Notification of claims and s 40(3) of the Insurance Contracts Act 1984 — Darshn v Avant Insurance Limited

Dr Darshn was a plastic surgeon who performed various breast augmentation procedures (the Procedures) between January 2015 and January 2018 at various clinics trading under the name 'The Cosmetic Institute' (TCI). At the relevant times, Dr Darshn held professional indemnity insurance with Avant Insurance Limited (Avant) under a 'claims made' policy with coverage until 30 June 2019.

This article was originally published in the Lexis Nexis Health Law Bulletin Volume 29 No 8.

Background

Dr Darshn was a plastic surgeon who performed various breast augmentation procedures (the Procedures) between January 2015 and January 2018 at various clinics trading under the name 'The Cosmetic Institute' (TCI). At the relevant times, Dr Darshn held professional indemnity insurance with Avant Insurance Limited (Avant) under a 'claims made' policy with coverage until 30 June 2019.

Part 3 of the Avant policy provided 'This policy operates on a claims made and notified basis. It covers you for claims (including legal defence costs) made by patients and other third parties against you and which you notify to us within the policy period when the healthcare giving rise to the claim occurred after the retroactive date'. The policy further stated, 'You must notify us in writing as soon as practicable of any claim'.

In September 2017, a class action was commenced in the Supreme Court of New South Wales by five former patients against various TCI entities and their surgical director on the basis that breast augmentation procedures were performed using a 'one size fits all' approach without reference to the individual suitability and physical characteristics of patients (the Class Action Proceeding). It was alleged that the 'one size fits all' approach increased the risk of particularised complications of breast augmentation surgery.

In March 2018, Dr Darshn gave written notice to Avant of a proceeding that had been commenced by a former patient against Dr Darshn, TCI and others in the District Court of New South Wales (the Scotford Proceeding). In these proceedings, the plaintiff also made allegations in respect to the 'one size fits all' approach and it later became apparent that the plaintiff in these proceedings had previously opted out of the Class Action Proceeding. Avant accepted Dr Darshn’s claim for indemnity in respect of the Scotford Proceeding and appointed a firm of solicitors to act on his behalf.

In January 2019, Dr Darshn received a subpoena to produce documents issued by the plaintiffs in the Class Action Proceeding. The Court noted that the breadth and terms of the subpoena suggested that the multiple surgeons upon whom it had been served (four of whom were insured by Avant) might be joined as defendants to the Class Action Proceeding.

In February 2019, Dr Darshn telephoned Avant’s Medico-Legal Advice Service and obtained general advice regarding the subpoena. Around the same time, Dr Darshn’s solicitor from the Scotford Proceeding sent an email to Avant advising that a co-defendant was seeking a three-week adjournment of a directions hearing on the basis that there was an overlap between the Scotford Proceeding and the Class Action Proceeding. Dr Darshn’s solicitors also advised Avant of the possibility of Dr Darshn being joined to the Class Action Proceedings if the Scotford Proceeding was discontinued and referred to the similarity of issues in dispute as between the Class Action Proceeding and the Scotford Proceeding.

In March 2019, Dr Darshn again spoke with Avant in respect to the subpoena. At this time, Avant already had a copy of a subpoena in substantially the same terms (having been provided with the subpoena by other surgeons insured by Avant). Avant suggested that Dr Darshn provide a copy of the subpoena in case he needed further advice about it however, he failed to do so.

In May 2019, Dr Darshn’s solicitor from the Scotford Proceeding advised Avant that a co-defendant was seeking a stay of the Scotford Proceeding pending the conclusion of the Class Action Proceeding. In the affidavit in support of the stay application (which was provided to Avant) there was a heading titled 'Similarities between the claims in the two proceedings' and the annexures to the affidavit included the Statement of Claim from the Class Action Proceeding.

Soon thereafter, Dr Darshn’s solicitors sent a further email to Avant and advised that the insurers of the TCI defendants to the Class Action Proceeding had been denied indemnity and the TCI entities were in liquidation. It was also indicated that the liquidators of the TCI entities had advised that they did not have the funds to satisfy any judgment that may be awarded against the TCI entities.

On 30 June 2019, Dr Darshn ceased to hold insurance with Avant and the next day commenced his policy with MIGA. On 30 June 2020 (one year after Dr Darshn’s policy with Avant had expired), Dr Darshn and 10 other surgeons were joined as a defendants to the Class Action Proceeding.

Dr Darshn then sought indemnity from Avant in respect of his legal costs and any liability in respect of the Class Action Proceeding. However, Avant refused his claim for indemnity on the ground that no 'claim' had been made against him during the period of cover. MIGA also refused the claim for indemnity on the basis of various exclusions in its policy. Dr Darshn then commenced proceedings in the Federal Court of Australia seeking, inter alia, a declaration that he was entitled to be indemnified by Avant with respect to the Class Action Proceeding.

ICA and Dr Darshn’s notifications to Avant

Dr Darshn sought to rely on s 40 of the Insurance Contracts Act 1984 (ICA) which provides:

1. 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.
2. The insurer shall, before the contract is entered into:
   1. clearly inform the insured in writing of the effect of subsection (3), and
   2. if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does not provide such cover.
      
      Penalty: 300 penalty units.
3. Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract.

Relevant to consideration of this provision, Justice Moshinsky considered that the key communications made to Avant included advice from Dr Darshan’s solicitor regarding (a) the fact that there was 'overlap' between the Scotford Proceeding and Class Action Proceeding, (b) the possibility of Dr Darshn being joined to the class action if Ms Scotford decided to discontinue the Scotford Proceeding and (c) the fact that TCI entities had been denied indemnity by their insurers and were in liquidation.¹

The Federal Court’s decision

Dr Darshn made six separate contentions to the Court which include the following two contentions which Justice Moshinsky found were made out:

1. By the communications from Dr Darshn’s appointed solicitors in the Scotford proceedings, which were viewed collectively, Avant were notified in writing of facts which might give rise to claims against him in the Class Action Proceeding such that s 40(3) of the ICA operated to prevent Avant from denying liability under the policy (the second contention).
   
2. Avant acted in breach of its duty of utmost good faith pursuant to s 13 of the ICA in in its refusal of Dr Darshn’s claim for indemnity, while accepting the claims of other surgeons who notified Avant of the Class Action Proceeding claims by providing a copy of the subpoena² and failed to advise Dr Darshn that he was required to send it the subpoena in order to be covered for any claim related to the Class Action Proceedings³ (the fifth contention) [at 255].

Of note, the other contentions advanced by Dr Darshn which did not succeed were as follows:

1. By giving Avant written notice in June 2017 of an OHO complaint made by a former patient who subsequently became a plaintiff of the Class Action Proceeding, Dr Darshn gave Avant written notice of a 'claim' within the meaning of the applicable Avant policy, being a claim which continued to be advanced by the lead plaintiffs in the Class Action Proceeding and as such, the notification entitled him to indemnity in relation to the Class Action Proceeding (the first contention). In response to this contention, his Honour found that while the initial HCCC complaint constituted a claim, he was not persuaded that the same claim was being advanced by the patient in the Class Action Proceeding.⁴
   
2. By notifying Avant of the abovementioned OHO complaint, the Scotford Proceeding and another proceeding initiated by a former patient (by themselves or in conjunction with his oral notification of his receipt of the subpoena in the Class Action Proceeding), Dr Darshn provided written notice to Avant of facts that might give rise to a claim against him as soon as was reasonably practicable after he became aware of them and as such s 40(3) applied (the third contention). His Honour noted that whilst it might be argued that the notification of the Scotford Proceeding (assuming it included the statement of claim) constituted the giving of written notice of 'facts that might give rise to a claim' in respect to the 'one size fits all approach', this did not satisfy the requirements of s 40(3) as the notification did not assert that other patients of Dr Darshn had also suffered loss or damage as a result of the procedures performed.⁵ This reason was applied to the other notifications referred to in this contention.⁶
   
3. By notifying Avant orally of the subpoena in the Class Action Proceeding, Dr Darshn provided notice to Avant of facts that might give rise to a claim against him as soon as was reasonably practicable after he became aware of them for the purposes of s 40(3) and, in the absence of any prejudice to Avant from Dr Darshn’s failure to provide that notice in writing, s 54 and/or s 14 of the ICA operated to prevent Avant from relying on the requirement of writing in s 40(3) in order to avoid liability (the fourth contention). His Honour found that s 40(3) and s 54 operate according to its own terms and their operation cannot be combined in the way contended by Dr Darshn.⁷
   
4. On a proper construction of the aggregation clause in the Avant policy, the abovementioned OHO complaint, the Scotford Proceeding and another proceeding initiated by a former patient and the Class Action Proceeding arose out of a series of related single acts, errors, omissions or occurrences and, accordingly, were to be treated as a single 'claim' under the policy in force at the date the first of the series of related claims commenced (the sixth contention).

His Honour found that the aggregation clause in the Avant policies could not be used in the way that Dr Darshn sought to use it, to assist him in satisfying the notification requirements under the policy. His Honour pointed out that the aggregation clause needed to be read in the context of the other paragraphs that the same paragraph which were concerned with matters such as deductibles and the aggregate limit of cover. It was not concerned with notification of a claim.⁸ As such, Justice Moshinsky held that Avant was required to indemnify Dr Darshn in respect of any civil liability and legal defence costs arising in relation to the Class Action Proceedings.

In the course of his decision, his Honour also made the following key findings as to the scope of s 40(3) of the ICA:

1. It is not necessary that the provider of notice have an intention to give notice of facts that might give rise to a claim under s 40(3).⁹
2. The requirement of s 40(3) that the insured give the notice in writing may be satisfied by another person, an agent, doing so on the insured’s behalf.¹⁰
3. The solicitors acting for Dr Darshn in the Scotford Proceeding, whilst appointed by Avant, were acting on Dr Darshn’s behalf/as his agent and as such, it was held that the notice provided in writing by these solicitors was notice in writing 'by the insured' (as required by s 40(3)).¹¹
4. Section 40(3) and s 54 of the ICA are standalone provisions and their operation cannot be combined (in the way that Dr Darshn sought to do).¹²

As to the issue of utmost good faith required pursuant to s 13 of the ICA, his Honour indicated that if he had not held that s 40(3) operated in the circumstances of this case, he would have concluded that Avant’s denial of Dr Darshn’s claim for indemnity constituted a breach of Avant’s duty of utmost good faith.¹³

In this respect, his Honour stated that the cited authorities make it clear that an insurer’s statutory obligation to act with utmost good faith may require the insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. In this respect, his Honour considered that having regard to the matters referred to above, which would have been apparent to Avant in considering Dr Darshn’s claim for indemnity, Avant’s statutory obligation to act with utmost good faith required it to grant Dr Darshn indemnity with respect to Class Action Proceeding and the associated legal defence costs.

As such, his Honour found that it was unfair and unreasonable not to do so for the following reasons:

1. The effect of s 40(3) was not made apparent to Dr Darshn at or about the time of the second conversation regarding the subpoena.¹⁴
2. Avant was already aware of the Class Action Proceeding and the possibility that Dr Darshn might be joined as a defendant.¹⁵
3. The relevant step that Dr Darshn needed to take to be covered by the policy was merely to send Avant a copy of the subpoena.¹⁶

Implications

In respect to the operation of s 40(3), of the ICA, the judgment indicates that:

1. Notification of facts that might give rise to a legal claim need not be provided directly by an insured and can be provided by an agent acting on behalf of the insured, such as a solicitor appointed by an insurer to act on behalf of the insured.
2. In considering whether such notification has been made, there does not need to be any intention to provide such notice and the Court will collectively view communications between the insured/insured’s agent and the insurer to determine whether notification has been made.

This judgment also provides a reminder to insurers of the obligations of utmost good faith placed upon them by the ICA which, depending on the circumstances, may require the insurer to advise an insured of the need to provide written notification of the facts that might give rise to a claim (as required by s 40(3)).

¹ Darshn v Avant Insurance Ltd [2021] FCA 706; BC202105884 at [155].
² Above n 1, at [225].
³ Above n 1 at [255].
⁴ Above n 1 at [138].
⁵ Above n 1 at [180].
⁶ Above n 1 at [181].
⁷ Above n 1 at [199].
⁸ Above n 1 at [234].
⁹ Above n 1 at [158].
¹⁰ Above n 1, at [161].
¹¹ Above n 1 at [168].
¹² Above n 1 at [192].
¹³ Above n 1 at [218].
¹⁴ Above n 1 at [219].
¹⁵ Above n 1 at [223].
¹⁶ Above n 1 at [224]–[225].