Law Report: Bank's insurance policy did not cover theft

A bank's insurance policy which covered loss through theft committed by persons present on the bank's premises contemplated theft by a thief who was physically present on its premises.

The House of Lords (Lord Steyn dissenting) allowed an appeal by the appellant underwriters and restored Mr Justice Hobhouse's order that the bank was not entitled to claim for a loss by theft under its insurance policy.

A company, Wallace Smith Trust Co Ltd, was a customer of the bank with a secured credit line of pounds 9m. Wallace Duncan Smith, the chairman of the company, arranged a variation of the credit terms whereby the bank would allow the company to take possession of the securities until close of business on any day in exchange for a letter of undertaking by the company that it would produce acceptable securities to the bank by the close of business that day.

A junior employee of the company went to the bank's premises, handed over a letter signed by Mr Smith on behalf of the company undertaking to deliver specified securities and the original securities were handed over to the employee. The alternative securities were never delivered. The company was wound up and Mr Smith was charged with fraudulent trading. The bank was never repaid the pounds 9m.

The bank claimed against the underwriters under clause 2 of its insurance policy, which covered the bank against losses "On premises": "By reason of . . . theft, larceny or false pretences, committed by persons present on the premises". Mr Justice Hobhouse decided that the theft was not committed by persons present on its premises within clause 2, since the theft was committed by Mr Smith and through him by the company and the only person on the premises was the employee who was not alleged to have committed any criminal offence. The Court of Appeal (Lord Justices Waite and Peter Gibson, Lord Justice Staughton dissenting) allowed the bank's appeal on the basis that the company was present on the bank's premises through its employee who did the act of appropriating the securities.

Gordon Langley QC and Guy Philipps (Berwin Leighton) for the underwriters; David Donaldson QC and Rory Phillips (Herbert Smith) for the bank.

Lord Keith said that the reason why the company was guilty of theft was that its directing mind and will, Mr Smith, was himself guilty of theft. If there had been no company involved and if it had been Mr Smith as an individual to whom the bank had granted the loan, so that the theft was committed by Mr Smith alone, then it could not be said that Mr Smith was present in the bank when the securities were uplifted by the employee.

If Mr Smith himself had taken delivery of the securities in the premises of the bank, the company, as well as Mr Smith, would have been criminally liable for theft, and it could be said that the company had been present in the premises of the bank within clause 2. But the company's liability would be irrelevant, since the theft would in any event had been committed by a real live person on those premises. Where Mr Smith could not be said to be in present on the bank's premises then neither could that be said of the company.

The purpose of clause 2 was to limit in some way the liability of the underwriters for theft from the bank, such as abstraction by electronic means. What was in contemplation was a theft by a real live person in the bank.

Lord Lloyd, agreeing, said that no doubt the bank could, by paying an increased premium, have covered itself against theft by electronic transfer. But it might have decided to pay a lower premium and limit the cover to thefts by persons actually on the premises.

Lord Nicholls, agreeing, said that the words in clause 2 were not satisfied by the presence of some innocent person acting on behalf of the person committing the theft.

Lord Steyn, dissenting, said that clause 2 was intended to introduce an element of physical presence on the premises. The bank's interpretation was loyal to that objective: the company was present through its duly authorised agent.

Lord Hoffmann said that "persons present on the premises" was not intended to refer to companies at all.