Gorczynski v W&FT Osmo Pty Ltd  NSWCA 163: Third Parties and Section 54 – Another nail in the coffin of œclaims made and notified policies?Author : Michael Bath, Special Counsel and Kiri-Ana Libbesson, SolicitorProfessional Indemnity
Where section 54(1) of the Insurance Contracts Act 1984 (Cth) (ICA) operates, it prevents an insurer from refusing to pay a œclaim because of an act or omission occurring after the policy was entered into if that act or omission did not cause or contribute to the loss. It has recently been suggested that one of the most contentious applications of section 54 arises in the context of late notifications under claims made and notified policies.
Claims made and notified policies are one of the most typical forms of professional indemnity and directors & officers (D&O) insurance policies available in the market. As the name suggests, these policies provide cover for claims which are both:
- made against the insured person or entity; and
- notified to the insurer,
during the period of insurance. The intent of these policies is that both criteria must be satisfied in order for the policy to be enlivened.
Despite these requirements, since decisions in cases such as East End Real Estate v CE Heath Casualty General Insurance (1991) 25 NSWLR 400 and FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 insureds have had the protection of section 54 of the ICA notwithstanding that the claim or circumstance was notified to the insurer after the period of insurance had expired.
A recent decision of the New South Wales Court of Appeal considered whether a third party claimant was entitled to the benefit of section 54(1) of the ICA where the insured had not made a claim or notified circumstances under a œclaims made and notified policy. The question was considered in the context of an application by the third party to join the insurer to proceedings under section 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (LRMPA).
W&FT Osmo Pty Ltd (Osmo) was a firm of consulting structural and civil engineers which held successive œclaims made and notified insurance policies with QBE Insurance Group Ltd (QBE) covering the period 7 May 1997 to 7 May 2004.
In 1999 Osmo was retained by the plaintiff’s neighbours to provide various certificates to the Leichhardt Municipal Council (the Council) for the construction of a building on the neighbours’ property. In reliance on the certificates, the Council authorised the construction of the building.
On 24 January 2000 the plaintiff commenced proceedings against the neighbours and the Council in the Land and Environment Court (L&E Court) seeking orders that the building on the neighbours’ property be demolished. Those proceedings were successful and, relevantly for present purposes, on 6 June 2003 the L&E Court ordered that the neighbours pay the plaintiff’s costs of those proceedings, but made no order for costs between the plaintiff and the Council.
On 5 May 2006 the plaintiff commenced proceedings against Osmo in the District Court of New South Wales to the recover costs incurred in the L&E Court proceedings that were not recovered by costs orders. Osmo was impecunious and did not defend the District Court proceedings. Default judgment was entered against Osmo in July 2006.
The costs claimed by the plaintiff were incurred during the periods of cover. However, Osmo never notified QBE of the proceedings brought against it or of any claim made against it by the plaintiff or that it proposed to make a claim against the policies. It was noted, however, that the plaintiff contacted QBE on a number of occasions during 1999 and 2000 to advise that a claim would probably be made against Osmo and to demand that indemnity be provided under the relevant policies in respect of that claim.
On 16 December 2008 the plaintiff filed a Notice of Motion pursuant to the UCPR 6.24(1) seeking to join QBE to the proceedings. The Court of Appeal noted that this application was really one under section 6(4) of the LRMPA for leave to commence proceedings against QBE to enforce a charge created by section 6(1) of the LRMPA. QBE resisted the application on grounds that it was entitled to disclaim liability under the policy, and therefore leave under section 6(4) could not be granted. The plaintiff argued in response that section 54 of the ICA prevented QBE from disclaiming liability.
DECISION AT FIRST INSTANCE
At first instance, although not the subject of direct submissions from QBE, Simpson J held that section 54(1) of the ICA could apply to a claim by a third party based on the charge created by section 6(1) of the LRMPA. As Her Honour observed, if that was not the case:
an indolent, or malevolent, insured (especially if impecunious and with nothing to lose) could, by merely refraining from or failing to give the proper notice, entitle the insurer to disclaim the policy, thereby thwarting an attempt by a third party claimant to exercise the right conferred by s 6¦
Her Honour held that such circumstances would defeat the object of section 6 of the LRMPA. In that context Her Honour considered that section 54 of the ICA could be taken in to account in the exercise of the Court’s discretion under section 6(4) of the LRMPA.
Nevertheless, based on factual findings (which were ultimately demonstrated to be incorrect) Her Honour refused the plaintiff’s application to join QBE on the basis that:
- Osmo was not covered by the policy for the plaintiff’s claim;
- QBE was therefore entitled to disclaim liability under the policy; and
- therefore s 6(4) could not be invoked.
DECISION ON APPEAL
The plaintiff appealed the decision of Simpson J to the NSW Court of Appeal. The Court of Appeal ultimately dismissed the appeal on grounds that the plaintiff’s claim was statute barred and therefore the Court should not exercise its discretion to grant leave under section 6(4) of the LRMPA.
In resisting the appeal QBE raised a number of alternate arguments about the application of section 54(1) of the ICA. Relevantly for present purposes QBE submitted that:
- section 54(1) of the ICA has no application to a case where the insured never made a claim under the applicable policies; and
- section 54(1) required the claim against the insurer to be made by its insured.
In rejecting the first submission, the Court noted that QBE’s essential submission was that there was no œclaim made against it within the meaning of section 54(1). In dealing with this issue, the Court noted that the œclaim to which section 54(1) was directed was the œclaim against the insurer, not a claim by a third party against the insured. While, in the context of a œclaims made and notified policy the third party claim must be made within the time limits provided in the policy, their Honours noted that there was no such temporal requirement for making a œclaim against the insurer under section 54(1).
Recognising that there was no authority which identifies the meaning of a œclaim in section 54(1), their Honours referred to a number of judicial and academic authorities which stated that a œclaim is œa demand for something as due, an assertion of a right to something. Having done so, their Honours concluded for the purpose of section 54(1) a œclaim was made by filing and serving the application for leave to commence proceedings against QBE under section 6(4) of the LRMPA. As their Honours stated:
The claim was for payment of insurance monies payable under the policies over which the plaintiff was entitled to a charge pursuant to s 6(1) of the Act¦
In relation to the second submission, the plaintiff argued that sections 48 and 51 of the ICA entitled persons who were not the insured to make a claim under a policy of insurance. In those circumstances the plaintiff argued that because of the apparent application of section 54 to claims under sections 48 and 51, it followed that the reference to a œclaim in section 54 should not be confined only to a claim made by the insured.
QBE advanced a number of reasons why the plaintiff’s suggestions should be rejected including that:
- the ICA drew a distinction between claims under a contract of insurance (which are caught by section 54) and claims made under the ICA by persons not insured by the contract of insurance (which QBE submitted were not);
- the words of sections 54(3) and (4) were a clear indication that section 54 was only intended to include a claim by the insured against the insurer; and
- where the legislature intended the ICA to apply to claims other than by an insured it expressly said so. QBE submitted that since section 54 does not,
- that is an indication that it was intended to only apply to claims by an insured.
Their Honours rejected each of QBE’s submissions and could not find anything in the ICA or any policy reason why the application of section 54(1) of the ICA should be limited to claims by an insured. Their Honours therefore concluded that section 54(1) of the ICA could apply to a claim by a third party against an insurer.
It followed that since a claim under section 6(4) of the LRMPA was a claim against the insurer, the plaintiff was entitled to the relief provided for by section 54(1) to prevent the insurer disclaiming liability by reason of Osmo’s failure to notify QBE of the claim.
Given the widespread use of œclaims made and notified policies in the professional indemnity and D&O insurance market, the impact of this decision has far wider implications than the neighbourhood dispute from which it originated.
Although the insured had never made a claim or notified circumstances under the policy, the third party was entitled to the benefit of section 54(1) of the ICA to prevent QBE disclaiming liability and thereby defeating its application under section 6(4) of the LRMPA.
It may be suggested that this decision is another œnail in the coffin of œclaims made and notified policies. However, it should be recognised that there remains a temporal requirement that the claim against the insured must be made during the relevant policy period. Without this temporal requirement being satisfied the policy is not enlivened. Mead, P Professional Indemnity insurance “ claims made and notified polices (2010) 25(6) ILB 68 30/08/2010