---

Peter Stockdale  
Partner
T +61 2 9296 2330

---

Philip Ward  
Partner
T +61 2 9296 2213

---

Brisbane
Justin McDonnell  
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

Canberra
John Topfer  
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

Hong Kong
Stuart Valentine  (萬思陶)
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

---

The recent decision of the High Court in CGU Insurance Ltd v Porthouse [2008] HCA 30 clarifies that the reference to “a reasonable person in the Insured’s professional position” in a ‘Known Circumstance’ exclusion excludes the insurer’s liability for claims arising out of facts or circumstances which a reasonable person would consider would give rise to a claim, even if the insured did not consider such facts or circumstances would give rise to a claim.

Background

In 2001, Mr Porthouse failed to advise his client that certain legislative amendments had the potential to preclude his claim against the State of New South Wales for damages if proceedings were not commenced by a certain time. In 2003, the District Court found that the amendments did not defeat the claim and the client was awarded damages. The State of New South Wales appealed the decision of the District Court.

Before the appeal was heard, Mr Porthouse completed a professional indemnity policy form with CGU. The policy excluded cover for claims arising from a ‘Known Circumstance’ . Section 11.12 defined ‘Known Circumstance’ as

• any fact, situation or circumstance which:
• an Insured knew before the policy began; or
• a reasonable person in the Insured’s professional position would have thought, before the policy began,
• might result in someone making an allegation against an Insured in respect of a liability, that might be covered by the policy.

The Court of Appeal overturned the decision of the District Court, holding that the amendments did preclude the client’s claim against the State of New South Wales, and the client successfully sued Mr Porthouse for negligence. CGU declined Mr Porthouse’s claim for an indemnity under the policy on the basis of the ‘Known Circumstance’ exclusion. Mr Porthouse commenced proceedings against CGU and succeeded at first instance and on appeal. CGU then appealed to the High Court.

Decision

At issue before the High Court was the interpretation and application of the ‘Known Circumstance’ exclusion.

The Court found that the phrase “a reasonable person in the Insured’s professional position” sets 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 professional position.” The Court held that the exclusion required an enquiry about what a reasonable person “would have thought” as to the real (not remote or fanciful) possibility of an allegation being made.

The Court stated that when applying s.11.12(b) of the definition of ‘Known Circumstance’, it is not wrong to take into account what an insured thought as a piece of possibly relevant evidence, but the standard described is an objective standard and a question of fact to be determined independently of the insured’s state of mind.

The Court concluded that a reasonable barrister who knew of the potential effect on his client’s case of the legislative amendment and who knew of the pending appeal and of his role in creating his client’s possibility, “would have thought that there was a real possibility that an allegation might be made in respect of a liability which might be covered by the policy.”

The High Court held that CGU was entitled to rely on the ‘Known Circumstance’ exclusion.

Implications of decision

When determining whether a ‘Known Circumstance’ exclusion like that found in the CGU policy can be relied upon to deny a claim for indemnity, an insurer, therefore, need only establish that a reasonable person in the insured’s position would have thought, before the policy commenced, that a future claim against the insured was possible.

The decision of the High Court strengthens the extent to which ‘Known Circumstance’ exclusions safeguard insurers from indemnity claims arising from the prior conduct of insureds, even where the insured did not actually consider that such prior conduct could give rise to a future claim. It emphasises the need for insureds to evaluate their own conduct so that they are able to identify any potential claims and notify their insurers accordingly. It also confirms the value to insureds of ‘Continuous Cover’ clauses, which can effectively disapply prior claims or known circumstances exclusions, at least back to the date when the cover was first effected with the insurer.