Avant Insurance Ltd v Burnie

Procedural Context

1. The Plaintiff commenced proceedings in the District Court of New South Wales against Mr Blackstock claiming damages on the basis that Mr Blackstock breached a duty of care owed to her by failing to treat her with due care and skill when carrying out a procedure for breast augmentation on 27 October 2016 (the Procedure) and that that breach resulted in loss or damage. By notice of motion filed on 17 October 2018 (the Joinder Motion), the Plaintiff sought leave under the Third Party Claims Act to join Avant Insurance as a defendant in those proceedings. On 14 August 2020, a judge of the District Court (the primary judge) granted the Plaintiff leave to file an amended statement of claim joining Avant Insurance as the second defendant in the proceedings (the Amended Statement of Claim).
2. By the Amended Statement of Claim, the Plaintiff alleges that, at all material times, Avant Insurance was the insurer of Mr Blackstock and that Avant Insurance is joined pursuant to s 4 of the Third Party Claims Act. No other allegation is made against Avant Insurance as the basis for liability of Avant Insurance to the Plaintiff. Specifically, the Amended Statement of Claim does not specify the basis upon which it is alleged that Avant Insurance was the insurer of Mr Blackstock or is liable to indemnify Mr Blackstock in respect of any liability that he may have to the Plaintiff.
3. Avant Insurance now seeks leave to appeal from the order made by the primary judge on 14 August 2020. Leave is necessary because the orders made by the primary judge were interlocutory. A direction has been given that the application for leave and the appeal if leave be granted be heard concurrently.
4. Mr Blackstock is a party to the application for leave to appeal to this Court but has not appeared. However, he has been notified of Avant Insurance's application for leave to appeal and his solicitor has informed the solicitors for Avant Insurance that he has no interest in the appeal, does not want to take part in the appeal and does not want to make any submissions in relation to the appeal either in person or remotely.

The Relevant Insurance Contracts

1. It is common ground that, as at 27 October 2016, Avant Insurance and Mr Blackstock were parties to a contract of insurance (the First Policy) that provided indemnity for the period 1 July 2016 to 30 June 2017 (the First Policy Period). A further contract of insurance (the Second Policy) was entered into between Avant Insurance and Mr Blackstock for the period 1 July 2017 to 30 June 2018 (the Second Policy Period). The terms of the Second Policy were varied on 18 April 2018 in respects that are not presently relevant. However, on 26 April 2018, Avant Insurance notified Mr Blackstock in writing that, by reason of failure by Mr Blackstock to pay an "outstanding deductible debt", the insurance under the Second Policy ceased as of 11.59 pm on 24 April 2018.
2. The Amended Statement of Claim makes no reference to either the First Policy or the Second Policy (together the Policies). Further, in her reasons, the primary judge, did not distinguish between the Policies. However, on the hearing of the application for leave to appeal to this Court, it became apparent that the Plaintiff contends that Avant Insurance is liable to indemnify Mr Blackstock under the First Policy. Accordingly, it is unnecessary to deal in detail with the language of the Second Policy. In any event, the language of the Second Policy is not relevantly different from the language of the First Policy.
3. It appears that the First Policy became operative upon the acceptance by Mr Blackstock of an invitation to renew his "membership" with Avant Mutual Group Limited (Avant Mutual) and his insurance with Avant Insurance. The invitation was given in a document dated 26 May 2016 that was sent to Mr Blackstock by Avant Mutual and Avant Insurance (the Renewal Notice). The part played by Avant Mutual in any insurance is unclear. In any event, it does not appear to be material.

The Renewal Notice

1. The Renewal Notice appears to have consisted of nine pages although only pages 4 to 9 were in evidence. Pages 4 and 5 were headed "Renewal Notice and Tax Invoice". Page 6 was headed "Acceptance Conditions" and pages 7 and 8 were headed "Policy Schedule". Page 9 was blank. Page 4 of the Renewal Notice relevantly provided as follows: "This is your invitation to renew your membership with Avant Mutual Group Limited (Avant) and your insurance with Avant Insurance Limited (Avant Insurance). What you need to do to renew: Please read the enclosed documents which include your Renewal Notice and Policy Schedule, our Practitioner Indemnity Insurance Policy with the Product Disclosure Statement, and the Category of Practice Guide."
2. Details of Mr Blackstock's name, the First Policy Period, the State where he practises, the category of his practice and the amount of his billings were set out on page 4. A "Payment summary" then followed showing the total amount payable for "membership and insurance". Page 5 contained further details of the calculation of the amount payable after a deduction in respect of "premium support scheme (PPS) payment".
3. The Renewal Notice contained the following statement on page 5: "This is your notice for the renewal of your membership with Avant and your insurance with Avant Insurance. … This is also your Tax Invoice and Policy Schedule once payment has been received. … This offer is based on information you have previously provided to us and is valid for 30 days from the due date." Under the heading "Acceptance Conditions" on page 5, the Renewal Notice relevantly stated as follows: "It is important that you inform us of any changes to the details currently listed in your Renewal Notice or Policy Schedule. If you do not advise us that you require any changes to your cover or if you pay the premium (if any) in full or in part, we will regard that as confirmation that you: (a) accept this offer of renewal and the offer of retroactive cover set out in the Policy and Policy Schedule … (b) declare the Retroactive Dates specified on your Policy Schedule will cover all your prior uncovered incidents; (c) have provided complete, true and correct information … (d) understand that you have a duty under the Insurance Contracts Act that means that before you renew your Policy you must disclose to us every matter that you know or could reasonably be expected to know that is relevant to our decision to accept your Policy … (e) have read and understood the PDS, Policy Wording, Category of Practice Guide, Policy Schedule, Renewal Notice and understand that the contract of insurance will be subject to the terms, conditions and exclusions of the Policy or as otherwise specifically varied by us and agreed to by you. …"
4. Under the heading "Policy Schedule" on pages 7 and 8, the Renewal Notice specified the following matters:

• Policy Number;
• Insured;
• Member ID;
• Policy Period;
• Category of Practice;
• Sums Insured;
• Deductible;
• Retroactive Date;
• Date Issued;
• Part C - Additional Cover;
• Policy Wording; and
• Endorsements. Mr Blackstock was named as "Insured", the "Policy Period" was from 1 July 2016 to 30 June 2017, the "Retroactive Date" was 14 September 2006, the "Date Issued" was 26 May 2016 and the "Policy Wording" was "Version 4.1 1 July 2015".

The Policy Document

1. Attached to the Renewal Notice was a further document of some 42 pages (the Policy Document). The cover page of the Policy Document said: "Practitioner Indemnity Insurance Policy Product Disclosure Statement". A table of contents at pages 1 to 2 stated that the Policy Document included the following:

• Welcome to Avant;
• How your insurance works;
• Policy Wording;
• Part A - Cover for your civil liability;
• Part B - Cover for legal fees and other expenses;
• Part C - Additional cover;
• Exclusions; and
• Conduct of Claims and Requests for Indemnity. The Product Disclosure Statement (the Product Disclosure Statement) followed at pages 3 to 12.

The Product Disclosure Statement

1. At pages 7 to 12, the Product Disclosure Statement contained, relevantly, the following under the heading "How Your insurance works": "'Claims made and notified' policy Part A of the Policy operates on a 'claims made and notified basis'. This means that you need a current insurance policy to protect yourself against claims made by patients and other third parties at the time the claim is made rather than when the incident leading to the claim occurred. Part A covers You for Claims of compensation (including Legal Defence Costs) first made against You and which You notified to Us within the Policy Period when the Healthcare or Unpaid Healthcare giving rise to the Claim occurred after the Retroactive Date. … This Policy does not provide cover in relation to: … - Claims against You, or facts that may result in claims against You, notified to Us after the end of the Policy Period; or … Notification of a Claim You must notify Us in writing as soon as practicable of any Claim against You. Section 40(3) of the Insurance Contracts Act 1984 (Cth) provides that where You give notice to Us of facts that might give rise to a Claim as soon as was reasonably practicable after You become aware of those facts but before the Policy Period expires, You are covered for any Claim made against You arising from those facts even if it is not made against You until after the Policy Period has expired. … Your Policy "When We accept Your application and You pay Your Premium, We will issue You with a Policy. The Policy comprises this PDS (and the documents that form part of it) and any supplementary PDS We have provided to You, the Policy Wording and Your Policy Schedule. … Your Policy Schedule is Our confirmation to You that We have accepted Your insurance application. It sets out any special conditions which may apply to You, Your Policy Period, personal details, Your professional practice details, sums insured, sub-limits, Deductibles, Retroactive Date and any optional covers. … Premium Support Scheme Premium Support Scheme (PSS) is a Commonwealth Government scheme which assists eligible Medical Practitioners with the cost of their medical indemnity insurance. We have entered into an agreement with the Department of Health and Ageing and Medicare Australia to administer the scheme on the Government's behalf. Participation in the PSS is optional. Please refer to the PSS terms and conditions booklet for the full details of the scheme. This booklet forms part of this PDS." The material under the heading "Notification of Claim" (the Notification Provision) is of significance for reasons that will become apparent below.
2. At pages 13 to 40, the "Policy Wording" followed. Page 13 dealt with the "Sum insured" and specified the amount of cover under Part A, Part B and Part C. Part A was cover for "Your civil liability", Part B was cover for "Legal fees and other expenses" and Part C dealt with "Additional cover".
3. The following then appeared on page 14: "Introduction … Below is your policy wording and, in consideration of the premium, sets out what we will cover you for, what we won't cover you for and the other conditions. Some of the words in this policy have a special meaning and these can be found in the Definitions section. .… How much We will pay: (a) The most We will pay for any one Claim or Request for Indemnity under this Policy, and in the aggregate for all Claims and requests for indemnity during the Policy Period is the maximum sum insured listed on Your Policy Schedule. … (b) Any sub-limit that applies to a cover is the most We will pay against that cover for any one Claim or Request for Indemnity and in the aggregate of all Claims or Requests for Indemnity during the Policy Period for that cover. …".
4. The Policy Wording contained the following provisions under the heading "Conduct of Claims and Requests for Indemnity": "17.2 You must notify Us of a Claim. 7.2.1 You must notify Us in writing as soon as practicable of any Claim. 7.2.1 If You do not notify Us of a Claim as soon as practicable, You may not be covered under this Policy and Your right to indemnity may be prejudiced. … 17.4 Continuous cover Where You, prior to the Policy Period, first become aware of facts or circumstances that might give rise to a Claim or Request for Indemnity and You decide not to notify Us of these facts or circumstances, then, notwithstanding clause 6.1, We will cover You where: (a) We continued without interruption to be Your professional indemnity insurer from the time You knew or ought to have known of the facts and circumstances that might give rise to a Claim or Request for Indemnity to the date You actually notified Us; (b) had You decided to notify Us when You first became aware of the facts or circumstances, You would have been covered under the policy in force at that time; and (c) Your decision not to notify Us when You first became aware of the facts or circumstances was not fraudulent non-disclosure or fraudulent misrepresentation. Our liability to indemnify You is limited to the extent We would have been obliged to indemnify You under the terms and conditions of the policy in effect at the time You knew or ought to have known of facts and circumstances that might give rise to a Claim or Request for Indemnity. If We are obliged to indemnify You pursuant to this clause, We may reduce Our liability to You by the amount of any prejudice We suffer as a result of Your decision not to notify Us at the time You knew or ought to have known of the facts or circumstances that might give rise to a Claim or Request for Indemnity." Clause 17.4 (the Continuous Cover Clause) is of some significance, as will appear below.
5. Clause 14 on pages 24 and 25 of the Policy Wording dealt with "Exclusions" that apply to "Part A - Cover for your civil liability". There was no cover for any claim that arises out of or in connection with some 11 separate circumstances identified in the "Exclusions". None of those is presently relevant.
6. The Policy Wording contained definitions as follows: "19.2 Claim A demand for compensation or damages in relation to Healthcare or Unpaid Healthcare which: (a) is first made against You during the Policy Period; and (b) You tell Us about in writing during the Policy Period. … 19.9 Healthcare Means: (a) any care, treatment, advice, service or goods provided by You in respect of the physical or mental health of a patient; (b) a medical examination, medical report or medical opinion prepared by You at the request of a third party, such as a Lawyer, insurer or statutory body; (c) You providing education, giving a paid presentation or address or providing medical advice or information that is published, including in a newspaper, textbook, journal, video, mobile application or weblog; (d) any care, treatment, advice, service or goods provided by You to a person in an emergency that is necessary to stabilise that person or to prepare that person for transfer; or (e) You acting in an administrative capacity, in relation to (a), (b), (c), and (e) above only to the extent that it is associated with Your Category of Practice. … 19.19 Policy This PDS, Practitioner Indemnity Insurance Policy and the Policy Schedule. 19.20 Policy Period The period of cover specified in Your current Policy Schedule. 19.21 Policy Schedule The current schedule to this Policy. … 19.32 Us, We, Our Avant Insurance Limited ABN 82 003 707 471 AFS Licence 238765. 19.33 You, Your The Healthcare Professional named as the Insured on the Policy Schedule and, if that Insured is a Sole Trader, that Insured's Practice Entity."

The Third Party Claims Act

1. Section 4 of the Third Party Claims Act relevantly provides that, if an insured person has an insured liability to a person (the claimant), the claimant may, subject to the Act, recover the amount of the insured liability from the insurer in proceedings before a court. An insured person is, relevantly, a person who is, in respect of a liability to a third party, entitled to indemnity pursuant to the terms of a contract of insurance. An insured liability is a liability to pay damages, compensation or costs in respect of which an insured person is entitled to be indemnified by an insurer. In proceedings brought by a claimant against an insurer under s 4, the insurer stands in the place of the insured person as if the proceedings were proceedings to recover damages, compensation or costs from the insured person. Accordingly, but subject to the Act, the parties have the same rights and liabilities, and the court has the same powers, as if the proceedings were proceedings brought against the insured person.
2. However, under s 5 of the Third Party Claims Act, proceedings may not be brought or continued against an insurer under s 4 except by leave of the court in which the proceedings are to be or have been commenced. Section 5 provides that leave must be refused if the insurer can establish that it is entitled to disclaim liability under the contract of insurance or under any act or law.
3. The first question that arises under the Third Party Claims Act is whether the defendant in the proceedings has a liability to the claimant. On the hearing of the Joinder Motion, the primary judge accepted that, before leave could be granted under s 5 of the Third Party Claims Act, it must be established that the Plaintiff has an arguable case of liability against Mr Blackstock. Avant Insurance accepts that that requirement is satisfied in the present case.
4. The second question that arises under the Third Party Claims Act is whether the defendant is entitled to be indemnified by the insurer in respect of the liability owed to the claimant by the insured. The question of whether the insurer is entitled to disclaim liability is part of that question. The primary judge formulated the question as being whether there is an arguable case that either of the Policies responds to the Plaintiff's claim against Mr Blackstock. Her Honour recorded Avant Insurance's position as being that there was no such arguable case and that it was entitled to disclaim liability under each of the Policies.
5. Avant Insurance's contention to the primary judge was that neither of the Policies responds so as to indemnify Mr Blackstock for his potential liability to the Plaintiff because no notification was given to Avant Insurance, during the First Policy Period or the Second Policy Period, of a claim by the Plaintiff or of facts or circumstances that might give rise to a claim by the Plaintiff. The primary judge observed that the basis for Avant Insurance's submission was the wording of the Policies and their characterisation by Avant Insurance as "claims made and notified policies".
6. The Plaintiff accepts that Avant Insurance was not notified during the First Policy Period or the Second Policy Period of a "Claim" within the meaning of either of the Policies or of facts or circumstances that might give rise to a Claim or Request for Indemnity under either of the Policies. Thus, there was unchallenged evidence on behalf of Avant Insurance that:

• Avant Insurance did not, before 15 October 2018, receive any notification, from Mr Blackstock or any other person, of a claim by the Plaintiff arising out of the Procedure or notification of any incident leading to such a claim;
• Avant Insurance has not received from Mr Blackstock a request for indemnity in any form in relation to a claim by the Plaintiff against Mr Blackstock; and
• Avant Insurance did not become aware of the Plaintiff's claim against Mr Blackstock or the proceedings in the District Court until the Plaintiff served on Avant Insurance a subpoena dated 15 October 2018. In addition, it is accepted by the Plaintiff that Mr Blackstock is not insured by Avant Insurance in respect of claims made against him that he has not notified and that were not made during either the First Policy Period or the Second Policy Period.

Characterisation of Contracts of Insurance

1. Contracts of insurance or insurance policies affording indemnity liability to third parties may be characterised in several ways. Thus, an "Occurrence Based" policy provides indemnity in respect of claims arising out of events that occur during the period of insurance of the policy. A "Claims Made" policy provides indemnity in respect of claims that are made during the period of insurance of the policy, irrespective of when the events giving rise to the claim takes place. A "Claims Made and Notified" policy provides indemnity in respect of claims that are both made and notified to the insurer during the period of insurance of the policy, irrespective of when the events giving rise to the claim takes place.
2. A "Claims Made" policy or a "Claims Made and Notified" policy might also contain a provision that enables the insured, during the period of insurance of the policy, to notify to the insurer facts or circumstances that might give rise to a claim by a third party. If the insured gives such a notification, indemnity is afforded by the policy in respect of a claim that arises from the facts or circumstances so notified, even if the claim is made after the expiry of the period of insurance of the policy. A policy of that character might be characterised as a "Discovery" policy. [1] Thus, a "Discovery" policy is a policy that contains a provision to the following effect (a deeming clause): [2] "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 [insurer] 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." Where notification of the relevant occurrence is made during the policy period, such a provision functions to deem a claim in respect of the occurrence to have been made during the policy period notwithstanding that it is made after the policy period has expired. [3]

Insurance Contracts Act

1. The Plaintiff's contentions relied on the operation s 54 of the Insurance Contracts Act 1984 (Cth) (the Insurance Contracts Act). As will be seen, the operation of s 40 may also be relevant. It is therefore necessary to say something about each of those provisions.

Section 40

1. Section 40 applies, relevantly, in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract. Section 40(2) provides that an insurer must, before a contract of insurance is entered into, clearly inform the insured in writing of the effect of s 40(3). Section 40(3) relatively provides that, where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract. Since it is common ground that Mr Blackstock did not give any notice to Avant Insurance of facts that might give rise to a claim by the Plaintiff against him, s 40(3) has no direct application in the present circumstances.

Section 54

1. Section 54 of the Insurance Contracts Act relevantly provides that, where the effect of a contract of insurance would, but for s 54, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act or omission of the insured or of some other person, being an act or omission that occurred after the contract was entered into, the insurer may not refuse to pay the claim by reason only of that act or omission. Rather, in those circumstances, the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act or omission.
2. The elements with which s 54 deals are as follows:

• the effect of the relevant contract of insurance as between the parties;
• the claim that the insured has made; and
• the reason for the insurer's refusal to pay that claim. Section 54 directs attention to the effect of the contract of insurance on the claim on the insurer that the insured has in fact made. It is not concerned with some other claim that the insured might have made at some other time or in respect of some other event or circumstance. Even if the fact that the third party made no claim on the insured within the period of cover was said to be an omission, it is important to recognise that the claim to which s 54 refers is the claim that was actually made by the insured on the insurer. It is not a claim for indemnity against some other claim. [4]

1. The restrictions that are inherent within a claim vary according to the type of insurance in issue. Under a "Claims Made and Notified" policy, if no claim is made by a third party upon Mr Blackstock during the period of insurance, any claim that may subsequently be made by Mr Blackstock on Avant Insurance, being the claim to which s 54 refers, would necessarily acknowledge that indemnity is sought in relation to a claim of a type not covered by the policy, because it was not within the temporal limits that identify those claims in relation to which indemnity is to be given. [5]
2. "Claims Made and Notified" policies are sufficiently common for the peculiarities of that type of insurance not to be ignored. It is a type of insurance that has distinct advantages from the point of view of both insurers and insured. Because such types of policies permit a more accurate forecast of the insurer's risk exposure, there will be a lower premium reflecting the deletion of the insurer's liability to "long-tail" risks. The insured therefore derives a benefit from a lower premium. [6]
3. A professional indemnity policy may indemnify the insured against a claim made after the expiration of the period of insurance where the insured gives to the insurer during the period of insurance notice of the facts or circumstances that subsequently give rise to that claim. In those circumstances, s 54 may operate to "cure" an omission to notify of the occurrence during the period of insurance. [7]

Reasoning of the Primary Judge

1. The primary judge considered that the Plaintiff's contention that s 54 of the Insurance Contracts Act operates to prevent Avant Insurance from disclaiming liability under each of the Policies, based on the failure of Mr Blackstock to notify Avant Insurance of facts and circumstances that may give rise to a claim, would require an evaluation of Mr Blackstock's actual or imputed knowledge. Her Honour said that, on the evidence, there had been a complaint by the Plaintiff to Mr Blackstock's clinic, an email from him to the Plaintiff indicating that he was at the very least aware of claims being made against him by patients and a subpoena issued to him relating to the Plaintiff. Her Honour considered that all, or any one, of those facts could indicate that Mr Blackstock may well have been aware of facts and circumstances that may have given rise to a claim being made on behalf of the Plaintiff. Her Honour considered that the existence of unresolved questions of fact as to that matter demonstrated that there was an arguable case that the Policies will respond to any liability of Mr Blackstock to the Plaintiff. Her Honour concluded that there was a real possibility that, if Mr Blackstock knew or ought to have known about the circumstances giving rise to the Plaintiff's claim, the First Policy would respond to that liability, albeit possibly in a reduced manner.
2. Significantly, that analysis was predicated upon the primary judge's construction of the effect of the terms of the Policies. Her Honour considered that the effect of the reference to, and near verbatim inclusion of, s 40(3) in the Product Disclosure Statement [8] indicated that, had Mr Blackstock notified Avant in writing when he became aware of facts that might have given rise to the claim made by the Plaintiff during the First Policy Period, then regardless of the time when the Plaintiff made the claim, Mr Blackstock would have been entitled to indemnity from Avant. Her Honour then set out cl 17.4, the Continuous Cover Clause, and concluded that the effect of those provisions was that, if Mr Blackstock had become aware of facts and circumstances that may have given rise to the Plaintiff's claim and had, at any time within either the First Policy Period or the Second Policy Period, notified Avant of those facts and circumstances, he would have been entitled to indemnity, subject to the terms set out in paragraphs (a) to (c) of the Continuous Cover Clause and any reduction that Avant Insurance applied to the liability based on any prejudice that it may have suffered.
3. The primary judge's analysis construed the reference to s 40(3) and the content of the Continuous Cover Clause as supporting the existence of a contractual "Discovery clause" as opposed to merely looking to the effect of s 40(3) of the Insurance Contracts Act. Thus, the relevant act (or omission) on the part of Mr Blackstock was identified as the failure to notify Avant insurance of the facts and circumstances that may have given rise to the Plaintiff's claim. Her Honour considered that the omission was one to which s 54(1) could apply.

Characterisation of the Policies

1. The Plaintiff's position was that, on their proper construction, each of the Policies was a "Discovery" policy rather than a "Claims Made and Notified" policy. While there is no equivalent of a deeming clause in either of the Policies, the Plaintiff contended that certain provisions of the Policies caused them, in effect, to be "Discovery" policies rather than "Claims Made and Notified" policies. Avant Insurance disputed the characterisation of the Policies as "Discovery" policies, contending that, properly construed, each of them was a "Claims Made and Notified" policy.
2. The question of whether the Policies can fairly be characterised as "Discovery" policies in the sense indicated is significant because s 54 cannot operate to resolve a failure to satisfy s 40(3). If the Policies are to be characterised as "Discovery" policies only by the operation of s 40(3) rather than by reason of the actual contractual terms of the Policies, s 54 can have no relevant operation.
3. The essence of the cover under each of the Policies is that, during the relevant Policy Period, there must be a notification to Avant Insurance of a Claim or of facts or circumstances that might give rise to a Claim or Request for Indemnity in respect of such facts or circumstances. That is a necessary prerequisite for any entitlement to indemnity. For the reasons that follow, the Policies are not "Discovery" policies. Rather, they are properly to be characterised as "Claims Made and Notified" policies. Any "Discovery" element was derived entirely from the statutory operation of s 40(3).
4. The primary judge relied upon two provisions of the Policies, namely, the Notification Provision and the Continuous Cover Clause, as establishing that as a matter of contract, each of the Policies was a "Discovery" policy. However, her Honour did not indicate whether the relevant omission of Mr Blackstock, for the purposes of s 54, was a failure to notify under the Notification Provision, or omission to notify under the Continuous Cover Clause. Nor was the particular policy identified to which the relevant omission was said to relate. Rather, her Honour said: [9] "The effect of the first, second and second revised policies was that if the defendant was aware of facts and circumstances that may have given rise to the plaintiff's claim and he failed [to] notify Avant of those facts and circumstances, the insurer might have refused (and has in fact refused) to provide the defendant with indemnity. Due to the defendant's omission to notify Avant within the policy periods, but for s 54(1) of the [Insurance Contracts Act], the insurer might refuse indemnity for the absence of a claim within the period of cover. This is certainly one kind of claim envisioned by s 54 of the [Insurance Contracts Act]… [which] 'operates to prevent an insurer relying on certain acts or omissions to refuse to pay that particular claim'." (citations omitted)
5. If the Notification Provision was a contractual provision amenable to the operation of s 54, the relevant relief would be in respect of refusal to provide indemnity under the First Policy. The relevant omission would be a failure to notify of facts and circumstances as contemplated by the Notification Provision. For that purpose, the Continuous Cover Clause is not relevant because it only concerns facts and circumstances arising under a previous policy period. If Mr Blackstock was said to have become aware, during the First Policy Period, of the relevant facts and circumstances, the Continuous Cover Clause was not applicable at that point because the awareness had not emerged "before the policy period". To the extent that the Plaintiff's application is in respect of a claim under the First Policy, only the Notification Provision is directly relevant.

The Notification Provision

1. Although the Notification Provision, being in the Product Disclosure Statement, formed a part of the First Policy, the reference to s 40(3) does not rise beyond a mere allusion to the legislative effect of the Insurance Contracts Act. It does not have contractual effect in its own right. Only the first component of the Notification Provision is expressed in mandatory language, which refers to notification of a claim made against the insured. In contrast, the balance of the Notification Provision merely states the effect of s 40(3) by reference to the parties to the contract of insurance. It is not worded so as to indicate the creation of a further contractual right. Further, while the Notification Provision does not fully extract the requirements of s 40(3), its language suggests only that the insured is able to receive cover in accordance with the terms of s 40(3).
2. The terms of s 40(3) are important. To satisfy s 40(3), an insured must provide notice in writing to the insurer. It would be curious if the Notification Provision were construed as not merely constituting a signpost to s 40(3) but as incorporating a new "discovery" term into the First Policy, modified so as to exclude the requirement of writing. The purpose of the Notification Provision is to draw the attention of the insured to the effect of s 40(3), which provides an independent set of rights and obligations arising by force of the statute rather than out of the contract itself. The absence of subsequent reference to notification of facts and circumstances and how notice of the same is to be effected under the terms of the First Policy, in contrast to the prescriptive notice requirements for claims, indicates a tacit recognition that what is referred to is merely those rights and obligations that are conferred by the Insurance Contracts Act.
3. The terms of s 40(2) reinforce that conclusion. Section 40(3) applies to both "Claims Made and Notified" policies and "Claims Made" policies, [10] and s 40(2) at the least applies to "Claims Made and Notified" policies. [11] Avant Insurance contends each of the Policies should be characterised as a "Claims Made and Notified" policy. Thus, for "Claims Made and Notified" policies, s 40(2)(a) requires the insurer to inform the insured clearly in writing of the effect of s 40(3). The inclusion of the reference to s 40(3) in the Notification Provision merely reflects compliance by Avant Insurance with its obligation under s 40(2)(a), rather than a contractual term. In that context, it is unsurprising that there is no provision for coverage for facts and circumstances provided as part of the terms of the Policies.
4. For those reasons, the reference in the Notification Provision to s 40(3) should not be construed as creating a contractual "Discovery" clause. It merely draws attention to the rights and obligations arising under the Insurance Contracts Act, as Avant Insurance was required to do. To the extent that the primary judge considered that the Notification Provision created a contract for a "Discovery" policy, her Honour erred.

The Continuous Cover Clause

1. It is not clear whether the primary judge considered that the Continuous Cover Clause provided a separate basis for characterising the Policies as "Discovery" policies with contractual provisions equivalent to s 40(3) or simply referred to it in aid of construction of the Notification Provision. To the extent that the Plaintiff's claim was based only on the First Policy, the relevance of the Continuous Cover Clause is limited. It appears that the Plaintiff submitted that the Continuous Cover Clause provided evidence of recognition that the First Policy provided indemnity in respect of facts and circumstances notified as a matter of contractual effect.
2. The Continuous Cover Clause concerns a person who, before the policy period, became aware of facts and circumstances that might give rise to a claim but who decided not to notify Avant Insurance. It provides that, notwithstanding an exclusion clause that is not presently relevant, Avant Insurance would provide indemnity if certain conditions were met and the insured notified Avant Insurance of the facts and circumstances during a subsequent policy period.
3. Properly construed, the Continuous Cover Clause grants additional rights to an insured who is loyal to Avant Insurance by entering into successive policies. For such an insured, assuming that the insured satisfies the specified requirements, a failure to notify facts and circumstances under a previous policy can be covered under a subsequent policy, such as the Second Policy, if the insured relevantly notifies Avant Insurance during the renewed policy period. The Continuous Cover Clause provides for a reduction of the liability of Avant Insurance to pay in a manner reflective of the scheme available under s 54.
4. The correct analysis of the Notification Provision indicates that the liability of Avant Insurance in respect of notification of facts and circumstances would not arise out of a term of the Policy, but from the operation of s 40(3) alone. For reasons indicated below, the "Discovery" effect of a "Claims Made and Notified" policy that arises solely by the operation of s 40(3) is not open to remedy by s 54. The purpose of the Continuous Cover Clause becomes clear in that context.
5. If the liability of Avant Insurance to provide indemnity in respect of facts and circumstances notified is a liability arising out of the Policy itself, then the Continuous Cover Clause would be partially redundant, in that the relief it provides would already be afforded under s 54. However, when one considers that the liability arises only on account of s 40(3), the Continuous Cover Clause meaningfully provides an extension of coverage of that statutory liability on the proviso that an insured remains continuously covered.
6. The Continuous Cover Clause is expressed to be subject to whether Avant Insurance would have been liable "under the terms and conditions" of a previous policy. In the light of the strong considerations weighing against reading the Notification Provision as creating a liability as a contractual term, without more, the words in the Continuous Cover Clause are alone insufficient to overcome that finding. Rather, the words in the Continuous Cover Clause should be read as referring to a liability arising out of the Policy, including liabilities incurred as a result of the operation of provisions such as s 40(3).

Application of s 54

1. Section 54 of the Insurance Contracts Act was the result of consideration by the Australian Law Reform Commission (the ALRC) of contractual obligations regularly contained in contracts of insurance to protect the interests that general insurers have both during the period of cover and after a loss has occurred. One such interest that general insurers have is to prevent the risk that has been assessed from increasing during the period of cover. Another such interest is to ensure that nothing is done to inhibit proper investigation and assessment of a claim. Both of those interests may be protected by provisions of the contract of insurance that either impose promissory obligations on the insured or exclude certain risks from the stipulated cover. [12] The former would be construed as a warranty. Such a warranty may be a promise that a certain state of affairs will continue to exist or that certain matters or events will or will not exist or occur during the currency of the insurance contract.
2. Such a warranty is a promissory or continuing warranty. An example of such a warranty is a promise by the insured in a householder's policy of insurance that the dwelling will not be left uninhabited for more than a specified period of time in any one year. A similar warranty would be a promise by the insured to take all reasonable precautions for the safety and protection of the property. If such a warranty is breached, the insurer may be entitled to deny liability for a loss even if that loss occurred after the house became inhabited again. In some cases, the insurer may even be entitled to terminate the contract of insurance. [13]
3. Terminating the contract or declining the claim may impose heavy loss upon an insured in circumstances where the insurer suffers little or no prejudice as a result of the breach of the warranty by the insured. One solution to that problem would be to limit the right of termination or declinature to cases where the conduct of the insured caused or contributed to the relevant loss.
4. The ALRC concluded that the only satisfactory solution was a combination of two tests. Where the conduct of the insured might, in principle, have caused or contributed to a loss, a causal connection approach should be adopted. Where the conduct of the insured could not, in principle, have caused or contributed to the loss, the insurer should be limited to a right to damages, which should be assessed by reference to ordinary contractual principles. The ALRC considered the actual test should be stated in terms of prejudice to the insurer and damages should be measured by reference to the prejudice that the insurer has suffered as a consequence of the conduct of the insured and the right to damages should be exercisable only by way of reduction of a claim. [14]
5. Thus, s 54 was aimed at ameliorating the consequences for an insured of an act or omission by the insured in breach of a promissory warranty included in the contract to protect the interests of the insurer. The remedy of the insurer is limited. Rather than declining the claim or avoiding the contract, the liability of the insurer is reduced to compensate the insurer for the detriment resulting from the act or omission. The section was not aimed at rectifying the consequences of an act or omission by the insured that is detrimental to the insured. More particularly, it was not intended to have the effect of permitting an "omission" to make or notify a claim or to notify circumstances within the Policy Period to be excused. That would have the effect of altering the essential character of the cover provided under a "claims made and notified" contract of insurance such as the Policies. Section 54 does not contemplate an act or omission that would entail the failure to abide by the essential character and nature of the relevant contract of insurance.
6. If the Plaintiff had made a claim on Mr Blackstock during the Policy Period of the First Policy but, for whatever reason, Mr Blackstock did not notify Avant Insurance of the making of that claim until after the Policy Period ended, would be entitled to refuse to indemnify Mr Blackstock in respect of that claim by reason of the failure of Mr Blackstock to notify Avant Insurance of the fact of the claim. Similarly, if after the expiration of the Policy Period of the First Policy Mr Blackstock had made a claim on Avant Insurance for indemnity for an occurrence of which Mr Blackstock first became aware during the Policy Period of the First Policy, Avant Insurance would be entitled to refuse to indemnify Mr Blackstock in respect of that claim because Mr Blackstock did not give notice of the occurrence to Avant Insurance during the Policy Period.
7. If the claim made by the Plaintiff after the expiration of the Policy Period of the First Policy were to be treated as a claim by Mr Blackstock, the question is whether the effect of the First Policy would be that Avant Insurance may refuse to pay Mr Blackstock's claim by reason only of his omission to notify Avant Insurance that the occurrence, at the time, was one that might subsequently give rise to a claim by the Plaintiff against him. In such circumstances, s 54 would be engaged. Whether there was any prejudice to Avant Insurance's interests would be a matter for the final hearing. [15]
8. That conclusion would follow only if it was a contractual term of the First Policy that, if Mr Blackstock gave notice to Avant Insurance of facts that might give rise to a claim as soon as was reasonably practicable after he became aware of those facts but before the First Policy Period or the Second Policy Period expired, Mr Blackstock would be covered for any claim made against him arising from those facts, even if the claim was not made against him until after such expiration. It would then follow that, by the operation of s 40(3) of the Insurance Contracts Act, Avant Insurance would not be relieved of liability in respect of the Plaintiff's claim by reason only that it was made after the expiration of the Policy Period of the First Policy and, indeed, the Policy Period of the Second Policy.
9. The question, therefore, is whether the language set out under the heading "Notification of a Claim" in the Product Disclosure Statement, which is clearly derived from s 40 of the Insurance Contracts Act, is a term of the First Policy or simply states the effect of s 40. That is to say, the question is whether the effect of the First Policy is that the liability of Avant Insurance is excluded by reason that notice of a claim against Mr Blackstock in respect of loss suffered by the Plaintiff was not given to Avant Insurance before the expiration of the Policy Period of the First Policy. That raises the distinction between terms of cover, on the one hand, and an exclusion, on the other. The First Policy recognises that distinction. Under the terms of the First Policy, there is simply no cover except in relation to a claim, notice of which is given during the Policy Period or, by the extension under s 40(3), a claim arising out of facts of which notice to Avant Insurance was given during the Policy Period.
10. Some statutes, such as the Sale of Goods Act 1923 (NSW), imply terms into contracts. However, s 40(3) does not imply into a contract of insurance a term that reflects the content of that provision. Where a statute implies a term into a contract, the resulting rights and obligations created by the implied term are contractual, not statutory. Section 40(3) confers rights on an insured and obligations on an insurer, but to obtain the subsection's protection an insured must comply with its terms, by giving notice.
11. Section 54 applies only where the effect of a contract of insurance according to its terms would be that the insurer may refuse to pay a claim. [16] If it were the intention of Parliament that s 54 should modify the operation of s 40(3) one would expect to find some indication of the intention in the provision. There is nothing in s 40(3) that makes the requirement that notice be given during the currency of the policy subject to s 54. [17]
12. Section 54 does not permit the reformulation of a claim, such that it could work with s 40(3) to allow a failure to notify facts and circumstances to be overcome where such a "discovery" clause was not a term of a policy that is properly characterised as a "claims made" policy. Section 54 operates to prevent an insurer from relying on certain acts or omissions to refuse to pay a particular claim. The section does not operate to relieve the insured of restrictions or limitations, such as the temporal limits within which a claim must be made on the insured in a "claims made" policy, that are inherent in that claim. [18] Section 54 cannot be combined with s 40(3) to modify a "claims made" policy to cover a claim arising out of facts and circumstances that were not notified during the period of insurance of the policy. The two sections have different functions.
13. No claim was made against Mr Blackstock within the First Policy Period or the Second Policy Period, and no notice of such a claim was given during either period. The claim that was made on Mr Blackstock was made outside both periods. To invoke s 40(3), it must be shown that Mr Blackstock gave notice in writing to Avant Insurance of facts that might give rise to a claim against him as soon as it was reasonably practicable after he became aware of those facts but before the relevant period of insurance under the Policies expired. Mr Blackstock did not do so and the occasion for s 40(3) to operate did not arise.

Conclusion

1. The question is whether, if facts and circumstances that may have been capable of giving rise to the Claim now made on behalf of the Plaintiff were known to Mr Blackstock during the Policy Period of the First Policy, s 54(1) would operate to prohibit Avant Insurance from refusing to pay that Claim by reason only of the failure by Mr Blackstock to give to Avant Insurance prior to the end of the Policy Period of the First Policy notice of those facts and circumstances.
2. If that question were reasonably arguable, it would follow that leave should be granted to the Plaintiff to join Avant Insurance. Even then, however, the joinder of Avant Insurance would not finally resolve the question of the proper construction of the First Policy and the application of s 54 to the circumstances of the case. That would be a matter for determination at the trial and, if need be, on any appeal to this Court or ultimately to the High Court of Australia following a final determination of the proceedings.
3. I do not consider that, in the circumstances of this case, the Plaintiff has demonstrated an arguable case that any liability that Mr Blackstock has to her is an insured liability under either of the Policies. It follows that the primary judge erred in granting leave to join Avant Insurance. Accordingly, leave to appeal should be granted. The appeal should be allowed and the orders made by the primary judge should be set aside. In lieu thereof, the Joinder Motion should be dismissed with costs. The Plaintiff should pay Avant Insurance's costs of the appeal. If otherwise entitled, the Plaintiff should have an order under the Suitors Fund Act 1951 (NSW).

Endnotes

1. See FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [23].
2. This is the clause considered in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [14].
3. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 64; [2001] HCA 38 at [43] and [46].
4. See FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [39]-[42].
5. See FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [39]-[42].
6. See FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [65]-[66].
7. FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [43]-[47] and [88]-[89].
8. See above at [53].
9. Primary Judgment at [33].
10. See Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 at 94-95, 101-103, 114-116; [1997] HCA 53.
11. The High Court considered that the introductory words of s 40(1) should not be read literally so as to govern s 40(3), but at least one member considered that those words did define the policies to which s 40(2) relates: Newcastle City Council v GIO General Ltd (1997) 191 CLR 85 at 94; [1997] HCA 53.
12. See para 215 of Australian Law Reform Commission, Insurance Contracts (Report No 20, December 1982).
13. See para 216 of Australian Law Reform Commission, Insurance Contracts (Report No 20, December 1982).
14. See para 228 of Australian Law Reform Commission, Insurance Contracts (Report No 20, December 1982).
15. See FAI Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [45]-[46].
16. See FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 at [20].
17. See CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R 1; [2001] QSC 388 at [44]-[46].
18. Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; [2003] NSWCA 34 at [36]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 08 November 2021