Mr Lynch was the general manager of a mortgage broking company called QI. Lynch persuaded Mr & Mrs Smart (the plaintiffs) to invest in several short term loans and represented that he would lend the plaintiffs’ money to borrowers for a period of three months and that the plaintiffs would then be repaid the loans plus interest.

The plaintiffs invested a total of $267,000 between July 2007 and October 2007. By May 2008 the plaintiffs’ loans had not been repaid and they demanded that their money be repaid.

It was ultimately discovered that Lynch had never arranged for the money to be lent to QI’s clients and indeed that the clients never existed. It was found that Lynch stole the funds invested by the plaintiffs.

In 2009 QI was declared insolvent and was deregistered. The plaintiffs’ final hope was to recover their investments under QI’s professional indemnity insurance policy. The plaintiffs therefore made an application under s.601AG of the Corporations Act 2001 (Cth) to bring a claim directly against QI’s insurer.

The insuring clause in the policy provided ‘claims made’ professional liability cover.

‘Claim’ was defined as follows:

Claim means any demand by a third party upon the Insured for compensation, however conveyed, including a writ, statement of claim, application or other legal process.

The Court accepted that at some time before the policy period expired the plaintiffs notified QI that they wanted their money returned. The Court also accepted that QI was liable for breach of contract to pay the plaintiffs compensation by way of damages. However, the Court determined on the evidence that at no time prior to expiration of the policy period did the plaintiffs make a ‘Claim’ as defined by the policy.

In making its decision the Court noted that ‘Claim’ was defined in the policy to mean a claim for compensation. The Court highlighted that a claim for restitution should be distinguished from a claim for compensation. The plaintiffs’ demands on QI prior to May 2008 were to get their money back.  Such demands were for restitution rather than compensation. In fact the plaintiffs did not make a claim for compensation until quite some time after the policy expired. The Court therefore determined that the policy did not cover QI’s liability to the plaintiffs and declined to grant the plaintiffs leave to pursue an action against the insurer.

Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd

‘Claims made’ policies continue to be problematic for third parties wanting to claim on them directly.