The NSW Court of Appeal case of P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd  NSWCA 136 is interesting for a number of reasons, but this article focuses on the issue of what information is required to constitute a notification of circumstances which might give rise to a claim under section 40(3) of Insurance Contracts Act 1984 (Cth). The case upheld the primary decision that the notification must contain more than “bare possibilities” but softened the finding a little by acknowledging that notification of an event that, in common experience, is followed by the making of claims may be sufficient in some circumstances.
The appellants sued MRS’ professional indemnity insurers directly to recover the indemnity payable in respect of MRS’ liability to them for negligent financial advice, misleading and deceptive conduct and breach of fiduciary duties.
The primary judge held, relevantly, that MRS’ purported notification in January 2013 of facts that “might give rise to a claim” did not engage Insurance Contracts Act 1984 (Cth), s 40(3) because the notification was not of “facts” but of “bare possibilities” which did not point towards any particular claim which may arise.
What constitutes an adequate notification for the purposes of s40(3)?
Where there has been a notification “of facts that might give rise to a claim” within s40(3), the insurer is not relieved of liability “in respect of the claim, when made” (emphasis added), by reason only that it was made after the expiry of the policy period.
In January 2013, whilst seeking to renew their 2012/2013 PI policy, MRS had purported to notify the insurers 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”. In fact, MRS’ principal, Mr Moylan, had invested funds not in accordance with instructions and/or had invested in businesses in which he had an interest without disclosing that interest.
The question whether a fact or facts “might give rise to a claim” requires an objective assessment of the likelihood or possibility of a claim or claims. It will be sufficient to engage Insurance Contracts Act, s 40(3) that the notified facts are reasonably to be regarded as giving rise to a realistic possibility of a claim or claims, whether or not the likely claimants or the quantum of such claims are known and notwithstanding that those claims may have modest or limited prospects of success.
In completing a questionnaire attached to the renewal application, MRS’ answered as follows:
- the “name of the Claimant or potential Claimant” was “unknown”;
- that the particulars of the relevant retainer or contract were “unknown – depends on likely client to bring claim”;
- that the work “out of which the claim arises or may arise” was performed in “2008-2011”;
- that there had been “no” “claim or the intimation of a claim made verbally”;
- that Mr Moylan first became aware of the claim or fact or circumstance which may give rise to a claim in August 2011;
- that the amount claimed was “unknown”; and
- Mr Moylan’s “comments on the quantum of the claim” and “estimate of your potential monetary liability” were in each case “unknown”.
MRS’ notified facts:
- Made reference to a small number of clients who had made investments which MRS advised or recommended, which investments “to date” had been unable to repay the invested funds “in total”;
- Did not state that the time for repayment of the invested funds has passed or that it is likely that the funds will not be repaid in total;
- Did not identify a particular client;
- Did not state as a fact that loss by any of the “small number of clients” had crystallised or been incurred;
- Did not state that it was anything other than a “potential possibility” that in the final outcome the invested funds will not be repaid in full; and
- none of the “small number of clients” had made a formal claim or complaint, and there was no verbal claim, or even a verbal intimation of a claim.
While expressing sympathy for the appellants, the Court held that the facts notified, in the context of the information provided by the questionnaire to which they were attached, foreshadowed the possibility of claims only 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 over a period of four years. Critically, the notified facts did not include that any such loss had been suffered or that that was more than a potential possibility in relation to any particular client.
The language of s40(3) requires that there be a sufficient link between the facts notified as likely to give rise to a claim and a claim subsequently made for that claim to be identified as one arising or resulting from those facts. What that information will be will depend on the circumstances in each case, and whether the notification is sufficient will not be able to be tested until the actual claim arises to test against the notification made. However, in general terms and as far as possible, the notification should identify the background facts, the type of claims likely to arise, the persons likely to bring those claims and potential quantum.
However, in some cases, it may not be necessary to identify the likely claimants if the notification is of an incident which can be identified as giving rise to claims by persons or entities having particular characteristics, or which in common knowledge usually gives rise to claims. In the current case, the notification may have been assisted by identifying the class of investors affected, the potential breaches of duty that may have occurred, and/or the potential quantum involved.
Finally, it may be the case that the Court was also influenced by the fact that Mr Moylan attempted to provide a notification that did not reveal the full extent of his knowledge in relation to the potential claims.