An uncertain future for prior known circumstance exclusions in Australia

An application for Special Leave to Appeal to the High Court was lodged on 7 March 2025. Watch this space for further updates.

The recent judgment of the majority of the Full Court of the Federal Court in Allianz Australia Insurance Ltd v Uniting Church in Australia Property Trust (NSW) [2025] FCAFC 8 casts significant doubt on whether “prior known circumstances” exclusions in claims-made liability policies are valid.

The judgment also provides useful commentary on the requirement that facts which might give rise to a claim be notified “as soon as was reasonably practicable” under section 40(3) of the Insurance Contracts Act 1984 (Cth) (ICA).

Background

The judgment concerned the availability of insurance cover to the Uniting Church (UC) under policies of professional indemnity and malpractice liability insurance underwritten by Allianz Australia Insurance Limited (Allianz) in respect of historical sexual and physical abuse claims made against Knox Grammar School (Knox). Allianz had continuously insured UC over the relevant period.

Initially Allianz accepted that its policies responded to claims concerning a specific teacher at Knox. However, a blanket notification was provided to Allianz in 2009 in respect of potential claims that concerned other teachers at Knox (further teachers). Allianz subsequently determined that these claims were not covered because:

• prior to the inception of the relevant policies, the relevant insureds were aware of facts or circumstances from which the claims arose, with the consequence that they were excluded by the prior known circumstance exclusions in the relevant policies; and
• no notice of those facts or circumstances had been given during an earlier policy period when the UC first became aware of the facts or circumstance with the result being that section 40(3) of the ICA did not operate to extend cover under the policy then in place to subsequently made claims.

Decision at first instance and issues on appeal

UC successfully sought declarations at first instance to the effect that Allianz was required to indemnify UC for the claims arising from the alleged sexual or physical abuse by the further teachers.

Allianz appealed the decision to the Full Court of the Federal Court. While there were a number of issues before the Full Court, we only focus on:

1. Whether valid notification was given to Allianz under section 40(3) of the ICA; and
2. Whether Allianz was entitled to rely on the “prior known circumstances” exclusions in its policies having regard to sections 33 and 52 of the ICA.

Notification under section 40(3) of the ICA

Section 40(3) of the ICA applies where the effect of a contract of liability insurance is that it excludes or limits the extent of the insurer’s liability because notice of a claim was not given to the insurer during the policy period. It is a form of statutory deeming provision that provides the following:

“Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract.” (our bold emphasis)

An issue in the appeal was whether the blanket notification in 2009 was provided to Allianz “as soon as was reasonably practicable” after UC became aware of relevant facts as required by section 40(3) of the ICA.[1]

At first instance, Allianz unsuccessfully submitted that the blanket notification in 2009 was not valid under section 40(3) so as to the trigger the policy in place in 2009 because UC was aware of facts that might give rise to claims concerning other teachers where Knox had in 2004 commissioned a report (defined as LKA2) that raised the potential for more claims.LKA2 was not disclosed by Knox to UC or Allianz at that time.

The primary judge found that LKA2 did not establish that UC was aware in 2004 of facts that might give rise to other claims because it gave rise to a ‘bare possibility’ of the making of a claim, which was insufficient to be a ‘fact’ for the purpose of section 40(3) of the ICA. The primary judge also found that the opinion of an investigator is not capable itself of constituting a ‘fact’ within the meaning of section 40(3) of the ICA.[2] 

All members of the appeal Court disagreed with the primary judge on the above issues. In respect of the relevant legal tests, their Honours confirmed:

• the test as to whether and when an insured has the relevant awareness of facts that might give rise to a claim is to be determined objectively;
• it is not necessary for the insured to be able to identify the precise cause of action or even be aware of the likely occurrence of all the facts or events which would be the basis for a claim;
• 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 or what amounts, in effect, to conjecture; and
• the requirement in section 40(3) that the fact is one “which might give rise to a claim” sets the bar at a relatively low level. Further, section 40(3) speaks in terms of a possibility of a ‘claim’, as opposed to the possibility of a liability and encompasses circumstances where consequent claims may not have significant prospects of success

In light of this, the Court found that:

• to a reasonable reader with the responsibility of being headmaster of Knox (who was the recipient of LKA2), LKA2 included a statement that was a ‘red flag’ which drew attention to the ‘highly questionable conduct’ of other staff at Knox who had left the school after concerns about their behavior;
• LKA2 warned in clear terms of the prospect of further claims relating to ‘a pattern of alleged and some sustained behavior’; and
• that the primary judge’s approach with respect to an expert opinion not constituting a noticeable ‘fact’ under section 40(3) was 'too broad', and that there may be circumstances where the views of an expert are relevant to determining whether known facts indicate a likelihood of claims being made.

Accordingly, their Honours found that the blanket notification made in 2009 did not attract protection under section 40(3) of the ICA because it was not made “as soon as reasonably practicable after the insured became aware of those facts”. It followed that UC could not rely on the 2009 blanket notification to obtain cover under the policy in place in 2009, and, having not made a notification previously (i.e., when in receipt of LKA2), UC could not rely on section 40(3) of the ICA to obtain cover under an earlier policy. This was sufficient in itself to uphold the appeal and find that Allianz was entitled to decline indemnity under its policies.

Prior known circumstances exclusion

Despite it not being necessary to dispose of the appeal (having already decided the issue concerning section 40(3) of the ICA), all judges of the Full Court proceed to consider the issue of whether the “prior known circumstances” exclusion in the later policy was valid.

The “prior known circumstances” exclusion under the policies (subject to variations in particular years) excluded cover for 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 (Exclusion).

Most claims-made liability policies contain an exclusion to this effect with some variations in the wording. One purpose of such an exclusion is to allocate cover between different years of account or different policies based on when the insured first becomes aware of a relevant fact or circumstance. Relevantly, the exclusion is not directly linked to an insured’s obligations in respect of the duty of disclosure.

Allianz relied on the Exclusion as an additional ground to decline cover for the claims in respect of the further teachers because it alleged that LKA2 evidenced that UC was aware of facts and circumstances that might give rise to a claim before the commencement of the relevant policy periods.

The Full Court unanimously found that awareness of LKA2 was awareness of a fact, circumstance or occurrence for the purpose of the Exclusion. Accordingly, on its terms, the Exclusion applied. However, the Full Court had to consider UC’s further submissions that:

• the operation of the Exclusion was limited by section 33 of the ICA to Allianz’s remedies for pre-contractual non-disclosure under section 28 of the ICA; and
• the Exclusion is void for inconsistency with the ICA by operation of section 52 of the ICA.

These issues have been the subject of some earlier academic and judicial consideration. However, until now, they have not been determined in any way that could be considered conclusive or binding.

Sections 28 and 33 of the ICA

Section 28 of the ICA provides:

(1) This section applies if a relevant failure occurs in relation to a contract of general insurance, but does not apply if the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the failure had not occurred.

(2) If the relevant failure was fraudulent, the insurer may avoid the contract.

(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the relevant failure had not occurred.

Section 33 is entitled ‘No other remedies’ and it provides:

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.

Until Allianz filed its opening submissions on the appeal, it had advanced a case that there had been a breach of the duty of disclosure under section 21 of the ICA, in addition to its reliance on the Exclusion. Allianz did not press its non-disclosure case at the hearing of appeal.

Presumably because Allianz initially relied on the non-disclosure provisions of the ICA and the Exclusion, UC submitted that the Exclusion purported to provide Allianz with a contractual remedy for what was, in substance, alleged pre-contractual non-disclosure by UC (i.e. the failure to disclose the facts in LKA2 to Allianz before the policies were entered into).UC submitted that the Exclusion was not consistent with sections 28 and 33 of the ICA because it purported to provide a contractual remedy (being a wholesale denial of the claim) that was separate from the sole remedy available under section 28(3), being a remedy that required Allianz to establish the prejudice suffered by the alleged non-disclosure.

The Full Court unanimously found that:

• section 33 is limited to provisions that enable declinature of cover on the ground of non-disclosure; and
• the Exclusion is not concerned with the duty of disclosure, misrepresentation or incorrect statements. It delimits the extent of cover by removing cover for claims, facts, circumstances or occurrences that are known to the insured whether or not there is disclosure prior to entry into the contract of insurance.

Accordingly, the Full Court held that section 33 did not limit Allianz’s ability to rely on the Exclusion to deny cover for the claims.

Section 52 of the ICA

Section 52 is entitled ‘“Contracting out” prohibited’ and provides:

Where a provision of a contract of insurance (including a provision that is not set out in the contract but is incorporated in the contract by another provision of the contract) purports 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.

In contrast to the decision in respect of section 33 of the ICA, the Court was split. The majority held in respect of section 52 of the ICA that it rendered the Exclusion void, as an “effect” of the Exclusion was to exclude, restrict or modify the operation of the ICA to the prejudice of the insured. The majority stated the following:

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 will exclude or restrict the operation of the disclosure provisions. It will mean that conduct which would otherwise be a failure to perform the duty of disclosure will 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 purposes of s 52, a provision expressed as an exclusion from cover is outside the scope of provisions to which s 52 applies because they have the requisite effect.

….

In effect, Exclusion 7c transforms what is a matter for 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 7c is void by operation of s 52.

Derrington J issued a dissenting judgment on this point. In his opinion “the legal reality of clauses such as Exclusion 7(c) is that they are neither concerned with the duty of disclosure nor the failure to disclose facts and, moreover, their operation is not conditioned upon either” and the view that section 52 rendered the Exclusion void was “contrary to the historically held understanding that insurance generally provides cover for fortuity”.

In our view, there is force to his Honour’s analysis having regard to the generally understood nature of claims-made liability policies and the nature of the fortuitous risk sought to be unwritten in such policies.

Implications

There is now serious doubt about whether “prior known circumstances” exclusions that are commonly found in claims-made liability policies are valid.

Importantly, having decided that UC could not rely on the section 40(3) of the ICA for the purpose of its 2009 blanket notification, the decision on the Exclusion was not necessary to dispose of the appeal in Allianz’s favour. However, the issue was argued in full and it is the subject of consideration in both the majority and dissenting judgments. Subject to any contrary decision by the High Court in the future, it is therefore likely to be followed by other courts in Australia, particularly at first instance.

From a practical perspective, insurers will need to closely consider claims where a “prior known circumstances” exclusion is engaged and consider as part of that process whether an investigation and determination on the issue of non-disclosure should be carried out.

Moreover, insurers will need to ensure that their underwriting procedures and policies accommodate this development, including consideration of the process and procedures for the exclusion of specific matters notified before a policy is entered into. That will be particularly important where underwriting evidence may be required to decline claims that would previously have been assumed to be excluded by prior known circumstance exclusions.

From the perspective of brokers and insureds, the judgment stresses the importance of prompt and full notification of facts and circumstances that might give rise to a claim.

It should be noted that the majority decision concerns prior known circumstances of which the insured was aware. It does not concern the exclusion of claims made or intimated against an insured before a policy is entered into, claims excluded by a retroactive date, or the exclusion of claims arising from matters notified under earlier policies.