Macquarie Underwriting Pty Ltd v Permanent Custodians Limited

The first policy 6 The policies were professional indemnity policies for valuers. The valuation the subject of the proceedings was carried out by Mr Teves on behalf of ARMA. The insurance period for the first policy was 26 July 2003 to 26 July 2004. 7 The Schedule to the first policy provides eight circumstances in which Macquarie will not cover the insured. There is no express indication whether the circumstances are conjunctive or disjunctive. Two of those circumstances are: 'We will not cover You for any Claim which: … 1.7 arises from Valuations undertaken or signed by Brian Smith. 1.8 arises from Valuations undertaken or signed by any person not named in the SPECIAL CONDITIONS of the Schedule.' 8 Mr Teves is not a person named in the special conditions of the Schedule. The sole named valuer is Terrence Stewart. Permanent's contention is that it is arguable that the circumstances are cumulative. Accepting that Mr Teves is not a person named in the special conditions of the Schedule it submits that, at the least because Brian Smith was not the valuer, cover is not precluded. Permanent accepted that a construction that meant that the conditions for cover were cumulative was superficially unlikely but submitted that it was an arguable construction as there was no actual indication in the first policy whether the conditions were conjunctive or disjunctive. If conjunctive, clauses 1.7 and 1.8 mean that the limits of cover with respect to the identity of the valuer are such that liability is excluded only where the valuation is undertaken or signed by a valuer not named on the policy and that valuation is undertaken or signed by Mr Smith. A valuation by an (unnamed) valuer who is not Mr Smith would be covered by the policy. 9 The insurers submit that such a construction is untenable, commercially and as a matter of construction. 10 The primary judge noted Permanent's contention that a conjunctive interpretation was 'sufficiently arguable' for the purposes of the operation of s 6 of the Act (Permanent (No 1) at [41]). When the matter was considered further by His Honour, he referred to the submission that the first policy 'could not conceivably be construed as having a conjunctive operation' but decided that he should not finally resolve that issue (Permanent (No 2) at [4]). 11 It is accepted that, if the provisions of clause 1.0 operate disjunctively, there is no insurance cover because Mr Teves was not a person named in the Schedule. 12 In my opinion, there is sufficient doubt as to whether such a conjunctive construction can be said even to be reasonably arguable to warrant reconsideration by a Full Court (Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 398-9). 13 There was no claim for indemnity made by ARMA during the currency of the first policy.

The second policy 14 The primary judge noted that Permanent's case was primarily based on the second policy (Permanent (No 1) at [20]). The primary judge seems to have accepted that the applicable insurance cover related to the second policy (Permanent (No 1) at [39]). 15 Mr Teves was first notified by Permanent of the likelihood of a claim by letters of 23 April 2004 and 13 May 2004 during the currency of the first policy. The first letter, which would seem to have been sent on Permanent's behalf by Bluestone Mortgages, included a request that Mr Teves 'notify your professional indemnity insurer that circumstances have arisen that may give rise to a claim against you and/or your firm in this matter'. The insurance period of the second policy was 26 July 2004 to 26 July 2005. Counsel for the insurers informed the Court that Macquarie was first notified of Permanent's claim on 1 September 2004, during the currency of the second policy. 16 The insurers rely on Exclusion 4.1 of the second policy which provides: '4.1 We will not cover You for any Claim or claims: · first made, threatened or intimated against or to You prior to the Insurance Period; or · arising from any matter disclosed or notified to Us or any other insurer prior to the Insurance Period as being either a Claim or claim, or circumstances which might result in a Claim or claim; or · arising from any litigation or Inquiry that was in progress or pending prior to the Insurance Period; or · arising from circumstances of which You were aware prior to the Insurance Period and which You, or a person in Your position, ought reasonably to have realised to be circumstances which might result in a Claim or claim.' 17 The insurers emphasise the distinction between "Claim" and "claim". As the primary judge recorded at [21] of Permanent (No 1), 'Claim' as defined by clause 6.0 refers to an originating legal process whereas 'claim' with "c" in lower case is defined by Exclusion 4.1 as follows: 'For the purposes of Exclusion 4.1 a "claim" includes, but is not limited to: ·a demand for compensation or damages; or · an assertion of a right or entitlement to compensation, damages or other legal relief; or · an assertion, allegation or complaint of a breach of professional duty; · an assertion, allegation or complaint of any act or omission causing or potentially causing loss or damage; or · an intention to seek compensation, damages or other legal relief.' 18 The insurers submit that, while his Honour may have dealt with the whether there had been a 'Claim' for the purposes of Exclusion 4.1, he did not consider whether the agreed notification that took place prior to the contract period of the second policy constituted a 'claim', namely 'an assertion, allegation or complaint of any act or omission causing or potentially causing loss or damage'. 19 As the insurers submit, Exclusion 4.1 arises not only where the circumstances amounted to a 'Claim' but also where they might result in a 'claim'. If the notification to the insured constituted circumstances within that exclusion with respect to a "claim", there was a complete defence under the second policy, subject to the possible application of s 33 of the Insurance Contracts Act 1984 (Cth) ('the Insurance Act') ([23] to [27] below). 20 Permanent's submissions to the primary judge were to the effect that the letters from Permanent to Mr Teves were couched in words that did not amount to 'a claim nor an assertion of the breach of duty' butmerely raised 'the possibility of overvaluation, foreshadowing future action in the event of a shortfall' (Permanent (No 1) at [23]). It was put to his Honour that, as there was 'no claim as such then pending' there was no basis for any claim to indemnity unless further events transpired or 'crystallised' (Permanent (No 1) at [23]). His Honour referred to the decision of Lindgren J in FAI General Insurance Co Limited v McSweeney (1999) 10 ANZ Insurances Cases 61-443 at 75,033-4 that circumstances 'may give rise to a claim' where the 'bringing of a claim against the insured in respect of them was a "definite risk" or a "real possibility" or "on the cards"'. The primary judge concluded that it was reasonably arguable that Exclusion 4.1 had no operation, at least because of the lack of clarity in the letters as to whether any loss or damage would crystallise by way of actual sale of the properties in question (Permanent (No 1) at [39]). On that basis, his Honour concluded that it was open to argument that Exclusion 4.1 may have no operation. 21 In coming to that conclusion, based upon the crystallisation of the loss of damage, his Honour was considering a "Claim", that is in the sense of a bringing of a claim in the nature of an originating process (as in McSweeney). 22 His Honour seems to have dealt compendiously with Claim and claim or, alternatively, dealt with the former but not with the latter. He relied on the absence of any sale of the properties the subject of ARMA's valuations prior to the commencement of the second policy (Permanent (No 1) at [39]). His Honour recorded the insurers' contention that there was no liability under the second policy because of an absence of disclosure of the notifications by Permanent to Mr Teves (Permanent (No 1) at [26]). His Honour did not consider the effect of those notifications on Exclusion 4.1. The insurers emphasise that this was not a question of disclosure but of awareness of circumstances. His Honour held that it was open to argument that the exclusion clause had no operation but that was in the context of whether loss or damage relevantly crystallised. That was relevant to whether a "Claim" might result but not a "claim" as defined in the policy.

The Insurance Act 23 The next issue was whether, as submitted by Permanent, even if the notification did constitute knowledge of circumstances which might result in a 'claim', s 33 of the Insurance Act operated to preclude the Insurers from relying on Exclusion 4.1. Section 33 of the Insurance Act provides: 'No other remedies The provisions of this Division are exclusive of any right that the insurer has otherwise than under this Act in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement.' 24 Permanent submitted to his Honour that Exclusion 4.1 provides the insurers with a right to disclaim liability for the failure to disclose a matter 'otherwise than under [the Insurance Act]' and could not be relied upon. Permanent relied upon Permanent Trustee Australia Limited v FAI General Insurance Company Limited (1988) 153 ALR 529 in support of its submission that Exclusion 4.1 is, in effect, a non-disclosure clause for the purposes of s 33. The primary judge recognised that, in Permanent v FAI, Hodgson CJ in Eq was concerned with a claimed exclusion from liability for non-disclosure and with whether the insured was aware of the circumstances which might give rise to a claim. In these circumstances, Hodgson CJ in Eq thought s 33 applied (Permanent (No 1) at [28]; Permanent v FAI at 589). 25 The insurers relied upon Pech v Tilgals (1994) 94 ATC 4206 where Dunford J considered a comparable if not identical clause to Exclusion 4.1 and held that it was not concerned with non-disclosure because 'the claims specified are excluded from the cover whether the circumstances are disclosed or not' (at 4218). The primary judge accepted that Pech was relevant to the second policy. However, his Honour concluded that Pech did not provide 'sufficient bearing' on the circumstances in this case (Permanent (No 1) at [30]). His Honour did not consider the impact of the reasoning in Pech on s 33. 26 The primary judge seemed to accept that the applicable policy was the second policy. The insurers relied upon Exclusion 4.1 to 'destroy' Permanent's case. The insurers asserted a complete defence to the cause of action because the letters from Permanent to Mr Teves constituted, by their content, circumstances of which, at the least, Mr Teves and ARMA ought reasonably to have realised to be circumstances which might result in or intimated 'an assertion, allegation or complaint of any act or omission causing or potentially causing loss or damage' or 'an intention to seek compensation, damages or other legal relief'. The insurers assert that this was not a question of non-disclosure because Exclusion 4.1 applies whether the circumstances are disclosed to the insurer or not. The primary judge did not consider the application of Exclusion 4.1 for other than non-disclosure, whether a defence was thereby available and whether it was a total answer to the cause of action. 27 The primary judge seemed to accept that the reasoning in Permanent v FAI applied with respect to s 33, the consequence being that the insurers could not rely on Exclusion 4.1. Permanent v FAI concerned a failure to disclose. The insurers' submission that Exclusion 4.1 is not relevantly concerned with a failure to disclose and that s 33 has no application was not dealt with. His Honour did not explain why the reasoning in Pech was not applicable.

CONclusion 28 The consequences of the insurers being successful in resisting joinder to the proceedings are obvious. If the insurers are entitled to disclaim liability, substantial injustice will result from the joinder and consequent full participation in the proceedings. Permanent submits that there is no injustice because, if the insurers ultimately succeed, there would be an order for costs. That fails to recognise that a costs order does not, in the ordinary course, fully indemnify a party and fails to recognise the disruption occasioned by legal proceedings that extends beyond expenditure of money. 29 The insurers contend that they have an unanswerable case on the construction of the first and second policies and that each of their arguments were put to the primary judge. Their contention is that, if their submissions had been considered, there was no arguable case to be met. Contentions that were central to their defence and its right to resist joinder were not fully considered. It is appropriate in these circumstances for there to be a grant of leave to appeal (Woolworths Limited v BP plc (2006) 150 FCR 134 at [54] per Sundberg and Bennett JJ). 30 It was also submitted to his Honour that Macquarie is not the underwriter of either policy and should not be joined for this reason. The insurers' argument is that Macquarie was agent only and that SVB was the underwriter of the first and second policies. Section 6 of the Act refers to a grant of leave to join 'the insurer' which, it is submitted, cannot be both Macquarie and SVB. 31 His Honour held that the terms of the policies disclosed that Macquarie acted on behalf of the unidentified 'certain Underwriters at Lloyds' and that Macquarie should be joined to the proceedings (Permanent (No 1) at [18]). As I have concluded that there should be a grant of leave, I do not propose to consider this further. 32 A grant of leave to appeal will not avoid the need for a hearing of the substantive proceedings between Permanent and ARMA and Mr Teves. It will, however, if the appeal is successful avoid the hearing of proceedings brought by Permanent against the insurers. In the circumstances I am satisfied that there should be a grant of leave and that Permanent should pay the insurers' costs of the application. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bennett.

Counsel for the Applicants: I D Faulkner SC and N J Kidd

Solicitor for the Applicants: Colin Biggers & Paisley

Solicitor for the First Respondent: Gadens Lawyers

Date of Judgment: 28 September 2006