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Queensland University of Technology Law and Justice Journal |
Michele Muscillo[*]
The High Court’s decision in FAI General Insurance Co Ltd v
Australian Hospital Care Pty
Ltd[1] (FAI v AHC) appears
to be the “final word” on the operation of s54(1) Insurance
Contracts Act[2] with
respect to “claims made and notified” policies of
insurance.
The majority[3] gave
the provision a wide interpretation and ended any doubt that the NSW Court of
Appeal decision in FAI General Insurance Co Ltd v
Perry[4] (FAI v Perry) was
overruled.[5]
In short, the
importance of the High Court’s decision is two-fold:
(a) | First, to endorse a liberal construction of s 54(1) in line with its previous decision in Antico v CE Heath Casualty & General Insurance Ltd[6] (Antico), disapproving of attempts to read down the provision through artificial distinctions between “omissions” and “non-actions”[7] or “actions external to the policy”[8]; and |
(b) | Secondly, to reformulate the reasoning in Greentree v FAI General Insurance Co Ltd[9] (Greentree) and Permanent Trustee Australian & Anor v FAI General Insurance Co Ltd[10] (Permanent Trustee). |
(c) | . |
“Claims made and notified” policies were an innovation
developed by insurers “to confine the insurer’s liability
to those
claims which were both made against the insured and notified by the insured to
the insurer within the policy
period”.[11]
These
policies are to be contrasted with “occurrence based” liability
policies which provide indemnity for acts occurring
within the period of cover
subsequently giving rise to a claim.
“Claims made and
notified” policies were developed to limit the “long tail” of
liability under occurrence
based policies, which may arise many years after the
policy had expired, thus prejudicing the
insurer.[12]
An extension of
such policies are “claims made and occurrences notified” or
“discovery” policies[13]
which :
...include cover in respect of an occurrence of which an assured
became aware during the policy period which might give rise to a
claim outside
that period, where the assured invoked the policy by notifying the insurer of
the occurrence during the policy
period.[14]
Such a policy
arose for consideration in FAI v AHC.
Section 54(1) provides that an insurer may not refuse to pay a claim by
reason only of an act of an insured or another person which
would (apart from
s54(1)) give rise to a right in the insurer to refuse the claim. However, the
insurer’s liability is reduced
by the extent to which the insurer is
prejudiced. Section 54(6) provides that “act” includes an
“omission”.
It is now settled that in respect of
“claims made and notified” policies, s54(1) operates to cure a
failure on the part
of the insured to notify the insurer of a claim made by a
third party (a
“demand”[15]). That is,
the failure to notify is an omission to which s54(1)
applies.[16]
Recently, the
High Court in FAI v AHC extended s54(1) for the benefit of the insured in
respect of a “claims made and occurrences notified” policy, however
the High Court was clear in its view that the provision was not
boundless.
At this juncture, it is necessary to examine the competing
arguments, the state of the case law prior to FAI v AHC and the effect of
the High Court’s latest pronouncement.
Many argue that the results outlined above are beyond the intended object
of s54(1).[17] However it is
submitted that the reason for such a divergence of judicial (and academic)
opinion[18] over the past decade
between a wide or narrow construction, is that neither approach is entirely
satisfactory.
A narrow reading of the term “omission”
benefits insurers who can rely on a greater range of post-contractual failures
on the part of insureds to refuse payment of a claim. However, many argue that
it would be contrary to the remedial nature of s54(1)
to read down the natural
meaning of the term to the detriment of
insureds.[19]
By contrast, a
wide construction of “omission” would excuse a range of failures on
the part of the insured, inadvertent
or otherwise.
It was submitted in
FAI v Perry with respect to a failure to notify of an occurrence under a
“discovery” policy, that the insured may have sound reasons
for not
notifying the insurer of potential claims, including the effect it may have on
future premiums. Gleeson CJ stated that it
would be odd that such “a
decision not to elect to expand the scope of
cover”[20] could be classed as
an omission.
Facing the dilemma in FAI v AHC, the High Court
adopted a liberal interpretation of s54(1) – but not an interpretation
without limit, balancing the competing
views in line with the facts (but not the
reasoning) in Greentree and Permanent Trustee.
In East End, the insured sought to extend the operation of s54(1)
to a “claims made and notified” policy.
In that case, a
demand was made on the insured by a third party, however the insured failed to
notify the insurer until some six weeks
after the period of cover had expired.
Under the terms of the policy, the insurer would have been entitled to deny
liability based
on the failure to notify.
The insurer argued that s54 did
not apply to acts or omissions “which formed part of the definition of the
risk insured”[22] and that it
should not be used to widen the scope of the insured’s cover.
The
NSW Court of Appeal held in favour of the insured, Gleeson CJ stating that the
insurer’s argument must fail, as it would
be a triumph of form over
substance.
It is important to note in that case that special leave to appeal
to High Court was refused.
Similarly to FAI v AHC, the facts before the NSW Court of Appeal
in FAI v Perry concerned a “discovery” policy (occurrence
notified policy).
The policy covered the insured, Perry for :-
(a) | claims made and notified during the currency of the policy; and |
(b) | by virtue of clause 3, occurrences which may give rise to a claim outside the period of cover but which the insured became aware of and notified the insured during the period of cover. Upon notification, these subsequent claims were deemed by clause 3 to occur within the period of cover. |
Perry argued that his
failure to take advantage of clause 3 constituted an “omission”
within s54(1).
The court held in favour of the insurer. Gleeson CJ and
Clarke JA drew a distinction between an omission to act (to which s54(1)
would
apply) and a failure to exercise a right or
election.[24]
Applying FAI v Perry, the court in Kelly decided that a
failure to increase the “insured value” of items under a home and
contents policy by furnishing a list
of the items’ values was not an
omission to which s54(1) relates.
The court drew a distinction between
“inaction” and an
“omission”.[26]
In Antico the issue of an “omission” under s54(1)
reached the High Court.
The case concerned a Directors’ and
Officers’ legal expenses policy under which Antico was indemnified for
legal expenses
incurred in actions taken against him as a director during the
period of cover. However, the indemnity was conditional upon the
insurer
consenting to defend the claim – consent that it was required to furnish
if “reasonable grounds” for a
defence existed.
Antico failed
to obtain consent and argued, inter alia, that this failure could be excused
under s54(1).
At first instance, Giles CJ Comm D relied on FAI v Perry
in dismissing Antico’s claim – applying the distinction between
“inaction” / “non-event” and omission.
Antico’s
appeal to the NSW Court of Appeal was dismissed.
In unanimously upholding
the appeal, the High Court rejected the reasoning in FAI v Perry stating
that “omission” did not merely refer to a failure to discharge an
obligation owed by the insured, but included
“a failure to exercise a
right, choice or liberty which the insured enjoys under the contract of
insurance”.[27]
The
effect of Antico, according to Sutton, was :
...to spell the end
of the distinction between inaction and omission to act, between failure to
exercise a right of election and a
failure to act, and of the attempt to limit
the application of the subsection to the loss of a pre-existing
right”.[28]
In Greentree, the insured seized upon the liberal interpretation
handed down in Antico and attempted to extend the scope of s54(1) one
step further. It was argued that the relevant “omission” was the
failure
on the part of the third party to make a demand (claim) on the insured
within the period of cover.
The NSW Court of Appeal rejected
Greentree’s submissions. Mason P adopted the distinction between an
“act” and
a “non-event” as outlined by Gleeson CJ in
East End[29]. Spigelman CJ
described the failure on the part of a third party to make a demand as “an
event wholly external to the
policy”.[30]
On the
same point in Permanent Trustee, Hodgson CJ in Eq stated that “the
gravamen of the refusal [by the insurer to meet a later claim on it] is not that
someone
omitted to do something, but rather that something did not
happen”.[31]
Whilst the
result in Greentree seemed to be a correct one, it remained difficult to
reconcile the reasoning of the Court of Appeal with the liberal approach taken
by the High Court in Antico. Though factually distinguishable from
Antico, the reasoning in Greentree was questionable given the
approach laid down by the High
Court[32] and in any event, remained
short-lived.
In the face of the uncertainty following Greentree and
Permanent Trustee, the High Court seized the opportunity to resolve the
confusion in FAI v AHC.
The facts before the court were that the
insured (AHC) was covered by a policy of professional indemnity insurance with
FAI from 20
June 1992 to 20 June 1993. In circumstances substantially identical
to those in FAI v Perry, condition three (3) of the contract
“deemed” claims to have been made within the policy period, if the
insured notified
the insurer within that period of circumstances giving rise to
a subsequent claim.
Despite being aware of an injury occurring prior to
the FAI cover, AHC failed to notify the insurer and take advantage of condition
3 as it was “not expected...that a claim would be
made”.[33] The insured argued
that this was an omission that could be cured by s54(1).
At first
instance, the court found for the insured. A majority in the Queensland Court
of Appeal dismissed FAI’s
appeal.[34]
On appeal to the
High Court, a 4:1 majority[35] found
in favour of the insured.
McHugh, Gummow and Hayne JJ criticised the reasoning in Greentree
and Permanent Trustee although “the actual decision in each was
right”.[36] Instead their
Honours offered an alternative explanation. They stated that s54(1) “does
not operate to relieve the insured
of restrictions or limitations that are
inherent in the
claim”.[37]
It is
submitted that their Honours have proffered a distinction between an inherently
essential element of a claim as a matter of
law (to which s54(1) cannot apply)
and other merely ancillary or procedural matters.
Adopting the High
Court’s examples :
(a) “Occurrence” policies
The
“occurrence” is the essential element – therefore s54(1) will
not operate to cure a failure of the event to
occur giving rise to liability
under the policy.
(b) “Claims made” or “claims made and
notified” policies
The fact of the “demand” being made
by the third party within the policy period is the essential element
– therefore, s54(1) will not cure the failure of a third party to make the
demand
(as per the facts in
Greentree).[38]
(c) “Discovery”
policies
The inherent limitation is the fact of the insured becoming
aware of facts giving rise to a subsequent claim – therefore a failure
to become aware cannot be cured by
s54(1).[39]
Also in the majority, Kirby J rejected the previous attempts to apply
artificial distinctions to the term
“omission”[40] but
rather applied a test based on
causation.[41] His Honour’s
approach is to look to the “real reason” for the insurer’s
refusal to pay[42] – to
determine as a matter of law whether that refusal was “by reason of”
an omission of the insured or some other
person (to which s54(1) would apply),
or “by reason of” the fact that the claim does not fall within the
policy.
Applying this reasoning to Greentree, McHugh, Gummow and
Hayne JJ stated that :
...the reason for the 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 [because it was
made out of time].[43]
In dissent, Gleeson CJ also focuses on the cause of the insurer’s
refusal as the relevant test. His Honour held that the real
reason for
FAI’s refusal was that a demand was not made on the insured during the
policy period, not a failure on the part
of the insured to take advantage of
condition 3.[44] However, with the
greatest of respect to the Chief Justice, this approach seems to turn on matters
of form and might for instance,
be different if condition 3 were not expressed
as an optional extension, but as part of the scope of cover
itself.[45]
In strict terms, FAI v AHC had no real effect on the operation of
s54(1) on “claims made and notified” policies – that position
being set
down in East End (and accepted in Antico) and with the
court accepting the decision (but not the reasoning) in Greentree.
FAI v AHC dealt with a situation which was one step further removed from
a mere failure to notify of a claim, that is, a failure to elect to
extend the
scope of cover to possible future claims. With the exception of the Chief
Justice, the High Court was willing to extend
the operation of s54(1).
In
terms of settling the debate, the importance of the decision was to clearly and
unambiguously declare FAI v Perry as no longer good law, to extend s54(1)
to a failure to notify under a “discovery” policy, but importantly
– to
clearly set out the limits of s54(1), which McHugh, Gummow and Hayne
JJ accomplished through their “restrictions inherent in
the claim”
test.
However, with the High Court drawing fine distinctions (especially
Kirby J on the issue of causation) and with the result, in the
opinion of the
Chief Justice, beyond what was intended by
parliament,[46] legislative
intervention to limit FAI v AHC may be a foreseeable consequence.
[*] Currently completing the
Bachelor of Laws degree at the Queensland University of Technology.
[1] [2001] HCA 38 (27 June
2001).
[2] Insurance Contracts
Act 1984 (Cth).
[3]
McHugh, Gummow and Hayne JJ, Kirby J (Gleeson CJ
dissenting).
[4] (1993) 30 NSWLR
89.
[5] FAI General Insurance v
Australian Hospital Care [2001] HCA 38 (27 June 2001) at para
35.
[6] [1997] HCA 35; (1997) 188 CLR
652.
[7] See Kelly v New
Zealand Insurance Co Ltd (1996) 9 ANZ Ins Cas
61-317.
[8] See Greentree v FAI
General Insurance Co Ltd [1998] NSWSC 544; (1998) 158 ALR 592 per Spigelman CJ.
[9] [1998] NSWSC 544; (1998) 158 ALR 592.
[10] [1998] NSWSC 1011; (1998) 44 NSWLR
186.
[11] M Burns, ‘FAI v
Perry: High Noon in the High Court’ (2000) 12 ILJ 79 at
83.
[12] K Sutton, Insurance
Law in Australia 3rd edn LBC Sydney 1999 at para 8.44
.
[13] [2001] HCA 38 (27 June
2001) at 23.
[14] M Burns;
supra n 11 at 83.
[15]
See majority decision in FAI General Insurance v Australian Hospital Care
[2001] HCA 38 (27 June 2001) at para
40.
[16] FAI v AHC; see
also East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance
Ltd (1991) 25 NSWLR 400 (Gleeson CJ, Mahoney, Clarke
JJA).
[17] Supra n 11 at
1.
[18] See Kirby J in FAI v
AHC [2001] HCA 38 (27 June 2001) at para
63.
[19] Antico [1997] HCA 35; (1997)
188 CLR 652 at 675.
[20] (1993)
30 NSWLR 89 at 93.
[21] (1991)
25 NSWLR 400 (Gleeson CJ, Mahoney, Clarke
JJA).
[22] K Sutton; supra
n 12 at para 8.47].
[23]
(1993) 30 NSWLR 89 (Gleeson CJ, Clarke JA, Kirby P
dissenting).
[24] Ibid at
93.
[25] (1996) 9 ANZ Ins Cas
61-317.
[26] Ibid at
76,518.
[27] [1997] HCA 35; (1997) 188 CLR 652
at 669, 670.
[28] Supra n
12 at para 8.72.
[29] (1991) 25
NSWLR 400 at 405.
[30] [1998] NSWSC 544; (1998)
158 ALR 592 at 595.
[31] [1998] NSWSC 544; (1998)
44 NSWLR 706 at 710 as quoted in FAI v AHC [2001] HCA 38 (27 June 2001)
at para 38.
[32] A Christopher,
‘The Latest Word on FAI v Perry: Greentree v FAI General Insurance Co
Limited’ (1999) 10 ILJ 189 at
4-5.
[33] [2001] HCA 38 (27 June
2001) at para 4.
[34] FAI
General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999) 10 ANZ
Ins Cas 61-445 (Derrington and Chesterman JJ; Pincus JA
dissenting).
[35] McHugh,
Gummow, Kirby and Hayne JJ, Gleeson CJ
dissenting.
[36] [2001] HCA 38
(27 June 2001) at para 39.
[37]
Ibid at para 41 {emphasis
added}.
[38] Ibid at
para 42.
[39] Ibid at
para 43.
[40] Ibid see
para 79, 80, 81.
[41] Ibid
at para 82.
[42] Ibid
at para 84, 85.
[43] Ibid
at para 44.
[44] Ibid
at para 9.
[45] See the wide
definition of “Claim” in the policy at issue in East
End.
[46] [2001] HCA 38 (27
June 2001) at para 12.
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