TurkAlert - Keeping your insurance policy ‘alive’ - notifying of potential claims: facts, not fiction or fraud
- Published 28.09.2021
The NSWCA has confirmed that in order to ensure a policy of insurance will respond to a potential claim after the policy has expired, the person responsible for advising the insurer must ensure that the advice or notification of a potential claim is based on clear objective facts. The Court’s decision in P&S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds (NSWCA 2021) has reminded us that broad notifications of mere possibilities will most likely result in the policy not responding to a claim.
Insurance Contracts Act 1984
The Insurance Contracts Act 1984 (the Act) was intended to bring a ‘fair balance…between the interests of insurers, insureds, and other members of the public’.
Section 40 was introduced to address the risk of a gap in cover for insureds under claims made policies where a potential claim may not be made until after a policy has expired, and that claim may have been excluded from cover in a subsequent policy year. It did this by making it clear coverage extended to claims not brought but about which the insurer had been informed (of the potential claim) during the policy period.
To enable the insurer to properly assess the terms upon which they may provide cover, s28 allows them to reduce their liability where relevant facts haven’t been disclosed and the coverage was affected by the non-disclosure or fraud of the insured.
Between about 2006 and late 2011, through various entities, Christopher Moylan provided financial planning advice and engaged in investments on behalf of 26 clients. One of the entities invested in property developments and by providing unsecured loans including to entities in which Moylan had a personal interest.
That entity relevantly had two policies of insurance, namely in 2012/2013 and 2013/2014.
In 2012/2013 policy period, Moylan informed the insurers of the possibility that clients might bring claims should they suffer losses from the investments made on his advice. Among other things, the notification specified that: ‘At this stage no loss has been crystallised and no claim or complaint has been formally lodged.' In parts where the notification form sought details, Moylan had stated ‘unknown’.
Underwriters successfully defended the claim for coverage under the 2012/2013 policy on the basis Moylan had failed to sufficiently notify the insurer of facts to trigger the protection of s40 of the Act.
The NSWCA confirm that it was necessary to notify the insurers of ‘facts’ ‘rather than matters of belief or opinion’. It was necessary that the insurer be advised of those facts during the policy period to ensure the policy would respond to a claim made after the expiry of the policy period.
The Court found that Moylan's purported notification was merely advice of the chance a claim, or nothing ‘more than a potential possibility’ a claim may be made against MRS if investors suffer a loss. It failed to describe any objective fact why a claim might be made. Therefore the investors were unsuccessful in their claim brought directly against the insurers.
Underwriters also successfully defended the claim under the 2013/2014 policy. Despite the lack of detail that had been given in the notification, Moylan did know as at January 2012 that the loans would not be repaid to his small pool of potential clients (and therefore claimants). He did not tell the insurers about these objective facts. He also didn’t advise insurers that the moneys had not been invested as instructed and he continued to advise his clients to invest when there was little prospect of being repaid. The insurers were able to show that if Moylan had disclosed these facts prior to the insurance being renewed, he would have not provided cover.
Underwriters were able to establish that Moylan’s conduct was fraudulent and that no coverage would have been offered if the circumstances had been known to them at the time of placing the policy. Therefore, s28 of the Act enabled the insurers to successfully reduce their exposure under the 2013/2014 policy period to nil.
The Court of Appeal has confirmed underwriters in the Australian market will not be on risk for claims notified unless the notification was based on objective facts and in the absence of fraud.