CA & MEC McInally Nominees Pty Ltd & Ors v HTW Valuers

INSURANCE - PROFESSIONAL INDEMNITY INSURANCE - where defendants had been careless in valuation of commercial property - where settlement reached between all parties except in the first, second and third defendants' claim against the first third party - where defendants did not give notice of a claim to the first third party - whether s 54 Insurance Contracts Act operates to overcome the failure to give notice

INSURANCE - PROFESSIONAL INDEMNITY INSURANCE - where the first, second and third defendants did not call evidence of their liability to the plaintiffs - whether terms of settlement proved liability and quantification of liability - whether the settlement reached between the first, second and third defendants and the fourth defendant is reasonable

STATUTES - ACTS OF PARLIAMENT - INTERPRETATION - whether s 54 Insurance Contracts Act operates to overcome a failure to give notice under s 40(3) Insurance Contracts Act

STATUTES - ACTS OF PARLIAMENT - PARTICULAR WORDS AND PHRASES - SPECIFIC INTERPRETATIONS - interpretation of "claim" in s 40(1) Insurance Contracts Act 1984 (Cth)

Insurance Contracts Act 1984 (Cth) s 40, s 54

Einfeld v HIH Casualty and General Insurance Ltd [1999] NSWSC 867; (1999) 10 ANZ Insurance Cases 61-450, not followed

FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 75 ALJR 1236, distinguished

Newcastle City Council v GIO General Ltd [1997] HCA 53; (1997) 191 CLR 85, followed

Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603, cited

Mr G A Thompson SC and with him Ms H Bowskill for the first, second and third defendants

Mr P A Keane QC and with him Mr L F Kelly for the first third party

Minter Ellison for the first, second and third defendants

[1] CHESTERMAN J: Only a remnant of this action went to trial. The issues between all parties save the first, second and third defendants and the first third party were settled the (working) day before trial. What remained was a claim by the first, second and third defendants for damages against their former insurer in an amount equal to the sum they had agreed to pay the fourth defendant.

[2] The first defendant was a company which carried on business as a valuer of real estate. The second and third defendants were employees. I shall refer to these three defendants collectively as "HTW", or "the valuers".

[3] The fourth defendant was a firm of solicitors, a significant part of whose practice consisted of lending clients' money, pooled for that purpose, to borrowers on the security of mortgages taken over real property. The interest rates obtained from the borrowers were substantially higher than those available from more conventional forms of investment. So, obviously, was the risk.

I shall refer to the fourth defendant either as "the solicitors" or "Bells".

[4] The plaintiffs were all clients of the solicitors. They contributed in varying proportions to make up a sum of $500,000 which was advanced on 23 August 1996 to Stamlaw Pty Ltd ("Stamlaw") to enable it to purchase a gymnasium and fitness centre ("the centre") together with some vacant land which adjoined the centre at Chubb Street in Leichhardt.

[5] The first third party ("CUA") was HTW's liability insurer for the year 15 September 1998 to 15 September 1999. The second third party was HTW's liability insurer for subsequent periods.

[6] The centre was located in a depressed suburb. As well it was on a cul-de-sac and distant from any surrounding development. At the request of the centre's then owners the second defendant in November 1994 valued it at $760,000 and the vacant land at $60,000. In August 1995 Evelink Pty Ltd ("Evelink") applied to Bells for a loan of $400,000 to enable it to purchase the centre and land. The application was not made directly by Evelink but by a mortgage broker on its behalf. A number of Bells' clients (among whom were two of the plaintiffs) contributed between them the sum of $400,000 which was duly advanced to Evelink. A copy of the HTW valuation was supplied to Bells to support the loan application. Bells, in turn, sent a copy of the valuation to the lenders.

[7] By an application dated 30 July 1996 the same mortgage broker informed Bells that Evelink had sold the centre to Stamlaw and sought an advance of $500,000 on behalf of that company to assist with the purchase. Curiously the application makes no reference to the contract price but identified the purchaser as the trustee of a family trust. Its sole director was Mr Bloxham whose income was said to be $50,000 per annum and whose assets amounted to only $187,000.

[8] This application was also accompanied by a valuation of the centre and land. It was dated 26 June 1996 and was performed by the third defendant. It valued the centre at $700,000 and the land at $60,000.

[9] The proposal was that the secured loan made to Evelink would be transferred to Stamlaw which would borrow a further $100,000. One of the contributors to the loan to Evelink declined to proceed with the transaction. The other two, and four new contributors are the plaintiffs. By a letter dated 2 August 1996 Bells advised Stamlaw that "clients of (the) firm" were prepared to advance $500,000 by way of first mortgage over the centre and the land for a term of twelve months, at a rate of interest of 18%, reducible to 13% if paid promptly, subject to a number of conditions:

* satisfactory completion of searches and inquiries by Bells;

* receipt of the original valuation by HTW evidencing a minimum market valuation of $700,000 for the centre and $60,000 for the vacant land;

* execution of guarantees by directors and shareholders of Stamlaw.

[10] In due course Bells expressed itself to be satisfied that the conditions had been performed and on 23 August 1996 Evelink repaid the loan to the original lenders and was released from all obligations under its mortgage to them. At the same time Stamlaw became indebted to the plaintiffs for their respective contributions to the sum of $500,000 which was advanced to it on the security of a first registered mortgage over the centre and land.

[11] In January 1997 Stamlaw failed to pay an instalment of interest. It made no further payments. The plaintiffs experienced considerable difficulty in effecting a sale of the property but eventually it was sold in January 1999 for a price of only $275,500. In addition to their loss of capital and interest the plaintiffs lost the return on investments they could have made with the lost capital. They incurred considerable expenses in attempting to sell the centre. They claim those losses against HTW and Bells each of whom claimed contribution from the other. HTW sought to be indemnified by CUA and/or the second third party in respect of the plaintiffs' and Bells' claims against them. Both insurers denied any obligation to indemnify HTW. HTW's claim against the second third party was, as I have mentioned, compromised.

[12] The plaintiffs' claim against HTW was based upon the third defendant's valuation of the centre which was submitted with the broker's application on 30 July 1996.

[13] It is accepted by the remaining parties to the action that both valuations performed by HTW were erroneous and that the errors were a product of a failure by the valuers to exercise the standard of care to be expected of a professional valuer. It is, however, necessary to go beyond the admission and consider the nature of the error because it has a consequence for the litigation.

[14] The second defendant's valuation in November 1994 assessed the value of the centre on the summation method, that is by assessing the value of the land in its unimproved state and then adding the estimated value of improvements. These values were fixed after a comparison of the centre with other similar properties which had been sold and had a known price. This approach was clearly inappropriate when the land being valued was income producing and the use to which it was put was its highest and best use. In such cases what must be valued is the income stream generated by the land. The second defendant, in fact, used that method as a second or "check" method of valuation. It involves capitalising the net maintainable income earned from the land. That in turn involves an assessment of what was the sustainable market rent of the land. This may or may not be the same as the rent payable under a lease actually in place.

[15] The valuation records that the second defendant had sighted "a signed stamped photocopy of the lease", which was for a term of five years commencing 21 May 1993, with an initial base rent of $115,000 per annum. This had increased by adjustment to $116,792 at the time of valuation. There was an option for a further term of five years which, oddly, had been exercised only eighteen months into the first term. The agreed rent for the commencement of the new term was $129,434. The valuer noted:

"This information and the stamping and execution of the lease should be verified by your searches. If any discrepancy is discovered it should be returned to the valuer for comment . . .

As part of the valuation exercise, the valuer must be satisfied that the rental payable under the lease is fair and reasonable . . . in terms of being capable of being serviced by the business . . . We have not been provided with details of financial statements of the operation however, have been advised by (the lessee) that average . . . takings are of the order of . . . $360,000 per annum. No substantiation has been given . . . however our enquiries . . . indicate this level of turnover to be supported. . . . the rental of $116,792 per annum equivalent to 32.44% of reported sales, is considered to be towards the higher end of . . . rental standards.

From our experience . . . we consider that 25% of estimated sales to be an affordable rental structure ie . . . $90,000 per annum."

[16] HTW capitalised the market rental at between 12%, and 13% which was an appropriate rate, and added $50,000 for the value of the "above market rent" recoverable from the lease to arrive at a value of $770,000.

[17] The second valuation was prepared by the third defendant and consists of a letter dated 26 June 1996 which was "to be read in conjunction with (HTW's) formal valuation dated 2 November 1994". This valuation, too, was prepared for the vendor of the centre, this time Evelink.

"The property essentially remains as described in our earlier report . . . We have sighted a photocopy of the lease, the pertinent details of which are:

The valuation recorded that HTW had not been given "supporting trading details of the business to substantiate the ability of the business to service the rental" so it adopted a hypothetical market rent of $90,000 per annum "the same as in our previous report".

HTW noted that the property market had declined since November 1994 which made it appropriate to increase the capitalisation rate to between 14 and 15%. As before, the capitalised value of "over market rental" was added. The centre was valued at $700,000. No change was made to the earlier valuation of the vacant land, $60,000.

[19] The valuations grossly inflated the sustainable market rent. The real level was about $60,000 per annum. HTW had information from the sale of other centres which should have enabled them to make an assessment of true market rent. They did not make proper use of the information and, indeed, adopted an erroneous methodology. They should have compared the centre with the other properties to arrive at an understanding of what rent the centre could command. For example, two properties noted in the valuation which were vastly superior to the centre rented for $90,000 per annum and $82,500 per annum respectively. A slightly inferior facility rented for $54,600 per annum. Instead of comparing these rents and properties with the centre to determine its true rental value, what HTW did was to assess from those other properties the percentage of their rent to their turnover. They then applied that percentage (25%) to the reported turnover of the centre, to derive the rent of $90,000 without seeking verification of the stated figure for turnover.

[20] It is necessary now to return to the narrative of the transaction by which Stamlaw borrowed the plaintiffs' money and bought the centre.

On 7 August 1996 the broker wrote to Bells to accept the offer of finance contained in their letter of 2 August. On 8 August 1996 HTW wrote to Bells:

"that the letters of valuation are suitable for your mortgage security purposes and extend our responsibility to Bells . . . so far as the content of those letters are concerned."

On the same day Bells wrote to the plaintiffs seeking their consent to the advance to Stamlaw. The letter advised that Bells had a copy of the second HTW valuation. It concluded with an assurance that Bells would make "the necessary searches and inquiries in respect of Stamlaw".

On 14 August 1996 Bells wrote to Stamlaw's solicitor (Mr Barrell) enclosing, inter alia, a guarantee for execution by Stamlaw's directors and shareholders. The letter requested Mr Barrell to send a copy of the contract of sale. By letter dated 20 August 1996 Mr Barrell sent Bells fourteen documents, one of which was the contract. It is an extraordinary document. The copy which was tendered in proceedings (exhibit 12) came from Bells files. It is in standard form and recites a purchase price of $760,000. Three handwritten annexures were attached. Annexure `A' made the contract subject to Stamlaw obtaining finance from Bells or another lender in the sum of $500,000. The second annexure made the contract subject to the vendor, Evelink, advancing $25,000 to Stamlaw by way of vendor finance. Annexure `C' provided that:

"The vendor . . . is agreeable to Stamlaw . . . receiving an early settlement discount of $310,000 at completion of the said property . . ."

No member or employee of Bells was called to give evidence. There is nothing to rebut the inference naturally arising from the documents, which is that Mr Barrell sent the contract including annexure `C' and the solicitor handling the transaction on behalf of the plaintiffs read it.

[21] Earlier, on 16 August 1996, Mr Barrell wrote to the Commissioner of Land Tax to inform him of the sale to Stamlaw and to request a land tax clearance. The letter set out details of the transaction which included the information that the purchase price was $450,000. A copy of this letter, exhibit 15, was produced from Bells' files. Again no evidence was called to show that the letter had not been received by Bells prior to the settlement of the transaction or, if received, had not been read. In the absence of such evidence I infer it had been received and read prior to 23 August 1996.

[22] By a letter of 22 August 1996 Bells wrote to Mr Barrell acknowledging receipt of the documents sent by him on 20 August 1996 and requesting advice about land tax liability. It may have been in response to this that a copy of Mr Barrell's letter of 16 August to the Commissioner of Land Tax was sent to Bells. However it does not matter.

On 22 August 1996 Mr Barrell wrote to confirm how moneys were to be disbursed at settlement and enclosed copies of the transfer and another form required by conveyancing legislation. This latter document, Form 24, declared the purchase price to be $760,000. The former document noted that the consideration was $450,000, in typewritten words and figures which had been crossed out and replaced by the sum of $760,000 in handwritten words and figures. Stamp duty was assessed on the higher consideration.

[23] On 23 August 1996 Bells wrote to a firm of Law Stationers to request them to act as agents when the transaction settled "at 3.30pm today". The letter enclosed copies of the transfer and Form 24 which I have just described, and a real property search apparently conducted that same day. The search showed that the only encumbrances on the title were a deed of grant reserving certain rights to the Crown, and the mortgage granted by Evelink to the original lenders. The ten year lease to Mr Olsen had not been registered. It is also noteworthy that the contract did not recognise the lease. The centre was to be sold free of encumbrance, apart from the mortgage to the plaintiffs.

[24] On 13 September 1996 Bells wrote to HTW requesting them to assign the valuation to the plaintiffs. HTW replied by letter of 15 October 1996 advising that:

". . . The letters of valuation are suitable for mortgage security purposes and extend our responsibility to (the plaintiffs) so far as the content of those letters are concerned."

[25] As I have mentioned Stamlaw defaulted and the centre was eventually sold for a considerable loss. On 8 December 1998 Bells wrote to HTW. Having referred to the two valuations, the letter continued:

"Our client has been endeavouring to sell the property by mortgagee sale, and in fact, entered into a contract . . . last year . . . unfortunately the contract did not proceed . . . the property has now been listed for auction . . . on 12 December 1998.

Our enquiries with the local agents indicate that the likely sale price . . . at auction will be substantially below your valuation. We therefore invite you to inspect the property and provide us with your estimate of the current market value together with an explanation if it is substantially less that your valuations. . . . we . . . invite you to make any comment prior to . . . the auction . . ."

HTW replied by letter of 10 December 1998 declining to accept Bells' "instructions" because of the immediacy of the auction.

[26] On 6 or 7 December 1999 HTW was served with the plaintiffs' claim and statement of claim. By a claim dated 16 March 2000 HTW sought indemnity from CUA in respect of the plaintiffs' claim. The document, signed on behalf of HTW, asserted that HTW first became aware on 6 December 1999 that there existed a set of circumstances which might result in a claim, and that it was on the same day that HTW first received notice of a claim against them.

[27] Some time later HTW sought indemnity from the second third party. In a letter dated 28 February 2000 to the solicitors for that insurer HTW wrote:

"On 8 December 1998 we received a letter from Bells . . . that the property was being put to auction . . . By letter dated 10 December 1998 we responded . . . The auction was attended and it was noted that the property was in disrepair and vandalised and was sold mortgagee in possession . . . The letter from Bells . . . did not specifically make a claim or say that a claim would be made but merely stated that the property was to be sold. Given that (it) had substantially altered from our past valuations, in particular, . . . the failure of the tenant and . . . the vandalised state of improvements, we did not honestly believe that Bells' request represented a claim at that time. No further correspondence other than the very recent notification of the current claim had occurred . . . In December 1998 we did not consider nor were we put on notice that a claim was being made . . ."

[28] On 22 November 2000 Bells claimed contribution or indemnity against HTW in respect of the plaintiffs' claim against it. No prior intimation of this claim was given to HTW.

[29] The policy of insurance issued by CUA to HTW was in respect of the period 15 September 1998 to 15 September 1999. By the policy CUA promised to provide cover up to a limit of $5m for claims for civil liability arising from the conduct of HTW's practice. The claims which were to be covered by the policy were those:

(a) which were made against HTW during the year just specified; and

(b) about which CUA was given notice in writing as soon as reasonably possible in that year.

The policy gave to the word "claim" a special meaning. It was defined to be:

"Any originating process (in a legal proceeding or arbitration), cross claim or counterclaim or third party or similar notice claiming compensation against and served on an insured."

[30] It is significant in this litigation that no claim of the type defined by the policy was made by the plaintiffs against HTW until 6 December 1999 and no claim was made by Bells against HTW until 22 November 2000. HTW did not give CUA notice of the claim or, indeed, of the possibility that there might be a claim, until March 2000.

[31] The terms on which the litigation, apart from HTW's claims against CUA, were settled are also relevant. The compromise was effected in two parts and by two documents. Both are dated 28 September 2001. By the first agreement, Bells agreed to pay the plaintiffs $500,000 within 30 days. Bells and HTW released and discharged the plaintiffs from any claims arising out of the proceedings and their subject matter. In return the plaintiffs agreed, upon payment of the money, (a) to release Bells from all further claims arising out of proceedings or their subject matter and (b) not to prosecute any further claims against HTW arising out of the proceedings or the subject matter.

By the second agreement HTW admitted that their valuations were prepared carelessly and were misleading or deceptive. Bells similarly admitted that it was careless in the discharge of its retainer to the plaintiffs. Bells and HTW then agreed to settle the plaintiffs' claims "upon the basis that they will pay to the plaintiffs the sum of $500,000 . . ." and to compromise the contribution claims each had made against the other by apportioning liability equally between them. Clause 4 of the agreement provided that:

"Pursuant to the compromise . . . (HTW) and Bells acknowledge and agree:

(a) (HTW) have a liability to contribute $250,000 to the settlement of the plaintiffs' claims;

(b) Bells have a liability to contribute $250,000 to the settlement of the plaintiffs' claims."

Clause 5 then provided that unless and until HTW's claim for indemnity against CUA was successful it could only pay $105,000. It was agreed that HTW would pay that sum to Bells and Bells would pay the balance of the $500,000 to the plaintiffs. HTW promised to prosecute its claim for indemnity against CUA expeditiously and assigned the proceeds of that claim to Bells. To give added efficacy to this promise HTW were required to change their solicitors and engage Messrs Minter Ellison who, up to that date, had acted for Bells. As well they were to retain senior counsel who had, prior to the settlement, been briefed to represent Bells. The costs of prosecuting the claim for indemnity, including any costs awarded against HTW, were to be paid by Bells. The second and third defendants were promised immunity from enforcement proceedings.

[32] It is at once apparent that the terms of the policy of insurance do not extend to HTW's liability. No claim was made against HTW while the policy was in force and no notice, written or otherwise, of a claim was given to CUA while the policy was in force. HTW seeks to overcome this embarrassment by a combination of s 40 and s 54 of the Insurance Contracts Act ("the Act"). Section 40 provides:

"(1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.

(3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract."

This section does not, at first sight, give any comfort to HTW. The alleviation of an insured's plight suffered when it does not give its insurer notice of a claim against it before the expiration of the cover which is found in subsection (3) applies only where the insured gave written notice of facts that might give rise to a claim against it as soon as practicable after becoming aware of the fact and during the period of insurance. HTW did not give such notice to CUA. To obtain the benefit of s 40(3) HTW calls in aid s 54 of the Act. That 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 . . . by reason of some (omission) of the insured . . . being an (omission) that occurred after the contract was entered into . . . the insurer may not refuse to pay the claim by reason only of that (omission) . . ."

[33] HTW argues that not giving the notice required by s 40(3) was an omission the effect of which was that CUA could refuse to pay the policy indemnity. Section 54 operates so that it may not refuse to pay.

[34] The argument is novel. The researches of counsel have not found any case in which an insured has been brave enough or necessitous enough to use the sections in combination to this effect. The argument seeks to extend the operation of the decision of the High Court in FAI General Insurance Company Limited v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 75 ALJR 1236.

[35] Before considering that authority it is necessary to notice a submission made by CUA that s 40(1) does not apply to the policy here in question because it gives "claims" a restricted definition. "Claims" are defined to mean a claim initiated by a legal proceeding, whereas, it is submitted, the subsection is concerned only with "mere demands by third parties on the insured during the course of the policy". I cannot agree that the word "claim" appearing in s 40(1) should be so understood. What emerges from recent decisions of the High Court concerning the Act is that one should not approach its construction with any preconception that it was intended to have a particular effect, or that it was to apply only to a particular type of policy. One is to give the words in question their ordinary meaning (subject to any necessary textual implication) and apply that meaning to the policy wording in question. As McHugh, Gummow and Hayne JJ said in their joint judgment in Australian Hospital Care (para 23) there is to be no

" . . . substitute for strict attention to the terms of the particular insurance contract in question and to the operation of the relevant statutory provisions in connection with that contract."

[36] Approaching s 40(1) in this way there is no warrant for reading "claim" as excluding a claim of the sort defined by CUA's policy. Indemnity under the policy is limited to liability arising from a specific type of claim, but such a claim is still recognisable as a "claim". Although the legal proceeding required by the policy may not be a "mere" demand, such documents still constitute a demand. The policy promises to provide cover for a claim of the defined type which CUA is "told about in writing as soon as reasonably possible while this policy is in force". If written notice is not given during the currency of the policy the effect of the policy:

"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 . . . cover . . ."

the situation described by s 40(1).

[37] This approach is compelled by the reasoning in Newcastle City Council v GIO General Ltd [1997] HCA 53; (1997) 191 CLR 85, especially in the judgment of Toohey, Gaudron and Gummow JJ at 102 in which the point, inter alia, is made that the terms of s 40(1) are not to be construed narrowly or with undue technicality.

[38] CUA's preferred construction of the subsection involves excluding from its operation claims made on an insured by legal process. There is nothing in the section itself to suggest such a limitation and no support in the reasoning of the High Court to a construction that would so artificially limit the operation of the subsection.

[39] Although s 40 applies to CUA's policy, HTW did not comply with the requirements of subsection 3. It did not give notice of facts which might give rise to a claim against it before the expiration of the policy. Does s 54 of the Act supply this deficiency? In Australian Hospital Care the policy promised to indemnify the insured against any claim for compensation first made against the insured during the period of cover. Condition 3 of the policy provided that if the insured should become aware of any occurrence which might subsequently give rise to a claim against it while the policy was in force, written notice to the insurer of the occurrence given during the period of insurance would be deemed to be notice of a claim made against the insured.

[40] While the policy was in force the insured did become aware of an occurrence which might give rise to a claim against it, but did not give notice of the circumstances to the insurer. After the policy had expired a claim was made against the insured which sought indemnity under the policy. The insurer resisted on the basis that no claim had been made against the insured during the period of cover, and no notice of circumstances which might give rise to a claim had been given.

The High Court held that not giving notice of the circumstances was an omission to which s 54 applied with the result that the insurer could not refuse indemnity because its denial of indemnity was based upon ("by reason of") that omission.

[41] McHugh, Gummow and Hayne JJ said in their joint judgment (paras 40, 43 and 46):

"Section 54 directs attention to the effect of the contract of insurance on the claim on the insurer which the insured has in fact made. It is not concerned with some other claim which the insured might have made at some other time or in respect of some other event or circumstance. It requires the precise identification of the event or circumstance in respect to which the insured claims payment or indemnity from the insurer . . .

In the context of "discovery" contracts, containing clauses such as condition 3, the analysis is similar. If an insured "becomes aware of any occurrence which may subsequently give rise to a claim" during the period of cover, an event of the type contemplated by the contract of insurance has occurred. Any subsequent claim would be for indemnity against a demand of the type covered by the contract. . . .

. . . the claim which the insured made on FAI was for indemnity against liability for an occurrence of which the insured first became aware during the period of cover. The effect of the contract of insurance is that FAI could refuse to pay that claim by reason only of the fact that the insured did not give notice of the occurrence to it. Section 54, therefore, requires the conclusion that FAI may not refuse to pay the insured's claim. The effect of the contract of insurance, but for s 54, would be that the insurer may refuse to pay the insured's claim by reason only of the omission of the insured to notify the occurrence . . ."

[42] It is important to recognise that in Australian Hospital Care if the omission in question were disregarded the policy provided cover against the claim eventually made against the insured. Had the insured not omitted to give notice of the occurrence, condition 3 would operate to convert the occurrence into a claim against the insured made during the policy.

[43] The present case is different. The policy would not have entitled HTW to indemnity had CUA been given notice of their negligent valuation. Section 40(3) would have obliged CUA to grant indemnity, but that indemnity would have flowed from the intervention of the statute, not the effect of the policy. In this regard the phrase, "but for this section", which appears in s 54(1) cannot be overlooked. The effect of CUA's policy, if one ignores HTW's omission to give notice of its negligent valuation, would not have been that HTW was entitled to indemnity. An insurer may not refuse to pay a claim by reason only of the fact that an insured omitted to give notice of an occurrence but, had HTW given notice, the insurer would still not have been obliged to indemnify. To get to that result s 40(3) must also operate. But s 54 is concerned with a situation where, if an omission is disregarded, a policy of insurance would provide cover. To assist HTW here s 54 has to be understood as though it read:

" . . . where the effect of a contract if insurance would, but for this section, and s 40(3) . . . "

[44] Section 40(3) does not imply into policies of insurance a term to the same effect as the subsection. Some statutes do imply terms into contracts: the Sale of Goods Act perhaps provides the best example. When it happens the legislation makes it clear that the implication is to occur. Where a statute applies a term into a contract the resulting rights and obligations created by the implied term are contractual, not statutory. In Newcastle City Council Brennan CJ referred to "the statutory alteration in an insured's rights . . . worked by subsection (3)" and the imposition by the subsection of "a liability where no contractual liability exists", and a "statutory modification of contractual relations" (p 91,93). To speak of the statutory alteration of the insured's contractual rights, or the imposition of a statutory liability "where no contractual liability exists" is inconsistent with s 40(3) implying a term into contracts of insurance.

[45] 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. HTW's submissions would require a modification to the subsection and provide relief in circumstances other than those specified by the legislation. If it were Parliament's intention 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) which makes the requirement that notice be given during the currency of the policy "subject to s 54".

[46] This opinion is contrary to that expressed by Rolfe J in Einfeld v HIH Casualty and General Insurance Limited [1999] NSWSC 867; (1999) 10 ANZ Insurance Cases 61-450 at 75,170. His Honour's view was obiter and I respectfully disagree with it. It proceeds from an acceptance that s 40(3) was meant to operate as a statutory equivalent to the condition earlier discussed. The decision appears to overlook the limitation found in s 54 itself, that it operates only where, but for the section, an insurer could refuse indemnity by reason of an omission to give notice. Moreover the judgment predates Australian Hospital Care in the High Court where focus was directed to the particular policy wording and the effect on that of the omission in question. As well the joint judgment of McHugh, Gummow and Hayne JJ emphasised the point that:

"Sections 40 and 54 deal with different problems. Section 40 is concerned with certain contracts of liability insurance and, among other things, with the insured giving notice of a potential claim during the period of insurance cover when the claim is not made until after the expiration of that period. Section 54, by contrast, deals with the much more general subject of an insurer refusing to pay claims".

[47] The result, in my opinion, is that HTW's contention that their policy with CUA indemnified them in respect of the negligent valuation by a combination of s 40(3) and s 54(1), is wrong. But even if the sections were read as HTW contend, their claim for indemnity under the policy would fail on a point of fact. Before s 40(3) can operate, an insured must, during the currency of the policy, become aware of facts which might give rise to a claim. It must also give notice, which obviously it could not do unless it knew of the facts. In such a case, where an insured did not give notice because it was ignorant of the facts, s 54 would not operate because an insurer's refusal of indemnity would not be by reason only of the lack of notice. It would be, as well, by reason of the fact that the event "contemplated by the policy" as giving rise to a right of indemnity, had not occurred. This situation can be contrasted with that in Australian Hospital Care in which the policy would have provided indemnity but for the omission to give notice of facts known to the insured. The majority judgment noted (para 43) that an event of the type contemplated by the contract will occur if the insured becomes aware of any occurrence which may subsequently give rise to a claim. There is no such event if the insured remains ignorant of the occurrence. The judgment in Australian Hospital Care insists upon a precise definition of the claim (or circumstances) in respect of which the insurer claims indemnity, and an examination of how the omission in question impacts on the claim. If, disregarding the omission, the policy does not extend to the circumstances, there will be no right to indemnity.

[48] I have noted (in para 26 and 27) that HTW did not become aware of the facts which gave rise to the plaintiffs' claims against them until after the policy had come to an end. There is no reason to believe that exhibits 22 and 23 do not contain the truth. HTW did not understand that a claim was being adumbrated against them by Bells' letter of 8 December 1998, and did not believe that the decline in worth of the centre called into question their earlier valuation. The claim made by HTW on CUA was not one which arose from facts known to HTW during the currency of the policy.

[49] This discussion has proceeded on the basis that HTW seeks damages for CUA's failure to indemnify them against the plaintiffs' claims. In fact the claim against HTW which CUA has refused to pay is one made by Bells for contribution to the amount it has agreed to pay the plaintiffs. HTW was exonerated from liability to the plaintiffs in consequence of Bells paying them $500,000. It was by a separate agreement that HTW became liable to pay Bells $250,000. The claim for contribution which resulted in that agreement was not made until 22 November 2000, almost a year after the policy expired. Apart from the claim itself the only previously existing facts which could qualify as those which might give rise to a claim, and of which HTW were aware, was the institution of proceedings by the plaintiffs against HTW and Bells. A claim by one defendant against another could be anticipated when litigation was commenced against them both. However the action did not commence until 7 December 1999, which is itself later than the expiration of the policy.

[50] HTW's claim for damages must fail. Although it is unnecessary to consider the other defences advanced by CUA it is appropriate, nevertheless, to do so. My opinion on this novel point may be superseded by a second, or even a third. Because there is no settled law on the point it may obviate further litigation if I ascertain whether HTW would succeed if my opinion of the construction of the Act does not prevail.

[51] Assuming that HTW had a right to be indemnified against Bells' claim there would need to be consideration of what consequences flowed from CUA's refusal of indemnity. HTW submits that the terms of the settlement proved both the existence of their liability to the plaintiffs and Bells, and the quantification of the liability. CUA submits that the settlement does not relieve HTW of the need to prove that it would have been liable to the plaintiffs and for what amount. The point is, I think, a difficult one but can be avoided, at least for the moment. Both parties accept that unless the settlement were reasonable it would not obviate HTW's need to prove the matters just mentioned.

[52] There is no quarrel with the amount paid to the plaintiffs, but CUA submits that the settlement was not reasonable because it apportioned liability equally between solicitors and valuers when the cause of all, or most, of the plaintiffs' misfortune was the negligence of the solicitors. CUA emphasises that (a) Bells allowed the plaintiffs to advance their moneys when their searches revealed that the lease which underpinned the valuation had not been registered and could be defeated by the registration of an inconsistent interest in the land; (b) the solicitors had not enquired about the lessee's income and ability to pay the agreed rent when this was vital to the security and when they knew that the principal guarantor was insubstantial; (c) the solicitors knew that the contract price had been falsified and that, in reality, the centre was changing hands for an amount less than the mortgage debt. These acts of carelessness were said to overshadow the valuers' negligence and to supersede it as a cause of the plaintiffs' losses.

[53] Whether a settlement is reasonable must be judged objectively in the sense that it takes into account the interests of the insurer from whom indemnity is sought as well as the interests of the insured who makes the compromise. It is not enough that it is reasonable subjectively from the point of view of the parties to it. See Unity Insurance Brokers Pty Limited v Rocco Pezzano Pty Limited [1998] HCA 38; (1998) 192 CLR 603. The question must be judged by reference to the material the parties had available to them at the time of the agreement, not what subsequently became available or what might have been ascertained from a trial. Legal advice given to an insured to settle on the terms obtained is admissible but not conclusive. A relevant factor in this case is that the insurer, a third party to the proceedings, had been given leave to defend the claim against the insured and intended actively to contest the insured's liability.

[54] HTW briefed their junior counsel to advise on the reasonableness of the settlement, with particular regard to CUA's assertions that the plaintiffs' losses were caused wholly or principally by Bells' negligence. In a careful and comprehensive advice Mrs Bowskill concluded that an equal distribution of blame between solicitors and valuers was reasonable. Her advice took into account "commercial considerations" as well as an assessment of respective legal merit. Mr Johnson, HTW's former solicitor, who was called to give evidence in support of the settlement also thought it reasonable.

[55] A court should be reluctant to differ from the opinion of competent practitioners who advise their clients that a proposed settlement is reasonable, but in this case it is my clear opinion that the settlement was not, viewed objectively, of that character. Essentially, there are two grounds. The practitioners' advice did not come to grips with the requirement that the settlement had to take account of CUA's interests as well as HTW's. Although the compromise offered benefits to HTW it gave nothing to CUA but, instead, deprived it of the right to defend the plaintiffs' claim. This is particularly important if, as HTW submits, the fact of the settlement itself establishes HTW's liability to the plaintiffs. The second ground is that Bells' negligence was so egregious that it overtopped the valuers' negligence.

[56] This conclusion depends upon the finding that Bells were aware of the real price prior to 23 August 1996. It may be objected that when HTW's advisers gave their opinions that finding could not be anticipated. The settlement should not be declared unreasonable on the basis of a finding subsequently made, and which was controversial earlier.

The reality, however, is that the evidence available to HTW's advisers is the same as that adduced at trial. Bells' files contain documents revealing that the price to be paid by Stamlaw was $450,000. I have inferred they read the documents. No evidence was led at trial to show why, at a slightly earlier time, the same inference should not have been drawn.

There can be no doubt that Bells were in possession of the transfer document before the advance was made. This showed the consideration had been altered from $450,000 to $760,000. There is nothing in their files to suggest that Bells made any inquiry about this adjustment, which should have excited their curiosity. The absence of such material reinforces the inference to be drawn from the contract, including annexure `C', and Mr Barrell's letter, both in Bells' files, that the solicitors knew what the price actually was.

[57] Once Bells knew that the price was less than the amount of the loan, it is impossible to see that the negligent valuation played any part in the decision to lend. Annexure `C' showed the transaction to be suspicious. There was, at least, a hint of fraud. There is no plausible, honest, reason why a purchaser would pay stamp duty on a stated consideration of $760,000 when it had paid barely two-thirds of that amount. That apart, it was clearly improvident to lend $500,000 on the security of a property for which the purchaser was only prepared to pay $450,000. Had Bells exercised any care at all they would have strongly advised the plaintiffs against making their loan. It is impossible to believe that, had such advice been given, the plaintiffs would have risked their money. Whatever opinion Bells might have had about the value of the property as protection for the plaintiffs should Stamlaw default was rendered negatory by the information as to the price. Bells must have realised that the valuers were ignorant of the price at which the centre was to change hands. They could not possibly have believed that a sale at that price would not affect the valuation. However carelessly the valuation had been prepared Bells were in possession of information of such significance as to make the valuation otiose.

[58] At the very least the "discounted" price called for a reconsideration by HTW of their valuation. The price called into question the assumptions as to turnover and sustainable rent on which the valuation was predicated. The earlier valuation had drawn attention to the fact that HTW had not been provided with trading figures and requested that any subsequent information which might cast doubt on the centre's income "should be returned to the valuer for comment". Instead Bells chose to ignore the valuers' expressed caveat and permitted their clients to hazard their money in a questionable transaction.

[59] I do not think it sensible to conclude that Bells relied upon the valuation when permitting the plaintiffs to advance their money to Stamlaw, or in failing to advise them not to proceed with the loan. It is Bells' reliance, rather than the plaintiffs', which is relevant. Although the valuations were sent to the plaintiffs I think the reality is that they would have looked to Bells to find a suitable transaction, and depended upon the solicitors to make what inquiries they thought appropriate. None of the plaintiffs were called to say that they read the valuations or relied upon them for their decision to lend. The likelihood is that they looked to Bells to put together an investment and depended upon the solicitors for the safety of their money. Bells did not tell any of the plaintiffs that Stamlaw was paying only $450,000 for the centre.

[60] Even if it be wrong to conclude that Bells' negligence supplanted HTW's as the sole cause of the plaintiffs' loss, their conduct was so grossly derelict and so much more immediately connected to that loss that it would not be just and equitable to apportion responsibility equally with the valuers. The solicitors' retainer was to locate safe opportunities for the plaintiffs to lend money. Obtaining a valuation of the property to be taken as security was only a part of their obligation under the retainer. The solicitors had a more extensive duty to enquire whether a particular transaction was provident. The valuation obtained was carelessly put together, but the solicitors did not attempt to verify the particular assumptions on which the valuations depended and to which HTW drew attention. Moreover the valuations had been obtained by the vendors of the property which was to be taken as security. One does not need much experience in the law to know that such valuations are likely to be inflated and should be scrutinised with particular care. The solicitors did not even notice (or care) that the lease essential to the value of the property was unregistered, could be defeated, and might not have existed. These factors alone indicate a substantial failure of duty by the solicitors. When one adds to the catalogue of defaults their failure to act on their knowledge of the discounted price it becomes apparent that an equal apportionment of responsibility was unreasonable.

[61] The settlement was also unreasonable in failing to give adequate consideration to CUA's interests. The insurer contended, with some vehemence, that HTW would not be found liable to the plaintiffs for the reasons I have discussed. HTW was aware of CUA's confidence in the point. Although their advisers did not have that same confidence they knew the point was potentially a strong one, that the insurer wished to test it and that, if successful, HTW would have no liability to Bells or the plaintiffs. CUA had obtained leave to defend the claims against HTW and had briefed senior and junior counsel for that endeavour. A settlement which reasonably accommodated CUA's position would not have denied it altogether the benefit of that defence.

[62] If the settlement is to provide proof that HTW suffered loss by reason of CUA's refusal to indemnify it, the reasonableness of the settlement must be judged with respect only to the question whether they were liable to Bells. If other considerations come into play the settlement cannot be shown to be reasonable for the purpose of fixing the insurer's liability.

The point can best be illustrated by a consideration of the facts in Unity Insurance Brokers. The broker arranged a policy of property insurance but negligently failed to disclose the insured's claims history. After the property was damaged by fire the insurer refused indemnity on the ground of the non disclosure. The insured sued the insurance company but settled for about half of the amount to which it would have been entitled in the event its policy was enforceable against the insurer. It claimed the balance against the broker. The insurer defended the claim against it on the grounds (a) of non-disclosure; (b) that the fire had been deliberately lit by the insured; and (c) and that the property had not been insured for its full value thus reducing the amount payable under the policy. The trial judge found that the only issue which caused the insured to settle for less than the full amount of its claim was non-disclosure. The trial judge also found that had full disclosure been made a reasonable insurer would have accepted the risk.

On these findings the settlement reflected only the doubts about the enforcibility of the policy occasioned by the broker's negligence. It would have been otherwise had there been an arguable case of arson. A settlement which reflected also the risk that the insured might lose on that ground could not be a true indication of the loss suffered by the insured as a result of the broker's negligence.

[63] Likewise, if HTW's settlement with Bells did not reflect only an assessment of the fair apportionment of their respective liability to the plaintiffs it would not be a proper indication of HTW's loss.

[64] The settlement was influenced by other factors. On Mr Johnson's evidence a consideration taken into account by HTW in agreeing to the compromise was that the policy with CUA might not extend to the plaintiffs' claim. The settlement thus reflected HTW's desire to protect themselves by limiting the monetary extent of their exposure in the event they were found liable to Bells and had no insurance. As well "commercial considerations", played a part in the decision to settle. These were, in essence, the impecuniosity of the first, second and third defendants and their desire to avoid liquidation and bankruptcy, and the potential exposure to the costs of litigation including appeals. The compromise of litigation is commonly influenced by circumstances other than the assessments of the parties' respective cases. Matters personal to the parties and their finances obviously play a part. This is not surprising and is not to be criticised. The presence of those factors does not prevent the settlement from being reasonable from the subjective standpoint of Bells and/or HTW. It does, however, prevent it being reasonable from an objective point of view which must take into account CUA's interests.

[65] CUA had a further point. It was that even a reasonable settlement would not have been sufficient proof that HTW had suffered loss by reason of its refusal to grant indemnity and of the amount of the loss. Unity Insurance Brokers was said to be distinguishable because there the broker's negligence produced a contract of doubtful enforcibility and the compromise of a claim to enforce contractual rights was an expected outcome of the negligence, whereas HTW's settlement with Bells was, or should have been, unaffected by the status of the contract between HTW and CUA. I was referred to a substantial number of authorities and an article, "An Uneasy Compromise: An Analysis of the Effect of a Settlement reached by an Insured with a Third Party Claimant viz-a-viz his . . . Insurer" by Ms Sutherland, in (1998) 9 Insurance Law Journal 257 where the cases which predate Unity Insurance Brokers are collected and analysed. It is clear from the judgment in the High Court that an insured seeking damages from an insurer for breach of its promise to grant indemnity must prove what loss it has suffered by reason of the breach. The loss claimed by the insured must have been caused by the breach and must not be too remote from it in the sense that it must have been reasonably foreseeable and/or within the reasonable contemplation of the parties to the contract when they made it. In some cases proof of such loss will be established by the insured having made a reasonable compromise, but in other cases that will not suffice for the purpose. That case itself illustrates the difficulty of determining the circumstances in which a settlement will be sufficient proof.

[66] In this case I am inclined to accept CUA's submissions that, assuming a breach by it of its promise to indemnify HTW, the breach did not cause the latter to compromise the contribution proceedings by Bells. A disputed right of indemnity against CUA cannot be said to have led to HTW's compromising its formidable defences to Bells' claim, especially when CUA was also defending the claim. However it is not necessary to express a concluded opinion on the point, and I do not do so.

[67] There must be judgment for the first third party in the action brought against it by the first, second and third defendants, with cost to be assessed on the standard basis.