Judgment date: 24 February 2012
Lane v Dive Two Pty Ltd  NSWSC 104
Supreme Court of New South Wales 1
- Entertaining family and friends on a commercial scuba diving boat was found not to be "in connection with the Insured's Business".
- Pleading guilty to a crime will not necessarily be sufficient to invoke the criminal act's exclusion clause. The criminal act which caused the loss must be intentional and not merely negligent or inadvertent.
- A broker has a duty of care to advise a client that its insurance policy would not cover all activities on the boat but rather only those activities undertaken "in connection with the business".
The plaintiff, Mr Lane, claimed damages against the defendants, Dive Two Pty Ltd (Dive Two) and Mr Todd, in respect of injuries he sustained when a boat driven by Mr Todd collided with a boat from which the plaintiff was fishing. The passengers on the boat being driven by Mr Todd included Mr Todd's wife and 4 of her friends.
Mr Todd pleaded guilty in the Local Court to a charge of negligent navigation occasioning grievous bodily harm.
The defendants claimed an indemnity or damages from their insurer, Liberty Mutual Insurance Company (Liberty). In the event the insuring clause did not respond to the claim, the defendants sought damages from their insurance broker, Horsell International Pty Ltd (Horsell), for breach of retainer and negligence.
Liberty denied indemnity to the defendants on 2 bases:
- The claim did not fall within the contract's insuring clause because it did not arise "in connection with the Insured's Business"; and
- The claim was excluded by reason of the criminal act's exclusion clause.
"In connection with the Business"
Mr Todd gave evidence that he had asked the 2 other couples on the boat to thank them for prior referrals and in the hope of getting new work.
In considering what "in connection with the business" meant, the court found that the words include the promotion of the business, and noted that the words "in connection with" requires a relationship between one thing and another.
In relation to whether or not the claim arose "in connection with the business", the Court found that Mr Todd made a number of earlier statements to the police to the effect that the purpose of the trip was a "private function".
Notwithstanding Mr Todd's current position that the trip was made "in connection with the business", the Court found the earlier statements indicated that the trip was a recreational one which was not made in connection with the business. Accordingly, Liberty was entitled to deny indemnity.
Criminal act exclusion clause
It was necessary to consider whether any exclusion clauses applied to determine whether Horsell was liable to the defendants. Relevantly, clause 7 of the policy provides, in part, that:
"This Policy does not cover liability directly or indirectly caused by, arising out of or in any way connected with ...
7.24. Any alleged or actual fraudulent, dishonest, malicious, wilful or criminal act or omission of the Insured or any person covered by Clause 3 of this Policy ..."
In considering whether the criminal act exclusion clause applied, the Court considered the following points:
- The NSW Court of Appeal has previously read down the words "criminal act" to exclude non-intentional criminal acts because of the context in which it appeared; and
- The word "criminal" must be construed in the context of the whole phrase in which it appears.
Accordingly, the Court found that the term "criminal act" is broad and, in a sense, arbitrary since it depends on legislative choice and may cover acts of considerable seriousness or relatively trivial infringements without any requirement of intention. Because the words "criminal act" appear at the end of a list where the preceding words have in common an element of intention, the Court found that they should be read down to include only those criminal acts that are intentional.
The Court found that Mr Todd's actions, while negligent and criminal, were not intentional. Accordingly, the criminal act exclusion clause did not apply to this claim.
Broker's liability to defendants
Horsell was engaged to advise PADI, and its members, on appropriate insurance cover, and, by implication, to warn it and its members where cover was inadequate or doubtful.
The Court found a reasonably competent broker should, in circumstances where the broker had earlier advised a client that it did not need public liability insurance for its boat, to advise the client that:
- the Policy would only cover activities relating to scuba diving and associated activities which were conducted in connection with its business; and
- Protection & Indemnity insurance for boats was available and could be obtained to cover risks not covered by the Policy.
The Court found that Horsell was negligent and in breach of its implied retainer by failing to warn Dive Two of a potential deficiency in the policy which could be rectified by obtaining a public liability insurance policy similar to the policy purchased for a related scuba diving boat.
The Court found that it was Horsell's negligence which caused the defendants' loss. Accordingly, the Court ordered Horsell to pay the judgment plus costs awarded to the plaintiff and the defendants and Liberty's costs.
This case is a reminder to brokers that where an insured engages in activities using assets of the business but not in the course of the insured's business, that broker has a duty to advise its client that separate insurance may be required for those activities.
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