A recent decision of the Supreme court of Queensland once again highlights that the terms of a contract of insurance are to be construed by reference to what a reasonable person armed with knowledge of the surrounding circumstances at the time of entry into the contract would consider the terms to mean.
Proceedings were commenced by the plaintiff, Shirley Livesay, against the first and second defendants, Jeremy and Gaylene Hawkins, and the third defendant, Neville Newman.
Ms Livesay was the tenant of a residential premises owned by Mr and Mrs Hawkins. Mr Newman was the real estate agent engaged by Mr and Mrs Hawkins to perform property management services in relation to the residential premises.
On 25 April 2005, Ms Livesay claimed she suffered personal injuries when the framework above the toilet door at the premises fell and struck her.
The following day, Ms Livesay delivered a letter to Mr Newman detailing the incident and injuries sustained by her, as well as complaining about the state of the property. The letter then went on to enumerate some 17 repairs to the property which she claimed were required urgently and foreshadowed legal action if such repairs were not attended to. In her letter, Ms Livesay expressly stated that such contingent legal action “does not include Personal Injury Claim that we are currently entitled to due to injury caused by dangerous fixture [sic].”
In September 2005, Ms Livesay served on Mr Newman a Form 1 Notice of Claim under the Personal Injuries Proceedings Act 2002. On 4 October 2004, Mr Newman caused a copy of Form 1 along with the 26 April letter to be lodged with his professional indemnity insurer, American Home Assurance Company (AHAC).
On 4 November 2005, AHAC wrote to Mr Newman denying indemnity under the policy. In denying indemnity, AHAC stated that no claim had been made by Ms Livesay against Mr Newman during the policy period (which expired on 24 July 2005).
Following the commencement of the proceedings by Ms Livesay, the court ordered that there be a separate determination of AHAC’s denial of indemnity to Mr Newman in relation to Ms Livesay’s claim. In making this order, the court identified the following questions for determination:
- whether Ms Livesay’s letter of 26 April 2005 to Mr Newman was a “claim” made within the policy period; and
- whether a clause of the policy purporting to exclude liability for “bodily injury” applied to deny any liability on the part of AHAC in relation to Ms Livesay’s claim.
Clause 1.1 of the policy of insurance provided as follows:
“1.1 PROFESSIONAL LIABILITY
The Insurer will pay on behalf of the Insured all Loss which the Insured is legally liable to pay by reason of any Claim first made against the Insured during the Policy Period and notified in writing to the Insurer during the Policy Period …”
Clause 2 contained definitions of terms used in the policy including the following:
“2.2 Claim means:
(a) any written demand;
(b) any civil proceeding
for compensation made against the Insured but only in respect of the performance of Professional Services by the Insured.”
Clause 3 of the policy set out exclusions from the policy. It relevantly provided:
“The insurer is not liable to make any payment for Loss in connection with any Claim:
3.5 Bodily Injury
for bodily injury or nervous shock, sickness, disease, death or mental anguish of any person. This Exclusion does not apply to damages for mental anguish in respect of a Claim for defamation which is covered under this policy.”
A document that was described as a “schedule” to the policy contained the following statements:
“Retention/Excess: 1. $10,000 arising our of bodily Injury or Property damage to which this policy responds.
Was the 26 April letter a “claim”?
In reaching its decision, the court emphasised that the terms of a contract of insurance are to be construed objectively by reference to what a reasonable person would have understood the terms to mean in light of both the plain meaning of the text used, as well as the surrounding circumstances known to the parties at the time of entry into the contract.
Accordingly, the question of whether the 26 April letter was a “claim” under the insurance policy was one of substance and not of form; the essential requirement being that there be a “written demand … for compensation”.
In holding that the 26 April letter constituted a “claim” the court found that in the letter Ms Livesay:
- expressed a clear entitlement to recover for a personal injury said to have been caused by a dangerous fixture at the premises; and
- made a sufficiently clear assertion of liability on the part of Mr Newman in relation to that personal injury.
The fact that the letter went on to detail and make demands about other defects with the property did not, in the court’s view, detract from the conclusion that the 26 April letter, even when read in the context of the other matters mentioned, clearly constituted a “written demand … for compensation” and therefore a “claim” within the meaning of the insurance policy.
The exclusion clause
The court went on to consider whether the “bodily injury” exclusion clause operated to absolve AHAC from any liability under the policy in relation to Ms Livesay’s claim.
In addressing this point, the court rejected the proposition (advanced on behalf of Mr Newman) that the meaning and operation of the clause 3.5 “bodily injury” exclusion was tainted by ambiguity occasioned by the express nomination in the schedule to the policy of a retention/excess for bodily injury claims.
The court once again emphasised that the terms of a contract of insurance must be construed objectively and as a whole in light of the circumstances known to both parties at the time of entry into the policy.
The court noted that although the schedule to the policy provided for a retention/excess in relation to claims involving “bodily injury” it expressly did so only in relation to such bodily injury claims “to which this policy responds”. This express caveat would, in the court’s view, cause a reasonable person to enquire as to the circumstances in which the policy responds to a bodily injury.
The court found that upon making such an enquiry, a reasonable person would find that, pursuant to clause 3.5, the policy does not in fact apply to bodily injury, except for “mental anguish” caused by defamation.
As the claim by Ms Livesay did not involve any allegation of mental anguish caused by defamation, the court concluded that clause 3.5 clearly and unambiguously operated to exclude any liability on the part of AHAC under the policy for this claim.
The court therefore concluded that Mr Newman was not entitled to be indemnified by AHAC under the policy in relation to Ms Livesay’s claim.