Kirby P observed in GIO General Ltd v Newcastle City Council  38 NSWLR 558 at 568 that "the term 'professional' in the context of professional indemnity insurance today is very broad. This is evidenced by the very large range of policies which are written for such insurance". Cases dealing with the term invariably note that the meaning of the term will vary with the context in which it is used. Both these points were made in Kyriackou v ACE Insurance Ltd  VSC 214, which dealt with the meaning of "professional capacity", but the outcome of the case suggests that a professional indemnity insurance policy may be issued in the absence of any professional activity.
ASIC commenced court proceedings against K, a company director, and other parties, claiming that they had been involved in promoting and operating an unregistered managed investment scheme. The proceedings were subsequently discontinued.
K was insured against "Loss arising and Claim[sic] in respect of civil liability for breach of duty owed in a professional capacity. . .". "Claim" was defined in the relevant policy as:
a written demand for, or an assertion of rights to, civil compensation or civil damages . . .
while "Loss" was defined as all amounts payable by the insured or insurer:
as civil compensation or civil damages in respect of a Claim, including . . . payments for Defence Costs.
K sought indemnity from his insurer in respect of his legal costs in defending the proceedings. The insurer declined, arguing that there had been no "Claim" and that K's loss was not "for breach of duty owed in a professional capacity".
The court held that there was no "Claim", as ASIC had only sought winding up orders, orders that K do certain things (such as pay liquidators' costs) and orders that K not do other things (such as promote the scheme). No civil compensation or civil damages were sought. It followed that K was not entitled to be indemnified.
The court also held that, even if damages or compensation had been sought, K would not be entitled to succeed because the proceedings had not involved breach of a duty owed in a "professional capacity". ASIC had proceeded against K in his capacity as an entrepreneur in the management of the relevant companies and management and promotion of the scheme. On this characterisation, K's activities were in the commercial sphere, and not the professional realm.
While the court purported to take a broad view of the term "professional capacity", it still concluded that K had not been acting "in a professional capacity".
Determining what is done in a "professional capacity" when an insured falls into one of the established categories of profession, such as law or accounting, may be relatively straightforward. In other cases, such as this one, the dividing line between what is and what is not professional is less clear, and it is arguable that a different approach is required. For instance, the distinction between activities that are "professional" and activities that are "entrepreneurial" (or "commercial") may be valid where the party is a solicitor (eg Solicitors' Liability Committee v Gray (1997) 77 FCR 1), but less valid where the party is a scheme promoter.
While the court in Kyriackou purported to give broad scope to the meaning of "professional capacity", query whether the approach taken by the court left the policy with any work to do. If the policy did not respond to K's activities as a manager, promoter and operator of the scheme, and these were the only activities undertaken by K, when would it have responded?
The construction of professional indemnity insurance policies is of particular relevance to the protection offered to clients of financial service providers. This issue was considered in the recent "Compensation arrangements for consumers of financial services" report prepared as part of the Government's Future of Financial Advice (FOFA) reforms. We consider this report elsewhere in this update.