Aussie Tax Pty Ltd v Markel Capital Limited
[2008] VSC 592
•18 December 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 7566 of 2007
| AUSSIE TAX PTY LTD (ACN 072 008 854) and RONALD JOHN ASQUITH | Plaintiffs |
| V | |
| MARKEL CAPITAL LIMITED | Defendant |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15 October 2008 | |
DATE OF JUDGMENT: | 18 December 2008 | |
CASE MAY BE CITED AS: | Aussie Tax Pty Ltd v Markel Capital Ltd | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 592 | |
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INSURANCE – professional indemnity insurance – extension of cover where insured failed to report circumstances giving rise to claim – extension not available where by reason of non-report cover not available under earlier policy – whether cover available under earlier policy – whether under earlier policy insurer not liable where non- report of circumstances giving rise to claim – whether failure to report is an omission of insured – whether earlier insurer may not refuse to pay by reason of the omission.
Insurance Contracts Act 1984 (Cth) s 54
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P H Solomon | Adams Leyland |
| For the Defendant | Mr P G Cawthorn SC and Mr C G K Madder | Moray & Agnew |
HIS HONOUR:
This is the trial of the following preliminary question pursuant to R 47.04 ordered by a Master on 13 August 2008.
Upon the admitted facts is continuity extension clause 4 in the policy of professional indemnity insurance number 01VCPA03301 dated 23 January 2002 issued by the Markel Syndicate 702 to the plaintiffs engaged?[1]
[1]I have enlarged the terms of the question a little to make it more intelligible at this stage of my judgment.
The second plaintiff, Ronald John Asquith, has, from 1999 (at least), been a certified practising accountant carrying on practice in Wodonga. Part of his work is in fact conducted by one or more companies apparently under his control including the firstnamed defendant, Aussie Tax Pty Ltd.
In the period from July 1999 to about October 2001 the plaintiffs gave certain professional advice in the course of their accounting practise to a client or group of clients (“the clients”).
On 16 May 2006 the clients commenced a proceeding against the plaintiffs alleging a breach of their professional duty of care with respect to that advice.[2] In January 2007 the proceeding was settled on terms which included a promise by the first plaintiff to pay $935,000 to the clients.[3]
[2]Statement of claim para 11.
[3]Statement of claim para 18.
In each of the periods 30 September 1999 to 30 September 2000; 30 September 2000 to 30 September 2001; and 30 September 2001 to 30 September 2002 the plaintiffs participated in a professional indemnity insurance scheme conducted by the Australian Society of Certified Practising Accountants and entered into policies of insurance under that scheme as follows:
·Policy No 99VCPA3016 issued by GIO General Ltd in respect of the period 30 September 1999 – 30 September 2000 (“the 1999 Policy”)
·Policy No 00VCPA13059 issued by Lloyds in respect of the period 30 September 2000 – 30 September 2001 (“the 2000 Policy”)
·Policy No 01VCPA03301 issued by Lloyds in respect of the period 30 September 2001 – 30 September 2002 (“the 2001 Policy”)
In February 2002 the plaintiffs advised the insurer under the 2001 Policy of the existence of a potential claim by the clients and in the same month submitted a claim form seeking indemnity in respect of the apprehended claim of the clients. I shall refer to the insurer or insurers under the various policies as the 1999 insurer, the 2000 insurer and the 2001 insurer.
The plaintiffs have by writ filed on 31 July 2007 sued the defendant Markel Capital Ltd representing the 2001 insurer seeking declarations that the insurer is liable to indemnify them in respect of civil liability to the clients for the advice in accordance with insuring clause 1 of the 2001 Policy and in respect of certain costs and expenses in accordance with insuring clause 3 of that policy.
These insuring clauses are in the following terms:
Insuring Clause
1.The Insurers will indemnify the Insured in respect of any civil liability whatsoever and whensoever incurred in connection with the Practice in respect of which a claim is first made against the Practitioner, the Firm or the Company, as the case may be, during the Period of Insurance and which is reported to Insurers –
(a)during the Period of Insurance; or
(b)within 30 days after the Period of Insurance provided that a replacement policy commencing from the expiry of the Period of Insurance is effected with the Scheme.
…
3.The Insurers shall also indemnify the Insured in respect of all costs and expenses reasonably and necessarily incurred after notification by the Insured to the Insurers of any claim against the Insured in respect of which the Insured is entitled to indemnity under this Policy, or would have been so entitled if the claim succeeded against the Insured, where such costs and expenses relate to the investigation, defence, settlement, avoidance or reduction of the claim.
The 2001 Policy contains a number of exclusion clauses among which is the following:
Exclusions
1.The Insurers shall not indemnify the Insured in respect of any civil liability or loss arising from –
(a)Any circumstances of which the Practitioner, the Firm or the Company, as the case may be, knew, or a reasonable person in the circumstances could be expected to know, prior to the Period of Insurance, to be circumstances likely to give rise to a claim against the Insured in respect of civil liability;
It is agreed for the purposes of this preliminary trial that the plaintiffs knew prior to the period of insurance of the 2001 Policy, of circumstances which they knew to be circumstances likely to give rise to the clients’ claim. Accordingly, exclusion clause 1(a) would have the effect of defeating their claims for indemnity under that policy.
Reliance was, therefore, placed on a continuity extension provision which is contained in extension clause 4 to the 2001 policy. The trial before me was the trial of a preliminary question whether this continuity extension is engaged. It is in the following terms:
4. Continuity Extension
If:
(a) during the Period of Insurance –
(i)a claim is first made against the Practitioner, the Firm or the Company, as the case may be, which arises from circumstances which occurred prior to the Period of Insurance; or
(ii)circumstances are first reported to the Insurers; and
(b)the Practitioner, the Firm or the Company, as the case may be, knew, or a reasonable person in the circumstances could be expected to have known, at a point in time prior to the Period of Insurance, that the circumstances were likely to give rise to a claim against an Insured; but
(c)the circumstances were not reported prior to the Period of Insurance and, as a result, the Insured is not entitled to indemnity under any preceding policy; and
(d)the Practitioner, the Firm or the Company, as the case may be, has been insured under the Scheme continuously from the point referred to in paragraph (b) until commencement of the Policy.
then:
(A)exclusion 1(a) will not apply to the claim or to any claim arising from the circumstances; and
(B)the Insurers will not avoid this Policy or reduce their liability under this Policy by reason of the failure to disclose the circumstances prior to commencement of this Policy, unless the failure was fraudulent; but
(C)the liability of the Insurers will be reduced by the amount that fairly represents the extent by which the insurers could have mitigated their liability under the policy which was current at the point in time referred to in paragraph (b), had the circumstances been duly reported under that policy;
For the avoidance of doubt, this extension will not apply if any Insured is entitled to indemnity under any preceding policy in respect of a claim arising from the circumstances.
It was accepted that each of these paragraphs (a), (b) and (d) has been satisfied. With respect to paragraph (c) it was common ground that the circumstances were not reported prior to the period of insurance under the 2001 Policy, that is, the period commencing 30 September 2001; the issue, then, is whether, as a result of this, the insured are not entitled to indemnity under any preceding policy. The contention of Markel is that the plaintiffs were and are entitled to indemnity under the 1999 Policy or the 2000 Policy. This produces the curious result that the trial concerned the liability of an insurer which is not a party to the litigation and which is, therefore, not presenting argument against its liability and is not bound by a finding adverse to it. And the plaintiffs find themselves now in the position of presenting the absent insurer’s case against a claim which they, the plaintiffs, may well have to pursue later if the contentions of Markel are made out.
Each of the 1999 Policy and the 2000 Policy is, like the 2001 Policy, a claims made and notified policy[4]: the claim must be made upon the insured and reported to the insurer both within the period of insurance.[5] The policies also contain a discovery provision,[6] that is, indemnity will be provided notwithstanding that a claim upon the insured is not made until after the expiry of the period of insurance provided the insured gave notice to the insurer during the period of insurance of circumstances discovered which might give rise to a later claim. The discovery provisions in each policy are in identical terms:
[4]See Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542 at 544 [3] per Sheller JA.
[5]In fact the time for reporting the claim is the period expiring 30 days after the period of insurance, but nothing turns on this.
[6]But note the warning against the labelling of policies given in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 at 652 [23] by McHugh, Gummow and Hayne JJ.
13.If during the Period of Insurance the Practitioner, the Firm or the Company, as the case may be, becomes aware of any circumstances which may subsequently give rise to a claim against the Insured in respect of civil liability, and
(a)during the Period of Insurance; or
(b)within 30 days after the Period Insurance provided that a replacement policy commencing from the expiry of the Period of Insurance is effected with the Scheme
the Practitioner, the Firm or the Company, as the case may be, gives notice to the Insurers of those circumstances, then the Insurers are not relieved of liability under this Policy in respect of any such claim, when made, by reason only that it was made after the expiration of the Period of Insurance.
It is agreed that the plaintiffs became aware of the circumstances[7] contemplated in these provisions during the period of insurance under the 1999 Policy and during the period of insurance under the 2000 Policy. It is also agreed that no notice was given by the insured plaintiffs to the relevant insurer as contemplated by the clause in question in either of the earlier policies.
[7]These circumstances are those referred to in the schedule to the agreed facts, provided that, in the case of the period of the 1999 Policy they do not include circumstance (m)(xix) in the schedule. But nothing was made of this.
The continuity extension will not engage if the plaintiffs are entitled to indemnity under either of the earlier policies. They say that it follows, from their failure to give notice of the known circumstances prior to the period of insurance under the 2001 Policy to the 1999 insurer and the 2000 insurer, that their claim under either or both of those earlier policies must fail. This has the consequence that their entitlement under the 2001 Policy is not defeated by paragraph (c) of the continuity extension. What Markel then contends is that s 54 of the Insurance Contracts Act 1984 operates to preserve the plaintiffs’ rights of indemnity under one or other or perhaps both of these earlier policies. The position of the plaintiffs is that s 54 does not create an entitlement to indemnity under either of the earlier policies so that the continuity extension in the 2001 Policy does engage.
I turn then to the effect of s 54 upon the right of indemnity under the 1999 Policy or the 2000 Policy. The section is in these terms:
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.
…
(6) A reference in this section to an act includes a reference to:
(a) an omission; and
…
55 No other remedies
The provisions of this Division with respect to an act or omission are exclusive of any right that the insurer has otherwise than under this Act in respect of the act or omission.
The immediate questions then, are whether the insured plaintiffs under the 1999 policy or under the 2000 policy, or both of them, are “not entitled to indemnity under that policy” as a result of their failure to report the known circumstances to the relevant insurer under the earlier policy prior to 30 September 2001, being the commencement of the period of insurance under the 2001 policy.
It is convenient to start with the 1999 policy. Under the insuring clause 1[8] the 1999 insurer agrees to indemnify the plaintiffs “in respect of any civil liability whatsoever and whensoever occurred” of which a claim is made upon the insured and reported to the 1999 insurer both within the period 30 September 1999 to 30 October 2000. No claim was made upon the plaintiffs or notified to the 1999 insurer within the stipulated period.
[8]Set out above at para [8].
Any liability of the 1999 insurer must, therefore, depend upon the application of condition 13.[9] This provision, as counsel for the plaintiffs observed, is expressed in a curious way. It provides that, where its preconditions are satisfied, “then the insurers are not relieved of liability under this Policy in respect of any such claim, when made, by reason only that it was made after the expiration of the Period of Insurance”. This provision does not in terms create a further obligation to indemnify nor does it deem a claim on the insured to have been made during the period of insurance;[10] it provides that, where the preconditions are fulfilled, the insurers are not relieved of liability because the claim on the insured was made after the period of insurance. In this sense, condition 13 proceeds upon the assumption that the obligation to indemnify under insuring clause 1 is to indemnify one in respect of civil liability of the kind specified, but that the liability of the 1999 insurer attaches only where the claim is made within the stipulated period.
[9]Set out above at para [13].
[10]As in FAI v Australian Hospital Care Pty Ltd (2001) 204 CLR 641.
A second feature of this condition 13 is that it does not address the second part of the proviso to insuring clause 1 – that the claim upon the insured be notified to the insurer within the specified period. Presumably, this is because this claim as yet unmade cannot be notified. The effect of condition 13, where it applies, must be to override this second part or to treat the later giving of notice of the circumstances within the stipulated period as the equivalent of the giving of notice of the later made claim. This, however, was not seen as a problem in the Australian Hospital Care case and was not the subject of argument before me. I shall say nothing further about it.
The fact remains that, absent condition 13, the policy contemplates that the fact that no claim was made on the insured within the stipulated period relieves the insurer of liability in respect of that claim.
The agreed facts are that the first of the preconditions of condition 13 was satisfied, namely, the insured plaintiffs were aware of the circumstances in question within the period of insurance under the 1999 policy. The second, that the insured plaintiffs notified these circumstances to the 1999 insurer within the period of insurance, was not.
This failure to notify is said to be an act of the insured within the meaning of s 54(1), which occurred after the 1999 policy was entered into. I have no difficulty in concluding that it was such an act, having regard to the fact that, by s 54(6), act includes omission.[11]
[11]See FAI v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 at 657 [35] per McHugh, Gummow, Hayne JJ and at 676 [88], per Kirby J.
The further requirement for the operation of s 54(1) is that the effect of the policy, but for the statutory provision, would be that “the insurer may refuse to pay” the claim upon it by reason of that omission. This requires a consideration of the effect of the policy. The effect of insuring clause 1 is that the 1999 insurer, like the insurer in the Australian Hospital Care case,[12] could refuse to pay where no notification of the circumstances was made during the stipulated period. It follows that, in terms of s 54(1), the 1999 policy permitted the 1999 insurer to refuse to pay by reason of the omission of the insured plaintiffs to give notice to that insurer. No other basis for refusal to pay was suggested. The effect, then, of s 54(1) is that the 1999 insurer was not entitled to refuse to pay under insuring clause 1 of the 1999 policy. Put affirmatively, the liability of the 1999 insurer under insuring clause 1 was engaged.
[12](2001) 204 CLR 641 at 660 [46] per McHugh, Gummow, Hayne JJ.
I prefer this analysis to that proposed on behalf of the plaintiff – that section 54 creates a statutory entitlement to indemnity in an insured. The liability, which is one created by the policy, is a liability “to indemnify the insured in respect of civil liability” to the claimants. Although the word adopted is “indemnify”[13], it is not an unqualified obligation to indemnify. There are in the policy a number of qualifications, including a provision for excess which must be borne by the insured and a limit to the liability of the insurer.
[13]As in insuring clauses 2 and 3.
Subject to these qualifications and to any others imposed by law, the 1999 insurer must pay the insured plaintiffs’ claim under the 1999 policy. Section 54(1) then goes on to provide for an abatement of this liability to reflect any prejudice suffered by the insurer as a result of the omissions.[14] I am not here required to consider whether the 1999 insurer has suffered prejudice or to determine the extent of the statutory abatement as a consequence.
[14]Described by Pincus JA as “a limited statutory right to refuse to pay” Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [2002] 1 Qd R 17 at 24.
Since the provisions of the 2000 policy are relevantly identical, it also follows, upon the agreed facts, that the 2000 insurer is also obliged to pay the insured’s claim under that policy.
I return now to the continuity extension in the 2001 policy. The question is whether, in terms of paragraph 4(c) of the extension clause, the failure of the insured to give notice prior to 30 September 2001 had the result that the insured is not entitled to indemnity under the 1999 policy or the 2000 policy. The answer to this question must be in the negative: the insured is entitled to indemnity under the 1999 policy and under the 2000 policy. It follows, then, that the continuity extension does not engage. The question for my determination and my answer to it are therefore as follows:
Question:Upon the admitted facts is continuity extension clause 4 in the policy of professional indemnity insurance number 01VCPA03301 dated 23 January 2002 issued by the Markel Syndicate 702 to the plaintiffs engaged?
Answer: No.
I will hear counsel further as to the terms of the orders to be made to give effect to these conclusions, as to costs and as to the future disposition of the remaining questions in this proceeding.
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CERTIFICATE
I certify that this and the 9 preceding pages are a true copy of the reasons for Judgment of Byrne J of the Supreme Court of Victoria delivered on 18 December 2008.
DATED this 18th day of December 2008.
Associate to Justice Byrne
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