CGU v Porthouse

CGU Insurance Limited v Porthouse [2008] HCA 30 (30 July 2008) – the High Court determines what is a known circumstance.

The High Court of Australia reversed previous decisions to hold that an objective test is applicable when considering the operation of "known circumstance" exclusions. The decision reminds us of the need for diligent notification of circumstances that could give rise to claims against an insured. We cannot rely in hindsight to not appreciate the potential for any matter to become a claim. It is certainly no excuse based on what is now known as the Porthouse matter. 

These exclusions are common in “claims made” policies such as Professional Indemnity and Directors & Officers Liability, that generally require the disclosure of "known circumstances" prior to the inception of a policy and exclude cover for subsequent claims arising from such circumstances.

What happened?

Mr Porthouse was a barrister who provided incorrect advice to his client in relation to important and well known legislative amendments. This resulted in his client not receiving an award of damages for personal injury.
Mr Porthouse's client initially obtained a significant award at arbitration which was affirmed before the District Court. However, Mr Porthouse was aware that the other side maintained an arguable appeal. The Court of Appeal ultimately set aside the verdict. 

Mr Porthouse was successfully sued by his client. He then sought indemnity under his professional indemnity policy.

The insurance policy and exclusion clause

It was from the time the negligent advice given and success at trial, but prior to the judgment on appeal against his client, Mr Porthouse decided to change his professional indemnity insurer and switched cover to CGU. He explicitly stated in his insurance proposal form that he was not aware of any circumstances which could result in any claim or disciplinary proceedings being made against him. 

CGU denied indemnity on the basis that Mr Porthouse ought to have disclosed the possibility of a claim against him. Professional indemnity and D&O policies often contain a clause to the effect that an insured shall not be covered for "known claims" or claims arising from "known circumstances", in this instance defined as:

Any fact, situation or circumstance which:
(a) an Insured knew before this Policy began; or
(b) a reasonable person in the Insured's professional position would have thought before this Policy began,
might result in someone making an allegation against an Insured in respect of a liability, that might be covered by this Policy.


Ultimately subclause (b) was the focus of attention as at the time of completing the proposal Mr Porthouse did not know the result of the appeal and did not actually think that his client would sue him. But his client did. And CGU declined the claim.

Porthouse took action against CGU 

Mr Porthouse's claim was upheld at first instance and by the NSW Court of Appeal.

Two of the three judges in the Court of Appeal construed subparagraph (b) against CGU for contrasting reasons. Justice Hodgson considered that the phrase "in the Insured's professional position" required a subjective enquiry into the insured's state of mind. Justice correctly applied an objective test, however the clause was considered ambiguous due to the terms would and thought and ultimately the clause was construed narrowly to require a reasonable person to have "believed that the circumstances might, as a realistic possibility, result in an allegation" being made.

In a rather circular approach, the Court of Appeal considered whether it was unreasonable for the insured to think that a claim was not a realistic possibility. This approach was ultimately rejected by the High Court.

In dissent, Justice Hunt construed subparagraph (b) to establish an objective test and to find that a reasonable person in the insured's professional position would clearly have, at the relevant time, contemplated the real possibility that an allegation of negligence might result against them based on the facts, situation and circumstances.
 

CGU appealed to the High Court

In a unanimous decision, the High Court overturned the Court of Appeal's decision and held that the insured's claim was prevented by the "known circumstances" exclusion.
The High Court provided the following primary reasons for the decision:

  • Paragraph (b) set an objective standard, with the modification that the insured's professional experience and knowledge of facts and circumstances are imputed to "a reasonable person in the insured's profession". Such consideration is independent of the insured's state of mind but rather involve a reasonable person's state of mind. 
  • The inferences to be drawn from the undisputed facts and circumstances known by the insured were so obvious that the Court is able to evaluate for itself the correct application of the objective standard. 
  • There can be no real doubt that a reasonable barrister with the knowledge and experience of the insured would have thought that there was a real (not a fanciful or remote) possibility (not a certainty) that an allegation might be made. 

The High Court concluded that subparagraph (b):
…sets an objective standard, with the modification that the insured's professional experience and the insured's knowledge of facts and circumstances are imputed to "a reasonable person in the Insured's professional position". An enquiry about what a reasonable person "would have thought" enquires about real (not remote or fanciful) possibilities; it does not enquire about certainties. … it is not wrong to take into account what an insured thought, as a piece of possibly relevant evidence, but the standard … is an objective standard, and a question of fact to be determined independently of the insured's state of mind. 

What it means for insurers

The High Court's decision provides more certainty in relation to the operation of "known circumstance" exclusions. An objective standard is probably welcomed by insurers. 
However, the decision involved a CGU clause, and differently worded clauses will give rise to a different result. Insurers would therefore be well advised to ensure that their "known circumstance" exclusions stand up to an objective test. However none will be willing to give a definition of what is a “circumstance”.

What it means for insureds

The decision also shows the importance of not only timely notifications of circumstances by insureds but also to report any matter that a “reasonable person” in the situation considers could become a circumstance that may give rise to a claim. An honest failure to appreciate that a possible circumstance that may give rise to a claim will be no excuse if a "reasonable person" in the same circumstances would have appreciated the risk.
The decision is also closely tied to an insured's duty of disclosure and emphasises the importance of completing proposal forms thoroughly and with as much information as possible.

We understand Insureds are often reluctant to notify circumstances for fear of increased premiums but they run a far greater risk of not having cover when they need it if they do not disclose such matters. 

While continuous cover clauses (allowing cover for claims arising from late notified circumstances where an insured has continuously insured with the one insurer) can provide additional comfort, these only work when remaining with the same insurer. However, there is no substitute for full disclosure and timely notifications which also allows you to change insurers confidently if the current one does not come up with the right deal at renewal time. 

Latest News

Finalists again in 2020

CPR Insurance Services was very pleased to be nominated again for this year's Insurance Business Magazine awards. Unfortunately the Awards night has been postponed until later due to COVID19, we very much appreciate the accolades this brings us. We have been nominated three years in a row now and won the the award the past two years. It was always going to be very hard to win three in a row.

read more

CPR Insurance Services Awarded Authorised Representative Insurance Business of the Year for 2019

Mandy and Robert Cooper were proud to receive the inaugural Authorised Representative Business of the Year from ANZIIF in the Australian Insurance Industry Awards for 2019.

We share this award with all our staff, Lauren, Guy and Sarah and thank them for their dedication in providing the best possible customer service. We also thank our clients who have made our business what it is today. We thank you all so much.

read more