Review of the Insurance Contracts Act , Australian Government, Department of the Treasury

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Review of the
Insurance Contracts Act 1984 (Cth)

REPORT INTO THE
OPERATION OF SECTION 54

Alan Cameron
Nancy Milne

October 2003

© Commonwealth of Australia 2003

ISBN 0 642 74215 4

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Contents

Executive summary

Background

'Claims made' and 'Claims made and notified' insurance

Judicial interpretation of section 54

Consultation process

Options for reform

Issues

Discussion of the issues

The operation of section 54 in relation to 'claims made' and 'claims made and notified' insurance

Recommendation

Amendment of section 54

Attachment A

List of submissions

Attachment B

Organisations involved in consultation meetings

Attachment C

Sections 54 and 40 of the Insurance Contracts Act 1984 (Cth)

Bibliography

Cases
Articles
Books
Other sources

Executive summary

Section 54 of the Insurance Contracts Act 1984 (Cth) (IC Act) operates to excuse the late notification of claims and the late notification of circumstances for 'claims made' and 'claims made and notified' insurance policies.

The interpretation of the section has caused difficulties for the insurance industry in how it deals with long tail insurance. We are satisfied that it is a major contributing factor in discouraging insurers from offering 'claims made' insurance in Australia, and is increasing the costs of, and reducing the breadth of coverage of, 'claims made' insurance.

The complexity in 'claims made' insurance has increased as insurers attempt to address the perceived problem with the application of section 54 to late notification of circumstances, by omitting deeming provisions from their policies. Such a result still allows circumstances notified to insurers to be covered, due to the operation of subsection 40(3). However, section 54 will not apply to this statutory right, to excuse the late notification of circumstances. The result is that insureds are required to be aware of and understand the effect of the IC Act in conjunction with their insurance contract, to understand properly their rights regarding the notification of circumstances to an insurer.

Based on the evidence available, the Review Panel considers that legislative reform is necessary, but only in respect of 'claims made' insurance. The section should not be amended or affected in its application to 'occurrence based' policies. Taking into consideration the interests of insurers, insureds and third party claimants, the Review Panel recommends that section 54 be amended so as not to apply to failures to notify circumstances (that is, overriding the Australian Hospital Care case, but not the East End case).

  • The Review Panel also recommends that an extended reporting period be made available for the late notification of circumstances. Further, insurers should be required to notify insureds, prior to the expiration of these policies, of the necessity to make such notifications (unless there is, to the insurer's knowledge, a broker involved).

Background

A Review of the IC Act is a logical outgrowth of the reviews of the system of financial regulation, which commenced with the Wallis Committee of Inquiry. The Commonwealth Government has asked us to conduct that review.

Further, at the Ministerial Meeting on Insurance Issues (Commonwealth, State and Territories and the Australian Local Government Association) of 6 August 2003, it was agreed that reform of the indemnity insurance market required a package of measures including professional standards legislation, proportionate liability, amendments to the Trade Practices Act 1974 (Cth) and consideration of section 54 of the IC Act. In light of the joint government policy to improve the availability and affordability of professional indemnity insurance in Australia, we were asked in the first instance, to examine the current operation of section 54 of the IC Act.

Section 54 of the IC Act provides relief for non-compliance with contractual requirements of an insurance policy, where the non-compliance did not cause or contribute to the loss. If the non-compliance did contribute, however, the section gives insurers the ability to reduce the payout to the extent that their interests were adversely affected.

Section 54 is important in ensuring contractual fairness between insurers and insureds. This is especially true for the kinds of insurance held by ordinary consumers, household, motor vehicle and the like, which is written on an 'occurrence' basis.

However, concerns have been expressed about the operation of section 54 in relation to 'claims made' and 'claims made and notified' policies.

Any proposed reforms to section 54 of the IC Act would not only need to maintain its underlying objective of continuing fairness, but also promote the availability of professional indemnity and similar types of insurance in Australia. This is important for the benefit of businesses, professionals and consumers (or others) that may be third party claimants against an insured professional.

'Claims made' and 'Claims made and notified' insurance

The application of section 54 in relation to 'claims made' and 'claims made and notified' policies of insurance,1 has been the subject of judicial consideration on a number of occasions.

'Claims made' and 'claims made and notified' policies both indemnify insureds for claims which are made against them by a third party during the period of cover. Many of these policies contain a 'deeming provision' which provides that where an insured notifies facts or circumstances which might give rise to a claim to the insurer during the policy period, any claim which ultimately eventuates from those facts and circumstances will be treated as a claim under that policy. Subsection 40(3)2 of the IC Act stipulates that insurers are required to provide cover where facts or circumstances which may give rise to a claim are notified to the insurer during the period of cover regardless of whether it is provided for in the contract.

For various reasons, including that professional indemnity claims (and similar types of claims) can often be made a long period after the event or circumstance giving rise to the claim, insurers have not traditionally covered such risks under 'occurrence' policies. One reason is that insurers find it difficult to account for their liabilities when they are not notified of the incident that may lead to a potential claim until, for example, several years later. Such a result can lead to insurers having to set aside excessive reserves or worse, having insufficient reserves to cover claims.3

Judicial interpretation of section 54

Recent judicial interpretation of subsection 54(1) of the IC Act has excused the insured from the consequences of a failure to notify claims or circumstances which might give rise to a claim during the period of cover (even where the decision not to notify was deliberate) so that coverage is still available for such losses for an indeterminate period after the policy has expired. In simple terms it has been said that this result converts the policy into an 'occurrence trigger contract', with the consequence that insurers must provide for 'incurred but not reported claims' as in traditional accident-based liability insurance.4

Consultation process

Since the Review was announced, extensive consultation has been undertaken on the operation of section 54. To this end an issues paper was released regarding section 54 on 25 September 2003. The paper was intended to stimulate stakeholder discussion and assist the preparation of submissions.

The Review received twenty-eight written submissions that commented on a range of issues regarding the operation of section 54. A list of the submissions is at Attachment A.

To develop further understanding of the various issues involved in the operation of section 54, consultation meetings were held in Sydney on 1 October 2003, and in Melbourne on 9 October 2003.

Meetings were held with representatives of the insurance industry; insurance brokers; the consumer movement; professional bodies; the regulators; dispute resolution bodies; and the Victorian Government. The bodies involved in the meetings are included in Attachment B.

Options for reform

To stimulate discussion regarding the operation of section 54, the issues paper put forward four broad options for reform. Those options were in essence:

  • That section 54 be retained in its current form;
  • That section 54 be amended, so that notification by an insured to the insurer, of facts or circumstances which might give rise to a claim outside the period of cover, would be excluded from the relief provided under section 54. Section 54 would still provide relief to an insured in respect of a claim made against the insured during the period of cover, but notified to the insurer outside that period;
  • That section 54 be amended so that notification by an insured to the insurer, of facts or circumstances which might give rise to a claim outside the period of cover, would be excluded from the relief provided under section 54. Section 54 would no longer provide relief to an insured in respect of a claim made against the insured during the period of cover, but notified to the insurer outside that period; or
  • That section 54 be divided into two sections. The first section would reflect the operation of section 54 in its current form, however, the operation of this section would be limited to 'occurrence' policies. A variation of section 54 would be drafted to operate in relation to 'claims made' and 'claims made and notified' policies. Regulations could prescribe the application of each section to insurance types that may not fall within the specified categories.

Issues

The consultation meetings and submissions highlighted the far-reaching effects of section 54, not just in relation to 'claims made' and 'claims made and notified' policies, but also 'occurrence' insurance. It is therefore evident that any potential changes to section 54 may have implications (both intended and unintended) upon many classes of insurance and other parts of the IC Act. It is these implications that must be considered carefully when deciding upon an appropriate recommendation in relation to section 54.

In summary, the following important points emerged through the meetings and submissions for consideration:

  • Generally, stakeholders were pleased with section 54, agreeing that the rights and obligations it confers upon parties to an insurance contract increases contractual fairness. In particular, there was a broad concession that the operation of section 54 upon 'occurrence' policies should not be amended;
  • Most stakeholders suggested that section 54 was not drafted with 'claims made' and 'claims made and notified' insurance in mind. In this regard, the effect of section 54 upon these classes of insurance is different to the effect of the section upon 'occurrence' policies;
  • The majority of stakeholders accepted the desirability of some form of amendment of section 54 in relation to 'claims made' and 'claims made and notified' insurance. At the same time, legitimate concerns were raised about the effect this might have on the interests of insureds. Similar concerns were also raised regarding the effect of an amendment to section 54 in relation to third party claimants against insured professionals;
  • The material available to the Review Panel supports the proposition that there has been a reduction in the affordability and availability of professional indemnity insurance in Australia. This would mean that:
    • some professionals will not be able to afford or obtain adequate insurance;
    • some professionals will have to take on more risk through increased self insurance;
    • some services will decrease or disappear from the Australian market, if certain industries can no longer obtain professional indemnity insurance; and
    • consumers, as the indirect beneficiaries of professional indemnity policies, will suffer if insurance is not available to cover their losses.
  • Strong evidence was provided to suggest that the judicial interpretation of section 54 was one, although by no means the only, factor having a material impact on the professional indemnity insurance market in Australia. Some insurers had withdrawn from the professional indemnity insurance market in Australia (particularly London insurers), or had altered their policies in an effort to reduce the impact of the decisions. Others made it clear that they would withdraw if those alterations were found by subsequent judicial decisions to be ineffective.
  • The consequences of insurer withdrawal are said to have included premium increases for those professionals able to obtain cover, some professionals conducting business without insurance, reductions in cover and the availability of cover only on much less favourable terms, and some professionals insuring with unauthorised foreign insurers (whose solvency is not subject to supervision in Australia).
  • The insurance industry indicated that the capacity of the Australian market would strengthen if it was clear that professional indemnity and similar classes of insurance could be offered and would be interpreted to be on a 'claims made' basis.
    • Improving the availability of professional indemnity insurance in the Australian market requires that insurers have certainty. Currently, insurers face a high degree of uncertainty in provisioning for 'incurred but not reported' insurance claims, due essentially to the operation of section 54.
  • The general consensus was that if section 54 was amended to preclude late notification of claims or circumstances, there was a need for a statutory extended reporting period for claims or circumstances under 'claims made' and 'claims made and notified' policies.
  • Changes in relation to the operation of section 54 with respect to 'claims made' and 'claims made and notified' insurance, could result in an anomalous effect upon insurance classes, such as group life and disability polices, that can be offered as an 'occurrence' policy or a 'claims made' policy.

We have given extensive consideration to all the above issues before reaching a conclusion in relation to the operation of section 54. We shall highlight some of what we consider to be the most relevant and important issues below.

Discussion of the issues

Not a single stakeholder has sought the removal of section 54 from the IC Act. In fact, all interested parties have emphasised its importance in relation to insurance contracts, especially general insurance classes. It is clear that all stakeholders see value in the operation of section 54.

It is also clear that section 54 works very satisfactorily in relation to the vast majority of 'occurrence' insurance, for example, comprehensive motor vehicle insurance. The prominent message from meetings and submissions is that the operation of section 54 in relation to 'occurrence' policies should remain unchanged.

We accept and agree that the operation of section 54 in relation to 'occurrence policies' should be retained and the drafting of any change to give effect to our report must ensure that result. The rest of this discussion will focus on the effect of section 54 upon 'claims made' and 'claims made and notified' insurance, and the consequences of these effects.

The operation of section 54 in relation to 'claims made' and 'claims made and notified' insurance

The Value and Role of 'Claims Made' Insurance

The availability at reasonable cost of 'claims made' insurance cover is important to the Australian economy. It provides cover to many valued Australian professionals, such as accountants, lawyers, doctors and engineers. 'Claims made' cover offers a number of significant advantages for insurers, insureds and third parties. As compared with 'occurrence' policies, 'claims made' cover provides:

  • greater stability and certainty for the insurance industry:
    • 'Claims made' insurance eases the burden of insurer provisioning for long-tail insurance. In that regard, 'claims made' insurance reduces insurer (and therefore ultimately insured) risk;
    • Decreases in insurer risk leads to lower premiums both directly and indirectly by encouraging greater insurer competition and increased insurance capacity.
  • consumer confidence in the adequacy of coverage.
    • 'Claims made' insurance is more likely to provide adequate coverage for a claim as the policy period will be more closely aligned with the time of the claim. In long-tail insurance, the event that leads to the claim may occur long before the claim itself. This time lapse may result in coverage (that is perceived adequate at the time of the occurrence) being inadequate when the claim is made a number of years later.

Nevertheless, section 54 currently allows an insured who entered into a 'claims made' or 'claims made and notified' insurance contract, to alter the nature of the contract from that of 'claims made' to one of 'occurrence'. This result was explained in a number of submissions from insurers who underwrite or have underwritten these types of policies.

Judicial Interpretation and Comment

The interaction of section 54 with 'claims made' policies has often been the subject of judicial note and expressions of concern. It has been described as a 'startling result', 'going far beyond what the legislature intended', and 'distorting contractual arrangements'. For example, Justice Cole (of the NSW Supreme Court) in Breville Appliances Pty Ltd v Harold Duvernay Ducrou & Ors5, stated:

    'To construe section 54 to convert a Claims Made and Notified Policy into a Claims Made Policy seems to me, to go far beyond which the legislature intended. There is, I would have thought, a clear distinction between denying an insurer a right to refuse indemnity because of an act or omission of the insured on the one hand, and effectively broadening the scope of cover by denying an insurer the right to define cover, and thus assessment of risk and consequential assessment of premium, on the other.'

The operation of section 54 was discussed between Justice Hayne (now a Justice of the High Court) and Senior Counsel for the Applicant in Greentree & Anor v FAI General Insurance Co Ltd6:

      Hayne J: Is the consequence of this contention (that Section 54(1) responded to a Claimant's failure to make its claim during the Policy period) that one cannot write, as an insurer, a Claims Made and Notified Policy that limits the insurer's liability to pay Claims Made and Notified during currency?

Mr McInnes: Yes.

      Hayne J: The consequence is that those Policies can no longer be written, effectively.

      Mr McInnes: Well, the insurer has to take into account the effect of Section 54(1) if they are going to write those Policies. They will not necessarily be absolved from liability.

      Hayne J: So that Claims Made Policies become events based, not claims based Policies.

      Mr McInnes: Yes.

      Hayne J: It is a startling result, is it not, Mr McInnes, founded upon the words 'refuse to pay a claim by reason of some act...'

Chesterman J in FAI v Australian Hospital Care Pty Ltd7 summarised the operation of section 54 as:

    'The result (that Section 54(1) responds to an insured's failure to notify circumstances during the policy period) does not give rise to any particular sense of satisfaction but seems compelled by the explanation of Section 54 found in Antico. So understood the section appears to produce a policy of insurance rather different from the one agreed upon by the parties ... The effect of the section is to distort the contractual arrangement made by the parties.'

In 2001, the Australian Law Reform Commission, (differently constituted since recommending what became section 54 of the IC Act), in its Review of the Marine Insurance Act, rejected section 54 as a model for reform of the Marine Insurance Act in these terms:

    'In important respects, the practical effect of the operation of section 54 is to allow the insured to unilaterally alter the bargain made by the parties, arguably to the extent of fundamentally changing the scope of the insurance.8 While the insurer's liability may be reduced to the extent of the prejudice it suffers, even to zero, the room for dispute over whether or not a particular marine insurance claim is payable, and the extent to which it is payable, would be greatly expanded.'9

Section 54 and Declining Capacity in the Professional Indemnity Market

As noted above, in some circumstances section 54 operates to excuse the late notification of claims and the late notification of circumstances for 'claims made' and 'claims made and notified' insurance policies.10 The Review Panel accepts that such a result gives rise to both disadvantages and also apparent benefits to insureds.

The main benefit is that insureds are seemingly given greater coverage under such policies and third party claimants are, on the face of it, more assured of receiving compensation when making a claim against an insured.

The largest disadvantage is the contribution of the operation of section 54 to the current reduction in affordability and availability of 'claims made' insurance in Australia.

The argument that section 54 may be adversely affecting the availability of 'claims made' insurance in Australia has been advanced as a reason for amendment by a number of parties in the past. Of particular note are the comments made by the judiciary on this subject, several of which are set out below. Justice Kirby in FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd11 discussed the nature of the problem the judges have faced in this area in these terms:

    The essence of the problem, that has seen so many judges struggling with issues of construction and application of the words adopted by parliament, in s 54 of the Act, is that if the section is given the large ambit argued for it by the insured, it might effectively permit courts to repair all kinds of 'omissions' on the part of insured persons and third parties and effectively to rewrite insurance policies accordingly. Courts could do so in a way that would essentially destroy the basic foundation upon which claims made type policies are based. This is a legitimate concern. I acknowledged it in Perry. It needs to be addressed....12

    Claims made type policies have become so common that it would be absurd to ignore the peculiarities of this form of insurance.

His Honour noted the distinct advantages of this form of insurance from the point of insurers, and continued:

    '... it would be surprising if the Act were to permit 'omissions' to make or notify claims, or to notify occurrences, within the period of cover that had the effect of altering the essential character of the cover provided in the contract of insurance. It would be surprising if it permitted an insured, at its option, to convert a claims made policy, effectively, to a kind of occurrence policy for which a substantially higher premium would ordinarily have been levied by the insurer.' (Emphasis added)

His Honour then analyses the reasons why such a result would be surprising, and concludes:

    'There is merit in the argument that, as far as it would permit, in the case of claims made policies, s 54 of the Act should be construed to afford the relief contemplated in a way consistent with the maintenance of this type of insurance and not in a way that would be destructive of its availability.'

Despite that, His Honour was unable to construe the law in that way:

    'Unless the meaning of the section, derived from its language, permits or requires a Court to confine relief in such cases, any dissatisfaction with the operation of the section in respect of this class of insurance is a matter for legislative amendment. The judicial 'struggle' with the requirements of the provision, as such requirements are found to be inherent in its language and apparent purpose, can only go so far.'

Further, Professor Sutton, in commenting on the High Court decision in the Australian Hospital Care case, indicated that:

    'There is merit in the fears expressed by Gleeson CJ and Pincus JA that the wide operation of sec 54(1) now given the imprimatur of the High Court of Australia by its majority decision, may lead to the imposition of much greater risks on insurers, with the consequence that premiums will increase and the Australian insurance industry will be out of step with international practice. As matters now stand, an occurrence that might give rise to a subsequent claim by a third party against the assured, could happen in 1998, the assured could become aware of that event and of its potential in 1999, and notify the insurer of it only after a claim was made by the third party in 2001. Such a failure to notify during the currency of the 1999 cover would be excused under sec 54(1) and the 1999 insurer would be liable on the claim. The 'long tail' nature of 'occurrence-based' policies is back with a vengeance, albeit that the trigger for the cover to respond is awareness of a potential claim against the assured.

    In this situation, some remedial action is called for. Reliance on the stipulation in sec 54(1) permitting the insurer to reduce its liability on the claim 'by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of' the omission is a weak reed on which to base any reform, if only because of the comment by Gleeson CJ that such prejudice may be impossible to measure (para 11). In any event, a greatly expanded notion of what constitutes prejudice in this context would have to be developed, including the concept that the loss of an opportunity to investigate a third party's claim has some value, and that an insurer will inevitably suffer loss in being required to maintain adequate contingency funds to meet possible future claims of which it knows nothing.'13

While the reduction in the availability of professional indemnity insurance in Australia has, we believe, been clearly established previously, the causes of that reduction are multifaceted, and include the collapse of the largest general insurer, HIH, the hardening of the insurance market generally following the terrorist attacks of September 2001 and the medical indemnity crisis. What is more difficult to quantify by unequivocal hard evidence, is the part played in this context by the interpretations of section 54. Some stakeholders appeared to believe that we should not recommend change unless this contributory role could be proved decisively, but such a requirement appears unreasonable.

The available evidence is that several providers of professional indemnity insurance, in particular London based insurers, have in fact withdrawn from the Australian market due, in part, to the operation of section 54. Some London insurers have not completely withdrawn from the market, but have reduced their operations to simply dealing with 'old clients'. That is, they will not accept new business in the Australian market.

Further, a number of insurers have indicated that they will withdraw from the market, if the removal of deeming clauses, discussed below, is found to be an ineffective way of preserving the 'claims made' nature of these policies.

Even where cover remains, its cost is increasing alarmingly and the comprehensiveness of cover is declining. Such evidence has not only come from insurers, but also insurance brokers and representative bodies of the professions, who are in the business of obtaining insurance on behalf of their clients/members.

The combined result is:

  • a reduction in the capacity of the Australian professional indemnity insurance market;
  • as capacity reduces and existing insurers face higher risks, professional indemnity insurance premiums will inturn increase;
  • less policy coverage, due to restrictive terms and increased conditions;
  • increased self insurance; and
  • businesses insuring with unauthorised foreign insurers (these businesses often have no ability to determine whether the unauthorised foreign insurer will be able to honour all claims).

The above effects have been seen already, for example, in the engineering industry. The Association of Consulting Engineers Australia conducted a survey titled 'Feedback on Premiums, Excesses and Exclusions in PI Policy Renewals for Consulting Engineering Firms from Dec 2002 - Feb 2003'14. The survey indicates, amongst other things, that:

  • during the period, premiums quoted rose on average 114 per cent, when compared to former premiums;
    • 'The cost of premiums continues to escalate to a point where some firms are questioning the commercial viability of having PI insurance cover. The alternative is to 'go bare', leaving clients and the community unprotected in the event of a liability claim.'
  • the proportionate rise in excesses quoted was 207 per cent;
  • 48 engineers surveyed indicated that exclusions had been added by insurers to renewed policies; and
  • a number of firms (11 per cent that responded to the relevant question) intended on operating uninsured in at least one service delivery area.

While there is no evidence to support the extreme claim that section 54 is the sole or even the predominant cause of a reduction in the capacity of the 'claims made' insurance market, evidence that the operation of section 54 is an active factor resulting in a reduction in professional indemnity capacity abounds. A reduction in the availability and affordability of professional indemnity insurance affects not only the operations of Australian professionals, but the third party claimants that ultimately benefit from 'claims made' insurance.

Therefore, the evidence supports the view that section 54 is a material component in the group of causes, that are currently discouraging insurance providers from offering, increasing the cost of and reducing the breadth of coverage of 'claims made' insurance in Australia.

Section 54 and Declining Service Levels

Large firms from major industries, while having trouble finding affordable insurance may not be at significant risk of finding themselves without insurance. However, there is concern that many small firms (for example, sole traders) may be finding obtaining professional indemnity insurance increasingly difficult or not financially viable.

The anecdotal evidence is that the declining capacity in the professional indemnity insurance market is becoming a barrier to small business. If small professionals cannot obtain insurance, they are faced with the decision of leaving the industry, or self-insuring.

To support this contention, the Review Panel has received some industry specific surveys regarding the availability and affordability of professional indemnity insurance.

A survey conduced by the Association of Consulting Engineers Australia15 found, amongst other things, that:

  • 'The percentage of income spent on PI insurance by engineering firms doubled in each of the last three years.'
  • 'One third of firms have had their profits affected. As a result, nearly 1 in 5 have reduced services to the community.'
  • 'About 20 per cent of firms are recovering only half their PI costs from clients. Nearly 30 per cent can't pass the increases on at all. Most of these are small firms.'
  • 'Responses to a number of the survey questions indicate the significant detrimental impact on the profitability and operations of small firms. The survey suggests that, without major change to the PI environment, small engineering firms will become increasingly marginal, and an aggregation in engineering service delivery will occur towards the larger end of the market.'
  • 'If increases in PI insurance continue, 42 per cent of firms will either close, work uninsured, or reduce services further.'

The CPA Australia Professional Indemnity Insurance Survey Report (February 2003) found that in the accounting industry:

  • '26.6 per cent of respondents had withdrawn or were intending to withdraw certain high risk services such as audit or financial planning in the next twelve months due to the increasingly high costs of PI insurance and policy exclusions;
  • 12 per cent of respondents specifically identified the withdrawal or winding down of audit services;
  • Particular emphasis was placed on withdrawing audit services to small businesses and community organizations;
  • Many members will be forced to withdraw pro-bono audit services to non-profit or community organizations due to the increasingly high costs of PI insurance and policy exclusions.'

As well as the reduction in industry specific services, some inherently risky (yet useful) industries may find themselves uninsurable, essentially meaning the disappearance of certain services in Australia. The Review Panel noted, for example, the reference to those who provide consulting services with respect to cooling tower safety and fairground safety, in the Professions Australia publication, 'Protecting Consumers of Professional Services', published earlier this year.

Removal of Deeming Provisions from 'Claims Made and Notified' Insurance Policies

Historically, in Australia (and overseas) most 'claims made' policies included a clause providing that if an insured notified the insurer of facts and circumstances which might later give rise to a claim, any such claim would be treated as if it occurred during the policy period. This is described as a 'deeming provision'.

Recently, insurers writing 'claims made' policies in Australia have attempted to address the perceived problem with the application of section 54 to late notification of circumstances, by omitting deeming provisions from their policies. This is an undesirable result from the point of view of both insureds and the insurers. Further, it has created an anomaly which requires remedy.

Recent judicial decisions have affirmed that section 54 will not provide relief, where a policy does not contain a deeming provision.

'Claims made' policies are subject to subsection 40(3)16 of the IC Act. Subsection 40(3) provides a similar right to an insured to that which would apply if a deeming provision were included in the policy. In the case of Gosford Council v GIO General Limited,17 the Court held that section 54 would not apply in relation to the statutory right provided by subsection 40(3), because section 54 provides relief from the 'effect of the contract', not from a requirement imposed by law. We understand that there is at least one case involving similar issues to the Gosford case which is likely to be subject to an application for special leave to appeal to the High Court.

Thus, on the present state of the authorities, some insurers at least believe that there is a technical solution to the problems caused by FAI v AHC. Evidence provided to the Review Panel indicated that this solution is being broadly adopted.

However, there is still some uncertainty because the High Court may well reverse the effect of the decision in Gosford Council v GIO General Limited. It has also been submitted to the Review Panel that 'claims made' policies that do not include a deeming provision do contain an implied term to the same effect18.

Whilst this 'anomaly' is providing some comfort to insurers at present, we consider that the current position is unsatisfactory for the following reasons:

  • The outcome of any High Court appeal on this issue is uncertain;
  • There is still a degree of uncertainty about the application of section 54 to 'claims made' policies that do not include a deeming provision. As this is an issue of considerable importance to the insurance industry, it is likely that there will continue to be uncertainty, disputes and litigation until the matter is determined by the High Court; and
  • The practice of omitting deeming provisions from 'claims made' policies for this kind of reason is undesirable; insureds should be able to understand the effect of the policy without having to consult lawyers.

We fear that some insureds, and a great many third party claimants (or more realistically, those advising them), may not understand that without deeming provisions, 'claims made' policies may no longer enable section 54 to excuse the late notification of circumstances. A great many submissions supporting the current application of section 54 appear to be doing so under the false understanding that section 54 continues to work in relation to late notification of circumstances under most 'claims made' policies.

If section 54 was amended so as not to excuse the late notification of circumstances under a 'claims made' policy, the benefit would be the provision of certainty to insurers and insureds and increased contract clarity through encouraging the reintroduction of deeming provisions into 'claims made' policies. Deeming provisions allow an insured to understand their rights and obligations under an insurance policy, by simply reading the terms of the contract.

The current 'claims made' policies (minus deeming provisions) require insureds to be aware of and understand the effect of the IC Act in conjunction with their insurance contract, to properly understand their rights regarding the notification of circumstances to an insurer.

The position of third party claimants

A number of submissions to the Review Panel have emphasised the importance of ensuring that third party claimants are not disadvantaged by any proposed amendments to section 54.

A third party is not often in a position to determine how a professional will compensate them, if, in their dealings, the third party is somehow wronged. Most third parties would be likely to simply assume that the professional is covered by insurance of some kind. Some larger third parties may seek evidence of coverage, however, providing this evidence is frequently precluded by the terms of cover, which sometimes even precludes confirming it exists at all. In addition, this evidence may not indicate how high deductibles for the policy are, how restricted the coverage is, how low the caps on cover are and how likely the insurer is to pay if called upon to do so.

The consequences of this information asymmetry are magnified when professional indemnity capacity is withdrawn. That is, with the reduction of capacity, third parties are more likely to deal with a professional that, for various reasons, is not appropriately covered by indemnity insurance.

While the protection of third party claimants is extremely important, it appears already to have been eroded by:

  • the general problems with availability of professional indemnity and similar types of cover leading to some professionals being forced to self-insure or seek offshore cover (which may have all sorts of restrictions and be difficult to enforce) or agree to more restrictive conditions in insurance policies; and
  • the current judicial interpretation as determined in Gosford Council v GIO General Limited where section 54 has been found not to provide any relief for the late notification of circumstances outside the policy period.

Consequently, an amendment to section 54 that clarifies this position will leave third party claimants no worse off than they are now. Their position may well be improved if the quality, availability and price of insurance for professionals is improved. In addition, an amendment to section 54 may once again encourage insurers to include deeming provisions in insurance policies. Such a result would be very desirable and would promote clarity for insureds in understanding contract terms.

We understand those making submissions to us on behalf of consumers are concerned about the risk to third party claimants when the insured professional is not able to claim because they have failed to notify a claim or a circumstance. By definition, of course, the insured here is not unsophisticated, and there will be those who would say that their sophistication, combined with their self interest in ensuring the availability of the insurance which they have bought, should mean that this possibility is more theoretical than real.

Nevertheless, our recommendation will seek to ameliorate that risk in three ways:

  • By ensuring that any proposed amendments to section 54 do not apply to failures to notify claims, but only to failures to notify circumstances (that is, overriding the Australian Hospital Care case, but not the East End case);
  • By adding a period of grace for the notification of circumstances; and
  • By requiring insurers to notify insureds, prior to the expiration of these policies, of the necessity to make such notifications (unless there is, to the insurer's knowledge, a broker involved).

International

The Review Panel has not been able to examine exhaustively whether similar problems with 'claims made' policies exist in overseas jurisdictions. We are aware that there is or has been legislation which restricts insurers in France, Spain, Belgium and Israel from enforcing the notification provisions of 'claims made' and 'claims made and notified' policies. We understand that in those jurisdictions international insurers and reinsurers have been reluctant to cover professional indemnity and similar risks. In Spain, legislation has been introduced to specifically allow 'claims made' cover, although some judicial decisions are undermining the effect of the legislation. In France, the problem is topical and it has been reported that insurers are seeking various solutions. In Israel, similar concerns to those expressed to this Review Panel are being raised and it is likely there will be amending legislation.

In Australia, we are dependant upon access to the international insurance market, particularly the London market. Our local insurers are also dependant upon the international reinsurance market, mainly based in the United Kingdom, Europe, United States and Bermuda. In the United States, United Kingdom and Bermuda 'claims made' policies operate according to their terms. Submissions from overseas insurers have indicated that those insurers are reluctant to provide professional indemnity and similar types of cover on anything other than a 'claims made' basis.19

Insurer disclosure requirements

A number of submissions recommended that if any amendments to section 54 were proposed, there should be increased insurer disclosure requirements and increased education of insureds. The current subsection 40(2) provides for disclosure as follows:

The insurer shall, before the contract is entered into:

    (a) clearly inform the insured in writing of the effect of subsection (3); and

    (b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover.

However, the usual notices that are provided may not sufficiently explain to an insured, particularly an insured who is operating a small business, exactly what is required and the effect of non-compliance. There is also an issue with the application of subsection 40(2) because section 71 of the IC Act currently provides that where an insured or proponent for insurance is represented by an insurance broker, the insurer is relieved from the notice requirements of the Act. Most professional indemnity and similar types of insurance are arranged with the assistance of a professional insurance broker, and brokers normally provide a notice that complies with subsection 40(2).

Extended reporting period

Many submissions supported the requirement of an extended reporting period, if section 54 was amended in relation to 'claims made' and 'claims made and notified' insurance. Such a reporting period would add an element of fairness, particularly in instances where an insured may, for example, discover circumstances one day before their policy expires, but for certain reasons (such as that day being a public holiday) cannot notify their insurer of those circumstances until after policy expiration.

In submissions made to the Review Panel, suggestions for an extended reporting period have ranged from 14 days to 6 months. To avoid any injustice, an extended reporting period would need to be long enough to allow an insured who is operating a small business, possibly as a sole proprietor, or for scattered offices in a professional practice operating under a single policy centrally administered, to have sufficient time after the expiry of their policy to assess whether or not there are any facts or circumstances which should be brought to the attention of their insurer. An appropriate extended reporting period time-frame is explored further in the recommendation.

(Although our issues paper raised the question of a need for run-off cover, few submissions dealt in detail with that matter. We are satisfied that it is a separate issue, and one that does not warrant a simple, stand-alone legislative solution. We do not intend to deal further with it at this time.)

Recommendation

Amendment of section 54

The Review Panel strongly supports the continued operation of section 54 in relation to traditional, 'occurrence based' policies, and recommends that be explicitly noted in order to avoid any slight risk that the changes it will recommend, in the context of 'claims made' polices, could ever be interpreted otherwise. Many submissions were made emphasising the need to ensure that any amendments do not have unintended consequences.

The Review Panel believes that an amendment to section 54 is warranted to clarify its operation in relation to professional indemnity and similar policies. Most of these policies are written on a 'claims made' or 'claims made and notified' basis20.

The recommended amendment to section 54 should:

  • be minimalist;
  • specifically deal with the problem that has been identified and to the types of policies which have been the subject of complaint; and
  • not interfere with the general operation of section 54 for 'occurrence' policies. This may necessitate the introduction of a separate section 54A to specifically deal with 'claims made' policies.

The Insurance Council of Australia, and many insurers, has submitted that section 54 should be amended along the lines of option 3 in the Issues Paper. This would mean that there would no longer be any relief provided by section 54 to the late notification of both claims, and facts or circumstances which might give rise to a claim for 'claims made' policies.

Having considered the competing submissions on this issue and the relevant history, we have come to the view that the amendment should be along the lines of option 2 contained in the Issues Paper, that is, section 54 be amended so that notifications of facts or circumstances which might give rise to a claim, would be excluded from the relief provided under section 54. Section 54 would still provide relief to an insured in respect to a claim made against the insured during the period of cover, but notified to the insurer outside that period.

The reasons why we consider that any amendment should be limited are as follows:

  • Despite suggestions from most stakeholders that section 54 was not drafted with 'claims made' and 'claims made and notified' insurance in mind, it is by no means clear that this was the case in relation to the late notification of claims under 'claims made' policies. In a circular no. IC1/95 the then regulator of the insurance industry, the Insurance and Superannuation Commission, reported on sections 40 and 54 of the Insurance Contracts Act 1984. At that time, the state of judicial interpretation was that section 54 had been held to apply to the late notification of claims, but not to the late notification of circumstances.21 At that time, the ISC rejected the pleas for amendment and stated:

        'In the absence of persuasive argument to the contrary, the ISC considers that the current legislation and case law strikes a fair balance between the competing interests of all parties, the insured, the insurer and general policyholders as well as third part claimants.

        Submissions put to the ISC about underwriting commercial applications arising from section 54 and the difficulties with the 'prejudice' test have not been sufficiently persuasive to warrant legislative amendment.'

    Since that time the relevant change in interpretation in the law has come about as a result of the High Court's decision in FAI v Australian Hospital Care which deals with the late notification of circumstances. In our view, the reasoning of the ISC in 1995 remains sound in respect of the late notification of claims.

  • For many years now, since at least the East End decision, the insurance industry has lived with the effect of that decision and the application of section 54 to late notification of claims. Despite the fact that this position has applied for at least 12 years, neither the Insurance Council of Australia nor any of the industry submissions have been able to provide any solid evidence of the problems caused by late notification of claims. On a practical level, this is understandable, because upon receipt of a claim (which could be an initiating court process or a letter of demand) most professionals would immediately notify their insurer.

The real mischief that seems to have caused difficulties for insurers is the application of section 54 to late notification of circumstances. It seems to us that this can be described as an anomalous result whereas the application of the section to late notification of claims could hardly be described as unintended. Therefore, we recommend that section 54 be amended to rectify this anomaly in respect of 'claims made' policies.

This could be achieved by excluding from the relief provided under section 54, any failure to notify the insurer of facts or circumstances that might give rise to a claim. The amendment should be limited to 'claims made' and 'claims made and notified' policies, or, simply those policies which are subject to section 40(3) of the IC Act.

The amendment should ensure that it is restricted to those types of policies which presently fall within the classes of insurance written on a 'claims made' basis, and that it cannot be used by insurers to draft around section 54 by converting 'occurrence' policies to 'claims made'. To avoid such an outcome, the amendment could exclude from its operation any class of contract prescribed by regulation or declared by the Australian Securities and Investments Commission (ASIC). Alternatively, the amendment could be limited to a specified class of insurance contracts. Initially the class would include those types of policies that have been identified in submissions and consultations with the Review Panel, that is:

  • contracts of professional indemnity insurance;
  • contracts of insurance that provide cover for liability of a person in their capacity as a director or officer of a corporation, including any related contract of insurance which provides cover for a corporation in respect of its liability to indemnify a person in their capacity as a director or officer of that corporation;
  • contracts of insurance that provide cover for liability arising from employment practices;
  • contracts of insurance that indemnify a trustee or trust fund in relation to a loss or liability incurred by the trustee in the course of carrying out the trustee's functions in relation to the trust;
  • contracts known as errors or omissions contracts of insurance;
  • contracts of insurance commonly known as a product recall or product guarantee insurance contracts; and
  • contracts of medical malpractice insurance.

Further, the Review Panel recommends that there should be enhanced disclosure requirements for 'claims made' policies such as those advocated in the ASIC submission; however, our proposal is less ambitious.

Insurers should be required to notify insureds not earlier than one month and no later than seven business days prior to the expiration of the relevant policy, of the importance of notifying facts or circumstances, unless the insured is, to the insurer's knowledge, advised by an insurance broker.

We considered and discarded, making the giving of such notice a condition of the exclusion of section 54. Further, we do not favour too prescriptive an approach to whether or not the insured is currently advised by a broker; this notification is a failsafe device which need not be over engineered.

Finally, if section 54 is amended as recommended, it will be necessary to provide for an extended reporting period of facts or circumstances that might give rise to a claim for policies, which are subject to section 40 of the Act. A grace period is necessary if for no other reason than that awareness of circumstances may arise late on the last day of cover, when notification is in practice impossible before expiration.

The Review Panel recommends that there should be an extended reporting period of 45 days for facts or circumstances that might give rise to a claim for policies, which are subject to section 40 of the Act. This time frame has the advantage of allowing insureds a reasonable time in which to consider and make necessary notifications but also provides a clear cut-off period for insurers in terms of assessing their policy liabilities. Of course, circumstances notified during that period but of which the insured became aware during the previous period are to be taken as covered by the policy for the previous period.

As our recommendation does not involve any change to section 54 in connection with the late notification of claims, there is no need to provide an extended reporting period for claims.


Attachment A

List of submissions

1.

Judge John Goldring

2.

Mr Martin Harris

3.

National Insurance Brokers Association

4.

Trowbridge Deloitte

5.

Mr Seungho Bang

6.

Strategic Insurance & Risk Solutions

7.

Royal & Sun Alliance

8.

Insurance Enquiries and Complaints Ltd and Financial Industry Complaints Service Ltd

9.

Insurance Australia Group

10.

Australian Medical Association Limited

11.

RACQ Insurance Limited

12.

Motor Trades Association of Australia

13.

Australian Bankers' Association

14.

Marketform Acquisition Company Limited

15.

Phillips Fox

16.

Insurance Council of Australia Limited

17.

Australian Securities and Investments Commission

18.

The Consumers Federation of Australia

19.

The Law Council of Australia

20.

Marsh Pty Ltd

21.

Investment and Financial Services Association

22.

Australian Plaintiff Lawyers Association

23.

Australian Law Reform Commission

24.

The Victorian Department of Treasury and Finance

25.

The Financial Planning Association of Australia Limited

26.

Health Professionals Insurance Australia Pty Ltd

27.

Legal Aid Commission of New South Wales

28

Resource Underwriting Pacific Pty Ltd

 


Attachment B

Organisations involved in consultation meetings

Organisation

Date of meeting

Australian Competition and Consumer Commission

1 October 2003

Australian Prudential Regulation Authority

1 October 2003

Australian Securities and Investments Commission

1 October 2003

Banking and Financial Services Ombudsman Limited

9 October 2003

CGU Insurance Limited

1 October 2003

Consumer Law Centre of Victoria

9 October 2003

Financial Industry Complaints Service Limited

9 October 2003

Insurance Brokers Disputes Limited

9 October 2003

Insurance Enquiries and Complaints Limited

9 October 2003

Legal Aid Commission of New South Wales

1 October 2003

Liability Reform Steering Group

1 October 2003

National Insurance Brokers Association

1 October 2003

The Australian Bankers' Association

9 October 2003

The Insurance Council of Australia

1 October 2003

The Investment and Financial Services Association

1 October 2003

Victorian Department of Treasury and Finance

9 October 2003

 


 

Attachment C

Sections 54 and 40 of the Insurance Contracts Act 1984 (Cth)

54 Insurer may not refuse to pay claims in certain circumstances

1. Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act.

2. Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.

3. Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act.

4. Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act.

5. Where:

      a. the act was necessary to protect the safety of a person or to preserve property; or

      b. it was not reasonably possible for the insured or other person not to do the act;

        the insurer may not refuse to pay the claim by reason only of the act.

6. A reference in this section to an act includes a reference to:

      a. an omission; and

      b. an act or omission that has the effect of altering the state or condition of the subject-matter of the contract or of allowing the state or condition of that subject-matter to alter.

40 Certain contracts of liability insurance

1 This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.

2 The insurer shall, before the contract is entered into:

      a clearly inform the insured in writing of the effect of subsection (3); and

      b if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover.

      Penalty: 300 penalty units.

3 Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as 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.

Bibliography

Cases

Antico v C E Heath Casualty & General Insurance Limited (1997) 188 CLR 652.

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CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Limited (2001) 11 ANZ Insurance Cases 61-507.

East End Real Estate Pty Ltd v C E Heath Casualty and General Insurance Limited (1992) 25 NSWLR 400.

Einfeld v HIH Casualty and General Insurance Limited (1999) 10 ANZ Insurance Cases 61-450.

FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641.

FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd (1999) QCA 243.

FAI General Insurance Company Limited v Perry (1993) 30 NSWLR 89.

Gosford City Council v GIO General Limited [2002] NSWSC 511.

Gosford City Council v GIO General Limited [2003] NSW CA 34.

Greentree & Anor v FAI General Insurance Co Ltd (1998) 44 NSWLR 706.

Greentree & Anor v FAI General Insurance Co Ltd (1999) 10 ANZ Insurance Cases 61-423.

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Burns, M., 'FAI v Perry: High noon in the High Court', Insurance Law Journal, vol. 12, 2002.

Carson, N., 'Liability insurance claims made policies', paper submitted to Senator Helen Coonan on 23 May 2002.

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Christopher, A., 'Is FAI v Perry dead?' Insurance Law Journal, vol. 8, 1997, p. 260.

Christopher, A., 'The latest word on FAI v Perry: Greentree v FAI General Insurance Co Limited', Insurance Law Journal, vol. 10, 1999, p. 189.

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Clarke, J., 'After the dust settles on Antico: FAI v Perry lives', Insurance Law Journal, vol. 9, 1997.

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Finn, C., 'Insurers claw background on s 54', Insurance Law Journal, vol. 13, 2002 p. 291.

Hawke, F., 'Circumstance notification: Failure to obtain insurer's consent to costs - Whether an 'omission' within Insurance Contracts Act s54', Insurance Law Journal, vol. 7, 1996.

Hawke, F., 'Notification of circumstances under claims made policies: Some observations upon the scope and operation of the Insurance Contracts Act 1984 (Cth)', Insurance Law Journal, vol. 6, 1994.

Horsely, K., 'Section 54 of the Insurance Contracts Act', Insurance Law Journal, vol. 7, 1996, p. 97.

Lewins, K. & Lo, S., 'Striving for equilibrium: A critical analysis of Section 54 of The Australian Insurance Contracts Act', Murdoch Electronic Journal of Law, vol. 10, No 2, 2003.

Mannolini, J., 'The uncertain ambit of section 54 of the insurance contracts act', Australian Business Law Review, vol. 24, Iss. 4, August 1996, p. 260.

Masel, G., 'Taking liberties with claims made policies', Insurance Law Journal, vol. 11, 2001, p. 104.

McSweeny, M., 'Aspects of prejudice in insurance law', Insurance Law Journal vol. 13, 2001, p. 88.

Mead, P., 'The effect of section 54 of the Insurance Contracts Act 1984 and proposals for reform', Insurance Law Journal, vol. 9, 1997.

Meagher, A., 'Operation of section 54 of Insurance Contracts Act and 'claims made and notified' professional indemnity policies', Insurance Law Journal, vol. 5, 1992.

'Reform of the Insurance Contracts Act 1984', Australian Insurance Law Bulletin, vol. 11, No. 8, June 1996.

Schoombee, A., 'Antico's Case and other recent decisions on notification of claims and circumstances: Sections 54 and 40 of the Insurance Contracts Act', Insurance Law Journal, vol. 8, 1997, p. 167.

Scott, T., 'FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd', Insurance Law Journal, vol. 12, 2001, p. 272.

'Section 54: raising the dead', Australian Insurance Law Bulletin, vol. 16, No. 8, August/September 2001.

Sutton, K., 'Interaction of s40(3) and s54(1) Insurance Contracts Act', Australian Business Law Review, vol. 30, Iss. 6, 2002, p. 452.

Sutton, K., 'Section 54(1) and the question of prejudice', Australian Business Law Review, vol. 30, Iss. 3, June 2002, p. 244.

Sutton, K., 'Insurance Law: McInally Nominees Pty Ltd v. HTW Valuers (Brisbane) Pty Ltd [2001] QSC 388 (Chesterman J, 16 October 2001)', Australian Business Law Review, vol. 30, Iss. 2, April 2002, p. 156.

Sutton, K., 'Insurance Law: Section 54 of the Insurance Contracts Act 1984', Australian Business Law Review, vol. 30, Iss. 1, Feb 2002, p. 76.

Sutton, K., 'Insurance Law: Recent decisions', Australian Business Law Review, vol. 29, Iss. 6, Dec 2001, p. 508.

Sutton, K., 'Antico v Heath Fielding Australia Pty Ltd', Australian Business Law Review vol. 25, Iss. 5, Oct 1997, p. 371.

Sutton, K., 'Insurance Contracts Act (Cth), Section 54', Australian Business Law Review, vol. 21, Iss. 6, Dec 1993, p. 448.

Sutton, K., 'Insurance: Section 54, Insurance Contracts Act 1984 (Cth)', Australian Business Law Review, vol. 20, Iss. 5, Oct 1992, p. 421.

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1 'Claims made' and 'claims made and notified' policies include, professional indemnity, directors and officers, trustees liability, errors and omissions and medical malpractice insurance.

2 'Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as 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': subsection 40(3).

3 For example, Royal & Sun Alliance submitted:

      'There are a number of reasons why PI and D&O insurance is underwritten on [a claims made] basis... One of the primary benefits provided by the claims made and notified basis of underwriting is certainty for both parties to the contract.

      On the one hand, the insurer knows at the end of the policy period the universe of potential claims for which a policy may be called upon to respond and for which the insurer must reserve accordingly.

      For the insured, on the other hand (and bearing in mind that claims made forms of insurance frequently relate to risks involving advice given, or management actions taken, over a period of time), the benefits are:

      a) the greater certainty of being able to 'pinpoint' the date a claim was made (or when awareness of a set of circumstances was gained), rather than trying to determine when the causative event took place; and

      b) the benefits of current policy terms for claims which conceivably can relate to 'stale' events.

      There are therefore clear benefits for both insurer and policyholder with such a basis of cover, especially with the protection a policyholder has from the deeming provisions of s40(3) of the ICA.'

4 There is still some uncertainty flowing from the various cases as to whether the late notification of circumstances which might give rise to a claim in a claims made and notified policy, which does not include any provisions relating to the notification of circumstances which might give rise to a claim, can be the subject of relief under section 54.

5 (1992) 7 ANZ Insurance Cases 61-125 at 77 628 - 77 629. This case was the first time that the judiciary addressed section 54 and the late notification of circumstances.

6 (1999) 10 ANZ Insurance Cases 61-423.

7 [1999] QCA 243 at para 51.

8 Australian Law Reform Commission, ALRC 91 Review of the Marine Insurance Act 1909 (2001). Australian Law Reform Commission, Sydney, [9.100]-[9.102], recommendation 7.

9 ALRC submission to the Review of the IC Act.

10 Note: some cases have determined that section 54 will not provide relief where the policy does not include a deeming provision.

11 (2001) 204 CLR 641 at paragraph 73; (2001) 11 ANZ Insurance Cases at paragraph 63.

12 In support of the proposition Kirby J cites various authorities at footnotes 75, 76 and 80.

13 Report 250 of Australian and New Zealand Insurance Law.

14 Responses for the survey came from 77 firms, which constitute 90 per cent of ACEA firms in the market for professional indemnity insurance as at the date of the survey. Similar surveys were conducted in the accounting profession - CPA Australia Professional Indemnity Insurance Survey Report (February 2003).

15 The Impact of Changes in Professional Indemnity (PI) Insurance on Costs and Fees for Consulting Engineering Firms, May 2003.

16 As above at n2.

17 [2002] NSWSC 511 and [2003] NSW CA 34.

18 Paper by Nicholas Carson LLB, 'Liability Insurance - Claims Made Policies', submitted to Senator Helen Coonan on 23 May 2002, and provided to the Review Panel.

19 Some of these submissions have been made on a confidential basis and are not reproduced on the Review website.

20 The evidence of market difficulties presented to the Review has been limited to those classes of business although consultation with and submissions by the Investment & Financial Services Association Ltd (IFSA) have suggested that there may be problems with late notification under group life insurance policies. The Review Panel has also been advised that some policies of this nature are occasionally written on a `claims made' basis. The Review Panel has not actually seen any policies of this type, but is concerned to ensure that such policies are not impacted by any proposed amendment.

21 The report stated at page 1:

      'The effect of the East End case ... is that subsection 54(1) operates in respect of claims made and notified policies to extend cover to claims made against the insured during the policy period but not notified to the insurer until after that period. The effect of FAI v Perry ... is that subsection 54(1) does not operate to extend further the (s40(3)) claims made and notified statutory extension that provides cover for potential claims notified to the insurer within the policy period. The issue addressed in this Circular is whether this operation of subsection 54(1) should be modified.'