Federal Court decision provides useful guidance regarding s 40(3) ICA and duty of utmost good faith
The Federal Court of Australia has held that a cosmetic surgeon’s professional indemnity insurer was not permitted to avoid cover for a claim, to which the surgeon was joined, following the expiry of the policy period. In doing so, the Court made key findings as to the scope and operation of s40(3) of the Insurance Contracts Act 1984 (Cth).
- whether communications by an insured’s solicitor, to an insurer, may amount to a notification of circumstances which may give rise to a claim; and
- whether a failure by an insurer, or its failure to explain s40(3) of the Insurance Contracts Act (Cth) (ICA), can lead to a breach of the duty of utmost good faith.
Dr Darshn was a cosmetic surgeon who performed breast augmentation surgery (BAS) at various clinics run by The Cosmetic Institute (TCI). Until 30 June 2019 Dr Darshn held professional indemnity insurance with Avant Insurance Limited (Avant) under a “Claims made” Policy. On its face, in order for there to be cover under such policies, claims must be made against the Insured during the policy period.
In September 2017 class action proceedings were commenced in the Supreme Court of NSW against various TCI entities and Dr Eddy Dona. Dr Darshn was not named as a defendant at this time, however, the statement of claim referenced the allegedly negligent conduct of the doctors of TCI, which included Dr Darshn.
In June 2020 Dr Darshn was joined personally to the class action, and sought indemnity from Avant. Avant declined on the basis that the claim was not made or notified during a period of time where Dr Darshn held insurance with Avant.
Dr Darshn sued Avant, seeking a declaration that he was entitled to indemnity.
Dr Darshn advanced an argument that, pursuant to s 40(3) of the ICA, Avant were not entitled to decline indemnity. This section provides that where an insurer is notified of circumstances that may give rise to a claim, during the policy period, it cannot later decline cover for a claim which is made after the policy expires arising from those circumstances.
Relevantly, Dr Darshn argued that Avant were already aware of circumstances which may give rise to a claim (being the class action) by virtue of their past dealings with him. Notably:
(a) in March 2018 Dr Darshn was sued by a former patient, who made allegations against him which were very similar to those made in the class action. Indemnity was granted with respect to the March 2018 proceedings, and Avant appointed solicitors to act for Dr Darshn; and
(b) in January 2019 Dr Darshn was served with a subpoena by the plaintiffs in the class action, and Dr Darshn consulted Avant’s medico-legal advice helpline. The solicitor advised Dr Darshn to provide the subpoena to Avant, but he did not do so.
The Court had regard, in the first instance, to the correspondence between Avant and the Insured’s solicitor for the proceedings commenced in March 2018. It was found that in their correspondence with Avant, the solicitors made reference to the possibility of Dr Darshn being joined to the class action. The Court held that as the solicitors were acting as Dr Darshn’s agents, the correspondence constituted written notice of a potential claim - being the class action.
As regards (b), the Court did not view the telephone call alone was sufficient notification. However, Avant conceded that had the subpoena been provided to it, that that would have been sufficient written notification. The Court was critical of Avant in this regard, noting they failed to explain the practicalities of s40(3) to Dr Darshn; namely that notifications are required to be in writing. Further, given Avant had received similar subpoenas from other insured surgeons (who were in substantially the same position as Dr Darshn), they ought to have done so.
Overall the Court held s40(3) was enlivened, and Avant was not entitled to decline cover. The Court also held that, if it had not found that way, it would have found Avant’s denial of indemnity (having regard to matters known to it when Dr Darshn sought advice on the subpoena) to be a breach of its duty of utmost good faith.
Implications for you
This judgment provides helpful reminders to insurers of the obligations placed upon them pursuant to the ICA. Relevantly, it is indicative that:
- notification need not be given by an Insured directly, but can be done via an agent acting on the Insured’s behalf; and
- a failure by insurers to explain the practical realities of s40(3) of the ICA may risk a finding of a breach of the duty of utmost good faith.