CGU Insurance Ltd v Porthouse

CGU Insurance Limited appealed to the High Court of Australia against a decision of the Court of Appeal of the Supreme Court of New South Wales, which had upheld a District Court judgment. The dispute concerned a claim for indemnity under a professional indemnity policy issued by CGU to a barrister, the respondent. The barrister had provided advice to a client, Mr Bahmad, regarding a workers compensation claim. This advice was later found to be negligent, and Mr Bahmad's claim was significantly diminished due to legislative amendments that came into effect shortly after the negligent advice was given. The barrister sought indemnity from CGU for the damages awarded against him, but CGU denied liability based on a "Known Circumstance" exclusion clause in the policy.

The central legal issue before the High Court was the proper construction and application of the "Known Circumstance" exclusion clause. Specifically, the Court had to determine whether the exclusion operated by reference to an objective standard, requiring consideration of what a reasonable person in the insured barrister's professional position would have thought, or if the insured's subjective state of mind was relevant. The exclusion defined a "Known Circumstance" to include 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 an allegation of liability covered by the policy.

The High Court, in a joint judgment, allowed the appeal. Their Honours reasoned that the "Known Circumstance" exclusion clause was to be construed objectively. The test was not what the insured barrister actually thought about the possibility of a claim, but rather what a reasonable barrister in his position would have considered might lead to a claim. The primary judge had erred by focusing on the barrister's subjective belief that he had not acted wrongly, rather than on whether a reasonable person in his position would have foreseen the possibility of an allegation of negligence, irrespective of his personal view on his blameworthiness. The Court found that the facts known to the barrister at the time, including the impending legislative changes to the Workers Compensation Act and the potential for a claim to be adversely affected by the timing of filing proceedings, were such that a reasonable barrister would have considered the possibility of an allegation of negligence.

Consequently, the High Court set aside the orders of the Court of Appeal and the District Court. Judgment was entered for CGU Insurance Limited on the barrister's cross-claim, meaning CGU was not liable to indemnify the barrister. The barrister was ordered to pay CGU's costs at trial and in the Court of Appeal, with CGU ordered to pay the barrister's costs of the appeal to the High Court.