The legal industry has been following the progress of a professional indemnity (PI) claim that CGU has fought through several courts over the past few years until – as reported last week in insuranceNEWS.com.au – winning its case in the High Court.

Porthouse v CGU concerns the “known circumstances” exclusion in PI policies. Its significance lies in its reinforcement by the High Court of the broad protection that “known circumstances” exclusions give insurers. It’s also a reminder to policyholders to identify potential claims against them to ensure they are covered for any claims that subsequently do arise.

The circumstances of the case are simple enough. In June 2001, barrister Anthony Porthouse wrongly advised a client, James Bahmad, that the NSW Workers’ Compensation Act did not apply to a proposed damages claim against the state of NSW for an injury he sustained.

Later that year the Act was amended to preclude damages awards for injuries that did not satisfy a 15% permanent impairment threshold. The amendment did not apply to proceedings commenced before November 2001.

Mr Bahmad’s injury did not satisfy the 15% threshold and his proceeding was not filed until December 11. At trial, the NSW District Court decided the amendment did not apply to Mr Bahmad’s claim and awarded him damages. The state appealed.

Before the appeal was heard, Mr Porthouse obtained a PI policy for 2004/05 from CGU. The policy contained a “known circumstances” clause that excluded cover for claims arising from “any fact, situation or circumstance” which the insured knew before the policy began, or a reasonable person in the insured’s professional position would have thought before this policy began might result in someone making an allegation against an insured in respect of a liability, that might be covered by this policy”.

In August 2004, the state’s appeal was successful and Mr Bahmad’s damages award was reversed. Mr Bahmad later successfully sued Mr Porthouse for negligence.

Mr Porthouse claimed indemnity under the policy and CGU, relying on the exclusion, declined the claim. Mr Porthouse then took CGU to court, succeeding in his NSW Supreme Court trial and subsequent appeal by CGU. The insurer then appealed to the High Court.

The earlier court finding that Mr Porthouse had not known before the policy commenced that Mr Bahmad might make an allegation of negligence against him was not challenged.

Instead, the High Court considered the second limb of the exclusion, particularly the phrases “a reasonable person in the insured’s professional position” and “would have thought… might result in”.

The court decided the phrase “a reasonable person in the insured’s professional position” provided “an objective standard, with a modification relating to professional, not personal, matters”. It said the phrase “describes a hypothetical reasonable person with the experience and knowledge of the insured coupled with the capacity of such a reasonable person to draw a conclusion (whether it is plain and obvious or not) as to the possibility of someone making an allegation against the insured”.

On the meaning of the phrase “would have thought… might result in”, the court decided that the hypothetical reasonable person must conclude that there was a “real (not fanciful or remote) possibility (not a certainty) of an allegation being made”.

Ultimately, the High Court decided that “there can be no real doubt that a reasonable barrister… who knew of the potential for the effect on his client’s case and who knew of the appeal and of his role in creating his client’s problem, would have thought that there was a real possibility that an allegation might be made in respect of a liability which might be covered by the policy”.