When can an insurer refuse a claim?
Section 54 of the insurance contracts act 1984 (Cth) can be used to restrict an insurer from rejecting a claim.
What are the limits of Section 54?
Section 54 of the Insurance Contracts Act 1984 (Cth) provides that an insurer may not refuse to pay a claim in certain circumstances. It is a section often relied on by dissatisfied policy holders who have had a claim refused.
DIF3-Global Co Investment Fund LP v Babcock & Brown International Pty Ltd (2019) NSWSC 527 is a case from the Supreme Court of New South Wales that looks at some of the limits around the operation of Section 54 where an insurer refutes an obligation to pay.
Babcock & Brown Ltd (“Babcock”) was sued as a result of a poor performing laundry business that it acquired. The plaintiff sought to establish that Babcock personnel were entitled to an indemnity from Babcock’s directors and officers insurer and its professional indemnity insurer for policies that the plaintiff alleged responded to the claim brought by it.
The relevant PI policy provided that a claim to which the policy could respond would arise when Babcock personnel had knowledge that a claim may be brought or had knowledge of a fact, circumstance or event which would reasonably be expected to give rise to a future claim. Under the policy, Babcock personnel were to provide the PI insurer with notice as soon as possible and no later than within 30 days after the policy expired.
The plaintiff argued that Babcock’s personnel were notified of concerns regarding the performance of the laundry business and that correspondence of this nature amounted to knowledge of a potential claim arising under the policy. As such, the plaintiff argued that Babcock’s PI policy should respond to the claim brought by it and that Babcock personnel should be indemnified by the PI insurer for any award of damages made against them in the proceedings. However, the court found that the correspondence, which the plaintiff argued, amounted to notice of a potential claim, instead contained general references to the poor performance of the laundry business. The court found, the view that the relevant correspondences may have been construed as giving notice of a potential claim within the Babcock Group but not necessarily against its personnel.
Further, the court did not consider that the relevant correspondence should be attributed to the knowledge of the relevant Babcock personnel.
The plaintiff sought to rely on Section 54 to overcome the fact that notice of the potential claims were not received within 30 days of the PI policy expiring. However, the court found that the policy required Babcock personnel to actually have knowledge of a potential claim during the period of the policy. Having found that the Babcock personnel did not have knowledge of a potential claim by reason of the abovementioned correspondence, the court found that the policy did not respond and that Section 54 could not be relied upon to overcome the difficulty caused by the knowledge requirement. The knowledge requirement was an inherent restriction in the policy.
The case is an important one for both insureds and insurers. Insurers should consider reviewing their policy wording in light of this case so as to minimise the scope for Section 54 arguments. Insureds should always consider the benefits and power in section 54 when found with objections to a claim.
Should you want advice on a policy please contact Steven Brown from Lynn & Brown Lawyers.
About the authors:
Steven is a Perth lawyer and director, and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.