CGU Insurance Ltd. v Porthouse - [2007] NSWCA 80

NEW SOUTH WALES COURT OF APPEAL

CITATION: CGU Insurance Ltd. v. Porthouse [2007] NSWCA 80
This decision has been amended. Please see the end of the judgment for a list of the amendments.

FILE NUMBER(S):
40202/06

HEARING DATE(S): 7 September 2006

JUDGMENT DATE: 11 April 2007

PARTIES:
CGU Insurance Ltd. - appellant
Anthony Porthouse - respondent

JUDGMENT OF: Hodgson JA Young CJ in Eq Hunt AJA

LOWER COURT JURISDICTION: District Court

LOWER COURT FILE NUMBER(S): DC 728/05

LOWER COURT JUDICIAL OFFICER: Balla DCJ

LOWER COURT DATE OF DECISION: 17 March 2006

LOWER COURT MEDIUM NEUTRAL CITATION:
Not applicable

COUNSEL:
Mr. M.A. Pembroke SC with Mr. G. Lucarelli for appellant
Mr. L. King SC for respondent

SOLICITORS:
Kennedys (Sydney) for appellant
Langes (Sydney) for respondent

CATCHWORDS:
Damages payable to person injured carrying out work in accordance with Community Service Orders Act 1979 — Tort law reform restricting damages to be awarded in common law claims effected by Workers Compensation Legislation Further Amendment Act 2001 — Transitional provision applying provisions of that Act to existing rights before its commencement, but not in cases where litigation started before that commencement.
Barrister retained by plaintiff so injured to advise on commencement of proceedings unaware of applicability of these provisions — Proceedings commenced 14 days after legislation commenced — Plaintiff’s claim dismissed — Barrister found to be negligent.
Professional indemnity policy — Known circumstances excluded from policy included any fact, situation or circumstance which a reasonable person in the insured's professional position would have thought, before the policy began, might result in someone making an allegation against insured in respect of a liability that might be covered by policy — Meaning of exclusion clause — Whether barrister's claim for indemnity excluded.

LEGISLATION CITED:
Civil Liability Act 2002
Community Service Orders Act 1979
Crimes (Administration of Sentences) Act 1999
Workers Compensation Act 1987
Workers Compensation Legislation (Further Amendment) Act 2001
Workplace Injury Management and Workers Compensation Act 1998
Corporations Act 2001 (Cwth),
Insurance Contracts Act 1984 (Cwth)

CASES CITED:
Correll v Costello 404 NYS (2d) 836, 838 (1978)
Cussons v FCT (2003) 47 ACSR 107
D’Orta-Ekenaike v Victoria Legal Aid (2000) 223 CLR 1
FAI General Insurance Ltd v McSweeney & Ors (1999) ANZ Insurance Reporter §61-443 at 75,033-034
Fishwives Pty Ltd v FAI General Insurance Co Ltd [2001] NSWCA 103
GIO General Ltd v Wallace [2001] NSWCA 299; (2001) 11 ANZ Ins Cas 61-506
Heydon v NRMA Ltd (2000) 51 NSWLR 1
L’Aloia v FCT (2003) 48 ACSR 204
Macrae v Stevens (1996) Aust Torts Reports §81-405
Permanent Trustee Australia v FAI General Insurance Co Ltd (1998) 44 NSWLR 168; and on appeal: (2001) 50 NSWLR 676; (2003) 214 CLR 514
Regina v Jeffrey [1967] VR 467
Safety Cab Inc v Ferguson 205 NE (2d) 827, 831 (1965)
Saif Ali v Sydney Mitchell & Co [1980] AC 198
Sims v Celcast Pty Ltd (1998) 71 SASR 142
State of New South Wales v Bahmad [2004] NSWCA 287

DECISION:
By majority (Hunt AJA dissenting), the appeal is dismissed with costs.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA40202/06
DC 728/05
HODGSON JA
YOUNG CJ in Eq.
HUNT AJA
Wednesday 11 April 2007

CGU INSURANCE LIMITED V. PORTHOUSE
Headnote

FACTS
The respondent, a barrister, acted on a claim for damages for personal injury by a person doing work pursuant to a Community Service Order. In advising his client, he did not ascertain that legislation concerning such a claim meant that the 2001 amendments to the Workers’ Compensation Act had the potential to deny his client’s claim, if proceedings were not commenced by a certain time. The proceedings were commenced after this time, and although the District Court judge found that the amendments did not defeat the claim, this decision was later overturned by the Court of Appeal.
The client sued the respondent and his instructing solicitors in the District Court for negligence.
The respondent cross-claimed against the appellant CGU for indemnity under his professional insurance agreement with it. Although the respondent had completed the policy proposal form after he became cognisant of the potential effect of the amendments on his client’s case, he answered “No” to a question asking whether he was aware of any circumstances which could result in any claim being made against him.
The policy excluded claims arising from “known circumstances” which was defined by cl. 11.12 as any fact or circumstance which the insured knew, or which “a reasonable person in the insured’s professional position would have thought …, might result in someone making an allegation” against him.
The primary judge held that the respondent had been negligent, that there was no circumstance which the respondent knew or a reasonable person in his professional position would have thought might result in someone making an allegation against him, and ordered that CGU indemnify the respondent. CGU appealed.
HELD (dismissing the appeal)
(per Hodgson JA, Young CJ in Eq agreeing)
(1)On the construction of the insurance agreement, the phrase “thought…might result” can cover a spectrum of likelihoods. The primary judge applied the correct standard of “believed as a realistic possibility”, having construed the agreement contra proferentem against the insurer.
(2)The question whether a reasonable person in the respondent’s position “would have thought” something can be approached by considering the person’s actual state of mind and then considering whether this was reasonable, so long as this does not distract attention from the ultimate question, whether a reasonable person in the respondent’s position “would have thought” it.
(per Hunt AJA dissenting)
(3)The test to be applied was a solely objective one, albeit from the perspective of a reasonable person in the respondent’s position, and not the test applied by the primary judge. Applying the objective test, a reasonable person in the respondent’s position would have been far more perceptive of the consequences of his oversight than he was.

ORDERS
Appeal dismissed with costs.

**********

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40202/06
DC 728/05
HODGSON JA
YOUNG CJ in Eq.
HUNT AJA
Wednesday 11 April 2007

CGU INSURANCE LIMITED V. PORTHOUSE

Judgment

HODGSON JA: On 23 March 2006, Judge Balla made orders in proceedings in which Mr. Bahmad had sued solicitors Cameron Gillingham Boyd (CGB), a barrister Mr. Porthouse (the respondent in this appeal), and another solicitor Mr. Kheir for damages in respect of the loss of a cause of action; in which the defendants had cross-claimed against each other for indemnity or contribution; and in which the respondent had put on a cross-claim against the appellant CGU claiming indemnity under an insurance policy.
By those orders, Mr. Bahmad obtained a judgment against CGB and the respondent for $170,000.00 and costs, which according to the verdicts on their cross-claims against each other was to be borne equally by them. On the respondent’s cross-claim against CGU, the primary judge ordered that CGU indemnify the respondent in accordance with the terms of an identified professional indemnity policy.
CGU appeals from the order made against it.
CIRCUMSTANCES
On 17 April 1999, Mr. Bahmad sustained an injury to his right arm while performing work pursuant to a Community Service Order. On 16 December 1999, Mr. Bahmad consulted CGB concerning his rights to compensation for that injury.
On 3 April 2000, the Crimes (Administration of Sentences) Act 1999 (the CAS Act) came into force; and it is common ground that Mr. Bahmad’s entitlement to compensation for his injuries was thereafter governed by that Act. The effect of s.122 of the CAS Act was to make the provisions of Part 5 Divisions 1-3 of the Workers’ Compensation Act 1987 (the WC Act) apply to any award of damages in respect of injury sustained in the course of an offender’s performance of community service work, with references to “a worker” being taken to be an reference to such an offender.
In about May or June 2000, CGB briefed the respondent to advise whether Mr. Bahmad had a claim pursuant to the Workers’ Compensation Act or a claim in negligence against the Department of Corrective Services. On 6 June 2000, the respondent conferred with Mr. Bahmad and instructing solicitors; and on 7 June 2000, the respondent gave a written Memorandum of Advice to the effect that Mr. Bahmad had a possible claim in negligence against the prison authority, but was not entitled to make a claim for workers’ compensation. The advice did not refer to the CAS Act, and did not suggest that the claim for damages for negligence was subject to the provisions of the WC Act.
From about June or July 2001, foreshadowed amendments to the WC Act were widely publicised in the context of the New South Wales government undertaking a comprehensive program of tort reform. These amendments included severe restrictions on common law claims for injuries governed by the WC Act. The foreshadowed amendments included a transitional provision which would apply the amendments to recovery of damages for injuries received before the commencement of the amendments, unless proceedings for such recovery were commenced prior to that commencement. It became known that the date of commencement was to be 27 November 2001.
On 20 November 2001, the respondent was sent an expert’s report about the matter; and on 26 November 2001 he was asked to draft a Statement of Claim. On 27 November 2001 the amendments of the WC Act came into force, pursuant to an amending Act which passed on 6 December 2001. On 6 December 2001, the respondent provided a draft Statement of Claim, naming the State of New South Wales as the defendant; and this was filed on 11 December 2001.
On 30 October 2002, the Crown Solicitor, acting for the State of New South Wales, for the first time raised the point that Mr. Bahmad’s damages were governed by an Act regulating community service orders, the effect of which was that the WC Act applied (albeit that the Crown Solicitor referred not to the CAS Act, but to its predecessor); and that Mr. Bahmad’s claim did not meet a 15% threshold, which was one provision introduced into the WC Act as from 27 November 2001.
On 4 November 2002, Mr. Bahmad recovered a verdict at an arbitration. The Crown applied for a re-hearing. The matter was listed for hearing in the District Court on 15 May 2003. On that day, Counsel for the State of New South Wales informed the respondent that the State would argue that the amendments applied to Mr. Bahmad’s case. This was the first time the respondent became aware of this argument, and he successfully applied for an adjournment.
In late May and early June 2003, the respondent researched the point that had been raised by the Crown, and satisfied himself that, if it was correct, Mr. Bahmad would lose the case.
Mr. Bahmad’s case proceeded before Graham DCJ, and on 29 August 2003 Graham DCJ delivered judgment in favour of Mr. Bahmad, assessing his damages on the basis that the amendments did not apply. He stayed execution of the judgment unconditionally, pending a Crown appeal. The respondent conceded to Graham DCJ that the Crown had an arguable appeal point.
On 22 September 2003, the Crown lodged its Notice of Appeal. On 24 October 2003, the respondent received the Crown’s submissions; and on 9 February 2004, Mr. Bahmad’s submissions, prepared by the respondent, were filed. In April 2004, the appeal was listed for hearing on 19 July 2004.
On 20 May 2004, the respondent completed a proposal form seeking professional indemnity insurance from CGU for the year commencing 30 June 2004. Question 4 on the proposal form was: “Are you aware of any circumstances, which could result in any Claim or Disciplinary Proceedings being made against you?” The respondent inserted the answer: “No”. The form also drew attention to the applicant’s duty to disclose “every matter which you know, or could reasonably be expected to know, is relevant to the insurer’s decision to insure you and, if so, on what terms”, this form of words reflecting the provisions of s.21(1) of the Insurance Contracts Act 1984 (Cwth).
CGU issued the policy, which was a claims-made policy, expressed not to cover what was called “known claims” or claims arising from “known circumstances”. “Known circumstances” was defined as follows:
11.12 Known Circumstance
Any fact, situation or circumstance which:
(a)an Insured knew before this Policy began; or
(b)a reasonable person in the Insured’s professional position would have thought before this Policy began,
might result in someone making an allegation against an Insured in respect of a liability, that might be covered by this Policy.
On 19 July 2004, the Crown’s appeal was heard. On that day, Mr. Bahmad raised with the respondent the question of negligence of the solicitors.
On 27 August 2004, the Court of Appeal allowed the Crown’s appeal, and set aside the verdict in favour of Mr. Bahmad. These proceedings were commenced on 3 March 2005.
DECISION OF PRIMARY JUDGE
The primary judge found negligence established against the respondent, on the basis that he should have found the provision under the CAS Act, should have realised the WC Act applied, should have appreciated that the amendments proposed to commence on 27 November 2001 could defeat Mr. Bahmad’s claim, and therefore should have given advice to ensure that a Statement of Claim was filed before 27 November 2001.
As regards the respondent’s claim against CGU, the primary judge referred to cl.11.12, and held that the case did not fall within par.(a) of that clause, because she found the respondent did not know, before the policy commenced, that Mr. Bahmad might make an allegation of negligence that might be covered by the policy. No challenge is made by CGU against that finding, so the relevant part of the primary judge’s judgment, for the purpose of this appeal, is that which supported her finding that par.(b) of cl.11.12 was not engaged.
On this question, the primary judge was satisfied that, before the policy commenced, the respondent understood there were legal difficulties with Mr. Bahmad’s case, he considered he had taken all reasonable steps to prepare Mr. Bahmad’s claim, Mr. Bahmad had not made any complaint to him about his conduct of the case, Mr. Bahmad had obtained a verdict from an arbitrator and then from a judge, and the respondent believed there were good prospects that Mr. Bahmad would succeed in the appeal. The primary judge found that it did not occur to the respondent that the issue concerning the late filing of the Statement of Claim or the failure to find relevant legislation could be matters which would give rise to a claim against him. The primary judge found that the possibility that Mr. Bahmad might believe there could be some fault on the part of his lawyers first became apparent to the respondent after the Court of Appeal hearing on 19 July 1994.
The primary judge continued as follows:
The issue is then whether a reasonable person in the second defendant's professional position would have thought, before 30 June 2004, that something had occurred which might result in someone making an allegation against him.
Counsel for the cross defendant submitted that:

A reasonable person in the second defendant's professional position would have thought, as at 30 June 2004, that if the pending appeal went against the plaintiff, he might be the subject of an allegation of negligence;
The plaintiff himself raised the issue of negligence after the hearing of the appeal and before the Court of Appeal delivered judgment. If it was obvious to the lay plaintiff that if the appeal went against him then his lawyers may have been negligent, then a fortiori it must have been obvious to any reasonable barrister, even before the appeal was argued, that there existed a situation in which an allegation of negligence might be made.
The inquiry is objective and the fact that it had not occurred to the second defendant was irrelevant.
A reasonable barrister who turned his mind to the issue before 30 June 2004 would have concluded there existed a situation in which the plaintiff might make an allegation of negligence against him and that such an allegation was a "definite risk" or "a real possibility" or "on the cards". If the appeal was successful the plaintiff would lose his claim for damages because his claim had not been filed two weeks earlier and he would know that he might be alleged to be partly responsible for that late filing.
From 12 September 2003 there existed facts and circumstances that might give rise to an allegation of negligence that had to be disclosed to the insurer, quite irrespective and independent from the different issue of whether or not there existed facts and circumstances that might give rise to liability on the part of the second defendant.
So long as there was any risk at all of an adverse result in the appeal, then there existed a situation or circumstance that might result in the second defendant being alleged to have been negligent. The policy wording does not require any subjective belief of wrong doing.
I consider that the submission made by counsel for the cross defendant would mean in practice that an insured barrister would have to notify his or her insurer every time there was a possibility that his or her client's case might fail and there was a possibility that the client could think that the loss had been caused by the barrister. This would, of course, happen very often. As the High Court observed in D'Orta-Ekenaike v Victoria Legal Aid, [2005] HCA 12 supra:
"Parties who fail in litigation, whatever its subject, may well consider the result of that litigation to be wrong, even unjust. Seldom will a party have contested litigation without believing, or at least hoping, that it will be resolved in that party's favour. If that party does not succeed, an explanation for failure may be sought in what are perceived to be the failures of others - the judge, the witnesses, advocates - anyone other than the party whose case has been rejected.
This is no new phenomenon. It is a problem with which the common law has had to grapple for centuries. Its response has been the development of immunities from suit for witnesses, judges and advocates. The origin of these rules can be traced to decisions of the 16th and 17th centuries." (at para 37)
The issue then arises as to whether the provision is ambiguous. It is settled law that, if a clause is capable of more than one meaning it will be construed against the cross defendant (as it drafted the policy) and in favour of the second defendant.
The exclusion can be construed as having the wide meaning relied on by counsel for the cross defendant.
The exclusion can also operate in a more limited way. As outlined by senior counsel for the second defendant, 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. In addition the word ('thought" in 11.12 is ambiguous. It is conceded by the second defendant that it imposes a lower threshold than the word "knows". However I accept that it is consistent with meanings ranging from "thought or considered almost certain" to "considered an outside possibility".
I also take into account the decision in FAI General Insurance Co Ltd v McSweeney (1999) 10 ANZ Insurance Cases at 61-443 at 75,033-4 cited by the NSW Court of Appeal in Fishwives Pty Limited v FAI General Insurance Company Ltd [2001] NSWCA 193 where the Court considered the words "may give rise to a claim" and observed:
"Ordinarily it can be expected that what will be known will include the fact that the circumstances have actually led a person at least to contemplate the making of a claim. However, I do not exclude the case where the underlying circumstances establishing liability themselves, of their nature, would prompt a reasonable person immediately to foresee the making of a claim as a real possibility."
I am accordingly satisfied that the exclusion is ambiguous. It is to be construed against the insurer. I accept the submission made by counsel for the second defendant and find that a reasonable insured in the position of the second defendant would need to have a much higher degree of conviction of the likelihood of a claim than that described by counsel for the cross defendant.
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.
I find that the insurer has not shown that, at 30 June 2004 a reasonable person in the second defendant's professional position would have thought that the plaintiff might make an allegation against him in respect of a liability which might be covered by the policy.
Accordingly the exclusion does not apply and there will be a verdict for the second defendant against the cross defendant on that cross claim.
GROUNDS OF APPEAL

CGU appeals on the following grounds:
1. The trial judge erred in finding that a reasonable person, in the respondent's professional position, with knowledge of all material facts, would not have thought, as at 30 June 2004, that there existed any fact, situation or circumstance which might result in someone making an allegation against the respondent in respect of a liability that might be covered by the Professional Indemnity Policy.
2. Additionally, the trial judge misconstrued the definition of "Known Circumstance" in Clause 11.12 of the Professional Indemnity Policy, in particular in Her Honour's construction of the following words and phrases:
(a)"a reasonable person in the Insured's professional position..."
(b)"would have thought..."
(c)"might result in someone making an allegation against an Insured in respect of a liability that might be covered by this Policy".
SUBMISSIONS
Mr. Pembroke SC for CGU submitted that the primary judge misconstrued cl.11.12 of the policy, and introduced a subjective element into its operation by reference to the respondent’s actual state of mind.
He submitted that a reasonable person in the respondent’s professional position would have known, prior to 30 June 2004, that when he gave advice in 2000 he gave no consideration to the CAS Act; that from 30 October 2002 the Crown contended that, by reason of an Act governing community service orders and the WC Act that Mr. Bahmad was not entitled to damages; that on 15 May 2003 he was advised of this contention; that he then advised Mr. Bahmad that, if this point was good, Mr. Bahmad had no entitlement to damages because his Statement of Claim was not filed before 27 November 2001; that Graham DCJ had, unusually, granted an unconditional stay of his judgment because the Crown’s proposed appeal was arguable; that he had received the Crown’s submissions on the appeal and prepared submissions in response; and that while the appeal was still pending he filled out CGU’s proposal form.
Mr. Pembroke submitted that a reasonable person, with knowledge of those facts, would have thought that there was a possibility, real and not merely fanciful, that Mr. Bahmad might make a claim against him in respect of a liability that might be covered by the policy.
Mr. Pembroke submitted that the irrelevance of the respondent’s own subjective belief was confirmed by the bifurcated structure of cl.11.12 of the insurance contract; and he pointed out that this was similar to the structure of s.588FG of the Corporations Act 2001 and s.21(1) of the Insurance Contracts Act: cf. GIO General Limited v. Wallace [2001] NSWCA 299 at [23].
Mr. Pembroke submitted that the primary judge also erred in finding ambiguity in cl.11.12, such as to justify the requirement that a person in the respondent’s position would have to have a much higher degree of conviction of the likelihood of a claim than propounded by CGU. Mr. Pembroke submitted that the word “thought” was not ambiguous, meaning simply “product of mental activity”; and that the subject matter of that activity “might result in … an allegation” was likewise not ambiguous.
DECISION
As regards Mr. Pembroke’s submission that the primary judge erred in detecting ambiguity, in my opinion a fair reading of the judgment is that the ambiguity detected by the primary judge does relate to the combination of “thought” and “might”; and in that respect, the primary judge held that this ranged from “considered as almost certain” to “considered an outside possibility”. The primary judge did then say that this was to be construed against the insurer, giving rise to a need for a much higher degree of conviction of the likelihood of a claim than that described by Counsel for CGU.
There is some difficulty in identifying the degree of likelihood of a claim described by Counsel for CGU, because at one stage Counsel for CGU referred to a “definite risk” or “real possibility”; but in another place, referred to “any risk at all” of an adverse result of an appeal as meaning that there would exist a circumstance that might result in a claim.
I think the primary judge was correct to consider that the combination of the words “thought” and “might” does cover a spectrum, albeit, in my opinion, a spectrum not going as high as “considered as almost certain”. I think the spectrum ranges from something like “believed that the circumstance might as a realistic possibility result in an allegation” down to “fleetingly thought that the circumstance might as a remote possibility result in an allegation”; and in my view, the primary judge correctly construed the provision against CGU as requiring the former rather than something like the latter. In my opinion this is consistent with the approach of FAI General Insurance Co. Ltd. v. McSweeney (1999) 10 ANZ Ins.Cas. 61-443 and Fishwives Pty. Ltd. v. FAI General Insurance Co. Ltd. [2001] NSWCA 193 relied on by the primary judge. I do not think the primary judge adopted the incorrectly high standard of “considered as almost certain” referred to earlier, which would be inconsistent with those cases; and the view she adopted, which I think is correct, can fairly be regarded as stronger than the way CGU’s Counsel had put the matter, having regard to his reference to “any risk at all”.
In my opinion also, the approach of the primary judge in considering whether the respondent’s actual state of mind was unreasonable was not an error. 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, not (for example) that such a person may well have thought it. The language is different from that of s.21(1) of the Insurance Contracts Act, which refers not to what a person “would” have thought, but rather to what a person “could reasonably be expected” to know. 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’s position “would have thought” it.
Here, certainly a reasonable person in the respondent’s position would have acted responsibly in answering question 4 of the proposal, and so would have thought carefully about whether there was any circumstance “which could result in any Claim against him”. The question then is, on such reflection, would a reasonable person in the respondent’s position have believed that the pending appeal in Mr. Bahmad’s case, coupled with the respondent’s role in the creation of the problem that gave rise to it, was a circumstance which could, as a matter of realistic possibility, result in a claim.
In substance the primary judge answered that 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.
I would add that, in my opinion, this result has some support from the consideration that the Insurance Contracts Act discloses an intention that an insured under successive claims-made policies should not be precluded from claiming under both of them. Section 40(3) of that Act provides as follows in relation to claims-made policies:
40. Certain contracts of liability insurance
…
(3)Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract.
A finding that a reasonable person in the position of the respondent would have thought that there existed circumstances that might give rise to a claim means that such a reasonable person would have believed it appropriate to give notice as contemplated by s.40(3) under any existing claims-made policy. And while I think a reasonable person in the professional position of the respondent may well have believed it appropriate to give notice under s.40(3), I do not think it can be said that such a person would have believed it appropriate to do so (cf. the consideration of issues of notification and disclosure in Permanent Trustee Australia v. FAI General Insurance Co. Ltd. (1998) 44 NSWLR 186, only one narrow aspect of which was considered in the appeals from that decision reported at (2001) 50 NSWLR 679 and (2003) 214 CLR 514). I think this consideration tends to support the construction given to cl.11.12 by the primary judge, and tends to confirm that the conclusion reached by the primary judge was not an error.
CONCLUSION
For those reasons, in my opinion the appeal should be dismissed with costs.
YOUNG CJ in EQ: The facts, circumstances and finding of the learned District Court Judge have been admirably set out in each of the judgments of my brethren which I have read in draft and there is no need for me to repeat them.
The focus in this appeal is on whether the appellant has shown that the exclusion in subclause 6.1(b) of the policy applied. That subclause provided that the policy did not cover “Claims (or losses) arising from a Known Circumstance”.
The words “Known Circumstance” are in bold type to indicate that one has to read in the definition of that term in clause 11.12 (which I will hereafter call “the Definition”) where “Known Circumstance” is described as:
“Any fact, situation or circumstance which:
(a)an Insured knew before this Policy began; or
(b)a reasonable person in the Insured’s professional position would have thought, before this Policy began,
might result in someone making an allegation against an Insured in respect of a liability, that might be covered by this Policy."
I have read in draft the reasons of Hodgson JA and Hunt AJA. Unfortunately, each reaches a different result of the appeal after a careful consideration of the Policy.
Where my brothers differ on the result of this appeal and the essential difference between them is the proper exposition of the phrase “would have thought” in the Definition and, in particular, whether the Primary Judge erred in taking the approach that she must look at what the respondent in fact considered and determine whether that was unreasonable.
Although one must look at the Definition as a whole, it is useful to spend a little time on the key words in the Definition, namely “reasonable person”, “might”, “would” and “thought”.
First it might be noted that a reasonable person in the Insured’s position is not to be equated with a person in the insured’s position acting reasonably, a "reasonable person" in this sort of expression denotes an ordinary person, a person on the Bondi bus; see eg R v Jeffrey [1967] VR 467, 482; Sims v Celcast Pty Ltd (1998) 16 ACLC 1140, 1142; 71 SASR 142, 145. I thus regret that I do not share Hunt AJA’s views on this point.
During argument before us, the consensus was almost reached that the word "thought" connoted some mental activity. So Mr Pembroke for the appellant submitted that the focus was on what a reasonable person would have reflected upon when thinking about the matter, and that the scenario of a person not reflecting upon the matter at all, as the respondent said was his position, was irrelevant.
Both of my brethren have taken the view, which I respectfully share, that “thought” in subclause 11.12(b) combined with “might” when first used in the concluding words of the Definition mean that the reasonable person would have considered that there is a reasonable possibility that an allegation might be made.
Then one needs to consider what the reasonable person would have thought. The word "would" carries with it the idea of an expectation of the thought process of that person; see eg Safety Cab Inc v Ferguson 205 NE (2d) 827, 831 (1965) (Appellate Court of Indiana). Thus, a finding that a plaintiff "would" obtain a verdict over the capped amount means that it is expected that the plaintiff should receive such a verdict: Correll v Costello 404 NYS (2d) 836, 838 (1978) (NYSC).
It was conceded during argument before the Primary Judge that “thought” denoted something less than “knows”.
The Primary Judge did not further define “thought”. The word to my mind carries with it the idea that, had the reasonable person thought about the matter at all, he or she should be expected to have assessed that there was a real possibility of an allegation against the insured.
The question as to what a reasonable person would have thought is ultimately one of fact.
It is clear from the cases that where a court has to decide whether a reasonable person would have acted in a particular way, an objective test is applied. 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.
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.
It is to be noted that in Sims v Celcast Pty Ltd (1998) 16 ACLC 1140, 1142; 71 SASR 142, 144, Williams J when giving the reasons of the South Australian Full Court said, “the creditor’s subjective appreciation of the facts will not be relevant unless that appreciation reflects that which would be expected by the ‘reasonable person’.”
Again, in the Sims case, Williams J said at 1142 (145) that “The reasonable person…is not necessarily to be equated with Celcast acting reasonably in its perception…” (The italics are mine).
Accordingly, the fact that the learned Primary Judge took that factor into account does not cause me concern.
However, her Honour said, (Red 75) “As outlined by Senior Counsel for the [now respondent], clause 11.12 does not necessarily impose an entirely objective test since it involves a consideration of whether the [now respondent’s] actual state of mind was unreasonable.”
With respect to her Honour, I cannot see how the second part of her proposition flows from the first. Indeed, it runs contrary to the approach taken by Heydon JA on a similar, but not identical provision (with which approach Priestley & Hodgson JJA agreed) in GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506 at 75,866 that “the ultimate question turns on what could be expected of a reasonable person’s state of mind, not on the insured’s state of mind.”
However, after due consideration, I do not see how, if her Honour fell into error here, it affects the result.
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 facts 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.
I have considered whether this result means that the two tests in the Definition have in effect been conflated into one if one takes the approach that I have taken. I do not believe that that result follows.
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.
Accordingly, I agree with the result reached by Hodgson JA that the appeal should be dismissed with costs.
HUNT AJA: The respondent, Anthony Porthouse, is a practising barrister. At the relevant time, he had a professional indemnity policy with the appellant, CGU Insurance Ltd. The respondent was retained by the solicitors for James Ali Bahmad, the plaintiff in proposed proceedings in the District Court to recover damages for an injury to his shoulder on 19 April 1999 when carrying out work he was required by a court to perform as a punishment in accordance with the Community Service Orders Act 1979.
The right of a person carrying out such work to damages for such an injury was originally governed by ss 26L-26Q of the Community Service Orders Act, but that statute was repealed and those sections were replaced by s 122 of the Crimes (Administration of Sentences) Act 1999. That was the statute applicable at the relevant time. Section 122 related the quantum of the damages which could be recovered to the provisions of Division 3 (Modified common law damages) in Part 5 (Common law damages) of the Workers Compensation Act 1987. Section 122 was itself repealed in 2004 and replaced by Part 2A (Special provisions for offenders in custody) of the Civil Liability Act 2002.
The respondent was retained by the plaintiff’s solicitors in May or June 2001 to consider whether, as a result of the State Government’s then proposed further tort reform programme, the assessment of the plaintiff’s claim for damages against the State of New South Wales for those injuries would be restricted. That tort reform programme was effected in part by the Workers Compensation Legislation Further Amendment Act 2001 (“Further Amendment Act”), which commenced on 27 November 2001. It inserted in Division 3 of Part 5 of the Workers Compensation Act 1987 - to which the plaintiff’s claim was specifically related by s 122 of the Crimes (Administration of Sentences) Act - two new sections: s 151G, which denied any further entitlement to damages for non-economic loss; and s 151H, which provided that damages for economic loss are available only if the worker is able to establish a degree of permanent impairment of at least 15%.
The imposition of a minimum degree of permanent impairment by s 151H appears to bring into play the provisions of the Workplace Injury Management and Workers Compensation Act 1998, Part 6 (Court proceedings for work injury damages), also inserted by the Further Amendment Act, although it is unnecessary to resolve that issue in this appeal. These provisions require a degree of negotiation between the parties to the prospective litigation before the plaintiff may commence his proceedings. Stated in fairly broad terms relevant to the present case, the prospective plaintiff must identify for the prospective defendant, in what is called a “pre-filing statement”, the nature of his claim and the evidence by which it is to be established. The prospective defendant must then either accept liability and make an offer of settlement or deny liability. Where there is a dispute as to whether the degree of permanent impairment is sufficient for an award of damages, the plaintiff is unable to give a pre-filing statement or to commence his proceedings unless the degree of permanent impairment has been assessed by an approved medical specialist (s 313).
However, the Further AmendmentAct also inserted into the Workers Compensation Act a transitional provision applying the 15% threshold to all injuries which were received before the commencement of the amendment, but not to injuries for which proceedings for the recovery of damages had been commenced in a court before the commencement of the amendment: Workers Compensation Act, Schedule 6, Part 18C, clause 9(1) (Amendments relating to common law damages). It is this transitional provision that was vital to the rights of the plaintiff (Mr Bahmad) in the present case.

The plaintiff’s Statement of Claim against the State of New South Wales was not filed until 11 December 2001, two weeks after the Further Amendment Act commenced. The transitional provisions therefore did not apply. It was common ground that the plaintiff’s claim necessarily failed if the 2001 amendments applied because he could not satisfy the 15% threshold in relation to the degree of his permanent impairment.
The plaintiff’s personal injury claim against the State of New South Wales was nevertheless upheld in the District Court on 29 August 2003, Judge Graham holding that the transitional provision was ambiguous, and that the 15% threshold therefore did not apply to his claim. Unfortunately, the judge did not identify in his judgment the nature of the ambiguity he found. That decision was reversed by this Court on 27 August 2004: State of New South Wales v Bahmad [2004] NSWCA 287. The judgment the plaintiff had obtained in the District Court was set aside and judgment for the State of New South Wales was entered, with an order that the costs of both the trial and the appeal be paid by the plaintiff.
The plaintiff then brought proceedings in the District Court against the firm of solicitors he had retained and the present respondent, his barrister, for negligence. He claimed that, if the Statement of Claim in his action against the State of New South Wales had been filed earlier in the District Court, it would have fallen within the transitional provision and not been caught by the 15% threshold imposed by the Further Amendment Act, and that the defendants had been negligent in not acting more quickly.
The negligence action was heard by Judge Balla. Applying the standard of care and skill in the provision of professional advice as that which may reasonably be expected of practitioners (Heydon v NRMA Ltd (2000) 51 NSWLR 1 at [146]), the judge found that both the solicitors and the respondent were negligent. The instructions to the respondent delivered in June 2001 had been to advise whether the plaintiff had either a valid claim pursuant to the Workers Compensation Act or a personal injury claim against the Department of Corrective Services based on negligence. The respondent, after a conference with the plaintiff, had advised that the plaintiff had no claim for workers compensation, but that (subject to receipt of an expert report confirming that negligence could be established) the plaintiff could claim common law damages for a breach of the duty to take reasonable care for his safety when he was working in accordance with a community service order.
The judge accepted the plaintiff’s submissions that the circumstances in which he received his injuries were unusual (in that they were not of a “common garden variety” of personal injury litigation) and that, exercising reasonable care and skill, a barrister in the position of the respondent advising the plaintiff would have researched the law relating to community service orders and, on the balance of probabilities, would have found the relevant legislation relating to community service orders which was to limit the common law damages that could be recovered for injuries received when working under such an order in accordance with the provisions of Part 5, Division 3, of the Workers Compensation Act (see par [64] supra). The respondent conceded in evidence that, in June 2001 (when he had received his instructions), it had been known within the New South Wales profession, and that he knew, that the Government intended to amend that statute in a manner that would restrict the rights of workers by removing the entitlement to damages for non-economic loss and imposing a threshold on damages which could be awarded for other loss.
The judge held that a barrister exercising reasonable care and skill would have found the relevant legislation in time for the proceedings to have been commenced before the foreshadowed legislation was passed. She said that these proposals had been the subject of widespread discussion between barristers. The judge held:
Even if the matter was one in which damages were to be assessed on a common law basis, an ordinary competent and prudent barrister should have turned his or her mind to the applicability of those proposed reforms. He or she should have contacted [the instructing solicitors] to advise that the matter could well be caught by the proposed reforming legislation and that proceedings should be filed as soon as possible, subject to instructions.
The judge accepted that the plaintiff had established a breach of the respondent’s duty of care by failing to advise the need to commence the proceedings before the foreshadowed legislation was passed. She also rejected the respondent’s claim of a barrister’s immunity from suit, on the basis that this Court, in Macrae v Stevens (1996) Aust Torts Reports §81-405, had excluded from counsel’s immunity advice given before the proceedings commenced as to the application of a limitation period, following the decision of the House of Lords in Saif Ali v Sydney Mitchell & Co [1980] AC 198.
None of these findings against the respondent is in issue in this appeal.
The judge next proceeded to consider the respondent’s cross-claim against the appellant, his insurer. The respondent had completed the proposal for professional indemnity policy on 30 May 2004. The period of insurance commenced one month later, on 30 June 2004. That was shortly before the appeal to this Court from the plaintiff’s judgment against the State of New South Wales was to be heard. The policy is a “claims made and notified” one. In Section 6 (What is not covered), it provided:
We do not cover any of the following Claims (or losses):
6.1 Known Claims and Known Circumstances
(a)Known Claims (or losses) as at the inception date of this Policy, or
(b)Claims (or losses) arising from a Known Circumstance, or
(c)Claims (or losses) directly or indirectly based upon, attributable to, or in consequence of any such Known Circumstances or known Claims (or losses) […]
The phrase “Known circumstance” is defined in Section 11 (Words with special meanings) as follows:
11.12 Known circumstance
Any fact, situation or circumstance which:
(a)an Insured knew before this Policy began; or
(b)a reasonable person in the Insured’s professional position would have thought, before this Policy began,
might result in someone making an allegation against an Insured in respect of a liability, that might be covered by this Policy.
The proposal which the respondent had earlier signed (on 20 May 2004) asked the following question:
4. Are you aware of any circumstances, which could result in any Claim or Disciplinary Proceedings being made against you? If “Yes” please provide details.
The form contained the notice - required by s 21 of the Insurance Contracts Act 1984 (Cwth) - of the proposed insured’s duty of disclosure of any matter which the proposed insured knows or “could reasonably be expected to know” is relevant to the insurer’s decision whether to accept the risk of the insurance and, if so, on what terms. That notice contains the “Comment” that the requirement of full and frank disclosure of anything which may be material to the risk or the magnitude of the risk is of “the utmost importance with this type of insurance”, and that:
It is better to err on the side of caution by disclosing anything, which might conceivably influence the insurer’s consideration of your proposal.
The respondent ticked the “No” box in answer to that question. However, that proposal - a form supplied by the insurance broker, not by the appellant - is couched in terms different from those in the exclusion clause in the policy.
The exclusion clause in the policy is concerned with the questions:
(a) whether the insured “knew” before the policy began of circumstances which “might result” in someone “making an allegation […] in respect of a liability” which may be covered by the policy, or
(b) whether a reasonable person in the insured’s professional position “would have thought” before the policy began that the circumstances known to the insured “might” have that result.
The terms of the policy are the relevant terms in this case. If the answer to either question is in the affirmative, the claim is not covered by the policy. The exclusion clause is directed to the relevant state of mind concerning circumstances which might result in someone making an allegation of liability against the insured, not just making a claim against the insured (which would no doubt ordinarily include an allegation of liability).
It was common ground at the trial that the appellant bore the onus of proof of establishing that the respondent’s claim on the policy fell within that exclusion clause.
The judge found that the respondent first became aware in May 2003 of the argument on behalf of the State of New South Wales (the defendant to the plaintiff’s personal injury claim) - subsequently upheld by this Court - that the amendments were retrospective and therefore necessarily denied the plaintiff’s claim. This was at least twelve months before the period of insurance commenced. It had been when the claim was first listed for hearing in the District Court. The respondent accepted in evidence that he had been surprised, as he had not considered the point. He had successfully sought an adjournment in order to consider the issue. In his evidence during the negligence claim hearing, the respondent sought to explain his state of mind concerning the prospect of any allegation of liability being made against him in various ways. He said that he had himself explained to the plaintiff in May 2003 that he could lose his claim because the proceedings had not been filed two weeks before they were in fact filed, but that he had felt no professional embarrassment when he did so as he did not regard the failure to file the proceedings before the expected legislation commenced to have been his fault. He said that it was no-one's fault; it was, he said, an accident of fate. He said that he had "not really" applied his mind to the ramifications of that failure.
The respondent acknowledged that his view at that stage was that it was a “knockout point”, and that if upheld the plaintiff would be completely out of court without any remedy and even his out-of-pocket expenses.
The respondent accepted that, following the institution of the appeal from the judgment in favour of the plaintiff (late in 2003), he knew that the plaintiff would be out of court if that appeal were successful on the basis that the proceedings had been commenced two weeks after the new workers compensation legislation came into effect. The respondent did not agree that it was "on the cards" that this was a circumstance which could give rise to a claim. He was asked whether, at the time he completed the insurance proposal on 20 May 2004, it was his view that, whatever happened in the Court of Appeal, the plaintiff was "never going to make any allegation" against him. He replied:
I didn't believe I’d done anything wrong and I had no belief at that time that a claim would be made against me no matter what happened in the Court of Appeal.
He said that he had not directed his mind to "the possibility or the potential" of the plaintiff making a claim against him at the time he filled out the proposal, and he disagreed that, if he "had reflected on the plaintiff's case", the possibility of the plaintiff making a claim against him "would have sprung to mind". He said that he had not directed his mind to whether or not the plaintiff may make a claim against him because he had no cause to do so.
After the plaintiff commenced his action against his former solicitors and the respondent, the respondent replied to a query from the insurer’s solicitors concerning “known circumstances”:
As [Judge] Graham’s decision was subject to appeal I didn’t know whether any of those matters would give rise to a claim against me and hadn’t really turned my mind to it. It was all so contingent on what the court of appeal would do. I don’t know if there is anything much I can add.
When considering the purely subjective test as to the respondent’s knowledge (expressed in question (a) of par [77] supra), Judge Balla first gave separate consideration to the plaintiff’s satisfaction with his legal representatives after he was first apprised of the legal problem he faced, so as to determine when the plaintiff had first given some indication to his legal representatives that he would allege that the respondent was at fault for allowing that problem to arise. She expressed her satisfaction that the plaintiff was himself aware that there were legal issues relating to the assessment of his damages from May 2003, when he had been advised by his legal representatives in writing that his case depended on obtaining, prior to commencing proceedings, an appropriate medical assessment of a “15% whole person impairment or greater”, and that no such assessment had been obtained. The plaintiff also knew that there was a possibility that the legislation could operate to defeat his claim. She accepted, however, that the plaintiff did not make any complaint to the respondent (or to his instructing solicitors) or indicate to them in any way that he was dissatisfied with their performance until after the respondent’s policy commenced — which the exclusion clause made the relevant time by which the relevant state of mind had to be established by the appellant (see par [75] supra). (The circumstances in which the plaintiff indicated his dissatisfaction are related in par [86] infra.)
The judge accepted the evidence of the respondent that, by the time the plaintiff’s personal injury claim came on for hearing in the District Court, he (the respondent) had formed the view that there was a good argument that the restrictions on damages did not apply to the plaintiff. The Senior Counsel originally briefed for the plaintiff as the respondent to the State Government’s appeal in his personal injury claim, who had substantial experience in personal injury litigation, had indicated to the respondent that there were reasonable prospects of the plaintiff’s success in the Court of Appeal. (When the appeal was taken out of the hearing list in the middle of 2004, Senior Counsel had been obliged to return his brief, but he had by that stage prepared the appeal for hearing. The indication of reasonable prospects of success had thus been given before the commencement of the insurance policy.)
The judge found that, as at the commencement of the policy, the respondent understood that there were legal difficulties which had to be met, although he considered that he had taken all reasonable steps to prepare the plaintiff’s claim. The respondent had taken into account that both an arbitrator and then a judge had made a finding in favour of the plaintiff. (In fact, the arbitrator had not been concerned with the 15% threshold issue.) Judge Balla accepted that it had not occurred to the respondent before the commencement of the policy on 30 June 2004 that the issues of the late filing of the Statement of Claim or the failure to find the relevant legislation could be matters which could give rise to a claim against him. The judge does not appear to have considered the somewhat wider issue as to whether, in the terms of the exclusion clause itself, the respondent knew of “any fact, situation or circumstance” which “might result in someone making an allegation against [him] in respect of a liability that might be covered” by the policy. I have emphasised the word “allegation” in order to contrast it with the narrower issue the judge determined as to whether a claim might be made.
The judge found that the possibility that there could be fault on the part of the legal representatives of the plaintiff (including the respondent) first became apparent to them as those representatives left the hearing of the appeal to this Court on 19 July 2004 (when judgment was reserved) - which was after the insurance policy had commenced. The plaintiff had been upset, apparently at this Court’s reaction to the submissions his counsel had made, and the respondent formed the belief that the plaintiff was questioning the competence of his legal advisers. On the following day, the respondent wrote to one of the solicitors in the firm which had retained him saying:
The plaintiff has already raised the issue of whether his former solicitors were negligent in failing to file the Statement of Claim prior to 27 November 2001. As I was briefed at the time and in fact drafted the Statement of Claim, I am obviously in no position to advise on this issue due to a conflict of interest. The plaintiff will need to seek independent advice on this issue.
The appellant does not appeal against those findings in favour of the respondent. This appeal is concerned with the judge’s interpretation of, and findings concerning, the alternative test - whether “a reasonable person” in the insured’s professional position “would have thought” before the policy began that the circumstances known to the insured “might result” in someone “making an allegation […] in respect of a liability” which may be covered by the policy (see pars [75] and [77(b)] supra). There are a number of issues to be considered in relation to the judge’s determination of this test in favour of the respondent.
The respondent had argued at the trial that the verb “thought” should be interpreted as “knew in the sense of thought or considered almost certain”. The appellant had submitted that a reasonable barrister in the respondent’s position who turned his mind to this issue at the commencement of the respondent’s policy (30 June 2004) - when the State Government’s appeal was still pending against Judge Graham’s decision that the transitional provision (see par [69] supra) was ambiguous and therefore did not apply to the plaintiff - would have concluded that an allegation of negligence against him was a “definite risk” or a “real possibility” or “on the cards”, as a successful appeal would mean that the plaintiff would recover nothing because he had not complied with the transitional provision as a result of the ignorance of his legal advisers (including his barrister) that the new modified common law damages applied to the plaintiff’s claim. According to the judgment in the District Court, the appellant had also submitted that:
So long as there was any risk at all of an adverse result in the appeal, then there existed a situation or circumstance that might result in the [respondent] being alleged to have been negligent.
I did not understand that last submission to have been repeated in this Court, but I would have rejected it if such a submission had been repeated.
The tests quoted in the appellant’s submission to the judge (other than the “any risk at all” test) were based on the decision of Lindgren J in FAI General Insurance Ltd v McSweeney & Ors (1999) ANZ Insurance Reporter §61-443 at 75,033-034. That case was concerned with a proposal form which asked the insured (a firm of accountants) whether any of the partners in the firm, after inquiry, was “aware of […] any claim or circumstances which may give rise to a claim” against their firm. (I leave to one side at this stage the fact that the present case is concerned with making an allegation, not with making a claim.) Lindgren J said:
In my opinion, it is not desirable to attempt to define precisely the shade of meaning signified by the expression “may give rise to a claim”. The appropriate connection between the known circumstances and the claim referred to in [the question in the proposal] is, perhaps, best described by saying that the circumstances “may give rise to a claim” if they would, as at the time of the proposing of the insurance, immediately suggest to a reasonable person in the proponent insured’s position who reflected upon those known circumstances, that the bringing of a claim against the insured in respect of them was a “definite risk” or a “real possibility” or “on the cards”. Perhaps the notion of the “springing to mind” of the making of a claim also appropriately expresses the shade of meaning intended.
The expression is concerned with the making of a claim as distinct from the mere existence of legal liability. Ordinarily it can be expected that what will be known will include the fact that the circumstances have actually led a person at least to contemplate the making of a claim. However, I do not exclude the case where the underlying circumstances establishing liability themselves, of their nature, would prompt a reasonable person immediately to foresee the making of a claim as a real possibility. In such a case, the length of time that has passed without any suggestion of a claim and the degree of obviousness of liability may assume importance.
Lindgren J commented that the last sentence of the passage I have quoted would be illustrated by the example given in another case (quoted by Lindgren J at 75,033) where a ship had foundered with potential claims when the survivors reached shore, but if such claims had not been made when the proposal was filled out, then the foundering of the ship by itself would be a circumstance which may result in a claim.

That passage was quoted by this Court in Fishwives Pty Ltd v FAI General Insurance Co Ltd [2001] NSWCA 103 at [37]. Mason P, with whom Meagher & Handley JJA agreed, said (at [38]) said that it was unnecessary in that case to express a concluded view on what Lindgren J had said, although he described it as a “helpful summary”. The appellant in the present appeal submitted that the adverb “immediately” in each of the paragraphs of the quoted passage was not a crucial part of the analysis, and that, where the event giving emphasis to the possibility of an allegation of negligence being made occurs after the acts giving rise to the allegation but before the commencement of the policy, it is sufficient that the reasonable person in the respondent’s professional position would, on reflection at that stage, immediately foresee the making of an allegation of negligence as a “definite risk” or a “real possibility” or “on the cards”.
I agree that the adverb “immediately” must be related to the occasion when such reflection would be expected, but I am unable to accept the width of the range of synonyms adopted by Lindgren J in the passage quoted. The relevant phrase in the exclusion clause is:
[…] might result in someone making an allegation against an Insured in respect of a liability that might be covered by this Policy […],
Substituting a more consistent description of the chance that an allegation would be made that the respondent had been negligent, the synonyms suggested by Lindgren J ranged from a certain chance (“definite risk”), to something within the range of probability (“on the cards”), to an existing possibility (“real possibility”). (The appellant’s submission that “any risk at all” was sufficient amounted to any chance at all.) It may be instructive that Lindgren J himself appears to have preferred the “real possibility” test in the second paragraph I have quoted. In my opinion, the “real possibility” that an allegation would be made is what was meant by the phrase “might result in someone making an allegation” in the appellant’s policy.
So far as the present case is concerned, the phrase is related to the alternative (wider) issue of whether a reasonable person in the insured’s professional position “would have thought” at the relevant time that that the circumstances known to the insured “might” have that result. It was correctly conceded by the appellant at the trial that the word “thought” imposes a lower threshold than the word “knows” (the condition of mind required by the exclusion clause in relation to the insured). Judge Balla said that the clause was consistent with meanings ranging from “thought or considered almost certain” to “considered an outside possibility”. That proposition appears to have flowed from the synonyms adopted by Lindgren J in the case cited to her. She accepted the submission on behalf of the respondent that what was required was a much higher degree of conviction of the likelihood of a claim being made than that described by counsel then appearing for the appellant, but she did not identify the particular degree of conviction she applied in relation to the reasonable person in the respondent’s professional position. She merely held that the clause was ambiguous and that a reasonable person in the respondent’s position would not have thought otherwise than what the respondent thought.
In my opinion, the judge erred in that finding. It appears to have arisen at least in part from the judge’s treatment of the next issue which has to be considered.
The appellant had submitted at the trial that the alternative test posed by the exclusion clause was concerned solely with the objective reaction of a reasonable person in the professional position of the insured, and that it did not require consideration of any subjective belief on the part of the insured of any wrongdoing on his or her part. The judge accepted that that was one interpretation of the exclusion clause, but she concluded that the clause was also open to a different interpretation which was not an entirely objective test -
[…] since it involves a consideration of whether the [insured’s] actual state of mind was unreasonable.
She held that the exemption clause was accordingly ambiguous in that respect also and had to be construed contra proferentem. The judge then said:
I have made findings in relation to the state of mind of [the respondent] at the relevant time. I am satisfied that a reasonable person in his position would not have thought otherwise.
This was a reference to the findings identified in par [85] supra. The judge’s finding that the alternative formulation of the exclusion clause produced the same result is hardly surprising in the light of the approach she had taken.
The judge did not explain just how she considered the reasonableness of the insured’s “actual state of mind” of the insured - his knowledge as to whether an allegation might be made against him - could be relevant to the issue as to whether a reasonable person in the professional position of the insured “would have thought” that such an allegation might be made (I have added the emphasis). The test posed by the alternative formulation of the exclusion clause necessarily accepts that the person in that position is reasonable. The resolution of that alternative test against the insured does not involve a finding that the actual state of mind of the insured was unreasonable. Whereas a particular insured may have had a flawed perception of the significance of the circumstances, and so lulled him or herself into a false sense of security, the reasonable person in the professional position of the insured may well be found to have been more astute as to that significance than that particular insured, or just more perceptive of the possible consequences of the situation and of the real possibility that an allegation of liability may be made by his or her client. A finding against a particular insured on the basis of the alternative formulation of the exclusion clause in the present case can amount to no more than that he or she was either less astute or less perceptive than a reasonable person in that insured’s professional position. It neither requires nor involves a finding that the insured’s state of mind was unreasonable.
That is how a similar issue was considered in Sims v Celcast Pty Ltd (1998) 71 SASR 142 at 144, 145. The SA Full Court was there concerned with s 588FG(2)(b) of the Corporations Law, which required an examination of (a) whether the particular person became a party to a transaction with a company had no reasonable grounds for suspecting that the company was insolvent at that time and (b) whether a reasonable person in that particular person’s circumstances would have had no reasonable grounds for so suspecting.
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 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. The test is, as the appellant has submitted, solely an objective one — the reaction to the circumstances known to the insured of a reasonable person in the insured’s professional position — and not in any way a subjective one: Cussons v FCT (2003) 47 ACSR 107 at [31]; L’Aloia v FCT (2003) 48 ACSR 204 at [18]–[27]. Both these cases deal with s 588FG(2)(b) of the Corporations Act 2001 (Cwth), the same provision considered in Sims v Celcast Pty Ltd. See also GIO General Ltd v Wallace [2001] NSWCA 299 at [23], [33]. That case was concerned with s 21(1) of the Insurance Contracts Act, which requires an insured to disclose to the insurer every matter known to the insured which (a) the insured knows to be a matter relevant to the decision of the insurer to accept the risk and, if so, on what terms, and (b) a reasonable person could be expected to know to be a matter so relevant.
In my opinion, the judge erred in her interpretation of the alternative (objective) formulation of the exclusion clause in this way as well. This clause requires the insurer to establish that a reasonable person in the insured’s professional position would have contemplated the real possibility that an allegation of negligence that might be covered by the policy might be made against him. The errors demonstrated to have been made by the judge requires this Court to determine for itself whether the appellant had succeeded in establishing the alternative formulation of the exclusion clause.
The reference to the thought processes of a reasonable person in the insured’s professional position is to those of such a person who has the professional qualifications of the insured, the insured’s knowledge of the relevant facts and circumstances at the relevant time, and the opportunities which the insured had to react to those facts. Those circumstances included - in accordance with the findings made by the judge - that the reasonable person in the insured’s professional position knew, as at May 2003:
(i)that he had failed to research the law relating to community service orders and thus discover that the plaintiff’s damages would be affected by the proposed restrictions by removing his entitlement to damages for non-economic loss and by restricting his right to recover economic loss only if he were able to establish a degree of permanent impairment of at least 15%;
(ii) that the plaintiff was unable to establish such an impairment;
(iii)that these problems would have been avoided if he had advised the plaintiff’s solicitors in time to commence the proceedings before the relevant statutes were amended, and thus fall within the transitional provision which avoided the application of those restrictions; and
(iv)that the only way the plaintiff’s claim could succeed was to persuade the trial judge that the transitional provision was ambiguous and thus had be construed contra proferentem.
Another circumstance the reasonable person in the respondent’s professional position knew before the commencement of the term of insurance in June 2004 - from the respondent’s discussions in relation to the appeal to this Court with Senior Counsel then briefed to argue that appeal - would be the nature of the argument to be put forward in opposition to that appeal. The argument in fact put forward is set out in this Court’s judgment at [15]-[21]. Stated briefly, the argument was that the transitional provision had to be read as being limited to cases in which damages were to be recovered for a “work injury”. The very obvious difficulties involved in this argument put are demonstrated in this Court’s rejection of that argument. In my view, those difficulties would have been apparent to a reasonable person in the respondent’s professional position, notwithstanding the assurances by Senior Counsel then appearing for the plaintiff that it was a good argument. Even if that were not so, the reasonable person in the respondent’s professional position would also have been aware of the unusual course followed by Judge Graham, when he granted the State’s application for an unconditional stay of proceedings, of refusing to order the payment of any part of the verdict to the plaintiff pending the hearing of the appeal. The judge remarked to the respondent that “minds might differ on that point”, and the respondent conceded that “there is an issue to go further if the defendant is so minded”. The judge responded that the State “has a lot on its side in terms of the ordinary words of the section”, and that “it is possible that other minds would approach the matter and resolve it differently”. He was clearly indicating concern that his ruling may not survive an appeal.
It was submitted by the appellant in this appeal that a reasonable person in the respondent’s professional position would not have demonstrated the respondent’s self-assuredness or perhaps obtuseness or even blindness that he revealed in the evidence to which I have referred. I would prefer to express my opinion by saying that this reasonable person would clearly have been far more perceptive of the significance of the circumstances known to him and of the possible consequences of those circumstances than the respondent was. The respondent’s fixed belief was that he had not been guilty of negligence - that is, that no claim made against him would succeed. He did not even consider whether there was a real possibility that the plaintiff would see it differently and might make an allegation that he had been negligent. Yet he knew that the plaintiff would have been aware of the fact that his claim would have succeeded had his barrister advised his solicitor to commence the proceedings before the legislation was passed, and that his barrister simply had not applied his mind to that issue.
As the joint majority judgment in the High Court observed in D’Orta-Ekenaike v Victoria Legal Aid (2000) 223 CLR 1, in a passage quoted by Judge Balla:
[37] Parties who fail in litigation, whatever its subject, may well consider the result of that litigation to be wrong, even unjust. Seldom will a party have contested litigation without believing, or at least hoping, that it will be resolved in that party’s favour. If that party does not succeed, an explanation for failure may be sought in what are perceived to be the failures of others — the judge, the witnesses, advocates — anyone other than the party whose case has been rejected.
[38] This is no new phenomenon. It is a problem with which the common law has had to grapple for centuries. Its response has been the development of immunities from suit for witnesses, judges and advocates. The origin of these rules can be traced to decisions of the sixteenth and seventeenth centuries: [Authorities cited].
If the State’s then pending appeal in the present case were to be upheld, the plaintiff in the present case would not just “perceive” the loss of his case to have been the failure of others. He would know - from the warning he had received in May 2003 (see par [79] supra) - that he had lost his case because of the failure of his solicitors and barristers to commence the proceedings before the statute commenced.
In my opinion, the reasonable person in the respondent’s professional position would, upon the reflection required by his insurance policy which was at that stage about to commence, have contemplated the real possibility that the plaintiff would, at the very least, make an allegation of negligence against his barrister. It does not have to be the contemplation that he will sue, as I have attempted to emphasise earlier in this judgment. As Lindgren J remarked in the FAI case, in the passage I quoted in par [89] supra:
Ordinarily it can be expected that what will be known will include the fact that the circumstances have actually led a person at least to contemplate the making of a claim.
The reasonable person in the respondent’s position would perceive that it is but a brief step for the disappointed litigant (who would necessarily perceive that his barrister was at fault in the circumstances of this unhappy case) to make an allegation of negligence against him.
It follows in my opinion that Judge Balla erred rejecting the appellant’s reliance on the exclusion clause of the insurance policy, and in entering judgment against the appellant. She had entered judgment for the plaintiff against the solicitors and the respondent for $170,000, and ordered them to pay the plaintiff’s costs of the trial. She apportioned the liability of the solicitors and of the respondent as 50% each, or $85,000. However, the appellant was ordered to indemnify the respondent in accordance with his professional indemnity policy not only the $85,000 but also half of the plaintiff’s costs, plus the respondent’s costs of the cross-claim. The plaintiff’s costs and disbursements have been assessed by his solicitors at just under $161,000. The appellant’s solicitor has sworn an affidavit that the plaintiff’s costs will exceed $50,000, so that the judgment of $85,000 plus one half of those costs bring the appellant’s liability to more than $100,000. It is not disputed that the appeal lies to this Court without the need for leave.
It follows, then, that I would uphold the appeal. I propose the following orders:
1. The appeal is allowed.
2. The respondent is to pay the plaintiff’s costs.
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AMENDMENTS:

11/04/2007 - cross-references incorrect - Paragraph(s) 72, 83, 87, 88, 94, 102, 103.

LAST UPDATED: 11 April 2007