Insurance
cover for loss by employee dishonesty does not extend to staff exceeding their
authority in attempts to make money for the boss. Vero refused cover on a one million dollar
claim where a Marac employee dishonestly exceeded his authority but had no
intention of causing a loss. He lacked
sufficient expertise to oversee the business of a defaulting Marac client.
The Court of Appeal was told Marac Finance, now
Heartland Bank, got its fingers burnt to the tune of $6.87 million financing
Rapson Holdings importation of Daewoo and Ssangyong vehicles from South Korea. After writing off $5.5 million, Marac put
staffmember Mr Grant Atkinson in charge of plans to recover what it could of
the outstanding debt. In October 2003,
Marac opened a replacement credit facility for Rapson to be overseen by Mr
Atkinson. The intent was to lend on
confirmed orders from bona fide dealers, issuing letters of credit for each
importation and collecting a margin on the sale in reduction of Rapson’s debt: so-called
back-to-back deals. It transpired that
Mr Atkinson failed to follow the rules, financing some importations without
first booking a sale to a dealer. This
left Marac exposed with unsold inventory.
Rapson had been insolvent for some time.
It was put into liquidation in 2010.
Marac claimed from Vero Insurance for employee dishonesty up to the
policy limit of one million dollars. The
policy covers financial loss following acts of dishonesty “committed with the
clear intent to cause [Marac] a loss”.
The High Court ruled Mr Atkinson had been
dishonest: he did not fully disclose the state of the Rapson account when asked
for periodic reports by the Marac board; he concealed unauthorised advances by supressing
arrears of interest which were accruing; he lied to Marac’s internal auditor
stating Rapson was holding new motor vehicles in a warehouse when this was untrue;
and he did not tell Marac senior executives that he had lost control of the Rapson
account and was exposing Marac to further losses.
The Court of Appeal ruled Vero did not have to
pay the claim because the dishonesty was not carried out with intent to cause
loss. Mr Atkinson acted dishonestly to
protect his job, not to cause Marac further loss. There was no evidence Mr Atkinson gained any
financial advantage from his unauthorised actions, other then the benefits of
his continued employment. He left Marac
in early 2010.
Like securities traders who get in over their
head, conceal losses and continue trading (even recklessly) to recover their
position, it is not theft to push on with the intent of making money.
Vero v.
Heartland Bank – Court of Appeal (7.07.15)
15.076