New South Wales Supreme Court CITATION : Quintano v B W Rose Pty Ltd & ors [2008] NSWSC 793 HEARING DATE(S) : 30 July 2008 JUDGMENT DATE : 5 August 2008 JURISDICTION : Common Law Division Professional Negligence List JUDGMENT OF : Brereton J DECISION : Judgment for the cross-defendants, with costs. CATCHWORDS : CONTRACTS – INSURANCE – construction of exclusion clause – construction of "arising from" – whether claim arose from insolvency of insurer – whether claim arose from failure of duty to advise on suitability of insurer – whether the failure to advise needed to be established as an objective fact. CATEGORY : Principal judgment GIO (NSW) v R J Green & Lloyd Pty Ltd (1966) 114 CLR 437 Haydon v Lo & Lo [1997] 1 WLR 198 Murphy & Allen v Swinbank [1999] NSWSC 934 CASES CITED : Rouleston Clarke Pty Ltd (in liq) v FAI General Insurance Co Ltd [1999] TASSC 150; (2000) 11 ANZ Ins Cas 61-465 Walton v National Employers' Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 West Wake Price & Co v Ching [1957] 1 WLR 45 Winspear v The Accident Insurance Co Ltd (1880) 6 QBD 42 Luke Quintano (plaintiff) BW Rose Pty Ltd (first defendant) PARTIES : AWS Security Services Pty Ltd (second defendant) Prestige Insurance Brokers (Aust) Pty Ltd (x-claimant, third x-claim) Syndicate 3245 (first x-defendant, third x-claim) Syndicate 1218 (second x-defendant, third x-claim) FILE NUMBER(S) : SC 20130/04 COUNSEL : Mr I M Neil SC w Mr A C Harding (x-claimant, third x-claim) Mr D S Weinberger (x-defendants, third x-claim) SOLICITORS : Macedone Christie Willis (x-claimant, third x-claim) McCabe Terrill Lawyers Pty Ltd (x-defendants, third x-claim) IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION PROFESSIONAL NEGLIGENCE LIST BRERETON J Tuesday, 5 August 2008 20130/04 Quintano v B W Rose Pty Limited & ors JUDGMENT (on third cross-claim) 1 HIS HONOUR: On 15 December 2002, the plaintiff Luke Quintano suffered traumatic brain damage when shot in the head in Skelseys, a nightclub operated by the first defendant B W Rose Pty Limited (BWR). In January 2002, BWR had retained the third cross-claimant Prestige Insurance Brokers (Aust) Pty Ltd as its broker to procure public liability insurance, and Prestige placed such insurance, through the Cameron Group (a broker located in Queensland specialising in the placement of "hard to place" risks), for the period from 27 March 2002 to 20 February 2003, with International Unity Insurance Co Limited, an insurance company incorporated in the Solomon Islands. Mr Quintano instituted these proceedings on 27 April 2004, claiming damages for his personal injuries from BWR and AWS. International Unity was wound up by order of the Federal Court of Australia on 2 June 2004. Being practically uninsured as a result, BWR, by second cross-claim filed on 18 March 2005, claimed indemnity or contribution from Prestige, alleging that Prestige had negligently placed the insurance with an unregistered overseas insurer and failed to advise BWR of the associated risks. Prestige filed a defence to that cross-claim on 25 July 2005, and by third cross-claim filed on 29 December 2006, claimed indemnity from its professional indemnity insurers, the third cross-defendants Syndicates 3245 and 1218 at Lloyds (the Underwriters), who declined indemnity on the grounds of certain exclusions in the professional indemnity policy. 2 By the policy issued to Prestige, the Underwriters agreed to indemnify Prestige against legal liability for any claim (defined relevantly to mean any statement of claim issued against or served on Prestige) first made against Prestige during the period 30 April 2004 to 30 April 2005 and notified as soon as reasonably practicable thereafter but still during that period, in respect of any civil liability incurred or alleged in the conduct of Prestige's professional practice as insurance brokers (clause 1.1). The Underwriters also agreed to pay, in addition to the limit of indemnity, the costs and/or expenses incurred with their prior written consent in the investigation, defence or settlement of any claim covered by the policy (clause 1.2). The limit of indemnity under the policy was $1 million, subject to an excess of $10,000 for each and every claim. Clause 2.18 relevantly provided: 2. EXCLUSIONS The Underwriters shall not provide indemnity in respect of any Claim: … 2.18 INSURANCE COMPANY SUITABILITY/INSOLVENCY arising from: a) the insolvency of any insurer or reinsurer; or b) any breach of the Assured's duty to advise on the suitability (which expression shall, without prejudice to the generality of such term, including financial standing) of any insurer or reinsurer utilised; … 3 BWR itself went into voluntary administration, and then into liquidation on 16 July 2008. On 18 July 2008, the last court day before the trial of the proceedings commenced on 21 July, the liquidator of BWR sought leave to discontinue its cross-claims, which leave was granted upon terms that BWR be precluded from bringing any further proceedings on the same or substantially the same causes of action as pleaded in those cross-claims. Accordingly, Prestige has not and will not incur any legal liability under BWR's (second) cross-claim against it. However, Prestige has incurred costs and expenses in investigating and defending the claim against it, and maintains its (third) cross-claim, for the purpose of recovering those costs and expenses from the Underwriters. I ordered that the third cross-claim be determined separately from the other issues in the proceedings, which are currently part-heard before me. 4 The Underwriters accept that BWR's second cross-claim against Prestige was a "claim" within the meaning of the policy, and that it was made against Prestige, and notified to the Underwriters, on or about 29 March 2005, within the period of the policy. The Underwriters no longer maintain a non-disclosure point taken in their defence. The sole remaining issue is whether, as the Underwriters contend, the operation of exclusion clause 2.18(a) and/or (b) – which exclude from cover claims arising out of the insolvency of any insurer, or any breach of the insured's duty to advise on the suitability (including financial standing) of any insurer – is attracted. 5 It is not in dispute that, insofar as there is any factual dispute, the Underwriters bear the onus of proving that the claim falls within an exclusion. Did the claim arise from insolvency? 6 Although it is common ground that International Unity is as a matter of fact insolvent, Mr Neil SC and Mr Harding, for Prestige, submit that BWR's cross-claim does not allege, nor refer to, nor demonstrate any connection with, its insolvency, and that the claim therefore cannot be said to arise from the insolvency of International Unity. 7 The words "arising from" require that there be some causal connection between the claim and the specified matter, but the requisite nexus is satisfied by a less proximate relationship than that required by the phrase "caused by" [GIO (NSW) v R J Green & Lloyd Pty Ltd (1966) 114 CLR 437, 443 (Barwick CJ), 445 (Menzies J), 447 (Windeyer J)]. It is true that in Winspear v The Accidental Insurance Co Limited (1880) 6 QBD 42, a policy covering accidental death other than those "caused by or arising from" a natural disease or weakness was held to cover an accidental death by drowning, even though the insured fell into the water because he was having an epileptic fit – on the basis that the cause of the death was drowning, not the epileptic fit. The short ex tempore judgment of Coleridge LCJ, with whom Baggallay and Brett LJJ concurred, does not give attention to the phrase "arising from". While recognising that that case did involve an exclusion clause – unlike GIO v RJ Green & Lloyd which concerned an insuring clause – nonetheless it would be unreasonable to attribute to the words "claim arising from" a requirement for a more proximate nexus when they appear in an exclusion clause than when they appear in an insuring clause. As, in my view, Winspear is inconsistent in that respect with GIO v RJ Green & Lloyd, I must follow the latter; accordingly, I do not accept Prestige's submission that the relevant exclusions can operate only if their subject matter is the proximate cause of the claim. 8 It will satisfy the requirement that a claim "arise from" a matter, if it originates in, springs from, or has its foundation in, that matter [cf Walton v National Employers' Mutual General Insurance Association [1973] 2 NSWLR 73, 84]. A cause of action arises from a set of material facts, proof of which found the cause of action. Similarly, a claim arises from the underlying facts that, if established, justify the claim. In my view, a claim can be said to arise from a matter – at least – if it has a foundation in that matter, so that the matter is one of the underlying facts that, if they exist, together justify the claim. 9 BWR's cross-claim against Prestige alleged that Prestige had placed its public liability insurance with the Cameron Group (par 3); that the Cameron Group had ceased to operate and the public liability policy had as a result ceased to indemnify BWR (par 4); and that Prestige had negligently placed the insurance with an unregistered overseas insurer and failed to advise BWR of the associated risks (par 10). It is true that it did not explicitly refer to insolvency, but the craftiness or clumsiness of the claimant's pleading is not determinative of the characterisation of the claim for the purposes of the professional indemnity policy. Both parties accept that whether a claim falls within an exclusion depends on the facts that give rise to the claim, and not its formulation by the claimant [West Wake Price & Co v Ching [1957] 1 WLR 45; Haydon v Lo & Lo [1997] 1 WLR 198; Rouleston Clarke Pty Ltd (in liq) v FAI General Insurance Co Ltd [1999] TASSC 150; (2000) 11 ANZ Ins Cas ¶61-465; Murphy & Allen v Swinbank [1999] NSWSC 934, [492]]. Those cases establish that, for the purposes of a professional indemnity policy, the manner in which a claimant formulates its case against the insured cannot be decisive of the rights and liabilities of the parties to the insurance policy, for which purpose the claim is characterised by its underlying facts, and not the form in which the claimant propounds it. Thus, if the facts underlying a claim amount in substance to fraud, the circumstance that the claimant eschews fraud and pleads its case in negligence does not allow the insured to evade a fraud exclusion [West Wake Price v Ching; Rouleston Clarke v FAI General]. 10 Damage is the gist of an action in negligence. Plainly, the damage asserted by BWR was that it was left without indemnity of value. While it pleaded that this was because the Cameron Group had ceased to operate, it is manifest that the Cameron Group was an intermediary who placed the insurance with International Unity, and the reason BWR was left without indemnity of value was that International Unity was insolvent. In substance, BWR's claim against Prestige was for loss it would suffer, if judgment on Mr Quintano's claim went against it, because it was practically uninsured – which situation was attributable to International Unity's insolvency. It is immaterial that BWR did not assert it had ever made a claim on International Unity, nor that any such claim had not been paid: those are not necessary elements of its cause of action, or claim. The loss that was the gist of BWR's claim was, as a matter of fact, attributable to International Unity's insolvency. 11 In my opinion, therefore, BWR's claim against Prestige originated in, sprang from, or had its foundation in, the insolvency of International Unity. International Unity's insolvency was a material underlying fact. Accordingly, in my judgment, the relevant claim was one that arose from the insolvency of an insurer, and clause 2.18(a) therefore operates to exclude cover. Did the claim arise from breach of duty to advise on suitability? 12 As that decision is dispositive, it is strictly unnecessary to consider the clause 2.18(b) exclusion. However, in deference to the carefully formulated arguments that were presented, I will address it. Mr Neil SC accepts, correctly in my view, that BWR's cross-claim alleges a breach by Prestige of a duty to advise on the suitability of an insurer – that is, a breach of the type referred to in the exclusion. He submits, also correctly, that no such breach has been objectively established (as distinct from alleged), and by reason of the discontinuance of BWR's cross-claim it never will be established. Prestige's case is that a claim cannot arise from a matter if the matter does not objectively exist, and as the breach has not been and never will be objectively established, the Underwriters have not and cannot discharge their onus of proving that the claim is within the exclusion. This question, therefore, is whether (as Prestige contends) exclusion 2.18(b) properly construed operates only where, as a matter of objective fact, there has been a breach of the stipulated duty; or whether (as the Underwriters contend) it operates if the claim is one, justification of which would require the existence of such a breach. 13 Mr Neil SC submits that the principle, already mentioned, that whether a claim falls within an insured peril or an exclusion depends upon its underlying facts and not on the manner in which it is formulated by a claimant, means that in order to invoke an exclusion, the facts referred to in the exclusion clause must objectively exist, as distinct from being alleged as an element of the claim. However, I am unable to accept that submission. That principle does not necessarily require that the underlying facts must objectively exist, as distinct from that they be the material facts required to sustain the claim. Ultimately, the question must be one of construction of the exclusion in the relevant policy. 14 Prestige's argument derives some textual support from the circumstance that the draftsperson, elsewhere, arguably recognised the distinction between an actual state of affairs and an alleged state of affairs: in the insuring provision, clause 1.1, indemnity is given against legal liability for any claims in respect of civil liability incurred or alleged; while in the exclusions, clause 2.2 excludes cover in respect of claims "directly or indirectly based upon, attributable to, or in consequence of any actual or alleged dishonest, fraudulent, criminal or malicious act …", and clause 2.15 excludes cover in respect of claims arising from any act, error or omission occurring or committed, or allegedly occurring or committed, prior to the Retroactive Date …". However, in each of those provisions, "alleged" is use in apposition with words which would otherwise have unambiguously excluded alleged as distinct from actual states of affairs – "incurred", "actual" and "committed" – so that the context required a clear statement that alleged as well as actual states of affairs were intended to be caught. It is not so apparent that clause 2.18 requires that type of clarification. 15 Other clauses in the policy that exclude cover by reference to the subject matter of the claim use the phraseology "claim directly or indirectly based upon, attributable to, or in consequence of … " – see clause 2.6 in respect of occupier's liability, 2.5 in respect of employer's liability, 2.10 in respect of actions for refund of professional fees, 2.11 in respect of contractual liability, and 2.14 in respect of plagiarism and breach of confidence. However, I do not find much assistance in these textual indications, because one gets the impression that different connective expressions have been used somewhat randomly, without the intention of necessarily conveying a different meaning. Thus while in exclusions 2.2, 2.3, 2.5, 2.6, 2.10 and 2.14, the formula "claim directly or indirectly based upon, attributable to, or in consequence of …" is employed, in exclusion 2.8, it is "claim directly or indirectly caused by or contributed to by or arising from …", and then, in exclusions 2.15, 2.16, 2.17 and 2.18, the language "arising from" is used. 16 Ultimately, however, the best indication is the structure and purpose of the policy, and in particular the exclusions, as a whole. The policy covers liability, and defence costs, for claims in respect of civil liability, incurred or alleged. The exclusions carve out from that cover certain classes of claim. Although the insuring clauses indemnify against liability for any claim in respect of civil liability incurred or alleged (clause 1.1) and costs incurred (clause 1.2), the exclusions are expressed to operate in respect of any claim having certain characteristics. 17 First, the word claim – in this context – connotes an as yet undetermined allegation of liability. This has significance, in that the exclusions operate, not in respect of ascertained liabilities of the insured, but in respect of claims against the insured which, when made (which is the critical time under this type of insurance policy), will usually be unresolved. That favours the view that – at least in respect of those exclusions which characterise excluded claims by reference to the underlying cause of action, such as 2.6 (occupier's liability), 2.5 (employer's liability), 2.11 (contractual liability), and 2.14 (plagiarism and breach of confidence) – the contractual intention was that the Underwriters were not to be at risk in respect of such claims, whether or not they were ultimately justified. 18 Secondly, the characteristics by which the excluded claims are defined vary widely: some are "descriptive", concerning subject matter, and relating to the nature of the "cause of action" that founds the claim (for example, claims caused by or arising from employer's liability (clause 2.5), or nuclear radiation (clause 2.8), or breach of confidence (clause 2.14)), while some are "circumstantial", concerning some circumstance pertaining to the claim which the Underwriters do not wish to cover (for example, claims by related persons (clause 2.4), or claims brought in the USA (clause 2.13), or claims arising before the retroactive date (clause 2.15). Here, the exclusion is expressed to be in respect of any claim … arising from … any breach of the duty to advise on suitability of insurer. The notion of a claim arising from a matter, as already explained, suggests that what was contemplated were claims in which the relevant matter was a material underlying fact, the existence of which would be required to justify the claim, rather than a fact which had to exist independently and objectively. 19 Thirdly, where, as here, the insuring clause insures against liability for claims in respect of incurred or alleged liability, it would be very curious if the exclusions were intended to be limited to claims only of incurred and not of alleged liability of the excluded classes, or if they carved out any one or more of those classes as to liability, but not as to defence costs. Yet Prestige's construction would have just that effect: if an exclusion operates only where the underlying facts objectively exist, then claims would be excluded only if liability were established, and not otherwise; so that insurance would extend to defence costs of such a claim if it was ill-conceived, but not to liability or costs if the claim was objectively well-founded. Thus, if a claimant alleged breach of confidence (clause 2.14), breach of director's duties (clause 2.16), or breach of duty to advise on suitability of an insurer (clause 2.18(b)), the exclusion would apply only if, objectively ascertained, there was a breach of the kind alleged; if not, the Underwriters would still be at risk. In the context of this policy, it does make sense that the parties would have intended the Underwriters to be on risk in respect of such a claim, unless it was successful. The construction urged by Prestige would have the curious consequence that the Underwriters would be liable to pay defence costs in respect of unsuccessful claims alleging breach of duty to advise on suitability of insurer, but not to indemnify in respect of successful claims of that character. 20 The better view, therefore, in my opinion, is that where the policy excludes cover for claims arising from a specified matter, what was intended was that the Underwriters were not to be at risk in respect of claims, justification of which would require the existence of the specified matter as an underlying fact. It is not necessary that the matter objectively exist; it suffices that its existence is asserted, expressly or implicitly, by the claim. 21 Accordingly, in my opinion, exclusion 2.18(b) operates, where the claim is one that includes an allegation of breach of the relevant duty, to exclude cover for such claims. It is not dependant upon the existence, as an objective fact, of the alleged breach. It is uncontroversial that the particulars in par 10 of BWR's cross-claim involve such an allegation. Accordingly, the claim is excluded from cover on this ground also. Conclusion 22 My conclusions may be summarised as follows. 23 A claim can be said to arise from a matter – at least – if it has a foundation in that matter, so that the matter is one of the underlying facts that, if they exist, together justify the claim. The loss that was the gist of BWR's claim in negligence against Prestige was, as a matter of fact, attributable to International Unity's insolvency: International Unity's insolvency was a material underlying fact. Accordingly, the claim arose from the insolvency of an insurer, and clause 2.18(a) operates to exclude cover. 24 Where the policy excludes cover for claims arising from a specified matter, what was intended was that the Underwriters were not to be at risk in respect of claims, justification of which would require the existence of the specified matter as an underlying fact. It is not necessary that the matter objectively exist; it suffices that its existence be asserted, expressly or implicitly, by the claim. It is uncontroversial that BWR's cross-claim involves an allegation of breach of Prestige's duty to advise on the suitability of International Unity. Exclusion 2.18(b) operates to exclude cover for such claims, and is not dependant upon the existence, as an objective fact, of the alleged breach. 25 On the third cross-claim, I give judgment for the cross-defendants, with costs. ********** 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.