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 [2008] HCA 30 (30 July 2008).
The unhappy client and the barrister with professional indemnity cover
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 side appealed.
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 insured
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 began,
might result in someone making an allegation against an Insured in respect of a liability, that might be covered by this Policy."
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 exclusion clause:
"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 insured.
"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.
Implications
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.
