Banks and other financial institutions usually rely on internal controls to prevent or identify dishonesty by employees. However, given the often large sums of money at stake, if the internal controls fail the consequences can be catastrophic.

Fidelity insurance may be available where employees have control over funds and, therefore, the opportunity to defraud their employers. In the recent New Zealand Court of Appeal case of Vero Liability Insurance Limited v Heartland Bank Limited (formerly Marac Finance Limited) [2015] NZCA 288, Marac held a Crime Insurance policy with Vero, which was a form of fidelity insurance providing cover for loss caused by acts of dishonesty committed by employees. At issue was whether Vero was liable to indemnify Marac under that policy.

Marac succeeded in the High Court. However, on appeal, the Court of Appeal held that Vero was not liable because the dishonest acts had not been committed with the clear intent to cause Marac a loss (and because Marac had not suffered any additional loss during the relevant period of cover under the policy). On 3 November 2015, the Supreme Court declined leave to appeal against the Court of Appeal's decision.

The unauthorised lending

Marac provided finance facilities to Rapson Holdings Ltd, a distributor of motor vehicles. In 2002, Marac appointed one of its employees, Mr Atkinson, to take responsibility for managing Rapson's account.

In October 2003, Mr Atkinson opened a new account, under which he made advances to Rapson that often exceeded his delegated authority. Mr Atkinson concealed from Marac's credit committee and board the fact of the new account and the advances. In 2010, Marac discovered the unauthorised advances and made a claim under its Crime Insurance policy. Rapson subsequently went into liquidation owing over NZ$4 million to Marac under the new account.

In essence, to be indemnified under the policy Marac had to establish that Mr Atkinson had acted dishonestly and with the clear intent to cause Marac a loss.


The Court of Appeal confirmed that a person is dishonest if they do not act in a way that an honest person would act and that:

…although a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant's mental state would be described as dishonest, it is irrelevant that the defendant has different standards and does not appreciate that his conduct, by ordinary standards, would be regarded as dishonest.

The High Court found that, although Mr Atkinson had not set out to deceive Marac from the beginning, by 2005 he realised that what he had done was beyond his authority and that he would be in very serious trouble if Marac's credit committee came to know of the increased exposure. At that point, an honest person would have come clean about the problem to his superiors. However, Mr Atkinson did not tell his superiors about the unauthorised lending. Instead he continued to make further advances, which he knew he was not authorised to make. On that basis, both the High Court and Court of Appeal held that Mr Atkinson had acted dishonestly.

Clear intent to cause Marac a loss

The High Court concluded that Mr Atkinson had acted with a clear intent to cause Marac a loss. The Court of Appeal disagreed. In relation to the meaning of "clear intent", in the Court of Appeal it was accepted that:

In every case it is a question of fact as to whether the employee intended to cause loss. But proof of intent to cause loss does not require proof that the employee also desired that outcome.

The Court of Appeal concluded that Mr Atkinson's dishonesty lay in his attempts to avoid the credit committee discovering that the advances he had made exceeded his delegated authority, so as to reduce the risk of dismissal or internal discipline. Mr Atkinson had not recognised the inevitably of loss through his actions. Mr Atkinson's conduct was directed towards recovery of Marac's debt, rather than an intention to cause loss. Accordingly, Vero succeeded with its appeal.


The case highlights that fidelity insurance will usually be limited to classic embezzlement cases, where the employee's gain is inevitably the employer's loss. This reinforces the need for appropriate internal controls to ensure that employees do not engage in unauthorised lending or trading.