Key takeaways
- The Federal Court has re-affirmed the importance of prompt and express notifications of potential claims for insureds who hold a ‘claims-made’ policy.
- For institutions managing complaints of historical sexual abuse, a timely notification of all incidents uncovered is imperative, as multiple victims of an identified perpetrator may in due course advance their own claims.
- An insured is not able to rely on s 54 of the Insurance Contracts Act 1984 (Cth) (ICA) to extend the beneficial effects of s 40(3) of the ICA.
- Where multiple entities are insureds under a policy of insurance, complex internal arrangements may result in one insured being attributed with the knowledge of another insured for certain purposes.
- Long-term coverage with a single insurer does not provide an insured with blanket indemnity for all similar claims, and emerging new information may alter an insurer’s position for future claims.
Background and prior decision
Over the past two decades, awareness around institutional child sexual abuse has grown in Australia, culminating in a Royal Commission in 2013. Undoubtedly connected with this heightened awareness, some institutions have seen increasing claims of abuse. This has led to a rise in indemnity claims under ‘claims-made and notified’ policies.
This case concerned Knox Grammar School (Knox) and its insurer Allianz Australia Insurance Limited (Allianz). In response to claims made by previous students, Knox sought indemnity from Allianz under policies issued to the Uniting Church in Australia NSW & ACT (UCA) between 31 March 1999 and 31 March 2011. Knox is a school within the UCA umbrella. Also under that umbrella was a trust known as the Uniting Church of Australia Property Trust (NSW) (UCPT). Relevantly, UCPT owned and held the UCA’s property in NSW. UCPT was the legal entity against which such claims were made.
In 2003, Knox received complaints regarding the conduct of a staff member, Mr Nisbett (Nisbett), towards one student. The Headmaster of Knox at that time engaged a risk services firm to investigate. The results of the investigation were provided to the Headmaster in December 2003, and were reported by UCPT to its broker Marsh, which in turn advised Allianz of the potential claim.
In 2004, a new Headmaster determined that further investigations of Nisbett’s conduct at the school were required. The same risk services firm was briefed to provide a second investigative report (the second report). While still focused on Nisbett, the second report contained information concerning alleged conduct by several other staff members involving a number of other students. Though the report was only 19 pages, the accompanying material was voluminous, comprising over 1,500 pages, and included a supplementary risk assessment and transcripts of interviews with former students, as well as correspondence and related materials.
The second report was delivered to the Headmaster in May 2004.
The primary issues in both the initial case and the appeal, centred around:
- who knew of the second report and its contents
- when Allianz was notified of the second report, and
- the significance of its contents.
For the purposes of both cases, the Court considered the actions taken outside of Knox only, and did not take into account any internal changes made by Knox as a result of the second report.
Up until 2011, Allianz issued successive policies to UCA. During this period, UCPT made bulk notifications of circumstances to Allianz, former students lodged claims, and Allianz granted indemnity and paid claims. A single firm of solicitors was appointed to manage the claims, acting for both UCPT and Allianz.
In 2014, Allianz declined all further requests for indemnity. Allianz’s position was that the second report contained allegations, including grooming and inappropriate sexual behaviour by various staff members, with a sufficient level of certainty and detail to establish that Knox was aware of the prior facts and circumstances from which the claims arose, placing them outside the scope of the policies’ cover. Additionally, the facts and circumstances were not notified during any policy period, meaning that UCPT could not rely on the protection provided by section 40(3) of the ICA. Allianz did not seek to recover the sums it had already paid out.
Section 40(3) of the ICA states that, if an insured provides notice to its insurer of facts which may give rise to a claim, as soon as reasonably practicable and before the expiry of the relevant policy period, then the insurer cannot deny indemnity on the basis that the actual claim is brought after the expiry of the policy period. It was a mainstay of Allianz’s case initially and on appeal that no notice of the contents of the second report was provided prior to 31 March 2005, and therefore coverage could not be compelled under s 40(3).
At first Instance, Justice Lee disagreed with Allianz’s position, finding that the second report demonstrated only a bare possibility of a claim, and therefore did not require notification to Allianz. This position changed when certain staff members of Knox were arrested for child sexual offences in 2009, and the allegations in the second report were further substantiated. Justice Lee determined that the report had been provided to Allianz in 2007 via the solicitor appointed to act on behalf of it and UCPT, as soon as practicable after a formal claim was brought by the first of Nisbett’s victims.
Justice Lee was also required to consider the scope of cover and the application of a prior knowledge exclusion to the policies taken out by UCA from 2005 onwards. The exclusion removed coverage for liabilities arising from any facts, circumstances or occurrences, of which the Insured was aware prior to the commencement of the period of insurance. Allianz contended that the contents of the second report constituted facts which the Insureds were aware of prior to the commencement of any subsequent periods of insurance, and therefore any claims related to the contents of the second report were excluded from coverage. This position was rejected by Justice Lee, on the basis that while the contents of the second report were within the knowledge of Knox, this knowledge could not be attributed to UCPT as the Insured.
Issues in the appeal
Allianz appealed to the Full Federal Court, citing six grounds of appeal. These grounds of appeal can be distilled into the argument that, as UCPT was aware of the second report in 2004, its prior knowledge meant it could not rely on s 40 in 2007 or after, and any claims made in subsequent policy periods were beyond the scope of those policies.
The Full Federal Court considered that Justice Lee had erred in his interpretation of the facts and circumstances outlined in the second report. Justice Derrington expressed a strong view in her judgment that the second report exposed a number of facts which may give rise to claims for sexual abuse perpetrated by several teachers. She described the information in the report as being “far from benign”, revealing grooming, sexual molestation, and paedophilic-like behaviours dating back over two decades. This position was supported by Justices Colvin and McEvoy, who stated that a reasonable insured would have, upon reading the report, concluded that it demonstrated a significant problem relating to several staff members and numerous students. Taken together, this was said to constitute a substantial risk of claim(s) against Knox.
On the issue of whether the facts known to Knox were also within UCPT’s knowledge, Justice Derrington pointed out that the practical effect of UCPT’s argument was that, by assuming the liabilities of the entities within UCA to third parties, it could protect those entities from the consequences of failing to notify Allianz of circumstances which may lead to claims. The Court examined and placed great emphasis on UCA’s internal arrangements and its robust annual insurance reporting processes. It also noted that the policies were composite policies, with severance of cover for each insured. However, the Court determined that a special rule of attribution was appropriate in the present case, meaning UCPT could be said to have the knowledge of each insured entity for whom it sought indemnity. Otherwise, were the Court to try and separate Knox and UCPT, indemnity could be denied to UCPT for claims brought against Knox, on the basis that it had ‘artificially assumed responsibility’ for another insured.
As to when Allianz knew of the existence and contents of the second report for the purposes of s 40(3), UCPT sought to attribute Allianz with the knowledge of the solicitor appointed to act for both UCPT and Allianz, who first read the report in 2007. The Court found that while Allianz could be attributed with the solicitor’s knowledge for some purposes, it was not until 2013 that Allianz saw the report and began to comprehend its significance.
UCPT also argued that s 54 of the ICA extended the effect of s 40(3). Section 54 prevents an insurer from refusing to pay claims in certain circumstances. UCPT argued that its failure to notify was excused by s 54, and the time to notify provided by s 40(3) was therefore extended. The Court determined as a matter of statutory interpretation that this was not the case. Justice Derrington stated that the genesis of the ICA was such that if the legislature had intended the sections to operate in this way, it would have said so. The interpretation suggested by UCPT would mean that insurers could become liable to indemnify an insured well into the future for claims the insured was required to disclose to the insurer but failed to do so.
After extensive consideration of both the operation of s 40(3) of the ICA, and the prior knowledge clause in the policies, the Court determined that the claims for which UCPT sought indemnity fell between the operation of these two mechanisms. Had Allianz been notified of the contents and significance of the second report prior to the expiry of the relevant policy period on 31 March 2005, the 2004/2005 policy would have responded to any claims brought regarding the actions of the staff members that the report uncovered, no matter when the claims were ultimately made. However, from 1 April 2005, the coverage under the subsequent policies did not extend to these claims due to the operation of the prior knowledge clause.
Knox brought a special leave application in the High Court regarding the interaction between s 40(3) and s54(1). The High Court ultimately refused special leave on the basis that, the matter did not provide a suitable vehicle for considering the question of the operation of s 40(3) of the ICA and there were not sufficient prospects of success on the question concerning the operation of s 54(1).
Why this decision is important
While the Full Federal Court did not depart from previous authorities in its consideration of s 40(3), this decision serves as an appropriate reminder to institutions. Rumours or suspicions are not sufficient to trigger a notification. However, where there are any facts or investigations supportive of a problem it is not satisfactory for an insured to wait until a claim is made to notify its insurer.
The decision also serves as a reminder that, despite complex internal arrangements, all entities that comprise an insured still have obligations to an insurer, whether regarding policy issues or when dealing with third party complaints. Correspondingly, when met with such arrangements, insurers should make it clear that the entity it is dealing with has the knowledge of the other member entities.
For insurers, in circumstances where coverage has been provided to an entity for an extended period, a right to deny indemnity may emerge if new information reveals a previous failure to notify, or on other bases. It is important to assess indemnity for each new claim on its own facts.
Where an insurer is dealing with numerous third party claims involving an insured over a protracted period, it is often convenient to appoint one firm of solicitors to investigate and defend those claims on behalf of the insured and the insurer. This case highlights that, in such circumstances, it may be beneficial for the insurer to also appoint separate coverage counsel, to initially provide advice and then to monitor as the claims evolve.
This article was written by Principal Matthew McDonald and Associate Talia Mason. For further information or advice on any related matters please contact Matthew.
Disclaimer: This information is current as of March 2025. This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.
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