P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyd's Ltd
The NSW Court of Appeal’s recent decision is helpful to Insurers on the vexed question of:
- notifications under s40(3) of the Insurance Contracts Act 1984 (Cth)(‘ICA’); and
- the standard of proof for fraudulent misrepresentation and non-disclosure under s28(2) of the ICA.
Summary of findings
- Any notification must be of “facts” because s40(3) is concerned with the notification of ‘objective matters’ that bear on the possibility of a claim being made rather than matter of belief or opinion as to the possibility.
- Notification of facts or circumstances which may give rise to a claim must be sufficiently detailed to as to inform the Insurer of potential liability and evaluate the potential claim or claims, or notified problem.
- The NSWCA decision strengthens the position set out in the English Court of Appeal decision of Kidsons v Lloyds’ Underwriters (2008) (‘Kidsons’), as it requires (a) subjective knowledge of circumstances; and (b) factual elements or objective material circumstances, which is likely to, or may, give rise to a claim.
- In light of the above, the Australian position may make it harder for an Insured to rely on a ‘hornets’ nest’ or ‘can of worms’ type notification as seen in Euro Pools Plc (in administration) v Royal & Sun Alliance Insurance Plc  EWHC 46 (Comm) (‘Europools’), which lacks sufficient detail of the factual elements which might give rise to the claim.
Fraudulent misrepresentation and non-disclosure:
- There must be clear, unequivocal evidence of fraud in order for a Court to be satisfied, on the balance of probabilities, that such conduct has occurred.
- Negligence is insufficient.
The NSWCA was required to consider the following key issues in dispute:
- whether or not the primary judge erred in not finding that the January 2013 notification was of “facts that might give rise to a claim”, sufficient to satisfy s40(3) of the ICA; and
- Whether the primary judged erred in finding there had been fraudulent misrepresentation and non-disclosures under s28(2) of the ICA.
Ultimately the NSWCA upheld all of the findings made by the primary judge, dismissing the appeal.
Importantly, the NSWCA held that the notification made in late January 2013 did not engage s40(3) and confirmed the threshold standard of proof for fraudulent misrepresentation and non-disclosure
under s28(2) of the ICA.
Summary of primary case and appeal proceedings
The appellants are members of self-managed superannuation funds of our family groups who received financial planning advice from Moylan Retirement Solutions Pty Ltd (‘MRS’). Relying on s601AG of the Corporations Act 2001, the appellants sought to recover from the insurer of MRS, indemnity payments that it asserted MRS was entitled to under the Policy, on account of investment and financial planning advice given from 30 June 2006 to 30 June 2011. The appellants alleged that MRS, deregistered in 17 August 2014, was indemnified against those liabilities under one or other of the two policies of professional indemnity insurance, in each case the business insured being that of financial planning. The three separate proceedings brought by the various appellants were heard together in the New South Wales Supreme Court. The NSWSC in the primary proceedings held that whilst MRS was liable to the applicants for losses sustained as a result of its misleading and deceptive conduct, negligent advice and breaches of fiduciary duty, indemnity in respect of those liabilities was not recoverable under either policy. The Court found that that the 2012/2013 policy did not respond because no ‘claim’ had been made against MRS before May 2013, and the notification made in late January 2013 did not engage s40(3).
Had that subsection applied, the claims subsequently made would have been treated as made during the period of the 2012/2013 policy. In that event, there would have been an issue as to whether there was fraudulent misrepresentation and non-disclosure before that insurance was entered into, entitling the insurers to reduce that liability to nil. (ICA ss 21, 28(2)).
Notification - section 40(3) Insurance Contracts Act 1984 (CTH)
Section 40(3) of the ICA provides the following:
“Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract.”
The primary judge in the NSWSC concluded that the facts notified did not engage s 40(3) because they did not identify ‘facts’ which ‘might give rise to a claim’. His Honour found that the notification was no more than bare ‘possibilities’ which did not point towards any particular claim. Importantly, it did not identify any particular:
- Client; or
- Transaction; or
- Particular loss;
which may result in a claim.
The appellants argued that the requirement was that the notification be of facts that “point to a realistic possibility” that the claims would arise in those facts, notwithstanding the factors listed by the primary judge.
On appeal, Justices Bathurst CJ, Bell P and Meagher JA were unanimous in their view that the facts provided were not sufficient to give rise to a realistic possibility of a claim. Rather, they foreshadowed the possibility of claims if the position became that the small number of clients suffered losses as a result of investments made on the advice of MRS over the relevant period.
Critically, the NSWCA noted that the facts notified did not state that any loss had been suffered or that there was more than a potential possibility in relation to any particular client. The relevant letter of notification stating;
‘in relation to the potential claim, at this stage it is just a possibility and no action has been brought’
Further, in answer to ‘facts and circumstances which may give rise to a claim’ the insured answered:
‘A small number of client have invested/lent funds to property investments and/ or companies that have to date been unable to repay those funds.
At the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of the circumstances at the time.
At this stage no loss has been crystallised and no claim or complaint has been formally lodged.
We wish to advise the insurance company that there is a chance of a claim against Moylan Retirement Solutions in relation to any loss that may be incurred.’
The NSWCA, in reliance of the above facts, dismissed the appeal stating that it is not necessary to that the notified facts identify the likely claimant or claimants. Rather, it is necessary to focus on the facts that may give rise to a claim. Justice Meagher JA remarked that the requirement for notification to be of “facts” indicates that s40(3) is concerned with the notification of ‘objective matters’ that bear on the possibility of a claim being made rather than matter of belief or opinion as to the possibility. The appellants failed to prove that the notification provided included any fact which made loss more than a potential possibility and did not identify any defect in the advice given or disclosures made by MRS.
Some of the specific factors considered by the NSWCA are as follows:
- It was not stated that time for repayment has passed or that it was likely that the funds will not be paid in total;
- No particular client was identified;
- No loss had been incurred or ‘crystallised’;
- There was only a ‘chance’ that a claim would be made against MRS.
Fraudulent non-disclosure or misrepresentation - section 21 & 28 ICA
The second issue was whether Insurers were entitled to void the 2013/2014 policy for fraudulent nondisclosure or misrepresentation, concerning the following facts;
- On and from 25 October 2010, 21 March 2011, and 23 May 2011, MRS knew that:
- $790,000 of its client moneys had been deposited or invested into Moylan Investments Group Pty Ltd (MIG), a related entity with Mr Moylan had financial interests in; and
- MIG had retained or used those moneys for a purpose other than the purpose for which it had been instructed to use those moneys.
The NSWSC on this issue found that the above facts were known to Mr Moylan and were not disclosed to insurers. The facts being ‘highly relevant to their decision whether to accept the risk’ proposed in both the 2012/2013 policy and 2013/2014 policy.
In summary, the NSWCA rejected the challenge by the appellants to the primary judge’s conclusion that, based on the facts, it was clearly evident that fraudulent non-disclosure or misrepresentations were made by Mr Moylan on both respective issues. This enabled insurers to void the 2013/2014 policy. Ultimately, the NSWCA upheld that Mr Moylan made misstatement that could not have been negligent or accidental. Rather, he knew that the information which underpinned these representations were false and incorrect.
The NSWCA’s decision is helpful to Insurers, particularly with regard to s40(3), as it confirms that Insurers are entitled to a sufficiently detailed notification of facts/circumstances which informs them of potential liability and allows them to evaluate the potential claim or claims, or notified problem.
The notification also must provide Insurers an opportunity to minimise their exposure, as well as to accurately fix reserves and premiums to account for future liabilities.
When presented with a broad or ambiguous notification of circumstances, Insurers are entitled to request further information from the Insured in relation to a potential claim before accepting a notification as valid under s40(3).
The NSWCA decision strengthens position set out in Kidsons, as it requires subjective knowledge and objective factual elements or material circumstances, which that is likely to, or may, give rise to a claim. Furthermore, the decision departs from the undemanding tests adopted by the UK Courts in Europools, which supports a not too stringent test as to the form and contents of a notification. As a result, an Insured may find it more difficult to notify of ‘hornets’ nest’ or ‘can or worms’ type notification, which lacks sufficient detail of factual elements which might give rise to the claim.
This means that notifications will need to meet the Australia case law test for blanket notification. That is, they will need to be sufficiently detailed, as to indicate the claim that might arise, who the claim may be brought by, for what reason and on what grounds.
As for the issues arising under s28(2), the Court of Appeal confirms the standard of proof for fraudulent misrepresentation and non-disclosure. Mere negligence or accident is likely insufficient for the Court to make an inference of fraud. There must be clear, unequivocal evidence of fraud in order for a Court to be satisfied, on the balance of probabilities, that such conduct has occurred.
Kennedys acted for three (of four) defendants/respondents in this NSW Court of Appeal matter, which will have significant impact on the notification landscape within Australia.