FAI General Insurance Co Limited v Australian Hospital Care Pty Limited

CATCHWORDS: INSURANCE - Professional indemnity insurance - Claims made policy - No claim made during the term of policy - Effect of s.54 of Insurance Contracts Act 1984 (Cth) - Application to join insurer in proceedings under s.6 of Law Reform (Miscellaneous Provisions) Act 1946 (NSW) - Onus of proof in such applications.

LEGISLATION CITED: Insurance Contracts Act 1984 (Cth) ss.45, 54 Law Reform (Miscellaneous Provisions) Act 1946 (NSW) s.6

FAI General Insurance Co Limited v Australian Hospital Care Pty Limited [2001] HCA 35, (2001) 204 CLR 641 Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited (1993) 176 CLR 332. CASES CITED: Homebush Abattoir Corporation v Bermria Pty Limited (1991) 21 NSWLR 605 House v The King (1936) 55 CLR 499 Tzaidas v Child (2004) NSWCA 252

Warwick Nettle - claimant PARTIES: Mathieson Group Pty. Limited - 1st opponent Vero Insurance Limited - 2nd opponent

COUNSEL: Mr. G. McVay for claimant Mr. J.V. Gooley for 2nd opponent

SOLICITORS: James A. Moustacas & Co., Bondi Junction for claimant Robin Elizabeth Watson, In House Legal, for 2nd opponent

LOWER COURT JURISDICTION: District Court

LOWER COURT JUDICIAL OFFICER: Judicial Registrar McDonald

LOWER COURT DATE OF DECISION: 20 September 2007

LOWER COURT MEDIUM NEUTRAL CITATION: Not applicable

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40669/06 DC 4589/05

HODGSON JA McCOLL JA CAMPBELL JA

Thursday 26 April 2007 NETTLE V. MATHIESON GROUP PTY. LIMITED & ANOR. Judgment 1 HODGSON JA: On 20 September 2006, the judicial registrar of the District Court dismissed a notice of motion by which the claimant (the plaintiff) sought an order that the second opponent (Vero) be joined as an additional defendant in proceedings in which the plaintiff was suing the first opponent (MG) for breach of contract and negligence in respect of the provision of engineering services. 2 The plaintiff seeks leave to appeal from that order. It is perhaps surprising that an appeal from the judicial registrar comes direct to the Court of Appeal. In any event, the application for leave to appeal has been heard on the basis that, if leave is granted, the appeal will be dealt with without further argument. 3 The appeal requires consideration of two statutory provisions. First, s.6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), which is in the following terms: 6 Amount of liability to be charge on insurance moneys payable against that liability (1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. (2) If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured (being a corporation) is being wound up, or if any subsequent winding-up of the insured (being a corporation) is deemed to have commenced not later than the happening of that event, the provisions of subsection (1) shall apply notwithstanding the winding-up. (3) Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves. (4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken. (5) Such an action may be brought although judgment has been already recovered against the insured for damages or compensation in respect of the same matter. (6) Any payment made by the insurer under the contract of insurance without actual notice of the existence of any such charge shall to the extent of that payment be a valid discharge to the insurer, notwithstanding anything in this Part contained. (7) No insurer shall be liable under this Part for any greater sum than that fixed by the contract of insurance between the insurer and the insured. (8) Nothing in this section shall affect the operation of any of the provisions of the Workers Compensation Act 1987 or the Motor Vehicles (Third Party Insurance) Act 1942. (9) Despite subsection (8), this section applies in relation to a policy of workers compensation insurance entered into by an employer (whether entered into before or after the commencement of this subsection), where the employer: (a) being a natural person, has died, or is permanently resident outside the Commonwealth and its Territories, or cannot after due inquiry and search be found, or (b) being a corporation (other than a company that has commenced to be wound up), has ceased to exist, or (c) being a company, corporation, society, association or other body (other than a company that has commenced to be wound up), was at the time when it commenced to employ workers to which the policy relates incorporated outside the Commonwealth and its Territories and registered as a foreign company under the laws of any State or Territory and is not so registered under any such law, or (d) being a company, is in the course of being wound up. 4 Second, s.54 of the Insurance Contracts Act 1984 (Cwlth), which is in the following terms: 54 Insurer may not refuse to pay claims in certain circumstances (1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but 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. (2) S ubject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim. (3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. (4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act. (5) Where: (a) the act was necessary to protect the safety of a person or to preserve property; or (b) it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act. (6) A reference in this section to an act includes a reference to: (a) an omission; and (b) an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter. 5 The circumstances giving rise to the application are as follows. 6 In 2002, the plaintiff contracted with MG for design and supervision of construction of rooms to accommodate his practice as a plastic surgeon. The work was carried out in 2002. The plaintiff says the design and work was defective, leading to delay in occupation of the rooms and need for rectification. 7 The sole director and shareholder of MG, Mr Mathieson, died in a motor vehicle accident on 3 August 2003, and it appears that MG has ceased trading. On 26 October 2005, ASIC gave notice to MG that it would be deregistered because its review fee had not been paid, but it appears that ASIC has deferred deregistration for the time being. 8 The plaintiff commenced proceedings against MG in October 2005. On 20 July 2006 the plaintiff filed a notice of motion seeking to join Vero as an additional defendant. MG had a policy of professional indemnity insurance with Vero or its predecessor from 1 March 2001 to 28 February 2003. 9 The relevant parts of the policy that was in force from 1 March 2002 to 28 February 2003 are the insuring clause and the run off provision. They are in the following terms: 1. INSURING CLAUSE The Company will indemnify the Insured against liability at law for compensation and claimant's costs and expenses arising from any claim or claims first made against the Insured and notified to the Company during the Period ofI11surance resulting from any Breach of Duty m connection with the Business or Practice but not in respect of any such claim or claims resulting from any act error or omission occurring or committed prior to the Retroactive Date.

10. RUN-OFF Notwithstanding anything to the contrary contained herein, the Company hereby agrees to indemnify the Insured in respect of any claim or claims first made against the Insured after the expiration of the Period of Insurance in respect of any civil liability in the conduct of the Business or Practice by the Insured. Provided always that, such indemnity will: (a) only apply when the Insured has ceased carrying on the Business or Practice; (b) apply in accordance with the terms and conditions of the Policy, including the Excess and Limit of Indemnity, in force at the time the claim is first made against the Insured; (c) be provided for no additional premium; (d) remain in force for such period as the Company continues to underwrite the engineers Facility; and (e) only apply if the Insured is not entitled to indemnity in respect of such claim under any other professional indemnity insurance policy issued after the expiry of the Period of Insurance of this Policy. 10 Vero was unable to locate a policy in force after 28 February 2003, and communications from MG's accountants and insurance brokers were to the effect that no subsequent policy was located. Apart from that, there was no evidence as to whether or not there was insurance effected with some other company. It was common ground that MG made no claim on Vero during the currency of the policy. 11 The judicial registrar determined that the plaintiff had an arguable case against MG. However, so far as the judicial registrar could determine from the evidence, the plaintiff did not give MG any notice of a potential claim before the death of Mr Mathieson. 12 The judicial registrar was not satisfied that Vero was entitled to disclaim liability, within s.6(4) of the Law Reform (Miscellaneous Provisions) Act, referring to Tzaidas v Child [2004]) NSWCA 252. The judicial registrar was not able to determine that prejudice suffered by Vero would result in its liability being reduced to nothing, in terms of s.54(1) of the Insurance Contracts Act referring to FAI General Insurance Co Limited v Australian Hospital Care Pty Limited [2001] HCA 35, (2001) 204 CLR 641, Tzaida, and Ferrcom Pty Limited v Commercial Union Assurance Co of Australia Limited (1993) 176 CLR 332. 13 The judicial registrar then continued: 38. I must determine on discretionary grounds whether I should grant leave to the plaintiff to join Vero. There is a significant evidentiary gap, which I believe must dispose of the application in the exercise of the general discretion provided for in the section. The certificates of currency evidence a policy in force to 28 February 2003. Mr Lock suggests that the defendant was still trading in mid 2003. That evidence is equivocal. Vero agrees that it cannot find a policy in existence after that date and the broker says that the policy was not renewed. There is however, no evidence of that the plaintiff's representatives undertook searches or issued subpoenas to attempt to determine if the defendant took out insurance with another insurer, directly or through another broker, after 28 February 2003. The evidence shows that no attempt was made to investigate the question of insurance until after the statement of claim was filed. It appears that the plaintiff's solicitor had not written a letter of demand before commencing proceedings. 39. It may not be easy to find information about insurance. It may be that an application under part 5 of the Uniform Civil Procedure Rules is appropriate after some further inquiries, probably by way of subpoena, are undertaken. 40. lf the order was made, Vero would be forced to defend proceedings and undertake further inquiries, which may result in another insurer being located. I am sympathetic to Dr Nettle's position and his difficulty enforcing an arguable case. There was no time limitation to force him to commence proceedings when he did. I believe that the appropriate steps should be taken before consideration is given to joining an insurer who went off risk nearly six months before the principal of the defendant died. 41. For those reasons, I dismiss the notice of motion. I will hear the parties with respect to costs. 14 Mr McVay for the plaintiff submitted that the judicial registrar's exercise of discretion miscarried, because she took into account and exercised her discretion on an irrelevant matter, that is, the matter relating to whether MG had taken out insurance with another insurer after 28 February 2003. He also submitted that there was a denial of procedural fairness in her deciding the case on that basis, when it was not a matter that had been argued before her. 15 Mr Gooley for Vero submitted that the plaintiff's submissions did not show in what manner the judicial registrar had acted on a wrong principle, referring to Homebush Abattoir Corporation v Bermria Pty Limited (1991) 21 NSWLR 605, and submitted that no error of the type referred to in House v The King (1936) 55 CLR 499 had been made out. 16 Further, he submitted that there was no injustice in that, so far as the evidence before the judicial registrar went, the plaintiff did not give notice of any potential claim to MG before the death of Mr Mathieson. Also, since no notice of a claim was given to Vero before the death of Mr Mathieson, it could be inferred that MG was not aware during the period of the policy that the plaintiff proposed to make a claim. This gave rise to a situation where Vero was now unable to obtain any instructions in relation to the existence of any other policy or the circumstances of the claim. 17 In my opinion, it is clear from the paragraphs I have quoted from the reasons of the judicial registrar that she exercised her discretion against the plaintiff because of what she saw as an evidentiary gap, namely as to whether or not MG had taken out insurance with another insurer after 28 February 2003. 18 There is nothing in her reasons that discloses any relevance of that matter, and if attention was confined to matters disclosed in her reasons, it would follow that the discretion was exercised on the basis of an irrelevant consideration, and appellate intervention would be justified. 19 However, in this Court our attention was drawn to para.(e) of the run-off clause, which could make the existence of another policy relevant, in that if there were another policy, that could preclude MG and thus the plaintiff having the benefit of the run-off clause. However, that in turn raises the difficulty that para.(e) was never raised before the judicial registrar, giving substance to the plaintiff's submission that procedural fairness was denied. 20 Mr McVay contended that, if the matter had been raised, the plaintiff could have directly addressed the question of the so-called evidentiary gap, if necessary seeking an adjournment, and certainly could have addressed questions relating to the onus and quantum of proof required under s.6(4) of the Law Reform (Miscellaneous Provisions) Act and under the run-off clause. 21 On the matter of onus of proof, in my opinion the onus is on an applicant for leave under s.6(4) to show an arguable case that the insured in question has "entered into a contract of insurance by which the [insured] is indemnified against" the liability in question, as those words are used in s.6(1). Although the proviso to s.6(4) puts an onus on the insurer to satisfy the court of two matters, if the prohibition in the second sentence of s.6(4) is to apply, this does not in my view remove the onus on the applicant to show an arguable case under s.6(1) that it has a charge which can be enforced under s.6(4). 22 However, in my opinion, in this case, where the plaintiff gave evidence of inquiries made of MG's accountants, of MG's insurance brokers and of Vero, which did not disclose any suggestion of another insurance policy, and where Vero did not raise any question under para.(e) of the run-off clause, the absence of further evidence on the matter could not prevent a finding that the plaintiff had an arguable case under s.6(1) and would not in my opinion justify refusal of leave under s.6(4). 23 Accordingly, in my opinion, the discretion of the judicial registrar did miscarry. 24 Another difficulty with the decision of the judicial registrar is that, while the question of whether there was a policy after 28 February 2003 could be relevant to Vero's liability under the run off clause, it has no relevance to the alternative ground of liability on which the plaintiff relied, namely liability under the insuring clause together with s.54 of the Insurance Contracts Act, as interpreted in FAI v Australian Hospital Care. 25 It is arguable that that case is distinguishable from the present on the facts as they were before the judicial registrar, because there was no evidence before the judicial registrar that the plaintiff had made a claim on MG before the expiry of the policy; but Vero did not rely on that possible distinction before this Court. 26 Vero did however rely on the absence of such a claim as a discretionary consideration, as referred to earlier; but in my opinion this would not be sufficient to justify an exercise of discretion against the plaintiff. I would note also that that discretionary consideration has less weight in relation to the claim under the run off clause. 27 I might also add, though it is not a matter which this Court can take into account in making a decision in this case, that we have been told that the plaintiff proposes to lead evidence that he did in fact make a claim on MG before 28 February 2003, despite the absence of evidence to that effect before the judicial registrar. 28 In any event, for the reasons I have given, in my opinion the discretion of the judicial registrar did miscarry. In my opinion the plaintiff has an arguable case against MG. It is highly unlikely that MG would satisfy any judgment that the plaintiff could obtain against it, and the plaintiff has an arguable case against Vero; and in those circumstances in my opinion the appropriate exercise of discretion is to grant the leave sought. 29 For those reasons, in my opinion, leave to appeal should be granted and the appeal allowed. 30 There has been some argument on the questions of costs below. It was put by Mr McVay that an order should be made that Vero pay the plaintiff's costs of the proceedings below because, although leave had to be sought, Vero could have avoided the necessity for a contested court hearing. Mr Gooley submitted that costs should be costs in the proceedings, on the basis that they should turn on the ultimate resolution of the question whether the plaintiff does in truth have a claim against Vero. 31 On the whole I think the appropriate order is that the costs below be the plaintiff's costs in the proceedings. In my opinion the plaintiff's success in the appeal, however, should carry the costs of the appeal. 32 So for those reasons, I would propose the following orders: 1. Leave to appeal granted. 2. Appeal allowed. 3. Orders of the judicial registrar set aside. 4. Leave granted to the plaintiff pursuant to s.6(4) of the Law Reform (Miscellaneous Provisions) Act to commence an action against Vero, and Vero joined as a party in proceedings 4589 of 2005 in the District Court of New South Wales. 5. Costs of the application below to be the plaintiff's costs in the proceedings. 6. Vero to pay the plaintiff's costs of the leave application and the appeal. 33 MCCOLL JA: I agree. 34 CAMPBELL JA: I agree with the orders and reasons pronounced by the presiding judge but would add one matter only. If the argument that there was an evidentiary gap concerning the existence of another policy had been raised, an additional topic for argument would have been opened up. The operation of para.(e) of the run off provision needs to be considered in the light of section 45 of the Insurance Contracts Act 1984 (Cth) which provides: 45 "Other insurance" provisions (1) Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.

(2) Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first-mentioned contract. 35 If para.(e) of the run off provision was indeed the basis of the judicial registrar's decision, natural justice requires that the plaintiff have had the opportunity to argue that, even if there had been another policy, its existence did not remove any cover it would otherwise have had from Vero. When there are other reasons to set aside the decision of the judicial registrar, it is not necessary to decide whether that argument would ultimately have prevailed. 36 HODGSON JA: So the orders of the court are as I proposed. **********

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