Something you will want to be assured of, when providing advice and professional services to your clients, is the protection of a valid insurance policy. In the unfortunate event that a negligence claim is made against you, even one lacking in merit, a policy that responds to your claim and an insurer willing to assume your defence is critical.
Many professionals simply assume that their policy will cover any claim made against them. What they do not think about, however, is the necessity of ongoing disclosure and notifications to their insurer or potential insurer (when applying for a new policy).
This is particularly important as professionals are generally insured under claims made PI policies, whereby indemnity depends on a claim being made against the insured during the policy period. Most PI policies also require notification of claims and circumstances likely to give rise to a claim. When applying for PI cover, you must notify of any known claims/circumstances likely to give rise to a claim; exclusions usually apply to known claim/circumstances. The failure to disclose claims or known circumstances/claims may result in indemnity being validly refused.
A recent decision of the High Court, CGU Insurance Ltd v Porthouse  HCA 30, acts as a reminder of the importance of proper disclosure and notification.
In this case, Mr Porthouse, a barrister, was denied indemnity under a PI policy with CGU on the basis of a known circumstance exclusion. He had sought indemnity for a negligence claim brought by a former client. The claim related to advice given by Mr Porthouse to his client that the Workers Compensation Act (1987) (Compensation Act) did not apply to his claim. This advice was wrong. Further, around the time the advice was given (in June 2001), the NSW government foreshadowed proposed amendments to the Compensation Act. These amendments came into effect on 27 November 2001, and if applicable to his client's claim, reduced his entitlements to zero. His client's claim was not filed until after the commencement of the amendments.
Whilst his client's claim was successful at first instance, the client lost on appeal in August 2004. In March 2005 the client brought negligence proceedings against his solicitor and Mr Porthouse, who in turn claimed under his policy with CGU. CGU denied indemnity on the basis of a "known circumstance' clause excluding cover for claims arising out of:
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."
Mr Porthouse claimed that, at the time he applied for his policy (May 2004), his client had won before the trial judge and the appeal had not been heard. He also relied on the fact that his client had obtained advice from Senior Counsel that the appeal had reasonable prospects of success and had made no allegation against Mr Porthouse at that time.
However the High Court noted that, at the time he applied for his policy, Mr Porthouse knew of the potential effect of the amendment on his client's pending appeal. The High Court found that part (b) of the exclusion clause required consideration of a "reasonable person" in the insured's position. A reasonable barrister, unable to practice without the benefit of PI cover, who knew of the 2001 amendments, the pending appeal, and his role in creating his client's problem would have thought a "real possibility" existed that an allegation may be made against him. This was irrespective of the subjective state of mind.
The Court allowed the appeal and entered judgment for CGU.
Implications of the Decision
The decision is a reminder that clauses such as that in the CGU policy above carry a subjective and objective element. Even if you not believe a claim could be made against you, you must still notify if reasonable person in your circumstances would contemplate a claim.
Whilst not addressed in the case, presumably Mr Porthouse did not notify the circumstances noted by the High Court (which existed when he applied for the policy), under his earlier insurance policy. Most PI policies will cover claims made during the policy period, and often also circumstances likely to give rise to a claim and notified to the insurer, even if an actual claim is not brought until later.
Section 40(3) of the Insurance Contracts Act can also assist. The effect of this section is that an insurer cannot deny indemnity if "facts that might give rise to a claim" are notified in writing "as soon as reasonably practicable" after the insured becomes aware of those facts (but before the policy expires), even if the claim itself is only made (by the third party), after the policy has expired.
To obtain the benefit of section 40(3), however, you must notify any likely circumstances before a policy expires. Similarly, to avoid the operation of exclusion clauses in later years, you must notify all possible claims/circumstances likely to give rise to a claim on proposal forms.
This decision is therefore a reminder of the importance of:
(a) timely notification of claims and circumstances likely to give rise to a claim; and
(b) notifying claims/circumstances before the yearly expiry of PI policies, and on renewal forms or applications for new policies.
The failure to disclose or notify can result in indemnity being validly denied, leaving you without the protection of a policy in the unfortunate event that a claim is made against you. This is obviously a situation best avoided!
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.