Australia: Professional Indemnity: No cover for defence costs for director

Insurance Update

Kyriackou v ACE Insurance Limited (2012) 17 ANZ Insurance Cases 61-935


The plaintiff, Kyriakou, was a former director of various companies within the Australvic group (Australvic). The plaintiff sued Australvic's professional indemnity insurers, ACE Insurance Limited (ACE), seeking a declaration that ACE was liable to indemnify him in respect of legal costs he incurred defending a proceeding brought against him by ASIC.

Australvic carried on business "bailing out" land owners and builders who were in financial difficulty. Under Australvic's scheme, distressed developers would transfer their land to Australvic to hold upon trust. Australvic would develop the property using the original developer's existing finance, supplemented as required with additional finance it obtained. Australvic would then market and sell the trust property, thereafter distributing the net proceeds to the beneficiaries after deducting its own costs and remuneration.

The ASIC Proceeding

On 15 May 2007, a creditor's petition was filed in the Federal Court of Australia seeking to wind up one of the Australvic companies after a 2005 property development carried out by Australvic as trustee for a Mr. Calderone ran into difficulty. ASIC also commenced an investigation into Australvic and Kyriackou.

On 28 May 2007, ASIC commenced suit in the Federal Court against Australvic, Kyriackou and others alleging Australvic and Kyriakou contravened the Corporations Act by operating an unregistered managed investment scheme, trading while insolvent, and improperly diverting company assets to Kyriackou's own use. ASIC alleged Australvic had received or assumed loans totalling $6 million, yet had no cash remaining and had made no loan repayments. It was further alleged that Kyriackou had received substantial sums of money, including direct payments to him of loan proceeds. In their defence, Australvic and Kyriackou pleaded the Calderone transactions were structured to fall outside the Corporations Act definition of a "managed investment scheme", thus registration was not required under the Act.

ASIC's originating process sought a declaration that Australvic and Kyriackou had contravened the Corporations Act, together with final orders restraining Australvic and Kyriackou from further operating or promoting the scheme. Interlocutory injunctions were sought appointing liquidators to the Australvic entities and restraining Kyriackou from disposing of assets and records.

In April 2008, ASIC decided the public interest was not served in proceeding to trial because: (1) the administration of Australvic was being overseen by liquidators who were officers of the court; (2) the key Australvic entities had ceased trading, so there was no ongoing risk to the public; and (3) the liquidator's report concluded Australvic was hopelessly insolvent, so there was a low probability of ASIC recovering its costs if successful.

An agreement had been reached for ASIC to discontinue the proceeding, with the issue of Kyriackou's costs to be referred to mediation. Mediation proved unsuccessful. ASIC was granted leave to discontinue the proceeding and it was determined that ASIC had acted responsibly throughout the proceeding and Kyriackou's application for a costs order against ASIC was refused.

The ACE Proceeding

Kyriackou notified ACE of the claim against him when judgment was pending in his application for costs against ASIC. ACE denied indemnity, and Kyriackou filed suit against ACE in the Victorian Supreme Court.

The ACE professional indemnity policy contained a typical coverage clause, providing indemnity "against Loss arising and Claim in respect of civil liability for breach of a duty owed in a professional capacity". The term "Claim" was defined in the policy as "a written demand for...civil compensation or civil damages arising out of the Firm's Business". The term "Loss" was defined as "the aggregate of all amounts payable by the Insured or ACE as civil compensation or civil damages in respect of a Claim including...Defence Costs". The policy also contained an exclusion for losses connected with any breach by Kyriackou of duties owed in his capacity as a director or officer of any Australvic company.

"Claim" under the policy?

Vickery J adopted the reasoning of Pagone J in the leading case of Major Engineering Pty Ltd v CGU Insurance Limited [2009] VSC 504, which imposes a duty on the insurer to defend a claim on behalf of the insured where the claim as pleaded, and if successful, would trigger indemnity under the policy. Significantly, Vickery J decided that, when determining the nature of the claim against the insured, the court ought to consider not just the pleadings but also the affidavits and written submissions filed in the proceeding.

ACE submitted that the ASIC proceeding did not constitute a "claim" as defined under the policy because ASIC's originating process sought declaratory and injunctive relief but not compensation or damages. Kyriackou argued he was potentially exposed to a damages award because section 1324(10) of the Corporations Act and section 38 of the Supreme Court Act both permitted the court to award damages in place of an injunction. Vickery J rejected Kyriackou's argument, inferring instead that ASIC declined to seek damages or compensation by not expressly pleading an entitlement to same. Vickery J ruled the insuring clause was not engaged by the ASIC proceeding in the absence of an express claim for damages or compensation.

Vickery J's ruling is consistent with the interpretation given by the Queensland Court of Appeal to section 1234(10) in the decision of McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129 (reported in our June 2012 Insurance Update). Coincidentally, both judgments were delivered on the same day.

Acting in a "Professional Capacity"?

ACE further argued that the insuring clause was not triggered because the ASIC proceeding did not allege a breach of duty owed by Kyriackou in a professional capacity. ACE, relying upon the affidavits filed by ASIC, argued ASIC's claim was brought against Kyriackou as an entrepreneur in the management of Australvic and the scheme promoted by the group. Kyriackou submitted that, in promoting Australvic's scheme to distressed developers, he was not acting as a director but rather in a professional capacity as a broker or intermediary.

Vickery J had regard to Toomey v Scolaro's Concrete Constructions (No. 5) [2002] VSC 48 and GIO General Limited v Newcastle Council (1996) 38 NSWLR 558, in which the court acknowledged the term "professional capacity" is given a very broad interpretation in the context of professional indemnity insurance. Vickery J interpreted those two cases as deciding that, even adopting a broad interpretation of "professional capacity", an activity is ordinarily regarded as "professional" only where it is carried out pursuant to an established discipline or by persons with a professional qualification or special skill. The court ruled that Kyriackou's promotional activities were not sufficiently professional to fall within the insuring clause.

Kyriackou's claim for indemnity was dismissed and he was ordered to pay ACE's costs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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