Insurance Litigation – Professional Indemnity & Liability: News and Commentaries: Edition 5

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Mat Wilkins
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The ICA’s remedial heavy weight strikes again


The Full Court of the Federal Court of Australia recently determined that section 54 of the Insurance Contracts Act 1984 (Cth) applied so that an insurer could not refuse to pay a claim for contribution by another insurer who had paid the insured for damage to his yacht: Watkins Syndicate 0457 at Lloyds v Pantaenius Australia Pty Ltd [2016] FCAFC 150.


Arthur Phillips’ yacht was insured with the appellant, Watkins Syndicate 0457. On 22 June 2013, the yacht ran aground off Cape Talbot in Western Australia on its return from competing in a race from Fremantle to Bali. Importantly, the yacht had cleared Australian Customs on its voyage to Bali, but had not yet done so on its return voyage. The yacht was directly insured by Pantaenius Australia Pty Ltd for its voyage in the race. Mr Phillips claimed under both policies. Pantaenius paid the claim. Watkins denied the claim.

Watkins’ declinature relied on a clause which, in substance, suspended cover in circumstances where the yacht had cleared Australian Customs for the purposes of leaving Australian waters until it cleared Australian Customs on its return. Pantaenius sought contribution from Watkins to the amount Pantaenius paid under its policy. Pantaenius argued that section 54 of the Insurance Contracts Act 1984 (Cth) applied, so Watkins could not refuse to pay the claim on the basis it had done so.

At first instance, the Federal Court of Australia determined that section 54 applied, and Pantanenius was entitled to contribution from Watkins. Watkins appealed to the Full Court of the Federal Court of Australia.

Appeal decision

The Full Court determined that the act of the yacht clearing Australian Customs (which occurred after the inception of the Watkins’ policy) during the policy’s period of cover and within its geographic limits, was sufficient to engage section 54(1).

The reasoning of the Full Court focused on distinguishing between the restrictions or limitations that are inherent in any claim under a policy (which avoids the application of section 54) from the restrictions or limitations that do not necessarily exist in any claim under a policy (which may bring the application of section 54). The Court emphasised that process is arrived at by construing the words of the policy, and “the essential character” of the policy. Further, the Full Court determined that section 54 applied to contribution proceedings between insurers, despite Watkins’ contention that section 54 only applied to the benefit of the insured. The Full Court dismissed the appeal.


The decision is another in a long line of authorities where the courts have mostly interpreted section 54 broadly and applied it to a variety of factual circumstances consistent with its remedial purpose. For example, the Full Court extended the reach of section 54 to equitable contribution proceedings between insurers, and applied it to a suspension of cover clause of the policy.

Practically, the decision is confirmation that underwriters should continue to be careful to ensure that policy wordings or endorsements are carefully drafted. That is, to ensure that any risks intended to be excluded from cover are likely to be characterised as “restrictions or limitations” of any claim made under the policy to avoid the operation of section 54. The decision is also a good reminder for claims managers to cautiously consider the application of section 54 when determining whether to refuse to pay a claim.

False answers not enough to prove fraud


In the case of Rolleston v Insurance Australia Ltd [2016] NSWSC 1561, the Supreme Court of New South Wales has held that false answers provided by an insured was not enough to discharge the onus of proof that the claim was fraudulent.


In 2013, the Plaintiff owned a property at Mosman. A residence was planned to be built on the property. The property was insured by the Defendant, against risks including loss or damage by fire. The insured amount (excluding contents) was the agreed sum of $4.2 million.  On 10 May 2013, a fire broke out at the property causing substantial damage. The cost of rectification was a little under $1 million. The Plaintiff claimed on the policy. The Defendant refused indemnity on the basis that the claim was made fraudulently as:

  • They believed either the Plaintiff or someone on behalf of the Plaintiff started the fire;
  • The Plaintiff was not truthful and frank in his statements made to the Defendant’s employee’s and investigators; and
  • The Plaintiff did not act with the upmost good faith.

His Honour outlined that as this is a civil case, the Defendant must adduce proof that raises a more probable than not inference that the Plaintiff procured someone to set the fire deliberately and that the Plaintiff made deliberately false and fraudulent statements to its investigators. The Defendant claimed that an inference should be drawn that the Plaintiff was responsible for the fire as he knowingly provided false answers.

His Honour held that evidence of those conversations and interviews taken overall do not prove an inference that the Plaintiff was responsible. Instead, the more probable inference is that the fire was set deliberately, by someone who had knowledge of the alarm code and who may have had a key (as there was no evidence of forced entry). He said there were many people who had keys to the house and who knew the alarm code. As such, the Defendant had the onus of providing that it is more probable than not that it was the Plaintiff rather than one of those other people who did so. His Honour held that he was not satisfied of this.

Doubt was also cast on any possible motive the Plaintiff would have had to set the fire. His Honour did not consider that the Plaintiff had motive as it could not be assumed that the entire property would be destroyed and if there was only a partial loss there would be no gain to the Plaintiff – his position would in fact be worse. Even if the Defendant paid out the amount necessary to rectify the fire damage, the inevitable delay would have prolonged the time taken to complete the work and put the property on the market.

For those reasons, his Honour held that the Defendant failed to discharge its onus of proving that the Plaintiff was relevantly responsible for setting the fire. The Plaintiff was awarded the cost of repairs along with interest.

Liability of professional indemnity insurers in the presence of a deed of settlement

On 11 November 2016, Robson J sitting on the Supreme Court of Victoria handed down his judgment in Re Akron Roads Pty Ltd 1 and declined to make a declaration that CGU Insurance Limited was liable to indemnify Crew Sharp Pty Ltd, a management consulting firm, and Mr Crew, the managing director of this firm, for all amounts either insured was required to pay the liquidators under court order.

In doing so, Robson J clarified whether liquidators have standing to seek a declaration against professional indemnity insurers and the extent of a professional indemnity insurer’s liability in the presence of a deed of settlement.  Further, his Honour clarified the operation of the disclosure provisions in the Insurance Contracts Act in relation to professional indemnity insurance policies.


From 2001 until 2010, Crewe Sharp Pty Ltd provided management consultancy services to Akron Roads Pty Ltd.  In providing these services, Mr Crewe – Crewe Sharp Pty Ltd’s managing director, served variously as a non-executive director, chairman and CEO on Akron Roads Pty Ltd’s board of directors.  In May 2010, Akron Roads Pty Ltd went into liquidation.  The liquidators of the company sought to recover amounts owed to creditors by initiating proceedings against Crew Sharp Pty Ltd as a shadow director and Mr Crewe as a director under the insolvent trading provisions in the Corporations Act.  The liquidators entered a deed of settlement with Mr Crew under which Mr Crew was required to pay $125,000 and assign the benefit of his professional indemnity insurance policy to the liquidators.

In CGU Insurance Limited v Blakely 2, the liquidators in this case had successfully sought a declaration from the High Court that CGU Insurance Ltd was liable to indemnify Crew Sharp Pty Ltd and Mr Crew.  The High Court found that a justiciable controversy existed on the basis that the liquidators of Akron Roads Pty Ltd were entitled to receive an insurance payout under Crew Sharp Pty Ltd’s professional indemnity insurance policy under section 562 of the Corporations Act section 562 and an insurance payout under Mr Crew’s professional indemnity insurance policy under section 117 of the Bankruptcy Act.  The effect of both sections, which the High Court highlighted, is to assign the benefit of a third party insurance policy to the beneficiary under that policy when the insured becomes insolvent or bankrupt.

The Court’s Decision

Robson J held that the liquidators had standing to seek a declaration again CGU Insurance Ltd as the professional indemnity insurer of Crewe Sharp Pty Ltd and Mr Crewe.  For the Supreme Court to have jurisdiction to make a declaration, the party seeking the declaration must establish that the declaration relates to a “justiciable controversy” or a live issue in a case and is not purely an opinion.  His Honour reasoned that the assignment of the benefit of the professional indemnity insurance policy under the deed of settlement was analogous to the assignment of the benefit of a third party insurance policy under section 562 of the Corporations Act and section 117 of the Bankruptcy Act.  Further, the determination regarding the declaration sought was useful in the context of the case because it would effectively resolve outstanding questions of liability and quantum against Mr Crewe and Crewe Sharp Pty Ltd.

Under the deed of settlement, Mr Crewe was required to pay the liquidators $125,000.  His financial loss in relation to the professional indemnity claim was therefore $125,000.  Robson J cited a number of authorities that financial loss is the relevant loss for the purpose of a professional indemnity insurance policy.  The consequence was the liquidators could pursue CGU Insurance Ltd for a maximum of $125,000.

Section 21(1) of the Insurance Contracts Act imposes a duty on insured to disclose all information known to the insured that the insured knows, or a reasonable person in the circumstances could be expected to know, is relevant to the insurer’s decision to accept the risk.  The liquidator submitted that section 21(1) of the Insurance Contracts Act did not apply; section 21(2)(c) of the Act provides for an exception where the insurer knows or ought, in the ordinary course of business as an insurer, to know the information.  Robson J commented that knowledge requires more than belief, suspicion or even strong suspicion.  The evidence before Robson J indicated that Crewe Sharp Pty Ltd and Mr Crewe failed to disclose that the management consulting services provided to Akron Roads Pty Ltd included appointment as a director in an email detailing the precise management consultancy services provided.  His Honour found that the liquidator failed to make out the exception in section 21(3).


This case usefully clarifies the right of liquidators to enforce rights under a deed of settlement and the extent of this right.  Further, it clarifies that the exception to an insured’s duty to disclose in section 21(2)(c) is not easily satisfied.

1 [2016] VSC 657

2 [2016] HCA 2

Published: 21 March 2017

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