Pursuant to s601AG of the Corporations Act 2001, the plaintiffs sued MRS' professional indemnity insurers directly to recover their losses. They claimed that MRS was entitled to indemnity through one of two insurance policies, being for the 2012‑2013 year (2012/2013 policy) or the 2013‑2014 year (2013/2014 policy). MRS' insurers denied that MRS was entitled to indemnity.
In a proposal filled out in January 2013, at the time of renewal and prior to the expiry of the 2012/2013 policy, Mr Moylan answered "yes" to the question of whether any circumstances or incidents may give rise to a claim. He also indicated:
"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 circumstances at the time. At this stage no loss has been crystallised and no claims or complaints have been formally lodged."Mr Moylan had provided no such disclosure at the time of renewal in 2012.
The plaintiffs relied on s40(3) of the ICA. This section provides that where an insured gave notice in writing to the insurer of facts that might give rise to a claim as soon as it was reasonably practical after the insured became aware of those facts, but before the insurance cover expired, the insurer is not relieved of liability by reason only that the claim was made after the expiration of the policy.
Had s40(3) been found to apply, the claims would have been treated as being made during the 2012/2013 policy period.
In addition, his Honour held that MRS had made fraudulent misrepresentations and non‑disclosures when seeking to renew the policies, entitling the insurers to avoid both the policies.
Meagher JA, with whom Bathurst CJ and Bell P agreed, held that the question of whether a fact "might give rise to a claim" requires an objective assessment of the likelihood or possibility of a claim. It would be sufficient to engage s40(3) of the ICA if the notified facts would reasonably be regarded as giving rise to a realistic possibility of a claim.
It was held that the facts notified by MRS in January 2013 did not give rise to a realistic possibility of a claim. The notification was simply that should any investors suffer loss, there was a chance that they may make a claim against MRS. The notification did not include any facts which made loss more than a possibility.
The court noted the disclosure did not identify any defect in the advice given or disclosures made by MRS, and in fact positively asserted that there was none. As such, there was no notification of facts which "might give rise to a claim".
The court also found that had MRS disclosed that it misapplied its clients' money, then underwriters would have declined to issue the policy. Accordingly, the failure to disclose this entitled the insurers to reduce their liability to nil.
The decision provides useful guidance to insurers and underwriters. If insurers are provided with vague and unspecific information about a potential claim, they should press the insured for further information. An insured will be unable to rely on s40(3) of the ICA in circumstances where the information provided is insufficient.
It is also a reminder that insurers can deny indemnity in circumstances where had material facts been disclosed, the insurer would not have offered coverage.