FEATURE ARTICLE -
Advocacy, Issue 99: March 2025
In Allianz Australia Insurance Limited v Uniting Church in Australia Property Trust (NSW) [2025] FCAFC 8 (7 February 2025), the Full Court of the Federal Court, in respect of a “claims made” policy of liability insurance taken out by the respondent insured with the appellant insurer over a period of years, addressed an issue whether policy cover was disengaged for want of notification under s 40(3) of the Insurance Contracts Act 1994 (Cth). The subject matter of the claims consisted of damages for sexual abuse by students of teachers of a private school conducted by the insured. The facts of the case, and the issues involved, are of complexity, but the point of this note is to identify – by reference to the policy in question and the circumstances – the useful collection of principles undertaken by Roger Derrington J, whose statement of such principles was not departed from by Colvin and McEvoy JJ. Their Honours ultimately concluded the appeal, in some respects, on disparate bases.
Derrington J wrote:
…
[2] Between 31 March 1999 and 31 March 2011, Allianz Australia Insurance Limited (Allianz) (or its predecessor, Mercantile Mutual Insurance (MMI)) issued successive policies of insurance to the Uniting Church in Australia (UCA). The UCA is not itself a legal entity, but an amalgam of a variety of numerous groups, associations, synods, assemblies, committees, councils, bodies corporate and individuals, all of which were individually covered by the policies. Amongst the bodies corporate are statutorily incorporated trusts referred to as “Property Trusts” which, for their respective geographical areas, own or hold the UCA’s property. For present purposes, they included the Uniting Church in Australia Property Trust (NSW) (UCPT), which is the respondent to the appeal.
[3] Knox Grammar School (Knox) is a school within the umbrella of the UCA and, specifically, within the Synod of New South Wales. Those who were responsible for the school’s management, operation and administration, being the members of the School Council and the successive Headmasters, were also within the scope of the expression, “Insureds”, in the successive policies.
[4] From about 2007, civil claims in respect of historical sexual and physical abuse were brought by numerous former Knox students or by the parents of former students. Though having no discernible part in the management, administration or operation of Knox, the UCPT responded to those claims, engaged in settlement negotiations, and resolved a number of them. It made substantial payments for those settlements and, consequently, sought indemnity from Allianz under the policies. Initially, Allianz accepted that its policies responded to the UCPT’s losses and, over time, it paid substantial sums by way of indemnification. Subsequently, it determined that, in the events which had occurred, the liability for claims arising from the sexual abuse of boys at Knox was not entitled to indemnity under its policies. It had concluded that, prior to the inception of the policies, the relevant insureds were aware of the facts or circumstances from which the claims arose with the consequence that they were beyond the policies’ cover. It further asserted that no notice of those facts or circumstances had been given during any policy period with the result being that s 40(3) of the Insurance Contracts Act 1984 (Cth) (ICA) did not operate to extend cover to subsequently made claims. In particular, it contended that, on or about 1 May 2013, it discovered, for the first time, the extent of the prior awareness on the part of the relevant insureds of facts likely to give rise to the sexual abuse claims. It therefore declined all further requests for indemnity. It has not sought, and does not seek, to recover the amounts which it has previously paid though, on its case, it had no obligation to pay them.
[5] Central to the appeal is one of two investigative reports prepared by Mr Grahame Wilson, a licensed private investigator with LKA Risk Services Pty Ltd, into the possible sexual abuse of boys at Knox by a teacher, Mr Adrian Nisbett. Mr Wilson had a long employment history in educational institutions, following which he had held a government position as the director of child protection investigation, where he led a team of investigators. He clearly had expertise in the area of investigating the sexual abuse of children.
[6] On 7 May 2004, he provided a report (LKA2) to the then Headmaster of Knox, Mr John Weeks. It was detailed, extensive and addressed matters that had been raised following an initial investigation undertaken by him late in the previous year, also in respect of allegations made against Mr Nisbett. Following the receipt of the initial report (LKA1) from this first investigation, Mr Weeks became aware of additional allegations relating to Mr Nisbett’s conduct in and from 1986. As a result, Mr Wilson was engaged to investigate those additional allegations.
[7] It will be necessary, in due course, to refer extensively to the content of LKA2 and what it would have revealed to a reasonable reader in Mr Weeks’ position at the time. It is accepted by the UCPT that it was read by Mr Weeks in full at the time it was received. At this stage, it is sufficient to observe that it contained references to alleged incidents of inappropriate behaviour of a sexual nature towards students at Knox by Mr Nisbett as well as by a number of other teachers. It also contains information about the extent to which a former Headmaster of Knox had been aware of allegations of that type of conduct.
[8] In brief, Allianz contends that on receipt of LKA2, the relevant insureds under the policies became aware of the facts from which the claims subsequently made against the school by former students could reasonably be said to have arisen. It says that none of the insureds under the policies took the opportunity provided by s 40(3) of the ICA to give it notice of LKA2 or its content to Allianz, which would have extended cover under the relevant extant policy to the claims which were subsequently made. It further contends that the former students’ claims are not within the scope of later policies because those insureds were aware of facts or circumstances which may have given rise to those claims.
[9] In the proceedings below, the UCPT sought orders that it was entitled to indemnity under several of the successive policies in respect of amounts which it has paid by way of settlement of claims, and declarations that it was covered under the later policies for claims by others who had been identified as potential claimants.
[10] These claims were substantially upheld. The primary judge granted declarations to the effect that Allianz is required to indemnify the UCPT for the claims arising from sexual or physical assault by former teachers of Knox. Their breadth reflects the range of the primary judge’s findings as to the notification of claims by the UCPT.
[11] Allianz now appeals the primary judge’s orders and declarations. In addition to opposing the appeal, the UCPT contends, by a notice of contention, that the reasoning of the primary judge should be upheld on several additional grounds.
…
THE POLICY TERMS
[77] Before turning to a consideration of the grounds of appeal it is appropriate to set out the relevant policy terms.
[78] Although the issues in this appeal are relatively generic across the 12-year period of insurance (being from 31 March 1999 to 31 March 2011), it is relevant that the policy wording differed from time to time.
[79] The policies in each relevant year were entitled, “Malpractice Liability Insurance”, “Professional Indemnity Insurance”, or some variation of that. Generally, the insured was defined as, specifically, “The Uniting Church in Australia including:-” and, thereafter, reference was made to the several property trusts for the respective States or Territories, as well as other associations such as the Uniting Church Council of Mission Trust Association, the United Theological College, and the Uniting Church in Australia, National Assembly. On other occasions the additional insureds were initially identified as “The Uniting Church in Australia, Synods of” and reference was then made to the several states and to the Northern Territory.
[80] In some policies there followed a general description of other entities within the scope of the word “Insureds”. On one occasion the reference read as follows:
… and including all those entities listed in the directories of The Uniting Church in Australia; Synod of Victoria and Tasmania, The Synod of New South Wales and the ACT, and the Northern Synod, and all other entities under the Uniting Church’s effective management control or for which the Uniting Church is responsible and all their subsidiary and related corporations as defined in the Corporations Act 2001 (including those acquired during the Period of Insurance) for their respective rights and interests …
[81] In the “Annexure A Endorsements” to the policies, cover was extended to the entities and persons who act in the performance of their duties in the businesses or activities of the Church. Though the wording of this part of the definition differed across the years, it was often in broad terms such as “constituent, related and affiliated bodies, institutions, associations or entities, now or hereafter formed by or on behalf of the Insured” as well as “educational services facilities or activities”. The extension of cover to non-legal entities is indicative of an intention to ensure cover for all persons and groups within the UCA.
[82] Despite the differences as between the policies with respect to their descriptions of the insureds, they were all broad and sought to include the numerous entities, associations and persons across Australia which were within the umbrella of the UCA.
[83] Each of the policies was composite and the word “Insured” was to be construed as applying to each party comprising “the Insured”, and in the same manner as if that party were the only party named as the insured. In that respect, after the extensions of the identified “Insureds” the following wording appeared:
PROVIDED THAT in relation to the foregoing
1. Such person(s) shall comply with and be subject to the Terms, Conditions, Exceptions, Provisions and Memoranda of this Policy insofar as they can apply.
2. Where the “Insured” is comprised of more than one party the words “the Insured” shall be considered as applying to each party comprising the Insured in the same manner as if that party were the only party named herein as the Insured.
3. Nothing contained in this definition or Provisos 1 or 2 shall operate to increase the Company’s Limit of Liability.
(emphasis in original)
[84] There is no reason to think that, by reason of the above clause, Exclusion 7(c) would not apply individually to each of the insureds in relation to the cover afforded to them or, similarly, that s 40(3) would not apply to them to the extent to which relevant information was given to Allianz in relation to circumstances of which they became aware during a policy period. That is the natural effect of the severance clause which treats each insured as a separate insured.
[85] The insuring clause in the 2005/2006 policy provided:
Allianz Australia Insurance Limited (A.C.N 000 122 850) (hereinafter called the Company) hereby agrees, subject to payment of the premium specified in the Schedule and subject to the terms of this policy, to indemnify the Insured up to the Limit of Indemnity against all sums which the Insured shall become legally liable to pay as a result of any claim or claims first made against the Insured during the Period of Insurance and notified to the Company during the period for breach of professional duty arising out of any negligence whether by way of act, error or omission on the part of the Insured , in the conduct of the Insured’s Profession as specified in the Schedule.
(emphasis added)
[86] Similarly, although the precise terms of the insuring clause differed slightly from year to year, those variations made no relevant difference for the purposes of the issues on appeal.
[87] It is undoubted that the insuring clause promises indemnity with respect to each insured in respect of their personal liability “for breach of professional duty arising out of any negligence whether by act, error or omission on the part of the Insured …”. On the analysis discussed previously, subject to any feature to the contrary, this would prima facie indemnify each of the members of the School Council and the Headmasters in relation to any claims by former students founded on that insured’s breach of professional duty by that insured party. It would not, however, cover the UCPT in relation to claims on another insured such as these, based upon such a breach by another insured, for the promise is expressly limited to cover the liability of the particular insured for a breach “on the part of the Insured”.
[88] The claims notification requirements of the policies over the years were usually contained in Condition 1, and though there were significant variations in relation to them, it is unfortunate that the parties tended to treat them as being somewhat generic. Helpfully, the learned primary judge set out the variations of this clause in his reasons for judgment at [59]–[62].
[89] He noted that, for the 1999/2000, 2000/2001 and 2001/2002 policy periods, Condition 1 was in the following terms:
Upon the making of a claim against the Insured, or the making of any allegation or the discovery of any circumstance which indicates the possibility of a claim arising, the Insured shall notify the Company in writing immediately and shall provide to the company whatever information relating to the claim or possible claim is in the Insured’s possession.
If during the Period of Insurance the Insured becomes aware of any circumstance which may subsequently give rise to a claim against the Insured and during the Period of Insurance gives written notice to the Company of such circumstance, any claim which may subsequently be made against the Insured arising out of that circumstance shall be deemed for the purposes of this policy to have been made during the Period of Insurance.
For the purpose of this condition only, “the Insured” shall mean “the General Secretary of the Synod”.
[90] In the 2002/2003 and 2003/2004 policy periods, the clause was slightly modified and read:
Upon the making of a claim against the Insured, or the making of any allegation or the discovery of any circumstance which indicates the possibility of a claim arising, the Insured shall notify the Company in writing immediately and shall provide to the Company whatever information relating to the claim or possible claim is in the Insured’s possession.
For the purpose of this condition only, “the Insured” shall mean “the General Secretary of the Synod”.
[91] Conversely, in the 2004/2005 policy period, the clause was in the following terms:
Upon the making of a Claim against the Insured, the Insured shall notify the Company in writing as soon as practicable after the Claim is made and shall provide to the Company whatever information relating to the Claim that is in the Insured’s possession.
For the purposes of this clause only, “the Insured” shall mean “the General Secretary of the Synod”.
[92] The clause was again modified in the following year, being the 2005/2006 policy period, where it read:
Upon the making of a claim against the Insured, the Insured shall notify the Company in writing as soon as practicable after the Claim is made but during the period of insurance and shall provide to the Company whatever information relating to the Claim that is in the Insured’s possession.
For the purposes of this clause only, “the Insured” shall mean “the General Secretary of the Synod”.
(emphasis in original)
[93] It was submitted that Condition 1 assisted the UCPT’s submission that the only knowledge relevant to the operation of s 40(3) and Exclusion 7(c) was that of the General Secretary of the Synod. That should be rejected and, indeed, it is evident on closer consideration that the opposite is true.
[94] The several iterations of Condition 1 are inherently ambiguous. If read literally, they would apply only where claims were made against, or the possibility of a claim arose against, the General Secretary. On no view would that have been intended. This is an example of the poor drafting of insurance policies that has attracted courts’ criticism from time to time. It is a basic feature of a “claims made and notified” trigger of cover, associated with an extension as to possible claims, and as such, it has to be inclusive of all insureds. It is not reasonably possible to draw any implication from it that may be relevant to this matter.
[95] Condition 1 might be understood to mean that, whenever a claim is made or is considered possible against any of the entities covered by the policy, it is the General Secretary of the relevant Synod who is to give Allianz notice of it. Such a provision has the advantage of the notification of claims being funnelled through the one point of contact within the particular Synod, which avoids difficulties which might arise if every insured possibly involved were to notify. This may also have been to the administrative benefit of Allianz. So much is not unexpected in the context of a composite policy which provides cover for an exceptionally large single organisation composed of a diffuse group of multiple insureds.
[96] To the extent to which the clauses refer to the giving of notification of potential claims by the General Secretary in the 1999/2000 to the 2003/2004 policy periods, they confer an obvious benefit on Allianz in relation to any extension of the policy coverage under s 40(3). By limiting it to one person or office, the scope for any disputation as to whether notice had been given would be substantially diminished. There is no need to consider whether that limitation is unenforceable or ineffective by reason of its possible inconsistency with the broad wording of s 40(3).
[97] Importantly, the clauses have nothing to say about the knowledge of the insureds under the policy or its attribution.
[98] Despite the submissions to the contrary, until the end of the 2003/2004 policy period, they had two functions. First, they made provision for the notification of claims which were made against any of the insureds under the policy in accordance with the trigger of cover and, secondly, they made provision for the giving of notice of any potential claims as similarly provided by s 40(3). That duality was abandoned in the 2004/2005 policy, when its only function was the former. The effect of s 40(3) made the contractual extension redundant. If anything, the change in the wording of Condition 1 suggests that the parties intended the subsequent policies to operate differently, with the obligation for the notification of facts which might give rise to a claim falling on each insured or, at least, not necessarily funnelled through the General Secretary.
[99] These clauses do not suggest any intention to negate the specific statement in the proviso to the definition of “the Insured”, that all of the insureds were subject to the terms, conditions and memorandum of the policy. That would include Exclusion 7, which read (subject to variations in particular years):
This Policy does not cover any Claim for any liability for or arising directly or indirectly from:
…
7. Prior Claims & Circumstances
any Claim, fact, circumstance or occurrence;
a. in respect of which notice has been given to the Company or any other insurer under a previous insurance policy, or
b. disclosed or communicated to the Company in the proposal or declaration or otherwise before the commencement of the Period of Insurance, or
c. of which the Insured is aware before the commencement of the Period of Insurance, which may give rise to a claim.
This exclusion is independent of and shall not affect the Company’s other rights regarding misrepresentation and non-disclosure;
[100] This clause, and particularly subclause (c), applies to each insured and limits the scope of the coverage to which they are separately entitled under the policy. Whatever may have been the protocol for notification to the insurer of potential claims or facts which might give rise to a claim, that could not extend each insured’s cover.
ISSUE 1 — FACTS REVEALED BY LKA2
[101] Whether a fact known by an insured has the characteristic that it is one that may give rise to a claim is necessarily determined by a consideration of it in its context. This approach was relied upon by the primary judge and after its application to the facts before him, the substance of his conclusions was that LKA2, by itself, was benign in that the facts revealed were not of a nature that might give rise to a claim. Rather, he found it was only being the subsequent making of claims against Knox by former students and the arrest of some teachers for child sexual abuse, that LKA2 acquired a different “hue”. His Honour found that this lately acquired complexion revealed the existence of a problem at the school of the sexual abuse of students by Mr Nisbett.
[102] Allianz submits that no such metamorphosis of the facts contained in LKA2 was required and that, as the facts appeared in the report, they were sufficient to objectively indicate the possibility that claims might be made against one or more of the insureds under the policies of insurance by a former student or students in relation to the sexual abuse which they had suffered.
…
Did LKA2 reveal facts which might give rise to a claim?
[152] The question which now arises is whether the nature of the facts revealed by LKA2 were of such a character that they were apt to be disclosed under s 40(3).
The nature of facts within the scope of s 40(3)
[153] Relevantly for present purposes, ss 40(1) and (3) of the ICA provide as follows:
40 Certain contracts of liability insurance
(1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer’s liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.
…
(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.
[154] There is no express or implied operation of this section to the effect that the insurer’s liability is excluded or limited by reason that notice of the facts which might give rise to a claim is not given prior to the expiration of the period of cover. That consequence is a result of the policy’s operation which is recognised in s 40(1). Section 40(3) is facilitative but it is triggered only if notice is given as soon as reasonably practicable after the insured became aware of the relevant fact and within the policy period. Only then is the policy’s operation extended in relation to claims which arise from the notified facts, even if they are made after the policy’s expiration. If no such notice is given, the cover provided by the policy ceases according to its terms.
[155] On the ordinary meaning of the words used in s 40(1), it would have no application to the present “claims made” policies which have no provision excluding claims by reason of the absence of the giving of a notice of a claim in the policy period. However, in Newcastle City Council v GIO General Ltd (1997) 191 CLR 85, 103 (Newcastle City Council v GIO), the High Court gave the section an expansive operation such that it applies in circumstances where a policy operates in a particular case to produce the stipulated effect. Therefore, in this matter, had notice of a claim being made been given to Allianz in the 2004/2005 policy period, that policy would have responded. As notice was not given, the effect of the policy was that liability for the claim was excluded. Therefore, the policy had the required effect as prescribed by s 40(1) though no claim had been made against any insured in the relevant period.
[156] Section 40 plainly interferes with the parties’ contractual freedom and, particularly, the insurer’s right to limit its exposure to claims notified during the relevant policy period. The extension effected by the section creates uncertainty for insurers and reduces their ability to calculate the extent of any potential liability and to arrange reserves when the policy term concludes. That uncertainty is enlarged by the degree of flexibility of the expression, “facts that might give rise to a claim against the insured”. However, the authorities have thus far mitigated that uncertainty somewhat by requiring that the word “facts” in the section be limited to objective facts; that is, the “fact” must be an objectively verifiable piece of substantive data. Only information of that nature can be of any practical safety to an insurer which, on being informed of it, might take appropriate action to protect itself or to minimise any loss or damage which might arise from such potential claims. Subjective opinions or beliefs of the insured as to theoretical possibilities of future claims are not facts, and the communication of them to an insurer can serve no operative purpose in relation to s 40(3).
[157] For similar reasons, whether the fact is one which might give rise to a claim requires objective assessment. Only facts which are reasonably indicative of the possibility of a claim’s being made against the insured are within the section’s scope, as an insurer can rationally act only upon notice of such facts to organise its affairs. Were it otherwise, an insured could give notice of matters that only give rise to a faint, remote or vague possibility of a claim, which would then have the effect of substantially expanding the duration of a policy’s cover to any claim which might arise in the future in respect of any of the insured’s past conduct. That was obviously not the legislative intention.
[158] Similarly, the notice must be given in a timely manner and prior to the end of the policy period, which would permit the insurer to take any appropriate remedial action that might be available. A construction which is counter to the purpose of the requirement as to the timeliness of the giving of notice of the relevant fact would undermine the protection which is otherwise fairly afforded to the insurer.
The authorities
[159] With those general observations in mind, it is appropriate to identify the interpretation given to s 40 by the relevant authorities. In that respect, it is fortunate that a careful analysis of it was undertaken by Meagher JA, in his Honour’s customary erudite manner, in P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd (2021) 105 NSWLR 110 (P & S Kauter Investments). There, his Honour (with whom Bathurst CJ and Bell P agreed) relevantly held the following:
(a) The requirement that there be a notification of “facts” indicates that s 40(3) is concerned with the notification of objective matters, rather than beliefs or opinions as to the possibility of a claim being made (at 119–120 [33]).
(b) Similarly, the characterisation of a fact as one “which might give rise to a claim”, needs to be undertaken objectively, in the sense that the fact must be reasonably regarded as having that quality. For a fact to be capable of use for effective notification under s 40(3), it must be such that a “reasonable person in the insured’s position would recognise a real risk of a claim” (at 120 [34]–[35]). That assessment is made in relation to the fact taken alone or together with other notifiable facts (at 119–120 [33]).
(c) The requirement that there be a possibility of a “claim”, as opposed to the possibility of a liability, means that s 40(3) encompasses claims which may not have “significant prospects of success”, or which have merely modest or limited prospects (at 119–120 [33]).
(d) Facts which are likely to give rise to a claim do not include those where no loss has been suffered or where loss is a mere potential possibility (at 120 [37]). Facts which amount to only a breach of a legal standard, but without any suggestion that any third person has suffered loss or damage, do not suggest that the insured will incur liability, and are not of a nature that might give rise to a claim (at 122 [43]).
(e) There needs to “be a sufficient correspondence between the facts notified and those which are actually made in the subsequent claim for the latter to be identified as ‘the’ claim or a claim arising or resulting from those facts” (at 119 [31]).
(f) However, it is not necessary that the facts notify the existence of a particular claimant or claimants and it is sufficient if the notification is of a “problem” which may of itself give rise to claims by persons having particular characteristics, even if the quantum of such claims and the identity of any claimants may not be known at the date of notification (at 119 [31], citing DIF III — Global Co-Investment Fund L.P v DIF Capital Partners Ltd [2020] NSWCA 124 [171] (DIF III)).
(g) The temporal element was explained (at 119 [32]) as follows:
… The requirement that the notification be made “as soon as was reasonably practicable after the insured became aware of those facts” is concerned to provide the insurer with knowledge of claims that “might” be made shortly after the insured acquires that knowledge. That characteristic of the notified facts will enable the insurer to evaluate the potential claim or claims, or notified “problem”, and provide an opportunity to take steps to avert or minimise or resolve any potential insured loss: as to which see J Rothschild Assurance plc v Collyear [1999] 1 Lloyd’s Rep IR 6 at 22; [1998] EWHC 1205 (Comm) at [78] (Rix J). It also allows the insurer to “more accurately fix its reserves for future liabilities and compute premiums”: see Federal Deposit Insurance Corporation v St Paul Fire and Marine Insurance Co 993 F 2d 155 at 158 (1993), cited by Giles CJ Comm D in Antico v CE Heath Casualty & General Insurance Ltd (1995) 8 ANZ Insurance Cases 61–268 at 76,003.
[160] The construction of s 40(3) should adopt a purposive approach as occurred in Newcastle City Council v GIO at 101; the consequence is that whether a fact was notifiable is to be determined by an “undemanding test”: see DIF III [171]. In other words, for the remedial operation of the section, it should not be read to require the insured to know all the facts from which a claim could arise, but only those at a higher level of generality, so long as at that level they bespeak of the possibility of a claim. That approach is inherent in acceptance of the proposition that, to engage the remedial benefit of s 40(3), it is sufficient for the insured to notify of “the problem” which may give rise to a claim or claims by entities with a particular characteristic: P & S Kauter Investments at 119 [31]; see also DIF III [170], where reference was made to the decision of the UK Court of Appeal in Euro Pools Plc v Royal & Sun Alliance Insurance Plc [2019] Lloyd’s Rep IR 595 [39] (Euro Pools).
[161] In DIF III , the New South Wales Court of Appeal articulated the principles to be applied when construing clauses in policies analogous to s 40(3), and which extended cover to subsequently made claims, but which arise out of facts of which the insured first became aware during the policy period. At [171], the Court of Appeal observed:
Those principles include: first, that the provision should be construed with a view to its commercial purpose, being to provide an extension of cover “for all claims in the future which flow from the notified circumstances”; secondly, that consistently with that purpose, a provision which refers to circumstances that “may” give rise to claims sets a “deliberately undemanding test”; thirdly, that a notification need not be limited to particular events and may be to a “problem” described in general terms if that problem of itself may give rise to a claim, and notwithstanding that the quantum and character of such claims, or the identity of claimants, may not be known at the date of notification; and fourthly, that whilst the insured necessarily has to be aware of circumstances which might reasonably be expected to produce a claim (or in this case, could reasonably be anticipated to give rise to a claim), that does not “predicate that the insured needs to know or appreciate the cause, or all the causes, of the problems which have arisen, or the consequences, or the details of the consequences, which may flow from them.”
[162] The reference to the fact in question being a “problem” was considered at length in Euro Pools . There, Dame Elizabeth Gloster (with whom Hamblen and Males LJJ agreed), when considering the general principles applying to the notification extension, observed (at 602 [39(iii)]):
(iii) A notification need not be limited to particular events. It may extend to something as general as a regulatory warning about a class of business or a concern about work done by a former employee or prior entity. The insured may give a “can of worms” or “hornet’s nest” notification; ie a notification of a problem, the exact scale and consequences of which are not known. As I said in Kidsons (at first instance) at para 76 (in a passage which was not departed from or disapproved in the Court of Appeal’s decision in Kidsons at [2009] Lloyd’s Rep IR 178:
At the end of day, it is in my view largely a question of interpretation and analysis of the document setting out the notification, in the context of the facts known to the assured, as to what precise circumstance or set of circumstances has in fact been notified to insurers. I am not therefore convinced that semantic cavilling over the precise formulation of the test assists the ultimate resolution of the problem. There may well be uncertainty at the time of notification as to what the precise problems or potential problems are; there well may be, whether known, or unknown, to the assured a ‘hornets’ nest’ which may give rise to numerous types of claims of presently unknown quantum and character at the date of the notification. Whilst in principle there is no reason why such a state of affairs should not be notified as a circumstance if the assured is aware of it, in each case the extent and ambit of the notification and the claims that are covered by such notification will depend on the particular facts and terms of the notification.
(emphasis omitted)
[163] She then referred to two cases which exemplified the occasion on which notice of a state of affairs which may give rise to multiple claims might be given, and that the ability to do so was not hampered by the absence of knowledge of who might make the claim or the specific damage which may have been caused. In Rothschild Assurance plc v Collyear [1999] Lloyd’s Rep IR 6, it was held that it was possible to give notice of a statement by an industry regulator of its view of appropriate industry standards of practice in circumstances where the insured, who was a participant in the industry, was uncertain of the extent to which its earlier practices had complied with that standard. In that case, there was also evidence from industry wide testing of a general non-compliance with the standard expected by the regulator. These facts were held to be such as might give rise to a claim, though none of the insured’s customers had complained at the time the notice was given and there were no identified contraventions of the industry standards. Rix J held that the industry prevalence of non-compliance with the regulator’s expressed standard meant that it was at least possible that similar non-compliance had occurred in the insured’s business.
[164] Dame Gloster also referred to her previous decision in HLB Kidsons (a firm) v Lloyd’s Underwriters [2009] Lloyd’s Rep IR 178, which concerned notification by a firm of tax accountants as to the efficacy of various tax avoidance products which they had provided to clients. Concerns about those products had been raised by a tax manager of the business in the Edinburgh office and were supported by the opinion of a tax counsel. The Court of Appeal concluded that the tax manager’s view that the implementation of certain products might be criticised and might give rise to claims, was a fact of which notification might be effectively given.
[165] As to that latter point, confirmation that an expert opinion can be a “fact” for the purposes of s 40(3) can be found in the observations of Jackman J in MS Amlin Corporate Member Ltd v LU Simon Builders Pty Ltd [2023] FCA 581 [50] (MS Amlin). There, his Honour rejected the narrow approach adopted by Lee J at first instance in this matter, and preferred the reasoning that, “the opinion of an expert, such as a professional investigator, based on reasoned explanations and substantive evidence, may constitute a ‘fact’ for the purposes of s 40(3)”. Indeed, his Honour had earlier opined (at [48]) that the “fact that an opinion has been given by a person with appropriate expertise is itself a fact”, in the sense of one that might be provided to an insurer. In addition, his Honour added:
In circumstances where that opinion is given by a person in a position of public authority … the publication of that opinion may well be a most important fact that might itself give rise to a claim.
[166] The applicability of Jackman J’s observations was challenged by the UCPT on this appeal. As a result, it is necessary to consider his Honour’s decision in slightly more detail.
[167] In MS Amlin , the insured conducted a construction and management business. The question before the Court was whether it had given notice to its insurer in relation to claims which were subsequently made upon it concerning the inclusion of combustible cladding in a building which it had erected. The occurrence of cladding related fires had been given some prominence in the media and several statements about that topic had been publicly made by relevant authorities, including the building authority. Whilst it is true that his Honour identified that the publication of a report by an expert might be a circumstance that might give rise to a claim, his Honour did not restrict his conclusion to that instance. He expressly accepted that an expert’s opinion on a matter could itself be a fact for the purposes of s 40(3), and then noted that all that Meagher JA in P & S Kauter had rejected was the possibility that a bare belief or opinion to the effect that there might be a claim could amount to a fact.
[168] The observations of Jackman J can be applied in the present case. There was no need for LKA2 to be published before it or its contents were capable of being facts which might give rise to a claim. The report revealed facts which had hitherto been kept private to those involved, and those facts, singularly or collectively, became facts which might give rise to the claims which were made. Similarly, Mr Wilson’s opinion as to the existence of tortious conduct by teachers at Knox against students over a prolonged period of time, is a fact likely to give rise to claims particularly because it verifies the likelihood of the claims being made. The same can be said of his opinion that claims might be made against the school. Though the publicising of a report of the occurrence of a widely committed tort might render claims based on the underlying wrongdoing more likely than if the report were not disclosed, it is not only in that circumstance that the report and its contents are relevant facts for the purpose of s 40(3).
[169] Even without Mr Wilson’s view on the possibility of claims, which may not have been within the scope of his expertise, the possibility and even the likelihood of claims would have been clear to a hypothetical reasonable person. That is particularly so in light of the number of consistent detailed actual complaints, not mere rumours of diverse species of misconduct of the same genus, where there must be at least the possibility of credibility of at least some, if not all, of the complaints. That is certainly sufficient to trigger the availability of the remedy in s 40(3) and the acquisition of knowledge by the insured for the purposes of determining the scope of cover of subsequent policies.
[170] The cognate issue of whether a fact is “known” was discussed by Hodgson CJ in Eq in Permanent Trustee Australia v FAI General InsuranceCo Ltd (1998) 44 NSWLR 186 (Permanent Trustee v FAI), where he expressed the view that it means more than suspected or believed, and that what is required is that the matter should be the subject of a true belief held with sufficient assurance. That is not really an issue in the present case where that which was known, with its limitations and merits, was clearly set out in LKA2 and its associated materials.
[171] As has been foreshadowed above, to the foregoing it can be added that the policies in this case included cover for defence costs which had the effect of expanding the nature of facts which might give rise to a claim, in the sense that, even if a suspected claim against the UCPT was thought to be not likely to succeed, the risk that the defence costs cover might be called upon would be real. It was submitted that such a conclusion would widen the notion of the concept of facts which might give rise to a claim in this case. Whilst there is much force in that submission, given the circumstances of the present matter, there is no need to consider it further.
…
Existence of a problem of the sexual abuse of children at the school
[197] It follows that LKA2 revealed the existence of this “problem”, “hornets’ nest”, or “can of worms” going back to the 1980s. Though Mr Nisbett’s conduct was the report’s focus, it incidentally revealed a management approach at the school which included a persistent failure to take appropriate action in relation to information about the possible sexual abuse of boys. That permitted an environment to develop where predation on students by a number of teachers could and did occur. The evidence against teachers other than Mr Nisbett of grooming and of actual inappropriate sexual conduct towards students cannot be set to one side. Whilst that which was then available against them was minor relative to that against Mr Nisbett, that is not surprising given that the investigation was not directed to them. Nevertheless, the report revealed the problem of the sexual abuse of boys at the school over a number of years by a number of teachers, and that the full extent of it had not been investigated and was not known. From that, it is possible to extrapolate that for some significant time the school had inadequate procedures in place to protect students from staff who had a sexual interest in boys or to deal with staff who were thought to be so inclined. This conclusion largely accords with Allianz’s submissions as to the revelatory nature of LKA2.
[198] By way of confirmation of the above, one might consider the position of an insurer who might have been approached by the UCA to provide insurance cover for the 2005/2006 year and to whom LKA2 was provided. Though some different considerations might apply, it is difficult to conclude other than that the insurer would exclude cover for claims by former students at Knox in relation to sexual abuse perpetrated upon them by teachers. That was the clear risk which LKA2 indicated.
[199] To the same effect, if, promptly on its receipt LKA2 was given to Allianz by way of notification under s 40(3), it would have exposed a problem or hornets’ nest, being that of the sexual assault of students by teachers at Knox over a number of years. Had that occurred, and putting aside the policy’s sub-limits for sexual abuse or any issue of non-disclosure, the school could have claimed cover for all subsequent claims by former students. All of this fortifies the position that LKA2 clearly indicated the serious possibility of claims based on the conduct it disclosed regardless of the identity of the teacher involved.
…
The facts shown might give rise to a claim
[207] The requirement in s 40(3) that the fact is one “which might give rise to a claim” sets the bar at a relatively low level, being an assessment that must be objective, that is, it is to be reasonably regarded by a reasonable person in the insured’s position as having a real risk of a claim: P & S Kauter Investments at 120 [34]–[35].
[208] Despite the UCPT’s submissions as to the suggested lack of veracity of the evidence supporting the facts derived from LKA2, as they emerged those facts were sufficiently cogent to meet the description in s 40(3). The report was commissioned in the context of the UCA’s being particularly aware of the risk of sexual abuse within its organisations. Its reporting guidelines specifically highlighted that risk as one requiring vigilance in detecting and reporting. The facts which LKA2 revealed plainly gave rise to the objective risk of claims for damages in relation to sexual abuse. The evidence that some boys had been abused by Mr Nisbett or Mr Vance or others is, of itself, sufficient. However, the fact that there had been a long period during which Mr Nisbett and others had been engaging in grooming behaviour which was unchecked by any suitable system to prevent its occurrence, gives rise to a real risk that sexual abuse of a number of students will have occurred and that claims and actions will be forthcoming.
[209] Though LKA2 did not reveal the identity of the many victims, the authorities to which reference has been made show that such knowledge is not a requirement for s 40(3). It was sufficient that it revealed a “problem” or “hornets’ nest” over an extended period. The characteristics of persons who were likely to make claims were students at the school from the 1980s onwards. In the light of the combined evidence, its quality overall could not be dismissed in such a cavaliere fashion as the school did, and to have done so at the time would have been an exercise of judgement as to the likelihood of claims of a most courageous kind.
Conclusion with respect to the facts revealed
[210] At the time of its presentation to the school and others, LKA2 and the associated materials sufficiently revealed facts which might have been reported to Allianz to trigger s 40(3). They revealed many years of paedophilic conduct by Mr Nisbett and other teachers, the persistent grooming and sexual abuse of boys, and the existence of a school culture where that could occur. They were all matters which might give rise to claims against the school. It was not in dispute that no notification was given at the time or within the prescribed period.
ISSUE 2 — ATTRIBUTION OF KNOWLEDGE
[211] The second issue is whether the knowledge of Mr Weeks, as the then Headmaster of Knox, or of some other person or persons, of the facts revealed by LKA2 can be attributed to the UCPT for the purposes of s 40(3). As will be discussed subsequently, similar principles apply to the attribution of knowledge for the purposes of Exclusion 7(c).
[212] The major point in dispute was whether the UCPT was, or is taken have become, aware of the contents of LKA2 in May or June 2004, or at some other time. Its resolution turns on the identity of the person or persons whose knowledge can be attributed to the UCPT. Allianz’s main submission was that the UCPT was aware of LKA2 either in 2004 or, alternatively, by 30 January 2006 at the latest, through the knowledge of the Headmaster of Knox or of the members of the School Council.
[213] The UCPT’s submissions on this issue were somewhat obscure. That lack of clarity was emphasised by the vagaries surrounding its position within the UCA and its role, or responsibility, if any, in relation to the management or administration of Knox. This was further exacerbated by the uncertainty surrounding the legal efficacy and effect of the UCPT’s assumption of responsibility for any liability arising from any litigation brought against the school or School Council. Nevertheless, a central tenet of its submissions is that its right to indemnification under the polices in respect of claims by former students of Knox relating to their suffering sexual abuse whilst at the school, is unaffected by the pre-policy knowledge of the school’s Headmaster or members of the School Council of the existence of facts from which those claims arose, and that such knowledge did not adversely affect its right to the benefit of s 40(3) since it, itself, had no such knowledge. This position was maintained though it was the inaction of the members of the School Council and Headmasters which allowed the damage to the students, and it was their liability in respect of which it sought indemnity.
[214] That position needs only to be so articulated for its problematic character to reveal itself. In particular, if its position were maintainable it would mean that, by assuming responsibility for the liabilities of entities and individuals within the UCA to third parties, it could immunise those insureds in respect of their obligations as insureds to Allianz in relation to those liabilities by invocation of its own ignorance of facts despite the knowledge of those who were directly liable.
…
Was the Headmaster or the School Council the repository of knowledge for the business of Knox?
[267] In the above context the central issue is whether the UCPT was fixed with the knowledge of the School Council and/or the Headmaster for the purposes of s 40(3) and/or Exclusion 7(c).
Legal principles on attribution for insurance
[268] The parties took the Court to a number of authorities which considered the attribution of knowledge of corporate entities which are examined below. They are mostly concerned with the “upward” flow of attributed knowledge as a reciprocal concomitant of a “downwards” delegation of authority. Whilst they usefully articulate the relevant principles, the following consideration of them should not obscure the particular circumstances of the present case. Here, the relevant liability attaches to the members of the School Council and it is that liability which is insured under its policies. Without the consent of the members of the School Council (even if it be tacit as is the case) the UCPT cannot assume its liability to the former students any more than it may exercise its rights to indemnity under its policy. As a matter of substance, it must be acting as, in effect, the agent of the members of the School Council in both respects. It assumes the School Council’s liability as agent (being for the purposes of the operation of the UCA) and acts as the council’s agent in seeking indemnity.
[269] On the issue of the attribution of corporate knowledge, the decision in Commonwealth Bank of Australia v Kojic (2016) 249 FCR 421 is important. It concerns the knowledge of a corporation for the purposes of a claim of unconscionable conduct, and specifically whether, for the purpose of attributing a state of mind to a corporate entity, the knowledge of its employees could be aggregated. There, Edelman J (with whom Allsop CJ and Besanko J agreed) considered the general principles of the attribution of knowledge in the setting of a corporate group. His Honour noted that the concept of the “directing mind and will” of a company, as articulated by Viscount Haldane LC in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, 713 (Lennard’s Carrying), had been rejected as the sole test in this context. In doing so, his Honour referred to the opinion of Lord Hoffmann in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, and, citing from that decision, observed that it:
… is a question of construction in each case as to whether the particular rule requires that the knowledge that an act has been done, or the state of mind with which it was done, should be attributed to the company” (at 511). The relevant rule of attribution must be tailored to “the terms and policies of the substantive rule” (at 512) and the rules of attribution in a particular case depend on the construction of the particular statutory provision of attribution (at 511).
[270] Edelman J (at 446 [100]) then referred to Bilta (UK) Ltd (in liq) v Nazir (No 2) [2016] AC 1, 65–66 [187]–[190] (Bilta v Nazir (No 2)), where Lords Toulson and Hodge JJSC identified a threefold taxonomy of corporate attribution. The first category was where legislative or corporate rules provide for the attribution of liability for acts of directors, which are treated as the acts of the company. The second was where a company will incur direct liability through the actions of agents acting within the scope of their authority. The third, and more open-ended class, was where the attribution for the acts of others was appropriate in circumstances where a rule of law impliedly excludes the first two general principles. This latter category is sometimes referred to as creating a “special rule of attribution” for the particular circumstances of a case. Edelman J added that in each instance it is necessary to consider the context in which the question is being posed.
[271] The discussion in Bilta v Nazir (No 2) is instructive in the context of the present matter. In relation to the special rule of attribution and, indeed, each of the identified rules of attribution, Lords Toulson and Hodge JJSC emphasised the importance of considering the legal context in which the question of attribution is to be assessed. They also referred to Lennard’s Carrying , where the question was whether a ship-owning company was liable for loss caused by one of its ships as a consequence of the company’s actual fault or privity. It was held that the fault of Mr Lennard, who was a director of another company which was the manager of the ship and who was also a director of the ship-owning company, should be attributed to it. Viscount Haldane LC and Lord Dunedin regarded the question as one of statutory construction which depended upon the particular circumstances and facts of the case. Relevantly, in determining whether the acts or knowledge of an individual is that of a company, consideration is to be given to the terms of the particular statute and its application to particular facts. For instance, in Tesco Stores Ltd v Brent London Borough Council [1993] 1 WLR 1037, which was concerned with the improper supply of a video to a person under the age of 18, the relevant knowledge was that of the employee who supplied the video, and not that of the company’s senior management.
[272] In Bilta v Nazir (No 2), their Lordships applied the same principles as to the attribution of knowledge as those applying in the context of private contracts and specifically policies of insurance. They held (at 69 [198]):
The courts have also had to consider questions of attribution of knowledge or actions in a contractual context such as that of an insurance policy. In that context the terms of the insurance policies are relevant and can be decisive as the court seeks to give effect to the intentions of the parties as expressed in their contract. …
[273] They then referred to Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd’s Rep 262, where for the purposes of construing a policy of insurance, Rix J held that the directing mind and will of the company for all other purposes — namely, that of the managing director — was not attributed to the company in respect of losses sustained by the fraud of the managing director himself. As the policy insured the directors and the company as separate insureds, and because it included fidelity cover, it was not appropriate to ascribe the fraudulent director’s intention to the insured company.
[274] In its submissions on this issue, Allianz called in aid the reasoning of Willmer LJ in The Lady Gwendolen [1965] P 294, 343–344 (The Lady Gwendolen), where his analysis of the attribution of knowledge to a corporate entity included the following:
Where, as in the present case, a company has a separate traffic department, which assumes responsibility for running the company’s ships, I see no good reason why the head of that department, even though not himself a director, should not be regarded as someone whose action is the very action of the company itself, so far as concerns anything to do with the company’s ships.
[275] That case concerned whether the company that owned a vessel which was involved in a collision was aware of its previous regular reckless operation by its master. The master’s conduct was known by the marine superintendent of the vessel’s owner and the head of the traffic department of the company. On these facts, it was the latter’s knowledge that should be attributed to the company for the purposes of whether it was aware of the conduct of its shipping activities.
[276] Allianz referred also to the decision in Nationwide News Pty Ltd v Naidu (2007) 71 NSWLR 471. It concerned the liability of Nationwide News for tortious conduct towards an employee of ISS Security, which provided security services to it. The conduct related to alleged bullying and harassment by a Nationwide News employee. The question was whether his conduct could be attributed to Nationwide News. Beasley JA opined (at 505 [235]) that the question is resolved, in part, by considering the position and authority of the person said to have performed an act as the company. In the case at hand, the relevant officer was the Fire and Safety Officer who had a high level of seniority in the organisation, whose management role involved all the company’s security requirements across the country, and who was responsible for managing its contracts with ISS Security. It followed that his position and responsibilities rendered him its directing “mind and will” for the management of its security arrangements, including management of the injured employee’s work. On that basis, his tortious conduct was that of the company.
[277] To similar effect is the earlier decision of Rogers CJ in Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673 (Lindsay v CIC), where at issue was the knowledge of an insured for the purposes of non-disclosure under s 21 of the ICA. It had claimed indemnity in respect of fire damage to its premises. The insurer declined it in reliance on the insured’s failure to disclose that the premises were being used as a brothel, or as a place where “men and women resorted on payment of a fee to engage in immoral conduct involving exchanging sexual partners and group sexual practices”. The premises were located in Sydney. The insurer asserted that, had it known of these matters, it would not have provided cover. The owners were, themselves, unaware of the manner in which the premises were being used as they had left the management and running of the premises to an estate agent. In these circumstances, the Chief Justice held that the managing agent’s knowledge was attributable to the owners for the purposes of non-disclosure. At 684, he said:
In my view, the pre-1984 law imputed to a proponent the knowledge of appropriate agents (cf Tarr Australian Insurance Law (1987) at 76 footnote 32). The managing agent of a block of shops and offices is, in my opinion, such an agent. His knowledge of matters relating to the property which impact on the insurance risk ought to be imputed to the owners. In other words, by delegating the management of the property to an agent, the owners cannot avoid having knowledge of matters which might result in a proposal being refused or a higher premium being imposed. That law was enacted in s 21(1).
[278] Use of the premises as described increased the risk of damage to them and, as it was a matter of which disclosure was required and was known by the agent, the insurer was entitled to reduce its liability to nil under s 28(3) of the ICA.
[279] That decision was referred to with approval by Hodgson CJ in Eq in Permanent Trustee v FAI (at 261) as follows:
The case of Lindsay is authority for the proposition that, in relation to the insurance of a particular piece of property, the knowledge concerning that property of a person to whom the management of the property is delegated is attributed to the principal. In my opinion, that is reasonable, because an insured seeking insurance, and having a duty of disclosure, would be bound to inquire from a person to whom it had delegated the management of the property to be informed of matters concerning the property that could be relevant to insurance.
[280] For clarity, that proposition was not in issue when the matter reached the High Court which overturned the decision of Hodgson CJ in Eq and that of the Court of Appeal.
…
Conclusion on special rule of attribution
[322] The necessary and, indeed, inevitable conclusion is that the circumstances lead to the result in accordance with the protocol adopted that, when the UCPT makes a claim under a policy against Allianz on behalf of another insured entity, it is fixed with the knowledge of that entity. That is aside from the result of the facts known to all relevant parties that the defence and claim for indemnity are conducted on behalf of the entity, that entity’s knowledge is directly relevant to the claim for indemnity.
[323] Here, the liability in question was that of the members of the School Council and/or of the Headmaster at the relevant times. No reason was given as to why those persons would not be liable for the claims of sexual abuse which occurred at the school which they managed and operated. It is sufficiently clear that the Headmaster was the agent of the School Council for the purposes of receiving information in relation to the school’s activities and that the latter was aware of LKA2 in its own right when the report was tabled at the School Council’s meeting. For the purposes of the School Council’s indemnity under its insurance policies, the UCPT is taken to have had its knowledge.
[324] In the context of the fiction which the UCPT adopted in its relationship with Knox, the formation of a special rule of attribution does not require recourse to issues of duties to communicate: see generally South Australian Housing Trust v State Government Insurance Commission (1989) 51 SASR 1, 23 and Peter Watts and Francis Reynolds, Bowstead & Reynolds on Agency (Sweet & Maxwell, 23rd ed, 2023) ch 8, p 583–610; or to questions of whether someone has power to make a final decision without further reference: see The Lady Gwendolen . In this case, there is no management or structural arrangement connecting the School Council to the UCPT which carried the necessarily concomitant delegation of authority on which a relevant attribution of knowledge could occur. Rather, the UCA’s protocol for defence of actions artificially interposed the UCPT between the School Council on the one hand, and the former student claimants on the other, and had the UCPT claim against Allianz in respect of any liability. That also was artificial. Such circumstances require the commensurate attribution, as has been described.
[325] As mentioned above, a slightly alternative analysis has the UCPT as the agent or representative of the School Council in seeking indemnity in respect of its liability to the former students. As such, the UCPT is not claiming in respect of its own liability, of which there is none that comes within its cover. Assuming this to be the manner in which the UCA operates, a matter of which the insurer knows and in which it cooperates, the rights of the School Council to indemnity as the party liable must be affected by its knowledge to the extent to which it is relevant to the policy terms.
[326] Although it was not argued by the parties (and for that reason not considered as part of the reasoning) it is apt to keep in mind that the parties’ reciprocal obligations of utmost good faith are relevant here, with the word, ‘utmost’, having significance. On the subject of relationship with the insurer, the principle might expect that if an uncompromised insured could, would and does accept the liability of a co-insured for a wrong for which the former was not liable, it would also, by implication for the insurer, have undertaken to have taken steps to be informed of all matters relevant to the insured risks, or to have impliedly appointed the co-insured to share knowledge of those facts. In that context, the insurer could expect that the knowledge of the co-insured would be attributed to the insured making the claim for indemnity.
…
ISSUE 6 — THE OPERATION OF EXCLUSION 7(C)
[397] The sixth issue in the appeal is whether the primary judge ought to have found that the information in LKA2 and the associated materials recorded a claim, fact, circumstance or occurrence that may give rise to a claim for the purposes of Exclusion 7(c). To some extent, that will depend upon the construction of the exclusion. The UCPT submitted that it ought to be so construed that the central concept of the potentiality of a claim being made should be read stringently so as to reduce its scope. The essence of that submission was that, for Exclusion 7(c), the known claims, facts, circumstances or occurrences, must point more strongly towards a potentiality of a claim than that required for the cognate concept in s 40(3), so the beneficial, purposive approach accorded to s 40(3), will be excluded from the construction of Exclusion 7(c) as advanced by Allianz.
…
[403] Substantively, s 40(3) and Exclusion 7(c) are merely corresponding descriptions of the policy’s cover in certain respects and define the conceptual limitations of that cover in relation to existing circumstances that subsequently give rise to the insured’s liability. Importantly, the application of the same interpretive techniques to the construction of the known facts and circumstances exclusion, promotes the giving of prompt notice of potential claims and “avoids stacking the limits of successive policies to cover essentially the same or very closely related claims”: Desmond Derrington and Ronald Ashton, The Law of Liability Insurance (LexisNexis Butterworths, 3rd ed, 2013) 1877–1878 [10–36]. So, in this case, the prompt notification of the “problem” or “hornets’ nest” revealed by LKA2 in 2004 when received by the School Council, would have extended cover under the current policy to all related claims and that cover would not have been disturbed by the exclusion relating to potential claims known before the current policy period. It may be that the relevant policy limit or sub-limit would not accommodate all those claims, but that is merely the result of the limits agreed upon between the parties. Nevertheless, the operation of s 40(3) requires prompt notification and, here, the UCPT omitted to give notice, either promptly or at all.
[404] It can be accepted that if, prior to entering a contract of insurance, an insured is aware of a claim, fact, matter or circumstance that might give rise to a claim and fails to disclose it, such omission may well constitute a breach of the duty of disclosure in s 21 of the ICA, since it is likely to be a matter of which the insured and a reasonable person knows or would know to be relevant to the insurer’s decision to accept the risk and on what terms. It is likely that, if in accordance with their disclosure obligations, the fact was disclosed, the insurer would, in any event, exclude cover of any claim arising from that fact which does materialise. It necessarily follows that the potentiality of Exclusion 7(c) to cut down the scope of cover is further reduced.
[405] For these reasons, the UCPT’s submissions on this topic are unacceptable and should be rejected.
…
ISSUE 8 — DOES S 54 EXPAND THE OPERATION OF S 40(3)?
[463] The next issue is whether s 54 of the ICA applies to the UCPT’s failure to comply with the requirement in s 40(3) to notify the insurer during a relevant period of insurance so that it could be excused. Relevantly, s 54 provides:
54 Insurer may not refuse to pay claims in certain circumstances
(1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act.
…
[464] The import of the UCPT’s submissions was that its failure to give notice, pursuant to s 40(3), of LKA2 to Allianz in the year in which it became aware of it, can be excused by s 54. On that basis, the policy cover in force when the omission occurred was thereby extended, so that when a relevant claim was subsequently made it is taken, if it had arisen from the circumstances which were subsequently notified, to have been made during the relevant period. Undeniably, this would effect a substantial alteration to the statutory preconditions expressed in s 40(3) as to when an extension of cover under a policy will occur.
[465] On this issue, the UCPT must establish that the decision of the New South Wales Court of Appeal in Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542 (Gosford v GIO), which held that s 54 is unable to cure an insured’s failure to notify for the purposes of s 40(3), is plainly wrong: see Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 151–152 [135]; Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, 492. That task is made more difficult since the Court of Appeal’s decision has been followed on several occasions by differently constituted benches of that same court: see, for example, Clark v Avant Insurance Ltd [2022] NSWCA 175 [39].
[466] The substance of the submission was that the current authorities on this topic have failed to grapple with and give effect to s 54 as a statutory extension of the rights under a policy in accordance with FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641 (FAI v Australian Hospital Care) and claimed to have been clarified by Maxwell v Highway Hauliers Pty Ltd (2014) 252 CLR 590 (Maxwell v Highway Hauliers).
…
[471] In Gosford v GIO, the insured (being Gosford City Council) became aware in 1991 of a fact which might give rise to a claim, but gave no written notice of it to its insurer in that policy year. In 1994, a claim arising from that fact was made against the Council which then notified the insurer. The insurer declined indemnity on the basis that the claim had not been made against the Council during the policy year. The Council asserted that, by the concurrent application of ss 40(3) and 54 of the ICA, its failure to notify during the relevant policy year of the facts which might give rise to a claim was excused, though no claim was made against it during that policy period. That was rejected by the Court of Appeal. Sheller JA (with whom Spigelman CJ and Meagher JA agreed) observed that the policy in question was a “claims made” policy, though its operation was altered by s 40(3) in that cover was extended in relation to claims which arose from facts which were notified to the insurer within the policy period. His Honour (at 548 [19]) then referred to the insured’s submission that s 40(3) transformed the policy into a “discovery policy” and that s 54 had the consequence that the insurer could not “refuse to pay the claim by reason of the act of the insured in failing to give the notice in writing to the insurer of facts which might give rise to a claim against the insured before the insurance cover expired”.
[472] After reviewing a series of cases which had rejected the proposition that s 54 operates upon the effect of the statutory provisions as distinct from the contractual provisions, Sheller JA referred to FAI v Australian Hospital Care at 659–600 [40]–[46] and concluded (at 553 [35]) that crucial to the High Court’s finding was that s 54 was premised upon the actual claim made on the insurer and whether it fell within the scope of the cover provided, such as a claim against the insurer for indemnity in respect of a claim made against the insured during the policy period. Although the section extended the insured’s rights to indemnity in respect of such a claim by denying the insurer’s right to rely upon some act of the insured or other person, it did not transmogrify a claim against the insured which was not within the cover into one which was. As his Honour held (at 533 [36]):
… The section [s 54] does not operate to relieve the insured of restrictions or limitations, such as the temporal limits within which the claim must be made upon the insured in a claims made policy, that are inherent in that claim.
[473] His Honour then found that the fact that the demand was made on the insured outside the policy period was decisive, unless s 40(3) effected an extension. In this latter respect, he said (at 554 [37]):
To invoke s 40(3) the insured must have given 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. This was not done. In my opinion, that is the end of the matter. The occasion for s 40(3) to operate did not happen. Accordingly, the subsection does not apply to prevent the insurer contending that the claim is not within the policy.
[474] The UCPT argued that the broad principle in FAI v Australian Hospital Care can and should apply to a policy of insurance, the operation of which is extended by s 40(3) to cover claims which arise from facts which might give rise to a claim and which are notified to the insurer within the policy period, and s 54 then cures the omission where notice is not given within the policy period. It was argued that s 54 applies because the insurer is unable to refuse to pay merely because of the insured’s omission.
[475] That submission should be rejected. As it was indicated by the High Court in FAI v Australian Hospital Care, s 54 does not extend the policy’s cover as the UCPT would have it. First, consideration must be given to the relationship between the claim which the insured makes and the liability for which the policy provides cover. The policies in issue in this case cover claims made against the insured during the policy. The relevant temporal limit is necessarily an inherent restriction on the scope of the policy cover and, in accordance with the determination in FAI v Australian Hospital Care, is not affected by s 54.
…
[482] The UCPT also relied on Avant Insurance Ltd v Burnie [2021] NSWCA 272 (Avant v Burnie), where the New South Wales Court of Appeal addressed the issue of whether s 54 could apply to s 40(3), in respect of an omission during the policy period to give the required notice. The policy was a “claims made and notified” policy and no notice had been given of the possibility of a claim during the period of cover, though the insured had by then become aware of a fact that might give rise to one. It was submitted that the trigger of s 40(3), to give notice of a fact that might give rise to a claim was, in effect, a contractual provision on which s 54 could operate. That was rejected by McCallum JA and Simpson AJA (at [29]–[30]) whom, in their joint judgment, held that there was no such contractual provision. It is a requirement of s 54 that the policy should have a particular effect, and that did not exist where it was only the statutory provisions that had such an effect.
[483] In his separate reasons, Emmett AJA held (at [40]) that the policy was not a “discovery policy”, as that expression was used in FAI v Australian Hospital Products, but rather a “claims made and notified” one, and that was decisive on the question of the operation of s 54. As his Honour observed (at [78]):
The question of whether the Policies can fairly be characterised as “Discovery” policies in the sense indicated is significant because s 54 cannot operate to resolve a failure to satisfy s 40(3). If the Policies are to be characterised as “Discovery” policies only by the operation of s 40(3) rather than by reason of the actual contractual terms of the Policies, s 54 can have no relevant operation.
[484] Later, his Honour said (at [89]):
The correct analysis of the Notification Provision indicates that the liability of Avant Insurance in respect of notification of facts and circumstances would not arise out of a term of the Policy, but from the operation of s 40(3) alone. For reasons indicated below, the “Discovery” effect of a “Claims Made and Notified” policy that arises solely by the operation of s 40(3) is not open to remedy by s 54. The purpose of the Continuous Cover Clause becomes clear in that context.
[485] These passages reflect the orthodoxy that s 40(3) does not impose a term into the contract of insurance, but merely superimposes a statutory entitlement which extends the insured’s rights against the insurer.
[486] Emmett AJA also carefully analysed the ALRC Report from which the ICA emerged, and noted that the rationale for s 54 was to ameliorate the consequences of an insured’s breach of a promissory warranty and not to abrogate the consequences of an act or omission by the insured that is detrimental to the insured (at [96]). He opined that the section was not aimed at altering the essential character of cover under a “claims made and notified” policy by permitting an insured to retain cover despite failing to notify of a claim or circumstances within the policy period. Were it otherwise, the entire basis of the cover provided by the insurer would be altered. His Honour’s approach is emphasised at [103] of his reasons where he said:
Section 54 does not permit the reformulation of a claim, such that it could work with s 40(3) to allow a failure to notify facts and circumstances to be overcome where such a “discovery” clause was not a term of a policy that is properly characterised as a “claims made” policy. Section 54 operates to prevent an insurer from relying on certain acts or omissions to refuse to pay a particular claim. The section does not operate to relieve the insured of restrictions or limitations, such as the temporal limits within which a claim must be made on the insured in a “claims made” policy, that are inherent in that claim. Section 54 cannot be combined with s 40(3) to modify a “claims made” policy to cover a claim arising out of facts and circumstances that were not notified during the period of insurance of the policy. The two sections have different functions.
(footnotes omitted)
[487] Reference was also made to the New South Wales Court of Appeal’s decisions in Guild Insurance Ltd v Hepburn [2014] NSWCA 400 and Clark v Avant [2022] NSWCA 175 [39], where, in each, the Court adopted the analysis in Gosford v GIO at 553–554 [36]–[37], albeit without further comment.
[488] Allianz sought support for its position from the first instance decision of Moshinsky J in Darshn v Avant Insurance Ltd (2021) 154 ACSR 1, 54–55 [195]–[198], where the insured had made the submission that a combination of ss 40(3) and 54 could expand the operation of a “claims made policy”. His Honour rejected this, noting that, as a matter of construction, s 54 is concerned with the “effect of a contract of insurance” and not the effect of a contract of insurance together with s 40(3) or the provisions of the ICA more generally. He stressed (at 54 [192]) that there was nothing in the detailed extrinsic materials, including the ALRC Report, to suggest that ss 40(3) and 54 were intended to have a combined application. Each stood alone as an ameliorative provision. This was stated to be consistent with the conclusion in Gosford v GIO.
[489] The foregoing authorities, and especially that of Avant v Burnie reveal the difficulties of the UCPT’s submission regarding s 54, which fails for either of two reasons. The first is that, even if it were assumed that it applied to a policy affected by s 40(3), the inherent restriction or limitation in the claims covered is that they be made against the insured in the policy period or arise out of a fact of which the insured notified to the insurer in the policy period: Gosford v GIO at 553 [36]. The second is that s 54 applies only where the policy operates in a way that the insured may refuse to pay the claim. It has no application where the non-compliance with a statutory provision rather than the policy renders the insured’s claim unmaintainable.
Section operates upon the effect of a contract of insurance
[490] That s 40(3) was intended to assist insureds by effecting a change in the operation of policies of insurance does not, as the UCPT submitted, justify a conclusion that the fulcrum of the operation of s 54, that is, the “effect of the contract of insurance”, should be displaced. Were that to have been intended by the legislature it might easily have been expressly stated. Though that type of interpretive analysis lacks force on some occasions, in relation to the ICA it has substantial weight. The history of its enactment, especially its origins in the ALRC Report, emphasises the precision with which the terms of the ICA were drafted. Had it been intended that s 40(3) and s 54 were to have a cumulative effect on a policy of insurance, it is unlikely that it would not have been mentioned and discussed, particularly given that the operation which the UCPT would give to the ICA would have the effect that a claims made and notified policy would not only be converted into a “discovery policy”, but would be further extended to include liabilities arising from facts of which the insured became aware during the course of the policy, but of which it did not inform the insurer. In that context, an insurer could, at some indefinite future time, become liable to indemnify in respect of a substantial liability, the possibility of which it was not aware, although the insured was, and in respect of which it had not made provision. Though s 54 includes the concept that the insurer’s liability is reduced “to the extent to which the insurer’s interests were prejudiced”, the insurer would carry the onus of establishing that and the peril of not being able to discharge it: Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389. With respect, it is beyond reasonable dispute that, if the ALRC Report and the legislature had intended to impose such a dramatic change on the potential liability of insurers, it would have been mentioned, rather than something left to be divined by inference.
[491] The importance of the words in s 54, “the effect of a contract of insurance” was discussed in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R 1, where Chesterman J held (at 9 [34]) that, if the submission now advanced by the UCPT were accepted, it would substantially extend the operation of the decision in FAI v Australian Hospital Care. The insured had not given notice of occurrences which might give rise to a claim during the policy period and, indeed, had not even become aware of the position. However, unlike, in FAI v Australian Hospital Care, no clause of the policy enabled the insured to extend the policy’s cover by giving such notice. Whilst s 40(3) would have entitled the insured to cover if it had given notice of the occurrence, that entitlement would have flowed from the intervention of the statute rather than through the effect of the policy.
[492] For that reason, his Honour observed (at 11 [43]) that the expression “but for this section” in s 54(1) could not be overlooked. The effect of the contract, if one ignores the omission of the insured to give notice of the occurrence, would not have been that the insured was entitled to indemnity. His Honour reasoned that whilst an insurer is not entitled to refuse to pay a claim by reason only of the fact that its insured omitted to give notice of an occurrence, in the matter then at hand, had the insured given notice, the insurer would still not have been obliged to indemnify. In order to reach that position, s 54(1) would have needed to be understood as though it provided, “… where the effect of a contract of insurance would, but for this section, and s 40(3) …” (emphasis in original).
[493] His Honour also recognised (at 11 [44]) that s 40(3) does not imply a term into policies of insurance which has the effect of turning them into “discovery polices”. That could be contrasted with other pieces of legislation which use the drafting technique of implying terms and, when that occurs, the rights which arise are treated as contractual rather than statutory. He noted that the distinction between contractual and statutory rights has been firmly recognised and maintained:
… In Newcastle City Council Brennan CJ referred to “the statutory alteration in an insured’s rights … worked by sub-s (3)” and the imposition by the subsection of “a liability where no contractual liability exists”, and a “statutory modification of contractual relations” (91, 93). To speak of the statutory alteration of the insured’s contractual rights, or the imposition of a statutory liability “where no contractual liability exists” is inconsistent with s 40(3) implying a term into contracts of insurance.
[494] The form of impact of s 40(3) on the terms of a contract is clear. It does not replace them, alter them, substitute other terms, or imply terms. It overrides the party’s agreement and imposes an additional statutory right which modifies the contract’s effect. No amount of judicial exegesis can alter the limitation in the meaning of the words, “where the effect of a contract of insurance”, so as to equate to the expression, “where the effect of a contract of insurance as modified by s 40(3) or some other statutory provision”.
[495] His Honour held (at 11–12 [45]) that, as a matter of statutory construction, s 40(3) did not create a statutory right to which s 54 might apply. Although that conclusion was not consistent with that of Rolfe J in Einfeld v HIH Casualty and General Insurance Ltd (1999) 10 ANZ Insurance Cases ¶61–450, 75,170, that case pre-dated FAI v Australian Hospital Care and it did not address the statutory interpretation issue referred to above.
[496] The views of Chesterman J were subsequently approved by the New South Wales Court of Appeal in Gosford v GIO at 549–550 [26]–[28].
[497] The UCPT was then faced with the heavy weight of this confluence of very persuasive authorities, the effect of which it needed to avoid. It submitted that, despite the foregoing, s 40(3) should be seen as laying a foundation on which s 54 might operate. However, its arguments in support of that are neither textual nor contextual, but rather policy-based. As explained to this Court, by reference to the opinions expressed in Kelly and Ball Principles of Insurance Law, it was said that s 40(3) was intended to address the position where insurers did not include such an extension in claims made policies and the section could have been drafted to imply a term to that effect. If, therefore, s 54 cannot apply because s 40(3) does not imply a term, it should be read as if it did. It was stressed that it is the substance that counts, rather than the form.
[498] That would amount to an invitation to engage in judicial legislating, and should be rejected. It would involve a substantial leap of faith in circumstances where its terms were carefully formulated in the course of the ALRC’s extensive report and consideration. Indeed, acceptance of the invitation might result in serious and impractical commercial consequences, as has been previously explained. The ultimate impact on the insurance industry of extending the operation of s 54 in such a manner is far from clear. It is customary in relation to law reform inquiries of such magnitude, to invite those who have a financial or economic interest in the outcome to make submissions and be consulted, and the ALRC Report reveals that this occurred in its preparation, and the consultation was wide. It is more than likely that had this expansive operation of the Act been suggested, insurers might have provided useful responses about the consequences of widening the gap between the Australian retail market and the operation of the international reinsurance market. They would also have been in the position to identify any unintended consequences of such a significant change.
[499] There is no interpretative justification for construing the words of s 54 in a way that fits a preconceived, but unstated, policy objective. Rather, the construction of s 54 insofar as it may relate to s 40(3) was carefully articulated in Gosford v GIO and there is no reason to doubt the accuracy of that decision. That being so, it is inappropriate for this Court to depart from it.
[500] This aspect of the UCPT’s contentions must also fail.
…
(emphasis added)
A link to the full decision may be found here.
