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High Court of New Zealand Decisions |
Last Updated: 14 October 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-003346 [2013] NZHC 2525
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BETWEEN
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MARAC FINANCE LIMITED Plaintiff
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AND
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VERO LIABILITY INSURANCE LIMITED
Defendant
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Hearing:
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22-24, 26 and 29 April 2013
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Appearances:
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R J Hollyman and T P Mullins for Plaintiff
C T Walker and Z A Fuhr for Respondent
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Judgment:
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26 September 2013
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JUDGMENT OF COURTNEY J
This judgment was delivered by Justice Courtney on 26 September 2013 at 4.00 pm
pursuant to R 11.5 of the High Court Rules
Registrar / Deputy Registrar
Date...............................
MARAC FINANCE LTD v VERO LIABILITY INSURANCE LTD [2013] NZHC 2525 [26 September 2013]
Table of Contents
Para No.
Introduction [1]
The Policy [5]
The history of the Rapson account
Lending to motor vehicle dealers [12]
Lending to Rapson [15] Mr Atkinson becomes involved [21] Proposals for restructuring the Floorplan debt [30]
Did Mr Atkinson act dishonestly in lending to Rapson under the
464768 account?
What is dishonesty in the context of the policy? [47]
Mr Atkinson’s authority to lend [51] The 464768 account is established [54] Lending under the 464768 account [56] Did Marac know about the lending? [61] Did Mr Atkinson act dishonestly? [68]
Did Mr Atkinson act with the clear intent of causing loss to Marac? [77] The meaning of “clear intent” [78] The US, Canadian and United Kingdom cases [83] Which approach should be adopted in New Zealand? [94] Did Mr Atkinson act dishonestly with the clear intent of causing
Marac loss? [104]
Did Marac sustain direct financial loss consequent on Mr Atkinson’s
acts of dishonesty?
Direct financial loss consequent on dishonest acts [110]
The effect of endorsement 4 [112]
Calculation of loss [122]
Breach of condition 5.9 – failure to appoint an investigative
specialist [126]
Summary and result [135]
Introduction
[1] Between 2003 and 2008 a senior manager employed by Marac Finance Ltd, Grant Atkinson, lent substantial sums to a motor vehicle dealer, Rapson Holdings Ltd. The lending was effected through a dealer floorplan facility account (the
464768 account) and letters of credit. Marac claims that Mr Atkinson was not authorised to make the advances and concealed the existence of the account from its Board. By the time the account was investigated in January 2010 Rapson owed Marac $4.432m which it could not repay.1
[2] Marac made a claim under its Crime Insurance policy with Vero Liability Insurance Ltd. The policy covers direct financial loss consequent on dishonest acts of employees committed with the clear intent of causing loss to Marac. Vero has refused to indemnify Marac. It says that the claim does not fall within the operative clause of the policy because Mr Atkinson’s lending is properly characterised as bad business judgment rather than dishonesty and that he did not act with the clear intent of causing loss to Marac. Further, Vero maintains that Marac cannot prove any loss consequent on acts done by Mr Atkinson after February 2006, which is required by an endorsement to the policy.
[3] In this proceeding Marac sues Vero for indemnity of $1m, being the policy limit. The issues that arise in relation to Vero’s liability to indemnify are:
(a) Did Mr Atkinson commit acts of dishonesty in connection with the
Rapson account?
(b) If so, were such acts committed with the clear intent of causing loss to
Marac?
(c) Did Marac sustain direct financial loss consequent on the dishonest acts?
(d) How is that loss to be calculated for the purposes of the policy?
1 Rapson went into liquidation in May 2010.
[4] Marac also alleges a breach of policy condition 5.9 which requires Vero to appoint a specialist investigator upon notification of a loss. On that cause of action it sues for its actual costs in bringing the proceeding. The following issues arise:
(a) Was Vero required to appoint an investigator?
(b) If so, what losses has Marac sustained as a result of Vero’s failure to
do so?
The Policy
[5] I set out here the policy provisions relevant to the question of indemnity. Condition 5.9 is set out later as part of my discussion on the second cause of action. All emphasis is contained in the original policy.
[6] The operative clause provides that:
The Insurer shall indemnify the Insured for their direct financial Loss
sustained at any time consequent upon a single act or series of related acts of
... dishonesty ... committed by any Employee ... which is:
(i) Committed with the clear intent to cause the Insured a Loss, and
(ii) Discovered by the Insured during the Policy Period – ...
[7] “Loss” is defined as:
... the direct financial loss (other than salaries, commissions, fees, bonuses, promotions, awards, profit sharing, pensions or other employee benefits paid by the Insured, which are not deemed to direct financial loss) sustained by the Insured in connection with any single act or series of related, continuous or repeated acts (which shall be treated as a single act) of ... dishonesty ... committed by any Employee ...
[8] Endorsement 4 limits the indemnity provided by the operative clause:
It is noted and agreed that the Insurer shall not indemnify the Insured for any Loss sustained at any time consequent upon a single act or series of related acts of ... dishonesty ... committed more than 48 months prior to the Discovery of the Loss.
[9] Exclusions 4.1 and 4.3 further limit the amount of indemnity:
The Insurer shall not be liable to make any payment for:
4.1 Consequential loss
Indirect or consequential loss of any nature, including the loss of income (including but not limited to interest and dividends) not realised by the Insured or any other person or organisation because of a Loss covered under this policy, except as provided under Extension 3.6.
...
4.3 Credit risks
Loss resulting from the complete or partial non-payment of or default under any:
(a) Credit agreement, extension of credit or hire purchase agreement;
(b) Loan or transaction in the nature of a loan ...
However, this exclusion does not apply to any Loss resulting from fraudulent or dishonest acts of an Employee or unless the agreement was originally obtained from the Insured by any other person not in collusion with such Employee by virtue of Forgery, Counterfeiting or Computer or Funds Transfer Fraud, in which event the amount of such Loss shall be determined to be the amount of money paid out, advanced or withdrawn, less any money received from any source, including payments, interest, commissions and the like.
[10] Extension 3.6 writes back some indemnity for loss of interest:
Cover is extended to include an amount in respect of any interest actually lost or owed by the Insured directly in respect of a Loss covered by this policy, provided that the Insurer’s liability:
(a) For such interest receivable or payable is calculated by applying the average of the Reserve Bank of New Zealand base rate in force between the time of sustaining such Loss and the date of Discovery of such Loss; and
(b) Is limited to 10% (ten per cent) of the limit of liability specified under Item 4 of the schedule and such amount is part of and not in addition to the Limit of Liability.
[11] The limit of indemnity is $1m “any one Loss and in the aggregate” with a
deductible of $100,000 “each and every Loss”.
The history of the Rapson account
Lending to motor vehicle dealers
[12] Floorplan lending is a revolving credit facility under which a motor vehicle dealer draws down money to purchase new vehicles and repays it from the proceeds of sales. The facility has a fixed limit and the borrower can draw down funds within that limit provided it has “scaled security” equal to or greater than the amount drawn down. Scaled security is the value of the stock held, scaled to reflect its probable value on realisation.
[13] Security for the facility is by way of a charge over assets through a debenture or general security agreement, together with guarantees and other collateral securities. The level of security held at any one time is critical to Marac’s own position. To ensure that the dealer actually holds vehicles to a value required to cover any particular draw down, Marac’s internal stock auditors visit dealers every few weeks to ensure that the stock held is adequate to secure the amount advanced.
[14] A separate form of funding is available through letters of credit. These are issued to assist in the purchase of pre-sold vehicles by guaranteeing the dealer’s performance of its contract with the manufacturer. They are typically referred to as “back-to-back” because the purchase is expected to be followed almost immediately by the on-sale of the vehicles, thereby providing funds to repay the amount covered by the letter of credit. Specific security is not taken in relation to funding by way of letters of credit because Marac does not expect to be exposed for any length of time.
Lending to Rapson
[15] Rapson was the New Zealand distributor of Daewoo and Ssangyong cars. It and its retail subsidiary, CBC Ltd, were funded through a $7.5m Dealer Floorplan facility established in 2000 with Allied Finance, which subsequently merged with Marac2. Daewoo itself failed soon after the funding facility was established. This
posed a real threat to Rapson’s viability. It was expected that GM would acquire
Daewoo and it was not known what the impact of that would be on Rapson’s distributorship. Further, the Daewoo distributorship would terminate automatically if Rapson went into receivership or liquidation.
[16] Daewoo’s collapse revealed serious lapses by Marac staff in properly documenting and managing the Rapson facility. It also left Marac significantly exposed on the unpaid balance of the facility. A report by Marac’s credit analyst, Sarah Lee, on 21 June 2001 referred to Rapson hoping to have the facility “back within its limits by the end of July” but noted that “technically the company is insolvent”.
[17] Marac ultimately wrote off more than $5.5m of the Rapson debt but in 2001 the focus was on trying to recoup the debt. Marac retained an insolvency practitioner, Kerryn Downey, who provided a report to the chief executive officer, Brian Jolliffe, in February 2002. He noted that Rapson’s liability to Marac of
$6.870m had not changed since 31 December 2001, with no payments having been made in reduction of the debt, and that Rapson could expect to continue to lose money pending resolution of the Daewoo position. Mr Downey considered Rapson to be “clearly insolvent” and identified the available options for it, which included receivership or restructuring.
[18] Mr Downey referred to a plan being proposed by Rapson’s managing director, Russell Burling, as an interim option intended to preserve the Daewoo licence pending the outcome of the Daewoo/GM negotiations, observing that “this plan includes steps to reduce the costs being incurred by Rapson and effectively transfer to CBC, a downsized Rapson operation”. However, Mr Downey had doubts about Mr Burling’s plan, in part because Marac was “at risk of being a shadow director if the creditors are not paid and CBC continues Rapson’s business. CBC and Rapson are insolvent entities”.
[19] I particularly note this warning because it makes clear how serious a problem Rapson was for Marac. At that stage, Marac’s Credit Committee comprised very experienced businessmen and its chair, Brian Jolliffe, had some 30 years banking experience. Against this backdrop it is obvious that Marac’s ongoing interest in
Rapson would be centred on recovery of the Floorplan debt and avoiding further exposure for Marac.
[20] Consequent on Mr Downey’s report Mr Jolliffe reported to the Board on behalf of the Credit Committee. That report identified the overall shortfall as being in the range of $3-4.5m. It identified the options and concluded that:
The Credit Committee do not believe that trading on is an option any longer
... Whilst all of the ramifications of further action by Allied are necessarily unpalatable, continuation of eroding security cover through losses is more so. A further decision point has now been reached for the full board.
Mr Atkinson becomes involved
[21] This was the point at which Grant Atkinson first became involved in the Rapson account. Mr Atkinson had been an advances manager with the company since 1996 and was highly thought of. In early 2002 he was promoted to General Manager Group Credit.
[22] There was a meeting on 1 March 2002 attended by Brian Jolliffe, Richard De Lautour and Sarah Lee. Richard De Lautour had previously managed the Rapson account but he was leaving Marac. The minutes of the meeting recorded that the Rapson account was to be managed in the future by Brian Jolliffe and Grant Atkinson with Sarah Lee’s assistance. In reality, however, Mr Atkinson would take the major role in managing Rapson. With hindsight, it seems likely that he lacked some of the operational skills required to effectively take on that task.
[23] The same minutes record the Board’s response to Mr Downey’s report, namely a decision “not to fund more losses ... and to look at ways the business can move through this and see what comes out the other side”. Having discussed the Board’s decision not to fund Rapson further the meeting was then joined by Russell Burling and subsequently, Kerryn Downey and an accountant from KPMG, to discuss the formation of a business plan that could be presented to the Credit Committee.
[24] It was against this background that, in June 2002, Brian Jolliffe provided the
Board with a full update and recommendation. Allowing for the value of stock and
other assets the overall shortfall was assessed at about $3.416m. The realistic options were for Rapson to either trade on, pending the outcome of the General Motors negotiations with Daewoo, or receivership. Primarily because of the inevitable losses that would occur on receivership Mr Jolliffe recommended the former.
[25] In addition, Mr Jolliffe recommended that Marac “pursue the option to fund the import of PRESOLD Ssangyong vehicles based on 30% deposit from Bona Fide dealers ... Margins from each sale to be retained by Allied to reduce Floorplan balance, and hence shortfall.” These recommendations were made on the basis that the GM/Daewoo settlement was viewed as imminent and the shortfall from any receivership would be in the order of $4.5m (and increasing) but survival through this period would allow for the resulting entities to be restructured and enable Rapson to repay Allied. A postscript to the report dated 24 June 2002 recorded that Daewoo had given notice of termination of Rapson’s distribution agreement.
[26] Although there is no (or no existing) record of the Credit Committee’s decision I infer that Mr Jolliffe’s recommendation regarding the provision of funding pre-sold cars was acted on; in August 2002 Marac forwarded a letter of credit for the importation of vehicles on a “bailment” basis with all sale proceeds being paid direct to Marac in repayment of the Floorplan debt.
[27] The Board reviewed the Rapson account again in September 2002 with the benefit of a memorandum from the Chief Executive Officer on behalf of the Credit Committee. That report suggested that Allied’s position on the Rapson account could be approximately $4.269m in deficit and identified the sources of repayment of that debt to be CBC stock, debtors, Rexton profits, Daewoo demo stock, fixed assets and the balance of any other current assets. The Credit Committee recommended the following steps:
1. All Daewoo New Stock to be Consigned and subject to Bailment
(Standard Allied conditions – i.e. 100% proceeds to Allied).
2. Sale Proceeds of Parts to be Consigned to Allied.
5. Develop a Sales Plan on demonstrator vehicles.
[28] The Board’s acceptance of that recommendation is reflected in Mr Jolliffe’s letter 25 September 2002 to Rapson which advised these requirements together with the additional requirement that once the proposed new company to distribute Ssangyong in Australia was established there, a cross-guarantee in favour of Allied Finance would be required.
[29] Although the letter 25 September 2002 refers to new stock, there was no specific reference to funding for new stock coming from Marac. However, about three weeks later a new wholesale business funding (WBF) facility was established. An internal email between Mr Atkinson and another Marac staff member, Debbie Whittaker, refers to the establishment of the facility for three months and an advance made under it of $315,339.72, with authority for the facility coming from the Credit Committee. Mr Jolliffe had no memory of the Credit Committee approving that facility and was doubtful that approval would have been given. It is not essential to the determination of this case to know whether Credit Committee authority was given for this account. However, given the timing of it and the limited term, I think it likely that this was a temporary arrangement approved by the Credit Committee to keep Rapson trading long enough to make a full assessment of the best course for recovery of the Floorplan debt.
Proposals for restructuring the Floorplan debt
[30] In January 2003 Rapson wrote to Marac with a formal proposal for the
resolution of the outstanding Floorplan debt. The proposal reflected Rapson’s earlier
plan to transfer the business to CBC. It also relied significantly on the acquisition by Rapson Australia of the Australian distribution rights for Ssangyong vehicles. The proposal had three limbs. First, $4.5m of the Floorplan debt would be converted into a 45% shareholding in Rapson Australia. Secondly, $1.25m of the residual debt would be moved to provide Floorplan finance to CBC Ltd. Thirdly, $250,000 of the residual debt would be converted to a flexible loan facility to CBC Ltd on normal commercial terms.
[31] Rapson premised this proposal on the following:
The current level of debt owing by Rapson to Allied is
unsustainable by the New Zealand Rapson business.
Rapson presently owes Allied around NZ$6.0M, the security
for which is effectively vehicle stock with a value of around NZ$1.5m
and the
joint and several guarantees of the directors of Rapson, limited collectively to
NZ$500,000.
Rapson Australia’s Ssangyong distribution
agreement has been assessed by PricewaterhouseCoopers as having an
“Indicative”
value under the “Probabilistic DCF”
valuation basis of up to NZ$10.0m as at the valuation date December 2002.
[32] Grant Atkinson took the proposal to the Credit Committee in early April 2003 by way of a memorandum and loan recommendation summary. However, he put it to the Credit Committee in a slightly altered form. First, the restructured facility loan which Rapson had proposed being offered to CBC was referred to as being provided to “Rapson/CBC” rather than CBC only. Secondly, it was proposed that there be an import letter of credit facility of $500,000. Mr Atkinson said of that aspect:
We have over recent months provided two separate letters of credit on a one- off basis to allow Rapson to import the Ssangyong product from Korea. This product has been Rapson’s best provider of earnings with margins available in excess of any other of their product. Both the existing l/cs have been completed without adverse incident and full repayment including interest in fees achieved.
To support the Rapson Ssangyong business we are requested to provide a similar facility on an ongoing basis to guarantee HSBC (Rapson’s bank and l/c provider) to enable the importation of the Ssangyong product. Although this represents an additional debt exposure to this connection, it is warranted on the basis of it providing/enhancing the source of our repayment by:
(a) The Ssangyong Rexton is providing high wholesale and retail margins for Rapson and CBC.
(b) Supporting Rapson’s Ssangyong business protects the larger Australian business which although separate is viewed by Ssangyong Korea as interlinked. The Australian operation will provide our most likely avenue of full recovery from this connection.
The terms of the provision of l/cs will by necessity be stringent, including – Back-to-Back orders from Sub Distributor or Retail Purchaser (written confirmation to be sighted and held by Marac)
– no more than NZ$500,000 outstanding at any time
– for any vehicle going into Rapson/CBC’s stock, sufficient headroom
must be available within the Rapson Floorplan facility
– settlement of amounts funded to be on delivery of vehicles. (emphasis added)
[33] The proposal was considered at a Credit Committee meeting on 7 April 2003. Mr Atkinson attended that meeting. The response was cautious. The minutes recorded that:
We cannot and will not fund any further NZ downside. In this regard the committee wants to see
– monthly sales details Jan-Mar (CDC/Rapson)
– cashflow from above
– update cashflow/projections for next three months
The debt/equity swap was discussed and will require additional clarification regarding:
– structure – entity used to hold equit
– taxation advice (Aust/NZ)
– terms of deal (put and call option)
– all representation accounting – implications
Management has provided some views on some of these and additional advice (external) will need to be sought.
In conclusion, the committee generally supports the restructure which management can now tentatively discuss with Burling and seek clarification/formal advice.
Further clarification to be provided to the committee at next meeting.
[34] Mr Walker, for Vero, identified the interpretation of these minutes as a critical point of divergence in the case between Marac and Vero, particularly as regards the question of whether subsequent lending was contemplated by the Credit Committee as part of a restructure package or a subterfuge initiated by Mr Atkinson. He contended that the minutes showed that the Credit Committee was generally supportive of the restructure, provided that Marac did not fund further downside and subject to receiving further information from management. I agree with this.
[35] However, Mr Walker also suggested that the opening of the 464768 account was a natural step in the implementation of Marac’s strategy to keep Rapson trading, albeit that the strategy had not yet matured into a final Credit Committee decision recorded in any of the discoverable documents and no formal structure or limits had yet been put in place. Mr Walker also contended that the Credit Committee did not, and would not have, implemented only part of the proposal. I do not accept either proposition.
[36] It is clear from the minutes of this meeting and from Mr Jolliffe’s evidence that the Credit Committee regarded keeping Rapson out of receivership as essential to preserving the best prospects for repayment of the debt. It is evident from subsequent events that the Credit Committee did agree to the debt for equity swap and to letters of credit being provided. Agreement to these discrete aspects of the proposal was consistent with the Credit Committee’s two stated objectives, namely preserving the New Zealand Ssangyong distributorship to provide cash to reduce the Floorplan debt and accessing the more profitable Australian operation. However, Rapson’s position changed significantly within a short time of this proposal, rendering the proposal obsolete in relation to the funding of the retail operation.
[37] When Mr Atkinson took Rapson’s proposal to the Credit Committee in April
2003 the focus was on CBC continuing to trade, with the retail business of CBC producing money to reduce the Floorplan facility deficit. But by May 2003 Rapson was looking to exit the retail operation altogether and maintain a much reduced wholesale operation. Forecasts for a changed operation of this nature were yet to be provided. Self-evidently, there was no basis on which to maintain the previous proposal insofar as it related to the restructuring of the debt around the New Zealand
operation. Therefore, whilst the Credit Committee could (and, I find, did) pursue the debt for equity swap and the provision of letters of credit on a limited basis, the uncertainty over which entity would continue trading and in what form meant that no decision could possibly have been made regarding a restructured floorplan and term loan.
[38] Mr Atkinson provided further information to the Credit Committee in his memo 12 May 2003. It referred to Rapson’s revised forecast, which was poor. Rapson was now proposing to sell the retail operation and limit trading to the wholesale supply of Ssangyong vehicles:
Burling has recognised that there is a major risk in failing to achieve the forecast turnover numbers and continuing to incur the overhead cost of running the dealership. To this end he has recently commenced negotiations with Continental Cars with a view to exiting the retail yard and maintaining only the Wholesale operation for Ssangyong in NZ.
A revised proposal on this proposal, with re-forecast trading data solely on a Ssangyong Wholesale platform are to be provided this week, together with progress on the possible sale negotiations with Continental.
[39] Mr Atkinson’s memo went on to describe the progress being made towards documenting the proposed debt for equity agreement with Rapson Australia, which was clearly proceeding regardless of the state of the funding arrangements between Marac and Rapson New Zealand. All of these developments were noted at the Cedit Committee meeting on 13 May 2003. There was no particular course agreed on other than ongoing monitoring of the position:
Management are to continue to closely monitor the position
(cashflow/floorplan) to ensure no deterioration in our position.
G Atkinson also updated the committee on Burling’s decision to look to exit
the NZ business and the negotiations currently occurring. Regular updates (verbal) will be provided each week.
Documentation for the new Australian arrangements is now drafted and being provided to Burling and his lawyer for comment.
(emphasis added)
[40] Although Mr Walker regarded the reference to monitoring of
“cashflow/floorplan” as significant and an indication that the Credit Committee
knew that Marac was continuing to fund Rapson through a Floorplan facility, I consider that it did no more than refer to the fact that the existing Floorplan facility, which had not been cancelled, needed continued monitoring to ensure that payments coming to Rapson were applied against that debt.
[41] Apart from the establishment of letters of credit for five new Ssangyong Rextons in July 2003, the documents do not show communications between Marac and Rapson in May or June 2003. But there clearly had been discussions because at the end of July 2003 Mr Burling emailed Mr Atkinson regarding execution of the share transfer for Rapson Australia. He also commented that:
For me it is very important that Rapson NZ is allowed to continue importing Ssangyong product in the current manor [sic] above all Rapson NZ is left in a financial position that it can continue to trade comfortably.
[42] Mr Atkinson replied that:
As discussed, we see Rapson NZ providing a source of repayment to the residual debt, with profitability from a lower overhead Ssangyong Wholesale operation. On the basis that this remains the case we do not see our position changing. Obviously we would review and monitor progress.
We are agreeable to the establishment of the l/c for the five new Rextons per the 15 July 2003 order ET2-030715-NZ and will confirm same to HSBC upon receipt of the pre-sale orders from Lifestyle.
[43] Mr Burling’s concerns presumably reflected the imminent winding up of CBC, which was placed in voluntary liquidation on 1 August 2003. Self-evidently, this development killed the proposal for restructuring the debt around CBC. As at
1 August 2003, there was no basis on which to conclude that the Credit Committee had agreed to any funding arrangements beyond Rapson’s original Floorplan facility and letters of credit.
[44] There is no clear record of the Credit Committee’s final position regarding Rapson. Mr Jolliffe considered the position to be that the debt for equity swap was to proceed but that no further revolving credit facilities were to be extended and further finance made available only on the restricted basis of back-to-back letters of credit so as to ensure that Marac was 100 per cent covered for any imports. I have concluded that Mr Jolliffe’s recollection is correct and, given the serious nature of
Marac’s exposure on the Rapson account, there could have been no
misunderstanding about that on Mr Atkinson’s part.
[45] From late 2003 the Credit Committee’s oversight of Rapson and the actual lending being undertaken diverged. Rapson was discussed at Credit Committee meetings only twice more. At a meeting on 13 October 2003, attended by Mr Atkinson, the position was noted that:
Provision was confirmed at existing level. Sale of outstanding vehicles is progressing slowly but at prices at, or above, provision level. The documents for our 50 per cent shareholding in Rapson Australia have now been executed. The chairman asked management to obtain further advice on the accounting thinking in respect of possible recovery via both the NZ company and Australian shareholding.
[46] The last time Rapson was discussed at a Credit Committee was at its meeting on 23 January 2004, also attended by Mr Atkinson. The focus was on provisioning for the bad debt:
Management recommended an increase of provision of $100K ($4.449m to
$4.549m). Following extensive discussions on all aspects of the Rapson exposures and assets, including Rapson Australian shareholding, the increase
in provision was approved.
The Committee also approved the Chairman, working with management, as to any write-off that may be taken at 31 December, within the provision now approved.
Did Mr Atkinson act dishonestly in lending to Rapson under the 464768 account?
What is dishonesty in the context of the policy?
[47] Mr Walker relied on US decisions as to the meaning of dishonesty. However, there are authoritative statements from the Court of Appeal and the Privy Council which I find to be more useful. In McMillan v Joseph the question of dishonesty arose in the context of the dishonesty exclusion in a professional indemnity policy. Cooke P adopted the approach taken by Quilliam J at first instance, namely that the
conduct in question was:3
... Deliberate and such as to be called “not straightforward” and
“underhand”.
[48] Cooke P went on to observe that:
The law has experienced unexpected difficulty in defining dishonesty. In England there have been vacillation and differences of opinion between Judges of high authority about whether the test is objective or subjective or some compromise between the two ...
Here we are concerned with the use of “dishonest” in an exception clause where it is accompanied by “fraudulent criminal or malicious” and is evidently used in a wide general sense, rather than some special one. Perhaps the only workable answer in such a context is that the tribunal of fact has to make up its own mind whether, according to the ordinary understanding of this ordinary English word, it is satisfied that the actions in question were dishonest.
[49] Subsequently, in the context of accessory to knowing receipt the Privy
Council considered that dishonesty meant:4
Simply not acting as an honest person would in the circumstances. This is an objective standard. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety.
However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual ...
In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment ...
[50] On the basis of these statements I take the approach that dishonesty in the present context means deliberately not acting in a straight forward way or in a way that an honest person would act.
Mr Atkinson’s authority to lend
[51] Marac introduced a formal policy on delegated discretionary lending authority (DDLA) in January 2004. Brian Jolliffe, as chair of the Credit Committee, had authority to approve loans of up to $3m for non-property related loans or risk exposures (this included floorplan facilities). He could, in turn, delegate up to 50 per cent of that authority. In considering any application for funding, an individual with lending authority was required to include assessment of all existing exposures to that party. Under this policy Mr Atkinson’s delegated authority to approve a total floorplan exposure to any one borrower was $1.5m. From July 2005 this authority was increased to $3m.
[52] However, all delegated authorities were subject to a “Hindsight Policy” which ensured ongoing supervision of the exercise of the delegated authority. This policy required Mr Atkinson to provide Mr Jolliffe with a copy of all approvals he made under delegated authority for periodic review.
[53] The DDLA did not apply to letters of credit. Proposals for letters of credit were to go directly to the General Manager Credit (Mr Atkinson at the time). Mr Jolliffe explained that this was because no issue of security arose in relation to letters of credit, which were generally issued only on a “back-to-back” basis, so that Marac was not exposed for any significant length of time.
The 464768 account is established
[54] The new wholesale business facility under the account number 464768 was established on 9 October 2003. By this time CBC was in liquidation. Rapson’s financial position had not improved. The Credit Committee had not discussed further lending to it. There is no record of a decision to establish the account. Marac has been unable to establish who authorised its establishment. Only Mr Jolliffe and Mr Atkinson were in a position to do so. I accept Mr Joliffe’s evidence that he knew nothing about it. Given Mr Atkinson’s subsequent management of the account, including directions to more junior staff regarding changes to credit limits and the making of advances I am satisfied that Mr Atkinson was instrumental in the setting up of the account.
[55] The account had an initial credit limit of $242,000 and the initial advance was $207,000. On 9 January 2004, the week before the Credit Committee meeting on 23 January 2004 at which provisioning for the bad debt on the old Rapson account was discussed, the balance owing under the account was $195,142.76. On
19 January 2004, two days before the meeting, there had been a repayment of some of that, leaving a balance of $71,793.92, of which $2,230.02 was in arrears. This information was not referred to in the minutes of the meeting and I have no doubt that if it had been discussed there would have been mention of it in the minutes.
Lending under the 464768 account
[56] Mr Atkinson approved funding to Rapson through a combination of advances under the 464768 account and letters of credit. Rapson would request a letter of credit but generally not on a back-to-back basis, so that there was neither security for the funding nor certainty that Rapson could pay the manufacturer. Once the letter of credit was issued, funds had to be advanced under the facility to pay the supplier. This method of funding did not fit the usual forms of funding within Marac. The former General Manager-Consumer, Christopher Flood, described the funding arrangements that Mr Atkinson approved as blending a floorplan facility with letters of credit.
[57] From June 2004 the credit limit on the account exceeded Mr Atkinson’s delegated authority. On 28 June 2004, the credit limit was increased to $1.833m, in excess of Mr Atkinson’s authority of $1.5m. By February 2005, the credit limit had been increased to $4,537,160. From the point that Mr Atkinson’s authority was increased to $3m the credit limit of the account was never less than that, peaking at
$5,057,000 in February 2006.
[58] For most of that period the actual account balance also exceeded Mr Atkinson’s delegated authority. It only fell below $3m in the months of January and December 2006. From mid-2008 the account was virtually inactive; there were no advances after May 2008 and only a few repayments, with those ceasing altogether in January 2009.
[59] Although Mr Atkinson admitted that the credit extended to Rapson over this period exceeded his delegated lending authority I do not place significant weight on his admissions. It is evident that he remembers little of the relevant period. Nevertheless, I am satisfied on the basis of the contemporaneous documents that neither the Board nor the Credit Committee had made any decision that would have justified the lending. The credit limits granted and advances made under them on the account were in excess of Mr Atkinson’s delegated authority and without authority from the Credit Committee. I am also satisfied that Mr Atkinson did not bring this lending to Mr Jolliffe’s attention by way of the required hindsight check. There is no indication of Mr Atkinson having followed the normal Credit Committee procedures regarding credit limit increases or advances that exceeded his delegated authority.
[60] Stock audits were not done on the regular basis that was expected of floorplan facilities. Mr Atkinson could recall only one stock check that he had asked a staff member to do but none undertaken by the internal stock auditors charged with the regular audits. He knew that Rapson was not on the internal list for stock audits but never added it to the list.
Did Marac know about the lending?
[61] Vero maintains that the existence of the 464768 account was not hidden and that many Marac staff, including senior staff, were aware that Marac was continuing to fund Rapson by issuing letters of credit that were not on a back-to-back basis and in excess of $500,000. It says that these facts tell against dishonest concealment of the funding by Mr Atkinson.
[62] It is clear that, at least in 2003 and 2004, Mr Jolliffe was aware that letters of credit were being provided. In July 2003 Mr Jolliffe was the second signatory on a letter of credit for $93,950, the first signatory being Mr Atkinson. In July 2004
Mr Jolliffe was the first signatory on two letters of credit for $334,590 and $162,100 respectively. Brian Bartholomew, a credit manager, was the second signatory. However, although Mr Jolliffe appreciated that Rapson was still trading, he was firm in his assertion that he did not know it was being provided with ongoing funding by Marac beyond the provision of letters of credit on a back-to-back basis. Because
there had been occasional references in meetings to Rapson obtaining funding from another source and the fact that ongoing funding beyond back-to-back letters of credit was never referred to in any subsequent correspondence or general managers’ meetings, he assumed that funding was being obtained from another financier.
[63] Mr Bartholomew, who was the second signatory on the July 2004 letters of credit that Mr Jolliffe also signed, had virtually no knowledge about Rapson or the basis on which the letters of credit were being issued. Mr Bartholomew was below Mr Atkinson in the corporate hierarchy. He had no other involvement in the Rapson account and was only asked to sign letters of credit by Mr Atkinson when Mr Atkinson himself was away. He was told by Mr Atkinson that the stock being funded by the letters of credit was to be sold on to a dealer network with Rapson reimbursing Marac the amount advanced under the letter of credit within a short time.
[64] Apart from Mr Atkinson and Mr Bartholomew, the third person who was most often the co-signatory on the letters of credit was Stewart Mainwaring, the funding and treasury manager. Mr Mainwaring did not give evidence. I note, however, that he was below Mr Atkinson in the corporate hierarchy and in a different department.
[65] Only two Marac staff at the same level as Mr Atkinson co-signed letters of credit over the relevant period. These were David Battersby, the General Manager- Business and Allan Williams, the chief financial officer of Pyne Gould Corporation and the General Manager-Finance and Treasury. Neither gave evidence. Mr Battersby signed only one letter of credit as the first signatory in September 2004 for $394,270 at a time when the facility limit showing in the computer system was
$1,833,000. Mr Williams signed two letters of credit in November 2007 and April
2008. The letter of credit that Mr Williams signed in November 2007 was for
$313,828 at a time when the facility limit was $5,057,000. The letter of credit that he signed in April 2008 was for $245,032 at a time when the facility limit was
$5,057,000.
[66] Whilst I would have expected senior managers such as Mr Battersby and Mr Williams to have requested assurance that any letter of credit they signed was within the credit limit, as Mr Jolliffe claimed that he did, it is evident that in each of those cases the answer would have been yes. Mr Jolliffe gave evidence that he would not have signed letters of credit without first being assured that “arrangements were appropriately in place”. He did not believe that Marac was increasing its exposure as he believed the letters of credit were back-to-back. The problem was not that letters of credit were being provided; Mr Atkinson had authority to issue letters of credit and it would be reasonable for those managers to accept his assurance. The problem was that the letters of credit being issued were not back-to- back and were being funded from the unauthorised 464768 account.
[67] I am not satisfied that Marac either knew or ought to have known about the nature and level of the lending under the 464768 account.
Did Mr Atkinson act dishonestly?
[68] I am not prepared to find that Mr Atkinson set out to deceive Marac from the beginning. It seems equally likely that, although highly thought of within Marac, Mr Atkinson lacked the skills to actually manage an account such as this. However, I am in no doubt that by 2005 at the latest Mr Atkinson realised that what he had done was beyond his authority and that he would be in very serious trouble if the Credit Committee came to know of the increased exposure. Indeed it is very likely that he would have lost his job over it. At that point, an honest person would have come clean about the problem to his superior. This would have required Mr Atkinson to have disclosed the position to Mr Jolliffe or the Credit Committee.
[69] However, Mr Atkinson did not tell his superiors about the unauthorised lending. Instead he continued to make further advances and issue letters of credit which he knew he was not authorised to make. He also acted in other ways which, looked at overall, satisfy me that he was acting dishonestly when he made those further advances.
[70] Over a period of years, Mr Atkinson deliberately kept the state of the Rapson account from the other general managers at the weekly meetings of general managers. In advance of those meetings Mr Atkinson prepared and circulated meeting notes which usually included a brief update on the Rapson position. These notes clearly refer to Rapson continuing to trade. They also refer to Rapson beginning to make modest repayments and they refer to letters of credit being issued. There is, however, no reference to the new facility and in particular, no reference to its ballooning balance. For example, in mid-May 2005 Mr Atkinson’s meeting notes were very brief, referring to “reconciling old a/c” and referring to receipt of the Rapson Australia accounts. Not a word was said about the 464768 account which, at that point, had a balance of over $1.6m. In cross-examination about these meeting notes Mr Atkinson agreed that the facility should have been disclosed to the other general managers. He said that, even at the time, he would have apprehended the response to such advice as being “shock horror”.
[71] Moreover, Mr Atkinson kept the state of the Rapson account from the Board when he reported to it in June 2006. The Board had requested a report “summarising the entire Rapson position”. Mr Atkinson’s report said nothing at all about the
464768 account which, at that time, had a credit limit of more than $5m and a current balance of $2.979m.
[72] Next, Mr Atkinson took steps to conceal the unauthorised advances by suppressing the arrears of interest that were accruing on the Rapson account. In early 2009 he directed a more junior staff member, Siddartho Sengupta, to make an adjustment in relation to arrears which then stood at $35,170. As a result, the account was not flagged for the attention of the collections department. Mr Atkinson’s explanation to Mr Sengupta was that the account was to be repaid in full once a property had been sold. No evidence was adduced that might have suggested a basis for such a belief. Mr Atkinson had other staff make the same adjustment regularly throughout 2009. By that time all payments by Rapson had ceased. There was no good reason to take a step that would ensure that the collections department would not take action. The only explanation can be that Mr Atkinson was attempting to conceal the ever-increasing problem.
[73] Finally, in late 2009, Mr Atkinson lied to Marac’s internal auditor, Ms Darby, when she queried the account. The Rapson account had a credit limit then of $4m and a current balance of $4.261m. There were arrears of $28,162.70. In July 2009
Ms Darby asked Mr Atkinson for an explanation of anomalies in the account that concerned her. He did not respond. She prompted him in September 2009 and he told her, among other things, that the vehicles securing the advances were in storage and that six weekly monitoring was being undertaken by him and Michael Hershberger. This was untrue.
[74] The truth about the Rapson account was discovered as a result of Ms Darby speaking to Mr Atkinson in January 2010. She was seeking to have Rapson included in a review of stock audits. Mr Atkinson, who was still on holiday, had come into the Christchurch office briefly and Ms Darby asked him about auditing Rapson. He told her that Rapson was holding new Ssangyong vehicles wrapped in plastic in a warehouse. He said they were being held until the client re-launched the brand, since it was currently not trading. Although Mr Atkinson agreed that a stock audit would be worthwhile he said it was not required at that point and that any audit could be contracted out rather than be done by Marac’s internal team. This made Ms Darby suspicious and she began making enquiries internally. Mr Atkinson did not come into work following his holiday and was subsequently found disoriented and unwell. He has no memory of this period.
[75] I also take into account the fact that Mr Atkinson never once mentioned the
464768 account to his colleague, Mr Flood. According to Mr Flood, who was not challenged on the point, he and Mr Atkinson were very close and had lunch together most days. They talked frequently about issues that concerned them. The significance of the Rapson debt to Marac was well-known and was a topic of conversation between them. But Mr Flood recalled that the discussions never went beyond the recovery of the old Rapson debt from the Australian operation, even in
2009. Although Mr Atkinson had no obligation to tell Mr Flood about the account in this informal setting, an honest person in Mr Atkinson’s position would have volunteered to his close colleague that he had lost control of this account and had not only exposed Marac to losses against the Board’s specific determination, but was continuing to make unauthorised advances, thereby increasing that exposure.
[76] I find Mr Atkinson knew very well that he had no authority to continue advancing money to Rapson under the facility but kept doing so and lied to his colleagues and superiors in circumstances that required him to make disclosure. The acts that I have described show a pattern of dishonest behaviour over a period of years that satisfy me that Mr Atkinson was acting dishonestly within the meaning of the policy.
Did Mr Atkinson act with the clear intent of causing loss to Marac?
[77] The insuring clause requires not only dishonesty on Mr Atkinson’s part but also that the dishonest acts were “committed with the clear intent to cause the Insured a Loss”. Vero argued that the circumstances in which the advances were made show only poor judgment by Mr Atkinson rather than any intent to cause Marac loss.
The meaning of “clear intent”
[78] The interpretation of an insurance policy is, as with any commercial contract, a search for the meaning intended by the parties. This involves an objective enquiry conducted against the commercial background in which the parties were operating. The plain and ordinary meanings of the words are to be construed taking into account the background knowledge that would reasonably have been available to the
parties at the time.5 The phrase “clear intent” is acknowledged by both parties to
have been derived from the “manifest intent” wording introduced to the standard wordings of fidelity policies in the 1980s. For present purposes, there is no distinction between “manifest intent” and “clear intent”. The history and judicial interpretation of the former is an important part of the factual matrix in this case.
[79] The standard form of fidelity cover, the Bankers Blanket Bond, is a predecessor of the type of crime policy held by Marac. The Bankers Blanket Bond,
itself derived from the fidelity bond, originally provided cover for losses resulting
5 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19];
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at
912-913 (HL).
from the dishonesty of specified employees, and later to employees generally.6
Fidelity cover is typically purchased by businesses where staff have access to or control over funds and therefore the opportunity to defraud their employers.
[80] In their recent paper, Critical Issues in Determining Employee Dishonesty Coverage, Messrs Keeley and Nelson make the following observations about the tension between insurers and insureds as to the intended scope of cover of this type of cover:7
As with all forms of insurance, such fidelity bonds create a risk sharing arrangement, with insurers assuming the risk of certain losses that are difficult for banks to protect against and banks maintaining the risk of common business losses. For example, banks are in the business of making loans and, thus, they are in the best position to avoid the risk of loss due to unpaid loans, whether due to a customer’s financial problems or fraud. Therefore, fidelity bonds specifically exclude coverage for loan losses except under very limited circumstances where the loss is caused by employee dishonesty. On the other hand, banks are not as equipped to avoid the risk of losses resulting directly from embezzlement, forged or counterfeit securities, or forged or altered negotiable instruments. As a result, the multi peril Financial Institutional Bond has been providing limited forms of insurance against such losses since 1916.
From the beginning, coverage for a bank’s loss due to employee dishonesty has been intended to be narrow, limited to embezzlement and embezzlement type acts. For just as long, insured banks looking for relief from significant employee dishonesty losses have disagreed over the scope of coverage for such losses. As a result, over the years, insurers, led by the Surety and Fidelity Association of America, have continually modified the standard form bond to clarify the narrow scope of coverage.
(Footnotes omitted)
[81] Originally the standard wording of the Bankers Blanket Bond provided cover for loss “through any dishonest act” of an employee. From an early stage there was tension between the insurers’ strict view of what constituted dishonesty and the
broader view favoured by insureds.
36 Tort & Ins LJ 43.
7 Above n 6, at 934–935.
[82] A number of US decisions interpreted dishonesty in the earlier wordings broadly, so as to confer cover for conduct that was merely reckless rather than actually dishonest. These decisions led to the Bankers Blanket Bond wording being altered in 1976 to require that the employee acted with “manifest intent” to cause loss to the insured. The manifest intent wording was subsequently adopted by the underwriters of commercial crime policies and used largely unchanged for two decades, not only in the US but also in Canada, the United Kingdom and New Zealand. All insurers writing business in this area and their commercial clients can be taken to have been aware of the origin and purpose of this wording.
The US, Canadian and United Kingdom cases
[83] Most judicial consideration and commentary on the manifest intent wording has occurred in the US and Canada. There is, it appears, only one United Kingdom decision on the point. In New Zealand neither the manifest intent wording nor the clear intent variation of it has been considered.
[84] In interpreting manifest intent, some decisions have looked at the meaning of “manifest” and “intent” separately. Ultimately, however, it is preferable to treat “manifest intent” and, in the context of this case, “clear intent” as an indivisible phrase when searching for its meaning in the policy.
[85] The US decisions are divided on whether “manifest intent” requires the employee to have had loss as his or her specific purpose or desire.8 The first approach is the general intent test, sometimes referred to as the “substantially certain to result” test.9 It treats knowledge that loss is substantially certain to result as a basis for inferring manifest intent to cause loss, regardless of the employee’s desire
for that outcome. This is the approach contended for by Marac.
9 It has been adopted by the sixth, seventh and tenth circuits.
[86] In Federal Deposit Insurance Corporation v St Paul Fire & Marine Insurance Co the US Court of Appeal for the sixth circuit discussed the nature of intent generally and concluded that manifest intent to cause loss does not require a specific desire for that outcome:10
Intent, as used in ordinary language, is thought to refer to a subject phenomenon that takes place inside peoples’ heads. In fact, however, the word “intent” is really shorthand for a complicated series of inferences all of which are rooted in tangible manifestations of behaviour. For us, the external behaviour ordinarily thought to manifest internal mental states is all that matters. We need not concern ourselves with the question of whether mental state actually exist, as an ontological matter ...
“Manifest intent” in such a provision means “apparent or obvious” Hanson PLC v National Union Fire Ins Co 58 WAS at app. 561,794 P2d 66, 72 (1990). Although the concept of “manifest intent” does not necessarily require that the employee actively wish for or desire a particular result, it does require more than a mere probability ... Manifest intent exists when a particular result is “substantially certain” to follow conduct.
[87] That Court reiterated this statement in its later decision in Peoples Bank & Trust Co v Aetna Casualty & Surety Co.11
[88] The Canadian courts have come to the same conclusion about the meaning of manifest intent.12 In McNab Auto Sales Ltd v Sun Alliance Insurance Co the Ontario Court of Appeal citied approvingly from the trial Judge’s reasoning that:13
Assuming that [the employee], through some process of reasoning fervently wished that [his employer] would not suffer a loss, the evidence here demonstrates nevertheless that [the employee] was consciously aware of the fact that he was delivering overused cars that West End never intended to pay for, and that the total number delivered over on that basis was a steadily increasing one ... Intention is not to be confused with desire and indeed it may be inimical to it. Consequences are intended where there is a conscious awareness that they are the certain result of one’s actions. [The employee] knew that a loss to [the employer] was the certain result of his actions and yet he continued their pursuit. It follows, therefore, that [the employee’s] plain and obvious intention was to cause [the employer] to sustain the loss for which it now claims.
(emphasis added)
10 Federal Deposit Insurance Corporation v St Paul Fire and Marine Insurance Company 942 F
2d 1032 (6th Cir 1991).
11 Peoples Bank & Trust Co v Aetna Casualty & Surety Co [1997] USCA6 560; 113 F 3d 629 (6th Cir 1997).
12 See for example Autoworkers (Ajax) Credit Union Ltd v Cumus General Insurance Company
2012 ONSC 172, [2012] ILR I-S244.
13 McNab Auto Sales Ltd v Sun Alliance Insurance Co (1998) 107 OAC 387 (ONCA).
[89] In Iroquois Falls Community Credit Union Ltd v Co-operators General Insurance Co, also a decision of the Ontario Court of Appeal, the Court referred to the cited passage of McNab and concluded:14
... The passage makes clear that an employee’s “fervent wish” or “desire” for a particular ultimate outcome was irrelevant. Secondly, the employee’s “manifest intent” could be inferred from his “conscious awareness” of what he was doing and his knowledge of the certain consequences of his acts.
I do not read the reasoning of Misener J or the reasons of this Court upholding it, as requiring knowledge that the consequences of an act are certain in order to infer “manifest intent”. McNab simply decided that knowledge of certain results was sufficient to infer manifest intent.
...
In my view, the employee’s “manifest intent” under the bond may be established by the employee’s admission as to his or her intent, or by evidence which establishes that he or she knew or was substantially certain that loss would be the consequence of the dishonest act. Knowledge may be proved by admissions, circumstantial evidence, or a combination of both.
No matter what evidence is used, the focus of the analysis should be placed on the employee’s intent in performing the very act that caused the loss, and not on some act the employee performs or plans to perform later. Doing so makes the analysis both clearer and simpler ...
(emphasis added)
[90] The position in the UK is represented (so far as counsel and I have been able to ascertain), solely by the decision of New Hampshire Insurance Company & Ors v Philips Electronics North America Corporation (No 2) in which Clarke J adopted the general intent approach, following Federal Deposit Insurance Corporation v St Paul Fire & Marine Insurance Co. The Judge also had recourse to criminal law principles regarding the meaning of intent (as some of the earlier US cases had done):15
Whatever the definition of “manifest intent”, as Oliver LJ put it in Bourgoin
SA v Ministry of Agriculture [1986] 1 QB716 at 777:
If an act is done deliberately and with knowledge of its consequences, I do not think that the actor can sensibly say that he did not “intend” consequences or that the act was not “aimed” at the person who, it is known, will suffer them.
...
14 Iroquois Falls Community Credit Union Ltd v Co-operators General Insurance Co 2009 ONCA
364, 97 OR (3d) 53.
15 New Hampshire Insurance Company & Ors v Philips Electronics North America Corporation
(No 2) [1998] CLC 1244 (QB).
Nor is it necessary to embark upon a detailed discussion of the meaning of either manifest or intent, save to say this. In the US “manifest” has been held to mean clear or obvious or apparent and “manifest intent” has been held to exist where a particular result is substantially certain to follow from conduct: see e.g. Federal Deposit Insurance Corp v St Paul Fire & General Insurance Co [1991] USCA6 1658; (1991) 942 F. 2d 1032 ... As I see it, there is no significant difference between that approach and the approach adopted here in cases like R v Nedrick [1986] 1 WLR 1025. Thus the actor must subjectively intend the result but as Lord Lane CJ put it (at p1028G):
When a man realises that it is for all practical purposes inevitable that his actions will result in death or serious harm, the inference may be irresistible that he intended that result, however little he may have desired or wished it to happen. The decision is one for the jury to be reached upon a consideration of all the evidence.
There has been discussion in more recent cases, notably R v Walker and Hayes (1990) 90 CR App R226 and R v Woollin [2009] EWCA Crim 1697; [1997] 1 CR App R97 as to the appropriate direction to the jury in a criminal case and, in particular, as to when it is necessary to tell the jury that they may only infer the necessary intent if they are sure that the result of the defendant’s actions was a virtual certainty and that the defendant knew that. It is not necessary to discuss those cases further here because, as already stated, it is, as I understand it, common ground or not seriously in dispute between the parties that the jury would be properly directed if they were told that they must be satisfied to the relevant standard of proof in Illinois that Mr Filson had the clear, obvious and apparent intent to cause PENAC to sustain the loss, that in considering that question they should consider all the circumstances of the case and that in doing so it was open to them to hold that Mr Filson had that intent if he believed that the loss was substantially certain.
[91] Mr Walker submitted that the policy wording required that the employee consciously desired that the employer sustain the loss or appreciated that this was the inevitable consequence of his or her conduct. Whilst the second limb of that submission appeared to reflect the general intent approach just discussed, Mr Walker went on to submit that the focus of the enquiry must be on the employee’s subjective purpose and relied on the decision in Resolution Trust Corporation v Fidelity and
Deposit Company of Maryland.16 This decision stands for a different approach,
described as the specific intent test. Under this approach the employer must prove that the employee committed the dishonest act with the specific purpose, object or
desire of causing loss to the employer.17
16 Resolution Trust Corporation v Fidelity and Deposit Company of Maryland [2000] USCA3 18; 205 F 3d 615 (3d
Cir 2000).
17 Adopted by the second, third, fourth and fifth circuits.
[92] In Resolution Trust the Court of Appeal for the third circuit approved the following explanation of the specific intent approach taken by the fourth circuit Appeals Court in General Analytics Corporation v CNA Insurance Companies:18
Because employee dishonesty policies like CNA Insurances require proof that the employee have acted to accomplish a particular purpose, they require that the insured establish a specific intent, analogous to that required by the criminal law. Thus, if a dishonest act has the unintended effect of causing a loss to the employer or providing a benefit to the employee, the act is not covered by the policy ... Stated succinctly, employee dishonesty coverage insures against “loss caused by a thief” as opposed to a fool or a saboteur “who happens to be an employee of the insured”. Robin v Weldy, A Survey of Recent Changes in Financial Institutions Bonds, 12 Forum 895,
897 (1997).
As a state of mind, intent is often difficult to prove. And because it is abstract and private, intent is revealed only by its connection with words and conduct ... Thus, evidence of both words and conduct is probative of intent
... and because context eliminates the meaning of words and conduct,
evidence of the circumstances surrounding such words or conduct, including
the motive of the speaker or actor, similarly is admissible ...
[93] The Court rejected the insured’s argument that motive should be distinguished from intent. After considering both the general intent approach as it is discussed in Federal Deposit Insurance Corporation v St Paul Fire & Marine Insurance Co and the specific approach exemplified by General Analytics, the Court concluded that only the specific intent approach satisfied the purpose and wording of the policy:
A review of the different approaches reveals the obvious distinction between the two lines of cases. As is evident from our discussion, under either approach, evidence tending to show that the employee acted “knowingly” would support a jury finding that the employee intended the consequences of his actions. Nevertheless, under the rationale explicitly adopted in General Analytics, proof of an employee’s recklessness or an employee’s knowledge that a result was substantially certain to occur from the conduct, are objective indicia – manifestations – of the employee’s specific purpose or intent. But neither an employee’s recklessness or his knowledge that a result was substantially certain to occur would satisfy the language of the policy, absent that inference of specific intent ... (“Like our sister circuits, we recognise that reckless conduct might be evidence – a manifestation – of intent. But recklessness itself without an inference of intent would clearly not satisfy the language of the policy any more than recklessness alone would create culpability for a crime requiring specific intent”.) In contrast, those courts that have equated the term “intent” with the mental state “knowingly” would find that the employee acted with the manifest intent
18 General Analytics Corporation v CNA Insurance Companies [1996] USCA4 1576; 86 F 3d 51 (4th Cir 1996).
where the loss and the benefit was substantially certain to follow, regardless of whether the employee desired such results ...
We agree with the approach espoused by the Courts of Appeals for the second, fourth, and fifth circuits and hold that the term “manifest intent” as it is used in the fidelity provision requires the insured to prove that the employee engaged in dishonest or fraudulent acts with the specific purpose, object or desire to cause a loss ... Inasmuch as we equate the “substantially certain to result” standard with the mental state “knowingly” we are of the view that “purposefully” rather than “knowingly” better captures the meaning of “intent” as it is used in the fidelity provision, given the history that prompted its inclusion in the dishonesty definition and its stated purpose. Indeed, we believe that our construction strikes an appropriate balance because it comports with the drafter’s obvious intent to limit the types of employee misconduct covered by this provision but ensures that proof of the employee’s recklessness and the substantial likelihood of loss factor into the ultimate enquiry into the employee’s subjective state of mind.
(emphasis added)
Which approach should be adopted in New Zealand?
[94] Intent is inherently subjective and the relevant commercial context requires that “manifest intent” or “clear intent” be taken as referring to the employee’s subjective state of mind. But this is not controversial; all of the cases to which I have referred take that view. Nor is it controversial that intent may be proved by inference from all the evidence, including knowledge of the consequences of the relevant act.
[95] The difference between the “general intent” and “specific intent” approaches is whether intent should be regarded as taking in desire for a particular consequence. In my view the proper approach is the general intent approach because it focuses on what intent actually is. Intent is the word that the parties have chosen to use. It is not helpful to interpret intent by reference to concepts that may sometimes overlap with intent and sometimes resemble intent but which are essentially different from intent. Had the drafters meant desire or purpose they could have used those words but they used the word intent.
[96] Although care is needed when looking to the criminal law for assistance in resolving civil cases, I consider that such assistance is permissible in this case, because the meaning of intent has received close consideration in New Zealand in
relation to offences requiring proof of intent. It is clear that in that context intent is to be treated as different from desire.
[97] In Regal Casting Ltd v Lightbody, which concerned a claim under s 60 of the Property Law Act 1952 for an order setting aside the transfer of a property as having been made with intent to defraud, the Chief Justice described the question of intent as one of fact on the evidence.19 In their joint judgment, Blanchard and Wilson JJ, considering the question of what constituted an intent to defraud, said:
[53] ... To answer that question it is essential to distinguish between the debtor’s purpose and his or her intention ... It is not necessary to show that the debtor wanted creditors to suffer a loss, or that it was his purpose to cause a loss. It is, however, necessary to show the existence of an intention to hinder, delay or defeat them and that the debtor has accordingly acted dishonestly ...
[54] Whenever the circumstances are such that the debtor must have known that in alienating the property and thereby hindering, delaying or defeating the creditors’ recourse to that property, he or she was exposing them to a significantly enhanced risk of not recovering the amount owing to them, then the debtor must be taken to have intended this consequence, even if it was not actually the debtor’s wish to cause the loss. We respectfully agree with the opinion of Gaudron J in Cannane (DM) v J Cannane Pty Ltd (in liquidation) that an intent to defraud:
... involves the notion of detrimentally affecting or risking the property of others their rights or interests in property or an opportunity or advantage which the law accords them with respect to property.
[98] Under the New Zealand Crimes Act 1961 one form of the requisite intent for murder is that the offender “means to cause” the death of the deceased.20 This is a close proxy for “intend to cause” in the policy wording. In the New Zealand context the observations by the House of Lords in R v Woollin are helpful.21 The Court was concerned with an offender who had, in a fit of temper, thrown his infant son onto a hard surface, causing the child’s death. On the question of intent Lord Steyn quoted
from the United Kingdom Court of Appeal’s decision in R v Nedrick:22
19 Regal Castings Ltd v Lightbody [2008] NZSC 87, [2009] 2 NZLR 433 at [5].
20 Crimes Act 1961, s 167(a).
21 R v Woollin [1999] 1 AC 82 (HL), described as the “traditional approach to intention” in Police v
K (CA 320/11) [2011] NZCA 533, (2011) 28 FRNZ 835.
22 R v Nedrick [1986] 1 WLR 1025. This case was referred to by Clark J in New Hampshire
Insurance Co v Philips Electronics North America Corporation (No 2), above n 15.
When determining whether the defendant had the necessary intent, it may therefore be helpful for a jury to ask themselves two questions. (1) How probable was the consequence which resulted from the defendant’s voluntary act? (2) Did he foresee the consequence? If he did not appreciate that death or serious harm was likely to result from his act, he cannot have intended to bring it about. If he did, but thought that the risk to which he was exposing the person killed was only slight, then it may be easy for the jury to conclude that he did not intend to bring about that result. On the other hand, if the jury are satisfied that at the material time the defendant recognised that death or serious harm will be virtually certain (barring some unforeseen intervention) to result from his voluntary act, then that is a fact from which they may find it easy to infer that he intended to kill or do serious bodily harm, even though he may not have had any desire to achieve that result ... Where the charge is murder and in the rare cases where the simple direction is not enough, the jury should be directed that they are not entitled to infer the necessary intention unless they feel sure that death or serious bodily harm was a virtual certainty (barring some unforeseen intervention) as a result of the defendant’s actions and that the defendant appreciated that such was the case. Where a man realises that it is for all practical purposes inevitable that his actions will result in death or serious harm, the inference may be irresistible that he intended that result, however little he may have desired or wished it to happen. The decision is one for the jury to be reached upon a consideration of all the evidence.
(emphasis added)
[99] Approving that passage, Lord Steyn observed that:
It may be appropriate to give a direction in accordance with Nedrick in any case in which the defendant may not have desired the result of his act.
[100] These statements are consistent with the approach taken in the “general intent” line of cases that treats intent as different from desire. In the “manifest intent” wording cases distinguishing intent from desire often comes down to the difference between the employee’s intentions regarding the immediate consequences of a dishonest act compared with his or her wider purpose, object or desire. In my view it is the immediate consequences of the act that are to be focussed on.
[101] The difference is illustrated by an analogy used by Juriansz JA in Iroquois Falls Community Credit Union. An employee had, among other things, made unauthorised loans to members of the credit union to enable them to service their existing loans. Her stated motive was to ensure that the credit union would not attract regulatory scrutiny and prevent members accounts from going into default, Juriansz JA said:
The Credit Union suffered a direct loss to its cash position from that transaction in much the same way that the King sustains a direct loss when robbed by Robin Hood, even though Robin Hood later gives the money to peasants to pay their taxes to the King.
[102] In several of the cases relied on by Vero the issue of intent was decided on the basis that an employee whose stated intention was, ultimately, to make money for the employer could not be said to have intended to cause it loss, even if the expectation of making money was unrealistic.23 However I do not see these cases as representing any general rule. An intention that the employer ultimately benefits is a piece of evidence to take into account. But it cannot preclude an intention to cause
loss through the immediate act. Likewise, the absence of any benefit to the employee is a relevant piece of evidence but does not preclude an intention to cause loss.
[103] In conclusion, in every case it is a question of fact as to whether the employee intended to cause loss. But proof of intent to cause loss does not require proof that the employee also desired that outcome. Intent can only be proven by reference to all the available evidence, including subjective statements by the employee concerned (if available) and circumstantial evidence. Knowledge that the act in question would result in loss to the employer will be a significant piece of circumstantial evidence. It may, either alone or together with other evidence, satisfy the Court that the employee intended to cause loss to the employer. The fact that the employee did not desire the loss may also be a relevant piece of circumstantial evidence but is not necessary for, and will not preclude, a finding of intent to cause loss.
Did Mr Atkinson act dishonestly with the clear intent of causing Marac loss?
[104] Mr Walker submitted that Mr Atkinson was guilty only of improvident lending or bad business judgment and did not intend to cause Marac loss. He suggested that, far from intending to cause loss, Mr Atkinson was working with Rapson to enable payment of the old Rapson debt. However, there is no evidential
foundation for that submission. In contrast to many of the cases in this area, where
23 e.g. Municipal Securities Inc v Insurance Company of North America 829 F2d (6th Cir 1987);
Leucadia Inc v Reliance Insurance Co 684 F2d 964 (2nd Cir 1988).
the employee has been able to explain his or her reasons for acting dishonestly, Mr Atkinson was unable to give any coherent account of his motivation. He accepted, in hindsight, that he did not have authority to make the advances. But, as I have previously noted, he has little memory of this period and his evidence was of limited assistance in identifying his motivation.
[105] Mr Walker also submitted that there were many things that Mr Atkinson did that were not the acts of someone who intended to cause Marac loss. First, he said that Mr Atkinson assiduously chased the residual debt under the old facility. This, of course, was supposed to be Mr Atkinson’s main function in relation to the Rapson account. He did monitor that aspect of the account, though little return was achieved. I do not see this as conduct that assists in identifying intent in relation to the unauthorised lending.
[106] Secondly, Mr Walker submitted that Mr Atkinson had a staff member track vehicles against letters of credit and payments against vehicles. This was, presumably a reference to Michael Hershberger. Mr Hershberger occupied a position below Mr Atkinson in the corporate hierarchy and occupied a collections function within Marac. He assisted Mr Atkinson from about 2004 onward, arranging advances to meet letters of credit, ensuring that advances stayed within the facility limit and keeping track of payments made by Rapson against the old bad debt. Mr Hershberger’s perception was that he had been asked to assist because of his Excel skills. Perhaps significantly, however, Mr Hershberger noted that this was the only account on which he had such responsibilities. Even if Mr Hershberger had good Excel skills I find it distinctly odd that he would have been asked to undertake work which, had this account been an orthodox Marac facility, would have fallen within the ambit of somebody else at Marac.
[107] Thirdly, Mr Atkinson declined approval for some letters of credit that would have put the 464768 in excess of its credit limit. I accept that this did happen. However, the real issue here was that Mr Atkinson should not have been issuing letters of credit funded through the facility at all. In the absence of anything that might assist in understanding why Mr Atkinson did what he did I regard this aspect as neutral.
[108] Mr Walker also submitted that Mr Atkinson did not gain personally from Marac’s loss and, to the contrary, putting Marac into a bad loan could only harm him. There is some truth in this; had the unauthorised lending been discovered it is virtually certain that Mr Atkinson would have lost his job. But in my view Mr Atkinson was very likely motivated from about 2005 onwards to avoid that outcome and did so by continuing to fund Rapson, thereby postponing the discovery of his previous unauthorised lending. I am satisfied that Mr Atkinson could not genuinely have thought that Rapson would be able to repay the continued advances. He was simply postponing the inevitable.
[109] Whilst there are aspects of Mr Atkinson’s conduct that are not consistent with an intention to cause Marac loss, after weighing them against the conduct that I have found to be dishonest I find that the overwhelming weight of evidence is towards that intent. I conclude that from about mid-2005 the advances that Mr Atkinson made were made knowing that they would cause Marac loss and intending, though not necessarily desiring, that outcome.
Did Marac sustain direct financial loss consequent on Mr Atkinson’s acts of
dishonesty?
Direct financial loss consequent on dishonest acts
[110] Insurance policies invariably require a causal connection between the specified peril and the loss. However, the quality of that connection varies. It may be the close and direct connection of proximate cause signalled by words such as “caused by”.24 In comparison, expressions such as “arising out of” are regarded as being much broader, not requiring such a close causal nexus. The expression “consequent upon”, used in this operative clause, is one that carries a both causative and sequential connotation but does not require a close causal connection.25
[111] However, the looser causative language is countered by the requirement that the loss be “direct financial” loss. I have identified various acts of dishonesty by
24 Naviera de Canarias SA v Nacional Hispanica Aseguradora SA (The Playa de las Nieves)
[1978] AC 853 at 881.
25 Western Australia v Container and Handlers Pty Ltd & Ors (2004) 13 ANZ Insurance Cases 61-
607 (HCA).
Mr Atkinson. Some involve the actual advancing of money in circumstances that make the act dishonest. Clearly, those acts were capable of resulting in a direct financial loss for the purposes of the operative clause. Others involve misleading Marac over the state of the Rapson account. Whilst they are capable of resulting in loss in the sense of depriving Marac of the opportunity to avoid further losses, a loss of opportunity is not a direct financial loss. So it is only acts that had as their consequence Marac actually parting with money that could be the subject of claim under this policy.
The effect of endorsement 4
[112] The operative clause does not impose any limitation in terms of when the dishonest acts must be committed or the loss sustained. It simply allows for loss consequent upon either individual acts or a series of related acts of dishonesty. However, endorsement 4 provides that there is no indemnity for loss:
... consequent upon a single act or series of related acts of ...dishonesty ...
committed more than 48 months prior to the discovery of the loss.
[113] The parties treated 8 February 2010 as the date the loss was discovered for the purposes of the policy. 26 Vero argues that as a result of endorsement 4 Marac can only recover losses that it can show were consequent upon dishonest acts committed after 8 February 2006. Substantial advances had already been made and letters of credit issued by 8 February 2006. Vero argues that Marac either has not or cannot prove any loss resulting from acts committed after 8 February 2006 because
by that date Rapson already owed more than $4m which it could not repay. Marac could never have recovered the lending made prior to that date so that any dishonest conduct after that date had no causative effect.
[114] There is a flaw in this argument. It fails to recognise that Marac sustained a loss with each separate advance. Under the definition in clause 2.1 a loss is a “direct financial loss”. Marac sustained a loss as soon as Mr Atkinson parted with its money dishonestly and with the clear intent of causing it loss. The ability to recover the
debt would only be relevant in relation to exclusion 4.3 which excludes loss resulting
26 This being the date on which Marac lodged its claim with Vero.
from the non-payment of any loan. But by virtue of the proviso the exclusion does not operate where the loss resulted from dishonest acts.
[115] Vero is, however, correct that Marac can claim only for loss consequent on acts committed after 8 February 2006. Marac’s argument was that endorsement 4 related to a series of acts that occurred in its entirety before 8 February 2006 but that this case involved a series of acts that occurred before and after that date. Mr Hollyman submitted that since a series of related acts are to be treated as a single act under the definition of loss, endorsement 4 did not apply.
[116] I do not need to decide whether this proposition is correct because in my view there is not just one series of related acts in this case and it is a straightforward matter to apply the cut-off date provided for in endorsement 4 by reference to the date the advances were made. Before I explain my reason for this conclusion, I note the ambiguity inherent in both the operative clause and endorsement 4.
[117] Although the operative clause and the endorsement both use the phrase “series of related ... acts” they both also use “loss” in its defined sense. The definition of “loss” includes the phrase “series of related, continuous or repeated acts (which shall be treated as a single act) of ... dishonesty”. If the operative clause and endorsement 4 were read literally they would each include two phrases that refer to “series of related acts of dishonesty” but which have different meanings. In the phrase that is used directly the “series of related ... acts” is not qualified. In the phrase incorporated by the extended meaning of “loss” the phrase is qualified so as to treat the series of acts as a single act.
[118] The operative clause and endorsement 4 must be interpreted so as to make sense. That is not possible if they are interpreted as containing two phrases with contradictory meanings. One of the phrases must prevail. Although the doctrine of contra proferentem is rarely used now, and only as a last resort, I consider that this is an instance in which it would properly be applied, given that Vero prepared this wording and that the endorsement benefits it. However, I do not need to go further and express a view on the correct outcome because it does not affect my conclusion and counsel did not make submissions on it.
[119] I return, then, to the question whether the endorsement excludes loss consequent on advances made before the nominated date. A series in this context is a number of discrete events or acts following one another in succession over time.27
In the House of Lords decision in Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Co Ltd Lord Hoffman made the following observation in considering a similar phrase in the context of a deductible provision:28
[26] When one speaks of events being “related” or forming a “series” the nature of the unifying factor or factors which makes them related or a series must be expressed or implied by the sentence in which the words are used. It may sometimes be necessary to imply a unifying factor from the general context. But the express language may make such an implication unnecessary or impermissible.
[120] Whilst it might be right to view all Mr Atkinson’s acts in relation to Rapson as a series of acts, in a temporal sense they are not all related. The focus of the operative clause and endorsement 4 is loss. The “unifying factor” between acts of dishonesty by Mr Atkinson that makes them “related acts” for the purposes of these clauses is that they are acts that culminate in a particular loss through the making of an advance. So the various acts connected with the issuing of a letter of credit and its associated advance would be one series of related acts. This means that there were as many series of acts after February 2006 as there were advances.
[121] In a practical sense, therefore, proof of loss turns on the advance having been made. Whether or not there were other related acts, it is only when the advance was made that there was direct financial loss that would support a claim. So provided the advance was made after 8 February 2006 it could not matter what other acts were connected with it (though they may have relevance in determining that the act of making the advance was dishonest). Vero is therefore right to say that only losses flowing from advances made after 8 February 2006 can be claimed. However, Vero is wrong to say that Marac’s existing losses are to be taken into account in
calculating those losses.
27 Oxford University Press “Series, n” (12 September 2013) OED Online <www.oed.com>.
Calculation of loss
[122] Marac’s approach to quantum was unsatisfactory. The usual approach by an insured seeking to prove its loss in proceedings such as this is to call a forensic accountant to give evidence of an analysis undertaken of the company’s records by reference to the policy wording. This was not done, drawing justified criticism from Vero’s counsel. Instead, Marac relied for proof of its loss solely on Mr Flood’s evidence that as at 30 January 2010 the balance of the 464768 account stood at
$4,432,511.29. Of that, at least $2.15m was unrecovered advances and these losses would not have been incurred had Mr Atkinson not concealed his unauthorised advances because, on Mr Flood’s evidence:
Marac would have closed its position almost immediately and demanded repayment had it known of the extent of its exposure when Grant [Atkinson] exceeded his DDLA [delegated discretionary lending authority]. If it had done so it would have obtained substantial repayment (Rapson’s accounts from that time show that it had significant inventory).
[123] This approach is wrong for the reasons I have already discussed: Marac’s loss of opportunity to terminate the Rapson account did not result in any direct financial loss. Nor does Marac’s approach recognise the effect of endorsement 4.
[124] The starting point in calculating quantum is to recognise that there was a claimable loss to Marac each time an unauthorised advance was made after
8 February 2006. Repayments during that time may need to be taken into account because, on the evidence, it seems certain that most if not all such repayments were made from further advances by Marac. However, since the issue of quantum was not addressed in this way by counsel I am unable to reach a view as to what Marac’s properly adjusted loss under the policy is. Further, the exclusion of interest and penalties by exclusion 4.1 (subject to the write-back allowed by extension 3.6) needs to be taken into account. In addition, neither counsel referred to the deductible which would normally be of some moment in the calculation of claim such as this.
[125] For reasons I come to next I have concluded that Vero was in breach of its obligation to appoint a specialist investigator. Had it done so, many of these quantum issues would have been avoided. For this reason I am not prepared to treat
the inadequacies in the proof of quantum as fatal but instead invite counsel to either agree on the amount payable under the policy or to make further submissions on the point so that I can make a finding.
Breach of condition 5.9 – failure to appoint an investigative specialist
[126] Marac claims its actual solicitor/client costs in this proceeding as a loss sustained as a result of Vero’s breach of a policy condition requiring it to appoint an investigator to report on the facts of the claimed loss and quantum.
[127] Under Condition 5.9 Vero must appoint a investigative specialist (defined)
when it is notified of any loss:
(a) An investigative specialist will be nominated by the insured and approved by the insured and approved by the insurer with respect to any loss notified under this policy. The investigative specialist shall not be any entity or person with a clear conflict of interest.
(b) The investigative specialist shall:
(i) Investigate the facts behind the loss; and
(ii) Determine the quantum of the loss; and
(iii) Advise when and how the insured’s controls were or may have been breached; and
(iv) Summarise recommendations which may prevent further future similar losses; and
(v) Issue their report, in a format approved by the insurer in duplicate to the insured and to the insurer.
(c) The insurer will pay the expense of the investigative specialist unless the loss is not covered and in that event expense will shared equally between the insurer and the insured. The Deductible amount is not applicable to the expense of the investigative specialist and such expense paid by the insurer will be in addition to the Limit of Liability specified under Item 4 of the Schedule.
...
(e) The report issued by the Investigative Specialist will be binding and definitive as respects the facts and quantum of the Loss only.
[128] Also relevant is exception 4.2 which provides that Vero shall not be liable for:
Costs, fees or other expenses incurred in establishing the existence or amount of Loss covered under this policy or in prosecuting or defending any legal proceeding ... except as provided under Extension 3.7 or Condition
5.9.
[129] Extension 3.7(c) provides that:
The insurer shall not be liable to make any payment for fees, costs or other expenses ... incurred by the insured in establishing the existence, validity or amount of any loss under this policy, other than as provided under Condition
5.9.
[130] Following its notification of loss in February 2010 Marac nominated GAB Robins for appointment under Condition 5.9. Vero refused to approve the appointment. Mr Walker submitted that Vero’s refusal was not a breach of Condition
5.9 because there was no loss to which the policy responded and therefore Vero was under no obligation to agree to the appointment of a specialist investigator.
[131] This view of Vero’s obligations is wrong. It does, however, highlight an ambiguity in Condition 5.9. The use of “loss” in its defined sense does suggest that the appointment of an investigative specialist is only required where the loss falls within the ambit of the policy. However, it is also evident from sub-clauses (b) and (c) that the policy contemplates the appointment of an investigative specialist before it is known whether the claimed loss is covered. Indeed, sub-clause (c) is specifically directed towards the sharing of the investigative expenses if it turns out that the loss is not covered. It is not feasible to interpret “loss” in Condition 5.9 as bearing its extended meaning in the face of Condition 5.9(c). The word is properly used in this context to refer to the claimed loss.
[132] It follows that when Marac notified Vero of its claim and nominated GAB Robins for appointment under Condition 5.9, Vero was obliged to make that appointment (or another appointment if GAB Robins was unacceptable to it). Whether or not Marac was ultimately shown to have sustained a loss that fell within the terms of the policy, Vero was obliged to appoint an investigator and either pay the full amount of the expenses or, if the loss was shown not to be covered, then to share the expenses equally with Marac.
[133] Had Vero approved the appointment the investigators report would have been binding as to the facts of the claim and the quantum of the loss. In the event that the parties still disagreed as to cover, the next step was arbitration under clause 5.10. Vero’s refusal to follow the provisions of the policy has meant that Marac was left with the option only of issuing these proceedings. Exception 4.2 and extension
3.7(c) do not apply.
[134] I am therefore satisfied that Vero was in breach of its policy obligations under Condition 5.9 and that the loss to Marac is the actual costs and disbursements connected with this proceeding. Unfortunately, no evidence was led as to this loss. That, too, is to be the subject of further consideration by counsel.
Summary and result
[135] I have concluded that:
(a) Dishonesty in the context of the policy means deliberately not acting in a straightforward way or in a way that an honest person would act.
(b) Marac did not know about the nature and level of lending to Rapson and was not in a position where it ought to have known.
(c) By at least 2005, Mr Atkinson realised that he had acted beyond his authority. At that point, an honest person would have revealed the problem to his or her superior. Mr Atkinson acted dishonestly by: omitting reference to the 464768 account in his meeting notes, omitting reference to the 464768 account in a report that was meant to summarise the Rapson position, directing junior staff to suppress arrears of interest on the account, lying to Marac’s internal auditor about the account, and never mentioning the account to Mr Flood.
(d) Intent to cause loss is a question of fact to be inferred from the available evidence, including subjective statements of the employee and circumstantial evidence. Knowledge that an act will result in loss is strong circumstantial evidence pointing towards intent. Intent is
different from desire and the fact that an employee did not desire loss to the employer, whilst a relevant piece of evidence, does not preclude a finding of intent.
(e) Taken overall the evidence shows the advances made from mid-2005 were made with knowledge that they would cause Marac loss, and intending that outcome. Marac’s claim therefore falls within the operative clause.
(f) There was a claimable loss to Marac each time an unauthorised advance was made after 8 February 2006. I cannot determine quantum of the loss on the available information.
(g) Vero breached its obligation under condition 5.9 to appoint an investigative specialist. This caused Marac loss, being its solicitor/client costs of this proceeding. I cannot determine the quantum of the loss on the available evidence.
[136] There is judgment for Marac on the question of liability.
[137] Counsel are to confer on the issue of quantum. If they agree, they may file a joint memorandum for my consideration. If they are unable to agree, the plaintiff is to file a memorandum within four weeks of the date of this judgment, the defendant within six weeks and the plaintiff in reply within eight weeks.
[138] Leave is reserved to seek a telephone conference to address any other issues that the parties require direction on.
P Courtney J
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