Australasian Medical Insurance Ltd & Anor v CGU Insurance Ltd [2010] QCA 189 (2010) 271 ALR 142

SUPREME COURT OF QUEENSLAND CITATION: Australasian Medical Insurance Ltd & Anor v CGU Insurance Ltd [2010] QCA 189 PARTIES: AUSTRALASIAN MEDICAL INSURANCE LIMITED ACN 003 707 471 (first plaintiff/first appellant) QUEENSLAND MEDICAL LABORATORY (A PARTNERSHIP) (second plaintiff/second appellant) v CGU INSURANCE LIMITED ACN 004 478 371 (defendant/respondent) FILE NO/S: Appeal No 10459 of 2009 SC No 1426 of 2000 DIVISION: Court of Appeal PROCEEDING: General Civil Appeal ORIGINATING COURT: Supreme Court at Brisbane DELIVERED ON: 27 July 2010 DELIVERED AT: Brisbane HEARING DATE: 29 April 2010 JUDGES: Muir and Chesterman JJA and Atkinson J Separate reasons for judgment of each member of the Court, each concurring as to the order made ORDER: Appeal dismissed with costs CATCHWORDS: INSURANCE – THE POLICY – THE INSURED – where second appellant was a partnership of 15 pathologists – where first appellant was the partners’ professional indemnity insurer – where respondent insurer issued second appellant with policy covering certain risks associated with the pathology practice – where first appellant indemnified second appellant in respect of a claim and sought contribution from respondent – where first appellant had issued 15 separate policies, one to each partner – where respondent’s policy did not name each partner but referred to three practice companies “T/AS Queensland Medical Laboratory Partnership” – whether the insured under the policies issued by the two insurers were different – whether the partners were insured under the respondent’s policy -- 1 of 25 -- 2 INSURANCE – DOUBLE INSURANCE AND CONTRIBUTION – GENERALLY – where first appellant indemnified second appellant in respect of a claim and sought contribution from respondent – where respondent’s policy included a clause excluding liability where partners were entitled to indemnity under another professional indemnity insurance policy – where trial judge struck down the clause as void under s 45(1) of the Insurance Contracts Act 1984 (Cth) – where parties intended respondent’s policy to cover an employee not indemnified by first appellant’s policy and to cover a partner’s vicarious liability for the negligence of a non-medical employee – where, notwithstanding this intention, respondent had previously contributed to a similar claim made by first appellant – where trial judge found appellants were estopped from denying the risk covered by respondent’s policy did not extend to the claim – whether the policies of first appellant and respondent covered the same risk – whether the respondent’s policy responded to the claim Insurance Contracts Act 1984 (Cth), s 45(1) Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342; [1969] HCA 55, cited Arrale v Costain Civil Engineering Ltd [1976] 1 Lloyd’s Rep 98, considered CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; [2008] HCA 30, cited Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24, applied Devries v Australian National Railways Commission (1993) 177 CLR 472; [1993] HCA 78, cited Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55, considered Fox v Percy (2003) 214 CLR 118; [2003] HCA 22, cited HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co [2001] 2 Lloyd’s Rep 161; [2001] EWCA Civ 735, considered KPMG v Network Rail Infrastructure Ltd [2008] 1 P & CR 11; [2007] EWCA Civ 363, considered Ladbroke Group plc v Bristol City Council [1988] 1 EGLR 126, considered McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; [2000] HCA 65, applied National Bank of Australasia Ltd v J Falkingham & Sons [1902] AC 585, cited Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35, applied Squarey v Harris-Smith [1981] 42 P & CR 118, considered The Karen Oltmann [1976] 2 Lloyd’s Rep 708, considered Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52, applied -- 2 of 25 -- 3 COUNSEL: G W Diehm SC, with M Callaghan, for the appellants L F Kelly QC, with D Pyle, for the respondent SOLICITORS: Flower and Hart Lawyers for the appellants Tynne & McCartney for the respondent [1] MUIR JA: I agree that the appeal should be dismissed for the reasons given by Chesterman JA. [2] CHESTERMAN JA: The second appellant (“QML”) was at relevant times a partnership of 15 pathologists. The first appellant (“AMIL”) was the partners’ professional indemnity insurer. The appellants were the plaintiffs in an action for declarations and contribution which was dismissed by the Chief Justice on 26 August 2009. [3] The respondent, the defendant in the action, (“CGU”) was an insurer which issued a policy covering certain risks associated with the conduct of QML’s pathology practice. The identity of the insured under CGU’s policy, and the exact risk covered by it, were the subject of the dispute in the action and on appeal. [4] In essence AMIL’s claim was for contribution as between co-insurers. It had indemnified QML in respect of a claim made against the partners and alleged that CGU’s policy covered the same risk. Accordingly it sought equal contribution in the sum of $238,154.03. [5] That being the nature of the claim QML would appear to have been a completely unnecessary party. It suffered no loss having been indemnified by AMIL whose claim was not brought by way of subrogation but in AMIL’s own right as co- insurer. The unnecessary joinder excited no comment at trial or on appeal and I, too, propose to ignore it. [6] There was a dispute as to the extent of any contribution CGU should make in the event that its policy covered the risk indemnified by AMIL. That insurer had issued a separate policy to each partner. The appellants contended that there being two insurers they should bear the loss equally. CGU contended that because there were 15 policies issued by AMIL which answered QML’s claim for indemnity the contribution should be one sixteenth from CGU and fifteen sixteenths from AMIL. (In the course of submissions we were told that there were 16 policies so that the contributions should have been one seventeenth and sixteen seventeenths. However only 15 pathologists are identified in paragraph 1(c) of the Further Further Further Amended Statement of Claim. As well the AMIL policy schedules in evidence, one for each partner, number 15, not 16). Because the Chief Justice dismissed the action it was not necessary for his Honour to settle the controversy. [7] The Chief Justice described the claim against CGU in these terms: “[2] The claim for contribution relates to a claim pursued in court proceedings brought by Tracey Leigh D’Arcy and Scott John Vinnicombe against QML, for damages for QML’s negligence, on the basis that QML failed properly to interpret the results of a pap smear on 18 February 1993, a failure which resulted in a lost opportunity to prevent the development of the cervical cancer which subsequently afflicted her. AMIL was obliged to indemnify QML in -- 3 of 25 -- 4 respect of QML’s liability under that claim, and AMIL did so. AMIL accordingly paid the claimants $435,000 for damages and $33,000 for costs, and itself incurred costs amounting to $18,517.95. It was common ground that QML was liable to those claimants, and that QML’s settlement with them was reasonable.” [8] The Chief Justice also described the manner in which QML operated its pathology practice: “[4] QML operated in tandem with three companies, Queensland Medical Services Pty Ltd which, as is apparent from its name, was a service company for the QML partnership, and Renbond Pty Ltd and Samboor (sic) Pty Ltd. Dr David Russell was the general manager of the broad trading group, which included the partnership. Dr Russell’s evidence … was that the trading name ‘QML’ was used for the group, including the companies and the partnership, although it could be used to refer to the partnership alone. Queensland Medical Services Pty Ltd employed about 1,500 staff. Those staff members included cytologists, who were employed by that company … . The cytologists were scientists, not medical practitioners or pathologists, and they were the persons who screened the samples. [5] Dr Russell was responsible for managing the insurance risks of the trading group. He made sure the individual pathologist partners kept up their professional indemnity cover with AMIL. It was he who arranged, in addition, for the involvement of a broker to look after QML’s cover. In about 1991, that broker became Marsh and McLennan. The CGU policies were issued by CGU through QML’s agent, the broker Marsh and McLennan. At material times, Ms Nicolson … was the relevant officer of Marsh and McLennan, and she dealt with Mr Hansen of CGU … .” [9] The nature of the right given to an insurer to recover contribution from another where both have effected a policy of insurance was described in Albion Insurance Co Ltd v Government Insurance Office of New South Wales (1969) 121 CLR 342 at 352: “What attracts the right of contribution between insurers … is simply the fact that each contract is a contract of indemnity and covers the identical loss that the identical insured has sustained … .” [10] CGU defended the action on three bases. It argued that the insured under the AMIL policies were not insured under its policy. Secondly it submitted that the risk covered by the policies, those issued by AMIL and CGU’s policy, was different. Thirdly it contended that if the insured and the risk covered were identical AMIL and QML were estopped from denying that the risk covered did not extend to the D’Arcy claim. The estoppel was identified as being based on the convention the parties had adopted in their dealings with each other with respect to the issue of the CGU policy. [11] The Chief Justice held in favour of the appellants on the first two grounds but for the respondent on the third. -- 4 of 25 -- 5 [12] The CGU policy which the appellant contended indemnified the second appellant against the D’Arcy claim covered claims made in the year 1 July 1997 to 30 June 1998 (“the 1998 Policy”). It was the third such policy and was, in effect, a renewal of the policies issued in the two preceding years. [13] The convention which CGU advanced as giving rise to the estoppel, and which the Chief Justice accepted, was described by his Honour: “[65] It applied to each of the policies for the years ended 1996, 1997 and 1998. The assumption was that the policy did not provide cover for QML partners for negligence in their own right, although it would cover a partner’s vicarious liability for the negligence of a non-medical employee … . It was not an overlapping or duplicate insurance to that which the partners already had from AMIL. It provided cover for the employees of the partnership, or of the insured companies, in the event those employees were sued. And it provided cover where a claim against the partnership arose solely from the conduct of a non-medical employee, but excluded a situation where a partner failed properly to supervise the employee. Ms Nicolson … and Mr Hansen … were in agreement that the CGU policy would not cover the D’Arcy claim.” [14] The appellants support the rejection of the respondent’s defences based upon the CGU policy but attack the findings of fact which led to the acceptance of the estoppel by convention. The respondent by notice of contention argued that it should be found that the CGU policy did not respond to the claim by Ms D’Arcy against QML. [15] I propose to deal firstly with the arguments raised by the notice of contention because I have concluded that the respondent’s second point should be accepted: the 1998 Policy did not extend to indemnify QML against the D’Arcy claim. In my opinion the facts which led the Chief Justice to find the estoppel by convention led, as well, to that construction of the 1998 Policy. Identity of Insured [16] As I mentioned AMIL issued polices to each of the pathologists who were partners in QML. CGU’s first point, that the insured under the policies issued by the two insurers were different, depends upon whether the partners were included among the insured promised indemnity by the 1998 Policy. [17] Item 1 in the schedule to the 1998 Policy identified the insured as: “Queensland Medical Services Pty Ltd Samdoor Pty Ltd Renbond Pty Ltd T/AS Queensland Medical Laboratory Partnership.” The policy defined “Insured” as the persons named in the schedule. [18] The insuring clause in the policy promised that CGU would, in consideration of the payment of $29,000 by way of premium: “… to the extent and in the manner … provided … -- 5 of 25 -- 6 1.1 Indemnify the Insured against any Claim … for which the Insured shall become legally liable to the Claimant up to but not exceeding in the aggregate … the Total Sum Insured being a Claim: (1) made against the Insured during the Period of Insurance; and (2) as soon as reasonably practicable, notified in writing to (CGU) … ; and (3) arising from any actual or alleged act, error, omission or conduct wherever the same occurred subsequent to the Retroactive Date specified in Item 6.4 of the Schedule.” The monetary limit of indemnity appeared in the schedule. It was $2 million. [19] Item 11 in the schedule to the policy contained a special condition. It was: “Notwithstanding anything contained herein to the contrary, this policy does NOT indemnify the Insured in respect of a claim or claims made arising from the activities of Pathologists and/or Medical Practitioners providing services for or on behalf of the Insured, where such Pathologist or Practitioner is entitled to indemnity under a Medical Defence Union or Protection Society or other Professional Indemnity Insurance. This exclusion shall apply whether or not indemnity has been granted by the Defence Society, Association or relevant Insurer.” [20] The CGU policy defined “Proposal” to mean: “… the written Proposal form bearing the date stated … made by the Insured to (CGU) containing particulars and statement which, together with any attachments thereto, are considered to be incorporated into this Policy.” The proposal for the 1998 Policy was made on 6 May 1997. It identified the “natural persons & incorporated bodies currently comprising the proponent” as: “Queensland Medical Laboratory Partnership – List of names attached Queensland Medical Services Pty Ltd Samdoor Pty Ltd.” The attached list set out the names of 14 persons described as “partners/directors”. [21] There were, as I mentioned, 15 separate policies issued by AMIL to the partners. Fourteen of the policies had a limit of liability of $5 million each. The fifteenth policy had a limit of $1 million. The aggregate cover was therefore $71 million. There was no evidence of the amount of premium paid by the individual partners for their policies. Each policy promised that AMIL would pay up to the insured amount: “All sums which You become legally liable to pay as compensation for any civil liability in respect of claim(s) against You which: … arise directly in connection with Your Profession. …” “Profession” was defined to mean “the provision by You of medical treatment, advice and services to patients in the course of Your medical practice.” -- 6 of 25 -- 7 [22] CGU’s argument was that the insured under its policy were the three companies, Queensland Medical Services Pty Ltd, Samdoor Pty Ltd and Renbond Pty Ltd (“practice companies”) which together traded under the name “Queensland Medical Laboratory Partnership”. The abbreviation “T/AS” was said to indicate that the three companies constituted a particular partnership, the three corporate members of which were the only insured, so that “Queensland Medical Laboratory Partnership” did not designate QML the second appellant or the pathologists who were members of that partnership. As the pathologists were the only insured under the AMIL policies there was no double insurance. CGU relied as well on Dr Russell’s evidence that “QML” was a convenient designation which had no defined object. It could refer to the partnership of pathologists, or that partnership and the company Queensland Medical Services Pty Ltd, or “the entire group” which consisted of the partnership and the practice companies. [23] The appellants had initially sought relief by way of rectification of the 1998 Policy to amend the designation of insured to include the 15 partners. That claim was abandoned. The respondent submits that without such relief the CGU policy must be read literally and therefore to the effect that the partners of “QML”, the second appellant, were not included among the insured covered by CGU’s policy. [24] CGU relied upon the High Court’s emphatic affirmation that parties who sign a written contract are bound by its terms. The court (Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ) said in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at 483: “The respondents each having executed a loan agreement, each is bound by it. Having executed the document, and not having been induced to do so by fraud, mistake, or misrepresentation, the respondents cannot now be heard to say that they are not bound by the agreement recorded in it. The parol evidence rule, the limited operation of the defence of non est factum and the development of the equitable remedy of rectification, all proceed from the premise that a party executing a written agreement is bound by it. … There are reasons why the law adopts this position. First, it accords with the ‘general test of objectivity [that] is of pervasive influence in the law of contract’. The legal rights and obligations of the parties turn upon what their words and conduct would be reasonably understood to convey, not upon actual beliefs or intentions. Secondly, … oral agreements will sometimes be disputable. … Where parties enter into a written agreement, the Court will generally hold them to the obligations which they have assumed by that agreement. At least, it will do so unless relief is afforded by the operation of statute or some other legal or equitable principle applicable to the case.” (footnotes omitted) [25] The Chief Justice dealt with the point. His Honour said: “[33] Ms Nicolson explained how the problem arose. The 1997/8 policy was the successor to the previous year’s policy, which had named the partners in the Schedule … . In the instant policy, the wording changed, so that the term ‘insured’ extended to the members of a named partnership, with the consequence that there was no need to list the -- 7 of 25 -- 8 names of the partners in the Schedule … . On that basis, one may infer that the retention of the letters ‘T/AS’ may have been a mistake. Ms Nicolson and Mr Hansen gave their evidence on the assumption that the partners were included as ‘insured parties’ … . [34] Counsel for the defendant submitted that the plaintiffs cannot have the pathologist partners brought within the CGU policy as “insured” persons without having the policy rectified. The plaintiffs abandoned a claim for rectification shortly before the commencement of the trial last year. Counsel for the defendant relied on Equuscorp … . On the other hand, the plaintiffs contend that the partners are brought in as ‘insured’ persons by a proper process of construction of the policy. [35] A possible explanation for the exclusion of the partners from the scope of the ‘insured’ under the CGU policy may have rested in the view that because their insurance was provided by the AMIL policies, there was no need for them to be covered by the CGU policy as well; the CGU policy was intended to provide cover for employees, and they were employed by Queensland Medical Services Pty Ltd, which was named as an insured party. [36] Notwithstanding that consideration, the conjunction of the incorporated ‘proposal’, naming the partners of ‘Queensland Medical Laboratory Partnership’ as proponents of the policy on the one hand, and on the other hand, the inclusion of the descriptor ‘T/AS’ before the reference in the Schedule to that partnership, does to my mind raise an ambiguity. On the one hand, the partners were seeking their inclusion, as proponents, and the policy acknowledged that. Yet when we come to the Schedule, the reference to the partnership is preceded by ‘T/AS’ (which we know was a remnant of the predecessor policy and should have been deleted). Dr Russell’s evidence was that ‘QML’ was the trading name used by the companies and the partnership as a group … . But the reference in the Schedule is not to that trading name (QML), but to ‘T/AS Queensland Medical Laboratory Partnership’, that is, with the word ‘partnership’ included. The ambiguity is simply resolved, by ignoring the letters ‘T/AS’ .” [26] The reasons cannot, I think, be criticised. The ambiguity in the identity of the insured under the CGU policy is best resolved by notionally omitting the description “trading as” (“T/AS”) so that the partnership, QML, is included as a named insured. This approach, and the conclusion to which it leads, is inevitable given the uncontroversial facts. The proposal, which became incorporated into the policy, was made inter alia by the members of the partnership. The omission of the individual partners as designated insured was explained by Ms Nicolson’s evidence concerning the change in policy wording from the previous year which obviated the -- 8 of 25 -- 9 need to list the partner separately by name in the schedule. As well Mr Hansen for CGU prepared a quote with respect to the proposal for the 1998 Policy which identified the partners individually. The parties obviously intended to include the partners of QML as insured. [27] The respondent’s first argument on its notice of contention should be rejected. Scope of CGU Cover [28] It will be helpful when considering the arguments for and against the contention that the 1998 Policy did not respond to the claim against QML by Ms D’Arcy and Mr Vinnicombe to know a little more about their claim. It was succinctly described by the Chief Justice: “[20] Ms D’Arcy alleged that on 18 February 1993, she provided QML with a pap smear. The QML report on that incorrectly said that the sample was free of any cancerous cell … . That report, prepared by a cytologist (unidentified), was not signed by a pathologist. There was no evidence a pathologist checked it. [21] The QML report on a second pap smear provided by Ms D’Arcy on 2 March 1995 noted the presence of abnormal cells, leading to the diagnosis of cervical cancer. [22] Ms D’Arcy and Mr Vinnicombe (claiming for loss of consortium etc) brought their proceeding against the QML partnership. They did not join any non-medical employee, such as a cytologist. … They did not contain any allegation of negligence on the part of any cytologist. The allegations were of breach by the partners. … [23] The statement of agreed facts in this instant proceeding … summarizes the D’Arcy proceeding in this way: “3. That Tracey Leigh D’Arcy and Scott John Vinnicombe instituted proceedings against the Second Plaintiff [QML, a partnership] claiming damages for personal injuries caused by the Second Plaintiff’s negligence regarding a failure to properly interpret the results of a pap smear performed on 18 February 1993, resulting in a lost opportunity to prevent the development of a cervical cancer which subsequently emerged. … 5. The First Plaintiff [AMIL] was obliged to indemnify the Second Plaintiff [QML, a partnership] with respect to the said claims. … 8. The Second Plaintiff was liable for negligence to the Claimants.” -- 9 of 25 -- 10 [29] The respondent’s argument that its policy did not respond to Ms D’Arcy’s claim foundered at trial on the terms of Special Condition 11. Again it is convenient to turn to the explanation of the point given by the Chief Justice to gain an understanding of the arguments. His Honour said: “[39] Prima facie, CGU would have been obliged to indemnify the partners in relation to the D’Arcy claim, item 11 aside. That emerges from the natural application of the terms in which the right to indemnity is expressed. But item 11 would exclude that cover, because the claim arose from the partners’ activities as pathologists providing services on behalf of the insured, attracting cover under the AMIL policy. [40] The plaintiffs submitted, however, that s 45(1) of the Insurance Contracts Act 1984 (Cth) avoided item 11. … [41] Counsel for the defendant submitted that s 45 does not apply ‘because the insured is different and the risk covered is different in the case of the AMIL policy and the CGU policy’. There is some difference in the ‘insured’: under the AMIL policies, the insured parties are the respective partners; under the CGU policy, they are the aggregation of the partners and the service companies. I consider, however, that applying s 45, one looks at the insured under the CGU contract in a distributive way: have the pathologist partners (being the objects of the claim) entered into another applicable indemnity policy? They have. The other question is whether the respective policies cover the same risk. Subject to another question to which I will come shortly, in my view they do. [42] Counsel then submitted that item 11 is not a provision ‘limiting or excluding’ liability, but ‘merely assists in defining’ the risk covered by the CGU policy: ‘special condition 11 must be read with the remainder of the policy as defining the nature of the risk covered and not as an isolated exclusion clause of the type which section 45 is aimed at’. [43] I do not accept that submission. Because a right to indemnity in respect of the D’Arcy claim would arise under the provision in the policy according the indemnity, Item 11 must be read as ‘limiting or excluding’ that right to indemnity in the specified circumstances. That would mean that item 11 is void.” [30] The appellants argued that Special Condition 11 fell within the ambit of s 45(1) of the Insurance Contracts Act 1984 (Cth) (“IC Act”) and was therefore void, leaving the full extent of the insuring clause to operate. The contrary submission, advanced unsuccessfully by the respondent, was that Special Condition 11 did not take away what the insuring clause gave, but should instead be read with it to define and confine the risk which was covered by the CGU policy, which did not extend to those risks covered by the AMIL policies. Properly construed, CGU submitted, its policy never extended to cover a risk of the type represented by the D’Arcy claim. -- 10 of 25 -- 11 On that construction Special Condition 11 did not exclude liability “by reason that” the second appellant had affected the AMIL policies. The CGU policy, the argument ran, never extended to the subject matter covered by the AMIL policies. [31] The Chief Justice accepted the appellants’ submission. His Honour regarded Special Condition 11 as a provision excluding the obligation to indemnify which would otherwise arise pursuant to the insuring clauses, by reason that QML had entered into other contracts of insurance, with AMIL, which covered the same risk. The claim brought by Ms D’Arcy and Mr Vinnicombe arose from an “act, error, omission or conduct” of the insured, which included the partners of QML, and was therefore within the insuring clause. Special Condition 11 excluded the obligation of indemnity by providing the CGU policy did not “indemnify the (partners) in respect of a claim … arising from the activities of Pathologists … providing services for or on behalf of the Insured, where such Pathologist … is entitled to indemnity under (the AMIL) … Insurance.” and was therefore struck down by s 45. [32] Section 45 provides: “(1) Where a provision included in a contract of general insurance has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured has entered into some other contract of insurance, not being a contract required to be effected by or under a law, including a law of a State or Territory, the provision is void.” [33] Put succinctly CGU submitted that the insuring clause and Special Condition 11 should be read compositely as together defining the risk which was the subject of the 1998 Policy. So read the scope of the policy did not extend to indemnifying the insured (the partners of QML) against any claim for which they became legally liable arising from the activities of pathologists and/or medical practitioners providing services for the insured, where such pathologist or practitioner was entitled to indemnity under professional indemnity insurance. This left as the scope of the 1998 Policy liability for the (negligent) acts of others. [34] Section 45 invalidates terms of insurance contracts which have the effect of excluding liability “by reason that” the insured has entered into another insurance contract. CGU’s argument is that its policy did not operate to exclude liability to the partners of QML (“pathologists/medical practitioners providing services for or on behalf of the insured”) because (“by reason that”) they took out policies with AMIL. Its argument is that its policy did not exclude liability for that reason but because it never extended to such persons, and a reference to their having effected other professional indemnity insurance was only a means of identifying a risk to which the CGU policy did not attach. [35] The appellants’ argument is that one looks separately at the insuring clause and Special Condition 11. So regarded the insuring clause extended to indemnify pathologists and/or medical practitioners who were insured under the policy against any claim arising from any act, error, omission or conduct. The clause obviously extended to provide indemnity against the D’Arcy claim. However, Special -- 11 of 25 -- 12 Condition 11 purported to remove the indemnity where the pathologist or practitioner had other professional indemnity insurance. The condition therefore fell squarely within the prohibition of such terms contained in s 45, and was void. [36] The Chief Justice preferred the appellants’ construction. In my opinion the respondent’s construction is to be preferred and the facts which led the Chief Justice to find the convention which gave rise to the estoppel should have led to the construction of the CGU policy for which it contends. To repeat, the convention which was found to exist between the second appellant and the respondent was that the 1998 Policy: “… did not provide cover for QML partners for negligence in their own right, although it would cover a partner’s vicarious liability for the negligence of a non-medical employee … . It was not an overlapping or duplicate insurance to that which the partners already had from AMIL. It provided cover for the employees of the partnership, or of the insured companies, in the event those employees were sued. And it provided cover where a claim against the partnership arose solely from the conduct of a non-medical employee, but excluded a situation where a partner failed properly to supervise the employee.” Fact I [37] This is Mr Hansen’s account of a meeting he had with Mr Russell of QML and Ms Nicolson and Mr Kirkwood from QML’s insurance brokers in August or September 1996. Mr Hansen testified that: “(a) Dr Russell told me that the tests conducted at the QML pathology laboratory were not 100% accurate, but rather they were considered ‘screenings’ … because not every blood cell is tested, only a small sample(.) (b) We discussed the extent of cover under the policy with (CGU). The intention of the policy was discussed and Mr Russell agreed with me that the policy was intended to protect only employees. Also discussed was the extent of cover to the entity that employed the staff. I stated, and Mr Russell agreed, that if the partnership was sued due to an error by an employee other than a medical practitioner, the policy would respond. In this way, it was agreed the policy was a ‘back-up’ if the corporate entities (the partnership) were named in an action, provided that the claim against the partnership arose solely from the activities of an employee rather than those of a medical practitioner. It was a ‘sleep easy’ policy which was highly unlikely to be called upon as it would be rare for an employee to be sued directly.” Fact II [38] In July 1995 Dr Russell prepared a memorandum to be circulated to the cytology screeners employed by QML, or one of the practice companies. Before issuing the memorandum Dr Russell sought and obtained the approval of CGU to its contents. It read: -- 12 of 25 -- 13 “Recent litigation and threatened litigation against pathology firms … has heightened the awareness of all pathology professionals including staff directly responsible for screening … . It is … more important than ever to ensure that all staff use professional care in all things that they do. For the information of those who may be more concerned about their level of duty of care than in the past, please bear in mind that before any QML employee will be personally liable for any mistakes which they … may make, the following systems have to be satisfied. 1. The employee must firstly be actually negligent. 2. The negligence must be capable of proof in a court of law … (which) can be very time consuming and difficult. 3. Even if negligence is proven in a court, that negligence has to be attached to an identified individual. Under common law employer/employee arrangements, the employer is liable for the actions of the employee. … In practice most plaintiffs will seek only to recover from the employer. 4. Even if the above are all satisfied and QML is unable … to indemnify the employee, all QML pathologists are members of a medical defence organisation. 5. If all of the above mechanisms fail, QML has arranged a professional indemnity insurance policy with an independent underwriting insurance company to cover its employees in the unlikely event that any liability could be attached to them. While no absolute guarantees can be given … that there could never … be negligence which attaches back to the individual, the above ‘net’ should ensure that no QML employee would ever be liable personally for any acts they commit whilst employed at QML.” The insurer referred to in paragraph 5 was CGU. [39] Dr Russell explained that his purpose in writing the memorandum was to: “give … comfort to employees who nationally were at risk … and convince the employees that the chance of them personally losing their house was as low as (QML) as a business could make it.” He agreed that in writing paragraph 5 he meant to convey that if for some reason AMIL did not cover a claim under its polices: “then the employees had the knowledge or … comfort that in the unlikely event that they were sued … there was professional indemnity insurance separately that had been arranged for them.” Mr Hansen gave evidence confirming that paragraph 5 of the memorandum accurately reflected his own understanding of what the CGU policy covered. [40] The point is, as the Chief Justice noted in his reasons, that by his memorandum, and in particular paragraph 5, Dr Russell for QML confirmed its intention that the CGU policy would only respond to a claim to indemnify an employee not covered by the AMIL policies. -- 13 of 25 -- 14 Fact III [41] Next there is the point that early in 1997 Dr Russell became concerned with the scope of the AMIL policies. His concern arose from a newsletter circulated by the Medical Defence Society of Queensland from which Dr Russell surmised “Medical Defence are continuing to try to limit their liability … .” He asked Ms Nicolson to confirm that QML was covered against liability arising from the acts of employees. The newsletter had also suggested the possibility that AMIL might seek to cap the monetary extent of its indemnity. Ms Nicolson sent the inquiry onto Mr Hansen who replied to her on 4 February 1997: “… coverage provided by the (CGU) policy as it stands is not affected by this suggestion of limitation or capping of liability, nor is it affected by the comments relating to indemnity to employee practitioners. Non employee practitioners are not within the scope of the policy, so any capping of liability under (the AMIL policies) shall not impose any liability upon (CGU). It may be worth considering, should capping be imposed, recommending to your client that excess cover should be purchased if they feel the capped amount will not sufficiently allow for possible future litigation costs and awards. As you are aware, Practitioners who are employees are covered within the scope of the policy. … … the (CGU) policy does indemnify the Insured for actions taken against them arising from the acts of staff, either qualified or not. In addition though, we also, with the agreement of the Insured, indemnify the employee if they are named personally in any action.” (emphasis in original) [42] On 5 February 1997 Ms Nicolson relayed this information by facsimile transmission to Dr Russell. He did not contest the assertions contained in Mr Hansen’s communications. Four months later, on 6 May 1997, Dr Russell submitted the proposal to renew the CGU policy for a further 12 months. [43] The Chief Justice found that the exchange of facsimile transmissions, setting out the shared understanding of CGU and QML’s broker as to the risk covered by the CGU policy was agreed to by Dr Russell. The finding is supported by the evidence and should be accepted. Fact IV [44] Next there is the point that Dr Russell was anxious to avoid any duplication of insurance cover between the AMIL policies and CGU’s policy which would involve paying to CGU an additional premium for the cover that the AMIL policies already provided. Mr Hansen paraphrased what was said between them at their 1996 meeting: “It was agreed that the function of this policy is primarily an employee cover, but also a back up policy if the corporate entities were named in an action, provided of course that the claim against the corporation arises from the activities of an employee rather than those of a partner. No cover for partners was understood to be included, as this is what they pay the MDS so much money for.” -- 14 of 25 -- 15 [45] Ms Nicolson told Dr Russell that there was: “… no cover for medical practitioners under (the CGU) policy, but that was covered under the Medical Defence policy … . So, I didn’t feel that there was actually any overlap, because you had one policy that was for the medical practitioners that were covered by the Medical Defence policy, and then the employees that … weren’t qualified Medical Defence employees … were picked up under this (CGU) policy.” [46] She also said that: “The intention of (the CGU) policy wasn’t to cover (pathologists or medical practitioners if they were entitled to indemnity from (AMIL)).” “(A)t around the time of renewing the … 1998 policy”, she explained to Mr Russell Special Condition 11 “meant that no one with medical qualifications … no medical practitioners, were covered under (the CGU) policy.” Mr Russell replied that he was “not worried” because he did not want QML to pay for cover already provided by AMIL. [47] Mr Hansen gave similar evidence. He said that the CGU policy was not intended to “cover the risk of partners of QML as pathologists.” Had that been intended he would have required “a full claims history in respect of any allegation of negligence in respect of each partner to be disclosed.” No such disclosure was made or requested. Fact V [48] The premium payable under the CGU policy was significantly below what would have been charged had the risk to be covered included the liability of the partners of QML and employed medical practitioners. The premium charged, $29,000, extended cover to 1,500 persons employed by the practice companies. Fact VI [49] This concerns what was called “the Fraser claim”. Late in 1995 Ms Fraser brought proceeding against QML in New South Wales. The circumstances of her claim are indistinguishable from Ms D’Arcy’s. AMIL conducted QML’s defence and sought contribution from CGU with respect to Ms Fraser’s claims which was eventually settled. CGU contributed equally with AMIL to the agreed compensation. The relevant CGU policy was that issued for the 1995-1996 year. The claim for contribution was made by AMIL’s solicitors without consulting Dr Russell the partner at QML responsible for its insurance business. [50] The claim for contribution came as a surprise both to CGU and QML both of whom were, to use the description of the Chief Justice, “highly disturbed”. His Honour continued: “[68] This claim relates to the 1996 CGU policy. When AMIL sought contribution from CGU, both CGU and QML were highly disturbed. The policy then contained a medical practitioner exclusion endorsement (cl 8). In drafting item 11 for the 1998 policy, Mr Hansen, aware of that Fraser claim, sought to shore up the convention, agreed in by -- 15 of 25 -- 16 Dr Russell and him, which they considered had been breached by AMIL in the Fraser case … . The claim had put Mr Hansen on a state of “high alert” … . [69] Far from suggesting acquiescence on the part of CGU in the claim for contribution brought against it, CGU’s reaction to the claim was one of alarm, on the basis the making of the claim subverted an established understanding. While there was a settlement to which CGU contributed, that occurred in Sydney without involvement on the part of Mr Moore.” [51] The Fraser claim is relied upon by the appellants as being inconsistent with, and destructive of, the convention between QML and CGU as to the basis on which they effected the CGU policy. The Chief Justice said, with respect to this contention: “the claim against CGU was driven, not by QML (with which it had the common assumption) but by the medical defence insurer with which it had no communications and which had been cold and extremely secretive in its dealings with QML itself.” His Honour therefore considered that CGU’s contribution to the Fraser settlement did not detract from “the strength of the mutual assumption or understanding otherwise established by the evidence.” Fact VII [52] Item 8 in the CGU policy issued for the year preceding the period of insurance covered by the 1998 Policy was in these terms: “It is hereby declared and agreed that under the terms, conditions and exclusions of this policy that no indemnity extends to members of a Medical Defence Organisation who (a) provide professional services to third parties within/at or on premises owned or under the control of the insured and (b) are not employees of the insured or any company associated with the insured. Further, it is a condition of the indemnity provided by this policy that any such health care professional/s using/occupying the insureds’ premises is/are a current financial member of a representative Medical Defence Organisation that provides Malpractice protection and/or Professional Indemnity protection for their members.” In response to AMIL’s claim for contribution with respect to the Fraser claim Mr Hansen altered Item 8 to take the form of Special Condition 11. [53] These facts which I have numbered I to VII are taken, more or less verbatim, from the findings made by the Chief Justice. His Honour expressly accepted as honest and reliable Mr Hansen’s account which is the basis for fact I. His Honour thought there was little conflict between the testimony of Mr Hansen and Ms Nicolson on the one hand and Dr Russell on the other. Notwithstanding that observation his Honour accepted what was said by CGU’s witnesses. There was a body of more or less contemporaneous documents supporting what they said. -- 16 of 25 -- 17 Construction of the CGU Policy [54] The copious references to what representatives of the insurer, insured and broker said and thought should not obscure the fact that the 1998 Policy is to be construed objectively, by reference to what the reasonable observer would have concluded was meant by the words chosen by the parties to reflect and record their bargain in the light of the relevant “matrix of facts” known to them both. The subjective intentions or beliefs of one or both parties to a contract as to what they had agreed is, of course, inadmissible. The High Court (Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ) said in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at 179: “This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.” (footnotes omitted) [55] In Pacific Carriers the same court had said (2004) 218 CLR 451 at 462: “The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. In Codelfa Constructions Pty Ltd v State Rail Authority of NSW ((1982) 149 CLR 337), Mason J set out with evident approval the statement by Lord Wilberforce in Reardon Smith Line Ltd v Hansen-Tangen: ‘In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.’” [56] The same approach is taken in the construction of policies of insurance. Gleeson CJ explained in McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579 at 589: “A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation. Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.” (footnotes omitted) -- 17 of 25 -- 18 That explanation was recently reaffirmed by Gummow, Kirby, Heydon, Crennan and Kiefel JJ in CGU Insurance Ltd v Porthouse (2008) 235 CLR 103 at 116. [57] Evidence of negotiations between the parties in the course of arriving at their ultimate contract are inadmissible, except to the extent that they: “… establish objective background facts which were known to both parties and the subject matter of the contract. … But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable”: Codelfa at 352 per Mason J. See also Prenn v Simmonds [1971] 1 WLR 1381; Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Ltd (1979) 144 CLR 596. Likewise prior drafts of a contract discarded and amended in the process of recording the final contract are inadmissible: National Bank of Australasia Ltd v J Falkingham & Sons [1902] AC 585 at 591. [58] There are, however, exceptions to the prohibition. The first exception arises where the words in a contract are capable of more than one meaning. In that case “extrinsic evidence is admissible to show the facts which the negotiating parties had in their mind”: Codelfa at 350 per Mason J. The point was made at greater length by Kerr J in The Karen Oltmann [1976] 2 Lloyd’s Rep 708. The case concerned the construction of a charter party for two years’ duration which gave the charterer a right to terminate “after 12 months trading”. The dispute was whether the right to terminate arose at the expiration of 12 months or at any time thereafter. Kerr J looked at the telexes exchanged in the negotiations for the charter party. He said (at 712): “If a contract contains words which, in their context, are fairly capable of bearing more than one meaning, and if it is alleged that the parties have in effect negotiated on an agreed basis that the words bore only one of the two possible meanings, then it is permissible for the Court to examine the extrinsic evidence … to see whether the parties have in fact used the words in question in one sense only, so that they have in effect given their own dictionary meaning to the words as the result of their common intention.” [59] A very brief recognition of the exception appears in the judgment of Stephenson LJ in Arrale v Costain Civil Engineering Ltd [1976] 1 Lloyd’s Rep 98 at 104: “Even if the ‘genesis’ of a written contract includes negotiations and its ‘aim’ includes intentions, they are alike admissible only to clarify ambiguity or to support rectification.” [60] Lewison in his book The Interpretation of Contracts (2nd Ed p 37-38) regards the principle, at least that espoused in Karen Oltmann, as “akin to the formulation of an estoppel by convention … .” The opinion supports my conclusion that the convention found by the Chief Justice, the basis on which CGU and QML made their contract, is available as an admissible relevant fact to aid in construing the 1998 Policy. [61] This exception to the prohibition against receiving evidence of negotiations is, I think, the same as that described by Mason J in Codelfa at 352-3. His Honour said: “There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their -- 18 of 25 -- 19 presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances.” [62] The English cases, in particular Karen Oltmann, suggest that where the parties in negotiation have concurred on a meaning as to a word or phrase and share a mutual intention with respect to it, evidence of the concurrence and the intention is admissible, on the question of what the word or phrase means. [63] The second exception to the rejection of evidence of negotiations arises where the negotiations have resulted in an actual agreement which antedates the documented form of the contract the construction of which is in dispute. Lewison puts it this way (at 35-36): “This objection (to evidence of negotiations) is not open in the case of reference to an antecedent agreement. In (Reardon Smith) it was said that the court should be placed in thought in the same factual matrix as that in which the parties were when they made their agreement. If they had already reached an agreement, that would have been one objective fact which would have been known to both of them, and ought therefore to be admissible in evidence.” [64] The case principally relied upon for the proposition is Ladbroke Group plc v Bristol City Council [1988] 1 EGLR 126. The case concerned the construction of a rent review clause in a very long lease. The date on which the first review was to occur was ambiguously stated. The lease had been executed consequent upon a building contract between the parties which provided that the property to be built pursuant to the agreement would then be leased. A draft lease was annexed. The court had regard to the rent review clause in the draft to elucidate what the parties meant by the date of the first review in the executed lease. The Court of Appeal said (129): “In our judgment it is therefore permissible and relevant to look at the draft lease for the purpose of discovering the parties’ intentions in including the reference to March 31 1973 in clause 2(a) of the lease as executed. In our judgment, a study of clause 2(a) of the draft lease in its context makes reasonably clear the parties’ intentions … .” [65] Ladbroke was followed in KPMG v Network Rail Infrastructure Ltd [2008] 1 P & CR 11. Twenty years after the execution of the lease a dispute arose between lessor and lessee as to the terms in which the latter might quit. In this case, too, a draft lease was attached to the agreement for lease. The primary judge had concluded that the draft lease was “of little … assistance” in construing the executed lease in dispute. The argument on appeal in support of that view was dismissed as being “inconsistent … with the decision of this court in Ladbroke Group … .” Accordingly the earlier agreement: -- 19 of 25 -- 20 “… including the form and content of the draft lease attached to it, was an important part of the background and is a permissible aid in the construction of the lease in its final form.” [66] The court also noted the judgment of Rix LJ in HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co [2001] 2 Lloyd’s Rep 161 at [83]: “In principle, it would seem to me that it is always admissible to look at prior contracts as part of the matrix or surrounding circumstances of a later contract. I do not see how the parol evidence rule can exclude prior contracts, as distinct from mere negotiations. The difficulty of course is that, where the later contract is intended to supersede the prior contract, it may in the generality of cases simply be useless to try to construe the later contract by reference to the earlier one. … a cautious and sceptical approach to finding any assistance in the earlier contract seems … a sound principle. What I doubt, however, is that such a principle can be elevated into a conclusive rule of law.” [67] Another example is Squarey v Harris-Smith [1981] 42 P & CR 118 in which a claim that the conveyance of a lease carried with it an implied easement of way over other adjoining land of the lessor was defeated by reference to the contract between the predecessors in title pursuant to which the lease was agreed to be conveyed. A term of the contract excluded the implication. [68] The principle also appears to have been endorsed by Mason J in Codelfa though his Honour expressed himself in terms of common assumptions rather than agreement or antecedent contract. I apprehend that the point made by his Honour is the same as that expressed in the cases just discussed. Relevantly Codelfa was concerned with the implication of a term in a building contract. The implication was said to arrive as a matter of construction of the contract. Relevant to the construction were background facts. Mason J said (353-4): “The implication of the term … rests on findings made by the Arbitrator based on circumstances surrounding the making of the contract, including evidence of the discussions between the parties which preceded entry into the contract. Thus the Arbitrator found that there was a common understanding … that the works would be carried out on a three shift … basis … . He also found that the Authority had represented to Codelfa, and that it had accepted, that no injunction would be granted … . … The first question is whether, in the light of the principles … explained … it was legitimate to look to this material on the issue of implication of a term. I think it was. The discussions which generated these findings were not negotiations about the terms of the contract. … The relevant discussions were … directed to the question of price. Their object was to enable Codelfa to inform itself of what was involved in the work and to cost it… . … the evidence revealed a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption.” [69] The present case seems to fall more naturally within the second exception rather than the first. The facts found by the Chief Justice, which I have repeated and -- 20 of 25 -- 21 numbered, establish an agreement between the parties as to the scope of the indemnity to be offered by the 1998 Policy. The case differs from those discussed in that there is no written record by way of a draft of the agreement. That point goes only to the confidence with which a court might find the terms of an earlier agreement. It does not affect the principle described in those cases. In this case the evidence allowed a definite finding of the parties’ agreement, though it was oral. [70] Even if the case be within the first exception the result is the same. In the course of their negotiations the parties concurred on what they meant by “pathologists and/or medical practitioners providing services for or on behalf of the Insured … .” It was pathologists who had policies with AMIL who were not covered for their own negligence. That left cover for employees and employers who were vicariously liable for the employees’ negligence. The concurrence is a fact which may be used in the construction of the 1998 Policy. [71] The facts which the Chief Justice found, and which I have set out, with the exception of fact VI, the Fraser claim, show unequivocally that CGU and QML had reached agreement prior to the issue of the 1998 Policy as to the commercial benefit QML accepted from it (i.e. the scope of the cover). They had, at the very least, a common understanding of what the policy was to achieve for them both. That common understanding, or agreement, was admissible and relevant in the construction of the policy and, in particular, the relationship between Special Condition 11 and the insuring clause. [72] It is plain from the parties’ agreement, and their common understanding, that the 1998 Policy was not to cover the partners of QML for their own negligence (using that word generally to include all bases on which a partner might be liable to compensate a patient arising out of the practice of pathology). The 1998 Policy was intended to indemnify the practice companies and/or the partners in QML, who might be liable to pay damages arising out of the negligence of an employee. As well the policy would indemnify an individual employee who might be sued for his or her own negligence. The parties’ common understanding was that the 1998 Policy would not indemnify the partners of QML who had their own professional indemnity insurance with, as it turned out, AMIL. Special Condition 11 did not exclude liability to indemnify the partners of QML in circumstances where they took out professional indemnity insurance. The condition did not operate “by reason that” the partners had effected insurance with AMIL. Accordingly s 45 of the Insurance Contracts Act had no application. [73] The results would be the same if one did not regard the facts as establishing an antecedent agreement, or common understanding, as to what the parties meant by the particular phrase they chose to record their contract. That is, if the two exceptions I have discussed were disregarded as not being a proper departure from the rule rejecting evidence of negotiations, the facts would nevertheless establish the same construction of the policy I have advanced. [74] The facts are admissible to aid in the construction of the 1998 Policy. They fall squarely within the designation of admissible facts identified in the judgments in Pacific Carriers, Codelfa and McCann. All of the facts are of “surrounding circumstances” attending the making of the 1998 Policy, and/or show its commercial purpose, and/or its origin or genesis. They show what the parties set out to achieve by their policy and, more particularly, the risk against which QML -- 21 of 25 -- 22 sought protection from CGU. When one has regard to the origin and aim of the transaction as revealed by the facts, the scope of the policy and the risk it covered, is readily apparent. [75] I do not wish to ignore fact VI, the Fraser claim, on which the appellants relied so heavily. It is true that CGU’s payment by way of contribution is inconsistent with its construction of its policy and the convention found by the Chief Justice. The short answer is that it was an aberration and payment was made over the objections of CGU in Brisbane and its solicitor. There may have been reasons for it other than an acceptance that the convention, or the common understanding, did not exist. Fact VI is overwhelmed by the other facts. [76] The AMIL policies and the 1998 Policy did not cover the same risk. With one exception there was no “double insurance”, and no basis on which AMIL could claim contribution against CGU in respect of the D’Arcy claim. The exception would occur where the basis of a claim against QML was the vicarious liability of a partner or partners for the negligence of an employee. In that case where the partners were not themselves negligent the 1998 Policy would indemnify the partner (and the employee if sued). The AMIL policies would also indemnify the partners (but not the employee). [77] It is therefore necessary to consider whether the D’Arcy claim was one against QML for its vicarious liability for the negligence of the employed cytologist or whether it was a claim against QML for the partners’ own negligence. [78] Before turning to that consideration it is necessary to digress to mention a concession made by counsel for the appellants which appears only obliquely in their written submissions. The concession was that the 1998 Policy did not indemnify the partners of QML for their own negligence where they acted independently of employees, but indemnified them against any liability for their own negligence if it was connected with anything done or omitted by an employee, whether or not the act or omission constituted negligence. The concession is curious because it appears an impossible construction of the 1998 Policy if Special Condition 11 is given the meaning advanced by the appellants. If Special Condition 11 has that effect, which the Chief Justice accepted, then s 45 did operate to strike it down, leaving the insuring clause to operate according to its terms which extend to covering the partners for their own negligence. If one ignores Special Condition 11, as s 45 requires, if it applies, the policy cannot be read to produce the result now said by the appellants to be what the policy achieves. [79] It is only if Special Condition 11 remains an operative term of the 1998 Policy that the policy can have the meaning which the appellants now adopt. That involves an abandonment of the submissions made at trial and on appeal that the condition operated as an exclusion of liability to indemnify the insured because it had taken out other insurance. The appellants’ concession involves accepting CGU’s contention that s 45 of the IC Act did not apply, and the condition operated to define the risk covered which did not extend to the liabilities of QML’s partners for their own negligence for which they were insured by AMIL. [80] The debate then becomes quite narrow and focuses upon what is meant by a claim “arising from the activities of the pathologists and/or medical practitioners providing services for or on behalf of the Insured.” The respondent’s contention is, -- 22 of 25 -- 23 as I have set out at some length, that such a claim is one for negligence of the partners themselves. This leaves as the subject matter of the CGU policy claims against an employee, or a practice company or QML as employer. That is to say claims arising out of an employee’s negligence for which the employer is vicariously liable. [81] The appellants’ submission was that the claims excluded by the special condition were those arising out of acts or omissions of the partners of QML without any involvement at all of an employee with respect to the activity which gave rise to the claim. This rather clumsy expression is not how the appellants expressed their submission but it is what it comes down to. [82] The appellants approached the question of construction from the insuring clause, not the special condition. They emphasise the promise of indemnity against “any Claim … arising from any actual or alleged act, error, omission or conduct … .” They accept that (despite the inconsistency with their position that the condition is void) Special Condition 11 exempts from the promise of indemnity the partners’ own negligent conduct but submits that if there was any causal connection between an act, error or omission of an employee and the partners’ negligence then the 1998 Policy responds to the claim. It is not necessary, the appellants emphasise, that the act, error or omission amounted to negligence. [83] The appellants’ submission should be rejected. It would achieve a strained and unnatural result, and one at odds with the common understanding pursuant to which QML effected the 1998 Policy, particularly the memorandum which was the basis of fact II. The policy was to indemnify an employee who was sued, and incidentally the employer. It was not to cover the QML partners for their own negligence. The appellants’ contention would nullify the common understanding and extend indemnity to the partners for their own negligence as long as their negligent conduct was somehow connected with an act or omission of an employee. [84] The insuring clause of the 1998 Policy is concerned with legal liability. It indemnifies QML against any claim for which it became legally liable arising out of any act, error or omission. The words naturally import some negligent act, error or omission. In context that means such an act or omission of an employee. [85] One then returns to the question whether the D’Arcy claim was against QML for the negligence of the partners themselves, or whether it was based upon the negligence of an employee for which the partners were vicariously liable. The 1998 Policy would respond to the latter claim but not the former. The Chief Justice concluded the claim was in the former category. His Honour said: “[25] That assumes significance because of the basis on which AMIL contends CGU’s liability arose. In paras 18-19 of the statement of claim, AMIL alleges that each of the pathologist partners fell within the definition of “insured” under the CGU policy, and that Ms D’Arcy’s claim arose from the act or omission of a cytologist who was not a pathologist or medical practitioner and not entitled to indemnity under a medical defence union policy etc. The last reservation refers to item 11 in the schedule to the policy. The claim was presented in that way to distinguish it from the sort of claim for which a pathologist partner would -- 23 of 25 -- 24 be primarily liable, such a claim as would activate the AMIL coverage. [26] In this context the following circumstances are significant: that Ms D’Arcy alleged a breach by the partners of their primary duty to exercise care and skill as pathologists; that the “agreed facts” include the statement that Ms D’Arcy’s proceeding alleged negligence on the part of the partnership as the cause of her loss; that there was no proof in this instant proceeding that a cytologist was negligent, notwithstanding QML’s capacity to establish that if it was indeed the case. Dr Russell, QML’s general manager, gave evidence, and he said that he would be surprised if any QML doctor had supervised the interpretation of the screening … but Dr Russell was unaware of the circumstances and could do no more than speculate as to what occurred … . I regard that assessment from Dr Russell as no more than speculative, and therefore unhelpful. [27] I infer that the claim was accepted and processed on the basis on which it was advanced, that is, as alleging negligence on the part of the QML partners for their failure properly to check the analysis of the pap smear. Consistently with that, after the incorrect reading in 1993, and at the time of other proceedings instituted against the QML partners in New South Wales in 1995 by Ms Fraser (to which I will come), QML put into place more rigorous systems to improve the screening process … .” [86] The finding is, with respect, plainly right. The only allegation of negligence made by Ms D’Arcy and Mr Vinnicombe was against the partners of QML for their own failures. Paragraph 9 of the D’Arcy statement of claim pleaded: “In relation to the 1993 pap smear and, in particular, the Defendant’s examination and report on that … smear, the Defendant breached its duty to the First Plaintiff and was negligent. Particulars of Negligence (a) The Defendant failed to ensure that due care and skill was exercised in the performance of examinations on the 1993 pap smear; (b) The Defendant failed to ensure that examinations on the 1993 pap smear were performed with such professional care and skill as could reasonably be expected of a pathology specialist; (c) The Defendant failed to ensure that the 1993 pap smear was examined in such a way as to detect the presence of any abnormal or cancerous cells … ; (d) The Defendant failed to perform sufficient tests to detect any and all abnormalities in the … smear; (e) The Defendant failed to ensure that any and all abnormalities in the … smear were detected; -- 24 of 25 -- 25 (f) The Defendant failed to detect the presence of abnormal or cancerous cells … in the … smear; (g) The Defendant failed to ensure that the presence of any and all abnormalities … in the … smear was reported to the First Plaintiff or (her) treating doctor; and/or (h) The Defendant failed to inform the First Plaintiff or (her) treating doctor of the presence of abnormal or cancerous cells … in the … smear.” [87] The “defendant’ was said to be: “Queensland Medical Laboratory … a company duly incorporated … (which) carried on a business under the name … QML … as a pathology specialist … .” [88] That would appear to be factually incorrect but no point was taken about the error. Clearly enough the allegation of negligence was made against the pathologists who constituted QML, the partnership. The statement of claim contains no allegation of a negligent act or omission by a cytologist or any other employee. There is no pleading of liability arising from an act or omission of employees. The case advanced against QML was one of a deficient system of supervision and examination by the pathologists, not their employees. [89] The 1998 Policy did not respond to the claim actually made by Ms D’Arcy and Mr Vinnicombe. [90] One last matter should be mentioned. There is a trace of confusion in some of the evidence as to whether the employees protected by the 1998 Policy included medical practitioners. The Chief Justice seems to have thought such persons were not covered in his Honour’s statement of the convention. On the other hand there are several contemporaneous documents which refer to the cover extending to employees whether medically qualified or not. I expect that was the position but nothing turns on it for the present appeal. The cytologist in question was not a medical practitioner. Nor was she said to have been negligent. [91] The basis on which the appeal should be dismissed makes it unnecessary to discuss the appellants’ challenge to the finding of estoppel by convention, or their arguments that it could not arise by reason of pre-contract statements, or operate against s 45. To the extent that the appellants’ attack on the estoppel depended upon criticisms of fact the critical findings were all supported by evidence which the Chief Justice indicated he accepted. There was ample support for them in the oral testimony and the supporting documents. Devries v Australian National Railways Commission (1993) 177 CLR 472 and Fox v Percy (2003) 214 CLR 118 show the difficulty in the path of such an attack. The appellants, as I understood their arguments, did not seek to bring the case within the narrow limits within which an appellate court might interfere with findings of fact. I mention this because the criticisms of the facts relevant to the estoppel would, if made out, apply to the facts on which I have relied to construe the policy, or some of them. The appellants relied also upon what they saw as discrepancies between the convention as pleaded and as proved. Even if made out the point goes only to the credit of the respondent’s witnesses, and they were believed. [92] The appeal should be dismissed with costs. [93] ATKINSON J: I agree with the order proposed by Chesterman JA and with his Honour’s reasons. -- 25 of 25 --