Australia: Insurance - Professional Indemnity - Exclusion Relating To Known Claims And Known Circumstances

CGU Insurance Limited -v- Porthouse [2008] HCA 30

Gummow, Kirby, Heydon, Crennan and Kiefel JJ

In Brief

• Professional Indemnity Insurance.

• The response to a question in a proposal requiring disclosure of any circumstance which a reasonable person in the insured's professional position would have thought might result in an allegation of a liability that might be covered by the policy must be judged objectively to determine whether a hypothetical reasonable person in the same professional position of the insured ("standing in his shoes") would have thought that there was a reasonable (not a fanciful or remote) possibility (not a certainty) of an allegation being made.

• The disclosure must be of "allegations" and therefore does not require insured to make a judgement as to whether the claim is likely to be successful.

Background Circumstances

• A barrister was found liable to a personal injury plaintiff client (who had sustained injury performing community service whilst on parole) because he wrongly advised that the plaintiff's claim was not covered by the Workers Compensation Act.

• The Crimes (Administration of Sentences) Act 1999 provided that the relevant provisions of the Workers Compensation Act applied to any award of damages in respect of personal injury incurred while involved in community service work.

• On 27 November 2001 amendments to the Workers Compensation Act came into effect which prohibited the awarding of damages unless the injury resulted in a degree of permanent impairment that was at least 15%. This amendment applied to proceedings commenced on or after 21 November 2001. This proposed amendment had become well known in New South Wales prior to November 2001.

• It was not contested that the plaintiff's injury was serious but not a 15% impairment. He would have been able to prosecute a claim for damages under the law prior to November 2001 but, so it was found, could not do so thereafter.

• The barrister gave advice in June 2001 and on 26 November 2001 was instructed to draft a Statement of Claim. He did so on 6 December 2001 and it was filed on 11 December 2001.

• In November 2002 the solicitors for the defendant wrote to the solicitors for the plaintiff advising that the injury did not reach the 15% threshold required by the 2001 amendment.

• The plaintiff's case proceeded firstly to arbitration (4/11/02) and then to a re-hearing before a judge of the District Court (29/8/03). Both decisions were in favour of the plaintiff and an award of damages was made on the basis that the plaintiff's claim was covered by the provisions of the Workers Compensation Act as it stood prior to the 2001 amendments. The defendant appealed and on 27/8/04 the Court of Appeal set aside this judgment and awarded judgment for the defendant on the basis that the 2001 amendments applied.

• In March 2005 the plaintiff commenced proceedings against the solicitor and barrister. The barrister's insurer denied liability to indemnify and was added to the proceedings by cross-claim.

The Policy

• The insurance policy indemnified the insured for the period from 30 June 2004 to 30 June 2005 for civil liability to any third party which is incurred by the insured in the conduct of his business as a barrister. The information given by the insured in the proposal was included in the policy (by its terms) and was therefore part of the contract of insurance.

• The policy contained an exclusion which, summarised relevantly for present purposes, is as follows:

" We do not cover any of the following Claims (or losses);

6.1 Known Claims and Known Circumstances:

(a) ...]

(b) Claims (or losses) arising from a Known Circumstance, or

(c) Claims (or losses) directly or indirectly based upon, attributable to or in consequence of any such Known Circumstance or Known Claims (or losses). "

• The term "Known Circumstance" was defined in the policy as follows: " 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 a liability, that might be covered by this Policy. "

• The proposal was completed on 20/5/04. A question in the proposal asked:

"Are you aware of any circumstances, which could result in any Claim or Disciplinary Proceedings being made against you?"

• The respondent answered "no".

• The proposal contained a statement that the policy did not provide cover in relation to "facts or circumstances (of) which you first became aware prior to the period of cover, and which (you) knew or ought reasonably to have known had the potential to give rise to a claim under this policy."

District Court Decision

• The District Court found that the barrister did not know before the policy began, any fact which might result in someone making an allegation against him. Accordingly, the District Court found that the first limb of the definition of "Known Circumstance" that related to the exclusion did not apply. This finding was not subsequently challenged.

• The District Court further found that a reasonable person in the position of the barrister would not have thought that a claim would be made against him having regard to the barrister's state of mind at the relevant time. The District Court ordered that the insurer indemnify the barrister.

Appeal to Court of Appeal

• The Court of Appeal dismissed the insurer's appeal by majority. The issue argued before the Court of Appeal was whether the District Court judge erred by considering the subjective state of mind of the barrister when construing and applying the second limb of the definition of "Known Circumstance".

• Hodgson JA considered that the question of what a reasonable person in the barrister's professional position would have thought before the policy began could be approached by considering what the actual insured did think and asking if this was unreasonable.

• Young CJ in Eq took the view that whilst the relevant test was objective he considered that how people in the relevant industry are accustomed to act forms part of the material to be considered when making an objective assessment. He concluded that in his view a reasonable person in the barrister's professional position would not have thought that the plaintiff might make an allegation against him in respect of a liability covered by the policy.

High Court Appeal

• The appeal was allowed – the insurer was successful.

• The court considered the proper construction of the term "a reasonable person in the insured's professional position." It pointed out that this imposed an objective test of knowledge similar to that found in s 21 (1) (b) Insurance Contracts Act. The court stated that the second "limb" of the policy condition was directed, not to the state of mind of the insured, but to the state of mind of the reasonable person in the same professional position as the insured. It was that hypothetical person's conclusion as to the possibility of an allegation being made which needed to be ascertained.

• The phrase described a hypothetical reasonable person with the experience and knowledge of the insured (that is the professional knowledge) coupled with the capacity of such a reasonable person to draw a conclusion as to the possibility of someone making an allegation against the insured.

• Section 11.12 (b) of the policy sets an objective standard, with the modification that the insured's professional experience and the insured's knowledge of facts and circumstances are imputed to "a reasonable person in the insured's professional position".

• An enquiry about what a reasonable person "would have thought" enquires about real (not remote or fanciful) possibilities but not certainties. When applying s 11.12 (b) it is not wrong to take into account what the insured thought, as a piece of possibly relevant evidence, but the standard described in s 11.12 (b) is an objective standard, and a question of fact to be determined independently of the insured's state of mind.

• The inferences to be drawn from the undisputed facts and circumstances known by the insured in the case were so obvious that the court is able to evaluate for itself the correct application of this objective standard. The court said that given the nature and objects of the policy there could be no real doubt that a reasonable barrister (unable to practise without a policy of professional indemnity insurance), who knew of the potential effect of his client's case of the 2001 amendment to the Workers Compensation Act, and who knew of the pending 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.

Implications

• Proposals and policies similarly worded entitle an underwriter to challenge what the insured states to have been his state of mind as to possible claims by testing whether a hypothetical reasonable insured in the same professional position, i.e., standing in the shoes of the insured, would have thought as to possible claims.

• The disclosure required is circumstances of allegations likely to be made and is not confined to claims that necessarily are likely to succeed.

• The likelihood of an allegation/claim which might result in a claim must be a real possibility. On the one hand it need not be fanciful or remote, but on the other hand it need not be a certainty.

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.