On 30 July 2008, the High Court delivered its much anticipated decision in CGU Insurance Ltd v Porthouse which provides clarity on the interpretation of known circumstances exclusions.
The April 2008 edition of Deacons Insurance Update reported that CGU Insurance Limited (CGU) was unsuccessful before the NSW Court of Appeal which held that CGU was not entitled to rely upon a known circumstances exclusion in its professional indemnity policy issued to a barrister, Anthony Porthouse (CGU policy), to deny indemnity to Porthouse.
Known circumstances exclusions are typically found in professional indemnity and directors and officers insurance policies which are claims made policies. They exclude cover for claims where the insured knew of circumstances, before the inception of the policy, that either the insured knew or a reasonable person in the insured's position should have known, had the potential to lead to a claim.
The wording of these exclusions, while not replicating s21 of the Insurance Contracts Act 1984 (Cth) (ICA), employs a similar technique for identifying a "known circumstance". Section 21 of the ICA effectively provides that the insured has a duty to disclose to the insurer, before entering into an insurance contract, every matter that the insured knows or a reasonable person in the circumstances of the insured could be expected to know, to be a matter relevant to the decision of the insurer as to whether to accept the risk and if so, on what terms.
Exclusion 6.1 of the CGU policy effectively excluded cover for claims directly or indirectly based upon Known Claims and Known Circumstances.
The term "Known Circumstance", was defined in section 11.12 of the CGU policy to mean:
"Any fact, situation or circumstance which:
- an Insured knew before this policy began; or
- 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 liability, that might be covered by this Policy."
CGU's appeal to the High Court was based principally on the following issues of construction of the known circumstances exclusion in the CGU policy:
- whether, upon a proper interpretation of the phrase "a reasonable person in the Insured's professional position", one was confined to taking into account the insured's experience and knowledge or whether the insured's state of mind could also be taken into account;
- the correct interpretation to be given to the conditional expressions "would have thought ... might result in"; and
- the correct application of the known circumstances exclusion in the CGU policy and whether evidence of what the insured actually thought could be taken into account when determining what the hypothetical reasonable person "would have thought".
The High Court unanimously allowed CGU's appeal and held that CGU was entitled to rely upon Exclusion 6.1 to deny indemnity to Porthouse. In relation to the interpretation of the term "Known Circumstances" in the CGU policy, the High Court held that:
- the phrase "a reasonable person in the Insured's professional position" posits an objective standard, with a modification relating to professional, not personal matters. It described a hypothetical reasonable person with the experience and knowledge of the insured coupled with the capacity to draw a conclusion (whether it is plain and obvious or not) as to the possibility of someone making an allegation against the insured;
- nothing in the context or language of the CGU policy suggested the insured's personal idiosyncrasies or state of mind was to be imputed to the hypothetical person;
- the phrase "would have thought" coupled with the expression "might result in" required a conclusion by the hypothetical person that there was a real (not fanciful or remote) possibility (not a certainty) of an allegation being made against the insured; and
- while it was not wrong to take into account what an insured thought, as a piece of possibly relevant evidence, the standard described in s11.12(b) of the CGU policy was an objective standard and a question of fact to be determined independently of the insured's state of mind.
The decision provides clarity on the interpretation of known circumstances exclusions for all underwriters of professional indemnity and directors and officers policies in the Australian market. While the wording of these exclusions may differ to some degree from policy to policy, it is now clear that they will be interpreted by reference to an objective standard and determined as a question of fact independently of an insured's idiosyncrasies or state of mind. Further, they will apply where the hypothetical reasonable person with the insured's knowledge would conclude that an allegation or a claim (as the case may be), was a real possibility.
The interpretation applied by the High Court to known circumstances exclusions is now also consistent with the statutory test applied in determining whether there has been a non disclosure by an insured under s21 of the ICA.
CGU Insurance Ltd v Porthouse  HCA 30 (30 July 2008)
CGU Insurance Ltd v Porthouse (2007) 14 ANZ Insurance Cases 61-727 (11 April 2007)
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.