Australia: Courts Lower The Bar On Insurance ‘Claims’
Corporate Risk and Insurance Update

A number of recent decisions have considered what constitutes a 'claim', both as against an insured or under a policy. The trend in these cases has been to lower the bar so as to allow claims against the insurer to proceed.

The recent decision of the New South Wales Supreme Court (the Court) in Eastern Creek Holdings Pty Limited v Axis Speciality Europe Limited [2010] NSWSC 840 has highlighted the difficulties insurers face when resisting an application for leave to commence proceedings against them pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the Act).

What went wrong?

In August 2006, Eastern Creek Holdings Pty Limited as principal (the Plaintiff) entered into a design and construction contract with Seana Constructions Pty Limited (Seana) for development of the Chifley Hotel in Eastern Creek, NSW.

Seana was insured under a professional indemnity insurance policy (the Policy) underwritten by Axis Speciality Europe (the Defendant). The schedule to the Policy described Seana's professional business as 'Project/Construction Managers'.

The Policy period was from 11 September 2007 to 11 September 2008. The works were carried out during this time and were completed on or about April 2008. The Policy provided:

On 2 September 2008, the Plaintiff gave the following written notice to Seana:

What the Court said?

With Seana in liquidation, the Plaintiff sought leave pursuant to s 6(4) of the Act (which creates a charge over insurance moneys payable in respect of an insured's liability) to serve a Statement¹ against the Defendant. Section 6(4) of the Act (for the full provision click here ) provides:

What must the plaintiff establish?

The parties agreed that to obtain leave, the Plaintiff must show that there is:

• an arguable case against the Insured;
• an arguable case that the Policy responds; and
• a real possibility that if judgment is obtained, the Insured would not be able to meet it.

The Defendant accepted that the Plaintiff had satisfied the first and third requirements but argued that the Plaintiff had not satisfied the second.

Hammerschlag J explained that the Plaintiff merely needed to show it is 'arguable that the Policy responds'. Whether in fact it does is a matter for the final hearing.

The Defendant argued that the Policy would not respond because:

• The Policy only responded to claims arising from acts, errors or omissions committed by Seana in the conduct of 'Professional Business' (as defined in the schedule) and the alleged failings of Seana as pleaded did not arise in this context; and
• No claim was made against Seana or circumstances notified during the Policy Period.

Hammerschlag J noted that it was inappropriate to finally determine whether the conduct complained of in the originating process amounted to activities of 'Professional Business' as described in the schedule. His Honour explained:

In relation to the Defendant's second submission, His Honour found that it was arguable that the Policy on its wording responded and, accordingly, found sufficient grounds for leave to be given. His Honour explained that the Defendant's argument was not one that the Policy did not respond, but rather that the Plaintiff had no arguable reply to a defence that may be used by the Defendant in the future.

By deferring this consideration, His Honour has set the bar for a grant of leave exceedingly low.

What is a 'claim'?`

...against the insured

Even if the Plaintiff was in fact required to provide an arguable reply to any such defence, His Honour found that it had done so.

His Honour noted that the 2 September letter did not constitute notice of a 'claim' against Seana. This should be contrasted with the recent decision in Dimitra Cassidy v Eric J Leslie [2010] NSWSC 742 where the court, in considering a very similar email, found that the email amounted to a 'claim' (constituting an assertion of a right to compensation, whether or not that right was contingent or conditional) with s 54 of the Insurance Contracts Act 1984 (Cth) (the ICA) remedying late notification.

It will be interesting to see whether Hammerschlag J's finding is challenged on the basis of Dimitra Cassidy v Eric J Leslie although subtle differences in the respective definitions and demands may be critical. The definition of 'claim' in Dimitra Cassidy v Eric J Leslie also included the 'assertion of a right' to compensation in addition to a demand and the relevant email stated that a claim would be made if certain criteria were satisfied.

His Honour further commented that s 40(3) of the ICA precluded the Defendant from being relieved of liability under the Policy if the 2 September letter constituted notice in writing 'of facts that might give rise to a claim' against the Defendant. This finding may not withstand scrutiny as s 40 refers to notice given in writing 'to the insurer' by the insured whereas the 2 September letter was from the Plaintiff to the Insured.

His Honour also considered s 54 of the ICA, determining that it was sufficient to say that this section may operate to preclude the Defendant from refusing to pay the claim as a result of the omission by the Plaintiff to notify circumstances within the Policy Period. Again, this finding seemingly ignores the decision in Gosford Council v GIO General Limited [2002] NSWSC 511 that s 54 does not rectify a failure of an insured to exercise the statutory right provided by s 40 of the ICA.

...under the policy

Staying with s 54 for a moment, in Gorczynski v W&FT Osmo Pty Ltd [2010] NSWCA 163, the New South Wales Court of Appeal (NSWCA) recently considered whether a third party claimant was entitled to the benefit of s 54(1) of the ICA where the insured had not made a claim or notified circumstances under a 'claims made and notified' policy. This question also arose in the context of an application by a third party to join the insurer to proceedings under s 6(4) of the Act.

In resisting the appeal, the insurer (QBE) argued that s 54(1) had no application to a case where the insured did not make a claim under the applicable policy and that s 54(1) required the claim against the insurer to be made by the insured. The NSWCA noted the 'claim' to which s 54(1) was directed was the 'claim' against the insurer, not a claim by a third party against the insured. Accordingly, a third party 'claim' on the insurance is a 'claim' for the purposes of s 54 of the ICA.

QBE further noted that in respect of a 'claims made and notified' policy, the third party claim must be made (or circumstances notified) within the time limits provided in the policy. However, their Honours noted that there was no such sequential requirement for making a claim against the insurer under s 54(1).

Therefore, the court held that a 'claim' for the purpose of s 54 was not limited to one only made by the insured but extended to claims by third parties, including in the context of s 6 proceedings.

This expansive approach may have significant implications for the rights of third party claimants on insurance policies (and therefore the exposure of insurers) in the future.

And this means?

The three decisions briefly touched upon above demonstrate the court's willingness to utilise the elasticity of language so as to allow claims against insurers to proceed. In particular, the meaning of 'claim' in a variety of contexts has been clarified.

The low threshold that a plaintiff is required to meet in an application pursuant to s 6 of the Act also renders resiting a claim at this initial stage rather difficult.

Further, the decision in Gorczynski has broad implications. Although the insured had never made a claim (or notified circumstances), a third party was afforded the benefit of s 54 (although the insurer succeeded on other grounds).

Future developments in these areas will be viewed with interest as the implications of these decisions filter through to a new generation of cases.

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