Notification of facts that might give rise to a claim – the relationship between sections 40(3) and 54 of the Insurance Contracts Act 1984 (Cth)

This article was co-authored by Liana Emirzian, Associate.

Key takeaways

A recent decision handed down in the Supreme Court of Victoria has reaffirmed the relationship between sections 40(3) and 54 of the Insurance Contracts Act 1984 (Cth) (ICA). The Court has confirmed that the operation of these sections cannot be combined to correct any failure by an insured to notify insurers of ‘facts that might give rise to a claim’ under a policy.

Overview of the relevant legislation

Section 40(3) of the ICA allows an insured to notify ‘facts that might give rise to a claim’ as soon as was reasonably practicable after becoming aware of those facts but before the policy expired.

Section 54 of the ICA deals with acts or omissions occurring after the contract of insurance has been entered into, where the effect of the policy is that an insurer may refuse to pay a claim by reason of that act or omission. It precludes an insurer from relying on certain acts or omissions of the insured to decline cover. Instead, insurers are limited to reducing their liability only where their interests have been prejudiced. However, what reach does this curative provision have?

Fairbank Haven Pty Ltd v Merkon Constructions Pty Ltd & Ors [2024] VSC 32

This claim relates to alleged defects found in a residential property in Victoria. Fairbank Haven Pty Ltd (Fairbank) was the owner of the residential property and it sought to  recover the costs of rectifying the defects from multiple parties including the builder, project manager and architect involved in construction.

The plaintiff, Fairbank, filed an application seeking that Berkley Insurance Company (Berkley) be substituted as the sixth defendant to the proceeding. Berkley provided professional indemnity insurance to Peter Sgourakis Architect Pty Ltd (Architect) between 31 October 2011 and 14 November 2019.

In respect of this application, three main issues arose:

1. Whether the plaintiff satisfied rule 36.01 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) such that their further amended statement of claim may be amended;
2. Whether Fairbank made a ‘Claim’ against, or gave ‘notice of any Claim’ to the Architect (a deregistered company) such that Berkley may not, by reason of section 54 of the ICA, refuse to indemnify the Architect;
3. Assuming Fairbank did not make a ‘Claim’ against, or gave ‘notice of any Claim’ to, the Architect, whether Fairbank could have relied on the combined operation of sections 40(3) and 54 of the ICA such that Berkley may not have refused to indemnify the Architect.

Delaney J found the plaintiff failed on the first issue, and so the analysis of the policy arguments are relatively brief. However, on the second issue, Delany J found that a ‘Claim’ had not been made by the plaintiff because, as required by the relevant policy, there was no ‘positive assertion in writing of a legal entitlement to damages… in evincing an intention to pursue such legal entitlement’. As such, Delaney J had to consider whether section 54 of the ICA corrected Fairbank’s failure to notify a Claim.

As to the application of sections 40(3) and 54 of the ICA, the plaintiff relied on Einfeld v HIH Casualty & General Insurance Ltd (1999) 166 ALR 714 (Einfeld), contending that the combined effect of the sections precluded Berkley from denying cover. Fairbank argued that its failure to give notice to Berkley of the Claim (or in the alternative, facts which might give rise to a Claim), in the form required by section 40(3), was an omission and therefore, by operation of section 54, Berkley could not deny cover.  

Delany J disagreed, noting that the decision in Einfeld was inconsistent with more recent judgments (CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (CA & MEC McInally Nominees), Darshn v Avant Insurance Ltd (2021) 154 ACSR 1 (Darshn) and Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542 (Gosford). Specifically, CA & MEC McInally Nominees confirmed that to have the benefit of the protection conferred by section 40(3) notice must be given. Whilst, both Darshn and Gosford confirmed that section sections 40(3) and 54 stand alone and their operation cannot be combined to cure acts or omissions by an insured.

Sheller JA, in Gosford, stated that ‘the actual claim made by the insured is one of the premises from which consideration of the application of s 54 must proceed’, and that this provision does not relieve the insured of its duties, including to provide written notice.

In Darshn the plaintiff submitted that his failure to provide written notice to his insurers during the policy period could be remedied by the operation of section 54, which would preclude insurers from relying on that omission to avoid liability. The Court rejected this position, stating that section 54 stood alone and could not substitute a lack of written notice as required by section 40(3).

Implication for insurers

The decision in Fairbank is a reminder of the interplay between sections 40(3) and 54(1) of the ICA - they do not interact and are standalone provisions. It reaffirmed the findings in Gosford and Darshn that an insured cannot utilise section 54 of the ICA to correct a failure to notify in writing ‘facts that might give rise to a claim’ where there is no deeming provision in the policy. Section 54 will only have a curative effect for a failure to notify ‘facts that might give rise to a claim’ where there is a deeming provision in the policy.