Darshn v Avant: notification of facts by an insured in a class action context

Darshn v Avant Insurance Ltd [2021] FCA 706

In Darshn v Avant Insurance Ltd [2021] FCA 706; 154 ACSR 1, Dr Darshn (“the Insured”) sought, amongst other things, an order requiring Avant Insurance Ltd (“the Insurer”) to pay the Insured’s legal defence costs in respect of a class action to which he had been joined as a defendant after the expiry of claims made and notified policies of professional indemnity insurance that he held with the Insurer. He did so on several bases, including that he had notified the Insurer of facts that might have given rise to claims against him in the class action such that s 40(3) of the Insurance Contracts Act 1984 (Cth) operated to prevent the Insurer from denying liability under the policies. He also contended that the Insurer breached its duty of utmost good faith under s 13 of the Act. Justice Moshinsky upheld the Insured’s claim.

Background

The Insured was a registered medical practitioner who practised as a cosmetic surgeon. From January 2015 to January 2018 he performed breast augmentation surgery (BAS) at premises owned or occupied by The Cosmetic Institute Pty Ltd (TCI) or one of its subsidiaries.

In September 2017, the class action was commenced in the Supreme Court of New South Wales. There were five plaintiffs. There were five defendants: TCI, certain related companies and a natural person who was said to be the surgical director of the four corporate defendants and a director of three of them. The group comprised women who, amongst other things, had BAS performed by surgeons who were servants and/or agents of the corporate defendants. The surgeons themselves were not defendants.

In March 2018, the Insured gave written notice to the Insurer of a proceeding that had been commenced by S against the Insured, TCI and others. The Insurer accepted the claim for indemnity and appointed solicitors to act on the Insured’s behalf. S fell within the represented class in the class action but subsequently opted out of it.

In January 2019, the plaintiffs in the class action served a subpoena to produce on the Insured. Subpoenas in substantially the same terms were also served on other surgeons who had performed BAS at TCI clinics. The breadth and terms of the subpoena suggested that the surgeons upon whom it had been served might be joined as defendants to the class action.

In February 2019, the appointed solicitors communicated with the Insurer in relation to the S proceeding. In the course of those communications, the solicitors provided the Insurer with information about the class action.

After being served with the subpoena, the Insured twice telephoned the Insurer’s medico-legal advice service. On the second occasion, he again discussed the subpoena. At that time, the Insurer already had a copy of a subpoena in substantially the same terms as the subpoena served on the Insured, as the Insurer was the insurer for other surgeons who had been served with such a subpoena. During the call and in a subsequent email, the Insurer suggested that the Insured provide a copy of the subpoena in case he needed further advice about it, but he did not do so.

In mid-2020, the Insured was joined to the class action as one of 11 new defendants. Seven new plaintiffs were joined. One of them was a representative for group members who were alleged to have suffered injury, loss and damage in consequence of undergoing BAS performed by the Insured. The Insurer declined to cover the Insured in respect of the claims made against him in the class action.

It is worth noting that it appeared that the Insurer had adopted a position that implied (in his Honour’s view, correctly) that if an insured doctor who received the subpoena in the class action provided a copy of it to the Insurer, that would constitute the giving of notice in writing to the Insurer of facts that might give rise to a claim against the insured for the purposes of s 40(3) in relation to a subsequent claim against the insured in the class action: [225].

The oral notification contention

The Insured argued that by notifying the Insurer orally of the subpoena in the class action, the Insured provided notice to the Insurer of facts that might give rise to a claim against him for the purposes of s 40(3) and, in the absence of any prejudice to the Insurer from the Insured’s failure to provide that notice in writing, s 54 operated to prevent the Insurer from relying on the requirement of writing in s 40(3) to avoid liability (the Oral Notification Contention).

Justice Moshinsky did not accept this submission, essentially because the text of the provisions and the intended scope of operation of s 54 (namely, upon “a contract of insurance”: [195], [197]) militated against the ameliorative operation of s 54 extending to an omission to give notice in writing in accordance with s 40(3). His Honour held that whilst each was an ameliorative provision ([192]), they each operated according to its own terms and could not be invoked in a combined way: [195], [199]. It is worth noting, as his Honour observed, that his Honour’s construction differed from that ventured in Kelly & Ball Principles of Insurance Law.

The other s 40(3) contentions

The Insured contended that by notifying the Insurer of, amongst other things, S’s claim, the Insured provided written notice to the Insurer of facts that might give rise to a claim against him so that s 40(3) operated.

Apart from the Insured, the defendants in Ms S’s proceeding were three of the five defendants in the class action. The statement of claim alleged negligence, referring to the adoption of a “one size fits all approach” (being the very expression that had been used in the statement of claim in the class action). His Honour accepted that the statement of claim identified a number of systemic issues with the Insured’s surgical practices (especially the “one size fits all approach”) that could be relevant to other patients. However, the notification did not assert that other patients of the Insured had also suffered loss or damage as a result of BAS performed on them, let alone identify them by name or description. Thus, there was no “recognisable correspondence”[1] between the facts that might give rise to a claim that was the subject of Ms S’s proceeding (being that notified to the Insurer) and the claim by the representative plaintiff subsequently brought against the Insured in the class action: [180].

Separately, the Insured argued that by the communications between the solicitors the Insurer had appointed to act for the Insured and the Insurer, the Insured (by his agent, the solicitors) notified the Insurer in writing of facts that might give rise to claims against him in the class action such that s 40(3) operated. The correspondence included: a forwarded email from another defendant’s solicitors that identified that Ms S was then a member of the class in the class action and that there was a substantial overlap between the class action and Ms S’s proceeding ([155(a)] and [68]ff); an email that referred to the possibility of the Insured being joined to the class action if Ms S decided to discontinue her proceeding ([155(c)]); and an email to the effect that the corporate defendants to the class action had been denied indemnity by their insurers and were in liquidation, and that the liquidators had advised that they did not have the funds to satisfy any judgment: [155(e)] and [105]ff.

Justice Moshinsky concluded that it was apparent that, in the circumstances set out in the last email, it was possible, if not likely, that the surgeons who had practised at TCI clinics and performed the relevant BAS would be joined as defendants to the class action and that the correspondence, “viewed collectively”, gave notice of facts that might give rise to claims of the relevant kind against the Insured: [157]. His Honour concluded that whilst the correspondence was sent to the Insurer purportedly in connection with the proceedings that were then on foot against the Insured, the class action and its nature and scope featured prominently in the correspondence. Indeed, the relevant information was the “central focus” of the communications: [157]. There was a “recognisable correspondence” between “the facts that might give rise to a claim” and “the claim” ultimately made: [159].

His Honour also concluded that the notice was given by the Insured, notwithstanding that it was made by solicitors whom the Insurer had appointed to act for him in Ms S’s proceeding. His Honour found that the solicitors had been engaged to act as the solicitors for the Insured in relation to the two existing claims against him, and that the retainer established an agency relationship between them and the Insured, the scope of which extended to doing all things necessary for, or incidental to, the conduct of the proceedings on the Insured’s behalf: [168]. The communications related to the proceedings in which the solicitors were engaged and were necessary for, or at least incidental to, the solicitors’ retainers to act on the Insured’s behalf in connection with those proceedings: [169].

It followed that s 40(3) operated and the Insured was entitled to cover under the policy in force when the solicitors sent the emails to the Insurer: [173].

The utmost good faith contention

The Insured contended that the Insurer breached its duty of utmost good faith under s 13 because it failed to advise or inform the Insured during his two calls with its medico-legal advice service that he was required to send it the subpoena in order to be covered for any claim related to the class action. Justice Moshinsky accepted this submission, emphasising the following circumstances:

1. The Insurer held out its medico-legal advice service as providing advice in relation both to claims that may need to be notified and facts that might give rise to a claim. Notwithstanding this, the fact that the class action was referred to in the second conversation and the breadth of the subpoena, the Insurer did not advise the Insured of the effect of s 40(3) and that he needed to send the Insurer a copy of the subpoena if he wanted to be able to rely on the section if he were joined. Whilst the Insurer suggested that the Insured send the Insurer a copy of the subpoena, this was said to be in case he needed further advice. The position would likely have been very different had the Insurer given the Insured advice to the effect mentioned above.
2. At the time of the second conversation, the Insurer was aware of the nature of the class action and of the possibility, if not the likelihood, that the surgeons might be joined as defendants.
3. Other doctors whom the Insurer insured had provided to it subpoenas that had been served on them, which were in substantially the same terms as the subpoena received by the Insured.
4. As noted above, the Insurer seemingly adopted the position that if an insured received such a subpoena and provided it to the Insurer, that was sufficient to constitute the giving of notice for the purposes of s 40(3).

In those circumstances, his Honour held that the Insurer’s obligation to act with utmost good faith under s 13 required it to grant the Insured indemnity with respect to the class action: [226].

In so doing, his Honour rejected the Insurer’s submission that there was no scope for s 13 to operate beyond the terms of ss 40(2)-(3): [227]. Further, his Honour considered that the section was not confined to conduct that had an element of capriciousness, bad dealing or lack of clean hands: [228].

Comment

Darshn may at first appear troubling for professional indemnity insurers.

In particular, the notion that communications from solicitors appointed by the insurer (and indeed with whom the insurer was also in a lawyer-client relationship) could constitute notice for the purposes of s 40(3) is not immediately obvious. Expressly excluding the giving of notice for the purpose of s 40(3) from the scope of appointed solicitors’ authority may mitigate this risk somewhat.

Further, the conclusion that the Insurer’s statutory obligation of utmost good faith required it to grant the Insured indemnity may also come as a surprise, especially in circumstances in which the Insured was asked to provide a copy of the subpoena (but chose not to do so). However, the decision may be one that can be confined to its facts. Only a policy from several years earlier had a statement of the effect of s 40(3). The inclusion of a statement of the effect of s 40(3) in the current policy and a recorded disclaimer prefacing the call (referring to the policy) may have tipped the balance in favour of the Insurer, though the fact that it had granted indemnity to other surgeons who had provided the subpoena to it was never going to help its cause.

The judgment is subject to appeal.

This note first appeared in the Insurance Law Bulletin: (2021) 37(3) ILB 56.

[1] Esined No 9 Pty Ltd v Moylan Retirement Solutions Pty Ltd (No 2) (2020) 353 FLR 1, [534] (Slattery J).