'Dishonesty And Fraud Exclusion In PI Policy: Court Affirms Wayne Tank Principle And As To Defence Costs Entitlements': Mccarthy -v- St Paul International Insurance Co Ltd [2007] FCAFC 2

Publish Date: March 14, 2007

McCarthy -v- St Paul International Insurance Co Ltd

[2007] FCAFC 28

Kiefel, Stone and Allsop JJ

In Brief

The Full Federal Court has confirmed the Wayne Tank principle, which denies indemnity for a loss arising from both insured and excluded events.

An excluded cause of a loss need not be the only or the proximate cause of the loss for the loss to be excluded from indemnity. Although each case will differ in its particular facts, fraud will give rise to a loss where that fraud is a material fact in the third party's claim.

Where particular costs of investigation and defence relate to both insured and excluded causes, the Insured is entitled to indemnity for these costs.

Where an Insured succeeds in proceedings for indemnity against its Insurer, it is prima facie entitled to its costs on a party-party basis only. The costs of bringing indemnity proceedings do not fall within the insurance indemnity.

Facts

The Appellants were the members of a firm of solicitors ("the Insured") insured against professional liability by the Respondent ("the Insurer") under a claims-made policy. The policy excluded liability to third parties brought about by dishonesty or fraud. The Insured's subsequent insurer, QBE, was a party at trial, but was not involved in the appeal.

The Insured offered investment schemes to investors. The Insured's Loans Manager (a Mr Blackadder) prepared an "investment summary" for each proposed investment. The investment summary was then circulated among the Insured's partners before a decision was made to issue the summary to potential investors.

In the investment scheme sued on, Blackadder's investment summary dishonestly stated that the developer was in a strong financial position. Blackadder's representations, both dishonest and merely negligent, induced 39 investors to invest in a land development scheme.

The 39 investors brought proceedings in the Federal Court against the Insured, who cross claimed against the Insurer, seeking indemnity with respect to the investors' claims and the cost of defending the claims.

Decision at Trial

The Trial Judge found the investment summary to have been fraudulently prepared within the terms of the policy exclusion.

The Trial Judge found the Insured liable to 36 of the investors based on Blackadder's fraud, one on another basis and two claims not to have been made out.

In relation to the Cross Claim, the Trial Judge ordered:

The Insurer indemnify the Insured for:

the...