The New South Wales Court of Appeal has handed down its decision in P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd . The decision allowed an insurer to avoid responding to a professional indemnity claim made by the plaintiff, as the insured had fraudulently misrepresented and failed to disclose relevant information.
This case sets down the guidelines in relation to the required standard of proof for fraudulent misrepresentation and non-disclosure under section 28(2) of the Insurance Contacts Act 1984 (ICA), as well as what “facts” are capable of being construed as notification under section 40(3) of ICA.
Between 2006 and 2012, Moyland Retirement Solutions Pty Ltd (MRS) and its principal, Christopher Moylan, provided financial advice to the plaintiff. Based on Mr Moylan’s advice, the plaintiff made various investments in which Mr Moylan held financial interest in. Additionally, Mr Moylan arranged transfers of the plaintiff’s funds without authorisation.
MRS held a policy for professional indemnity insurance from Lloyds Underwriters for two relevant insurance policy periods, being 2012/2013 and 2013/2014.
The 2012/2013 insurance policy required that “the insured shall notify [the insurer] of any claim for loss as soon as practicable and within the insurance period”.
In relation to the renewal of the insurance policy for the 2013/2014 period, Mr Moylan provided an Appendix with a Notification form, which noted:
“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 the time of the investment all appropriate disclosures were made and clients invested/lent funds with full knowledge of the circumstances at the time.
At this stage no loss has been crystallised and no claim or complaint has been formally lodged.
We wish to advise the insurance company that there is a chance of a claim against Moylan Retirement Solutions in relation to any loss that may be incurred.”
Around August 2014, MRS was deregistered.
The plaintiff commenced proceedings against the insurer under section 601AG of the Corporations Act 2001, seeking to recover their losses suffered because of Mr Moylan’s advice and his actions. The plaintiff alleged that MRS’ negligent financial advice, breach of fiduciary duty, and misleading and deceptive conduct resulted in it suffering losses.
Supreme Court Decision
The insurer of MRS defended the matter on the following grounds:
- MRS did not make a notification of any claim during each policy year;
- the plaintiff was a sophisticated or wholesale client, and not a retail client;
- MRS engaged in fraudulent non-disclosure and failed to comply with its duty of disclosure; and,
- exclusion clauses applied under the policy of insurance.
The primary judge held that 2012/2013 did not respond because there was no valid notification in January 2013; it was not a notification of “facts” but of “bare possibilities”. This meant that section 40(3) of the ICA did not assist.
His Honour held that MRS made fraudulent misrepresentations and non-disclosures in relation to its 2013/2014 policy, when it sought to renew its policy, which allowed the insurer to avoid the policy pursuant to section 28(2) of the ICA.
Cout of Appeal
The Court unanimously dismissed the plaintiff’s appeal and upheld the finding of the primary judge, Justice Slattery.
Notification – section 40(3) of ICA
Meagher JA, with whom Bathurst CJ and Bell P agreed, held that it is an objective assessment of a fact that “might give rise to a claim”. It was held that MRS, during its renewal process, did not give a realistic possibility of a claim. The notification did not include relevant facts in relation to the losses suffered by the plaintiffs, which was more than just a possibility. Therefore, section 40(3) of the ICA did not assist.
Fraudulent non-disclosure or misrepresentation – section 28(2) of ICA
The Court held that Mr Moylan withheld information from his insurer because he believed that he would not obtain another insurance policy if proper disclosure was made to the insurer. This fact was highly relevant to the decision of the insurer as to whether they were willing to accept this risk.
The Court held that if Moylan did disclose that it had misapplied the plaintiff’s funds, the underwriters would have declined to issue the policy of insurance. Further, the Court noted that Mr Moylan did not make an accidental misstatement in relation to the factual circumstances. This meant that the insurer was able to void the insurance policy.
Implications of this decision
For section 40(3) of the ICA, this case reminds insureds that they should give detailed and precise particulars of factual circumstances in relation to any potential claim(s) that could be made against them. This means that the insured should note the facts surrounding the claim and not just a belief or opinion in relation to possibility of a claim that could be made against them.
The notification must provide an insurer an opportunity to calculate the appropriate premium and assess their risk exposure, to which a blanket notification fails to assist them in understanding their risks.
As for insurers, the case acts as a reminder that if they receive vague and/or ambiguous information about a potential claim(s), they should consider pressing their insured for further information.
In relation to section 28(2) of the ICA, the case confirms that the standard of proof required for fraudulent misrepresentation and non-disclosure is the civil standard. The Court noted that mere negligence is not sufficient to establish that the insured had fraudulently misrepresented information to the insurer. As such, the insurer will need to show that there was clear and unequivocal evidence that the insured committed fraud, for the Court to accept and draw those inferences.