Skip to content.

Home

Allens Arthur Robinson

Focus: Insurance & Reinsurance – August 2008

The cost of ignoring 'known circumstances'

In brief: Partner Louise Jenkins (view CV) and Senior Associate Andrew Maher comment on a recent High Court decision in CGU Insurance Ltd v Porthouse, concerning the operation of a 'Known Circumstance' exclusion in a professional indemnity insurance policy. The decision highlights the broad application of 'Known Circumstance' exclusion clauses in claims-based liability insurance policies and reminds insureds of the importance of timely identification and notification of circumstances that may give rise to future claims.

How does it affect you?

  • For insurers, the decision reinforces the broad protection that 'Known Circumstance' exclusions afford you against indemnity claims arising from the prior conduct of insureds.
  • For insureds, it is important that you regularly and carefully reflect on your conduct to identify potential claims and then notify those circumstances to your insurers in a timely way. The adoption of cautious circumstances notification practices can assist you to avoid being denied cover for claims that subsequently arise from those circumstances.

The facts of CGU Insurance Ltd v Porthouse

In June 2001, Anthony Porthouse wrongly advised his client, James Bahmad, that the Workers' Compensation Act 1987 (NSW) (the Act) did not apply to Mr Bahmad's proposed damages claim against the New South Wales Department of Corrective Services (the State) for an injury he sustained while performing community service. Later that year, the Act was amended to preclude damages awards for injuries that did not satisfy a 15 per cent permanent impairment threshold (the amendment). The amendment did not apply to proceedings commenced before 27 November 2001.

Mr Bahmad's injury did not satisfy the 15 per cent threshold and his proceeding was not filed until 11 December 2001. At trial, the New South Wales District Court decided that the amendment did not apply to Mr Bahmad's claim and awarded him damages. The State appealed.

Before the appeal was heard, Mr Porthouse obtained a professional indemnity insurance policy from CGU Insurance Limited (CGU), for the period 30 June 2004 to 30 June 2005 (the policy). The policy contained a 'Known Circumstance' exclusion (the exclusion) that excluded cover for claims arising from a 'Known Circumstance', being:

Any fact, situation or circumstance which:

  1. an Insured knew before this Policy began; or
  2. 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 a liability, that might be covered by this Policy.

In August 2004, the State's appeal was successful and Mr Bahmad's damages award was reversed. Mr Bahmad later successfully sued Mr Porthouse for negligence.

Mr Porthouse claimed indemnity under the policy for his liability to Mr Bahmad. CGU, relying on the exclusion, declined Mr Porthouse's claim. Mr Porthouse then commenced a proceeding against CGU. Mr Porthouse succeeded at trial and on appeal to the New South Wales Court of Appeal. CGU then appealed to the High Court.1

Return to top

The High Court decision

The earlier finding that Mr Porthouse had not known, before the policy commenced, that Mr Bahmad might make an allegation of negligence against him was not challenged. Instead, the High Court considered the proper construction of the second limb of the exclusion and, in particular, the phrases 'a reasonable person in the Insured's professional position' and 'would have thought ... might result in'.

On the meaning of the phrase 'a reasonable person in the Insured's professional position', the High Court decided that it 'posits an objective standard, with a modification relating to professional, not personal, matters'. The court observed that the phrase 'describes a hypothetical reasonable person with the experience and knowledge of the insured coupled with the capacity of such a reasonable person to draw a conclusion (whether it is plain and obvious or not) as to the possibility of someone making an allegation against the insured'. Neither the language nor the context of the policy permitted imputing to the 'reasonable person' the insured's 'personal idiosyncrasies or ... state of mind', which may, in fact, be unreasonable.

On the meaning of the phrase 'would have thought ... might result in', the court decided that the hypothetical reasonable person must conclude that there was a 'real (not fanciful or remote) possibility (not a certainty) of an allegation being made'.

Ultimately, the High Court decided that 'there can be no real doubt [on the undisputed facts of the case] that a reasonable barrister ..., who knew of the potential for the effect on his client's case of [the amendment], and who knew of the appeal and of his role in creating his client's problem, would have thought that there was a real possibility that an allegation might be made in respect of a liability which might be covered by the policy'. Consequently, the High Court allowed the appeal and entered judgment for CGU.

Return to top

What does this mean?

This decision demonstrates that a 'Known Circumstance' exclusion in a claims-based liability insurance policy can deprive an insured cover for a claim that arises from circumstances existing before the insured's policy commenced. Importantly, this is so even where the insured did not know, at that time, that it was possible that a claim might arise from those circumstances. All that an insurer need prove is that a reasonable person in the insured's position would have thought, before the policy commenced, that a future claim was possible.

This decision reinforces the broad protection that 'Known Circumstance' exclusions afford insurers concerning the prior conduct of insureds. It also highlights the importance of insureds regularly and carefully reflecting on their conduct to identify potential claims and then notifying those circumstances to their insurers in a timely way. Those notifications can be made under section 40(3) of the Insurance Contracts Act 1984 (Cth) or, in some policies, particular notification provisions. Ultimately, the adoption of cautious circumstances notification practices can assist insureds to avoid outcomes of the kind described in this case.

Footnotes
  1. CGU Insurance Limited v Anthony Porthouse [2008] HCA 30, 30 July 2008.

Return to top

For further information, please contact:

Return to top

Bookmark with

What are these?

Recent Insurance & Reinsurance publications