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Construction, Insurance, Professional Indemnity, property
The Wolf of Newcastle – Fraudulent Investments and s 40(3) of the Insurance Contracts Act
11 July, 2021
The NSW Court of Appeal in P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd considered what information must be contained in a notification to insurers for it to constitute notification of facts giving rise to claim for the purpose of s40(3) of the Insurance Contracts Act 1984 (ICA). The court also considered whether the non-disclosure and misrepresentation made by the insured would be sufficient to allow insurers to deny cover.
Principles
- Notifications must contain sufficient detail of the factual circumstances for s40(3) of the ICA to apply.
- Vague and imprecise information regarding a potential claim will be insufficient.
- In the event an insured fails to disclose material information that would affect its entitlement to coverage, the insurer may be entitled to avoid the policy in full.
Background
The plaintiffs received financial planning advice from Moylan Retirement Solutions Pty Ltd (MRS) (now deregistered) and its principal, Christopher Moylan. Acting on Mr Moylan’s advice, between 2006 and 2009 the plaintiffs made various investments in projects in which Mr Moylan had financial interests. Additionally, moneys of the plaintiffs were misapplied by MRS. No payments of interest, repayments of principal, dividends, or distributions were received in respect of any of these investments.
Pursuant to s601AG of the Corporations Act 2001, the plaintiffs sued MRS’ professional indemnity insurers directly to recover their losses. They claimed that MRS was entitled to indemnity through one of two insurance policies, being for the 2012‚Äë2013 year (2012/2013 policy) or the 2013‚Äë2014 year (2013/2014 policy). MRS’ insurers denied that MRS was entitled to indemnity.
In a proposal filled out in January 2013, at the time of renewal and prior to the expiry of the 2012/2013 policy, Mr Moylan answered “yes” to the question of whether any circumstances or incidents may give rise to a claim. He also indicated:
“A small number of clients have invested/lent funds to property investments and/or companies that have to date been unable to repay those funds in total. At the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of circumstances at the time. At this stage no loss has been crystallised and no claims or complaints have been formally lodged.”
Mr Moylan had provided no such disclosure at the time of renewal in 2012.
The plaintiffs relied on s40(3) of the ICA. This section provides that where an insured gave notice in writing to the insurer of facts that might give rise to a claim as soon as it was reasonably practical after the insured became aware of those facts, but before the insurance cover expired, the insurer is not relieved of liability by reason only that the claim was made after the expiration of the policy.
Had s40(3) been found to apply, the claims would have been treated as being made during the 2012/2013 policy period.
Supreme Court Decision
The primary judge held that the 2012/2013 policy did not respond because no “claim” had been made against MRS before the 2012/2013 policy expired. His Honour held that the notification in January 2013 of facts that “might give rise to a claim” did not engage s40(3) of the ICA because the notification was not of “facts” but of “bare possibilities”.
In addition, his Honour held that MRS had made fraudulent misrepresentations and non‚Äëdisclosures when seeking to renew the policies, entitling the insurers to avoid both the policies.
Court of Appeal Decision
The court unanimously dismissed the plaintiffs’ appeal.
Meagher JA, with whom Bathurst CJ and Bell P agreed, held that the question of whether a fact “might give rise to a claim” requires an objective assessment of the likelihood or possibility of a claim. It would be sufficient to engage s40(3) of the ICA if the notified facts would reasonably be regarded as giving rise to a realistic possibility of a claim.
It was held that the facts notified by MRS in January 2013 did not give rise to a realistic possibility of a claim. The notification was simply that should any investors suffer loss, there was a chance that they may make a claim against MRS. The notification did not include any facts which made loss more than a possibility.
The court noted the disclosure did not identify any defect in the advice given or disclosures made by MRS, and in fact positively asserted that there was none. As such, there was no notification of facts which “might give rise to a claim”.
The court also found that had MRS disclosed that it misapplied its clients’ money, then underwriters would have declined to issue the policy. Accordingly, the failure to disclose this entitled the insurers to reduce their liability to nil.
Why this case is important
The case illustrates that to attract the protection of s40(3) of the ICA, an insured must give detailed and precise particulars of the factual circumstances of a potential claim, not simply provide vague and inaccurate information. Any notification must be of the facts surrounding the claim, not just a belief or opinion as to the possibility of a claim. Although an insured does not necessarily need to identify the potential claimant(s) or the quantum of the claim.
The decision provides useful guidance to insurers and underwriters. If insurers are provided with vague and unspecific information about a potential claim, they should press the insured for further information. An insured will be unable to rely on s40(3) of the ICA in circumstances where the information provided is insufficient.
It is also a reminder that insurers can deny indemnity in circumstances where had material facts been disclosed, the insurer would not have offered coverage.
