Prospective insureds under professional indemnity policies
are often asked about "known circumstances" when
applying for cover - but what is a "known
circumstance"? This can be a crucial question when
insurers attempt to rely upon exclusion clauses. The High Court
today gave important guidance - and found in favour of the
insurer - in its decision in CGU Insurance Limited v Porthouse
 HCA 30 (30 July 2008).
The unhappy client and the barrister with professional
Mr Porthouse was a barrister who was sued for negligence. He
had not ascertained the effect of legislative amendments upon a
client's claim; the client won at trial, but the other
Between the success at trial and the appeal which found
against his client, Mr Porthouse filled in a proposal form with
CGU for professional indemnity cover.
Question 4 on the proposal form asked: "Are you aware
of any circumstances, which could result in any Claim or
Disciplinary Proceedings being made against you?", to
which he answered "No". The form also pointed out his
duty of disclosure under section 21 of the Insurance Contracts
Act. CGU issued a claims made policy.
At the time of filling in the proposal form, Mr Porthouse
knew that the other side had an arguable appeal point based on
the legislative amendments. He did not know the result of the
appeal. He did not think that his client might sue him for
negligence. When his client did precisely that, he turned to
his insurer, who pointed to the exclusion clause.
The exclusion clause, the reasonable person, and the
The claims made policy under which Mr Porthouse was insured
did not cover "known claims" or claims arising from
"known circumstances", defined 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
might result in someone making an allegation against an
Insured in respect of a liability, that might be covered by
The relevant part is (b), since Mr Porthouse didn't
have the actual knowledge of a claim by his client, as his
client hadn't actually sued him yet. Did Mr Porthouse
have knowledge in this sense?
To answer that question, the High Court pulled apart the
"Any fact, situation or
circumstance": this is a reference to objective
matters, not to a state of mind or belief.
"A reasonable person in the Insured's
professional position": this is an objective
test, and means a hypothetical reasonable person with the
insured's experience and knowledge, and the
reasonable person's capacity to draw a conclusion
(whether it is plain and obvious or not) as to the
possibility of someone making an allegation against the
"Would have thought... might result in someone
making an allegation": this asks whether the
hypothetical person would have concluded that there was a
real (not a fanciful or remote) possibility (not a certainty)
of an allegation being made.
"Before this Policy began": this
question is not limited to the period immediately before the
Policy, but any time before it began.
So putting this all together, Mr Porthouse's
subjective belief as to whether he was about to be sued is only
relevant as evidence of what a reasonable person in the
insured's professional position "would have
thought" - and that can be rebutted by other evidence of
what the reasonable barrister would think.
For insurers, this decision is an important one. As the High
Court noted, this sort of exclusion clause mirrors the test of
disclosure in section 21 of the Insurance Contracts Act, and is
intended to protect the insurer from claims where disclosure is
inadequate because the insured is unreasonable, idiosyncratic
or obtuse. Of course, every exclusion clause turns on its
wording, so it's advisable to review your policies and
proposals in the light of this decision to ensure that you are
asking the right question.
For insureds, this decision is an important reminder about
their duty of disclosure, both under the Act and under the
policy. It's crucial that they think outside the square
when answering questions on proposals. As the High Court
pointed out, the question is not whether you think you will be
successfully sued, or whether any allegation is reasonable -
it's what a reasonable person in your professional
position would conclude. Failure to answer this question
properly could be an expensive error.
The content of this article is intended to provide a
general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The failure of a party to call a witness does not necessarily give rise to an adverse inference being drawn in accordance with Jones v Dunkel (1959) 101 CLR 298. An unfavourable inference is drawn only if evidence otherwise provides a basis on which that unfavourable inference can be drawn.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).