Significant Federal Court decision on the Insurance Contracts Act

In an important recent decision (Darshn v. Avant Insurance Ltd [2021] FCA 706), Justice Moshinsky (Moshinsky J) found that:

• Reports to an insurer by its own appointed defence counsel may amount to a “circumstances” notification on behalf of an insured.

• However, a failure to notify a circumstance under s 40(3) of the Insurance Contracts Act (ICA) cannot generally be remedied by recourse to s 54 of the ICA.

• Declinature of a claim resulting from a known circumstance may breach an insurers duty of utmost good faith if, during the policy period, the insured and insurer discussed matters that were clearly capable of giving rise to a claim against the insured and the insurer did not explain the importance of notifying a circumstance in writing.

The basic facts

Between January 2015 and January 2018 Dr Darshn performed breast augmentation surgery (BAS) at clinics, conducted under the banner “The Cosmetic Institute” (TCI), by companies who are now in liquidation.  Avant insured Dr Darshn under a “claims made” policy until 30 June 2019.

In September 2017, a class action was commenced against TCI and its Surgical Director. The plaintiffs alleged that BAS was performed at the TCI clinics using a “one size fits all” (OSFA) approach without reference to the suitability and physical characteristics of patients.  The pleadings referred to the negligent performance of BAS by TCI doctors.

The class action plaintiffs joined Dr Darshn in June 2020. Avant declined indemnity because Dr Darshn did not notify it in writing of relevant circumstances during an Avant policy period.

Circumstances were notified by a third party on Dr Darshn’s behalf

Pursuant to s 40(3) of the ICA, if an insurer is notified during its policy period of circumstances that may give rise to a claim against the insured, it cannot later decline indemnity for a resulting claim merely because it is made after the policy expires.

While Dr Darshn never gave written notification of circumstances during an Avant policy period, Avant did agree to indemnify him for proceedings commenced against him in 2018 by a former TCI patient, Ms Scotford alleging, inter alia, that Dr Darshn performed BAS on her negligently, using the OSFA approach. Avant appointed solicitors to act for Dr Darshn who, in February and May 2019, sent Avant material suggesting that there was a significant overlap between allegations made in Ms Scotford’s proceedings and the class action.

Moshinsky J found that Avant was duly notified by the solicitors acting for Dr Darshn in Ms Scotford’s proceedings, who were Dr Darshn’s agents. It was clear from the material provided to Avant that Dr Darshn may be joined to the class action. Further, Avant knew that the TCI companies were in liquidation with limited funds, had been denied indemnity and were unlikely to be able to meet any verdict against them. Therefore, it was possible if not probable that the class action plaintiffs might look for other defendants.

It was immaterial that the notification comprised more than one piece of correspondence. The solicitors did not intend to notify circumstances and Dr Darshn himself did not appreciate that he might be joined to the class action.

No interaction between s 40(3) and s 54

Dr Darshn argued, in the alternative, that his failure to provide a written notification to Avant was an omission during an Avant policy period that could be cured by s 54, which provides that an insurer may not refuse to pay a claim by reason only of an act that occurred after its policy commenced.

Moshinsky J found that the relevant omission by Dr Darshn was not one to which s 54 applied. Section 40(3) is not a term that can be implied into a claims made policy. However, the decision might have been different if the terms of s 40(3) were expressed in the policy.

Breach of the duty of utmost good faith

In January 2019 Dr Darshn was served with a wide-ranging subpoena in the class action, from which it was apparent that the plaintiffs were considering joining him as a defendant. He telephoned the Avant help line to discuss the subpoena before his policy expired but, did not send Avant a copy of the subpoena.

Avant was generally familiar with the terms of the similar subpoenas served on its insureds and of the allegations made in the class action. Avant knew that the subpoenas’ breadth suggested the plaintiffs were looking at the TCI doctors as possible defendants. Avant agreed to indemnify other former TCI doctors for the class action, where those doctors had sent the subpoena to Avant while it was on risk.

Avant promoted its help line as providing advices to insureds about when they should notify circumstances but, did not tell Dr Darshn that he should do that, or explain why.

Moshinsky J accepted that Dr Darshn did not know that notifications under s 40(3) had to be written, or why they were important and would have given written notification if those matters had been explained to him. Therefore, Avant’s declinature, after failing to give that explanation, breached its duty of utmost good faith.

Lessons from the case

Whilst it may be good news for insurers that s 40(3) is not to be implied into a policy wording and that the scope of acts and omissions that may be cured by s 54 has not expanded to that extent, insurers should:

• review policy wordings to ensure that they do not include or paraphrase s 40(3)

• ensure that claims and helpline staff understand s 40(3) and know that they must explain it to an insured who tells them verbally about something that might lead to a future claim and, of course, make a contemporaneous note of any such conversation, and

• have a central repository for notes about s 40(3) conversations, so they can easily be located later.