Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

Dishonest, reckless, or fraudulent conduct It may seem obvious that an insured will not be able to insure against its own deliberate or reckless breaches of its obligations, such as:

ƒ obtaining a personal profit advantage or remuneration from the discharge of their duties; or ƒ engaging in any conduct that is dishonest, fraudulent or criminal. 529

If an insurer’s decision to decline indemnity can be justified by a proper analysis of the evidence and construction of the policy, then it is likely that a decision to decline indemnity in circumstances of actual dishonesty or fraud will be upheld. Similarly, the importance of insurers being diligent in gathering as much circumstantial evidence as possible in claims of suspected fraud was highlighted in the recent decision of Cassa Bedding Pty Ltd v Insurance Australia Ltd, 530 where the Court was satisfied that the sole director of the insured had intentionally started a fire at the insured’s premises before seeking indemnity for the loss under the policy. Where a dispute arises in relation to defence costs, and subject to the policy wording, insurers cannot usually decline to pay merely because the relevant conduct (such as fraud) is alleged; it is necessary to prove the conduct before the right to decline arises. Accordingly, if the policy requires an admission, determination or finding in respect of unproved allegations of fraud or dishonesty, then the insurer will usually be obliged to indemnify until that requirement is met. There is an obligation on insurers to continue to advance defence costs even though there is an allegation of fraud, as in Wilkie v Gordian Runoff Limited. 531 If the policy does not have that requirement and affords the insurer an opportunity to refuse to indemnify simply on an allegation of fraud or dishonesty (which is becoming increasingly uncommon in the current market), then the insurer will be entitled to decline to indemnify the claim, including defence costs. In Silbermann v CGU Insurance Limited, 532 the insurers were entitled to refuse to advance defence costs on the basis that, on the construction of the policy, they had the discretion to decline indemnity for certain allegations of fraud, even if unproven. However, while the High Court ultimately withdrew the grant of special leave to appeal, the minority of Kirby and Callinan JJ did consider that on its true construction, the policy provided an upfront indemnity for defence costs. Fines and penalties The law does not permit an insured to be indemnified for its own criminal conduct. However, certain policies are available to cover fines and penalties arising from, for example, occupational/ workplace health and safety legislation and environmental offences. There is currently no Australian case law on the extent to which civil fines and penalties can be insured against, and the issue remains to be tested here. To some extent, the distinction between civil and criminal law is less helpful than an analysis of the ingredients of an offence.

In Strongman v Sincock, in the English Court of Appeal Lord Denning said:

‘It is, of course, a settled principle that [someone] cannot recover for the consequences of [their] own unlawful act, but this has always been confined to cases where the doer of the act knows it to be unlawful or is himself in some way morally culpable.’ 533

529 Rich v CGU Insurance Limited (2005) 214 ALR 370. 530 [2022] QSC 1.

531 (2005) 221 CLR 522. 532 (2003) 57 NSWLR 469. 533 [1955] 2 QB 525, 535.

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