The consequences of no notification revisited: Fairbank Haven v Merkon Constructions

The Supreme Court of Victoria has recently handed down its decision of Fairbank Haven Pty Ltd v Merkon Constructions Pty Ltd [2024] VSC 32. The decision demonstrates the consequences, for plaintiffs as well as for insureds, of failing to notify an insurer of a potential claim with respect to ‘claims made’ policies. The decision also reaffirms the courts’ attitude to the interaction of sections 40(3) and 54 of the Insurance Contracts Act 1984 (Cth) (ICA). This is a well-traversed debate, and the court has reminded the industry once again that the two sections, in combination, do not rescue a failure to notify circumstances.

Background

The proceeding concerned alleged defects in a building owed by the plaintiff, Fairbank Haven Pty Ltd. The plaintiff sought to make a claim against the incorporated insured architect (insured) involved with the project, however, the insured became deregistered. The plaintiff applied to the court for the insurer to be substituted as a defendant to the proceeding pursuant to section 601AG of the Corporations Act 2001 (Cth) and rule 36.01 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic).

In deciding whether to grant the application, the court determined that there were three issues:

1. Whether the application satisfied the procedural rules;
2. Whether the plaintiff made a ‘Claim’, or whether the insured gave ‘notice of any Claim’ to the insurer, within the meaning of the insurer’s professional indemnity policy; and
3. If a ‘Claim’ or ‘notice of any Claim’ was not made, whether the plaintiff could rely on sections 40 and 54 of the ICA, such that the insurer could not refuse indemnity.

This article focuses on issues 2 and 3.

Section 601AG

Section 601AG of the Corporations Act permits a plaintiff to recover from an insurer of a deregistered defendant, an amount that was payable to that deregistered defendant under an insurance policy, provided the deregistered defendant had a liability to the plaintiff and the insurance policy covered this liability before the defendant was deregistered.

As section 601AG requires the policy to respond to the alleged liability, the court was required to consider whether a ‘Claim’ had triggered the policy. This is discussed further below.

‘Claim’ or ‘notice of any Claim’ not made

Claim

The Policy defined ‘Claim’ as:                                                               

‘7.2.1 any writ, application, summons or other originating legal process, cross claim or counter claim issued against or served on the Insured claiming damages or other compensatory relief;  

7.2.2   the positive assertion in writing of a legal entitlement to damages or other compensatory relief in connection with an alleged civil liability on the part of the insured, in terms evincing an intention to pursue such legal entitlement’

Clause 7.2.1 was not satisfied, as there was no writ, application or similar process made by the plaintiff during the relevant period.

In terms of clause 7.2.2, the court considered an email from the plaintiff to the insured, which outlined concerns about the building’s defects and requesting information to be provided by the insured on that issue.[1] The court was unequivocal that this email did not assert any ‘legal entitlement to damages or compensation’. It was merely a request for information, with no suggestion of legal action to be taken.

Accordingly, the ‘Claim’ definition failed on both limbs.

Notice of any Claim

The plaintiff argued that, even if there was no ‘Claim’, the insured still received ‘notice of any Claim’ under clause 4.1 of the policy. Clause 4.1 of the policy stated:

‘If during the Policy Period the Insured receives notice of any Claim that may be covered under this insurance the Insured will give notice to Us as soon as practicable and before the expiry of the Policy Period.’

The plaintiff stated that its email to the insured was the ‘notice of any claim’.

The court stated that the above argument ‘goes nowhere’ because there was no ‘Claim’ in the email that the insured could be said to have received notice of.

Sections 40 and 54(1) not satisfied

As an alternative, the plaintiff argued that it could rely on sections 40(3) and 54(1) of the ICA, such that the insurer could not refuse indemnity.

The plaintiff argued that:

1. section 40(3) of the ICA would have obligated the insurer to cover the Claim, if the insured had given written notice of facts giving rise to the Claim. However, the insured failed to give written notice;
2. section 54 of the ICA could operate to cure a failure to provide written notice for the purposes of section 40(3).

The court rejected the above argument, affirming the position of previous authorities[2] that the two provisions stand alone and cannot be combined to provide relief, where there has been a failure by the insured to notify circumstances. Those authorities agree that an insured will only receive the benefit of 40(3) if it has complied with its terms, by giving the written notice.

Conclusions and observations

A ‘Claim’ (pursuant to the policy) was never made, and written notice of facts that might give rise to a claim were never given. The court therefore dismissed the plaintiff’s application to join the insurer as a defendant in place of the insured because the requirements of section 601AG were not met.

The situation would likely have been different if the plaintiff’s email asserted an entitlement to compensation or damages.[3] That would have triggered the policy’s definition of a ‘Claim’ and section 54 of the ICA would have cured any failure to notify by the insured.

Although the decision turns on its own facts, it provides a useful reminder of the interaction between sections 40 and 54 of the ICA, as well as the importance of considering whether an insuring clause has been triggered by correspondence from a potential claimant.

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