Pinpointing the time at which a claim or cause of action arises is crucial when invoking the statutory charge mechanism provided for by s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).

In s 6 (and similar legislation in the ACT, NT and New Zealand), the charge attaches “on the happening of the event giving rise to the claim for damages or compensation”. A charge can only attach to proceeds payable under a policy that exists at the time of that event. If the event pre-dates the policy, no charge can attach to funds payable under that policy. This was recently considered in Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) [2011] FCA 1124 (see link).

This requirement can make attaching a charge to a claims-made policy difficult, as such policies can respond to events that pre-date the policy. This typically leads to disputes about what constitutes the “event giving rise to the claim for damages or compensation”. A third party cannot take advantage of a statutory charge unless both the event and the claim occur while the policy is in place. Such a dispute arose in Perpetual Trustees Victoria Ltd v Malouf [2012] NSWSC 1119 (see also the related proceedings in Perpetual Trustees Victoria Ltd v Malouf [2008] NSWSC 834).

Facts and issue in dispute

Malouf made a loan (Loan 1) that was not repaid. He in turn defaulted on repayment of a loan he owed (Loan 2) to another person. Malouf claimed that his lawyer had negligently failed to ensure that Loan 1 was adequately secured, and that if he had known that the loan was not secured he would not have made it. Malouf’s lawyer was no longer in practice. Malouf argued that a s 6 statutory charge had arisen, and applied to join LawCover, the lawyer’s insurer, so that he (Malouf) could exercise the rights that he had against his lawyer directly against LawCover.

The LawCover policy was a claims-made policy which came into effect on 1 July 2006 (Policy). What was the “event giving rise to the claim”? Three possibilities were put forward:

  • the making of Loan 1 (which occurred in 2004 and so pre-dated the Policy);
  • Malouf’s default on Loan 2 (which also pre-dated the Policy); or
  • the point at which recoupment of Loan 1 became impossible (which according to LawCover pre-dated the Policy, but according to Malouf did not).

Findings

The Court found that the event was the making of Loan 1. It was at this time that Malouf’s cause of action was complete. Because the Policy did not exist at that time, there was nothing to which a statutory charge could attach. It followed that LawCover could not be joined.

What was relevant in identifying the event was the true character of Malouf’s claim, and not simply the way it had been presented to the court. Malouf’s claim was framed in negligence. In negligence, the event is the suffering of loss, because a claim or cause of action in negligence is not complete unless or until loss is suffered. However, the court concluded that the true character of Malouf’s claim was a breach of the solicitor’s contract with Malouf. The event was the making of the loan. The making of the loan pre-dated the Policy.

The Court went on to note that, even if the true nature of the claim had been negligence, no charge would attach to funds that may have been payable under the Policy. In a case of this kind, the event that would complete the cause of action in negligence would be the impossibility of recouping Loan 1. It was this event that completed any cause of action Malouf had in negligence. In a case such as the present, where economic loss was claimed to have been suffered as a result of negligent advice, the event occurred at the moment at which it was reasonably ascertainable that Malouf would not be able to recover the amount of Loan 1. Despite Malouf’s claim that this moment did not occur until after the Policy was in place, the Court concluded that it pre-dated the Policy.

Comment

A statutory charge of the kind considered in Malouf is triggered by the event “giving rise to the claim for damages or compensation”. It is now beyond argument that the charge can only attach where there is something for it to attach to; an event without a policy will not give rise to a charge. In the case of claims-made policies, disputes about what constitutes the relevant event can be complex and costly. Claims-made policies were not as common in 1946 (when s 6 was enacted) as they are now, and this is one of the “conceptual difficulties” that have led many to call for reform of the statutory charge mechanism: see eg Drummond SW and Mann P, Abolish Section 6 (1997) 8 ILJ 1.