Australian Hospital Care Pty Ltd v Swinbank

[1999] QCA 247

IN THE COURT OF APPEAL	99.247
SUPREME COURT OF QUEENSLAND

Appeal No. 10020 of 1998

Brisbane

[Aust Hospital Care P/L v Swinbank]

BETWEEN:

AUSTRALIAN HOSPITAL CARE PTY LTD

(ACN 005 288 095)

(First Defendant) Appellant

AND:

CHRISTOPHER MARK SWINBANK

(First Third Party) Respondent

DEVENDRA GURASAMY TAMPOE

(Plaintiff)

PAUL ROBINSON

(Second Defendant)

FAI GENERAL INSURANCE COMPANY LIMITED

(ACN 000 327 855)

(Second Third Party)

Pincus JA
Derrington J

Chesterman J

Judgment delivered 9 July 1999

Separate reasons for judgment of each member of the Court; each concurring as to the orders made.

APPEAL ALLOWED.
ORDER BELOW DISMISSING THE FIRST DEFENDANT’S CLAIM AGAINST

THE FIRST THIRD PARTY WITH COSTS SET ASIDE. IN LIEU THEREOF JUDGMENT ENTERED FOR THE FIRST DEFENDANT AGAINST THE FIRST THIRD PARTY IN THE SUM OF NINETY-EIGHT THOUSAND DOLLARS ($98,000), TOGETHER WITH COSTS OF AND INCIDENTAL TO THOSE PROCEEDINGS TO BE TAXED ON THE DISTRICT COURT SCALE WHERE THE AMOUNT RECOVERED IS MORE THAN FIFTY THOUSAND DOLLARS ($50,000).

RESPONDENT IS ALSO TO PAY THE APPELLANT’S COSTS OF AND

INCIDENTAL TO THIS APPEAL.

FURTHER, THE FIRST THIRD PARTY IS TO INDEMNIFY THE FIRST

DEFENDANT IN RESPECT OF ITS COSTS OF THE PLAINTIFF’S ACTION

AGAINST IT.

LIBERTY TO APPLY.

CATCHWORDS:	INSURANCE - LIABILITY INSURANCE - claims made and notified policy - exclusion - claims arising from malpractice antecedent to the policy if the insured could have reasonably
foreseen that it “might be expected to be the basis of a claim” -
whether actual malpractice need be known to insured - meaning
of “might be expected” - general scope of application of the
exclusion
Carrier Air Conditioning Pty Ltd v Kurda (1993) 11 ACLC 773 Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946
Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd
(1998) 10 ANZ Ins Cas 61.409
Re Bradley and Essex and Suffolk Accident Indemnity Society
[1912] 1 KB 415
Walton v National Employers’ Mutual General Insurance
Association [1973] 2 NSWLR 73
Counsel:	Mr S S W Couper QC for the appellant Mr P R Dutney QC for the respondent
Solicitors:	McLaughlins for the appellant Ebsworth & Ebsworth for the respondent
Hearing Date:	19 May 1999
IN THE COURT OF APPEAL	[1999] QCA 247
SUPREME COURT OF QUEENSLAND

Appeal No. 10020 of 1998

Brisbane

Before Pincus JA
Derrington J
Chesterman J

[Aust Hospital Care P/L v Swinbank]

BETWEEN:

AUSTRALIAN HOSPITAL CARE PTY LTD

(ACN 005 288 095)

(First Defendant) Appellant

AND:

CHRISTOPHER MARK SWINBANK

(First Third Party) Respondent

DEVENDRA GURASAMY TAMPOE

(Plaintiff)

PAUL ROBINSON

(Second Defendant)

FAI GENERAL INSURANCE COMPANY LIMITED

(ACN 000 327 855)

(Second Third Party)

REASONS FOR JUDGMENT - PINCUS JA

Judgment delivered 9 July 1999

1. I have read the reasons of Derrington J in which the circumstances giving rise to these

   proceedings are set out. An issue is the proper meaning of the exclusion clause making the

   insurer not liable for -

   "any Claim arising out of any Malpractice occurring prior to the inception date of this policy if the Assured on such date knew or could have reasonably foreseen that such Malpractice might be expected to be the basis of a Claim".

   It will be seen that the exclusion applies only to "any Claim arising out of any Malpractice" of a certain description. Read literally, then, the exclusion perhaps applies only if there is

   malpractice in fact. Here, there has been no finding of malpractice; the patient's claim was

   settled, no doubt on the basis of each side's assessment of the risks involved and the prospects

   of success. It is common ground that the settlement was reasonable, but that does not involve

   any assumption that there was malpractice in fact and so, on that line of reasoning, the

   exclusion would not apply.

2. But the policy covers two sorts of losses: amounts paid out to claimants, and costs of

   defence of claims. In the second paragraph of the relevant contract the underwriters agree to

   indemnify the insured against all sums "which the Assured shall become legally liable to pay

   as damages arising out of any bodily injury, mental injury, illness, disease or death of any

   patient caused by any negligent act, error or omission committed by the Assured . . .

   (hereinafter referred to as 'Malpractice'); and pay in addition to the Limit of Indemnity all

   defence costs, expenses (including Claims handling) incurred with Underwriters' consent,

   such consent not being unreasonably withheld, in connection with any Claim which falls

   within this policy".

3. Here one finds a definition of "malpractice", consisting in the words beginning "any

   negligent act". Again, it might appear that the intention is that the insurer's obligations relate

   only to negligent acts, not to acts merely alleged to be negligent. But the latter part of the

   provision I have quoted creates an obligation to pay costs of defence "in connection with any

   Claim which falls within this policy". The intention must be that the costs may be payable in

   respect of bad claims as well as good ones; that is, the obligation to pay defence costs must

   relate to claims made alleging negligence.

4. The first proviso to the clause just discussed requires that "such Malpractice results in a Claim being first made against the Assured during the Period of Insurance". It would be unreasonable to read this provision as requiring that the insured positively prove that it was

   guilty of malpractice before becoming entitled to have the claim defended at the insurer's

   expense. Further, the second proviso, (b), uses the expression "Claim made against the

   Assured for Malpractice" and I think that there "for" means "alleging". Subject to a

   reservation to be mentioned shortly, I would treat the expression "any Claim arising out of

   any Malpractice" in the exclusion which is in issue in this case as referring to claims alleging

   malpractice. Otherwise the exclusion would leave the insurer liable to pay costs of defending

   a claim relating to old alleged negligence, if it appeared there was no actual negligence.

5. The approach I favour, giving a broad meaning to the expression "arising out of any

   Malpractice" in the exclusion in question, and to "such Malpractice" in proviso (a), receives

   some support from consideration of cl 4, which entitles the insurer to "take control of the

   defence of any Claim" - which must mean any claim covered by the policy. It would seem

   almost absurd to confine this right to instances in which the insurer can prove there has been

   actual malpractice, as opposed to an assertion of malpractice.

6. The reservation I have alluded to above is based on the fact that special condition 2(a)

   uses the expression "Claim for Malpractice or Alleged Malpractice". This might imply that

   where the word "Malpractice " is used by itself that excludes merely alleged malpractice; but

   I do not think this consideration is strong enough to make it necessary to read the word

   "Malpractice" in the exclusion which is in question here as meaning actual malpractice - or,

   more precisely, to prevent the expression "Claim arising out of any Malpractice" being read

   as covering claims alleging malpractice.

7. It is my view, therefore, that the word "Malpractice" includes alleged malpractice so

   that "any Claim arising out of any Malpractice occurring prior to the inception date of this

   policy" covers such a claim as was made by the patient in the present case; the malpractice was alleged to have occurred prior to the inception date of the policy. For the meaning of

   "such Malpractice" in the exclusion one looks to the definition of "Malpractice" earlier

   discussed and reads "such Malpractice" as meaning such (alleged) "negligent act, error or

   omission committed by the Assured . . .".

8. The question then becomes whether the appellant's insured "knew or could have

   reasonably foreseen" that such allegedly "negligent act, error or omission . . . " was one which

   "might be expected to be the basis of a Claim". This is a question of fact and degree. The

   learned primary judge was not satisfied that the insured had reasonable grounds to expect that

   its negligence might be expected to be the basis of a claim. But her Honour held against the

   insured on this point, on the basis that any reasonable person in the insured's position "would

   have been aware that this very issue, negligence on the part of [the insured] had been raised

   by Corrs' letter, sufficient one would have thought to raise the alarm bells, as it did in August

   1991, and as it should have again when prompted by the words in question 16 of the

   proposal".

9. The relevant facts are in my opinion accurately set out in the reasons of the learned

   primary judge at pp 6 to 16. It is clear from the evidence that the insured had reason to think

   that a claim could possibly be made, but at the time the policy began, 20 June 1992, the

   solicitor's letter to which her Honour referred was nearly a year old and no claim had been

   made or threatened. The insured's advice from Dr Kay, whose regular function it was to give

   advice on such claims, was that there was no case to meet. There had been a meeting on

   21 August 1991 at which the matter was discussed and the patient's solicitors gave Dr Kay

   the impression that the matter would be taken no further. Although her Honour was of the

   view that the insured's attitude, which was it appears that the matter was "dead", was too

   optimistic, it is my respectful opinion that her Honour erred in holding that the facts fell within the exclusion clause; there was in my opinion ground for thinking that a claim could

   possibly ensue, but I cannot accept that the insured's state of mind was or should have been

   that which is set out in the language of the exclusion. I should add that I have reached this

   conclusion despite being conscious of the careful attention the learned primary judge paid to

   this and indeed all aspects of the disputes which were before her.

10. For these reasons I agree with the orders proposed by Derrington J.

    IN THE COURT OF APPEAL

    SUPREME COURT OF QUEENSLAND

    Appeal No. 10020 of 1998

    Brisbane

Before Pincus JA
Derrington J
Chesterman J

[Aust Hospital Care P/L v Swinbank]

BETWEEN:

AUSTRALIAN HOSPITAL CARE PTY LTD

(ACN 005 288 095)

(First Defendant) Appellant

AND:

CHRISTOPHER MARK SWINBANK

(First Third Party) Respondent

DEVENDRA GURASAMY TAMPOE

(Plaintiff)

PAUL ROBINSON

(Second Defendant)

FAI GENERAL INSURANCE COMPANY LIMITED

(ACN 000 327 855)

(Second Third Party)

REASONS FOR JUDGMENT - DERRINGTON J

Judgment delivered 9 July 1999

1. The appellant was insured by the respondent under a claims made and notified

   liability insurance policy in respect of its business in the conduct of a hospital. A claim was

   made during the policy period but the insurer disclaimed any liability to indemnify the

   insured.

2. The grounds of disclaimer were material non-disclosure and the effect of an exclusion

   clause. For reasons which need not be discussed here, since it has not been put in issue, the

   ground of non-disclosure was found to be untenable, but the insurers reliance upon the

   exclusion was upheld. It is that finding which is the subject of the appeal.

3. That provision read as follows:

   “Underwriters shall not be liable for:

   ...

   (ii) any claim arising out of any malpractice occurring prior to the inception date of this policy if the assured on such date knew or could have reasonably foreseen that such malpractice might be expected to be the basis of

   a claim.”

4. It was found by the learned trial judge that at the commencement of the policy the

   insured could have reasonably foreseen that the malpractice referred to in the claim might be

   expected to be the basis of a claim.

5. The relevant circumstances are relatively simple. The policy commenced on 20 June

   1992. A patient in the insured’s hospital who later made the claim had contracted

   septicaemia in March 1991. On 10 July 1991 his then solicitors wrote to the insured in the

   following terms:

   “We act for Dr Devendra Tampoe. Dr Tampoe was a patient at your hospital

   from 12 March 1991 to 28 March 1991 when he underwent a total knee replacement operation. Subsequent to his operation, Dr Tampoe contracted septicaemia. Our client is giving consideration to bringing an action against the hospital in relation to the treatment he received.

   We request that you allow us access to our client’s hospital notes in relation to

   his treatment during the above period. We make this request at this stage so that we can inspect the file prior to advising our client in relation to instituting

   proceedings.”

6. That solicitor gave evidence, which was accepted by the learned trial judge, that the

   letter was part of an information-gathering exercise at that time and that no decision had been

   made whether to advise his client to make a claim against the insured.

7. After the receipt of the letter, the insured’s medical experts investigated the patient’s

   treatment and formed the view that there was no indication of malpractice. On 21 August

   1991 they consulted with the patient’s solicitor and explained the results of their

   investigations and expressed their view that there was no malpractice. None of this was

   controverted by the solicitor who indicated that he would consider the matter and in due

   course would be in contact with the insured to advise of his client’s intentions. The insured’s

   representatives’ impression was that all his concerns had been resolved.

8. Between that date and the commencement of the policy, there was no further activity

   concerning the matter. Indeed, despite his solicitor’s considerable expertise and experience

   in these matters, the claimant only commenced proceedings after he had engaged a different

   solicitor, so there is some indication that the insured’s representatives were correct in their

   reading of the unexpressed views of the former.

9. The claim was eventually settled by the insured, and it is still not clear that there was

   any justifiable claim against it. It appears to have been a commercial settlement.

10. The learned trial judge found, and with good reason, that the insured did not disclose

    the matter to the insurer because they were convinced that no malpractice on the hospital’s

    part had been indicated. Nevertheless, she found that the exclusion applied. She said:

    “Thus on the proper interpretation of the clause ‘reasonable grounds to

    expect” as it appears in the Corporations Law, a mere suspicion is not

    enough. An appreciation of the possibility is not enough. There must be, as the cases suggest, an expectation or understanding, properly understood and reasonably based that something is likely to happen. Although Dr Kay did not make inquiry of anyone other than the medical practitioners, the only other evidence of investigations into the cause of the septicaemia was that in the

    doctors’ reports which were tendered, and they did not suggest any breach of

    duty had been the cause of his illness. I cannot, with hindsight, find that AHC

    ‘had reasonable grounds to expect’ that its negligence might be expected to be

    the basis of a claim. But this is not the issue. The element of certainty

    attaching to the word ‘expect’ is somewhat qualified by the element of

    possibility or conditionality rather than probability introduced into the

    exclusion clause by the verb ‘might’. AHC did not know at the relevant time

    in what relevant respect there had been a breach of duty. But any reasonable person in the position of AHC would have been aware that this very issue,

    negligence on the part of AHC, had been raised by Corrs’ letter, sufficient one

    would have thought to raise the alarm bells, as it did in August 1991, and as it should have again when prompted by the words in Question 16 of the proposal. I am satisfied then that Lloyds may rely on the exclusion clause to deny liability. No argument was advanced by AHC as to whether or not s.33

    has the effect of denying Lloyds the benefit of the exclusion clause.”

11. The following preliminary observations may be made as to the effect of the exclusion:

	The expectation referred to relates to the insured’s liability for “any claim arising out
of any malpractice” which on its primary meaning connotes actual malpractice.
	Similarly, the exclusion requires that it be reasonably foreseeable that “such
malpractice might be expected to be the basis of a claim”, which also indicates that it
must be a claim for actual malpractice for which the insured was liable that had to be
expected. This predicates knowledge of actual malpractice, which is necessary before
there can be any foresight of an expectation that might arise concerning it.
	The expression “might be expected to be the basis of a claim” is awkward because of
the tension between the confidence connoted by the word “expectation”[1] and the
absence of confidence connoted by the word “might”. The latter is consistent with
the relative uncertainty associated with foreseeability; but while it has that function, it
does not modify the force of “expected”.
	At its strictest possible application against the insured, the provision could be
construed to apply if it were reasonably foreseeable that the actual malpractice might
possibly lead to an expectation that it would be the basis of a claim. First it would
need to be determined whether it would be expected, with the confidence appropriate
to that term, to be the basis of a claim. If so, the next question is whether it was
reasonably foreseeable to the insured that there might be such an expectation. Since,
as it is explained above, the exclusion is predicated upon knowledge of actual
malpractice, if there is no such knowledge there can be no expectation as to it, and no
foreseeability of such an expectation.
	The construction discussed above is less favourable to the insured than it should be.
It is probably more correct to regard the expression “might be expected” as a
composite whole where the uncertainty connoted by “might” loses some of its force to
become only something less than certain but with a flavour of the element of
expectation. For example, the expression, “A male citizen of middle age might be
expected to fight to defend his country”, while female citizens of the same age group
might not be so expected, despite the possibility of it, demonstrates the point. So too
with the example, “Farmers might be expected to plant their crops if the weather is
favourable”. The word “might” is used instead of “would” on the possibility of
reasons against it, but the thrust of the meaning expresses expectation subject to some
qualification. This requires more than mere possibility, the standard applied by the
learned primary judge.
In the present case, even if the insured’s lack of knowledge of any actual malpractice
is disregarded, the mere investigative enquiry by the patient’s solicitor that appeared
to acquit the insured of liability would not mean that a claim based on some alleged malpractice might have been expected. The mere foreseeable possibility of such a
claim does not attain the required level of likelihood. But of course, that is not the
only point. Because the possible expectation referred to in the exclusion had to relate
to actual malpractice, and the insured was certainly not aware of any circumstances
indicating that conclusion, the requirement for the exclusion’s operation is not met.
	If there were any serious doubt arising from ambiguity, either internally or by reason
of the operation of other provisions of the policy, the contra proferentum doctrine
would favour the latter construction, particularly in respect of an exclusion;[2] but the
point does not turn on this.

[1]

[2]

1. The exclusion will ordinarily apply when the insured is aware of its own malpractice,

   and in that respect there is considerable room for its operation. Then the question will be:

   “Might the malpractice be expected to be the basis of a claim?” If that is reasonably

   foreseeable at the inception of the policy, the exclusion applies. Its purpose is plainly

   justified in these circumstances. To extend it to cases where the insured has no knowledge of

   the existence of any malpractice would deprive the cover of most of its content in respect of

   occurrences prior to the policy which later give rise to a claim. Mere awareness of inquiry of

   possible malpractice where none seems to exist also seems to be an unsatisfactory and most

   impractical basis for an exclusion.

2. A different approach would be necessary if the exclusion had referred instead to

   circumstances known to the insured prior to the contract that might have given rise to a claim.

   The patient’s contraction of septicaemia and his solicitor’s investigation would have

   suggested such a possible claim, since the claim there referred to need only be anticipated. It need not necessarily be justifiable. A question to this effect in the proposal is usually

   appropriate. Then the insurer would be properly protected and could negotiate with the

   insured as to whether the possible claim might be covered or expressly excluded. Such

   desirable flexibility would not be provided if the exclusion were framed in that way.

3. An exclusion such as that in the present case was considered in Permanent Trustee

   Australia Ltd v FAI General Insurance Co Ltd.[3] Even there it was emphasised that not only

   [3]

   must the relevant circumstances be known to the insured, but it must also be foreseeable by

   the insured or a reasonable person that such circumstances might be expected to give rise to a

   claim. It was observed that although aware of the circumstances, the insured might not be

   aware of their potential risk.

4. In general, this authority tends to fortify the conclusions reached above. There was

   also a query whether s.33 of the Act would prevent the operation of the exclusion as to what

   is, in effect, non-disclosure. That need not be decided now.

5. The result is that the exclusion has no operation here, and since that is the only

   remaining justification for the insurer’s rejection of the claim, the appeal should be allowed.

   The order dismissing the first defendant’s claim against the first third party with costs should

   be set aside and in lieu thereof there should be judgment for the first defendant against the

   first third party in the sum of ninety-eight thousand dollars ($98,000.00) together with costs

   of and incidental to those proceedings to be taxed on the District Court scale where the

   amount recovered is more than fifty thousand dollars ($50,000.00). The respondent is also to

   pay the appellant’s costs of and incidental to this appeal.

6. It should be further ordered that the first third party indemnify the first defendant in

   respect of its costs of its defence of the plaintiff’s action against it. Because of the possibility
   of consequential issues there should be liberty to apply.

   IN THE COURT OF APPEAL

   SUPREME COURT OF QUEENSLAND

   Appeal No. 10020 of 1998

   Brisbane

Before Pincus JA
Derrington J
Chesterman J

[Aust. Hospital Care P/L v. Swinbank]

BETWEEN:

AUSTRALIAN HOSPITAL CARE PTY LTD

(ACN 005 288 095)

(First Defendant) Appellant

AND:

CHRISTOPHER MARK SWINBANK

(First Third Party) Respondent

DEVENDRA GURASAMY TAMPOE

(Plaintiff)

PAUL ROBINSON

(Second Defendant)

FAI GENERAL INSURANCE COMPANY LIMITED

(ACN 000 327 855)

(Second Third Party)

REASONS FOR JUDGMENT - CHESTERMAN J

Judgment delivered 9 July 1999

1. For some years the appellant has carried on the activity of providing hospital

   accommodation and services to private patients. It owned the Pindara Private Hospital at

   Benowa on the Gold Coast. For the year 20 June 1992 to 20 June 1993 it had the benefit of a

   policy of liability insurance issued by a syndicate of Lloyds Underwriters (“the insurers”)

   whom the respondent represents.

2. By the terms of the policy the insurers agreed:

   “To indemnify the [appellant] against all sums which the [appellant] shall

   become legally liable to pay as damages arising out of any bodily injury, mental injury, illness, disease or death of any patient caused by any negligent act, error or omission committed by the [appellant] in or about the conduct of

   the [appellant’s] occupation or business as stated in the Proposal or

   Declaration ... (hereinafter referred to as ‘malpractice’) ...

   Provided Always That

(a) such Malpractice results in a Claim being first made against the [appellant] during the Period of Insurance ... and ...

immediate notice has been given ...”

Under the heading “Exclusions” the policy provided that the insurers

“... shall not be liable for:-

...

(ii)        any Claim arising out of any Malpractice occurring prior to the inception date of this policy if the [appellant] on such date knew or could have reasonably foreseen that such Malpractice

might be expected to be the basis of a Claim”.

1. On 12 March 1991 Dr Devendra Tampoe was admitted to Pindara Hospital for an

   operation to replace one of his knee joints. During convalescence he contracted septicaemia

   and was for a while gravely ill. Happily he recovered and was discharged on 28 March 1991.

   In October 1992 Dr Tampoe’s solicitors notified the appellant of his intention to commence

   proceedings against it to claim damages. The appellant told the insurers who declined

   indemnity under the policy relying upon exclusion clause (ii) and, as well, an alleged failure

   by the appellant to disclose a material fact when compiling the policy proposal. The second

   point was decided in favour of the appellant and is no longer in issue. The trial judge,

   however, held that by reason of the exclusion the insurers were not liable to the appellant

   whose claim to be indemnified against Dr Tampoe’s suit for damages was dismissed. It is

   against that judgment that the appellant has appealed.

2. Dr Tampoe’s action against the appellant was compromised on the basis that it paid

   him $100,000.00 to include compensation and costs. The policy provided for an excess of

   $2,000.00. The appellant’s claim against the insurers is for $98,000.00.

3. The trial judge made findings of fact which have not been challenged. Before

   mentioning them it is appropriate to consider the proper construction which should be placed

   on the exclusion. The appeal turns upon that construction and its application to the

   established facts.

4. The construction of the exclusion gives rise to some perplexity. The underwriter’s

   clerk to whom was given the task of composing a suitable protection for his employer was no

   believer in the benefits of plain English. The clause does not comply with the conventional

   rules of grammar and deals confusingly with disparate concepts. The clerk seems to have

   thought that a plentiful supply of words was necessary to achieve his purpose, failing to

   appreciate that brevity tends to produce clarity. His employer had not apparently warned him

   of Farwell LJ’s admonition (Re Bradley and Essex and Suffolk Accident Indemnity Society

   [1912] 1 KB 415 at 430) that such composition is a breach of the duty of good faith owed by

   an insurer to its insured and will result in the uncertainty being resolved in favour of the

   insured.

5. The “malpractice” referred to in the exclusion is, in the present case, “illness

   [septicaemia] ... of any patient [Dr Tampoe] caused by any negligent act, error or omission

   committed by the [appellant] in or about the conduct of the [Pindara Hospital]”.

6. If there were malpractice it occurred in March 1991, prior to the inception date of the

   policy which was 20 June 1992. The exclusion operates if before then the appellant “knew or

   could have reasonably foreseen that such malpractice might be expected to be the basis of a

   claim”.

7. The first problem encountered in construction is to determine the object of the verb

   “knew”. What is it that, if known by the insured, excluded the policy indemnity? A possible

   answer is “that malpractice might be expected to be the basis of a claim”. This has a

   superficial attraction in that it would allow the exclusion to operate on two alternative bases.

   There would be no cover if the insured

   (i)         knew; or

   (ii)        could reasonably have foreseen;

   that such malpractice might be expected to be the basis of a claim.

   This solution would be nonsensical. Knowledge and expectation are both states of mind but

   are different and necessarily inconsistent. An expectation is a belief falling short of

   knowledge. It stands in contrast to knowledge. To know that a claim might be expected is

   either to expect it, or to have self-knowledge of one’s own expectation. The latter adds

   nothing relevant to the former. It is not then a sensible construction to regard the words

   “knew” and “could have reasonably foreseen” as alternatives, the words following providing

   the necessary object of the knowledge or foresight.

8. It seems clear enough that the draftsman intended to distinguish between actual

   knowledge and reasonable foresight and to provide for the operation of the exclusion in the

   event that something was known or that something was reasonably foreseeable. In each case

   the something is involved with malpractice being the basis of a claim against the insured.

   The first desired object could be achieved by notionally adding “would” before the

   concluding six words. This part of the exclusion would thus read that the insurer would not

   be liable for any claim arising etc ... if the insured “knew ... that such malpractice ... would be

   the basis of a claim”.

9. This is probably what was intended. The result is achieved by a minimal notional

   addition which involves only an adjustment to the verb structure to allow it to operate

   grammatically with what appears to have been the verb’s object. If malpractice being the

   basis of a claim is not the object of knowledge it can have none, and the words “knew or”

   where they appear in the exclusion would have to be ignored altogether.

10. Another approach is to regard the phrase “knew ... malpractice might be expected ...”

    as saying no more than if the insured expected the malpractice to be the basis of the claim the

    exclusion operates. This requires substituting “expect” for “knew” which is perhaps a drastic

    expedient. It would preserve the symmetry apparently intended. The exclusion would

    operate if the insured expected malpractice to the basis of the claim or if it could have

    reasonably foreseen that malpractice might be expected to be the basis of a claim.

11. The first solution is preferable for a number of reasons. First, it is a strong thing to

    ignore altogether the draftsman’s choice of “knew”. Second, less violence is done to the

    language chosen and to the apparent sense if the verb is merely changed from its indicative

    mood to the subjunctive by supplying the auxiliary “would” thus allowing the concluding

    words of the exclusion to be the requisite knowledge, that is that object of the verb. Third,

    ambiguity should be resolved against the insurer. To require knowledge rather than

    expectation as the basis for excluding cover is more favourable to the insured.

12. The trial judge was not satisfied that the appellant knew Dr Tampoe might bring a

    claim against it (R254).

13. This leaves the second basis for exclusion. If the insured “could have reasonably

    foreseen that such malpractice might be expected to be the basis of a claim” there is no cover.

    There is conflict between the elements of the phrase which the clumsiness of its language

    tends to disguise. Reasonable foreseeability is an objective phenomenon. The hypothetical

    reasonable person in the postulated circumstances foresees an outcome which, in the present

    context, is that malpractice might be expected to be the basis of a claim. “Expectation” is,

    however, a subjective state of mind. The clause read literally predicates objective foresight of

    a subjective mental state. It is not sensible so to regard the exclusion. The expectation of a

    claim, or the objectively based reasonable prospect of a claim might each be a plausible basis

    for excluding cover but the combination of both is not.

14. It is apparent that the draftsman intended to contrast actual knowledge on the one

    hand and reasonable foresight on the other, and to exclude cover if either existed. The

    problem comes with the requirement that what is to be objectively, reasonably foreseen is a

    belief rather than something which can be objectively assessed. The sense of what appears to

    have been intended can be achieved if what is to be foreseen is understood not to be the

    expectation of a claim based on malpractice but the objective basis for the expectation.

15. “Expect” means “to look forward with likelihood” or “to regard as about to happen”:

    Shorter Oxford English Dictionary. The Macquarie propounds the same meaning: “to regard

    as likely to happen”. Therefore something is expected if it is thought it is likely to occur.

    Likelihood can be assessed objectively.

16. In my view the exclusion should be understood as though it read:

    “Any claim arising out of any malpractice occurring prior to the inception date

    of this policy if the insured on such date knew that such malpractice would be the basis of a claim or could reasonably foresee that such malpractice was

    likely to be the basis of a claim”.

17. The trial judge was urged to adopt a somewhat similar construction. Analogy was

    sought with the phrase formerly appearing in section 592 of the Corporations Law, which

    imposed liability on directors where there were “reasonable grounds to expect” that a

    company would be unable to pay its debts. Had that been the construction her Honour would

    have found the exclusion did not apply because her Honour could not

    “... with hindsight, find that [the appellant] ‘had reasonable grounds to expect’

    that its negligence might be expected to be the basis of a claim.”

    Her Honour thought that, however, was not the issue because

    “The element of certainty attaching to the word ‘expect’ is somewhat

    qualified by the element of possibility or conditionality rather than probability

    introduced into the exclusion clause by the adverb ‘might’. [The appellant]

    did not know at the relevant time in what relevant respect there had been a breach of duty. But any reasonable person in the position of [the appellant] would have been aware that this very issue, negligence on the part of [the

    appellant] had been raised by Corrs’ letter, sufficient one would have thought
    to raise the alarm bells ...”

18. I do not, with respect, share this view. The word “might” is not an adverb used to

    indicate possibility and so to qualify the primary meaning of “expect”. Its function is as an

    auxiliary verb to render the phrase (might be expected) into the subjunctive mood appropriate

    for the connotation that any claim is hypothetical or prospective. It would have been possible

    to omit “might” without altering the sense or subjunctive form. There would have been an

    element of contrivance and even pretension about that mode of expression which is

    presumably why the draftsman made it more familiar by adding the further auxiliary “might”.

    If the mood is altered to the usual indicative form the phrase becomes “could have

    reasonably foreseen that such malpractice is expected to be the basis of a claim”. The point is

    perhaps clearer if the voice of the verb is changed from passive to active. The relevant words

    would be “could have reasonably foreseen that he expects such malpractice to be the basis of

    a claim”. So understood the content of “expect” is not diminished.

19. The trial judge’s finding that the appellant had no reasonable grounds to expect that

    his negligence “might be expected to be the basis of the claim” provides a negative answer to

    the question: Was it reasonably foreseeable that malpractice was likely to be the basis of a

    claim? Although addressing a differently formulated construction her Honour’s finding is, I

    think, determinative of what I regard as the correct formulation. I would independently arrive

    at the same conclusion from a review of the evidence found in her Honour’s reasons at R246-

    54. The trial judge appears to have found for the insurer only because of her view that

    indemnity was excluded if it were reasonably foreseeable that it was possible that malpractice

    would be the basis of a claim.

20. I agree with Derrington J that the exclusion will not operate unless there has been

    malpractice, as defined by the policy, and that the insured was aware of the malpractice.

    Unless that condition exists the insured cannot have the knowledge or reasonable foresight on

    which the operation of the exclusion is predicated. It was not proved at the trial that there had

    been any malpractice. The trial judge noted that the appellant conceded in effect that it had

    been negligent “in that the relevant events (whenever they happen to be) amounted to

    ‘malpractice’ within the meaning of” the policy (R247). What is important for present

    purposes, however, is whether there was evidence of malpractice at the inception of the

    policy, 20 June 1992. The findings indicate there was not. Dr Tampoe’s solicitors obtained

    opinions from two medical specialists, an anaesthetist and an intensive care specialist, both of

    whom had attended Dr Tampoe in the appellant’s intensive care unit. Both reported that they

    could see no evidence of medical negligence. The appellant’s own enquiry made it confident

    that it had not been negligent and that Dr Tampoe’s septicaemia had been a “normal”

    complication of surgery. As late as 23 June 1992 Dr Tampoe’s very experienced solicitor

    advised him that “his chances of success were not good”.

21. I agree with the orders proposed by Derrington J.

    Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946; Carrier Air Conditioning Pty Ltd v
    Kurda (1993) 11 ACLC 773.

    Walton v National Employers’ Mutual General Insurance Association [1973] 2 NSWLR 73, 84.

    (1998) 10 ANZ Ins Cas 61.409.