Section 33 – Still a mystery
The insurance industry and their advisers have, for a long time, grappled with questions about the scope of section 33 of the Insurance Contract Act 1984 (Cth) (ICA), including its operation, if any, to prior known facts exclusions. Section 33 prohibits an insurer from relying on a remedy for non-disclosure other than as prescribed in the ICA.
On 8 March 2023, in Uniting Church in Australia Property Trust (NSW) v Allianz Australia Insurance Limited (Liability Judgment)  FCA 190, the Federal Court delivered the first ever judgment in a case in which it was asked to conclude that an insurer is precluded by section 33 (and section 52) of the ICA from relying on a prior known facts exclusion to decline indemnity, amongst other issues. The decision articulates the arguments for and against the operation of section 33, and adds further support to the view that prior known facts exclusions are effective and can be relied on by insurers.
Regrettably, the Court did not reach a final conclusion, leaving insurers and insureds alike with ongoing uncertainty. We expect the issue will need to be resolved at appellate level.
The Uniting Church in Australia Property Trust (NSW) (UCPT), as operator of Knox College (College), was the subject of historic claims of alleged sexual and physical abuse of former students by former teachers and staff of the College. It sought cover under professional indemnity policies issued by Allianz Australia Insurance Limited (Allianz) to the Uniting Church in Australia (UCA) (to which UCPT is affiliated) for a continuous 12 year period from 31 March 1999 to 31 March 2011.
The alleged conduct the subject of the claims dates back to the 1970s. At the date of the hearing, 53 claims had been made against the UCPT, and the UCPT had identified 139 potential other claims.
The UCPT notified facts to Allianz at various times in the period 2009 to 2011, including four ‘bulk’ notifications, which included lists of potential claimants then identified by the UCPT.
Allianz initially extended indemnity and appointed a panel lawyer to act for UCPT in its defence of the claims and to advise Allianz. From 19 May 2014, Allianz declined indemnity on the bases that, firstly, the claims then made arose from relevant matters known to UCA and/or the UCPT before commencement of the policies and a prior known facts exclusion applied and, secondly, non-disclosure by the UCA entitling Allianz to reduce its liability to nil.
The UCPT issued proceedings seeking declarations for insurance cover under the relevant policies.
By the time of the hearing, Allianz did not press its non disclosure case. Allianz maintained it was entitled to rely on a prior known facts exclusion, on the basis the claims arose out of facts referred to in an investigation report and materials commissioned in 2004 by the College, in connection with a complaint or complaints made against a specific member of staff.
The Court was asked to resolve a number of issues associated with the operation of the policies, by way of separate hearing, including the effectiveness of ‘hornets nest’ notifications and whether the knowledge of panel lawyers appointed by an insurer can be imputed to the insurer for the purposes of section 40(3) of the ICA. In the interests of brevity, this article only touches on the Court’s approach to section 33.
Are prior known facts exclusions void or unenforceable by reason of sections 33 and/or 52 of the ICA?
The prior known facts exclusion was in materially the same terms in each policy and adopted wording commonly found in PI and D&O policies. In substance, it excluded cover for liabilities for, or arising directly or indirectly from, any claim, fact, circumstance or occurrence of which the insured was aware before the commencement of the period of insurance. The exclusion was not linked to an insured’s disclosure obligations at inception of a policy.
UCPT argued that Allianz is not entitled to rely on the prior known facts exclusion because it provides a contractual remedy for non disclosure other than permitted in the ICA and is void or unenforceable pursuant to sections 33 and 52. Part V, Div 3 of the ICA sets out a code with exclusive remedies available to an insurer for non disclosure and replaces the common law. In respect of innocent (ie, non fraudulent) non disclosure, the remedy requires evidence from the insurer of what it would have done had there not been a misrepresentation or non disclosure, amongst other things.
Section 52 of the ICA prohibits the contracting out of the ICA and provides that a clause in a policy that has that effect is void.
As noted in the judgment, on at least two prior occasions, the Court has accepted, without deciding the point, that it is arguable that section 33 or 52 applies to certain exclusions, such as a prior known facts exclusion. Those decisions acknowledged that a view can be taken that in some circumstances, such an exclusion if it operates will provide an insurer with an avenue to decline liability (without proving materiality, as required in the ICA) where a claim has a connection with a matter that has not been disclosed.
While not finally decided, Justice Lee preferred a view that sections 33 and 52 of the ICA do not apply to the prior known facts exclusion in this instance. In doing so, his Honour endorsed a distinction drawn in the authorities between an exclusion which affects the validity of the policy itself, as compared with a clause which merely defines the risk for which the insurer is prepared to offer cover. The former, if associated with matters that should have been disclosed, would be void under section 33 as it encroaches on the mischief to which the non-disclosure regime in the ICA is directed; that is, to replace common law rights previously available to an insurer for non-disclosure, such as the right to avoid a policy from inception. The Court did not offer an example and we have struggled to identify a typical clause that may come within this category and attract section 33.
The function of the latter (and the prior known facts exclusion in this instance) is to define the parameters of the cover, once the contract of insurance is concluded. In Justice Lee’s opinion, section 33 has no operation in those circumstances. In other words, section 33 cannot operate to bring within cover a matter that is outside the cover as defined by the contract of insurance.
Justice Lee also observed that:
- the chapeau to section 33 refers to ‘remedies’ as opposed to ‘rights’ for non disclosure, being a relevant point of distinction in His Honour’s view; and
- section 40(3) would be rendered inutile if section 33 or 52 of the ICA applied to prior known facts exclusions and retroactive date clauses. That arguably assumes that every occasion when a prior known facts exclusion would otherwise operate will fall within the prescribed circumstances in section 40.
For completeness, while the prior known facts exclusion was valid, Allianz could not rely on it to decline indemnity. The Court was not persuaded, on the evidence, that UCPT was aware of the relevant facts or circumstances to engage the exclusion.
The distinctions referred to in the judgment are undoubtedly available and accord with fundamental legal principles in contract and insurance law; however, the judgment will be of little comfort to insurers and insureds alike. Appeal Courts have historically taken a purposive approach to the ICA and eschewed technical arguments. In the short term, it would be prudent to approach the operation of prior known facts exclusions in liability policies with a degree of caution until this issue is resolved at appellate level.