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12 Jul 2010

Is it a bird, is it a claim? What's a claim under professional indemnity insurance policies?

Professional indemnity insurance is usually underwritten on a claims made basis - but what is a "claim"? The NSW Supreme Court has reaffirmed the importance of looking to the policy for the answer (Dimitra Cassidy v Eric J Leslie [2010] NSWSC 742).

The valuation, the unhappy client, and the solicitor's letter

Mr Leslie is a land valuer. He was engaged by the plaintiff to provide a valuation for some land which was to secure a loan she made.

When the mortgagor defaulted, the plaintiff took possession and arranged for it to be sold. She came to the conclusion that Mr Leslie's valuation was too high. Her solicitor sent Leslie an email which said in part:

"Our instructions are to place you and the valuer on notice that an insurable event may occur if the property does not provide sufficient funds at auction to repay the loan. We strongly suggest that you obtain legal advice with respect to the matter.

We have advised the borrowers and the guarantors that unless loan funds are paid with (sic) seven days then proceedings will commence in the NSW Supreme Court. Where a shortfall occurs in the auction of the property a claim will be made against Leslie, Capital and De Cianni."

Mr Leslie did not pass this on to his professional indemnity insurer. When he later claimed on his insurance after the policy had expired, his insurer denied indemnity on the basis that no claim had been made against him during the policy period as the solicitor's letter was not a "claim". He was then sued, his insurer was added as a cross-defendant to Mr Leslie's cross-claim, and the insurer asked: what claim?

What is a claim?

This turns on the definition of "claim" in the policy:

“Claim

(a) A writ, statement of claim, summons, application or other originating legal or arbitral process, cross-claim, counter claim or third or similar party notice served on the Insured for compensation;

(b) A written assertion of a right to or a demand for compensation.”

According to the insurer, this meant that the claimant had to assert against the insured an “existing right to compensation”. The email did not contain this, because the right asserted was significantly qualified and was at best a contingent one. The insurer referred to a line of cases and submitted that what was required was an assertion that the third party is at the time of the assertion so entitled or regards himself as currently so entitled.

Unfortunately, said the Court, the cases relied on by the insurer aren't about this policy and its definition of "claim", which extends to "a written assertion of a right to or a demand for compensation". There's no reason to insert "existing" into the definition - a right doesn't have to be existing, but can be contingent or conditional. And as the insurer wrote the policy, any ambiguity in the policy should be interpreted in a way which favours the insured.

Here, the email clearly said that it appears the valuer may have been negligent, the auction might not make enough money to repay the loan, and if there's a shortfall litigation will be commenced. That's a written assertion of a right to compensation, the compensation being the extent of the shortfall, so this was a claim.

What does this mean for professional indemnity insurance policies?

This case highlights for insureds that when litigation is threatened it is essential to carefully manage the insurance notification. It is dangerous to hold off notifying your insurer in the belief that the threatened litigation may not eventuate. In this case, the insured was fortunate the threatened litigation fell within the definition of "claim" and that the failure to notify the insurer could be remedied. If it did not the insured was exposed the risk that a claim, which should otherwise have been covered by the insurance, would be uninsured.

The case also demonstrates the importance for insureds of reviewing the key policy terms. In the context of "claims made" insurance this includes carefully reviewing the definition of "claim" and ensuring that the policy includes a "deeming clause" permitting notification of "potential claims" so that the policy provides the broadest possible cover that can be negotiated. Commercial insurance policies are technical contracts and a legal review to ensure that the policy will operate effectively can avoid disputes and disappointment.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.