Arab Bank Plc v Zurich Insurance Company [QBD (Comm)]

JurisdictionEngland & Wales
JudgeRix J
Judgment Date16 June 1998
CourtQueen's Bench Division (Commercial Court)
Date16 June 1998
Arab Bank plc
Zurich Insurance Co

Rix J.

Queen's Bench Division (Commercial Court).

Insurance — Fraud — Managing director of valuers gave fraudulent overvaluations of properties to banks — Banks obtained judgment against valuers and sought to recover from insurers when valuers went into liquidation — Whether insurers could avoid policy for director's dishonesty — Whether managing director's fraud to be imputed to company — Third Parties (Rights Against Insurers) Act 1930.

These were preliminary issues in actions by banks against the professional liability insurers of negligent valuers.

The defendants were the insurers of JDW, a company which carried on business as estate agents and valuers. B, the managing director of JDW, prepared valuations in the name of JDW for the plaintiff banks in relation to commercial properties. The valuations were fraudulent, in that the valuation figure was deliberately or recklessly provided in the figure required by the borrower and not in the figure representing the open market value of the property, and were grossly in excess of the true values. The plaintiff banks obtained judgments against JDW for negligence and when JDW went into liquidation claimed against the defendants under the Third Parties (Rights Against Insurers) Act 1930. The defendants sought to avoid the insurance on the ground of B's fraud. Preliminary issues were ordered relating to whether as a matter of construction the policy would respond in the case of dishonesty of any of the insured's in favour of another insured not complicit in that dishonesty; whether the policy was composite insurance of a kind such that the right to avoid for one insured's non-disclosure or misrepresentation in the formation of the contract brought the whole policy down; and whether B's fraud and dishonesty was to be imputed or attributed to JDW. B had signed the proposal form for the insurance, which warranted that the statements therein were true to the best of the insureds' knowledge. There was also an issue whether the limit of liability under the policy was £2m or £4m.

Held, answering the preliminary issues accordingly:

1. As a matter of construction of the policy, the fraud of one insured did not forfeit the policy against all, and any insured who was personally innocent of an intent to deceive was entitled to resist avoidance. The policy was designed to cover an innocent principal (e.g. fellow partners or a company) even where an agent (the dishonest partner or employee) had acted within the scope of his authority or the ordinary course of the principal's business. ( General Accident Fire and Life Assurance Corp Ltd v Midland Bank LtdELR [1940] 2 KB 388 and Fisher v Guardian Insurance Co of Canada (1995) 123 DLR (4th) 336 considered.)

2. The insurance was composite insurance of a type under which there were several insureds with separate interests and the policy was to be treated as a bundle of separate contracts under which B and JDW were separately insured for their own separate interests. ( New Hampshire Insurance Co v MGN Ltd [1996] CLC 1692 applied.)

3. B's dishonesty was not to be attributed to JDW. B was not the alter ego of JDW in the context of the policy. The logic of the policy's scheme was that directors could not by themselves be treated as the alter ego of the company. ( Meridian Global Funds Management Asia Ltd v Securities CommissionUNK [1995] BCC 942; [1995] 2 AC 500applied.)

4. B's knowledge was not to be attributed to JDW because of the fortuity that he signed the proposal.

5. In any event the case was within the exception that the knowledge that an agent was acting in fraud of his principal was not to be attributed to the victim of the fraud. A director's knowledge of his own acting in fraud of his company was not to be attributed to the company. JDW was a victim of the fraud as well as the banks. B's fault came within the concept of an agent's “fraud on his principal” but even if it did not his breach of duty to JDW was such as to make it impossible to infer that his knowledge of his own dishonesty was transferred to JDW. ( Re Hampshire Land CoELR [1896] 2 Ch 743, PCW Syndicates v PCW Reinsurers[1995] CLC 1517andGroup Josi Re v Walbrook Insurance Co Ltd[1995] CLC 1532applied, Kingscroft v Nissan Fire and Marine Insurance Co LtdUNK(unreported, 4 March 1996, Colman J) followed.)

6. The qualification of the warranty was designed to fit with the provisions of the contract as a whole and accordingly innocent insureds would not be in breach. JDW would only be in breach if B's knowledge was attributed to it, but it was not to be so attributed.

7. The limit of liability under s. 1 of the policy was £4m not £2m.

The following cases were referred to in the judgment:

Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (“The Good Luck”)ELR [1992] 1 AC 233.

Belmont Finance Corp Ltd v Williams Furniture LtdELR [1979] 1 Ch 250.

Dawsons Ltd v BonninELR [1922] 2 AC 413.

Deutsche Genossenschaftsbank v BurnhopeUNK [1995] BCC 488; [1995] 1 WLR 1580.

Fisher v Guardian Insurance Co of Canada (1995) 123 DLR (4th) 336.

General Accident Fire and Life Assurance Corp Ltd v Midland Bank LtdELR [1940] 2 KB 388.

Group Josi Re v Walbrook Insurance Co Ltd [1995] CLC 1532; [1996] 1 WLR 1152.

Hampshire Land Co, ReELR [1896] 2 Ch 743.

Houghton (J C) and Co v Nothard, Lowe and Wills LtdELR [1928] AC 3.

Kingscroft v Nissan Fire and Marine Insurance Co LtdUNK (unreported, 4 March 1996, Colman J)

Lennard's Carrying Co Ltd v Asiatic Petroleum Co LtdELR [1915] AC 705.

Meridian Global Funds Management Asia Ltd v Securities CommissionELR [1995] 2 AC 500; [1995] BCC 942.

Netherlands v Youell [1997] CLC 938.

New Hampshire Insurance Co v MGN Ltd [1996] CLC 1692.

Orakpo v Barclays Bank Insurance Services Co [1994] CLC 373.

Panzera v Simcoe & Erie Insurance Co (1990) 74 DLR (4th) 197.

PCW Syndicates v PCW Reinsurers [1995] CLC 1517.

Regina Fur Company v BossomUNK [1957] 2 Ll Rep 466.

Royal Boskalis Westminster NV v Mountain [1997] LRLR 523.

Samuel (P) & Co Ltd v DumasELR [1924] AC 431.

Tesco Supermarkets Ltd v NattrassELR [1972] AC 153.

Yorkville Nominees Pty Ltd (in liquidation) v LissendenUNK (1985) 63 ALR 611 (High Court of Australia)

Anthony Boswood QC and Michael Soole (instructed by Reynolds Porter Chamberlain) for Arab Bank plc.

Peter Goldsmith QC and Richard Handyside (instructed by Linklaters & Paines) for Banque Bruxelles Lambert SA.

Stephen Tomlinson QC and Simon Brown QC (instructed by A E Wyeth & Co) for Zurich Insurance Co.

Stephen Tomlinson QC and Julian Field (instructed by Davies Arnold Cooper) for the Lloyd's syndicates.


Rix J: If a director, the managing director, of an incorporated firm of professional estate agents and valuers issues fraudulent valuations in his company's name, can the company recover under its professional indemnity cover from its underwriters on the basis that the dishonest mind and knowledge of its managing director are not to be attributed to it? That question lies at the heart of a number of preliminary issues which have been ordered to be tried on assumed facts in two actions in which different plaintiffs, having recovered judgment against the company for negligent valuations, are seeking to enforce those judgments directly against the company's underwriters under the Third Parties (Rights against Insurers) Act 1930, to be met by a defence of fraud.

The two plaintiffs are Arab Bank plc (“Arab Bank”), plaintiffs in action 1997 Folio No. 1575, and Banque Bruxelles Lambert SA (“BBL”), plaintiffs in action 1994 Folio No. 413. The underwriters and defendants in both actions are Zurich Insurance Co (“Zurich”).

The company is John D Wood Commercial Ltd, now in liquidation (“JDW”). The directors of the company had previously been partners in a firm but had incorporated their business on 9 December 1987. The company's share capital was divided into 3m ordinary shares of 10p each. Most, if not all, of the issued capital was in the hands of its directors.

I am concerned with a number of valuations made in 1989–1990, and with claims under the so-called “1990 policy” issued by Zurich (“the policy”). This covered the period 25 September 1990 to 24 September 1991. It was written subject to a written proposal dated 10 August 1990. The valuations in question were all made prior to that proposal, with the exception of one revised valuation which was issued on the same day as the proposal.

By letter dated 11 August 1992 Zurich purported to avoid the policy on various grounds and in particular because of alleged fraud by JDW's managing director, Mr Anthony Browne, in the making of those valuations. In due course Arab Bank and BBL obtained judgment against JDW for negligence: on 21 December 1993 BBL for £10,809,339.53 in respect of two London properties, Trevelyan House SW1 and Cambridge Circus WC2, and in June 1997 Arab Bank in respect of Piccadilly Plaza, Manchester, where damages are yet to be assessed. Claims in respect of other valuations failed.

In the meantime JDW had gone into liquidation on 3 February 1994. Arab Bank and BBL have therefore pressed their claims directly against Zurich under the 1930 Act.

The preliminary issues

The preliminary issues were ordered in both actions against Zurich in identical form by orders dated 17 December 1997. Those orders also made provision for the issues in both actions to be tried together. The issues are as follows:

  1. 1.(1) Whether JDW is a “person” within the meaning of the proviso in pt. 1, s. 1 (professional indemnity) of the policy dated 5 January 1991.

  2. (2) If so, whether the fraud and dishonesty of Mr Browne is to be imputed or otherwise attributed to JDW, such that JDW is a “person knowingly committing, making or condoning any dishonest, fraudulent or malicious act or omission” within the meaning of the proviso to pt. 1, s. 1 (professional indemnity) of the policy.

  3. (3) If so, whether...

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