Ce Heath Casualty & General Insurance Ltd v East End Real Estate Pty Ltd trading as City Living

[1992] HCATrans 105

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S4 of 1992

B e t w e e n -

C.E. HEATH CASUALTY & GENERAL

INSURANCE LIMITED

Applicant

and

EAST END REAL ESTATE PTY

LIMITED trading as CITY LIVING

Respondent

Application for special leave

to appeal

MASON CJ
TOOHEY J

GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 10 APRIL 1992, AT 10.36 AM

Copyright in the High Court of Australia

Heath 1 10/4/92

MR D.F. JACKSON, QC:  May it please the Court, I appear with

my learned friend, MR M.T. McCULLOCH, for the

applicant. (instructed by Minter Ellison)

MR T.S. HALE: If the Court pleases, I appear with my

learned friend, MR D. FREDERICKS, for the

respondent. (instructed by Maurice May & Co)

MR JACKSON:  Your Honours, may I hand to the Court initially

a bundle containing a copy of the Insurance

Contracts Act, together with some other documents

to which I may refer in the course of my

submissions?

MASON CJ: Yes.

1'l.K. JACKSON:	Your Honours, the issue which merits the grant of special leave concerns the interpretation of
section 54(1) of the Insurance Contracts Act 1984.
The issue arises in connection with a policy of professional indemnity insurance which
provided - - -
MASON CJ:	We are familiar with the case, and I think you

might directly proceed to endeavour to persuade us

that the case is sufficiently arguable, from your

point of view. ·

MR JACKSON:  Yes. Your Honour, I was about to make the

observation which I was just in the course of

making then, simply to indicate one preliminary

thing in relation to that topic and it is this,

that the policy of insurance provided for cover for

claims which were both made on the insured and made

by the insured - notified by the insured to the

insurer during the period of insurance.

Your Honours, the Insurance Contracts Act

contains two provisions which are material for

present purposes.	They are sections 40 and 54.
Your Honours, section 40 appears in the middle of	the booklet which I handed to Your Honours, and I
notice that the copies have all been stapled with the pages reversed, but it is on the page
numbered 19 at the top of the page, section 40.

Your Honours, section 40 recognizes

specifically the existence and continued operation of policies of the kind presently in question, and

Your Honours will see from subsection (1) that, in

terms, it has the clearest application to this kind

of policy of insurance. Your Honours,

section 40(3), to which I direct Your Honours'

attention, then provides a limited exception to the

operation of a "claims made" clause of the present

kind in the sense that, as Your Honours will see,

Heath 2

if, during the period of insurance, the insurer is

not given notice of the claim but notice has been given in writing by the insured to the insurer of facts that might give rise to a claim, then the

insurer is not relieved of liability.

TOOHEY J: But it is a different situation, is it not, to

section 54?

MR JACKSON:  Your Honour, I am sorry, it is different in one

sense but the point I am seeking to make from it,

Your Honour, is just this: if one looks at

section 40 and looks at subsections (2) and (3)

particularly, what one sees is that section 40 is a
particular provision dealing specifically and only
with policies of the class presently in question
and it makes a specific but limited provision in

relation to them.

Now, Your Honours, in particular, the

legislature in section 40 chose not to give relief

where the claim was made on the insured within the

period of insurance but was not made by the insured on the insurer within that time. Your Honours, the point about section 40, to put it shortly, is that

it is a specific but limited provision.

From there, one goes to section 54, in

particular subsection (1), is a provision which is

expressed in general terms and is a provision which

applies to insurance contracts generally. Could I

go first, Your Honours, to section 54(6)(a) and

Your Honours will see from it that the term "act"

used in the section includes "omission".

Your Honours, if one goes from that, bearing

that in mind, to subsection (1), what one sees is

that it deals with circumstances:

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 -

and in those circumstances -

the insurer may not refuse to pay the claim by

reason only of that act -

and so on.

Now, Your Honours, it is possible, of course,

that one view of the operation of section 54(1), if it is considered in isolation, is that a failure to

Heath

make the claim within the period of the cover is

something to which section 54 applies, but there

are two features which, in our submission, militate

against the adoption of that view. The first,

Your Honours, is the presence of the specific terms

of section 40 and it is a case where - Your Honours

if I could adopt the words of Justice Taylor in Reg

v Kelly; Ex parte The Victorian Chamber of

Manufactures, (1953) 88 CLR 285. Your Honours will

see page 319 extracted. It is a case where - I am

referring Your Honours to about the middle of the
page after the reference to Wallis's case:

In that case the court was concerned with two legislative provisions contained in the same statute and in the result held that the presence of a particular provision in the

statute precluded the conclusion that a

provision couched in general terms and capable

of application to an infinite variety of

circumstances dealt also with the particular

matter expressly dealt with by the particular

provision.

Now, Your Honours, that is a principle of general

application, of course, and that is ·a principle

which, we would submit, applies in the present case

in the sense that section 40 makes a specific but

limited exception in the case of contracts of this

kind but continues to recognize their existence

and, in those circumstances, Your Honours, the

presence of section 40 militates against

section 54, a provision expressed in very general

terms, being treated as applicable to this.

Your Honours, the second feature that I, in a

sense, mention in passing concerns the presence of

section 52 in the Act. Your Honours will see that

is at the bottom of page 25. Your Honours will

see, if I could go first to section 52(2):

Sub-section (1) does not apply to or in

relation to a provision the inclusion of which

in the contract is expressly authorized by

this Act.

Then Your Honours will see that subsection (1)

says:

Where a provision of a contract of

insurance ..... would, but for this sub-section,

have the effect of excluding, restricting or

modifying, to the prejudice of a person other

than the insurer, the operation of this Act,

the provision is void.

Heath 4

And, Your Honours, what we would submit in relation

to that is that the terms of section 40, in

particular, subsection (1), indicate that the type

of insurance of the kind presently in question is a

type, the nature of which is contemplated by the

Act and, in those circumstances, that one cannot

treat the provisions of section 54(1) as provisions

which override the terms of section 40.

Your Honours, what I mean by that is that

section 52 provides an additional indication that

the principles to which I earlier referred should

apply.

TOOHEY J:	The Act may not be the most happily drafted piece of legislation, but section 40 and section 54 find
themselves in different division of the Act, do
they not?  I mean, section 54 is within Division 3
that is concerned with remedies.  Now, it is true
that section 40(3) might be described as conferring
a remedy but it really begins as a section which
obliges the insurer to clearly inform the insured of certain things and failure to do so attracts a
penalty.  So that while there might be some overlap
between section 40(3) and section 54, it cannot be
said that section 40 is not concerned with other
matters as well as remedies.  I am hot sure how far
that takes you.
MR JACKSON:	Your Honour, could I just say, in relation to

that, that section 40 performs really two

functions. One function is the function

contemplated by subsection (2), and that is an

insurer is required to notify the insured of

particular matters before the contract of insurance

is entered into and it is made a defence not to do

so; that is one thing. But a quite different and

really disparate thing is done by subsection (3)

and that is to say that in respect of this class of

insurance where the risk is defined by reference to

the time within which a claim is to be made upon
the insured and then upon the insurer, that there

is a circumstance in which, notwithstanding the

terms of definition of the risk, that an insured

may yet have a successful result, if I can put it

neutrally, against the insurer. So, that is the

second thing it does.

Now, Your Honours, what I am seeking to say is

this, that if it were the case that notwithstanding

the particular form of exception or qualification

or indulgence granted by subsection (3), section 54

were yet to have the effect that the "claims made"

provision, the requirement as part of the

definition of "risk", was not to have effect, then,

Your Honours, it seems a strange way to do it

because not only has there been an indulgence given

in particular circumstances by subsection (3), but

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there is also a general wiping out - I do not want

to say it excessively - of the proposition that the

"claims made" policy covers the risk which it

defines to be the risk covered by it. That would

be by the operation of section 54(1).

Your Honours, that is, in a sense, a lot for

section 54(1) to do in a context where there is a

section 40 making the specific provision.

Now, Your Honours, that is the essential

argument we would seek to present based on the

relationship of those provisions of the Act. On

that, Your Honours, the primary judge decided one

way; the Court of Appeal the other. Your Honours,

I am happy to take Your Honours to the various

provisions in the Court of Appeal but the argument

that I have advanced so far really sets out the

arguments one way or the other.

Your Honours, could I go then to the second

argument in relation to it? I have referred so far

to section 40 but, in addition, there is a

question, in a sense, the anterior question,

namely, whether section 54(1) is, in any event, at

all concerned with provisions which define the risk

insured against as distinct from provisions which

can be conveniently enough described, for example,

as conditions and non-compliance with conditions.

Your Honours, we would urge that if one looks

at section 54, that it is a provision which is

concerned with claims which fall within the risk

but in respect of which there has been some, in

effect, conduct disentitling - if I could use that

expression - on the part of the insured or on the
part of some other person. Your Honours,
section 54 operates in a context where it requires
that the insured may refuse to pay a claim by

reason of some act of the insured or of some other

person.

Now, Your Honours, one would think, we would

submit, that if the provision was dealing with

circumstances where the reason for not paying the

claim was not some act of the insured or of some
other person but merely the fact that the claim did

not fall within the risk insured against at all,

then section 54 would be expressed in somewhat

different terms.

Your Honours, that view of section 54 is not

one which is particularly original so far as the

insurance law is concerned. Could I refer

Your Honours, for example, to one of the passages

from Sutton's Insurance Law in Australia, Second

Edition, 1991 that Your Honours have.	May I refer
Your Honours to paragraph 9.82.	The relevant

Heath 6

passage, Your Honours, is throughout that paragraph
but it is perhaps sufficient to refer Your Honours

to about the first 10 lines of it down to where it

is said, "In those circumstances s. 54 comes into

play, II

TOOHEY J: If that is right, Mr Jackson, the result might

well turn upon the way in which the policy were

drafted. This is what obviously troubled the

Chief Justice.

MR JACKSON:  Your Honour, there is no doubt that it could

but that is not a very surprising thing, of course,

with respect, because Your Honours will have seen

from the material in support of the general

interest part of the application for special leave

that policies of this kind are a very common and

traditional way of effecting insurance of this and

related kinds and it has a significant effect. The

way in which the policy is drafted in terms of the

risk does have a very significant effect upon the

finances of the insurers.

Your Honours, one has a situation where one

would think that there are particular remedies of a
public nature, by complaint and otherwise, in

circumstances where insurers that have policies

drafted in particularly unattractive ways but the

remedy for that, Your Honours, is not section 54, and if one enters into policies that just simply

have no provision for the particular risk then,

Your Honours, there is not any particular reason

why the legislative provision of section 54 should

be treated as applicable to them. Your Honours, I

do not doubt it is possible to draft policies in

particular ways, to take them in or out of

section 54 but, Your Honours, one is not talking

about the extreme case; one is talking about a very

common case in the particular instance.

Your Honours, what we would say, to put it

shortly, is that the view, in effect, adopted by

Mr Acting Justice Staff, at first instance, was

correct. And could I refer Your Honours, for

example, to page 5, at about lines 13 to 20, and,

in effect, His Honour adopted the proposition that

is set out there in the passage quoted:

"Section 54 does not widen the cover -

but provides for the -

cover being lost through breach of a

condition."

So, Your Honours, we would submit, generally

speaking, that so far as the issue is concerned, it

Heath

is one of considerable importance, of course, but

that the terms in which the Act is framed raise the

issue directly and is one on which two views might

well be taken.	Your Honour, those are our
submissions.

MASON CJ: Yes, thank you, Mr Jackson. Yes, Mr Hale?

MR HALE:  Your Honours, in our submission, the unanimous

decision of the Court of Appeal was correct or,

certainly, there is insufficient doubt to warrant

appeal.

Section 54 is cast in terms which concentrate

upon "effect" - the word "effect" is used in the

first line - and it deliberately avoids

characterization of contractual provisions. It

avoids the use of the word "terms", "conditions",

"insuring clauses". It concentrates on the effect

rather than the form. The Chief Justice,

Mr Justice Gleeson, has adopted that approach in

constructing or in construing the section.

Now, that approach to construction is

consistent with the terms of the explanatory

memorandum which is set out at page 17 of the

application book in Mr Justice Gleason's judgment.

It just says, when introduced in the explanatory

memorandum:

"The existing law is unsatisfactory in that

the parties' rights are determined by the form

in which the contract is drafted rather than

by reference to the harm caused.

Now, the submission put on the part of the applicant is to concentrate again on the form

rather than the effect or the harm caused which

is -

MASON CJ:  In the quotation which appears on page 17, there

is the expression, "the substance and effect of the

term", line 25. What does "the term" refer to

there?

MR HALE:  I think they are referring back to the previous

law and the manner in which perhaps section 18, the

old section 18 of the Insurance Act used the word

"terms" and there the characterization was, "Is it

a term, is it a condition?", and in that context

the explanatory memorandum is to get away from that

characterization and referred to "effect".

It should be noted that the words of

section 54 are in the most general terms and

deliberately so. Now, as I say, what the applicant

is seeking to do is read down those general terms

Heath 10/4/92

effectively to reintroduce the phrase of "insuring

clause" which we say is quite contrary to the

intention and it gives rise to the difficulties

which Mr Justice Toohey referred to, namely, the

effect of section 54 could be avoided by

characterization in terms of insuring clauses.

The reference to Mr Justice Handley's decision

in Ferrcom that was referred to at first instance -

Mr Justice Handley's remarks might be

characterized, without disrespect, as a throw-away

line. They certainly did not go to the ratio of

the decision.

As to section 40, we say that it is of limited significance in the construction of section 54.

What the applicant says: there may be circumstances

in which both section 40 and section 54 might

apply, but there is no conflict between the two.

There may be certain circumstances. If the matter

falls within section 40 then the insurer is not

entitled to deny liability. If the matter falls

within section 54, there is an issue or question of

abatement. So, there are different remedies and,

in our submission, Mr Justice Gleeson was correct

in his judgment at page 20 when he says:

However that may be, the fact that it might be

possible to envisage circumstances in which

the inter-relationship of s40 and s54 produces

a curious result does not constitute a

sufficient reason for applying s54 in a manner

that denies the words of that section their

ordinary meaning.

And we would say that it does not matter that there

might be circumstances in which both might apply.

MASON CJ:  What does His Honour mean in the first sentence

on that page, the long sentence that commences on

line 1 and ends at line 10? His Honour is there referring to a possible difference in operation.

MR HALE:  I think what he is saying is this: section 40 is

directed to the circumstances, assuming

professional indemnity policy, where the insured

knows of facts - perhaps a solicitor.	He knows
there is a potential liability for negligence.	No
claim has been made upon him, therefore, the
operation of the insurance policy, being a claims
made and notified, has not come into existent.
Therefore, he is saying there is no omission

because there has been no claim, and that is why he

uses the phrase, it is "not an omission; it is simply a non-event.", compared with section 54

where the claim has been received but it has not

Heath 9 10/4/92

been notified to the insurer. That, I think, is

what he is directing his attention to.

MASON CJ:  And the suggestion seems to be that section 40

would be directed to the first case.

MR HALE:  The first.

MASON CJ: Section 54 to the second.

MR HALE:  To the second. Section 40 is directed to the

circumstances, as I outlined, where the insured -

perhaps the solicitor or accountant - is not in a

position to claim under his policy because the

claim has not been made. The time is likely to

expire. He then has to extend his insurance policy or approach a new insurer in circumstances where he

must notify that new insurer of the potential claim

to be made upon him. So, he is caught in a bind

and that is why section 40 has been introduced.	He
can overcome that - - -

MASON CJ: So, so long as the insured complies with

section 40(3), the insurer is not relieved from

liability.

MR HALE: That is so.

MASON CJ: But in the 54 case where, in a sense, there is an

omission, he does not do as well? There may be an

abatement?

MR HALE: That is so.

TOOHEY J: In effect, section 40(3) seems to operate as a

sort of notional claims "made and notified"

situation even though there has been no claim made

and, of course, therefore no claim notified.

MR HALE: It does.

TOOHEY J:  And in that case the insurer simply cannot refuse

liability where that notice has been given. Under

54, there may be an abatement of the insurance

amount by reason of whatever the circumstances

might be.

MR HALE:  Yes. Just finally, in the event that the Court

were minded to grant special leave, the issue of

public importance referred to is one involving the

insurance industry and it would seem this would be

regarded as - - -

MASON CJ: Yes, if leave were to be granted, it would be

appropriate to impose a condition as to costs.

MR HALE:  Yes.

Heath 10 10/4/92

MASON CJ: Yes, Mr Jackson?

MR JACKSON:  Your Honours, it is true to say that

section 54(1) concentrates on the effect on ae

contract of insurance, but the question is what is

the effect which is material? What is the relevant

effect? And that is, Your Honours - the relevant

effect must be that the insurer may refuse to pay a

claim. Now, Your Honours, that is the way in which

section 54 is expressed. It is expressed on the

basis of the effect of a contract being a refusal

to pay a claim and, Your Honours, one is not
talking about a claim in the abstract, it is a

claim, in our submission, within the policy.	One
is not talking about a claim in the abstract
because that is what one really has in

circumstances where, in a policy of this kind, the claim is not made in time because it is not within the risk.

So, Your Honours, we would submit that it is

all right to say, in a sense, that one is looking

at the effect of section 54(1) but it is the
question of what is the effect which is the
relevant effect, and that is the refusal to pay the

claim - the ability to refuse to pay the claim.

Your Honours, so far as section 40(3) is

concerned, it is clear, of course, that section 40

and section 54 perform somewhat different functions

but the presence of section 40, in our submission,

is a clear indication that policies of this kind,

that is, policies of the kind specifically referred

to in section 40(1), are policies which will

operate according to their terms subject, of
course, to the terms of subsection (3) and it is
the presence of that provision, giving the limited

but specific different operation that militates, we

would submit, against the wider view of section 54.

Your Honours, the second point that I would

seek to make is this, that if one looks at the

passage quoted in the Chief Justice's judgment in

the Court of Appeal at page 17 one sees that what

is being spoken of - it is the passage of the
explanatory memorandum - what is said is that the
present law can also operate inequitably in that

breach of the term may lead to termination of the

contract regardless of whether or not an insurer

suffered any prejudice as a result of the insured's

breach.

Now, Your Honours, if that is the context in

which the provision is being introduced, there does

not sound, with respect, very much like

circumstances where the risk does not attach at

all.

Heath 11

TOOHEY J: Well, unless the risk does not attach because of

what proves on examination to have been, in

substance, a breach of the term. I mean, your argument, Mr Jackson, has the consequence that cover and the range and the extent of cover is

dictated by the way in which the policy is drafted

and section 54, as it were, must take the policy at

its face value.

MR JACKSON: Well, Your Honour, it is true to say that,

normally, the particular cover, leaving aside
questions of numbers of dollars and so on, the
identification of the risk insured is something

that is the subject of agreement between insured

and insurer, particular in the case of professional

indemnity policies because there is a number of

particular types one can have. But, Your Honours,

if one is talking about effect and talking about

the operation of them, for the purposes of

section 54, one has to bear in mind what I was

saying before, that section 54 is speaking about an

ability to refuse to pay the claim. It is not just

saying, "Look at the effect of the policy overall."

Your Honours, I do not know that I can advance it

beyond that.

Your Honours, on the question of paying the costs in any event should special leave be granted,

could I just say that whilst it is true to say that

the issue is one of considerable interest to the insurance industry, if the true situation in the

particular case be that the respondent should not

have succeeded under the policy in the first

instance, then it would be appropriate, at the end

of the day, if the appeal were allowed, if special

leave were granted, for them to pay the costs.

But, Your Honours, all I am seeking to say in that

regard is that the Court, if it was otherwise

minded to grant special leave, should perhaps defer

that question until the termination of the appeal.

MASON CJ: Yes, thank you, Mr Jackson.

The Court is not persuaded that the decision of the Court of Appeal is attended with sufficient

doubt to warrant the grant of special leave to

appeal. The application is therefore refused.

You want to make another application for

costs?

MR HALE:  An application for costs.

Heath 12 10/4/92

MASON CJ:	You do not oppose that, Mr Jackson?
MR JACKSON:	No, Your Honour.
MASON CJ:	The application is refused with costs.

AT 11.10 AM THE MATTER WAS ADJOURNED SINE DIE

Heath 13 10/4/92