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In this appeal Zurich was entitled to rely on a dishonesty exclusion to decline PI cover for an insured’s liability under the Fair Trading Act 1986 (FTA). The insured, Mark Withers, was an accountant who had acted in breach of certain undertakings. In reaching this decision, the court placed significant weight on professional accounting standards when assessing whether Mr Withers had acted dishonestly.
As a result, the judgment sum of $1.31m against Zurich was set aside, and judgment was instead entered in favour of the plaintiffs against Mr Withers personally.
Background
The plaintiffs (the Swindles) loaned $3m to the Vintage Group (Vintage). The funds were intended as working capital for Vintage’s wine business but were instead used to repay inter-company loans. Vintage only repaid $380,000 before being wound up, leaving the Swindles out of pocket for $2.62m. They therefore looked to Vintage’s accountant, Mr Withers, to recover their loss.
It was a condition precedent of the loans that Mr Withers would be a mandatory signatory for Vintage’s costs account, and that account would be used solely to meet production costs. Mr Withers gave undertakings to that effect. The Swindles’ claim relied on those undertakings.
The High Court found Mr Withers liable for misleading and deceptive conduct under the FTA for failing to fulfil his undertakings. However, damages were reduced by 50% to $1.31m for contributory negligence.
Mr Withers looked to his PI insurer, Zurich, to cover his liability. In the High Court, Zurich’s grounds for declining the claim, including reliance on a dishonesty exclusion, were rejected and judgment for $1.31m was entered against Zurich. Zurich appealed.
Dishonesty exclusions
The policy contained an automatic extension for liability under the FTA subject to a proviso that excluded cover for liability arising from dishonest, fraudulent, criminal, malicious or intentional conduct.
The policy also included a general dishonesty exclusion for liability “arising out of or connected with any actual or alleged dishonest … act or omission” or “with a reckless disregard for the consequences”.
Zurich relied on this dishonesty proviso and exclusion.
Appeal decision
The court considered that it able to determine on appeal whether these exclusions applied because the “primary facts” were not in material dispute and no question of credibility arose.
The test for determining dishonesty incorporates objective and subjective elements. In summary, the relevant person is measured against an objective moral standard of what constitutes honest behaviour (the objective element), and they must also have acted with conscious impropriety (subjective element).
In this case, Mr Withers’ explanation that he had misunderstood the undertakings, rather than being dishonest, was not accepted on appeal. Importantly, expert evidence of professional accounting standards and Mr Withers’ failures to meet those standards was “of singular relevance” in establishing the objective measure of dishonesty. Particular reference was made to the NZICA Code of Ethics, including its Fundamental Principle of Integrity, which prohibits false or misleading statements. An experienced accountant in his position, having regard to his role and his professional ethical obligations, would have understood the serious adverse consequence if his undertakings were wrong.
That appears to have been the correct result in a case for breach of an undertaking. However, assessing dishonesty by reference to professional standards may be more difficult where the insured has breached other professional rules.
