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