Perpetual Trustees Victoria Ltd v Malouf [2012] NSWSC 1119

The October 2012 decision by the NSW Supreme Court in Perpetual Trustees Victoria Ltd v Malouf [2012] NSWSC 1119 declined to grant leave to join an insurer to proceedings under section 6 Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (Act) where the wrongful act occurred before the inception of the relevant insurance policy. The decision highlights the difficulties of joining insurers to proceedings particularly in relation to 'claims made' policies.

Facts

In 2004, Albert Malouf arranged to provide a loan to a group of companies referred to here as the Farah Companies. In order to fund the loan, Albert Malouf transferred his mother's interest in his parents' home into his name and remortgaged the property to obtain a $700,000 loan from the plaintiff (Perpetual).

The Farah Companies defaulted on the loan and went into receivership. Consequently, the Maloufs could not meet their mortgage repayments to Perpetual and Perpetual brought proceedings seeking an order for possession of the property.

At around the same time in 2004, Albert Malouf had retained a solicitor, Charles Goldberg, to provide advice on the best method of security to support the loan to the Farah Companies. Albert Malouf alleged that Goldberg represented that the loan to the Farah Companies had been secured with a registrable interest in the property but this turned out not to be the case. Albert Malouf therefore alleged that Goldberg had provided negligent advice.

The Law Society of New South Wales cancelled Goldberg's practising certificate in 2004. From 1 July 2006, Law Cover Insurance Pty Ltd (Law Cover) insured solicitors who had ceased to practice for claims first made against them from this date. Subsequently Albert Malouf brought an application to join Law Cover to the proceedings in accordance with section 6 of the Act.

Decision

Section 6 of the Act creates a statutory charge over insurance monies that would otherwise be payable to an insured, in favour of a third party that has a claim against the insured. A charge under section 6(1) arises "on the happening of the event giving rise to the claim for damages or compensation".

The relevant question for the court to address in Perpetual was therefore, what constituted the "happening of the event giving rise to the claim". Following earlier authority on this point, Justice Davies held that in order for a charge to attach, the event giving rise to the claim must occur after the insured entered into the policy, as no charge can be created over an insurance contract which does not yet exist. Therefore, the event giving rise to the claim must occur in the course of the policy period between 1 July 2006 and 30 June 2007.

Whilst it was not directly pleaded that Goldberg breached his retainer, Albert Malouf alleged that the retainer included implied terms to provide appropriate advice. He alleged that Goldberg represented that the loan was secure, and that had the true nature of the loan been explained to him, he would not have loaned the money to the Farah Companies. Accordingly, Justice Davies held that the relevant "event" was Goldberg's breach of the retainer in 2004 when the loan was made with inappropriate advice and insufficient security i.e. before the inception of the Law Cover policy on 1 July 2006. The application to join the insurer to the proceedings was therefore dismissed on the grounds that there was no charge over the policy.

Implications

Section 6 of the Act is well known as having given rise to extensive litigation. However, since the decision in Manettas v Underwriters at Lloyds (1993) 7 ANZ Ins Cas 61-180 a line of authority has emerged in the NSW Supreme Court that section 6 of the Act requires the policy of insurance to have been in existence at the time of the happening of the event. The Perpetual case supports this approach and serves as a reminder of the difficulties third parties face in joining insurers to proceedings under section 6 of the Act particularly even where the policy is a 'claims made' policy.

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