Joining the Dots - Going from Notification to Indemnity.
Updated: Nov 15, 2021
One of the most intricate elements of an insurance policy can be its process for notifying its insurer and, in so doing, shifting the policy into gear. The result can be that there is no insurance if it is not done effectively.
The New South Wales Court of Appeal has recently provided the Australian insurance industry with some clear guidance as to what needs to be notified to get a policy working. The corollary is that there is equally clear guidance as to what is ineffective notification.
The point to remember is that there are essentially three parts to this journey: -
The content of the notification
The connection between the notification and the claim made against the insured; and
The policy’s response to the claim.
This update concerns the first two points.
Various investors received financial planning advice from Moylan Retirement Solutions Pty Ltd (MRS) and its principal, Mr Christopher Moylan. Acting on that advice they made various investments in projects or entities in which Mr Moylan had financial interests by making unsecured loans to Moylan Investments Group Pty Ltd (MIG), a company of which Mr Moylan was the sole director and shareholder. Additionally, some of the money invested was misapplied and treated by Mr Moylan and his interests as their own.
No payments of interest, repayments of principal, dividends or distributions were received in respect of any of these investments after late 2009. MIG was wound up in September 2010.
The investors made a claim against the insurers of Mr Moylan and his interests. They failed before the Supreme Court of New South Wales and so appealed to the New South Wales Court of Appeal. One of this matter’s central issues was the effectiveness of any attempt to notify the circumstances of these claims to those insurers.
Notification of Circumstances Procedure
Where available, the traditional platform for the notification of circumstances is a provision in the policy permitting that notification on terms that the policy will respond to any claim subsequently arising from those circumstances.
In Australia, there is a second platform. Section 40 of the Insurance Contracts Act relevantly provides as follows: -
(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.
(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.
Mr Moylan and his interests only had access to Section 40. Did they effectively engage it?
Mr Moylan’s letter to his broker, which attached the completed renewal proposal and notification of circumstances, was forwarded to the insurers through their local underwriting agency. It is worth reciting its contents as recorded in the Court of Appeal’s judgment.
Having noted that MRS only had “26 clients, of which 15 have their own self-managed superannuation fund”, the letter concluded that “in relation to the potential claim, at this stage it is just a possibility and no action has been brought” (emphasis added).
In the proposal, Mr Moylan answered “Yes” to the question “Is the proposer aware, after inquiry, of any circumstances or incidents which may give rise to a Claim?”. The form provided space for the provision of “further details”. Mr Moylan provided those details by completion of the notification form. That form commences with an “Important Notice” which includes that all questions must “be answered as fully as possible”.
Mr Moylan’s answers to the questions which followed included that the “name of the Claimant or potential Claimant” was “unknown”; that the particulars of the relevant retainer or contract were “unknown – depends on likely client to bring claim”; that the work “out of which the claim arises or may arise” was performed in “2008-2011”; that there had been “no” “claim or the intimation of a claim made verbally”; that Mr Moylan first became aware of the claim or fact or circumstance which may give rise to a claim in August 2011; that the amount claimed was “unknown”; and that his “comments on the quantum of the claim and what is your estimate of your potential monetary liability” were in each case “unknown”.
Finally, Mr Moylan answered “see attached” or “refer attached” to questions directed to (1) the “fact or circumstances that might give rise to a claim”; (2) his “comments in response ... to the fact or circumstance that might give rise to a claim”; and (3) the “details” he could provide. There followed, as Appendix A, the following four sentences and paragraphs:
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.
I have highlighted some of the notification to reflect its gist.
The reference in Section 40(3) to ‘facts’ requires the insured to notify objective matters that reflect the possibility of a claim. One fact or a combination of such facts may be sufficient.
Subjective beliefs, opinions or impressions are insufficient.
The words and expressions reveal little few, if any, objective facts. On that basis alone the Court of Appeal concluded that the notification which Mr Moylan and his interests gave, was insufficient.
Now a couple of points need to be made about the claim arising from the notified facts.
Firstly, the ‘facts’ notified do not need to be complete. As the Court observed:
That language (of Section 40(3)) requires that there be a sufficient correspondence between the facts notified as likely to give rise to a claim and a claim subsequently made for the latter to be identified as “the” or a claim arising or resulting from those facts. To answer that description it is not necessary that the notified facts identify the likely claimant or claimants. The notification may be of a problem which of itself may give rise to a claim or claims by persons or entities having particular characteristics, although the quantum of such claims and the identity of the claimants may not be known at the date of notification: see DIF III – Global Co-Investment Fund LP v DIF Capital Partners Ltd  NSWCA 124 at .
Secondly, as Section 40(3) uses the expression ‘claim’ rather than ‘liability’, the prospects of the claim arising from those notified facts, is irrelevant. The notification is effective even if the claim’s prospects are limited, bordering on hopeless.
The are two key points to remember. Firstly, the content of the notification must be objectively substantive but not necessarily complete. Secondly, the content and the ‘claim’ must relate but need not equate.
Then it is just a matter for the policy to do its work. But that is another story.
The name of the case is P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd  NSWCA 136 (2 July 2021). It can be found here.