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& S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd  NSWCA 136
The decision of the NSW Court of Appeal in P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd  NSWCA 136 tells an unfortunate tale of a group of plaintiffs who sustained significant losses because of the negligence and breach of duty of Moylan Retirement Solutions Pty Ltd (MRS) and its principal, but were unable to obtain indemnity from the insurers.
The decision relevantly provides important guidance as to what constitutes sufficient 'notification' of a claim in order to satisfy a 'claims made and notified policy' and what facts must be notified in the context of s40(3) of the Insurance Contracts Act 1984 (Cth) (the Act).
The Court also made findings regarding the insured’s duty of disclosure and consequences of non-disclosure and misrepresentation within the factual matrix of the appeals. This article focuses on the Court’s comments as to notification.
MRS provided investment and planning advice to the appellants (members and self-managed superannuation funds of four family groups) for over five years. In so doing, MRS and its principal, Mr Christopher Moylan, knowingly misappropriated or misapplied the appellants’ funds through MRS and related entities under the pretext of making 'investments'.
MRS was deregistered, and the appellants brought an action directly against the insurers of MRS to recover their losses. The claim was brought directly against MRS’ insurers pursuant to either of two policies of professional indemnity insurance in respect of financial planning, being from 5 February 2012 to 5 February 2013 (the 2012/2013 Policy) and 5 February 2013 to 5 February 2014 (the 2013/2014 Policy). The policies were held with DUAL Australia Pty Ltd (DUAL) as agent for the underwriters.
At first instance, Slattery J found that MRS was liable to the appellants for their losses, which totalled $4,630,000 exclusive of interest and costs. However, indemnity was not recoverable under either policy due to the following:
The 2012/2013 policy was considered a 'claims made and notified' policy. Under s40(3), an insured is required to give the insurer written notice of 'facts that might give rise to a claim' against it as soon reasonably practicable after the insured became aware of those facts but before the relevant cover expired.
The issue for consideration was therefore whether MRS had given notice of 'facts that might give rise to a claim' against it.
The Court of Appeal (Bathurst CJ, Bell P and Meagher JA agreeing) considered the language of s40(3) and arrived at two relevant conclusions.
First, an objective consideration is required as to whether the notified facts might give rise to a possibility of a claim or claims. In reaching this conclusion, the Court rejected the view of Toulson LJ in HLB Kidsons v Lloyds Underwriters  Lloyd’s Rep IR 178 at - that there is scope for subjectivity as to whether notified facts give rise to a realistic possibility of a claim.
Second, a notification will be sufficient to engage s40(3) if the notified facts include an event which, in common experience, is followed by the making of claims, by persons or entities having common characteristics, even where:
On 15 January 2013, Mr Moylan completed a proposal form for the 2013/2014 policy year addressed to DUAL. The proposal was accompanied by a notification form notifying 'circumstances' under the 2012/2013 Policy (Notification).
The Notification stated:
"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 Court upheld the primary judge’s finding that the Notification was not sufficient to engage s40(3) of the Act.
The Notification did not include any fact which made a loss more than a potential possibility, and therefore was not a notification of 'facts' which 'might give rise to a claim'. This was on the basis that the Notification:
As such, the 2012/2013 Policy did not insure the subsequent claims made by the appellants.
The Court found that there had been a breach of MRS’ duty of disclosure with respect to the 2012/2013 Policy, and otherwise upheld the primary judge’s findings in relation to the entitlement of the underwriters of the 2013/2014 Policy to avoid that contract of insurance or otherwise reduce their liability to nil on the basis of fraudulent and innocent non-disclosure and misrepresentation.
The Court accepted that the language of the proposal form submitted to DUAL indicated that the information provided therein (including the Notification) was to be taken into account in determining whether to renew, and if so on what terms. As such, the underwriter of the 2013/2014 policy successfully relied on the information in the notification as constituting fraudulent misrepresentations and non-disclosures.
The Court was sympathetic to the positions of the appellants (as per the comments of Bell P), but unanimously dismissed the appeals.
The Court of Appeal’s adherence to objective characterisation of 'facts that might give rise to a claim' shows that there is no scope for subjectivity as to whether certain facts might give rise to a realistic possibility of a claim in making a notification.
The lesson is that notification must be given of 'facts' which can objectively give rise to a realistic possibility of a claim, rather than information about the 'chance' of a claim conditional upon unconfirmed events. A satisfactory notification can be given without precisely identifying the claimants, or where quantum of the claim is unknown as at notification.
For further information / assistance regarding next steps and the issues raised in this article, please contact the author, James Page – Lawyer, or your usual contact at Moray & Agnew.