Insurance: Zurich v. Withers

Zurich Insurance refused to pay on a $1.31 million professional negligence claim because a chartered accountant’s unthinking behaviour when signing off on misleading letters of comfort was so reckless as to be dishonest.

Mark Withers was ordered by the High Court to compensate US investors for part of their financial losses after the Vegar family’s Matakana and Goldridge wine companies went under.  These investors had provided working capital to fund processing of each year’s harvest.  Their only security was the finished product.  To ensure investor advances were used as agreed, they required Mr Withers to provide a letter of comfort each year confirming he had co-signed each cheque drawing down on their funds and that payments were used solely for production of each season’s grape harvest.

The Court was told Mr Withers did not oversee disbursement of the funds and failed to co-sign cheques as required.  Despite this, he still signed letters of comfort for the US investors confirming he had done so.  In fact, substantial funds were siphoned off into other Vegar family companies and not used to pay processing costs.  Mr Withers was held liable in the High Court for making false and misleading statements to the US investors in breach of the Fair Trading Act.

Zurich Insurance refused to pay out on Mr Withers' professional indemnity insurance saying the policy excluded liability for “dishonest” conduct.  The Court of Appeal ruled dishonesty is measured against what constitutes honest conduct in the circumstances.  There is no need to prove an intention to deceive.  The Court said Mr Withers knew his role was to provide an independent check on the use of US investors funds.  Signing misleading letters of comfort, year on year, was more than mere inadvertence and indifference, the Court ruled.  Mr Withers had acted in reckless disregard of investors’ interest, being actions indistinguishable from dishonesty, it said.

Zurich v. Withers – Court of Appeal (16.12.16)

17.013

Insurance: Southern Response Claims v. Southern Response

Over 2500 AMI policy holders with unresolved insurance claims following  Christchurch’s earthquakes have until April 2017 to join a class action seeking damages for delays claiming $15,000 per policy holder for each year of unacceptable delay in finalising claims and an extra $25,000 each general damages.

AMI’s Christchurch earthquake liabilities were taken over by Southern Response Earthquake Services set up as a taxpayer-funded bailout when AMI was brought to its knees by an over-concentration of earthquake risk in the Canterbury region.  Southern Response inherited 7600 earthquake insurance claims and half a million dollars from government.  Southern Response has yet to sign off on one-third of the claims it took over.  A vocal group of dissatisfied AMI policy holders allege Southern Response is dragging the chain: delaying repairs by having Arrow International alone manage repairs; skimping on repair costs and not honouring policy terms when negotiating cash payouts for policy holders intending to self-manage repairs.  Rather than argue individually with Southern Response they obtained High Court approval, despite Southern Response’s objections, for a representative action consolidating their common grievances into one court action.

This class action is being funded by private litigation funder, Litigation Lending Services.  It says it will charge 10-15 per cent of damages recovered; a lesser commission than its usual 20-30 per cent fee.

Litigation Lending says Southern Response is drawing out the claims process because it is not in the business of writing new insurance cover.  It has no reputation to protect as there will be no ongoing business relationship.  The strategy is to minimise costs at the expense of AMI policyholders’ rights, it says.

Southern Response Claims Group v. Southern Response – High Court (16.12.16)

17.012

Negligence: Roose v. Duthie

For professional negligence claims, the Court of Appeal draws a distinction between “flawed transactions” and “no transactions” in deciding when the six year limitation rule starts running.  Negligent tax advice commonly falls under the “no transaction” category because taxpayers would be unlikely to follow advice if promised tax outcomes were fruitless.   

When losses from negligent advice arise more than six years before court proceedings are filed, the claim fails.  This is a policy rule from the Limitation Act forcing litigants to get something on the court record before memories dim and records get lost.  Deciding when a right to sue for negligence first arose can be a headache.  Professionals sued for negligence exploit the rule by arguing the right to sue arose so far back in time that it is now too late to claim.   

The Court said in “flawed transaction” cases,  the deal would still have gone ahead despite what turns out to be negligent advice. The right to sue ends six years after loss caused by the negligence becomes apparent.  In “no transaction” cases, the deal would never have been agreed to if it were not for the negligent advice.  The right to sue ends six years after being committed to the deal.

Denise Roose alleges her Pukekohe accountants Duthie Taylor Ruiterman gave negligent tax advice on tax structures to be used for buying a neighbouring property and subdividing the combined block of land.  This was coupled with a need to protect the asset from potential relationship property claims.  Use of a new company structure coupled with a trust were recommended as minimising tax and GST.  Ms Roose was not happy with the outcome.  Her company was lumbered with a $413,500 tax bill and tax audit fees of $39,500.  She sued her accountants.

The Court of Appeal ruled she filed her court case within six years of the last date she was committed to the deal recommended by her accountants.  This was when the land was transferred to a new company.  She was not firmly committed to the deal at a date some three weeks previously when a sale contract was signed between her two companies.  Since Ms Roose controlled both the selling company and the buying company she could pull out of the deal at any time prior to land being transferred by cancelling the deal and ripping up the contract.

The Court ruled Ms Roose still has the right to sue.  A ruling on whether the accountants’ tax advice was negligent requires a further court hearing.

Roose v. Duthie – Court of Appeal (15.12.16)

17.011

Insurance: Lyttelton Port v. Aon

Aon’s dawdling start in defence of Lyttelton Port’s $184.8 million dollar claim alleging negligently arranged insurance has raised concerns in the High Court.

Badly damaged in the 2011 Christchurch earthquake, Lyttelton Port was paid $449.2 million following an out-of-court settlement with its insurers for earthquake damage, interruption to port construction works and business interruption losses.  It then sued broker Aon alleging a failure to arrange complete cover.  Aon denies liability.

Prior to trial, Aon seeks disclosure of documents and reports it says are relevant to the claim.  Lyttelton Port has a database of some eight million documents.  The breadth of information demanded by Aon requires discovery to progress in stages with Aon making further requests after inspecting documents previously made available.  It already has access to 6000 Lyttelton Port documents, including 500 reports.

Declining Aon’s request for further detailed discovery, Associate-judge Osborne expressed concern that Aon had yet to arrange for experts to review and to analyse technical information in documents it already has.  Lyttelton Port has legitimate concerns about delays in getting the case to trial, he said.

Lyttelton Port v. Aon – High Court (12.12.16)

17.010