Rouleston Clarke v FAI General Insurance Company


Supreme Court of Tasmania – 22 December 1999


Rouleston traded as a financial planning and investment advisement business. Badger was employed by Rouleston as a financial adviser and was responsible for receiving cheques from clients for investment in various funds.

Badger dishonestly converted some of these cheques for his own use and was eventually charged and convicted of theft charges. The clients who were defrauded made claims against Rouleston alleging fraud and negligence. Rouleston was insured by FAI and the relevant professional indemnity policy provided that Rouleston was covered for claims made by clients. The policy included optional extensions for dishonesty and fidelity. The claim limit on the insurance was $1,000,000.00 but the limit on fidelity claims was $250,000.00.

Rouleston made a claim under the insurance policy for indemnity for claims exceeding $685,000.00. FAI claimed that only the fidelity extension covered these claims and that its liability was limited to $250,000.00.


Was the claim by Rouleston a claim for indemnity for dishonest conduct or a claim for indemnity under the fidelity extension?


The dishonest conduct by Badger was covered by the fidelity extension and not by the dishonesty extension as the dishonesty extension did not cover the dishonest use of negotiable instruments by employees.


Evans J said

“In construing the proviso [dishonesty provision], it is to be borne in mind that it relates to claims for damages for the loss of specified items.

Claims for damages are only made where a financially measurable loss has been suffered. Whilst the physical loss of some of the specified items, such as bank or currency notes, will cause a financial loss, that is not always the case with some of the other items such as negotiable instruments.

When a negotiable instrument is physically lost, for example, destroyed or mislaid, it may readily be replaced without financial loss. It is when the negotiable instrument is converted to the use of another that financial loss is suffered. This suggests that loss means more than physical loss. Whilst physical loss of the items referred to can arise from conduct of this description, the sort of loss which is more readily linked to this sort of conduct is a detriment or disadvantage arising from the appropriation of the specified item to the use of an employee.”


Contract Managers should note that insurance policies may include limits on liability which may reduce the anticipated protection provided by insurance. If a contractor is to be covered by professional indemnity insurance the limits on indemnity should be noted.

FAI General Insurance Company v Australian Hospital Care


[2001] HCA 38

High Court of Australia – 27 June 2001


A former patient of the Hospital informed the Hospital that he contemplated bringing an action against the Hospital and its surgeon for negligent treatment given while he was a patient at the Hospital.

The Hospital did not inform its insurer, FAI of the potential claim because the matter was not pursued.

The former patient commenced proceedings against the Hospital the following year but the Hospital’s professional indemnity policy for negligence claims with FAI had expired and replaced with a new professional indemnity policy taken with Lloyd’s Underwriters.

FAI claimed that s54 of the Insurance Contracts Act 1984 (“the Act”) precluded it from being liable for claims made by the former patient which was outside the period of cover under the policy.


Whether FAI could refuse to pay for the former patient’s claim against the Hospital when the Hospital failed to notify FAI of the claim within the period of cover under the insurance contract.


The Hospital’s failure to notify FAI of the claim within the period of policy was an omission not consistent with the contract of insurance between the parties but section 54 of the Act precluded FAI from refusing to indemnify for claim.


McHugh, Gummow and Hayne JJ said:

“The effect of the contract of insurance is that FAI could refuse to pay the claim by reason only of the fact that the Hospital’s did not give notice of the occurrence to it. Section 54, therefore, requires the conclusion that FAI may not refuse to pay the Hospital’s claim.

The effect of the contract of insurance, but for s54, would be that the insurer may refuse to pay the Hospital’s claim by reason only of the omission of the Hospital to notify the occurrence which at the time was one which might subsequently give rise to a claim by the former patient against it. That being so the section is engaged.”


Section 54 of the Act operates to preclude the insurer from refusing to pay for a claim under the contract of insurance simply because the insured or third party failed to notify the insurer of the claim during the period of policy.

The insurer’s only recourse if its interests are prejudiced due to the failure to notify within the period of policy is to reduce its liabilities to the extent of its prejudice suffered.

In this case, FAI’s liabilities were not reduced because it did not suffer any prejudice as a result of the Hospital’s failure to notify the claim within the period of policy.