Warning: This article contains details about sexual assault and abuse which may be upsetting for some readers. Reader discretion is advised.
The Full Federal Court has ruled that Allianz was entitled to deny indemnity to Uniting Church in Australia Property Trust (UCPT) for historical abuse claims at Knox Grammar, for failure to disclose a 2004 investigation report detailing allegations.
Despite a complex corporate structure, UCPT was fixed with the knowledge of an entity under its umbrella, and this knowledge about the investigation report should have been disclosed. Neither s 40(3) nor s 54 of the Insurance Contracts Act 1984 (Cth) (ICA) operated to require the insurer to grant indemnity in respect of the claims.
In issue
- The right of an insurer of a ‘claims made’ policy to decline indemnity in respect of claims arising out of facts and circumstances known to an insured but not disclosed to the insurer during the period of insurance.
The background and decision at first instance
Knox Grammar School (Knox) in Sydney falls under the umbrella of the Uniting Church in Australia’s (UCA’s) Synod of NSW, amongst various bodies corporate which the UCA comprises, which includes the Uniting Church in Australia Property Trust (UCPT).
Between 31 March 1999 and 31 March 2011, Allianz Australia Insurance Limited (Allianz) issued policies of insurance to the UCA. Those policies named various insureds, including those responsible for Knox’s management, operation and administration, as well as UCPT and numerous other organisations associated with UCA.
From about 2007, former students of Knox made civil claims in respect of historical sexual and physical abuse. UCPT responded to those claims on Knox’s behalf. UCPT had sought indemnity in relation to the claims from Allianz, which Allianz initially accepted (and made payments as a result), but subsequently determined that its policies did not respond to liability arising from the sexual abuse of boys at Knox, on the grounds that relevant insureds were aware of the facts or circumstances from which the claims arose.
Allianz’s position was based upon the fact that in 2004, an investigation report commissioned by John Weeks, the headmaster, detailed allegations that Adrian Nisbett, a teacher at Knox, had sexually abused boys since the 1980s, as well as alleged incidents of inappropriate sexual behaviour towards Knox students by other teachers. The report found, on the balance of probabilities, Mr Nisbett had engaged in grooming and inappropriate sexual touching. It documented the extent to which a former headmaster and other staff of Knox had been aware of allegations regarding similar conduct. Several teachers were subsequently arrested and charged as a result.
The Insurance Contracts Act 1984 (ICA) provides, at s 40(3), that if an insured gives an insurer notice in writing of facts that might give rise to a claim as soon as reasonably practicable and during the period of insurance, the insurer cannot deny liability if the relevant claim is made after the period of insurance has expired.
Allianz asserted that, as it had been given no notice of those facts and circumstances during any policy period, s 40(3) of the ICA would not compel it to accept UCPT’s claims made after the expiration of a given policy period in relation to facts and circumstances falling within said policy period.
Allianz contended that the relevant insureds under the policies became aware of the facts from which the claims subsequently brought against Knox could be said to have arisen on receipt of the investigation report on 7 May 2004. Had UCA or UCPT given notice of the report to Allianz, cover would have extended to the claims made by former students under the relevant policy by operation of s 40(3) of the ICA. Allianz further contended that the former students’ claims were not within the scope of later policies because the insureds were aware of facts or circumstances which may have given rise to those claims, and they were therefore expressly excluded from cover.
At first instance, the trial judge rejected Allianz’s arguments and found that it was required to indemnify UCPT for claims arising from sexual or physical assault by particular former teachers of Knox. In doing so, His Honour concluded that as the investigation report had been provided to Allianz in 2007, shortly after Allianz had retained lawyers to act on UCPT’s defence, the notification was 'as soon as reasonably practicable' for the purposes of s 40(3) and the receipt by the lawyers of the investigation report effectively constituted notification to Allianz. His Honour further reasoned that until certain teachers were arrested in connection with the facts and circumstances outlined in the investigation report, the report only suggested a 'bare possibility' that claims might be made.
Allianz appealed to the Full Federal Court.
The appeal
There were some variations in the successive Allianz policies, but generally, they afforded each insured ‘claims-made’ cover in respect of claims made during the period of the insurance and notified to Allianz.
A key issue on appeal was the practice of using UCPT as a ‘nominal defendant’ in relation to claims brought by former students of the school and reconciling its position as the effective respondent to those claims and a separate insured under the Allianz policies. Whilst the court acknowledged the practicality of this approach, it observed that there was no legal liability, absent agreement between the parties to a given matter, directly between any claimant and UCPT. The corollary of this was that UCPT would not have a legal liability to trigger insurance cover as an insured, and otherwise was seeking indemnity in respect of the liabilities of another insured.
The Full Court found that the investigation report also included a letter to Knox containing a risk assessment, which concluded that the risk to Knox, reputationally and in terms of its exposure to claims, was 'extreme'. Against this background, the Full Court rejected the trial judge’s conclusion that the investigation report did more than give rise to the 'bare possibility' of a claim being made; it identified the possible existence of actual sexual abuse of students by several teachers and expressly warned that claims might be made.
On the construction of what constitutes a 'fact' within the meaning of ICA s 40(3), the Full Court noted that judicial authority on ICA s 40(3) has interpreted 'facts' to mean objective facts; that is, what is an objectively verifiable piece of substantive data. Similarly, whether the facts in question are such that a claim might arise as a result, is a matter of objective assessment. The Full Court also referred to DIF III – Global Co-Investment Fund L.P v DIF Capital Partners Limited [2020] NSWCA 124, where the NSW Court of Appeal accepted that a notification of facts could include the notification of a 'problem' which may give rise to claims by entities with a particular characteristic, which was described by the UK Court of Appeal in Euro Pools Plc v Royal & Sun Alliance Insurance Plc [2019] Lloyd’s Rep IR 595 as an insured giving a 'can of worms' or 'hornet’s nest' notification of a problem the exact scale and consequences of which might not be known at that time.
On the issue of the attribution of knowledge between the relevant insureds and UCPT, the Full Court took note of internal memoranda and correspondence circulated amongst UCA organisations in preparation for making ‘no claims’ disclosures to Allianz upon policy renewal. It was the knowledge of the individual insured entities or persons comprising those entities that was relevant to their entitlement to cover under the Allianz policies. The Full Court concluded that a special rule would apply in this case so that the UCPT would be 'fixed with the knowledge of those insureds in respect of whose liability it seeks indemnification'. Otherwise, Allianz had no obligation to indemnify UCPT in respect of the responsibility it had 'artificially assumed' for the liability of another insured. This conclusion would also bind UCPT to any exclusions applicable to the liability of the relevant insured that it had elected to assume.
The Full Court ultimately held that had the investigation report been notified to Allianz during the 2004/2005 year of account, the policy would have responded to subsequent claims of abuse arising out of the facts captured in the report. In the facts as they transpired, subsequent claims could be denied cover, because there was no notification that would have triggered ICA s 40(3). Claims could also be excluded by reason of prior known circumstances exclusion, to the extent that they were based on the known but undisclosed facts in the investigation report, which would entitle Allianz to reject all current and future claims for sexual abuse of students at Knox by teachers or masters between the 1980s to 2004. Although it was not a matter argued at first instance, and not directly relevant to the outcome of the appeal, Derrington J rejected UCPT’s arguments that the prior known circumstances exclusion was an attempt to contract out of the ICA and was therefore unenforceable.
The Full Court further upheld authority from the NSW Court of Appeal to the effect that s 54 of the ICA could not operate to cure a failure to notify facts as would enliven the statutory extension provided by ICA s 40(3). ICA s 54 operates upon the provisions of the contract of insurance, not the statutory provisions (such as s 40(3)), and could not have the effect of bringing within the scope of cover a claim which was otherwise outside the scope of cover.
Implications for you
The Full Federal Court adhered to previous authorities on the application of s 40(3) and s 54. The decision is a reminder for insureds that prompt notification of circumstances, particularly where cover is on a 'claims-made' basis is imperative.
This is particularly important for organisations with potential historical sexual abuse exposure where the cover available is shifting from occurrence based to 'claims-made'. A complaint with sufficient evidence to establish that the alleged conduct could have occurred may well amount to notifiable circumstances and given that there can be multiple victims of perpetrators in abuse claims, there are significant risks if insurers are not notified promptly, as this case demonstrates.
