Boardroom Briefing | October 2020
An awareness by an insured that a third party has suffered losses may not be enough to establish awareness of circumstances that might give rise to a third-party claim. Whilst it all depends on the policy wording and the facts at hand, this recent case throws light on the challenging issues around notifiable circumstances.
THE CLAIM: involved, leaving aside a complex factual matrix, the investment of monies by DIF Capital Partners (DIF) in a laundry equipment business on the professional advice of Babcock & Brown (BB). A casualty of the GFC the investment collapsed, and BB was accused of withholding information from investors. DIF brought actions against BB and the professional indemnity insurer of BB.
THE POLICY: had a deeming provision that could have potentially triggered the remedial effect of sec 54 of the Insurance Contracts Act (the Act). This meant that a claim would be considered to have been made when BB’s management became “aware of any fact, circumstance or event which could reasonably be anticipated to give rise to a Claim at any future time.” The PI insurers denied that they were obliged to indemnify BB because BB’s management had not become aware of circumstances that might give rise to a claim so as to give notification to the insurers during the policy period.
THE AWARENESS: of several emails, argued DIF, established the relevant knowledge of BB’s management by highlighting the ‘distressed’ position and nil equity of the investment. The first instance Judge decided that these emails did not create awareness of the circumstances that could give rise to a claim and sec 54 had no work to do, so DIF pushed on to the Court of Appeal.
THE APPEAL: Court found that no member of BB management had become aware of any fact or circumstance which could be reasonably anticipated to give rise to a claim. Yes, the “fact of (the investment’s) financial position made it likely that (it) would suffer losses as a result of its failure, but that was not of itself a matter which could reasonably be anticipated to give rise to a claim against (BB).” The Full Court however did affirm caselaw that a notification need not be limited to a particular event; it might be a ‘problem’ described in general terms if that problem could give rise to a claim, notwithstanding that the quantum, character of the claim or identity of the potential claimant may not be known to the insured at the time of the notification.
In brief: a deeming provision in a PI policy will attract potentially the remedial care of sec 54 of the Act. Further sec 40(3) of the Act creates a statutory right to notify circumstances that might give rise to a claim. Your Lockton broker knows the ins and outs of notifying circumstances to your insurer particularly how your policy wording and particular circumstances interact with the Act. If in doubt talk to us.
DIF III-Global Co-Investment Fund v DIF Capital Partners Ltd  NSWCA 124