Whether either or both Macquarie and/or SVB should be joined in the present proceedings as additional respondents pursuant to section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 - the respective contentions of the parties
16 PCL seeks to pursue its claims for statutory indemnity against Macquarie and/or SVB as insurers by reason of the scope of indemnity the subject of either or both of the first and second insurance policies. Macquarie and SVB contended however that PCL should not have leave to join Macquarie or SVB to the present proceedings, at least on the basis that PCL must plead that either Macquarie or SVB is the insurer, since it could not be claimed to be both. Macquarie and SVB seemingly asserted moreover that PCL had been already informed that SVB is the insurer in relation to each policy sought to be relied upon by PCL, upon the footing apparently that Macquarie was merely the agent for SVB. Macquarie and SVB therefore contended that leave ought to be refused in any event for the joinder of Macquarie as a respondent in the proceedings, irrespective of whether the circumstances alleged by PCL attracted the operation of either or both of Macquarie's so-called 'PROFESSIONAL INDEMNITY' policies (to which I have been referring of course as the first and second policies). PCL instituted the present interlocutory proceedings by notice of motion filed on 18 November 2005, whereby leave was sought to add Macquarie as third respondent to its existing proceedings commenced on 29 November 2004 against ARMA and Mr Teves, and subsequently on 15 December 2005, PCL filed an amended notice of motion for the addition of SVB as fourth respondent. A proposed amended statement of claim, which pleaded relief against Macquarie as third respondent and SVB as fourth respondent, was tendered to the Court by PCL. For that reason, where I hereafter refer generally to 'respondents' in these reasons, the same may be taken to include reference to both Macquarie and SVB, as well as ARMA and Mr Teves, unless inconsistent with the context.
17 Both the first and second policies were of course issued by Macquarie. Each policy bore Macquarie's seal through which was placed an indecipherable signature, which appears beneath the words 'Signed for and on behalf of Macquarie Underwriting Pty Ltd'. The definition segment of each policy contained the following in relation to the identity of the insurer or insurers:
'6.8 Our(s) means: pertaining to Macquarie Underwriting Pty Limited on behalf of the Security.
…
6.11 Security means: certain Underwriters at Lloyds, each of whom… is only liable for their share of any Claim, loss, liability or expense payable by this policy. Details of each syndicate and its share can be obtained from Macquarie Underwriting Pty Limited.
…
6.13 Us and We means: Macquarie Underwriting Pty Limited on behalf (sic) the Security.
… .'
The corporate status of 'the Security' was not made specifically apparent by the literal terms of each policy, but so much was seemingly accepted by the parties to the subject interlocutory proceedings.
18 There is no evidence as to PCL having been furnished with, or for that matter having sought details of, the identity of the 'certain Underwriters at Lloyds' appearing in clause 6.11 above. In any event, Macquarie disclosed at least implicitly by those terms of each policy that it acted on behalf of those unidentified 'certain Underwriters at Lloyds'. Accordingly Macquarie should be joined as a third respondent to the proceedings, as PCL presently seeks, irrespective of any joinder of SVB as fourth respondent. As to the joinder or otherwise of SVB, there is no specific indication in either policy, as I have foreshadowed, that the 'Security' is a legal entity; so much has however been apparently indicated by Macquarie to be the case, and hence PCL's present application that both entities be added as respondents for the purpose of the claims to be advanced pursuant to s 6 of the LR Act. There is no compelling reason, that I can identify, for Macquarie to add as further respondents the unidentified and otherwise undisclosed 'certain Underwriters at Lloyds'.
19 Each of the policies contains in clause 1 thereof, which appears under the heading 'STANDARD PI ENDORSEMENT', reference to the circumstances whereby '[w]e will not cover you for any Claim…'. Clause 1.2.1 stipulated that valuations the subject of cover must have been undertaken by a 'registered or licensed valuer', and thereafter set out minimum requirements for valuations to attract cover. One of those requirements was that the valuations the subject of cover should not have been 'undertaken or signed by Brian Smith'; another stipulated that cover was not to be available in relation to '… [v]aluations undertaken or signed by any person not named in the SPECIAL CONDITIONS of the Schedule'.
20 The only material difference between that second policy and the first policy, apart of course from the latter relating to the earlier insurance year 26 July 2003 to 26 July 2004, and the former to the following insurance year 26 July 2004 to 26 July 2005, was that only one 'Named Valuer' was identified in the 'SPECIAL CONDITIONS' of the 'SCHEDULE' to the extent appearing on the front page of the earlier or first policy, being Terrence Stewart, whereas there were three 'Named Valuers' appearing in the 'SPECIAL CONDITIONS' of the 'SCHEDULE' on the front page of the later policy (ie that relating to the subsequent insurance year 26 July 2004 to 26 July 2005), being Neil Teves, Paul Lowis and John Wake, and additionally 'Terrence Stewart, but only in relation to valuations done prior to the Insurance Period'. Mr Teves is of course the existing second respondent to the proceedings. It is common ground that it was during the term of the later or second policy, that a claim was made by PCL upon the existing respondents ARMA and Mr Teves, being a claim which was adequate in scope in relation to the risk pleaded by PCL, and further that such claim was notified to Macquarie during that later or second term. PCL's case accordingly was that there was what may be described as a prima facie indemnity response in operation pursuant to the terms of the second policy. PCL's case was primarily put on the basis of the second policy.
21 However it was put against PCL that each of Macquarie and SVB is not liable under the second policy by reason of the operation of exclusion clause 4.1 thereof, the second policy relating of course to the year of indemnity 26 July 2004 to 26 July 2005, and which, as appears from the text of what I have earlier reproduced, excludes cover for any claim 'first made, threatened or intimated against or to [ARMA] prior to the Insurance Period; or arising from any matter disclosed or notified to Us… prior to the Insurance Period as being either a Claim, or claim, or else arising from circumstances of which [ARMA was] aware prior to the Insurance Period and which [ARMA]… ought reasonably to have realised to be circumstances which might result in a Claim or claim'. The distinction between Claim and claim thus appearing in that segment of each policy is that the former refers to an originating legal process, whereas the latter is what appears as a non-exclusive definition in the second segment of exclusion clause 4.1, and thereby includes an 'allegation or complaint of a breach of professional duty', and generally 'a demand for compensation or damages'. That critical exclusion clause 4.1 is in identical in terms in relation to the first and second policies for the successive years of cover of course from 26 July 2003 to 26 July 2004 and from 26 July 2004 to 26 July 2005.
22 The parties agreed that prior to the commencement of the insurance year of the second or later policy, ARMA had received the two letters of significance I have already extracted, the first from Bluestone Mortgages written on behalf of PCL on 23 April 2004, and the second written from PCL's solicitors written on behalf of PCL on 13 May 2004, the latter whereof repeating the substance of the allegation made in the former as to overvaluation, and consequentially of a likely or possible shortfall on the prospective realisation by PCL of the subject properties in its capacity as mortgagee exercising power of sale. More precisely, the earlier letter used the expression 'it appears likely there will be a shortfall', whereas the latter or subsequent letter used the perhaps more conservative expression '… our client may suffer a shortfall upon sale…'. Each letter was written of course some time prior to the expiration of the term of insurance the subject of the first policy, and therefore of course prior to commencement of the term of insurance the subject of the second policy. However it would seem from Macquarie's fax of 25 October 2004 that neither letter was passed on by ARMA to Macquarie until October 2004 (see Macquarie's fax to 'Greg Parr' of 25 October 2004).
23 A threshold debate arose as to the construction to be given to the operation of each of those two letters of 23 April and 13 May 2004. One contention of PCL was that those letters did not evince 'circumstances which might result in a claim' within policy exclusion 4.1, with emphasis being placed upon the word might, as both letters had been written at a time prior to crystallisation of any loss to PCL, that is to say, at a time prior to any sale of the properties by PCL (in exercise of its power of sale as mortgagee) involving any actual shortfall being sustained in respect of the mortgage indebtedness of Brett Robinson to PCL, and that the letters were therefore merely 'speculative' in operation for that reason. Attention was drawn by PCL in particular to the words 'it appears' and 'may suffer' in the later letter of PCL's solicitors of 13 May 2004 extracted above. PCL asserted in that regard that '[t]his is not a claim nor an assertion of the breach of duty, it merely raises the possibility of overvaluation, foreshadowing future action in the event of a shortfall', and that consequently, any so-called 'known circumstances' the subject of exclusion clause 4.1 did not apply. PCL also contended that to foreshadow the possibility of a claim pursuant to either policy did not constitute a 'known circumstance', because otherwise 'every event, no matter how remote and contingent, would trigger the exclusion'. Put another way, PCL submitted that 'at the relevant time', there was no claim as such then pending, because it was implicitly acknowledged in those letters of 23 April 2004 and 13 May 2004, written on behalf of PCL (during of course the terms of the first policy being 26 July 2003 to 26 July 2004), that there was no basis for any claim to indemnity unless certain further events transpired or crystallised by way of sale by PCL as mortgagee exercising power of sale. In my opinion, that submission of PCL cannot be dismissed as not reasonably arguable or not open to argument.
24 The Insurers rejoined that the words 'circumstances which might result in a claim' the subject of exclusion clause 4.1 of each policy included circumstances where a claim is possible in the sense, for instance, of being contingent upon crystallisation of some event, and that if such was not the case, there could never be any circumstances, short of the making of a claim per se, which could constitute circumstances which might result in a claim. The respondents drew attention to FAI General Insurance Co Limited v McSweeney ((1999) 10 ANZ Ins Cas 61-443 at 75,033-4), where this Court (Lindgren J) gave consideration to a policy condition containing a similar expression 'may give rise to a claim', and expressed the opinion that although it was not desirable to attempt to define precisely the shade of meaning to be signified by that expression in particular contexts, circumstances may be said to give rise to a claim if 'they would… immediately suggest to a reasonable person in the… insured's position who reflected upon those known circumstances, that the bringing of a claim against the insured in respect of them was a "definite risk" or a "real possibility" or "on the cards". It was therefore contended by the Insurers the second policy 'does not respond' to the claim of ARMA as valuer and hence also to that of PCL as mortgagee.
25 As appears further from the text of the letter dated 13 May 2004 which I have earlier extracted in full, it contains the opinion '[i]t appears your valuations significantly overvalued the properties, such that our client may suffer a shortfall upon sale of the properties', and the statement of intention that '[w]e have been instructed to take action to recover any shortfall from you'. Moreover this letter warned '… that circumstances have arisen that may give rise, to a claim', being words reflected in the fourth indented paragraph of exclusion clause 4.1 of each of the first and second policies. The letter dated 23 April 2004 is to similar effect.
26 PCL drew attention to the well known principle of insurance law that an exclusion clause in an insurance policy should be construed narrowly and otherwise against the interests of the insurer, citing in that regard Derrington and Ashton, The Law of Liability Insurance (2nd edition Lexis Nexis, 2005) at 10-2. PCL referred further to the principle enunciated in the unanimous reasons for judgment of the High Court in Darlington Futures Limited v Delco Australia Proprietary Limited (1986) 161 CLR 500 at 510 to the effect that in the event of ambiguity, an exclusion clause is to be construed contra proferentem. I have already extracted the material provisions of exclusion clause 4.1 of potential relevance. Given the content of the letters of PCL to Mr Teves, apparently a director and shareholder of ARMA during the term of the first policy (as well as the second policy), yet the absence of any sale of the properties the subject of ARMA's valuations prior to commencement of the second policy, being letters apparently not provided to Macquarie prior to the commencement of the term of the second policy, the Insurers contended that if the second policy was otherwisethe subject of relevant cover, that absence of disclosure by ARMA to Macquarie of those notifications of apparent likely claim communicated by PCL to ARMA was fatal to invocation of any liability of the Insurers under the second policy.
27 It was PCL's further contention however that s 33 (of Division 3 of Part IV) of the Insurance Contracts Act 1984 (Cth) ('IC Act') so operates as to preclude, in the present circumstances, the Insurers from any effective reliance upon exclusion clause 4.1. Section 33, which is headed 'No other remedies', stipulates as follows:
'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.'
28 PCL submitted that if exclusion clause 4.1 was to be applied adversely to PCL, it would effectively provide an additional right to Macquarie/SVB that they have 'otherwise than under [theIC 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 an incorrect statement', and thus should be invalidated by reason of the operation of s 33 of the IC Act. PCL cited in that regard Permanent Trustee Australia Limited v FAI General Insurance Company Limited (1988) 153 ALR 529, where Hodgson CJ in Eq considered a policy condition, extracted at 536 under the heading 'Retroactive Liability', which was claimed to have granted unlimited retroactive liability, qualified only by the words 'omitting claims or circumstances which may give rise to a claim which are known to the insured prior to the inception of this insurance'. PCL contended that such exclusion condition addressed in FAI was 'on all fours' with exclusion clause 4.1 of each of the present policies, and that what was addressed by his Honour was indeed the substance rather than the form of the exclusion clause there in issue. His Honour determined (at 568) that '… the retroactive clause should be interpreted as applying only if the insured knows the circumstances ascircumstanceswhich might give rise to a claim (being his Honour's emphasis), because otherwise the clause would have the unreasonable effect of excluding many or even most circumstances that were purportedly insured against'. Subsequently (at 589), his Honour added that '[i]f the retroactive clause had the effect of excluding liability for something which was in substance a non-disclosure, then I think s 33 would in any event, prevent the retroactive clause excluding liability'. PCL's submissions was that '… the only way that [Macquarie and SVB] can escape the making of the orders sought is… to persuade [the Federal Court]that Hodgson J… was wrong' in his approach to the resolution of Permanent Trustee.
29 Counsel for the Insurers Macquarie and SVB drew attention to the reasons for subsequent decision of Dunford J in the Supreme Court of New South Wales in Pech v Tilgals (1994) 94 ATC 4206, where the circumstances involved a claim against an accountant for professional negligence, and a cross-claim by that accountant for indemnity against his professional indemnity insurer. The professional indemnity insurance policy excluded from cover claims '[a]rising from any circumstance or circumstances of which [the insured] shall became aware, prior to the commencement of insurance cover under this Policy… and which a reasonable Accountant in [the] position [of the insured] would at any time prior to the commencement of cover have considered may give rise to Claim'. His Honour first observed that the words '"at any time" (prior to the commencement of cover)' did not embrace circumstances which may have existed some time previously but which had been overtaken by subsequent events, as such a construction could at times lead to absurd results; rather in his Honour's view, those words referred to what a reasonable accountant should consider right down to the commencement of cover.
30 Assuming that policy language addressed in Pech to have relevantly similar effect as that of exclusion clause 4.1, two observations may be made. The first is that his Honour's observation cited above would have no application in relation to the operation of the first policy, but only the operation of the second policy, since the letters of 23 April 2004 and 13 May 2004 were written by PCL to Mr Teves during the currency of the first policy. The second is that the critical issue remains here as to the import of what was said in those letters concerning the implications as to what appear to have then constituted merely pending or proposed sales, rather than the implications of sales effected during that subsequent year of indemnity commencing 26 July 2004. It does not seem to me that Pech provides sufficient bearing upon the circumstances thus far in evidence in the present case.
31 PCL submitted next that s 14 of the IC Act, headed 'Parties not to rely on provisions except in the utmost good faith', was also applicable to the present circumstances of claim, it providing by subsection (1) that '[i]f reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision'. PCL's submission was that 'the effect of what the insurer seeks to do by relying on the exclusion is to penalise the insured for failing to notify the insurer of circumstances that might give rise to a claim during the previous policy year'. PCL asserted that the previous policy year of indemnity did not contain any provision that required the insured to notify any such circumstances. Accordingly PCL contended that '… where an insured is covered under successive policies of insurance, it is arguably a breach of duty of utmost good faith to rely on [an] exclusion which relates to the failure of the insured to perform an act during the prior policy of insurance when in fact there was no obligation of the insured pursuant to the prior policy to perform that act, namely to notify those circumstances'. The Insurers asserted on the other hand that PCL did not demonstrate 'how reliance upon a well known limitation in a claims made cover could amount to a lack of good faith', though no explicit evidence has yet been tendered as to the existence of the limitation being 'well known'.
32 PCL advanced an alternative claim for indemnity based on the first policy, that being of course issued by Macquarie to ARMA for the period of cover 26 July 2003 to 26 July 2004. It appears to have been common ground that the valuations the subject of the present proceedings were undertaken and signed by Mr Teves, who was not a named valuer in the so-called special conditions appearing on page 1 of the Schedule to the first policy, the only valuer named therein being Terrence Stewart (as I have earlier recorded). Upon that basis, the Insurers' case was that the first policy did not provide insurance in relation to the circumstances of PCL's claim, the first policy not extending to valuations undertaken and signed by persons other than 'Terrence Stewart', and hence not extending to valuations undertaken and signed by 'Neil Teves'. The Insurers submitted that there was no averment or evidence at all about Mr Teves' role or association with ARMA at the time of the commencement of operation of the first policy, or about 'any negotiations between the insured and the insurer relating to the decision to name Mr Stewart (and not Mr Teves) in the policy', and that there was therefore no basis, pleaded or otherwise, for the proposition that the first policy was intended to include valuations undertaken or signed by Mr Teves.
33 PCL invoked reliance by way of rejoinder to those submissions of the Insurers upon the remedial provisions s 14 of the IC Act, appearing within Part II thereof under the heading 'The duty of the utmost good faith', and which read as follows:
'14 Parties not to rely on provisions except in the utmost good faith
(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision.
(2) Subsection (1) does not limit the operation of section 13.
(3) In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise.'
The preceding s 13 relates to the contracts of insurance being 'based on the utmost good faith', and s 37 requires an insured to be 'clearly informed' in writing by the insurer of the effect of terms 'not usually included in contracts of insurance that provide similar insurance cover'.
34 PCL asserted that the purpose of ARMA in obtaining professional indemnity insurance from Macquarie was inferentially to acquire cover in respect of valuations conducted in the course of its business, and PCL informed the Court, seemingly without objection, that Mr Teves had been at all relevant times both a company director and a shareholder of ARMA. Upon that apparent footing of Mr Teves' involvement in ARMA to the extent of being a director and shareholder, PCL contended that 'given Mr Teves' position at ARMA, it is improbable in the extreme that his name was omitted from the schedule otherwise than by mistake or oversight'. However the Insurers drew attention to the circumstance that there had been no evidence tendered as to Mr Teves' role or association with ARMA at the time of commencement of the first policy. It would be inappropriate nevertheless to permit the present proceedings to be by interlocutory strike-out by reason largely of an apparent oversight on the part of PCL to have attended to such an evidentiary formality. One difficulty for PCL, so the Insurers contended in any event, was that no evidence had been provided to enable the Court to determine whether s 14 of the IC Act operates to preclude the proposed respondents from relying on such a mistake or oversight, being evidence for the purpose of proceedings for rectification of the first policy. Nevertheless it would be an unsatisfactory approach on my part to the resolution of the present interlocutory application to uphold the same in circumstances where there had emerged an apparency of a potentially viable basis for rectification of the first policy, albeit that such an evidently available course had not yet been formally commenced.
35 PCL's concluding principal contention in relation to the operation of the first policy was that 'a simple point of construction allows [PCL] to overcome the respondents' argument that Mr Teves was not named in the Special Conditions of the Schedule to the first policy'. That asserted point of construction as to the first policy was said to be based on paragraph 1.0 of the 'Valuers - Australia' endorsement on the first policy (also, for what it may matter, on the second policy) which states, inter alia:
'1.0 We will not cover You for any Claim which:
1.1 is payable under any fund established by any statutory or professional body;
1.2 arises from Valuations other than Valuations where:
1.2.1 the Responsible Valuer is a registered or licensed valuer.
…
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.'
36 PCL pointed out that there were no words of disjunction employed throughout each of the subparagraphs of paragraph 1.0, which as above appears is literally the case, and that therefore on the proper construction of the first policy, at least each of the foregoing paragraphs 1.1 to 1.8 should be read conjunctively rather than disjunctively. The 'clearest indication' of that interpretation advanced by PCL was said to be the circumstance that only valuations of Mr Brian Smith were specifically excluded from the first policy by paragraph 1.7 thereof (supra), and further that Terrence Stewart was (as I have earlier indicated) the only valuer named in the first policy. PCL submitted that '[i]f the clause was not intended to take effect conjunctively there would be no reason to include subparagraph 1.7 [and] [v]aluations by Mr Smith would go out by operation of subparagraph 1.8', an observation which is literally correct but obviously highly controversial. Given that paragraphs 1.1 to 1.8 are to be read conjunctively, PCL contended further that since there was no suggestion made by the Insurers that all of the requirements of the subparagraphs of paragraph 1.0 of the first policy had been fulfilled, the exclusions the subject of paragraph 1.0 had no present application, and PCL had the benefit of insurance cover for the claim, even though Mr Teves was not specifically named in the schedule to the first policy.