An insurer falls foul of a contractual deeming clause
Jun 2019 | InsuranceIntroduction
The decision from Bechini v IUS Pty Limited (ABN 93 003 359 279 (in Liquidation)1 highlights the importance for insurers to routinely review their insurance contracts to ensure they reflect developments with relevant case law and statute.
The facts
This matter was brought by way of an application by the insurer seeking a determination of a collateral issue relevant to the principal proceedings concerning the conduct of IUS Pty Ltd (IUS) in providing professional services. IUS was an architectural firm established in around 2004 that was placed in external administration on 5 August 2013 and was wound up shortly thereafter.
The principal proceedings
Mr and Mrs Bechini (Plaintiffs) contacted IUS in November 2006 to procure plans for a proposed development to be constructed on land they owned. On 23 April 2007 the relevant planning regime changed and the proposed development could no longer proceed. The Plaintiffs alleged that IUS failed to prepare plans in accordance with the applicable planning regime and they suffered loss as a consequence. In light of IUS’ insolvency and the need for the Plaintiffs to pursue recovery via IUS’s insurance, the Plaintiffs also alleged that IUS became aware on 23 April 2007 of circumstances that may give rise to a claim, and on 29 July 2008 IUS was informed of the claim.
The Policy
Relevantly, IUS obtained professional indemnity insurance (Policy) from the insurer through insurer’s agent, M&R Insurance Brokers Pty Ltd (M&R) commencing on 23 March 2007 until 23 March 2008 (First Period of Cover) which was then renewed on 20 March 2008 for a further year (Second Period of Cover).
The application
It was not in dispute that the insurer issued two claims made policies to IUS in respect of professional indemnity claims (of the type which the Plaintiffs had brought against IUS). The insurer, however, denied that the polices responded to the claim due to an irregularity in the Policy document exchanged between IUS, M&R and the insurer.
It was also common ground that the Policy was issued by the insurer, that the insurer was first notified of circumstances potentially giving rise to a claim in early 2014, some 6 years after the Policy cover ceased and that civil proceedings were not commenced by the Plaintiffs until 27 March 2015. The insurer was only notified of the proceedings on 1 April 2015 and even then not by IUS.
A central issue to this application was that the insurer alleged that page 2 of the Architects Proposal Form, (Proposal Form) was not returned to M&R as part of the initial attachment from IUS on 23 March 2007, and accordingly did not form part of the Policy. Page 2 of the Proposal Form contained a contractual deeming clause.2
The Plaintiffs and M&R argued that page 2 was included in the Proposal Form, while the insurer argued that page 2 was not a part of the Proposal Form.
Issue
Was the contractual deeming clause contained on page 2 of the Proposal Form, a part of the Policy?
Decision
The Court found that page 2 of the Proposal Form was part of a pro forma explanation, no part of which was required to be completed by IUS. However, the terms of the executed Policy defined the term 'Policy' to include the 'Proposal'.
The insurer submitted that the 'Proposal' consisted only of that part of the document that was completed by IUS, and accordingly the subject matter of page 2 was not a part of the Policy agreed to by the parties. However, it was not suggested that the use of the term “Proposal” in the Policy was a reference to at least some part of the Proposal Form, which contained the first two pages.
Ultimately, the Court found that the Proposal Form including page 2 was included in the Policy and referred to the decision in Deaves v CLM fire and General Insurance Co Ltd3 where Jacobs J said, at 68:
'At least in Australia the policy itself must in some way express the incorporation of the proposal or its contents into the policy'.
Comment
This decision highlights the importance for insurers to routinely review all of their insurance contracts to ensure that their interests are protected in accordance with developments in case law and statute. The 2001 decision in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd4 and the subsequent 2001 decision in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd5 concern the interaction of ss 40(3) and 54 of the Insurance Contracts Act 1984 (Cth) (ICA).
Section 40(3) of the ICA is directed to a situation in which an insurer might otherwise be entitled to decline or limit indemnity, if the insured fails during the currency of the policy to give notice of a claim. The contractual right of an insurer to decline indemnity in such circumstances is ameliorated by s 40(3), being that it has the effect of a statutory ‘deeming’ provision, deeming the claim to have been notified at the time the circumstances were notified. Section 54 is concerned with the position where the insured knows about circumstances which might give rise to a claim and fails to comply with its contractual obligations to provide notification of the claim to the insurer during the currency of the policy. Section 54 operates to ‘forgive’ a failure by an insured to notify a claim within the policy period, provided there is no prejudice to the insurer.
Had the Court concluded that page 2 was not included in the policy, then it would be open to the insurer, consistent with the decision in HTW Valuers, to deny coverage to the Plaintiffs as the provision in s 54 could not be invoked to ‘forgive’ the failure of IUS to notify the insured of circumstances which might give rise to a claim on 23 April 2007. In this decision, the Court concluded that page 2 did form part of the Policy and accordingly, the contractual deeming clause and s 54 provide an avenue for the Plaintiffs to ensure there is a defendant who is capable of meeting any damages awarded in the principal proceedings.
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1 [2019] NSWSC 427
2 A contractual deeming clause provides that a claim will be deemed to have been made during the period of insurance if it arises from circumstances which were notified to the insurer during the period of insurance.
3 (1979) 143 CRL 24.
4 (2001) 204 CLR 641.
5 [2009] 2 QdR 1.
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