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Court of Appeal of New ZealandLast Updated: 2 September 2005
IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN QBE INSURANCE
LIMITED
Appellant
AND ATTORNEY-GENERAL
Respondent
Hearing: 27 June 2005
Court: O'Regan, Baragwanath and Panckhurst JJ
Counsel: M G Ring QC for Appellant
H S Hancock for Respondent
Judgment: 3 August 2005
B Judgment for QBE against Crown with costs $6000 and usual disbursements.
____________________________________________________________________
REASONS
(Given by Baragwanath J)
Table of Contents
Para No
Introduction [1]
Background facts [2]
The terms of the
policies [8]
The decision of
the High Court [15]
Submissions [17]
For QBE [17]
For the Crown [21]
(1) Notification of Wild
J’s judgment sufficient [22]
(2) Decision of Judge
correct [24]
(3) Claim may
be made at any time [25]
(4) Policies to be read
together [27]
(5)
Rectification [28]
(6)
Estoppel [30]
(7)
Construction/implied term of the 1998-1999 policy [33]
(8) Construction/implied term
of subsequent policies:
Exclusion 6 no application [34]
For QBE in reply [35]
Discussion [36]
Construction/implied term of
1998-1999 policy [40]
Construction/implied term of
subsequent policies:
Exclusion 6 no application [44]
"as soon as
practicable" [49]
Decision [50]
Introduction
Background facts
[2] Between 30 June 1998 and 30 June 2003 the Crown on behalf of the Ministry of Agriculture and Fisheries ("MAF") was insured for successive 12 month periods beginning 30 June under what may loosely be called a claims made policy of insurance. The insurer was first HIH General & Casualty Insurance (NZ) Limited, whose obligations QBE later assumed, and later QBE. Nothing turns on the identity of the insurer. At all stages Aon Risk Services NZ Ltd was MAF’s broker. [3] QBE’s application for summary judgment responded to a proceeding against it by the Attorney-General on behalf of MAF advancing claims against various individual policies on a variety of bases. [4] The indemnity sought by the Crown is in respect of $1,215,028 paid by MAF to settle a claim against the Crown by Alan Johnston Sawmilling Ltd (AJS). On 9 June 1999 Wild J in the High Court gave judgment (reported at [2002] NZAR 129) in favour of AJS in a claim against the Crown. He declared illegal Regulation 4 of the Customs Export Prohibition Order 1996 and the Minister’s conditions of approval made on 11 December 1996 insofar as they applied to indigenous timber and its products taken from lands subject to the South Island Landless Natives Act 1906, as being repugnant to a statutory exemption in s 67A(1)(b)(I) of the Forests Act 1949. The effect of the judgment was to vindicate AJS’s claim that the Crown’s attempt to prevent it from felling timber from the indigenous beech forests of the Rowallan-Alton blocks on the coastline of western Southland was unlawful. [5] The Crown notified QBE of Wild J’s decision; the evidence does not record when precisely that was done although a proposal dated 29 July 1999 for cover for the year commencing 30 June 1999 responded to a question:
8. POTENTIAL CLAIMS
Are any of the Principals/Directors/Officers or Senior Employees after enquiry, aware of:
a) Any circumstance which could give rise to a claim against the Proposer; or
b) Any accounts overdue for payment where there is reason to believe the client is dissatisfied with the professional services rendered.
If so, please give full particulars:
Mr Graham, Chief Financial Officer of MAF, answered:
Previously notified to Aon
Attached to the proposal was MAF’s "statement of contingent liabilities" which recorded as a potential liability $500,000 in respect of a claim by AJS for loss of income from its export and beech chip forest.
[6] The form of policy that had been employed in prior years and was used for the period 30 June 1998-30 June 1999 was materially different from the policies for ensuing years. [7] Three years later, on 5 June 2002 during the term of the 2001-2002 policy, AJS gave notice to MAF of its claim for damages for consequential losses. Following a settlement at mediation with AJS, MAF brought the present proceeding. Each development was duly notified by MAF to QBE.
The terms of the policies
SECTION 2
PROFESSIONAL INDEMNITY/ERRORS & OMISSIONS
1. The Insurers will indemnify the Insured up to the Limits of Indemnity specified in Schedule (2) in the Aggregate during the Period of Insurance against all sums which the Insured shall become legally liable to pay as damages and claimant’s costs and expenses as a result of any claim or claims made against the Insured and reported to the Insurers during the period of insurance specified in this Section (for any claim or claims first made against the Insured within ten (10) days of the expiry of the Period of Insurance specified, the Insurers will allow an additional ten (10) day notification period after expiry of the Period of Insurance specified) all arising out of any act, error or omission on the part of:
1.1 the Insured
1.2 any person now or previously employed by the Insured
1.3 any other person(s), partnership, company or firm acting for or on behalf of the Insured
in the conduct of the Insured’s business or occupation as specified in Schedule (2).
2. The Insurers will pay costs and expenses incurred with their written consent in the investigation, defence or settlement of any such claim provided that if a payment in excess of the Limits of Indemnity available has to be made to dispose of a claim, the Insurers’ liability for such costs and expenses incurred with their consent shall be such proportion as the Limits of Indemnity available bears to the amount paid to dispose of the claim.
CLAIM CLAUSE
The definition of a claim shall mean the demand for compensation made by a third party against the Insured. Where an act, error or omission results in a claim or series of claims against the Insured which may be the subject of indemnity, all such claims shall constitute one claim under this Section.
...
[10] The policy later provided under the heading "CONDITIONS":
1. The Insured shall not admit liability for or settle any claim or incur any costs or expenses without the written consent of the Insurers who shall be entitled to take over and to conduct in the name of the Insured the defence or settlement of any claim. Neither the Insured nor the Insurers shall be required to contest any legal proceedings unless a Queens Counsel (to be mutually agreed upon by the Insured and the Insurers) shall advise that such proceedings should be contested.
2. If the Insured refuses to consent to any settlement recommended by the Insurers and elects to contest or continue any legal proceedings the Insurers’ liability for the claim shall not exceed the amount for which the claim could have been so settled (less the deductible specified in the Schedule) plus the costs and expenses incurred up to the date of such refusal.
3. The Insured shall as soon as practicable give to the Insurers notice in writing:
3.1 of any claim made against it
3.2 of the receipt of notice or any other information as to any intention by another party to claim against it
3.3 knowledge of circumstances which could give rise to a claim against it
irrespective of whether the quantum is likely to be within or above the amount of the Deductible specified in the Schedule.
...
[11] For the ensuing years the policy included two material new terms. The 1999-2000 policy had been renewed on the previous terms. But on 27 August 1999 Aon notified HIH that it was in the process of redrafting the policy wordings for MAF. On 21 September 1999 HIH proposed certain changes. On 24 September 1999 Aon wrote to HIH attaching copies of the amended policy. A copy was signed and returned by HIH on 28 September 1999. Since the initiative for the change was that of Aon as MAF’s brokers and Aon did not act for HIH during the negotiation of the contract, s 10(1) of the Insurance Law Reform Act 1977 does not deem Aon to be the agent of HIH or QBE. [12] We have emphasised material parts of the changed terms, which are very important. One was a condition ("Condition 5"):
5. CLAIMS NOTIFICATIONS
The Insured shall give to the Insurer notice in writing of any circumstances which could give rise to a claim or claims against it as soon as reasonably practicable after first becoming aware of such circumstances. If the Insured during the Period of Insurance (or within 21 days of the expiry date) shall give such notice of such circumstances, then any claim or claims which may subsequently be made against the Insured arising from such circumstances shall be deemed to have been made in the Period of Insurance.
This condition shall only apply where specific case details of the circumstances are supplied to the Insurer.
[13] The other was an exclusion ("Exclusion 6"):
6. The Insurer shall not indemnify the Insured for any Claim:
(a) notified or arising out of any circumstances notified under any previous policy of insurance held by the Insured or by its predecessors.
(b) arising out of circumstances (which are likely to give rise to a claim under this policy) which was or were known to the Insured prior to the Period of Insurance specified in the Schedule.
[14] No attention appears to have been paid to the effect of Exclusion 6 on prior notifications made under Condition 3 of previous policies [reproduced at [10] above].
The decision of the High Court
[15] The Judge correctly directed himself as to the application of Rule 136(2) which provides:
The Court may give judgment against a plaintiff if the defendant satisfies the Court that none of the causes of action in the plaintiff’s statement of claim can succeed.
The authorities include Jones v Attorney-General [2004] 1 NZLR 433, 440 where the Privy Council described the test as:
...exacting... and rightly so since it is a serious thing to stop a plaintiff bringing his claim to trial unless it is quite clearly hopeless.
Submissions
For QBE
For the Crown
[21] Mr Hancock made eight submissions. Some can be dealt with immediately.
(1) Notification of Wild J’s judgment sufficient
3. The Insured shall as soon as practicable give to the Insurers notice in writing:
3.1 of any claim made against it
3.2 of the receipt of notice or any other information as to any intention by another party to claim against it
3.3 knowledge of circumstances which could give rise to a claim against it
irrespective of whether the quantum is likely to be within or above the amount of the Deductible specified in the Schedule.
[23] As Mr Ring submitted, like the policy in Safeco Title Insurance Co v Gannon 774 P 2d 30 (1989) (a decision endorsed in Reid Crowther & Partners v Simcoe & Erie General Insurance Co (1993) 99 DLR (4th) 741, 756), the 1998-1999 policy expressly distinguishes between a claim so defined by the Claim Clause (at [9] above) and other circumstances that must be notified under subclause 3.3. So the claim of loss given to MAF by AJS on 5 June 2002 and later quantified by agreement is not covered by the 1998–1999 policy.
(2) Decision of Judge correct
(3) Claim may be made at any time
[25] Mr Hancock submitted that the formula in the 1998-1999 Insuring Clause [reproduced at [9] above]:
...any claim or claims made against the Insured and reported to the Insurers during the period of the insurance specified in this Section
embraces any claim or claims made at any time against the insured and reported to the insurers during the period of insurance, so that notification under the 1998-1999 policy would embrace claims made three years later.
[26] But a "claim" as defined in the Claim Clause cannot be reported to the insurer before the claim has been notified to the insured. The submission cannot succeed.
(4) Policies to be read together
(5) Rectification
(6) Estoppel
(i) QBE accepted that it had been notified by MAF of circumstances of the potential claim;
(ii) QBE required no further information concerning the claim at that time;
(iii) the 1999-2000 policy should be treated as acknowledging in Condition 5 that any claim that might subsequently be made in relation to the notified circumstances should be deemed to have been made in the 1998-1999 period.
QBE’s acceptance of premiums for the periods from 30 June 1999 was on the footing that QBE knew that MAF believed that it was covered for the notified loss. The receipt of a premium with such knowledge can amount to a representation that such footing is accepted: Murchie v Victoria Insurance Company (1885) NZLR 4 SC 114. MAF acted to its detriment by not seeking a different policy or a different insurer and QBE is estopped from denying that that was so.
[31] But Murchie was a case where the insurer had the right of election whether to cancel a policy assigned without the written notice to which the insurer was entitled. Subsequent acceptance of a premium was held to constitute election against cancellation of the policy; it was explicable on no other basis. Here the acceptance of premiums was referable to the insurer’s undertaking to go on risk on the terms the parties had agreed. We do not agree that the acceptance by HIH of MAF’s proposal of 29 July 1999 constituted a representation that the circumstances notified would be accepted as giving rise to different terms - a notional addition of Condition 5 to the prior year’s contract. [32] We outline the two more substantial arguments to which we will return.
(7) Construction/implied term of the 1998-1999 policy
(8) Construction/implied term of subsequent policies: Exclusion 6 no application
For QBE in reply
[35] Mr Ring’s submissions in reply are substantially endorsed in our reasons for concluding that the appeal succeeds.
Discussion
Words and phrases used in an insurance contract are normally to be given their ordinary meaning...As Lord Greene MR said in Hutton v Watling [[1948] Ch 398, 403]:
The true construction of a document means no more than that the court puts upon it ...the meaning which the other party...would put upon it as an ordinary intelligent person construing the words in a proper way in the light of the relevant circumstances.
That is why at para 7.15 they conclude:
...it was not permissible to reject a word or phrase merely because no reasonable person would have used it in the relevant context.
We do not doubt that the plain language of the successive policies, proposed to the insurer by Aon even if taken by Aon from the insurer’s standard wordings, would exclude the insurer’s liability. The only question is whether the circumstances are such as to warrant adoption of a strained construction or an implied term.
[38] We reproduce much of a valuable analysis of claims made policies by McLachlin J in Reid Crowther & Partners v Simcoe & Erie General Insurance Co (1993) 99 DLR (4th) 741 at pp 749-753:
A... sweeping method used by insurers to refuse coverage for some contingent liabilities of their insureds is that of using a standard policy term that excludes covering for claims arising out of any negligent act of which the insured was aware as of the date of commencement (or renewal) of coverage. This is inconsistent with the theoretical basis of true "claims-made" policies. Since it is the claim which is the focus of a true "claims-made" policy – not the underlying negligent act – knowledge prior to the commencement (or renewal) of coverage of an antecedent negligent act should not be a bar to coverage. Policies with this kind of provision may be viewed more as hybrid policies than as true "claims-made" policies. The insurer has in effect incorporated an element of an "occurrence" policy into its policy framework.
Another type of restriction of coverage in "claims-made" and hybrid policies is found in what are referred to as "claims made and reported" policies. Coverage under such policies applies only to claims which are both made of the insured and reported to the insurer during the policy period. This type of policy creates obvious problems for insureds regarding claims discovered and/or made by third parties just before the expiry of their coverage. In his article "Professional Liability Insurance: The Claims Made and Reported Trap" (1991), 19 W. St. U. L. Rev. 165, Lee Roy Pierce, Jr. writes at p. 171:
Claims made and reported policies are less expensive because it is statistically probable that a certain number of insureds will find it impossible or impracticable to timely report their claims. Thus, premium costs to the group are reduced because it is statistically probable that many insureds (who actually encounter the insured loss) will forfeit coverage.
(emphasis in original)
McLachlin J continued:
In sum, while it is reasonable to argue that some part of the reduced premiums (and greater availability of coverage) associated with "claims-made" and hybrid policies is the result of greater certainty of risk, a major reason why "claims-made" and hybrid policies are cheaper and more available to insureds than are "occurrence" policies is that there are significant gaps in coverage inherent to "claims-made" or hybrid liability insurance policies.
This is not to say "claims-made" or hybrid policies with these sorts of gaps in coverage are necessarily unfair to insureds. It is open to insureds to agree to a more risky sort of indemnity agreement (if the phrase is not an oxymoron) in exchange for a lower premium. The issue of fairness arises only if the insured is not aware that it is buying a "more risky" policy. But, it should be noted that most insureds will purchase liability insurance assuming they are covered for all liability and not realizing there may be gaps in the coverage they have purchased. These considerations suggest that so-called "claims-made" policies should be examined with care to determine whether, read as a whole, they clearly transfer the risk of the long-term liability in question to the insured. In particular – considering again the discovery principle as it relates to the purpose of avoiding the problems associated with "occurrence" policies – courts should be careful not to construe "claims-made" or hybrid policies in such a way as to exclude claims discovered by the insured during the policy period on the ground of some technical defect in the nature of the claim. If they do, they may be unfairly depriving people of the benefit of the coverage for which they reasonably understood themselves to have contracted.
... the distinction between "claims-made" and "occurrence" policies does not resolve this question. In each case the courts must examine the provisions of the particular policy at issue (and the surrounding circumstances) to determine if the events in question fall within the terms of coverage of that particular policy. This is not to say that there are no principles governing this type of analysis. Far from it. In each case, the courts must interpret the provisions of the policy at issue in light of general principles of interpretation of insurance polices, including, but not limited to:
(1) the contra proferentem rule;
(2) the principle that coverage provisions should be construed broadly and exclusion clauses narrowly; and
(3) the desirability, at least where the policy is ambiguous, of giving effect to the reasonable expectations of the parties.
...
I turn to the third relevant principle of construction, the reasonable expectations of the parties. Without pronouncing on the reach of this doctrine, it is settled that where the policy is ambiguous, the courts should consider the reasonable expectations of the parties: Wigle v. Allstate Insurance Co. of Canada (1984), 14 D.L.R. (4th) 404, 10 C.C.L.I. 1, 49 O.R. (2d) 101 (C.A.), leave to appeal to S.C.C. refused D.L.R. loc. cit. [1985] 1 S.C.R. v, C.C.L.I. loc. cit. The insured’s reasonable expectation is, at a minimum, that the insurance plan will provide coverage for legitimate claims on an ongoing basis. The presumption must be that the intention of the parties is to provide and obtain coverage for all legitimate claims on an ongoing basis, whether through renewal with the same insurer or through securing new insurance with a different insurer. This presumption is consistent with the discovery principle discussed earlier in these reasons, in that the insurer is able to secure a means of certainty in calculating its risk without unfairly creating gaps in coverage.
[39] In terms of that analysis, this case concerns hybrid policies with the risk of significant gaps in coverage that had been pointed out with such clarity more than six years before the policy changes in this case were made. We return to the major Crown submissions, which include the argument for giving effect to "the insured’s reasonable expectation" with which the statement by the present Chief Justice of Canada concludes.
Construction/implied term of 1998-1999 policy
[40] Mr Hancock cited Adamastos Shipping Co Ltd v Anglo-Saxon Petroleum Ltd [1959] AC 133 and its discussion in Kelly and Ball Principles of Insurance Law in Australia and New Zealand (1991) paras 7.14-15, where words that were held to be "insensible in their context" were excluded on construction of a charterparty. He also cited the further discussion at paras 7.17-29 which concludes:
It was permissible to reject a word or a phrase if it was inconsistent with the main object of the contract; if it was contradicted by another more important provision; or if it made no sense.
He argued that the construction argued for QBE would thwart subclause 6.3 of each policy from 30 June 1999, providing:
...run-off cover for liabilities arising out of any act, error, or omission by the Ministry of Forestry committed or alleged to have been committed prior to 1 February 1998.
He submitted that Condition 3 does not create classes of notification; claims, intentions to claim and circumstances are all to be notified promptly. Having accepted entitlement to the benefit of prompt notification QBE must accept the burden of liability to indemnify for the loss that later became manifest.
[41] We are satisfied that the events of June 1999 did not trigger liability on QBE to indemnify MAF under the 1998-1999 policy for the claim notified by AJS to MAF in June 2002. To accept the Crown’s implied term argument would require this Court to depart fundamentally from the settled principle that insurance policies like any other contract are to be construed in accordance with the plain language selected by the parties. The risk of a gap in the cover was inherent in the language employed in the 1998-1999 policy which lacked the extension of the later Condition 5. As a hybrid claims made policy, under which circumstances of apprehended claims had to be notified, it entailed the risk that notification might be required during the term of the policy under which no claim could be made in the absence of a third party demand. Such risk entailed the further risk of insurers’ refusing to continue to indemnify for later years or agreeing to do so only on terms of excluding notified claims: it was not suggested for the Crown that HIH or QBE had committed to continue to provide insurance on any particular basis or at all. Whether or not MAF could have negotiated for a modification of Exclusion 6 in the ensuing policies to exclude risks already notified, that did not occur. [42] The availability in the market of policies containing Condition 5 must have been well known in New Zealand as a result of the decision of this Court in Sinclair Horder O’Malley & Co v National Insurance Co of New Zealand Ltd [1995] 2 NZLR 257 delivered on 12 April 1995. The effect of the absence of such a condition is not something that would be known to a broker only with the hindsight of this case and access to such texts as Derrington and Ashton The Law of Liability Insurance (2nd ed) 2005. The authors state at 8-160:
A serious hiatus existed in the cover of insured persons holding "claims made" or "claims made and notified" policies because of their loss of indemnity where the policy expired before an anticipated claim was made, and consequently did not come within the policy. One important consequence of this was that... disclosure could see the specific exclusion of that claim from the cover of the new policy, or it could be caught by a general exclusion to the same effect. IN answer to public demand, it has been common for current claims made and notified policies to contain a term providing an additional feature of cover [to the effect of Condition 5].
They state further at 11–348:
The policy period is usually for a year, but with an optional run-off cover over claims made during the run-off period and relating to liability for occurrences or conduct during the period of the original cover or any retroactive period referred to in the original policy. The premium will be a proportion of the original premium and will vary with the length of the cover. Some of these policies contain a general exclusion of cover for liability resulting from any negligent act or omission occurring prior to a date specified in the exclusion. These considerations make this supplementary cover extremely valuable in this situation...
[43] Industry practice, described by Derrington and Ashton at 8-163 with references which include Sinclair Horder at first instance in 1992, has recognised the use of a Condition 5 equivalent for over a decade. It is reasonable to infer that the provision of such extended cover would attract a further premium. We are unable to imply in the 1998 contract a term for which the market of the day provided as a supplementary cover. The argument therefore fails.
Construction/implied term of subsequent policies: Exclusion 6 no application
[44] The final submission was that a claim was duly made and notified under the 2001-2002 policy and Exclusion 6 could not be construed as applying to loss arising from circumstances previously notified under an earlier policy. Mr Hancock argued that Exclusion 6 of the policies from 30 June 1999 should be construed as excluding claims previously notified to another insurer, not those notified to the same insurer who was aware of those circumstances when agreeing to provide continuing cover and assessing the premium for that purpose. Exclusion 6 is to be construed as a purported release of an inchoate right of indemnity which vested under the 1998-1999 policy and would crystallise when a later claim was made. A release in such general terms is ineffectual: Bank of Credit and Commerce International SA (in liquidation) v Ali [2002] 1 AC 251 (HL). [45] This would be a powerful argument if one confined attention to the Exclusion without reference to Condition 5. But the policy is to be construed as a whole. Reading the clauses together the contractual purpose is plain: circumstances notified in the current year are to be the subject of indemnity under the policy, whenever an actual claim is later made; circumstances notified in all prior years are excluded. That construction makes perfect sense in relation to each of the contracts from June 1999 in relation in which those clauses were included, leaving aside notifications of circumstances prior to the 1999-2000 contract. For the claim to succeed, it would require reading in to Exclusion 6 of that and later contracts, especially that of 2001-2002 when the damages claim was notified, some such term as "but this Exclusion does not apply to claims the circumstances have previously been notified to QBE". [46] The test for the implication of contractual terms is stated in the well-known passage from BP Refinery (Westernport) Pty Ltd v The Shire of Hastings [1977] HCA 40; (1977) 16 ALR 363, 376 (PC):
... for a term to be implied, the following conditions (which may overlap) must be satisfied:
(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
Its effect for present purposes may be put more simply in the even more familiar language of MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206, 227:
Prima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying; so that, if while the parties were making their bargain an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common, "Oh, of course".
[47] The difficulty for the Crown is that it is impossible to be sure that the parties would have agreed. In relation to the 1998-1999 policy it is theoretically possible that HIH would, if the point had been raised, have agreed without further payment to include Condition 5. But no Crown witness made such assertion and given the availability of extended cover we have been unable to imply a Condition 5. [48] The same is the case in relation to the implication of the proposed exception to Exclusion 6 in the contracts for 1999-2000 and later years. The submission therefore fails.
"as soon as practicable"
Decision
Solicitors:
McElroys,
Auckland for Appellant
Crown Law Office, Wellington
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