IAG will not have to pay an insurance broker’s professional indemnity (PI) claim after the New Zealand Court of Appeal ruled the policy does not cover dishonest conduct.

In 2009 broker John Jackson told clients Nicola and Jacques Marchand he had arranged insurance for their home, vehicles and business, but he had secured it only for their medical practice.

The clients discovered the failure when their house was badly damaged in the September 2010 Christchurch earthquake.

The court says the lack of cover was initially an oversight, but Mr Jackson assured the Marchands several times that he had placed cover with IAG-owned NZI, “apparently intending on each occasion to do so immediately”.

The couple sued Mr Jackson for their uninsured loss, and when the broker joined his PI insurer IAG to the case it cited a policy exclusion relating to dishonest conduct.

The Marchands have won a separate court case against Mr Jackson. That court found the reasons for not arranging the insurance are a mystery, “but it seemed that pressures of business, in combination with some reversals in health, overwhelmed Mr Jackson”.

Mr Jackson had Mr Marchand complete a high-value homes questionnaire for NZI and got a quote, but did not bind cover or invoice the couple for the premium.

Mrs Marchand rang Mr Jackson several times because she had not received an invoice but he assured her cover had been placed. When she made a $NZ649.20 ($570) claim in 2010, he had her fill out a claim form but paid it himself.

When the September 4 earthquake struck, Mr Jackson sent NZI an application form dated August 30, later saying he had not placed cover because the paperwork was filed incorrectly but he had meant to do it after Mrs Marchand’s phone calls. 

IAG rejected his PI claim, saying he was not insured for civil liability over a dishonest act.

In supporting IAG’s argument, the court says Mr Jackson admits he knew the assurances he gave the Marchands were false.

DLA Phillips Fox partner Grant Macdonald says the decision is consistent with the principle that people should not be able to insure against their own dishonesty, and clarifies when dishonest professionals may be refused indemnity cover.

In ruling on Mr Jackson’s PI cover, the court had to decide whether there was a connection between the dishonesty and the loss suffered by the Marchands.

It found that if the Marchands had known there was no insurance, they would have arranged it themselves, so there was a “causal connection” between the dishonesty and the civil liability.

If Mr Jackson had not lied about placing the cover, his PI policy would have covered him for the negligence, Mr Macdonald told insuranceNEWS.com.au.

It would even have covered him if he had lied after the earthquake, because there would be no connection with the loss through negligence.