Policyholder wins right to cover after ‘facts’ notified by insurer’s panel lawyer eventually became a ‘claim’

Under “claims made and notified” policies (such as professional indemnity policies or D&O policies), policyholders can ensure that a claim which might be made against them after the policy expires is still covered – they must have notified the insurer of the facts which give rise to that claim during that earlier policy period. Section 40(3) of the Insurance Contracts Act 1984 (Cth) (ICA) provides this right even if such a right is not explicitly set out in the policy.

The Full Federal Court has confirmed a broad interpretation as to when a valid notification of “facts which may give rise to a claim” is made under s40(3) of the ICA and strengthened policyholders’ rights. We have reported on the first instance decision here and provide this update on the appeal.

KEY TAKEAWAYS

• A panel law firm appointed by insurers to act for the policyholder in one matter can validly notify the insurers on behalf of the policyholder of facts that might give rise to a claim in another matter
• It is not necessary for a notification under s40(3) of the Insurance Contracts Act 1984 (Cth) (ICA) to state explicitly that it is made under s40(3) or even to be intended to be a notification under s40(3) by the person making the notification
• The decision confirms that policyholders should convey to their insurers in writing any ‘facts’ out of which a claim might arise at a later stage

FACTS

Dr Darshn was a cosmetic surgeon who performed surgeries at the premises of The Cosmetic Institute Pty Ltd (TCI) between 2015 and 2018. He held professional indemnity cover with Avant up to June 2019 and with a different insurer from July 2019. Each of the policies was a “claims made and notified” policy.

In 2017, a class action was commenced against TCI in relation to surgeries which had taken place at its premises. Dr Darshn was not joined as a defendant until June 2020 (after Avant’s policy had expired).

However, in March 2018, Avant accepted a claim for indemnity by Dr Darshn in respect of a complaint by Ms Scotford, a former patient, and appointed solicitors (MDL) to act on Dr Darshn’s behalf in defending the Scotford claim.

In January 2019, the plaintiffs in the TCI class action served subpoenas on Dr Darshn and other TCI cosmetic surgeons seeking documents. The content of these subpoenas suggested that they might be joined as defendants to the class action. Dr Darshn phoned  Avant for advice about the subpoena, but did not provide Avant with a copy. Shortly afterwards, MDL was updating Avant about the Scotford proceeding and another action against Dr Darshn, and identified a significant overlap between those actions and the TCI class action.

When Dr Darshn was later joined as a defendant to the TCI class action after the Avant policy had expired, he could not make a claim under his new policy (as a result of various exclusions in that policy) so he sought indemnity under his earlier policies with Avant, arguing (amongst other things) that the MDL update to Avant  constituted notice of facts that he might be joined to the class action such that s 40(3) of the ICA applied. This was accepted by the primary judge.

FULL COURT DECISION

In a unanimous decision, the Full Court confirmed the first instance decision holding:

• First, that Dr Darshn’s lawyers, MDL, could give notice under s 40(3) on behalf of Dr Darshn to Avant, notwithstanding that they were originally appointed by Avant from its panel to represent Dr Darshn in the other matter – regardless, once appointed, they were Dr Darshn’s lawyers and there was no reason to confine their authority in the way argued by Avant.
• Secondly, that the update letters written by Dr Darshn’s lawyers constituted effective notification of potential claims against Dr Darshn which later emerged in the TCI class action. In doing so, the Court stressed the lack of formal requirements for notification under s 40(3): it is not to be construed narrowly or with undue technicality. In particular, it was irrelevant that the communication:
  • did not explicitly state that it was a notification under s 40(3);
  • did not use the words “potential claim”, and
  • was not intended to constitute notification under s 40(3).

In dismissing the appeal, the Court also affirmed the primary judge’s conclusion that Avant failed to act with the utmost good faith by failing to advise Dr Darshn when he rang for advice about the subpoena that he needed to provide a copy of the subpoena to Avant if he wanted to be covered for any claim that might arise in relation to it (as s40(3) is only triggered where the notification is in writing).  

PRACTICAL TAKEAWAY

Claims made and notified policies are helpful in that coverage attaches not to the time when the relevant (but usually unknown) misconduct occurred, but to the time when the policyholder actually knows about a claim being made. However, they exclude cover for claims arising from facts or circumstances known to the policyholder prior to entering into the policy.

It is therefore very important for policyholders to give written notice of any facts that might give rise to a future claim, at the latest prior to renewal, if they want to ensure that a later claim arising from those facts is covered under the expired policy (because it will be excluded under the renewed policy). This decision lowers the bar on the formality required to enliven the policyholder’s rights when some information at least has been conveyed to the insurer under the expired policy.