In what circumstances are there prior known circumstances?

Key Points
  • Attempts to rely on a restrictive reading of the definition of the insured’s services to limit cover often fail – but not always.
  • Application of the prior known circumstances exclusion must be seen in the context of the policy.

In Ritchie v Woodward (Executor of the Estate of the late Brian Patrick Woodward)[2016] NSWSC 1715 the Supreme Court of NSW examined an accountants’ liability to their clients and the accountants’ entitlement to indemnity under its professional indemnity policy.

The court found in favour of the accountants against their clients and also found in favour of the insurer.  The principal basis of the finding in favour of the insurer was that the service provided by the insured was investment advice and that this fell both outside the primary insuring clause (not being professional services as defined) and within a specific exclusion relating to liability for investment advice.

The insurer also sought to rely on the prior known circumstances exclusion.  The Policy did not cover loss in connection with any Claim arising out of, based upon, or attributable to any circumstance that, as at the inception of the Policy, may reasonably have been expected by any Insured to give rise to a Claim.  There were a number of facts known to the insureds prior to inception including that their clients.

  • had lost a substantial amount of capital through their investments; and
  • were deeply unhappy about the losses.

One of the insured’s had made a file note following a meeting with the client which included:

“No legal action against me.

no intention..”

Emmett AJA pointed out that application of the exclusion required an appropriate connection between the known circumstances and the Claim; i.e. the circumstances may give rise to a Claim if they would immediately suggest to a reasonable person in the proposed insured’s position, who reflected upon those known circumstances, that the bringing of a Claim against the insured in respect of those circumstances was a definite risk, or was a real possibility or was ‘on the cards’. It is an inquiry as to the possibility, not the certainty, of a Claim being made and does not call for any judgment about the prospects of success of a possible Claim or the strength of possible defences to it. The application of the exclusion has two stages. First, it is necessary to determine what the insured knew. Secondly, it is necessary to make an objective inquiry as to whether the circumstances known to the insured may reasonably be expected to give rise to a Claim. Ultimately His Honour found that the insurer had not made out the application of the exclusion but was influenced by the cover provided by the policy.  As stated by His Honour, what must be a definite risk or a real possibility or ‘on the cards’ is a Claim within the meaning of the Policy. The fact that the policy did not cover investment advice was a significant element of the finding that the exclusion did not apply.

Post by Paul Hendriks

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