The David Trust and Others v Aegis Insurance Company Limited and Another

The appellants were seven trusts and one partnership who were long-standing clients of a firm of chartered accountants, Katz Salber & Company. Katz Salber was mandated to administer and invest clients’ funds, including placing surplus monies in money-market accounts at approved banks. One partner, Lombard, over several years dishonestly misappropriated pooled client funds for his own purposes while producing fictitious statements. The fraud was discovered in 1994 when Katz Salber could not meet a demand for payment. Katz Salber and its partners were sequestrated and Lombard was convicted of theft. Katz Salber held a professional indemnity policy underwritten by the respondents. The appellants, relying on s 156 of the Insolvency Act 24 of 1936, sued the insurers directly to recover their losses, alleging that Katz Salber incurred liability to them arising from breach of mandate, negligence, and failure to account, which liability was covered by the policy.

The appeal was upheld. The order of the court a quo dismissing the appellants’ claims was set aside, and the insurers were held liable, subject to the policy limits and deductibles, to indemnify Katz Salber and thus the appellants in terms of s 156 of the Insolvency Act.

The case clarifies the scope of professional indemnity insurance for accountants, confirming that liability arising from breach of a mandate to administer and invest client funds can fall within professional cover, even where the immediate cause of loss is a partner’s dishonesty. It also affirms that, under s 156 of the Insolvency Act, third parties may recover directly from insurers where the insured’s liability is covered, and distinguishes professional mandates from deposit-taking or banking activities.