AON New Zealand Ltd v Attorney-General [2008] NZCA 524; (2008) 15 ANZ Insurance Cases 61-800 (3 December 2008)

Last Updated: 5 January 2012

IN THE COURT OF APPEAL OF NEW ZEALAND

CA248/2008

[2008] NZCA 524

BETWEEN AON NEW ZEALAND LIMITED
Appellant

AND THE ATTORNEY-GENERAL IN RESPECT OF THE MINISTRY OF AGRICULTURE AND FORESTRY
Respondent

Hearing: 6 November 2008

Court: William Young P, Ellen France and Baragwanath JJ

Counsel: C S Withnall QC and G S A MacDonald for Appellant
B W F Brown QC and H S Hancock for Respondent

Judgment: 3 December 2008 at 2.30 pm

JUDGMENT OF THE COURT

1. The appeal is dismissed.
2. The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
   

REASONS OF THE COURT

(Given by Ellen France J)

Table of Contents

Para No

Introduction [1]
Factual background [4]
The High Court judgment [12]
Would the AJS circumstance have been excluded? [16]
The relevant evidence [18]
The approach in the High Court [24]
Discussion [29]
AJS claim not within insuring clause? [43]
The approach in the High Court [47]
Discussion [49]
AJS claim excluded by malice exclusion? [52]
Quantum [60]
Conclusion [63]
Costs [64]

Introduction

[1] This case concerns the liability of an insurance broker, Aon New Zealand Limited (“Aon”), to its client, the Ministry of Agriculture and Forestry (“MAF”). MAF’s claim against Aon arose after MAF’s insurer, QBE Insurance (International) Limited (“QBE”), declined cover in relation to a damages claim brought against MAF by Alan Johnston Sawmilling Limited (“AJS”) which MAF settled for $1,092,375.
[2] Aon accepts it owed a duty of care in contract and/or in tort to MAF. Aon also accepts it breached that duty by not drawing to MAF’s attention that, as a result of changes to the policy wording for the 1999/2000 year, there was a gap in the insurance cover provided to MAF by QBE. However, Aon says its breach of duty was not causative of MAF’s loss because QBE would have been entitled to and would in fact have declined to indemnify MAF. Aon relies on three matters: first, evidence that QBE, if properly notified of the claim, would have taken steps to avoid any liability; second, an argument that the claim was not within the scope of the policy; and third, an argument that the claim was one excluded by the policy.
[3] MAF’s claim was heard in the High Court by Mallon J and in a decision delivered on 10 April 2008, judgment was given in favour of MAF and damages of $1,262,523.05 plus interest were awarded: HC WN CIV-2005-485-1814. Aon appeals against this decision and MAF filed a notice of intention to support the judgment on other grounds as well as a cross appeal. (The matters raised in the cross appeal are, however, properly treated as arguments to support the judgment on other grounds.) The issue on appeal is whether Aon’s breach was causative of MAF’s loss. That issue turns on a consideration of the three matters, outlined above, relied on by Aon as defences to the claim.

Factual background

[4] We need to say something first about the background to the AJS claim against MAF before turning to the factual material relating to MAF’s claim against Aon.
[5] AJS was in business as a sawmiller and wanted to export indigenous timber and timber products from land reserved under the South Island Landless Maori Act 1906 (“SILMA”). The prohibition on the export of such timber under the Forests Act 1949 did not apply to indigenous timber from SILMA land. However, ultimately, AJS was prevented from exporting timber by the promulgation of reg 4 of the Customs Export Prohibition Order 1996 and associated ministerial conditions.
[6] In June 1997, AJS brought judicial review proceedings challenging the lawfulness of reg 4 and, in a decision now reported as Alan Johnston Sawmilling Ltd v Governor-General [2002] NZAR 129 (HC), Wild J declared reg 4 invalid. Wild J’s conclusion was that the regulation was repugnant to the exemption for SILMA land in the Forests Act and had been made for improper or irrelevant purposes, namely, promoting sustainable management of forests on SILMA lands and to improve the Government’s negotiating position with SILMA owners.
[7] In June 2002, some three years after the delivery of the High Court decision, AJS commenced proceedings against MAF claiming damages. There were three causes of action in the AJS proceeding: unlawful interference with AJS’s business; misfeasance in public office; and negligence.
[8] MAF settled with AJS, following a mediation, on 27 August 2003. QBE declined to participate in the mediation. The settlement agreement recorded that parties had settled their “dispute as set out in the statement of claim”.
[9] Turning then to the present proceedings, we first need to note that QBE provided “professional indemnity/errors and omissions” insurance to MAF under successive 12-month policies from 30 June 1996 to 30 June 2002. The wording of the insurance cover relevantly changed for the polices in place on and after 30 June 1999. The effect of the change was to create a gap in cover for a circumstance which was or ought to have been notified as a potential claim under the earlier polices (ie before the changed wording) where the actual claim was made in a subsequent year (when the policies with the changed wording were in place). The AJS claim was caught by this gap in the cover.
[10] Aon arranged insurance on MAF’s behalf over this period but Aon did not advise MAF that the changed policy wording gave rise to a gap in cover.
[11] QBE advised Aon on 28 February 2003 that MAF’s claim relating to AJS was declined. The Crown then brought proceedings against QBE in early 2004. QBE unsuccessfully applied to the High Court for summary judgment but this Court, on appeal, granted summary judgment: QBE Insurance Ltd v Attorney-General CA174/04 3 August 2005. The Attorney-General’s application for leave to appeal to the Supreme Court was unsuccessful: [2006] NZSC 6; (2006) 17 PRNZ 930. MAF’s present proceedings against Aon were commenced on 7 September 2005 and alleged breach of contract, negligence, breach of fiduciary duty and breach of the Fair Trading Act 1986. MAF also said that Aon was estopped from taking a different stance from that it had taken when MAF was seeking cover from QBE.

The High Court judgment

[12] The Judge first addressed MAF’s obligations in terms of the condition in the insurance policy that it give written notice “as soon as practicable” of its knowledge of circumstances which may give rise to a claim. The Judge concluded that MAF was required to notify QBE in or around May 1997 when the AJS judicial review proceeding was filed.
[13] As to what QBE would have done if it had been notified, Mallon J found, contrary to Aon’s evidence, that QBE would not have taken action to specifically exclude any claim arising from that circumstance.
[14] The Judge’s other central findings were, first, that the 1999 policy would have covered the claim by AJS against MAF. That was because the operative clause of the policy would have responded to the claim, as one of the causes of action in the AJS proceedings (the negligence claim) related to a breach of professional duty by MAF. Second, the Judge found that the malice exclusion in the policy relied on by Aon would not have applied because at least one of the causes of action in the AJS proceedings did not encompass any claim of malice.
[15] The Judge also found that the amount paid by MAF in settling the AJS claim was reasonable. The judgment sum of $1,262,523.05 was made up of the settlement sum paid by MAF to AJS less a policy deductible and including various legal costs.

Would the AJS circumstance have been excluded?

[16] We deal now with the first of Aon’s three defences.
[17] At trial, Aon called evidence which it says showed QBE would have declined to indemnify MAF because, if the claim had been properly notified, QBE would have ensured it was not at risk from any future claim arising from the notified circumstance. Aon submits that its evidence on this point was unchallenged and uncontradicted. Aon therefore argues it was not open to Mallon J to conclude at [99] that:

[I]f the AJS circumstance had been notified in May 1997 or any time prior to 30 June 1999, QBE would not have taken action to specifically exclude any claim arising from that circumstance. Accordingly this defence is not made out.

The relevant evidence

[18] The relevant evidence came from two employees of QBE and from its legal adviser, Michael Ring QC.
[19] The first of the two employees was Ian Morrison, the underwriting manager at QBE from 1991 to 2001. Mr Morrison issued the cover for MAF over the period 30 June 1996 to 30 June 2001. The relevant evidence from Mr Morrison is summarised by Mallon J at [83] as follows:

[T]he underwriting and claims departments were in constant communication about potential claims and underwriting issues. When circumstances were notified to the underwriter they would be passed immediately to the claims department. Mr Morrison said that if the AJS circumstance had been notified in 1996 it would have been highly relevant to the assessment of MAF’s risks at the next policy renewal. He says that if Ms Woodman [QBE’s claims manager over the relevant period] had strongly recommended that he consider ways of ensuring that QBE was not exposed to the AJS circumstance he would have done so. He considers that he would have inserted a “no AJS circumstance” exclusion at the next renewal. He also says that a dishonesty/malice exclusion would have been included. He says that he would have also considered including exclusion 6 and condition 5 in the policy [exclusion 6 and condition 5 related to claims arising from circumstances known to the insured as likely to give rise to a claim].

[20] Jennifer Woodman’s evidence as described at [84] by the Judge was as follows:

Ms Woodman confirmed Mr Morrison’s evidence that notification of a circumstance would be passed from the underwriter to her and that the insured would be requested to provide full information of that circumstance. She says that if the AJS circumstance had been notified in 1996 then she would have instructed Mr Ring to advise QBE on that circumstance. Mr Ring was QBE’s primary legal adviser in 1996. (Mr Ring was subsequently instructed when MAF sought indemnity for the AJS claim.) Ms Woodman says that if Mr Ring had advised her that MAF’s conduct had caused significant loss to AJS and that MAF was continuing in that conduct she would have been concerned to limit or eliminate QBE’s exposure. She says that she would have suggested to Mr Morrison that he impose, at least, a “no AJS circumstance” exclusion at the next renewal. She also considers that she would have suggested more extensive amendments to the policy including the condition 5, exclusion 6 and malice exclusion that were incorporated in the policy from 1999 onwards.

[21] Mr Ring confirmed that if QBE had been notified of the AJS circumstance in 1996, he would have expected QBE to instruct him. He would have then expected to receive the relevant documents relating to AJS and the 1996 policy wording. As the Judge put it at [85]:

Mr Ring said that with this information he would have:

1. concluded the circumstance was not covered under the 1996 policy because no claim for compensation had at that point been made;
2. considered the prospect of a judicial review proceeding was high;

100. considered that, if the judicial review proceeding was successful, there was also a high probability that AJS would issue further proceedings seeking compensation. That would be a “claim” under the policy and, even if ultimately unsuccessful, defence costs would be incurred;

4. advised QBE that it could avoid liability altogether by declining to renew the policy or renewing on revised terms which excluded this potential liability.

[22] As to QBE’s ability to effect the latter change, the Judge described Mr Ring’s evidence in these terms at [88]:

[A]lthough a circumstance would not normally be excluded by the insurer before it became a claim, this would have been appropriate in respect of the AJS circumstance. Mr Ring said that his understanding was that the suspension, and then ban, on AJS exporting indigenous forest products was to put pressure on the SILMA owners in negotiations. He viewed the suspension and the ban as a deliberate course of conduct carried out with that purpose. Any claim for losses from SILMA owners or affected parties as a result of the suspension and ban would therefore arise as a result of a calculated course of conduct rather than a fortuity. Conceptually, he said, insurance is for fortuities not calculated courses of conduct. What is more, QBE would not be able to force MAF to settle the AJS claim or to alter its stance on the export approval. That was because, in the absence of a claim, QBE did not have the right under the policy to assume conduct and control of the matter.

The evidence from Ms Woodman and Ms Morrison on this last point was similar to that of Mr Ring. Reference was made in this context to an example, termed the “Equiticorp circumstance exclusion”, of QBE excluding a claim but in the context where a new insured was seeking insurance.

[23] Aon also relied on the evidence from MAF’s insurance expert, John Sloan, who accepted QBE could have acted in this way and that no other insurer was likely to have agreed to insure the AJS circumstance if MAF had sought to change insurers.

The approach in the High Court

[24] Mallon J at [92] accepted it was not directly put to Ms Woodman, Mr Morrison and Mr Ring that they would not have acted in the way they said they would. However, the Judge said, the basis for their conclusions was challenged in two ways. First, on the basis that the 1998/1999 policy would not have worked in the way Aon’s witnesses said it would. In particular, Mr Morrison thought that the existing policy would have applied to the notified circumstance so there was “no reason for him to take any steps to seek to exclude that circumstance from cover under later policies”: at [94].
[25] Second, MAF challenged the QBE evidence on the basis that when the claim was notified, there was no reaction from QBE. The Judge noted that MAF pointed out that there was nothing to show Mr Morrison advised Ms Wood or that she or anyone else at QBE sought further information from MAF or asked for advice from Mr Ring.
[26] Mallon J then dealt with Aon’s submission that the reaction from QBE would have been different if “proper” notice of the AJS circumstance had been given before 30 June 1999. The Judge said at [96]:

AON said that it suited QBE in the MAF/QBE proceeding to accept that notice had been given when MAF sent the contingent liability schedule to AON. I agree with MAF that it is not now open to AON to contend that notice by way of the contingent liability schedule was not proper notice under the 1998/1999 policy and that therefore QBE’s non-reaction to this notice is not evidence of how QBE would have reacted if the AJS circumstance had been notified earlier. That is because in the MAF/QBE proceeding AON maintained to QBE that it had forwarded the schedule to it. No AON witness was called to give any different evidence at this trial. QBE, for its part, had accepted in its statement of defence in the MAF/QBE proceeding that notice was given in the 1998/1999 year.

[27] Mallon J accepted that QBE’s non-reaction to a circumstance assessed as giving rise to a potential liability of $500,000 was evidence that Mr Morrison did not, “as a matter of course”, refer circumstances to Ms Woodman and/or that she did not, “as a matter of course”, refer notified circumstances to Mr Ring: at [97].
[28] The Judge’s conclusion was as follows:

[98] While it is possible that events would have unfolded as QBE now says, the evidence has the advantage of hindsight. QBE, if fully informed and if acting cautiously and prudently, might well have acted in this way. But it may also have done nothing, as it did when it received the contingent liability schedule. I consider that the “Equiticorp exclusion” referred to by QBE and Mr Ring in support of their evidence is not a sufficiently similar example from which it can be inferred that a “no AJS circumstance” exclusion would have been included here. The “Equiticorp exclusion” seems to have been included in different circumstances where, as Ms Woodman explained, a new insured was seeking insurance. Ms Woodman and Mr Morrison did not provide other examples more comparable to the present, and Mr Ring accepted that he had never given advice to QBE to include this kind of circumstance specific exclusion. Even if Mr Ring had given this advice, QBE would have also needed to consider whether it ought to include such an exclusion against an existing insured (as opposed to a new insured) and also whether it was necessary (for example, whether changes to the insuring clause and the malice exclusion would suffice).

Discussion

[29] We agree with Mallon J’s finding on this point.
[30] Dealing first with Aon’s argument that the evidence was unchallenged, Mallon J was right that the premises underlying the evidence were challenged. That was sufficient in this case, especially given the problems with direct challenge where the evidence is of what a person would have done in hypothetical circumstances.
[31] Second, Aon seeks to distinguish this claim from the more common situation in which it might be expected an insurer would hesitate to seek to cut out a potential claim by an existing customer. Aon says this is a one-off case where the liability represents a risk which is the corollary of the implementation of government policy. However, in our view, the Judge was right to give weight to the fact QBE would have had to consider its ongoing relationship with its customer. The broad description in the policy of the insured’s business (discussed below at [45] and [46]) which would encompass this sort of case is also relevant in this context.
[32] Finally, in challenging the Judge’s reliance on QBE’s non-reaction, Aon submits that QBE did not receive MAF’s schedule of contingent liabilities as at 30 June 1999 or, if it did, Aon says that provision of the schedule was not proper notification.
[33] The schedule was a document maintained by the legal services division of MAF with input from each business group. As Mallon J noted at [27], “[a]ccounting would use the collated information for accounting purposes”. Included in the schedule MAF say was annexed to the 1999/2000 policy proposal was a reference to AJS with the nature of the dispute described as “[l]oss of income from export beech chip forest”. The dispute was described as “[s]till pending”. The “amount” columns in the schedule for the year as at 30 June 1998 and for the three years after that included the sum of “$500,000.00”.
[34] There are three planks to Aon’s argument on this aspect. The first is that the fax header dated 28 July 1999 from MAF to Aon attaching the documentation relating to the 1999/2000 policy said there were 15 pages attached. But, as Aon points out, if the schedule of contingent liabilities had been attached, the total number of pages had to have exceeded 15.
[35] Second, Mr Morrison said he could not recall receiving the schedule and Ms Woodman said she had not been able to find it, despite an extensive search.
[36] Third, when the schedule was sent, MAF’s documentation referred expressly to the fact the schedule was attached. For example, in relation to the 2002/2003 proposal, the documentation referred expressly to the attached “schedule of legal proceedings and disputes”. Otherwise, MAF’s response was “[p]reviously notified to Aon”. Aon relies also on MAF’s manual of procedures for insurance and claims which discusses the duty of disclosure and its implications.
[37] None of these matters in our view affect the Judge’s finding. As to the first point, the fax header also said the originals were being sent by post. It is quite possible the additional material, if missed from the fax, was posted.
[38] More importantly, the affidavit evidence from Christopher Bell (Executive Director at Aon), filed in MAF’s proceedings against QBE but before Mallon J was that:

MAF notified [QBE] insurance of the potential of a claim by AJS against it as a past event via the 1999/2000 MAF proposal for insurance commencing 1st July 1999.

[39] Mr Bell also said he considered MAF’s notification was consistent with the relevant policy condition. Although present in court, Mr Bell was not called by Aon to give evidence.
[40] It is also of significance that, in its pleadings, Aon admitted it received the schedule. That admission is consistent with Aon’s letter of 7 July 2003 which says the schedule was attached to MAF’s proposal to QBE for the relevant period.
[41] The fact QBE may now not be able to find the document is not critical. Nor is the fact MAF may on other occasions have been more explicit about what was attached.
[42] Because we agree with the Judge’s finding, we do not need to consider MAF’s argument about the time at which the duty to notify arose.

AJS claim not within insuring clause?

[43] Aon says the Judge erred in finding MAF satisfied the operative clause of the insurance policies because the claim did not concern conduct constituting a breach of a professional duty by MAF. The relevant policy is the 1999/2000 policy because that is the one with the altered wording which created the gap in cover. The relevant clause of that policy, under the heading “Professional Indemnity/Errors & Omissions”, provided cover for:

... all sums which the Insured shall become liable to pay as damages [etc] ... arising from any claim ... by reason of any of any act, error, omission or conduct constituting a breach of professional and/or fiduciary and/or statutory duty committed or omitted or alleged to have been committed or omitted or [sic] alleged to have been committed or omitted by the Insured in the conduct of their business ...

[44] By contrast, the earlier policies provided cover for claims made arising out of any act, error or omission on the part of the insured in the conduct of the insured’s business.
[45] The insured’s business in the 1999/2000 policy was described in Schedule 2 as:

Government department providing a range of services including policy advice, regulations and service to the agriculture, horticulture and forestry sectors.

[46] Under the earlier policies, the business was “[t]he functions and powers conferred on the Insured” by the relevant statutes and other functions “as may be lawfully conferred upon it”.

The approach in the High Court

[47] Mallon J rejected MAF’s argument that the words “constituting a breach of professional and/or fiduciary and/or statutory duty” did not qualify the type of act, error, omission that was covered: at [118]. The Judge therefore went on to consider whether the claim was within the insuring clause. Her Honour concluded that because the third cause of action in the AJS proceeding was within the insuring clause, cover would have been forthcoming.
[48] In this context, Mallon J observed that Aon did not make submissions as to the position if the Court had found one cause of action was within the insuring clause but others were not. The Judge said that if Aon had wanted to make this submission then prejudice from Aon’s failure to plead this would have arisen.

Discussion

[49] For the reasons advanced by MAF, we agree that the words “act, error, omission” are not qualified by the words added for the first time in the in 1999/2000 policy.
[50] We agree with MAF that the approach taken in the High Court does not take into account the fact that, prior to the addition of the new words, MAF’s policy was expressed as a “professional” indemnity policy, in relation to the conduct of the “Ministry of Agriculture”, the business of the insured being broadly expressed. We also agree with MAF that explicit words would have been required to reduce or limit the scope of the cover and “business of the insured”. The additional words “breach of professional and/or fiduciary and/or statutory duty” did no more than reflect the existing policy wording. While not conclusive, of course, we note also that Mr Morrison’s evidence was that the change had the effect of adding to, not narrowing, the coverage of the policy.
[51] This interpretation of the policy is an answer to Aon’s appeal on this matter. It follows also that we do not need to deal with MAF’s pleading point on this aspect of Aon’s defence.

AJS claim excluded by malice exclusion?

[52] The malice exclusion under the 1999/2000 and 2001/2002 policies excluded claims “for loss wholly or partly caused by a dishonest, fraudulent, criminal (whether actual or constructive) or malicious act or omission of the Insured (except as provided for in Extension 2)”.
[53] Mallon J took the view that the meaning of “malicious” had to be interpreted in light of its context. The Judge continued at [146]:

That context is an exclusion clause in a professional indemnity policy that covers breaches of professional, fiduciary or statutory duties. That exclusion also excludes dishonest, fraudulent and criminal (whether actual or constructive) conduct. I consider that in this context something more than a deliberate or intentional act that causes harm is required. The clause seems to me to be directed to excluding liability for certain kinds of intentional wrongdoing or criminal acts. Insurance is intended to cover fortuities but not intentional wrongdoing or criminal acts. I consider that in this context “malicious” was not intended to be confined to its ordinary or common meaning, but was intended to exclude a deliberate wrongful act intended to harm a third party or with reckless indifference that harm to a third party would result.

[54] Aon challenges the Judge’s finding that the claim was outside the exclusion and says that Mallon J’s reasoning is wrong in requiring actual knowledge that the relevant act is unlawful or improper.
[55] Aon had the burden of showing that the exclusion clause applied. We agree with the Judge that Aon could not do that based on Wild J’s judgment in the judicial review proceedings. As Mallon J found at [147], the finding of “acting for an improper purpose” in the administrative law sense is different from a malicious act or omission as envisioned by the exclusion. As the Judge also said at [147]:

Some decisions made under statute with an improper purpose will be malicious, but others will be an unintentional misapplication of the statutory power.

[56] Further, as Mallon J observed, Wild J found that the improper purposes for which the power to make regulations under the Customs and Excise Act 1996 were exercised were promoting and sustaining the management of forests on SILMA lands and improving the Government’s negotiating position with SILMA owners. Mallon J, correctly in our view, said at [148]:

There is nothing in that finding that indicates any bad faith, as opposed to an unintentional or mistaken misapplication of the statutory power. The judicial review judgment refers to the Government’s legal advisers “consistently acknowledging the risk of legal challenge which Regulation 4” presented. However, the judgment does not state whether that risk was assessed as arising because Regulation 4 was considered to be outside the proper purposes of the Customs and Excise Act or because of the concerns around process identified by Mr Jebson in the briefing papers. In my view the judicial review judgment does not establish that the loss was wholly or partly caused by a malicious act or omission.

[57] In addition, the Judge was right in terms of the evidence before her that there was insufficient material to conclude that there was malice. Michael Jebson, who had been the primary advisor to the Ministry of Forestry in respect of indigenous forestry issues, gave evidence but was the subject of limited cross-examination. While he was aware of the possible challenges in an administrative law sense, there was nothing to show he knew or was reckless that the law being promulgated was invalid for repugnancy.
[58] Finally, we add that we do not consider the Judge has unduly elevated the requirement of knowledge. MAF may have known AJS would suffer financial loss as a result of the export ban on the beech chips. But the relevant knowledge in terms of the malice exclusion was knowledge of the illegality of the regulation. That knowledge has not been established.
[59] For these reasons, we do not consider malice has been established.

Quantum

[60] There was a further issue in the notice of appeal under which the appellant argued that MAF should have mitigated its loss by requiring two other government entities to contribute to the settlement of the AJS damages claims.
[61] The point arises because the Minister of Customs had control of timber exports for a period of time encompassed by AJS’s claim. Hence, AJS’s claim was brought against the New Zealand Customs Service and the Minister of Food, Fibre, Biosecurity and Border Control as well as against MAF.
[62] This aspect was not pursued in oral argument, but, in any event, we agree with MAF that the evidence that Customs relied on the then Ministry of Forestry (now MAF) is sound. Hence the Judge’s conclusion that the other two entities would have been entitled to claim back from MAF their share of any settlement payment should not be disturbed.

Conclusion

[63] The appeal is accordingly dismissed.

Costs

[64] The respondent, having succeeded, is entitled to costs. If any issue arises as to costs in the High Court, they are to be dealt with in that Court.

Solicitors:
DLA Phillips Fox, Auckland for Appellant
Crown Law Office, Wellington for Respondent