CGU Insurance Ltd v Porthouse [2007] NSWCA 80

The need for Insurers to keep their policy wording under constant review has been highlighted again in this recent decision of the New South Wales Court of Appeal. The particular context was a Professional Indemnity policy and an Insured's disclosure obligations under the Insurance Contracts Act 1984 (Cth) ('the Act')

Section 21 (1) of the Act says the following:

(1) An insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: 

    a. the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk, and, if so, on what terms; or 
    b. a reasonable person in the circumstances could be expected to know to be a matter so relevant.

The Facts of the Case

The Insured was a Barrister acting on a claim for personal injury who failed to ascertain that legislative amendments had the potential to deny his client's claim, if proceedings were not commenced by a certain time. The proceedings were commenced late, and although the District Court found that the amendments did not defeat the claim, that decision was later overturned by the Court of Appeal.

Sometime between the initial finding in the District Court and the different finding in the Court of Appeal, the Insured completed a professional indemnity policy proposal form with CGU Insurance. In completing the form, the Insured answered "No" to a question asking whether he was "aware of any circumstances, which could result in any Claim or Disciplinary Proceedings being made" against him. The policy also drew attention to the disclosure obligations under 21 (1) of the Act. CGU issued the policy.

Legal Issues

In the usual way, the claims-made policy excluded cover for "known claims" or claims arising from "known circumstances", defined in clause 11.2 of the policy as:

"Any fact, situation or circumstance which: 

    a. an Insured knew before this Policy began; or 
    b. a reasonable person in the Insured's professional position would have thought before this policy began,

might result in someone making an allegation against an Insured in respect of liability, that might be covered by this Policy."

It was determined by the primary Judge (and not challenged by CGU in their appeal) that the facts did not fall within the parameters of clause 11.2 (a) because the insured did not know that his client might make an allegation in negligence that might be covered by the Policy.

Accordingly, CGU's Appeal focused on clause 11.2 (b). In dismissing that Appeal, the Court of Appeal held that the exclusion clause did not apply because the Insured did not have the requisite knowledge.

In considering the spectrum of the meanings of "thought" and "might", the Court of Appeal said that it ranged from "believed that the circumstance might as a realistic possibility result in an allegation" down to "fleetingly thought that the circumstance might as a remote possibility result in an allegation". The Court construed the provision against CGU, such that cl 11.2 (b) required the former, rather than the latter, and CGU was liable.

The Court noted the differences in language between clause 11.2 and section 21 (1) of the Act. The Act does not refer to what a person "would" have thought, but rather to what a person "could reasonably be expected" to know. The Court found that conclusions about whether a person "would" have thought something can be approached by considering what an actual person did think, and then asking if that thought was unreasonable.

The Court also referred, in support, to the intention of section 40 (3) of the Act that an insured, should not be precluded from claiming under successive claims-made policies where notice of facts that might give rise to a claim has been given in accordance with section 40 (3) of the Act. Hodgson JA commented that "while I think a reasonable person in the professional position of the respondent may well have believed it appropriate to give notice under s 40 (3), I do not think it could be said that such a person would have believed it appropriate to do so".

Implications for PI Policies - it is certainly a risky business

This decision has re-affirmed the importance of careful policy drafting, in particular the need for precision in Exclusion clauses. More generally, Insurers' risk assessments always require careful individual analysis, of course, and part of any analysis has to acknowledge an element of uncertainty as to how particular wording might ultimately be interpreted by a court. If the proposed changes to other elements of the Insurance Contracts Act, particularly section 54, actually become law, insurers will likely suffer another period of uncertainty while those new requirements come to be interpreted by the courts! 


Colin Porter
Partner
Blackstone Waterhouse Lawyers
Phone: 61 2 8216 1515
cporter@blackstonewaterhouse.com.au