An insurance broker who negligently failed to place insurance cover for clients affected by the Christchurch earthquake has been told that he cannot rely on his professional indemnity policy to pay for his clients’ losses. The broker, Mr Jackson, was engaged by Mr and Mrs Marchand to arrange insurance cover for their home and contents, motor vehicles and medical practice. Mr Jackson placed business interruption insurance cover for the medical practice but, despite having obtained a quote that the Marchands had confirmed was satisfactory to them, failed to arrange the other insurance policies. To make matters worse, when Mrs Marchand contacted Mr Jackson in mid-2009 and early 2010, having wondered why she had not received insurance premium invoices, Mr Marchand assured her that the insurance policies were in place. Mr Jackson even covered Mrs Marchand’s insurance claim for a pair of spectacles out of his own pocket (unknown to the Marchands, who thought it was being covered by the insurer). After the first Christchurch earthquake on 4 September 2010, Mr Jackson tried to arrange insurance cover for the Marchands. He back-dated the application form to 30 August 2010. The Marchands successfully sued Mr Jackson to recover their losses arising from the Christchurch earthquakes and the absence of suitable insurance cover. Mr Jackson joined his professional indemnity insurer, IAG New Zealand Ltd, to the proceedings, claiming that his failure to arrange the Marchands’ policies was covered by his own professional indemnity policy. The IAG policy contained an exclusion clause that Mr Jackson would not be insured for civil liability in connection with any dishonest, fraudulent, criminal or malicious acts or omissions. The crucial issues for the Court to determine were whether Mr Jackson had acted dishonestly and, if so, whether his dishonest conduct was connected to his civil liability to the Marchands. In a summary judgment hearing held separately from the trial of the Marchands’ claim against Mr Jackson, the High Court decided that it could not determine IAG’s application for removal from the proceedings without the evidence about Mr Jackson’s dishonest conduct (if any) being tested at a trial. IAG appealed to the Court of Appeal. The Court of Appeal decided that, based on the affidavit evidence alone, Mr Jackson’s conduct had been dishonest. This is because the test for dishonesty involves an objective standard - it does not matter whether Mr Jackson thought he was acting honestly by meaning to place the insurance cover timeously, nor does it matter whether Mr Jackson had intended to deceive. On the second issue, the Court reasoned that “in connection with” entails a causal or consequential relationship, so that it was necessary for IAG to establish that Mr Jackson’s dishonest conduct had given rise to his civil liability to the Marchands. The High Court Judge had found that if Mr Jackson had not hidden the truth from the Marchands, they would have secured insurance cover before the earthquakes. The Court of Appeal considered that finding sufficient to establish the necessary connection between Mr Jackson’s dishonesty and his liability to the Marchands. Accordingly, cover under IAG’s policy is excluded. It is likely that Mr Jackson will also have to pay some of IAG’s costs incurred in the proceedings. It is easy to feel a degree of sympathy for Mr Jackson, whose performance at work may have been affected by health issues (affidavit evidence to that effect was provided by a consultant psychiatrist). However, the Court’s reasoning in this case seems sound. A subjective standard of dishonesty would be a difficult concept to apply evenly, and would increase the significance of evidence as to parties’ credibility. The net result would be a haziness around the standards of conduct that insurers and other contacting parties are entitled to expect from those they insure / deal with.
By Chris Patterson