The Federal Court has ruled Chubb does not have to cover a $2 million employee theft claim made after client trust account funds were misused in an apparent attempt to keep afloat failing brokerage All Class.

The alleged theft involved the payment of client trust monies into the working account of All Class, where Leroy Bowmaker was the sole director, shareholder and company secretary from 2007 to February 2014.

Chubb was made aware of discrepancies in the trust account on March 27 2013 following the appointment of Mr Bowmaker’s wife as his power of attorney after he was admitted to hospital.

All Class was placed into external administration and “proof of loss” related to the trust account was later provided by the liquidator to the insurer.

A court order for $2.05 million comprising fraudulent payments and investigation expenses was sought on behalf of All Class after Chubb rejected a claim under a policy employee theft clause.

The denial grounds included non-disclosure by All Class, given that Mr Bowmaker was the “guiding mind and will” of the business and therefore All Class had knowledge of the fraudulent payments.

The insurer also argued Mr Bowmaker wasn’t an employee under the policy and was not stealing from the company as trust fund monies went into the brokerage’s working account and therefore All Class had sustained no direct loss.

Non-disclosure was said to have occurred when Mr Bowmaker completed the insurance application form in April 2012, two months before finalisation of the policy terms.

Chief Justice James Allsop found in a judgment last week that a significant part of the funds wrongly and dishonestly removed from the trust account were placed into All Class’ office account by Mr Bowmaker for the purpose of supporting the business of All Class.

“It is not possible on the material provided to draw any conclusion as to how much of the funds were actually taken wrongfully from the company by Mr Bowmaker for his own benefit,” Chief Justice Allsop said.

On the non-disclosure issue, Chief Justice Allsop said it was necessary to consider whether Mr Bowmaker’s knowledge of the misappropriations could be characterised as knowledge held by All Class that should have been passed through to Chubb.

The evidence showed Mr Bowmaker did not disclose his conduct in communications with Chubb and its broker network group Steadfast, and no other person was the “mind and will of the company”, the judgment finds.

“In particular because of Mr Bowmaker’s position as an insurance broker, there is no basis to think that the non-disclosure was other than knowingly false and, in all the circumstances, fraudulent,” Chief Justice Allsop says. “He could not but have known that his actions were dishonest, and that not to tell Steadfast in order that it could tell the insurers was dishonest.”

Chief Justice James Allsop judged that Mr Bowmaker was an employee in the context, but the misuse of clients’ funds had not amounted to a direct loss.

“The proper reading of ‘direct loss’ from theft or dishonesty or fraud is the removal from the accounts held by the company and the taking from the company, whether as trustee or not, of those funds,” he said.

“The evidence may ultimately reveal an amount of such theft. However, the wrongful and dishonest use of trust funds for use in the company’s business to prop it up or stave off financial disaster or difficulty is not direct loss of money of the company.”

Chief Justice Allsop ruled that Chubb was “entitled to avoid the policy for fraudulent non-disclosure”, or in the alternative, to reduce its liability to nil.

“As such the proceeding should be dismissed with costs,” he said.

The decision is available here.