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Possibility loses indemnity 28 WCMS

CGU Insurance Ltd v Porthouse [2008] HCA 30. Gummow, Kirby, Heydon, Crennan, Kiefel JJ. 30.07.08.

The professional indemnity insurer succeeded in asserting its exclusion for non-disclosure.

Balla DCJ had found the respondent barrister equally liable with his solicitors for the $170,000 plus costs award for a plaintiff client, injured in 1999 while on community service.

Their advice had failed to comprehend Crimes (Administration of Sentences) Act 1999 applied 1987 WCA in the circumstances.

Also, proceedings were commenced after the 27.11.01 retrospective suspension of common law.

Those proceedings went to Court of Appeal judgment for the defendant: State of NSW v Bahmad [2004] NSWCA 287 (27 August 2004).

The client's professional negligence suit brought call and declinature from the insurer, who was joined as cross-defendant by the barrister.

Balla DCJ found for the barrister, and was upheld by the Court of Appeal: CGU Insurance Ltd v Porthouse [2007] NSWCA 80 (11 April 2007).

In their single judgment, the five High Court Justices detailed history of the cause and referred to instruments, including the policy's definition of "known circumstances", described as "Section 11.12", particularly its sub-proviso (b) "... a reasonable person in the Insured's professional position would have thought, before this Policy began...".

Their Honours [43]: "There was no disagreement about the principles to be applied to the task of interpretation. Gleeson CJ in McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; 203 CLR 579 said:

'A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure'."

Later, [52] "The statutory test for disclosure now to be found in s 21 of the Insurance Contracts Act focuses on the 'reasonable insured', not the 'prudent insurer', and operates, first, by reference to the actual knowledge of the insured s 21(1)(a), and secondly, by reference to what 'a reasonable person in the circumstances could be expected to know': s 21(1)(b).

"That latter statutory phrase has been interpreted as meaning that one should take into account only factors which are 'extrinsic' to the insured, such as the circumstances in which the policy was entered into, rather than 'intrinsic' factors such as the individual idiosyncrasies of the insured.

"Whilst it is possible to take into account the circumstances of the insured, the ultimate question under s 21(1)(b) turns on consideration of a reasonable person's state of mind, not the insured's state of mind," citing Twenty-First Maylux PL v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919 at 925 per Brooking J, and GIO General Limited v Wallace [2001] NSWCA 299 per Heydon JA.

The High Court said without replicating s 21, the policy definition clause similarly expressed subjective and objective criteria of knowledge.

"The phrase 'a reasonable person in the insured's professional position' in Section 11.12(b) [of the policy] posits an objective standard, with a modification relating to professional, not personal, matters.

"The phrase describes a hypothetical reasonable person with the experience and knowledge of the insured coupled with the capacity of such a reasonable person to draw a conclusion (whether it is plain and obvious or not) as to the possibility of someone making an allegation against the insured.[55] "

In the clause, (i) "allegations" ...  "means allegations in respect of claims (successful or not) or in respect of disciplinary proceedings";  (ii) the phrase "before this Policy began" ... " is a temporal expression meaning earlier in time, no matter how much earlier in time" and there was "no justification for reading down" the reference to a period instantly preceding the disclosure; and (iii) "any fact, matter or circumstance" meant "objective matters".

Then, [64], "In the context of the policy, the conditional expression 'would have thought' is a reference to a supposed conclusion reached by the hypothetical 'reasonable person'.

"Once that person satisfies the condition of being 'in the insured's professional position' and once knowledge of 'any fact, situation or circumstance' known to the insured is imputed to that person, the phrase 'would have thought' coupled with the expression to which we give emphasis 'might result in' requires a conclusion by the hypothetical person that there was a real (not a fanciful or remote) possibility (not a certainty) of an allegation being made."

At trial,  "While each of the insured and the insurer called expert evidence from senior counsel, their evidence did not go beyond the issue of negligence.

"A third senior counsel called by the respondent gave evidence limited to issues relevant to Section 11.12(a), namely the respondent's actual knowledge at the relevant time.

"The primary judge rejected an attempt to tender opinion evidence on the question of what a reasonable person in the insured's professional position 'would have thought', partly because of late service."

The insurer wishing to rely on the exclusion clause bore the burden of proof: [71].

"Evidence of a particular practice or standard of conduct, whether laid down by a professional body or sanctioned by common usage, may be relevant to establishing a standard of care in a case of professional negligence, although expressions of personal opinion about what an individual would have hypothetically done, if in the same position as a defendant in a negligence action, might be thought to be of little assistance.

"While the legal criterion here is not the standard of care for professional conduct, similar considerations might arise. It is not inconceivable that an occasion, or set of facts, could arise where it is necessary for an insurer to prove common practices or attitudes in order to prove what a hypothetical reasonable person 'would have thought' so as to establish that it is not liable to indemnify the insured."

In the instant matter there was no doubt of the barrister's knowledge.

Infra [73]: "Given the nature and objects of this particular policy, there can be no real doubt that a reasonable barrister (unable to practise without a policy of professional indemnity insurance), who knew of the potential effect on his client's case of the 2001 amendment to the Workers Compensation Act, and who knew of the pending appeal and of his role in creating his client's problem, would have thought that there was a real possibility that an allegation might be made in respect of a liability which might be covered by the policy. Accordingly, evidence on that issue was not essential and may well have been superfluous."

Then [74], "The error of the primary judge, which was not corrected by the majority in the Court of Appeal, was that she gave no independent consideration to the alternative, additional and objective standard stated in Section 11.12(b) of the policy, namely what a 'reasonable person ... would have thought'.

"In particular, there was no clear foundation for the primary judge's finding that the respondent's knowledge coincided with what a reasonable person in the insured's professional position would have thought and concluded, in respect of the undisputed facts and circumstances known to the insured.

"Yet the reference in the policy to that consideration afforded an essential criterion that had to be applied.

"Moreover, it was an important practical protection for insurers. It protected the insurer from a genuine but unreasonable or unrealistic estimate or understanding of the insured. It introduced a necessary element of objectivity into the final conclusion to be reached. It had to be given proper application in the present case."

Ultimately [75],  "Section 11.12(b) sets an objective standard, with the modification that the insured's professional experience and the insured's knowledge of facts and circumstances are imputed to 'a reasonable person in the Insured's professional position'.

"An enquiry about what a reasonable person 'would have thought' enquires about real (not remote or fanciful) possibilities; it does not enquire about certainties.

"When applying Section 11.12 it is not wrong to take into account what an insured thought, as a piece of possibly relevant evidence, but the standard described in Section 11.12(b) is an objective standard, and a question of fact to be determined independently of the insured's state of mind. "

Appeal allowed, verdict substituted, respondent to pay trial and intermediate appeal costs, by agreement, appellant to pay respondent's High Court costs.

A: M A Pembroke SC, G Lucarelli, inst Kennedys. R:  A J Meagher SC, A J Payne, D F C Thomas, inst Langes Lawyers.

Also, New South Wales v Bahmad [2004] NSWCA 287 (27 August 2004) 
CGU Insurance Ltd v Porthouse [2007] NSWCA 80 (11 April 2007);

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