The NSW Court of Appeal has clarified that a notification must contain sufficient information to enable an insurer to objectively assess the likelihood or possibility of a claim. To engage section 40(3) of the Insurance Contracts Act (1984) (Cth) (ICA) it will be sufficient that the notified facts are reasonably to be regarded as giving rise to a “realistic possibility” of a claim. As such, the notified facts may be of a “problem” or 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 appellants, members of self-managed superannuation funds, acting on financial planning advice from Moylan Retirement Solutions Pty Ltd (MRS) and its principal, Mr Moylan, made various investments between 2006 and 2009 in projects or entities in which Mr Moylan had financial interests. Funds of some of the appellants were misapplied instead of being invested as instructed. No payments of interest, repayments of principal, dividends or distributions were received in respect of any of these investments after late 2009.
In January 2013, whilst seeking to renew the 2012/2013 policy, MRS purported to notify the insurers of facts which may give rise to a claim. What was notified was that a “small number of clients” had made property investments that “have to date been unable to repay those funds in total” and that there was “a chance of a claim … in relation to any loss that may be incurred”.
MRS was deregistered in August 2014. The appellants sued MRS’ professional indemnity insurers directly to recover the indemnity payable in respect of MRS’ liability for negligent financial advice, misleading and deceptive conduct and breach of fiduciary duties. The appellants alleged that MRS was indemnified against those liabilities under either the 2012/2013 policy or the 2013/2014, being the two policies of professional indemnity insurance.
Supreme Court Decision
The primary judge, Slattery J, held that the 2012/2013 policy did not respond because no “claim” had been made against MRS before May 2013, and MRS’ purported notification in January 2013 of facts that “might give rise to a claim” did not engage section 40(3) of the ICA because the notification was not of “facts” but of “bare possibilities” which did not point towards any particular claim. His Honour further found that MRS had made fraudulent misrepresentations and non-disclosures when seeking the renewal in January 2013, entitling the insurers to avoid the 2013/2014 policy, and separately that the insurers were entitled to reduce their liability under that policy to nil because of other non-disclosures by MRS.
Issues before the Court of Appeal
The Court of Appeal was required to consider whether:
- the January 2013 notification was of “facts that might give rise to a claim” within the meaning of section 40(3) of the ICA such that the 2012/2013 policy responded to claims made outside the policy period;
- there had been fraudulent non-disclosure or misrepresentation entitling the insurers to avoid the 2013/2014 policy under section 28(2) of the ICA.
Court of Appeal Decision
In unanimously dismissing the appeal, in relation to the first issue, Meagher JA, Bathurst CJ and Bell P held:
- the facts notified did not give rise to a realistic possibility of a claim. Properly understood the notification was that should any investors suffer a loss of their invested funds, there was a “chance” that they may make a claim against MRS. Critically, the notification did not include any facts which made loss more than a potential possibility in relation to any particular client nor did it identify any defect in the advice given by MRS, and to the contrary, positively asserted there was none;
- the language of section 40(3) requires that there be a sufficient correspondence between the notified facts and a claim subsequently made for the claim to be identified as arising or resulting from those facts. However, it is not necessary that the notified facts identify the potential claimant or claimants;
- the requirement that the notification be made “as soon as was reasonably practicable after the insured became aware of those facts” is concerned to provide the insurer with knowledge of claims that may be made shortly after. This enables the insurer to evaluate the potential claim or claims, or the notified “problem”, and gives it an opportunity to take steps to avert or minimise or resolve any potential insured loss;
- the requirement that the notification be of “facts” indicates that section 40(3) is concerned with the notification of objective matters that bear on the possibility of a claim being made, rather than matters of belief or opinion as to that possibility.
As to the second issue, the Court of Appeal upheld the primary judge’s finding that, based on the facts, it was known to Mr Moylan that the appellants’ funds were misapplied and that it was clearly evident that Mr Moylan made misstatements to the insurers which could not have been negligent or accidental. Rather, he knew that the information which underpinned the representations was false and incorrect. Accordingly, the insurers were entitled to avoid the 2013/2014 policy.
The decision demonstrates that a notification of circumstances must be sufficiently detailed to attract the remedial effect of section 40(3). The notification must be of facts that demonstrate there is a real possibility that a claim might be made. A bare chance of a claim or potential possibility of a loss will not be sufficient to engage section 40(3). The decision assists insurers when assessing ambiguous blanket notifications and provides guidance as to the level of detail insurers are entitled to request from insureds before accepting that a valid notification of circumstances has been made.
The case also serves as a reminder that the standard required for a finding of fraudulent misrepresentation or non-disclosure for the purposes of section 28(2) is high. There must be incontrovertible evidence of fraud and mere negligence will not be enough to entitle an insurer to avoid the policy pursuant to section 28(2).