HER MAJESTY'S ATTORNEY-GENERAL SUING IN RESPECT OF THE MINISTRY OF AGRICULTURE AND FORESTRY V AON NEW ZEALAND LIMITED HC WN CIV 2005-485-1814

HER MAJESTY'S ATTORNEY-GENERAL SUING IN RESPECT OF THE MINISTRY OF AGRICULTURE AND FORESTRY V AON NEW ZEALAND LIMITED HC WN CIV 2005-485-1814 10 April 2008IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2005-485-1814BETWEEN HER MAJESTY'S ATTORNEY- GENERAL SUING IN RESPECT OF THE MINISTRY OF AGRICULTURE AND FORESTRY Plaintiff AND AON NEW ZEALAND LIMITED Defendant Hearing: 4 - 11 February 2008 Appearances: Mr Brown QC and Mr Hancock for the Attorney General Mr Withnall QC, Mr Macdonald and Ms Labao for AON New Zealand Ltd Judgment: 10 April 2008 at 12.30 pmJUDGMENT OF MALLON J ContentsIntroduction..........................................................................................................................................[1] Issues ...................................................................................................................................................[5] Background..........................................................................................................................................[6] Duties AON owed to MAF ................................................................................................................[52] No causation: because AJS circumstance would have been specifically excluded?..........................[61] No causation: because AJS claim not within insuring clause? ........................................................[100] No causation: because AJS claim excluded by malice exclusion? ..................................................[134] Failure to prove reasonableness of loss claimed? ............................................................................[155] Estoppel ...........................................................................................................................................[158] Result ...............................................................................................................................................[168] Costs ................................................................................................................................................[173]Introduction[1] This is a claim by the plaintiff ("MAF") against its insurance broker ("AON"). It arises out of a claim for damages brought by Alan Johnston Sawmilling Ltd ("AJS") against MAF. MAF and AJS agreed to settle the AJS claim. The settlement required MAF to pay to AJS $1,092,375. MAF sought indemnity from its insurer ("QBE"). QBE declined indemnity and this declinature was upheld by the Court of Appeal. MAF now claims against AON the settlement sum paid to AJS together with the costs in unsuccessfully pursuing indemnity for that sum from QBE. [2] QBE (or its predecessor) 1 was the professional indemnity insurer for MAF (and its predecessors) 2 for the period 30 June 1996 to 30 June 2002. The AJS claim arose during this period. Cover was declined by QBE on a number of grounds, but the only ground considered by the Court of Appeal concerned the effect of a change in the policy wording that applied for the policies in place on and after 30 June 1999. That change created a transitional gap in cover for a circumstance which was or ought to have been notified as a potential claim under the earlier policies (prior to the changed wording) where the actual claim for damages or compensation was made in a subsequent year (when the policies with the changed wording were in place). The AJS claim was caught by this transitional gap in cover. [3] AON, or its predecessor, acted as insurance broker for MAF (and its predecessors) throughout the time that insurance was arranged with QBE. It did not advise MAF that the changed policy wording gave rise to the transitional gap. MAF claims against AON for breach of contract, negligence, breach of fiduciary duty and breach of the Fair Trading Act 1986. MAF also says that AON is estopped from1 For convenience, this judgment refers only to QBE rather than its predecessor, HIH Casualty and General Insurance (NZ) Ltd, although for most of the period the insurer was HIH rather than QBE.2 On or about 15 September 1999, with effect from 1 March 1998, the Ministry of Forestry merged with the Ministry of Agriculture and Fisheries to become the Ministry of Agriculture and Forestry. Except where it is necessary to specifically refer to one or other of the Ministries that existed before the merger, this judgment generally refers to MAF.taking a position contrary to that which it took when MAF was pursuing indemnity from QBE. [4] AON accepts it owed a duty of care (in contract and/or in tort) which it breached by failing to bring the transitional gap to MAF's attention. It denies that it breached any fiduciary duty and says that the Fair Trading Act does not add anything to MAF's claim. AON says that its breach of duty did not cause any loss to MAF. It says that this is because, irrespective of the transitional gap, the AJS claim would have been declined by QBE in any event. It raises a number of reasons why cover would have been declined. It also says that MAF has failed to prove the reasonableness of the loss it claims against AON.Issues[5] The issues that arise are: a) What duties did AON owe to MAF; b) Would the AJS claim have been declined by QBE irrespective of the transitional gap because: i) QBE would have excluded the AJS claim from cover had it received notice of the AJS circumstance when MAF first became aware of it? ii) The AJS claim was not within the insuring clause? iii) The AJS claim was within the malice exclusion? c) Has MAF proven that its loss is reasonable? d) Is AON estopped from now raising any defences because of the position it took in relation to MAF's claim against QBE?BackgroundApplications by AJS to Minister[6] The AJS claim against MAF arose out of changes to the Government's control on the milling of indigenous forest and the export of indigenous timber and timber products. From 1 July 1993 this milling and export was prohibited unless carried out in accordance with a sustainable forest management plan. This prohibition was effected by the introduction of a new Part IIIA to the Forests Act 1949. This prohibition expressly did not apply to indigenous timber from land permanently reserved under the South Island Landless Maori Act ("SILMA") 1906 (previously referred to as the South Island Landless Natives Act 1906). [7] The exclusion of SILMA land from the prohibition meant that the export of indigenous timber and timber products from this land continued on a more or less routine basis. The export of indigenous timber took place pursuant to an earlier general export approval authorised by the Minister of Customs under the Export Prohibition Regulations 1953. Export of indigenous woodchips was approved pursuant to individual applications for approval. [8] In September 1995 AJS applied for approval to export indigenous woodchips sourced from SILMA lands. Consent was withheld pending a review of the exemption of SILMA land from the prohibition under Part IIIA of the Forests Act. Meanwhile AJS continued to log forest blocks on SILMA land pursuant to contracts with SILMA owners. The chip logs were stock-piled at various sites though the cut- over forest. [9] In July 1996 Cabinet reviewed Government policy and agreed that further export of indigenous woodchips from SILMA land should remain suspended while the Government negotiated with SILMA landowners "on their aspirations for their land, and the relationship between these aspirations and the Government's indigenous forest policy goal (of achieving sustainable management of all privateindigenous forest in New Zealand, including the remaining indigenous forest on SILMA lands)". AJS was advised of this decision in July 1996. [10] On 1 October 1996, pursuant to the Customs Export Prohibition Order 1996, the responsibility for approving the export of indigenous timber and timber products was transferred from the Minister of Customs to the Minister of Forestry. Regulation 4, which prohibited the export of indigenous timber and timber products without the consent of the Minister, was promulgated. [11] On 17 October 1996 AJS sought approval to export indigenous sawn timber. On 29 October 1996 AJS lodged a further application for approval to export indigenous woodchips and sawn timber. [12] Mr Jebsen, a senior policy analyst employed by the Ministry of Forestry, prepared briefing papers for the Minister of Forestry in respect of the applications. In the briefing papers the competing relevant considerations (excluding issues around the conventions applying to decisions of a "caretaker" Government, as was the position at that point) were seen as being that: a) Government policy was for the sustainable management of all private indigenous forest including in SILMA land; and b) There was a "duty to act fairly". [13] As to the latter, Mr Jebsen advised the Minister that the delay in advising AJS of the policy relating to sawn timber, and failing to consult AJS on that policy, could be seen as procedurally unfair. As a result of the delay AJS would have incurred harvesting costs, stockpiled sawn timber and may also have entered into new contracts for harvesting SILMA land. There was also a concern that AJS may have legitimately expected of approval and that this may have arisen due to an error in approving an August 1996 shipment. For these reasons Mr Jebsen advised the Minister that a decision to decline the application "could well be successfully challenged on judicial review".[14] Mr Jebsen also identified that declining or delaying the decision could potentially cause a severe financial impact on AJS. Mr Jebsen's recommendation was that the Minister take a pragmatic approach and approve the application. In accordance with that recommendation the Minister approved the sawn timber application. AJS was advised of this by letter dated 29 November 1996. [15] The decision on the application to export woodchips was deferred by the caretaker Minister for consideration by the new Minister of Forestry. Mr Jebsen provided a briefing paper dated 10 December 1996 for the new Minister of Forestry. In this paper Mr Jebsen set out the case for and against approval. The case against approval was that approval would conflict with Government policy to bring all private indigenous forest under sustainable management and would undermine national and international commitments under conventions signed by New Zealand. Further, opening up the export of woodchips would give SILMA owners a major commercial advantage over other forest owners and act as a major disincentive to SILMA landowners to adopt sustainable management of their forest. [16] The case for approval was that "there could be dire financial consequences" for AJS and the loss of local employment if approval was not granted. It was considered likely that AJS would seek a judicial review. Two potential grounds were identified. One ground was that AJS might contend that up to 1 July 1996 it had a legitimate expectation that the woodchip trade would restart. The other ground was that AJS could argue that the suspension of the woodchip trade in 1996 was unfair because it was imposed without consulting AJS. The paper further stated:AJS Ltd may also seek compensation in respect of its inability to fulfil contracts with land owners and any liability and loss of earning that this would cause Earlier legal advice on this issue suggested that the Crown would be unlikely to be liable for compensation in such circumstances.[17] The recommendation was to decline approval to the application to export the woodchips. In accordance with that recommendation the woodchip application was declined by letter dated 13 December 1996 addressed to AJS's solicitors. On that day the Minister of Forestry altered the conditions of approval under Regulation 4 to make them identical to those applying to products subject to Part IIIA of the Forests Act.Judicial review decision[18] On 25 June 1997 AJS commenced proceedings for judicial review. This proceeding sought to set aside the Minister of Forestry's decision of 13 December 1996 to decline AJS's application and an order quashing Regulation 4 as invalid. [19] The High Court found that, by promulgating Regulation 4 and the conditions for approval under that regulation, the Executive sought to remove or defeat the exemption provided for SILMA land under Part IIIA of the Forests Act. This was because the effect of Regulation 4 and the conditions was to subject SILMA lands to the sustainable management regime. The High Court considered this to be a plain case of the Executive making a regulation repugnant to Parliament's expressed intention to exempt SILMA lands from that regime. Consistent with this, the High Court also held this to be contrary to the Bill of Rights Act 1688 (of England). [20] The High Court further held that the Regulations had been made with improper or irrelevant purposes. The purpose of the Customs and Excise Act 1996 (pursuant to which the Regulation was promulgated) was to control the export of produce from New Zealand. Promoting the sustainable management of forests on SILMA lands and improving Government's negotiating position with SILMA owners were considered by the Court to be remote and unconnected with that purpose. [21] As a result of these findings the High Court declared Regulation 4 to be illegal. The High Court's decision was delivered on 9 June 1999 ("the judicial review decision").AJS damages claim[22] On 5 June 2002 AJS issued proceedings against Her Majesty's Attorney- General (sued in respect of the Ministry of Agriculture and Forestry, the New Zealand Customs Service and/or the Minister of Food, Fibre, Biosecurity and Border Control). Three causes of action were alleged:a) Unlawful interference with business – the suspension of woodchip exports in September 1995, the Cabinet decision of 1 July 1996, the promulgation of Regulation 4 and the conditions for approval, and the refusal of AJS's application were unlawful and were calculated and intended to cause loss to AJS and the landowners "by devaluing the timber resource on the lands and thereby improving the defendant's negotiating position regarding payments of compensation for loss or diminution of the right to utilise the resource"; b) Misfeasance in public office – the suspension of woodchips in September 1995, continuing the suspension in July 1996, the promulgation of Regulation 4 and the conditions for approval, and refusing to approve AJS's application were unlawful. The defendant's unlawful actions were made "either knowing that its actions were without lawful authority, or with reckless disregard as to whether they were with lawful authority, and with intent to damage the economic interests" of AJS and SILMA landowners; and c) Negligence – the defendant owed AJS a duty to exercise reasonable care not to injure AJS's business by introducing measures drastically affecting its business without lawful authority, and without adequate notice, so as to enable AJS to reorganise its business to cope with the changes. This duty of care was breached by imposing the unlawful prohibition on the export of woodchips and sawn timber without any adequate notice to AJS. [23] On each cause of action AJS claimed special damages of $2,545,312.53 and other damages as its alleged losses from the suspension of the woodchip trade. The proceedings were settled at a mediation on 27 August 2003. The Attorney-General agreed to pay AJS $1,087,375 plus GST if any. In accordance with this settlement on 1 September 2003 MAF paid to AJS $1,092,373 being the agreed settlement sum plus interest and costs. MAF sought indemnity from QBE for this loss under the professional indemnity cover provided by QBE (see [43] to [50] below).The insurance arrangements[24] QBE provided "professional indemnity/errors and omissions" insurance to MAF (or its predecessors) under successive 12 month policies from 30 June 1996 to 30 June 2002. Throughout that time AON (or its predecessor) arranged the insurance on MAF's behalf. For some of that period the Ministry of Agriculture and Fisheries was also being advised by another broker as to its insurance risks and needs. However, as the trial developed, AON sought to place no significance on the role of the other broker, and accordingly the role of the other broker as compared with AON's role need not be discussed further. [25] In the lead-up to renewal AON would discuss with MAF (or its predecessors) whether there had been any changes in the business. AON would raise whether there were areas that MAF might consider insurance. Any contingent liabilities would be discussed. AON would come back to MAF with draft policies and work through them with MAF. Then the policies would be finalised with QBE. There were a number of policy wording changes during the period of insurance. The changes that were relevant to the Court of Appeal's decision upholding QBE's decision to decline indemnity (see [48] to [50] below) were made for the policy in place between 30 June 1999 to 30 June 2000 and these changes were retained in the policies in place for subsequent years.Notification of "circumstances"[26] All of the policies required MAF to give notice "as soon as practicable" (or words to similar effect) of circumstances "which could give rise to a claim". Notice of circumstances in relation to AJS was given by MAF to AON via a MAF contingent liabilities schedule annexed to the proposal completed on 29 July 1999 by MAF for the 1999/2000 policy period. [27] The contingent liabilities schedule was a document kept by the legal services division of MAF with input from each business group. Accounting would use thecollated information for accounting purposes. Included in the schedule annexed to the 1999/2000 proposal were the following items:Date Rec'd Ref Correspondent Party Nature of Dispute How Resolved Date Resolved and $ amount Amt 30 June 1998 $(000) GAAP 30 June 1999 $(000) Amt 30 June 1999 $(000) 99/00 $(000) 00/01 $(000) 01/02 $(000)1999 SILNA landowners and other affected parties Compensation for export controls on SILNA forests and Crown indigenous production forests Pending 0 Non- quantif iable Non- quantif iable Non- quantif iable 0 01996 F98/ 43 A Johnston Sawmilling Ltd Loss of income from export beech chip forest Still pending 500 500 500 500 0 0[28] The cover to the schedule explained that MAF produced two figures for contingent liabilities:One is for our annual accounts and meets the requirements of Generally Accepted Accounting Practice (GAAP). This generally means we have had formal advice of a claim against the Ministry. The second shows potential claims, ie where we have an indication that claims are pending.[29] Although the contingent liability schedule was annexed to the proposal, the proposal did not otherwise refer to the AJS claim. The proposal asked MAF if any claims had ever been made against MAF to which MAF answered "yes". The proposal asked for particulars of any such claims to which MAF answered "refer to the listing that AON Risk Services holds". The proposal also asked MAF if it was aware of any circumstances which could give rise to a claim against it. To this question MAF answered "Previously notified to AON". [30] Mr Capes, who was employed by the Ministry of Agriculture and Fisheries and who became the MAF director of legal services from September 1999 (ie. after this particular contingent liability schedule was prepared), discussed the contingent liability schedule in his evidence. He said that he had been unable to ascertain origin of the inclusion of the AJS claim in the contingent liability schedule. Mr Jebsen, the senior analyst advising the Minister of Forestry on the AJS export applications, says it is possible that he was the source of this information although he could not specifically recall providing this information. Despite a diligent search of MAFrecords, no originating documents or statements were located to enable the source of the information to be identified. [31] In the absence of specific information about how the AJS circumstance came to be included in the contingent liability schedule, Mr Capes gave general evidence about the schedule. He said that the "Ref" column in the contingent liability schedule indicated whether a file had been opened. Initials under the "Ref" column indicated which lawyer was holding the file. The non-quantifiable compensation for SILMA landowners and other affected parties indicated that it was anticipated that a sum of money, not quantifiable, could be paid to the SILMA landholders not to cut down trees. The absence of lawyer's initials noted in the "Ref" column, indicated to Mr Capes that this was not a legal matter. [32] It was put to Mr Capes in cross-examination that the schedule indicated that somebody within MAF had identified the potential for a claim by AJS for half of a million dollars as at the end of 30 June 1998 and that the claim had been first received in 1996. Mr Capes did not accept that. He said that the reference to "F98/43" was a reference to a legal file. He said that the absence of initials indicated that this matter had not been included in the schedule by a lawyer. He also said that the "Date Received" of 1996 appeared to him to be a guess at when the matter first arose. He accepted that the inclusion of $500,000 under GAAP generally indicated that formal advice of a claim against the Ministry had been made but this was not always the case. He also accepted that the schedule had been signed off by Mr Larry Fergusson who was the director of legal services for MAF prior to Mr Capes. Mr Capes confirmed that legal services would have seen all the matters listed in the schedule under "Legal Proceedings and Disputes–Non Departmental" before it was submitted to AON. [33] There is some conflicting evidence as to whether QBE received the contingent liability schedule with the 1999/2000 proposal. Mr Morrison, the underwriter at QBE, could not recall receiving it. Ms Woodman, the claims manager for QBE, said that despite an exhaustive search QBE had not located any copy of the document and that the first she saw the document was when it was disclosed by MAF on discovery. The 1999/2000 proposal was sent by AON to QBE by fax. Thenumber of pages referred to on the fax cover sheet suggests that the contingent liability schedule may not have been annexed. [34] On the other hand, Mr Bell, an AON representative, signed an affidavit in the proceeding brought by MAF against QBE (discussed below – [45] to [50]) stating that notice of the AJS circumstance had been given with the 1999/00 proposal. This was also the position he took in correspondence with QBE. QBE, for its part, did not take issue with that in the proceeding MAF brought against it. Mr Bell did not give evidence in this trial. Given this, I proceed on the basis that the position was as stated in Mr Bell's affidavit and as accepted by QBE in MAF's proceeding against it. [35] There is no evidence establishing that the circumstance was referred to by MAF before its appearance as a contingent liability as at 30 June 1998 and 30 June 1999 in the schedule annexed to the 1999/2000 proposal. It was not referred to in subsequent years when the policies were renewed. [36] This is consistent with MAF's treatment of the circumstance in its financial accounts. MAF correspondence indicates that AJS was not shown as a contingent liability in the financial statements for the year ended 30 June 1996, 30 June 1997, 30 June 2000 and 30 June 2001. The 30 June 1997 financial statements did, however, refer to a compensation scheme as follows:Indigenous Forest Policy Adjustment AssistanceIn July 1990, new export regulations were promulgated banning the export of indigenous timber and timber products from unsustainably managed forests. In August 1990, an adjustment assistance scheme was established to consider commercial loss arising from the export ban. The Ministry of Forestry administers this scheme. Expenditure was incurred in 1996/97 negotiating settlement of one of the remaining claims.[37] The only other reference that has been found is in financial statements for the eight months ended 28 February 1998 (which is just prior to the effective date of the merger between the Ministry of Forestry and the Ministry of Agriculture and Fisheries). In those financial statements the statement of contingent liabilities states:The Ministry has a potential non-quantifiable liability relating to a dispute over an export beech chip forest. At 30 June 1997 the Ministry had no contingent liabilities.[38] With the merger of the Ministry of Forestry with the Ministry of Agriculture and Fisheries the insurances were also merged. This required a declaration concerning potential risks. In response to that requirement on 20 April 1998 MAF advised AON that in March 1998 personal declarations from all Ministry of Forestry senior managers confirmed that they knew of no potential risks that "may give rise to a potential claim" under the professional indemnity policy. [39] Neither the commencement of the judicial review proceeding nor the judicial review decision were notified by MAF to QBE.Notification of claim[40] The AJS damages proceeding was served on MAF on 12 June 2002. It was notified to AON on 10 October 2002. Mr Capes was unable to say why there was this delay in notifying the claim. [41] Mr Capes said that the damages claim in June 2002 was "a complete surprise and shock". Mr Capes did not think that a damages claim was contemplated either before or after the judicial review decision. He said this was for two reasons. First, it was not expressly indicated by AJS even though AJS had access to legal advice throughout. Secondly, once Regulation 4 had been struck down by the High Court AJS could continue with its business. [42] Mr Capes accepted in cross-examination that he did not actively go and seek advice from within the Ministry (or elsewhere) to determine AJS's circumstances. He therefore did not consider whether AJS had suffered loss through funding costs and deterioration of logs during the period of suspension. He assumed that the judicial review proceeding was the end of the matter unless AJS indicated otherwise. He accepted that others in the Ministry may have known more than he. That must have been so because Mr Capes also said he did not become aware of the judicial review proceeding until just before or just after the merger of the two ministries. As that occurred on 15 September 1999, that was several months after the judicial review decision was given.MAF's claim against QBE[43] QBE declined indemnity for the AJS damages claim by letter dated 28 February 2003. In this letter QBE advised that the applicable policy was that for the period 30 June 2001 to 30 June 2002. This was because the statement of claim was served on MAF on 12 June 2002 and MAF had advised QBE that this was the first notification to MAF of AJS's claim. QBE advised that, even if the claim was within the insuring clause of the 2001/02 policy, the claim was declined because: a) Exclusion 3, which excluded indemnity for a claim arising from malicious conduct, would apply; b) Exclusion 6(b), which excluded a claim arising from circumstances known to the insured as likely to give rise to a claim, applied because on receipt of the judicial review decision on 9 June 1999 MAF knew or should have known of circumstances which might give rise to a claim; and c) Exclusion 9, which excluded claims arising from MAF exercising a statutory power, also applied. [44] AON advised MAF that it did not agree with QBE's declinature. By letter dated 12 May 2003 AON, on behalf of MAF, advised QBE that it believed there was little merit in the reasons given by QBE for its declinature and that the costs of instigating action against QBE had been approved by Cabinet. This letter was followed by a letter from AON to QBE on 7 July 2003 in which AON set out a detailed response as to why the grounds for declinature were not accepted. Further correspondence followed between AON and QBE with QBE maintaining the claim was not covered and AON maintaining that it was. MAF and its legal advisers were involved in reviewing this correspondence. [45] On 29 January 2004 MAF commenced proceedings against QBE seeking indemnity for the settlement sum paid to AJS and the legal costs in defending that claim ("the MAF/QBE proceeding"). MAF contended that it had notified QBE ofthe AJS circumstance under the 1998/1999 policy and that it was covered by that policy. Alternatively it contended that it had cover under any of the succeeding policies in place in 1999/2000, 2000/2001, 2001/2002 and 2002/2003. [46] The statement of defence filed by QBE raised the following defences: a) The 1998/99 policy did not apply because the AJS claim was not made during the period of insurance; b) The 1999/2000, 2000/2001 and 2002/2003 policies did not apply because the claim was not first made during these policy periods; c) Exclusion 6 under the 1999/2000, 2000/2001, 2001/2002 and 2002/2003 policy applied; d) The claim was outside the insuring clause under the 1999/2000, 2000/2001, 2001/2002 and 2002/2003 policies; e) Exclusion 3 under the 1999/2000, 2000/2001, 2001/2002 and 2002/2003 policies applied; f) Exclusion 9 under all policies applied; g) The AJS claim was made against three parties (the Attorney-General in respect of MAF, the New Zealand Customs Service and the Minister of Food, Fibre, Biosecurity and Border Control), only one of which (MAF) was the insured under the policy; h) The policy deductible would need to be deducted from the claim if QBE was obliged to indemnify MAF. [47] QBE applied for summary judgment against the Crown. In the High Court this application was unsuccessful. QBE appealed and the Court of Appeal found in its favour.[48] The Court of Appeal held that the 1998/99 policy did not apply. This was because this policy provided cover for any "claim" made against MAF and reported to QBE during the period of the policy. "Claim" was defined as meaning a "demand for compensation made by a third party against the Insured". When the AJS matter was notified to QBE via the contingent liabilities schedule annexed to the 1999/2000 proposal, there was notice of a circumstance which could give rise to a claim, but there was no "claim" as defined under that policy. [49] The policy wording changed for the policy period commencing on 30 June 1999. Like the 1998/1999 policy, this policy provided cover for a "claim" first made against MAF and reported to QBE during the period of the policy. However, a new condition 5 and a new exclusion 6 were added. Condition 5 provided that if a circumstance notified by MAF to QBE during the policy period subsequently became a claim, then the claim was deemed to have been made during the policy under which the circumstance was notified. Exclusion 6 excluded indemnity for any claim notified or arising out of circumstances notified under a previous policy or arising out of circumstances which were known or ought to have been known to MAF prior to the policy period. Neither of these provisions were present in the policies in place prior to this. These provisions remained in the policies after 30 June 1999 (ie. 1999/2000, 2000/2001, 2001/2002 and 2002/2003). The Court of Appeal held there was no cover for AJS under these policies. The AJS claim was or should have been notified as a circumstance prior to the changed policy wording. This meant that cover was excluded by the later policies. [50] The effect of the changed policy wording was to create a transitional gap for circumstances notified under the earlier policies which became claims during the period of the later policies which contained exclusion 6 and condition 5. The AJS claim fell within this gap in cover. The result was that MAF was not entitled to indemnity from QBE despite having paid QBE premiums across the years and despite having reported the AJS claim as a circumstance likely to give rise to a claim during these years. While the Court of Appeal viewed this result as "unattractive", it was satisfied that MAF had no arguable case and accordingly MAF's claim against QBE was dismissed. Leave to appeal the Court of Appeal's decision was declined by the Supreme Court.[51] Because QBE was successful in resisting MAF's claim for indemnity on the basis of the transitional gap in the policies, none of the other defences raised by QBE were determined by the Court. Following the Court of Appeal's dismissal of MAF's claim against QBE, MAF brought this proceeding against AON.Duties AON owed to MAF[52] It is not in dispute that an insurance broker has a duty to carry out the terms of its engagement with reasonable care and proper skill: Cee Bee Marine v Lombard Insurance Co Ltd [1990] 2 NZLR 1 at 4. This duty of care is an implied term of the contract between the broker and the insured and also arises in tort: see Jackson & Powell on Professional Liability (6ed 2007) at 16-012 and 16-014. In addition, since an insurance broker is the agent of the insured, the broker is the insured's fiduciary and accordingly owes a fiduciary duty to the insured not to put him or herself in a position of conflict: Jackson & Powell at 16-016. [53] In summary, the first and second causes of action (in contract and tort respectively) allege that, when arranging MAF's insurance, AON failed to act with reasonable skill, care and diligence by failing to take steps to avoid the transitional gap. [54] The third cause of action alleges that AON breached fiduciary duties by: a) Failing to take all reasonable steps to safeguard the interests of MAF in AON's dealings with QBE; and b) Failing to disclose to MAF any gaps or deficiencies in the terms proposed for the insurance. [55] The fourth cause of action alleges that, in breach of s 9 of the Fair Trading Act, AON made misleading representations by representing that there was satisfactory insurance covering claims arising out of circumstances already notified.[56] MAF contended that the policy changes that led to the transitional gap were initiated by AON. No representative from AON gave evidence at the trial before me. However Mr Bell, an AON representative, swore an affidavit in relation to MAF's claim against QBE (discussed above – [45] to [50]). In that affidavit Mr Bell said that policy wordings were generally prepared by AON rather than QBE. He said that often the insurer will intervene to require certain wording to be included and he believed that was what occurred in the case of the changes made between the 1998/1999 and 2002/2003 policies. He said that exclusion 6 was a QBE requirement and was a common requirement of all liability insurers. [57] Mr Morrison, the QBE underwriter, also provided affidavit evidence in MAF's claim against QBE. In that evidence he says that he received revised policy wording from AON and that "he requested a couple of minor unrelated changes and then agreed to the wording". Mr Morrison gave evidence at the trial before me. He was cross-examined on this statement. He was not completely clear about what changes he requested. He thought, however, that he may have requested the "extended reporting provision" (by which he seems to have been referring to condition 5) and other changes including the malice exclusion (discussed below at [134] to [154]). Mr Morrison said that exclusion 6 and condition 5 were common clauses in professional indemnity policies in 1996 and remain so today. Mr Sloan, an expert insurance broker called by MAF, confirms this. [58] It is not necessary to determine whether it was AON or QBE that initiated the changes. That is because AON accepts it owed a duty in contract and tort to advise MAF of the transitional gap that the changed wording gave rise to. Had MAF been advised that the proposed new wording would give rise to a transitional gap it can be inferred that MAF would have wanted to avoid the transitional gap. It follows that AON would have been asked to seek policy wording that avoided the transitional gap. I consider that the duty to advise on and/or endeavour to avoid the transitional gap is contractual and tortious rather than fiduciary. [59] Although this was not how it was pleaded, in closing submissions Mr Brown QC (for MAF) submitted that a fiduciary duty arose at the point in time that AON realised there was a transitional gap in the wording. I agree that there wasa fiduciary duty at this point. That is because QBE's declinature on the basis of the transitional gap put AON in a position of conflict. It had been involved in the drafting and finalising of the changed wording (whether the changes were entirely at AON's initiative or not). It knew or ought to have known that if QBE were correct to decline indemnity for the AJS claim on this basis then MAF had a potential claim against AON. MAF does not claim damages for this breach (as by this time the absence of cover under the policy had already occurred), but contends that it is relevant to its estoppel defence (discussed below at [158] to [167]). [60] I do not consider the fourth cause of action because it does not add anything to the acknowledged tort and contract breaches. MAF has not suggested that it does.No causation: because AJS circumstance would have been specifically excluded?Submissions[61] AON says that MAF can only succeed against it if QBE would have agreed to cover the AJS circumstance had it been properly notified. It says that QBE would not have done so. It says that MAF did not call anyone from QBE to say that QBE would have so agreed and that QBE's evidence is to the contrary. AON develops this submission as follows: a) MAF was required to notify the AJS matter as a circumstance in 1996 and/or on various dates prior to 30 June 1999; b) If MAF had given the required notice at any time prior to 30 June 1999 Ms Woodman, the QBE claims manager, would have sought advice from Mr Ring QC; c) If Mr Ring's advice had been sought he would have advised QBE to insert a specific "AJS circumstance" exclusion;d) If Mr Ring had given this advice, Mr Morrison and Ms Woodman would have amended the policy terms to exclude the AJS circumstance. [62] MAF says that it was not required to give notice of the AJS circumstance until the judicial review judgment. It says that notice was given then. It says that even if notice should have been given earlier QBE would not have excluded cover for the AJS circumstance. [63] AON and MAF are agreed that AON carries the burden of establishing, on the balance of probabilities, that the AJS circumstance would have been excluded as AON alleges.When was MAF required to notify the AJS circumstance?[64] The obligation under condition 3 of the 1996/97 policy was to give written notice "as soon as practicable" of "knowledge of circumstances which could give rise to a claim against it". The policies for the period from 1997 to 30 June 1999 contained a similar obligation. [65] In FAI General Insurance Co Ltd v McSweeney (1999) 10 ANZ Ins Cas 61- 443 at 75,033-4, the Court considered a policy condition requiring notice of circumstances which "may give rise to a claim". The Court said that this required notice of circumstances that:would, as at the time of the proposing of the insurance, immediatelysuggest to a reasonable person in the proponent insured's position who reflected upon those known circumstances, that the bringing of a claim against the insured in respect of them was a "definite risk"; or a "real possibility" or "on the cards". Perhaps the notion of the "springing to mind" of the making of a claim also appropriately expresses the shade of meaning intended.[66] I accept the submission of Mr Withnall QC (for AON), supported by this case, that the test is an objective one, requiring notice when a reasonable person in the insured's position would consider that there was a reasonable possibility of a claim. Notice is not required if the possibility of a claim is remote or unlikely.However, providing there is a real or definite risk of a claim, notice is required even if the claim is not probable. [67] In declining leave to MAF to appeal the Court of Appeal decision in the MAF/QBE proceeding, the Supreme Court commented "we consider that, on receipt of Wild J's judgment, the Ministry undoubtedly had knowledge of circumstances that could well give rise to a claim for damages or compensation against it". The Supreme Court did not express any view on whether an obligation to notify arose earlier than this, and nor did the lower Courts. [68] In 1996, as is set out in Mr Jebsen's briefing papers, MAF knew that: a) AJS may have entered into contractual commitments with a legitimate expectation that future export approvals would be given; b) Declining AJS export approval could well be successfully challenged on judicial review on the basis of a failure to consult and/or a breach of a legitimate expectation; c) AJS was reliant on the wood chip export trade to enhance profitability and without it the company could fail; d) AJS had engaged solicitors to represent it; e) In addition to seeking judicial review, AJS might also seek compensation for its inability to fulfil contracts with landowners and any liability and loss of earnings that this would cause. [69] Additionally, as is recorded in the judicial review judgment (Alan Johnston Sawmilling Ltd v The Governor-General & Ors HC WN CP140/97 9 June 1999):Government legal advisers, both in Forestry and the Crown Law office, consistently acknowledged the risk of legal challenge which Regulation 4 presented, as opposed to Parliament repealing the exemption in s67A(1)(b)(i) Forests Act 1949 if that was its intention.[70] Mr Withnall submitted that from these facts a reasonable person in MAF's position would have appreciated in 1996 that there was a reasonable possibility of a claim. Consistent with this, the contingent liability schedule prepared in or about June 1999 referred to "1996" as the "Date Received" (refer [27] above). AON further says that on or very shortly after 28 May 1997 MAF knew AJS had filed its judicial review proceeding. And by 9 June 1999 MAF had received the judicial review judgment finding that Regulation 4, under which AJS' woodchips application had been declined, was ultra vires. [71] MAF submits that in 1996 it was aware of the potential for a judicial review claim, but not a damages claim. Any judicial review was seen as likely to be based on procedural grounds and considerable efforts were made to accommodate and act fairly towards AJS. MAF recognised that compensation might be sought, but it envisaged the possibility of a request for assistance rather than a legal claim. [72] I consider that AON's submission has the benefit of hindsight. It is now known that in 1996 the circumstances that arose gave rise to the later damages claim. It is easy to say now that MAF ought to have foreseen the damages claim as a reasonable possibility. For there to be a damages claim, AJS would need to establish first, that MAF's decision to decline the woodchips application was unlawful in some way and, secondly, that this unlawful action would give rise to a cause of action for which damages could be claimed. MAF appreciated this was at least a possibility because it sought advice from Crown Law about this. Crown Law's advice was that such a claim was unlikely to be successful. [73] The obligation was to give notice of a circumstance which could give rise to a claim. A claim that is unlikely to be successful is still relevant to the insurer's assessment of the insured risk. This is because, apart from indemnifying the insured for any damages that may be ordered, the policies provided cover for the costs and expenses of defending the claim. However, the advice from Crown Law that a claim would not succeed was relevant to whether a claim was a reasonable possibility. Effectively, Mr Jebsen wanted to know if there was a risk of a compensation claim and the advice from Crown Law was that there was no basis for such a claim.[74] There is nothing else to indicate that MAF considered a claim for compensation to be a reasonable, real or definite risk as opposed to a remote possibility. At that stage, in so far as Mr Jebsen's briefing papers disclose, the grounds of judicial review proceedings contemplated would not obviously give rise to causes of action for which damages could be claimed. The grounds on which the judicial review proceeding in fact was brought were different. The evidence before me does not establish that MAF considered in 1996 that these grounds were a reasonable possibility. The passage from the judicial review judgment I have referred to (at [69] above) does not indicate the basis on which the legal advisers saw this as a risk. The only other evidence I was referred to (by Mr Ring in his evidence) was a draft cabinet paper which included the following:119. Should Ministers not seek to remove this exemption, but choose to cease approving further woodchip shipments, then a regulatory amendment will be required to the Customs Act 1966. 120. Crown Law advises that the current Customs export regulations which would be used to effect any decision to ban the woodchip trade could be ultra vires. Crown law suggests that should the Government decide to ban or restrict the trade in the absence of applying the relevant provisions of the Forests Act to SILMA lands, then appropriate regulatory amendments should be made to the Customs Act to give certainty to the decision. 121. Customs advises that the new Customs and Excise Act which replaces the existing Customs Act 1966 is due to come into force on July 1 1996. The Ministry of Forestry is recommending that regulations under this Act provide the Minister of Forestry with powers which are similar to those under the Customs Act 1966 which at the same time would give the Minister of Forestry the power to approve additional indigenous timber exports on conditions determined by him/her on a case by case basis. The Ministry believes these regulations should eliminate this legal uncertainty.[75] It is not clear to me that this indicates a view that Regulation 4 would be ultra vires. Rather, it seems to be saying that the pre-July 1996 position may be ultra vires but that the Government's intention of banning woodchip export could be achieved by appropriately drafted regulations under the post-July 1996 legislation. The paper then goes on to consider the risk of judicial review based on a legitimate expectation that the export of woodchips would continue.[76] I therefore find that MAF was not required to notify QBE in 1996. I consider MAF was required to notify QBE in May 1997 when the judicial review proceeding was filed. At this point the risk of challenge to the Minister's decision declining approval to the export of wood chips had materialised. The challenge was not on the basis that Mr Jebsen identified in the 1996 briefing papers, but on the basis that Regulation 4 and the conditions of approval issued under that regulation were ultra vires and made with an improper purpose. A reasonable person in the position of MAF would have sought advice on the prospects of this proceeding succeeding and therefore ought to have known that there was a reasonable possibility that it would succeed. MAF also knew that it was likely that AJS had suffered loss from the export ban. If the judicial review proceeding succeeded a reasonable person in the position of MAF ought to have known that there was a reasonable possibility that a damages claim would be brought. [77] Consistent with this, someone within MAF (presumably sourced from Mr Jebsen) seems to have identified an unquantifiable liability to AJS as possible as at February 1998 (refer [37] above). By this stage, the judicial review proceeding had been filed (on 28 May 1997) but not determined. As at 30 June 1998 (refer [27] above), this potential liability had been assessed at $500,000. On the evidence before me, nothing had changed between the filing of the judicial review proceeding and the February 1998 accounts, nor between February 1998 accounts and June 1998, to warrant any change in the assessment of the liability. [78] As at 30 June 1999 the potential liability had been assessed, in accordance with GAAP, as a contingent liability of $500,000. By this time the judicial review judgment has been delivered. AON's view as stated to MAF and Crown Law in April 2003 was that MAF should have notified a circumstance when the judicial review decision was released in June 1999. AON said:Usually, judicial reviews in themselves are not necessarily always an insurance issue but in this case the finding was clearly that MAF had acted illegally and it would have been prudent at that stage to conclude that the Plaintiff would likely follow the decision up with a claim for compensation. Had we received a copy of the Judicial Review at that time, we certainly would have insisted upon a potential notification being made by MAF before the expiry of the "days of grace" during which notification is required to be made, ie. 21 days after 30 June 1999 (Refer Policy Condition 5 – ClaimsNotification). In this case, Doug Graham completed and signed the proposal on the 29 July 1999, 8 days after the expiry of the days of grace. Aon received the completed 1999/2000 Professional Indemnity Proposal and MAF's Contingent Liabilities Schedules (copies attached), although no formal claim was notified at that time or until October 2002.[79] Ms Woodman, the QBE claims manager throughout the relevant period, had a similar view to that expressed by AON. She said that a successful judicial review claim, finding that the Minister had acted wrongly, would necessarily give rise to a claim for damages with almost no successful defence and in respect of which the insurer would be exposed. She considered that there would be a notifiable circumstance prior to the decision, but by the time of the decision "it must have been apparent even to the Minister that this was really a claim". [80] As the Supreme Court said, by this time MAF had knowledge of circumstances that could well give rise to a claim. However, if the judgment gave rise to knowledge of circumstances, then that knowledge must also have existed when the judicial review proceeding was lodged – at that point it ought to have been apparent that the proceeding might well succeed. [81] I therefore consider that MAF was required to notify QBE of the AJS circumstance on or about the date that the judicial review proceeding was served. At that time the policy in place was that for the period 30 June 1996/30 June 1997.What QBE would have done[82] The next step in this part of AON's defence is to determine what QBE would have done had notice been given in or about May 1997 (or indeed at any time prior to the change to the new policy wording commencing on 30 June 1999). [83] Mr Morrison was the underwriting manager at QBE from 1991 to 2001. He issued the cover for MAF for the years 30 June 1996 to 30 June 2001. Mr Morrison says that the underwriting and claims departments were in constant communication about potential claims and underwriting issues. When circumstances were notified to the underwriter they would be passed immediately to the claims department.Mr Morrison said that if the AJS circumstance had been notified in 1996 it would have been highly relevant to the assessment of MAF's risks at the next policy renewal. He says that if Ms Woodman had strongly recommended that he consider ways of ensuring that QBE was not exposed to the AJS circumstance he would have done so. He considers that he would have inserted a "no AJS circumstance" exclusion at the next renewal. He also says that a dishonesty/malice exclusion would have been included. He says that he would have also considered including exclusion 6 and condition 5 in the policy. [84] Ms Woodman confirmed Mr Morrison's evidence that notification of a circumstance would be passed from the underwriter to her and that the insured would be requested to provide full information of that circumstance. She says that if the AJS circumstance had been notified in 1996 then she would have instructed Mr Ring to advise QBE on that circumstance. Mr Ring was QBE's primary legal adviser in 1996. (Mr Ring was subsequently instructed when MAF sought indemnity for the AJS claim.) Ms Woodman says that if Mr Ring had advised her that MAF's conduct had caused significant loss to AJS and that MAF was continuing in that conduct she would have been concerned to limit or eliminate QBE's exposure. She says that she would have suggested to Mr Morrison that he impose, at the least, a "no AJS circumstance" exclusion at the next renewal. She also considers that she would have suggested more extensive amendments to the policy including the condition 5, exclusion 6 and malice exclusion that were incorporated in the policy from 1999 onwards. [85] Mr Ring confirms that if QBE had been notified in 1996 of the AJS circumstance he would have expected QBE to instruct him. Had he been instructed in respect of a notification of a circumstance in 1996 Mr Ring says that he would have wanted, and would have expected to have received, the relevant documents in relation to AJS as well as the 1996 policy wording. Mr Ring said that with this information he would have: a) concluded the circumstance was not covered under the 1996 policy because no claim for compensation had at that point been made;b) considered the prospect of a judicial review proceeding was high; c) considered that, if the judicial review proceeding was successful, there was also a high probability that AJS would issue further proceedings seeking compensation. That would be a "claim" under the policy and, even if ultimately unsuccessful, defence costs would be incurred; d) advised QBE that it could avoid liability altogether by declining to renew the policy or renewing on revised terms which excluded this potential liability. [86] On the face of it, this course of conduct seems unfair. The 1996/1997 policy (and the 1997/1998 and 1998/1999 policies) require circumstances to be notified. QBE is saying that if, as required, MAF notified QBE of the AJS circumstance then QBE would have amended the policy to exclude from cover any claim arising from that circumstance. Potentially QBE could do this for all circumstances, in which case MAF would be paying premiums for no cover when claims arose from those circumstances. Once a circumstance is notified to an existing insurer, a new insurer would also be likely to exclude cover for that circumstance. Mr Sloan, an experienced insurance broker called by MAF, went as far as to say that it would have been impossible for MAF to have obtained cover from a new insurer for the AJS circumstance once notified to QBE. [87] Mr Ring said that the effect of QBE's and his evidence was not that all notified circumstances could and would be excluded before they materialised into claims for which QBE would be liable. He said that the wording of the earlier policies (1996-1999) provided cover for notified circumstances that later became claims, providing the insured did not change insurers. A circumstance notified in one policy year would be covered if and when it became a claim, and was notified as a claim, in a later policy year. [88] Mr Ring said that, although a circumstance would not normally be excluded by the insurer before it became a claim, this would have been appropriate in respect of the AJS circumstance. Mr Ring said that his understanding was that thesuspension, and then ban, on AJS exporting indigenous forest products was to put pressure on the SILMA owners in negotiations. He viewed the suspension and the ban as a deliberate course of conduct carried out with that purpose. Any claim for losses from SILMA owners or affected parties as a result of the suspension and ban would therefore arise as a result of a calculated course of conduct rather than a fortuity. Conceptually, he said, insurance is for fortuities not calculated courses of conduct. What is more, QBE would not be able to force MAF to settle the AJS claim or to alter its stance on the export approval. That was because, in the absence of a claim, QBE did not have the right under the policy to assume conduct and control of the matter. [89] Ms Woodman's view was similar. She said that an insurer that had been on risk continuously would not normally exclude a particular notified circumstance from cover if it became a claim. But here, as she saw it, there were two Crown Ministers "continuing to act knowingly illegally for the purposes of bettering their negotiating position and at any point it was within their power to step back from it and the claim wouldn't have existed". She considered that the Crown was effectively reducing its compensation exposure in anticipated negotiations with SILMA owners at QBE's expense if QBE indemnified the Crown for the AJS claim. [90] Similarly, Mr Morrison says that it is not the purpose of professional indemnity cover to provide insurance cover for intentional unlawful conduct or deliberate conduct which would knowingly cause loss. He says that if MAF's conduct would cause loss that MAF could readily prevent he would have been concerned to limit or eliminate QBE's exposure for any potential later claim. [91] AON says that the evidence of Ms Woodman, Mr Morrison and Mr Ring stands unchallenged. AON refers to the evidence from Mr Sloan that QBE could have acted in the way it says it would have, and that no other insurer was likely to have agreed to insure the AJS circumstance if MAF had sought to change insurers. And, if QBE would have excluded cover for the AJS circumstance from 30 June 1997 if it had been notified in 1996, AON says that it is a matter of inference that QBE would also have excluded cover for the AJS circumstance if QBE had been advised of it prior to 30 June 1999.[92] I do not think it is accurate to say that the evidence of Ms Woodman, Mr Morrison and Mr Ring was unchallenged. It is correct that it was not directly put to them that they would not have acted in the way they said they would. Nevertheless, the bases for their conclusions about what they would have done were challenged. [93] One basis on which the evidence was challenged concerned Mr Morrison's view of how the 1998/1999 policy (and therefore the 1996/1997 and 1997/1998 policies) worked. Mr Morrison's view, as set out in an affidavit in the MAF/QBE proceeding, was that he viewed the 1998/1999 policy as a "traditional claims made and notified policy". He explained that by that he meant that if circumstances were notified during the 1998/1999 policy, and a claim were made in a later policy year, then the claim would be deemed to have been made and notified under the 1998/1999 policy. Mr Morrison had this view although he recognised that the 1998/1999 policy did not contain a deeming provision similar to condition 5 in the 1999/2000 and subsequent policies. Mr Morrison was asked in cross-examination if he would have adopted the same view in the previous policy years (ie. 1996/97 and 1997/98). He agreed that he would have. [94] Mr Morrison's view differs from Mr Ring's (see [85] to [88] above). However, Ms Woodman and Mr Morrison are agreed that Mr Morrison is likely to have been the initial contact point for the notification of a circumstance. If Mr Morrison considered that the existing policy would have applied to the notified circumstance there was no reason for him to take any steps to seek to exclude that circumstance from cover under later policies. [95] MAF also challenges the QBE evidence about what it would have done on the basis that, when the circumstance was notified via the 1999/2000 proposal, there was in fact no reaction from QBE. There is no evidence that Mr Morrison advised Ms Woodman of the circumstance. There is no evidence that Ms Woodman (or anyone else at QBE) requested further information from MAF. There is no evidence that QBE requested advice from Mr Ring. There is no evidence that any policy wording change was considered as a result of the AJS circumstance.[96] AON sought to distinguish what QBE did when it received the contingent liability schedule with what would have occurred if "proper" notice of the AJS circumstance had been given before 30 June 1999. AON said that it suited QBE in the MAF/QBE proceeding to accept that notice had been given when MAF sent the contingent liability schedule to AON. I agree with MAF that it is not now open to AON to contend that notice by way of the contingent liability schedule was not proper notice under the 1998/1999 policy and that therefore QBE's non-reaction to this notice is not evidence of how QBE would have reacted if the AJS circumstance had been notified earlier. That is because in the MAF/QBE proceeding AON maintained to QBE that it had forwarded the schedule to it. No AON witness was called to give any different evidence at this trial. QBE, for its part, had accepted in its statement of defence in the MAF/QBE proceeding that notice was given in the 1998/1999 year. 3[97] AON submitted that when notice was given via the contingent liability schedule AON/QBE were amending the policy terms in a way that would mean that the later policies would not apply to the circumstance in any event. On this basis AON says that QBE's non-reaction is not evidence of how it would have reacted if notified earlier when the earlier policy wording applied. I agree that Mr Morrison would not have been concerned about notifications under the earlier policy wordings in drafting/agreeing to the amended wording to apply from 1999/2000 (and subsequently). Nevertheless QBE's non-reaction to a circumstance assessed as giving rise to a potential liability of $500,000 is evidence that Mr Morrison does not, as a matter of course, refer circumstances to Ms Woodman and/or that she does not, as a matter of course, refer notified circumstances to Mr Ring. [98] While it is possible that events would have unfolded as QBE now says, the evidence has the advantage of hindsight. QBE, if fully informed and if acting cautiously and prudently, might well have acted in this way. But it may also have done nothing, as it did when it received the contingent liability schedule. I consider3 Although the notice was given after the expiry of the 1998/1999 policy year there was no prejudice to QBE arising from the late notification and so, in accordance with the Insurance Law Reform Act, it was viewed as having been given in the 1989/1999 year.that the "Equiticorp exclusion" referred to by QBE and Mr Ring in support of their evidence is not a sufficiently similar example from which it can be inferred that a "no AJS circumstance" exclusion would have been included here. The "Equiticorp exclusion" seems to have been included in different circumstances where, as Ms Woodman explained, a new insured was seeking insurance. 4 Ms Woodman and Mr Morrison did not provide other examples more comparable to the present, and Mr Ring accepted that he had never given advice to QBE to include this kind of circumstance specific exclusion. Even if Mr Ring had given this advice, QBE would have also needed to consider whether it ought to include such an exclusion against an existing insured (as opposed to a new insured) and also whether it was necessary (for example, whether changes to the insuring clause and the malice exclusion would suffice). [99] On the balance of probabilities I consider that, if the AJS circumstance had been notified in May 1997 or any time prior to 30 June 1999, QBE would not have taken action to specifically exclude any claim arising from that circumstance. Accordingly this defence is not made out.No causation: because AJS claim not within insuring clause?Submissions[100] AON submits that its actions were not causative of any loss to MAF because the AJS claim was not within the relevant insuring clause. This would mean that even if the policy wording had not been altered in a way that gave rise to the transitional gap MAF would not have had cover for the AJS claim. [101] The insuring clause of the 1999/2000, 2000/2001 and 2001/2002 policies provided cover "for all sums which the Insured shall become liable to pay" for claims "by reason of any act, error, omission or conduct constituting a breach of4 See Equiticorp Industries Group Ltd (In Statutory Management) & Ors v Hawkins & Ors (1994) 7 ANZ Insurance Cases 61-207.professional and/or fiduciary and/or statutory duty committed or omitted by the Insured in the conduct of their business specified in the Schedule" (my emphasis). In contrast the 1996/1997, 1997/1998 and 1998/1999 policies provided cover for "all sums which the Insured shall become legally liable to pay" for claims "arising out of any act, error or omission in the conduct of the Insured's business as specified in [the] Schedule". [102] AON submits that the AJS claim was not within the insuring clause of the 1999/2000 policy because the claim did not arise by reason of any breach of a professional, fiduciary or statutory duty. MAF did not owe any fiduciary or statutory duty and AJS did not allege this. AON says that the claim did not involve a breach of a professional duty either. AON submits that insurance cover for legal liability caused by MAF's wrongful performance of its non-professional functions may be covered under the Commercial General Liability insurance. To be covered the loss must be caused by an unexpected and unintended event. That was not the case with AJS because it was expected that the export ban achieved under the regulations would cause AJS loss. [103] MAF submits that AON has not pleaded this defence. Without prejudice to this, MAF says that the 1999/2000 policy extended the coverage previously provided under the earlier policies. It submits that "constituting a breach of professional fiduciary and/or statutory duty" in the insuring clause of the 1999/2000 policy qualifies only "conduct" and does not also qualify "any act, error or omission". Alternatively, it submits that having regard to the purpose of the insurance, and the definition of MAF's "business" in the Schedule to the policy, the advice given to the Minister by Mr Jebsen was "professional" advice within the terms of the cover. As a further alternative, MAF submits that the claim is within the run-off cover and that because of this the insuring clause of the 1999/2000 policy does not apply.Not pleaded[104] AON says that it is for MAF to show that its claim would have been within the terms of the policy. AON submits that as MAF had the burden of proving that itwould have obtained insurance that covered the AJS circumstance, it was for MAF (and not AON) to plead this. [105] In support of this submission AON relied on TBI Pty Ltd v AON Financial Planning Ltd (2004) 13 ANZ Insurance Cases 61-601. In that case an insured made a claim against its broker for a damages claim that the insured settled that was not covered by the professional indemnity insurance that the broker had arranged on the insured's behalf. One of the issues raised was whether the insured or the broker had the burden of proving that insurance that covered the claim would have been obtained. The Supreme Court of Victoria held that on general principle "the plaintiff should bear the onus of proving the availability of such insurance to the ordinary civil standard". [106] The Court went on to consider the broker's defence that part of the claim made against the insured in that case would have been within the insurance that could have been obtained and part of the claim would not. The Court noted that the insured had pleaded that the broker's default in arranging professional indemnity cover was causative of its loss. The Court said (at [247] to [248]):I consider that it was for the defendant to positively raise by its defence, if it so desired, an allegation that the amount paid in the Fletcher settlement was not in respect of the notionally insured risk. That is so although it was for the plaintiff to prove that the notional policy would have responded. Absent an issue so raised, the compromise of the Fletcher claims, proved by tender of the Terms of Settlement in this proceeding, stood in proof of a legal liability incurred by the plaintiff and falling within the insuring clause of the notional policy, and also a legal liability falling outside that clause. The former was on the face of it a liability for the full amount of the settlement, notwithstanding that the same might be said of the latter. It is pointless to speculate about the course of evidence had the defendant pleaded the issue, or whether the defendant could have established that which it might have pleaded. In all, then, if the plaintiff had established that it would probably have been insured after 30 September 1996, it would have satisfied me that the Fletcher settlement in an amount of $5M and up to $5M in costs fell within the scope of the notional policy. It was not for the plaintiff to negative all exclusions contained in the notional policy. The defendant did not establish that any exclusion would have operated in favour of the insurer, and so to its advantage.[107] I agree with what is said in TBI. As a matter of general principle an insured must prove that the broker's negligence caused its loss. Where the negligence is thefailure to obtain insurance it is for the insured to prove that insurance covering the claim could have been obtained ("the notional policy"). It is then for the broker to prove that the claim would have been excluded under the notional policy. That is consistent with the burden of proof on an insurer to establish that an exclusion clause in a policy applies. 5[108] The question of burden does not, however, completely answer the question of pleading. The requirements as to pleadings are dealt with by the High Court Rules. Rule 130 of the High Court Rules requires the defendant to: a) Either admit or deny the allegations of fact in the statement of claim; b) Plead any affirmative defence intended to be relied upon (an affirmative defence being something relied on by the defendant in defending the claim that raises material going beyond that alleged by the plaintiff in the statement of claim as answered by the statement of defence 6 ); c) Give such particulars of time, place, amounts, names of persons, nature and dates of instruments, and other circumstances as may suffice to inform the Court, the plaintiff, and any other parties of the defendant's defence. [109] In this case MAF's statement of claim against AON did not specifically plead that the AJS claim was within the insuring clause of any particular policy. Instead it pleaded that, through AON's actions or omissions in arranging new policy wording (condition 5 and exclusion 6), there was a transitional gap in respect of notified circumstances which included the AJS claim. It pleaded that as a result of the5 MAF referred to authority to the effect that it is for the broker to prove that the insurer would have repudiated liability on the grounds relied on by the broker. In this case the evidence establishes that QBE did repudiate liability on the grounds relied on by AON. What is not established by the earlier course of events is whether QBE's repudiation would have been upheld on any of these grounds other than the transitional gap ground. Some authority referred to by MAF suggests this then becomes a loss of a chance claim by the insured. However, neither party argued the case as a "loss of a chance" and I therefore do not consider this further.6 McGechan on Procedure at HR130.16(1) and (2).transitional gap MAF suffered loss. This loss was pleaded as being the sum MAF paid to AJS pursuant to the settlement reached with AJS and associated legal and other costs. [110] The statement of defence responds to this pleading as follows:Change to the policy15 It admits that on or around 28 September 1999 the defendant and the insurer arranged to introduce the new clauses into the wording of the policy. It otherwise denies paragraph 15 and says further other clauses that were introduced to the policy at that time independently entitled the insurer to decline any subsequent AJS claim. In particular: 15.1 Exclusion 3 excluded any loss caused by the plaintiff's malicious conduct; 15.2 Exclusion 1.11 of the 30 June 1998 to 1999 policy and exclusion 9 of the 30 June 1999 to 2000, 30 June 2000 to 2001, 30 June 2001 to 2002, and 30 June 2002 to 2003 policies excluded any loss caused by the plaintiff's unlawful exercise of statutory powers.[111] The statement of defence denies the general allegation in the statement of claim that AON's actions are causative of MAF's loss. A number of affirmative defences are pleaded. They include a "no causation" affirmative defence, but this relates only to the defence discussed above ([61] to [99]). There is no specific pleading that there was no causation because QBE would have been independently entitled to decline the AJS claim as being outside the insuring clause of any particular policy. [112] AON's statement of defence contrasts with QBE's defence in the MAF/QBE proceeding. In that proceeding QBE's statement of defence included as an affirmative defence that the AJS claim was not within the insuring clause of the 1999/2000, 2000/2001, 2001/2002 and 2002/2003 policies because the AJS claim did not allege or involve any breach of professional, fiduciary or statutory duty by MAF. [113] I consider that AON should have included a similar pleading in its defence if it intended to rely on this. MAF had pleaded that AON's breach gave rise to thetransitional gap and resulted in MAF's loss. This was denied by AON and the particulars relied on for this denial did not include that the AJS claim would have been outside the insuring clause of the relevant policy. The issue now raised advances matters beyond those alleged by MAF in the statement of claim and responded to by AON in the statement of defence. It was necessary for AON to plead that a further reason why the insurer would have been entitled to decline indemnity was that the claim was not within the insuring clause. This was necessary in order to inform the Court and MAF of what was in issue. [114] That, however, is not the end of the matter. I consider that AON should be entitled to rely on this ground provided that MAF has not suffered prejudice by the failure to plead it. Although MAF says that it is prejudiced, it does not suggest that there was any additional or different evidence it would have called had this ground been pleaded. Nor did it point to any other particular prejudice from the lack of pleading. This ground of defence was first raised at the conclusion of MAF's opening submission. MAF did not require an adjournment or a ruling either at that time or in the course of the trial. MAF was able to and has responded to the substance of the submission. Accordingly, I consider the substance of the submission should be determined.Which policy?[115] MAF has established on the balance of probabilities that insurance for claims arising from notified circumstances was available from QBE (either under the wording of the earlier policies or under the wording of the later policies). Either way, on the balance of probabilities I find that QBE would have agreed that a transitional gap should not exist for claims arising from notified circumstances. The questions then are which policy would have applied to the AJS claim and would the claim have been within the insuring clause of that policy. [116] If AON had noticed the transitional gap created by the changed wording the following might have occurred:a) One possibility is that an extension may have been provided so that any circumstance previously notified under the earlier policy wording would have cover under the policy wording that applied when the notice of circumstance was given. (This was Mr Morrison's view of how the 1996/1997 and 1998/1999 policies worked – refer [93] above.) That would mean that the 1996/1997 policy wording (if the circumstance was notified in May 1997 when the judicial review proceeding was commenced) or the 1998/1999 policy (if the circumstance was notified on or about 8 June 1999 when the judicial review decision was given) would be relevant; b) An alternative possibility is that exclusion 6 in the later policies would expressly not have applied to circumstances notified under the earlier policies. That would mean that a claim in respect of a previously notified circumstance would be covered under the policy in existence when it was eventually made. In this case that would mean that the AJS claim would be covered under the 2001/2002 policy because the claim was made on 5 June 2002; c) A further alternative is that, if the transitional gap had been identified and steps were taken to avoid that gap, QBE may have accepted the AJS circumstance as being notified as part of the 1999/2000 renewal. In that case the 1999/2000 policy would respond under the new (condition 5) wording. [117] As I have said, AON first raised the issue that the AJS claim was outside the insuring clause at the conclusion of MAF's opening submission. It was raised at that time in the form of a statement of issues provided to me and to MAF. This statement of issues referred to the AJS claim not being within the insuring clause in the 1999/2000 to 2002/2003 policies. By the time of its closing submissions AON referred only to the wording in the 1999/2000 policy. AON did not rely on the first alternative and so I do not consider this further. It is not clear to me why AON limited its closing submissions to the 1999/2000 policy (the third alternative) when the relevant policy may have been the 2001/2002 policy (as per the secondalternative). However, whether the second or third alternative was the most likely does not matter because the insuring clause (and the malice exclusion which is also relied on by AON – refer [134] to [154] below) are the same in the 1999/2000 and 2001/2002 policies.7 This insuring clause in these policies is set out above (refer [101]).Covered by insuring clause of 1999/2000 or 2001/2002 policy?[118] I do not accept MAF's first argument that "constituting a breach of professional and/or fiduciary and/or statutory duty" qualifies "conduct" but does not qualify "act, error or omission". Accepting that Mr Morrison's view of the meaning of the insuring clause was not directly relevant to what the clause meant as a matter of legal construction, Mr Brown referred to Mr Morrison's evidence in cross- examination that the 1999/2000 policy was wider than the earlier wording (refer [101] above). I consider that "conduct" in the later policy wording added to "act, error or omission" in the earlier wording by making it clear that the coverage extended to an on-going act, error or omission. To that extent the cover was extended. However, in my view "constituting a breach of professional and/or fiduciary and/or statutory duty" qualified the type of act, error, omission or conduct that was covered. If it were meant only to qualify "conduct" then I consider it would have needed to say "by reason of any act, error or omission or by reason of any conduct constituting a breach of professional and/or fiduciary and/or statutory duty". [119] The AJS proceeding had three causes of action: unlawful interference with AJS' business, misfeasance in public office and a common law duty of care. The causes of action concern acts, errors, omissions in the conduct of MAF's business as described in the Schedule. They do not concern any alleged fiduciary or statutory duty. The question is whether they concern a breach of professional duty.7 This policy wording was annexed to MAF's statement of claim against QBE and Ms Woodman's affidavit in that proceeding accepted that this policy wording applied in the period between 1999/2000 and 2001/2002.[120] AON referred to GIO General Ltd v Newcastle City Council (1996) 134 ALR 605 (CA) at 615 (reversed by Newcastle City Council v GIO General Ltd (1997) 191 CLR 84 (HCA) on other grounds). In that case an issue arose as to whether the Council's certification of a defective building pursuant to a statutory requirement to inspect and certify was a "professional" duty. It was held that the source of the duty was not determinative. Rather, a duty to inspect/certify was a "professional" one because it involved the provision of services or advice according to a discipline or profession. [121] AON says the AJS claim did not concern a breach of a professional duty because MAF did not provide any services or advice to AJS; MAF was not retained by AJS in any way; there was no benefit to AJS from MAF's advice to the Minister; and MAF's conduct and the Minister's decision did not involve any skills of a particular discipline. AON says that it is "nonsense to say that in its legislative function (whether passing statute law or subordinate legislation) the Crown owes a professional duty to those adversely affected". [122] MAF says that Mr Jebsen's advice is "professional" advice to the Minister. It involved a senior analyst with knowledge and expertise advising the Minister. MAF also says that the advice, and the subsequent action of the Minister based on that advice, is within MAF's business as described in the Schedule. That business is described as being "Government department providing a range of services including policy advice, regulations and service to the agriculture, horticulture and forestry services". MAF says that if this claim is not covered then the insurance would apply to very little of the business of MAF. [123] MAF's submission is similar to the decision in Suncorp Metway Insurance Ltd v Landridge Pty Ltd (2005) 13 ANZ Insurance Cases 61-660. In that case a tenant of premises managed by a real estate agent tripped in a hole in the floor of the premises. The tenant alleged that the real estate agent had breached a common law duty of care to the tenant. The real estate agent settled the claim brought by the tenant and sought indemnity from its professional indemnity insurer. The policy covered claims "for breach of a professional duty by reason of any act, error or omission committed or alleged to have been committed by the Insured in the conductof the Business". The "Business" was identified in the schedule to the policy as that of a real estate agent. Three kinds of "business and professional activities" were listed. One of those listed activities was "residential property management". [124] The Victoria Supreme Court recognised that not everything done by the real estate agent is to be described as carrying on a profession. However, unless the listed core activities of the real estate agent's business were to be regarded as carrying on a profession, the policy would afford no significant protection. The policy should be construed so as to make commercial sense. The Court held that the tenant's claim against the real estate agent was covered because it concerned the negligent performance of the real estate agent's activities and so constituted a breach of a professional duty, and that it did not matter that the agent had no retainer with the tenant. [125] I agree with Suncorp that the policy must be construed so that it makes commercial sense. I also agree that the definition of business in the Schedule is relevant in determining the type of act, error, omission or conduct that might constitute a breach of professional duty. I also agree with the discussion in Suncorpthat a common law breach of a duty of care can give rise to a breach of a professional duty and that a retainer is not required. However, every act, error, omission or conduct in the course of MAF's business as described in the Schedule will not necessarily constitute a professional, statutory or fiduciary duty. Those words, which were first added in the 1999/2000 policy, must have been intended to have some meaning. I consider that the insuring clause contains two qualifications. One is that the act, error, omission or conduct must occur in the course of MAF's "business" as described in the Schedule. The second qualification is that the act, error or omission or conduct in the course of MAF's business must constitute a breach of a professional, fiduciary or statutory duty. (A similar view was taken inFAI General Insurance Co Ltd v Gold Coast City Council (1992) 2 Qd R 341.) [126] An unlawful interference with AJS' business and misfeasance in public office, arising from acting unlawfully under legislation and/or by enacting and acting pursuant to ultra vires regulations, does not fit comfortably within what would ordinarily be considered to be the provision of service or advice according to adiscipline or profession even taking into account that here the business included "regulations". However, I do not need to decide whether the first and second causes of action of the AJS claim concerned a breach of a professional duty, because in my view the third cause of action did. [127] The third cause of action of the AJS claim alleged that:[a]rising out of the relationship between the Ministry of Forestry and the Plaintiff and, in particular, the knowledge by the Crown of the particular characteristics of the Plaintiff's business, its dependence upon the export woodchip trade, and the Plaintiff's reliance on the special skill and knowledge of the Ministry of Forestry to advise it in relation to its rights in pursuing the export trade for unsustainably harvested timber and timber products, the Defendant owed the Plaintiff a duty to exercise reasonable care not to injure the Plaintiff's business by introducing measures drastically affecting its business without lawful authority, and without adequate notice, so as to enable the Plaintiff to reorganise its business to cope with changes.[128] It further alleged:That in breach of its said duty the defendant, by imposing unlawful prohibition on the export of the woodchips and also sawn timber, imposed severe and unlawful restrictions on the plaintiff's business, without any or any adequate notice, and thereby injured the plaintiff's business.[129] It can be seen that this cause of action pleads that: a) A duty was owed to AJS; b) The duty arose (in part) because of AJS' dependence "on the special skill and knowledge of the Ministry of Forestry to advise it in relation to its rights"; and c) The Ministry of Forestry breached its duty by taking unlawful action without adequate notice. [130] The cause of action concerned advice to AJS. That advice was given in the conduct of MAF's business. It was "professional" advice in that it required special skill and knowledge (as per GIO). I consider that it was not necessary that AJS retain MAF or pay MAF for this advice in order for it to be "professional" (as perSuncorp). A professional duty (ie. a duty arising out of the special skill andknowledge of the insured) arises because of the nature of the advice, service or conduct undertaken and not because of its source (statutory, contract or at common law). To confine professional duty to one arising under a retainer or for which there was payment could deprive the professional indemnity policy cover of any real scope. [131] Mr Withnall referred to MAF's contingent liability schedule as illustrating that there are a whole range of MAF's activities that would still be covered. Examples from that schedule included "alleged denigratory remarks by MAF officials relating to standards in a factory", "alleged unnecessary testing for toxins in Queen Scallops", "alleged failure to follow protocol on importing horses from Australia", "defamation and breach of duty of care over quarantine goats", "breach of duty of care by MAF over export of live deer to Korea", "negligent call of mussels from Big Glory Bay" and "unnecessary quarantine of horses". It is not clear, however, that any of these examples involved a retainer or payment. [132] AON did not make submissions as to the position if I found that one cause of action was within the insuring clause but others were not. 8 In particular it did not submit that MAF was not "liable to pay as damages" (as required by the insuring clause) the settlement sum because MAF was not in fact "legally" liable under the third cause of action. 9 It must therefore be taken as accepting that the settlement sum was paid in respect of the third cause of action in the alternative to the first and/or second causes of action and without distinction. That is, the settlement sum was payable because of the third cause of action and was therefore a liability falling within the insuring clause, irrespective of whether it was also payable because of the first and second causes of action. That was the view taken of the settlement discussed in the TBI case (see [106] above) and I agree with it.8 If it had wanted to make this submission then prejudice from the failure to plead this would have arisen – see TBI at [106] above.9 See for example the discussion of this issue in K Sutherland "An Uneasy Compromise" (1998) 9 ILJ 257 and G Pynt "I'm a Lumberman. Are you OK?" (2006) 17 IJL 183.Conclusion[133] This defence fails because AON has not established that the claim was outside the insuring clause of the relevant policy (or policies). It is therefore not necessary to consider MAF's submission concerning the run-off cover in the 1999/2000 policy.No causation: because AJS claim excluded by malice exclusion?Submissions[134] AON submits that its actions were not causative of MAF's loss because the malice exclusion in the relevant policy would have excluded cover for the AJS claim. AON says that the judicial review judgment confirms that MAF's unlawful actions were actuated by improper motives. Those improper motives were to improve MAF's bargaining position with SILMA landowners and to remove the competitive advantage which SILMA landowners had over the owners of indigenous forests were who required to log in a sustainable manner. AON submits that acting with improper motives is sufficient to trigger the malice exclusion, and that an intent to harm is not required. [135] Alternatively AON says that MAF's actions were with intent to harm. AJS' first cause of action alleged that MAF's unlawful actions were calculated and intended to cause loss. AJS' second cause of action alleged that MAF acted unlawfully knowing its actions were without lawful authority or with reckless disregard as to whether they were lawful "and with intent to damage the economic interests" of AJS and the SILMA landowners. AON says that all the causes of action sought to recover the same loss, were caused by the same unlawful acts and were all tainted by the same malicious intent (that is, knowing or being reckless that harm would ensue). [136] MAF submits that AON was required to, but did not, plead this as an affirmative defence. MAF says that the reference to the exclusion at paragraph 15 of the statement of defence (refer [110] above) is insufficient. It says that this pleadingwas responding to the pleading in the statement of claim which set out the changes to the policy wording that gave rise to the transitional gap and was not asserting this as an affirmative defence. [137] Without prejudice to the pleading point, MAF submits that the relevant policy would not have contained the malice exclusion. MAF further submits that if the relevant policy contained the malice exclusion then MAF's loss was not wholly or partly caused by malicious act. It refers to the dictionary definition of malice as being a desire to injure, active ill-will or the kind of evil intent which constitutes the aggravation of guilt. It says that a high threshold of wrongful conduct is required. It says that the judicial review judgment regarded the improper purpose pleading as equivalent to the irrelevant consideration pleading. It says that an irrelevant consideration in administrative law is a considerable distance short of dishonesty or fraud. It also says that an improper purpose is by no means synonymous with an improper motive that constitutes malice. It says that the judicial review judgment made no finding of dishonesty, fraud or an active desire to injure. It says that the Government's policy was intended to achieve important and meritorious conservation purposes and that there was a strong concern to do the right thing by all parties, including AJS. It submits that MAF recognised that compensation to affected parties might be required, but it did not contemplate potential liability arising out of tort proceedings.Procedural point[138] I consider that AON is not precluded from defending the claim on the basis that the malice exclusion would have applied. While a model pleading would have set this out as a specific affirmative defence (as per the QBE defence in the MAF/QBE proceeding) the pleading was adequate to inform MAF and the Court that AON intended to defend the claim on the basis that the insurer would have been entitled to decline the claim because the malice exclusion applied.Relevant policy[139] AON's statement of issues referred to the malice exclusion in the 1999 to 2003 policies. AON's closing submissions, as with the submission concerning the insuring clause, proceeded on the basis that the 1999/2000 policy was the relevant one. However the malice exclusion in the 1999/2000 policy is the same as the malice exclusion in the 2001/2002 policy so the particular policy (as between the later policies) that would have applied does not matter. [140] MAF submits that if AON had been alert to the transitional gap then it is likely that future claims would have been covered by reference to the policy that applied when they were notified. Here the AJS circumstance was accepted as being notified under the 1998/99 policy. That policy did not have the malice exclusion. [141] If AON had been alert to and taken steps to avoid the transitional gap, then I consider it more likely than not that the relevant policy (ie. the notional policy referred to above – [107]) would have contained the malice exclusion. Mr Sloan viewed the earlier policies as "very flexible" and "less restrictive" than the later policies. Mr Morrison believes that he required that the malice exclusion be included in the 1999/2000 policy (which was retained in the subsequent policies) and that this was part of a number of changes QBE was applying to policies of a similar type at this time. Mr Morrison apparently did not appreciate that there was a transitional gap because his view was that the earlier policies would apply (see [93] above). However, if AON had pointed out the transitional gap and asked Mr Morrison to address this before the 1999/2000 policy wording was finalised, it would have been in QBE's interest to apply the less flexible/more restrictive terms to the previously notified circumstances if they became claims. That is, it would have been in QBE's interests to agree to cover them but under the new policy wording. I proceed on the basis that the relevant policy would have contained the malice exclusion.Meaning of "malicious"[142] The malice exclusion (under the 1999/2000 policy and the 2001/2002 policy) excluded claims "for loss wholly or partly caused by a dishonest, fraudulent, criminal (whether actual or constructive) or malicious act or omission of the Insured (except as provided for in Extension 2)". [143] Counsel referred to Mead v Allianz Australia Ltd [2006] NSW SC 366 as to the meaning of "malicious". In that case the Court needed to determine whether a liquidator's claim for indemnity under an insurance policy was excluded by an exclusion for claims "directly or indirectly based upon, attributable to, or in consequence of any dishonest, fraudulent, malicious, or reckless act or omission". The Court reviewed various authorities and concluded (at para 51):I am of the view that the expression "malicious" in cl 21(a) of the Policy should be construed in the context in which it appears taking its colour from the words and expressions within the clause. This is a clause excluding the insurer's liability for the intentionally wrongful or wilful acts or omissions of the insured. The concepts of dishonesty and fraud and wilful violations and breaches seem to me to suggest that the insured's conduct that disqualifies him from indemnity must be intentional. I am of the view that a "malicious" act or omission referred to in cl 21(a) of the Policy relevant to the issues in this case is an act or omission done or made for the predominant purpose of inflicting harm or damage to another person.[144] For AON it is submitted that the reasoning in this case was flawed, and that the case can be distinguished from the present one. It is said that in this case the surrounding words of the exclusion do not require any intent to harm. It is said that "dishonesty" in the context of a professional indemnity insurance policy does not require proof of intention to deceive (McCann v Switzerland Insurance Australia Ltd(2001) 11 ANZ Insurance Cases 61-479 (HCA)); "dishonest" and "fraudulent" are interchangeable (Commissioner of Inland Revenue v Bhanabhai [2006] 1 NZLR 797); and "criminal" is qualified by the phase "whether actual or constructive". [145] Various cases in various contexts have considered the meaning of malice: Malice in its ordinary or common sense means spite, ill will or the like, whereas malice in a legal sense may mean a wrongful act done intentionally without just cause or excuse: see for example Trobridge v Hardy (1955) 94 CLR 147 at 162(referred to in Mead at [39]); Nishina Trading Co Ltd v Chiyoda Fire Marine Insurance Co Ltd [1996] 2 QB 449; and Jeffery v Associated National Insurance Co Ltd [1984] 1 Qd R 238 at 249. [146] The meaning of "malicious" in the later policies in this case must be interpreted in light of its context. That context is an exclusion clause in a professional indemnity policy that covers breaches of professional, fiduciary or statutory duties. That exclusion also excludes dishonest, fraudulent and criminal (whether actual or constructive) conduct. I consider that in this context something more than a deliberate or intentional act that causes harm is required. The clause seems to me to be directed to excluding liability for certain kinds of intentional wrongdoing or criminal acts. Insurance is intended to cover fortuities but not intentional wrongdoing or criminal acts. 10 I consider that in this context "malicious" was not intended to be confined to its ordinary or common meaning, but was intended to exclude a deliberate wrongful act intended to harm a third party or with reckless indifference that harm to a third party would result. [147] I agree with MAF that the finding of "acting for an improper purpose" in an administrative law sense is different from a malicious act or omission in terms of the exclusion. Some decisions made under statute with an improper purpose will be malicious, but others will be an unintentional misapplication of the statutory power. 11 Insurance for the latter is insurance against a fortuity and so the reason for excluding malicious conduct does not apply. [148] In the judicial review decision the improper purposes of the power to make regulations under the Customs and Excise Act were found to be promoting and sustaining the management of forests on SILMA lands and improving the Government's negotiating position with SILMA. There is nothing in that finding that indicates any bad faith, as opposed to an unintentional or mistaken misapplication of the statutory power. The judicial review judgment refers to the10 See MacGillivray on Insurance Law (10ed 2003) at 14-2 and 14-34.11 See for example the discussion in Joseph Constitutional v Administrative Law in New Zealand (3ed 2007) at 22.2.1 and 22.2.2.Government's legal advisers "consistently acknowledging the risk of legal challenge which Regulation 4" presented. However, the judgment does not state whether that risk was assessed as arising because Regulation 4 was considered to be outside the proper purposes of the Customs and Excise Act, or because of the concerns around process identified by Mr Jebsen in the briefing papers. In my view the judicial review judgment does not establish that the loss was wholly or partly caused by a malicious act or omission. [149] There is nothing else in the material before me to indicate that the improper purposes were known to be such (refer [75] above). The evidence establishes only that when MAF/the Minister acted to suspend and then ban the export of woodchips it knew that: a) AJS might claim lack of consultation and breach of a legitimate expectation; b) AJS might suffer loss from the suspension and ban but, while that loss might give rise to a non-legal compensation/assistance claim, it was not thought (as per the Crown Law advice) that it would give rise to a legal liability for damages; c) The loss suffered by AJS (and SILMA landowners) by the suspension and ban would be helpful to the Government in moving the SILMA land to sustainable management. [150] In my view this evidence falls short of establishing any improper motive falling within the "malicious act or omission" exclusion. [151] That leaves the settlement of the AJS claim – does that establish that the AJS claim was for loss wholly or partly caused by a malicious act? I agree that liability arising from the second cause of action would fall within the exclusion. Knowledge that the actions taken were unlawful and an intent to harm were pleaded in that causeof action and this intent or reckless indifference as to harm is an essential ingredient of that tort.12 The same might be said about the first cause of action. 13 However, the same cannot be said about the third cause of action. That cause of action is for breach of a duty of care by introducing measures without lawful authority and failing to give adequate notice to AJS (see [22](c) above). It is concerned with the failure to take reasonable care not to harm AJS. Knowledge of the unlawfulness of the prohibition on export and an intent to harm (or recklessness) is not pleaded and it is not an essential element of that cause of action. It does not involve intentional wrongdoing in the sense that I consider the malicious conduct exclusion is intended to cover. [152] The settlement sum was not attributed to any particular cause of action. I do not think it can be said that because one or two causes of actions alleged "malicious" conduct and one did not that the loss was "wholly or partly caused by a malicious act or omission" so that the exclusion applied. The settlement sum is at best evidence only that MAF considered the payment should be made because of one or more of the pleaded causes of action. It is not evidence that the settlement was paid because of the first and/or second causes of action (which probably were claims for loss caused partly by a malicious act or omission). [153] AON accepts that it has the burden of proving that the exclusion would have applied. Because neither the judicial review judgment nor other evidence before me, nor the settlement (based on pleadings alleging some acts or omissions within the exclusion and some acts or omissions outside the exclusion) establish that the loss (the payment to AJS and the associated legal costs) was caused wholly or partly by a malicious act, AON has not discharged its burden. [154] AON's submission went on to address whether an extension in the policy would have extended cover to the AJS claim despite the malice exclusion. It is not necessary for me to consider those submissions because in my view the malice exclusion in the 2001/2002 policy (or the 1999/2000 policy) does not apply.12 See Todd The Law of Torts in New Zealand (4ed 2005) at 805.13 See Todd at 551.Failure to prove reasonableness of loss claimed?Submissions[155] AON submits that the 1999/2000 policy only covered sums which MAF (as the insured) was liable to pay. Indemnity under the policy would not have covered the liability of another government entity. AJS' damages claim was against MAF, the New Zealand Customs Service and the Minister of Food, Fibre, and Biosecurity and Border Control. Customs was in control of timber exports for 12 out of the 46 months in which AJS incurred losses. On that basis AON submits that it is appropriate that Customs contribute to at least one-third of AJS' losses. That would leave two-thirds of the settlement sum as the amount for which indemnity could have been claimed. From that two-thirds, $75,000 would have been deducted (being the amount of MAF's policy deductible). [156] MAF submits that it (or its predecessor) was responsible for the advice and implementation of the policy and the regulations that were the subject of the AJS damages claim. It would have been futile to have claimed contribution from Customs and the Minster of Food, Fibre, Biosecurity and Border Control because they in turn could have claimed back from MAF. MAF accepts that it would have been required under the insurance policy to bear the first $75,000 of its losses and that this sum should therefore be deducted from its claim against AON.My view[157] Mr Jebsen's evidence was that Customs relied on the advice of the Ministry of Forestry. That evidence was not challenged. It is consistent with the position set out in the judicial review judgment. I consider that, if Customs had contributed to MAF's settlement with AJS, Customs would have been entitled to claim contribution from MAF on the basis that it relied on MAF's advice and implemented the policy for which MAF was responsible. I therefore accept MAF's argument that in agreeing to pay the settlement sum to AJS it would have been futile to have sought contribution from the other defendants named in the AJS damages claim. There isagreement that the claim against AON is reduced by the insurance deductible of $75,000. To that extent only the claim against AON is reduced.EstoppelSubmissions[158] MAF says that AON owed a fiduciary duty to honestly and fully inform MAF as to AON's assessment of the various grounds of declinature relied on by QBE and to acknowledge its error in allowing the transitional gap to occur. It says that instead it reassured MAF that QBE was not justified in its stance and encouraged and assisted MAF in bringing the proceeding against QBE. It says that AON is now estopped from taking as against MAF the very points which it encouraged MAF to challenge when raised by QBE. [159] Mr Brown acknowledges that it is not clear which kind of estoppel (convention/agreement, representation/conduct or election) is the applicable one. But looked at as a whole he says, in effect, that it would now be unconscionable to allow AON to raise these points. If it is necessary to show detriment then Mr Brown says that a frank acknowledgement from AON at the outset would have led to both AON and QBE being sued in the same proceeding. They would have then been "at each other's throats" as to the source of the policy wording changes. Instead, in this proceeding, QBE has given evidence in support of AON's position. It is further said that MAF would not have shared its legal advice with AON if AON had frankly acknowledged its error and its assessment of the QBE declinature. [160] AON submits that no estoppel arises. It says that in making statements to QBE on MAF's behalf it was acting in its broker advocacy role. It says that it made these statements to assist MAF in pursuing its claim against QBE and not to induce MAF to change its position. The only loss that AON could have caused by its statements was the legal cost in pursuing QBE. However, Crown Law was acting for MAF when it decided to proceed against QBE. In these circumstances, there was no reasonable reliance by MAF on AON's statements or conduct, no detrimentsuffered by MAF as a result and no unconscionability in AON now raising the points it now makes against MAF.My view[161] AON did not inform MAF of its error in allowing the transitional gap to arise. In statements to MAF, and to QBE on MAF's behalf, it took the position that QBE should not decline the claim. This stance is likely to have provided some encouragement to MAF to pursue QBE. However MAF was also receiving legal advice from Crown Law. Crown Law's view was that, if QBE declined indemnity, "MAF has tenable grounds for commencing a legal proceeding against QBE". The reasons for this view were set out in a legal opinion dated 20 June 2003. A copy of that opinion was provided to AON. [162] Given Crown Law's advice, irrespective of AON's encouragement, it is more likely than not that the claim against QBE would have proceeded. MAF does not suggest otherwise. If AON had disclosed that it was potentially at fault in allowing the transitional gap to occur it also seems likely that MAF would have joined AON to the proceeding and would not have disclosed its legal advice to AON. [163] Nevertheless, looked at in terms of unconscionability or overall justice (as Mr Brown proposed), I consider that AON's actions should not now prevent it from raising the arguments that the QBE policies would not have provided indemnity even if there were no transitional gap. Even if AON had been joined as a defendant to the claim against QBE, both AON and QBE would have had the incentive to raise the same arguments that AON now raises against MAF. Whether AON and QBE would have disputed amongst themselves who was responsible for the transitional gap is not material. Even if that were QBE, AON had a duty to notice and advise of the gap before the policy became effective. [164] Further, no detriment arose from MAF disclosing its legal advice to AON. That advice was consistent with the position AON took on MAF's behalf with QBE. The advice discusses when MAF notified QBE of the claim but does not concede that earlier notification ought to have been given (as is now raised by AON) andworks off documents available to AON in any event. There is nothing else in that advice that gave AON knowledge that it otherwise would not have had about MAF and MAF's claim against QBE or AON. [165] A difference between what occurred, and what would have occurred had AON disclosed its error to MAF when QBE declined indemnity, is that the claim against AON was delayed. In my view that does not give rise to unconscionability such that AON should now be prevented from raising defences that would otherwise have been available to it had it been sued at an earlier time. Interest can be (and is in this case) claimed for the period that MAF has been out of pocket. [166] In terms of the traditional categories of estoppel, in my view this is not an estoppel by convention because the statements made by AON to QBE and MAF did not give rise to an agreement between AON and MAF upon which any transaction proceeded or their relations would be governed. 14 Rather, they were unilateral statements made by AON as to its view, which MAF and its advisors separately agreed with. Further, the MAF/QBE proceeding proceeded because of MAF's own decision to pursue it and not on the basis of an agreed position as between MAF and AON. It is not an estoppel by representation or conduct 15 because reliance to MAF's detriment is not present. It is not an estoppel by election16 because there was no election made as between two alternative and mutually exclusive courses of action – the decision to proceed against QBE only has not prevented MAF from also proceeding against AON. [167] For these reasons, I would not have found in favour of MAF on this part of the case had I found against MAF on the various defences raised by AON.14 Laws of NZ "Estoppel" at [70] and G S Bower The Law Relating to Estoppel by Representation: The Original Text (4ed 2004) at I.2.8.15 Laws of NZ "Estoppel" at [36] and G S Bower The Law Relating to Estoppel by Representation: The Original Text (4ed 2004) at I.2.2.16 Laws of NZ "Estoppel" at [71] and G S Bower The Law Relating to Estoppel by Representation: The Original Text (4ed 2004) at I.2.12.Result[168] The result is that MAF has established its claim against AON. AON's failure to notice that the policy wording would give rise to a transitional gap in cover and to take steps to avoid that gap caused MAF loss. That is because it is likely that cover would have been available from QBE for a claim arising from a previously notified circumstance. That cover is likely to have applied to the third cause of action in the AJS claim as being within the insuring clause and AON has not established that the loss claimed was excluded by the malice exclusion. I consider that it is not likely that QBE would have specifically excluded the AJS circumstance before it became a claim. [169] MAF has established that the settlement sum was reasonable even though the claim was also brought against two other government entities. That is because MAF was responsible for the conduct that gave rise to the loss and therefore the other two government entities would have been entitled to claim back from MAF their share of any settlement payment. [170] AON makes no other challenge to the sum claimed by MAF as damages. Accordingly, MAF is entitled to judgment against AON in the sum of $1,262,523.05 which is made up as follows: (a) Settlement sum paid by MAF to AJS on 1 September 2003 $1,092,375.00Less policy deductible of $75,000 $75,000.00 $1,017,375.00 (b) Legal costs and disbursements in defending the AJS claim and achieving a mediated settlement $122,653.00 (c) Legal costs in contesting QBE's declinature $122,495.05 $1,262,523.05 [171] In addition, MAF claims interest on the sum $1,215,028 from 1 September 2003 to the date of trial at 7.5% (pursuant to s 87 of the Judicature Act 1908) and thereafter until the judgment is satisfied at a daily rate of $250 (pursuant to r 538 of the High Court Rules). The claim for interest on $1,215,028 is a claim for intereston the settlement sum of $1,092,375 and the legal costs and disbursements in defending the AJS claim and achieving a mediated settlement of $122,653. [172] MAF is entitled to interest and I do not understand AON to contest the rate of interest claimed nor the period over which it has been claimed. (I note that there is no real issue of delay in pursuing the claim against AON because this claim was brought almost immediately after the Supreme Court's decision declining MAF leave to appeal the Court of Appeal's decision.) Accordingly AON is ordered to pay interest for this period and at this rate. However the s 87 Judicature Act interest is payable on $1,140,028 (being the settlement sum less the $75,000 deductible and plus the legal costs in defending and settling the AJS claim) and not $1,215,028 because if MAF had indemnity for the AJS claim it would have had to pay the first $75,000 of the settlement sum. (Judicature Act interest was not claimed on the legal costs in contesting QBE's declinature.)Costs[173] MAF initially sought costs on a 2B basis. In its closing submissions MAF referred to a number of late concessions made by AON which MAF submitted gave rise to substantial unnecessary cost and time. In my view additional costs over and above category 2B costs is not appropriate. The concessions, although made late, enabled the trial to be conducted efficiently. I accept that if these concessions had been made earlier some lesser cost and time may have been required in preparing the proceeding for trial, but I consider this is adequately met by a 2B order. If there is any other issue about costs or if the parties are unable to agree the calculation of the costs they may submit memoranda. Mallon JSolicitors: DLA Phillips Fox, PO Box 160, Auckland (ph: 09 303 2012, fax: 09 303 2311) Crown Law, PO Box 2858, Wellington (ph: 04 472 1719, fax: 04 473 3482)