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Under Cover March 2023

Gaining an Inappropriate Personal Benefit

Is it a good idea for a Company to give business to one of its directors?

Hakea Holdings Pty Ltd (Hakea) retained a company to supply construction services. The sole director, shareholder and general manager of that company was also a director of Hakea.

Hakea made a claim against the director for losses arising out of the supply of those construction services.

The director had failed to disclose to Hakea and his fellow Hakea directors that his company was in serious financial difficulties. He failed to do so because he wanted to maintain the benefit of the contract to supply construction services believing that that benefit would resolve his company’s financial difficulties.

The Full Federal Court of Australia held that the director had obtained a personal benefit inappropriately and that the D&O policy which Hakea and its directors held, did not respond to Hakea’s claim. In reaching that conclusion, the Full Court held that the concept of obtaining a personal benefit enjoyed a wide meaning which included ‘maintaining an existing benefit’.

Hakea Holdings Pty Ltd v Neon Underwriting Limited for and on behalf of the Underwriting Members of Lloyds Syndicate 2468 [2023] FCAFC 34 (10 March 2023)

The Life of a Misrepresentation

Once a misrepresentation is made, how long does it remain a misrepresentation?

Dr Sharma applied through his superannuation fund for additional life, TPD and income protection insurance. In the course of making that application, the insurer ask Dr Sharma about his health, particularly the condition of his heart. Dr Sharma answered ‘no’ to the questions which the insurer asked. Those answers were wrong, and Dr Sharma knew at the time that the answers were wrong.

Another life insurer bought the book of business (which included Dr Sharma’s additional policies) from the original insurer.

The new insurer made no inquiry of Dr Sharma about his health nor did Dr Sharma provide any updates or corrections to the information which he had previously provided. As far as the new insurer was concerned, Dr Sharma was in good health because that is what Dr Sharma had told its predecessor.

Dr Sharma died from heart failure. At the time he died, the new insurer still believed the information which Dr Sharma had provided. When it found out that Dr Sharma’s answers were wrong, it rejected his estate’s claim for indemnity arising out of his death, avoided the additional policies and refunded the premiums paid.

AFCA upheld the new insurer’s decision, but the Federal Court upheld the Estate’s appeal.

The Full Federal Court of Australia upheld the new insurer’s appeal. The Full Court unanimously agreed that once the misrepresentation had been made it remained a misrepresentation until the insured withdrew it or it was acted upon. Neither having occurred at the time Dr Sharma died, the new insurer was entitled to point to the misrepresentation as grounds to deny indemnity.

AIA Australia Ltd v Sharma [2023] FCAFC 42 (17 March 2023)

The Wholesale Notification of Circumstances

Can bulk notification be effective?

Against a background of appalling allegations of sexual and physical abuse of young boys, the Federal Court of Australia has considered the effectiveness of an insured’s extensive and, at times, wholesale notifications to its professional indemnity insurers or their agents of these allegations and the circumstances behind them.

While the Court’s decision explores a number of issues in this context, one of the key issues was whether the notifications were effective to trigger the policies which the insured held during the relevant period. In particular did those notifications trigger Section 40(3) of the Insurance Contracts Act?

Section 40(3) relevantly provides:

40 Certain contracts of liability insurance

(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.

At the conclusion of a lengthy reasoning, the Federal Court accepted that the notifications had been effectively given for the following reasons:

  • The appointment of one firm lawyers at the matter’s outset for the insured and insurer, and the retainer recording that appointment were sufficient to clothe notifications to the lawyers as notifications to the insurer;

  • The notifications were sufficiently fact-intensive to be effective; and

  • The notifications were given as soon as reasonably practical after the insured became aware of the facts underpinning those notifications.

Although not central to its determination of this matter, the Federal Court also noted and accepted the current authority that:

  • Section 54 of the Insurance Contracts Act did not remedy a failure to observe section 40(3); and

  • The Insurance Contracts Act 1986 (Cth) did not render void policy exclusions turning upon knowledge of the insured prior to the policy's inception.

Uniting Church in Australia Property Trust (NSW) v Allianz Australia Insurance Limited [2023] FCA 190 (13 March 2023)

Mark Sheller

Principal | Sheller

SHELLER | Clarence Chambers | Level 13 | 111 Elizabeth Street | Sydney NSW 2000 | Australia

Insurance & Commercial Law |

DISCLAIMER This newsletter is intended to provide a general summary only and does not purport to be comprehensive. It is not, and not intended to be, legal advice. © Sans Limitations Services Pty Limited

Edition 3 - March 2023

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