BARRY.NILSSON. Lawyers

CGU Insurance Limited v Anthony Porthouse
High Court of Australia (30 July 2008)

THE FACTS

Anthony Porthouse is a Sydney barrister who, in May 2001, received instructions from the firm Cameron Gillingham Boyd to advise on the prospects of a Mr James Bahmad making a claim against the Department of Corrective Services. Bahmad was injured while performing work pursuant to a community service order. On 12 June 2001, Porthouse wrongly advised that the Workers' Compensation Act did not apply to Bahmad's claim. At that time tort law reform was in full swing, and it became well known that one of the prime targets of reform was to be the Workers' Compensation Act and restricting claims against employers. If however proceedings were issued prior to the amending legislation then they would be unaffected by the changes. It became well known that the changes to the Act would take effect from 27 November 2001. Prior to the changes, damages for economic loss were awarded where the worker suffered a 'serious injury'. Bahmad had arguably suffered a 'serious injury'. The amendments introduced a threshold where damages were not awarded unless the injured worker had suffered at least a 15% impairment of the whole person. Bahmad's injury, while serious, was below this new threshold.

On 26 November 2001, Porterhouse was briefed to draw the claim and statement of claim. The documents were filed on 11 December 2001 naming the State of New South Wales as the defendant. On 30 October 2002 the Crown Solicitor's office raised for the first time the 15% threshold requirement, which if not met, would mean that Bahmad would not be entitled to an award of damages.

On 4 November 2002 Bahmad obtained an award at arbitration of $120,687.15 plus costs. On 15 May 2003 the State applied for a rehearing in the District Court. On 29 August 2003 the District Court held in favour of Bahmad. The State appealed to the New South Wales Court of Appeal, which on 27 August 2004 found for the State, setting aside the verdict in favour of Bahmad because his injuries did not meet the 15% threshold.

On 20 May 2004, Porthouse had completed a CGU professional indemnity insurance proposal for the period 30 June 2004 to 30 June 2005. At that time the appeal to the NSW Court of Appeal had been filed but not heard. In response to the question "Are you aware of any circumstances which could result in any claim or disciplinary proceedings being made against you?", Porthouse answered "No". Section 6 of the policy contained the following exclusion:

"What is not covered
We do not cover any of the following Claims (or losses):
6.1 Known Claims and Known Circumstances
(a)
(b) Claims (or losses) arising from a Known Circumstance, or
(c) Claims (or losses) directly or indirectly based upon, attributable to, or in consequence of any such Known Circumstances or Known Claims (or losses)
11.12 'Known Circumstance'
Any fact, situation or circumstance which:
(a) an Insured knew before this Policy began; or [THE FIRST LIMB]
(b) a reasonable person in the Insured's professional position would have thought, before this policy began; [THE SECOND LIMB]

might result in someone making an allegation against an Insured in respect of a liability that might be covered by this Policy."

THE LITIGATION

On 3 March 2005 Bahmad commenced proceedings in the New South Wales District Court against his former solicitors and Porthouse alleging negligence. He claimed that had his legal representatives acted with reasonable diligence and filed a Statement of Claim prior to 27 November 2001, his claim would not have been caught by the amendments to the Workers' Compensation Act, which reduced his entitlement to damages to nil. Porthouse subsequently made a claim for cover under his CGU policy. The insurance claim was denied. CGU relied on the Known Circumstances exclusion. CGU was joined to the proceedings by Porthouse as a cross-defendant.

The District Court held that Bahmad's solicitors and Porthouse had been negligent and awarded Bahmad $170,000 plus costs. In relation to Porthouse's claim against CGU, Her Honour held that the Known Circumstances exclusion did not apply and that Porthouse was entitled to be indemnified. She considered it to be significant that at the time he completed the proposal, Porthouse did not believe that he had done anything wrong and had no belief that a claim would be made against him by Bahmad.

CGU appealed to the NSW Court of Appeal arguing that the primary judge had failed to apply, or properly apply, the second limb of the definition of 'Known Circumstances'. In a 2-1 majority judgment the NSW Court of Appeal held in favour of Porthouse. CGU took the dispute to the High Court.

APPEAL TO THE HIGH COURT

In a unanimous decision, the High Court held in favour of CGU. The Known Circumstances exclusion was said to apply. The High Court said that the emphasis given by the primary judge and the New South Wales Court of Appeal to the state of mind of the insured in applying the exclusion was only doing part of the job. Referring to the definition of 'Known Circumstances' their Honours held that:

"The evidence of what the insured thought, without more, could hardly suffice as evidence of what a reasonable barrister in the insured's professional position would have thought in circumstances where Section 11.12, read as a whole, includes two separate reference points: the insured's actual knowledge, and the standard of "a reasonable person in the insured's professional position", which moderates the subjective test."

Their Honours went on to hold:

"Given the nature and objects of this particular policy, there can be no real doubt that a reasonable barrister (unable to practice without a policy of professional indemnity insurance) who knew of the potential effect on his client's case of the 2001 amendment to the Workers' Compensation Act, and who knew of the pending appeal and of his role in creating his client's problem, would have thought that there was a real possibility that an allegation might be made in respect of a liability which might be covered by the policy."

COMMENT

The trial judge, and the majority in the NSW Court of Appeal effectively held that the wording of the second limb of the definition of 'Known Circumstance' permitted the insured's state of mind to be taken into account. It would seem that much of the confusion would have been avoided if, in the second limb of the definition of Known Circumstances, reference to a "person in the insured's professional position" was deleted, so that it read:

"Any fact, situation or circumstance which:
(a)
(b) A reasonable person would have thought before the policy began;
might result in someone making an allegation against an Insured in respect of a liability that might be covered by this Policy."

We can't see that the insurer loses anything by making such a modification.

In hindsight, it does seem difficult to understand how Porthouse, if he read the question in the proposal carefully, could not have had a potential claim by Bahmad somewhere in his thoughts. He says that he didn't, and the trial judge believed him. It may have been something to do with the fact that barristers are rarely sued (barristers are immune from liability for negligence in the conduct of Court work but not advice work - known as advocates immunity).

For further information on this topic, please contact:

• Robert Samut