When you know, you know: notice under section 40(3) and the tripartite insurance relationship

In Avant Insurance Limited v Darshn [2022] FCAFC 48 the Full Federal Court considered the interesting question whether information provided to an insurer by defence counsel appointed to act on behalf of an insured in one claim can constitute notification of facts for the purpose of section 40(3) of the Insurance Contract Act 1984 (Cth) (ICA) in respect of another claim.

The answer, subject to the terms of the relevant policy, is that it can.

Facts

Dr Darshn was a cosmetic surgeon, who performed breast augmentation surgery at clinics operated by The Cosmetic Institute Pty Ltd (TCI) between January 2015 and January 2018. Until June 2019 he held professional indemnity insurance with Avant Insurance (Avant).

In March 2018 Avant agreed to indemnify Dr Darshn in respect of proceedings against him by Ms Scotford, arising from surgery Dr Darshn performed at TCI. On accepting that claim, Avant wrote to Dr Darshn in terms that it had appointed a panel law firm (MDL) to act on his behalf in the proceedings, that he would be consulted and kept informed, but that Avant would otherwise conduct and be responsible for management of the claim on his behalf. MDL similarly wrote to Dr Darshn confirming it had been appointed by Avant to represent him in the proceedings.

In February 2019 MDL informed Avant about the possibility of seeking a stay in the Scotford proceedings, because they substantially overlapped with a class action on foot against TCI, involving systematic issues at its clinics by a number of surgeons. Dr Darshn was not then a party to the TCI proceedings, although he had received a subpoena from the lead plaintiff in the TCI proceedings (as had a number of other doctors insured by Avant), the breadth and terms of which suggested he may be joined as a defendant, which Avant was aware of.

In March 2019 Avant agreed to indemnify Dr Darshn in respect of separate proceedings against him by Ms Summers-Hall, also arising from surgery Dr Darshn performed at TCI. Avant wrote to Dr Darshn in similar terms as it had in respect of the Scotford proceedings, and again appointed MDL to act on his behalf.

In May 2019 MDL wrote to Avant in respect of both the Scotford and Summers-Hall proceedings, again discussing the possibility of a stay of both proceedings given their similarities with the TCI proceedings.

Then, in June 2020 Dr Darshn was joined as a defendant to the TCI proceedings. Avant refused to indemnify Dr Darshn in respect of the TCI proceedings on the basis the claim had not been made against him during the period of cover by Avant.

Dr Darshn commenced proceedings against Avant seeking declarations that it is obliged to indemnify him in respect of the TCI proceedings, which the Federal Court granted at first instance. The Full Federal Court decision is the outcome of Avant’s appeal.

Section 40(3)

Section 40(3) of the ICA alters the usual operation of claims made insurance policies. It provides that where, during the period of cover, the insured gave notice in writing to the insurer of facts that might give rise to a claim, the insurer is prevented from declining cover by reason that the eventual claim is made after the policy has expired.

Dr Darshn contended that MDL’s communications to Avant about the Scotford and Summers-Hall proceedings between March 2018 and May 2019 satisfied the terms of section 40(3).

The principal issue in dispute was whether MDL, being a panel firm appointed by Avant to act on Dr Darshn’s behalf in the Scotford and Summers-Hill proceedings, had authority to give notice to Avant of facts which might give rise to a claim for the purpose of section 40(3).

Avant argued that MDL did not have that authority on a number of bases, including that:

1. MDL’s retainer was limited to acting for Dr Darshn in respect of the Scotford and Summers-Hall proceedings;
2. MDL was not engaged as agent for Dr Darshn in his dealings with Avant;
3. MDL’s retainer was not for Dr Darshn generally and was not sufficient to authorise MDL to provide any services to Dr Darshn, and in particular did not authorise the giving of a notice to Avant on behalf of Dr Darshn in respect of matters within the purview of section 40(3).

Decision

The Full Federal Court (in a joint judgment by Jagot, Derrington and Colvin JJ) dismissed the Appeal.

Their Honours had regard to the terms of the policy, which provided that if a claim is made Avant would appoint a lawyer to provide services to Avant, but “for the benefit of [Dr Darshn].” Their Honours observed that the policy was otherwise silent about the nature of the legal relationship between MDL and Dr Darshn. It did not expressly say that MDL would not be acting as an agent for Dr Darshn, nor did it preclude the existence of a solicitor-client relationship.

Their Honours refused to accept the existence of some limit on the scope of MDL’s authority in acting as Darshn’s legal representative in the Scotford and Summers-Hall proceedings. Avant was unable to advance any principled reason that would have the effect of placing the communications between MDL and Avant outside the potential scope of section 40(3).

On the contrary, their Honours found that “it would be an expected incident of the legal relationship between Dr Darshn and Avant (on the one hand) and Avant and MDL (on the other hand) that MDL, as agent for Dr Darshn (even if also as agent for Avant), would inform Avant of facts that might give rise to a claim against Dr Darshn under the policy if MDL came into possession of those facts in the course of acting for Dr Darshn in the Scotford proceeding and Summers-Hall proceeding.”

Dr Darshn’s (and MDL’s) intention that the relevant communications be made for the purpose of section 40(3) was considered irrelevant. The issue was simply whether Dr Darshn in fact gave the required notice. Their Honours found that if MDL’s communications with Avant were part of or an incident to MDL’s solicitor-client relationship with Dr Darshn, then they were communications to Avant by Dr Darshn for the purposes of s 40(3). This was considered so whether or not MDL’s communications with Avant were also part of or an incident to MDL’s solicitor-client relationship with Avant.

Key Lessons

It has long been accepted that in the tripartite relationship between an insurer, its appointed defence counsel and an insured, a solicitor-client relationship exists between defence counsel and the insured, despite the absence of a conventional retainer.[1] The decision here demonstrates the Courts’ reluctance to place any limitations on that relationship, absent a clear basis for it.

The decision also emphasises the remedial nature of section 40(3), which is not to be construed narrowly or with undue technicality.  The section does not prescribe any strict procedure by which the insurer should be informed of the relevant facts. All that is required, relevantly, is that “the insured gave notice in writing to the insurer,” for which MDL’s correspondence to Avant was plainly sufficient. Notice does not necessarily need to be given by an insured directly but can in appropriate circumstances be given by a third party or agent, and an insured’s intention to provide notice for the purpose of the section is irrelevant.

[1] Groom v Crocker (1939) 1 KB 194

Author:

David Fisher

David is recognised for his ability to get to the heart of a dispute at an early stage, allowing him to formulate strategies designed to achieve practical and timely outcomes.

David brings more than 12 years’ experience in the areas of insurance and commercial litigation, with a particular focus on the specialty lines of professional indemnity, directors and officers, and management liability.

He is independently recognised by Best Lawyers Australia for Professional Malpractice Litigation.

David advises on and defends disputes against professionals, company executives and their insurers across a wide range of professions and industries, having acted for accountants, financial planners, solicitors and other professionals.