King v McKean and Park

8. The policy is a "claims made and notified" policy. The considerations which have led to the development of claims made policies were adverted to by the High Court in FAI General Insurance Co Ltd v Australia Hospital Care Pty[1]. The Court was content for the purposes of that case to adopt the remarks of McLachlin J of the Supreme Court of Canada in Reid Crowther & Partners v. Simcoe & Erie General Insurance Co[2]:

" 'Occurrence' liability insurance policies work reasonably well in covering insureds such as automobile owners and drivers. Where an automobile operator is negligent and thereby causes damage, the nature of the negligent act and the resultant damages are in almost all cases known upon the happening of the negligent act or shortly thereafter. But for insureds who are professionals such as doctors, lawyers, engineers, etc. damages can result (or be discovered) many years after a negligent act is committed. This is even more the case for manufacturers and other types of insureds who can cause damages by producing hazardous products or toxic waste. Therefore, for each of these types of insureds, insurers are at risk for an unknown number of claims that may be made many years after the expiry of a particular policy of 'occurrence' liability insurance. ... Another type of problem associated with the 'long-tail' nature of 'occurrence' policies resulted where defendants to claims had been insured successively under liability insurance policies from different insurers over the years. In those types of situations, there arose disputes between the insurers as to when the 'occurrence' in question happened - and, therefore, which insurer had to provide an indemnity for the loss. These kinds of disputes further added to the uncertainty in calculating insurers' actuarial risk, and also caused added expenses to the insurance industry in engaging in this type of litigation. ... The 'claims-made' type of policy was seen (as were hybrid policies) as a means of providing liability insurance at reasonable rates while avoiding the problems associated with the 'long-tail' nature of 'occurrence' policies. The date at which a claim was made would be easier to ascertain than the date at which an 'occurrence' happened, and more importantly, insurers would be better able to project the likely level of claims that would be payable under liability insurance policies."[3]

"A more restrictive type of 'claims made' policy was one known as a 'claims made and notified' policy, under which not only had the claim by the third party to be made for the first time to the insured during the currency of the policy, but also the insurer had to be notified of the existence of that claim within the same period of cover. Hybrid policies involving features of both 'claims made' and 'claims made and notified' policies on the one hand, and 'occurrence' type cover on the other, were also evolved. Thus, a claim may be defined to include any circumstances, by which the insured became aware during the period of insurance, which might subsequently give rise to a claim against her or him and of which written notice was given to the insurer during the period of cover. In such a case any subsequent claim made outside the period of insurance was deemed to have been made during the currency of the policy ..."[4]

16. It is clear in the present case that the plaintiff's claim against the insured is a civil proceeding of the type potentially contemplated by the relevant insurance policy. The third party proceeding gives rise to two basic issues:

(1) Whether the liability asserted falls within the description "arising from any claim or claims first made against the insured during the period of insurance and reported to the insurer during the period of insurance ..."?

(2) If the answer to the first question is yes and the insurer is liable with respect to the claim, whether such liability is limited to 25% of the claim by reason of the terms of the schedule to the policy?

22. The first issue arises in the following manner. The plaintiff issued a writ against the insured on 19 May 1999, but did not serve the writ until 17 May 2000. The date of issue of the writ (19 May 1999) was within the policy period, but the date of service (17 May 2000) was not. The first issue thus requires determination of the question whether the issue of a writ constituted "a claim made against the insured".

25. In Walton v National Employers General Insurance Association[5] Bowen JA said that the primary meaning of "claim" was: "a demand for something as due, an assertion of right to something. It imports the assertion, demand or challenge of something as a right."

28. The word claim is defined in the policy as follows:

"Claim means any claim, order, award, direction, requirement, complaint or charge or threatened charge of contempt, for which the insured is entitled to be indemnified under this policy."

32. The definition might be said to be tautologous. Nevertheless I note the initial alternative words to claim, "order, award, direction, requirement, complaint ..." appear to refer back to clause 1.3.2 of the policy which relates to relevant provisions of the Legal Profession Act 1987. The definition does not resolve the issue before me namely whether a claim was made against the insured within the relevant period.

35. The making of a claim against someone would as a matter of ordinary language require the communication of that claim. In the context of a "claims made" insurance policy one would expect that communication to be intended to be to the insured. This is particularly so in the case of the present policy, because the relevant provisions of the policy require not only that the claim be first made against the insured during the period of insurance, but also that it be reported to the insurer during the period of insurance. It is true that the provisions of s.54 of the Insurance Contracts Act 1984, mitigate against any unjust effect of the second requirement, nevertheless it is difficult to accept that the intention of the parties was to define the making of a claim against the insured in a way which would mean that it might first be made, but could not be reported to the insurer during the period of the insurance. Given the commercial purpose of claims made and notified policies one would expect that the intention of the parties would be that a claim would be constituted by a communication which could be notified to the insurer (rather than potentially a communication of which the insured had no knowledge).

38. In the present case the insured wishes to rely on a policy covering the year prior to that in which he received notice of the claim and then to call in aid the provisions of s.54 of the Insurance Contracts Act 1984 to avoid the consequences of failing to give notice to the insurer with respect to the claim within the relevant period of insurance. The submission made on behalf of the insured is that despite the considerations to which I have referred above, the words "claim made against the insured" are apt to describe the issue of a writ naming the insured as defendant, and that they should be regarded as covering this circumstance.

41. A series of possible bases for this conclusion were canvassed in argument:

(a) That the issue of a writ is properly described as the making of a claim as a matter of the language of the law;

(b) That the issue of a writ itself has consequences as a matter of law without the service of the writ; and

(c) That the issue of a writ can be regarded as notice to the world or in some other way deemed to be notice to the insured.

47. Although not expressly articulated at the forefront of the arguments for the insured, it became clear that at least in part counsel's argument turned on the proposition that the language of the law would normally describe the issue of a writ as the making of a claim. I accept that the language of the Rules of the Supreme Court contemplates an endorsement of claim (order 5.04) and that other rules of the Court (eg. order 9.01) refer to what is contained within a writ as a claim. Nevertheless a fundamental purpose of a writ is to state a claim which is intended to be communicated to the defendants. It is for this reason that the writ in the present case commences after the heading with the words:

"TO THE DEFENDANTS TAKE NOTICE that this proceeding has been brought against you by the plaintiff for the claim set out in this writ."

51. In my view the bringing to court of a claim by way of institution of a proceeding is not necessarily to be equated with the making of a claim "against a person". It is also open to regard the claim as made against a defendant when notice effective to allow the proceeding to result in an order is given. The principles concerning service of proceedings elucidated by McInerney J in Pino v Prosser[6] do not compel the contrary view, including the following reference to the underlying principles stated in authority:

" 'The object of all service' as was pointed out by the Lord Chancellor in Hope v Hope [1854] EngR 805; (1854) 4 De G.M. & G. 328, at p.392; (1843-60) All ER Rep. 441 'is of course only to give notice to the party to whom it is made, so that he may be made aware of and may be able to resist that which is sought against him; and when that has been substantially done, so that the Court may feel perfectly confident that service has reached him, everything has been done that is required.' ..."[7]

55. The possibility that a writ might form the basis of an ex parte injunction might also be thought to be the exception that proves the rule rather than the reverse.

58. Likewise the fact that the Limitation of Actions Act 1958 controls when an action may be "brought" does not in my view establish that the issue of a writ constitutes the making of a claim against a person.

61. The question might be thought to demand an affirmative answer if the issue of a writ is to be regarded as notice to the world at large including a defendant not yet served. This view formed the basis of the minority judgment of Goodman JA in Re St Paul Fire and Marine Insurance Co and Guardian Insurance Co of Canada[8]. In that case the policy issued by the first insurer applied to "claims made or suits brought" within the relevant period. The policy of the second insurer applied only to "claims made against the insured while this insurance is in effect."

"With great deference to the opinion of the learned trial judge, I have reached the opposite conclusion. I agree that the words 'claims made' are not synonymous with 'writs issued' or 'suits brought'. In my view the words 'claims made' include but are broader than the words 'writs issued' or 'suits brought'. Claims may be made against an insured without the institution of legal process whether by way of writ of summons or otherwise. I agree with the trial judge that 'claims made against' the insured means more than 'claims against' the insured in the sense that the words 'claims made' in the Guardian policy do not relate to an intention or right to claim which some person has against an insured but notice of which has not been communicated to the insured. The terms of the policy make it clear the claim must be made during the terms of the policy. A claim, other than one made by way of the institution of legal proceedings, can only be made by notifying the person against whom the claim is being asserted of such claim. Prior to the giving of such notice, there can only be an intention to make a claim. On the other hand, where an action has been commenced by writ by a plaintiff against a defendant who is the insured person, there is then in existence a public record of a claim made against the insured and a document issued under the hand and seal of an officer of the court in which such claim is asserted. The law is clear that the issue of the writ is the act of the party and is not a judicial act: see Clarke v Bradlaugh (1881), 8 Q.B.D. 63 at 68 (C.A.) It is equally clear that at common law the issue of a writ creates notice to the world at large that litigation is pending between the plaintiff and defendant and accordingly that a claim has been made by the one against the other. Worsley v Earl of Scarborough [1746] EngR 792; (1746), 3 Atk. 392, 26 ER 1025, Lord Chancellor Hardwicke said: '... but it is the pendency of the suit that creates the notice, for as it is a transaction in a sovereign court of justice, it is supposed that all people are attentive to what passes there ...'."

68. The majority of the Court, however, rejected the above view. Thorson JA (with whom Houlden JA agreed) demonstrated by reference to authority that Worsley should not be taken as standing for the proposition that in all circumstances except where the common law has been modified by statute, the mere issue of a writ constitutes notice to the world at large of the making of a claim. The principles stated in Worsley were restricted to real property disputes and subsequently formed the basis for the statutory doctrine of lis pendens. Thorson JA stated at p.355:

"Moreover, to extend the principle so stated to all non-statutory claims in respect of which a writ has been issued appears to be unwarranted on any conceptual or practical basis of reasoning. It is, for example, not uncommon for a party to a potential legal dispute, believing that he may have a claim against the other party, to seek to protect his legal position by issuing a writ but not serving it on the other party until it later becomes clear that he has a claim which he wishes to pursue and which must, therefore, be notified to the other party. Until such time as the writ is served on, or the existence of the claim is otherwise brought to the attention of, the other party, what does it avail to say that as a matter of law he has 'made a claim' against the other party of which the latter must be deemed to have notice? How does it accord with any reality to view him, as a matter of law, as having made such a claim at the time the writ was issued, even although that time has passed, the writ has been put away unserved in a file in his solicitor's office, its very existence is unknown to the other party and he himself has still not decided whether the matter should go any farther? I can see no purpose served by the adoption of so artificial a fiction, nor any justification for interpreting the language used in the policy here in question by recourse to it."

"It follows in my opinion that the words 'claim made' in the Guardian policy ought to be construed in accordance with the ordinary plain meaning of those words, which, simply stated, denote a claim that is 'made' by being notified to or otherwise brought to the attention of the person against whom it is asserted. However that is done, the essence of the making of the claim is that the substance of the claim is in fact 'brought home to' that person."

76. This latter statement of principle has been approved and applied in a number of common law jurisdictions. In Triden Properties Pty Ltd v Capita Financial Group Ltd (15 November 1995, unreported) the New South Wales Court of Appeal applied this test in construing the effect of letters directed to the insured (per Sheller JA with whom Clarke and Powell JJA agreed at 57).

79. In Drayton v Martin[9] Sackville J applied the same approach in the Federal Court to a draft summons sent to the insured.

82. In Robert Irving and Burns v Stone[10] the Court of Appeal applied the reasoning in the St Paul case to circumstances where a writ was issued but not served on the insured within the relevant period of the insurance. Staughton LJ agreed with the judgment of Thorson JA in St Paul in the following terms:

"Such refreshing common sense appeals to me in contrast to some of the elaborate, not to say arcane, arguments of today and I would agree with it."

86. The decision in the St Paul case was also cited with approval in the Supreme Court of Canada in the course of obiter in the Reid Crowther case cited above,[11] in which McLaughlin J said at paragraphs 44 and 45 (citations omitted):

"The authorities establish that, as a general rule, for a 'claim' to be made there must be some form of communication of a demand for compensation or other form of reparation by a third party upon the insured, or at least communication by the third party to the insured of a clear intention to hold the insured responsible for the damages in question ... The authorities distinguish between a communication of a demand or assertion of liability sufficient to trigger coverage under a claims made policy and: (1) mere request for information; (2) filing of a law suit without serving it upon the insured or otherwise advising the insured of the claim embodied in the suit; and (3) expressions of dissatisfaction that are clearly not meant to convey a demand for compensation for the damages. These are sound distinctions."

90. In Junemill Ltd (In Liquidation) v FAI General Insurance Ltd[12] the Queensland Court of Appeal canvassed authorities with respect to the meaning of the word "claim" and Fryberg J said[13]:

"None of the cases cited to us involved a policy with a definition of 'claim'. Nonetheless, they show that, at least in the context of the scope of cover clause, the courts have dealt with the question of what amounts to a claim as one of substance and not a form."

94. As against this line of authority and statement of general principle, the insured in the present case relies on the decision of the Court of Appeal in the Thorman v New Hampshire Insurance Co (U.K.) Ltd[14]. In that case the policy required notice in writing be given by the insured of any claim "made against them". The critical issue was whether letters making a claim sent in 1982 constituted notice of the full extent of the claim subsequently made by way of a writ issued in 1982 but not served until 1983. Sir John Donaldson MR held that a letter of June 1982 comprised, "the clearest possible claim in respect of all serious problems which had arisen by that date."[15] He said further:

"Another answer may be found in the generally endorsed writ. I am inclined to the view that the issuing of the writ also constitutes a claim covering all matters subsequently particularised in the statement of claim and in the Scott schedule. The only objection to this view is that the writ was not served upon the architects until much later and it could be argued that the letters telling them that a writ had been issued were more accurately to be regarded as notice of intention to make a claim at a later date by serving the writ."

98. This passage contemplates the two alternative views taken by the members of the Court in the St Paul case. Although it inclines to one view namely that the issuing of the writ constitutes the making of a claim against the insured, it does not purport to conclusively prefer this view. Moreover, it is clear that the passage is written in a context where the critical question was not whether the issue of the writ on its own amounted to a claim or not. Similarly the judgments of Stocker LJ and Russell LJ do not distinguish between the consequences of a writ issued but not the subject of notice to the insured, and the effect of a writ the subject of notice. The subsequent decision of the Court of Appeal in the Robert Irving case rejected the view that Thorman's case is to be regarded as authority for the proposition that the issue of a writ is in itself to be regarded as the making of a claim against an insured.

101. In my opinion the weight of authority clearly favours the insurer in the present case and the accepted view of what amounts to a "claim made against the insured" should be preferred. The following considerations support this conclusion:

(a) The ordinary meaning of the phrase "claim made against the insured";

(b) The prevailing judicial interpretation given to such words and in particular the general acceptance of the approach articulated by Thorson J in the St Paul case; and

(c) The sensible outcome in which such interpretation results where a "claims made and notified" policy is concerned. In particular the alternative view would result in the creation of a category of claim which by definition could be made but never notified within the terms of a policy (or sequential policies) in like terms to that in the present case. In my view the intention of the parties having regard to the terms of the policy as a whole was that the making of a claim against the insured required notification to the insured.

"Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract." I.C.S. Ltd v West Bromwich B.S.[16]

108. It follows that in my opinion the third party notice cannot succeed and the third party proceedings must be dismissed.

111. I would add that although both parties supported the view that I should determine the third party proceedings prior to the determination of the plaintiff's claim, my conclusion in this matter should not be regarded as implying that a declaration would necessarily have been granted by the Court either in the terms sought or at all, even if I had been persuaded as to the construction put forward on behalf of the insured. In this regard I note the observations of the Full Court in AMP Insurance Co Ltd v Dixon[17]. In that case the Court held that if it is ever appropriate to grant a declaration of the liability of a third party to the defendant before the liability of the defendant to the plaintiff is established, it can only be in the most exceptional circumstances. In the present case the making of the declaration sought would have required me to form a view not only as to the construction of the policy but as to whether the failure to give notice in accordance with it had prejudiced the insurer's interest within the meaning of s.54 of the Insurance Contracts Act 1984. Despite the practical advantages of the course which was urged upon me it can be seen that it might be thought premature to decide this issue prior to the determination of the claim against the defendant.

114. Given the conclusion I have reached on the primary issue in this matter, however, it is unnecessary for me to express a concluded view with respect to this aspect of the matter or with respect to the subsidiary question of the effect of the schedule upon the potential proportion of liability of the insurer under the policy.

[1] [2001] HCA 38; (2001) 204 CLR 641

[2] [1993] 1 SCR 252

[3] [2001] HCA 38; (2001) 204 CLR 641 at 654-655

[4] Insurance Law in Australia, 3rd ed., p.663

[5] (1973) 2 NSWLR 73 at 82

[6] [1967] VicRp 107; [1967] VR 835

[8] (1984) 1 DLR (4th) 342

[9] (1996) 67 FCR 24; 137 ALR 147

[10] (Unreported decision of the Court of Appeal of England and Wales 16 October 1997)

[11] [2001] HCA 38; (2001) 204 CLR 641 at 654-655

[12] [1997] QCA 261 unreported

[16] [1997] UKHL 28; [1998] 1 WLR 896 at 912 per Lord Hoffman

[17] [1982] VicRp 83; [1982] VR 833