Section 40(3) explained: Who can make the notification of facts under s 40(3) of the ICA? Can s 54 cure a lack of written notification under s 40(3)?

The recent judgment in Darshn v Avant Insurance Limited [2021] FCA 706 provides useful clarification on the operation of section 40(3) of the Insurance Contracts Act 1984 (ICA). In particular, the decision has clarified that:

• panel defence counsel's written report to an insurer in the defence of a claim may constitute notification of facts that might give rise to a separate claim against an insured because defence counsel may be held to be the agent of the insured for that purpose; and
• sections 40(3) and 54 are standalone provisions and cannot be combined to cure an insured's failure to provide written notification of facts under section 40(3) during the policy period, even if there was oral notification within the policy period.

Factual background

The insured was Dr Darshn, a registered medical practitioner, who performed breast augmentation surgery (BAS) at premises owned or occupied by The Cosmetic Institute Pty Ltd (TCI) or one of its subsidiaries.

Between 27 September 2011 and 30 June 2019, Dr Darshn held professional indemnity insurance with Avant Insurance Limited (Avant). They were "claims made and notified" policies.

In June 2020, Dr Darshn was joined to a representative proceeding in the Supreme Court of NSW brought by Ms Rickhuss against TCI and other defendants (TCI class action), which has been on foot since September 2017.

As the TCI class action was commenced after the Avant policy periods had ended, a key issue in dispute was whether Avant had been given notice for the purpose of section 40(3) of the ICA during the policy period such that Avant could not refuse to indemnify Dr Darshn in respect of the TCI class action.

Claims history and relevant notifications

Relevant to the indemnity dispute was Dr Darshn's claims history between 2017 and 2020. A chronology of the relevant facts and various claims notified by Dr Darshn to Avant are set out below.

28 June 2017: Written notice was given to Avant of a complaint that had been made to the Health Care Complaints Commission against him by a former TCI patient, "Ms M", concerning BAS performed by him at TCI premises.

• The claim for indemnity was accepted by Avant. Ms M's complaint was resolved favourably to Dr Darshn.
• Ms M subsequently fell within the represented class in the TCI class action.

20 March 2018: Written notice was given to Avant of a proceeding commenced by Ms Scotford against Dr Darshn, TCI and others in the District Court of New South Wales (the Scotford Proceeding).

• The claim for indemnity was accepted by Avant and panel defence counsel, Makinson d’Apice Lawyers (MDL), was appointed to act on Dr Darshn’s behalf in the Scotford Proceeding. The proceeding was ongoing at the time judgment in this case was delivered.
• Ms Scotford was also within the represented class in the TCI class action, but subsequently opted out.

January 2019: The plaintiffs in the TCI class action served a subpoena to produce documents on Dr Darshn (Subpoena).

• Subpoenas in substantially the same terms were also served on other surgeons who had performed BAS at TCI clinics.
• The Subpoena was expressed in broad terms, seeking many categories of documents, which suggested that the surgeons and Dr Darshn might be joined as defendants to the TCI class action.

February 2019: MDL communicated with Avant in relation to the Scotford Proceeding, and in the course of doing so, provided Avant with information about the TCI class action and stated that there was a substantial overlap between the Scotford Proceeding and the TCI class action. Due to this overlap, another defendant in the Scotford Proceeding was seeking an adjournment of directions hearing in that matter until after two notices of motion in the TCI class action were resolved.

18 February 2019: Dr Darshn telephoned Avant’s Medico-Legal Advice Service and obtained advice regarding the Subpoena.

22 March 2019: Dr Darshn again telephoned Avant’s Medico-Legal Advice Service. In this call, he raised two matters:

• a letter he received from solicitors in relation to a proceeding against him brought by a Ms Summers-Hall (the Summers-Hall Proceeding); and
• he again discussed the Subpoena.

During the call, and in a subsequent email, Avant suggested that Dr Darshn provide a copy of the Subpoena so he could be included in a list of other doctors Avant was assisting in relation to the Subpoena in case he needed further advice about it. However, he did not do so.

Dr Darshn only sent an email to Avant with a copy of the solicitors’ letter in relation to the Summers-Hall Proceeding. Avant accepted his claim for indemnity in respect of the Summers-Hall Proceeding, which was subsequently settled in October 2019.

May 2019: MDL sent an email to Avant in relation to the Scotford and Summers-Hall Proceedings, which included an update on the status of the TCI class action and that the TCI entities were in liquidation and did not have funds to conduct the defence of the TCI class action.

30 June 2019: Avant policy period ended.

30 June 2020: Dr Darshn was served with a further amended statement of claim (FASOC) in the TCI class action, which had the effect of joining him as a defendant.

8 July 2020: Dr Darshn provided a copy of the FASOC to Avant and sought indemnity for the claims made against him in the TCI class action.

Avant's denial of indemnity and section 40(3) issue

Avant declined Dr Darshn's claim for indemnity in respect of the TCI class action. Avant stated that no cover was available because Dr Darshn was joined to the TCI class action after the Avant policy period ended.

Further, section 40(3) did not provide relief to Dr Darshn because his verbal contact to Avant's Medico-Legal Advice Service on 18 February 2019 and 22 March 2019 regarding the Subpoena, whilst within the 2019/2020 policy year, did not amount to written notification as required by section 40(3) of the ICA. This is because Dr Darshn did not provide the Subpoena to Avant, nor seek Avant's assistance in dealing with it.

Section 40(3) provides that:

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.

Dr Darshn's contentions

In support of his claim against Avant in the Federal Court proceedings, Dr Darshn relied on, amongst others, the following relevant contentions.

1. Agent Contention: by the communications between MDL and Avant in February and May 2019, Dr Darshn (by his agent, MDL) notified Avant in writing of facts which might give rise to claims against him in the TCI class action such that section 40(3) operates to prevent Avant from denying liability under the 2017/18 and/or 2018/19 Avant policies.
2. Section 54 Contention: by notifying Avant orally of the Subpoena Dr Darshn provided notice to Avant of facts that might give rise to a claim under s 40(3), and in the absence of any prejudice to Avant from Dr Darshn’s failure to provide that notice in writing, section 54¹ and/or section 14² of the ICA operate to prevent Avant from relying on the requirement of writing in section 40(3) to avoid liability.

Decision

Defence counsel's written report was notification for the purposes of s 40(3)

The Court held that the Agent Contention was substantially made out, and that section 40(3) operated in the circumstances of the case. This is so for the following reasons.

Firstly, the Court found that MDL’s communications to Avant in February and May 2019 gave notice in writing to the insurer of “facts that might give rise to a claim” against Dr Darshn within the meaning of s 40(3) because:

• the communications indicated that it was possible, if not likely, that the surgeons would be joined as defendants to the TCI class action;
• while the correspondence was sent to Avant in connection with the Scotford and Summers-Hall Proceedings, the interaction between those proceedings and the TCI class action and the nature and scope of the TCI class action featured prominently in the correspondence;
• it did not matter that the relevant facts were conveyed in several communications for the purposes of s 40(3) as it is not necessary that notice be given in a single document; and
• consistent with Esined³, there was a "recognisable correspondence" between the “facts that might give rise to a claim” and “the claim, when made”. The MDL correspondence set out facts that might give rise to a claim, namely potential claims by the plaintiffs and group members in the TCI class action upon whom Dr Darshn had performed BAS, with the claims being substantially similar to the existing claims in that proceeding. The claim, when made, was brought by Ms Sanchez against Dr Darshn in the TCI class action and was substantially similar to the claims already made in the proceeding.

Second, the Court found that in making the communications, MDL was acting on Dr Darshn’s behalf, such that the notice was "given by the insured". In support of this, his Honour noted:

• The requirement of s 40(3) that the insured give notice in writing may be satisfied by another person, an agent, doing so on the insured’s behalf.
• MDL was panel defence counsel appointed by Avant to defend Dr Darshn in the Scotford and Summers-Hall Proceedings. The retainer established an agency relationship as between Dr Darshn and MDL. The scope of this retainer extended to doing all things necessary for, or incidental to, the conduct of the proceeding on Dr Darshn’s behalf.
• Further, by virtue of the policy terms and conditions, there was also a lawyer-client relationship between MDL and Avant, and MDL provided advice (as well as information) to Avant in relation to the conduct of the proceedings.
• His Honour acknowledged that because of the lawyer-client relationship between MDL and Avant, the communications could be characterised as the provision of information or advice to Avant for the purposes of its management of the proceedings. However, his Honour nevertheless held that he would characterise the relevant communications as having been sent by MDL on Dr Darshn’s behalf. This was because:
  • MDL was the firm of solicitors acting for Dr Darshn in relation to the Scotford and the Summers-Hall Proceedings;
  • sending the communications was within the scope of MDL’s authority to act on Dr Darshn’s behalf in relation to the proceedings because the communications related to those proceedings and were sent in the course of MDL’s retainer as the solicitors acting for Dr Darshn in the proceedings; and
  • the communications were necessary for, or at least incidental to, MDL’s retainer to act on Dr Darshn’s behalf in connection with the proceedings.

In light of the above, his Honour held that the defence counsel's (MDL's) written reports to Avant constituted the relevant written notice required under section 40(3) such that Avant was not relieved of liability under the 2018/19 policy in respect of Ms Sanchez’s claim against Dr Darshn in the TCI class action, by reason only that the claim was made after the 2018/19 policy period expired.

Can section 54 cure a lack of written notice under section 40(3)?

In relation to the Section 54 Contention and the operation and interaction between sections 40(3) and 54 of the ICA, his Honour found that section 40(3) and section 54 stand alone as ameliorative provisions, such that section 54 does not operate to cure a lack of written notice under section 40(3), even if oral notice was provided within the policy period.

In the NSW Court of Appeal's decision in Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542 (Gosford), the Court had considered a similar question regarding sections 40(3) and 54. In Gosford, no notice (whether oral or written) under section 40(3) was given during the policy period and it was held that section 54 could not cure that failure to provide any notice.

Accordingly, a question remained open as to whether section 54 could operate to cure a failure to provide written notice for the purposes of section 40(3) if oral notice was provided within the policy period. Dr Darshn contended that because oral notification was provided by him during the policy period, section 54 could and should cure his failure to provide that notice in writing. His Honour disagreed and reaffirmed the construction of sections 40(3) and 54 consistent with the reasoning given in Gosford.

Concluding remarks

Whilst each case will ultimately turn on its particular facts, the judgment indicates that when considering the question of whether an insured can enjoy the benefit of section 40(3), the requirement that the insured give notice in writing may be satisfied by another person, an agent, doing so on the insured’s behalf.

As such, insurers should be aware that they may need to look beyond the written information provided directly by the insured, and also consider the written information provided by another person on behalf of the insured, including panel defence counsel appointed to defend the insured in other related claims.

As to the Court's comments on the operation and interaction between sections 40(3) and 54 of the ICA, we consider that, absent any appellable decision to the contrary, sections 40(3) and 54 will be construed as standalone statutory provisions and the latter cannot be used to cure the failure to provide written notice under section 40(3), even if oral notice was given.

Finally, when faced with a similar situation where there has been oral notification of facts that might give rise to a claim against an insured within the policy period but no written notification, insurers should carefully consider whether a denial of indemnity in the circumstances may amount to a breach of the insurer's duty of utmost good faith. Whilst the decision ultimately did not turn on this point, it was nevertheless an issue considered in the judgment.

¹ Section 54(1) if the ICA provides that: "Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act."

² Section 14 of the ICA provides that: "(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision...(3) In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise."

³ Esined No 9 Pty Limited v Moylan Retirement Solutions Pty Ltd (No 2) (2020) 353 FLR 1. Slattery J's decision was affirmed by the NSW Court of Appeal in P & S Kauter Investments Pty Ltd v Arch Underwriting at Lloyds Ltd [2021] NSWCA 136.