Insurers avoid policy for fraudulent misrepresentation and non-disclosure in financial planner case
Insurers were successful in avoiding a professional indemnity policy on the basis of the insured's fraudulent misrepresentation and non-disclosure in the recent case of [Esined No. 9 Pty Limited v Moylan Retirement Solutions Pty Ltd  NSWSC 359] 
The case provided useful guidance on the standard of proof for fraudulent misrepresentation and non-disclosure under s 28(2) of the Insurance Contracts Act 1984 (Cth) (ICA) and also what constitutes a "fact" that is capable of notification under section 40(3) of the ICA.
We discuss the case and its key takeaways below.
Mr Christopher Moylan was the Authorised Representative and the principal of Moylan Retirement Solutions Pty Ltd (MRS), an Australian Financial Services Licence (AFSL) holder. Mr Moylan gave financial advice to four families and their associated self-managed superannuation funds, the plaintiffs, between 2006 and 2012.
MRS held professional indemnity (PI) insurance from DUAL Pty Ltd as agent for certain Lloyd's underwriters for two relevant policy periods in 2012/2013 and 2013/2014.
Investments recommended and lost
Based on Mr Moylan's advice, the plaintiffs and some of their family members advanced funds into various loan investments and corporate investment vehicles. The plaintiffs' funds were primarily advanced to Moylan Investment Group Pty Ltd (MIG), the principal corporate investment vehicle Mr Moylan controlled. The plaintiffs were promised interest returns at rates of between 9% and 13.5%. What Mr Moylan was operating was in substance a Ponzi Scheme, and any repayment of the MIG loans entirely depended on successful subdivision of residential land or property development.
As a result of the global financial crisis, the investment vehicles failed, were placed in liquidation, ceased to trade, or otherwise became worthless. MIG was wound up, the plaintiffs' monies were not repaid, and Mr Moylan was made bankrupt. The insured, MRS, was also deregistered subsequently.
Section 601AG proceedings
As a result, the plaintiffs commenced three separate actions pursuant to section 601AG of the Corporations Act 2001 (Cth) (CA) directly against the PI insurers under the 2012/2013 and 2013/2014 policy years to recover the losses they claim they had suffered as a result of Mr Moylan’s advice.
To succeed against PI insurers directly, the plaintiffs had to satisfy both limbs under section 601AG, being:
- that MRS had a liability to the plaintiffs immediately prior to its deregistration and the quantum of any such liability; and
- that the relevant PI insurance policies respond to that liability.
PI insurers defended all three actions under both limbs of section 601AG. On the issue of coverage, the PI insurers denied liability under the policies on the following grounds:
- no notification of any claim for civil liability was reported during each policy year;
- insurance cover was limited to retail clients and the plaintiffs were sophisticated, or wholesale, clients of MRS;
- MRS was guilty of material (including fraudulent) non-disclosure and failed to comply with its duty of disclosure under section 21 of the ICA; and
- various exclusion clauses applied to exclude cover.
The plaintiffs were successful in establishing liability against MRS but they failed on their case that the PI insurance policies responded.
Plaintiffs successful in establishing liability
The Court found that the plaintiffs were successful in establishing the liability of MRS on a broad range of causes of action: misleading and deceptive conduct, negligent breach of a duty to advise, breach of fiduciary duty, breach of contract, and statutory unconscionability.
The plaintiffs also ran an argument that they were entitled to compensation arising from a contravention of section 912A(1) of the CA as MRS failed to do all things necessary to ensure that financial services provided by MRS were provided "efficiently, honestly and fairly". However, s 912A is a regulatory provision which does not found a statutory cause of action against MRS, or an award of statutory compensation . Having made the liability findings on the various causes of action in the plaintiffs' favour, the Court did not address this point further.
Insurance policy issues
The plaintiffs were however, unsuccessful on the second limb of s 601AG because the Court found that:
- there was no valid notification to insurers under the 2012/2013 policy year and s 40(3) of the ICA did not assist; and
- insurers were entitled to avoid the 2013/2014 policy on the basis of fraudulent misrepresentation / non-disclosure pursuant to section 28(2) of the ICA.
No valid notification for 2012/2013 policy year
The notification clause of the 2012/2013 policy required that “the insured shall notify [the insurer] of any claim or loss as soon as practicable and within the insurance period”. There was no "deeming provision" in the policy.
The relevant notification relied upon by the plaintiffs was the 2013 proposal for insurance for the 2013/2014 policy year and insurer's standard form for the "Notification of a claim or circumstance out of which a claim may arise" which Mr Moylan provided to insurers on 15 January 2013 with a cover letter (15 January 2013 Notification). The 15 January 2013 Notification was made prior to the inception of the 2013/14 Policy.
The 15 January 2013 cover letter gave a short description of the business of MRS and referred to a potential claim against the insured: “[i]n relation to the potential claim, at this stage it is just a potential possibility and no action has been brought.”
Attached to the notification form was an Appendix in the following terms:
"A small number of clients have invested/lent funds to property investments and/or companies that have to date been unable to repay those funds in total.
At the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of the circumstances at the time.
At this stage no loss has been crystallised and no claim or complaint has been formally lodged.
We wish to advise the insurance company that there is a chance of a claim against Moylan Retirement Solutions in relation to any loss that may be incurred.”
The Court found that there was no valid notification under the 2012/2013 policy year because:
- There was no valid notification of a "claim" as defined in the policy by 15 January 2013. That is, there was no written demand for monetary damages or any statement of claim in a civil action.
- Section 40(3) of the ICA did not apply because the 15 January 2013 Notification did not identify “facts that might give rise to a claim against the insured”. The Court emphasised that for s 40(3) to apply, there must be a recognisable correspondence between “facts that might give rise to a claim” given in writing to the insurer and “the claim, when made”. That is, the facts that are notified must at least point towards “a claim”. The Court found that no information was provided in the 15 January 2013 Notification that would assist in identifying a particular claim as distinct from "bare possibilities". Importantly, the Court found that no particular client, no particular transaction, no particular loss and no particular documents could be identified.
This meant insurers were not liable under the 2012/2013 policy year.
Fraudulent non-disclosure and misrepresentation - s 28(2) of ICA
The Court did however find that there was a valid notification of a claim made under the 2013/2014 policy year as the statements of claim were served on insurers during that policy period. Despite this, cover under that policy year was not available as a result of the Court's finding in the insurers' favour that the 15 January 2013 Notification constituted fraudulent non-disclosure and misrepresentation, which entitled the insurers to avoid the 2013/2014 policy.
In applying the principles in Briginshaw , the Court made findings of serious misconduct against Mr Moylan as the Court was "comfortably satisfied" from the available evidence that an inference of fraud was warranted. Those included the following:
First, the Court was comfortably satisfied that Mr Moylan had made fraudulent misrepresentations in the 15 January 2013 Notification. In coming to this conclusion, the Court closely scrutinised the words in Appendix A and found that it was misleading to say:
- “unable to repay those funds in total” as it implied that only some part of the monies due to the clients had not been repaid when in fact, Mr Moylan knew that no principal was repaid and no interest was paid since late 2009;
- "all appropriate disclosures were made and clients invested/lent funds with full knowledge of the circumstances" as the Court had found that no adequate disclosures were made about many matters, including undisclosed conflicts of interest for Mr Moylan and MRS in recommending these investments (Mr Moylan was a director and shareholder of MIG);
- "no loss has been crystallised" as by that time every one of the entities was either in liquidation, or assessed objectively, with no realistic prospect of repayment to the plaintiffs and Mr Moylan knew about this;
- “no claim or complaint has been formally lodged” as the Court had found that by no later than late 2012, one group of the plaintiffs had been demanding repayment of their money from Mr Moylan and the rest had made complaints about return of their money.
In light of the above, the Court found that the misstatements could not have been negligent or accidental. Mr Moylan knew the information which underpinned the falsity of these incorrect statements. The Court therefore found that Mr Moylan was aware that the misstatements were false when he approved and sent the 15 January 2013 Notification to insurers nonetheless. Further, Mr Moylan dishonestly concealed the true facts from DUAL, concerning the claims or complaints that the plaintiffs had already notified to MRS by then.
Second, the Court was satisfied that Mr Moylan had made fraudulent non-disclosures in the 2013 proposal form for much the same reasons as above.
In light of the available evidence, the Court also found that Mr Moylan withheld the information that he did from the 2013 proposal because he had reason to believe he would not obtain further insurance if proper disclosure was made to insurers.
The Court therefore found that the insurers were entitled to avoid the 2013/2014 policy pursuant to section 28(2) of the ICA.
Aside from the fraudulent non-disclosure and misrepresentation his Honour also commented in obiter that the insurers would also have been successful in their alternative non-disclosure case under s 28(3) to reduce their liability to nil based on the same matters.
Whilst fact specific, this case nevertheless provides a good reminder of the standard of proof for fraudulent misrepresentation and non-disclosure under s 28(2) and what constitutes a "fact" that is capable of notification under section 40(3) of the ICA.
Notification of "facts"
For section 40(3) to operate, the facts that are notified must at least point towards “a claim”. What this means in practical terms is that the insured should provide details or "facts" including the following:
- identify the clients who may be potential claimants;
- identify any deficiency in performance or alleged wrongdoing on the insured's part;
- identify any potential causes of action;
- identify the particular transaction out of which the potential claim may be made;
- identify the type and particular loss which may be claimed; and
- identify any particular documents where possible.
The notification should also not be couched in vague terms of a "potential possibility".
Non-disclosure and misrepresentation
As for section 28(2), running a fraudulent misrepresentation / non-disclosure case to avoid an insurance policy is not a decision that should be taken lightly by any insurer. Allegations of fraud are serious and the threshold to prove fraud is high. It therefore requires insurers to show clear and unequivocal evidence which allows the Court to comfortably draw inferences of fraud against the insured.
Insurers should keep in mind that while the standard of proof for fraud remains "on the balance of probabilities" (civil standard), inferences of fraud will not be drawn lightly and the Court must be "comfortably satisfied" from the available evidence that an inference of fraud is warranted. If an explanation of negligence or accidental error is plausible, it is unlikely that inferences of fraud will be drawn by the Court.
 Esined No. 9 Pty Limited v Moylan Retirement Solutions Pty Ltd; P&S Kauter Investments Pty Ltd ATF the Kauter Superannuation Fund v Moylan Retirement Solutions Pty Ltd; Graeme Manning v Arch Underwriting At Lloyds Limited on Behalf of Syndicate 2012 (No. 2)  NSWSC 359
 Up until April 2019, the main consequence of a contravention of the "efficiently, honestly and fairly" obligation and other general obligations under section 912A(1) was licencing action against an existing AFSL holder or the refusal of a new licence by ASIC - see s 915C (suspension or cancellation) and s 913B (refusal). In April 2019, an additional package of remedies for contraventions of the general obligations came into force pursuant to the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act 2019. As a consequence, a contravention of the general obligations of an AFSL constitutes a contravention of the new section 912A(5A) which is a civil penalty provision pursuant to s 1317E. The maximum pecuniary penalties for a contravention of the obligations under s 912A(1) are substantial. Although these new civil penalties now apply (since April 2019 and after this trial was concluded), a breach of s 912A(5A) does not give rise to an explicit right to compensation. Whilst compensation orders are provided for in ss1317H and 1317HA for breaches of certain specified provisions, a breach of s 912(5A) is not one of those specified as it is an unclassified provision according to the table in s1317E(3).
 Briginshaw v Briginshaw (1938) 60 CLR 336
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