Supreme Court New South Wales Medium Neutral Citation: Sciacca v Ace Insurance Ltd [2011] NSWSC 798 Hearing dates: 15 July 2011 Decision date: 28 July 2011 Jurisdiction: Common Law Before: Schmidt J Decision: The plaintiffs have leave under s 6(4) of the Law Reform (Miscellaneous Provisions) Act to commence proceedings against the defendant. Catchwords: INSURANCE - leave sought to institute proceedings under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 - claims made policy - consideration of the policy - when the relevant event occurred - arguable case established - s 54 of the Insurance Contract Act 1984 (Cth) - leave sought granted Legislation Cited: Insurance Contract Act 1984 (Cth) Law Reform (Miscellaneous Provisions) Act 1946 Limitation Act 1969 Cases Cited: FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641 Gosford City Council v GIO General Ltd [2003] NSWCA 34; (2003) 56 NSWLR 542 Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539 McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579 New South Wales Aboriginal Land Council v Ace Global Markets Ltd [2005] NSWSC 39; (2005) 14 ANZ Insurance Cases 61-703 Scarcella v Lettice [2000] 51 NSWCA 289; (2000) 5 NSWLR 302 The Owners - Strata Plan No 50530 v Walter Construction Group Ltd (In Liquidation) [2007] NSWCA 124; (2007) 14 ANZ Insurance Cases 61-734 Tzaidas v Child [2004] NSWCA 252; (2004) 61 NSWLR 18 Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514 Category: Principal judgment Parties: Frank Sciacca (First Plaintiff) Rosie Ianelli (Second Plaintiff) Maura Spresian (Third Plaintiff) ACE Insurance Limited (Defendant) Representation: Counsel: Mr RR Stitt QC with Mr HWM Stiff (Plaintiffs) Mr G Curtin SC (Defendant) Solicitors: WKA Legal Pty Ltd (Plaintiffs) Gilchrist Connell (Defendant) File Number(s): 2011/205355 Judgment 1The proceedings were commenced by summons filed in June 2011. Leave is sought under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 ('the Act') to commence proceedings against the defendant, as an insurer, with respect to enforcement of a charge arising under s 6(1) of the Act, over insurance monies payable by the defendant to Primrose Financial Group Pty Ltd ACN 094 338 459 ('Primrose'). 2The section provides: "6 Amount of liability to be charge on insurance moneys payable against that liability (1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. (2) If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured (being a corporation) is being wound up, or if any subsequent winding-up of the insured (being a corporation) is deemed to have commenced not later than the happening of that event, the provisions of subsection (1) shall apply notwithstanding the winding-up. (3) Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves. (4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken. (5) Such an action may be brought although judgment has been already recovered against the insured for damages or compensation in respect of the same matter. (6) Any payment made by the insurer under the contract of insurance without actual notice of the existence of any such charge shall to the extent of that payment be a valid discharge to the insurer, notwithstanding anything in this Part contained. (7) No insurer shall be liable under this Part for any greater sum than that fixed by the contract of insurance between the insurer and the insured. (8) Nothing in this section shall affect the operation of any of the provisions of the Workers Compensation Act 1987 or the Motor Vehicles (Third Party Insurance) Act 1942. (9) Despite subsection (8), this section applies in relation to a policy of workers compensation insurance entered into by an employer (whether entered into before or after the commencement of this subsection), where the employer: (a) being a natural person, has died, or is permanently resident outside the Commonwealth and its Territories, or cannot after due inquiry and search be found, or (b) being a corporation (other than a company that has commenced to be wound up), has ceased to exist, or (c) being a company, corporation, society, association or other body (other than a company that has commenced to be wound up), was at the time when it commenced to employ workers to which the policy relates incorporated outside the Commonwealth and its Territories and registered as a foreign company under the laws of any State or Territory and is not so registered under any such law, or (d) being a company, is in the course of being wound up. 3The purpose of the provision is to enable a person to pursue a claim against an insured person, where the insured has a valid claim on a policy, but does not, or cannot pursue the claim. It was common ground that there were valid insurance policies in existence at the relevant times and that Primrose and Integrity Mortgage Professionals Pty Limited, are both in liquidation. It was not in issue that the plaintiffs had an arguable claim against the insured. 4It was also not in issue that the plaintiffs had invested money through Primrose, a Mr La Rocca and Mr Piras being involved in that company's operations. The loan in question was a short term loan for $490,000 made in 2005 to a Mr and Mrs Waldron, to which the three plaintiffs had each contributed. The loan was secured over a property at Wahroonga, by way of second registered mortgage. 5There was a default and in 2006 steps were taken by the first mortgagee, Angas Securities Ltd, to obtain possession of the property, which was to be auctioned. Steps were taken to restructure the finance. The property was then valued at some $3.6 million. With the plaintiffs' consent, their security was transformed into a third unregistered mortgage and they were also given a share mortgage over a company known as Arnap Pty Ltd, a company Mr Waldron was utilising in order to conduct property developments. The first mortgagee then cancelled the auction and took no steps to further execute its security. There was a further default under the share mortgage. Discussions ensued. 7In October 2007, at a meeting which the plaintiffs attended with Mr La Rocca at their solicitor's office, the plaintiffs informed Mr La Rocca that they proposed to sue Primrose. The threat was acknowledged in writing on 29 October. There were further attempts to recoup the outstanding loan and in early December, at another meeting with Mr La Rocca and Mr Piras, the plaintiffs again advised of their intention to pursue claims in negligence. The plaintiffs' threat was then acknowledged in writing on 19 December. 6In April 2008, Mr Waldron transferred his shares in Arnap to another of its directors, in breach of the security arrangement. The plaintiffs became aware of this in May. The property was auctioned in June and was passed in, with a vendors bid made for only $1.8 million. Further marketing failed to secure a buyer and in October, Angas Securities issued a notice of intention to foreclose. On foreclosure, the plaintiffs' security over the property was extinguished. 8Finally, there were only two issues lying between the parties. The first, going to the construction of the insurance policy in question and the second, the time at which the relevant event occurred. 9What the plaintiffs have to establish is that they have an arguable case. In Tzaidas v Child [2004] NSWCA 252; (2004) 61 NSWLR 18 it was observed at [140] per Santow JA, that this is 'a relatively modest hurdle '. The policy 10Contrary to Mr La Rocca's advice, Primrose had insurance cover at all relevant times. The policy which appears to be relevant to the claim which the plaintiffs made, commenced in September 2007. It was not in issue that it was a valid policy. It was a claims made policy. Clause 1.1 provides: " 1.1 Civil Liability ACE will indemnify the Insured against Loss arising from any Claim in respect of civil liability for breach of a duty owed in a professional capacity first made against an Insured during the Period of Insurance." 11Clause 5.4 of the policy provides: " 5.4 Claim Claim is a written demand for, or an assertion of a right to, civil compensation or civil damages arising out of the Firm's Business or a written intimation of an intention to seek such compensation or damages. For the purposes of Automatic Extension 6.6 Mortgage Industry Ombudsman Service Complaints only, Claim is a written complaint arising out of the Firms' Business made to the Mortgage Industry Ombudsman Service and which is accept by the Scheme Manager approved by the Mortgage Industry Ombudsman Service Board." 12While not all of the documentary evidence has been led at this stage, it was not in question that the plaintiffs had asserted their right to damages for negligence against the insured. That was evidenced, for example, in an email sent by Mr La Rocca to the plaintiffs' solicitor in December 2008, where he said, amongst other things, '[f]urther with the prospect of imminent legal action against our firm, we anticipate that you will need to be informed of our financial position'. Mr La Rocca advised that he, Mr Piras and their companies did not hold significant assets; they each had a net asset position which was in net deficiency; and that they had no professional indemnity insurance. The latter advice was clearly incorrect. 13The plaintiffs accepted that what was being referred to in this email was not written demands which they had made. Nevertheless, it was argued that a claim had been made within the meaning of clause 5.4 of the policy, by way of their assertion of a right, which had been acknowledged in writing on more than one occasion by the insured, in correspondence between them. 14The defendant argued, that properly construed, only a written assertion of a right made by a claimant fell within clause 5.4 of the policy. A written acknowledgement by the insured of such an assertion was not sufficient. When the commercial purpose of the clause was considered, it would be concluded that it would be odd for the insurer to require two things to be in writing in order for a 'claim' to arise, but for an oral 'assertion' of a claim to be sufficient. 15In McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, it was held that policies of insurance must be construed to be given their natural meaning. In the case of this policy, it was submitted the insured providing a claimant with written acknowledgement of an oral claims did not satisfy the terms of the clause, especially when it was born in mind that it was a claims made policy, where the trigger is the making of the claim. The fact that the insured wrote down that an oral demand had been received, was not sufficient. 16Resolution of this aspect of the controversy depends on a consideration of the various written communications between the parties, in light of the proper construction of the policy. Whether there was any written response to the insured's written acknowledgments of the oral claims referred to, is not apparent. The contest between the parties turned on the written communications sent by the insured. 17The plaintiffs argued that the policy had to be construed contra preferendum, that is by selecting the interpretation less favourable to the defendant. In McCann , Kirby J discussed at [74] the principles applying to the construction of insurance polices, which include that they must be given their ordinary and fair meaning; taking into account the commercial and social purposes for which they are written; that the primary duty is to uphold the contract between the parties; that the contra proferentem rule is one of last resort, but that: "... it is not unreasonable for an insured to contend that, if the insurer proffers a document which is ambiguous, it and not the insured should bear the consequences of the ambiguity because the insurer is usually in the superior position to add a word or a clause clarifying the promise of insurance which it is offering"( Johnson v American Home Assurance Co [1998] HCA 14; (1998) 192 CLR 266 at 275 [19].) 18So approaching the construction of the policy, it seems to me that it must be concluded that the plaintiffs have an arguable case, given the drafting of the clause, which is unclear, and having in mind the underpinning commercial purpose of the clause in issue, namely to provide insurance in respect of claims which were received by the insured. In evidence is the later redrafted clause, which removes any ambiguity. It follows, in my view, that this aspect of the case pressed was established. The event 19The relevant event under s 6 is whatever completes the claimant's cause of action against the insured (see The Owners - Strata Plan No 50530 v Walter Construction Group Ltd (In Liquidation) & Ors [2007] NSWCA 124; (2007) 14 ANZ Insurance Cases 61-734 at [24].) 20On the plaintiffs' approach, a claim in negligence for economic loss requires that there be both a breach of duty and relevant actual loss flowing from the breach (see Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 514). The time that the cause of action accrues, depends on an identification the defendant's negligent acts or omissions and of when the resulting damage occurred. 21On the facts there was an initial loan, subsequent transactions, a refinance with different security and attempts to recover the investment. The time at which recoupment of the investment became impossible on the plaintiffs' approach, occurred in 2008. The shares were sold in April 2008. The property was auctioned in June 2008, but was passed in. Subsequent attempts to sell failed, with the result that in October 2008 the first mortgagee issued a notice of intention to foreclose. That notice, beyond argument, extinguished the plaintiffs' security over the property, thereafter being no prospect of them recovering the loan. 22Reliance was placed on what was observed by Gaudron J in Hawkins v Clayton [1988] HCA 15; (1988) 164 CLR 539 at 601: "If the interest infringed is the value of property, it may be appropriate to speak of a cause of action in negligence for economic loss sustained by reason of latent defect as accruing when the resultant physical damage is known or manifest, for as was explained by Deane J. in Heyman56 it is only then the actual diminution in market value occurs. If, on the other hand, the interest infringed is the physical integrity of property then there is a certain logic in looking at the time when physical damage occurs, as was done in Pirelli. So too, if the interest infringed is an interest in recouping moneys advanced it may be appropriate to fix the time of accrual of the cause of action when recoupment becomes impossible rather than at the time when the antecedent right to recoup should have come into existence, for the actual loss is sustained only when recoupment becomes impossible." 23It was also argued that in determining the question of when the relevant event occurred, the operation of market forces had to be taken into account, as Wood CJ at CL discussed in New South Wales Aboriginal Land Council v Ace Global Markets Ltd [2005] NSWSC 39; (2005) 14 ANZ Insurance Cases 61-703 at [105]: "In any event, in the case of a loan transaction, the borrowers' ability to repay, is not solely determined by the value of any security given. In the instant case, there was the added factor that additional security was taken over the borrower's assets by way of the fixed and floating charge, and by way of the guarantees from the Moore Corporation and from Mr and Mrs Moore. Recourse to those securities could potentially have made good any short fall arising from the sale of the mortgaged property." 24There was security over the shares, the value of which was fluid, but which was lost in April 2008. In June 2008, the property which had earlier been valued at some $3.6 million was passed in, with the result that it became apparent, by October 2008 at the latest, that recoupment of the plaintiffs' loan had become impossible. That was the relevant event. 25For the defendant it was argued that it was necessary to consider when the damage resulting from the negligence was first suffered, that being what s 14 of the Limitation Act 1969 is concerned with. In pure economic loss cases, time could run even if the plaintiffs were not aware of either the breach, or resulting damage (see Scarcella v Lettice [2000] NSWCA 289; (2000) 51 NSWLR 302). 26In this case, the loan was made in 2005 for a period of one month. On the evidence there was a breach in June 2006. The first mortgagee's debt then stood at some $2.78 million, with the debt increasing at some $39,000 per month. A distinct possibility then arose that if the property was sold, the first mortgagee would not be paid out. 27The auction did not proceed. The plaintiffs' second mortgage was discharged in June 2006 and another second mortgage in respect of a further loan for some $532,000 obtained from another lender was registered. The plaintiffs then obtained an unregistered third mortgage, a share mortgage and lodged a caveat over the property, claiming an equitable interest in the property. The borrowings then stood at some $3.4 million, with the property having been valued at some $3.6 million. 28On the defendant's case, the plaintiffs suffered an actual loss in June 2006. While it was accepted that a pragmatic approach had to be adopted, there was no evidence as to the value of the shares over which security was given in 2006. The question of when the relevant event occurred could not be determined on the hypothetical basis that they had some value. 29The plaintiffs pointed to evidence which it was argued established that the shares had ascertainable value. It followed that no loss or damage materialised in 2006, given the steps then taken by the plaintiffs, which permitted the refinance and gave them further valuable security. 30As discussed in Wardley (at [14] - [16] for example), at common law a plaintiff can only recover compensation for actual loss or damage incurred, not potential or likely damage. Loss and damage is not the inevitable result of every act of negligence. When a cause of action for negligence causing economic loss accrues, thus requires consideration of both the negligent act or omission in question and when the resulting loss or damage actually materialised. 31It follows, in my assessment of the evidence, that the plaintiffs have an arguable case that the cause of action did not accrue until 2008. In 2006, the steps taken averted damage materialising. The evidence does not permit the conclusion that the shares over which security was obtained had no value, or that the property provided no security in respect of the loan. The plaintiffs' submissions that it was only in 2008 that the relevant event occurred, resulting in the loan having no prospect of being recovered, must be accepted as being arguable. Section 54 of the Insurance Contract Act 1984 (Cth) 32The plaintiffs also argued that the effect of s 54 of the Insurance Contract Act 1984 (Cth) had to be considered; it providing a statutory basis for excusing a failure to give notice of a claim (see FAI General Insurance Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641.) 33It was argued for the defendant that in the case of a claims made and determined policy, if the insured did not notify the insurer of circumstances that might lead to a claim under the policy, s 54 has no application. (See Gosford City Council v GIO General Ltd [2003] NSWCA 34; (2003) 56 NSWLR 542.) 34The section provides: "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. (2) Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim. (3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. (4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act. (5) Where: (a) the act was necessary to protect the safety of a person or to preserve property; or (b) it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the 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." 35In this case there seem to be a number of relevant acts and omissions which arise to be considered. It appears that as well as acknowledging the plaintiffs' claims in relation to its alleged negligence in writing, Primrose also took steps to deceive the plaintiffs as to its insurance position. In the result, the plaintiffs made no written demand in relation to the negligence which they had complained of on more than one occasion. Primrose thus did not receive any written demand from the plaintiffs and did not notify the defendant of the plaintiffs' claims. 36For the defendant, it was submitted that the result was that s 54 was not a relevant consideration, to the question of leave. It was accepted, however, that if the plaintiffs' case on the two matters in issue were accepted, that the leave sought would then be granted. 37In the face of that concession, it follows for the reasons which I have explained, that the leave must flow. Order 38For these reasons, I order that the plaintiffs have leave under s 6(4) of the Law Reform (Miscellaneous Provisions) Act to commence proceedings against the defendant. ********** Amendments 29 July 2011 - typographical error in paragraph [7] - October 2008 changed to October 2007paragraph [7] inserted above paragraph [6] - orginal paragraph [7] becomes paragraph [6] Amended paragraphs: [6] and [7] 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. Decision last updated: 29 July 2011