Boardroom Briefing | July 2020

Boardroom Briefing July
BARE POSSIBILITIES – CIRCUMSTANCES THAT MIGHT GIVE RISE TO A CLAIM AND HOW TO GET IT RIGHT

A sufficiently detailed notification of circumstances, to indicate how a claim might arise, is now the benchmark as a result of a recent Supreme Court case which arguably ups the ante on what constitutes a valid notification to your insurer of a potential claim. A difficult part of your risk management just got more difficult however your Lockton broker can help.

THE NOTIFICATION: “A small number of clients have invested/lent funds to property investments and/or companies that have to date been unable to repay those funds in total…At this stage no loss has crystalised and no claim or complaint has been formally lodged…We wish to advise the insurance company that there is a chance of a claim…” wrote the principal of  Retirement Solutions Fund to its professional indemnity insurer.  The notification arose from professional advice given by the principal of the Fund to various trustees of superannuation funds for the advancing of monies into investments. The investments failed as a result of the GFC and none of the advanced funds were repaid. Actions were commenced against the Retirement Fund and the Fund sought to rely on its notification to the insurer for cover but the insurer argued that the notification was not valid (and did not attract the protection of sec 40(3) of the Insurance Contracts Act+) so as to deny indemnity. 

THE DECISION: the insured’s notification, said the Supreme Court, was a “particularly spare instrument of communication”. The potential claimants against the insured were ‘unknown’ and there was no identification of a particular client who might bring a claim. The facts, continued the Court, must “at least point towards ‘a claim’”. Instead the notifications gave “no information that would assist in identifying a particular claim as distinct from bare possibilities” so there was “no identifiable relationship between the ‘facts’ and ‘a claim’”. And so, concluded the Court, the notification was “not client-specific, transaction-specific or time-specific” and that meant there was no notification of facts, that had any relationship to a claim, but only a ‘notification of possibilities’ which did not activate the policy.  

IN BRIEF: these sorts of cases do turn on the facts in the spotlight. Nevertheless, you can see how a more detailed notification identifying: a particular client who might bring an action, with transaction and time-specific details alluding to particular documents and loss, might have brought about coverage for the insured under its PI policy. Effective drafting is key so as to allow sec 40(3), which is remedial in its pro-insured purpose, to do its work and enable an insured to notify facts which point towards a claim. Your Lockton broker is experienced in drafting notifications of potential claims to ensure the protection of the Act and the best possible policy coverage when circumstances progress into full-blown claims. 

Esined No. 9 Pty Ltd v Moylan Retirement Fund Solutions Pty Ltd & Ors [2020] NSWSC 359

Note: Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured a soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made by reason only that it was made after the expiration of the period of the insurance cover provided by the contract: sec 40(3) Insurance Contracts Act 1984

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