Perpetual Trustees Victoria Limited v Malouf  NSWSC 1119
|Judgment date:||31 October 2012|
|Jurisdiction:||Supreme Court of New South Wales1|
- Pursuant to s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the Act) a claimant may, with leave of the court, proceed directly against an insured's professional indemnity insurer.
- Section 6 is triggered on the happening of an "event" that gives rise to the claim.
- The court will refuse to grant leave when the relevant event happened before the policy's inception, even in claims made policies.
- The courts have considered that the happening of the event to be the moment when the cause of action is completed.
Albert Malouf borrowed on his parents' house to invest in the short term loan market. The money was lost and Perpetual Trustees Victoria Limited (Perpetual), the lender, sought possession of the house.
In May 2004, the parents attended their solicitor's office, Mr Goldberg, where they signed certain documents, the contents and effect of which were not explained to them. They later learned that as a result of the signed documents:
- Mrs Malouf was no longer an owner of the property;
- Albert had become a tenant in common with his father; and
- a mortgage of $700,000 had been placed over the property.
The advance of $700,000 was paid to Albert out of Mr Goldberg's trust account in June 2004.
On 3 June 2004, Albert agreed to advance the sum of $700,000 to George and Habib Farah, who had interest in a group of companies that owned various restaurants (the Farah Group). The Farah Group defaulted in repayment of the $700,000 to Albert. Without these funds, Albert and Mr Malouf had fallen into default under the mortgage granted to Perpetual.
In the substantive proceedings, Mr & Mrs Malouf and Albert cross-claimed against Mr Goldberg, claiming that Mr Goldberg did not explain the nature and effects of the document that they signed.
Mr Goldberg has ceased to practise as a solicitor and cannot be found. On 15 July 2004 the Law Society cancelled his Practising Certificate.
From 1 July 2006, LawCover Insurance Pty Ltd (LawCover) insured solicitors who ceased to practise for claims made against them after this date (the Policy). The Policy was a "claims made" policy meaning that coverage is triggered by the date the insured first became aware of the possibility of a claim.
Previously an Application to join LawCover pursuant to s 6 of the Act was brought by Mr & Mrs Malouf. The Motion was heard by McCallum J 2 . Her Honour determined that the event giving rise to the claim against Mr Goldberg, that is, the suffering of the loss by Mr & Mrs Malouf, was suffered before 30 June 2006. The result was that the procedure under s 6 was not available because the event giving rise to the liability of the insured occurred before the entry into the Policy.
Albert also made an application to join LawCover pursuant to s 6 of the Act. This case is in relation to Albert's Application.
Sub-section 6(1) refers to "the happening of the event giving rise to the claim for damages for compensation". Davies J noted that the wording of the section means that the statutory right provided by s 6 arises on the happening of the "event" giving rise to the claim against the insured. The relevant event is whatever completes the plaintiff's cause of action.
This is consistent with the NSW Court of Appeal's decision in Owners-Strata Plan No 50530 v Walter Construction Group Limited (In Liquidation) 3 , where the Court unanimously held that a right to pursue an insurer pursuant to s 6 of the Act did not arise when the event happened before the inception of the relevant policy. This was despite the fact that the policy was a claims made and notified policy which contained a provision for unlimited retroactive cover.
The principal issue to be determined in this matter was whether the event giving rise to the liability arose prior to the Policy's inception on 1 July 2006. His Honour considered that if it arose before the inception of the Policy leave should be refused. Albert contended that the event was the sale of the property which occurred on 6 October 2006. LawCover submitted that the event was Mr Goldberg's breach of his contract of retainer in 2004 when the loan was first made. It submitted that the fact that a cause of action in negligence may not have become complete until a later period of time (when damage was suffered) was irrelevant because s 6 is simply concerned with "the happening of the event giving rise to the claim for damages".
LawCover also submitted that if the time for suffering damage was the relevant date, this was in about December 2005 when Albert defaulted in repayments, or alternatively in April 2006 when recouping the money from Albert was impossible.
The policy was a "claims made" policy. There was no dispute that Mr Goldberg was served with Albert's cross-claim on 14 March 2007, which was within the Policy period.
His Honour held that if the allegations are established and Mr Goldberg is found liable for breach of his retainer with Albert, the breach took place in 2004 when the loans were made. The cause of action to which the policy responds is complete on the breach. His Honour held the event therefore occurred in 2004 prior to the inception of the Policy.
His Honour considered that it was irrelevant that the tort of negligence arising from the same matters may not be complete until a later time because damage had not been suffered.
His Honour therefore concluded that the Policy was not in existence at the time of the happening of the event which gave rise to the claim for damages and therefore the Application to join LawCover pursuant to s 6 of the Act was refused.
This is despite the fact that in a claims made policy the policy is not triggered until notification of a claim is made in respect of the event.
The decision illustrates that the language of s 6 of the Act creates a statutory right to join an insurer on the happening of the event giving rise to the claim against the insured. Should the event happen prior to policy inception, then the Application will be refused.
The language of s 6 of the Act is consistent with "occurrence" based policies, meaning policies in which it was the happening of an "event" during a policy period which activated or triggered coverage.
It is not the happening of an event which triggers coverage under a "claims made" policy. It is the notification of the claim against the insured. The event which triggers the operation of s 6 of the Act may often occur before policy inception and there may be many cases where a claimant will not be able to proceed directly against a professional indemnity insurer under s 6.
The language of s 6 of the Act is clearly inconsistent with "claims made" policies which are now typical in professional indemnity insurance. In such circumstances it is possible that, although indemnity would be available under a policy, an insurer can avoid being joined to the proceedings pursuant to s 6 as the event occurred prior to the policy's inception.
To succeed in an application to join an insurer pursuant to s 6 in respect of a "claims made" policy, a plaintiff must therefore establish that both the event and claim occurs after policy inception. This appears largely inconsistent with the purpose of s 6 of the Act and it will be interesting to see whether the wording of the section will be amended to reflect this.
This anomaly may be cured in respect of a corporation by joining an insurer pursuant to s 601AG of the Corporations Act. This provides that a person may recover from the insurer of a company that is deregistered as long as:
- the company had a liability to the person; and
- the insurance contract covered that liability immediately before deregistration.
In relation to a bankrupt individual, s 117 of the Bankruptcy Act 1966 provides that where a bankrupt was insured under a contract of insurance against liability to third parties and such a liability has been incurred, the bankrupt's right to indemnity vests in the trustee and any amount received by the trustee from the insurer under the policy shall be paid in full to the third party. However, a limiting feature of this section is that it does not provide third parties with a direct cause of action against an insurer.
Section 51 of the Insurance Contract Act also provides that in respect of liability insurance, if an insured has died or cannot be reasonably found and a policy provides insurance cover in respect of the liability, then the third party may recover from the insurer.
The terms of these sections do not require an event to occur during the policy period and insurers will need to remain wary of alternative remedies in some cases.
1 Davies J
2 Perpetual Trustee Victoria Limited v Malouf  NSWSC 834
3 (2007) 14 ANZ Insurance Cases 61-734
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