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Peter Stockdale  
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Philip Ward  
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Justin McDonnell  
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John Topfer  
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Stuart Valentine  (萬思陶)
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In a recent Supreme Court of NSW case of Quintano v BW Rose Pty Limited & Ors [2008] NSW SC 793 Brereton J clarified the circumstances in which a matter is said to “arise from” an excluded claim.

Background

The plaintiff, Luke Quintano, sued the first defendant (BWR) for personal injuries sustained after being shot in the head at BWR’s nightclub. BWR’s public liability insurer, a Solomon Islands entity, went into liquidation shortly after the plaintiff’s claim. BWR sued its broker (Prestige) for negligently placing the insurance with an unregistered overseas insurer and failing to advise BWR of the risks.

As BWR itself went into liquidation before the conclusion of proceedings, it discontinued its claim against Prestige. Prestige, however, had incurred costs and expenses in defending the claim by BWR and sought to recover these from its PI insurer.

The case considers whether the PI insurer properly denied indemnity by relying on exclusions in respect of any Claim “arising from”:

• the insolvency of any insurer or reinsurer, or
• breach of a duty to advise on the suitability of an insurer.

Decision

Brereton J confirmed the words “arising from” require some causal connection between the claim and the specified matter, with the requisite nexus satisfied by a less proximate relationship than that required by the phrase “caused by” (as set out in the High Court case of GIO (NSW) v RJ Green & Lloyd Pty Limited). His Honour found that a claim can be said to “arise from” a matter if the matter is one of the underlying facts that, if they exist, together justify the claim.

Accordingly, even if BWR’s claim against Prestige did not explicitly refer to insolvency, and was later discontinued, as the gist of BWR’s claim was attributable to the insurer’s insolvency, the PI insurer could rely on the exclusion. His Honour went on to confirm the position of the authorities which have dealt with professional indemnity insurance:

“…the manner in which a claimant formulates its case against the insured cannot be decisive of the rights and liabilities of the parties of the insurance policy, for which purpose the claim is characterised by its underlying facts, and not the form in which the claimant propounds it. Thus, if the facts underlying the claim amount in substance to fraud, the circumstance that the claimant eschews fraud and pleads its case in negligence does not allow the insured to evade a fraud exclusion.” [at 9]

Implications of decision

The case makes clear a matter need only be one of the underlying facts to “arise from” an excluded claim. Further, His Honour confirms that the fact that an excluded claim is not specifically pleaded does not mean the exclusion does not apply.

In terms of His Honour’s comment regarding the application of a fraud exclusion, His Honour does not go so far as to say that an insurer can simply rely on the fact that the substance of the claim could amount to fraud in order to rely on a fraud exclusion. Rather, the point is that the failure to expressly plead “fraud” is not dispositive. Although, as His Honour points out in considering the exclusion relating to the failure to advise of suitability, much depends on the construction of an exclusion as to whether it is necessary to prove the claimant’s allegation before reliance can be placed on the exclusion.

To avoid such arguments, particularly in relation to fraud and dishonesty exclusions, there has been a development in directors and officers liability policies to specifically state that a wilful breach or fraudulent exclusion may not be relied upon by an insurer until the final adjudication of a court, or admission by the insured. Such a proviso is not commonly included in general liability or professional indemnity policies, although there is no legal reason why the same drafting could not also be applied in those contexts if the market sought such change. A “final adjudication” approach would reduce the circumstances in which an insured would be required to act as a prudent uninsured pending determination of fraud allegations.