In brief - Relevance of section 54 of Insurance Contracts Act 1984 (Cth) to an application to join an insurer

In Guild Insurance Ltd v Hepburn [2014] NSWCA 400, the New South Wales Court of Appeal granted leave under section 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the Law Reform Act) to an injured plaintiff, Ms Hepburn, to join Guild as a second defendant to proceedings against her former dentist. In forming its decision, the Court confirmed that the potential operation of section 54 of the Insurance Contracts Act could be taken into account in the exercise of the discretion under section 6 in circumstances where an insured failed to notify their insurer of a potential claim during the policy period.

Plaintiff applies to join her former dentist’s professional indemnity insurer

The plaintiff claimed that her former dentist, Dr White, was negligent in providing wrongful dental advice and treatment between March 2008 and September 2009. The plaintiff sought leave to join Guild as a second defendant to the proceedings against Dr White. Section 6 provides for a charge on insurance monies in favour of an injured person where the person at fault has entered into a contract of insurance by which the person at fault is indemnified against liability to pay damages or compensation. Guild had been Dr White's professional indemnity insurer at the time that she treated Ms Hepburn.

Relevant requirements for leave to join the insurer

Before granting leave to join an insurer under section 6 of the Law Reform Act, the Court needs to be satisfied that:

  • there is an arguable case against the insured,
  • there is a real possibility that the insured will not be able to satisfy any judgment against it, and
  • there is an arguable case that the insurer sought to be joined has issued a policy under which the insured is entitled to indemnity in respect of the liability alleged by the plaintiff.

The judge at first instance found that there was an arguable case that Dr White was liable to Ms Hepburn for damages. This does not appear to have been disputed on appeal.

The primary judge also found that there was a real possibility that Dr White would not be able to satisfy any judgment obtained against her by Ms Hepburn. The Court of Appeal agreed.

The main issue for consideration was whether there was an arguable case that Guild had issued a policy under which Dr White was entitled to indemnity in respect of the liability alleged by Ms Hepburn.

Court of Appeal considers whether policy arguably indemnified the insured against the alleged liability – without the policy wording

Dr White had professional indemnity insurance with Guild which provided cover on a claims made basis. No claims were made against her during any of the policy periods so the only basis on which the insurer might be liable to indemnify Dr White was if the wording contained a provision that entitled the insured to notify circumstances that might give rise to a claim (because of the operation of section 54 Insurance Contracts Act). Ms Hepburn contended on appeal that they did.

Interestingly, neither party tendered the policy documents so the actual wording was unknown to the court. What was in evidence was a letter from Guild to Dr White which included the following:

You did have a policy of insurance in place with Guild Insurance during the time that you treated Mrs Hepburn. However, no claim was made against you by Mrs Hepburn during the currency of those policies. Further, no circumstances occurred during that period that could have been notified to Guild at the time. Accordingly, the policies in place during the time you provided treatment to Mrs Hepburn do not respond to the current claim. (at [7]) 

Guild argued that the reference in the letter to the notification of circumstances might well have been a reference not to the contractual provisions of the policy but to the terms of section 40(3) of the Insurance Contracts Act (which gives an insured a statutory right to notify circumstances). The distinction is important because section 54 may operate to excuse a failure to notify under a contractual provision, but not a failure to notify under the statutory provision. The Court rejected this inference, Macfarlan JA stating at [24]:

I'm fortified in that conclusion by the lack of correspondence between the language in the sentence and that of s 40(3) and by the fact the insurer, although undoubtedly in possession of copies of the policies, did not tender them in evidence to demonstrate the inference I have drawn was ill-founded.

Instead, the Court inferred from the letter that the relevant policies were "discovery policies" (also known as "claims made and notified" policies). That is, that the insurer's liability under the policy was triggered either when a claim was made against Dr White during the policy period, or if Dr White became aware, during the policy period, of circumstances that might give rise to a claim and notified the insurer.

Was insured aware of circumstances that might give rise to a claim?

The issue then became whether Dr White became aware, whilst the policies were current, of circumstances that might have given rise to a claim by Ms Hepburn against her. Ms Hepburn relied on an expert medical report which, among other things, recorded that Dr White did not provide any anaesthetic pain relief (as requested by Ms Hepburn) when carrying out a number of fillings nor during the removal of a tooth that Dr White previously splinted to the adjoining teeth. Specifically, she argued that Dr White would have been aware during the term of the policies that the surgical extraction of a tooth without pain relief might give rise to a claim.

Macfarlan JA (Meagher and Gleeson JJA agreeing) found at [33]:

There is no reason in principle why wrongdoers' knowledge of their wrongful acts cannot constitute awareness by them of circumstances that might give rise to claims against them, thus enlivening insurance policy notification provisions... It will frequently not do so, as in many cases it could not be inferred that insured who were (for example) negligent appreciated the fact of their negligence and the possibility of it giving rise to a claim against them. However in my view an inference is arguably available in the present case that Dr White was aware that her conduct might give rise to a claim. In particular, the "excruciating" pain which Ms Hepburn would have suffered as a result of procedures, including the extraction of a tooth, being undertaken without anaesthetic must have been obvious to Dr White and could thus constitute a basis for drawing that inference.

In short, the Court held that it was reasonable to infer that Dr White was aware of circumstances that may give rise to a claim by the plaintiff during the policy periods.

Plaintiff granted leave to join insurer after establishing an arguable case that insured entitled to indemnity

Ms Hepburn then argued that section 54 of the Insurance Contracts Act operated to preclude Guild from refusing cover by relying upon the absence of any notification by Dr White during the policy periods.

Section 54 of the Insurance Contracts Act provides that an insurer may not refuse to pay claims by reason of certain acts of the insured that occurred after the contract was entered into. Nevertheless, it provides that the insurer's liability is reduced by the amount that fairly represents the extent to which its interests were prejudiced.

The Court confirmed that the potential operation of section 54 of the Insurance Contracts Act may be taken into account in the exercise of the discretion under section 6 of the Law Reform Act to grant leave to join an insurer to proceedings.

As there was no evidence from Guild to demonstrate that it was prejudiced by Dr White's failure to notify the potential liability, the Court held that Ms Hepburn had established an arguable case that Dr White was entitled to indemnity from Guild in respect of the liability alleged by Ms Hepburn.

Accordingly, the Court granted Ms Hepburn leave to join Guild as a second defendant in the proceedings.

Implications of the decision

The decision is useful in setting out the relevant tests required before a plaintiff may obtain leave to join an insurer under section 6 of the Law Reform Act and confirms that the operation of section 54 of the Insurance Contracts Act may be taken into account in the exercise of the discretion to grant leave.