Tampoe v Australian Hospital Care Pty Ltd
[1998] QDC 270
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- Unreported Judgment
- Tampoe v Australian Hospital Care Pty Ltd[1998] QDC 270
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Tampoe v Australian Hospital Care Pty Ltd[1998] QDC 270
Tampoe v Australian Hospital Care Pty Ltd[1998] QDC 270
IN THE DISTRICT COURT HELD AT SOUTHPORT QUEENSLAND | Plaint No. 685 of 1992 |
BETWEEN:
DEVENDRA GURASAMY TAMPOE | Plaintiff |
AND:
AUSTRALIAN HOSPITAL CARE PTY LTD | First Defendant |
AND:
PAUL ROBINSON | Second Defendant |
AND:
CHRISTOPHER MARK SWINBANK | First Third Party |
AND:
FAI GENERAL INSURANCE COMPANY LIMITED | Second Third Party |
REASONS FOR JUDGMENT - WOLFE D.C.J.
Delivered the 30Th day of Sept. 1998
In this action the first defendant claims it is entitled to be indemnified by the first third party (Lloyds) as the representative of Lloyds Underwriters pursuant to a contract of insurance with Lloyds covering the period from 20 June 1992 to 20 June 1993, or alternatively by the second third party (FAI) pursuant to a contract of insurance with FAI in respect of the period from 20 June 1991 to 20 June 1992. Both insurers deny liability.
Background
On 17 December 1992 the plaintiff, Dr Tampoe, commenced this action claiming damages for negligence and/or breach of contract in respect of medical treatment afforded to him. He sued the first defendant, Australian Hospital Care Pty Ltd (AHC), which owns and operates Pindara Private Hospital at Benowa (the hospital), and the second defendant, Dr Robinson, the orthopaedic surgeon who performed a total knee replacement on Dr Tampoe while Dr Tampoe was an in patient of the hospital in March 1991. Dr Tampoe developed life-threatening gram-negative septicaemia after the operation while in the hospital.
AHC's third party notice, joining Lloyds and FAI as third parties, was not issued until January 1996 although AHC had given notice of the claim to both insurers by about December 1992. The claims against the insurers were pleaded in the alternative. Dr Tampoe discontinued his action against the orthopaedic surgeon about six months after the insurers were joined as third parties.
Following mediation ordered by the Court, and on the day that the trial before a jury was to begin, the action between Dr Tampoe and AHC was adjourned to the settlement list. The action between AHC and the insurers proceeded without a jury. AHC amended its third party notice, pleading against each of the third parties that AHC had entered a compromise agreement with Dr Tampoe pursuant to which AHC had agreed to pay the sum of $100,000 in full and final settlement of Dr Tampoe's claim and costs, that the compromise was bona fide and reasonable and that the excess under each policy is $2,000. The facts alleged by this amendment were not put in issue by either Lloyds or FAI.
However AHC had not notified the earlier insurer, FAI, during the subsistence of FAI's policy, that Dr Tampoe's claim (or any intimation of that claim) had been made on AHC or that it was aware of an occurrence which might subsequently give rise to a claim. Nor did AHC, prior to entering Lloyds' contract of insurance in June 1992, disclose to Lloyds that it was aware of any circumstances which might give rise to Dr Tampoe's claim being made against AHC. Both contracts of insurance provide for an indemnity on a claims made basis, FAI for the period 20 June 1991 to 20 June 1992, and Lloyds for the period 20 June 1992 to 20 June 1993.
Whether or not either of the insurers is liable to indemnify AHC largely depends on the construction of Dr Tampoe's solicitors' letter of 10 July 1991 which AHC received on 11 July 1991, and how s. 54 of the Insurance Contracts Act 1984 operates in the circumstances.
The position which AHA took in respect of this letter was somewhat confused and confusing. The effect of the letter (or its receipt) which AHC pleaded against FAI was the converse of that which it advanced at the trial. Further, so far as the letter was concerned, AHC's case as pleaded against Lloyds was the antithesis of that first pleaded against FAI. AHC claimed an indemnity from FAI relying solely upon its receipt of that letter, pleading that the letter amounted to an intimation of a claim (and thus a claim) on AHC. However pleaded, AHC did not attempt to prove that it had received an intimation of claim, and the primary submission first made by its counsel, Mr Couper SC, was that the letter was not a claim because there was no intimation that an action would be brought. On the other hand, in claiming to be indemnified by Lloyds, AHC denied the letter had the effect for which AHC had contended in its claim against FAI. As against Lloyds, AHC, in effect, asserted that the letter was not such a claim.
AHC pleaded against Lloyds that Dr Tampoe's claim was first made against AHC in about October 1992 or, alternatively, in December 1992, that is, during the subsistence of Lloyds' policy. Lloyd's denial of liability relied, firstly, upon the exclusion clause in its policy. It asserted that on the inception date of that policy, AHC knew or could reasonably have foreseen that AHC's “malpractice” might be expected to be the basis of a claim, and that Lloyds would have excluded the relevant risk from its policy had AHC disclosed to Lloyds, before the contract of insurance was entered into, matters such as its receipt of the letter or AHC's mid-1991 “without prejudice” meeting with Dr Tampoe's solicitors. Secondly Lloyds alleged that under Part IV of the Insurance Contracts Act such non-disclosure amounted to misrepresentation as AHC's proposal for insurance had asserted that no claims had been made against it and that it was not aware of any circumstances which might give rise to claims against it.
As against FAI, AHC pleaded that AHC had “first received an intimation” of the claim on or about 11 July 1991 (when AHC received the letter), and although it had not given notice of this during the subsistence of FAI's policy, AHC alleged that s. 54 of the Insurance Contracts Act 1984 obliged FAI to indemnify AHC. FAI denied that the letter constituted intimation of the claim and asserted that s. 54 did not have the operation for which AHC contended. Later in the proceedings, after the Court of Appeal had given judgment on the meaning of the term “claim” (Junemill Ltd (in liq) v. FAI General Insurance Company Limited (1997) 9 ANZ Insurance Cases 61-377) and the High Court had given judgment in Antico v Heath Fielding Australia Pty Ltd (1997) 71 ALJR 1210, which appeared to overrule FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89, the matter was relisted. AHC sought to further amend its third party notice in order to rely on condition 3 of the FAI policy to allege against FAI that by receipt of the Corrs' letter AHC became aware of an occurrence, namely Dr Tampoe's treatment and his contraction of septicaemia, in circumstances which might possibly give rise to a claim of negligence against AHC. AHC then claimed the benefit of s. 54 to excuse its failure to notify FAI of the occurrence during the period of cover. FAI opposed the amendment. Having indicated that I was inclined to allow it, FAI was given an opportunity to consider whether it required further cross-examination of AHC's witnesses or to call other evidence, or whether it was content to make further written submissions in respect of the operation of condition 3 of the FAI policy having regard to the evidence that had been given at the trial. The latter course was chosen with AHC replying to FAI's submissions on 24 March. On 1 September, at my request, AHC provided me with a copy of its proposed further amended third party notice.
Issues
The first issue for determination is whether by the letter of 10 July 1991 from Dr Tampoe's then solicitors, advising AHC that Dr Tampoe was considering bringing an action against the hospital, and seeking access Dr Tampoe's medical records AHC received notification of a “claim” as defined in FAI's policy (if so by operation of s. 54 of the Insurance Contracts Act, FAI may not refuse to indemnify AHC and Lloyds would not be liable). If not, the question arises whether by receipt of that letter AHC became “aware of an occurrence” which might give rise to a claim against AHC, (and if so, whether the decision in Antico v Heath Fielding Australia Pty Ltd (1997) 71 ALJR 1210 applies with s. 54 operating so that FAI may not refuse the indemnity) or whether FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89 applies (so that FAI may refuse to indemnify AHC, despite AHC's failure to give relevant notification to FAI during the subsistence of FAI's policy).
Absent FAI's liability, the second broad issue is whether by AHC's receipt of that letter and a meeting in August 1991 between Dr Tampoe's then solicitors and the hospital's director of emergency medicine, AHC could have reasonably foreseen that a claim “might be expected” to be brought as a result of the hospital's acts or omissions in relation to Dr Tampoe's developing septicaemia. If so, and if Lloyds relied on AHC's proposal in providing cover, then Lloyds is not liable. If Lloyds did not rely on that proposal, the question arises, having regard to ss. 21 and 28 of the Act, whether AHC's failure to disclose those matters to Lloyds prior to the inception of Lloyds' policy results in Lloyds' not being liable to indemnify AHC.
The facts
AHC entered into a contract of insurance with FAI in about June 1990 in respect of the period 20 June 1991 to 20 June 1992. The FAI policy is on a “claims made” basis with an “occurrence notification” clause in the same terms as that which has been considered by the Court of Appeal in Junemill Ltd (in liq) v. FAI General Insurance Company Limited (1997) 9 ANZ Insurance Cases 61-377 and by the New South Wales Court of Appeal in FAI General Insurance Company Ltd v. Perry (1993) 30 NSWLR 89.
the insured event - treatment at the hospital
Dr Tampoe was admitted to the hospital on 12 March 1991. Ashe was a medical practitioner, the hospital awarded him what it described as “V.I.P. status”. This meant, at least, that the hospital's director of medical services, Dr Phillip Kay, was aware that Dr Tampoe was an inpatient. On 13 March 1991 Dr Robinson, the orthopaedic surgeon, performed a total knee replacement on him. While recovering from the operation, a blocked catheter to the bladder was changed on 15 March. Dr Tampoe was also diagnosed with having temporary paralytic ileus which appears to have resolved by 16 March when all vital signs were noted as having been observed in the charts to be within normal limits.
On 17 March Dr Tampoe's condition deteriorated rapidly. He was suffering from the potentially fatal condition of gram negative septicaemia and septic shock. On diagnosing septicaemia, the hospital's resident medical officer called in Dr Kerry Brandis, an intensive care specialist then on call for the hospital. Dr Tampoe was transferred from the surgical ward to the hospital's intensive care unit where Dr Brandis instituted resuscitational and therapeutic measures. On 18 March, Dr Brandis called in another intensive care specialist, Dr Hugh Stephens, who thought that Dr Tampoe's condition was still critical. Dr Tampoe gradually improved and on 20 March 1991 he was weaned from the ventilator and transferred back to the surgical ward. Dr Tampoe was not discharged from the hospital until 28 March 1991.
Dr Tampoe's wife complained to a nurse at the hospital that the nursing care given to Dr Tampoe prior to his deterioration on 17 March was not as good as she would have liked. This complaint was recorded in the hospital notes of 22 March, as was her being reassured that Dr Tampoe had received appropriate nursing care and that “action was swiftly taken when required”. The hospital's director of medical services, Dr Kay, was not aware of her complaint but was aware of Dr Tampoe's admission to the intensive care unit. Dr. Kay had significant experience in the treatment of septicaemia, although he was not involved clinically in Dr Tampoe's treatment. Dr Kay gave evidence. He said there was nothing unusual about the sudden onset of septicaemia with no early warning signs, and that this was one of the most common presentations of septicaemia. I did not understand him to be asserting that Dr Tampoe's contraction of septicaemia was not the result of some breach of duty on the part of the hospital. In any event AHC conceded in effect that the hospital had been negligent in that the relevant events (whatever they happened to be) amounted to “malpractice” within the meaning of Lloyd's policy.
In 1991 Dr Kay advised the hospital on medical matters, he had overall responsibility for the hospital's emergency medicine and intensive care units and he was on various hospital committees and involved in some of the hospital's administration. It seems he was consulted about all claims made on the hospital. Dr Kay said he was not aware that there was any issue as to the treatment Dr Tampoe had received prior to the receipt of Dr Tampoe's solicitors' letter in July 1991. The ultimate responsibility for handling claims on the hospital of the type which were or might be notified to an insurer rested with Mr Lawrie Cahill, the executive director of AHC and the executive director of the hospital. He also gave evidence at the trial. Mr Cahill suggested that the hospital's practice was to notify the relevant insurer when the hospital received a letter making a claim.
It seems AHC then had a fairly basic system for identifying any matters at the hospital which had the potential of giving rise to a claim on the insurer. This system involved keeping incident reports, and the director of nursing checking the records or the medical records clerk being asked whether there were any matters which might be of concern. Mr Cahill gave evidence of the incidents which typically would be noted in the records and presumably considered by Mr Cahill when a decision was to be made whether or not to notify a claim or whether or not to disclose an incident in the course of making a proposal for insurance. According to Mr Cahill, these incidents included a patient falling in the shower or the like. He did not suggest that such falls had to be life-threatening to merit recording or further consideration. There was no procedure for recording the complaints of, for example, a patient's wife about the standard of nursing treatment other than recording them in the hospital records. Mr Cahill was not made aware prior to 30 June 1992 that Dr Tampoe's wife had complained that the nursing care was not as good as she would have liked. Dr Kay did not know of her complaint until after this action commenced.
Corrs' letter of 10 July 1991
In about May 1991 Dr Tampoe consulted his solicitors who were then Corrs Chambers Westgarth (Corrs). Coits obtained opinions from Dr Stephens, then the Gold Coast Hospital director of anaesthetics and intensive care, and from Dr Brandis, the intensive care specialist, both of whom had attended the plaintiff in the intensive care unit. Dr Stephens' report to Corrs states that the source of the infection was unclear and that the most likely primary sources were lung or urinary. From his perusal of the notes, he could see no evidence of medical negligence. Dr Brandis seems to have had regard to the observation charts as well as the medical records and his report was to the same effect as Dr Stephens'.
On 10 July 1991 Corrs wrote to the hospital:
“We act for Dr Devendra Tampoe. Dr Tampoe was a patient at your Hospital from 12 March 1991 to 28 March 1991 when he underwent a total knee replacement operation. Subsequent to his operation Dr Tampoe contracted septicaemia. Our client is giving consideration to bringing an action against the Hospital in relation to the treatment he received.
We request that you allow us access to our client's hospital notes in relation to his treatment during the above period. We make this request at this stage so that we can inspect the file prior to advising our client in relation to instituting proceedings.”
Mr Brian Bartley, the Corrs' partner with responsibility for the Tampoe matter and who signed the letter, gave evidence of the letter being part of the information gathering exercise at a time when no decision had been made by those solicitors to advise Dr Tampoe to make a claim against the hospital.
Mr Cahill received the Corrs' letter the following day. He said he did not regard that letter as making a claim, rather that it conveyed that Dr Tampoe was giving consideration to bringing an action. He showed it to Dr Kay who, at Mr Cahill's request, carried out an investigation into the treatment given to Dr Tampoe by the hospital. Dr Kay perused Dr Tampoe's medical records. He also spoke to the six medical practitioners involved, they being the doctors under his control and the specialists who had treated Dr Tampoe in the hospital. He said he formed the view that Dr Tampoe had received excellent treatment, that the complication with post-knee surgery had been within normal limits, that the deterioration in his condition had been “picked up very rapidly” and that all appropriate resuscitative measures were instituted. However Dr Kay made no inquiries of the nursing staff or of anyone other than the treating doctors. He told Mr Cahill that there was no case for the hospital to meet.
On 25 July 1991 Miss Fairfull, the solicitor employed by Corrs with day to day carriage of the matter, telephoned Mr Cahill to ascertain whether Corrs could obtain access to the hospital file prior to instituting proceedings. Mr Cahill told her they would not release the records without a subpoena. The following day Mr Cahill wrote to Corrs proposing a “without prejudice” meeting between Dr Tampoe and some of the hospital personnel, including the director of medical services, Dr Kay. Mr Cahill would have it that he did not really understand what the expression “without prejudice” meant. The letter also stated:
“We believe this would be the most fruitful method of dealing with the matter at hand.
We advised Miss Fairfull that we are unable to provide access to the patient's medical record on the basis that we are legally bound to retain confidential medical records with access only by the treating doctor, senior hospital clinical staff or to the patient's solicitor through the exercise of subpoena to a Court of Law.
We are happy to make the record available at the proposed meeting and for Dr Tampoe to request specific information from either his treating doctor or our senior hospital clinical staff.”
On 9 August 1991, Mr Cahill and Dr Kay spoke by telephone to Miss Fairfull about Corrs' request for access to the hospital records. Dr Kay said that the purpose of the telephone call was to establish why the letter had been written. This was, and is, hospital policy, Dr Kay suggested. Miss Fairfull said they told her they were not prepared to provide a copy of the hospital records because they were concerned about their insurance. Miss Fairfull made a note of the conversation. At the trial both Mr Cahill and Dr Kay agreed they had told her she could not have access to the records, but denied they had said they were concerned about insurance. It is more likely than not that both were concerned and did express concern about the hospital's insurance. By this stage AHC had twice refused Corrs access to the hospital files or to give Corrs copies of the records, and Dr Kay and Mr Cahill well knew that Dr Tampoe had contracted life threatening septicaemia and that before Dr Tampoe commenced an action, his solicitors wanted access to the hospital records. I preferred Miss Fairfull's evidence to that of the hospital's representatives. Mr. Cahill was vague and all but cavalier in his attempts to recall the facts that had occurred, and Dr Kay who was undoubtedly more concerned about medical outcomes than administrative matters, was unable to recall important conversations. AHC established that the knowledge of Dr Kay and Mr Cahill was the knowledge of the hospital and AHC. Consequently, AHC was at least apprehensive that Dr Tampoe's contraction of septicaemia in the hospital might result in Dr Tampoe's bringing an action against it. It must also be concluded, having regard to the conversations between Ms Fairfull and officers of the hospital, and Dr Kay's purpose in attending the meeting, that AHC was concerned that Dr Tampoe would assert that the hospital had breached its duty to him, that is, that there would be a claim against it in negligence.
the August 1991 meeting
Finally, on 21 August 1991 a meeting took place in Corrs' offices. It was attended by Corrs' Mr Bartley and Miss Fairfull, and Dr Kay from the hospital. As far as Corrs were concerned, the purpose of the meeting was to obtain information from Dr Kay as to what was in Dr Tampoe's hospital records. Dr Kay said he had understood the purpose of meeting with Corrs was to try to explain to Dr Tampoe's solicitors what had been involved in Dr Tampoe's hospitalisation, “it was an educational session”. He agreed that his purpose was to persuade the solicitors that any claim brought would be unlikely to succeed. Mr Bartley's recollection that Dr Kay had appeared to be at the meeting for the purpose of satisfying Dr Tampoe's solicitors that there was no basis for any claim is the more accurate description of what AHC, through Dr Kay, hoped to achieve by the meeting.
It was clear from the evidence of all at the meeting that the meeting was amicable and non-confrontational. Dr Kay brought the hospital records relating to Dr Tampoe to the meeting. He read from them. Miss Fairfull made some notes of the meeting. Dr Kay did not. Nor did Dr Kay make a written report of the meeting. Dr Kay did most of the talking, explaining what was in the patient record. Dr Kay said he gave a detailed explanation of what had happened throughout Dr Tampoe's treatment at the hospital. He said he explained that septicaemia was “a complication following surgery” and that this complication with post-knee surgery was within “normal limits”.
The solicitors did not dispute anything Dr Kay said about Dr Tampoe's treatment in the hospital. Dr Kay said he suggested the solicitors obtain alternative advice if they did not feel highly satisfied with Dr Kay's explanation about the septicaemia and that they could contact Dr Hugh Stephens, the intensive care specialist. The solicitors did not tell him they had already obtained reports from Dr Stephens and Dr Brandis.
Mr Bartley was non-committal as to what would happen. Mr Bartley did not express disagreement with any views Dr Kay proffered about Dr Tampoe's treatment. Nothing was said by the solicitors about the likelihood of a claim being made against the hospital nor that Dr Tampoe intended to make a claim against the hospital. Mr Bartley indicated that Corrs would consider the matter and in due course be in contact with the hospital to advise their intentions. He gave no indication one way or the other as to what those intentions might be. Dr Kay said that his impression at the end of the meeting was that he, Dr Kay, had resolved any concerns that the solicitor had about any claim of negligence against medical practitioners or against the hospital and that the solicitor would convey that information to his client - that there was a “clear indication” that no further action would be taken. Dr Kay said he left the meeting with the distinct impression that nothing else would happen. This impression was erroneous. The solicitors had said nothing to encourage him. At no time did Mr Bartley say or otherwise indicate that he accepted the view that there was no basis for a claim. Nor am I persuaded that, as Dr Kay would have it, the solicitors' “body language” should have encouraged him. Dr Kay said he received the impression that those solicitors would contact him “in the very near future if it was going to go any further”. Again, this was merely wishful thinking. The solicitors did not indicate they accepted the view that there was no basis for a claim. Mr Bartley did not tell him he would advise AHC if Corrs or Dr Tampoe was going to proceed - he said nothing which would indicate that Dr Tampoe would not be taking any action if nothing was heard soon.
Further, Dr Kay then understood that the decision whether or not to sue AHC was not one for Dr Tampoe's solicitors and that it was for Dr Tampoe to decide in due course whether or not to take any action. Dr Kay returned to the hospital and reported to Mr Cahill that he thought the solicitor understood the complexities of the case. He told Mr Cahill that “in the near future” probably nothing would happen. Mr Cahill said Dr Kay had told him he had been left with the impression that there was no more to be done with the matter and that there would be no further action taken. This conflicts with Dr Kay's account which I prefer on this point. Mr Cahill's recollection of some relevant matters concerning the hospital was not sound. Consequently I am not satisfied, given Dr Kay's evidence as to his belief that during the period from after the meeting to 20 June 1992, that AHC knew that Dr Tampoe might bring a claim in negligence against the hospital.
After Dr Kay's meeting with Dr Tampoe's solicitors, and prior to October 1992, Dr Kay and Mr Cahill received no indication, from Dr Tampoe or anyone else on his behalf, that a claim would or might be pursued against the hospital. Nor did they receive any indication that a claim would not be made. Mr Cahill would have it that he did not think about the Tampoe matter after receiving Dr Kay's advice after the meeting in August 1991. However AHC made no inquiry of Dr Tampoe or his solicitors to ascertain whether or not a claim would be made. For that matter, AHC had not received any release from AHC nor had Mr Cahill, Dr Kay nor anyone else connected with AHC received advice from Dr Tampoe, or Corrs, or anyone else on Dr Tampoe's behalf, that Dr Tampoe would not make a claim. Mr Cahill and Dr Kay were not the only person in authority at AHC who knew of the matter. The hospital reported the matter to the AHC head office in 1991, according to Mr Cahill's facsimile to an insurance broker on 23 December 1992. Thus, so far as AHC might reasonably be aware after 21 August 1991, Dr Tampoe's solicitors were continuing their investigations for a claim against the hospital.
The Lloyds insurance proposal
Meanwhile AHC was seeking insurance for the period 20 June 1992 to 20 June 1993. On 1 June 1992 AHC signed a proposal for the hospital's medical malpractice insurance. The proposal was made on an FAI form for reasons which are not relevant. Question 15 of the proposal asked:
“List any claims or suits alleging error, omission or negligence which has been made against the Establishment or its staff, giving dates of occurrences, names of patients concerned and the identities of the insurers at the relevant time.”
AHC's answer was “Nil”.
Question 16 of the proposal asked:
“List any circumstances which may give rise to a claim or suit being made against the establishment.
(ii) Are any of the Partners or Principals, AFTER ENQUIRY, aware of any circumstances which may give rise to claims against this Firm/Company or their predecessors in business or any of the present or former Partners or Principals whether you consider yourselves liable or not?”
AHC's answer was “No”.
The failure to disclose the possibility of Dr Tampoe's making a claim was contrary to AHC's internal policy. Mr Cahill's evidence was to the effect that it was AHC's policy to report to a proposed insurer any matter which had the potential to give rise to a claim. If AHC believed that the matter probably would not give rise to a claim, its practice was to disclose it nonetheless. AHC's list of malpractice insurance claims for the year June 1991 to June 1992 (document 13 of Exhibit 1) indicates that this was so. It identifies matters which AHC probably had notified to FAI. The matters listed bore some assessment of the viability or progress of those matters, such as “no further action expected”, “unlikely to proceed”, “settled”, “no action since report”, “no claim by third party yet” and “ongoing correspondence between solicitors”. Mr Cahill did not invariably notify such matters. According to his evidence, if he “definitely” believed that it was not proceeding, then he would not report the matter. Nonetheless he agreed that according to AHC's internal policy, any matter where there remained the potential or some possibility of a claim being brought, should have been reported. In my view, on the facts as found, Mr Cahill, having not heard or ascertained that the solicitors were not proceeding with their investigations, had no reasonable basis for “definitely” believing that the Tampoe matter would not proceed.
The factual issue then arising is whether Lloyds relied on the proposal form in entering the contract.
Entering the Lloyds' contract
AHC was known to Lloyds before the contract of insurance was entered into. Lloyds had been AHC's “excess” insurer for the period September 1991 and June 1991. The chairman of Market Form Limited, the senior underwriter of the relevant insurance through Lloyds syndicates, Ms Holly Bellingham, gave evidence by telephone of her involvement in the underwriting of Lloyds' insurance for AHC. Her evidence was to the effect that Lloyds entered the relevant contract of insurance in reliance on a proposal from AHC. This contract was arranged through the Australian broker which had forwarded the proposal, the list of insurance malpractice claims (or a list similar to document 13 of Exhibit 1), and a short summary of figures supplied by FAI under the heading “claims experience” (Exhibit 9). None of these documents referred to the Tampoe matter. However it is clear from Exhibit 9 that the broker (and consequently Lloyds) did not obtain the FAI summary until on or after 10 June 1992. Lloyds did not resile from the admission pleaded that Lloyds had entered the contract of insurance on 2 June 1992.
The broker had limited authority to bind Lloyds to a contract of insurance and to issue a certificate of insurance but not without first referring the matter to the underwriters. The broker did not have authority to quote the risk without Market Form's prior written approval. Clearly Ms Bellingham, at some stage in June 1992, considered the proposal and the other documents, and assessed the risk and quoted the premium on the basis of what was contained in them. Perhaps she believed that the contract of insurance had not been entered into when she made her assessment. Nonetheless the date on Exhibit 9 and Lloyds' admission on the pleadings predicate against my finding that Lloyds relied on the proposal in entering into the contract. Lloyds did not satisfy me that it probably had received AHC's proposal before the contract was entered into. Consequently Lloyds did not prove that it had relied upon the proposal before 2 June 1992 when it entered the contract of insurance.
At the time Lloyds contract was entered into, the insurance liability market in Australia was extremely competitive. Lloyds' quotation for the premium was $72,500 less 10% brokerage and tax. Ms Bellingham said this was calculated upon what she described as “the burning cost” of the risk as declared to Lloyds under AHC's proposal. According to Lloyds' practice, a “known risk” included circumstances where there had been an “intimation of a formal claim”, and these included where there was any involvement of solicitors on behalf of the person alleging negligence or malpractice, as there had been in this case, or as here where an inquiry had been made as to the availability of hospital records by a firm of solicitors for a patient so they might advise their client whether to make a claim or not, followed by a meeting where a member of the hospital's medical staff explained the course of treatment and asserted that the treatment had not been negligent, even if nothing further was heard of the matter for eight months. Had these circumstances been disclosed, one would expect that Lloyds would have inquired, at least, whether the matter was statute barred, and whether there had been a formal release from either the plaintiff or his solicitors. I accept that had Lloyds realised that there was then a known risk or the likelihood of a claim of the magnitude of about $100,000, Lloyds would not have entered into this contract of insurance with AHC. There are no circumstances under which Lloyds would have provided cover in respect of the Tampoe claim as it was, in Lloyds' parlance, a known loss.
Ms. Bellingham said that had Lloyds realised there was a claim of this magnitude outstanding, it would have excluded that claim from the cover, but cover for the relevant year would have been quoted at a premium in the region of $100,000. She said that there was no way Lloyds would then have been awarded this account as the Australian liability market was so competitive. This aspect of her evidence was not challenged. There were no circumstances then had the Tampoe matter been disclosed, under which Lloyds would have provided cover in respect of the claim.
events during the currency of Lloyds' policy
After AHC and Lloyds entered into the contract of insurance, Corrs advised Dr Tampoe on 23 June 1992 that his chances of success were not good. AHC knew nothing of this. Dr Tampoe then retained another firm of solicitors to act for him in the matter.
On 5 October 1992 Dr Tampoe's new solicitors wrote to the hospital seeking all records relating to Dr Tampoe's hospitalisation and stating:
“We have now received instructions to act on behalf of Devendra Gurasamy Tampoe in relation to a claim for damages for negligence arising during our client's period of hospitalisation in March 1991.
...
We appreciate that in the past you have declined to make such documentation available even though the client has authorised copies of such documentation to be released.
...
Should you persist with your present attitude of refusing to make such documentation available then we give notice that we will be shortly arranging for legal proceedings to be issued without further notice. After pleadings have closed, we will be delivering a Notice Requiring Discovery Upon Oath when all such documentation must be discovered in any event failing which we will obtain a court order compelling discovery of all documentation....”
Both FAI and Lloyds accept this letter constitutes a “claim” under their policies. On 4 November 1992, AHC's Mr Cahill responded, inaccurately, that:
“Let me state clearly at the outset that we have not at any time refused to make documents available..”
By then AHC accepted that Dr Tampoe intended to sue it, for Mr Cahill's letter, while suggesting that information from Dr Tampoe's medical file could be provided by Dr Tampoe's orthopaedic surgeon or by Dr Stephens who had treated Dr Tampoe in the intensive care unit, also stated that:
“... under a court order you can have access to the record for inspection at our premises at a time convenient to both parties. ... If you would like to provide us with your letter of discovery, a convenient time can be set up for you to inspect the record and obtain any information your require.”
Following service of the plaint on about 21 December 1992, AHC contacted its insurance broker, advising by Mr Cahill's facsimile of 23 December, which also provides a somewhat inaccurate history of the matter. It stated:
“As advised we first received correspondence from solicitors Corrs, Chambers Westgarth on July 10, 1991. We replied on July 21 and a meeting was set up for our director of medical services. Dr Kay met with the senior partner for 2 hours at their Brisbane office and discussed the patient's case in detail. The solicitor's opinion that he would advise his client not to proceed (sic). We next received a letter from the current solicitors dated 5th October 1992 asking again for information. We replied on 4th November 1992 and no further request was forthcoming until the plaint was rec'd. Our corporate office was advised back in 1991 but it was not added to a later list in 1992 as we believe (sic) it was a dead issue.”
The claims/or an indemnity
During 1993 AHC's solicitors corresponded with FAI's solicitors seeking an indemnity for the claim. On 27 October 1993 FAI denied it was liable to indemnify AHC as AHC had not given notification of a claim or an occurrence which may subsequently give rise to a claim during the currency of the FAI policy, and suggested that AHC might care to take the matter up with its current insurer. On 7 January 1994, Lloyds' solicitors wrote to AHC's solicitors also denying that Lloyds was liable as in their view the Corrs' letter amounted to a claim which ought to have been notified to FAI, that by that letter, AHC knew of or could have reasonably foreseen that such malpractice might be expected to be the basis of a claim and was therefore excluded under Lloyds' policy, and thirdly, by reference to the answers in AHC's proposal and the special conditions of the policy providing that it was a condition precedent to the policy that statements and particulars contained therein are true, Lloyds denied liability on the basis of that nondisclosure. Lloyds' solicitors also raised s. 54(1) of the Insurance Contracts Act by advising that AHC was entitled to be indemnified under the FAI policy, in accordance with the principles in East End Real Estate Pty Ltd v. CE Heath Casualty and General Insurance Ltd. (1992) 7 ANZ Insurance Cases 61-092, and that AHC's circumstances could be distinguished from those in FAI General Insurance Co Ltd v Perry (1993) 7 ANZ Insurance Cases 61-164. That day AHC's solicitors responded to FAI's solicitors. They not only advised that during the subsistence of FAI's policy “our client became aware of an occurrence which might subsequently give rise to a claim (letter from Corrs, Chambers, Westgarth dated 10 July 1991)” but also cited the same authorities to the same effect as had Lloyds' solicitors in asserting that although AHC failed to give written notice of such an occurrence that AHC was entitled to be indemnified by FAI.
In about February 1994 AHC's solicitors advised Lloyds' solicitors that AHC had entered into further negotiations with FAI and asked Lloyds' solicitors to explain the circumstances which distinguished AHC's case from those in Perry. On 28 February 1994 Lloyds' solicitors obliged with their views as to why s. 54 covered the FAI policy, and on 9 March 1994 AHC's solicitors wrote to FAI's solicitors, pressing for an indemnity under the FAI policy and repeating Lloyds' advice. However AHC obtained Queen's Counsel's advice that there was no foundation for claiming under the FAI policy and that AHC was entitled to be indemnified under the Lloyds' policy. On 30 June 1994 AHC informed Lloyds that it had obtained this advice and warned Lloyds that in the event of Lloyds' failing to agree to indemnify AHC, AHC would join Lloyds as a third party and that it also proposed to join FAI as a third party “given the contents of your previous correspondence”. AHC refused to provide Lloyds with a copy of Queen's Counsel's opinion. AHC did not obtain leave to issue the third party notice against Lloyds and FAI until January 1996.
Whether FAI is liable
It is convenient to consider AHC's claim against FAI before turning to Lloyds' defence.
FAI'S Policy
Under the heading “PROFESSIONAL INDEMNITY POLICY”, the policy provided:
“INSURING CLAUSES
THE COMPANY AGREES subject to the limitations, terms and conditions hereinafter mentioned or endorsed hereon:
- 1.to indemnify the Insured against any claim or claims for compensation, first made against the Insured during the period of cover specified in the Schedule and reported to the Company during the period of cover specified in the Schedule,
- (a)for breach of professional duty in the conduct of the practice ... by reason of any negligence, whether by way of act, error or omission whenever or wherever the same was or may have been committed or alleged to have been committed on the part of the Insured or his or their predecessors in business or any person now or heretofore employed by the insured ... during the subsistence of this Policy...
DEFINITIONS
...
- 2.The expression “claim” shall mean the demand for compensation made by a third party against the Insured but shall not include the insured's costs and expenses.
...
- 3....
- 4.A claim shall be deemed to be first made against the Insured when the insured first receives an intimation from the third party that the Insured is being held responsible in part or in whole for a loss.
...
CONDITIONS
...
- 2.The Insured shall as a condition precedent to his or their right to be indemnified under this Policy to give to the company immediate notice in writing:
- (a)of an claim made against him or them;
...
- 3.If during the subsistence hereof the Insured shall become aware of any occurrence which may subsequently give rise to a claim against him or them for breach of professional duty by reason of any negligence, whether by way of act, error or omission and shall during the subsistence hereof give written notice to the Company of such occurrence, then any such claim which may subsequently be made against the Insured arising out of such negligence shall, for the purposes of this policy, be deemed to have been made during the subsistence hereof. ...”
Does the letter contain a claim or an intimation of a claim?
The case against FAI was based solely on the letter. It was submitted by Mr Bain QC for FAI that Corrs' purpose in sending it and the impression it conveyed to those who received it, provides some support for the construction which must be given to its terms.
The letter did not amount to an express demand for compensation. By it, Corrs were, at least, exploring Dr Tampoe's rights against the hospital arising out of his contraction of septicaemia. It did not suggest that AHC could or should ignore the possibility that he would claim some entitlement to relief, but did it bring home to AHC the substance of the claim that he might bring (Drayton v Martin (1996) 137 ALR 145)? Was it merely an assertion of a possible future claim (Junemill Ltd (in liq) v. FAI General Insurance Company Ltd. (1996) 9 ANZ Insurance Cases 61-315 per Dowsett J at first instance) or did it contain the assertion of a right (Antico v CE Heath Casualty and General Insurance Ltd (1995) 8 ANZ Insurance Cases 61-268, Giles J at first instance, p. 75,999).
There has been considerable discussions in the cases of the meaning of “claim” in the context of insurance policies. In Walton v. National Employers' Mutual General Insurance Association [1973] 2 N.S.W.L.R. 73, Bowen JA at 82 said of a policy providing an indemnity against “any claim for which the Insured is legally liable arising out of negligence ...”.
“In my opinion the word ‘claim’ is here used in its primary sense of a demand for something as due, an assertion of a right to something. It imports the assertion, demand or challenge of something as a right....The mere fact that a client has contracted with the insured and, therefore, has contractual rights does not mean that on each occasion the client acts in exercise of his rights he is making a claim in the relevant sense.”
This formulation has been followed on many occasions as has the similar view taken by Devlin in West Wake Price and Co v. Ching [1956] 3 All E.R. 821. How it is to be applied depends on the provisions of the relevant contract. In Junemill Limited (in liq) v. FAI General Insurance Company Ltd (1997) 9 ANZ Insurance cases 61-377, the Court of Appeal construed the very same clauses in an FAI policy as those which concern me here. McPherson JA agreed with the reasons of Fryberg J who noted at p. 77,126 that in construing the word “claim” in various policies the word had been given different meanings depending on the context:
“One point of distinction between the policy in the instant case and those in cases to which we were referred is the feet that “claim” has been given an exclusive definition. That is a distinction of some importance. It does not mean that previous decisions are irrelevant; but it does indicate that our consideration should begin with the words of the definition and its applicability to the facsimile letter quoted above. Is that letter a “demand for compensation made by a third party against the Insured?”
Provisions in the FAI policy expand on the definition of claim or extend the period of cover, notably Clauses 2 and 4 of the definitions and condition 3. Fryberg J referred to the clause 2 definition and to the dictionary definitions in considering whether the word “demand” meant the act of demanding or whether it meant the subject matter of the demand. Noting that the clause 2 definition seemed to assume that for every claim there would in fact be a demand and that the subject matter of a claim might exist without any act of demand in respect of it, he observed at p. 77127:
“These two features incline me toward the view that “demand” is used to refer to subject matter rather than action in the present context...
This is not a case where one gains much enlightenment from substituting the definition into clause 1 of the Insuring Clauses. ... At a broader level however, there is not difficulty in reading clause 1 as obliging the [insurer] to indemnify the insured in respect of the subject matter of claims “first made” during the period of cover. And when one has regard to the definition of “first made” in clause 4, that view is reinforced. Under that clause, a claim is deemed to be first made when the insured first receives “an intimation” of the sort described. That clause would not sit happily with a meaning for “demand” which referred to the act of demanding. ... This difficulty is avoided if the clause refers to the time when the insured first received an intimation of the content of the claim. To the extent that any action is needed, receipt of an intimation is sufficient.”
The issue in Junemill was whether a claim had been made against the insured when the insured had not suffered any quantifiable loss. The insured was found to have received two letters and the Court of Appeal was unanimous in holding that the second contained a “claim”. The first letter referred to the services provided by the insured, stating that the client of the insured had received advice that there existed “a number of grounds for legal proceedings” against the insured in relation to the work done. It stated that the purpose of the letter was to put the insured on notice that in the event of the client sustaining a loss, then the client intended to commence legal proceedings against the insured. The second letter (found to be a “claim”) stated that the letter would operate as “sufficient notification of a claim, full details of which will be provided in due course”. Thus, the claim referred to in the second letter read against the background of the first letter was found to be an existing claim, and it implied an existing loss:
“It is not to the point that that letter, read in isolation, may not include sufficient matter to constitute a claim. There is no reason why the letter should be read in isolation. Nor does it make any difference that particulars of the claim were not furnished at that time. They do not have to be included.” per Fryberg J at p. 77128.
Fryberg J noted that the first letter did not particularise the remedy to which its writer implicitly asserted a potential entitlement, although there was a reference to “compensation”. At p. 17,128, he said:
“In the present case there are, to my mind, two provisions in the policy which suggest that the subject matter communicated to the insured must include an allegation for an existing malice on the part of the third party.
The first (and most obvious) of these provisions is clause 4 of the definitions. That expressly provides that the intimation referred to is one whose content includes an assertion that the insured is being held responsible in part or in whole for a loss. ...”
As Mr Bartlett said he was in an information gathering mode and the words and the tenor of the letter reflect this. Thus, if one had regard solely to the definition of “claim” in clause 2 of the definitions in the FAI policy, the letter does not contain a claim. But in Junemill, the Court of Appeal indicated that the question of what amounts to a claim is one of substance and not of form. At 77,129 Fryberg J referred to Triden Properties Pty Ltd v Capita Financial Group Ltd (unreported, Court of Appeal NSW, CA 40356/94, 15 November 1995), where reference was made to the dictum of Steyn J defining “claim” as “the assertion by a third party” against the insured by a right to some relief because of the breach of the insured of the duty referred to in the cover, where the threat of legal action if defects were not rectified was “a claim against the insured for damages for the defective design if the insured did not itself correct them”. Fryberg J also approved the view of Mahoney J in Transport Industries Insurance Co Ltd v NSW Medical Defence Union Ltd (1986) 4 ANZ Insurance Cases 60-736 who, in construing the meaning of the word “claims” in the context of an indemnity for sums for which the insured should become liable to pay in respect of claims notified to the insured said that those words referred to “something in the nature of a demand [on the insured] to satisfy a liability which he is alleged to have to a third party or, at the least, an assertion or stipulation to the [insured] that he is liable so to do”.
The Corrs' letter of 10 July 1991 contains no assertion that Dr Tampoe was holding AHC responsible for, at least, the pain and suffering undergone by reason of his contracting septicaemia while an in-patient of the hospital. The reference to Dr Tampoe's contraction of septicaemia impliedly refers to an existing loss. But there was no allegation of an “existing malice” (Junemill at 17,128). The letter can be construed as going no further than suggesting the possibility of AHC being sued in respect of this. It merely stated that Dr Tampoe was “giving consideration to bringing an action” and that the solicitors wished to inspect the file before they advised their client about commencing an action. The letter contained no other assertion of Dr Tampoe's rights: cf, Drayton v. Martin (1996) 137 ALR 145 at 165-166. As Mr Bain for FAI submitted, the letter of 10 July 1991 asserts no breach, and makes no claim for compensation, and at best is a reservation of right, making it plain, with an appropriate declaration of interest, as could be expected from a reputable firm that it may have this concern in the future, and the request for information is not to be seen with hindsight, if there should be an action, as underhanded or dishonest. Consequently no “claim” on AHC within the meaning of that term as defined by clauses 2 or 4 of the policy, was contained in the letter.
Was AHC aware of an “occurrence”? — condition 3
AHC then relies on condition 3 of the policy which deems certain claims made subsequent to the policy period to be claims for the purpose of the policy. Condition 3 has this effect if, during the subsistence of the policy, the insured becomes “aware of any occurrence which may give rise to a claim” against it “for breach of professional duty by reason of any negligence” and if during that period the insured gives notice to the insurer of “such occurrence”. In 1994 AHC was to assert, in correspondence to FAI, that by Corrs' letter it became aware of an occurrence which might give rise to a claim during the period of insurance. If this was the fact, and if s. 54 applies, then FAI must indemnify AHC.
AHC must then establish that during the relevant period it became aware of an occurrence which might subsequently give rise to a claim against it for breach of professional duty by reason of any negligent act, error or omission. Two questions arise: firstly, must AHC prove that it knew or realised during the subsistence of the policy that the Tampoe matter might give rise to a claim; secondly, in the relevant circumstances, does the “occurrence” referred to in condition 3 encompass only Dr Tampoe's contraction of septicaemia while in the hospital or does it also include the negligent act or omission which became the basis of the claim? In other words must AHC prove it was also then aware of facts amounting to a breach of professional duty, or a negligent act, error or omission or some fault in carrying out its duties to Dr Tampoe? AHC pleaded against FAI that the occurrence was “the treatment of the plaintiff in circumstances which might possibly give rise to a claim”. It did not expand on what those circumstances were. As to the first question:— it has been said that the extended cover provided by condition 3 arises only where the insured has “knowledge of the relevant facts or occurrence” (see, e.g., Junemill at first instance, per Dowsett J. at 76,496). This leads to the second question which concerns the ambit of the word “occurrence” in condition 3.
AHC alleged that it “became aware” of the occurrence by receipt of the Corrs' letter of July 1991. By that letter AHC learned that Dr Tampoe had retained solicitors to investigate the possibility of a claim being made. AHC knew Dr Tampoe had contracted life-threatening septicaemia while an inpatient of the hospital. It responded with a “without prejudice” letter.
The evidence did not establish the basis upon which AHC settled Dr Tampoe's action against it, although Mr Couper for AHC indicated that I could proceed upon the basis that AHC had been guilty of “malpractice” as defined in Lloyds' policy, which means AHC had become legally liable to pay damages arising, relevantly, out of bodily injury, illness or disease of the patient caused by a negligent act, error or omission committed by AHC at the hospital. However, the negligent act or omission was not identified. The evidence at the trial of treatment afforded by the medical practitioners indicated that none of the treating doctors was negligent. The only evidence adduced of nursing care was that there had been a complaint about the standard of nursing care afforded Dr Tampoe and that Mrs Tampoe had been reassured about it. By the process of elimination one might infer that the hospital's negligent act or omission possibly involved the carrying out or the failure to carry out relevant nursing duties. If this be so, then Dr Kay did not know this at the relevant time for he made no inquiries of the nursing staff to ascertain, for example, whether the notes made in the charts were accurate. AHC did not prove that Dr Kay or Mr Cahill had knowledge of any particular fact or circumstances which might have related Dr Tampoe's illness to the fault of the hospital. Dr Kay's investigations and the results of his inquiries of the treating doctors clearly establishes that he did not know of any facts suggesting liability on the part of AHC. Indeed Dr Kay's evidence of what he told the solicitors at the August 1991 meeting precludes my finding that he or AHC knew of any such facts. He said he told them that septicaemia was “a complication following surgery” and that this complication with post-knee surgery was within “normal limits”. But condition 3 does not prescribe as a prerequisite to the giving of the notice to be given under condition 3 that the insured should form an opinion that the facts or the circumstances of which it has knowledge are such that liability may arise in respect of them. This clause is not concerned with opinions as to the meaning of facts, only with the knowledge of facts.
The test of whether an insured is “aware of any occurrence which might give rise to a claim” is an objective one: see Bowling v Weinert [1978] 2 N.S.W.L.R. 282. There the insured had public liability cover. He was found to be negligent while driving a power boat towing a person on an aquaplane who was either flung off or let go of the aquaplane resulting in injury to him. At pp. 289-90, Lee J said:
“...the expression “which may give rise to a claim under this insurance” are words which identify the “occurrence” and do not import into the issue any consideration as to the knowledge or state of mind or belief or opinion of the insured. Once there occurs an “occurrence”, which looked at objectively, “may give rise to a claim under this insurance”, then prompt notice to the insurance company is required......it is immaterial that the insured may think that a claim will not be made, or even is uncertain, or does not know that the particular accident is covered by the policy.
In this case there is, of course, no question that the defendant was, from the very moment of the happening of the accident, aware that some injury could have been occasioned to the plaintiff, and was very soon afterwards aware that the injury had been occasioned. That, in my view, was the occurrence which was within the expression, ‘any occurrence which may give rise to a claim under this insurance’.”
The function of the words “which might give rise to a claim” is to define the relevant occurrence, as condition 3 operates only if the insured has knowledge of the occurrence which ultimately in the event of a dispute will be found to be relevant by a court. I doubt that the “occurrence” may be confined to Dr Tampoe's contraction of septicaemia, though it may encompass his contraction of this illness while being treated in the hospital. Dr Tampoe's claim arose out of those circumstances, that is, by reference to the subject matter (his contraction of septicaemia in the hospital) and by reason of the chain of causation (his negligent treatment at the hospital): see, for example, Dickinson v Motor Vehicle Insurance Trust (1987) 163 CLR 500 at 505. The Court of Appeal (Junemill 9 ANZ Insurance cases 61-377) considered the effect of condition 3 vis a vis the definitions of claim in clauses 2 and 4 of the definitions, and not the meaning of “occurrence”, but its exposition of the operation of condition 3 does not appear to be inconsistent with the principle as explained by Lee J or the judgment of the NSW Court of Appeal to which he referred. Fryberg J (with whom McPherson JA agreed) said at 17,128:
“The second reason why I am inclined toward the view that an existing loss is required is the inclusion in the policy of condition 3, which is set out above. Although described as a condition, this clause is really an extension of cover. Read with the insuring clauses, it extends and clarifies the scope of the risk of long-term liability which is cast upon the insurer. It suggests that the policy distinguishes between “claim” and “any occurrence which might subsequently give rise to a claim”. There is no evident reason why these two concepts should overlap.”
Fitzgerald P's view of clauses 2 and 4 of the definitions and condition 3 was that they are complementary:
“It was open to the [insured] to take advantage of any one of those clauses, and open to the [insurer] to do likewise; for example, to assert that, because a claim which met one of the tests had been given to the [insured], it had not given the [insurer] timely notice in accordance with condition 2.
Neither clause 2 of the definitions nor condition 3 expressly or impliedly requires an existing loss, and, when it is relied on, condition 3 is inconsistent with such a requirement.”
What then did AHC know of the “occurrence”: it knew Dr Tampoe had contracted potentially fatal septicaemia in the hospital, and consequently it was aware that he had suffered some damage. Not only was there no evidence of what facts were said to constitute the relevant breach of duty, there was no evidence from Dr Kay or in the reports tendered or from Mr Cahill, from which one might conclude that such could amount to negligence on the part of the hospital. The particulars of negligence which Dr Tampoe alleged against AHC appear in the plaint, but the evidence before me does not go to any of those matters. On the evidence before me it cannot be said that either Dr Kay or Mr Cahill was aware of all material facts which founded the claim in negligence. Certainly they became aware during the subsistence of FAI's policy that Dr Tampoe's contraction of septicaemia while being treated at the hospital might subsequently give rise to a claim for breach of professional duty that is, when AHC received Corrs' letter in July 1991. The Corrs' letter raised, by implication, the issue as to whether or not the hospital had been at fault in carrying out its professional duty. On receipt of the Corrs' letter, AHC became aware that a question had been raised as to whether or not the contraction of septicaemia was the fault of the hospital, that is, it became aware of the “occurrence” (Dr Tampoe's contraction of septicaemia while being treated in the hospital) which might give rise to a claim against AHC in negligence. In my view AHC does not have to prove its awareness of the relevant act or omission.
Accordingly, AHC has satisfied the first part of condition 3. As it did not give notice of its awareness of the occurrence during the policy period, s. 54 arises for consideration.
Section 54 of the Insurance Contracts Act
By reason of its failure to give notice of its being aware of the “occurrence” during the subsistence of FAI's policy, AHC claims that s. 54 of the Insurance Contracts Act as construed by the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 71 ALJR 1210, prevents FAI refusing to indemnify AHC. The starting point is East End Real Estate Pty. Ltd. v. CE Heath Casualty and General Insurance Ltd. (1991) 25 N.S.W.L.R. 400 which decided that a failure to notify the insurer of a claim within the policy period is a failure within the scope of s. 54, so that the insurer must then demonstrate that the insurer's liability should be reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that late notification. FAI did not plead any prejudice resulting from late notification.
Section 54 relevantly provides:
- “(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 the reason only of that act but his 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.
- (2)Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.
- (3)Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. ...
- (6)A reference in this section to an act includes a reference to:
- (a)an omission; and
- (b)an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.”
In East End 25 NSWLR 400 the NSW Court of Appeal considered s. 54 in the context of a “claims made and notified” policy of professional indemnity insurance against claims “which shall be first made against the insured within the period ... and which shall be notified to [the insurer] during the period of cover”. The insured failed to notify the insurer of the claim until after the period had expired and there was judgment against it. Gleeson C.J. said at 403-4:
“The respondent's first submission is that s. 54 has nothing to say concerning acts (or omissions) which form part of the definition of the risk insured. According to the respondent the reference in the section to the hypothesis that the effect of a contract would be that the insurer may refuse to pay a claim covers such matters as warranties, conditions, and perhaps exclusions, but not matters directly affecting the ambit of the insurance cover. In the present case, it is observed, the appellant is only covered in respect of claims both made and notified during the period of cover. Reliance is placed upon a statement made by Handley J.A. in a different context, in Commercial Union Assurance Co of Australia Ltd. v. Ferrcom Pty. Ltd. (1991) 22 NSWLR 389 at 414 to the effect that s 54 does not widen the cover in a policy but, subject to the abatement provided for, it prevents that cover being lost through breach of condition.
I do not read the language of s. 54 so narrowly. Unlike s. 18 of the Insurance Act 1902 it is not in its terms limited to providing relief in the event of a failure by the insured to observe or perform a term or condition of the contract of insurance. Even in relation to s. 18, there was room for argument as to the ambit of the expression ‘term or condition’: cf Accident Insurance Mutual Ltd. v. Sullivan (1986) 7 N.S.W.L.R. 65 at 71-72 per Priestley J.A. When an insurer desires to frame a policy of insurance in such a way that a particular act or circumstance will bring about the result that the insurer is not liable to the insured there is often a range of drafting techniques available to produce that result, and the selection of one rather than the other may be a matter of form and not of substance. In the case of a policy of professional indemnity insurance there may be a condition obliging the insured promptly to notify all claims received, or, as in the present case, the insurance may be expressed to cover only claims that are not only received but also notified during a particular period.
In my view, by choosing the words of generality and avoiding reference to the particular type of contractual provision that might provide the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s. 54 depends upon matters of form. As a matter of ordinary language, it is perfectly appropriate to say in the present case that the effect of the contract of insurance is such that, but for s. 54 the respondent may refuse to pay the appellant's claim. The circumstance that this comes about because of the language of that part of the contract of insurance which defines the risk rather than by reason of a breach of a condition of the policy does not seem to me to be material. The case falls within the general words of the section and I see no justification for reading them down.”
This statement was approved and applied by the High Court in Antico v. Heath Fielding Australia Ltd (1997) 71 ALJR 1210, and AHC argued that the effect of the High Court's decision in Antico is such that AHC's late notification of its awareness of the occurrence which gave rise to the claim falls within s. 54 so that FAI is liable and is not entitled to refuse to pay AHC's claim. But the relevant policies in Antico and in East End were in terms markedly different from the FAI policy which is relevant in this action. Neither Antico nor East End was concerned with a policy containing a condition extending cover in particular circumstances for claims made outside the policy period as does FAI's condition 3.
However Mr Bain for FAI submitted that FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89 applied, although the majority in Antico expressly rejected an argument which relied on the majority decision in Perry. Condition 3 of the FAI policy which concerned me here was the very same provision analysed in Perry concerned an FAI policy which contained an identical condition 3 as that in FAI's policy here, Antico did not. In Perry the NSW Court of Appeal) (Gleeson CJ and Clarke JA, Kirby P dissenting) held that s. 54 did not operate to prevent the insurer refusing to indemnify the insured where an insured had failed to notify FAI of an occurrence during the relevant period. Gleeson C.J. held that the insured's failure to notify the insurer of the occurrence which gave rise to a claim outside the period of cover was not an omission within the meaning of s. 54 because the insured had a choice whether or not to notify the insurer and thereby expand the cover of the policy. By condition 3 FAI was to indemnify an insured where the insured, during the period of cover becomes aware of an occurrence and hence the possibility of a future claim and, as Gleeson CJ pointed out (at 93), “if he or she chooses to do so”, notifies the insurer and thus extends the cover to “future claims in respect of occurrences discovered and notified during the relevant period”. Clarke J.A. held s. 54(1) did not assist the insured because the insured lost no previously existing right by reason of that failure to notify. Kirby P. (dissenting, at 101) described the relevant provision as providing a “notional definition of when” a claim is made.
Gleeson CJ, at 92, analysed condition 3 of the policy as follows:
“The policy provides a good example of the difficulty, emphasised by this Court in East End, involved in the distinction, in a contest such as the present, between provisions defining the scope of cover and conditions affecting the entitlement to claim. If one applies such a distinction, on which side of the line does condition 3 fall? It provides that, if two specified events occur (awareness of an occurrence and notification to the insurer) then any claim that is later made is deemed to have been made (and by implication, reported) during the relevant period.”
In holding that the insurer was not liable under the policy, Gleeson C.J. at 93 said:
“The appellant submits that all that happened was that the respondent, having what was in effect a right of election to expand the scope of the cover to make it what counsel described as ‘an occurrence discovered and notified’ policy, failed, either deliberately or inadvertently, to exercise that right. According to this argument, it is one thing, as in East End, to treat a failure to notify an insurer of a claim made against the insured as an omission; it is another thing so to describe a failure to exercise a right to elect to expand the scope of the policy.
The question is rather similar to one that was referred to, but left open, in East End (at 405E). It concerns the meaning in s. 54 of the concept of an entitlement to refuse to pay a claim by reason of someone's act or omission. The Court rejected the argument that the concept was limited to breach of a condition other than one affecting the scope of the cover, but it adverted to the consideration that there would be cases where inaction on someone's part could not relevantly constitute an omission. The words inaction and omission are not synonyms. ... Here the primary cover afforded by the policy is cover against claims made and reported during the relevant period. ... There could be reasons why an insured would choose not to do so. The possibility of a future claim might, for a number of possible reasons, be regarded as remote. Notification might indirectly affect future premiums. When one is dealing with claims that are mere future possibilities, a decision not to elect to expand the scope of the cover to include such claims does not seem to me to constitute an omission of the kind with which s. 54 is concerned. Condition 3 is intended to relieve an insured (in a way that is similar but not identical to the relief given by s. 40 of the Act) against a certain practical problem that can arise in liability insurance. It does that by giving the insured a choice. The insured may choose not to follow the course made available by condition 3. In that event I am unable to conclude that the absence of liability on the insurer is by reason of an omission on the part of the insured within the meaning of s. 54.”
Both East End and Perry were considered in Junemill Limited (in liq) v. FAI General Insurance Co. Ltd.. (1996) 9 ANZ Insurance Cases 61-315 (at first instance) and in Drayton v. Martin (1996) 137 A.L.R. 145, the former concerning a provision identical to condition 3 and the latter involving an FAI policy in similar, but not identical terms to condition 3. In Drayton Sackville J. found that the claim there was made during the period of cover. He said, at 171:
“I think that, at least where an insured, under a claims made and reported policy, fails to comply with a contractual obligation to report a claim made within the policy period, there is an ‘omission’ for the purposes of s. 54 of the IC Act. That is so whether the failure is due to a deliberate ‘election’ by the insured not to make the notification or report, or to some other reason, such as mistake or inadvertence.”
Drayton was decided before Antico but Sackville J considered the NSW Court of Appeal decision which was appealed from (Antico v. C.E. Heath Casualty and General Insurance Ltd. (1995) 8 ANZ Insurance Cases 61-268). There Kirby P declined to follow the reasoning of Clarke J.A. in Perry and although not resiling from his dissent in Perry, followed the reasoning of Gleeson CJ, confining it to the case where the insured has a choice whether or not to notify the insurer of circumstances which might, in the future, give rise to a claim against him. Sackville's reasons contain what is, respectfully, a useful summary of the positions then taken on s. 54 with respect to failure to notify the insurer under various “claims made and notified” policies, (at 169-170):
“[In Perry, the insured] became aware of his negligence (and perhaps the loss caused) during the period of insurance. A claim was made against him outside that period and he notified the insurer after receiving the claim.
Gleeson CJ (at 92) declined to apply a distinction between provisions defining the scope of the cover and conditions affecting the entitlement of an insured to claim. Such a distinction would allow the case to be determined by the skill of the draftsman and thus represent a triumph of form over substance. ... His Honour saw the answer as resting on the distinction between an omission and mere “inaction”. He pointed out (at 93) that, in East End, the claim was made during the period of cover and there was a condition requiring prompt notification of claims....
Clarke JA also concluded that s. 54 did not apply, but relied on somewhat different reasoning. He took the view that s. 54 applies only where there is a pre-existing right which is lost by virtue of the insured's failure to notify the insurer. He considered that there was no right in the insured to claim under the policy in Perry until the insured notified the insurer.
In Antico, Kirby P declined to follow the reasoning of Clarke JA in Perry. (The remaining members of the Court of Appeal, Priestley and Powell JJA, did not need to address this issue.) Kirby P, although not resiling from his dissent in Perry followed the reasoning of Gleeson CJ. However his Honour confined Gleeson CJ's reasoning to the case where the insured has a choice whether or not to notify the insurer of circumstances which might, in the future, give rise to a claim against him.”
At 170-171, Sackville J referred to Mahoney JA's view of s. 54:
“The choice referred to by Gleeson CJ in Perry was an election under the terms of the policy to expand the scope of cover to include future claims that might be made. Even if Gleeson CJ's reasoning is not to be confined in the manner suggested by Kirby P, his Honour was not referring to the motivation underlying an insured's failure to comply with the contractual obligation to report a claim. The judgments in East End do not suggest that a different result would have been reached had the insured deliberately decided not to report the claim during the period of cover. Mahoney JA's reasoning expressly links the word “omission” in s. 54 to a failure to perform a contractual obligation, and does not suggest or imply that the motive for the failure is in any way relevant. Indeed, although no finding was made as to the motivation underlying the insured's failure, it would hardly seem to have been inadvertent. The claim was made against the insured during the period of cover, resulting in a judgment only six weeks after the end of that period.”
These issues did not arise on the appeal in Junemill (1997) 9 ANZ Insurance Cases 61-377. Although Dowsett J's decision at first instance was overturned, he also summarised the opposing positions in East End and Perry and seemed to indicate a preference for the majority's reasons in Perry although he was to hold on the facts as he found them that Perry was not relevant for his purposes. At p. 76,495 Dowsett J. said:
“In Perry the majority (Gleeson C.J. and Clarke J.A., Kirby P. dissenting) distinguished between an omission by the insured to perform an act (which failure would be excused by s. 54) and an election by the insured not to extend its cover by notifying the insurer pursuant to condition 3 or s. 40(3) of the facts which might give rise to a claim in the absence of such a claim (which would not be so excused). This distinction appears unsatisfactory from a practical point of view. Gleeson C.J. characterised the non-notification as a choice not to follow “the course made available by condition 3” (at 93). Clarke J.A. described it as not exercising “an option to give notice of those facts” (at 106). To so characterise the absence of notice requires an assumption as to the state of mind of the insured at the relevant time. It is possible that an insured might elect not to notify the insurer for the reasons given by Gleeson C.J. and Clarke J.A., but on the other hand, it is also possible that such a person might simply omit to do so because of an oversight. Presumably, that would be an omission rather than an election. It would be unsatisfactory if the application of s. 54(1) were to depend upon an examination of a subjective intention of the insured to determine whether or she failed to notify the insurer or elected not to do so.
... The plaintiff submits that I should prefer the views of Kirby P. to those of the majority. Whilst I have some reservations about [Perry], I would be inclined to follow it if I considered it to be in point, leaving it to the Court of Appeal to consider its correctness”.
Mr Bain argued that Perry is still good law and applies here because Antico was concerned with a differently worded policy, and that there was a stark contrast between the policy construed in Antico and FAI's policy in Perry as here such that s. 54 has no application. As he submitted the focus of Antico was the combined effect of two provisions, the first which explicitly extended cover subject to the second which, in certain circumstances limited it, in other words an extant contractual promise to pay subject to defeasance in certain circumstances, and that the existence of that promise and the conducted of the insured made relevant by the exclusion clause in Antico was in stark contrast to condition 3. He submitted that the discrimen between the two positions could be put as simply as on the one hand, there having been insurance, subject to the question of consent (Antico) and on the other, no insurance, unless erected by the insured's having made a choice and having given a corresponding notice (Perry). Shortly stated, he submitted that condition 3 provides a mechanism for extending cover outside the period, and the failure to give notice of the “occurrence” is not simply an “omission” as defined by s. 54(b)(a) as it occurred when the policy was not “in place” or for circumstances on which s. 54(1) would not operate. As he pointed out, the policy considered in East End made no provision for extending the cover but contained a mandatory covenant on the part of the insured, which obliged the insured to notify the fact of a claim during the period of the cover, in contrast to condition 3 of the FAI policy.
Both East End and Perry were mentioned by the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 71 ALJR 1210. The High Court held that s. 54, being remedial in character, was to be construed so as to give the most complete remedy consistent with the actual language employed, and to which its words are fairly open. It also held that the failure by the insured to provide information to the insurer and otherwise comply with various conditions in the policy such as the procedure for appointing legal representatives, were omissions within s. 54(1). The majority (Brennan CJ dissenting on grounds irrelevant to the Perry argument) held that the insured's failure to comply with a condition obliging the insured to obtain the insurer's consent was an omission to which s. 54(1) applied. The Court approved and adopted the beneficial construction of s. 54 given by Gleeson CJ in East End. Brennan CJ said (71 ALJR at 1213):
“Subsection (1) of s. 54 focuses not on the legal character of a reason which entitles an insurer to refuse to pay a claim - falling outside a covered risk, coming within an exclusion or non-compliance with a condition - but on the actual conduct of the insured, that is, on some act which the insured does or omits to do. The legal classification of the act or omission is immaterial. The act or omission must have occurred “after the contract was entered into” so that subsection (1) does not operate to alter the contractual promise of the insurer to pay a claim. It is engaged when the doing of an act or the making of an omission would excuse the insurer from an obligation to pay a claim for a loss actually suffered by the insured.”
However the majority expressly rejected the view that s. 54 does not operate where the insured has failed to exercise a right. In their joint judgment, Dawson, Toohey, Gaudron and Gummow JJ's said (71 ALJR at 1218):
“Section 54 does not postulate a liability of the insurer to pay a claim which has been made. Rather, it takes as its starting point the existence of a claim and a contract the effect of which is that the insurer may refuse to pay the claim. The section directs attention to the reason founding the refusal, namely a particular act or omission on the part “of the insured or of some other person ... Section 54(1) ... does not specify the act or omission of the insured as being a failure to discharge an obligation owed by the insured to the insurer.
...
The legislation is expressed in broad terms and, on its face, there is no reason why the omission of the insured may not be a failure to exercise a right, choice or liberty which the insured enjoys under the contract of insurance. In any event, the act or omission may I be that of a third party, “some other person”, who is unlikely to be a party to the contract of insurance in question. Submissions by the [insurer] which were contrary to the above construction of s. 54(1) and which apparently were based upon the reasoning of the New South Wales Court of Appeal in FAI General Insurance Co v. Perry (1993) 30 NSWLR 89 at 93,107, should be rejected.”
Was there here then only an omission - the failure to give notice in accordance with condition 3, or was the situation such that the contract to provide cover for a claim outside the policy period was not in effect as the insured had not elected to extend cover by giving such notice. It is not appropriate to rely on the distinction between inaction and omission as did the majority in Perry (30 NSWLR 89 at 93,187) which approach was clearly disapproved by the High Court in Antico. Secondly, any suggestion that s. 54 does not apply because the making of the claim against the insured is something required in order that the insurance cover attach and is not a mere condition restricting the insured's right to recover is a distinction which was rejected in East End (at 303-4), in Perry (at 92) and in Antico (71 ALJR at 1218). Further, the distinction which was suggested be drawn between something an insured was obliged to do, such as give notice of a claim and being an “omission” if the person does not do it, and something a person might choose to do (and therefore a mere non-event if the person does not do it) was plainly rejected by the High Court in Antico.
It seems to me that the only relevant distinction between cases such as East End and Antico on the one hand and Perry on the other is that in the former the insured omitted to do something, and in the latter, something did not happen. If an insurer refuses to indemnify because the insured omitted to do something, then the refusal being made because of that omission activates s. 54. However, if the insurer refuses an indemnity because something did not happen (for example, in respect of a policy without an occurrence notification clause, a claim was not made) then that might not be an omission to which s. 54 could apply, even though it could also be said there that a claim would have been made if a third party had made a claim. Thus an insurer might refuse a claim for an indemnity for property destroyed by flood, where the policy covers only loss by fire. It could hardly be said that s. 54 arises because an arsonist omitted to burn the building before the rains came. Cf. Chan Muk-Ying v Triparthi [1993] 2 Qd.R. 599 where Ryan J held that s. 54 did not apply because the exclusion clause operated in respect of the act (the dishonest act of an employee of the insured) which, apart from the exclusion clause, would have involved the insurer in liability in respect to the claim.
Thus, if the reason for the refusal is that the act or the circumstances insured against did not occur, then that would suggest that the essence of the insurer's reason to refuse liability is the non-occurrence of an event rather than the omission of a person to do something. However, it was decided in East End, albeit on a differently worded policy, that in substance the circumstance insured against was the making of a claim against the insured and that notification of that claim was something the insured was required to do, or in other words, that the making of the claim against the insured and the notification of that claim to the insurer were together the circumstance insured against which had to occur within the policy period. Thus, if the insured has an obligation to do something and recovery is refused for the reason that this thing was not done, then the gravamen of the reason for the refusal is that the insured omitted to do it rather than that the event did not occur. In this way the result in Perry stands with what was said in Antico. Having regard to the relevant terms of the Perry policy, one could then say that the gravamen of the refusal in Perry was the non-occurrence of a claim during the insurance, or of anything else deemed to be a claim, and not that the insured omitted to notify the insurer of the circumstances.
Accordingly, a refusal by FAI to pay AHC on the ground that no claim was actually made within the period of the policy and that no claim is deemed to have been made, focuses on the non-occurrence of an event, rather than the omission of the insured or anyone else to do something. In that case, s. 54 does not apply.
However, that analysis does not stand with Brennan C.J's analysis of s. 54(6)(4a), in explaining that the question in Antico, was whether, if an act which the insured omitted to do had been done, the insurer would have been entitled to refuse to pay the insured's claim. Questions of sufficiency of causal connection which arise, at several stages, in an analysis of s. 54 were also considered in Antico. Brennan CJ said (71 ALJR at 1213-1214):
“Subsection (6)(a) extends a reference to an act in earlier subsections to a reference to an omission. In the context of s. 54, an omission is that by reason of which an insurer is entitled to refuse a claim. In that context, therefore, an omission is the non-performance of an act, which, if done, would disentitle the insurer to refuse to pay a claim. To state the definition in that way involves, of course, an hypothesis and a double negative. However desirable in the interests of simplicity it would be to avoid such a definition, the text of the subsection does not permit simplification. The true meaning of omission in the context of s. 54 is critical to the resolution of the present case. The act must be done or the omission made by ‘the insured or ... some other person’. Section 54 could not have been intended to include the insurer within the “some other person” category, so the section focuses on the act or omission of the insured or of a third party.
... The present appeal is not concerned with the effect of the omission on the insurer's interests. That question, which arises under the concluding provisions of sub-s (1), was considered in Ferrcom Pty Ltd v. Commercial Union Assurance Co of Aust Ltd (1993) 176 CLR 332 at 340. As that case indicates, the effect of an omission on an insurer's interest arises only if the omission is one to which s. 54 applies. In other words, the effect of an omission on an insurer's interests arises only if the insurer would not have been entitled to refuse to pay had the omitted act been done.”
The majority's analysis of the various stages of causal connection confirms this and on that basis I must refuse to follow or apply Perry. The majority said (71 ALJR at 1219-20):
“The first [of those stages of causal connection in s. 54] was indicated in the joint judgment of this Court in Ferrcom Pty Ltd v. Commercial Union Assurance Co of Australia Ltd where it was said (at 339-340):
“Section 54 prescribes the effect to be attributed to two classes of “act”: an act that “could reasonably be regarded as being capable of causing or contributing to [the] loss [s. 54(2)] and an act that could not reasonably be so regarded. Subsection (1) relates to acts or omissions occurring after the contract of insurance is entered into that could not reasonably be regarded as being capable of causing or contributing to the loss; subsections (2)-(4) relate to acts or omissions that could reasonably be regarded as being capable of causing or contributing to the loss.”
...
The question of sufficiency of causal connection which is significant to the present case arrives at the next stage, in an analysis of s. 54(1).”
In turning to consider whether “by reason of” certain omissions, the effect of the relevant policy, but for s. 54(1) would be that the insurer might refuse to pay the claim, the majority explained, at 1220 (188 CLR at 673):
“The phrase “by reason of” does not express a limitation to the sole or unique cause of the entitlement of the insurer to refuse payment. Rather, s. 54(1) refers not to precise concepts of form, but to the effect of the contract, and asks whether that effect is that the insurer may refuse payment “by reason of” the relevant act or omission.
The point is illustrated by consideration of a passage in the judgment of Mahoney JA in East End Real Estate Pty Ltd v. C.E. Heath Casualty and General Insurance Ltd (1991) 25 NSWLR 400. That case decided that, where a policy of professional indemnity insurance indemnified the insured against claims first made within the period of insurance and notified the insurer during the period of cover, s. 54 operated so that the insurer might not refuse to pay the claim merely by reason of the circumstance that the claim was notified to the insurer after the expiration of the period of insurance cover.”
The policy considered by the High Court in Antico contained no provision equivalent to condition 3 in the FAI policy, and so the submissions made by the insurer there in attempting to rely on Perry were probably misconceived, the High Court did canvass and reject a construction of s. 54 which does not extend the benefit of s. 54 to an insured relying on a condition such as condition 3. It rejected the distinction between a failure to notify and an election not to notify as was drawn by Gleeson CJ in Perry and approved by Kirby P (as he then was) in the judgment of the New South Wales Court of Appeal in Antico. Section 54(1) is expressly concerned with the “effect of the contract”, its immediate focus is not concerned with when the cover does or does not arise. The omission relates to an indemnity for a claim arising outside the period of the policy, but this does not give rise to an election in the insured to enter another contract with the insurer, it is simply cover for which provision is made under the extant contract. Accordingly s. 54(1) applies, and FAI may not refuse to indemnify AHC under the FAI policy.
Would Lloyds have been liable?
In case I am wrong in my conclusion that FAI is liable, I now consider AHC's claim against Lloyds.
Lloyds' insurance covered the period 20 June 1992 to 20 June 1993. AHC received a “claim” within meaning of Lloyds' policy on about 5 October 1992, that is during the currency of the policy, and notified Lloyds of the claim in about December 1992. Lloyds defence relied firstly on an exclusion clause in its policy and secondly, on ss. 21 and 28 of the Act, alleging non-disclosure which amounted to misrepresentation. In essence Lloyds asserted that facts known to AHC which AHC failed to disclose amounted to matters relevant to the decision of the insurer whether to accept the risk and if so on what terms, and either were known by AHC to be relevant or were such that a reasonable person could be expected to know them to be relevant (s. 21) or might expect that those matters to be the basis of a claim (the exclusion clause), and there was a failure to disclose those matters or there was a misrepresentation concerning those matters (s. 21) by reason of AHC's answers in its proposal. As a result Lloyds claimed it was then under no liability to indemnify AHC because the exclusion clause operated or that it would have excluded the risk from the policy had AHC disclosed those matters or not misrepresented them.
Lloyds' contract of insurance
The Lloyds' contract of insurance for the period 20 June 1992 to 20 June 1993 relevantly provides:—
- “2.‘WE, THE UNDERWRITERS, to the extent and in the manner hereinafter provided, HEREBY AGREE to indemnify the Assured against all sums which the Assured shall become legally liable to pay as damages arising out of any bodily injury, mental injury, illness, disease or death of any patient caused by any negligent act error or omission committed by the Assured in or about the conduct of the Assured's occupation or business as stated in the Proposal or Declaration, or Good Samaritan Acts, (hereinafter referred to as ‘Malpractice’);
and pay in addition to the Limit of Indemnity all defence costs, expenses (including Claims handling) incurred with Underwriters' consent, such consent not being unreasonably withheld, in connection with any Claim which falls within this policy.
...
PROVIDED ALWAYS THAT
- a)such Malpractice results in a Claim being first made against the Assured during the Period of Insurance as stated in Item 7 of the Schedule and of which immediate notice has been given in accordance with Special Condition 2”.
...
DEFINITIONS
...
- (iii)The expression ‘Claim’ shall mean any of the events which the Assured is required to give notice to Underwriters in accordance with Special Condition 2.
EXCLUSIONS
Underwriters shall not be liable for:—
...
- (ii)any Claim arising out of any Malpractice occurring prior to the inception date of this policy if the Assured on such date knew or could have reasonably foreseen that such Malpractice might be expected to be the basis of a Claim.
- (iii)any Claim arising from any circumstance or occurrence which has been notified under any Insurance incepting prior to this policy.
SPECIAL CONDITIONS
Subject to the conditions of Section 54 of the Insurance Contracts Act 1984 (hereinafter referred to as the Act), the following are conditions precedent to the right of the Assured to be defended or indemnified under this Insurance that:
- 1) a)the statements and particulars contained in the Proposal attached hereto are true; and
- b)during the Period of Insurance the Assured shall give immediate notice in writing of any alteration which materially affects the risk; and
- 2)during the Period of Insurance the Assured shall give immediate notice in writing of:
- a)any claim for Malpractice or alleged Malpractice made against the Assured or
- b)the receipt of notice from any person of an intention to hold the Assured responsible for any Malpractice or
- c)any conduct or circumstance which is likely to give rise to a Claim for Malpractice being made against the Assured;
to the person named in item 9 of the Schedule; and ...”.
- On the facts as I have found them, Lloyds did not prove that AHC knew of the particular negligent act or omission in respect of Dr Tampoe's contraction of septicaemia at the relevant time. The Lloyds defence also turns on what a “reasonable person could be expected to know to be a matter relevant to the insurer to accept the risk” (s. 21(1) (b)) and on whether, prior to 20 June 1992 (the inception date of the policy), AHC “could have reasonably foreseen” that Dr Tampoe's contraction of septicaemia while being treated in the hospital “might be expected to be” the basis of the claim (the exclusion clause). The question for Lloyds in respect of s. 21 and the exclusion clause are similar in some respects to that which concerned FAI in disputing that AHC was “aware of an occurrence”. The operation of s. 21 and the exclusion clause against AHC depends not only upon the knowledge of AHC but also on a possibility, by reference to the relevant adverb “could” (s. 21) and “might” (the exclusion clause).
non-disclosure and misrepresentation
Section 21 is found in Part IV of the Act which contains a statutory code regulating matters of non-disclosure and misrepresentation. Section 33 provides:
“The provisions of this Division are exclusive of any right that the insurer has otherwise than under this Act in respect of a failure by the insured to disclose the matter to the insurer before the matter was entered into and in respect of a misrepresentation or incorrect statement”.
In Advance (NSW) Insurance Agency Pty Ltd v Matthews (1989) 166 CLR 606 at 615 the High Court described the effect of s. 33:
“The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entering into a contract with the provisions of Part IV. To that extent Part IV is a statutory code which replaces the common law. Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statutes are extremely limited.”
Section 21 of the Insurance Contracts Act 1984 provides for the duty of an insured to disclose to an insurer matters which the insured, or a reasonable person in the circumstances knows, or could be expected to know, are relevant to the decision of the insurer to accept the risk and if so, on what terms. It provides :
- “21. (1)Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that -
- (a)the insured knows a matter to be relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or
- (b)a reasonable person in the circumstances could be expected to know to be a matter so relevant.
- (2)The duty of disclosure does not require the disclosure of a matter ...
- (d)as to which compliance with the duty of disclosure is waived by the insurer. ..”
Section 26 of the Act defines the circumstances when statements in a proposal will not amount to a misrepresentation:
- “26 (1)Where a statement was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that he held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation.
- (2)A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.”
Each of the questions on the proposal was answered and those answers on their face were not obviously incomplete or irrelevant. Thus s. 21 of the Act does not operate to deem that Lloyds waived compliance with AHC's duty of disclosure. Undoubtedly the occurrence (the contraction of septicaemia while being treated at the hospital and Corrs letter) was not disclosed to the insurer. Lloyds did not suggest that the failure to disclose the matters which it claimed were relevant to its decision whether to accept the risk, was fraudulent. The answer to Question 16 of the proposal was not absolutely accurate as AHC had become aware during subsistence of FAI's policy and prior to entering Lloyds' contract, of matters which might subsequently give rise to a claim. AHC, before this policy was entered into, had failed to disclose matters which it knew or a reasonable person could be expected to know were material to the insurer and which, if disclosed, would have led to the exclusion of any cover in relation to the Tampoe incident. Lloyds tendered the AHC's answer to an interrogatory to which is annexed a copy of a letter sent on the first defendant's instructions by its solicitors to FAI's solicitors on 7 January 1994, stating:
“During the subsistence of the relevant policy, our client became aware of an occurrence which might subsequently give rise to a claim (letter from Corrs Chambers Westgarth dated 10 July 1991).”
AHC was concerned about its insurance when Corrs sought access to the hospital file, learning that Dr Tampoe had retained solicitors, AHC responded with a “without prejudice” letter and arranged a meeting with those solicitors. It did not follow its own policy of advising its insurer of Corrs' request or of the meeting with Dr Tampoe's solicitors. These matters and Dr Tampoe's contracting life threatening septicaemia while being treated in the hospital were matters known to AHC. Nor did Mr. Cahill or Dr. Kay ascertain that there would be no claim when AHC had not heard from Dr Tampoe or his solicitors - which would have been what one would have expect would have been done having regard to the hospital's own policy and what Dr. Kay had been told at the meeting and reported to Mr Cahill. AHC was aware, at least of the possibility of a future claim by its receipt of the letter.
The only evidence as to the relevance of the non-disclosure of these matters to the insurer was Miss Bellingham's uncontradicted evidence that had the occurrence and the contact with the solicitors been disclosed, Lloyds would not have covered that risk. Thus there was no issue arising as to whether or not, for the purposes of s. 21, a reasonable person in the circumstances could be expected to know that the matter was relevant.
The non-disclosure of the occurrence amounts to a misrepresentation, and AHC breached the duty of disclosure in s. 21.
Remedies for non-disclosure and misrepresentation
The insurer's remedies for non-disclosure and misrepresentation relevantly appear in section 28:
- “(1)This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into:
- (a)failed to comply with the duty of disclosure; or
- (b)made a misrepresentation to the insurer before the contract was entered into;
but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the representation before the contract was entered into.
- (2)If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.
- (3)If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made.”
However, Lloyds cannot rely upon non-disclosure and misrepresentation to obtain the remedy under s. 28 avoid the policy or to reduce its liability to nil even though it has established that, were it not for the insured's failure to comply with its duty of disclosure, it would not have accepted the proposal at all (cf. Orb Holdings Pty Ltd v Lombard Insurance Co (Australia) Ltd [1995] 2 Qd.R. 51 at 52, 57-58). On the facts as I have found them Lloyds entered the policy without relying on the proposal form, thus there was no reliance by Lloyds upon the non-disclosure, that is, in terms of s. 28(1) that Lloyds would have entered into the contract for the same premium and on the same conditions even if AHC “had not failed to comply with the duty of disclosure or had not made the representation before the contract was entered into”. Although an insured is under an obligation to disclose every matter known to him or her which he or she knows to be relevant to the decision of the insurer as to whether or not to effect the policy of insurance or matters which a reasonable person in the circumstances of the insured knows to be so relevant, Lloyds is not entitled to the remedy provided by s. 28.
The effect of Lloyds' entering the contract without relying on the proposal is not changed by provisions in the proposal and the contract as to the basis of contract clause incorporating the answers into the policy.
The exclusion clause (ii)
The burden of proving the facts attracting the operation of this clause rests on Lloyds: see Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510; K Sutton, Insurance Law in Australia, 2nd ed., Law Book Company, 1995, 553 et seq. Exclusion clause (ii) does not rely on what a reasonable person could be expected to know to be relevant to the insurer's decision to accept the risk (as in s. 21(1)(b)), but upon the insured's knowing that “such malpractice might be expected to be the basis of a claim” or upon the circumstances being such that the insured “could have reasonably been foreseen” that. The question then is whether AHC could “reasonably have foreseen” that such malpractice might be expected to be the basis of a claim.
Mr Dutney QC, for Lloyds, submitted that the phrase “might be expected” in that provision means “a real possibility ... as distinct from a fanciful possibility or really something that you couldn't be expected to take seriously...”, or that there is a “likelihood” of that occurring. Mr Couper for the AHC referred to similar words used in the former s. 592 of the Corporations Law, which imposes liability where there were “reasonable grounds to expect” that a company would be unable to pay its debts. This phrase was said to mean, in 3M Australia Pty Ltd v Kemish (1986) 4 A.C.L.C. 185, something “beyond a mere scope or possibility”, and that to say “expecting” was very different from “suspecting”. It is synonymous with “predicting”. His Honour also referred to the Shorter Oxford English Dictionary definition of “expect” that “being to regard as about to happen: to anticipate the occurrence or the coming of.” Rolfe J in Southern Star Group Pty Ltd t/a KGC Magnetic Tapes v Taylor & Ors (No 2) (1991) 9 A.C.L.C. 1.211 quoted the above passage when considering the meaning of “expect”. Tadgell J in Commonwealth Bank of Australia v Friedrick & Ors (1991) 9 A.C.L.C. 946 said that neither) “suspect” or “anticipate” should be equated with the word “expect” and “mere suspicion will not afford evidence of ... expectation” as in its extended idiomatic form “expect” was often used to convey the sense of “expect to find” or “expect that it will turn out that”, and that there was “a measure of confidence is built in”. I take it to mean neither more nor less”. Debbelle J in Carrier Air Conditioning Pty Ltd v Kurda & Ors (1993) 11 A.C.L.C. 763 (with Cox and Duggan JJ agreeing) approved of Tadgell J's view: “It (‘expect’) is to be understood according to its usage in ordinary parlance, namely, “to regard as likely to happen” or “to expect to find” or “to expect that it will turn out that”.
Thus on the proper interpretation of the clause “reasonable grounds to expect” as it appears in the Corporations Law, a mere suspicion is not enough. An appreciation of the possibility is not enough. There must be, as the cases suggest, an expectation or understanding, properly understood and reasonably based that something is likely to happen. Although Dr Kay did not make inquiry of anyone other than the medical practitioners, the only other evidence of investigations into the cause of the septicaemia was that in the doctors' reports which were tendered, and they did not suggest any breach of duty had been the cause of his illness. I cannot, with hindsight, find that AHC “had reasonable grounds to expect” that its negligence might be expected to be the basis of a claim. But this is not the issue. The element of certainty attaching to the word “expect” is somewhat qualified by the element of possibility or conditionality rather than probability introduced into the exclusion clause by the adverb “might”. AHC did not know at the relevant time in what relevant respect there had been a breach of duty. But any reasonable person in the position of AHC would have been aware that this very issue, negligence on the part of AHC, had been raised by Corrs' letter, sufficient one would have thought to raise the alarm bells, as it did in August 1991, and as it should have again when prompted by the words in Question 16 of the proposal. I am satisfied then that Lloyds may rely on the exclusion clause to deny liability. No argument was advanced by AHC as to whether or not s. 33 has the effect of denying Lloyds the benefit of the exclusion clause.
Costs
As FAI is required to indemnify AHC, the issue arises as to whether that indemnity should extend to Lloyds' costs. At the trial AHC made no attempt to support the case first pleaded against FAI, that is that it received an intimation of a claim during the subsistence of FAI's policy. FAI suggested that AHC had been induced to join FAI by Lloyds' letter of 27 January 1994 to AHC's solicitors, where Lloyds spelt out its view that the Corrs' letter of 10 July 1991 amounted to a claim being made during FAI's cover. Secondly, Lloyds clearly stated the two reasons why they were not liable and pursued these at the trial. Lloyds asserted AHC should be indemnified under the FAI policy in accordance with the principles in East End and that the circumstances were distinguishable from those in Perry. AHC then obtained Queen's Counsel's advice and then advised Lloyds that there was no foundation for a claim under the FAI policy. It was said that AHC did not believe the claim fell within FAI's policy, as senior counsel retained by FAI had confirmed this view was correct and at the trial AHC made no real attempt to establish that FAI was liable.
However I have found that, in the relevant circumstances, the effect of the High Court's decision in Antico is that s. 54 so operated that FAI could not refuse to pay the indemnity.
The joinder of Lloyds was then reasonable and proper: Gould v Vaggelas (1984) 58 ALJR 560 at 565-6,574, 579. Costs are in the discretion of the court, a discretion to be exercised judicially: Rules 137 and 363 of the District Court Rules. Normally costs follow the event, and on that basis Lloyds should have their costs. However, AHC submitted that FAI should pay Lloyds' costs, either directly a Sanderson order: Sanderson v Blythe Theatre Company [1903] 2 KB 533), or by indemnifying AHC in respect of those costs: (a Bullock order): Bullock v London General Omnibus Co [1907] KB 264.
It is not sufficient for the making of a Bullock order that it was reasonable for a plaintiff to bring the proceedings against two defendants, although sometimes the conditions for making a Bullock order is stated in that way (e.g. Johnsons Tyne Foundry Pty Ltd v Massra Corporation (1948) 77 CLR 544 at 556). One statement of principle is that the order may be made where the costs have been reasonably and properly incurred by the plaintiff as between it and the unsuccessful defendant (e.g. Massra Corporation at 572-3; Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd (1984) 157 CLR 149 at 163; Gould v Vaggelas at 247, 229). It has also been said that the conduct of the unsuccessful defendant must have been such as to make it fair to impose some liability on it for the costs of the successful defendant, or that the conduct of the unsuccessful defendant must show that the joinder of the successful defendant was reasonable and proper to ensure recovery of the damages sought (Gould v Vaggelas at 229; Lackersteen v Jones (No 2) (1988) 93 FLR 442 at 449). The difference in formulation is probably more apparent than real because the issue of reasonableness as between the plaintiff and the unsuccessful defendant will normally be answered by some conduct to the unsuccessful defendant which made it proper that the successful defendant be joined or that the unsuccessful defendant should bear the costs of the successful defendant. Such conduct was found in Lackersteen v Jones (where the unsuccessful defendant denied the authority of its agent so that the plaintiff joined the agent who became the successful defendant), and on a wider basis, has been found where an unsuccessful defendant informs the plaintiff in one way or another that it should look to the successful defendant for its remedy (Altamura v Victorian Railways Commissioner [1974] VR 33; Gould v Vaggelas). The fact that AHC claimed against Lloyds first was of its own choosing. FAI should not be burdened with Lloyds' costs.
FAI should pay AHC's costs of defending the action on an indemnity basis.
Judgment and Orders
- 1.I dismiss the first defendant's claim against the first third party. I order that the first defendant pay the first third party's costs of and incidental to these proceedings to be taxed if not agreed, on a scale appropriate where the amount recovered is more than $50,000;
- 2.I give judgment for the first defendant against the second third party in the sum of $98,000.00.
- 3.I order the second third party indemnify the first defendant in respect of the first defendant's costs of its defence in the action against the plaintiff.
- 4.Liberty to apply.