In brief - Onley v Catlin highlights some important considerations for insurers where an insured seeks indemnity in respect of potentially criminal or fraudulent conduct
The decision confirms the fundamental principle at law of an insurer’s ability to rely on the fraudulent non-disclosure of material information for the purposes of avoiding an insurance contract from inception. The decision further highlights that a policy could be avoided against all named insureds, where the primary insured entered into the policy and purported to make full non-fraudulent disclosure as agent for the other named insureds.
Insureds fail in bid to seek indemnity, argue insurer should fulfil advancement of defence costs extension
The two applicants, Onley and Cranston, were directors of Synep Pty Ltd, as well as other related companies, which provided labour hire and recruitment services.
Two proceedings were brought against the applicants for alleged criminal conduct relating to the misappropriation of funds received by a company related to Synep for the alleged purposes of making payments for income tax liabilities to the ATO. The applicants had incurred, and were incurring, over $300,000 in legal costs in defending these two criminal proceedings. Relevantly, neither applicant had made any admissions as to the alleged conduct or entered a plea in the criminal proceedings.
Synep was insured under a Labour Force Liability Insurance Policy, under which Section Two provided cover in respect of “Management Liability and Professional Indemnity”. The policy was entered into on 1 July 2016 by Synep on behalf of five companies identified as named insureds, including the company engaged in the alleged conduct the subject of the criminal proceedings.
The applicants sought indemnity under the policy as directors of the insured companies. The Lloyd's underwriters, Catlin, denied the applicants’ request for indemnity. Instead, it alleged that for the 14 months prior to entering into the policy, the applicants and Synep were aware of, and had failed to disclose, the dishonest enterprise in misappropriating funds from their clients. (See  for a more in-depth discussion of the facts.)
Catlin argued that pursuant to section 28 of the Act, it was entitled to avoid the policy on the basis of the alleged fraudulent failure to disclose the company's dishonest business practices prior to entering the policy, or alternatively, it was entitled to reduce its liability to nil. The applicants disputed this, instead arguing that, in accordance with the Advancement Extension (outlined below), Catlin was required to advance the defence costs until there was an adjudication or admission of the relevant dishonest conduct.
Advancement of defence costs and non-disclosure at centre of dispute
It was not in dispute that the applicants were "insureds" under the policy, or that there was loss (namely incurring defence costs) resulting from a claim against them.
The dispute centred on the interaction between the “Advance of Defence Costs and Representation Expenses” clause (Advancement Extension) and section 28 of the Act.
The Advancement Extension provided inter alia that the insured was entitled to receive indemnity for defence costs except where it was not entitled for cover or until there was an admission, a judgment or an adjudication that the insured had engaged in wrongful conduct, whether a "Wrongful Act" or illegal or improper conduct.
Full Court finds that Advancement Extension does not prevent insurer from relying on section 28 of Insurance Contracts Act
The applicants’ argument was that, in accordance with the Advancement Extension, Catlin had promised to pay the applicants’ defence costs and therefore, until there was an admission or adjudication of the alleged wrongful conduct, Catlin was not entitled to rely on section 28 of the Act to deny indemnity for the defence costs incurred.
The Full Court disagreed with the applicants’ position and held (at ) that the Advancement Extension did not, whether expressly or by implication, prevent Catlin from relying on section 28 of the Act where the applicants had failed to comply with their duty of disclosure.
While an insurer may alter an insured’s obligations of disclosure prior to entering into a policy (see ), the Full Court confirmed (at -) that the duty of disclosure is a fundamental element of an insurance policy, which should not be displaced by implication, rather it required clear terms to that effect.
Nevertheless, the Full Court stated that for an insurer to rely on section 28 of the Act, they must have “a real or substantial ground” for alleging non-disclosure. However, this does not require “all necessary proof” of the relevant conduct (see ). In this matter, this was not held to be in dispute.
The Full Court also held (at ) that the Advancement Extension did not prevent Catlin from relying upon an allegedly fraudulent failure to disclose business practices to avoid the policy, in accordance with section 28(2) of the Act. The Full Court confirmed (at -) that, on public policy grounds, a party to a contract is not entitled to exclude liability for its own fraudulent conduct which induced another party to enter into the contract, except where there are “clear and unmistakeable terms on the face of the contract”.
Further, it confirmed that although the policy was entered into by Synep, as agent for the related companies, by reason of Synep’s allegedly fraudulent conduct, Catlin was entitled to avoid the entire policy from inception. The Full Court found (at ) that, in line with the reasoning above in relation to fraudulent conduct, there were no clear or unmistakeable words in the policy contrary to such action by Catlin.
Insurers should assess insured's wrongful conduct, ensure compliance with duty of utmost good faith, and consider impact of policy extensions
It is important to note that this decision was very much based on its particular facts, and the Full Court provided caution to insurers in this regard (see ).
However, where an insured seeks indemnity in respect of potentially criminal or fraudulent conduct, insurers should look behind the wrongful conduct to consider whether:
- it was engaged in prior to the inception of the policy*, and
- the insured knew that it was engaged in business practices which would be material to any risk assessment by an insurer
such that the policy could be avoided for pre-contractual fraudulent misrepresentation.
(*Importantly, if the alleged conduct in Onley v Catlin had occurred after the policy had incepted, there would have been no basis for Catlin to seek to avoid the policy for non-disclosure.)
Prior to making any such allegations, insurers must still comply with their overarching duty of utmost good faith (section 13
of the Act). They must also have a sufficient basis to evidence that they have "real and substantial" grounds for alleging that the insured's conduct should have been disclosed, and that such disclosure would have prevented them from entering into the policy.
Lastly, insurers should ensure that any policy extensions (automatic or otherwise) do not in any way limit or impact their rights to rely on their entitlements under the Act, including in relation to an insured's pre-contractual disclosure obligations.
This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal or financial advice. Please seek your own legal or financial advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.