Focus: Insurance – March 2003
S54 versus s40 – Insurance Contracts Act NSW
In brief: In a recent decision in New South Wales in Gosford City Council v GIO General Ltd, the Supreme Court refused to apply section 54 of the Insurance Contracts Act to an insured's failure to exercise a right conferred by s40(3). On 7 March this year, the Court of Appeal dismissed an appeal by Gosford Council and Senior Associate Mark Lindfield outlines the Court of Appeal's reasons.
Background to the Act
Section 54 of the Insurance Contracts Act 1984 (NSW) (the Act) operates to prevent an insurer from relying on a term of a contract of insurance that would allow the insurer to refuse a claim for the sole reason of an act, error or omission of the insured. Instead, the insurer may reduce the claim to the extent of the prejudice it has suffered. Section 40 of the Act provides that if an insured becomes aware of circumstances that might give rise to a claim and, during the period of insurance, notifies those circumstances to the insurer, the insurer is not relieved of its liability to pay the claim solely because it arose after the period of insurance.
Recent decisions on the possible interaction of ss40 and 54 have considered whether s54 can operate to excuse a failure to notify circumstances under s40 within the policy period.
In June 2001, the High Court of Australia ruled in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd1 that, by operation of s54, where a policy provides indemnity for claims made and circumstances notified during the policy term, late notification of circumstances by the insured does not entitle the insurer to decline indemnity on the basis of the insured's omission.
Four months later, the Queensland Supreme Court handed down its decision in CA & MEC McInally Nominees Pty Ltd & Ors v HTW Valuers (Brisbane) Pty Ltd & Ors.2 The policy in that case differed from the one considered by the High Court in Hospital Care because it was a 'claims made' policy and not a 'claims made and circumstances notified' policy. That is, the policy in McInally did not expressly provide an indemnity to the insured for claims occurring after the policy period that arose from circumstances notified within the policy period. The Supreme Court found that an insured cannot rely both on s40 to imply a term into an insurance policy and on s54 to excuse non-compliance with that term. It held that s40 does not imply a term into the policy but confers statutory rights on an insured only where the insured meets the criteria contained in that section.
The facts in Gosford City Council v GIO General Ltd3 concerned a 'claims made' professional indemnity insurance policy issued for the period 30 June 1988 to 13 December 1991. Gosford Council notified its broker of circumstances potentially giving rise to a claim within the policy period but the broker failed to pass on the notification to GIO, the Council's insurer. A claim subsequently arose from those circumstances, which the Council settled. However, citing the late notification of the claim, GIO refused to indemnify the Council for expenses incurred in the settlement.
Decision at first instance
In the New South Wales Supreme Court, Justice Bergin rejected the Council's argument that s40 of the Act implied into the policy of insurance a term that operated in a similar way to a 'circumstances notified' clause and that s54 could cure a failure to comply with that term. Justice Bergin applied the same reasoning as the Court in McInally. That is, if s40 had been intended to operate in that way, that would have been made clear in the Act, which it was not. Further, s54 would have been drafted to relieve an insured in clear terms from a failure to exercise a right conferred by s40, if that had been the intention of the drafters of the Act.
The appeal
Gosford Council appealed the decision. However, rather than the 'deeming clause' submission that it had pursued initially, on appeal the Council argued that the combined effect of ss40 and 54 was that the policy was transformed into a 'discovery policy', that is, a policy that provides indemnity for claims made after the policy period arising from circumstances notified during the policy period. The policy in Hospital Care, for example, was a discovery policy.
Justice Sheller, with whom Chief Justice Spigelman and Justice Meagher agreed, quoted extensively from Hospital Care in dismissing the appeal. Justice Sheller found that it was important to distinguish between a claim made after the policy period and a claim made during the policy period but not notified to the insurer within that period. In the latter case, s54 may assist an insured when faced with an insurer's refusal to pay the claim as a result of the late notification. However, Justice Sheller held that s54 does not permit reformulation of a claim and does not relieve an insured of restrictions or limitations inherent in the claim.
In the circumstances of the claim against the Council, the claim was not made within the period of insurance, which was a criterion of the indemnity offered by the insurer. That fact was, the Court of Appeal held, decisive unless s40 applied. As the Council had failed to comply with the requirements of s40, by failing to notify the insurer of the circumstances within the policy period, that section was not able to be invoked and the claim was not within the policy.
Policy review?
This decision re-affirms the approach taken by Justice Bergin in the original ruling and the approach of Justice Chesterman in the matter of McInally. Accordingly, where a 'claims made policy' does not contain a 'deeming clause', s54 will not operate in conjunction with s40. In such a situation, insureds must ensure that they notify their insurer of circumstances that might lead to a claim within the policy period. For insurers this decision would make it worthwhile considering redrafting the policy wording to limit it to a 'claims made' rather than a 'claims made and circumstances notified' wording.
References
For further information, please contact:
- Oscar ShubPartner,
Sydney
Ph: +61 2 9230 4305
Oscar.Shub@aar.com.au - Simon McConnellManaging Partner - Hong Kong and China,
Hong Kong
Ph: +852 2840 1202
Simon.McConnell@aar.com.au - Jenny ThorntonPartner,
Perth
Ph: +61 8 9488 3805
Jenny.Thornton@aar.com.au
