CGU Insurance Limited v Porthouse

[2007] HCATrans 599

[2007] HCATrans 599

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S205 of 2007

B e t w e e n -

CGU INSURANCE LIMITED

Applicant

and

ANTHONY PORTHOUSE

Respondent

Application for special leave to appeal

GUMMOW J
KIEFEL J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 5 OCTOBER 2007, AT 11.34 AM

Copyright in the High Court of Australia

MR M.A. PEMBROKE, SC:   If the Court pleases, I appear with my learned friends, MR G. LUCARELLI and MR G. HORAN.  (instructed by Kennedys)

MR A.J. MEAGHER, SC:   May it please the Court, I appear for the respondent.  (instructed by Lange & Co Solicitors)

GUMMOW J:   Yes, Mr Pembroke.

MR PEMBROKE:   Your Honours, the relevant clause is conveniently found at page 62 in the judgment of Justice Hunt. 

GUMMOW J:   Yes.

MR PEMBROKE:   Your Honours will see that at line 40, amongst other things, it speaks of:

might result in someone making an allegation against an Insured –

a point which Justice Hunt emphasises later on.  That is an allegation rather than a claim.  The whole of the policy can be found at pages 105 to 116 and clause 11.2 is at page 115.

GUMMOW J:   Yes.

MR PEMBROKE:   Your Honours, the error has its provenance in the judgment of the primary judge at page 29, lines 28 to 31, in particular, the sentence beginning:

As outlined by senior counsel for the second defendant –

a different senior counsel.  The response to that error differed between the three judges in the Court of Appeal.

GUMMOW J:   Just a minute, Mr Pembroke:

clause 11.12 does not necessarily impose an entirely objective test since it involves a consideration of whether the second defendant’s actual state of mind was unreasonable.

Where does it say that?

MR PEMBROKE:   It does not.  In fact, two of the judges in the Court of Appeal held that that was erroneous.

GUMMOW J:   Just looking at 11.12 for a minute, what is the point that the draftsman had in mind in putting in (a) or (b) of 12?  What was the work one was doing that the other one was not doing that the insurer wanted to ‑ ‑ ‑

MR PEMBROKE:   One is looking at the subjective state of mind of the insured.  The other is looking at the objective position of a reasonable insured so that in case, as appears to have occurred in this case, the insured insists that he had no belief or no understanding that there might be an allegation.  One can then have regard to the position of the objective person.  It is a protection for the insurer against insureds who perhaps give evidence which is difficult to accept.

GUMMOW J:   Now, how does the Court of Appeal end up on the construction of 11.12?

MR PEMBROKE:   The first judge, Justice Hodgson, deals with that at page 51.

GUMMOW J:   But what do they say?  Just tell us what they said.

MR PEMBROKE:   Two of them said that was quite wrong and ‑ ‑ ‑

GUMMOW J:   What was wrong?

MR PEMBROKE:   It was wrong to import into clause 11.12(b) any consideration of the subjective state of mind of the insured.  Justice Hodgson said there was no error in that approach.

GUMMOW J:   Yes.

MR PEMBROKE:   Can I briefly take you to ‑ ‑ ‑

GUMMOW J:   How did they then find against you?

MR PEMBROKE:   Because Justice Young, however, said although that approach was wrong, he said nothing flows from it in fact.  That appears from page 57, paragraph 58 and paragraph 61.  What he said was, in substance, “If I had to make my own finding, then I would not find on the facts found by her Honour that the reasonable person would have required thought”.  He gives no reasons and no explanation, whereas Justice Hunt explains in some detail why a different factual conclusion results.

GUMMOW J:   Now, what I am trying to understand is, is there some factual dispute - if “fact” is the right way to put it – as to what a reasonable person would or would not have done?  Assuming (b) is objective, we are going to be invited for the first time to plunge into some assessment of the position of a reasonable person?

MR PEMBROKE:   You have this situation.  Justice Hodgson says there was no error.  Two of his judges disagreed with him.  Justice Young said there was an error but, without giving reasons, he says, “I would not have reached a different decision myself”.

GUMMOW J:   Is anywhere in all this melee, do you have any plank you can hang on to which looks like a finding by some judicial officer at some stage in your favour as to the reasonable person point?

MR PEMBROKE:   Yes.  Justice Hunt does that at page 72.  Page 73, lines 30 to 33:

The errors demonstrated to have been made by the judge requires this court to determine for itself –

et cetera.  So he then embarks upon what Justice Young did not do.  He deals with an analysis of the facts in paragraphs 99, 100 and 101 and reaches his conclusion in 103 on page 76.

GUMMOW J:   Yes, I see.

MR PEMBROKE:   If it is convenient, at some stage, your Honours, the principal facts upon which Justice Hunt has relied in those paragraphs are summarised, we think reasonably fairly, on page 87 in the submissions of the applicant, in particular page 88, paragraphs 18 and 19.

GUMMOW J:   Thank you.

MR PEMBROKE:   And 19 is the more important of those two paragraphs.  So the result is, your Honour, that two of the three judges thought the primary judge’s enunciation of the test was wrong.  The first who found there was no error did not analyse the question of fact.  He simply said that he was not satisfied that the primary judge’s conclusion was in error.  On the factual question he did not form his own judgment.  The second judge, as I have pointed out, although finding that the primary judge was in error, held that it did not affect the result and that the reasonable person would not have the requisite thought, but he gave no reasons.  The third judge, Justice Hunt, explains his position in the way that I have just dealt with.

GUMMOW J:   Now, I think it may be said against you, “Well, this is just an insurance policy and ‑ ‑ ‑

MR PEMBROKE:   Yes.  I am coming to that now.  The last point that we would like to draw to your attention is the reason why this is an appropriate matter for special leave.  That is dealt with at page 133 at line 50, the deponent explains that:

(a)      CGU is one of the largest insurers in Australia –

et cetera.  Paragraph (b) on page 134:

in excess of 30,300 PI policies –

Paragraph (c):

8,700 D & O policies –

Paragraph (d) explains the range of coverage for professional persons.  Paragraph (e):

CGU’s standard PI wording (of which the Barristers’ policy in this case is an example) and its standard D & O wording define “known circumstances” –

in this way.  He then says in paragraph 5(c) that:

the concept of “known circumstances” usually includes circumstances actually known to the insured as well as circumstances which a reasonable person would have known.

He says in 6:

This bifurcated structure provides protection to insurers against individual insureds who may be obtuse, idiosyncratic or sometimes even dishonest. 

He says in paragraph 7:

A serious issue concerning possible “known circumstances” arises in about 10% of the claims in which I am instructed. 

Importantly, we think, in paragraph 8 he explains that the conduct of trials is affected by this question because if clauses such as this clause do not require consideration of the subjective position of the insured, then there is no need to hear evidence from insureds on this issue.  Then at page 117, your Honours, in the affidavit of Mr Earl, he says in paragraph (2)(a) at line 52:

The exclusion of cover for known circumstances which may give rise to a claim, in claims made policies, is standard and widespread . . . 

(b)In such policies, the issue of disclosure by insureds of claims circumstance prior to the inception of the insurance is often contentious.

Page 118:

(c)It is usual, in my experience, for insurers to seek to protect themselves by exclusion clauses which distinguish between the insured’s knowledge and the knowledge of a reasonable person –

Then in paragraphs 4 and 5 he refers to certain publications in the insurance industry and the legal profession which have exhibited interest in the issues raised by this case.  The first appears at page 126, left‑hand column, line ‑ ‑ ‑

GUMMOW J:   We are not going to get into the detail of that.

MR PEMBROKE:   The second appears at page 130.

GUMMOW J:   Yes.

KIEFEL J:    The policy has been around for quite a long time in these terms.

MR PEMBROKE:   I believe it has been.  I cannot be ‑ ‑ ‑

KIEFEL J:    And it has produced no difficulty to this point.  What I am concerned about is whether or not this is an unusual factual situation.

MR PEMBROKE:   I would not have thought so, your Honour.  It is not unusual for insureds to say, “I did not believe I did anything wrong.  I had no suspicion that there would be a claim or an allegation made against me”, but for the insurer to say, “Well, regardless of what you think, we believe a reasonable person in your position would have had that view”.

KIEFEL J:    I suppose you would say, in any event, it has thrown up divergent constructions now regardless of the factual background.

MR PEMBROKE:   Yes.

GUMMOW J:   Yes, on that question, how did Justice Young reach a result without deciding this question?

MR PEMBROKE:   I cannot answer that, your Honour, but there is certainly no hint of an explanation or any reasoned approach to that issue of fact.

GUMMOW J:   Mr Meagher is about to tell us.

MR PEMBROKE:   He will try.

GUMMOW J:   Yes, Mr Meagher.

MR MEAGHER:   I will try, your Honours.  Ultimately we submit that this is a case which involves, at the Court of Appeal level, different conclusions on the question of fact as to what a reasonable person in the insured’s circumstances might have thought.  Could I explain how that arises?  If your Honours go to page 115 of the application book, one has the terms of the exclusion at line 30.  As your Honour Justice Gummow has observed, the exclusion has two limbs.  One fixes upon what the insured knew.  The other fixes upon what a reasonable person in the insured’s professional position would have thought, so that the trial judge had to address both those questions. 

To explain how the Court of Appeal dealt with what the trial judge did, could I just take your Honours first to page 25 of the application book.  Her Honour the trial judge dealt with the position as to the insured’s state of mind commencing at about line 40.  She concluded in the insured’s favour in respect of what he knew, dealing with it principally at the bottom of page 25.  The trial judge then, if one goes to page 26, line 50, had to deal with the second limb, having disposed of the first limb, and there is no issue about that conclusion.  At the top of page 27, the trial judge then states the issue as she perceived it.  In our submission, at line 10 there is no error in that description of the issue raised by the second limb of the exclusion.  She then recites arguments of counsel for the cross-defendant and then enters upon a consideration of the question.  As my learned friend has pointed out at page 29 at line 30, she says it is not:

an entirely objective test since it involves a consideration of whether the second defendant’s actual state of mind was unreasonable.

Now, there may be some lack of clarity as to what the trial judge meant there having regard to the way the test was formulated and also having regard to the way she states her conclusion on the next page, that is, page 30, at line 20:

I have made findings in relation to the state of mind of the second defendant at the relevant time.  I am satisfied that a reasonable person in his position would not have thought otherwise.

In our submission, no clear error of principle there as to the construction of the clause.  Now, when the matter came before the Court of Appeal, the appellant insurer fixed upon the trial judge’s statement at page 29 at line 30, as my friend has before this Court, and the majority rejected that as an error in relation to the construction of the policy and Justice Young said even if there were an error which caused the conclusion to miscarry, he would have made the same finding of the question.

Now, Justice Hodgson deals with the matter at page 51, paragraph 31, and really what we have here is the judges of appeal dealing with the fact‑finding process and what the trial judge faced with addressing questions of reasonableness and unreasonableness might make reference to.  He points out that:

The clause directs attention to the “professional position of the respondent” and requires a finding that a reasonable person in that position “would” have thought something . . . In my opinion, conclusions about whether a reasonable person would have thought something can be approached by considering what an actual person did think and asking if this was unreasonable, so long as this does not distract attention from the ultimate question, whether a reasonable person in the respondent position “would have thought” it. 

His conclusion is at paragraph 33:

In substance, the primary judge answered the question no.  Having decided that question no, it would be reasonable to answer the similar, albeit not identical, question raised by cl. 11.12 in the negative also.  The question is ultimately one of fact, and I am not satisfied that the primary judge’s conclusion was an error.

Now, Justice Young dealt with the matter in a similar way.  He sets out the exclusion at page 54 and then at the bottom of page 55, paragraph 50, he notes that:

The question as to what a reasonable person would have thought is ultimately one of fact.

51       It is clear from the cases that where a court has to decide whether a reasonable person ‑ ‑ ‑

GUMMOW J:   Well, where the judges say something is purely a question of fact, I always get suspicious.  It is not a fact in the sense that the time is now 11.50 am.

MR MEAGHER:   It is not.  I accept that, your Honour.

GUMMOW J:   What is meant by that statement, “it is a question of fact”?

MR MEAGHER:   He exposes that in the following paragraphs where he points out that:

where a court has to decide whether a reasonable person would have acted in particular way, an objective test is applied.

GUMMOW J:   The first question is a question of law.  Who is the relevant reasonable person?

MR MEAGHER:   Yes.  The answer here does not seem to be in issue ‑ ‑ ‑

GUMMOW J:   …..someone on the Clapham omnibus.

MR MEAGHER:   No.  I accept that, your Honour.  It is a reasonable person in the position of the insured, but that is ultimately the way Justice Hodgson dealt with it and it is not suggested that the others did otherwise, but the point that Justice Young was making in paragraph 51 was that:

However, when considering the objective standard, how people in the relevant industry are accustomed to act and even how the actors in the drama before the court behaved forms part of the material to be considered by the tribunal of fact in making the objective assessment.

52       Thus, it seems to me that provided the matter gets into evidence before a court, what the insured in fact thought provides some material from which one can work out what an objective observer would expect the ordinary person in the insured’s professional position to have thought.

In my submission, a correct statement of the principle.  He then at paragraph 55 says:

Accordingly, the fact that the learned Primary Judge took that factor –

namely, the factor my friend relies on –

into account does not cause me concern.

He then refers to the passage my friend refers to.  He points out that that does not correctly formulate or is not consistent with what the policy requires but he says at paragraph 58:

However, after due consideration, I do not see how, if her Honour fell into error here, it affects the result.

59       There is no ground of appeal that her Honour’s judgment was deficient in reasons, she was entitled to take into account the fact, as she found, that the respondent himself did not consider that on the fact he knew he did not consider that an allegation might be made.  She had to find as a fact whether a reasonable person in the insured’s position would have thought that an allegation might be made and she declined to so find.

60       I have considered whether this result means that the two tests in the Definition have in effect been conflated ‑

He rejects that proposition.  Then he goes on to say:

61       If her Honour’s error was significant and we had to make our own finding of fact (as we were invited to do if we considered that the Judge erred) I would not find on the facts found by her Honour that the reasonable person would have had the required thought.

GUMMOW J:   What did the primary judge have by way of material on which to decide this question apart from the evidence of the insured?  Probably not the best person in the circumstances to tell you what a reasonable person in the same profession would have been doing.

MR MEAGHER:   If your Honour is asking whether there was any evidence led from any other professional, my understanding is from the record the answer is no.  It was a question which the trial judge had to address unassisted.

GUMMOW J:   I see.

MR MEAGHER:   But the sort of question that trial judges often address in professional negligence cases unassisted, perhaps, by evidence as to what legal professionals may or may not do ‑ ‑ ‑

KIEFEL J:    Some of that evidence about what a reasonable person would do in a professional context is quite contentious.

MR MEAGHER:   Yes.  In this case, what the trial judge did and what ultimately the two judges of appeal who agreed with her conclusion did was consider the sequence of events.  Initially, there was a failure to commence proceedings within time.  There was an issue as to whether an amendment applied which required a 15 per cent permanent disability threshold to be reached.  An arbitrator found in favour of the plaintiff.  A District Court judge found in favour of the plaintiff.  There was then an appeal to the Court of Appeal.  Senior counsel who advised in relation to that and who was appearing, said the prospects of successfully opposing the appeal would be good.  The matter was decided against the plaintiff and therefore exposed my client to this claim.

KIEFEL J:    Where would you say the parties were at issue in relation to the facts?

MR MEAGHER:   Could I take your Honours to Justice Hunt’s conclusion to illustrate the nature of the conclusion that might ultimately be the subject of debate ‑ ‑ ‑

GUMMOW J:   How did his Honour Justice Hunt get to his dissent without material of the nature we are talking about before him, other than this evidence of the insured?

MR MEAGHER:   Could I just take your Honours to where I think he deals with this?  At paragraph 97 he is, in effect, addressing the argument which the insurer put before the Court of Appeal and seeks to put before this Court.  He says:

The interpretation placed by the judge on the alternative formulation of the exclusion clause in the present case denies its clear intention to require an examination of the reaction to the circumstances known to the insured by someone without other reference to the subjective state of mind of the insured.

The point being that one has to have regard to what the insured knew as facts ‑ ‑ ‑

GUMMOW J:   Yes.  It is the last sentence in 98, right?  He is going to determine for himself:

whether the appellant had succeeded in establishing ‑ ‑ ‑

MR MEAGHER:   That is so.  Then in paragraph 99 he addresses certain matters.  Paragraph 100 he points out, as I pointed out to this Court, that:

from the respondent’s discussions in relation to the appeal to this Court with Senior Counsel then briefed to argue that appeal . . . the respondent’s professional position, notwithstanding the assurances by Senior Counsel then appearing for the plaintiff that it was a good argument.

He says at paragraph 101 at line 17, when looking at the position of my client as against the supposed:

reasonable person would clearly have been far more perceptive –

Then the conclusion is at paragraph 103, not expressed in terms which do anything other than indicate that it was a matter about which minds could differ.

GUMMOW J:   Yes.  Now, is this policy issued only to lawyers?

MR MEAGHER:   I do not think I can say that, your Honour.  In this State there are three barristers’ policies.  This is one of them.  One of the others does not have a provision like this.  The other has a similar but not the same provision.  This insurer has the same provision in other policies.  The real difference between the judges on appeal ‑ ‑ ‑

GUMMOW J:   It is a barrister’s civil liability.

MR MEAGHER:   Yes.  The real difference between the judges on appeal is as to the ‑ ‑ ‑

GUMMOW J:   The trouble is there is then a temptation on the part of judicial officers to let their professional experience intrude.

MR MEAGHER:   I am not sure that that happens, your Honour.

GUMMOW J:   It seems to have happened to Justice Hunt.  He says, “In my opinion, the reasonable person”.

MR MEAGHER:   Yes, he does.  Then the conclusion he expresses is in terms:

have contemplated the real possibility that the plaintiff would, at the very least, make an allegation of negligence against his barrister.

That is the finding which my friend seeks to urge on this Court and, in reality, what will happen is this Court will spend its time addressing that factual issue, because there is no issue as to the construction of the policy and therefore no general question of principle which should take this Court’s time.

GUMMOW J:   Now, on the construction of the policy, what do you say is the correct construction of the particular provision?  Do you accept that 11.12 is framed the way it is so that paragraph (a) deals with what the insured knew and (b) is an alternative protection for the insurer?

MR MEAGHER:   It is to protect the insurer against the idiosyncrasies of a particular insured and his or her obtuseness, perhaps.  Yes, it is not necessarily or probably principally there to protect against dishonesty.  My submission was ‑ ‑ ‑

GUMMOW J:   How does the court ever decide an issue as to (b)?  How does it go about it?  Or to put it more accurately, how do the parties go about it?

MR MEAGHER:   How do the parties go about it?

GUMMOW J:   Yes, getting the court to decide 11.12(b).

MR MEAGHER:   Generally speaking, as I see the position, the parties lead evidence as to what the insured knew and lead evidence as to the circumstances and then seek to argue before the court as to what a reasonable solicitor or barrister would or should have thought in those circumstances.

KIEFEL J:    But you are saying (b) is a combination of a subjective and objective test.

MR MEAGHER:   Yes.

KIEFEL J:   Which is what two members of the Court of Appeal did and that is the way in which they approached their fact finding.

MR MEAGHER:   Yes.  On this exclusion, the insured will, generally speaking, go into evidence because the insured has to give evidence as to his or her knowledge in relation to the first limb.  The question then arises whether a reasonable person in the circumstances would have thought something different, in substance.  A trial judge can test that by asking whether what the insured did or thought was reasonable at various points in order to explore ‑ ‑ ‑

GUMMOW J:   So it is in the insured’s professional position?

MR MEAGHER:   Yes.

GUMMOW J:   Is that as a barrister of five years call, 10 years call?  Does it matter?

MR MEAGHER:   Your Honour is asking me questions which probably raise questions of fact.

GUMMOW J:   A neophyte barrister?

MR MEAGHER:   The answer would be ‑ ‑ ‑

GUMMOW J:   I am wondering what 11.12(b) is talking about?  Who is this creature?

MR MEAGHER:   It says, “the insured’s professional position”.  If one is addressing a particularly skilled professional then one may take into account different circumstances just as one does in the context of negligence claims against professionals where different standards may be imposed depending upon the facts.

KIEFEL J:   Mr Meagher, if this was a purely objective test, would you say that the facts would still support your client’s defence?

MR MEAGHER:   I would say that the facts were finely balanced and that, as the Court of Appeal in fact did and the trial judge did, some people could impose a higher standard than others.  Really this is a case which turned on the facts.  Those are our submissions.

GUMMOW J:    Yes, Mr Pembroke.

MR PEMBROKE:   Three matters, your Honours.  First is the result of the Court of Appeal’s decision is that there are two extreme positions taken, one by Justice Hodgson and one by Justice Hunt.  In the middle is Justice Young.  There are two inconsistencies in his approach.

GUMMOW J:   Granted all of that.  The question that always agitates me is what are we going to do if we take this on?

MR PEMBROKE:   All right.  Second point is there are no contentious facts.  The material on which the Court of Appeal based its decision ‑ ‑ ‑

GUMMOW J:   That may be the problem.

MR PEMBROKE:   ‑ ‑ ‑ consisted of a series of objective facts and the sequence of events.  They were not in dispute.  There was no issue about them.  That appears from page 88 where I have already taken you to a summary with footnoted references to the most important half dozen facts in paragraph 19.  I should point out that at page 137 the respondent says at line 30 that:

The statement of facts in Part I of the applicant’s Summary of Argument is correct as far as it goes.

Then it adds two other matters which we do not ‑ ‑ ‑

GUMMOW J:   I think it might come to this, Mr Pembroke.  Looking at your draft notice of appeal on page 83, paragraph 4 there “The court should have found”.  Do you see that? 

MR PEMBROKE:   Yes, your Honour.

GUMMOW J:  

(a)      the test is solely an objective one –

Now, does that mean that evidence led from the insured at trial should not have been led?

MR PEMBROKE:   Yes, on this issue, if the ‑ ‑ ‑

GUMMOW J:   Was it objected to on this issue?

MR PEMBROKE:   No.  It could not have been objected to because the first limb was also in issue.

GUMMOW J:   Yes, I see.

MR PEMBROKE:   But in these cases the insurer can, if it wishes, rely only on the second limb.  It can say, “We do not care what evidence ‑ ‑ ‑

GUMMOW J:   Wait a minute.  Having got in on the first limb, was it properly to be considered on the second limb?

MR PEMBROKE:   We say no, and that is what Justice Hunt says.

GUMMOW J:   I see.

MR PEMBROKE:   Justice Hunt says that at paragraph ‑ ‑ ‑

GUMMOW J:   Where does he say that?

MR PEMBROKE:   ‑ ‑ ‑ paragraph 97, page 72:

clear intention to require an examination of the reaction to the circumstances known to the insured by someone without other reference to the subjective state of mind of the insured.  The judge’s interpretation that the reasonableness of the insured’s “actual state of mind” was relevant to the reasonable person in the insured’s professional position test would almost inevitably lead to both tests having the same result.

GUMMOW J:   How then is the court to determine an issue under (b)?

MR PEMBROKE:   It looks at the facts and makes up its own mind.  There is a sequence of events, a series of objective facts.  The court could be assisted in some cases by expert evidence, but there was none in this case.  In terms of the conduct of trials, insurers who want to run this point should be entitled to run it without having to hear evidence from the insured.  I should say about the policy, your Honour, as appears from page 134, that this particular exclusion is contained in:

PI policies provide cover to a wide range of professional persons –

not just lawyers.  That appears at page 134, lines 42 to 46.

GUMMOW J:   I wonder what happens then if it is an architect, for example.

MR PEMBROKE:   There might be more need for a judge in that sort of case to hear expert evidence rather than rely upon its own reaction to the facts.

GUMMOW J:   All right.  There is one other matter.  In a way, 11.2 is a definition, if you like, a special meaning.

MR PEMBROKE:   Yes.

GUMMOW J:   Where do we find it used in the body of the policy?

MR MEAGHER:   It is at 6.1(b), page 108. 

GUMMOW J:   Yes, thank you.

MR PEMBROKE:   Those are our submissions in reply, your Honours.

GUMMOW J:   We will take a short adjournment.

AT 12.07 PM SHORT ADJOURNMENT

UPON RESUMING AT 12.09 PM:

GUMMOW J:   There will be a grant of special leave in this matter and the appeal will be a one‑day appeal.

AT 12.09 PM THE MATTER WAS CONCLUDED