FAI General Insurance Company Limited v Australian Hospital Care Pty Ltd B23/2000 [2000] HCATrans 688 (17 November 2000)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Brisbane No B23 of 2000

B e t w e e n -

FAI GENERAL INSURANCE COMPANY LIMITED

Appellant

and

AUSTRALIAN HOSPITAL CARE

PTY LTD

Respondent

GLEESON CJ

McHUGH J

GUMMOW J

KIRBY J

HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 17 NOVEMBER 2000, AT 11.04 AM

Copyright in the High Court of Australia

MR P.A. KEANE, QC: May it please the Court, I appear with my learned friend, MR R.G. BAIN, QC, for the appellant. (instructed by Clayton Utz)

MR S.S.W. COUPER, QC: If the Court pleases, I appear with my learned friend, MR K.N. WILSON, for the respondent. (instructed by McLaughlins)

GLEESON CJ: Thank you. I understand that the Registry has notified counsel that I hold some shares in the parent company of the appellant in this matter.

MR KEANE: Yes, your Honour, we understand that. I think the form is that we should ask your Honour to sit.

MR COUPER: We concur in asking your Honour to sit.

GLEESON CJ: Yes, thank you. Yes, Mr Keane.

MR KEANE: Your Honours, the text of the policy of indemnity insurance here in question is set out at paragraph 7 of our written submissions. It affords cover against claims made on the insured during the period of the policy. It contains a provision which deems claims made by third parties on the insured after the period of the policy, but arising out of an occurrence of which the insured becomes aware during the period of the policy, and gives notice to the insurer during the period of the policy to have been made during the period of the policy.

As appears from our chronology, there was no claim made on the insured during the period of the policy - - -

KIRBY J: This is described by the respondent as a hybrid form of policy. Is that a fair description, do you think?

MR KEANE: We will submit to your Honours that it is not a particularly useful form of a description.

KIRBY J: It is not a pure claims made policy, is it?

MR KEANE: No. The policy in terms of the usage with which we are familiar in this field of discourse is that it is a claims made and reported policy.

GUMMOW J: Yes, but that is a conclusory statement, that is the whole problem.

MR KEANE: It is, your Honour, quite. It is a conclusory statement, and we accept that one has to look at the language of the policy. But in looking at the language of the policy, one also must obey the mandate of the statutory provisions and ascertain its effect, which seems to us to involve an exercise of characterisation.

GUMMOW J: Why? Of what?

MR KEANE: Well, characterisation or causation - - -

GUMMOW J: We just did a day and a half about essential characteristics of jury trials.

MR KEANE: Well, your Honour, one thing we can promise you, we will not take that long.

HAYNE J: Mention the figure "12" somewhere in your submissions, Mr Keane, and there might be some difficulty.

MR KEANE: Your Honours, as we were saying, there was no claim during the period of the policy against the insured. After the policy expired, the insured notified the insurer of the occurrence from which the claim arose. The question is whether section 54 of the Insurance Contracts Act, the text of which is set out at paragraph 8 of our written submissions, operates to oblige the insurer to indemnify an insured against whom no claim was made during the period of the policy, and who was not given notice of an occurrence during that period.

Your Honours, the decision of the New South Wales Court of Appeal in FAI General Insurance Co Ltd v Perry suggests, or indeed decides, that question in the negative, that is, in favour of the appellant. Can we just, in order to set the parameters, perhaps, for the debate, take your Honours to Perry's Case. It is in our bundle at tab 2. If we might take your Honours at this stage to two sentences from that case; the first in the judgment of the Chief Justice, as your Honour then was, at page 93, at the letter F, where it said:

When one is dealing with claims that are mere future possibilities, a decision not to elect to expand - - -

GUMMOW J: I am sorry, whereabouts on 93, Mr Keane?

MR KEANE: Sorry, your Honour. I said F, it is probably a line or two above F. It is in the middle of the paragraph, your Honour.

GUMMOW J: Yes, thank you.

MR KEANE:

When one is dealing with claims that are mere future possibilities, a decision not to elect to expand the scope of the cover to include such claims does not seem to me to constitute an omission of the kind with which s 54 is concerned.

Here, it is our submission that the relevant claim on the insured was, during the whole period of the policy, a future possibility and never anything more. The policy never covered it.

HAYNE J: The premise for the operation of section 54 is, is it not, that the policy does not advantage the insured in the events that have happened? It is only if the insured cannot gain advantage from the policy that 54 has any work to do.

MR KEANE: Yes, I think the answer to that, we would say, yes.

HAYNE J: If the insured has a good claim against the insurer, we are not fussed about 54 at all.

MR KEANE: That is true.

HAYNE J: So that the premise for the operation of 54 is that the insured cannot gain advantage under the policy. I put it as broadly and neutrally, I hope, as I can. But is that right?

MR KEANE: As broadly as your Honour puts it, perhaps with a need to qualify our assent, we accept that that is certainly the occasion for its operation. It is difficult to see any occasion otherwise for its operation.

GLEESON CJ: But section 54 refers to an act and, therefore, an omission of the "insured or of some other person".

MR KEANE: Yes.

GLEESON CJ: Well, another person in the present case was the person who was alleged, ultimately, to be the victim of the medical negligence.

MR KEANE: Yes.

GLEESON CJ: Did that other person omit to make a claim during the period of the cover?

MR KEANE: That other person did not make a claim during the period of the cover.

GLEESON CJ: I understand that the other person did not make a claim, but was that an omission during the period of the cover?

MR KEANE: Your Honour, we would say not, and we would say not relevantly for the purposes of section 54 for the reasons stated in the decision of the New South Wales Court of Appeal in Greentree. That is to say that when one is applying section 54, one must look to the effect of the policy by reason of "an act or omission", and where one has "an act or omission" which is entirely distinct from, and separate from, and outside the policy, one does not have "an act or omission".

HAYNE J: Accepting that to be so for the purpose of debate, is not the relevant omission here the omission under condition 3 of the insured to give written notice of having become aware of an occurrence?

MR KEANE: Your Honour, we would say that before one gets to that question there is a question that is logically anterior to it, that stands behind, if one likes, section 54. Section 54, in our respectful submission, postulates the existence of cover.

HAYNE J: The existence of cover or the existence of a policy. The two, I think, may need to be kept quite distinct because on one view of 54 it is engaged if, but only if, cover otherwise would not be granted.

MR KEANE: Your Honour, we think it is respectable to speak of cover because the Act does, not in 54 but in section 40. In saying that we are not attempting to re-run any races about section 40 being a code, but it does speak of cover and it does speak about the effect of the policy.

GUMMOW J: Section 54 just talks about a contract of insurance, does it not?

MR KEANE: It does, your Honour. We do not want to suggest that there is decisive relevance in this but it is of some relevance, we think, that section 40(1) uses the following language:

This section applies in relation to a contract of liability insurance the effect of which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.

GUMMOW J: But I think that might not help you because you might be on better ground if 54 qualified the words "the effect of a contract of insurance" by including words "talking about the cover provided by".

MR KEANE: Your Honour, the comfort we seek to draw from the difference in the language is that sections 40(1) and (3), speaking of the "expiration of the period of" cover, that is plainly referring to a state of affairs different from the state of affairs the consequence of an act or omission by reason of which a claim may be refused.

Section 40(1) speaks of the effect of the policy. That effect, the effect which it describes, is different from that spoken of in section 54, that is, so far as section 40(1) is concerned the effect which it describes is the effect of a contract:

which is that the insurer's liability is excluded or limited by reason that notice of a claim against the insured.....is not given to the insurer before the expiration of the period of the insurance cover provided by the contract -

is a description of an effect of a policy which is treated as different from - treated by the legislature - that of which section 54 speaks which is the effect that the insurer may refuse to pay a claim by reason of an act or omission.

What we are seeking to suggest, with respect, is that the statute recognises as is notorious as a matter of commerce, that this legislation falls to be applied in a particular context and that context is that, as we all know, insurance is usually annual. It has a fixed time and the Act recognises that policies of insurance may come to an end and, in particular, it recognises that policies of insurance may come to an end when a claim has not been made and that that may be the effect of the policy, that is to say that by reason of the policy coming to an end the insured misses out.

We submit that section 40 is telling us something about the context in which one must then try to apply section 54. If we might just take a few sentences to try to articulate the distinctions we rely on and, in saying that, of course, there have been many attempts by learned judges and academics and counsel to articulate a constraint that for many, though not for all, serves to limit the operation of section 54 so that it is not allowed to radically reform the substance of the contract the parties have made.

In this case, for example, in the judgment of Justice Pincus in dissent below at pages 185 to 186 of the record in paragraphs 12 and 13, your Honours will see that his Honour - - -

KIRBY J: This is still not reported in the Queensland Reports?

MR KEANE: No, your Honour.

KIRBY J: Is there no media neutral citation of the - - -

GUMMOW J: It is in 10 ANZ Insurance Cases 61-445.

MR KEANE: I am indebted to your Honour.

KIRBY J: Justice Gummow always has the citation. Always.

MR KEANE: Your Honours, the effect of what his Honour Justice Pincus is saying is that this was, in substance, in its "essence" as his Honour said - - -

GUMMOW J: We are back to "essence". I thought we would be.

MR KEANE: Whatever else - - -

GUMMOW J: The trouble is, one never knows what the extraction process is which removes the - - -

MR KEANE: Which extracts the essence, quite, your Honour.

GUMMOW J: Quite right.

HAYNE J: The only one I am familiar with is a still, Mr Keane.

MR KEANE: That is more common in Victoria, your Honour.

GUMMOW J: Paragraph 13, is it?

MR KEANE: No, 12 to 13, your Honour.

GUMMOW J: Yes.

MR KEANE: And particular in 12 where his Honour articulates a constraint which is really to the effect that one will not allow, or one does not read section 54 as manifesting an intention radically to reform the policy in a which would not accord with the intention of the parties, in the sense that - whether one talks about essence or core or substance, the substance of the policy is a policy of indemnity against claims made during its term.

KIRBY J: Well, is it? That is the question. That is why it is said to be hybrid. It is a question of where you put the brackets. Do you put the brackets around its general character or do you put the brackets around its general character, plus this unusual or additional provision?

MR KEANE: And, your Honour, that is why when we come back to the passage that we cited from Chief Justice Gleeson in Perry which is to be contrasted with your Honour's judgment - and the particular sentence we wanted to take the Court in that was the passage at page 102, I think it is, where your Honour spoke of - - -

GUMMOW J: Is this in the same case?

MR KEANE: It is in Perry, your Honour. Justice Kirby's dissent in Perry. The passage at 102 just above the letter B the sentence:

Here the insurer, by condition 3, expressly bound itself to a special notional definition of when a "claim" was made for the purpose of attracting the policy.

GLEESON CJ: Is condition 3 materially different from section 40(3)?

MR KEANE: In the sense that subsection (3) for its operation requires notice be given as soon as "reasonably practicable" after awareness. Condition 3 requires only that the notice of the occurrence be given within the term of the policy.

GLEESON CJ: Subject to that modification, this exact same argument would arise, would it not, if there was no condition 3 in this policy and the insured was relying on section 40(3)?

MR KEANE: It would, your Honour, but as Justice Kirby pointed out in his dissenting judgment in Perry, one has to take the fact that this policy has condition 3 in it and that then raises the question of whether section 54 applies, but - - -

KIRBY J: I was very influenced in that case, as I think I made clear by Professor Kelly's observations, he having been the principal commissioner on the insurance contracts reference, and - - -

MR KEANE: And your Honour set them out at page 103.

KIRBY J: Yes.

MR KEANE: We did actually intend to go to those a little later, but can we go to them now?

KIRBY J: Whenever it suits you.

MR KEANE: It is perfectly convenient, your Honour.

KIRBY J: He raised the policy issue that if your theory of the section is right, it is a very simple thing to draft conditions that will walk straight out of the protections of the Act and say, well that is part of the contract which the parties have entered and that, as it were, avoids the amelioratory provisions of section 54.

MR KEANE: Your Honour, the passage that I think your Honour is referring to is at page 103, commencing at the letter B.

KIRBY J: Yes.

MR KEANE: And that is, in our respectful submission, significant, firstly because it shows, in the first paragraph of the quotation from Mr Kelly, the kinds of mischiefs of which section 54 was aimed. Just above the letter C:

temporal exclusions, warranties and definitions of cover have long bedevilled this area -

HAYNE J: Can I just take up something provoked by that? Notions of essence and departure from the contract upon which the parties agreed may be thought to proceed from an unstated premise that the departure is of a kind that would be unjust. Do you accept that that is so?

MR KEANE: Yes, your Honour.

HAYNE J: Why is that, that notion of unjust departure, not addressed, at least partly, perhaps wholly, by the concluding words of section 54? That is, if there be prejudice resulting from this departure from the contractual terms, the prejudice is to be taken into account. If there be none, then why is the departure radical or unjust?

MR KEANE: Because one needs to start, as, with respect, we think is implicit in your Honour's question, from the question whether there is a departure from the contractual terms, and that means one has to start with what the parties have agreed. Section 54 - - -

HAYNE J: Which is why I put that first premise to you, that 54 is engaged if, but only if, the insured cannot depend upon the words of the policy to say, pay me the money now.

MR KEANE: By reason of an act or an omission. For example, if the policy has lapsed, there is no question about the policy lapsing, it is not a question of the effect of an act or omission on the policy; it is just simply that this policy no longer responds to the claim.

HAYNE J: Yes.

MR KEANE: And, your Honour, then the question is whether the fact that that policy no longer responds to the claim is a state of affairs that would have been different had the insured extended the period of the policy. That state of affairs that exists can be said to have been because the insurer did not do an act, but it is not something about which one says that that is the effect of an act or omission on the policy, because the policy has ceased to speak. Section 54 does not breathe life back into dead policies, in our respectful submission.

HAYNE J: But in the context of the present matter, if I am right to understand condition 3 as founding the omission, the omission to give notice within terms of an occurrence, then is 54 literally complied with? Is 54 on its terms engaged? If it is, then why should we limit it? How can we limit it?

MR KEANE: We submit that read in its context - and that context is both statutory and factual - it is not, because the context in which it operates is a context in which one is well informed by the knowledge that these policies afford cover of a particular kind for a period and then they die.

HAYNE J: So that you may see the whole of the chain, if 54 were literally engaged - and I understand you say it is not - then perhaps some weight may have to be given to the concluding words and their requirement to reduce liability by the amount fairly representing the extent of prejudice in considering whether the literal application of 54 leads to a reformation, as you would have it, of the parties' contract that is unfair or inappropriate.

MR KEANE: Your Honour, we would submit it is not a question of prejudice; it is a question of whether one made a particular bargain or not.

HAYNE J: I have interrupted too much, Mr Keane.

MR KEANE: Not at all, your Honour, no. If I could just return to your Honour Justice Kirby and Mr Kelly's remarks, what we were seeking to say in relation to the first paragraph, having referred to the false distinctions, the draftsman's art distinctions, between temporal exclusions, warranties and definitions of cover that are, one will not say tricky, but giving and taking away, creating the possibility of cutting down the cover that is afforded, in our respectful submission, we are a long way from that where one has cover which is a validly claims made cover with the possibility that in respect of future possibilities the cover might be extended.

Your Honours, the other thing to just mention if we might in relation to Mr Kelly's observations is that in the paragraph that begins above the letter D:

The second point follows from the first. It is that, if any change at all is necessary, it should be the minimum required to reverse the decision in East End.

GLEESON CJ: We might as well have out on the table the context in which Mr Kelly wrote. Mr Kelly was defending our judgment in East End which had been the subject of an extremely spirited attack. The essence of the attack on the judgment in East End was look and see what it leads to. Mr Kelly's remarks, quoted by the President there, were written in answer to criticism of the decision in East End, which I think by that time had been the subject of an unsuccessful application for special leave to appeal to this Court.

MR KEANE: That is true, your Honour, and also the subject of a spirited criticism by the learned judge at first instance in the case.

KIRBY J: What, Justice Cole criticised East End?

MR KEANE: Yes, your Honour.

KIRBY J: That was so unlike his Honour.

GLEESON CJ: East End was unpopular with the commercial division, Mr Keane.

MR KEANE: Your Honour, that was something that we did want to say in a polite as possible way, that there is evidently in the efforts of judges, as we have said, to articulate constraints, to find the constraints in context or in essence.

GUMMOW J: Why do they have to find them?

MR KEANE: Your Honour, because of an intuition that is evident in Justice Pincus's judgment, that it is actually not in the interests of protecting the reasonable expectations of honest people to say that an insured who can extend the cover by giving a notice once he is aware of an occurrence, but who does not, is then able to invoke a claims made policy to give him cover in respect of an occurrence at any time, however far in the future the claim may come.

KIRBY J: But the argument against that is that not all insureds are well organised and mistakes and omissions are made, and that this Act was designed to be ameliorative of the strict rules of the past and that in omissions of that kind some relief could be given but any prejudice would rebound against the insured. The problem would be, if the insured is on notice of the loss, it cannot really carry that over to its next insurer, a different insurer, because it would be bound to reveal that to the next insurer and the next insurer is certain to exclude it from cover. So it is you or no one, essentially.

MR KEANE: Your Honour, that is the view that prevailed with Justice Derrington.

KIRBY J: It is a pretty good argument, is it not, because omissions do occur.

MR KEANE: They do.

KIRBY J: Your know, some clerk in the office may put it in the little bottom drawer and that is it, and tremendous liability can fall and the amelioration of 54 is put at nought. Now, that just cannot be the purpose of the section.

MR KEANE: Well, your Honour, in judging the purpose of the section, one looks at the mischief at which it is aimed. One sees them identified in that first paragraph at 103B to C. In terms of the mischief of the kind of which your Honour is speaking, the mischief, in that regard, is probably better identified in the discussion of section 40. Once again, we are not suggesting section 40 is the Code but it is the section where that mischief is the subject of particular discussion. Can we give your Honours - it is not on our list and we apologise - copies of the decision of this Court in Newcastle City Council v GIO Ltd, which does have some reference to the relevant discussion of the mischief in that regard. I should apologise to your Honour Justice Kirby. We are, in fact, trying to answer your Honour's question, we are just going a long way about it.

KIRBY J: I know you will do it in your own time, Mr Keane.

MR KEANE: The point we wish to make, your Honour, in relation to that, is that if your Honours go to page 100 your Honours will see, in the joint judgment, the first full paragraph of text on the page where there is - the paragraph which begins:

The reference in the Explanatory Memorandum to "ALRC" is to Report No 20 of the Law Reform Commission, Insurance Contracts, which had been delivered in 1982 -

If we could invite your Honours to read what follows in the cited paragraph, and in doing so can we seek to emphasise the last sentence which is:

Consequently, the Commission suggested that insurers should be required to include in their policies a clause covering claims made outside the period of cover provided they arose out of occurrences notified within the period of cover.

The reason we refer to that, your Honours, is that, in relation to the concern which your Honour Justice Kirby has put to us, it would seem to us, with respect, that those responsible for the formulation of the policy that informs the Act and identifies the mischiefs did not think that it was asking too much of insureds to give notice if they were to have the benefit of that cover. Now, we accept what your Honour says, that sometimes people make omissions. We are simply referring to this to make the point that if someone has to suffer, and if the line has to be drawn somewhere, then so far as the policy informing this legislation is concerned, then the legislature or those whose formulations informed their prescriptions did not think it too much to ask of an insured to actually take steps to expand cover and to protect him or herself against the lapse of the policy, being a claims made policy and being a policy described as having that effect in section 40(1).

Can we come back then to what your Honour Justice Gummow was putting to us earlier, and that is to say, while we accept that section 40 is not a Code, it does suggest that it is possible to identify, in terms of effect, claims made policies as a particular beast. The other thing for which Newcastle v GIO is useful is the very lengthy discussion of the extraneous materials where claims made policies are identified eo nomine, by reference to their substance. That is to say, they afford cover in respect of claims made on the insured during the period of cover and distinguish them as a matter of substance from occurrence based policies.

We submit, with respect, coming back again now to your Honour Justice Hayne's question, that it is not just a question of saying, "Well, are you really prejudiced by departure from your contractual terms?". We would submit it is rather a question of asking, "Has this legislation intended to elide the distinction between occurrence based policies and claims made policies?", in terms of the substance of the promises that are made. Our respectful submission is that it has not and that that is so, the perception that it is, indeed, unjust to hold even insurance companies to indemnity in respect of future possible claims - - -

GUMMOW J: Well, how does one read the text?

HAYNE J: Leave aside why it is unjust. Where lies the injustice? But attend upon Justice Gummow's question. I suspect, it would be much more profitable.

MR KEANE: Your Honour, the injustice lies, as Justice Pincus - we could not put it better than his Honour does at paragraphs 12 and 13. It is an intention unlikely to be attributed to the parties, that the parties who have agreed to these things would honestly and reasonably consider that the insured might have this cover where he does not extend the cover in the manner opened to him.

GUMMOW J: That would go to the nature of the contract, it would not go to the effect of the Act. That is what I do not quite follow.

MR KEANE: Well, your Honour, the question posed - - -

GUMMOW J: I think what you have to say, maybe, is that the Act, read in its terms, may go some distance beyond what was said to be, or what was identified particularly as the mischief, and that, therefore, in some way one can massage the language in which section 54 is expressed. The trouble is, I do not know how one would do that.

MR KEANE: The first thing we would say about it is that section 54 speaks of the effect of a contract of insurance being that the insurer may refuse to pay a claim by reason of some act of the insured or some other person.

GUMMOW J: Yes, an "act" means "act or omission".

MR KEANE: And it means omission. Section 54 thus seems to require a determination whether the effect of the policy is that the insurer may refuse to pay a claim by the insured by reason of an act or omission. This determination is of the effect of the policy by reason of the acts or omissions of persons. In other words, the section postulates that it is sensible to speak of the policy having an effect in relation to acts or omissions. The effect of the policy can only be gauged by reference to the terms of a policy. It is as a function of a policy that the acts or omissions are apt to have an effect in relation to the claim. The policy in question in this case never had an effect in relation to this claim.

HAYNE J: Thus, may it be important for your argument to distinguish between two kinds of case: where, during the period of insurance there is not only an occurrence, but knowledge of the occurrence in the insured, one class of case; and the other class of case where, during the period of the insurance there is occurrence but neither claim nor knowledge on the part of the insured of the occurrence. Your argument seems to be pitched, at the moment, in a way that speaks more to the second kind of case I have identified. We are concerned with the former, are we not, occurrence?

MR KEANE: Well, your Honour, we are concerned with a case arising out of an occurrence of which the insured becomes aware, so it is a case of knowledge.

HAYNE J: Yes. Now, the insured knows of the occurrence during the period. What is complained of is that the insured does not convey this knowledge to the insurer.

MR KEANE: And, by not doing so, omits, if one wishes, to extend the cover beyond its otherwise natural expiry date.

GLEESON CJ: Now, I am just wondering if it is a little more complicated than that and the present case may provide a good example of it. I forget whether Perry provided an example of this. But what actually happened in this case, as I understand it, was - correct me if I have the sequence wrong - the occurrence happened before cover.

MR KEANE: Quite.

GLEESON CJ: During the provision of cover somebody raised with the insured the possibility of a claim.

MR KEANE: That was discussed.

GLEESON CJ: And then withdrew the possibility of a claim.

MR KEANE: Quite.

GLEESON CJ: Now, the words of the policy are "knows of an occurrence or an occurrence that may give rise to a claim".

MR KEANE: Yes.

GLEESON CJ: Here you have an occurrence before the period of cover. During the period of cover somebody says there might be a claim and then says, "I withdraw the claim" or "I withdraw the suggestion there might be a claim".

MR KEANE: Your Honour, that is probably putting it a little high.

GLEESON CJ: Well, the period of cover then expires. What I want to test is the question whether knowledge that there may be a claim is always a black and white situation. You know of the occurrence, presumably, because you did it yourself but there could be considerable uncertainty about whether or not an occurrence is likely to give rise to a claim.

HAYNE J: Or in the words of the policy "may subsequently give rise". "May".

GLEESON CJ: Yes.

GUMMOW J: Become aware of the occurrence which - - -

MR KEANE: In this policy it does not actually require an appreciation of its potential for giving rise to a claim. It is where there is an occurrence and where the insured becomes aware - - -

GLEESON CJ: Let me take an example that I am sure has no relevance to the practice of a lawyer. Let us suppose a professional person does something and thinks, "Ouch, I hope nobody every notices that or I hope that never causes anybody any harm", and nothing else happens during the period of the cover. Is that an occurrence that may give rise to a claim?

MR KEANE: Your Honour, we would have to admit it is.

GLEESON CJ: The statute and the policy have to operate on a fairly wide range of factual circumstances, do they not?

MR KEANE: They do. In this case, what your Honour says is correct. They do have to operate in a wide range of circumstances. In this case, of course, there is something poignant, at least from our point of view, in the circumstance that we are being held liable for an occurrence that occurred outside cover that was not notified to us inside cover.

GLEESON CJ: But what is your answer to this argument, that I do not understand there has been an argument put against you, but do you have an answer to it? The statute talks about acts or omissions of the insured or of some other person. What was the name of the person who was injured in this case?

MR KEANE: Dr Tampoe.

GLEESON CJ: Dr Tampoe is some other person. Now Dr Tampoe could have - and indeed at one stage, looked as though he might, but ultimately did not - made a claim during the period of the cover.

MR KEANE: Yes.

GLEESON CJ: So presumably Dr Tampoe, from one point of view, omitted to make a claim during the period of the cover. Right?

MR KEANE: Yes, your Honour.

GLEESON CJ: Well, how does section 54 operate in relation to Dr Tampoe's omission?

MR KEANE: Your Honour, in relation to that, the decision of the New South Wales Court of Appeal in Greentree says it does not operate. That decision is at tab 5 of our bundle.

GLEESON CJ: Well what is the relevant difference between the fact that Dr Tampoe did not make a claim during the period of the cover and the fact that the insured did not notify the insurer of the possibility of a claim during the period of the cover?

MR KEANE: In a couple of sentences, your Honour, as Chief Justice Spigelman said at page 710 at letter B - - -

GLEESON CJ: What is the reference?

MR KEANE: Page 710.

GLEESON CJ: This is Greentree?

MR KEANE: This is Greentree, your Honour, and it is item 5 in the bundle.

GLEESON CJ: Thank you.

MR KEANE: And we go to page 710, and can we say while your Honour is turning that up that earlier in the judgment his Honour had referred to the extraneous materials in relation to the statute, the mischiefs at which section 54 was aimed, and it mentioned that in this field of discourse, claims made policies are different in substance from current based policies. Chief Justice Spigelman goes on at 710 letter B:

Justice Handley has suggested a particular construction of the word "omission", which I do not entirely adopt. Rather, I prefer the formulation of "non event", in the sense of conduct wholly external to the policy itself. In the context of liability insurance, the failure of a third party to make a claim should be regarded as an event wholly external to the policy, in the same way as the conduct of an arsonist is an external event for a fire policy.

And the analogy that his Honour is there referring to, your Honours, is Chief Justice Hodgson's example of a fire policy that covers year A, the arsonist does not burn the house down until year B, it cannot be said that section 54 gets the home owner home, because the arsonist did not burn the house down in year A. His Honour Chief Justice Spigelman goes on:

Rather than focus on the definition of the word "omission", I would focus on the words "the effect of the contract of insurance".

And that, your Honours, is what we are seeking to do:

The drafting of the clause defining the risk may mean (as East End decided and Antico affirmed), that such a clause can be characterised as having an "effect" that "the insurer may refuse to pay a claim". That does not mean that every such clause, or every part of such clause, may be so characterised. The absence of a claim on the insured does not create any "effect" that "the insurer may refuse to pay a claim" by the insured. Until the first kind of claim is made, no issue of a claim of the second kind arises at all. This is not a matter of drafting or of mere form. The "claim" is an event wholly external to the policy and precedes any consideration of its "effect".

We would seek to take that a little step further in this case and to say as well that logically anterior to the question of the effect of the policy is the question of the existence of the policy.

GLEESON CJ: On the bottom of the first page of Greentree there is a note that:

An application for special leave to appeal to the High Court has been filed.

MR KEANE: It was refused, your Honour.

GLEESON CJ: Refused on what ground?

MR KEANE: I think inconvenient vehicle, your Honours. There were some procedural difficulties that the Court mentioned as well.

GUMMOW J: I think I sat on the application.

MR KEANE: Your Honour and Justice Hayne sat on that.

GLEESON CJ: The reason I gave you that example I did is not that I thought it up on the spot. It is an example that was put in argument by Mr Sheller who was arguing East End for the respondent. He put the example in argument as a reductio ad absurdum of the point of view that we ultimately accepted in East End.

MR KEANE: As your Honours will appreciate, we do not attack East End. We do not seek to put any argument about reductio ad absurdum and we do not suggest, with respect, that East End implies such a result. In our respectful submission, it does not imply a result contrary to that in Greentree. What we do submit though, with the greatest respect, is that sometimes somewhere a line has to be drawn in relation to the cover and its extent. In East End in relation to what we accept is loosely called or conventionally called a claims made and reported policy, the Court drew the line on the footing that the cover that was afforded was in respect of claims made during the period of the policy. The omission to report it was the type of omission to which section 54 spoke.

We accept that in working out the application provisions that are apparently as open textured as section 54 is, the courts have to draw the line somewhere. We do not cavil with drawing the line there. It is no doubt a difficult exercise to draw the line. We submit that the line was properly drawn in Perry and we submit that it is a clearer line, with respect, because we have the additional features of the temporal nature of the cover and the contrast with the description of "effect" contained in section 40. Here, accepting that the effect of the policy is to be determined by reference to its substance rather than its form, this policy does not seek to afford cover against an occurrence during its term, much less one before its term.

It is easier to see the line where the term of the policy is prominent rather than say, for example, in a case on our learned friend's list, Kelly v New Zealand Insurance, which was decided following Perry in 1996 and applying it, where the scope of the cover was not extended during the policy because of a failure of the insured to give a list of insured items. The result of that was that the amount of the cover was not extended as it would otherwise have been.

Now, that might be a more controversial application of the decision in Perry but, for our purposes, and sufficient under the day being the evil thereof, where the problem that arises, arises because this policy never afforded cover to mere future possibilities of claims. This policy was not extended, as it might have been to cover them, so that what happened when it expired was that there was a state of affairs. Now, that is another phrase thrown into the ring. But there was a state of affairs that existed and that that state of affairs may have existed because the scope of the policy was not extended does not make it any the less accurate to say that this policy has no effect in relation to this claim.

GUMMOW J: There was always a contingency. Condition 3 is a deeming provision, is it not?

MR KEANE: Yes.

GUMMOW J: There are conditions precedent to the deeming coming into effect and one of the conditions precedent here to the deeming coming into effect was not satisfied. It was not satisfied in circumstances which on their face fall within 54, so how does one chart one's way around that, that is the problem.

MR KEANE: Well, your Honour, we would submit, with respect, that one has from the legislature a charter which one knows is informed by an antipathy to mere drafting devices. It is our submission that condition 3 is not in the nature of some device or some artifice. It is a deeming provision. It does deem a subsequent claim to have been made during the subsistence of the policy and we submit that is not accident, nor it is a device. That language reflects the actual reality, as a matter of substance, and the proper construction of the policy on ordinary principles that a claim which is made later but of which notice has been given during the life of the policy is to be taken to have been made within the policy, otherwise - - -

GUMMOW J: No, you had to give notice of the occurrence, did you not, of which you become aware?

MR KEANE: Yes, I am sorry, your Honour.

GUMMOW J: Which itself was conjectural, as it were: may give rise.

MR KEANE: Yes.

HAYNE J: But, tested against the case where during the term of cover the letter from the solicitors does not amount to a claim but quite plainly gives notice of an occurrence that may give rise to a claim, that is, strip out of the current case any question that may arise because of the later withdrawal or close to withdrawal of the initial notice given by the solicitors. How, in such a case is 54 to operate if the insured become aware of an occurrence which may given rise to a claim does not give notice to the insurer?

MR KEANE: Your Honour, I am not quite sure that I fully understand your Honour's question. If what your Honour is putting to us is that there is no appreciation of the likelihood of a claim - - -

HAYNE J: Let it be sure there is clear appreciation in the insured that there is an occurrence which may subsequently give rise to a claim.

MR KEANE: Well, in that circumstance, your Honour - - -

HAYNE J: But they do not give notice.

MR KEANE: And, if they do not give notice then on 20 June when the policy expires the policy expires.

HAYNE J: And 54 is never engaged?

MR KEANE: No, because the effect - - -

HAYNE J: And what words in 54 show the non-engagement?

MR KEANE: The postulate that section 54 postulates a contract of insurance that has an effect.

GLEESON CJ: I asked you a little earlier what was the difference between condition 3 and section 40(3). One other difference - I am not sure where this leads - is that condition 3 works by way of deeming; section 40(3) does not, does it?

MR KEANE: I suppose it does not work by way of deeming. One is wary of saying it achieves the same result in substance, but it does seem to.

GLEESON CJ: Well, it may have a bearing upon an accurate characterisation of the insured peril under this policy, that the way in which condition 3 operates is by deeming a claim to have been made during a certain period.

MR KEANE: Well, we submit that that, accurately, deliberately, and substantively, reflects the bargain of the parties, which is that the policy affords cover in respect of claims made during the period.

GLEESON CJ: Subject to condition 3, which in certain circumstances deems a claim to have been made during the period.

MR KEANE: On the footing that if invoked, it may expand the cover. If it is not invoked, then the cover - - -

GUMMOW J: You say expand the cover. They fulfil a contingency, that is all.

MR KEANE: Well, that, your Honour - - -

GUMMOW J: That is part of this problem, you see.

MR KEANE: And, your Honour, that then, in our respectful submission, does become a question of characterisation. If one is engaging in that question of characterisation, in the statutory and commercial context where these policies come to an end and where section 40 makes its prescriptions on the basis of a particular effect in respect of particular kinds of policies then, in our respectful submission, one accepts that section 54 does indeed postulate an extant policy because, as we say, section 54 does not try to breathe life back into dead ones.

GLEESON CJ: But this does bring us up against Greentree again, does it not? If the way condition 3 works is by deeming a claim to have been made so that this is a policy that covers you against claims made or claims deemed to have been made during the period of cover - which I should have thought is an accurate description of it - then you ask how section 54 operates in relation to a claim that was not made during the period of the cover, and you ask how section 54 works in relation to a claim that was not deemed to have been made during the period of the cover, in both cases because somebody did not do something. It does not matter whether that somebody is the insured or some other person.

MR KEANE: Quite, your Honour, and we submit that the decision in Greentree is correct and we submit that the decision in Perry is correct for the reason that the policy simply expired and it is no longer appropriate. The postulate on which section 54 works is gone.

GUMMOW J: Yes, but this notion of a policy expiring may need some analysis too, I think. That is a trade expression. It is not a legal expression necessarily.

MR KEANE: It is also a statutory expression in the sense that it is used in section 40.

GUMMOW J: Yes, but it is descriptive of the operation of certain contractual terms.

MR KEANE: It is descriptive of their operation and it is also a clear recognition.

GUMMOW J: It does not dictate the operation of contractual terms by some conclusory process.

MR KEANE: No, it does not, your Honour, and we would submit neither does section 54.

GLEESON CJ: Is that what you mean by "policy expiring"? You mean the expiration of the period of the insurance cover provided by the contract?

MR KEANE: Yes.

GLEESON CJ: I was not clear about that when I read your submissions.

MR KEANE: And that is a concept that is actually expressed in terms in section 40, which is very near to this neck of the woods.

HAYNE J: But the contract between the parties may have given rise to rights and duties, the working out of which may take considerable time beyond that specified in the policy.

MR KEANE: Yes, your Honour.

GUMMOW J: That is the problem.

HAYNE J: And we are concerned to identify the rights and duties rather than the time at which they are worked out.

MR KEANE: We are concerned to make a determination about that for the purposes of section 54 by reference to a statute that does postulate a contract of insurance and a claim, and the claim that it postulates is not the third party's claim. It is postulating the claim by the insured on the insurer and it is doing that - having made those postulates, in this case we have to look at whether the policy has an effect in relation to the non-expansion of cover and, in our respectful submission, that is no effect at all. It is just a state of affairs. I am sorry, it is not an act or omission, it is just the state of affairs.

HAYNE J: Can I take up this notion of expansion of cover, for that seems to underlie Justice Pincus's analysis of injustice, does it not, that the cover is extended beyond that which the parties had in mind? The immediate case with which we are concerned is said to be one in which there was relevant awareness of the insured during the relevant period. Is that right?

MR KEANE: Yes, your Honour.

HAYNE J: On one view of the policy, the policy risks related to two subject matters: one, claims within dates; and two, occurrences of which awareness arose within dates. Is that right?

MR KEANE: Your Honour, we, with respect, would not accept that.

HAYNE J: You would not?

MR KEANE: No.

HAYNE J: What is the qualification or addition?

MR KEANE: The addition is that it is open to the insured to extend the cover, the cover which is claims made cover, in certain events to protect itself against claims that may not come in during the period of cover and, if it does so, it does not matter whether we call it a choice or an exercise of a right or a liberty, the effect of it is to expand the cover.

HAYNE J: In respect of an identified claim or claims, not claims more generally.

MR KEANE: In respect of a future possibility.

HAYNE J: Yes.

MR KEANE: The policy not covering future possibilities, but what it does is that you expand it so that when a claim comes in in the future referable to the occurrence of which you were aware, then there is the extra right.

HAYNE J: What I am not identifying in that analysis is where lies the expanded uncertainty or expanded risk of which Justice Pincus was speaking in his judgment, and of which you, as I understand it, embrace?

MR KEANE: Well, your Honour, the expanded risk is that if section 54 does operate in the manner in which the majority say, one would become liable for, in the usual case, an occurrence that occurred within the period of the policy about which you were given no notice and in respect of which the claim may come many years hence. That is not the bargain the parties made.

HAYNE J: But that may always be so if you have given notice. The claim may not come for another five years after the close of the period.

MR KEANE: That is true. I suppose the difference is that, and the reason why claims made policies came into vogue, is that the insurer has the chance to address the matter, and that is why we say it is really not a matter of looking at prejudice in terms of loss in respect of this particular policy, but it is really a matter of how one runs one's business.

GLEESON CJ: Mr Keane, did the majority in the court in Queensland deal with whether they agreed or disagreed with Greentree?

MR KEANE: Justice Derrington referred to it. Can we take your Honours to that?

GLEESON CJ: For reasons that I mentioned earlier, I just have some little difficulty in understanding, as a matter of construction of section 54, how you distinguish between the problem that arose in Greentree and the problem that arose in this case.

MR KEANE: Your Honours, I think the way the majority dealt with it was to treat it as distinguishable - pardon us a moment, your Honours, while I turn it up. It is at page 201 in paragraphs 37 to 46 where, at 46, his Honour Justice Derrington concluded that:

Perry has been effectively overruled by Antico, and Greentree is distinguishable on grounds that support the application of s.54 to it, there is no reason why the section should not operate here.

So, in answer to your Honour the Chief Justice, certainly, so far as Justice Derrington was concerned, he did not see the problems as congruent.

GLEESON CJ: I understand that, but why? If section 54 has the operation given to it by the majority in the present case, why does it not also operate in Greentree?

MR KEANE: Well, your Honour, in our respectful submission, we would accept that is one of the difficulties with the majority judgment.

GLEESON CJ: Well, it just is relevant to what we have to do when we are deciding this case, but you might have to do something about Greentree.

MR KEANE: Well, your Honours, we submit that Greentree is correctly decided, for the reasons that we read from the judgment of Chief Justice Spigelman and also for the reasons given by President Mason.

The other passage we should take your Honours to in the judgment of the majority is in the judgment of Justice Chesterman, commencing at paragraph 37 at page 219 and then, his Honour, sets out a lengthy passage from the judgment of President Mason. Paragraph 38:

With respect I do not find this a convincing explanation of Antico.

And at 39:

Moreover, it does not appear that Perry turned upon an analysis of causal connection between the refusal to pay and some act or omission by the insured.

At paragraph 40 there is a reference to the judgment of Chief Justice Hodgson in Permanent Trustee - - -

GUMMOW J: That reference to "causal connection", is that an indication of the sort of situation the Chief Judge in Equity is referring to when he talked about the arsonist?

MR KEANE: Yes, and, in our respectful submission, a relevant exercise, perhaps, in a process of characterisation. Chief Justice Hodgson put the question as one of characterisation, characterising whether it is fair to characterise the absence of cover as being the consequence of an act or omission.

GUMMOW J: Yes, another way of looking at it, perhaps the same way, is to say, it would not be by reason of some omission.

MR KEANE: That is right, your Honour, and in the New South Wales GIO Case Justice McHugh, I think, spent some time emphasising that ordinarily one is talking about "the" reason identifying the direct causal connection, although that decision was different because of the necessity to avoid an absurdity that would otherwise arise with section 40(1). Justice Chesterman concludes his discussion of Greentree at paragraph 42, where his Honour seems rather more to disapprove of the decision in Greentree than Justice Derrington had done.

Your Honours, if we can stay with the decision below for a moment, to take your Honours to some of the important part of the reasoning there, as we go can we say that it is our submission, as your Honours no doubt by now appreciate, that with section 54 there must be to start with an existing claim by the insured and a policy which is apt to have an effect in respect of that claim.

Justice Derrington in his Honour's reasons at - if your Honours could perhaps go to page 194, commencing at paragraph 21, halfway down paragraph 21 speaks of the "different bases" of cover:

forming an integrated whole, and both important to the insured. Certainly the primary focus of cover in this policy was directed to claims made and notified during the policy period, but the cover in respect of claims made after that period was equally a part of the total promise and of no less standing.

Then his Honour goes on. We invite your Honours to read what his Honour says. At 23 he mentions or observes that the insured could "have declined or omitted" to give notice. Now, in taking your Honours to this, what his Honour says is correct, of course, the insured could decline to give notice. That is not a right he is given by section 54. In our respectful submission, one of the problems with both of the judgments, but particularly this, is that the more one reads it the more one gets the impression that section 54 is actually altering the bargain of the parties and that it does not do, in our respectful submission.

McHUGH J: But why is that so? If you read section 54 with the clause 1 and condition 3, in this particular case, is not the effect this: the insurer may not refuse to pay the claim by reason only that the omission to give written notice of the occurrence prevented the claim being deemed to have been made during the period of the policy. Now, if that is the effect, the only question is, is there any other reason that entitles the insurer to reject the claim?

MR KEANE: Your Honour, we would submit there is and the way your Honour formulated it and put it to us could perhaps be put more shortly by saying that when the claim was made, the state of affairs was there was no cover and that that occurred - - -

McHUGH J: No, but it was by reason only. If the notice had been given it would have been deemed to have been within the period, because the occurrence occurred during the subsistence of the term. That is the critical factor, it is during the subsistence of the term that you become aware of the occurrence and if, during the period, you give notice, then occurrence is deemed to have occurred within the period of the policy. Now, that is the only reason that you can refuse to pay this claim, is it not?

MR KEANE: Your Honour, we would submit it is not. We would submit that because of the failure to give the notice there was then - at the end of the policy there had been no claim.

McHUGH J: But, you can refuse to pay it because it is not deemed to be within the period.

MR KEANE: But, your Honour, with respect, the question is, is that the effect of the policy by reason of some act or omission or is it just the fact that the policy has ceased to have effect?

HAYNE J: But that is question begging, is it not, Mr Keane, to speak in terms of the policy ceasing to have effect. The question is, what is the effect of the policy.

MR KEANE: Your Honour, that is right, and that is why we submit it is logically anterior to asking that question to see whether there is something that is apt to fall within the description of a contract of insurance at all. And, of course, that means one has to look at the terms and decide what they mean and decide whether it does give some right for the future, but in this case, can we just take your Honours to the difficulties that the kind of proposition that your Honour Justice McHugh was putting to us leads to in the judgment of Justice Derrington.

With respect, it does become very difficult and very confusing. If your Honours would read paragraphs 24 and 25. In paragraph 24, halfway down:

Because the claim would not be made within the period of the existing policy it would not come within that cover. In addition, because the insured would be obliged to disclose the known possible claim in its proposal for the new policy, that policy would usually expressly exclude it from the cover, and/or there would be a general exclusion that would catch it.

This second form of complementary cover was introduced to provide against such a contingency, which is far from uncommon, and it is important in its own right for that purpose. It is validly called an extension only because it extended the formerly inadequate cover to provide an efficient totality.

Now, your Honour, to return to your Honour Justice Hayne, there is some question begging too. Once again, we accept that you have to draw lines and that one has to draw the line somewhere.

HAYNE J: Which will draw us back to the policy and the Act.

GUMMOW J: I do not know why we leave it. I do not know why we leave the policy and the Act all the time.

MR KEANE: Why we?

GUMMOW J: Why one leaves the terms of the policy that Justice McHugh is taking you through, with the Act. I am not criticising you, but as it is you refer to it here on 24 and 25, both floating up into some other sphere.

MR KEANE: Your Honour, Justice Derrington tried to read the policy with the Act in terms of - - -

GUMMOW J: Well, he validly calls it an extension. I am looking at paragraph 25.

MR KEANE: His Honour is accepting that, at least perhaps intuitively, one does.

HAYNE J: Intuition.

MR KEANE: Sense of justice.

McHUGH J: But the fact the contract has expired is neither here nor there, is it? It still may give rise to rights.

MR KEANE: If your Honours look at his Honour Justice Derrington's judgment on 26 and 27 and 28, where he is trying to come to grips with the notion of just what rights are created. at paragraph 27 of his reasons, he spoke of the substance of the insurer's promise being "that it would indemnity it against late claims". But if that means claims made against the insured after the expiration of cover, it is, to say the least, not self-evidently true. To say a little more, we would submit that it is to mistake the effect of a policy by treating section 54 as operating from its inception to delete part of condition 3.

His Honour goes on to accept that the right of indemnity, as your Honour Justice McHugh says, must arise during the policy period. But his Honour treats the existence of cover - and your Honours will see this, that his Honour treats the existence of cover as the same as an accrued right to indemnity in respect of a claim, notwithstanding the distinction that he, himself goes on to draw at paragraph 28. There is, we submit, an evident tension between the propositions that notification has the contractual effect that the cover applies to the claim, where it otherwise would not do so, but it does not expand the cover. That is what his Honour says, in our respectful submission. These are mutually contradictory propositions.

Might we say also, with respect, and where the policy has lapsed, how, we ask rhetorically, can the notification then have any effect?

McHUGH J: Because the statute gives it that effect.

MR KEANE: But, your Honour - - -

McHUGH J: The statute operates after the event.

MR KEANE: And, your Honour, that is the point at which we say the statute postulates a policy that has effect in respect of the claim. If it has just died - - -

McHUGH J: He is looking at the policy as an historical document - - -

MR KEANE: And, your Honour, it does not alter the terms of it.

HAYNE J: It only is engaged when the insured cannot rely on its four corners. At some point you have to grapple with the fact that it is taking these parties beyond the four corners of their document, otherwise it is doing nothing.

MR KEANE: It is, your Honour. There is no doubt that it does that. The question is just how far does it go, and the argument that we have been putting to your Honours is that when one looks at the mischief that it was directed to, and when one looks at the provision that the Parliament made, with that in mind, and when one looks at the mischief at which section 40 was directed and the provision the Parliament made there, one can see that section 54 has a lot of work to do without necessarily doing this work. So, it is not a matter of it having to do this work otherwise it is otiose. It is not a matter of saying - section 54 does not say whenever the insured would be prejudiced by a particular state of affairs that it operates to hold the insurer bound to a full indemnity.

GUMMOW J: I am not sure where you locate the line between the work that the section does and the work it cannot do.

MR KEANE: At the point, your Honour, where, when the insured - - -

GUMMOW J: And where you find that line in the text.

MR KEANE: In Antico the Court spoke of the postulates. In this case we have a text in section 54 itself. It plainly postulates a contract which has effect in respect of a claim by the insured on the insurer and we also have as part of that context, section 40, and we also have as part of that context, the lively appreciation of everyone who has had something to do either with the Act or with insurance, that insurance is for a term and expires and it affords an order of cover in respect of certain risks for a period of time.

GUMMOW J: I would have thought 54(1) was speaking of the time of refusal to pay a claim.

MR KEANE: Quite. And then, and this is perhaps the difficult question that Justice Derrington was grappling with and which I am trying to grapple with Justice McHugh, is that, at that stage, does the policy have an effect, and one asks whether the policy has an effect before one sees what section 54 does to that effect? If the policy does not have an effect because it has gone the way of all flesh, then the postulates for the operation of section 54 do not exist and it is not surprising that that should be so - - -

McHUGH J: But the policy does have an effect in this particular case because the insured could not bring itself within clause 1 and it could not bring itself within condition 3 because of the effect of the policy, but then section 54 bites and it says, "You may not refuse to pay the claim by reason only of the omission of the insured to give written notice of the occurrence because that prevented the claim being deemed to have been made during the period of the policy".

MR KEANE: Your Honour, in a, perhaps, awkward way, can we endeavour to try to assist your Honour by taking your Honour to a passage in which Justice Derrington tried to apply the principle passage in Antico which follows that formulation that your Honour has just put to us to the facts of this case. Your Honours will find it at paragraph 36 at page 201 of his Honour's judgment - and this is applying the formulation, or seeking to apply the formulation your Honour has just put to us, and we are taking your Honours to it to show just how far one gets away from both the text of section 54 and what the parties agreed:

For the first two sentence, substitute:

"Section 54 does not postulate a liability of the insurer to pay a possible claim of which the insured has become aware. Rather, it takes as its starting point the existence of a claim, of the possibility of which the insurer had become aware, and a contract the effect of which is that the insurer may refuse to pay the claim."

The rest follows naturally.

Now, your Honours, it is our respectful submission that both the way your Honour Justice McHugh put it to us and that critical passage in Antico, with which your Honours are all familiar, that there is an awkwardness, a distinct awkwardness, in the approach of Justice Derrington in attempting to apply that formulation, which describes what section 54 postulates because it equates the claim by the insured, with which section 54 does deal, with the possibility of a claim against the insured, which section 54 does not postulate. It is our submission that in approaching the matter in what we would say with the greatest respect is not only a literal way but a rather rigid way which does not recognise the constraints that operate by reason of context, one reaches what does look like an entirely inappropriate formulation.

GLEESON CJ: If you get back to the question Justice Gummow asked, what strikes me as a problem, if an insurer can refuse to indemnify an insured because something has not happened and section 54 operates on that situation, where do you draw the line between cases where section 54 entitles the insured to disregard the fact that something did not happen or obliges the insurer to disregard the fact that something did not happen, and cases where section 54 leaves intact the consequences of something not happening, which I guess might only be another way of asking when does the failure of something to happen amount to an omission?

MR KEANE: Relevantly for the purposes of section 54, we would submit that it does not relevantly amount to an omission where it leads to the absence of cover.

GUMMOW J: I am sorry, where it?

MR KEANE: I am sorry, I should not put it that way. I probably should put it a different way: where, by reason of that act or omission, cover is not extended.

GLEESON CJ: Well, apply it to Greentree where the thing that did not happen was that an injured person did not make a claim during the period of the cover.

MR KEANE: Yes.

GLEESON CJ: The injured person, applying Antico, had the right to make the claim during the cover so, presumably, the injured person omitted to make the claim during the period of the cover. Now, why does not section 54 oblige the insurer to disregard that omission?

MR KEANE: Because section 54 looks at the reason on the basis of which the insurer can decline cover. If the reason is a state of affairs that has been produced, that state of affairs being that there is then no cover, that state of affairs has occurred, it is the reason, it is that there is no relevant effect of the policy. The postulates of section 54 are not made out. Another way of putting it would be the way that Chief Justice Hodgson did, to say that it is just not a proper or accurate or fair characterisation of that situation to say that that situation has arisen because someone did not do something. It is not about an omission; it is about a non-event. Something did not happen.

McHUGH J: But "omission" in 54 has no connotation of "duty", has it?

MR KEANE: No, right, choice or liberty. We accept that that does not matter. What does matter, in our respectful submission, is the state of affairs that the non-exercise of it may produce. We submit that is really the importance of that passage at 93F in Perry, particularly when one bears in mind that one is talking about the effect of the policy - not so much the effect of an act or omission, but it is the effect of the policy by reason of an act or omission. In that regard the language of section 54, stripped down, is that it is the effect of the contract of insurance by reason of some act or omission. It is not, for example, the effect of an act or omission is that the insured may refuse to recognise or afford the existence of cover. It is the effect of the policy "by reason of", so you need a policy and you need to identify the reason. If you do not have a policy because it has just gone away - - -

GLEESON CJ: Well it is not, again, as simple as that; it has gone away in a context where there are successive covers presumably. From the insurers point of view the question is, who is on risk in relation to this matter. Insurance policies - not just that an insurance cover normally lasts for a year, it is the insurance cover is normally renewed or a new insurance is taken out at the end of the year, so there is a succession of policies. Who do you say was on risk in relation to, if I can use a neutral expression, this incident?

MR KEANE: Well, what happened actually, your Honour, was that the insured sued both us and Lloyds Underwriters, who came on risk after us, and against them the claim was unsuccessful because of material non-disclosure.

GLEESON CJ: Were they one of the defendants in this action?

MR KEANE: Yes they were. Well, they were one of the third parties, your Honour.

GLEESON CJ: Which one was that, Mr Swinbank, I presume?

MR KEANE: He was the Lloyd's nominee.

GLEESON CJ: Well he is c/o Ebsworth & Ebsworth, which seems to identify him fairly well.

MR KEANE: Yes. To come back to your Honour Justice McHugh, where the reason for the entitlement to refuse indemnity is the absence of an effective policy, that that vacuum is a result of acts or omissions by the insured, in our respectful submission, does not engage section 54. It is a state of affairs, true is it it might be a state of affairs as been brought about by acts or omissions, most things are. I mean, everything is a result of acts or omissions. The question is in identifying the relevant reason, or the reason. That is why we have used the language "the immediate reason" in our written submission.

GLEESON CJ: Just getting back to the circumstance of this case. I think this is something that Justice Derrington referred to in his reasons. Is the practical outcome of the result for which you contend in the present case that the insured was confronted with the choice between notifying its current insurers of this occurrence during the period of the cover or disclosing the matter to the new insurers when it took out its cover for the next year?

MR KEANE: Yes, that is the effect of it, your Honour, and that, of course, is the advantage to the insured of condition 3.

GLEESON CJ: And, if it had been the same insurer in the second year, the same problem would have arisen, it would have been a problem of disclosure in relation to the next year's policy.

MR KEANE: Well, if they had given notice of the occurrence there would not have been a problem about it because they would have given notice of the occurrence, if it had been the same insurers.

GLEESON CJ: But presumably giving notice of an occurrence may have an effect on the premium you are going to pay next year.

MR KEANE: Quite.

GLEESON CJ: Just as giving notice to next year's insurer may have an effect on the premium you are going to pay next year.

MR KEANE: That is true. We say that while that may be some of a disadvantage to the insured, it is not something which is necessarily an affront to the reasonable expectations of honest parties.

KIRBY J: But it does indicate that there is a crack in the statute because if the insured does not give notice through some slip then if it gives notice to the new insurer, the new insurer will either not accept the risk or it will levy some additional premium.

MR KEANE: That is true.

GLEESON CJ: And if the insurer deliberately does not give notice in order to keep its insurance premiums down?

MR KEANE: If the insurer does not?

GLEESON CJ: Yes.

MR KEANE: Well, in that event, your Honour, there would be distinctly not an affront to the reasonable expectations of honest parties in that insured meeting the consequences.

GLEESON CJ: And then you get a different situation again, illustrated by the present case. I would have thought it is reasonable to infer - I do not know whether this was ever investigated or whether it should have been - but it is reasonable to infer that this person did not give notice because they thought the heat was off.

MR KEANE: They thought the claim had gone away.

HAYNE J: It is surprising then they failed against Lloyds.

MR KEANE: Your Honour, I suppose it is a question of just how much do you know and what is the question, what is the question that Lloyds asked, and I think that might have been - I think it might be perhaps a little broad of me to have said non-disclosure. There may have been a little more in it than that.

HAYNE J: Can I take you back to the Greentree-type problem, the third party who suffers an event and makes no claim on the insured. Can I invite attention to 54 and the way in which 54 may or may not be engaged in that circumstance where you have a claims made policy. The hypothesis for consideration is that there is an omission by some other person, namely, the injured person, to make a claim or notify of consideration of a claim to the insured. How would the words, "the insurer may not refuse to pay the claim by reason only" - I emphasise "only" - of that omission operate in such a case?

MR KEANE: I am not sure that I grasp your Honour's question.

HAYNE J: Well, we have to struggle with 54. It is said that 54 on its literal terms might apply to a case in which the injured person does not make a claim within term of cover, makes it five years after term of cover ended. You understand the hypothesis I am considering?

MR KEANE: Yes, your Honour.

HAYNE J: But how could 54 on its literal terms be engaged by such a case? In particular, how could the words towards the end of 54(1), "may not refuse to pay the claim by reason only of that" omission, be satisfied in such a case?

MR KEANE: We would submit that they are not because it is not by reason only of an omission.

HAYNE J: Thus, does it follow that the Greentree type of case example is one that offers any illumination of the present problem?

MR KEANE: Yes, your Honour.

HAYNE J: What is the illumination it offers?

MR KEANE: Because of the emphasis on the need to identify the effect of the policy by reason of the act or omission and where one can say fairly and sensibly and without stretching the imagination that fairly and sensibly without stretching the imagination this policy does not have that effect, it is not because of the failure to give notice that just because the policy has come to an end that that is the reason that there is a vacuum. There is a vacuum because, to go back to the language used by Justice Kirby in Perry, the policy was not attracted. I mean, in our respectful submission, it is a very long way away from this policy, the proposition your Honour puts to us.

HAYNE J: The point I am trying to elucidate with you is this: if 54(1) on its literal terms were to be engaged against your interests in this case, does that inevitably lead on to the Greentree problem. If it does not lead inevitably to that, then the position is different from that which would obtain if it inevitably forced you to confront the Greentree position.

MR KEANE: Your Honour, from our point of view, we submit that Greentree is correct. I know I am not answering your Honour's question. I must confess I am having difficulties.

HAYNE J: I am not articulating it properly then, Mr Keane.

MR KEANE: No, your Honour. We can see that it might be said that Greentree is a fortiori, our position, but we also submit that if the decision in Perry, the correctness of which Greentree has affirmed the decision in Perry is wrong, then we find it very difficult, with the greatest respect, to see where one does draw the line to stop the operation of section 54 in relation to Greentree. One does not stop at the logically anterior questions about the existence of policy and whether there is a policy that is apt to meet the claim at all. That is a proposition that Greentree does establish for us, in our respectful submission, as does Perry. If Perry is to go, we cannot see, with respect, why Greentree would not be swept away as well, although we do accept that it is a fortiori us in the sense that it is a very strong example of the absurdity to which section 54 could be driven if not read with some check. It would indeed, in our respectful submission, be distinctly absurd if Greentree were to be overruled. What would the answer be to Chief Justice Hodgson's arsonist example? Your Honours, I note the time.

GLEESON CJ: We were going to sit until 1 o'clock, Mr Keane.

MR KEANE: Your Honours, we have only a couple more things that we would wish to say, and that is to say that, by way of amplification with paragraph 35 of our written submissions, the mischief at which section 54 is directed is identified in Greentree. We mentioned it earlier, but we should take your Honours to it. In the judgment of Chief Justice Spigelman, commencing at page 708, at the letter D, and running to the bottom of that page, and on the following page to just before the letter D, and can we invite your Honours to read that particularly in relation to our submission that we are a long way from the mischiefs or the vices which are articulated in those paragraphs.

His Honour then refers to East End and the characterisation of the relevant clause there as involving a drafting technique. Then at F, his Honour says:

In my opinion, this reasoning does not apply to the "claims made" component of a "claims made and notified policy". The distinction between an "occurrence based " policy and a "claims made" policy is a distinction of substance for the purposes of definition of risk.

So that if one regards "cover" as "cover in respect of risks", then that is a substantial difference, and it makes sense to speak of - - -

KIRBY J: Is there anything you could tell me about claims made policy relating to premiums and the comparison between the way in which premiums are structured for claims made policies as against occurrence policies. Is there any discussion in the cases? In other words, does the insured get a better deal because they have this very strict and limiting cover?

MR KEANE: Your Honour, there was some discussion in the Supreme Court of Canada in Reid Crowther in the judgment of Justice McLachlin where her Honour does make the point that these - it is a case on our learned friend's list. It is Simcoe and Erie General Insurance Company, item 11 on our learned friend's list. Her Honour, in quite a lengthy discussion of the development of claims made as opposed to occurrence based policies, does explain the history of them and makes the point that occurrence based policies faded out because they became very, very expensive indeed, the point being that claims made policies are affordable because they are of a tighter reign, as your Honour says.

KIRBY J: I can understand that and I have read Mr Masel's commentary on this case. It may not be susceptible of a solution within the words of the Insurance Contracts Act but one gets a feeling that if the injured party, the third party, as it has been called, does not make the claim within the period then the policy does not respond to the situation, but if there is a claim on the insured within the period and some slip occurs in the insured's office that, by negligence or carelessness or oversight, does not communicate the claim, that that is the type of thing that section 54 is intended to deal with.

MR KEANE: Quite, your Honour, and that is East End and that line is appropriately drawn in East End but there is, in our respectful submission, no good reason to push it further. As we said earlier, we accept that lines have to be drawn and what your Honour has said identifies a perfectly sensible, rational place to draw it, bearing in mind the considerations discussed by Chief Justice Spigelman in relation to the Law Reform intentions.

KIRBY J: The problem is to do it in a statutory phrase which is in very general terms. It has not really addressed itself with particularity to this particular issue.

MR KEANE: What your Honour says, with respect, we adopt because, as we have been trying to say, section 54 uses very open textured language but it occurs in a context that has much more relevant, specific language in section 40 which speaks of "the effect" of a policy, very close to the effect of this policy, and recognises the need for the report of the occurrence so that it is at least, we would submit, unlikely that the legislature intended by the open textured language of section 54 to produce a different result.

GLEESON CJ: What has happened to the reasoning of Justice Clarke in Perry?

MR KEANE: Your Honour, it has been subjected to criticism on the footing that his Honour spoke in the language of exercise of rights or choices.

GLEESON CJ: So it is regarded as being overtaken by Antico?

MR KEANE: Yes, on the footing that it does not matter whether the act or omission is the exercise of a right, liberty or choice.

GLEESON CJ: I had in mind that part of his reasoning in which he said that if there had been no condition 3 in this policy, but there had been reliance by the insurer on section 40(3), it would have been impossible for the insurer to rely on section 54 and he thought it was a very odd result that, in effect, inserting something like section 40(3) in the policy in condition 3 produced a different consequence.

MR KEANE: Your Honour, yes; it would have been impossible for the insured to rely on section 54, yes, your Honour.

HAYNE J: And may that point of view be understood against what Justice McLachlin says in Reid Crowther, particularly at 264 column 1, where the judge describes the policies in terms of discovery rather than claims made, and that the extension we find in condition 3 here, takes you beyond, if we are to use these tags, a pure claims made policy, into a policy that might more aptly be described as a discovery policy, discovery of an event.

MR KEANE: Your Honour, I think discovery policies - I think it is another way of saying claims made, as her Honour suggests at page 264 - - -

GUMMOW J: Well, she uses the expression "hybrid" too.

HAYNE J: Yes, and her Lordship may be - whether or not Justice McLachlin is using it in these terms, condition 3 extends beyond the four corners of a pure claims made basis of liability, does it not? It enables the insured to recover against the insurer in respect of claims that are not made against the insured within the term of the cover.

MR KEANE: Quite, your Honour, by making a provision for the extension of the cover.

HAYNE J: Yes, and what triggers it is that the insured becomes aware of an occurrence, that is, in shorthand, discovers an event.

MR KEANE: Well, yes, your Honour. Of course, one has to be careful about using the labels again because - - -

HAYNE J: Just so, and her Lordship makes - - -

MR KEANE: Because speaking of discovering, where it is just becoming aware of an occurrence, in most cases the insured will be aware of the occurrence because the insured will have done it.

HAYNE J: I think I have probably, in using the expression, "her Lordship" disobeyed about three fundamental commands for every judgment made.

MR KEANE: Yes, your Honour.

HAYNE J: They are probably worth about page 1 and page 3 of the leading dailies for the next month, I suppose.

MR KEANE: Yes, your Honour. Your Honours, I should have mentioned earlier that, in relation to the matter of the Lloyds' Underwriters, the insured's appeal against that result was successful.

GLEESON CJ: Sorry?

MR KEANE: The insured appealed against the decision of the trial judge - - -

GLEESON CJ: In this case?

MR KEANE: In this case, and was successful. I must say I had forgotten that.

GLEESON CJ: I did not know anything about it. We are only dealing with part of the proceedings here, is that right?

MR KEANE: I think your Honours are dealing with all that - your Honours, can I come back to your Honours about that after lunch?

GLEESON CJ: If you would not mind. I am interested to know what happened about that.

MR KEANE: Yes, at the moment I am - - -

GLEESON CJ: We will adjourn until 2.00 pm.

AT 12.57 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.02 PM:

GLEESON CJ: Yes, Mr Keane.

MR KEANE: Your Honour, in relation to the insured's claim against Lloyds, what happened was that in a separate appeal the insured was successful in overturning the adverse judgment at first instance. Could we just take a moment to take your Honours to the record just to show the points on which it turned. If your Honours go to the appeal book at page 133 the material question in the proposal is question 16:

"List any circumstances which may give rise to a claim or suit being made against the establishment.

(ii) Are any of the Partners or Principals, AFTER ENQUIRY, aware of any circumstances which may give rise to claims against this Firm/Company or their predecessors in business.....whether you consider yourselves liable or not?"

AHC's answer was "No".

Then, if your Honours go to page 135 at about line 8 her Honour found, as a fact, that:

Lloyds did not satisfy me that it probably had received AHC's proposal before the contract was entered into -

And, therefore, they had not relied upon the proposal. But, then, her Honour went on at 166 to discuss the accuracy, or as her Honour describes at 166, line 26, not absolute accuracy of the answer and then went on at 169 to discuss the exclusion clause and then at 171 concluded:

that Lloyds may rely on the exclusion clause to deny liability -

on the basis of the view that is expressed at about line 4 and following:

any reasonable person in the position of AHC would have been aware that this very issue, negligence on the part of AHC had been raised by -

the letter from the solicitors for Dr Tampoe. On appeal, her Honour's decision was overturned - as we say, it was a separate proceedings from ours, although heard by the same court - on the basis that firstly her Honour read too high a standard into question 16, and, secondly, on the footing that her Honour's finding that the proposal had not been read or relied upon meant that it did not matter anyway.

GLEESON CJ: Well, who is liable to cover the insured on the basis of the decisions as they now stand?

MR KEANE: Well, there would be a double insurance situation, your Honour. Our learned friends have been good enough to make available copies of the decision in the Court of Appeal. May we hand them up to the Court.

GLEESON CJ: Thank you.

MR KEANE: Your Honours, those are our submissions.

GLEESON CJ: Thank you. Yes, Mr Couper.

MR COUPER: Your Honours, can we approach the matter in this sequence: can we start with the proposition that the section ought to be read according to its term, which is trite, but obviously based on authority, and then ask the question which has been raised by the Court, if the section is applied according to its terms, does it apply to this situation? In our respectful submission, the answer is plainly yes.

If one asks why could the insurer refuse the claim in this case, the answer is because there was neither a claim nor a deemed claim within the period of the policy. If one then asks why was there no deemed claim within the period of the policy, the answer is that the insured failed to notify of circumstances of which it was aware.

GLEESON CJ: Why was there no claim within the period?

MR COUPER: Your Honour, because all that happened within the period was that the insured became aware of the occurrence which might give rise to a claim.

GLEESON CJ: There was no claim because Dr Tampoe did not make a claim.

MR COUPER: That is so.

GLEESON CJ: Was that an omission?

MR COUPER: In our respectful submission, not, your Honour.

GLEESON CJ: Why not?

MR COUPER: If we may approach the matter somewhat slowly. If one takes the situation in which the third party claimant fails to make a claim within the policy period, it can be properly be said, in our submission, that there are two reasons why the insurer can refuse to pay the insured's claim eventually made when the third party's claim eventuates some time after the policy period. The first is the failure of the third party to make a claim within the policy period. The second is the failure of the insured in a claims made and notified policy to give notice to the insurer within the policy period. In our respectful submission, neither of those matters enlivens section 54.

If one asks the question posed by your Honour Justice Hayne, "Is the insurer's refusal by reason only of the failure of the third party to make a claim?", the answer is no. The additional matter is the failure of the insured within the policy period to notify of the claim. It may be that section 54 would have a cumulative effect, that is that each of the failures might be regarded as being within the scope of the section, but, in our submission, if one asks the question on a commonsense basis, "Is the failure by the insured to give notice during the policy period an omission within the scope of the section?", the answer is no because there has been no occasion for the insured to give such notice. No triggering event has occurred which would lead to the giving of notice, whether the giving of notice were required as a part of the definition of the risk or for fulfilment of a condition, no occasion under the policy has arisen for notice to be given. So that one could not in a commonsense way, in our respectful submission, say that the failure of the insured to give notice is an omission within the meaning of section 54.

If that is so, it follows that the insurer's refusal to pay the claim is not by reason only of the failure to make a claim by the third party, but also by reason of the absence of notice given by the insured. The second reason, in our respectful submission, why the section has no application is that one cannot again approach the matter as a question of causation rather than legal characterisation, so that the effect of the contract of insurance is to give the insurer a right to refuse the claim because of an omission by the third party.

The insurer's right to refuse the claim arises because no triggering event has occurred, that is, a claim has not been made by a third party against the insured. That may be because within the policy period there was no negligence by the insured; or because there was no damage; or because the third party did not become aware of the negligence and the damage which was caused in the loss; or because of a choice by the third party not to notify the insured; or for some other reason. In only some of those circumstances would one describe the third party's failure to give a claim as an omission by the third party.

In our respectful submission, it does not matter what the policy, what the contract of insurance focuses on, is has there been the triggering event, namely, the making of the claim. The effect of the contract is not to go further and to ask, "Why was the claim not made?". If the claim was not made, that is the end of the matter, and 54 is not attracted - - -

HAYNE J: Can I go back a moment and just, I fear, go back over what you have just put by reference to clause 1 of the policy and section 54 to see if I can understand the contention you are putting. As I understand it, you say that clause 1 of the policy found at page 75 of the appeal book contains two relevant elements. It is an obligation to indemnify against claim or claims for compensation first made and reported.

MR COUPER: Yes, your Honour.

HAYNE J: You say there are two elements there and that 54 cannot operate to deal with two elements which might, on one view, constitute an omission - each of which might constitute an omission.

MR COUPER: With respect, no, your Honour. We put it a little differently. We say that section 54 is capable of dealing with cumulative omissions but that one cannot properly characterise either of the two matters, that is the failure of the third party to make a claim or the failure of the insured to notify, as being an omission for the purpose of section 54.

HAYNE J: You see, that is a proposition I have some difficulty with and my difficulty stems from the expression "by reason only of that act" or read in "or omission". The reference to "only" indicates an intention in 54 to deal with singular acts or omissions, not the combined effect of double acts or omissions and if that is not so I do not, for the moment, understand where it is, at what point it is you are stopping the operation of 54 in the case just under consideration.

MR COUPER: Your Honour, may we say these things. If the section is devoted to singular acts or omissions only, it is, with respect, obviously right to say that it does not deal with or does not respond to the situation where there is no claim made by the third party. Our submission is really to say that if that is not so, if the section is regarded as extending to the cumulative effect of more than one act or omission, even if that is so, that does not lead to section 54 responding to the case of the failure by a third party to make a claim within time within the policy period.

We say that for the two reasons which we have attempted to articulate. One is that the failure of the insured to give notice cannot, in a commonsense way, be described as an omission within section 54 because no occasion for the insured to act under the policy has arisen. The second is to, with respect, adopt the approach of Chief Justice Spigelman in Greentree, say that the failure to make a claim by the third party more properly characterises a non-event rather than an omission by the third party.

GLEESON CJ: What is the difference between a non-event and an omission, just concentrate on the third party's failure to make a claim?

MR COUPER: Yes, your Honour. Your Honour, the different, in our submission, arises because of the requirement that section 54 depends upon the effect of the contract of insurance. The contract of insurance in a claims made case involves - a claims made notified case involves a triggering event, the making of a claim and then actions by the insured to bring the claim to the attention of the insurer. The triggering event, the making of the claim, may not occur for a number of reasons, some of which might involve what might properly be called omissions by the third party to make the claim against the insured.

In our respectful submission, the policy, the contract of insurance, is not concerned with why the claim is not made. It is concerned only with the fact of the making of the claim or not, so that if one approaches the matter as a question of the effect of the contract of insurance, one says that the effect of the contract of insurance is that the insurer may refuse to pay the claim because the triggering event has not occurred. The contract of insurance is not concerned with why the triggering event has not occurred. In that respect, in our respectful submission, it is the same sort of reasoning as was employed by Chief Justice Hodgson in Permanent Trustee in the case of a fire policy. The fire may be caused by an arsonist or by accident or some other means. The triggering event is the happening of the fire.

GLEESON CJ: There are some people who have to worry about run-off cover, Mr Couper. I will not elaborate too much on that, but suppose a person had a policy of professional indemnity insurance and then went into another occupation, and during the time of the cover, during the period of the cover, a person attempted, but failed, to make a claim against the insured, for example, by posting a letter that did not arrive, or whatever, so that the period of cover expired and a week later the insured received the claim.

MR COUPER: Yes, your Honour.

GLEESON CJ: Does section 54 come to the aid of the insured in those circumstances?

MR COUPER: In our respectful submission, no, because, as we put it, the contract of insurance is concerned only with the question has a claim been made not as a triggering event, not with the reasons for the failure to make the claim. So, when one asks under section 54 what is the effect of the contract of insurance, its effect is that the refusal is because a claim has not been made and one ceases the inquiry at that point. One does not go on to inquire, for the purpose of the effect of the contract, why was the claim not made?

GLEESON CJ: So a failure to make a claim is sudden death.

MR COUPER: If the third party does not make a claim against the insured - - -

GLEESON CJ: During the period of cover.

MR COUPER: In a pure claims made notified policy, it is sudden death, your Honour, in our submission.

KIRBY J: This implies that you read omission to mean failure where you ought to have done something. But omissions can be non-action. They can be.

GUMMOW J: That is what Antico decided.

MR COUPER: Your Honour Justice Gummow is right to say that omissions can be failure to exercise choices and matters of that sort, and omission, as to your Honour Justice Kirby's question, can have a wide range of meanings; there is no doubt about that. Underlying the submissions we make, I think one must concede, is the notion that as a matter of policy in addressing the mischief which the section is designed to address, the mischief does not extend to the situation in which a third party does not make a claim against the insured within the policy period.

KIRBY J: But once you concede that, are you not on a slippery dip down to accepting that omission can, on the part of a third party being excluded, that omission on behalf of the insured is also excluded?

GLEESON CJ: Once you are into the mischief that the section is designed to address and you add in a good dose of common sense, you may really be on a slippery slope.

MR COUPER: Your Honour, in our respectful submission, that is not so. Might we go to, in perhaps a roundabout way, the basis for the distinction between the Greentree situation and the situation in this case.

HAYNE J: Just before you do, you said the critical thing is whether the claim is made or not. Do I understand that?

MR COUPER: I was speaking only of the claims made - pure claims made policy at that stage, with respect, your Honour.

GLEESON CJ: Well, this policy.

HAYNE J: This policy, because the claim was not made in the term of insurance here, was it; neither the claim by the third party, nor the claim by the insured?

MR COUPER: Your Honours, I was not speaking of this policy. Perhaps I should have made that clear. If one applied the same approach to condition 3 of this policy, one would ask the question: did the third party fail to make the insured aware of circumstances within the policy period? In our respectful submission, the fact that the third party did not make the insured aware of circumstances, or an occurrence within the policy period, does not enliven section 54 for the same reason, that it is the absence of a triggering event.

Your Honours, if we might then approach - leaving aside Greentree - approach the situation of the present case. In our submission, as we say, as a matter of applying the section according to its terms, one inquires what is the reason why the insurer may refuse the claim. It is that there is no claim or deemed claim. Why is there no deemed claim? Because of the omission of the insured to give notice of the occurrence of which it has become aware. So that the section precisely covers the situation in this case, in our submission.

GLEESON CJ: But you say, as I understand it, that section 54 does not work in relation to the failure to make a claim, but it does work in relation to the failure to make a deemed claim.

MR COUPER: Yes, your Honour, and it works because of the existence of condition 3. Condition 3 is, in our submission, not some form of extension. It is part of the definition of the scope of cover in this particular contract of insurance. Because condition 3 is there, the failure to give notice of the circumstances of the occurrence is the failure which attracts section 54. Our learned friend's submission appears to involve the notion that once the policy period has expired, the policy ceases to exist for all purposes.

Our learned friend's argument appears to be that one asks the question, "Why has the insurer an entitlement to refuse the claim?", and the answer is, "Because the policy has expired without there being a claim or a deemed claim made", and that is the end of the inquiry. In our respectful submission, that is the first step in the inquiry. The next step is to ask, "Why is there no deemed claim?", and one comes inevitably to the failure to notify as being the reason for that state of affairs.

HAYNE J: I must say for my part, Mr Couper, talking about the contract having come to an end or expired is a concept that is conclusionary and in large measure, to my immediate view, wrong. These parties made a contract. The contract did not disappear in a puff of blue smoke when the end of the insurance period came.

MR COUPER: With respect, we accept what your Honour says as being obviously so. Our learned friend's argument depends upon the contract ceasing to have any relevant existence once the policy has expired.

GUMMOW J: What do you mean "ceasing to have any relevant existence"?

MR COUPER: Our learned friend says once the policy has expired and a claim is made, the insurer may refuse because the policy has expired, full stop, as if the policy - one cannot then look at what happened during the policy period and ask, "What is the effect of the contract?". If one applied our learned friend's argument to the East End situation, the result would have been the opposite. In the East End situation, the insured notified the insurer of the claim after the policy period had expired. On our learned friend's formulation, one would ask, "Why can the insurer refuse the claim?". Because notice came after the policy period had expired. End of inquiry. With respect, that, in our submission, highlights the flaw in that approach.

Your Honours, the other apparent basis of our learned friend's attempt to distinguish the reasoning in East End and Antico is to say that there is a difference in legal characterisation between the failure to give notice under condition 3 and the failure to give notice under the insuring clause and to describe the first of those as being an expansion or extension of the scope of the cover. In our submission, that approach fails for two reasons. The first is that this Court made clear in Antico that one does not approach section 54 by asking, "What is the legal character of the failure in question?". One approaches the matter on the broad basis of what is the effect of the contract of insurance. So that the approach necessarily fails.

The second reason why our learned friend's approach fails is that, in our respectful submission, there is no valid distinction in character between the failure to give notice under condition 3 and the failure to give notice under the insuring clause. Each of them involves merely a notification step by the insured as a condition precedent to the attachment of cover to a particular claim. It is not a case where a new category of risk is added by the taking of the step. Each merely involves the giving of notice that a particular claim when made in the condition 3 case to be made will be covered by the existing cover in the policy. In our respectful submission, there is no warrant for distinguishing between the two.

KIRBY J: What happens in a pure claims made policy if the event occurs on the last day and the claim is signalled at 4.00 pm, and the insured does not get around until the next morning, notified, that is it, is it?

MR COUPER: In a pure claims made policy, that is it, subject to section 40 of the Act.

GLEESON CJ: Of course, in a claims made policy it does not matter when the event occurred and it would commonly occur before the period of cover.

KIRBY J: But I pose that because if the event occurs on the cusp of the final day, well, it makes it virtually impossible or may make it practically difficult or impossible to make a claim or to notify.

MR COUPER: If your Honour, with respect, is speaking of a claims made and notified policy, then if the claim is made against the insured on the final day and there is a failure to notify on that day, then section 54, with respect, will respond. The reason why the insurer may refuse to meet that insured's claim is the failure to give notice on that final day. So section 54 will, in our respectful submission, deal with that situation. Similarly, if it is a policy with a condition such as condition 3, if the insured becomes aware of the circumstances on the last day but fails to give notice of those circumstances, section 54 will also respond for the same sorts of reason.

KIRBY J: But if the incident happened on the last day and the injured party does not give notice until the following day, and there is no other reason for the insured to notify the insurer, then you fall outside the scope of a pure claims made policy.

MR COUPER: Yes, your Honour. Your Honours, another thing we wish to say is this. The approach which our learned friends take is to say that there must be a constraint placed upon the reading of section 54, as my learned friend, Mr Keane, put it, so that the substance of the contract is not radically reformed. It is, with respect, obvious to say that section 54 will always have an effect upon the application of the terms of a contract of insurance. It must inevitably do so, with respect, for the reasons your Honour Justice Hayne was speaking of. If the contract meets the claim, there is no occasion to invoke section 54.

So the section must always involve a departure from the terms of the contract. Our learned friends then necessarily say that if one can say that there is an injustice to the insurer, in this particular case one should read down section 54. In our respectful submission, the point your Honour Justice Hayne raised is a complete answer, that the section itself deals with the question of injustice to the insurer by - - -

HAYNE J: Well, does it? The prejudice of which 54 is speaking is prejudice as a result of that Act. Now, the prejudice that an insurer may suffer may be of a much more general kind as, for example, having struck its premiums on one basis rather than another, and identifying prejudice as a result of the particular act engaged by 54 may not be an answer. What do you say about that kind of proposition?

MR COUPER: Your Honour, we say if your Honour is speaking of the striking of premiums in respect of a particular insured because of an absence of notice of a claim or a group of claims coming, then section 54 will directly deal with that prejudice. If one is speaking more generally of the difficulty of insurers in ascertaining their overall liability, speaking globally under all policies then, in our respectful submission, section 54 probably does not directly address that problem. Nonetheless, that type of prejudice is no reason to read down section 54 according to its ordinary language.

GLEESON CJ: That type of problem is the reason for the change from occurrence based policies to claims made and notified policies, is it not?

HAYNE J: Get rid of the long tail.

MR COUPER: That is so. We accept that that is so. The Law Reform Commission report which was the genesis of the Act considered that aspect of the insurer's difficulty, in our respectful submission, and section 54 was the product of that consideration and ought to be regarded as being the striking of the balance that the legislature though was appropriate to deal to the extent it thought appropriate with the balance between insured persons and insurers.

KIRBY J: It is not unknown, indeed I have sat in cases - I think Ferrcom was one where in order to show what would have happened brokers are called or insurance managers of other insurers to come along and say, "Well, had I been confronted with this knowledge I would have levied the premium in this way" or "I would never have written this particular insurance".

MR COUPER: Yes, your Honour.

KIRBY J: So, it is susceptible to proof by people who know the industry.

MR COUPER: Strictly - we agree with what your Honour says. There may be a difficulty of proof at the very global level about how insurers overall might structure premiums but where one is dealing with the situation of the result of any particular act or omission under section 54 then the extent of prejudice is capable of proof and is capable of quantification, in our respectful submission.

KIRBY J: Was there evidence, remind me, in this case of the reason for the omission?

MR COUPER: Your Honour, in this case the reason for the omission accepted by the court was that the letter was written by the solicitor for Dr Tampoe to the respondent. One of the respondent's medical officers then met with the solicitor and gave an explanation of the nature of the treatment and the cause of the septicemia, which had been the problem, and came away satisfied that he had convinced the solicitor that there was no negligence.

KIRBY J: It does not seem a very good explanation. I mean, it is easy to be wise after events but a prudent solicitor and prudent insured, in those circumstances, would say, "Just in case we are putting you on notice we have had this" and that is what Mr Keane says should be done.

MR COUPER: But what happened in this case, your Honour, was that those events were some nine months before the expiry of the policy. No further step was taken by the solicitor to communicate with the respondent or to suggest that a claim was to be pursued and the respondent, wrong as it turned out, made the assumption the matter had been put to rest.

GLEESON CJ: Well, there are reasons other than prudence in protecting your own interests for not notifying an insurer and they are most obviously related to the insurance premiums you are going to have to pay next year if you do notify your insurer. So, presumably, you do not lightly notify your insurer of something that is at the outer boundaries of possibility otherwise you could suffer an unfair consequence in terms of next year's premium.

MR COUPER: Your Honour, one readily accepts that that is so. In this case the evidence was that this respondent had a practice of notifying of occurrences whether they were likely to lead to a claim or not, but this one slipped through the net, if I can put it that way. This particular hospital did not pass on to the head office this potential claim and notification did not take place and the reason it was not passed on at the hospital level was the view, rightly or wrongly, of the hospital staff that they had satisfied the solicitor's inquiry and there would be no claim.

KIRBY J: What is your answer to Mr Keane's statement that in this type of insurance it is not unreasonable to say, well, if that happens you are just outside this - let it be a hybrid - policy and you would get some support from Mr Masel and Mr Clarke in their articles. They say judges and lawyers with their great fascination with justice and kindness and mercy and all that are not really doing the insurance business a service by the way in which they have been stretching section 54. Mr Masel's article especially says that that is an unrealistic approach to this type of insurance.

MR COUPER: Your Honour, we say two things. First, that that kind of criticism is not, of itself, a basis for reading down the section according to its terms of being a remedial character. The second is that there is a difference only in degree, but not in kind, in our submission, between the East End type situation where a claim is not notified and the situation here where an occurrence is not notified.

In each case there may be a considerable delay between either the making of the claim or the awareness of the occurrence and, for example, the commencement of proceedings. One might think that there is more likely to be a longer delay where there is an awareness of an occurrence but that is not a matter, a difference in kind, in our respectful submission, it is only a difference in degree and there is an element of speculation involved in all these articles, such as the article by Mr Masel, about how much difference there is, how much delay there is going to be.

The other compelling answer, in our submission, is that if there is a lengthy delay and that results in prejudice to the insurer, the section deals with that. If the delay leads to the sort of prejudice where the insurer cannot properly defend the claim - and that is a matter which is dealt with in the section - and the insurer's liability may be reduced to fairly reflect that prejudice. So that it is not simply a matter of saying time will go past. It is unfair. The section actually contemplates time will go past. If there is a prejudice to the insurer as a result that is expressly dealt with in the section by reducing the insurer's liability.

HAYNE J: The first of the points you make, I think, might be restated as being that any application of section 54 to a claims made and reported policy necessarily modifies the solution of the long tail problem that claims made and reported policies were seen as offering. We are debating the extent of the modification. We are not debating whether there should be modification.

MR COUPER: With respect, we accept what your Honour says and if one then asks why should one differentiate between the claims made portion of the policy and the occurrence notification portion of the policy, there is no good answer. Each of them serves the same purpose. Section 54, with respect, serves the same purpose for the insured by protecting a failure to notify.

KIRBY J: Except, as I understand it, Mr Keane's argument is that it is the nature of this peculiar type of insurance that, after the time the insurance is dead and you are trying to breathe life into it and there is no greater prejudice that can be done than trying to breathe life into something which is dead and you should not be allowed to do it. There is no spiritual element in it; this is pure commerce, and the policy is dead and you cannot resuscitate it under section 54. "We have closed our books". That is the nature of this particular insurance.

MR COUPER: Your Honour, we understand that is what our friend says. The concept of the policy is dead is one in which, in our submission, has no validity for the reasons we sought to advance earlier.

KIRBY J: You say it is not dead because of condition 3 and section 54.

MR COUPER: Because condition 3 exists. Whether condition 3 was, as it is, a deeming clause or a clause which simply said, "If you give notice of an occurrence within the policy period, we will indemnify you for a claim arising from it whenever the claim is made", its substance would be the same. If one looks at it in that second respect, one can see that it is misleading to say that the policy is expired and therefore dead, because once condition 3 is activated, the policy is alive, to adopt the analogy, so far as the making of that subsequent claim is concerned.

HAYNE J: But the contract has not been discharged for breach, performance, frustration; the contract is there. The rights and obligations under it have a time element. But that is very different from saying that the contract is discharged, which, if I may say so, seemed to be the flavour of some of the submissions that Mr Keane was putting.

MR COUPER: With respect, we accept what your Honour says, that our learned friend's submissions are on the footing that the contract is either discharged or can have no effect once the time limitation period has expired, but the time limitation period is only for relevantly two purposes: to determine whether a claim is made and notified within time; and to determine whether there is an awareness of occurrence within time and notification of that awareness. That is the only purpose of the time period and section 54 is designed to deal precisely with that sort of situation, where there is a failure to take the notification step within the time period.

GLEESON CJ: I understood earlier you to say that, for a number of reasons, not all of which may be relevant to what I am about to ask you, that failure to notify a claim that has not been made is not an admission.

MR COUPER: Yes, your Honour.

GLEESON CJ: Presumably, on your approach, failure to notify of an occurrence is not an admission unless you believe that the occurrence may give rise to a claim.

MR COUPER: No, with respect, we would not put it that way, your Honour. We say that failure to notify of the awareness of an occurrence which may give rise to a claim is not an omission if the awareness does not exist.

GLEESON CJ: Well, that was what I was intending to put to you. Now, I want to relate that to the present case and to the findings of fact that were made in relation to the claim against...... If the state of mind of your client during the period of cover was that it could not reasonably be said - will you just excuse me while I look at the policy?

MR COUPER: Yes, your Honour.

GLEESON CJ: What is the page of it, Mr Couper?

MR COUPER: Page 76 applies; the relevant condition is at 76.

GLEESON CJ: So that it could not be said that it had become aware of an occurrence which may subsequently give rise to a claim, then failure to notify that would not constitute an omission.

MR COUPER: Yes, your Honour.

GLEESON CJ: Well, now, your client's argument presumably was that it had become aware of an occurrence which may subsequently give rise to a claim.

MR COUPER: Yes, your Honour.

GLEESON CJ: How does that square with the stand it took in its claim against the Lloyds insurer?

MR COUPER: I am sorry, your Honour?

GLEESON CJ: The Lloyds insurer was seeking to resist your claim against them on the basis that you should have answered question 16 in a certain way.

MR COUPER: Yes, your Honour.

GLEESON CJ: Now, if you were asserting against Mr Keane's client that you had, in fact, during the period of cover, become aware of an occurrence which may subsequently give rise to a claim against you, how does that square with the answer you gave to question 16 in your proposal for a policy with Lloyds, which I take it was made during the period of the cover?

MR COUPER: Yes, your Honour.

HAYNE J: .....with difficulty, I suspect, Mr Couper.

MR COUPER: I think that is probably right, your Honour. I am seeking to lay my hands on section 16 so I can answer with as much precision as I can. I think, your Honour, I must concede that the answer to question 16 was wrong. The reason why the insured was not defeated so far as Lloyds was concerned by that answer was that Lloyds issued the policy before seeing the proposal and seeing the answer to the question.

GLEESON CJ: Just testing it a little bit further: suppose your client's state of mind about this matter changed during the period of cover so that if tapped on the shoulder during the first half of the period of cover, your client would have said, "Yes, we are aware of an occurrence that may give rise to a claim", but then after the meeting between the solicitor and the other person we were told about a little later during the period of the cover, your client was tapped on the shoulder, they would have said, "No, we are not aware of any occurrence that may give rise to a claim". When does the relevant omission to notify occur, during the first part of the period of cover, or the second part of the period of cover?

MR COUPER: Your Honour, at all times after the insured became aware of the occurrence. The fact that the insured then thought that the claim would not eventuate as a matter of probability, does not mean the insured ceased to have the awareness.

GLEESON CJ: Suppose that during the period of cover - I am not sure how close this is to the facts of the present case, but it does not strike me as an unrealistic example - suppose that during the period of cover, as a result of an occurrence that happened earlier, an insured comes to the view that he is going to be sued, and then, still during the period of the cover, he is satisfied that he is not going to be sued, he has talked the potential plaintiff out of it, and in the upshot does not notify the insurer, is that an omission?

MR COUPER: Yes, your Honour.

GLEESON CJ: But at the last date for notifying the insurer, he has a state of mind which you say is inconsistent with that being an omission. He is satisfied that there is going to be no claim.

MR COUPER: Your Honour, the test that condition 3 sets is not the state of the insured's satisfaction. It is whether the insured shall become aware of any occurrence which may subsequently give rise to a claim. The words "which may subsequently give rise to a claim", in my respectful submission, do not depend the insured's subjective understanding of the extent of the likelihood that that will be so. In the case your Honour postulates, the insured became aware of an occurrence that may possibly give rise to a claim and it became aware of that state of affairs when solicitors wrote saying, "We're investigating making a claim against you. We'd like to see your records". At that point the relevant awareness on the condition in 3 had occurred.

GLEESON CJ: I am just offering for your comment the proposition that characterising a failure to notify an insurer in circumstances of the kind we are discussing might not always easily be identified as an omission.

MR COUPER: Your Honour, one can see that there may be difficulties but in the sort of case that your Honour has been raising with me, in our submission, the difficulties do not arise. The satisfaction by the insured that the claim is unlikely to arise gives a reason why there is no notice given to the insurer but it does not make the failure to give notice cease to be an omission.

GLEESON CJ: In the facts of the present case, as I understand it - but I cannot pretend to have looked closely at this - on the last day of the cover, which was the last day for giving notification, the situation was that a threat of a possible claim had receded. To what extent, I have to say as I sit here, I am not sure. But suppose you had an insured who was in a situation where the threat of the possible claim on the last day of the cover had receded to the point of invisibility. In those circumstances would the non-notification of the insurer constitute an omission?

MR COUPER: Yes, it would, your Honour, because the insured had during the policy period become aware of the circumstances which may possibly give rise to a claim. The fact that the insured makes an assessment that that possibility is very slim does not mean that the insured has ceased to become aware of the possibility or that its failure to notify ceases to be an omission, because the triggering step of giving notice is still not taken. In our respectful submission, the question whether the failure to notify is an omission or not does not turn on the subjective view of the insured about the degree of likelihood of the claim being made, even if the insured forms a view that a claim possibility is almost nil. Once the insured becomes aware of the possibility, the occurrence which may possibly give rise to a claim, that is enough to say that if there is then a failure to notify, that is an omission within the meaning of the section. One does not, in our respectful submission, judge it by asking, "What is the subjective view of the insured about how likely this claim is?".

GUMMOW J: Now, how does Greentree stand in the light of your analysis? Looking at Greentree at 712, it may depend upon actually seeing the text of the policy which the report does not seem to set out.

HAYNE J: Page 711, I think, has an insuring clause.

GUMMOW J: It was the same insurer - it does not have condition 3, does it? It is from a statement of facts as summarised, really.

GLEESON CJ: It is a different policy though, is it not? At 711 it was a policy in which giving notice was a condition. I thought that was the

old-fashioned form and I thought that they made it a claims made and notified policy to try and avoid leaving that as a dangling condition that could be - - -

HAYNE J: Though condition 2(a) of the instant policy, at page 76, seems to track that considered in Greentree.

GLEESON CJ: Yes, and consistent with that, I noticed the words "and reported" between D and E, that I had not noticed before.

MR COUPER: That part of clause 1 contemplates that - - -

GLEESON CJ: Was there a condition 3 in this policy? It probably just was not relevant to the case.

MR COUPER: It was not, as I recall, your Honour, regarded as being relevant for the purpose of this case. The question was whether the failure to make the claim by the third party was an omission. There was no discussion of whether an additional failure notified of an occurrence might be an omission.

GLEESON CJ: Yes, but, probably, we cannot infer that there was no condition 3 from the absence of reference to it in the judgments because it was not relevant.

MR COUPER: I think that is probably right, your Honour, with respect.

GUMMOW J: Do you have any objection to us being given the exhibit from that case?

MR COUPER: No, your Honour.

GUMMOW J: It may have been in the special leave book for all I know.

MR COUPER: Your Honour, the special leave point, as we understand it, or the reason special leave was refused, was because Greentree also involved arguments about section 18 of the Insurance Act of New South Wales and it is regarded that because this issue might not determine the litigation, it was not an appropriate vehicle for special leave to be granted.

HAYNE J: It was cluttered.

GUMMOW J: Yes, it was cluttered, as Justice Hayne says.

KIRBY J: Special leave was granted by Justice McHugh and myself in another case concerning section 54. Are you aware of that case? It was quite recently. I have forgotten the details of it.

MR COUPER: Was that the case of Einfeld, your Honour? I am not aware of the recent grant of special leave - - -

KIRBY J: I am not sure, but reference was made to the pendency of this hearing.

GLEESON CJ: Was not that a decision of Justice Rolfe?

McHUGH J: No, it is a Western Australian case.

GLEESON CJ: Right.

MR COUPER: I apologise, your Honour, I am not aware of the Western Australian case where - - -

GLEESON CJ: Well, I am aware of it, and the note that I got following the special leave application indicated that it did not raise the same question as this, which is why - - -

McHUGH J: No, it does not. It is quite a different case.

GLEESON CJ: That is why I did not fix it for hearing.

McHUGH J: Yes, it is quite a different case from this. It raises the question whether the failure to give notice itself constitutes prejudice or whether the insurer must show that it would have done something as a result of giving the notice. That is the critical issue in the case. The trial judge had held as a fact that even if given notice the insurer would have done nothing, so it had suffered no prejudice.

MR COUPER: Yes.

McHUGH J: Justice Ipp held that the mere failure to give notice constituted prejudice and that was sufficient. And, Justice Wallwork, in the majority, decided the case on the basis that the trial judge had not given proper reasons about some aspect of it and the dissenting judge upheld the trial judge, so, it is a case with no ratio.

MR COUPER: Yes.

GLEESON CJ: Was Greentree decided on the basis that you advanced in explanation of it?

MR COUPER: Your Honour, Greentree was decided, as we apprehend, on the basis that the failure by the third party to make a claim was a non-event in the sense of an event external to the policy. It was decided perhaps on the second basis which we advance and not the first. That is, there was no consideration of there being more than one reason for refusal. The court's approach was to say the absence of a claim is simply properly regarded as being, a claim by a third party, as probably as being a non-event.

GLEESON CJ: And is not an omission.

MR COUPER: And is not an omission.

GLEESON CJ: And, so, whether it was right or wrong and whether the ultimate result was right or wrong, the reasoning in Greentree went on the basis that the failure of the third party to make a claim during the period of cover was not an omission.

MR COUPER: That is so, your Honour.

HAYNE J: What do you say of Chief Justice Spigelman's reasons at 710 in the sentence straddling letter D:

The absence of a claim on the insured does not create any "effect" that an "insurer may refuse to pay a claim" by the insured -

which his Honour seems to tie to the first words of 54(1) but might also be thought to be apt to describe the "by reason only of that Act" aspect of 54. What do you say about that style of reasoning?

MR COUPER: Your Honour, we adopt that reasoning and we were attempting, rather poorly, to articulate that same basis in the submissions we made earlier, that the effect of the contract is not that there is a refusal to pay by reason of an omission.

GUMMOW J: Well, which reasoning have you adopted? Have you adopted what Justice Spigelman says at 710 or are you adopting what my colleague was just putting to you?

MR COUPER: Yes, your Honour.

GUMMOW J: They are not the same.

MR COUPER: We are adopting the reasoning of Justice Spigelman at page 710.

GUMMOW J: Well, why are you rejecting what Justice Hayne put to you?

HAYNE J: This will test your tact, will it not, Mr Couper?

MR COUPER: We are pausing to - - -

GUMMOW J: I mean, I am just going to read the transcript. At the moment I have been entirely puzzled as to what is going on. You had better tell me. Now is your chance.

MR COUPER: If pushed to draw the distinction, your Honours, we would say that Justice Spigelman's reasoning about the effect of the policy is the appropriate reasoning because we have made the submission that when the section speaks by reason only of an act which may include an omission it does not necessarily lead to the view that there cannot be two omissions which section 54 can address, that we do not, with great respect, see Justice Spigelman's reasoning as being the same as the approach which says, if one looks at the words, "by reason only".

GUMMOW J: It is not suggested it is the same.

MR COUPER: No.

McHUGH J: Now, when do you say section 54 operates? Does it operate from the moment that a contract is made so that it in effect alters the rights - the contractual rights of the parties, or does it operate outside the contractual scheme altogether and bite only at a stage when an insurer has purported to refuse, or maybe at some other stage? Have you got any submissions on that?

MR COUPER: Your Honour, we would say that, with respect, there is not a real distinction between those two propositions. Section 54 operates in respect of an insurance contract from its inception. The time at which one asks what is the effect of section 54 is the time at which an insured makes a claim and that claim is refused. One then asks what is the reason for refusal and if the reason for refusal is the relevant act or omission, then section 54 applies. If one is talking about the time at which one considers the effect of section 54, it is at the time of the making of a claim and its refusal, but, if one is asking, "Does section 54 alter the rights contained in the policy?" the answer, speaking generally, is, "Yes, it must do so".

KIRBY J: Let me just make it absolutely clear in my own mind that your answer to the proposition that the interpretation of section 54 that you are advancing for the omission by the insured is not undermined by the way in which you could completely re-characterise a claims made policy by giving meaning to the words "or some other person" as being the third party, that your answer to that is twofold: (a) that the concept of omission has some notion of failure to do that which you could or ought to have done; and (b) that by reason only of that act, ie, of that omission, narrows the scope of the operation of the section. Is that your answer? I would be worried if you can use that other phrase "or some other person" to include the omissions of the third party because then you may as well completely throw out claims made policies because there is an omission by the third party to make a claim, there is an omission by the insured to notify the claim, "Don't worry. Don't you worry about that. We can patch that up by 54", both of them.

HAYNE J: There is some mysterious double application of 54 which I do not understand.

MR COUPER: At the risk of stepping back on the slippery slope, your Honour, we do make the submission that one of the reasons why section 54 does not apply to the failure by a third party to make a claim is that that sort of failure is entirely outside of the mischief at which section 54 was aimed.

KIRBY J: But it is an omission of another person.

MR COUPER: Yes, it is, your Honour.

KIRBY J: You therefore have to somehow say that is not the type of omission and/or any refusal that follows is not by reason only of that omission.

MR COUPER: We say, your Honours, it is not the type of omission essentially for the reasons of Justice Spigelman, which are summarised at page 710 of Greentree, that this is - - -

KIRBY J: This is a non-event, not an omission.

MR COUPER: A non-event. The absence of a claim by a third party cannot sensibly be characterised as a relevant omission because the claim is no more than the triggering event and whether it is because of the omission of the third party or some other reason does not bring it within the scope of section 54. It is, as Justice Spigelman put it, a matter which is wholly external to the policy.

GUMMOW J: What does that mean? It is a metaphor of some geographical nature that is being applied to an analysis of some mutual promises. I do not understand it.

MR COUPER: Your Honour, we take it to mean that once one has reached the stage of saying a claim has not been made by a third party, any analysis of why that is so, whether it be categorised as an omission by a third party, is taking a step too far. It becomes irrelevant. One simply asks: has the triggering event occurred or not?

GUMMOW J: What is the criterion of relevance?

MR COUPER: The criterion of relevance, we would say, your Honour, is can one - I am putting this badly - can one sensibly say that it matters in terms of the policy whether the absence of a claim is by an omission of a claimant or not, and we say it does not matter. We cannot put it better than that, because it is a matter which, in part, has an underlying policy notion to it that this is a step too far.

HAYNE J: That highlights the considerable difficulty I have with the argument. It is saying that the section can have a tiny impact, a little impact, a non-essential impact on the policy, some qualitative term is put in with absolutely no guidance at all to how you determine that quantity or quality and, as far as I can tell, with no sheet anchor in the words of the section.

MR COUPER: Your Honour, we must frankly acknowledge that that difficulty attaches to it once one gets on the policy pathway.

GLEESON CJ: Well, that is what we were warned about in East End.

MR COUPER: Yes.

GLEESON CJ: The argument that was advanced for the respondent in East End, which was a decision of Mr Acting Justice Staff as I recollect it, the argument was that if we applied section 54, as we did in that case, there was then no way we could stop short of consequences that, according to the argument, were regarded as absurd.

MR COUPER: I suspect that we have to submit, your Honour, that the only basis for stopping at those consequences is that they would be absurd.

KIRBY J: Is your fall-back position, can I understand, that ultimately the duty of a court is to obey the legislation of the Parliament and if that legislation happens to fall on claims made policies in a way that makes it difficult for claims made policies to survive, the answer is, well that is what Parliament has provided and if that is the consequence, and that is not acceptable, you have to do what Mr Masel said. You have got to change the statute.

MR COUPER: Yes, your Honour.

KIRBY J: I mean, that would be your ultimate fall-back position, that if there is no sheet anchor, it is because the Parliament has not provided a sheet anchor and you just have to apply the words of the statute, and if that falls on claims made and notified policies in a particular way, well, so be it.

MR COUPER: Yes, your Honour.

GLEESON CJ: Mr Couper, is your client a member of the Maine Nickless Group of companies.

MR COUPER: I will take some instructions, if I may, your Honour. I am instructed not, your Honour.

GLEESON CJ: Thank you. Yes, Mr Keane.

MR KEANE: Your Honours, just in relation to the question as to the findings of fact in relation to the circumstances of the failure to notify, your Honours will find them at pages 131, line 3 to 134, line 9. In relation to your Honour Justice Kirby's interest in relation to the circumstances in which these kinds of circumstances may not be notified, we draw your Honours' attention to the decision in Einfeld v HIH, which is item 14 on our learned friend's list. That is a case where your Honours will see at page 716, lines 40 to 47, a deliberate decision was made not to notify of the circumstances that might give rise to a claim. His Honour, following the decision in the Court of Appeal in Queensland in this case, held that section 54 did operate to enable the insured to recover. Your Honours, that is all we wish to say.

GUMMOW J: Well, just a minute: I notice that in Greentree, your client had different solicitors, but is there any difficulty in your solicitors getting access to the appeal book in Greentree, and to extract that policy?

MR KEANE: I am told we can do that, your Honours.

GUMMOW J: I think it is a legitimate thing to do; it is really supplementing the text of the report.

MR KEANE: Yes, we are quite prepared to do it, your Honour.

KIRBY J: It is not evidence; we would not want to supplement the evidence of the court.

MR KEANE: Well, our learned friends have no objection, your Honours. We will make it available in 48 hours - well, perhaps, over the weekend.

GLEESON CJ: Just one question I want to ask Mr Couper. I think it may be only formal, but you did not make any submissions about the case of Kelly v New Zealand Insurance.

MR COUPER: In our respectful submission, if the reasoning in Perry is gone, as we say it is, Kelly cannot be sustained either.

GLEESON CJ: That is what I wanted to be clear about. Thank you. We will reserve our decision in this matter.

AT 3.12 PM THE MATTER WAS ADJOURNED