One of the most common exclusion clauses in professional indemnity and D&O policies is one that excludes cover for loss arising from facts and circumstances, which are known by the insured prior to the inception of such policies and which may give rise to a claim.

The viability of a prior circumstance exclusion was challenged in Allianz v Uniting Church [2025] FCAFC 8. In this case, the insured argued that the exclusion was invalid because it contravened ss 33 and 52 of the Insurance Contracts Act 1984 (Cth) (ICA). While the s33 challenge failed, in a split 2:1 decision, the s52 challenge succeeded.

Obviously, the outcome of the s52 challenge has significant ramifications for financial lines insurers.

Brief Factual Background and Context

The insured sought indemnity under professional indemnity policies issued by Allianz in respect of historical abuse claims perpetrated by staff members at a prestigious private school. There was evidence that the insured possessed knowledge of facts and circumstances, prior to the inception of the applicable policy, which could give rise to such claims.

Allianz denied liability on various grounds including in reliance on the Prior Claims & Circumstances exclusion in the following terms:

‘This Policy does not cover any Claim for any liability for or arising directly or indirectly from: …

any Claim, fact, circumstance or occurrence;

1. in respect of which notice has been given to the Company or any other insurer under a previous insurance policy, or
2. disclosed or communicated to the Company in the proposal or declaration or otherwise before the commencement of the Period of Insurance, or
3. of which the Insured is aware before the commencement of the Period of Insurance, which may give rise to a claim.

This exclusion is independent of and shall not affect the Company’s other rights regarding misrepresentation and non-disclosure’ (emphasis added)’

The insured complained that limb (3) of the exclusion was void and ineffective because it contravened s33 and s52 of the ICA and therefore, Allianz could not rely on that sub-clause to deny cover.

The Validity Issue

Section 33 of the ICA provides

‘No other remedies

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.’

Section 52(1) also provides:

‘ ‘Contracting out’ prohibited

(1)  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.'

There has been a school of thought that either, or both, of these sections affected the viability of a prior circumstance exclusion because such an exclusion effectively covered the same territory as the insured’s disclosure obligations under s21 and the stipulated remedies for non-disclosure and misrepresentation regime under s28 of the ICA. On that basis, there has been a view, simmering for some time, that a prior circumstance exclusion impermissibly interfered with this regime and should be struck down. However, to our knowledge, the debate had not, prior to this case, been determined by an intermediate appellate court on a final basis.

The Full Court’s Decision

Before the Court, there was a substantial dispute about the insured’s state of knowledge and awareness but the outcome of this contest did not involve any radical departure from well-established insurance law principles on notification and turned on the peculiar circumstances of the underlying factual matrix. In relation to these issues, Allianz was successful and its appeal was upheld. In particular, consistent with a long line of authority, the Full Court:

• Dismissed an argument that the insured’s failure to make a s40(3) notification could be cured by s54; and
• Reiterated that section 40(3) is a ‘use it or lose it’ provision, which requires written notice to be given to the insurer before the expiry of the policy period.

Leaving aside the notification and attachment issues, the parties contested whether the Prior Circumstances exclusion was void by reason of the operation of ss33 and/or 52. It was held that this exclusion operated, subject to the operation of those sections.

Section 33

The Full Court was unanimous that the Prior Circumstances exclusion did not fall foul of s33. Derrington J stated (at [433]) that the preferable construction of s33 is that it is expressly limited to provisions that enable declinature of cover on the ground of non-disclosure and does not purport to limit an insurer’s right to formulate the express scope of its risk. Derrington J:

1. Considered the practice of drafting an exclusion in such terms was infinitely superior to attempting to articulate policy coverage by the impossible task of attempting to articulate each and every specific risk; and
2. Drew a key distinction by commenting that the Prior Circumstances exclusion is not concerned with the duty of disclosure and in particular, its operation is not conditioned on disclosure, but rather with the existence of a relevant fact, occurrence or circumstance and the insured’s knowledge of it prior to the commencement of the policy.

Colvin and McEvoy JJ followed the reasoning of Derrington J in relation to the s33 challenge and determined that this section did not affect the operation of the Prior Circumstances exclusion.

Section 52

Turning to the s52 challenge, the Full Court was split on this issue.

Derrington J considered that the Prior Circumstances exclusion was not void by reason of s52 and applied his reasoning on the s33 point here. However, Colvin and McEvoy JJ disagreed and determined that the exclusion was void by reason of s52.

While the majority acknowledged that such an exclusion and a disclosure failure were conceptually distinct for the purpose of insurance arrangements, they stated that it did not mean that, for the purposes of s52, a provision expressed as an exclusion from cover is outside the scope of provisions to which that section applies because they have the requisite effect. They also stated that the exclusion was addressing the state of knowledge of the insured before entering into the policy as to a very wide range of matters that would otherwise be matters that would be the subject of the duty of disclosure and then commented (at [844]):

‘In effect, Exclusion 7(c) transforms what is a matter for disclosure (what the insured knows that bears upon the decision by the insured (sic) 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.’

Plainly, their Honours were focused on the nature and content of the duty of disclosure, which overlaps with the subject matter of the Prior Circumstances exclusion – that is, the Insured’s awareness of facts (before the inception of the policy) that might give rise to a claim.

Reading between the lines (and while their Honours did not expressly say so), it appears that the plurality was effectively stating that the Prior Circumstances exclusion operated to relieve Allianz of its requirement to prove prejudice, as required by s28(3), by reference to the relevant counterfactual (see, in particular, [845]). That is, what Allianz would have done differently if the insured had complied with its duty of disclosure – for example, the inclusion of a specific matters exclusion by reference to the disclosed matter or the refusal to bind cover at all. In other words, for s52 purposes, the ‘effect’ of the Prior Circumstances exclusion meant that Allianz could side-step and avoid establishing its prejudice as required by s28(3) by relying on a blanket exclusion, which did not require such prejudice to be proven.

Key Takeaways

Obviously, insureds and brokers will welcome the majority’s decision on the s52 issue, which has been given broader operation than s 33. Given Allianz won the appeal albeit on other grounds, it is doubtful that it will challenge the majority’s decision on s52 on appeal to the High Court. Therefore, it may be some time before the High Court is asked to consider the issue.

Otherwise, the natural consequence of the majority’s decision on the s52 contest is that insurers will need to consider running more non-disclosure and misrepresentation defences with the benefit of lay evidence from their underwriters about what they would have done differently but for the insured’s non-disclosure. That, in turn, will place even greater importance on insurers maintaining, and having reference to, comprehensive underwriting evidence to support assertions of prejudice. Insurers will also need to re-consider whether they continue to waive or modify their non-disclosure or misrepresentation rights (as is common in many policies) in the context of the current softening market environment.

However, we do not think that the s52 outcome will affect the ability of insurers to rely on exclusionary provisions to the extent that they exclude cover for prior capital ‘Claims’ or prior notified/disclosed matters. Nor should it affect a retroactive date type exclusion. The key distinction being that such exclusions do not address an insured’s knowledge prior to policy inception so as to cross with the mandated disclosure regime under ss21 and 28.

Further, given the prevalence of continuous cover extensions in financial lines insurance policies, the majority’s decision on the s52 point may be largely academic.  For many years, continuous cover extensions have operated to restrict the practical operation of prior circumstance exclusions to claims arising from facts known to insureds prior to the relevant insurer first coming on risk. Moving forward, continuous cover clauses which write back cover otherwise excluded by prior circumstance exclusions will have no work to do. Accordingly, insurers may consider shifting their underwriting approach to further use of retroactive date type exclusions.

Relatedly, the existence of contractual deeming provisions and the FAI v Australian Hospital Care line of authority already provides a pathway for insureds to circumvent an insurer’s reliance on a prior circumstance exclusion. Viewed through this lens, practically speaking, the majority’s decision on s52 may not be as concerning to the insurance market to the extent that insurers are on risk for successive policy years with contractual deeming provisions in place. However, we recognise this point has no or less relevance where a policy does not contain such provisions and/or where an insurer comes on risk for the first time.

Finally, we have probably not heard the last word on this issue and it is possible that a prior circumstance exclusion still has some work to do, especially if an insured is not the contracting party and is arguably not subject to the duty of disclosure.

Further information / assistance regarding the issues raised in this article is available from the authors, Partners, Michael Polorotoff, Jeremy Peck, George Chadwick and Lawyer, Dugald Graham or your usual contact at Moray & Agnew.