La Trobe Capital and Mortgage Corporation Ltd v ACE Insurance Ltd

Supreme Court of NSW|2008-11-04|Before: Hislop J

Background 1 On 2 August 2002 the plaintiff advanced the sum of $1,260,000 secured by first mortgage over a property at 41 Sproule Road, Illawong. The purchase price of the property was $1.8 million. In or about January 2003 the mortgagor defaulted. In July 2003 the plaintiff, as mortgagee, obtained possession of the property. On 16 October 2003 the property was passed in at auction with the highest bid being $1,240,000. Ultimately the property was sold in April 2004 for $1,120,000, as a result of which a loss of $446,570 was allegedly sustained by the plaintiff. 2 In June 2002 REA Australasia Pty Limited ("REA") had provided a valuation of the property to the plaintiff for its use in connection with the then proposed loan. The valuation was prepared by Mr Wehbe. That valuation valued the property at $1,800,000. The plaintiff asserts the true market value of the property was significantly overstated in the valuation. The plaintiff contends that, acting partly in reliance upon that valuation, it advanced the sum of $1,260,000 secured by the first mortgage over the property. It further contends that REA, in providing the valuation acted negligently, engaged in conduct which was misleading or deceptive or likely to mislead or deceive in contravention of s 52 of the Trade Practices Act and was in breach of contract thereby causing the loss allegedly sustained by the plaintiff. 3 Subsequent valuations were obtained. The plaintiff obtained a valuation from United Valuers Pty Limited ("United") dated 15 August 2003 in which the property was valued at $1.8 million. The valuation was prepared by Mr Wehbe. There was no evidence of any other valuations by United. On 28 November 2003 a valuation was obtained from Egan National Valuers (NSW) assessing the market value of the property at $1,250,000. It assessed the market value as at 22 July 2002 at $1,050,000. A valuation obtained from Craig Miller Pty Limited on 20 January 2005 valued the property as at 22 June 2002 at $1.1 million. 4 REA went into voluntary liquidation on 26 March 2003. It was deregistered on 1 November 2003. It was reinstated to the register in 2007 to enable the plaintiff to make a claim upon it in respect of the plaintiff's alleged loss. 5 REA was insured under a professional indemnity policy issued by the defendant. The plaintiff sought leave to commence an action against the defendant pursuant to s 6 of the Law Reform (Miscellaneous Provisions) Act, 1946 to recover its loss. The application was opposed by the defendant.

The policy 6 The policy is a claims made policy. The relevant insuring provisions were in the following terms: " Civil Liability ACE Insurance Limited ('ACE') will indemnify the Insured against any civil liability for breach of a duty owed in a professional capacity in connection with the Firm's Business, if a Claim in respect of such breach is first made against an Insured - (a) during the Period of Insurance; or (b) during or after the Period of Insurance and the Claim arises from a Reported Circumstance. Trade Practices Liability ACE will also indemnify the Insured against any civil liability under the Trade Practices Act 1974, the Fair Trading Act 1987 (NSW), the Fair Trading Act 1985 (VIC), or similar legislation in the other States or Territories of Australia or in the Dominion of New Zealand for misleading or deceptive conduct (or conduct likely to mislead or deceive) in connection with the Firm's Business, if a Claim in respect of such conduct is first made against an Insured - (a) during the Period of Insurance; or (b) during or after the Period of Insurance and the Claim arises from a Reported Circumstance." 7 The period of insurance was from 4.00 pm on 14 December 2002 to 4.00 pm on 14 December 2003. The cover was granted to "The Firm", which was identified in the policy schedule as "United Valuers Pty Limited REA Australasia Pty Limited". The Firm's Business was identified in the schedule as "Property Valuer". 8 The policy contained the following relevant definitions: "' Circumstance ' A Circumstance is an incident, occurrence, fact or matter which may or does give rise to a Claim. ' Claim ' A Claim is a demand for, or an assertion of a right to, civil compensation or civil damages in connection with the Firm's Business or an intimation of an intention to seek such compensation or damages. ' Firm ' The Firm means the person, partnership or body corporate specified in the Schedule. Where two or more persons, partnerships and/or bodies corporate are specified, the Firm means each of them, unless the context otherwise requires. ' Firm's Business ' The Firm's Business means the business specified in the Schedule. ' Insured ' The Insured is (a) the Firm; (b) each Principal; (c) each Employee; and (d) the estate or legal personal representative of each deceased or legally incapacitated Principal or Employee. ' Reported Circumstance ' A Reported Circumstance is a Circumstance first reported by an Insured to ACE during the Period of Insurance."

The statute 9 Section 6 of the Law Reform (Miscellaneous Provisions) Act, 1946 ("the Act") states: (1) If any person (hereinafter in this Part referred to as the insured) has, whether before or after the commencement of this Act, entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person's liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. (4) Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken." 10 It is sufficient for the grant of leave (where, as here, the defendant does not claim to be entitled to disclaim liability under the terms of the policy) that there be established the existence of an arguable case that the insurer is obliged to provide indemnity. Thus, it is sufficient for the plaintiff to establish the existence of an arguable case against REA and an arguable case that the defendant is obliged to provide indemnity - Tzaidas v Child [2004] NSWCA 252; (2004) 61 NSWLR 18 at [21]. 11 The defendant has conceded that there is an arguable case of breach of duty. It does not dispute that a claim was made on REA by letter from the plaintiff's solicitors dated 25 September 2007. It does not dispute that a claim was made on the defendant by letter from REA to the defendant on 2 October 2007. It is apparent, and I find, that there is no "perfectly good common law defendant" by reason of the winding up of REA.

Did the cause of action arise prior to the commencement of the period of insurance/is the cause of action statute barred ? 12 The defendant submitted that the alleged cause of action accrued prior to the commencement of the period of insurance. It contended, in essence:

(a) The plaintiff advanced $1,260,000 on 2 August 2002 in purported reliance upon the REA valuation. The property at the time was worth $1,050,000 (Egan valuation).

(b) It was clear and objectively ascertainable on 2 August 2002 that there would be a shortfall and it was then that the causes of action in tort and under the Trade Practices Act arose.

(c) As the period of insurance did not commence until 14 December 2002 and the relevant causes of action accrued prior to the year of insurance, there was no entitlement to indemnity under the policy - The Owners - Strata Plan No. 50530 v Walter Construction Group Limited [2007] NSWCA 124; (2007) 14 ANZ Ins Cases 61-734. 13 The defendant also submitted:

(a) There was evidence the mortgagor was late in meeting the payments due under the mortgage on 2 November and 2 December 2002. Although such payments were made and accepted by the plaintiff, this nevertheless constituted a default under the mortgage.

(b) It was clear and objectively ascertainable when the default in making the payment on 2 November and/or 2 December 2002 occurred that there would be a shortfall.

(c) The causes of action in tort and under the Trade Practices Act accrued on 2 August 2002 or 2 November 2002 or 2 December 2002 and accordingly there is no entitlement to indemnity under the policy in respect of those causes of action. 14 The defendant further submitted a charge under s 6 is enforceable by way of an action against the insurer in the same way and in the same court as if the action was an action to recover damages or compensation from the insured. Accordingly, a limitation defence which would have been available to the insured is available to the insurer and, as the cause of action accrued in August, November or December 2002, the claim was statute barred. 15 In Kenny & Good Pty Limited v MGICA (1992) Pty Limited [1999] HCA 25; (1999) 199 CLR 413 it was held in respect of loss by a mortgagee that: "[16] … 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 sale will result in a loss. At the earliest it will be when default occurs and, at the latest, when the property is sold." 16 The default acted upon by the plaintiff occurred on 2 January 2003. At that time the plaintiff held a valuation in the sum of $1,800,000 from a qualified valuer in respect of a property which had been recently purchased for $1.8 million. It held no competing valuations. The amount advanced on the first mortgage was $540,000 less than the valuation. There was no evidence prior to January 2003 that a continuing default would occur. In my opinion, it is arguable that it was not reasonably ascertainable that there would be a short fall at that, or any, time between 2 August 2002 and 1 January 2003. It is arguable that the loss was not reasonably ascertainable until the property was passed in on 16 October 2003 or when the valuation was obtained on 28 November 2003 from an independent valuer. Accordingly, I am unable to accept the defendant's submissions in this regard.

Was a Claim made, or were Circumstances Reported, during the period of insurance ? 17 The plaintiff submitted that a claim was made or circumstances reported during the period of insurance. It relied upon a letter dated 17 October 2003 from the plaintiff addressed to Mr S. Wehbe, Valuer, United Valuers Pty Limited, to establish this. 18 The letter was in the following terms: "[Mortgagor] 41 Sproule Road, ILLAWONG NSW 2234

We refer to the abovementioned and to which we now advise. We refer to your valuation completed on behalf of La Trobe on the 15th August, 2003 valuing the property at $1,800,000.00 'as is' . Auction on the abovementioned property was held on the date of the 16th October, 2003 with the reserve price reflecting the valuation amount of $1,800,000.00. Our agent reported that the property was passed in on a genuine bid of 1,240,000.00. If this bid is accepted by La Trobe the second mortgagee will lose their entire investment amount. We now formally advise you that your company is on notice if: · upon the realisation of the security properties there is a shortfall to the mortgagee; and · the original valuations conducted by your company were negligently prepared, La Trobe will claim from your company the amount of the shortfall. Please review this matter and determine some suggestions to mitigate the loss La Trobe appears to be facing. Once you have had an opportunity to review these matters please place your suggestions in writing to this office. If you require any further information, please contact the writer on our toll free customer service number on …" 19 On 4 October 2002 United had written to La Trobe Home Loans Australia Pty Limited in the following terms: "REA Australasia Pty Limited has been replaced as a trading entity by United Valuers Pty Limited. The purpose of this change is to broaden and strengthen our present country-wide affiliations under the "United" banner. This will effectively give us a nationwide network of valuers. We believe the new name and entity United Valuers Pty Limited best expresses our business goals and focus. Apart from this change our business with you will remain as before." 20 The defendant submitted, essentially, that the letter dated 17 October 2003 was neither a Claim nor a Reported Circumstance. It contended the letter, on the face of it, was not addressed to REA , made no reference to REA, made no Claim against REA, did not mention REA's involvement, and was not a demand for damages on REA. The letter referred to the United valuation of 15 August 2003. The reasonable reader would only read it as an assertion of a right against United. Further, the claim had to be made against REA, that is REA had to receive it. There was no evidence that REA received the letter, such letter being sent some five months after REA was placed in a members' voluntary liquidation. 21 In my opinion, it is arguable, that the letter, when read a whole, is a Claim or Reported Circumstance. 22 The letter comes within the policy definition of a Claim in that it was "an intimation of an intention to seek compensation or damages" in connection with the Firm's Business in the event of a shortfall. The Firm was defined in the policy to include "REA" and "United". 23 The letter reported the circumstances giving rise to the claim. 24 The letter was addressed to Mr Wehbe. It referred to a claim against "your company". Mr Wehbe was not a director or shareholder of REA or United at any relevant time but he had worked for each. The reference to "your company" could be read as a reference to REA or United or both. 25 The letter specifically related the negligence asserted to the "original valuations conducted by your company". The original valuation of the property was the valuation by REA and it was that company against whom the claim was intimated. 26 The fact that the claim was addressed to Mr Wehbe of United was perfectly understandable having regard to the letter from United, (Exhibit B) and the fact that both valuations had been prepared by Mr Wehbe. 27 There is no evidence before me that Mr Wehbe forwarded the letter dated 17 October 2003 to the liquidator of REA. However, the letter, or a copy thereof, shortly thereafter came into the hands of Mr Millar, who at the time was a director of both United and REA. The Insured is defined as the Firm, which includes REA and United as well as each principal and each employee. It is, in my opinion, arguable that the claim was relevantly made. 28 It is arguable a copy of the letter was received by the defendant during the period of insurance. The evidence in support of this is:

(a) Mr Millar, in a letter to Rob Hayes, Group General Manager, La Trobe Home Loans of Australia Pty Limited, dated 17 December 2003, stated in respect of the relevant property "The indemnity insurers have been duly informed of the potential for a claim to be made. I am available to provide further information or help in any way I can to resolve this matter as soon as possible."

(b) In a letter dated 8 June 2005 from the solicitors for the plaintiff to the defendant it was asserted: "We have since contacted Geoff Millar of REA/United Valuers and he assures us that you were notified of the potential claim, but is unable to provide us with the date."

(c) In a letter dated 1 September 2005 the then solicitors for the defendant wrote to the solicitors for the plaintiff as follows: "A disclosure was made to ACE of your client's letter dated 17 October 2003." In a subsequent affidavit the solicitor who sent that letter claimed it was erroneous and that the letter dated 17 October 2003 was not received by the defendant before 14 December 2003.

(d) In a fax dated 12 November 2003 (or 12 December 2003) from the broker to the defendant there was reference in a policy proposal to a current claim. Under "Details of circumstances" there was written "See attached letter from La Trobe Home Loans". Mr Millar in an affidavit identified that letter as the letter dated 17 October 2003.

(e) A letter from Mr Millar to the broker dated 9 December 2003 stated: "We also advise that the La Trobe matter advised in our proposal is looking to be finalised within the next few weeks. No loss and subsequently no claim appears very likely."

(f) On 25 October 2007 the solicitors for the defendant wrote to the liquidator stating, inter alia "A disclosure was made to ACE of La Trobe's letter dated 17 October 2003. However that disclosure was made on behalf of United Valuers and not on behalf of REA."

(g) There is a fax which may have been sent by the broker to the defendant (the relevant page is missing) which contained a notification to the defendant of a circumstance that may give rise to a claim. 29 In my opinion, on the information before me (there having been as yet no discovery or interrogatories), it is arguable that, during the period of insurance, the claim was made and it/or the circumstances of the claim were reported to the defendant. The plaintiff has established that it has an arguable case against the defendant under s 6 of the Act. Accordingly, in my opinion, it is appropriate to grant leave to the plaintiff to commence proceedings against the defendant. The costs of the application should follow the event.

Orders 30 1. I grant leave to the plaintiff to commence proceedings against the defendant within 7 days by filing a statement of claim in the form of Exhibit A herein.

The defendant is to pay the plaintiff's costs of the application. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : La Trobe Capital and Mortgage Corporation Ltd v ACE Insurance Ltd [2008] NSWSC 1303

Tzaidas v Child [2004] NSWCA 252; (2004) 61 NSWLR 18 CASES CITED : The Owners - Strata Plan No. 50530 v Walter Construction Group Limited [2007] NSWCA 124; (2007) 14 ANZ Ins Cases 61-734 Kenny & Good Pty Limited v MGICA (1992) Pty Limited [1999] HCA 25; (1999) 199 CLR 413

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