PARTIES: GEOFFREY ARTHUR GREENTREE & ANOR V FAI GENERAL INSURANCE CO LTD

Appellant: BAKER & BORTHWICK, FORSTER By their Sydney agents HUGHES & CO

Insurance - indemnity - "claims made and notified" policy - no claim made or reported during period of cover - whether "by reason of some act of the insured or of some other person" - "omission" - Insurance Contracts Act 1984 (Cth), s54

Insurance - indemnity - "claims made and notified" policy - no claim made or reported during period of cover - whether "by reason of some act of the insured or of some other person" - "omission" - Insurance Contracts Act 1984 (Cth), s54

Insurance - statutory charge of liability on insurance moneys - application for leave to proceed against insurer - whether arguable case of liability against insured - Law Reform (Miscellaneous Provisions) Act 1946, s6

Brian W Walker & Associates held a policy of professional indemnity insurance with FAI General Insurance Co Ltd (the respondent) from 21 July 1986 to 21 July 1989, which covered both Mr Brian Walker and his company Brian W Walker & Associates (collectively, "the insured"). The policy was a "claims made and notified policy". It was a condition precedent to the right of indemnity that immediate notice in writing be given of any claim made. During the period of cover, no claim was made on the insured nor reported to the respondent.

On 3 November 1994, Mr and Mrs Greentree (the appellants) were successful in obtaining judgment against the insured in respect of allegedly negligent engineering work performed by the insured for the appellants. The judgment was not satisfied by either insured, and it was found that they were unable to meet it.

In 1995, the appellants sued the respondent in the Commercial Division seeking a declaration that they were entitled to be indemnified by the respondent pursuant to s6 of the Law Reform (Miscellaneous Provisions) Act 1946 (the "Act") in respect of the judgment sum awarded against the insured.

On 23 July 1995, Bainton J refused the appellants' application to commence proceedings against the respondent. His Honour held that the insured were not indemnified under the policy in respect of their liability to the appellants. Accordingly, the appellants could not succeed in their claim against the respondent under s6 of the Act. On appeal, the appellants argued that s54 of the Insurance Contracts Act 1984 (Cth) conferred a right of action upon the insured against the respondent.

S54 does not apply where the insured has not received a claim within the period of cover.

Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652; East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1988) 153 ALR 529; FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89, considered.

MASON P: In about mid 1988 the appellants retained Mr Brian Walker acting on behalf of his company Brian W Walker & Associates Pty Ltd (hereafter collectively referred to as "the insured") to prepare engineering details in accordance with existing approved building plans and specifications for a motel at Forster. The insured entered upon the retainer and purportedly performed it within the next year.

It was later observed that the building was subsiding. Cracks were observed by Mr Walker in May 1991. Complaints by the appellants made in 1991 led to proceedings in the Construction List commenced in 1994. On 3 November 1994 Rolfe J held each of the insured liable on the basis of negligence and (as regards the company) breach of contract. Judgment in the sum of $403,871 plus costs was entered against each insured. The judgment has not been satisfied and it has been found that the insured are unable to meet it.

In 1995 the appellants sued the respondent in the Commercial Division seeking a declaration that they were entitled to be indemnified by the respondent under a specified Professional Indemnity Policy in respect of the judgment sum awarded against the insured. The relief sought in the summons appears misconceived and it has latterly been reformulated in an Amended Summons filed by leave after judgment in the appeal was reserved. The real issue propounded by the appellants was reflected (dimly) in a notice of motion seeking leave to commence proceedings against the respondent pursuant to s6 of the Law Reform (Miscellaneous Provisions) Act 1946. Leave was granted ex parte on 17 March 1995 in the absence of an appearance by the respondent. That non-appearance was unintentional and application was later made to set aside the leave. In a contested application the issue became one of determining whether leave would be granted in the event of a notional fresh application for leave being made.

On 23 July 1995 Bainton J revoked the leave previously given and refused the appellants' application to commence proceedings against the respondent. This appeal challenges that decision on substantive grounds. The appeal is incompetent having regard to the interlocutory nature of the decision challenged. However, the court has heard full argument. I would grant leave because the issues debated are of significance.

The following facts were found by Bainton J and are not in dispute:

(1) Brian W Walker & Associates Pty Ltd held a policy of professional indemnity insurance with the respondent for the following periods only, namely

and no other policy of professional indemnity insurance by FAI;

(2) The policy was a "claims made and notified policy". The insuring clause is in the following terms:

"The company agrees subject to the limitations terms and

conditions hereinafter mentioned or endorsed hereon:

1. To indemnify the Insured against any claim for compensation first made against the Insured during the period of cover specified in the Schedule and reported to the Company during the period of cover specified in the Schedule,

(a) for breach of professional duty in the conduct of the practice ... by reason of any negligence ... whenever ... the same was or may have been committed or alleged to have been committed..."

(3) Condition 2(a) stipulated that it was a condition precedent to the right of indemnity that immediate notice in writing be given of any claim made;

(4) On 16 October 1991 the appellants' solicitor wrote to Mr Walker asserting negligence in the performance of the retainer and suggesting that the insured notify his professional indemnity insurer as soon as possible;

(5) The insured apparently did nothing in this regard. On 12 July 1993 the appellants' solicitors first notified the respondent directly. Subsequently the respondent was notified about the proceedings that had been commenced in the Construction List.

Bainton J also held that Mr Walker himself was not at any time covered by any policy issued by FAI. I understand this finding to represent only that Mr Walker was not himself "the Insured" named in the Schedule to the policy. However, the policy defined "the Insured" to include any person who was during a period of cover a principal, partner, director or employee of the Insured as named in the Schedule, but only in respect of work carried out in the practice. Mr Walker appears to have been treated as an Insured under this extended definition. This matter was not really explored in argument, but since it is not determinative I shall dwell on it no longer. The point could have been critical if anything turned on the different bases of liability of Mr Walker (negligence) and his company (negligence and contract) given the different dates at which the different causes of action would have arisen.

Before Bainton J, the respondent did not dispute that the professional negligence claim against its insured was of the type covered by the policy. Its point was that the policy only responded if a claim was first made against the insured during the period of cover. Since no claim was made, let alone notified, during the period of cover (ie between 21 July 1986 and 21 July 1989) no insurance moneys were payable in respect of the insured's established liability to the appellants. It followed that s6(1) of the 1946 Act could not give rise to any charge in favour of the appellants enforceable against the respondent pursuant to s6(4). The granting of leave was therefore an exercise in futility.

Bainton J accepted these submissions. He was correct to do so. There was nothing for s6 to latch onto, because the insured were not, in the events which happened, indemnified under the policy against liability to pay the damages awarded against them.

In deciding whether or not to grant leave pursuant to s6, the Court considers whether the applicant has shown "an arguable case of liability against the insured, being a liability against which the insured is indemnified by a contract of insurance in force at the time of the happening of the event said to give rise to the claim" (AFG Insurances Limited v Andjelkovic [1981] FCA 104; (1981) 54 FLR 398 at 400, cited by Priestley JA in Oswald v Bailey (1987) 11 NSWLR 715 at 734). Prima facie, the appellants fail to satisfy this requirement, because no claim was made upon the insured during the policy's currency, and therefore no timely notification to the insurer occurred either.

According to the terms of the policy, the insurer's liability depended upon a claim having been first made upon Brian W Walker & Associates Pty Ltd during one of the three policy years and upon such claim having been reported to the respondent during the policy year in which it was first made. It was not in fact so made or so reported. No claim was made against the insured until 1991 by which time the insured had no insurance cover. The policy had expired on 21 July 1989.

As in the court below, the appellants sought to meet the inexorable logic of these propositions by reliance upon the submission that they had an arguable case for being able to satisfy s54 of the Insurance Contracts Act 1984 (Cth). The argument was that, because the negligent act occurred during the period of the policy (to be precise, during the third year, that ending 21 July 1989) and because the consequences of those negligent acts were not known to the insured until a later period (when the building began to subside), then s54 of the Insurance Contracts Act arguably conferred a right of action upon the insured which the appellants could assert in their stead in the events which happened, pursuant to s6 of the Law Reform (Miscellaneous Provisions) Act.

The appellants place particular reliance upon authoritative statements to the effect that the remedial scope of s54 cannot be defeated by drafting forms: East End Real Estate Pty Ltd v C E Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400 at 403-4; Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652 at 668-70.

In a belatedly-filed notice of contention, the respondent has raised the issue whether s6 applies to a claim under a claims made and notified policy as distinct from an occurrence-based policy. The matter has been discussed in a number of first instance cases which are themselves usefully discussed by Einstein J in Schipp v Cameron (unreported, 9 July 1998, E 6425/91). The parties have put in written submissions on the point, but I find it unnecessary to resolve this question. I shall assume in the appellants' favour that s6 is capable of applying to such policies.

INSURANCE CONTRACTS ACT 1984, S54

Section 54 provides:

54(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 sub-section (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) Subject 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.

(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:

(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.

The report of the Australian Law Reform Commission, Insurance Contracts (Report No 20, 1982) identified two mischiefs which the provision which became s54 of the Insurance Contracts Act 1984 was designed to address. The first was the problem that the precise remedy available to an insurer in the event of breach depended on matters of form rather than substance (para 218). A breach of an obligation expressed as a warranty would entitle the insurer to rescind the contract, however the same obligation expressed as an exclusion merely entitled the insurer to refuse to pay the claim in question (para 216). Secondly, the insurer could deny liability under the contract of insurance irrespective of whether the breach was in any way causally related to the loss and even though the insurer may have suffered little or no prejudice as a result of the breach (para 218-20). Each mischief was identified in the explanatory memorandum to the Act when introduced into Parliament. Concerning s54 it stated:

The existing law is unsatisfactory in that the parties' rights are determined by the form in which the contract is drafted rather than by reference to the harm caused. The present law can also operate inequitably in that breach of the term may lead to termination of the contract regardless of whether or not the insurer suffered any prejudice as a result of the insured's breach. The proposed law will concentrate on the substance and effect of the term and ensure that a more equitable result is achieved between the insurer and the insured.

Section 54, with ss55 and 55A, comprise Div 3 of Pt V (ss34-55A) of the Act. Section 55 states:

The provisions of this Division with respect to an act or omission are exclusive of any right that the insurer has otherwise than under this Act in respect of the act or omission.

In Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652 at 668 Dawson, Toohey, Gaudron and Gummow JJ recognised that:

Section 55 evinces a legislative intention to establish a regime which will overcome the perceived inequities to the insured in the operation of the common law remedies available to the insurer. Those remedies depended upon form rather than substance. Thus, if an obligation of the insured were expressed as a condition, the insurer might rescind for breach, whereas if the same obligation were expressed as an exclusion from the cover, the insurer might refuse to allow a claim. Again, there might be little or no causal connection between the claim itself and the conduct relied upon by the insurer in refusing the claim.

But the identification of particular mischief is a prelude to legislative drafting. It does not relieve the court from struggling with issues of construction and application of the words adopted by Parliament. Although "words are only pictures of ideas on paper" (Dodson v Grew [1767] EngR 23; (1767) Wilm 272 at 278 97; ER 100 at 108 per Wilmot CJ), the form of words adopted by the legislature may determine the substance of the legislative response to the mischief, sometimes intentionally sometimes unintentionally.

Section 54 has thrown up a number of issues, especially in relation to "claims made and notified" insurance. A recent review of the case law has described it as "an area of considerable judicial, academic and commercial disquiet" (Patrick Mead, "The Effect of section 54 of the Insurance Contracts Act 1984 and Proposals for Reform" (1997) 9 ILJ 1).

Section 54(1) is directed to situations in which two elements are present. The first element is that "the effect" of the particular contract of insurance would, but for s54, entitle the insurer to refuse to pay a claim by reason of "some act of the insured or of some other person" that occurred after the contract was entered into. (In this context "act" includes "omission" (s54(6).) The second element is that the act which would, but for s54, entitle the insurer to deny liability, must not be one in respect of which s54(2) applies; that is, it must not be an act which could reasonably be regarded as being capable of causing or contributing to any loss covered by the contract of insurance. It thus becomes critical for the purposes of s54 to identify the relevant "act" (including omission), and then to assess whether that act is of a kind inside subsection (1) and outside subsection (2).

The way in which an insurance policy is structured and expressed will potentially determine what conduct of the insured could be said to constitute the "act" for the purpose of s54(1). To take an extreme case, a policy which covers an insured with respect to professional negligence will have nothing to say in relation to (not respond to) a motor accident that injures the insured. No massaging of the form of such policy would lead a court to conclude that a denial of liability by the insurer had anything to do with an act of the insured or of another person. It would be meaningless to say that the insurer's refusal to pay on the motor vehicle claim was "by reason of some act" of the insured or anyone else. True it is that the insured was unfortunate enough to be injured in a car accident (let it be assumed, due to the fault of the insured) rather than to commit an act of professional negligence. The conduct of the insured leading to injury in the motor vehicle accident might be described as an act or an omission, but as regards the putative insurance policy for professional indemnity it would be more accurate to describe it simply as a "non-event" (East End at 405 per Gleeson CJ). The gravamen of the insurer's refusal to pay on the claim would not be the fact that the insured did or omitted to do something, but rather that something relevant to the policy did not happen (cf Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529 at 565 per Hodgson CJ in Eq). To return to the words of s54(1), it must be "the effect of" the contract of insurance that enables the insurer to refuse to pay the claim before s54 is engaged. The issue of sufficiency of causal connection was emphasised by the High Court in Antico (at 660-1, 670, 672-3), a case to which I shall return.

What is involved in this analysis is the same process that occurs when the law decides whether one event caused or contributed to another. Although the judicial task is described as a question of fact, there is necessarily some element of judgment, some normative process, in which it is perceived sensible and fair to make the causative link. "Common sense answers to questions of causation will differ according to the purpose for which the question is asked" (Environment Agency v Empress Car Co (Abertillery) Ltd [1998] UKHL 5; [1998] 2 WLR 350 at 356 per Lord Hoffmann. See also Chappel v Hart [1998] HCA 55). But common sense prevails. If A's careless act breaks B's leg leading to B being placed in an ambulance and driven to hospital, A would not be regarded as having caused B's death in the event that the ambulance was struck by lightening on route to hospital.

Where a comprehensive motor insurance policy prohibited modification to a vehicle without the insurer's written consent, the fitting of mag wheels by the insured was an "act" for the purposes of s54 (Australian Associated Motor Insurers v Ellis (1990) 6 ANZ Ins Cas 60-957). The "act" was relevant to the policy for the very reason that it provided a basis, derived from the policy itself, for refusing to pay on a claim otherwise falling within the field of operation of the policy.

The first limb of s54(1) specifies that an insurer may not refuse to pay a claim in certain circumstances. It is trite but presently relevant to observe that the section seeks to define those circumstances. The section does not confer on a court a palm tree discretion to impose liability because it thinks that an insurer should indemnify its insured under a policy. Rather, the court must determine that the effect of the contract of insurance would, but for s54, be that the insurer may refuse to pay a claim by reason of some act of the insured or of some other person.

In East End Real Estate Pty Ltd v CE Heath & Casualty General Insurance Ltd (1991) 25 NSWLR 400 this Court rejected the argument that s54 had nothing to say concerning acts (or omissions) which formed part of the definition of the risk insured. In that case failure to notify a claim under a "claims made and notified" professional indemnity policy was held to be an act to which s54 applied. Merely because the requirement of notification was expressed as part of the definition of the risk insured did not take the situation outside the beneficial scope of s54. In so holding, the Court considered what was meant by the reference in s54(1) to the "effect of a contract of insurance" and applied it to the situation at hand. Gleeson CJ said (at 403-4):

In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s54 depends upon matters of form. As a matter of ordinary language, it is perfectly appropriate to say in the present case that the effect of the contract of insurance is such that, but for s54, the respondent may refuse to pay the appellant's claim.(emphasis added)

Both Mahoney JA and Clarke JA agreed with the judgment of Gleeson CJ. In the course of his additional reasons, Mahoney JA said (at 407):

Section 54(1) looks, in its terms, not to the provisions of the contract of insurance but to "the effect" of it. This, in my opinion, means the effect which the contract of insurance would, apart from the section, have in the relevant factual context. In the present case, a claim has been made on the insurer and it has refused to pay that claim. It has, for present purposes, refused to pay it "by reason of" the fact that, within the terms of the policy, the claim is for a loss which is not within the cover. But the reason why the loss is not within the cover is that the claim upon the insured was not "notified" to the insurer within the period of insurance. In my opinion, upon the construction of the words "by reason of", the effect of the policy in the factual context would, apart from s54(1), have been that the insured might refuse to pay the claim by reason of the fact that the claim upon the insured had not been "notified" to the insurer.

For the subsection to apply, the entitlement to refuse to pay the claim must be "by reason of some act of the insured or of some other person". In the present case, the immediate reason why the insurer could refuse to pay the claim was not, in terms, by reason of an act (for which may be substituted "omission") of "the insured or of some other person" but by reason merely of the fact that, the making of the claim upon the insured not having been "notified" to the insurer, the claim was not within the cover. But it was not within the cover by reason of an (omission) of the insured. Therefore the entitlement to refuse arose by reason of that omission.

The second qualification of the cover ("which shall be notified to underwriters ...") contemplates, by reason of "notified", that there will be a notification to the insurer by some person. I shall assume without deciding that the notification might within the qualification have been given either by the insured or by some other person. But it was to be given by one or the other. Therefore, the "effect" of the policy in the present case would be that the insured might refuse to pay the claim by a lack of notification by "the insured or ... some other person" within the terms of the subsection. (emphasis added)

These passages, which emphasise the causal enquiry necessary before s54(1) can be applied, were expressly approved by the High Court in Antico (at 660, 668-9, 673).

It would be quite fallacious to conclude that the way in which the risk is defined in a particular policy is irrelevant to the possible application of s54. To ignore it would preclude the court from addressing the necessary causation issues discussed above. It is important to observe that East End applied s54 to the insured's omission to notify within the period of the policy a claim received during that period. A claim within the policy had been made upon the insured during the period of cover. Later in his judgment in East End (at 405), Gleeson CJ indicated that he regarded these matters as critical, notwithstanding that the context was one where the form of the policy defined the risk in terms of claims made and notified within the period of cover. The Chief Justice referred to an argument that sought to give s54 a literal reading that would have caused it to be applied to precisely the circumstances of the present case. He continued:

This argument appears to depend upon the notion that a failure by a person who has a right to claim against an insured to make such a claim during a period of insurance cover is an act or omission of a kind falling within s54(1). It is not obvious to me that this is so. In terms of s54, there may well be a qualitative difference between treating an insured's failure to notify a claim received during the period of cover as an omission of the insured by reason of which the insurer could refuse to pay the claim and treating the fact that no claim has been made on the insured by a third party as an omission by the third party by reason of which the insurer could refuse to pay the claim. The latter may not be an omission; it is simply a non-event.

The High Court refused special leave to appeal on the basis that the Court of Appeal's decision was not attended with sufficient doubt ((1992) 7 Leg Rep SL 2).

The classical example of an "omission" for the purposes of s54(6) would be the failure to notify the insurer of a claim, whether the duty to do so is expressed in the definition of the risk itself, by way of exclusion, or as a condition of indemnity. However expressed, notification of the claim was a matter addressed by the policy as something which the insured had to attend to as a condition of enjoyment of its benefits. The same cannot be said of the happening of an event that is quite outside the subject matter of the policy.

It is true that s54(1) refers to acts occurring "after the contract was entered into" as distinct from "during the currency of the insurance". But this is explicable by recognising that s54 addresses many classes of insurance, not just "claims made" policies.

CLAIMS MADE (AND NOTIFIED) POLICIES OF PROFESSIONAL INDEMNITY INSURANCE

An insurer may offer to write a professional indemnity policy on an "occurrence" basis or on a "claims made" basis. An "occurrence" basis policy has at its core a promise by the insurer to indemnify the insured for any loss arising out of a defined event, occurrence, circumstance or accident. Professional indemnity insurers have for some time been unwilling to write such policies because, while the insured event may occur within the period specified, its effects on the third party and particularly the damages arising from the insured "event" may not be known or may not arise, until many years later. The effect of this is that investigation by the insurer of such a claim becomes difficult. Further, claims that are made against insurers under "occurrence basis" policies have been increased by inflation and interest and insurers have been unable to close their books on an underwriting year of account for an unacceptably long period (see Enright, Professional Indemnity Insurance Law, 1996, s3.023).

By contrast, the core of a "claims made" policy is a promise by the insurer to the insured that it will indemnify the insured for any claim that is made by a third party against the insured within the duration of the policy, no matter, subject to the provisions in relation to the time within which notice must be given, when the defined event affecting the third party occurred (ibid s3.024). It has been said that "the essence of a `claims made' policy is that the insured's right to an indemnity arises on the submission to him of a claim by a third party" (ibid s3.025). This said, it is common for such policies to include an extension clause to the effect that, if notification to the insurer is made within the duration of the policy, any claim arising out of the matters the subject of the notification will be treated as a claim under the policy, even though the claim itself is made outside the duration of the policy.

The distinction between an occurrence based policy and a claims made and notified policy, and the reasons why the latter came into vogue, are discussed by Kirby P in FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89 at 96-7. Referring to claims made and notified policies, his Honour said (at 97):

The event activating the policy was not the allegedly negligent occurrence but a claim against the insured during the period of cover, and notification to the insurer of an occurrence that might give rise to a claim during that period.

In Perry an auditor was covered for three successive annual periods under a claims made and notified policy. During the second period he became aware, for the first time, of an occurrence which might give rise to a claim against him for professional negligence. This awareness was, for the purposes of the policy, deemed to have been a "claim" made during the subsistence of the second policy. But it was subject to a proviso of a relevant act occurring, viz the giving of written notice to the insurer, during the subsistence of the second policy. This did not occur. Rather, the insured procured the renewal of the policy (with an increase in cover), giving a negative answer to the question in the proposal about his awareness of relevant circumstances. Notification during the earlier period of circumstances that might have given rise to a claim would have meant that such claim (if later made) would be deemed to have been made during the currency of the earlier period, pursuant to an extension condition (Condition 3). But no such notification was made, and there was non-disclosure when renewal was sought, despite adequate questions in the proposal forms which required disclosure of relevant matters.

Cole J (as he then was) considered himself bound by East End to regard the insured's failure to give notice before the expiry of the second policy of his discovery of facts that might give rise to a claim against him as an omission within s54. He did so reluctantly, and fearful that the decision would lead Australian insurers to withdraw from offering "claims made and notified" policies of professional insurance: see Breville Appliances Pty Ltd v Ducrou (1992) 7 ANZ Ins Cas 61-125 at 77,621. On appeal, Kirby P (dissenting) agreed, without the level of concern for the consequences that had been voiced by Cole J. The President considered East End indistinguishable in point of principle. The beneficial purpose of s54 indicated to him that East End extended to the facts of Perry.

But this was a dissenting view. Gleeson CJ and Clarke JA upheld the appeal, distinguishing East End. Gleeson CJ pointed out that in Perry the negligent act causing damage to the insured's client occurred before the relevant period of cover; and that the claim against the insured by his client and notification thereof to the insurer occurred after that period. All that happened during the relevant period of cover was that the insured became aware of his own negligence and perhaps the damage it had occasioned his client.

Gleeson CJ recognised (at 92) that the extension clause, condition 3, was the sort of provision that could as well be regarded as part of the defined scope of cover as a condition affecting the entitlement of the insured to claim. Notwithstanding, the Chief Justice distinguished East End. He said (at 92):

As I see it, the major question in the present case is whether it can be said, within the meaning of s54, that the effect of the contract of insurance is that, but for s54, the insurer could refuse to pay the insured's claim by reason of some act or omission of the insured or of some other person.

This question was answered in the negative. His Honour characterised the conduct of the insured as inaction as distinct from omission (at 93). Condition 3 gave the insured a choice which might not be availed of for reasons including belief that a claim was unlikely and/or fear of affecting future premiums. In the course of his reasons, the Chief Justice remarked (at 93B) that:

The question is rather similar to one that was referred to, but left open, in East End (at 405E). It concerns the meaning in s54 of the concept of an entitlement to refuse to pay a claim by reason of someone's act or omission. The Court rejected the argument that the concept was limited to breach of a condition other than one affecting the scope of the cover, but it adverted to the consideration that there would be cases where inaction on someone's part could not relevantly constitute an omission. The words inaction and omission are not synonyms.

The passage in East End at 405E is the one I have already quoted, which ends with the distinction between an "omission" and a "non-event".

Clarke JA also distinguished East End, emphasising (at 106) that the claim in East End had been made during the relevant period. He accepted that the language of s54 is very wide. His Honour cast no doubt upon the principles expounded in East End. He expressed the view (at 106F) that, if condition 3 had not appeared in the policy, there would have been no occasion to apply s54(1). Explaining this, he added (at 107):

Despite the obvious width of the language in s54 it operates only where the effect of the contract is that an insurer might refuse to pay a claim because of an act (omission) of the insured or some other person. As East End made clear it does not matter whether the insurance policy achieves this effect in the definition of the cover or by the imposition of obligations the breach of which entitles the insurer to avoid the policy. Nonetheless it is essential that the contract have that effect before s54 operates.

The decision in Perry has not escaped academic and judicial head scratching (see Mead, op cit). In Antico at first instance (Antico v CE Heath Casualty & General Insurance Ltd (1995) 8 ANZ Ins Cas 61-268 at 76,011) Giles CJ Comm Div thought that:

The difference between an omission and a non-event as described by Gleeson CJ [in East End] is qualitative, and it may be thought elusive. It reappeared in .... Perry as the difference between an omission and inaction... What is the difference between an omission and inaction? It is not enough simply to refer to the insured having a choice .... The choice must be in relation to obtaining a right to claim under the policy, not just in relation to making a claim in the invocation of an existing right (at 26).

Antico involved a Directors and Officers Legal Expenses Policy which was a claims made policy. Condition 1 stipulated that the insurer was not liable to indemnify unless the insured officer obtained its "specific consent" for defending any claim or proceedings against the officer. The insured sought consent to the incurring of legal costs in respect of certain claims made against him, but at a time after costs already had been incurred. The insurer did not give its consent but asked for additional information. Some but not all of this had been provided before various claims were settled. The question at issue was whether the insured's failure to obtain the consent of the insurer to the incurring of legal fees was an act or omission to which s54 applied.

The primary judge (Giles CJ Comm Div) found that the insured had not obtained the consent of the insurer in accordance with condition 1. Applying what he perceived to follow from the decision of the Court of Appeal in Perry, he held that the failure of the insured to obtain the consent required by the condition was neither an act nor an omission within the meaning of s54. Rather, it was "inaction", with the result that s54 did not apply.

The Court of Appeal also rejected the submissions by which the insured sought to attract the operation of s54. However, the reasoning of that Court differed somewhat from that of the primary judge. The Court held that, whilst the failure of the insured to seek consent was an omission on the insured's part, the failure to grant consent was an omission not of the insured but of the insurer. Consequently, s54 did not apply. The reasoning in this regard of Kirby P and Priestley JA appears from the following summary by Priestley JA ((1996) 38 NSWLR 681 at 708. See also at 706-707 per Kirby P):

(1) condition 1 of the policy states that the insurer shall not be liable to indemnify the insured unless the insured has "obtained" the insurer's consent in regard to the commencing or defending of proceedings; (2) the obtaining of consent requires action first by the insured and then by the insurer; (3) s54 might only help the insured in regard to his lack of action (not asking for consent) but could have no application to the absence of action by the insurer (not granting consent) since that action was never requested; (4) the result is that s54 cannot assist the appellant in the circumstances of the case.

Powell JA found it unnecessary to determine whether or not s54 applied in Antico, because (even if it were capable of application) it did not prevent the insurer from refusing indemnity by reason of the absence of its consent to the incurring of legal costs. However, his Honour indicated (at 709) that as presently advised he saw no inconsistency between East End and Perry.

The High Court approved the analysis of s54 contained in the judgments of Gleeson CJ and Mahoney JA in East End (see [1997] HCA 35; 188 CLR 652 at 660 per Brennan J; 668-9, 673 per Dawson, Toohey, Gaudron and Gummow JJ). However the Court was critical of the dissection by the Court of Appeal in Antico between the insured's omission to seek consent and the insurer's omission to give it. The majority justices (Dawson, Toohey, Gaudron and Gummow JJ) said (at 669-70):

Section 54(1) uses the phrase "by reason of some act of the insured or of some other person". It does not specify the act or omission of the insured as being a failure to discharge an obligation owed by the insured to the insurer. The legislation is expressed in broad terms and, on its face, there is no reason why the omission of the insured may not be a failure to exercise a right, choice or liberty which the insured enjoys under the contract of insurance. In any event, the act or omission may be that of a third party, "some other person", who is unlikely to be a party to the contract of insurance in question. Submissions by the respondent which were contrary to the above construction of s54(1) and which apparently were based upon the reasoning of the New South Wales Court of Appeal in FAI General Insurance Co v Perry should be rejected.

The words used in the concluding sentence and the passages from Perry cited by the High Court (30 NSWLR 89 at 93, 107) make it plain to me that the High Court was rejecting portion of the reasoning in Perry, but not questioning the result in that case.

The High Court held that the Court of Appeal had erred in analysing condition 1 so as to deny to s54(1) any operation because there was inaction or an absence of action by the insurer. It was sufficient for the particular case that there was an omission by the insured, who failed to obtain the consent of the insurer before incurring the relevant legal expenses. This raised the question of whether "by reason of" such omission, the effect of the policy, but for s54(1), would be that the insurer may refuse to pay the claim. Since the insured's failure to comply with condition 1 may or may not have prejudiced the interests of the insurer, s54 was capable of being applied. This meant that the question whether the appellant in Antico had reasonable grounds for compromising the proceedings brought against him was a matter that remained to be adjudicated. The capacity of s54 to apply was not defeated by the form of condition 1, or the insured's failure to get consent in advance to the incurring of legal expenses in defending claims brought against him. That was because condition 1 was construed as having the effect of protecting the position of the insurer where the insured lacked reasonable grounds.

The decision of the majority of the High Court in Antico establishes that an omission by an insured need not arise only from the failure to discharge an obligation, but is also capable of arising from a failure to exercise a right, choice or liberty which the insured enjoys under the contract of insurance. But Antico does not establish that every failure by an insured to exercise a right under an insurance policy is curable by s54. The justices emphasised the requirement in s54(1) of establishing sufficient causal connection between the insurer's refusal to pay a claim and some act or omission of the appellant or a third party (see at 670. See also per Brennan CJ at 660-1). It follows that Antico should not be read as overruling Perry. It certainly cannot be viewed as authority for the proposition that the terms under which insurance cover is defined in a claims made policy are irrelevant to the causation enquiry which s54(1) mandates. While portion of Gleeson CJ's judgment in Perry contains reasoning relating to a choice or election by the insured, such reasoning being disapproved by the High Court in Antico, a distinction remains between terms of the policy which should rightly be seen as conditions to be satisfied by the insured, and terms which might expand the scope of the policy itself (see Clarke, "After the dust settles on Antico: FAI v Perry lives" (1997), 9 ILJ 29 at 33. It will be obvious from what I have written that I have been greatly assisted by this article).

The distinction is difficult to express definitively. Ultimately, it is a question of applying the words of s54 and the policy it expresses to the substance of the words of a particular insurance policy. Section 54 was not available to cure the omission in Perry, because the effect of doing so would have altered the scope of the contract of insurance in such a way that it would have been impossible for the Court to find a sufficient causal connection between the terms of the policy and the insurer's refusal to pay a particular claim. In Perry and Antico the Court was at pains to identify the insured's rights existing under the contract at the time of the claim. Only when they were understood was it possible to determine whether the insurer's refusal of the claim could fairly be said to flow "by reason of" some act (or omission) of the insured or of some other person. Some acts or omissions are simply "non-events", in the sense of having no connection with the substantive rights conferred under the policy and negotiated between the parties. In the words of Brennan CJ in Antico (at 661):

s54(1) does not operate to alter the contractual promise of the insurer to pay a claim. It is engaged when the doing of an act or the making of an omission would excuse the insurer from an obligation to pay a claim for a loss actually suffered by the insured.

One writer has suggested that in Antico "the inaction/election/omission dichotomy was ... dealt a sharp blow by the joint majority judgment" Mead op cit at p10. But, Perry stands on a wider base than this and its correctness in point of decision has not been undermined by the High Court's judgment in Antico.

The differences between a failure to advise an insurer of a notifiable event and a failure to expand the scope of cover were recognised by the Full Court of the Supreme Court of Western Australia in Kelly v New Zealand Insurance Company Ltd (1996) 9 ANZ Ins Cas 61-317 at 76,518.

It is one thing to say that the insured's failure to notify receipt of a claim within the period of cover may be treated as an omission attracting s54 in a proper case. It is another thing entirely to invoke s54 where the insured had not even received a claim within the period of cover.

SPIGELMAN CJ: In this matter, I have read the reasons for judgment of Mason P and Handley JA in draft form. Subject to my comments below, I agree with their reasons.

It is now authoritatively established that failure of an insured to notify the insurer under a `claims made and notified' policy is an "omission of the insured", "by reason of" which "the insurer may refuse to pay a claim", this being "the effect of (the) contract of insurance", within s54(1) of the Insurance Contracts Act 1984 .

The issue in this case is whether or not the failure by a third party to make a claim on the insured is an "omission ... of some other person", within the terms of s54(1) in a `claims made and notified' policy. I agree that it is not.

In East End Real Estate Pty Limited v C E Casualty and General Insurance Ltd (1991) 25 NSWLR 400, in a passage referred to with approval in Antico v Heath Fielding Australia Pty Limited [1997] HCA 35; (1996-97) 188 CLR 652, 660 per Brennan CJ and 668-669 per Dawson, Toohey, Gaudron and Gummow JJ. Gleeson CJ said:

"In my view by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s54 depends on matters of form. As a matter of ordinary language, it is perfectly appropriate to say in the present case that the effect of the contract of insurance is such that, but for s54 the respondent may refuse to pay the appellant's claim. The circumstances of this comes about because of the language of that part of the contract of insurance which defines the risk rather than by reason of a breach of a condition of the policy does not seem to me to be material. The case falls within the general words of the section and I see no justification of reading them down.

The Act, in its long title, is described as an Act to reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interest of insurers, insureds, and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts, operate fairly. It would hardly be consistent with the purposes thus described to construe the language of s54 in such a way as to make its operation depend upon the choice that is made between various available drafting techniques." (pp403-404)

Section 54 of the Act is in identical terms to cl54 of the draft legislation appended to the report of the Australian Law Reform Commission Report No. 20 Insurance Contracts. This section implemented the recommendations contained in Chapter 8 of the Report. That chapter was concerned with two matters:

(i) The protection of the interest of insurers to prevent the risk from increasing during the period of cover;

(ii) The protection of the interests of insurers to see that nothing is done to inhibit proper investigation and assessment of a claim.

The former is described in the Report as "Obligations During the Period of Cover" and the second is described as "Conditions Subsequent". In each case, the Commission was concerned to ensure that it was dealing with matters of substance, not form, so that changes in the definition of risk would not prove determinative.

The Commission referred to the use of warranties and conditions as a means by which an insurer seeks to protect itself against an increase in the risk during the period of cover and went on to say:

"Another means of avoiding the increase in the risks is by careful definition of those risks in the policy. Cover may simply be suspended during the existence of specified facts or circumstances which increase the risks. Terms effecting this result are known as "temporal exclusions" and these exclusions vary in accordance with the type of insurance concerned." (par 217)

"The effect of a term should not depend on whether it is in the form of a warranty or a condition. Similarly, the difference in effect between breach of warranty and the occurrence of an excluded loss is not justified. The rights of the party should depend on matters of substance, not on subtle differences in form. The occurrence of an excluded loss should be treated as if the insured's conduct constituted a breach of warranty." (par 224)

Under the head of "Recommendations", the Commission said:

"The Commission has already pointed out that its present recommendation should extend not only to strict warranties and other terms imposing obligations on the insured, but also to exclusions from cover of certain risks. Were they not to extend to temporal exclusions, legislation based on the present recommendations might be avoided simply by rephrasing an obligation ("the insured warrants of the car will be kept in a road worthy condition") as a temporal exclusion ("the insurer will not be liable while the car is in an unroad worthy condition"). That legislation might also be avoided if obligations and exclusions were omitted and the cover itself stated in such a way as to achieve the same meaning ("cover is granted in respect of the road worthy car"). Once again, the form in which the insurer seeks to protect itself from the increase in risk should not be allowed to affect the extent of that protection. The relevant provisions of the draft legislation attached to the Report are designed to ensure an implementation of the present recommendations would be unaffected by the form in which policies were drafted." (par 229)

To similar effect is the analysis of the Commission under the heading of "Conditions Subsequent", concerned with the protection of the insurer's interest in connection with investigation and settlement of claims, including notification provisions of various forms. The Commission made it clear that its recommendations in this regard were consistent with the recommendations that it had made when "dealing with the effect of a breach of warranty and of the occurrence of an excluded loss" in the passages I have quoted above. (par 241)

The making of a claim by a third party on an insured does not, as a matter of substance, involve anything which can be described as an "obligation during the period of cover" or as a "condition subsequent". Accordingly, it is not within the mischief sought to be remedied by the Commission's recommendation that s54 should be enacted.

In East End, the reasoning of Gleeson CJ explicitly identified the inclusion of a notification provision in a clause defining the risk to be a matter of form or "drafting technique". The reference to a requirement of notification in the definition of the relevant risk to which an insurance policy responds, is not a matter of substance. Rather, the reference to notification by the insurer should be understood as the equivalent of a condition of the policy creating an obligation on the insured to notify the insurer on receipt of a claim. The insurer cannot escape liability by defining the relevant risk in terms of such procedural conditions.

In my opinion, this reasoning does not apply to the "claims made" component of a "claims made and notified policy". The distinction between an "occurrence based" policy and a "claims made" policy is a distinction of substance for the purposes of definition of risk.

In East End, Gleeson CJ said, in the context of dealing with an argument concerning the inter-relationship between s40 and s53 of the Insurance Contracts Act that:

"This argument appears to depend on the notion that a failure by a person who has a right to claim against an insured to make such a claim during a period of insurance cover is an act or omission of a kind falling within s54(1). It is not obvious to me that this is so. In terms of s54, there may well be a qualitative difference between treating an insured's failure to notify a claim received during the period of cover as an omission of the insured by reason of which the insurer could refuse to pay a claim and treating the fact that no claim has been made on the insured by a third party as an omission by the third party by reason of which the insurer could refuse to pay the claim. The latter may not be an omission; it is simply a non-event." (p405)

The matter left open by his Honour in this passage, falls for determination in this case. The distinction between an "omission" and a "non event" is not always an easy one, as the authorities considered in the judgment of Mason P show.

Handley JA has suggested a particular construction of the word "omission", which I do not entirely adopt. Rather, I prefer the formulation of "non event", in the sense of conduct wholly external to the policy itself. In the context of liability insurance, the failure of a third party to make a claim should be regarded as an event wholly external to the policy, in the same way as the conduct of an arsonist is an external event for a fire policy. (To use the analogy of Hodgson CJ in Eq in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529, 565).

Rather than focus on the definition of the word "omission", I would focus on the words "the effect of the contract of insurance". The drafting of the clause defining the risk may mean (as East End decided and Antico affirmed), that such a clause can be characterised as having an "effect" that "the insurer may refuse to pay a claim". That does not mean that every such clause, or every part of such clause, may be so characterised. The absence of a claim on the insured does not create any "effect" that an "insurer may refuse to pay a claim" by the insured. Until the first kind of claim is made, no issue of a claim of the second kind arises at all. This is not a matter of drafting or of mere form. The "claim" is an event wholly external to the policy and precedes any consideration of its "effect".

HANDLEY JA: In this appeal I have had the benefit of reading the reasons for judgment of Mason P in draft form. I agree with his reasons, but will add some brief additional observations.

Section 54 (1) of the Insurance Contracts Act 1984 provides that "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 act of the insured or of some other person ... the insurer may not refuse to pay the claim by reason only of that act ...". Section 54 (6) provides that "act" includes an omission.

As Mason P explains, the cases have drawn a distinction between an "omission" and a "non-event". The distinction was analysed by Hodgson CJinEq in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529 at 565 as follows:

"Suppose a person has fire insurance for 1995, and not 1996. An arsonist burns down the person's house in 1996. The insured claims under the 1995 policy, arguing that the insurer cannot refuse the claim by reason of the omission of the arsonist to burn down the house in 1995. Clearly, in that case, the reason for the refusal was that there was no fire whatsoever in 1995, whether caused by an arsonist or by accident or in any way whatsoever; so it would be bizarre to characterise the reason for refusal of cover in terms of an omission by the arsonist.

It seems to me that much the same applies to the lack of a claim in a claims-made policy; the gravamen of the refusal is not that someone omitted to do something, but rather that something did not happen. In my opinion this is the true basis for the distinction drawn in cases such as East End and Perry. If the reason for refusal is fairly characterised as being that someone omitted to do something, then this is an omission to which s 54 can apply; but if it is fairly characterised rather as being that something did not happen, then this is not an omission to which s 54 can apply, even if it is the case that this something would have happened if one or more persons had acted in certain ways".

The primary meaning of "omission" in the Oxford English dictionary is "the action of omitting, or fact of being omitted". The secondary meaning is "the non-performance or neglect of action or duty". Dobbie v Davidson (1991) 23 NSWLR 625 provides an illustration of the former meaning in s 42 (b) of the Real Property Act.

In my opinion it is used in s 54 in its secondary sense and refers to the failure of the insured or someone else to perform an act for the benefit of the insured under the policy. The other person need not be an agent of the insured. It may for example be the post office which fails to deliver a letter promptly or at all, or a facsimile transmission service which breaks down with the same result. The word does not cover failures to act by others having no relevant relationship or connection with the insured, whose interests are adverse to the insured.

Thus in my opinion the failure by the claimants, Mr & Mrs Greentree, to claim against the insured while any of the relevant policies were in force was not an omission within s 54 (1).