It also highlights the importance of making  prior notifications as soon as reasonably practicable in accordance with Section 40(3) of the Insurance Contracts Act (Cth) 1984 (ICA), and examines the validity of a prior known circumstance exclusion. 

These issues arose in determining the Uniting Church's (UC) right to indemnity under various policies underwritten over time by Allianz Australia (Allianz) in respect of historic sexual and physical abuse claims by former students of Knox Grammar School. While prior matters and claims regarding a specific teacher had been notified to, and paid by, Allianz, the issue was the availability of cover for claims by other students in respect of other teachers. A blanket notification in respect of those other claims was made in 2009, however Allianz disputed the validity of that notification, as in 2004 Knox had commissioned a report (termed  LKA2) which raised the potential for more expanded claims, but the contents were not disclosed to the UC or Allianz at that time. 

The issue for determination by the Court was whether the blanket notification was a valid notification pursuant to Section 40(3) of the ICA (which required notice "as soon as was reasonably practicable after the insured became aware of those facts") and, if it was, whether cover was available.

A large part of the judgment is dependent on the facts of the case, including the relationship of UC and Knox, and in determining the coverage position the Full Court had to determine the following relevant issues:

1. Whether the LKA2 report disclosed facts and circumstances which may give rise to a claim beyond the previous known specified teacher.

2. Whether  the knowledge of the Knox Headmaster was also that  of UC, such that UC's 2009 notification pursuant to Section 40(3) was a notification "as soon as reasonably practicable after the insured became aware of those facts".

3. Did Section 54 of the ICA apply to remedy any failure by UC to notify a circumstance as soon as was reasonably practicable after the UC became aware of those facts?

4. Was the prior known circumstance Exclusion 7(c) void either by reason of Section 33 or Section 52 of ICA?

LKA2 contained "red flags", "drew the reader's attention to highly questionable conduct of other staff and warned in clear terms of the prospect of further claims relating to a pattern of alleged and some sustained behaviour from the 1980s and early 1990s".

The Court clarified that the relevant test did not require the insured to be aware of the full extent of possible claimants or their identity. "It is enough if there is awareness of a problem which is of a character that is likely to give rise to claims of a kind that are covered by the policy …". "The required awareness is of facts that expose the possibility of a claim, not an unfounded suspicion or belief of what amounts, in effect, to conjecture". The Court referred to "… the awareness of facts that point to the realistic prospect that such claimants exist and may bring forth claims would meet the statutory terms …". 

Given those findings, the Full Court held that upon receiving LKA2 "a reasonable insured would become aware of facts that may give rise to all of the claims which subsequently emerged and in respect of which … was the subject of the blanket notification some years later".

Whether the Knox Headmaster's awareness could be deemed to be the knowledge of UC was largely dependent upon the peculiar facts of this matter, and the relationship of UC and Knox.  The Court held that the UC was effectively the nominal defendant in the proceedings, with the real defendant being Knox. As the policy expressly provided that notification of claims was to be given by the General Secretary of the Synod, the UC argued that the General Secretary had to be aware of those circumstances in order to effect proper notification, and there was no such awareness.

The Court held that UC's contention would "bring about the uncommercial consequence that Allianz would not have the benefit of notification of a claim despite being liable to indemnify". The better construction of the policy was that each individual insured was responsible for notifying the Synod, who was responsible for notifying Allianz. The Court held that where the insured is covered for liability as a nominal defendant (here UC), it is the awareness of the substantive defendant (here Knox) that is relevant. 

The Court recognised that there are important differences between the nature of Section 21 (Disclosure Obligations) and Section 40(3) (Notification) of the ICA, such that a conclusion as to the proper attribution approach for one will not indicate the proper approach to the other. However, in this "special case" where UC "seeks indemnification on the basis of its liability as a nominal defendant for the conduct of Knox, there was an obligation under the policy for Knox to notify".

"In the very unusual circumstances of the present case where all notifications were required to be given by the General Secretary of the Synod and [UC] has cover both as to its own liabilities and as to additional liabilities as nominal defendant, it seems to us that knowledge of Knox is knowledge of [UC] for the purposes of notification of a claim or the liability of UC is as a nominal defendant in respect of the claim against Knox. Put another way, if Knox is aware of a claim, the notification provision requires the General Secretary to notify the claim and a failure to do so is a failure by both Knox and UC."

While we consider that the attribution of Knox's knowledge to UC is rather contrived, that finding of knowledge on the part of UC in 2004 meant that the blanket notification by UC pursuant to Section 40(3) in 2009 was not made 'as soon as reasonably practicable after it became aware' of those facts in 2004, and therefore invalid. Notification ought to have occurred in 2004. 

In an attempt to address that failure to notify in 2004, UC argued that the omission could be remedied by Section 54 of the ICA.

It is established law that Section 54 does not apply to a failure to notify a circumstance unless there is a contractual deeming clause in the policy, which allows the insured to notify a circumstance within the policy period and also deems that any subsequent claim arising out of that notified circumstance will be deemed to be first made at the time of the circumstance notification. The rationale being that it is the "effect of the contract of insurance" by which the insured is refused indemnity, by reason of its failure to notify the circumstance pursuant to the policy terms. The Courts have taken a different position, and disallowed the application of Section 54, where there is no contractual deeming clause and the insured merely seeks to rely on Section 40(3) of the ICA to late notify a circumstance. A failure to rely on Section 40(3) cannot be remedied by Section 54, because it is a failure to rely on the legislative right provided by Section 40(3) and it does not arise as the effect of a contract of insurance. 

The Full Federal Court maintained the current law and held that Section 54 did not assist the UC in this instance where the insured sought to rely on Section 40(3) and yet had failed to notify relevant facts as soon as reasonably practicable. 

The Full Court then determined whether Allianz could also rely on the Prior Known Circumstance Exclusion 7(c) or whether that exclusion was void by reason of Sections 33 or 52 of ICA. The exclusion provides  "This Policy does not cover any Claim for any liability for or arising directly or indirectly from: … any Claim, fact, circumstance or occurrence: … of which the Insured is aware before the commencement of the Period of Insurance, which may give rise to a claim." The Full Federal Court's issue was split on this issue. While the Court unanimously held that Section 33 did not render Exclusion 7(c) void, the majority held that Exclusion 7(c) was void by reason of Section 52.

The courts have grappled with this issue previously and there has been much intellectual debate as to whether prior known circumstance exclusions are contrary to either Section 33 or 52.
Section 33 entitled "No other remedies" provides that:

"The provisions of this Division are exclusive of any right that the insurer has otherwise than under this Act in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement".

The Court acknowledged that there is a distinction between a prior known circumstance exclusion (which defines the extent, or parameters of, cover provided (i.e. cover does not extend to claims arising from known circumstances)) and the duty of disclosure which requires the insured to disclose all relevant known information. The court relied upon that distinction to find that Exclusion 7(c) was not rendered void by Section 33, as it did not affect the duty of disclosure. The Court held:

"Policies of insurance provide cover for risks, not for fortuities that are known or risks that are already manifest. The exclusion of risks of that kind is consistent with delimiting the extent of cover rather than conferring a right upon the insurer in the event of a breach of the duty of non-disclosure".

However, most importantly, the majority held that exclusion 7(c) was void by reason of Section 52 of the ICA which provides that:

"Where a provision of a contract of insurance… proports to exclude, restrict or modify, or would, but for this subsection, have the effect of excluding, restricting or modifying, to the prejudice of a person other than the insurer, the operation of this act, the provision is void". (our emphasis). 

The Court held that an "effect" of Exclusion 7(c) is that it confines the policy coverage to an extent that is dependent upon the insured's awareness of facts before the commencement of cover. However, if that exclusion was omitted, a failure by UC to disclose those facts prior to policy inception would be a breach of disclosure, the consequences of which are limited by Section 28  which requires insurers to establish prejudice, rather than a blanket exclusion. 

In order to deny liability, Allianz would need to demonstrate prejudice (i.e. it would not have insured UC if proper disclosure had occurred), but Allianz did not bring any non-disclosure case. The Court held that the ICA legislation expressly requires a stipulated disclosure process and provides for the limitation of an insurers' right to limit its cover by reference to what had not been disclosed to it, and yet Exclusion 7(c) had the effect of excluding, restricting or modifying the operation of Section 28. The Court held that:

"If an insurer is able to include a provision which in substance, makes any failure to disclose a fact that might give rise to a claim of which the insured is aware at the time of entry into the policy, a matter that means there is no cover under the policy for such claims then that would exclude or restrict the operation of the disclosure provision. It will mean the conduct which would otherwise be a failure to perform the duty of disclosure would instead become a matter that results in exclusion from cover. Whilst the two matters are conceptually distinct for the purpose of insurance arrangements it does not mean that, for the purpose of section 52, a provision expressed as an exclusion from cover is outside the scope of provisions to which section 52 applies because they have the requisite effect".

"In effect Exclusion 7(c) transforms what is a matter of disclosure (what the insured knows that bears upon the decision by the insured whether to accept the risks to be insured) into a general exclusion from cover in all instances. Its effect is to substantially exclude the application of the duty of disclosure provisions to the policy. For those reasons Exclusion 7(c) is void by operation of S 52)."

Going forward insurers will not be able to rely upon a Prior Known Circumstance Exclusion to deny or limit cover. In such circumstances, an insurers' sole remedy will be to establish a breach of the insureds' duty of disclosure or misrepresentation of the risk along with the resultant prejudice to the insurer.  This places greater emphasis on the underwriting evidence required to establish those disclosure issues. That evidence includes underwriting guidelines and compliance with them, the nature and extent of questions asked in the proposal, and the importance of those issues to the underwriters' deliberation and underwriting decision. It also requires  evidence in support of the answer to the hypothetical question of what the underwriter would have done if proper disclosure had occurred.

Insurers need to ensure that all such evidence is available for each risk, and is preserved so that it is available when needed. Otherwise, Prior Notification and Retroactive Date Exclusions should still be operative, as those confine the scope of cover, rather than effect the operation of the ICA.

Brokers also need to be mindful that the insured fully discloses, and/or fully notifies the known circumstances as soon as practicable upon becoming aware of the relevant facts. It was submitted that Allianz was aware of LKA2 due to references in some communications with Allianz involving materials held by Knox, However,  despite this alleged knowledge, Allianz was disinterested in its content. The Full Federal Court held that the insurer cannot be aware of matters if those matters were not brought to its attention. "Allianz was entitled to proceed on the basis that its insured had notified the extent of the claims that might be made. It could take those matters at face value and could hardly be said to be obliged to undertake its own check of what its insured was telling it about the extent of the facts of which it was aware about those claims".

Accordingly, if the contents of a document are relevant to an underwriting decision (either notification or indeed disclosure) that document or its content should be provided to insurers. A mere passing reference to that document will not be sufficient to properly inform the insurer. The decision also highlights the importance of contractual deeming clauses (which have largely been removed from policies other than D&O policies) and continuous cover clauses, which could have alleviated the consequences of the failure to disclose and/or properly notify.

Given the issues determined there must be a likelihood of an application for special leave to appeal to the High Court.