Bede Polding College v Limit

JUDGMENT 1 HIS HONOUR: This is an application pursuant to s 6 (4) of the Law Reform (Miscellaneous Provisions) Act 1946 for leave to commence an action against an insurer. 2 The claim by the plaintiff arose out of the following alleged facts. The plaintiff (the College) operated a school at South Windsor. Commencing in 1997 the College had an agreement for supply of security at the school including alarm monitoring and response with an entity, which for present purposes it will suffice to refer to as Western District Security (WDS or "the insured"). The agreement was on foot on 11 October 2003 when at about 1.02 am two youths broke into the College. This break-in registered on the insured's alarm monitoring system. It continued to register until at least 3.14 am. At about 1.25 am the youths returned and set fire to one of the buildings. The fire smouldered for about 90 minutes. The insured did not respond to the alarm. 3 An insurer of the College paid the plaintiff approximately $2.5 million in respect of fire caused damage and it can be inferred that this action is sought to be brought by that insurer pursuant to its rights of subrogation. 4 The nominated defendants became insurer of WDS in accordance with a typical Lloyds Syndicate arrangement for contract. In various documents there are ambiguous, or perhaps better described as obscure, nomenclatures of the insured but both the former principals of the business are deceased, a corporate entity entered external administration in 2005, the business does not trade and no one suggested that there existed a resource from which direct recovery might be had by the College. 5 Insurance had been obtained by WDS through a broker, National Corporate Broking (NCB) and the defendants dealt through an underwriting agency, Stirling Risk Services (SRS). The loss occasioned by the fire occurred during the currency of a policy covering a period of the year commencing on 5 July 2003. The issue between the parties turns upon the terms and conditions of that cover and I will later turn to some of the detail. 6 I approach the question of leave on the basis that the plaintiff must show three things. First, that there is an arguable case against WDS; second, that there is an arguable case that the policy responds and, third, that there is a real possibility that, if judgment is obtained, WDS would not be able to meet it: Oswald v Bailey (1987) 11 NSWLR 715; Zhang v Minox Securities [2008] NSWSC 689. 7 At the commencement of the hearing Mr Sexton SC who appeared with Mr Cheney for the defendants specified that it was not contended that there was not an arguable case for the plaintiff against WDS and that the issue was whether the particular policy responded. Given the circumstances of WDS which I have outlined, neither was the third factor a matter of contention. 8 An initial submission by the defendants was that the exercise of the general discretion vested by s 6 (4) of the 1946 Act required more than being able simply to put a proposition and say that it was arguable. The submission was exemplified by reference to a reliance by the plaintiff, in an alternative argument, upon s 37 of the Insurance Contracts Act 1984 (ICA) having regard to the provisions of s 71, the operation of which was succinctly stated in Porter v GIO Australia 2003 12 ANZ Insurance Cases 61-573 "section 71 of the ICA had the effect that an insured whose insurance was arranged by an insurance broker could not rely on section 37". I understood Mr Williams SC who appeared with Mr Weinberger for the plaintiff to recognize that their submissions on this matter, at least by analogy, conflict with authority, in particular Rocco Pezzano Pty Limited v Unity Insurance Brokers 1995 8 ANZ Insurance Cases 61-288. 9 The example does not demonstrate a need to qualify the approach to determination of whether there is an arguable case and I would, as submitted by Mr Williams follow the guidance of General Steel Industries v Commissioner for Railways (1962) 112 CLR 125. That case and Dey v Victorian Railway Commissioners (1949) 78 CLR 62 were focussed on summary dismissal but as Dixon J observed in the latter "once it appears that there is a real question whether of fact or law and that the rights of the parties depend on it, then it is not competent for the Court to dismiss the action". That test is applicable. 10 In the present case then, I should determine whether there is such a real question of fact or law. It is self evident that the rights of the parties would be dependent on the outcome. The answer can be revealed by tracing some of the history of WDS's insurance and the documentation pertinent to it. The ultimate issue can be summarized as whether the policy in force on 11 October 2003 was in the force of Lloyds Broadform Policy Wording (Lloyds wording) or in the form of SRS Security Services Wording (SRS wording). The discriminating significance is to be found in the general exclusions in the SRS wording, clause 10.18 whereof specifying that liability is not covered: "Arising directly or indirectly out of the failure of the insured to respond to an alarm, perform their function correctly nor to fulfil any warranty or representation made, represented or suggested by the insured". 11 It is the plaintiff's contention that the Lloyds wording was applicable and it contains no relevant exclusion. There is an exclusion in that form providing that the policy shall not apply: "To any liability either directly or indirectly out of the failure of the insured to perform their function correctly or to fulfil any warranty or representation made or suggested by the insured."

The advice continues with "policy notes" which state "policy excludes errors and omissions (e.g. alarm monitoring.) Contractors/subcontractors." 16 The exclusion of contractors/subcontractors obviously followed negotiations about the premium to be charged if those maintained their own cover. There is no evidence of any negotiation or discussion in relation to that year concerning alarm monitoring. I do not draw any conclusion from the specification of alarm monitoring as an extension and the exemplification in the notes. If conclusion were necessary, and I repeat that this is a communication between WDS and its own broker, I would find that the specific would prevail over what is described as simply an example. The present level of issue is, of course, arguability. 17 The intended statement of claim particularizes the breaches of agreement by the insured in terms of various failures to respond to the alarm. Plainly, and the contrary was not suggested, if clause 10.18 was applicable the defendants would not be liable. 18 The plaintiff's argument contends that the contract of insurance between the insured and SRS on behalf of the defendants was a renewal of the insurance which had been in force from 5 July 2002 to 5 July 2003. Accordingly, as was the case, it would continue to be in Lloyds wording without the clause 13.7 exclusion. 19 A determination of whether this is arguable requires examination of some history of the dealings between NCB and SRS as well as information tendered by way of proposal to SRS by WDS. 20 Under date 18 June 2002 there was completed a pro forma entitled "SRS Security Guards Liability Proposal". The document states the period of insurance as 7 July 2002/7 July 2003 but, as earlier noted, the subsequently issued schedule of cover specified 5 July 2002 to 5 July 2003. Significantly, the percentage derivation of turnover (estimated at a total $250,000) was stated to be "monitoring of alarms 50 percent" and "responding to alarms 1 percent". As I have already observed, for this year the schedule declared that the policy was in Lloyds wording and did not have endorsement of the 13.7 exclusion. Hence, what was disclosed as 51 percent of business operations was covered. 21 On a date that I cannot decipher but which referred to the policy due to expire on 5 July 2003 NCB was sent by facsimile transmission a notice pursuant to s 58 of ICA by Darren Fennessy (then National Liability Underwriter of SRS) advising a preparedness to consider renewal of that policy upon receipt of certain details. Among these the now relevant requirement was "completion of the attached questionnaire/proposal". That document, under date 27 June 2003, was returned completed. The pro forma expressly sought (in a list of activities) information about percentage turnover (then stated to be estimated at $400,000) which derived from items including a single item "monitoring or responding to alarms". This was completed and tendered to SRS with the figure 60 percent. 22 The notice under s 58 made no reference to any intention or desire by the insurer to substitute SRS wording for Lloyds wording, nor to add to the policy an exclusion of liability for claims arising out of monitoring or responding to alarms. 23 The first reference to this subject would appear to be in an email on 3 July 2003 from Mr Fennessy to a Mr Babet at NCB, however the obvious principal focus of the message was on premium and brokerage charges. The subject title of the email was "Renew Request.doc" and the wording of the text commenced "For renewal of the liability policy". The reference which I have mentioned appeared beneath some figures for premium quote and simply stated: "Lloyds Underwriters (expiring SRS Security Liability Wording)". Of course the evidence shows that there was no policy in SRS wording to expire and the only expiring policy, and therefore the only renewable policy, was that which was in Lloyds wording without the 13.7 endorsement. 24 On 4 July 2003 Mr Toan of NCB sent a message to Mr Fennessy effectively seeking a reconsideration of the quoted premium noting that the turnover stated could be adjusted to $350,000 on the basis that a contractor to WDS would take out his own cover. A reply from Mr Fennessy on 7 July 2003 stated "With reference to changes agree $11,000 +++ on expiring wording plus excluding liability of contractors subcontractors." 25 Bearing date 7 July 2003 a Renewal Closing to SRS was prepared by NCB addressed to SRS and on the same date NCB sent a renewal advice to WDS seeking payment. There has been no suggestion that payments as requested were not made in due time. 26 Dated 17 July 2003 SRS issued an interim cover note for the period 5 July 2003 to 19 August 2003. The insurer was described as "certain underwriters at Lloyds". The cover note proclaimed "cover and terms are as per our quotation". This would seem to be the quotation within the email passing on 7 July 2003 between Mr Fennessy and Mr Toan. 27 It is the plaintiff's contention that, no later than 17 July 2003, there was a contract to renew the cover in terms of the identifiable expiring policy. Given the facts and circumstances abovementioned I am satisfied that this contention is arguable on behalf of the plaintiff in the relevant sense and to the necessary degree. 28 I recognize that under date 26 August 2003 SRS issued a memorandum of insurance, which incidentally was entitled "Renewal," to which was attached a policy in the form of SRS wording which, contained the exclusion in clause 10.18. I repeat that it is arguable that there was no such policy in those terms to be renewed. To the extent that there was some mention in an ambiguous content within the email of 3 July 2003 above recited, I am unpersuaded that this undermines the arguability of the plaintiff's position to the extent that the relief presently sought should be denied. 29 No doubt an insurer is able to introduce different terms on renewal but that does not enable those terms to be imposed subsequent to the reaching of an agreement to renew. The evidence does not reveal any communication of the content of the SRS wording until 26 August which, on the plaintiff's case, is well subsequent to the agreement having been reached. 30 Mr Sexton pointed to correspondence in about 1998 which indicated an appreciation, at least on the part of NCB of the likely variation (presumably upwards) in premium if alarm cover was sought. At the particular time that activity was said to be about a contributor of one ninth to the turnover of WDS. It might be observed that the documentation shows that the insured was complaining about the increase in premium for the year 03-04 against what had been charged and paid for the year 02-03 when it appears undeniable on the documents that WDS in that year did have that cover, there being no operative exclusion. 31 I have referred to the reliance by the plaintiff upon s 37 of ICA and the obstacle which that argument faces. As I am otherwise persuaded that the plaintiff should have the leave sought, no point is served in analysing the argument on that basis, and it suffices to protect the plaintiff's position to note that the proposition was raised, as I also note in this connection that there is evidence in the report of Mr Muller that the exclusion clauses in the SRS wording were "unusual" for public liability policies issued specifically to the security services industry. 32 The evidence does not reveal the particular premium paid for the 02-03 cover except that what was sought for 03-04 obviously involved an increase, hence the complaint. Given that, for whatever was paid, there was cover for alarm monitoring and response which had been disclosed in the proposal as representing 51 percent of turnover, it is an astonishing situation that the insurer would have been seeking an increase in premium for 03-04 and at the same time when it is asserted that 60 percent of turnover is attributable to what is, as a new addition, proposed to be excluded. There is no evidence of any negotiation about such a change and the defendants, it would seem, rely upon the casual mention in the email on 3 July and the actual disclosure in late August. The evidence is silent, but it was not suggested that the insurer had not received the premium prior to late August. 33 As a second alternative the plaintiff asserted that the defendants were in breach of the obligation of good faith imposed by s 13 and 14 of ICA. In short, the plaintiff relies upon an asserted substitution of the SRS wording for the Lloyds wording and by that substitution, the removal of cover for which there had been disclosed in the proposal a deriving of 60 percent of WDS's turnover for a now to be excluded section of its activities. To say the least, if that was what was intended to be achieved, the intention on the part of the insurer was profoundly cloaked. It suffices to conclude that I consider that the plaintiff's contention on this basis is also arguable. 34 I make the following orders:

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