In brief - The NSW Court of Appeal has weighed in on the question of when a notification will be sufficient to engage section 40(3) of the Insurance Contracts Act 1984 (Cth) (ICA).
The decision in P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd  NSWCA 136 (Kauter) revisits existing authorities which require notified facts to be reasonably regarded, on an objective assessment, as giving rise to a "realistic possibility" of a claim, whether or not the likely claimant or quantum is known, and notwithstanding the claims may have modest or limited prospects of success.
However, it tapers the leeway previously given to insureds by disqualifying notifications which do no more than include facts which make loss a "potential possibility".
Given the "use it or lose it" nature of section 40(3) rights in policies with no deeming clause, this decision will cause ripples of uncertainty over past notifications.
What the decision in Kauter means for insurers and insureds
The decision makes it easier for insurers to reject claims for indemnity for later emerging claims where the initial notification of circumstances does not include any fact which makes loss more than a potential possibility. That may include circumstances where the notification fails to identify any defect, or asserts that there was no defect, in the services provided by the insured.
The decision adds rigour to aspects of previous cases that left open ambiguity. However, because many previously given notifications were based on earlier authorities, there is likely to be a period where insureds and insurers will have to resolve previously provided notifications which lack the specificity laid out by this latest decision.
Applicants' claim under section 601AG of Corporations Act against Moylan Retirement Solutions' professional indemnity insurer fails
Moylan Retirement Solutions Pty Ltd (MRS) provided the appellants with negligent financial advice, engaged in misleading and deceptive conduct, breached its fiduciary duty and misapplied the appellants' funds between 2006 and 2009. As a result, the appellants' investments were lost and they suffered substantial losses.
MRS was wound up in 2010 and deregistered in 2014.
The appellants then sued MRS's professional indemnity insurer directly under section 601AG of the Corporations Act 2001 (Cth), on the basis that MRS was entitled to indemnity under insurance policies it had held.
The relevant policies were current from 5 February 2012 to 5 February 2013 and from 5 February 2013 to 5 February 2014. The basis for the indemnity was said to be a notification MRS had given in January 2013, whilst seeking to renew the 2012/13 policy, which was in the following terms:
"A small number of clients have invested/lent funds to property investments and/or companies that have to date been unable to repay those funds in total. 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 trial judge held that MRS's insurer was not liable to indemnify it under either policy, with the result that the applicants' claims under section 601AG failed. This was because:
the 2012/13 policy did not respond as no claim had been made against MRS until May 2013 (after the period of insurance had expired), and MRS's purported notification of facts that "might give rise to a claim" did not engage section 40(3); and
insurers were entitled to avoid the 2013/14 policy for fraudulent misrepresentation.
The appellants appealed.
Key findings and implications of NSW Court of Appeal in Kauter
Section 40(3) Insurance Contracts Act
The Court offered the following important guidance on how to determine whether a notification will be adequate for the purpose of section 40(3):
there must be a 'sufficient correspondence' between the facts notified as likely to give rise to a claim and the claim subsequently made. This does not mean that it is necessary for the notified facts to identify the likely claimant. Rather, it is possible for an insured to give notification of a problem which might give rise to a claim by persons having particular characteristics, although the quantum of the claim and the identity of the claimants may not be known as at the date of the notification;
the characterisation of notified facts is approached objectively. Facts notified must objectively bear on the possibility of a claim being made. Matters of belief or opinion held by an insured as to that possibility will not be sufficient; and
the reference to the possibility of a 'claim' being made encompasses claims which may not have significant prospects of success. It will be sufficient if the notified facts include an event which, in common experience, is followed by the making of claims, notwithstanding that those claims may have modest or limited prospects of success.
The Court concluded that MRS had not notified facts which "might give rise to a claim".
In doing so, the Court emphasised that it was necessary to focus on what it is about the notified facts which is said to give rise to a claim. The facts notified by MRS foreshadowed the possibility of claims if the position became that the "small number of clients" referred to suffered losses as a result of investments made on the advice of MRS. They did not state, however, that any such loss had been suffered, or that it was more than a 'potential possibility' in relation to any particular client. Importantly, they did not identify any defects in the advice given by MRS. On the contrary, MRS had positively asserted that there were no such defects.
Non-disclosure and misrepresentation
The underwriter who made the decision to renew the 2012/13 policy gave evidence that they would not have so issued renewal terms if MRS had disclosed that it had misapplied the appellants' money. The Court considered that to be a matter which was required to be disclosed under section 21 of the ICA. MRS's failure to do so accordingly entitled insurers to reduce their liability under the 2013/14 policy to nil.
The Court also found that insurers were entitled to avoid that policy for fraudulent misrepresentation.
Blanket and block notifications
Spurred on by UK decisions of recent years, blanket notifications have been getting particularly woolly.
Kauter is both a cautionary tale in why not to take shortcuts as well as clear guidance as to the content of a notification. There are many notifications of systemic issues - Banking Royal Commission, combustible cladding etc - which will now have question marks hanging over them as to their adequacy. The time for assessing adequacy is of course when the subsequent claim emerges, so past inadequacies may just be hypothetical. However, one can easily see the scope for dispute - and disappointment.
Most of the major brokers have long sought to impose discipline on their insureds to ensure detailed notifications are provided which meet the more detailed criteria of Kauter. There are some in the market who have sought to rely on cases like Euro Pools and Kidsons to push the boundaries of what is reasonably adequate, and for those actors the past omissions cannot be undone: there is no statutory or other pathway to go back in time to fix up an unspecific notice given under section 40(3).
To that end, insureds with the benefit of either deeming clauses or continuous cover clauses are going to have even further reason to stick with their incumbent insurers.
Care in disclosure
The nub of the complexity rests with the different tests for pre-contract disclosure to insurers and post-contract rights to notify circumstances.
Under section 21 of the ICA, a prospective insured must disclose all matters which might reasonably be thought to affect an insurer's decision to enter into a policy and on what terms. A prospective claim is undoubtedly a matter for disclosure. Just how prospective though is where the interplay with section 40(3) arises. If an insured cannot articulate the risk of a claim eventuating to the standard set out in Kauter, what then? Any move to notify the current insurer under section 40(3) risks falling short, but will later insurers turn around and assert the collection of facts and knowledge held by an insurer was something which ought to have been disclosed prior to inception? The two sections are not reconciled in the ICA.
This potential disconformity is the next frontier in the judicial consideration of these issues.
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2022.