Fact 8 was in the following terms:

Chubb issued Forefront Portfolio Policies 93298628 (the Policies) to All Class as a shareholder of the Steadfast Group for the following periods:

a)     30 June 2008 to 30 June 2009;

b)     30 June 2009 to 30 June 2010;

c)     30 June 2010 to 30 June 2011;

d)     30 June 2011 to 30 June 2012;

e)     30 June 2012 to 30 June 2013.

113    The phrasing “issued to” was consistent with the proposition that Old Chubb and All Class were parties to the Policy. No qualification was made that cover was obtained by All Class not as a party to the Policy, but as a third party beneficiary for the purposes of s 48 of the IC Act.

114    On 2 November 2020 (one week before the hearing), All Class filed “submissions on hearing” of its counsel, Ms King. The submissions addressed the policy and construction issues, but did not address the question of non-disclosure.

115    On 6 November 2020, Chubb filed an outline of submissions of its counsel, Mr Keizer. These submissions dealt with non-disclosure.

116    On the first day of the hearing (9 November 2020), Ms King provided submissions in reply in which it was submitted that All Class was not a party to the Policy but a s 48 third party beneficiary, and thus had no duty of disclosure: ABN Amro Bank NV v Bathurst Regional Council [2014] FCAFC 65; 224 FCR 1 at 317–320 [1631]–[1652].

117    Chubb’s answer to this was that All Class was a party to the Policy as a disclosed principal, the policy being arranged on its (and all Steadfast’s shareholders’) behalf by its (and their) agent, Steadfast.

118    At the hearing, Ms King submitted that Chubb could not rely on that point because it had not been pleaded. It is to be recalled that All Class did not file a Concise Statement in reply to the assertion by Chubb in the Concise Statement in response that there had been non-disclosure.

119    Chubb is able to rely on this point for a number of reasons.

120    First, the s 48 point was not pleaded and not mentioned in any case management hearing over nearly two years. The point is inconsistent with a fair reading of admitted fact 8. Whilst the statement of agreed facts was not signed, there is no reason why the policy behind s 191 of the Evidence Act 1995 (Cth) should not apply.

121    During the hearing it became apparent that in the course of the negotiation of the statement of agreed facts, there was no discussion between the parties’ solicitors as to whether that paragraph was directed to s 48 of the IC Act or not. Counsel for All Class explained that from All Class’ perspective, [8] was merely intended to convey that All Class was entitled to claim on the policies, a fact which was not in dispute.

122    With the utmost respect, I am troubled by that statement of counsel for All Class. If the s 48 point had not been thought of, it can be raised, but Chubb should be able to meet it as a late raised and hitherto undisclosed point. If the point had been thought of in advance and was to the mind of those negotiating the agreed facts, and those responsible for not pleading it in reply or saying anything about it in case management hearings (held, it goes without saying, to elicit the real issues in dispute), then one could only conclude that the point had been deliberately hidden from the Court and Chubb in an attempt to advantage All Class with a point taken by surprise. Such an approach to trial by ambush has been removed from the running of commercial courts in this country, certainly in the Federal Court, for generations of practitioners. In 2001, in Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; 53 NSWLR 116 at 128 [28]–[29], Heydon JA with the concurrence of Mason P and Young CJ in Equity set out what I had said in a case in this Court:

[28] Allsop J has valuably expounded the appropriate approach to commercial litigation in the Federal Court in White v Overland [2001] FCA 1333 at [4]:

… However, by way of general principle I would simply like to make perfectly plain my view that in the efficient and proper conduct of civil litigation, even civil litigation hard fought between parties, it should always be recognised that in the propounding of issues for trial the parties should take steps to ensure that all relevant parties to the dispute are cognisant of what the issues are. Any practice of quietly leaving footprints in correspondence or directions hearings to be uncovered some time later in an attempt to reveal that a matter was always in issue should be discouraged firmly. Even if something has been said, where it is evident, or indeed suspected, that the other side is proceeding on the basis of a misconception or has not appreciated something, as a general rule, efficiency, common sense and an appreciation of the costs and resources (both public and private) likely to be wasted by confusion in litigation will mandate that a party through his or her representative ensure that the other is not proceeding on a misconception or that the other does appreciate something that has been said. Litigation is not a game. It is a costly and stressful, though necessary, evil. To paraphrase Roscoe Pound from ‘The Causes of Popular Dissatisfaction with the Administration of Justice’ (1906) 29 ABA Rep 395, 404–406, the ‘sporting theory of justice’ and any behavioural manifestation of it should be seen as a survival, or better, a relic, of the days when a lawsuit was a fight between two clans: cf Jackamarra v Krakouer (1998) 195 CLR 516 at 526–527 per Gummow J and Hayne J. Representatives do not owe duties to the other side’s client. They owe duties to their own client. But no one’s interests are advanced by litigation proceeding on assumptions which are seen or suspected to be false. This is very much the case when an issue, if it is to be propounded, might endanger the instructions of those acting for the other side. In saying this I need make no reference to the well-known responsibility of the Crown and emanations of the Crown to act at all times as model litigants beyond referring to what was said by the Full Court of this Court in Scott v Handley [1999] FCA 404 at [43] ff. I would expect no less than that which I have indicated of bitterly competitive commercial parties in the hardest fought of cases. In the long run, the only consequence of keeping issues hidden or not clearly identifying them is to disrupt the business of the court leading to the waste of valuable public resources and to lead to the incurring of unnecessary costs by the parties, costs which ultimately have to be borne by someone.

[29] The same approach operates in commercial and equity litigation in this Court. In that activity it is common for counsel to volunteer to each other what points will be argued and what authorities will be relied on. …

123    Practitioners in this Court should understand this and understand their obligations under Pt VB of the Federal Court of Australia Act 1976 (Cth).

124    The Insurance List was set up to provide a service to insureds and insurers in respect of an important subject. Frankness and a conscientious adherence to the overarching purpose is expected. Deliberate trial by ambush by withholding a point of law such as this is anathema to the proper conduct of matters in this List and to the conduct of litigation under Pt VB.

125    I draw no conclusion as to whether the s 48 point was thought of late or not. If it was thought of late, it can be run, but so can the answer to it. If it was always in mind, it should have been disclosed and it can now be answered.

126    There was no suggestion that any further evidence might have been led if the question of Steadfast acting as All Class’ agent had been adverted to earlier (that is, if the s 48 point had also been adverted to earlier).

Was All Class a party to the Policy or a third party beneficiary under s 48?

127    Section 48 provided as follows:

48 Entitlement of named persons to claim

(1)     Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person’s loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract.

(2)     Subject to the contract, a person who has such a right:

(a)     has, in relation to the person’s claim, the same obligations to the insurer as the person would have if the person were the insured; and

   (b)     may discharge the insured’s obligations in relation to the loss.

(3)     The insurer has the same defences to an action under this section as the insurer would have in an action by the insured.

128    All Class relies on the decision of ABN Amro to submit that it did not have a duty of disclosure because it was not a party to the contract of insurance. In ABN Amro, a subsidiary of the policyholder was by definition under the insurance contract an “Insured”. Only the policyholder had completed a proposal form and the contract of insurance was between the insurer and the policyholder. The evidence did not support a finding that the policyholder had acted in negotiation for, and entry into, the policy as an agent of its subsidiary. Despite being an Insured under the policy, the Full Court held that the subsidiary was not a party to the contract (at [1629]):

A party to a contract of insurance, depending on the particular kind of policy, need not necessarily be an insured person under it. Likewise an insured person need not be a party, as is the case here in relation to [the subsidiary].

129    At [1634]–[1636], the Court held that persons who are not parties to the contract but who have a right of recovery under s 48 of the IC Act do not have a duty of disclosure prior to entry into the policy:

[1634] While obiter, we, none the less, respectfully agree with the general observations of Clarke JA in Grey at 45–46 that the ICA in using the words “insurer” and “insured” is speaking to the parties to the contract and that there is a clear dichotomy between a party and a person who is not a party but who is entitled to benefit under the policy. That said, it needs to be borne in mind that “insured” and “insurer” includes, by definition, a “proposed insured” and a “proposed insurer”. Thus, “insured” under s 21, which provides for the pre-contractual duty of disclosure, has the extended meaning of “proposed insured”. The “insured” in s 48 is the insured who is the party to the contract.

[1635] This dichotomy is particularly evident when s 48 of the ICA is considered, where the distinction is drawn between, on the one hand, a “person who is not a party to a contract” who is, relevantly, named as a person to whom the insurance cover provided by the contract extends and, on the other hand, the “insured”.

[1636] We do not think that the use of the word “insured” in s 21 of the ICA rather than “party to the contract of insurance” affects this conclusion. This is so because when the duty of disclosure under s 21 arises and endures there are no parties to a contract of insurance. No such contract has been entered into. In s 21 “the insured” having the duty of disclosure “before the relevant contract of insurance is entered into” means, as defined, the “proposed insured” who is proposing to enter into a contract of insurance with the insurer, meaning, as defined, the “proposed insurer”. This description fits FuturePlus as the insured but not LGFS.

130    At [1638], the Court noted that it did not matter that the subsidiary was by definition under the policy an “insured”; the Court was concerned with the meaning of “insured” on the proper construction of s 21 of the IC Act, not the insurance contract itself. At [1639]–[1641], the Court concluded that the obligations imposed on a person who is not a party to the contract but who has a right of recovery are confined to the obligations which are “in relation to the person’s claim”. The Court did not regard this as referrable to the pre-contractual obligations of the policyholder under s 21 of the IC Act. At [1647], the Court noted that the insurer, before entering into the insurance contract, knew which entities were to be covered by the contract. It chose to deal only with the parent company as the putative policyholder or the “proposed insured”. It could easily have required that all of the subsidiaries which were intended to be covered become parties to the contract, making them subject to s 21. No case was advanced by the insurer in ABN Amro that the parent company failed in its obligations to make full s 21 disclosure in relation to the subsidiary.

131    Here, analysis of the position begins with understanding the place of Steadfast. It was not a parent with subsidiaries, as in ABN Amro. Rather it was acting for and on behalf of its members to obtain insurance for them, and each of them, if they wanted the cover. The placing slips for 2011/2012 and 2013/2014 ([58]–[63] above) and I infer for the relevant year 2012/2013 described the policyholder as, relevantly, the shareholders of Steadfast. Steadfast was not a policyholder of the cover provided pursuant to this placing slip. The shareholders who wished to take up the cover provided information to Steadfast in the offer of insurance. It was plainly for use by Steadfast in arranging insurance for the shareholders. Steadfast also made a proposal for its own insurance. The policy document of Chubb identified the “Principal Organisation” as the shareholders of Steadfast: see [85] above. The cover was set out at [96] above. Steadfast was not an insured or a party. I infer that it had separate cover, arranged pursuant to its separate proposal. Agreed fact 8 was that Chubb issued the Policy to All Class. I find that All Class entered the Policy as a principal of Steadfast who, as its agent, arranged the Policy on its (All Class’) behalf.

132    There were no certificates of insurance in All Class’ name issued by Chubb (at least included in the Tender Bundle (Exh B)). This, however, is not determinative in circumstances where a convenient group policy for individual members is arranged by the network service company and where there was evidence that, at least for the professional indemnity cover, shareholders could access a summary of cover and obtain a “Certificate of Currency” from the Steadfast website: see p 62 of the Tender Bundle (Exh B) (see [36] above).

133    Thus, All Class was a party to the Policy and it did not derive its entitlement to cover from s 48. Rather it had the duty to disclose under Div 1 of Pt IV of the IC Act, to which I now turn.

134    Further, the fact that Steadfast arranged the policy as agent for its shareholders is also relevant to the operation of s 71 of the IC Act, which was in the following terms:

71 Agency

(1)     A provision of this Act (other than subsection 58(2)) for or with respect to the giving of a notice, a statement, any other document or any information to an insured before a contract of insurance is entered into does not apply where the contract was arranged by an insurance broker, not being an insurance broker acting under a binder, as agent of the insured.

(2)     Where:

(a)     a person who is not an insurance intermediary acted as agent of an insured in arranging a contract of insurance; and

(b)     the insurer gave that person a notice, a statement, any other document or any information as mentioned in this Act;

the insurer shall be deemed to have given the notice, statement, other document or information to the insured.

(3)     An insurance intermediary, other than an insurance broker who is not acting under a binder, shall, in relation to the giving of a notice, a statement, any other document or any information that, by this Act, is required or permitted to be given, be deemed to be the agent of the insurer and not of the insured.

135    I come to the relevance of this in due course.

136    I therefore proceed on the basis that All Class was a party to the insurance policy and was subject to the statutory regime for disclosure.

The statutory framework for disclosure

137    Sections 21, 21A and 22 of the IC Act, as at 31 January 2013, provided relevantly as follows:

21 The insured’s duty of disclosure

(1)     Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

(a)     the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

(b)     a reasonable person in the circumstances could be expected to know to be a matter so relevant.

(2)     The duty of disclosure does not require the disclosure of a matter:

   (a)     that diminishes the risk;

   (b)     that is of common knowledge;

(c)     that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or

(d)     as to which compliance with the duty of disclosure is waived by the insurer.

(3)     Where a person:

 (a)     failed to answer; or

 (b)     gave an obviously incomplete or irrelevant answer to;

a question included in a proposal form about a matter, the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.

21A Eligible contracts of insurance—disclosure of specified matters

(1)     This section applies to an eligible contract of insurance unless it is entered into by way of renewal.

Position of the insurer

(2)     The insurer is taken to have waived compliance with the duty of disclosure in relation to the contract unless the insurer complies with either subsection (3) or (4).

(3)     Before the contract is entered into, the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.

 (4)     Before the contract is entered into, both:

(a)     the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and

(b)     the insurer expressly requests the insured to disclose each exceptional circumstance that:

    (i)     is known to the insured; and

(ii)     the insured knows, or a reasonable person in the circumstances could be expected to know, is a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and

(iii)     is not a matter that the insurer could reasonably be expected to make the subject of a question under paragraph (a); and

    (iv)     is not a matter covered by subsection 21(2).

(5)     If:

   (a)     the insurer complies with subsection (3) or (4); and

(b)     the insurer asks the insured to disclose to the insurer any other matters that would be covered by the duty of disclosure in relation to the contract;

the insurer is taken to have waived compliance with the duty of disclosure in relation to those matters.

Position of the insured

(6)     If:

   (a)     the insurer complies with subsection (3); and

(b)     in answer to each question referred to in subsection (3), the insured discloses each matter that:

   (i)     is known to the insured; and

(ii)     a reasonable person in the circumstances could be expected to have disclosed in answer to that question;

the insured is taken to have complied with the duty of disclosure in relation to the contract.

…

Definition

(9)     In this section:

eligible contract of insurance means a contract of insurance that is specified in the regulations.

22 Insurer to inform of duty of disclosure

(1)     The insurer shall, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure and, if section 21A applies to the contract, also clearly inform the insured in writing of the general nature and effect of section 21A.

(2)     If the regulations prescribe a form of writing to be used for informing an insured of the matters referred to in subsection (1), the writing to be used may be in accordance with the form so prescribed.

(3)     An insurer who has not complied with subsection (1) may not exercise a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent.

138    Regulation 2B of the Insurance Contracts Regulations 1985 (Cth) (IC Regulations), which was in force at all relevant times, provided as follows:

2B Eligible contracts of insurance (Act s 21A (9))

(1)     A contract of insurance is an eligible contract of insurance if it:

  (a)     is for new business; and

(b)     is wholly in a class of contracts that is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies.

Note The following regulations declare certain classes of insurance contracts for Division 1 of Part V of the Act:

•    regulation 5 (motor vehicle insurance)

•    regulation 9 (home buildings insurance)

•    regulation 13 (home contents insurance)

•    regulation 17 (sickness and accident insurance)

•    regulation 21 (consumer credit insurance)

•    regulation 25 (travel insurance)

(2)     A contract of insurance is an eligible contract of insurance if

(a)     it is not mentioned in subregulation (1); and

(b)     it is for new business; and

(c)     the insurer, before the contract is entered into, gives to the insured:

(i)     a written notice in accordance with the form set out in Part 3 of Schedule 1; or

(ii)     an oral notice in accordance with the words set out in Schedule 2; or

(iii)     a notice otherwise complying with subsection 22(1) of the Act clearly informing the insured of the general nature and effect of the duty of disclosure and the general nature and effect of section 21A of the Act.

139    Regulation 3(1) and Pts 1 and 3 of Sch 1 to the IC Regulations prescribed the form of writing that may have been used to inform an insured of the matters in s 22(1) of the Act for contracts of general insurance and for eligible contract of insurance, respectively.

Did All Class have a duty to disclose?

140    It is appropriate to deal first with the issue of whether All Class was required under Div 1 of Pt IV of the IC Act to disclose the misappropriation of funds to Chubb before the contract of insurance was entered into in 2012. If All Class failed to make a disclosure under Div 1 of Pt IV, Chubb submitted that it is entitled to avoid the policy (if the failure was fraudulent) or reduce its liability in respect of the claim to nil (if the failure was innocent) pursuant to s 28 of the IC Act. Chubb relied on the uncontested evidence of Mr Kelaher to submit that had the conduct been disclosed, Old Chubb would not have insured All Class under the Policy.

141    All Class submitted that it was not under a duty to disclose Mr Bowmaker’s conduct for three reasons. First, All Class submitted that it was a third party beneficiary under the Policy and was therefore not under a duty of disclosure, citing ABN Amro 224 FCR at 317–320 [1631]–[1652]. I have rejected that submission. Secondly, All Class submitted that the Policy was an eligible contract of insurance for the purpose of s 21A of the IC Act and that Chubb failed to carry out its notification obligations under s 21A, amounting to a waiver of the duty to disclose. Thirdly, All Class submitted that Chubb otherwise waived the duty of disclosure under s 22 by failing to inform All Class of the duty or by reason of the definition of “Discover” under the Policy.

142    All Class further submitted that, even if it were under a duty to disclose, Chubb has failed to establish the alleged non-disclosure to the satisfactory standard of proof.

The s 21A argument

143    All Class submitted during the hearing that Chubb failed to satisfy the requirements in s 21A, which required an insurer to ask the insured specific questions that are relevant to its decision whether to accept the risk and, if so, on what terms. All Class submitted that as a result of this failure, Chubb can be taken to have waived compliance with the duty of disclosure in relation to the contract.

144    This submission must be rejected. Section 21A only applies if the Policy is an “eligible contract of insurance”: s 21A(1). By s 21A(6) one is taken to the regulations for the meaning of the phrase “eligible contract of insurance”. Under reg 2B there are two ways in which a policy may constitute an eligible contract of insurance, neither of which applies here. The Policy is not a class of contract declared under the regulations for the purpose of reg 2B(1)(b). Nor was the contract for new business: reg 2B(2)(b). Nor did Old Chubb give All Class (or Steadfast) notice for the purposes of any of reg 2B(2)(c)(i), (ii) or (iii). It is clear that reg 2B(2) only applies where the insurer has elected to bring the contract of insurance within the s 21A regime. Old Chubb did not choose to do so.

Did Chubb otherwise waive the duty to disclose?

145    Pursuant to s 22(1), Old Chubb was required to clearly inform All Class in writing of the general nature and effect of its duty of disclosure. If the Court finds that Old Chubb failed to give this notification, it may not exercise a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent: s 22(5).

146    The form of notice set out in Pt 1 of Sch 1 to the IC Regulations was included in the Forefront Portfolio Proposal form created by Old Chubb, which was completed by Steadfast. That form contained a declaration to the effect that the “Applicant”, being Steadfast, and its directors and officers and “any other person proposed for insurance acknowledge that the Statutory Notice contained herein has been read and understood”. The declaration was signed by a representative of Steadfast.

147    The Insurance Application form completed by All Class in relation to the 2012 Policy also contained the wording specified in Part 1 of the Schedule. However, this form was provided to All Class by Steadfast, not Old Chubb.

148    All Class submitted that these notices are not sufficient to satisfy s 22(1) because at no time did Old Chubb directly provide the notice to All Class. In essence, All Class submitted that there is no evidence that Chubb ever sought, nor received disclosure under the Policy. It was said by All Class that at no stage has Old Chubb asserted that Steadfast was acting for Old Chubb for the purposes of providing the notice to All Class.

149    Chubb submitted that Old Chubb was not required to provide a notice of the duty of disclosure directly to All Class because it was sufficient to give a notice to Mega Capital and/or Steadfast which, according to Chubb, was acting as an agent of its members when arranging the insurance. Chubb relied on s 71 of the IC Act in this respect, the terms of which are set out at [133] above.

150    I accept the submissions of Chubb. Plainly, as I have found, Steadfast was acting as an agent for all its shareholders who wished to receive cover. Old Chubb was only required to give a notice in the proper form about the duty to Steadfast, which it did. Steadfast was then expected to ensure its various principals (being its members) were notified of the duty. In this respect, the Insurance Application form signed by Mr Bowmaker did so. It contained a statement of the duty and Mr Bowmaker acknowledged that the insurers would rely on the information contained in the declaration. The reference to insurers was not a reference to Steadfast. Steadfast, as was known to all, was not an underwriter or an underwriting agent for Old Chubb. The insurers were the persons in the position of Old Chubb who were approached by Steadfast to underwrite the insurance for the shareholders in, and members of, Steadfast. Declaration 4 in the Insurance Application form explicitly stated that the signatory understood that the disclosure and information would be used to assess whether insurance was offered.

151    All Class also argued at the hearing that Old Chubb had waived the duty to disclose by reason of s 21(3) of the IC Act. I reject that submission. As the Full Court held in ABN Amro, s 21(3) only applies where a person failed to answer or gave an obviously incomplete or irrelevant answer to a question included in a proposal form: ABN Amro 224 FCR at 328 [1704]. Subsection 21(3) provides that if the insurer chooses to ask questions in a proposal form, where a person fails to answer the question or gives an obviously incomplete answer, then the insurer shall be deemed to have waived compliance. The provision is not engaged on the facts of this case.

152    All Class also relied upon s 21(2)(d) of the IC Act, which provided a specific exclusion from the duty of disclosure for matters as to which compliance with the duty of disclosure is waived by the insured. It referred to the Full Court’s reasons in ABN Amro 224 FCR at 328 [1709]–[1711] where the Court held that compliance with the duty of disclosure was waived by the insurer when it made it clear that it did not require a proposal form to be filled in by the subsidiary but required only financial statements. In this context, the Court held at 224 FCR 328 [1711]:

… It would be surprising if, assuming the existence of the duty, AHAC could rely on non-compliance by LGFS when it had stated that all that it required were financial statements and that it did not require a proposal form to be completed. That is, beyond what was contained in, relevantly, the financial statements for LGFS, AHAC positively stated that it required no other information.

153    There is no evidence to suggest that Old Chubb stated that it required no disclosure information from All Class or any other shareholder of Steadfast. In contrast, the practice between the parties was for Steadfast to provide any relevant disclosure information pertaining to the shareholders in the Placing Slip.

154    Further, All Class submitted that the terms of the Policy engage s 21(2)(d). According to All Class, the definition of “Discovery or Discovered” under the Crime Coverage Section of the Policy constitutes a waiver of the duty to disclose theft, fraud or dishonesty which was known by an Executive who was involved in the relevant theft, fraud or dishonesty.

155    Chubb submitted that the definition of “Discovery” is irrelevant to the duty of disclosure and that the requirement for discovery is merely a prerequisite that must be met before there is any coverage under Insuring Clause I(A). That is, there is a requirement that the direct loss is discovered during the Policy period. In other words, unless and until there is the requisite discovery within the meaning of the Policy, there is no claim pursuant to the insuring clause. Further, Chubb submitted that the provision concerning discovery is a term of the Policy itself and, as the duty of disclosure is a duty that applies whilst the policy is still being negotiated, the terms of the Policy cannot constitute a waiver under s 21(2)(d). The actual terms of the Policy that were ultimately agreed cannot go to the question of waiver under s 21(2)(d) because the issue arises anterior to the clause coming into effect as between the parties. Chubb submitted that the question of waiver is properly addressed at the time that the relevant duty of disclosure arises and the time at which the relevant disclosure was made. Here, the non-disclosure is said to have occurred when Mr Bowmaker completed the Insurance Application form in April 2012, two months prior to finalisation of the Policy terms. In this respect, Chubb submitted that s 21(2)(d) reflects the common law position that, before a question of waiver arises, there needs to be a fair representation of the risk to the insurer (either by the insured putting the insurer on notice of the risk or the insurer acquiring knowledge of the risk through some other means). The insurer must then take some step in light of there being a fair presentation of the relevant risk: see Hitchens v Zurich Australia Ltd [2015] NSWSC 825; 18 ANZ Ins Cas ¶62-076 at 76,763 [141]. Neither of those steps occurred here.

156    I do not think it to be correct that the form and content of the policy the subject of negotiation is irrelevant to the duty of disclosure. If the insured or a reasonable person in the circumstances knew or could be expected to know of the policy and the risk it covered and that bore upon the matters relevant to the decision of the insurer, such would affect what needs to be disclosed: Delor Vue Apartments CTS 39788 v Allianz Australia Insurance Ltd (No 2) [2020] FCA 588; 379 ALR 117 at 172–173 [248]–[254].

157    Nevertheless, I do not consider the definition waived any obligation upon All Class to disclose any matter that it was obliged to disclose. The separate question of the position of Mr Bowmaker and the attribution of his knowledge to All Class, and the related question of what is relevant to disclose, are discussed below. The terms of the definition are not directed to waiver of what is required by All Class to disclose. This can be seen to be in contrast to the express waivers in relation to the Liability Coverage Sections of the Policy in Clause XIV of the General Terms and Conditions ([94] above).

Can Mr Bowmaker’s knowledge be attributed to All Class for the purposes of disclosure?

158    In dealing with the question of whether All Class failed to make a disclosure, it is necessary to consider whether Mr Bowmaker’s knowledge of the fraudulent misappropriations can be characterised as knowledge of All Class that it ought to have disclosed to Old Chubb.

159    The duty of disclosure for contracts covered by the IC Act is limited by s 21 to matters that are “known” to the insured. This knowledge requires more than mere belief or suspicion: Permanent Trustee Australia Limited v FAI General Insurance Company Limited (in liquidation) [2003] HCA 25; 214 CLR 514 at 531 [30]. Constructive knowledge is insufficient; actual knowledge is required: CIC Insurance Limited v Midaz Pty Ltd [1999] 1 Qd R 279; (1998) 10 ANZ Ins Cas ¶61-394. The majority judgment of McHugh, Kirby and Callinan JJ in Permanent Trustee indicated in obiter that the reference to knowledge of the insured suggests that is it the insured’s own knowledge that is relevant, not that of his or her insurance intermediary: 214 CLR at 531 [30]. Whether this observation should be taken to mean that the knowledge of an agent more generally is not relevant to the question of whether an insured has knowledge for the purpose of s 21 is yet to be settled. The minority judgment of Gummow and Hayne JJ in Permanent Trustee expressed the view that knowledge of an agent or employee may be taken into account and imputed to the insured: 214 CLR at 547–548 [82]–[88]. The authors of Kelly and Ball Principles of Insurance Law suggest that the minority’s approach is to be preferred: Kelly D and Ball M, Principles of Insurance Law in Australia and New Zealand (Butterworths, 1991) at [2.0130.2]. It is unnecessary to resolve this question on the facts of this case because, in my view and for the reasons which follow, it is unnecessary to rely upon the general law of agency to determine whether Mr Bowmaker’s knowledge should be attributed to All Class.

160    A central question is whether, assuming that All Class did have a duty to disclose, All Class is to be fixed with the knowledge of Mr Bowmaker concerning the fraudulent misappropriations. It is accepted by the parties that a corporation can have knowledge attributed to it through two categories of persons. The first category comprises persons who constitute the company’s directing mind and will: Tesco Supermarkets Ltd v Nattrass [1972] AC 153. The second comprises individual directors, employees and other agents who, under the law of principal and agent, have authority to receive and communicate relevant information to the company: Belmont Finance Corporation Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393 at 404.

161    The directing mind and will approach was explained by Lord Reid in Tesco Supermarkets [1972] AC 153 at 170 (quoted with approval in Hamilton v Whitehead [1988] HCA 65; 166 CLR 121 at 127):

… A corporation … must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. … He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company … and his mind is the mind of the company. … It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company’s servant or agent. …

162    It has been suggested that the “directing mind and will” approach is only applicable to criminal cases and that agency principles should be applied where the issue is civil responsibility arising under the general law: Beach Petroleum NL v Johnson [1993] FCA 392; 43 FCR 1 at 27–28 per von Doussa J. Nevertheless, von Doussa J acknowledged that cases on the Tesco principle may provide helpful guidance because where corporate responsibility attaches under the Tesco principle, it will also attach under ordinary agency principles. See also the comments of Kirby P in the New South Wales Court of Appeal in Darvall v North Sydney Brick & Tile Co Ltd (1989) 16 NSWLR 260 at 293C. It should be noted, however, that the Tesco “directing mind and will” approach has been applied in civil cases in Australia: see, for example, Stateliner Pty Ltd v Legal & General Assurance Society Ltd (1981) 29 SASR 16; 2 ANZ Ins Cas ¶60-455.

163    Lord Hoffmann explained in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500 at 507 that the question of which principle is to be applied will depend upon the construction of the legislation in question:

… there will be many cases in which … the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc. of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy.

164    The knowledge of a person in either category, whether the “directing mind and will” or an agent, may not be imputed to the corporation where that person’s knowledge is an element of his or her fraud against the corporation: Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250 at 261–262; Beach Petroleum NL v Abbott Tout Russell Kennedy [1999] NSWCA 408; 48 NSWLR 1 at 99 [473]–[476]; Macleod v The Queen [2003] HCA 24; 214 CLR 230 at 264 [128]; cf Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543 at 610–614. Lord Neuberger in Bilta (UK) Ltd (in liquidation) v Nazir (No 2) [2015] UKSC 23; [2016] AC 1 at 10 [7] stated the principle as follows:

… Where a company has been the victim of wrong-doing by its directors, or of which its directors had notice, then the wrong-doing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company’s liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrong-doing, even where the directors were the only directors and shareholders of the company, and even though the wrong-doing or knowledge of the directors may be attributed to the company in many other types of proceedings.

165    This so-called “fraud exception” has been the subject of controversy: see the discussion in Watts P and Reynolds FMB, Bowstead and Reynolds on Agency (21st ed, Sweet & Maxwell, 2018) at 545–548 [8-214] and Grimaldi v Chameleon Mining NL [2012] FCAFC; 200 FCR 296 at 366–367 [282]–[286]. As the authors of Bowstead and Reynolds on Agency say at 547 [8-214] in the context of disclosure in the formation and performance of contracts the cases appear fact (and thus context) specific. An underlying theme, however, is the notion of a company or principal not being imputed with knowledge of conduct that is entirely contrary to, and an abandonment of, the company’s or principal’s interests: see Grimaldi at [283]–[284] and the extract there quoted from Re Parmalat Securities Litigation 659 F Supp 2d 504 at 519 (2009). This exception to the general rule that a principal is affected by notice received by its agent has been applied in cases where the agent is the agent to insure: PCW Syndicates v PCW Reinsurers [1996] 1 Lloyd's Rep 241. In PCW Syndicates, directors of a company which acted as agent for a number of syndicates dishonestly directed premium income of the syndicates to entities they controlled, instead of holding it for the syndicates. The Court of Appeal held that the insurers were not entitled to deny liability in respect of a claim by the syndicate on the basis of the dishonesty of the syndicate agent.

166    All Class relied upon the decision of PCW Syndicates to submit that Mr Bowmaker’s knowledge should not be imputed to All Class. However, it is important to note that the directors who acted dishonestly in PCW Syndicates were not the directors of the insured syndicates, but were directors of the company acting as an agent for the syndicates and were acting entirely against the interests of the syndicates in their fraud.

167    The judgment of the Supreme Court in Bilta [2016] AC 1 is to the effect that there is no general fraud exception to imputation, rather the question is an open one: whether or not it is appropriate to attribute an action by, or a state of mind of, a company director or agent to the company or the agent’s principal in relation to a particular claim against the company or the principal must depend on the nature and factual context of the claim in question: Bilta at 11 [9] per Lord Neuberger, see also 18–19 [41]–[45] per Lord Mance JSC, 64–73 [180]–[209] per Lord Toulson and Lord Hodge JJSC, cf Lord Sumption JSC at 38 [86]; P Watts and FMB, Bowstead and Reynolds on Agency (21st ed, Sweet & Maxwell, 2018) at [8-214].

168    Drawing upon the Court’s reasoning in Bilta, the UK Supreme Court in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50; [2020] AC 1189 held at 1205 [34] that the question as to whether knowledge of a particular officer of a company should be attributed to the company depends on the particular context in which the question of attribution arises. Singularis sought to recover moneys that had been held for its benefit by its investment bank and broker, Daiwa. The money had been paid out by Daiwa on the instructions of the claimant’s sole shareholder, Mr Al Sanea. Singularis claimed that Daiwa had breached its duty of care owed to Singularis in respect of payment instructions. Daiwa had argued that, as Singularis was effectively a one-person company and Mr Al Sanea was its controlling mind and will, his fraud was to be attributed to the company, with the consequence that its claim against Daiwa was defeated. Baroness Hale of Richmond, with whom Lords Reed, Lloyd-Jones, Sales and Thomas agreed, stated that the dishonesty of the controlling mind in a “one-man company” will not always be attributed to the company. In holding that Mr Al Sanea’s fraud was not to be attributed to the company, the Baroness Hale explained at 1205 [35]:

The context of this case is the breach by the company’s investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the judge put it, to “denude the duty of any value in cases where it is most needed” (para 184). If the appellant’s argument were to be accepted in a case as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.

169    In the decision of Arab Bank Plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262, the managing director (who was not proved to be the alter ego of the company) engaged in fraudulent conduct which led to claims being made against the company. The company made a claim on its professional indemnity insurance which he had arranged. Under the policy, the company and each director and employee of the company were included in the definition of insured. The Court determined that the knowledge of the dishonest director could not be attributed to the company, following the approach adopted by Lord Hoffman in Meridian. Justice Rix (as he then was) reasoned that the policy was a composite policy which was intended to provide cover to innocent insureds. In those circumstances, the parties could not have intended that the knowledge of one insured, even if it was the managing director, was to be treated as the knowledge of another insured. A rule of attribution which imputed the knowledge of the managing director to the company as a whole would have been inconsistent with the policy.

170    In contrast, in East End Real Estate Pty Ltd t/as City Living v CE Heath Casualty and General Insurance Ltd (1992) 7 ANZ Ins Cas ¶61-151, the Supreme Court of New South Wales held that the dishonest conduct of a director, Mr Fallshaw, could be attributed to the company so as to preclude it from claiming under a professional indemnity insurance policy. The plaintiff corporate insured submitted that it was not precluded from recovery under the policy because the policy drew a distinction between the corporate insured and the director, which distinction transcended the principles whereby an individual, in certain circumstances, may be treated as the company. In rejecting this submission, Rolfe J held that Mr Fallshaw, as managing director, principal executive officer, secretary and shareholder of the plaintiff, and in having full power, at least ostensibly, to act on behalf of the plaintiff, was the personification of the plaintiff. Rolfe J reasoned at 77,799:

… It would, in these circumstances, be strange if Mr Fallshaw was precluded from recovering under the policy in his personal capacity, but that the plaintiff, of which it is submitted he was at all material times the directing mind and will, was entitled to recover for his dishonest omission. In other words it is difficult to see why the plaintiff, as the insured, should be in a better position than Mr Fallshaw, if it is found that he was acting, qua the plaintiff, in the manner to which I have referred. …

The second reason for coming to this conclusion is that public policy requires that an insured, which or who acted dishonestly, should not be entitled to recover under the policy, where the dishonest conduct, or the conduct from which there can be an attribution of moral blameworthiness, which relevantly affects the insured, is such that the insured should not be allowed to benefit from his own misdeed. …

171    All Class submitted that the Policy was procured by All Class for the purpose of protecting All Class and its customers from the fraudulent actions of employees and executives whilst acting “within the scope of the usual duties of an employee”. It was submitted on behalf of All Class that to construe Mr Bowmaker as the guiding mind and will of All Class, or to attribute his knowledge to All Class pursuant to the law of principal and agent, would defeat the purpose for which the Policy was obtained. Thus, citing Singularis, All Class submitted that Mr Bowmaker’s knowledge of the fraudulent misappropriations should not be attributed to All Class for the purpose of determining whether All Class made a non-disclosure prior to entry into the Policy in 2012.

172    Chubb submitted that the appropriate method of attribution is to determine whether Mr Bowmaker was the guiding mind and will of the company, applying Tesco Supermarkets. Chubb submitted that as Mr Bowmaker was the sole director and shareholder of All Class, he was the controlling mind and will of the company and, as such, his knowledge of the fraudulent transfers from All Class’ trust account is also knowledge held by All Class. In acting in a dishonest or fraudulent manner, Mr Bowmaker was acting as the embodiment of All Class itself and causing All Class to fraudulently misappropriate funds that were held in its trust account. Mr Bowmaker knew of the insurance taken out by Steadfast on behalf of All Class and the other shareholders. He was listed as the contact person on the Insurance Application form and signed the declaration at the bottom of the form on All Class’ behalf. There is no suggestion by All Class that any person other than Mr Bowmaker was the directing mind and will of All Class at any time.

173    Chubb submitted that the Tesco Supermarkets analysis is appropriate in these circumstances because the insuring clause is directed to theft, fraud and dishonesty, and it was an offence of strict liability for All Class to contravene reg 7.8.02 of the Corporations Regulations concerning payment of moneys out of the trust account. In circumstances where the payment likely constituted an offence by All Class under s 993C of the Corporations Act, Chubb submitted that the fraudulent acts should be properly regarded as acts committed by All Class, rather than acts committed by Mr Bowmaker in a personal capacity. Chubb argued that this position is fortified by the fact that the majority of funds were transferred to All Class’ general account and used for All Class’ benefit.

174    However, Chubb submitted that even if one approaches the case on the basis of agency, Mr Bowmaker’s knowledge should still be attributed to All Class because at least some of the funds were transferred to All Class’ general office account for the benefit of the company itself. Chubb refers to the principle expressed by von Doussa J in Beach Petroleum 43 FCR 1 at 29–30 that if an agent’s fraudulent conduct is not totally in fraud of his or her principal, such that by design or result the fraud partly benefits the principal, this will not prevent the knowledge of the agent from being attributed to the principal. This principle has been applied in a number of decisions: Cashflow Finance Pty Ltd (in liq) v Westpac Banking Corp [1999] NSWSC 671; Commonwealth of Australia v Davis Samuel Pty Ltd (No 7) [2013] ACTSC 146; 95 ACSR 258 at 511–513 [1867]–[1880]; Emanuel Management Pty Ltd (in liq) v Foster’s Brewing Group Ltd [2003] QSC 205; 178 FLR 1 at 280 [1143]–[1144]; Australian Securities and Investments Commission v ACN 101 634 146 Pty Ltd (in liq) [2016] QSC 109; 112 ACSR 138 at 239–247 [589]–[613]. See also Farrow Finance Co Ltd (in liq) v Farrow Properties Pty Ltd (in liq) [1999] 1 VR 584; (1997) 26 ACSR 544 at 587 in which Hansen J applied this reasoning beyond fraud to breach of fiduciary duty. Applying this principle, Chubb submitted that the particular knowledge concerning the fraudulent payments to All Class’ general account was knowledge which should be attributed to All Class and a matter which ought to have been disclosed by All Class itself.

175    The cover of the Policy was to protect All Class from direct loss of Money, Securities or Property by Theft, fraud or dishonesty. A significant proportion of the misappropriations from the client trust account were paid into All Class’ own accounts in order to benefit All Class by “keeping it afloat”. This was not direct loss sustained by All Class. Undoubtedly Mr Bowmaker was the directing mind and will of the company. The fraud and dishonesty he was undertaking was for the benefit of the company, at least in substantial part. At the same time as he was committing this dishonesty against others for the hoped-for saving of the company, he was seeking insurance for the company against the dishonest taking of money by employees.

176    The need to understand the context of the question as to attribution is evident here. The insurance, which All Class was seeking through its agent Steadfast, was insurance for directors’ and officers’ liability, employment practices liability, trustees’ liability, internet liability, statutory liability, crime and kidnap, ransom and extortion. Why in that context would it not be just and appropriate to attribute to the company the knowledge of Mr Bowmaker that he was dishonestly misappropriating funds held on trust for clients in significant part for the purpose of assisting the company?

177    Only one aspect of the Policy was the crime cover. The crime cover was for direct loss of Money, Securities or Property by Theft or fraud or dishonesty of an Employee. Assuming that Mr Bowmaker was an Employee, his misuse of clients’ funds for the purpose of benefitting the company did not amount to direct loss. Direct loss is not, in this context, the potential liability in a suit for breach of equitable or statutory obligation. It is theft – stealing from the company.

178    The crime cover was to provide cover to an innocent insured (All Class) which might be deprived of money directly by the acts of a dishonest Employee. If the facts were that all Mr Bowmaker was doing was taking All Class’ money for his own purposes (stealing it) such that there was a direct loss to All Class from such theft, there might be some logic in the proposition that All Class should not suffer the attribution of knowledge of the very thing against which it was seeking insurance. Whether or not that argument should succeed and why an insurer should have to suffer the consequences of a policy taken out by (on this hypothesis) the thief to cover the losses of his theft from his own company, need not be answered. To this situation the cases of Arab Bank, PCW Syndicates, Bilta and Singularis might speak. That is not, however, in relevant respects, what Mr Bowmaker was doing. He was misusing property of the company impressed with trust obligations to others to seek to benefit the company (and, perhaps, through the company, himself). It accords with principle that in those circumstances Mr Bowmaker’s knowledge should be attributed to All Class. He was the directing mind and will of the company. His dishonesty was, at least in material part, not in fraud of the company, but designed to benefit the company. To attribute such knowledge does not defeat the cover by requiring disclosure of the very wrong for which cover was granted: Beach Petroleum 43 FCR at 30–32; Arab Bank [1999] 1 Lloyd’s Rep 262; Singularis [2020] AC at 1205 [34]–[35].

179    Whether or not the knowledge of a particular officer or employee of a company should be attributed to the company depends upon the context in which the question of attribution arises. The question thus expressed as one derived from the law of agency is related to the identification of the relevant mind and will of the company. Here, the context is not whether the company is to be held liable to third parties for the wrongful conduct of its agent or employee or director as it was in cases such as Beach Petroleum. Rather, the context is the entry into insurance policies to protect the company against various risks including against the risk of theft from the company. It was within the scope of Mr Bowmaker’s authority to arrange the insurance cover. He was the mind and will of the company. No other person was the mind and will of the company. The context here for attribution is the entry into a contract of insurance to benefit the company that might make the insurer liable to the company for loss to the company by fraudulent conduct known to the only person who could be seen as the mind and will of the company, which conduct had been, was being, and likely would be, undertaken in substantial part for the benefit of the company. So to state the context answers the question of attribution. All Class should be taken to know of the matters to be disclosed, and through Mr Bowmaker, failed fraudulently to disclose them. This conclusion accords with authority: Regina Fur Co Ltd v Bossom [1957] 2 Lloyd’s Rep 466 at 484; Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; Itobar Pty Ltd v Mackinnon & Commercial Union Assurance Co Plc (1984) 3 ANZ Ins Cas ¶60-610 at 78,720–78,721; East End Real Estate 7 ANZ Ins Cas ¶61-151 at 77,800–77,801; Entwells Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas ¶61-059; and see Legh-Jones N, Birds J and Owen D, MacGillivray on Insurance Law (11th ed, Sweet & Maxwell, 2008) at 438–440 [17-008]–[17-011]. This approach also accords with the discussion and statements of principle by the Full Court in Grimaldi v Chameleon Mining 200 FCR at 366–367 [282]–[286] and by the authors of Bowstead and Reynolds on Agency (21st ed, Sweet & Maxwell, 2018) at 547–548 [8-214].

Was there non-disclosure?

180    The evidence is plain that Mr Bowmaker did not disclose his conduct. The Insurance Application forms that were in evidence for 2008/2009, 2009/2010, 2010/2011, 2011/2012 and 2012/2013 contained plainly false answers: see question 10 in 2008/2009 ([31] above); question 28 in 2008/2009 in the part of the application dealing with professional indemnity insurance ([32] above); similarly for 2009/2010 ([33] above) and 2010/2011 ([34] above); and similarly for 2011/2012 ([37] above). As for the 2012 Insurance Application, the non-disclosure is plain: [46] above.

181    If it were to be said that disclosure had been made to Chubb, Mr Kelaher could have been cross-examined. There was no basis to think that Mr Bowmaker or anyone on behalf of All Class informed Steadfast.

182    In particular because of Mr Bowmaker’s position as an insurance broker, there is no basis to think that the non-disclosure was other than knowingly false and, in all the circumstances, fraudulent. He could not but have known that his actions were dishonest, and that not to tell Steadfast in order that it could tell the insurers was dishonest.

183    All Class submitted that Chubb has failed to prove the non-disclosure to the requisite standard of proof, especially in circumstances where it claimed that the non-disclosure was fraudulent. All Class emphasised that there is no evidence that Chubb sent to All Class any documents which would inform them of their duty of disclosure, there is no evidence that the Insurance Application form completed by All Class in 2012 was ever provided to Chubb, and the Placing Slip for that year cannot be found and is not in evidence. In those circumstances, All Class submitted that there is nothing to indicate to the Court that the answers given by All Class in the Insurance Application form in 2012 were ever communicated to Chubb, whether in summary form or otherwise.

184    I reject these submissions. One can (and I do) draw the necessary inferences from the documents included in the Tender Bundle (Exh B) to conclude that All Class failed to make the requisite disclosure. Steadfast was acting as an agent on behalf of its members. Steadfast went to each of its shareholder members and asked those who wished to participate in the policy for the upcoming year to fill in the application form. Steadfast then summarised the results of those applications in the Placing Slips (also referred to as the renewal submissions), including a list of the shareholders who were not participating (i.e. those who had not completed an application form) and a summary of the key disclosures made in the applications. The Placing Slips were then provided to Old Chubb, and that is the basis on which the relevant disclosures were provided to it. Disclosures were effectively made by Steadfast on behalf of its members on an exception basis. Given All Class’ answers to the questions in the 2012 Insurance Application form, it would not be expected, given the form that was being used, to see All Class’ name anywhere on the 2012 Placing Slip in relation to disclosures. If there was something to disclose in relation to a particular shareholder, then it was disclosed in the Placing Slip. Otherwise, Chubb could assume that the answer was “no”.

185    The necessary inference is that no disclosures were made on behalf of All Class based on the Placing Slips provided to Chubb in 2011 and 2013, and the Insurance Application forms completed by All Class in 2011 and 2012. As discussed above, the table headings in the Placing Slip correspond to the questions asked of All Class in the Insurance Application form. The table thus appears to be one of the methods referred to by Mr Kelaher in his affidavit by which Steadfast collated and communicated the various disclosures to Old Chubb, so far as they were relevant to the particular policy of insurance. The Placing Slip for 2011 lists the five particular entities who answered “yes” to one or more of the relevant questions, but there is no reference to All Class. This is consistent with the fact that All Class answered “No” to all of the relevant questions in the 2011 application form. The answers given by All Class in the 2011 Insurance Application form (in effect denying that All Class had any matter relevant to disclose in 2011) and the corresponding absence of any disclosure on the part of All Class in the 2011 Placing Slip support an inference that the 2012 Placing Slip, had it been available to the Court, would also not have contained any disclosure relating to All Class on the basis that All Class answered “no” to the relevant questions in the 2012 Insurance Application form (which is before the Court). The inference is supported by Mr Kelaher’s unchallenged evidence that he has no recollection of the matters being disclosed to him, and if such a disclosure had been made, it would have been referred to him for further action: see [26] of his first affidavit.

186    The inference can be comfortably drawn (and I do) that the non-disclosure was fraudulent. Mr Bowmaker had been an insurance broker for some years. He could not but have known that his conduct was dishonest, and that to disclose it would lead to any insurer declining cover.

187    Even if I were not satisfied that the non-disclosure was fraudulent, Chubb could rely on s 28(3) of the IC Act to assert its entitlement to reduce its liability under the Policy to the amount that would place Chubb in a position it would have been in if the misrepresentation had not occurred. The liability should be reduced to zero because, had All Class disclosed that moneys had been fraudulently misappropriated over a number of years, Chubb would not have insured All Class under the Policy. Mr Kelaher’s evidence as to this was plain and unchallenged.

Was Mr Bowmaker acting as an Employee under the Policy?

188    In the light of my findings in relation to non-disclosure, it is strictly unnecessary to come to any conclusion on the meaning of “Employee” in Insuring Clause I(A).

189    The parties agree that Mr Bowmaker was an “Executive” of All Class as that term is defined in the Policy. The issue in dispute is whether in transferring the funds from the trust account, Mr Bowmaker was performing acts within the scope of the usual duties of an employee.

190    All Class submitted that the concept of “usual duties of an employee” means the usual duties undertaken by Mr Bowmaker in his position of Managing Director. All Class submitted that there is no reason why Mr Bowmaker could not be acting as both a director of the company and as the company’s employee, citing Andar Transport Pty Ltd v Brambles Ltd [2004] HCA 28; 217 CLR 424 at [48]–[49].

191    Chubb emphasised that an Executive will only be an Employee when he or she is performing acts within the usual duties of an Employee as described in para (a). Chubb submitted that the focus in paragraph (a) of the definition of Employee is on the “ability of the relevant organisation to govern and direct the performance of the person”. Chubb submitted that All Class could not be regarded as governing and directing Mr Bowmaker in the performance of certain duties in circumstances where Mr Bowmaker was the guiding mind and will of the company. To find that Mr Bowmaker was an “Employee” would require, according to Chubb, “an assertion that Mr Bowmaker, in undertaking certain duties, was effectively governed and directed by himself”.

192    All Class submitted that this construction of the Policy would mean that the insuring clause would never be engaged in relation to the acts of an Executive of All Class because All Class only had one Executive. According to All Class, the definition of Discovery, which excludes knowledge of an Executive where the Executive is a participant in the Theft, fraud or dishonesty, also negates Chubb’s proposed construction.

193    Finally, All Class submitted that the commercial purpose of the Policy is defeated if Chubb’s interpretation is permitted. On Chubb’s construction, there is no circumstance in which a single person company who has a director who is involved in the fraud can make a claim for that loss. The construction of Employee should take into account the context surrounding entry into the Policy, including the close negotiations between Chubb and Steadfast and the fact that Chubb must have known that Steadfast’s members would have included so-called “one-person companies” with a sole director and shareholder.

194    A significant portion of the hearing was dedicated to the question of where the Policy fell within the insurance required to be taken out by AFS Licensees pursuant to the Corporations Act and the Corporations Regulations, and how this impacted upon the construction of the Policy, including Insuring Clause I(A).

195    Section 912B(1) requires that an AFS Licensee must have arrangements for compensating retail clients for loss or damage suffered because of breaches of the relevant obligations under Ch 7 of the Corporations Act by the licensee or its representatives. Section 912B(2) requires that the insurance arrangements meet any applicable regulations or are approved in writing by ASIC. Regulation 7.6.02AAA of the Corporations Regulations provides that the relevant form of insurance that the AFS Licensee must hold is a form of professional indemnity insurance that has certain adequate coverage. Regulatory Guide 126, titled Compensation and Insurance Arrangements for AFS Licensees and dated December 2010, sets out what ASIC regards as the necessary features of the professional indemnity insurance. The policy objective of the regime set out in the Regulatory Guide is described on page 9 as to “reduce the risk that compensation claims to retail clients cannot be met by the relevant licensees due to the lack of available financial resources”.

196    The first Key Principle set out in the Regulatory Guide is to “Fit to achieve the policy objective”. Paragraph 126.25 states:

PI insurance is designed to protect the insured (in this case, the licensee) against certain risks; it is not designed to protect consumers and is not a guarantee that compensation will be paid. PI insurance is a way of reinforcing a licensee’s ability to meet any consumer losses caused by negligence or a breach of duty by the licensee or its representatives by making funds available to the licensee under the terms of the insurance policy. Consumers generally have no direct right of access to these insurances.

197    Paragraphs 126.44–126.46 on page 14 of the Regulatory Guide state:

Scope of cover

126.44     Section 912B requires that the insurance must cover loss or damage suffered by retail clients due to breaches of obligations under Ch 7 by the licensee and its representatives. This obligation extends to all financial services covered by Ch 7. Losses caused by negligence, fraudulent or dishonest conduct that amounts to a breach of Ch 7 and gives rise to liability to retail clients must be covered.

Terms and Exclusions

126.45     If exclusions in a PI insurance policy undermine the policy objective, it is hard to see how the cover can be adequate. This applies especially to exclusions that relate directly to the minimum scope of cover described above.

126.46     Of special concern are exclusions that mean cover is not available for breaches of obligations under Ch 7 (by a licensee or its representatives) for services (most often advice) that relate to moving a client from products that are outside the licensee’s approved product list to products that are on the licensee’s approved product list.

198    Pages 16 to 19 of the Regulatory Guide include a table headed “Features of adequate PI insurance cover”. Under “scope of cover”, it is stated that the policy must indemnify the licensee against “liability for fraud or dishonesty by directors, employees and other representatives of the licensee (although fraud cover is not required for sole traders)”. The table also states on page 17 that the “policy must not have the effect of excluding … fraud and dishonesty by directors, employees and other representatives”. Under “Fraud/dishonesty/infidelity” the table states: “Minimum requirement: The policy must cover fraud/dishonesty/infidelity by directors, employees and other representatives of the licensee”.

199    On page 20 of the Regulatory Guide, under the heading “Distinction between PI insurance and alternative arrangements”, paragraph 126.60 states:

126.60 If a contract of insurance is not labelled ‘PI insurance’ specifically but has the same broad effect as PI insurance, we will consider whether the cover provided is adequate in substance to meet the policy objective.

The steps for obtaining approval from ASIC are outlined on page 21, including the lodgement of an application and expert report.

200    All Class submitted that the existence of the Regulatory Guide and the insurance requirements of AFS Licensees should be taken as part of the commercial context in which the policy is to be construed. All Class further submitted that the parties must have intended through the provision of cover to meet their obligations under Regulatory Guide 126 and that it would be an adverse result if the interpretation of the cover contradicted the express goals of Regulatory Guide 126. This is said to be supported by Mr Kelaher’s statement that the policy was closely negotiated between Chubb and Steadfast. Whilst the Regulatory Guide may not be something that can be taken as known by every broker in Australia, there could be no doubt in issuing this policy, Chubb and Steadfast in the negotiations would be taken to be familiar with the Guide.

201    In this context, All Class submitted that Chubb’s construction of the definition of Employee would have the effect of taking the Policy outside of the regulatory scope as dictated by the Corporations Act and Regulations and ASIC in the Regulatory Guide.

202    Chubb submitted that the insurance envisaged in the regulatory regime is very different to the form of insurance taken out by Steadfast on behalf of its members in the Policy. Whilst it may be that some aspects of the Policy overlap with the forms of cover required by the Regulations, the Policy does not purport to be a professional indemnity insurance policy. Counsel for Chubb pointed to a number of aspects of the Policy in support of this, including the fact that coverage under the Miscellaneous Professional Liability Coverage Section of the Policy was not taken out.

203    Chubb submitted that there are no insuring clauses in the Policy which would correspond to what one would regard as an ordinary professional indemnity policy, for example that covers clients of the broker for losses they may have suffered as a result of negligence or breaches of the various obligations under Ch 7, which are much broader than merely the obligations of a trust account. Further, the Crime Coverage Section does not cover breaches of Ch 7 by the licensee, All Class, itself. It covers theft by third parties and employees: see for example the Computer Fraud coverage and Funds Transfer Fraud coverage. The Client Coverage Section concerns direct losses sustained by a client resulting from theft, fraud or dishonesty committed by an employee, but not All Class itself. It does not cover losses suffered by a client due to a breach of AFS Licence obligations where that breach does not amount to theft, fraud or dishonesty. The Policy does not insure the primary matters required to be insured under s 912B, being breach of Ch 7 obligations by the licensee itself, whether fraudulent or not.

204    Further, Chubb submitted that there is no evidence to suggest that All Class or any other Steadfast member made a formal application to ASIC (as required in pages 20 and 21 of the Regulatory Guide), nor that ASIC determined this particular policy was sufficient in and of itself to cover the regulatory obligations of AFS Licensees to hold adequate professional indemnity insurance.

205    It is apparent from the evidence that Steadfast obtained two separate programs of insurance on behalf of its members. First, it obtained the management liability/crime coverage which is the subject of the Policy in issue in these proceedings. Separately, there was an entirely distinct professional indemnity insurance program put in place by Steadfast which complied with the statutory requirement that each of the member brokers have in place sufficient and adequate professional indemnity insurance. It is apparent that, at least in the policy year commencing 2011, the fidelity cover in the professional indemnity insurance took into account the fact that there was limited coverage under the crime coverage policy and then it provided additional coverage over and above whatever was provided in the Chubb policy to ensure that there was sufficient coverage in line with the statutory and regulatory requirements. It is likely (though it is unnecessary to make any precise finding) that this included cover for breaches by the AFS Licensee, All Class, itself.

206    This evidence also gives context to the Insurance Application forms which All Class completed each year. These forms on their face are aimed at providing disclosures and providing information with respect to two different insurance programs which Steadfast was going to place. This also explains why only disclosures made in response to particular questions on the Insurance Application forms were brought to the attention of Chubb, being questions specifically going to matters relevant to crime coverage and management liability.

207    In the light of the apparent existence of a separate professional indemnity policy, All Class submitted that the Policy relevant to these proceedings was intended to fit together with the professional indemnity policy to meet the regulatory goal of ensuring the licensee has sufficient financial resources to compensate clients affected by breaches of Ch 7, including theft by employees and directors.

208    Ultimately, however, it is difficult to give much weight to the requirements in the Corporations Act and Regulations and the Regulatory Guide in circumstances where another policy existed which was designed to meet those requirements, including any fidelity claims not covered by the Policy in question. This is particularly the case where the terms of the relevant professional indemnity policy are not in evidence.

209    Looking at the matter as a question of what a reasonable business person would understand by the Policy wording, Mr Bowmaker as the Managing Director who was an Executive in the regular service of All Class was conducting or undertaking acts within the usual scope of his duties when dealing with the relevant accounts. Such activity would be within the usual scope of administrative duties of a trusted employee. Thus, I find that Mr Bowmaker was an Employee under Insuring Clause I(A).

Did All Class sustain any direct loss?

210    Insuring Clause I(A) requires “direct loss of Money, Securities or Property sustained by [All Class] resulting from Theft, fraud or dishonesty”. Direct loss is not defined in the Policy.

211    Chubb submitted that in circumstances where All Class has failed to identify whether the transfers to third parties were legitimate or otherwise, it has failed to prove any direct loss so as to engage the insuring clause.

212    In circumstances where Mr Bowmaker moved the money from the trust account to the general office account in an attempt to prop up or support the business, he left the company liable to the trust creditors, or persons the object of the statutory purpose trust to claim against the company and him for the loss they might suffer. All Class submitted that the removal of the money from the trust account was unlawful because it deprived the beneficiaries of the funds, and the relevant deprivation to the insured is the liability of the insured to repay the money to those beneficiaries. All Class submitted that “direct loss” should be construed so as to include these circumstances because, while the specific circumstances of All Class were not known to Chubb, it was known that the Steadfast members were insurance brokers, that they operated trust accounts of this kind, and that important statutory obligations arose from the operation of the trust accounts. All Class submitted that Chubb should not be taken to have been unaware of the fact that there was a trust account operated by the members of Steadfast. (There was, however, as I have said, a professional indemnity policy in place.)

213    All Class further submitted that it suffered a direct loss because each time moneys were improperly transferred out of the trust account, it created a debt payable to the insurer who held a beneficial interest in those funds. This is because reg 7.8.08 of the Corporations Regulations in force at the relevant time required that an AFS Licensee who has received money from the trust must pay the amount mentioned to the insurer within 90 days. This creates a debt payable to the insurer in relation to the amounts not remitted to the insurer.

214    I reject these submissions. The proper reading of “direct loss” from theft or dishonesty or fraud is the removal from the accounts held by the company and the taking from the company (whether as trustee or not) of those funds. The evidence may ultimately reveal an amount of such theft. However, the wrongful and dishonest use of trust funds for use in the company’s business to prop it up or stave off financial disaster or difficulty is not direct loss of money of the company. All Class’ liability to its clients is not direct loss of money by theft, fraud or dishonesty, but a liability to compensate or account for a breach of fiduciary duty and a breach of trust and of statutory obligations over money of All Class held subject to such trust and statutory obligations: cf Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth [2019] HCA 20; 368 ALR 390 at 416 [82].

215    The ascertainment as to whether there has been direct loss and, if so, how much would require factual investigation.

Conclusion and orders

216    For the above reasons, Chubb was entitled to avoid the Policy for fraudulent non-disclosure or, in the alternative, to reduce its liability to nil and, as such, the proceeding should be dismissed with costs. If I am wrong in my view as to non-disclosure, All Class would be entitled to a declaration that Mr Bowmaker was an Employee under the Policy and that All Class was entitled to indemnification limited to moneys found to have been taken by Mr Bowmaker from any account of the company dishonestly for his own financial gain, but not for sums taken, even knowingly dishonestly, from one (trust) account of the company and placed into another account of the company for the benefit or advantage of the company in its operations, even if that benefit or advantage to the company were dishonest.

217    Given my view as to the outcome there is no necessity to refine the words of such a declaration.

218    The amended originating application will be dismissed with costs. If an order is required to deal with any moneys held as security for costs, the parties should provide a draft minute of order within 14 days.

Associate:

Dated:    9 July 2021