REASONS FOR JUDGMENT
1 The applicant sells insurance policies to money lenders under which it indemnifies them against the risk that the security they hold might prove insufficient to discharge a given borrower's indebtedness. I shall refer to it as the 'mortgage insurer'. It is an ordinary part of the mortgage insurer's business to obtain valuations of the properties over which lenders propose to take security. The respondent was a valuer who issued valuations in respect of four properties and upon which the mortgage insurer says it relied by thereafter issuing insurance to lenders who took security over the properties. The borrowers all defaulted and, in due course, the properties were sold. Upon the sales, however, there was in each case a shortfall between the proceeds of sale and the amount secured by the mortgages. The lenders thereafter claimed on the mortgage insurer for the differences and it met those claims. The price for which each property was sold was less than the valuations provided by the valuer. It formed the view that the valuations had been issued negligently. It therefore sued the valuer in this Court. Shortly afterwards, the valuer went into liquidation which had the effect of staying the present proceedings until the Court granted leave to continue them. On 24 August 2011 I granted such leave: Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in Liquidation) (No 1) [2011] FCA 972.
2 As it happens, the valuer has a policy of professional indemnity insurance issued by the International Insurance Company of Hannover Limited. I will refer to it as the 'professional indemnity insurer'. It has accepted that the valuer is entitled to indemnity in respect of the claims arising from the valuations of three of the four properties.
3 The mortgage insurer now seeks to join the professional indemnity insurer to the proceedings as a second respondent. The professional indemnity and mortgage insurers are not in privity of contract with each other for the policy which exists is between the professional indemnity insurer and the valuer. At common law it is not possible for the mortgage insurer to sue the professional indemnity insurer. Although the common law and equity have, on some occasions and to a limited extent, ameliorated the common law's approach to privity, none of those doctrines is here apposite. It is not suggested, for example, that the valuer holds the benefits of the policy on trust for the class of persons who might be injured by its tortious conduct for there is lacking not only the requisite intention on the valuer's part to constitute such a trust but also an inability to identify who its putative beneficiaries might, in any event, be. Nor is it suggested that the case can be brought within the principle annunciated in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107 which permits recovery by a nominated insured not in privity.
4 Instead, the mortgage insurer pursues two distinct routes. First, it submits that it is entitled to call upon s 6(1) of Law Reform (Miscellaneous Provisions) Act 1946 (NSW) ('the Act') which, in certain circumstances, creates a charge over insurance funds which may be enforced by a party benefited by, if not privy to, a contract of insurance. Secondly, it claims to be entitled to a declaration that the professional indemnity insurer is liable to the valuer on the policy in question.
5 The first property was located at 1/18 Hill Street in Tweed Heads. On 3 October 2006 the valuer valued the premises at $1,000,000. On the strength of the valuation Permanent Custodians Ltd advanced to the borrower the sum of $800,000. The mortgager insurer then issued a policy to the lender, it says relying on the same valuation. The borrower subsequently defaulted on the loan, the lender entered into possession and thereafter sold the property using the proceeds to reduce the borrower's debt. It then claimed the outstanding amounts from the mortgage insurer who paid it the sum of $317,968.75. This was paid on 12 November 2010.
6 The professional indemnity insurer did not dispute that it was liable to indemnify the valuer for this claim. Section 6(1) of the Act provides relevantly that if a person is insured against a liability to pay damages 'the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation…be a charge on all insurance moneys that are or may become payable in respect of that liability'. Section 6(4) gives a claimant a direct right of action in respect of the statutory charge with the leave of the Court.
7 In this case the policy issued by the professional indemnity insurer covered the period from 14 January 2010 to 14 April 2011. It was a claims made policy; that is to say, it provided indemnity to the insured in respect of claims made during the insured period regardless of when the factual circumstances giving rise to that claim occurred. In this case, the claim was made by the mortgage insurer on the valuer by a letter dated 15 February 2011. The parties proceeded on the basis that the relevant 'event' for the purposes of s 6(1) of the Act was the paying out of the lender's mortgage insurance policy by the mortgage insurer on 12 November 2010. That was within the period of cover provided by the policy. There was no dispute that s 6(1) operated in that circumstance to create the statutory charge or that s 6(4) could, subject to a grant of leave, permit the mortgage insurer to seek to enforce that charge against the professional indemnity insurer. In those circumstances, no reason appears not to grant leave to the mortgage insurer to pursue a claim against the professional indemnity insurer under s 6(4) in respect of this property. Indeed, that course was not opposed. The mortgage insurer also sought to pursue a case against the professional indemnity insurer under which it would obtain, if successful, a declaration that the professional indemnity insurer was liable to the valuer. Given that the professional indemnity insurer will be joined under s 6(4), this course lacks utility and should not be acceded to.
8 The second property was situated at 4607, 'Q1', 9 Hamilton Street, Surfers Paradise. The valuer produced a valuation of this property dated 2 June 2005 which put the property's worth at $1,030,000. The borrower obtained a loan of $772,500 but ultimately defaulted. The property was sold and the lender recovered less that the loan. It claimed on the mortgage insurer the loss of $303,450.21 which was paid on 2 November 2009. A claim was then made on the valuer on 21 May 2010.
9 The professional indemnity insurer says that the mortgage insurer should not be permitted to join it in respect of this property for two reasons. First, it points to the terms of the policy as containing an exclusion which it is entitled to invoke. Secondly, it says that there can be no claim under s 6 of the Act because, putting the matter shortly, the policy did not exist at the moment of the event giving rise to the claim.
10 As to the first point, it draws attention to Endorsement 1 of the policy. It relieves the professional indemnity insurer of its obligation to indemnify the valuer for losses arising out of 'any valuation exceeding $1,000,000 that: (a) was not reviewed by a second appropriately qualified valuer prior to such valuation being issued; and (b) where such review is not clearly recorded on the [valuer's] file for such valuation'. The valuation was for $1,030,000: thus the first part of the exclusion is engaged. The debate concerns the balance.
11 Exhibit 2 on the application consisted of a 23 page bundle of documents extracted from the valuer's file. The written submissions for the professional indemnity insurer foreshadowed its tender in this way:
The Surfers Paradise valuation exceeded $1 million. However the [valuer's] file does not contain any record, clear or otherwise, that the requisite peer review had been conducted. (This can be proved, if necessary, by the tender of the copy of the file held by the [professional indemnity insurer]. To avoid this formality, the [professional indemnity insurer] will make the file available for inspection in advance of the hearing and invite [the mortgage insurer] to indicate whether it accepts the [professional indemnity insurer's] contention.)
12 It was the mortgage insurer which tendered Exhibit 2. Its precise nature was not proved but there was no dispute that it was drawn from the valuer's file. In his submissions on behalf of the mortgage insurer, Mr Mehigan of counsel submitted that there had not yet been discovery and that one could not be certain that the absence of material from Exhibit 2 necessarily meant that no such material existed. It is not entirely clear to me how this dispute should be resolved. The written submission suggests an informal arrangement whereby formal proof might be avoided but it is not clear that such an arrangement was reached. To the extent that the last sentence suggests that an invitation would be extended to the mortgage insurer it seems clear that any such invitation has not been accepted. One is left, therefore, only with the formalities and these are that the source of Exhibit 2 has not been proved, nor the exhaustive nature of its content.
13 That conclusion resolves this first issue for unless Exhibit 2 be exhaustive or, at least on an agreed basis, representative, I cannot draw the inference that either of the matters in (a) or (b) of Endorsement 1 has not been satisfied. The file may well contain such matters. It follows that the endorsement should not be a bar to leave.
14 Against the possibility that it might be concluded that Exhibit 2 was exhaustive of the contents of the valuer's file Mr Mehigan sought to show that there was material within the exhibit which suggested that there may well have been a second valuer who looked at the file so that the terms of the endorsement were not, in any event, engaged; further, that the threshold he had to surpass on this occasion was only the demonstration that the endorsement was arguably not applicable and that any uncertainty about this issue merely rendered the matter triable.
15 I accept that triability - that is, the presence of an arguable case that the exclusion provided for in the endorsement does not apply - is the requisite standard in relation to the question of a grant of leave under s 6(4): Tzaidas v Child (2004) 61 NSWLR 18 at 25 [21] per Giles JA and the authorities there collected. I am prepared to assume a similar standard should apply to the applications for joinder based upon declaratory relief. However, I do not think this would have assisted. The file copy of the valuation suggested it had been done by a Ray Allsop with a file number of 26346. It is true that the file contains another valuation with the same date (handwritten below an earlier, crossed-out, date) and a different file number, 25181 (also crossed-out by hand). Assuming in the mortgage insurer's favour that this might be a second valuation, the file would nevertheless still be caught by sub-clause (b) of the endorsement which requires that the second review be 'clearly recorded on the [valuer's] file for such valuation'.
16 Mr Mehigan also advanced an alternative legal argument. The endorsement was to be seen, in substance, as a warranty by the valuer that, at the time of its entry into the claims made policy, all of its valuations of properties which exceeded $1,000,000 had been checked by two valuers and that this was clearly shown on the file. This characterisation of the endorsement as a warranty mattered because s 24 of the Insurance Contracts Act 1984 (Cth) deemed contractual warranties about 'the existence of a state of affairs' to be statements made during negotiations proceeding the policy's inception. Section 24 is a reformative provision whose operation was designed to prevent an insurer from terminating a policy on the basis of a contractual representation outside the regime provided for in respect of non-disclosure and misrepresentation by s 28. That provision limits the ability of an insurer to decline cover effectively to the amount of prejudice generated by the non-disclosure or misrepresentation.
17 If the mortgage insurer were correct and it were true that the endorsement was, in substance, a warranty then this would mean that it could not operate as the professional indemnity insurer contended. This was either because it was a warranty to which s 24 directly applied or alternatively it was to be seen as an attempt to contract out of Part IV of the Insurance Contracts Act, a course both prohibited and rendered invalid by s 33. That section operates to make the provisions of Part IV a code in relation to misrepresentations and non-disclosures.
18 A similar argument was accepted by the Full Court to be arguable for s 6(4) purposes in Macquarie Underwriting Pty Ltd v Permanent Custodians Ltd (2007) 240 ALR 519. In that case the policy contained an exclusion in respect of circumstances of which the insured was aware prior to entry into the policy and which it ought reasonably to have known might give rise to a claim. It was argued that an exclusion in those terms would directly undermine the operation of s 28 and its specific regime relating to non-disclosure. Allsop and Buchanan JJ concluded (at 524-525 [28]) that that argument was 'arguable' so that the exclusion did not stand in the way of a s 6(4) claim. I would be inclined, in terms of arguablity, to reach the same conclusion. Thus, even if Exhibit 2 had been shown to be the whole of the valuer's file, I would nevertheless have concluded that for present purposes it was arguable that the exclusion did not apply.
19 The professional indemnity insurer then submitted that the mortgage insurer had paid out on the claim under the policy on 2 November 2009. This date preceded by ten weeks the inception of the professional indemnity policy on 14 January 2010. Mr Elliott of counsel, who appeared for the professional indemnity insurer, submitted that no charge under s 6(1) of the Act could have arisen because the event giving rise to the claim happened no later than the time at which the payment by the mortgage insurer to its insured lender occurred.
20 There is no doubt that the New South Wales Court of Appeal has so held: The Owners of Strata Plan 50530 v Walter Construction Group Ltd (in Liq) [2007] NSWCA 124 at [30] per Hodgson JA, Giles and Tobias JJA agreeing. As a decision of an intermediate appellate court other than the Full Federal Court I am bound to follow it unless persuaded it is plainly wrong: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at 151-152 [135]. Although that passage is strictly concerned with the interpretation of national legislation I do not think a different approach should be taken to the decision of a State appellate court about the meaning of a particular statute of that State.
21 The decision in Walter Construction follows a long consideration by first instance judges of the same question. The initial position in the NSW Supreme Court was that now espoused by the Court of Appeal: Manettas v Underwriters at Lloyds (1993) 7 ANZ Ins Cas 78,025 per Cole J. Shortly afterwards, Cole J followed that conclusion in Capita Financial Group Ltd v Triden Properties Ltd (Unreported, Supreme Court of NSW, Cole J, 6 September 1993). Two years later, Manettas was not followed by Young J in Schipp v Cameron (1995) 8 ANZ Ins Cas 75,867. In National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (No 4) (1996) 138 ALR 409 Lindgren J concluded (at 421) that it was arguable, for joinder purposes, that s 6(1) could apply to policies which post-dated the event giving rise to the claim, that being the situation which will very frequently be the case with claims made policies. In the following year Lindgren J concluded that the proposition was not only arguable but correct: FAI General Insurance Co Ltd v McSweeney (1997) 73 FCR 377 at 417. Despite that, the Supreme Court has preferred the Manettas view: cf. Carnie v Richmond (Unreported, Supreme Court of NSW, Dowd J, 9 September 1997); NSW Aboriginal Land Council v Ace Global Markets Ltd (2005) 188 FLR 389; The Owners of Strata Plan 50530 v Walter Construction Group Ltd (in Liq) [2006] NSWSC 552. Unsurprisingly, since the Court of Appeal's decision in Walter Construction, first instance judges of the Supreme Court have followed it: see, for example, Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834 at [19] per McCallum J; Provident Capital Ltd v Gould [2009] NSWSC 1458 at [22] per Rothman J.
22 Mr Mehigan argued that I should prefer the position in McSweeney. This was because the contrary position was said to be, in the requisite sense, plainly wrong. This, in turn, was to be seen as supported by the Full Court's decision in Macquarie Underwriting. It is true that in that case the Full Court did grant leave under s 6(4) of the Act on a claims made policy when the event giving rise to the claim antedated the inception of the policy. The joint judgment of Allsop and Buchanan JJ does not, however, mention the issue which leads one to query whether it was, in fact, the subject of argument. The third member of the bench, Graham J, thought it arguable that a claim could be sustained in those circumstances (at 539 [104]) although he did not refer to Manettas, McSweeney or the Court of Appeal's decision in Walter Construction. Graham J's observations do not form the ratio decidendi of the decision.
23 Ultimately, the debate between these two lines of authority turns on the correct interpretation of s 6(1) and, in particular, the words 'insurance moneys…that may become payable'. It is plain that those words do not themselves answer the question. The debate also turns on some remarks made by McHugh and Gummow JJ in Bailey v NSW Medical Defence Union Ltd (1995) 184 CLR 399 at 449 where it was said that the words of s 6(1) were 'apt to deal with the situation where, whilst the charge has descended, there is as yet no sum which could be identified as presently payable by the insurer to the insured. In such a case, the statutory charge operates, by loose analogy to an agreement for a charge on after-acquired property, upon such moneys as and when they do become payable.' The debate has hinged in part on whether these statements are to be viewed as only applying to situations where the charge has descended or whether a wider operation is available.
24 This is a difficult question about which it is not possible to say anyone is plainly wrong. In that circumstance, it seems to me that I must follow Walter Construction. I do not accept Mr Mehigan's argument that Macquarie Underwriting assists.
25 Accordingly, I am bound to conclude that I should not grant leave in relation to the claim over the property at Surfers Paradise under s 6(4) of the Act.
26 That does not, however, dispose of the entirety of the mortgage insurer's case on that property for it also seeks joinder under Rule 9.02 of the Federal Court Rules 2011 so that it may seek a declaration as to the professional indemnity insurer's liability to the valuer.
27 This submission should be accepted. The professional indemnity insurer presently invokes Endorsement 1 of the policy to deny liability. There is, therefore, a controversy as to the liability of the professional indemnity insurer to the valuer and this is a debate in which the mortgage insurer plainly has an interest. The Full Court of this Court has held that the joinder of an insurer on such a basis, at least where indemnity is in issue, involves no error: Employers Reinsurance Corporation v Ashmere Cove Pty Ltd (2008) 166 FCR 398 at 412-414 [63]-[74]. What remains of privity of contract in that circumstance is not altogether clear, but I do not think it would be appropriate to depart from the Full Court's approach. In that circumstance, I do not need to consider whether joinder for the purpose of seeking declaratory relief under s 562 of the Corporations Act 2001 (Cth) is also appropriate.
28 The third property was located at 3 Richmond Avenue, Bundall, which is also on the Gold Coast. On 27 October 2004 the valuer provided a valuation of these premises at worth $775,000. Permanent Custodians Ltd extended a loan of $589,206.24 to the premises' owners secured by a mortgage. The lender took out a policy from the mortgage insurer. The owners defaulted and the premises were sold but the proceeds of sale were insufficient to recover the loan. The lender claimed under the policy and, on 9 August 2010, the mortgage insurer paid the sum of $104,383.28.
29 In the case of this property the claim was paid during the life of policy but the professional indemnity insurer nevertheless contends that the event generating the claim occurred not at that time but instead at the time at which the loss became readily ascertainable. In that regard Mr Elliott submitted that a valuation report dated 24 November 2009 showed the property to be worth $610,000 whilst a sale report of 25 November 2009 suggested a price of $620,000 to $650,000. It is not plain from the evidence what the sales price ultimately was but I did not apprehend the mortgage insurer to take issue with the factual assertion that it was reasonably plain that loss had been suffered as at about 24 November 2009.
30 The submission instead was that the relevant event occurred not when loss was readily ascertainable but when the claim was in fact paid, in this case on 9 August 2010 (during the life of the policy). This submission is contrary to two of the judgments in Kenny & Good Pty Ltd v MGICA (1992) Limited (1999) 199 CLR 413. A mortgage insurer's interest which attracts the valuer's duty of care is its interest in seeing the lender's loan recouped. Thus 'the time that loss occurs (and hence the time when the tort is complete) is when recoupment is rendered impossible. In the case of a mortgage transaction, that will occur when it is reasonably ascertainable that the sale will result in a loss' (at 425 [16] per Gaudron J, footnotes omitted). Gummow J thought that in such a case the cause of action accrued when loss was suffered and this 'was, at the earliest, when the mortgagee defaulted' (at 447 [84]). Mr Elliott submitted that these statements had been applied by Davies J in Ross v Cook [2009] NSWSC 671 to conclude that, at least so far as a mortgage insurer was concerned, the time at which the cause of action accrued was when the loss was reasonably ascertainable. It was not suggested that I should approach the issue of when the 'event' for the purposes of s 6(1) occurred any differently to the issue of the accrual of the cause of action. Making that assumption, the reasons of Davies J demonstrate that Mr Elliott's submission is correct and I see no reason, with respect, not to follow it.
31 Mr Mehigan submitted that another passage in Kenny & Good proved the contrary. Kirby and Callinan JJ had said (at 457 [119]) that '[t]he obligation to perform, and the performance of that contract by the respondent therefore caused the respondent to suffer the loss, by making the whole of the payment that it then made'. But this passage occurred during a discussion about causation. The preceding three sentences were:
The facts of this case not only satisfy a "but for" test but also the other tests referred to in Chappel v Hart (1998) 195 CLR 232. Here, the valuation (given negligently) caused the respondent to insure the loan, and to suffer the loss arising from that insurance. The negligence of the valuer was directly productive of the making of the insurance contract. …
32 In that circumstance I conclude that the claim against the valuer accrued on or about 24 November 2009 when it was readily ascertainable that a loss would be made on the Bundall property. It was at that time that the partiers were content to assume that the 'event' occurred for the purposes of s 6(1). In any event, since 24 November 2009 was before the inception of the policy, it follows, for reasons already given, that leave may not granted under s 6(4) of the Act.
33 Unlike the position in respect of the Surfers Paradise property, the professional indemnity insurer has accepted indemnity for the claim on the Bundall property. There is, therefore, no controversy between the professional indemnity insurer and the valuer about the operation of the policy which declaratory relief could usefully resolve. Consequently the reasoning in Employers Reinsurance does not directly support the joinder of the professional indemnity insurer. Mr Mehigan pointed to passages in that case (at 409-410 [49]-[51]) which highlighted the difference between an issue between the parties and the constitutional nature of a matter by reference to which jurisdiction might be conferred. But those remarks are not apposite since the passages relied upon dealt with (and dismissed) an argument that the joinder which had occurred had been constitutionally forbidden. The remarks were not directed to the procedural issue of joinder.
34 Alternatively, the mortgage insurer relied upon s 562 of the Corporations Act. It confers a statutory priority over other creditors when a liquidator of an insured receives the proceeds of an indemnity policy. Granted that that be so, I do not see that there is presently any dispute about this which is available to be resolved. The liquidator has not come into funds; he has not indicated that he intends to disburse them if he does come into them contrary to the statutory demands of s 562. In any event, s 562 has no impact on the professional indemnity insurer whose obligations remain unchanged.
35 It follows that in the case of the Bundall property, joinder is not warranted.
36 The fourth property was situated at Lot 3604/12-18 Executive Drive, Burleigh Waters. The valuer had valued it on 23 October 2006 at $427,000. Subsequently, the borrower defaulted and the lender made a claim which the mortgage insurer paid out in the sum of $124,419.87. This occurred on 2 November 2009, prior to the inception of the policy. For reasons already given, and subject to the same assumptions, this means that there can be no grant of leave under s 6(4) of the Act. Because there is no dispute about the valuer's entitlement to indemnity, joinder of the professional indemnity insurer is not justified on that basis. Nor, for reasons already given, does s 562 of the Corporations Act provide an alternate path.