Australia: Director unable to access professional indemnity policy for legal costs related to ASIC proceedings

In brief - ASIC proceedings held not to be a claim under the policy

The Victorian Court of Appeal has grappled with an unconventional claim for indemnity under a professional indemnity policy issued to a finance professional. The court considered whether the ASIC proceedings constituted a claim under the policy and whether the director was acting in a professional capacity.

ASIC pursues director of companies operating unregistered managed investment schemes

Kyriackou was a director of a number of corporations in the Australvic Group and was insured under a policy of professional indemnity insurance with ACE Insurance Limited (ACE). The insured professions as nominated in the policy schedule were "finance originators, finance, intermediary, finance brokers, finance consultants, mortgagee aggregators".

The Australian Securities and Investment Commission (ASIC) pursued proceedings against Kyriackou and six of the companies in the Australvic Group in respect of his and the companies' conduct in operating unregistered managed investment schemes.

ASIC sought a declaration that the relevant defendants had been operating unregistered managed investment schemes, that Kyriackou be restrained from operating and promoting the scheme and that the scheme be wound up. Assets were to be frozen. No claim for damages or compensation was made.

ASIC action motivated by desire to protect investors

ASIC provided evidence that indirectly suggested that the group was engaged in obtaining finance from investors for the purpose of residential construction. Losses may have been sustained by these investors. ASIC took the action because of the alleged breaches under the Managed Investments Act 1998 (Cth).

ASIC's action was no doubt motivated by a concern to protect investors or potential investors in schemes promoted by Kyriackou and the group. But as the leading judgement of Harper JA of the Victorian Court of Appeal wistfully noted, after a little under three years of litigation, ASIC discontinued the proceeding with no orders as to cost, observing that "the ASIC proceeding has generated nothing except work for the Federal Court and fees for the lawyers". However, the practical consequence of the action was that the scheme had been shut down and a risk to investors was eliminated.

Kyriackou then sought indemnity under the ACE policy for his legal costs of that litigation. The trial judge found that there was no claim within the meaning of the policy. For practitioners in the professional indemnity field, that, on the material, was an unsurprising result.

Director argues that ASIC proceedings were a precursor to a claim

Kyriackou appealed on multiple grounds. The full reference to the decision is Kyriackou v ACE Insurance Limited [2013] VSCA 150.

On the question of whether the ASIC proceeding was a claim under the policy, the ASIC proceeding did not plead a claim for damages or compensation. Kyriackou argued that the proceedings commenced by ASIC which sought to stop the scheme and preserve its assets were a precursor to a claim for damages or civil compensation. It was said that the proceedings were in an embryonic stage, but it was implicit that if investors had lost money, claims against him may be made by ASIC for compensation.

Kyriackou also relied on an argument with respect to section 1324 of the Corporations Act 2001 (Cth) which permitted the court, in addition to granting injunctions, to order a party to pay damages to another person. This was despite the fact that ASIC never pursued a claim for damages under the umbrella of this provision or pleaded such a claim.

Creatively, Kyriackou argued that the general provision seeking relief in the originating process which included the phrase "further or other orders as the Court deems fit", when considered in the light of section 1324(10) would constitute a claim within the meaning of the policy.

Insurer argues that claimant and nature of claim must be identified

ACE argued, a proposition accepted by the court, that the express wording of the policy required a specific claim to be made or intimated in the proceeding, or otherwise contemplated by the policy. By the policy, a claim was defined to mean: "A written demand for, or an assertion or a right to, civil compensation or civil damages... or a written intimation of an intention to seek such compensation or damages".

The mere possibility that a claim may be made, particularly by persons unidentified, was insufficient. The nature of the claim and the claimant must be identified. It was not sufficient for Kyriackou to argue that the court must infer that claims may follow, for example, by way of claims bought on behalf of investors who had lost money.

Court of Appeal takes traditional approach to question of whether claim was made under the policy

It was an argument the Court of Appeal agreed with. With reference to the originating process, Harper JA suggested:

Pleadings in civil actions are required to inform the opposite party or parties of the claim they are asked to meet. This obligation is not fulfilled by the mere intimation of an otherwise undisclosed intention.

On the whole, his Honour did not find that the ASIC proceeding made an express claim or any intimation of a claim for relief other than that stated in the proceeding.

Whilst Kyriackou's argument was creative, the court took a traditional approach to the question of whether a claim was made within the meaning of the policy, having regard to the pleaded claim in the originating process and the definition of claim in the policy. It would not go beyond the formal pleadings and speculate as to the potential of claims behind the proceeding.

The Court agreed with an earlier decision of Byrne J in the Supreme Court of Victoria in Kantfield Pty Limited v Lockwood [2003]VSC 420 that a claim for damages or civil compensation does not include a claim for a debt, restitution or for a civil penalty. It certainly did not encompass a claim of the kind sought by ASIC.

Inconsistency in wording of professional indemnity policy

The court noted that there was a mismatch between the wording of the insuring clause and the definition of claim. The insuring clause insured Kyriackou "against Loss arising from any Claim in respect of civil liability for breach of duty owed in a professional capacity".

However, the definition of claim required a claim to be for "civil compensation or civil damages". The court noted that while "civil liability" can be given a broad definition which may go beyond civil compensation or damages, it chose to read down the words "civil liability" to restrict it to civil compensation or civil damages and nothing more. This, it said, made that term consistent with the totality of the policy. It resisted a broader construction encouraged by Kyriackou.

Nevertheless, the court suggested that none of the ASIC claims would fall within the definition of civil liability. We note some policies do cover insureds for civil penalties of the kind contemplated by the corporations and securities laws, whilst other policies expressly exclude cover.

Insurer argues that director was not acting in a professional capacity

Kyriackou had already lost his appeal on the basis that the ASIC proceedings were not a claim. However, the question of whether he was acting in a professional capacity within the meaning of the policy was considered by Justices Harper and Kyrou independently.

At first instance the trial judge had found he was not acting in a professional capacity.

ACE argued that Kyriackou was undertaking commercial or entrepreneurial activities, unconnected with any profession - whether that was considered with reference to one of the more traditional professions or on a more modern view of professions. ACE said he was engaged in soliciting monies from the public who would invest in schemes he was promoting. He was not providing professional advice or services in accordance with an established discipline.

ACE said this was not a question of a claim against him for providing negligent professional advice. It was said that there was no professional component to the activities he was undertaking, which were the subject of the ASIC proceeding.

Reference was had to the NSW Court of Appeal decision of Solicitors' Liability Fund v Gray & Anor (1997) 147 ALR. Two solicitors were involved in a scheme which they promoted to their clients for investment and tax purposes. After some of the schemes failed those clients sued the solicitors. Their insurer denied that the solicitors were acting in a professional capacity.

The Court of Appeal agreed and held that the solicitors were acting as entrepreneurs, rather than as legal professionals. The court concentrated on the activities performed by the solicitors and compared them with the traditional work that they may have performed as solicitors, such as conveyancing or providing taxation or legal advice. Their work was characterised as simply obtaining funds and earning a commission.

Ultimately, it was found for Kyriackou on this issue. Harper JA agreed with the earlier analysis of this issue by Buchanan JA in Suncorp Metway Insurance Limited v Landridge Pty Limited [2005] VSCA 223. In determining whether there is a breach of professional duty, what was required was a characterisation of the overall activity in the context in which the breach occurs, and is not answered by concentrating on the specific task which has not been performed or badly performed so as to give rise to a liability.

So, if there is a breach of duty, a court must consider whether it has occurred in the context of the overall professional activity insured. In Kyriackou's case, the overall activity of the group's business included finance originators and that activity was insured under the policy.

Professional indemnity insurance policies and non-traditional professions

On the question of an insured acting in a professional capacity, Kyrou AJA suggested that the court will give a broad construction to policies of professional indemnity insurance issued to those persons not within one of the traditional professions. It should reject a narrow reading which may deprive an insured of cover.

His Honour suggested that where the policy is sold to a person who is not in a traditional profession, then the court should have reference to the nominated business conducted by that person, (being the business nominated in the policy documents) and that the policy should be construed as giving cover for claims in respect to a breach of a duty owed in connection with that business, rather than the court going down the path of seeking to determine, presumably as in Gray, the specific professional activities undertaken.

The court also considered a number of other relevant policy exclusions relied upon by ACE which we will not discuss in this review.

Difficult coverage issues will continue to arise with professional indemnity

Insurers will be heartened by the Court of Appeal's finding in respect to a claim under the ACE policy, but less so in regard to its consideration of professional activities under a professional indemnity policy. Nevertheless, insurers have progressively offered a broader cover to businesses in this market for some time - a cover driven by market demand and competitive pressures.

Despite Kyrou AJA's comments, there will continue to be difficult coverage issues when professional insureds conduct business or entrepreneurial activities under the umbrella or in some way associated with their "professional" practice or business.

Perhaps tighter policy drafting and additional exclusions are required from insurers to avoid unintended outcomes for coverage if they do not wish to expose themselves to claims arising out of the conduct of non-traditional professional activities.

The writer suggests that the more the advice or service provided by a professional moves away from their recognised training and accreditation, the more difficult it will be to identify whether that conduct is "professional" for the purpose of policy coverage, and indeed how an alleged breach of that duty may be defended.

This decision, together with earlier decisions such as Suncorp, continues the trend of the courts to seek a purposive and commercial approach to the construction of policies of insurance. The question of whether an insured has been acting in a professional capacity or breached a professional duty will no longer focus on the specific task performed by that person or the insured company, but consider whether those activities are sufficiently associated and connected with the profession (or business) nominated in the policy.

If an insurer chooses a certain professional activity or business to insure, and where a claim arises out of an activity that is in some way connected or even peripheral to that profession, a court is likely to determine that it should be covered. A court is unlikely to be concerned by trifling, pedantic or nuanced distinctions about what the "professional" activity was.

Identifying "professional" advice or services not necessarily easy in less traditional professions

Decisions like Kyriackou should make professional liability insurers appreciate that, without careful policy drafting, they may have a broad exposure to claims which they may not have thought would fall within a policy.

It might be easy to draw the distinction for coverage purposes in the case of traditional professions, such as solicitors or accountants. For example, the entrepreneurial activities of raising funds by a solicitor or accountant can clearly be seen, without more, to be not the provision of advice or services connected to that profession. But making the distinction becomes more difficult, as in Kyriackou, where we are dealing with a less traditional profession and where the professional advice or services generated by that activity are less easily identified.

This may be particularly so in the area of finance, as we see in Kyriackou, where innovation occurs at a rapid rate. Business and technological changes open up new ways to do business.

We see a similar difficulty in the alternative health and medical professions, where advice and services provided by a practitioner or their staff might not necessarily be considered the provision of traditional professional services, but claims may well be covered by a policy offered for that business.

Ross Donaldson
Professional indemnity
Colin Biggers & Paisley

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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