Reported Decision : (2002) 12 ANZ Insurance Cases 61-527 New South Wales Supreme Court CITATION : Gosford City Council v GIO General Ltd [2002] NSWSC 511 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50010/02 HEARING DATE(S) : 4 June 2002 JUDGMENT DATE : 13 June 2002 PARTIES : Gosford City Council (Plaintiff) GIO General Ltd (Defendant) JUDGMENT OF : Bergin J COUNSEL : D L Davies SC; M Fraser (Plaintiff) D L Williams (Defendant) SOLICITORS : P J Donnellan & Co (Plaintiff) Ebsworth & Ebsworth (Defendant) CATCHWORDS : [INSURANCE] - Relationship between ss 40 and 54 of the Insurance Contracts Act 1984 (Cth) - Whether insured entitled to indemnification under a claims made policy with no deemed claims clause in circumstances where claim is made outside period of insurance and no notification of the claim given to the insurer during the period of insurance. LEGISLATION CITED : Insurance Contracts Act 1984 (Cth) Antico v Heath Fielding (1996-1997) 188 CLR 652 CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2001) ANZ Ins Cas 61-507 CASES CITED : East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance (1991) 25 NSWLR 400 Einfeld v HIH Casualty and General Insurance Ltd (1999) 10 ANZ Ins Cas 61-450; (1999) 166 ALR 714 FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 DECISION : Plaintiff not entitled to indemnification. - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION commercial LIST BERGIN J 13 JUNE 2002 50010/02 GOSFORD CITY COUNCIL v GIO GENERAL LTD JUDGMENT 1 In this matter the plaintiff, Gosford City Council, seeks indemnity from the defendant, GIO General Ltd, under a policy of insurance issued by the defendant to the plaintiff for the period 30 June 1989 to 31 December 1990 and renewed for the period 1 January 1991 to 31 December 1991 (the Policy). The Policy was not renewed after 31 December 1991. 2 The Policy is a claims made policy and is entitled "Broad Form Liability Insurance." The defendant agreed to insure the plaintiff "in accordance with and subject to the terms, exclusions, limitations and conditions contained in or endorsed on or otherwise expressed in the Policy." The section of the Policy entitled "Liability Coverage" provided relevantly: GIO will pay to or on behalf of the insured all sums for which the insured shall become legally liable to pay by way of compensation (excluding punitive and exemplary damages) in respect of: … (c) Professional Liability A claim or claims made against the insured during the Period of Insurance arising out of any negligent act, error or omission committed or alleged to have been committed, by the insured in the conduct of the insured's business as specified in the Schedule. Agreed Facts 3 On 30 May 1991, during the period of the Policy, an officer of the plaintiff telephoned the plaintiff's insurance broker, Jardine Australian Insurance Brokers Pty Ltd, and spoke with Mr Hornery in relation to a potential claim. Mr Hornery recorded the substance of the conversation in a fax to a person at L.G.A. but did not notify the defendant. That fax was in the following terms: Gosford City Council Potential P.I. Claim Further to my telephone conversation with Council – they may soon be drawn into a P.I. situation. The Central Coast Leagues Club has over the years received many additions – each, include the original construction, receiving Council building approval. Just recently a building survey of the entire Club produced a certificate to say that the Club hasn't come up to Fire Ordinance requirements. The Club sacked the Architects. The Architects are suing the Club for o/s fees ($400,000) and the Club has filed a countersuit for the rectification of sub–standard structures. It is only now a matter of time before the penny drops and suits are directed towards Council – as they always do. I'm having Council put something in writing at this stage – but I first wanted to at least have the Insurer Knowledgeable of the situation. If there are any problems please contact me. 4 On about 27 July 1994 the plaintiff was served with an Amended Statement of Claim in proceedings No 14550 of 1992 in the Common Law Division of this Court commenced by the Central Coast Leagues Club (the Club) against the plaintiff and others (the Common Law Division proceedings). 5 The Common Law Division proceedings pleaded Council approvals in 1986 and 1987 in respect of work carried out on the Club between 1987 and 1989. In 1990 the plaintiff issued Notices to the Club requiring upgrading of the premises to comply with the relevant legislation relating to fire rating. The Club pleaded breaches of duty of care by the plaintiff in approving the plans in 1986 and 1987. 6 On 22 August 1994 Jardine wrote to the defendant in terms which included the following: An initial check of our records did not indicate that the matter had been previously referred to this office. Under the circumstances same was referred to Phillips Fox's Mr. Michael Down who as per his correspondence of 11th August has filed a notice of appearance and requested further and better particulars. It has subsequently been determined the matter was referred to Jardines verbally as per Andrew Hornery's fax of the 30 May, 1991. In the light of same Michael Down has been advised the matter would fall within the scope of your policy cover and not to proceed any further, however, should you wish to continue to use his services and expertise we would have no problems in relation to same. This matter would have been advised to you as is our custom via the regular claims printout. Under the circumstances I look forward to your advices that indemnity is available and you will attend to the defence on behalf of our mutual client. 7 By letter dated 22 May 1995 the defendant declined to indemnify the plaintiff with respect to the claim made by the Club. The letter included the following: As you are aware the wording of indemnity clause (c), Professional Liability, requires that a claim be made against the council during the period of insurance. GIO insured council from 10 June 1988 to 31 December 1991. On the information you have provided there was no claim made against the council during that period. 8 The Common Law proceedings went to trial on liability and in February 1999 prior to the trial on damages it was settled. The plaintiff is seeking indemnification for its costs that were not covered by the settlement. These proceedings were commenced in the Common Law Division in 2001 and transferred to the Equity Division, Commercial List, in February 2002. The matter was listed for hearing before me on 4 June 2002 when Mr D L Davies SC, of counsel, leading Mr M Fraser of counsel appeared for the plaintiff and Mr D L Williams of counsel appeared for the defendant. 9 On 4 June 2002 I granted leave to the defendant to amend its Defence. That Amended Defence pleads that in further answer to the plaintiff's claim the defendant says that the plaintiff has no entitlement to indemnity under the Policy or alternatively damages for breach of contract. The particulars state that the plaintiff has not become legally liable to pay compensation for professional liability and that any claim for the plaintiff's costs do not fall within the section of the Policy dealing with Law Costs and Expenses. 10 The provision in the Policy in relation to Law Costs and Expenses provided that in addition to the Limit of Indemnity the defendant would pay "all expenses incurred by GIO, all costs taxed against the insured or accepted by GIO in any suit defended by GIO" and "all reasonable expenses, other than loss of earnings, incurred with the consent of GIO." It also provided that the defendant could, "at its discretion", defend any actions against the insured in the name of and on behalf of the insured in respect of claims in relation to personal injury or property damage. It is not clear whether, by this clause, the defendant was limited to defend in the insured's name only these last-mentioned actions. 11 Mr Davies sought an adjournment of the proceedings because the plaintiff wished to raise by way of Reply, firstly, a claim that the plaintiff had lost the chance of having the defendant take over the running of the proceedings brought by the Club, and secondly, a breach of duty of good faith. He submitted the plaintiff wished to serve a Notice to Produce on the defendant calling for files of similar claims for indemnification by Councils during the relevant period to establish that the defendant, as a matter of practice, took over such claims. 12 Mr Williams opposed the adjournment and submitted that the most efficient course was to decide, as a preliminary issue, the legal argument raised by the parties in the case as pleaded prior to the amendment. I acceded to that course after Mr Davies candidly conceded that there could be no prejudice to his client. The question for determination is thus whether as a matter of law the plaintiff is entitled to indemnification under the Policy. 13 At the end of the hearing on 4 June 2002 Mr Davies sought to have the matter adjourned part-heard to give his client the opportunity to serve the Notice to Produce and to call evidence in respect of the "new defence." I did not adjourn the matter part-heard and indicated that I intended to deliver my judgment on this preliminary matter irrespective of whether the parties re-listed the matter in respect of the "new defence." I granted the parties liberty to restore the matter to the list on two days notice. Respective submissions 14 The plaintiff submitted that there was a failure (through Jardine) to notify facts during the currency of the Policy. It was also submitted that by combination of sections 40(3) and 54 of the Insurance Contracts Act 1984 (Cth) (the Act) the failure to notify "those facts" does not entitle the defendant to refuse to indemnify the plaintiff. 15 The defendant submitted that s 40(3) and s 54 of the Act do not operate so as to bring the claim within the Policy. In particular, absent special conditions in the Policy, it was submitted that s 54 does not apply to instances of a claims made policy where no claim has been made upon the insured within the Policy period. It was submitted that the notification by the plaintiff to its broker does not advance matters because there is no clause in the Policy that deems a later claim to have been made at an earlier time if circumstances were notified. Consideration 16 Section 54 of the Act relevantly provides: Division 3 - Remedies 54 Insurer may not refuse to pay claims in certain circumstances (1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act. … (6) A reference in this section to an act includes a reference to: (a) an omission; and (b) an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter. 17 In Antico v Heath Fielding (1996-1997) 188 CLR 652 the High Court considered a claims made policy in a Directors and Officers Legal Expenses Policy. The policy included a condition that the insurer was not liable to indemnify the insured unless the insured had obtained consent from the insurer for the incursion of costs in defending any claim or proceedings. The insured had not obtained the consent and the insurer had refused indemnity. There were also other clauses in the policy with which the insured had not complied. The insured invoked s 54 of the Act to support a submission that his failure to obtain the insurer's consent to the incurring of legal expenses and his failure to comply with other conditions did not entitle the insurer to refuse indemnity. 18 Brennan CJ, at 661, referred to the focus of s 54(1) on the actual conduct of the insured and that the section is engaged when the act or omission of the insured would excuse the insurer from an obligation to pay a claim for which the insured had suffered loss. His Honour was of the view that having regard to s 54(6) the context of the omission is the non-performance of an act which, if done, would disentitle the insurer to refuse to pay the claim. 19 In the joint judgment (Dawson, Toohey, Gaudron and Gummow JJ) their Honours said at 673: … s 54(1) refers not to precise concepts of form but to the effect of the contract and asks whether that effect is that the insurer may refuse payment "by reason of" the relevant act or omission. 20 Their Honours continued at 675: S 54 is remedial in character and its language should be construed so as to give the most complete remedy which is consistent with the actual language employed and to which its words are fairly open: Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622 at 638. However, the construction which we would give to s 54 and its application to the present dispute involves not so much the giving of any generous reading to its provisions as the according to s 54 of the meaning it bears on its face. 21 The plaintiff relied upon Antico v Heath Fielding to submit that s 54 should be construed widely and generously. Brennan CJ at 640 referred also to Gleeson CJ's exposition of s 54 in East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance (1991) 25 NSWLR 400 at 403 – 404, in which he referred to the inappropriateness of reading down the general words s 54. The plaintiff submits that such an approach should be adopted in this matter. 22 The plaintiff also relied upon Newcastle City Council v GIO General Ltd (1997) 191 CLR 85. That case involved the identical policy with which I am dealing. However in that case the insured notified the insurer, during the period of insurance, of an anticipated claim and after the expiration of the policy proceedings were brought against the insured. GIO refused indemnity in respect of claims made after the period of insurance. 23 Newcastle City Council relied upon s 40(3) of the Act to sheet home liability to GIO. S 40(1) and (3) provides: 40 Certain contracts of liability insurance (1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract. … (3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract. 24 The plaintiff in this case relied in particular upon the judgment of McHugh J at 115 in which his Honour said: S 40(3) ensures that an insurer under a "claims made and notified policy" is not relieved from liability because the claim was made after the policy expired. But the subsection does not provide for the insurer to remain liable when it is a condition of the policy that a claim must be both made and notified during the period of cover. The insured must look elsewhere to find assistance in overcoming the failure to provide notification within the period of cover of any claim made against it. On the present state of the authorities, that assistance is provided by s 54 which, broadly speaking, states that where the insurer may refuse to pay a claim by reason of some act or omission of the insured, the insurer may not refuse to pay the claim by reason only of that act, but its liability in respect of the claim is reduced to reflect the prejudice to its interests. 25 It seems to me that an important section of McHugh J's judgment appears just prior to that extracted above. His Honour said at 114: To give effect to the purpose of the section as well as the language of s 40(3), the apparent conflict between s 40(1) and s 40(3) is best reconciled by treating s 40(1) as being concerned with cases where a claim against the insured was not made during the period of insurance and which therefore has resulted in notice of the claim not being given to the insurer during the period. On that construction, despite the literal meaning of s 40(1), both sub – ss (1) and (3) are directed to cases of claims being received outside the period of insurance. That construction accords with the evident intention of the framers of s 40. The purpose of s 40(3) is to reduce the occasions where an insured will lose its indemnity by reason of a claim being made against it after the period of insurance has expired. As long as the insured has given the insurer written notice of a potential claim before the period expired, s 40(3) ensures that the fact that the claim is made after the expiration of cover will not prevent recovery from the insurer. If s 40(1) is given a literal reading, however, a claims made policy would never come within s 40 even though it is the paradigm example of a policy that s 40(3) was intended to protect (Emphasis added). 26 In this case the insured did not give written notice of a potential claim before the period of insurance expired and the claim that was made upon the insured was made after the expiration of the Policy. 27 In Einfeld v HIH Casualty and General Insurance Ltd (1999) 166 ALR 714; (1999) 10 ANZ Ins Cas 61-450 Rolfe J considered a claims made and notified policy which contained a "deemed claims" clause (cl 4(b)). Such claims were deemed by reason of the plaintiff becoming aware of and giving notice of circumstances which may give rise to a claim and which were subsequently the basis of a claim. After reviewing the authorities in detail Rolfe J did not consider there was an inconsistency between ss 40 and 54 and concluded at [46]: … to the extent that section provides a statutory extension to the policy there is no reason why the ameliorating provisions of s 54 cannot apply to it. 28 Both parties have relied upon FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641. The defendant in particular relied upon the fact that the policy under consideration in that case also contained a deemed claims provision. The defendant submitted that the following portion of the joint judgment (McHugh, Gummow and Hayne JJ) is the key to the present case: [44] It is apparent that, in the circumstances considered in Greentree , the effect of the contract of insurance was that the insurer might refuse to pay the claim that had been made. This was not, however, by reason of any act or omission of the insured or some other person. The claim made by the insured was for indemnity against liability for a demand that was not a demand of the kind dealt with by the policy because it was not a demand by a third party made within the period of cover. The reason for refusal was not some act or omission of the insured or some other person. It was that the policy did not extend to the demand referred to in the claim for indemnity. [45] By contrast, if a third party had made a demand on the insured during the period of cover but, for whatever reason, the insured had not notified the insurer of the making of that demand until after the period of cover ended, it is apparent that the effect of the contract, but for s 54, would be that the insurer may refuse to pay the insured's claim only be reason of the failure to notify the fact of the demand. 29 The plaintiff submitted that by combination of s 54 and s 40 there is an implied term into the contract of a similar "deemed claims" provision or alternatively a statutory extension of the contract which operates to the same effect. That would mean that notwithstanding the fact that no claim was made during the period of insurance and no notification was given to the insurer of circumstances during the period of insurance, the defendant is obliged to indemnify the plaintiff. It is submitted that the omission, the failure to notify the circumstances during the period of cover, is, in line with Einfeld and HIH Casualty and General, the only matter that would entitle the defendant to refuse to indemnify the plaintiff. 30 In the joint judgment their Honours referred to the nature of the policy under consideration and in particular to the condition (cl 3), to which I have referred as a "deemed claims" clause, and said at [23]: If it is useful to apply a label to the contract in question in this matter it is evident, when regard is had to condition 3, that it would be inaccurate to describe it as a "claims made and notified policy". That would describe only one aspect of its operation. It would, perhaps, be more accurate to describe it as a "discovery policy" (cf Reid Crowther & Partners Ltd v Simcoe & Erie General Insurance Co [1993] 1 SCR 252 at 264, per McLachlin J), as the critical facts under the contract are the insured's discovery of the making of a claim on it or its discovery (its "becom[ing] aware") of an occurrence which may give rise to a claim. In the end, however, the application of labels to the contract may obscure more than it illuminates. 31 Notwithstanding the caution in relation to the utilisation of labels their Honours returned to them. After observing (at [40]) that s 54 directs attention to the effect of the contract of insurance on the claim on the insurer which the insured has "in fact made" their Honours said at [42]-[43]; [42] The restrictions that are inherent within a claim vary according to the type of insurance in issue. Under an "occurrence" based contract, no claim can be made under the contract unless the event insured against takes place during the period of the cover. Under a "claims made and notified" policy, if no demand is made by a third party upon the insured during the period of insurance, any claim that may subsequently be made by the insured on the insurer (that is, the claim to which s 54 refers) would not necessarily acknowledge that indemnity is sought in relation to a demand not of a type covered by the policy (because not within the temporal limits that identify those demands in relation to which indemnity must be given). [43] In the context of "discovery" contracts, containing clauses such as condition 3, the analysis is similar. If an insured "become[s] aware of any occurrence, which may subsequently give rise to a claim" during the period of cover, an event of the type contemplated by the contract of insurance has occurred. Any subsequent claim would be for indemnity against a demand of a type covered by the contract. 32 Mr Davies submitted that the Policy in the present case may fall within the "discovery" category identified by the High Court. I do not agree. There is no equivalent condition 3 in the Policy and, if any label were to be employed, in my view the Policy would fall within the "occurrence" category. Again, as their Honours said at [23]: "These labels are, however, not a substitute for strict attention to the terms of the particular insurance contract in question and to the operation of the relevant statutory provisions in connection with that contract." 33 The facts in the cases relied upon by the plaintiff are each distinguishable from the facts in this case. In Antico a claim was made during the period of insurance and there was a failure to notify the insurer during that period. Similarly in East End a claim was made during the period of insurance and there was a failure to notify the insurer during that period. In Newcastle City Council there was a notification during the period but the claim was made outside the period. In both FAI and Einfeld there were deeming provisions. In this case there is no deeming provision, there was no claim made during the period and there was no notification during the period. 34 In CA & MEC McInally Nominees Pty Ltd v H T W Valuers (Brisbane) Pty Ltd (2001) ANZ Ins Cas 61-507 Chesterman J considered a claims made policy that required the insured to give notice of the claim "in writing as soon as reasonably possible in that year". Claim was defined as "any originating process (in a legal proceeding or arbitration), cross claim or counterclaim or third party or similar notice claiming compensation against and served on an insured". Thus it was a claims made and notified policy. The relevant policy, with CUA, was for the period 15 September 1998 to 15 September 1999. Another insurer provided insurance to HTW in subsequent years. 35 The insured, referred to as HTW, had been sued in negligence in respect of a valuation it had provided during the course of its business as a valuer of real estate. The Statement of Claim was served on HTW on 6 or 7 December 1999. By claim dated 16 March 2000 HTW sought indemnity from CUA. Chesterman J said: [44] S 40(3) does not imply into policies of insurance a term to the same effect as the subsection. Some statutes do imply terms into contracts: the Sale of Goods Act perhaps provides the best example. When it happens the legislation makes it clear that the implication is to occur. Where statute applies (sic) a term into a contract the resulting rights and obligations created by the implied term are contractual, not statutory. In Newcastle City Council, Brennan CJ referred to the "statutory alteration in an insured's rights … worked by subs (3)" and the imposition by the subsection of "a liability where no contractual liability exists", and "a statutory modification of contractual relations" (p 91,93). To speak of the statutory alteration of the insured's contractual rights, or the imposition of a statutory liability where no "contractual liability exists" is inconsistent with s 40(3) implying a term into contracts of insurance. [45] S 40(3) confers rights on an insured and obligations on an insurer, but to obtain the subsection's protection an insured must comply with its terms, by giving notice. HTW's submission would require a modification to the subsection and provide relief in circumstances other than those specified by the legislation. If it were Parliament's intention that s 54 should modify the operation of s 40(3) one would expect to find some indication of the intention in the provision. There is nothing in s 40(3) which makes the requirement that notice be given during the currency of the policy "subject to s 54." [46] This opinion is contrary to that expressed by Rolfe J in Einfeld v HIH Casualty and General Insurance (1999) 10 ANZ Insurance Cases 61-450 at 75,170. His Honour's view was obiter and I respectfully disagree with it. It proceeds from an acceptance that s 40(3) was meant to operate as a statutory equivalent to the condition earlier discussed. The decision appears to overlook the limitation found in s 54 itself, that it operates only where, but for the section, an insurer could refuse indemnity by reason of an omission to give notice. Moreover the judgment predates Australian Hospital Care in the High Court where focus was directed to the particular policy wording and the effect on that of the omission in question. As well the joint judgment of McHugh, Gummow and Hayne JJ emphasized the point that: S 40 and s 54 deal with different problems. S 40 is concerned with certain contracts of liability insurance and, among other things, with the insured giving notice of a potential claim during the period of insurance cover when the claim is not made until after the expiration of the period. S 54, by contrast, deals with the much more general subject of an insurer refusing to pay claims. 36 The defendant also relied upon section 13 of the Act to submit that had there been an intention in the Act to imply a term in the Policy or to give statutory effect of such an extension there would have been a clear statement to that effect. Section 13 of the Act expressly implies into a contract of insurance a provision requiring each party to it to act towards the other with the utmost good faith. There is no similar provision in the Act in respect of an implication for which the plaintiff contends. 37 What the plaintiff seeks to do is to utilize the combinations of ss 40 and 54 of the Act to imply a deemed claims clause and then utilize the Act again to claim that notwithstanding the implication the plaintiff omitted to comply with the requirement of the implied term and thus, but for that omission, the later claim would have been deemed to have been made during the Policy period. In my view the plaintiff's submissions in this case would, as in HTW's submissions before Chesterman J, require modification to the subsection and provide relief other than that specified in the legislation. 38 In my view it would have at least been necessary for the plaintiff to give to the defendant some notice of a claim during the period of insurance before any statutory manipulation of this Policy could occur: Newcastle City Council v GIO General Limited per McHugh J at 114. Even then, in the circumstances of the provisions of this particular Policy, it would be difficult in my view to justify such manipulation. However I accept that there would be better prospects for the plaintiff in the light of the authorities to which reference has been made. 39 This Policy is a claims made policy, not a claims made and notified policy, and did not have a deemed claims clause. The claim for indemnity was not for a demand of the kind dealt with by the Policy because it was not a demand by a third party within the period of cover. The reason for refusal was that the Policy did not extend to the demand made on the insured and was not some act or omission of the insured or some third party: FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd at [44]. In my view there is nothing within the legislation that would justify the statutory implication of a contractual term or a statutory extension of the Policy. 40 The preliminary question of whether as a matter of law the defendant is obliged to indemnify the plaintiff under the Policy is answered "No." ********************************** Last Modified: 06/17/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.