Adam Cranston, the son of the former Deputy Commissioner of the Australian Taxation Office, is currently being prosecuted in relation to the alleged payroll tax fraud for conspiracy to defraud the ATO and the recovery of alleged proceeds of crime, writes Carlos Jaramillo and Ian Wylie.
He and others recently sought relief in the Federal Court against their insurer to permit them to be advanced defence costs to defend those proceedings.
On 3 August 2018, the Full Federal Court delivered judgment in Onley v Catlin Syndicate Ltd as the Underwriting Member of Lloyd’s Syndicate 2003  FCAFC 119.
The court denied relief, upholding the primacy of the insureds’ obligation of disclosure to the insurer over an insurance contract term arguably requiring the insurer to advance defence costs unless and until criminal or dishonest conduct was established by judgment or otherwise.
The facts and decision are in summary as follows:
• Lloyd’s underwriters had issued a liability policy which extended liability cover, including the provision of defence costs, to Plutus and other companies and their directors including Adam Cranston. The applicants sought indemnity in relation to the costs which they had incurred and would incur in relation to the proceedings.
• The insurer claimed that the conduct of Plutus and others which was the foundation of the proceedings was dishonest conduct which occurred at least partly prior to the policy’s inception, and that the applicants were aware of and failed to disclose its existence. It purported to avoid the policy on the ground of fraudulent non-disclosure, and alternatively claimed that it was entitled to reduce its liability to nil if the non-disclosure was not fraudulent.
• The applicants argued that the defence costs cover extension explicitly required the insurer to meet the cost of the proceedings unless and until the criminal or dishonest conduct was established by judgment, adjudication or otherwise admitted by them, regardless of whether they had breached their obligation to disclose their criminal or dishonest conduct or the facts underpinning it.
• The court held that:
- the defence costs extension did not diminish or contractually qualify the insurer’s right to
rely on its remedies in Part IV of the Insurance Contracts Act 1984 (Cth) consequent upon
the Applicants’ non-disclosure, particularly where the Applicants’ argument was based on
its construction of a provision which their non-disclosure prevented the insurer from
• as a matter of public policy, courts will not allow a party to contract out of the
consequences of their own fraudulent conduct; and
• if the insurer’s allegation of fraudulent non-disclosure is correct, it will have validly avoided
the policy and the result would be the same even if there was an express term purporting
to relieve the insureds of the consequences of their own fraud.
Notably, however, the court observed that an insurer may not escape its obligation to advance defence costs until relevant facts are established by a simple allegation of non- disclosure. Consistent with its obligation of utmost good faith under section 13(1) of the act, an insurer must have a real or substantial ground for alleging non-disclosure.
That does not mean the insurer must then have all necessary proof of the insured’s conduct to establish the ground for the exclusion. However, sufficient grounds must then exist which can be relied upon consistently with the obligation of utmost good faith.
Every insurance policy is to be construed commercially and contextually, not only by reference to the literal terms of a provision in isolation. Here the defence costs extension operated to provide cover where wrongful conduct was merely alleged until it was proven, particularly where the relevant conduct occurred during the policy period so that there is no question of non-disclosure.
The extension could not be construed to avoid the fundamental obligation of disclosure which is a pre-condition to entry into an insurance contract and central to the scope of cover offered and provided.
The decision also reinforces the importance of disclosure by insureds of all matters relevant to the risk being assumed. Here, leaving aside questions of dishonesty, the insureds were obliged to and had failed to disclose the nature of the business activities in which they were engaged.
In this case, there was no suggestion of disclosure, the relevant facts of the charges, if true, must have been known to the applicants, and the merits were sufficient to support the commencement of prosecutions.
In each other case, insurers need to consider carefully whether the known or likely facts are sufficient to support alleged non-disclosure consistent with the obligation of utmost good faith.
Carlos Jaramillo is a principal at William Roberts Lawyers and Ian Wylie is special counsel at William Roberts Lawyers.