Wednesday, 27 June 2001
On 27 June 2001 the High Court delivered its decision in FAI General Insurance Co Ltd v. Australian Hospital Care Pty Ltd ("AHC") which will have far reaching effects on the nature of professional indemnity insurance cover in Australia.
The decision is without doubt one the most anticipated decisions in the insurance industry for some time. The High Court, after much speculation and argument in the lower courts, has now clarified the operation of Section 54 of the Insurance Contracts Act 1984 ("the Act").
The High Court determined that the failure of an insured, the hospital in this case, to notify its insurer, FAI, of circumstances that might give rise to a claim, under a claims made and notified policy, during the policy period, was a mistake or omission which was cured by the operation of Section 54 of the Act.
In the present case, FAI was, therefore, unable to refuse to indemnify the hospital in respect of the claim. RELEVANT FACTS The Insured, AHC, became aware of a potential claim being made by a patient who contracted septicemia following surgery at it's Gold Coast hospital ("the occurrence").
The hospital was aware that the patient was giving consideration to bringing an action, however, the patient did not make a claim on the hospital during the period of cover. The relevant FAI policy provided indemnity to the hospital for any claim made against it during the period of cover and also in relation to any claim which may have ultimately arisen from an occurrence of which the hospital became aware of during the period of the FAI policy and which it notified to FAI.
Any claim arising from an occurrence that was notified to FAI during the period of cover was deemed to have been actually made during the policy period, regardless of whether the policy had expired or not. The relevant clause provided as follows:- 3.
If during the subsistence hereof the Insured shall become aware of any occurrence which may subsequently give rise to a claim against him or them for breach of professional duty by reason of any negligence, whether by way of act, error or omission and shall during the subsistence hereof give written notice to the [insurer] of such occurrence, then any such claim which may subsequently be made against the Insured arising out of such negligence shall for the purposes of this Policy be deemed to have been made during the subsistence hereof.
AHC did not notify FAI of the occurrence because it had been led to believe by the patient's Solicitors that no claim was likely. A claim was subsequently made by the patient arising from the occurrence but after the term of the "claims made policy" had expired.
When AHC sought indemnity from FAI, FAI refused to indemnity AHC on the basis that AHC had failed to notify FAI of the occurrence during the policy period. AHC was insured with a different Insurer at the time when the claim was ultimately made. That Insurer also initially refused to indemnify AHC. McLaughlins Solicitors were also successful in the Queensland Court of Appeal in obtaining an order that both Insurers indemnify AHC in relation to the claim.
SECTION 54 Section 54 relevantly reads as follows:- (1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into ... the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent of which the insurer's interests were prejudiced as a result of that act.
(6) A reference in this section to an act includes a reference to: (a) an omission ... THE HIGH COURT JUDGMENT The majority of the High Court (McHugh, Gummow, Hayne and Kirby JJ) re-affirmed the High Court's earlier decision of Antico v Heath Fielding Australia Pty Ltd that "an omission" for the purposes of Section 54 of the Act may be a failure by the Insured "to exercise a right choice or liberty which the Insured enjoys" under the insurance policy.
The majority found that the failure of AHC to notify of an occurrence (which notification would have otherwise entitled the hospital to cover under Clause 3 of the policy) was an omission cured by Section 54. The High Court affirmed the prior decisions of the Queensland District Court and the Queensland Court of Appeal which both found FAI liable to indemnity AHC, however, a number of decisions from New South Wales Courts in relation to Section 54 attracted criticism.
The High Court proceeded to review these decisions in relation to the construction of Section 54 of the Act in an attempt to clarify a number of issues which have been the subject of varying judicial opinion. IMPLICATIONS Professional indemnity insurance policies are held by many doctors, lawyers, accountants, company directors and other professionals throughout Australia.
Following the High Court's decision in this case, any person holding a professional indemnity insurance policy incorporating a circumstances notification clause (similar to clause 3 in the relevant FAI policy) may now be entitled to retrospective cover. Insurance companies must now indemnify professionals in relation to claims that are lodged after such a policy has expired, if knowledge of such a claim or an occurrence with the potential to give rise to a claim, was known during the period of insurance cover, but not notified in good faith or for a proper reason.
The Insurance Industry had previously adopted a practice of declining such claims unless the policyholder had given the appropriate notice within the policy period. Whilst this decision will offer little benefit to those Australians who had insured themselves with the now defunct HIH Group, this decision will allow those individuals holding certain classes of professional indemnity insurance policies with other insurers to now be successful in their claims for indemnity in appropriate circumstances.