Rogue traders still authorised (and indemnified) operators28 March 2019
The recent WA Supreme Court decision in Young Investment Group Pty Ltd v QBE Insurance (Australia) Limited  WASC 74 demonstrates how professional indemnity insurers can be held to account for the pleaded conduct of their deregistered insureds. It also highlights the challenges they confront in discharging the evidentiary onus of establishing the factual basis for engaging particular exclusions from cover under that insurance contract.
The Plaintiffs were related entities to Beverley Lorraine Margetts and clients of a broking business known as Stripe Capital Pty Ltd (Stripe Capital). Stripe Capital was an authorised representative of the stockbroking firm, Australian Stockbroking & Advisory Services Limited (ASANDAS). Stripe Capital, by way of one of its directors, caused the Plaintiffs to suffer substantial trading losses and ASANDAS, as the licensee under the Corporations Act 2001 (Cth), was responsible for these losses.
The Plaintiffs obtained a default judgment in Federal Court proceedings against ASANDAS for their losses by way of liquidated damages. However, the Plaintiffs did not receive any of the judgment monies from ASANDAS before the deregistration of the company.
The claim for indemnity
ASANDAS's deregistration permitted the Plaintiffs to commence proceedings directly against QBE under s 601AG of the Corporations Act, with whom ASANDAS held an insurance contract, to recover the amount that the Plaintiffs claimed was payable by QBE to ASANDAS with respect to the default judgment.
The evidence in the proceedings was, in effect, limited to the content of the Federal Court Statement of Claim, upon which the default judgment had been awarded. Indeed, the Plaintiffs and QBE accepted that the assertions in the Federal Court Statement of Claim were to be properly regarded as “admissions” for the purposes of the Supreme Court proceedings.
QBE’s exclusion to coverage arguments
QBE argued that, by operation of two exclusion clauses under the Financial Institutions Civil Liability Professional Indemnity Policy (the Policy), it was entitled to deny coverage to ASANDAS and therefore had no liability to pay the Plaintiffs.
The Court resolved the proceedings by examining the operation of the exclusion clauses wholly in the context of the allegations pleaded in the Federal Court Statement of Claim. No other evidence was relied upon by either side as to the actual circumstances referred to in the Statement of Claim.
The Unauthorised Transaction exclusion
QBE argued that the conduct pleaded and relied upon by the Plaintiffs in the Federal Court Statement of Claim was conduct in connection with discretionary and unauthorised trading by Stripe Capital on the Plaintiffs’ investment portfolios for and on behalf of ASANDAS. Such conduct was said to offend the terms of ASANDAS’s AFSL, which included the prohibition of conducting a Managed Discretionary Account service (MDA Service).
The Court accepted that an MDA Service provided for a broad authorisation being given, and necessarily agreed to, by the client for the particular financial services professional to manage portfolio assets at the professional’s discretion.
The allegations in the Statement of Claim were to the effect that the agreement between the Plaintiffs and Stripe Capital was that it would manage the Plaintiffs’ portfolio assets solely on the basis of individual instructions to purchase or sell those assets.
The Court found that the fact that a person, without the agreement of the client, engages in trading with portfolio assets in a way that may broadly be described as discretionary cannot be characterised as that person providing an MDA Service contrary to the licence. While such conduct might be in breach of the advisor’s tortious or contractual duties—which would give rise to separate causes of action—such conduct could not be construed as the person providing a particular form of service defined in the AFSL as an MDA Service.
While the actual conduct of Stripe Capital, in buying and selling securities alleged by the Plaintiffs in the Statement of Claim, might correctly be characterised as being a breach of its duties and in breach of the terms of the agreement provided by the Plaintiffs, the Court determined that the conduct, of itself, did not mean that the AFSL did not authorise the Financial Service provided within the meaning of the Unauthorised Transactions exclusion. Essentially, the fact that a person may be in breach of its duties under the licence was not the same as the licence not authorising, in general terms, the service or activities undertaken by the licensee.
The Court found that conduct that breached the licensee’s professional duty to its clients under an AFSL was, of itself, not sufficient in the circumstances to trigger the operation of the Unauthorised Transaction exclusion under the Policy.
To find that the Unauthorised Transaction exclusion was to be construed such that any departure from the authority of the client or the proper conduct of the professional service provider’s business was to be regarded as without the appropriate authorisation for the provision of the Financial Services under the AFSL, according to the Court, would negate the whole Policy.
The Conflict exclusion
Under the Conflict exclusion, QBE would not be liable to provide indemnity in respect of any claim against an insured arising out of or attributable to a conflict of duty with that of another client, or a conflict of the insured’s interest of personal advantage.
QBE argued that, by operation of what was referred to in the proceedings as the Stripe Endorsement—which from 27 February 2008 conferred a right of indemnity under the Policy on Stripe Capital as a nominated Authorised Representative “as if an employee” of ASANDAS—the Conflict exclusion applied to claims against ASANDAS in relation to conflicts by Stripe Capital.
Although Stripe Capital was an Authorised Representative and enjoyed the benefit of indemnity conferred pursuant to the Stripe Endorsement, the Court found that it was not an “Insured” as defined under the Policy, which was limited to directors, officers or employees of ASANSAS or its subsidiaries.
The Court considered that the intention of the Stripe Endorsement to treat Stripe Capital “as if an employee” of ASANDAS was limited to the indemnity conferred on Stripe Capital, which related to any liability that it may have as a result of a claim made against it in relation to services provided on behalf of ASANDAS. Accordingly, the Stripe Endorsement did not, in substance, confer upon Stripe Capital employee status for all purposes within the meaning of the Policy, including in relation to the indemnity provided to ASANDAS.
Accordingly, the Conflict exclusion did not apply to claims against ASANDAS in respect of Stripe Capital’s Conflicts.
The Court ultimately found that QBE was not entitled to deny coverage under the Policy on the basis that:
- the conduct alleged against Stripe Capital in the Federal Court Statement of Claim was not tantamount to providing an MDA Service, as prohibited under ASANDAS’ AFSL, so as to trigger the Unauthorised Transaction exclusion, and
- the Stripe Endorsement did not have the effect of conferring indemnity on Stripe Capital to the extent that Stripe Capital became insured under the Policy, such that the Conflicts exclusion was not triggered.
In the circumstances, QBE was found liable to indemnify the Plaintiff’s claims against ASANDAS and orders previously made under the default judgment were treated as being conclusive as to the value of the Plaintiffs’ losses that could potentially be recovered from QBE. The Plaintiffs were awarded the default judgment sum to the Policy limit of $10 million plus interest.
Evidentiary limitations and the premium of control
The Young Investment Group case highlights the difficulties that professional indemnity insurers of deregistered insureds face in proving that certain exclusions under the policy are triggered so as to validly decline indemnity, in circumstances where:
- the content of the alleged (mis)conduct is limited to the assertions pleaded in the originating process and accepted at face value as admissions, without the benefit of cross-examination in respect of actual conduct
- the alleged conduct suggestive of a breach of professional duty is not analogous to breach of AFSL conditions, which are excluded from cover under the policy, and
- there is a reluctance to extend the definition of “Insured” beyond the scope of defined terms under the policy so as to capture the conflicts and interests of the insured’s authorised representatives.
Had QBE been notified of the Plaintiffs’ claims when the Federal Court proceedings were on foot, it would have been better positioned to defend the proceedings on behalf of ASANDAS. In the absence of this, and with ASANDAS’ deregistration, QBE lost the ability to contest the merits of the pleaded allegations of misconduct through witness and expert evidence.
The Plaintiffs’ claims of misconduct as pleaded in the Federal Court Statement of Claim ultimately proved a double-edged sword for QBE. While they alluded to conduct that may arguably form the basis for coverage exclusions, the evidentiary onus of proving the engagement of those exclusions could not ultimately be discharged by virtue of those pleaded “admissions” alone. This is likely to encourage generality in claimants’ pleadings so as not to directly offend coverage or give cause to their exclusions.
Young Investment Group highlights the relative ease with which claimants are able to secure financial recourse for the professional misconduct of traders from insurers in circumstances where the insurer does not possess the premium of control in being able defend the allegations of misconduct and loss advanced in the substantive claim.