Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

The section provides that the insurer is not relieved of liability to indemnify the insured for a claim made after the policy expires on one condition only. The insured must have notified the insurer of ‘circumstances that might give rise to a claim’ as soon as reasonably practicable after the insured became aware of them during the currency of the policy. The section has the effect of a statutory ‘ deeming ’ provision, deeming the claim to have been made and notified during the policy period, provided notification of the claim (after the policy expires) is given as soon as reasonably practicable after the insured learns of the claim. However, the distinction between the effect of a contractual deeming provision and section 40(3) of the ICA carries important consequences for an insured in the case of a failure to notify of a circumstance, as will be explored further below. Obligation to notify As a threshold level, for a valid notification of circumstances, an insured must be aware of relevant circumstances during the policy period or extended notification period. A distinction needs to be drawn between circumstances that merely describe a situation and those that indicate the potential for a claim to arise out of that situation. Facts and circumstances can be notified when an insured is apprehensive that the circumstances may lead to a claim or where the insured is merely conscious of some error, loss or disgruntlement on the part of a potential claimant and feels there is a risk that something may come of it. Whilst the test for the interpretation of the expression ‘ might give rise to a claim ’ is an objective one (of whether a reasonable person in an insured’s position would have considered there to be a reasonable possibility of the facts leading to a claim), the following case examples provide some practical guidance. In HIH Casualty & General Insurance v Dellavedova, 400 the Court considered that the expression ‘… loss arising out of any circumstance or occurrence … of which [the insureds] were aware’ must relate to an awareness of the prospect of the claim made and notified, rather than to the events themselves giving rise to the claim. If it were otherwise, the insureds would be ineligible for insurance merely by being aware of a circumstance or an occurrence that ultimately resulted in a claim without any reason to anticipate that claim. The Court considered that in ‘ the absence of some awareness of the prospect of a claim, there could be nothing about which to give notice ’. ‘Circumstance’ in that case was considered to be ‘ … a causally relevant fact or circumstance which will, or has the potential to, generate a claim for civil liability. It is some mishap or default which exposes or has the capacity to expose the [insured] to civil liability to a third party …’ In FAI General Insurance Co v Australian Hospital Care Pty Ltd, 401 Derrington J held that ‘… it is not necessary to an awareness of an occurrence, that a person also knows its mechanics; it is enough to know that an event has occurred …’ To come within the terms of the contractual deeming clause, Derrington J held that ‘… [t]he Insured had to be aware of more than a mere circumstance forming the occurrence; it had to be aware of the possibility of a claim against itself for malpractice associated with those circumstances. However, again it did not have to be aware of how or why this might be so, and whether the possible claim was justified or might be expected to be successful …’ While the necessary awareness must be more than an awareness of the mere facts on which the claim is later made, the knowledge that those facts may give rise to a claim (although it is expected that they will not do so) may be enough to justify the giving of notice. That is so even if an insured does not know all the details of the possible alleged culpability.

400 [1999] FCA 456. 401 (1999) 153 FLR 448.

74

www.carternewell.com