Australia: General: "Insured's Business" and criminal acts exclusion
Insurance update

Rian Lane v Dive Two Pty Ltd [2012] NSWSC 104

The Supreme Court of New South Wales recently considered the meaning of the phrase "in connection with the insured's business" in the insuring clause of a policy of insurance, and whether the insurer could decline indemnity because the event causing the loss was not in connection with the insured's business.

The decision also considers whether an exclusion for "criminal act" could exclude negligent or unintentional criminal acts rather than only intentional criminal acts.

Background

The first defendant, Dive Two Pty Ltd, operated a scuba diving business. The second defendant, William Todd, was the sole director of the company.

On 29 July 2006, the company's diving vessel collided with another vessel while being navigated by Mr Todd. The owner of that vessel, the plaintiff, claimed against the defendants for injuries he sustained. Mr Todd was charged and pleaded guilty to dangerous navigation occasioning grievous bodily harm, in breach of s 52B(3)(b) of the Crimes Act 1900 (NSW).

The defendants claimed under a policy of insurance procured by their broker, but the insurer declined indemnity because:

1. the claim was outside the insuring clause because it did not arise "in connection with the Insured's Business"; and
2. an exclusion for wilful or criminal acts or omissions applied.

After the collision, Mr Todd told the police that the trip was a private function for his wife and her work colleagues for drinks and lunch. Court documents in the sentencing hearing stated Mr Todd spent the afternoon having a picnic lunch with his friends.

After he appreciated the significance to his insurance coverage for the event, Mr Todd later provided another version of events to the effect that he was providing passengers with a free trip to thank them for past referrals. By the time of trial, Mr Todd's evidence was that the trip was for the purpose of promoting the business to associates who worked at a local high school, and he was attempting to penetrate the high school market. There was no dispute that no scuba gear was on board.

As the insurer declined indemnity, the defendants cross-claimed against their insurance broker for failing to advise that the insurance coverage obtained was inadequate, and for other representations concerning the adequacy of the policy.

The insuring clause

The insuring clause provided:

The Policy Schedule provided the "Insured's Business" was "Scuba Diving", which was defined as:

Relevantly, the insurer submitted:

• the insuring clause and the clause defining "Scuba Diving" were to be read together, so that it would not be sufficient for there to be merely an activity described in the definition of "Scuba Diving" such as "transportation of people from one island to another" or "bird watching";
• the activity needed to be related to "recreational scuba diving", and was required to have a sufficient "connection with the Insured's Business". The insurer submitted that it was entitled to distinguish between insuring business activities as distinct from private activities, and the insuring clause could not be engaged simply because the vessel was generally used in connection with the insured's business;
• even if Mr Todd's evidence was accepted about the purpose of his trip, at its highest, it was a subjective, uncommunicated hope or expectation that a trip for lunch without any scuba diving or swimming may generate some business. That did not meet the discernable commercial purpose of the insuring clause to provide cover for the activities defined which also had a real or not insignificant connection with the insured's business involving "recreational scuba diving".

The defendants submitted that the extended definition of "Scuba Diving" referred to business by reference to a list of activities rather than purposes, meaning that there was no requirement that the activities listed in that definition be engaged in for the purposes of making any profit.

The defendants argued that the activity being undertaken at the time of the accident was a sightseeing tour in the vicinity of the area in which diving excursions were being undertaken by the company using the company's dive boat and usual boat skipper. In the alternative, the defendants submitted that the activity was in connection with the Insured's Business because the vessel taken out was the one used by the business for its dive operations, it was skippered by one of the business' usual diving operators, the trip involved an activity of a sort in which the business usually engaged (sightseeing on the Myall River) and the activity was likely to produce goodwill for the business among potential customers.

The broker contended that the insurance policy listed activities as the touchstone of coverage because of the fact "Insured's Business" was defined as "Scuba Diving". It was therefore argued that the words "Insured's Business" themselves were irrelevant because that term was defined.

The court held that for the insuring clause to apply, the activity must relate to recreational scuba diving and must be "in connection with the Insured's Business". The words "Insured's Business" were relevant to the construction of the policy even though that term was defined in the policy by the definition of "Scuba Diving". A construction which disregarded the requirement that there be a connection with the business, albeit defined, was at odds with the policy. A trip along a river conducted for a private purpose unconnected with the business did not fall within the insuring clause.

The court referred to various authorities¹ and observed the words "in connection with" should be read as extending the scope of the noun they precede and should not be read narrowly. The words require merely a relationship between one thing and another. Despite the width of those words, the court held the relevant connection with the businesses would be met if the purpose of the trip was to promote the business, whether by thanking persons for referrals or to entertain people to obtain further business. The fact that guests did not have to pay would not be fatal to that construction if the trip had been to promote the business.

After considering Mr Todd's varying versions of events, the court found that his first version given to the police was correct, that is, the trip was a recreational one not made in connection with his business. It was only when he appreciated the significance to his insurance coverage that he constructed a version that the trip was to thank passengers for past referrals or to promote the business.

The defendants argued the fact Mr Todd "discussed his business" with the passengers was sufficient. The court held it would be insufficient if he merely mentioned the business because it is a matter of common experience that people in social situations talk about their work and doing so would not be sufficient to convert that social situation into an event in connection with the business.

Policy exclusion for criminal acts

The insurer argued that as Mr Todd had plead guilty to dangerous navigation occasioning grievous bodily harm, it could decline the claim under cl 7.24 of the policy which excluded cover for:

The defendants submitted the fact Mr Todd's conduct amounted to conduct the legislature had chosen to criminalise should not determine whether it fell within the exclusion. The defendants contended the court should follow Australian Aviation Underwriting Pty Limited v Henry², in which the court construed the word "criminal" in an exclusion clause of an insurance policy to exclude acts of negligence notwithstanding that those acts were also criminal.

The insurer sought to rely on a more recent Court of Appeal decision³, in which it was held that a court cannot avoid the terms of an insurance policy by finding that an unintentional crime was involved where the policy clearly excludes conduct of that type. The insurer also submitted that it would be wrong to regard the offence committed by Mr Todd as an offence of negligence since the section defining that offence did not use the word "negligently", and dangerous driving involved more culpability on the spectrum of wrongdoing that mere negligence.

The court found there was no suggestion Mr Todd intended the collision or to cause the plaintiff any harm, and his conduct, while criminal and having serious consequences, was not intentional. The court referred to the character of the words used in the exclusion clause and held that because the words "criminal act" appeared at the end of a list where the preceding words had in common an element of intention, the words "criminal act" should be read down to include only intentional criminal acts. It was immaterial that Mr Todd was guilty of more than mere negligence because the conduct was not intentional. Accordingly, the clause was read down and the exclusion did not apply.

As the defendants were not entitled to indemnity under the policy, the court considered the liability of the broker who procured the insurance policy for the defendants. Ultimately, the court held the use of the phrase "in connection with the Insured's Business" should have put a reasonably competent insurance broker on notice that there was at least a substantial risk that private and non-business activities would not be covered by the policy. The defendants' claim for an indemnity against the broker succeeded.

Comment

This decision provides helpful guidance on the meaning of the phrase "in connection with the Insured's Business", particularly where that term is defined by reference to another term in the policy. It is also appropriate to consider the words "Insured's Business" to recognise the commercial purpose of the insuring clause so that coverage should only extend to business activities as distinct from private activities, even if the list of activities is wide in nature.

The case demonstrates that using an asset connected with a business will not of itself be sufficient for conduct to be considered in connection with the business, but on the other hand, the relevant connection to business may be met by gratuitous activities designed to promote a business or to obtain further business.

The decision also confirms that an exclusion clause for criminal acts will generally be read down so that it only applies to those criminal acts that are intentional.

First published in Australian Insurance Law Bulletin (2012) 27(4) (LexisNexis)

Footnotes

¹Selected Seeds Pty Ltd v QBEMM Pty Ltd [2009] QCA 286 at [22]; Drayton v Martin (1996) 67 FCR 1 at 32, per Sackville J; Our Town FM Pty Ltd v Australian Broadcasting Pty Ltd (1987) 16 FCR 465 at 479, per Wilcox J.
²(1988) 12 NSW LR 121.
³Xerri v Kingmill Pty Limited (T/AS Thrifty Car Rentals) (1998) 25 MVR 569.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.