Australian insurance law : a first reference [4 ed.] 9780409345490, 0409345490, 9780409345506, 0409345504
400 40 5MB
English Pages [870] Year 2018
Dedication
Full Title
Copyright
Preface
Acknowledgments
Tables of Cases
Table of Statutes
Table of Contents
Part 1 Background
Chapter 1 Insurance: A Risk Transfer, Loss-Spreading Arrangement
Introduction
The nature of insurance
The essential characteristics of general insurance: risk transfer and loss spreading
The non-essential characteristics of general insurance: contract, indemnity, premium and profit
The differences between an insurance arrangement, a wager (bet), a guarantee or indemnity and a manufacturer’s warranty
How insurance works
Reinsurance
Chapter 2 Dividing Insurance into Categories
Introduction
Marine insurance
Life insurance
General insurance
Chapter 3 A Short History of Insurance
Introduction
Early commercial risk transfer arrangements
The spread of insurance
The history of loss spreading
Insurance in Australia
Conclusion
Chapter 4 Regulation Of General Insurers
Introduction
Overview
The Insurance Act 1973 (Cth) and APRA
The Corporations Act 2001 (Cth) Ch 7
The Australian Securities and Investments Commission Act 2001 (Cth)
The Financial Sector (Shareholdings) Act 1998 (Cth) and the Insurance Acquisitions and Takeovers Act 1991 (Cth)
Financial Sector (Collection Of Data) Act 2001 (Cth)
The Privacy Act 1988 (Cth)
Self-regulation: The General Insurance Code of Practice and the Financial Ombudsman Service
Chapter 5 Insurance Intermediaries
Introduction
When is an insured fixed with an insurance broker’s knowledge?
The liability of loss adjusters, loss assessors and Investigators in contract and in tort
The liability of an insurance agent in contract and in tort and the liability of an insurer for the actions of its agent
The liability of an insurance broker in contract and in tort
The fiduciary obligations of an insurance agent and an insurance broker
The Australian Securities and Investments Commission Act 2001 (Cth)
The Corporations Act 2001 (Cth) Ch 7
Self-regulation: The Insurance Brokers Code of Practice 2014 and the Financial Ombudsman Service
Concluding observation
Chapter 6 Introduction to the Insurance Contracts Act 1984 (Cth)
Introduction
Background
Application of the ICA: ss 8 and 9
The extended application of the ICA: s 10
Limited relief elsewhere: s 15
The approach to construing a provision of the ICA
Part 2 Period Leading up to and Including the Formation of an Insurance Contract
Chapter 7 Utmost Good Faith
Introduction
Do all contracts have to be performed in good faith? Is there a tort of bad faith?
Utmost good faith at common law
Utmost good faith under the ICA
And yet
Chapter 8 Pre-Contractual Disclosure
Introduction
No common law requirement for pre-contractual disclosure in relation to contracts generally
The common law pre-contractual duty of disclosure in relation to insurance contracts
An insured’s pre-contractual duty of disclosure under the ICA Pt IV: Disclosures and Misrepresentations
An insurer’s pre-contractual common law duty of disclosure is not affected by the ICA
An insurer’s pre-contractual requirement to inform under the ICA
An insurer’s pre-contractual disclosure obligations under the Corporations Act 2001 (Cth) Ch 7
Chapter 9 Formation of an Insurance Contract
Introduction
Intention to create legal relations
Offer and acceptance
Consideration
Statutory illegality
Assignment and novation
Chapter 10 Insurable Interest
Introduction
The common law and statutes other than the Insurance Contracts Act 1984 (Cth)
Contracts subject to the Insurance Contracts Act 1984 (Cth)
Chapter 11 Duration of an Insurance Contract
Introduction
Interim insurance
Renewal, extension and cancellation of an insurance contract
Chapter 12 The Layout of an Insurance Policy: Recitals, Insuring Clause, Exclusions, Policy Terms and Definitions
Introduction
The recitals
The insuring (operative) clause and exclusions
Policy terms
Warranties
Terms descriptive of the risk
Conditions
Definitions
Chapter 13 Construing an Insurance Contract
Introduction
Construing a parliamentary drafted insurance contract
Construing a privately drafted insurance contract
What the dictionaries say
The approach to construction will usually favour the insured
Rectification
Chapter 14 The Nature of an Insurer’s Promise to Indemnify
Introduction
What an insurer agrees to do when it promises to indemnify an insured
The nature of an insurance claim for indemnity
Is an insurance claim for indemnity a claim under an insurance contract or a claim for damages for breach of contract?
When does an insured’s cause of action for an indemnity accrue?
Chapter 15 Causation
Introduction
The context in which the causation inquiry is conducted
Proximate cause
Chapter 16 Mitigation in Insurance Law
Introduction
Part 1
Part 2
Part 3
Conclusion
Chapter 17 First Party Insurance
Introduction
Property insurance (indemnity insurance)
Sickness and accident insurance (contingency insurance)
Chapter 18 Liability (Third Party) Insurance
Introduction
Public (general) liability insurance
Product liability insurance
‘Claims made’ and ‘claims made and notified’ liability insurance
Compulsory insurance for liability to pay compensation for death or personal injury related to the use of a motor vehicle
Proving entitlement to indemnity
Chapter 19 Some Common Policy Terms
Introduction
Some common conditions
Some common exclusions
Some common causal connectors
Some other common policy terms
Part 3 The Claim
Chapter 20 Broken Promises
Introduction
An insurer’s obligation to pay a claim within a reasonable time
An insured’s right to s 57 interest for late payment of a claim
An insured’s right to damages and other relief if an insurer wrongly denies, or delays, payment of a claim
An insured’s choices if an insurer repudiates a policy
Onus of proof
Chapter 21 Election, Estoppel and Abuse of Process
Introduction
Waiver, election (waiver by election) and estoppel
Granting indemnity and reserving rights
An insurer’s entitlement to repayment of a claim paid by mistake
Res judicata, issue estoppel and ‘anshun’ estoppel
Abuse of process in the context of a liability insurance policy
Chapter 22 Section 54
Introduction
The need for reform
Text and context
When s 54 is not in play
When s 54 is in play
If engaged, is the relief in s 54(1) or s 54(2)?
How s 54(2) operates
How s 54(1) operates on an ‘occurrence-based’ policy
How s 54(1) operates on ‘claims made’ and ‘claims made and notified’ policies
The scope of s 54(5)(b)
Concluding observation
Chapter 23 Fraudulent Claims
Introduction
The nature of a fraudulent claim
An insurer’s common law remedy for a fraudulent claim
An insurer’s remedy under the ICA for a fraudulent claim
Collateral lies (formerly known as ‘fraudulent devices’)
Some procedural and evidential matters
Chapter 24 How Many Claims (Aggregation Clauses)?
Introduction
Aggregation clauses
Some English and Australian cases
Chapter 25 Claiming the Benefit of Another Person’s Insurance Contract
Introduction
Part 1: The common law and statutory provisions that give direct access to another person’s insurance contract
Part 2: Statutory provisions that give a third party the direct benefit of a liability insurance contract
Part 3: Statutory provisions that enable a judgment creditor to ‘garnishee’ the amount of an insurer’s liability to the judgment debtor
Concluding observation
Chapter 26 Some Insurance-Related Civil Litigation Procedures
Introduction
Liability insurance
Client legal privilege and ‘without prejudice’ privilege
An insurer denying its insured access to a non-privileged expert’s report
Part 4 Recovery of an Insurer’s Loss from Third Parties and Other Insurers
Chapter 27 Subrogation
Introduction
An insurer’s right of subrogation
Exercising a right of subrogation
No subrogation rights against another insurer; subrogation rights against a non-insurer indemnifier
Circumstances in which an insurer has no, or limited, subrogation rights against a negligent third party
Allocating the proceeds of recovery
A third party’s liability to pay damages is not reduced by an insured’s access to insurance
The limitation period for exercising a right of subrogation
Chapter 28 The Duties Owed by a Lawyer When Retained by an Insurer
Introduction
A lawyer’s duties to a client generally
Insurer’s lawyer investigating a third party claim against the insured
Insurer’s lawyer informing insured they will be indemnified for a third party claim against them
Insurer’s lawyer acting in the insured’s interests in relation to a third party claim against the insured
Limits on the free flow of information and documentation from an insurer’s lawyer to the insurer and the insured
Chapter 29 Double Insurance and Contribution
Introduction
Double insurance
‘Other insurance’ clauses
The equitable right to contribution
Proving the right to contribution and determining the amount to be used for the contribution calculation
The contribution calculation
Index
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AUSTRALIAN
INSURANCE LAW A FIRST REFERENCE Fourth edition
To the people of Bengkulu, Sumatra
AUSTRALIAN
INSURANCE LAW A FIRST REFERENCE Fourth edition
Greg Pynt B Juris, LLB (UWA) Visiting Fellow, School of Law, University of Western Australia Barrister, Francis Burt Chambers, Perth, Western Australia
LexisNexis Butterworths Australia
2018
AUSTRALIA
ARGENTINA AUSTRIA BRAZIL CANADA CHILE CHINA CZECH REPUBLIC FRANCE GERMANY HONG KONG HUNGARY INDIA ITALY JAPAN KOREA MALAYSIA NEW ZEALAND POLAND SINGAPORE SOUTH AFRICA SWITZERLAND TAIWAN UNITED KINGDOM USA
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National Library of Australia Cataloguing-in-Publication entry
Author: Title: Edition: ISBN: Notes: Subjects:
Pynt, Gregory, John. Australian Insurance Law: A First Reference. 4th edition. 9780409345490 (pbk). 9780409345506 (ebk). Includes index. Insurance law — Australia. Insurance — Australia.
© 2018 Reed International Books Australia Pty Limited trading as LexisNexis. First edition 2008, Second edition 2011, Third edition 2015. The cover image has been reproduced with the kind permission of Simon Pynt. This book is copyright. Except as permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic or otherwise, without the specific written permission of the copyright owner. Neither may information be stored electronically in any form whatsoever without such permission. Inquiries should be addressed to the publishers. Typeset in HelveticaNeue and Sabon. Printed by Griffin Press, Australia. Visit LexisNexis Butterworths at www.lexisnexis.com.au
PREFACE In 1766, Lord Mansfield delivered his seminal judgment on ‘utmost good faith’ in Carter v Boehm, an insurance dispute that arose out of a French attack on Fort Marlborough, a British trading post in Bengkulu, Sumatra. The fort is located in the centre of Bengkulu, a city of close to 350,000 people. It is presently in very good condition, thanks to restoration work completed by the Indonesian government in 1984. In October last year, 19 of us from Australia, Singapore, England and Indonesia attended a Conference in Bengkulu to acknowledge the origins and implications of this most important case in its 250th anniversary year. The Bengkulu Province Governor’s First Assistant formally opened the conference. A local member of the Bengkulu Heritage Society outlined the history of Fort Marlborough. There then followed thoughtful presentations by some of those among us on a range of ‘utmost good faith’ topics. During the conference we visited Fort Marlborough, where we were greeted with a ‘welcome to country’ — Bengkulu style. One of the promoters of the conference, Dr Allan Manning of the LMI Group, has produced a coffee table book that records the conference and its historical context with some text and a series of wonderful photographs. A visit to Bengkulu and a walk around Fort Marlborough helps with an appreciation of the importance of reading Lord Mansfield’s judgment by reference to the circumstances that gave rise to it, the context in which it was decided and its relevance today. Fort
Marlborough is very close to Australia’s doorstep. You should consider a visit. Greg Pynt Francis Burt Chambers, Perth 23 July 2017
ACKNOWLEDGMENTS The author and the publisher are grateful to the holders of copyright from which extracts appear in this work, particularly the following: ■ Abacus; ■ Allens Arthur Robinson; ■ American Institute of Aeronautics and Astronautics, Inc; ■ Australian Government Publishing Service; ■ Cambridge University Press; ■ Commonwealth of Australia; ■ Haus Publishing; ■ Jefferson Law Book Company; ■ John Wiley, New York; ■ London Random House, Inc; ■ New York West, a Thomson Reuters business; ■ Oxford University Press; ■ Picador (Pan MacMillan UK), London; ■ Quartet Books; ■ Random House; ■ Stevens & Sons; ■ The Avalon Project; ■ The Hon Michael Kirby AC CMG; ■ The Law Book Exchange Ltd; ■ David Walsh of Mona (Museum of old and new art); ■ USA Penguin Books in association with J Cape, London; ■ Yale University.
Every effort has been taken to establish and acknowledge copyright. The publishers tender their apologies for any accidental infringement and would be pleased to come to a suitable arrangement with the rightful owners in each case.
TABLE OF CASES References are to paragraph numbers References are to Introduction page numbers 470 St Kilda Road Pty Ltd v Robinson [2013] FCA 1420 …. 19.45
A A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 [2006] FCA 520 …. 8.6, 8.36 AAMI Ltd v Ellis (1990) 6 ANZ Ins Cas 60-957 …. 7.47 Abigroup Ltd v Gennaro Abignano, Re (1992) 39 FCR 74; [1992] FCA 567 …. 26.2 ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 …. 13.11, 13.20, 8.35, 8.44 ABN Amro Commercial Finance Plc v McGinn [2014] EWHC 1674 (Comm) …. 14.9 Abou-Rahmah v Abacha [2006] EWCA Civ 1492 (Comm); [2007] 1 All ER 827 …. 23.1 AC Ward & Son Ltd v Catlin (Five) Ltd [2009] EWHC 3122 (Comm) …. 12.19 ACCC v ASIC (2000) 174 ALR 688; [2000] NSWSC 316 …. 25.29 Ace European Group v Standard Life Assurance Ltd [2012] EWCA Civ 1713; All ER (D) 159 …. 16.31, 16.33, 16.35 ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374; [1997] SASC 6338 …. 21.8, 28.24 Action Scaffolding Ltd v AMP Fire & General Insurance Co (NZ) Ltd (1990) 6 ANZ Ins Cas 60-970 …. 11.7 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 …. 8.36 — v — (1989) 166 CLR 606; [1989] HCA 22 …. 6.15, 12.17, 6.22, 2.26, 2.27, 8.30, 8.35, 22.6 Advision Pty Ltd v Preservatrice Skandia Insurance Ltd and Sedgwick Pty Ltd (1984) 3 ANZ Ins Cas 60-574 …. 5.10 Aequitas v Aefc (2001) 19 ACLC 1006; [2001] NSWSC 14 …. 5.41, 5.42 AF & G Robinson v Evans Bros Pty Ltd [1969] VR 885 …. 17.42 AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWC 985 …. 13.6 AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655; [1972] HCA 70 …. 7.18, 16.6, 16.8, 27.1, 27.6 Agapitos v Agnew [2002] EWCA Civ 247; [2003] QB 556 …. 7.19, 7.24, 23.1, 23.3, 23.6, 23.20
Agricultural and Rural Finance Pty Limited v Gardiner (2008) 238 CLR 570; [2008] HCA 57 …. 13.13, 21.1, 21.3, 21.13 AIG Europe Ltd v Woodman [2017] UKSC 18; 1 WLR 1168 …. 24.1, 24.7 AIOI Nissay Dowa Insurance Company Ltd v Heraldglen Ltd and Advent Capital (No 3) Ltd [2013] EWHC 154 …. 24.6 Akai Pty Ltd v Peoples Insurance Co Ltd [1996] HCA 39; (1996) 188 CLR 418 …. 6.6, 6.7, 6.8 — v — [1998] 1 Lloyd’s Rep 90 …. 6.8 Akedian Co Ltd v Royal Insurance Australia (1997) 148 ALR 480; 10 ANZ Ins Cas 61-398 …. 8.15, 8.16, 8.17 Akron Roads Pty Ltd (in liquidation) (No 3) Re [2016] VSC 657, …. 8.36 Albion Insurance Co Ltd v Government Insurance Office (NSW) (1969) 121 CLR 342; [1969] HCA 55…. 2.10, 29.1, 29.2, 29.3, 29.14 Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 …. 6.18 Alcan Gove Pty Ltd v Zabic [2015] HCA 33 …. 17.40 Alessi v National Mutual Life Association of Australasia Ltd (1982) 2 ANZ Ins Cas 60-481 …. 17.49 Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 …. 20.20, 22.31 Alexander v Ajax Insurance Co Ltd [1956] VLR 436 …. 14.8 Alexander Forbes Europe Ltd v SBJ Ltd [2003] Lloyd’s Rep IR 432 …. 5.29 Alexander Stenhouse Ltd v Austcan Investments Pty Ltd [1993] HCA 22; (1993) 7 ANZ Ins Cas 61-166 …. 8.4, 8.11, 8.30 Alfred McAlpine v BAI [1998] 2 Lloyd’s Rep 694 …. 12.24 Allen v QBE Syndicate 1886 at Lloyds [2010] QDC 4 …. 8.36 Allianz Australia Insurance Ltd v Anthony Vitale [2014] NSWSC 364 …. 7.20 — v BlueScope Steel Ltd [2014] NSWCA 276 …. 7.20, 7.50 — v Douralis [2008] VSCA 72 …. 23.16 — v GSF Australia Pty Ltd (2005) 221 CLR 568; [2005] HCA 26 …. 6.16, 6.23, 12.32 — v Inglis [2016] WASCA 25 …. 6.14, 13.20, 13.22, 22.23 — v Mercer [2014] TASFC 3 …. 25.23, 25.25, 25.26, 25.29, 25.30, 25.31 — v Waterbrook [2009] NSWCA 224 …. 15.20 Allison Pty Ltd v Lumley General Insurance Ltd [2006] WASC 104; (2006) 200 FLR 394 …. 12.12, 16.13, 16.15 Allstate Explorations NL v Blake Dawson Waldron (a firm) [2010] WASC 97 …. 2.31, 19.20, 19.21 Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (2005) 62 NSWLR 148; [2005] NSWCA 19 …. 25.22, 25.26, 25.30, 25.33 Alstrom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 …. 13.9 Amaca Pty Ltd formerly known as James Hardie and Co Pty Ltd v CSR Ltd [2001] NSWSC 324 …. 2.24 Amaca Pty Ltd v McGrath as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 …. 8.65, 23.18 American Home Assurance v Saunders (1987) 11 NSWLR 363 …. 17.45
AMP Bank Ltd v Brown and Kavanagh [2017] NSWC 313 …. 29.13 AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 …. 18.81 AMP Fire and General Insurance Company Ltd v Dixon [1982] VR 833 …. 26.1 AMP Workers’ Compensation Services (NSW) Pty Ltd v QBE Insurance Ltd (2001) 53 NSWLR 35; 11 ANZ Ins Cas 61-502; [2001] NSWCA 267…. 14.2, 18.11, 18.77, 29.4, 29.17 Angas Securities Ltd v Small Business Consortium No 9056 [2016] NSWCA 182 …. 27.10 Ansari v New India Assurance Ltd [2009] EWCA Civ 93 …. 8.10, 19.2 Antico v CE Heath Casualty and General Insurance Ltd (1996) 38 NSWLR 681; 9 ANZ Ins Cas 61-304 …. 18.55 AF & G Robinson v Evans Bros Pty Ltd [1969] VR 885 …. 18.20 Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652 …. 22.9, 22.11, 22.20, 22.21, 22.22, 22.24, 22.27, 22.28, 22.41 Archer Capital 4A Pty Ltd as trustee for the Archer Capital Trust 4A v Sage Group plc (No 2) [2013] FCA 1098 …. 26.12 Arnott v Choy [2010] NSWCA 259 …. 16.1 Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd (No 2) [2014] FCA 481 …. 26.19 Ashmere Cove Pty Ltd v Beekink [2009] FCA 564 …. 13.4 Aspen Insurance UK Ltd v Pectel Ltd [2008] EWHC 2804 (Comm); [2009] Lloyd’s Rep IR 440; 2 All ER (Comm) 873 …. 12.25, 19.13, 19.15 AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) (2006) 225 CLR 331; [2006] HCA 13 …. 6.18 Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642; [2003] Lloyd’s Rep IR 131 …. 8.17, 8.19, 8.24 Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6 …. 5.39 AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd [2013] EWHC 349 (Comm) …. 16.20, 18.78 — v — [2013] EWCA Civ 1660 …. 18.78 Athlone Pty Ltd v General Accident Fire & Life Assurance Corp (1985) 3 ANZ Ins Cas 60-648 …. 21.4 Atlas Tiles Ltd v Briers (1978) 144 CLR 202; [1978] HCA 37 …. 27.41 Atton v National Mutual Life Association (2007) NSWSC 310 …. 17.51 — v — Elmore Haulage Pty Ltd [2013] VSCA 54 …. 1.13 — v — Goss [1983] 1 VR 725 …. 8.4 — v — NRMA Insurance Ltd [2002] FCA 1061 …. 18.74 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 …. 13.2, 13.4, 13.6 Australian Casualty Co Ltd v Federico (1986) 160 CLR 513; [1986] HCA 32 …. 13.6, 13.15, 13.20, 17.39, 17.40, 17.41, 17.42, 17.43 Australian Competition and Consumer Commission v IMB Group Pty Ltd (2003) 12 ANZ Ins Cas 61-545; [2002] FCA 402 …. 6.12 Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 …. 21.20
Australian Health Insurance Association Ltd v Esso Australia Pty Ltd (1993) 116 ALR 253; 7 ANZ Ins Cas 61-195; [1993] FCA 376 …. 1.6, 1.21, 1.22, 1.27, 6.2, 9.14 Australian Provincial Assurance Association Ltd v Producers & Citizens Co-operative Assurance Company of Australia Ltd (1932) 48 CLR 341; [1932] HCA 34 …. 8.55 Australian Rail Track Corporation Ltd v QBE Insurance (Europe) Ltd [2013] NSWCA 175 …. 12.1 Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (ACN 113 114 832) (No 4) [2007] FCA 963 …. 5.41 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15 …. 6.24 Australian Turf Industries Pty Ltd v Dalet Pty Ltd (unreported, Steytler J, SC (WA) (FC), No 980658, 12 November 1998) …. 25.27 Australian Widows’ Fund Life Assurance Society Ltd v National Mutual Life Association of Australasia Ltd (1912) 14 CLR 141; [1912] HCA 32 …. 9.17, 12.24 Automatic Fire Sprinklers Pty Ltd v Watson (1946) 72 CLR 435; [1946] HCA 25 …. 16.1 AWB Ltd v Cole (No 5) (2006) 155 FCR 30 …. 26.12 AXA General Insurance Ltd v Gottlieb [2005] 1 All ER (Comm) 445; [2005] EWCA Civ 112 …. 23.5, 23.9 Axa Global Risks (UK) Ltd v Haskins Contractors Pty Ltd (2004) 13 ANZ Ins Cas 61-611; [2004] NSWCA 138 …. 17.23
B Baccanello v ANZ Life Insurance Company Ltd (unreported, DC (SA), 27 May 1992) …. 7.47 Bailey v New South Wales Medical Defence Union Ltd (1995) 184 CLR 399; [1995] HCA 28 …. 25.38, 25.45 Ball v Norwich Union Fire Assurance Society [1999] EWCA Civ 562 …. 29.25 Baltic Shipping Co v Merchant ‘Mikhail Lermontov’ (1994) 36 NSWLR 361 …. 27.6 Baltic Shipping Company v Dillon (1991) 22 NSWLR 1 …. 7.33 — v — (1993) 176 CLR 344; [1993] HCA 4 …. 7.34 Banco de Portugal v Waterlow & Sons [1932] AC 452 …. 16.1, 16.11 Bank of Australasia v Hall (1907) 4 CLR 1514 …. 14.12 Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (‘The Good Luck’) [1992] 1 AC 233 …. 12.10, 12.13, 12.15 Banksia Securities Ltd (Receivers and Managers Appointed) [2013] VSC 416 …. 26.9 Bankstown Football Club Ltd v CIC Insurance Ltd (SC (NSW), Cole J, 17 December 1993, unreported) …. 20.9 Banque Bruxelles v Eagle Star [1995] QB 375 …. 15.1 Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] UKHL 7; [1999] AC 221 …. 27.2 — v Westgate Insurance Co Ltd [1991] 2 AC 249 …. 8.27 Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1991] 2 AC 249 …. 7.13, 7.15 Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd (1987) 8 NSWLR 514 …. 8.16
Barclay MIS Group of Companies Pty Ltd (ACN 056321 272) v Australian Securities and Investments Commission [2002] FCA 1606 …. 1.15 Barisic v Devenport [1978] 2 NSWLR 111 …. 18.22 Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd [2005] UKPC 37; [2006] 1 WLR 1476 …. 19.34 Barrick Gold of Australia Ltd v FL Smidth Inc [No 3] [2009] WASC 364 …. 26.5 Barrie Toepfer Earthmoving and Land Management Pty Ltd v CGU Insurance Ltd [2016] NSWCA 67 …. 12.25, 12.28 Barroora Pty Ltd v Provincial Insurance Ltd (1992) 26 NSWLR 170 …. 25.5 Barry v The Australian Mutual Provident Society [1920] 22 Gazette LR 447 …. 11.11 Bartoline Ltd v Royal Sun Alliance Insurance Plc [2006] EWHC 3598 (QB); [2008] Env LR 1 …. 2.15, 16.28, 18.1, 18.13 Bass v Perpetual Trustee Co Ltd (1999) 198 CLR 334; [1999] HCA 9 …. 26.1 Bauer Tonkin Insurance Brokers v CIC (1996) 9 ANZ Ins Cas 61-298 …. 8.41 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (formerly GIO Insurance Ltd) [2006] NSWSC 223 …. 7.20 Bayswater Car Rental Pty Ltd v Hannell (1998–9) 10 ANZ Ins Cas 61-437; [1999] WASCA 34 …. 1.27, 6.10, 9.14 Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 48 NSWLR 1; [1999] NSWCA 408 …. 28.2, 28.4 Beavers v Westhaven Boatyard (1987) 4 ANZ Ins Cas 60-809 …. 19.26 Beck Helicopters Ltd v Edward Lumley & Sons (NZ) Ltd (1990) 6 ANZ Ins Cas 60-995 …. 5.14 Belan v Casey [2002] NSWSC 58 …. 28.2 — v — [2003] NSWSC 159; (2003) 57 NSWLR 670 …. 29.12 Bell v Lever Bros Ltd [1932] AC 161 …. 7.1 Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (2008) 225 FLR 1; [2008] WASC 239 …. 13.13, 25.9, 21.11 Benson-Brown v HIH Casualty & General Insurance Ltd [2001] WASC 6 …. 8.25, 23.22 Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274 …. 12.18, 22.31 Beresford v Royal Insurance Company Ltd [1938] AC 586 …. 1.11 Bhagat v Global Custodians Ltd [2002] NSWCA 160 …. 26.27 Bhasin v Hrynew, 2014 SCC 71 …. 7.50 Bilaczenko v Financial Ombudsman Service Ltd [2013] FCCA 420 …. 4.48 Biltmore Associates LLC v Twin City Fire Insurance Company 572 F.3d 663 (9th Cir. 2009) …. 19.40 Bird Constructions v United States Fire Insurance Co (1985) 24 DLR (4th) 104 …. 19.26 Birtchnell v The Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384; [1929] HCA 24 …. 28.2 Bit Badger Pty Ltd v Cunich [1996] QSC 100; (1996) 9 ANZ Ins Cas 61-312 …. 27.23 Bjork v State Farm Fire and Casualty Company (2007) 157 Cal. App. 4th 1 …. 19.39 Black Box Control Pty Ltd v Terravision Pty Ltd [2016] WASCA 219 …. 13.3
Blackley v National Mutual Life Association of Australasia [1972] NZLR 1038 …. 8.7 Blair v Curran (1939) 62 CLR 464; [1939] HCA 23 …. 21.23 Blatch v Archer (1774) 1 Cowp 63; 98 ER 969 …. 20.21 Boag v Standard Marine Insurance Co Ltd [1937] 2 KB 113 …. 27.6 Body Corporate Strata Plan No 4303 [1982] VR 699 …. 12.28 Bofinger v Kingsway Group Ltd (2009) 239 CLR 269; [2009] HCA 44 …. 2.9, 14.2, 14.7, 16.6, 20.3, 27.2 Bokiah v KPMG [1998] UKHL 52; [1999] 2 AC 222 …. 28.2, 28.5 Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd [2006] EWCA Civ 50; [2006] 1 WLR 1492 …. 21.4, 21.9, 21.10, 23.10 Bond Air Services Ltd v Hill [1955] 2 QB 417 …. 12.4, 12.18 Bonner v Cox [2005] EWCA Civ 1512; [2006] 2 Lloyd’s Rep 152 …. 7.31 — v Cox Dedicated Corporate Member Ltd [2004] EWHC 2963 …. 7.21, 7.26 Bonython v Commonwealth (1950) 81 CLR 486; [1950] HCA 37 …. 6.6 Booksan Pty Ltd v Wehbe, Elmir (2006) 14 ANZ Insurance Cases 61-678; [2006] NSWCA 3 …. 19.6, 19.10, 19.18 — v CE Heath Underwriting & Agency Services (NZ) Ltd (1993) 7 ANZ Ins Cas 61-189 …. 20.21, 22.31 Boral Resources (Qld) Pty Ltd v Pyke (1989) 93 ALR 89; 5 ANZ Ins Cas 60-942 …. 27.28 Borealis AB v Geogas Trading SA [2010] EWHC 2789 …. 16.37 BOS International (Australia) Ltd v Babcock & Brown International Pty Ltd [2011] NSWSC 1382 …. 9.31, 9.32, 19.51 Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 …. 21.1, 21.2 Bowling v Weinert [1978] 2 NSWLR 282 …. 19.15 Box Valley Pty Ltd v Kidd (2006) 24 ACLC 471; [2006] NSWCA 26…. 14.12 Boyce v Goodyear Australia Ltd (unreported, CA (NSW), 16 September 1996, BC9607060) …. 28.27 BP International Ltd v Energy Infrastructure Group Ltd [2003] EWHC 2924 (Comm) …. 20.19 BP plc v Aon Ltd [2006] 1 CLC 881; [2006] EWHC 424 …. 5.12, 5.35 Bradburn v The Great Western Railway Co (1874) LR 10 Exch 1 …. 27.1 Bradford Insulation (SA) Pty Limited v CGU Insurance Ltd [2004] NSWDDT 51 …. 17.42, 21.12 Bradley and Essex and Suffolk Accident Indemnity Society, Re [1911–13] All ER Rep 444; [1912] 1 KB 415 …. 12.29, 13.20 Bradshaw v McEwans Pty Ltd (27 April 1951) …. 23.23 Brand Hwy Pty Ltd v Hay Australia Pty Ltd [2015] WASC 375 …. 27.23 Breen v Williams (1996) 186 CLR 71; [1996] HCA 57 …. 5.41, 28.2 Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd (2007) NSWSC 598; 14 ANZ Ins Cas 61740 …. 7.32 Brescia v QBE (2007) 14 ANZ Ins Cas 61-740; [2007] NSWSC 598 …. 12.30, 14.4, 14.7, 16.6, 19.7, 20.2, 20.4, 20.13, 20.18, 23.16 Brick Protection Corporation v Alberta (Provincial Treasurer) 2011 ABCA 214 …. 1.3
Bridgeman v Allied Mutual Insurance Ltd [2000] 1 NZLR 433 …. 16.19 Briginshaw v Briginshaw (1938) 60 CLR 33; [1938] HCA 346 …. 8.25, 23.22 Bristol and West Building Society v Mothew [1996] EWCA Civ 533; [1998] Ch 1 …. 7.26, 28.2 British and Foreign Marine Insurance Company Ltd v Gaunt [1921] 2 AC 41 …. 1.12 British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86; [1964] HCA 24 …. 2.31, 17.2, 17.10, 17.16, 25.16, 27.11 British Transport Commission v Gourley [1956] AC 185 …. 27.35 Britton v Royal Insurance Company (1866) 4 F&F 905; 176 ER 843 …. 19.30, 23.5 Bromley London Council v Ellis [1971] 1 Lloyd’s Rep 97 …. 5.24 Bronfman v BFL Canada Risk, 2013 ONSC 5372 …. 5.19 Brooks v Sirius Insurance Company Ltd (1985) 3 ANZ Ins Cas 60-601 …. 8.4 Bropho v Western Australia (1990) 171 CLR 1; [1990] HCA 24 …. 6.16 Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705; [2003] Lloyd’s Rep IR 746 …. 7.14, 7.17, 8.1, 8.23, 8.28, 8.29 Brough v Whitmore (1791) 4 Term Rep 206; 100 ER 976 …. 13.1 Brown v Guardian Royal Exchange Assurance PLC [1994] 2 Lloyd’s Rep 325 …. 28.16, 28.27 — v Rezitis (1970) 127 CLR 157; [1970] HCA 56 …. 19.51 Buckland v Palmer [1984] 1 WLR 1109 …. 27.6 Buckley v Metal Mart Pty Ltd [2008] ACTSC 79 …. 19.5 Bulk Materials (Coal Handling) Services Pty Ltd v Coal & Allied Operations Pty Ltd (1988) 13 NSWLR 689 …. 26.18 Bupa Australia Pty Ltd v Shaw (as Joint Executor of the Estate of Norman Shaw) [2013] VSC 507 …. 27.8 Burke v LFOT Pty Ltd (2002) 209 CLR 282; [2002] HCA 17 …. 27.19, 29.12, 29.14 Burnand v Rodocanachi (1882) 7 App Cas 333 …. 27.4 Burns v MMI-CMI Insurance Ltd (1995) 8 ANZ Ins Cas 61-287 …. 11.3 Burr v Commercial Travellers’ Mutual Accident Assurance Co (1946) 166 Am LR 462 …. 18.1 Buses + 4WD Pty Ltd v Oz Snow Adventures Pty Ltd [2016] NSWSC 1017 …. 26.10 Byrne v People Resourcing (Qld) Pty Ltd [2014] QSC 269 …. 18.26, 26.1
C Caisse Populaire de Maniwaki v Giroux [1993] 1 SCR 282 …. 1.29 Caldwell v JA Neilson Investments Pty Ltd (2007) 69 NSWLR 120; 14 ANZ Ins Cas 61-724 [2007] NSWCA 3 …. 5.5, 5.6, 5.7, 5.25 Caledonia North Sea Ltd v Norton (No 2) Ltd [2002] Lloyd’s Rep IR 261; [2002] UKHL 4; [2002] 1 Lloyd’s Rep 553 …. 27.18, 27.19, 29.5, 29.6 California-Western States Life Insurance Co v State Board of Equalization (1957) 312 P 2d 19 …. 1.28 Callery v Gray (No 2) [2001] EWCA Civ 1246 …. 1.11, 1.18 — v — [2001] Lloyd’s Rep IR 743 …. 1.18 Calliden Insurance Ltd v Chisholm [2009] NSWCA 398 …. 19.53 Caltex Oil (Australia) Pty Ltd v The Dredge ‘Willemstad’ (1976–77) 136 CLR 529 …. 3.44
Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd [2013] NSWSC 1975 …. 7.34, 17.5, 20.4 Campbell v Members of Lloyd’s Syndicate QBE Casualty 386 [2014] VSC 655 …. 28.27 Canada Rice Mills Ltd v Union Marine General Insurance Co [1940] UKPC 56; [1941] AC 55 …. 2.4, 16.8 Canam Enterprises Inc v Coles (2000) 51 OR (3d) 481 …. 21.24 Canberra Pools Pty Ltd v MMI General Insurance Ltd [2000] FCA 751 …. 9.15, 11.3 Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 …. 13.8 Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd [2010] QSC 313 …. 17.34, 17.35 Carillion Construction Ltd v AIG Australia Ltd [2016] NSWSC 495 …. 14.19, 14.20 Carlill v Carbolic Smoke Ball Co [1892] 2 QB 484 …. 1.30, 3.28 — v — [1893] 1 QB 256 …. 9.6 Carlow Castle Pty Ltd trading as Greenhill Capital Partners v Aztec Resources Ltd [2014] NSWCA 123 …. 13.30, 13.31 Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162 …. 3.42, 7.9, 7.10, 7.15, 8.12, 8.24, 8.27 — v Kerr (1989) 2814 (BCSC); 39 BCLR (2d) 345 …. 28.19 Casino Show Committee v Norris (1984) 3 ANZ Insurance Cases 60-580 …. 19.5 Castellain v Preston (1883) 11 QBD 380 …. 2.31, 9.26, 17.2, 27.3 Cavill Power Products Pty Ltd v Royle (1991) 42 IR 229 …. 17.48 CCR Fishing Ltd v Tomenson Inc (The ‘La Pointe’) [1991] 1 Lloyd’s Rep 89 …. 1.2 CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61199 …. 7.50, 8.35 — v Pyramid Building Society (in liquidation) [1997] 2 VR 256 …. 18.74 CE Heath Underwriting & Insurance (Aust) Pty Ltd v Campbell Wallis Moule & Co Pty Ltd (1991) 6 ANZ Ins Cas 61-071 …. 28.20 — v Edwards Dunlop & Co Ltd (1993) 176 CLR 535; [1993] HCA 21 …. 11.10 — v Campbell Wallis Moule and Corp Pty Ltd (1991) 6 ANZ Insurance Cases 61-071; [1992] 1 VR 386 …. 21.9, 21.10 — v Edwards Dunlop and Co Ltd (1993) 176 CLR 535; [1993] HCA 21 …. 9.11, 12.1 Cedenco Funds Ltd v State Insurance Ltd (1997) 6 NZBLC 102 …. 7.27 Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Norde) [1976] QB 44 …. 13.21 Celik v NRMA [2000] NSWC 380 …. 8.44, 8.58 Centennial Coal Company Ltd v Xstrata Coal Pty Ltd (2009) 76 NSWLR 129; [2009] NSWCA 341 …. 13.13 Centrebet Pty Ltd v Baasland [2013] NTSC 59 …. 20.19 Century Insurance Company of Canada v Case Existological Laboratories Ltd (‘The BAMCELL II’) [1983] 2 SCR 47 …. 12.20 Certain Lloyd’s Underwriters v Cross [2012] HCA 56; (2012) 248 CLR 378 …. 6.16, 6.18 Certain Underwriters at Lloyds, London v Inlet Fisheries Inc 380 F Supp 2d 1145, 2005 US Dist Lexis 37397 …. 7.8 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; [2007] HCA 36….
7.16, 7.30, 7.38, 7.46, 7.50, 16.22, 28.7 — v Blakeley [2016] HCA 2 …. 26.3 — v Lawless [2008] VSCA 38; (2008) 15 ANZ Ins Cas 61-755 …. 12.28, 22.31 — v One.Tel Ltd (in liq) (2010) 16 ANZ Ins Cas 61-855; [2010] HCA 26 …. 9.33 — v Porthouse (2008) 235 CLR 103; [2008] HCA 30 …. 8.37 — v Watson (as trustee of the deed of arrangement in respect of Greaves) [2007] NSWCA 301 …. 14.20 CGU Workers Compensation v Panoy Pty Ltd [2012] NTSC 26 …. 19.6 CGU Workers Compensation (NSW) Ltd v Garcia (2007) 69 NSWLR 680; 14 ANZ Ins Cas 61746; [2007] NSWCA 193 …. 7.3, 7.27, 7.50, 16.7 Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Ins Cas 60-463 …. 19.28 Champtaloup v Thomas [1976] NSWLR 264 …. 17.33, 21.4, 21.5 Chandris v Argo [1963] 2 Lloyd’s Rep 64 …. 14.18 Chapman v Fraser (1793) BR Trin 33 Geo 111 …. 8.26 — v United Super Pty Ltd [2013] NSWSC 592 …. 17.53 Chappel v Hart (1998) 195 CLR 232; [1998] HCA 55 …. 15.1 Charter Reinsurance Co Ltd (In liquidation) v Fagan [1997] AC 313 …. 13.2 Cheltenham & Gloucester Plc v Royal & Sun Alliance Insurance Co Plc [2000] ScotCS 254 …. 18.76, 29.21 Chemainus Properties Ltd v Continental Insurance Co [1990] ILR 1-2574 …. 19.57 Chersinoff v Allstate Insurance Company (1968) 69 DLR (2d) 653; [1969] 65 WWR 449 …. 28.19 Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212 …. 18.11, 18.77, 25.38, 25.43, 25.44 — v Robinson [2016] FCAFC 17 …. 19.46 Cia Barca de Panama SA v George Wimpey & Co Ltd [1980] 1 Lloyd’s Rep 598 …. 26.15 CIC Insurance Ltd v Bankstown Football Club Ltd (1994) 8 ANZ Ins Cas 61-232 …. 17.29, 17.30, 17.31, 17.32, 17.35 — v — (1997) 187 CLR 384; [1997] HCA 2 …. 2.9, 6.18, 6.20, 11.12, 14.1, 14.4, 14.7, 14.9, 14.16, 16.6, 17.28, 20.2 — v Barwon Region Water Authority [1998] VSCA 77 …. 17.13 CIGNA Insurance Asia Pacific Ltd v Packer (2000) 23 WAR 159; [2000] WASCA 415 …. 14.17, 17.60, 17.61 City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 …. 15.15, 15.16 City of Laguna Beach v Mead Reinsurance Corp 226 Cal App 3d 822 (Cal App 4 Dist 1990) …. 16.22 City Realties (Holdings) Ltd v National Insurance Co of NZ Ltd (1985) 4 ANZ Ins Cas 60-695 …. 7.29 Clayton v Mutual Community General Insurance Pty Ltd (1995) 8 ANZ Ins Cas 61-263; [1995] SASC 5080 …. 15.21, 18.5 Clea Shipping Corp v Bulk Oil International Ltd(The Alaskan Trader (No 2)) [1984] 1 All ER
129 …. 16.1 Clerical Mutual General Insurance v ANZ Banking Group [1995] 3 All ER 987 …. 9.31 CMA Assets Pty Ltd v John Holland Pty Ltd [No 2] [2012] WASC 126 …. 26.11, 26.24 Codelfa Constructions Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; [1982] HCA 24 …. 13.10 Cole v Accident Insurance Company (1889) 5 TLR 736 …. 13.24 Collyear v CGU Insurance Ltd [2008] NSWCA 92; (2008) 15 ANZ Ins Cas ¶61-760 …. 17.7 Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd (1931) 46 CLR 41; [1931] HCA 53 …. 5.9 Comcare v Martin [2016] HCA 43 …. 19.51 Cominos v Cominos (1972) 127 CLR 588 …. 8.65, 23.18 Commercial Union Assurance Co Limited v Hayden [1977] QB 804 …. 29.24 Commercial Union Assurance Co PLC v Mander [1996] 2 Lloyd’s Rep 640 …. 26.15 Commercial Union Assurance Company of Australia Ltd v Beard [1999] NSWCA 422; [2000] 11 ANZ Ins Cas 61-458 …. 8.21, 8.36, 8.43 Commissioner of Inland Revenue v Motorcorp Holdings Ltd [2005] NZCA 33 …. 1.2, 1.22 Commissioner of State Revenue v Challenger Listed Investments Ltd (No 2) [2011] VSCA 398 …. 26.26 Commissioner of Taxation v Consolidated Media Holdings Ltd [2012] HCA 55; (2012) 293 ALR 257 …. 6.16 Commissioners of Inland Revenue v Maxse [1919] 1 KB 647 …. 19.43 Commonwealth v Amann Aviation Pty Ltd (1992) 174 CLR 64; [1991] HCA 54 …. 16.1 Commonwealth Construction Co Ltd v Imperial Oil Ltd (1977) 69 DLR (3d) 558 …. 27.22 Commonwealth Homes and Investment Co Ltd, Re [1943] SASR 211 …. 1.6 — v Hornsby [1960] HCA 27; (1960) 103 CLR 588 …. 17.42 — v Verwayen (‘Voyager case’) [1990] HCA 39; (1990) 170 CLR 394 …. 21.11 Compagnie Francaise D Assurance Pour le Commerce Exterieur t/a Coface Australia v Sims Group Australia Holdings Ltd [2013] NSWCA 418 …. 28.7 Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 QB 101 …. 27.13 Condogianis v Guardian Assurance Company Ltd [1921] 2 AC 125 …. 8.8, 8.55 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226; [1986] HCA 14 …. 2.5, 5.1, 5.61 Conway v Critchley [2012] NSWSC 1405 …. 9.1 Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297; [1981] HCA 26 …. 6.16 Cooper v Winter [2013] NSWCA 261 …. 28.2 Co-operative Bulk Handling Ltd v Jennings Industries Ltd (1996) 17 WAR 257; 9 ANZ Ins Cas 61-355 …. 27.21 Cornish v Accident Insurance Company (1889) 23 QBD 453 …. 13.24 Coronation Insurance Co v Taku Air Transport Ltd [1991] 3 SCR 622 …. 7.9 Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119 CLR 460; [1967] HCA 3 …. 25.1, 25.6
Council of the City of Sydney v Goldspar Australia Pty Ltd (2006) 230 ALR 437; [2006] FCA 472 …. 7.3 Countrywide Finance Ltd v State Insurance Ltd [1993] 3 NZLR 745 …. 15.19 Cox v Bankside [1995] 2 Lloyd’s Rep 437 …. 12.26 Craine v Colonial Mutual Fire Insurance Co Ltd (1920) 28 CLR 305; [1920] HCA 64 …. 21.1, 21.2, 26.16 Crystal Imports Ltd v Certain Underwriters at Lloyd’s of London [2013] NZHC 3513 …. 17.8 CSR Ltd v Cigna Insurance Australia Ltd (1997) 189 CLR 345; [1997] HCA 33 …. 21.1 Cunningham v Wheeler [1994] 1 SCR 359; (1994) 113 DLR (4th) 1 …. 27.38 Currie v Dempsey (1967) 69 SR (NSW) 116 …. 20.19
D DA Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 237 …. 20.15 Da Costa v Jones (1778) 2 Cowper 729; 98 ER 1331 …. 3.28 Dalby v India and London Life Assurance Company (1854) 15 CB Reports 365; 139 ER Rep 465 …. 3.35, 10.9 Dalgety & Co Ltd v Australian Mutual Provident Society [1908] VLR 481 …. 8.25 Dane v Mortgage Insurance Corporation Ltd [1894] 1 QB 54 …. 17.37 Danepoint Ltd v Allied Underwriting Insurance Ltd [2005] EWHC 2318 (TCC); [2006] Lloyd’s Rep IR 429 …. 23.2, 23.5, 23.7 Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission [2002] HCA 49; (2002) 213 CLR 543 …. 26.11 Darbishire v Warren [1963] 1 WLR 1067 …. 16.7 Dargham v Kovacevic [2011] NSWSC 2 …. 19.5 Darlington Borough Council v Wiltshier Northern Ltd [1994] EWCA Civ 6; [1995] 1 WLR 68 …. 25.54 David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353; [1992] HCA 48 …. 21.20 Davis v Westpac Life Insurance Services Ltd [2007] NSWCA 175 …. 8.20 Davjoyda Estates Pty Ltd v National Insurance Co of New Zealand Ltd (1967) 69 SR (NSW) 381 …. 25.18 Dawson v Bankers and Traders Insurance Co Ltd [1957] VR 491 …. 29.6, 29.16, 29.18 — v Mercantile Mutual Insurance Co Ltd [1932] VLR 380 …. 12.11 Dawsons Ltd v Bonnin [1922] 2 AC 413 …. 12.15 De Hahn v Hartley (1786) 1 Term Reports 343; 99 ER 1130 …. 12.12 Deaves v CML Fire & General Insurance Co Ltd (1979) 143 CLR 24; [1979] HCA 12 …. 2.32, 8.8, 12.16 Deeble v Nott [1941] HCA 11; (1941) 65 CLR 104 …. 17.40 Dellavedova v HIH Casualty & General Insurance Ltd (1997) 9 ANZ Ins Cases 61-383 …. 18.20 Denso Manufacturing UK Ltd v Great Lakes Reinsurance (UK) Plc [2017] EWHC 391 (Comm) …. 12.25
Department of Trade and Industry v St Christopher Motorists’ Association Ltd [1974] 1 WLR 99 …. 1.2, 1.32 Deutz Australia Pty Ltd v Skilled Engineering Ltd [2001] VSC 194 …. 27.27 Dickinson v Motor Vehicle Insurance Trust (1987) 163 CLR 500; [1987] HCA 49 …. 15.8, 18.68, 19.51 Digital Satellite Warranty Cover Ltd, Re [2011] EWHC 122 …. 1.33, 1.34 Digital Satellite Warranty Cover Ltd v Financial Services Authority [2013] UKSC 7 …. 1.17 Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; [1974] HCA 3 …. 7.18, 7.50, 19.10, 19.11, 20.15, 24.8, 27.24, 28.13 Do Carmo v Ford Excavations Pty Ltd (1984) 154 CLR 234; [1984] HCA 17 …. 14.17, 17.60 Dobbie v Davidson (1991) 23 NSWLR 625 …. 22.25, 22.26 Donoghue v Stevenson (1932) UHKL 100; [1932] AC 562 …. 3.44 D’Orta-Ekenaike v Victoria Aid (2005) 223 CLR 1; [2005] HCA 12 …. 28.15 Dr Gregory Moore v The National Mutual Life Association of Australasia Ltd [2011] NSWSC 416 …. 8.25 Drake Insurance plc (in prov liq) v Provident Insurance plc [2003] EWCA Civ 1834; [2004] 1 Lloyd’s Rep 268 …. 8.18, 8.24, 8.29 Drayton v Martin (1996) 67 FCR 1; 9 ANZ Ins Cas 61-322; [1996] FCA 1504 …. 19.51, 22.23, 29.20, 29.22, 29.24, 29.27 DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; [1978] HCA 12 …. 13.10 Dumitrov v S C Johnson and Son Superannuation Pty Ltd (No 2) [2007] NSWSC 42 …. 20.13 Dunlop Pneumatic Tyre Company Ltd v Selfridge and Company Ltd (1915) AC 847; [1915] UKHL 1 …. 25.6
E Eastern Associated Coal Corp v Aetna Casualty and Surety Co 632 F 2d 1068 (3d Cir 1980) …. 13.26 Economides v Commercial Assurance Co Plc [1997] EWCA Civ 1754; [1998] QB 587 …. 8.6, 17.13 Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 …. 8.65, 23.18 Edmunds v Lloyd Italico e L’Ancora Cia Di Assicurazioni e Riassicurazioni SpA (1986) 2 ALL ER 249 …. 14.6 EK Nominees Pty Ltd v Indemnity Corporation Pty Ltd (1990) 6 ANZ Ins Cases 61-008 …. 16.6 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 …. 12.1, 13.6 Elilade Pty Ltd v NonPareil Pty Ltd & CIC Insurance Ltd [2002] FCA 909 …. 5.15, 5.20, 20.11 Ellison v Lutre Pty Ltd (1999) 88 FCR 116; [1999] FCA 399 …. 21.5 Elphick v Westfield Shopping Centre Management Company Pty Ltd [2011] NSWCA 356 …. 28.22 Empress Car Company (Abertillery) Ltd v National Rivers Authority [1998] UKHL 5; [1999] 2 AC 22 …. 15.2
Ensham Resources Pty Ltd v AIOI Insurance Company Ltd [2012] FCA 710 …. 26.21 Enterprise Oil v Strand Insurance Co Ltd [2007] Lloyd’s Rep IR 186 …. 18.78 Entwell Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059 …. 8.36, 15.21, 18.5, 22.30, 23.2, 23.6 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 …. 17.19 Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7 …. 9.19 Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95; [2002] HCA 8 …. 9.1 Erzurumlu v Kellogg Superannuation Pty Ltd [2013] NSWSC 1115 …. 17.52, 17.57 Esanda Finance Corp Ltd v Colonial Mutual General Insurance Co Ltd [1993] VicSC 576; (1993) 217 ALR 180 …. 29.1 Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49; [1999] HCA 67 …. 26.12 Esso Petroleum Company Ltd v Hall Russell & Co Ltd [1989] AC 643 …. 27.13 European Bank Ltd v Robb Evans of Robb Evanns & Associates (2010) 240 CLR 432; [2010] HCA 6 …. 7.32 European Risk Insurance Company HF v McManus (t/a McManus Seddon Runhams (A Firm) [2013] EWCA Civ 1545 …. 18.59 European Roma Rights Centre, R (on the application of) v Immigration Officer at Prague Airport [2004] UKHL 55; [2005] 1 All ER 527 …. 7.2 Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd (2013) 250 CLR 303; [2013] HCA 46 …. 26.16
F F & D Normoyle Pty Ltd v Transfield Pty Ltd (2005) 63 NSWLR 502; [2005] NSWCA 193 …. 19.51 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999) 153 FLR 448; 10 ANZ Ins Cas 61-445 …. 18.55, 22.28 — v — (2001) 204 CLR 641; [2001] HCA 38 …. 6.21, 18.33, 18.34, 18.46, 18.47, 22.3, 22.8, 22.9, 22.11, 22.19, 22.23, 22.24, 22.27, 22.42, 22.43 — v Gold Coast City Council [1995] 2 Qd R 341; (1992) 7 ANZ Ins Cas 61-153 …. 19.47 — v Perry (1993) 30 NSWLR 89 …. 18.55 FAI General Insurance v ACN 010 087 573 Pty Ltd [1999] QCA 524 …. 28.16 — v Ocean Marine Mutual [1998] LRIR 24 …. 9.17 FAI Insurance Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; [2001] HCA 38 …. 2.22 — v Custom Credit Corporation Ltd, Re (1980) 44 FLR 431; [1980] FCA 32 …. 1.10 FAI v Interchase Corp Ltd [1998] QCA 180 …. 21.22, 21.23 Fairwater Pty Ltd v QBE Insurance (Australia Ltd) [2012] WASCA 270 …. 25.22, 25.26, 25.30 Falcon Investments Corp (NZ) Ltd v State Insurance General Manager [1975] 1 NZLR 520 …. 17.2, 17.3 Fanhaven Pty Ltd v Bain Dawes Northern Pty Ltd (1982) 2 NSWLR 57 …. 5.17
Farah Constructions Pty Ltd v Say-dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 …. 6.25, 13.14 Farrow Mortgage Services Pty Ltd (in liq) v Webb (1996) 39 NSWLR 601; [1996] NSWSC 259 …. 26.15, 26.17 Favelle Mort Ltd v Murray [1976] HCA 13; (1976) 133 CLR 580 …. 17.39, 17.40 Fawcett v BHP By-Products Pty Ltd [1960] HCA 59; (1960) 104 CLR 80 …. 18.65 Fazlic v Milingimbi Community Inc [1982] HCA 3; (1982) 150 CLR 345 …. 16.1, 16.8 Feasey v Sun Life Assurance Company of Canada [2003] EWCA Civ 885; Lloyd’s Rep IR 637 …. 3.32, 3.35, 10.2, 10.6, 10.7 Federal Commissioner of Taxation v United Aircraft Corporation (1943) 68 CLR 525 …. 19.33 Federation Insurance Ltd v Wasson [1987] HCA 34; (1987) 163 CLR 303 …. 2.30, 2.32 Fenton v The Queensland Insurance Company Ltd (1915) 11 Tas LR 125 …. 16.24 Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 7 ANZ Ins Cas 61-156; [1993] HCA 5 …. 8.10, 8.61, 22.32, 22.38 Field v Commissioner for Railways for New South Wales (1957) 99 CLR 285; [1957] HCA 92 …. 26.23, 26.24 Financial Ombudsman Services Ltd v Pioneer Credit Acquisition Services Pty Ltd [2014] VSC 172 …. 4.43 — v Utopia Financial Services Pty Ltd [2016] WASC 55 …. 4.48 Financial Services Authority v Digital Satellite Warranty Cover Ltd [2011] EWCA Civ 1413 …. 1.3 Finch v Telstra Super Pty Ltd [2010] HCA 36 …. 17.54, 17.58 Fire & All Risks Insurance Co Ltd v Powell [1966] VR 513 …. 15.21 Firma C-Trade SA v Newcastle P&I Association (‘The Fanti’) [1991] 2 AC 1 …. 1.21, 14.6 Fishlock v The Campaign Palace Pty Ltd [2013] NSWSC 531 …. 13.13 Fitzgerald v CBL Insurance Ltd [2014] VSC 493 …. 20.9 Fitzpatrick v Job t/a Job’s Engineering (2007) 14 ANZ Ins Cas 61-731; [2007] WASCA 63 …. 13.23, 19.48 FNCB Ltd v Barnet Devanney (Harrow) Ltd [1999] LIRL 459; [1999] Lloyd’s Rep IR 459 …. 2.32, 5.23 Folan v United Super Pty Ltd [2014] NSWSC 343 …. 17.48 Folgate London Market Ltd v Chaucer Insurance Plc [2011] EWCA Civ 328 …. 25.48, 25.51 Forfar Weavers Ltd v MSF Pritchard Syndicate (2006) SLT (Sh Ct) 19; [2006] ScotSC 83 …. 12.10, 12.19, 12.11 Forrest v ASIC (2012) 247 CLR 486; [2012] HCA 39 …. 23.1 Foster v Thackeray Tr 21 Geo 3, B R Vide ante, 1 vol. 57 …. 3.13 Franke v CIC General Insurance Ltd (The Coral) (1994) 33 NSWLR 373 …. 17.4 Franklins Pty Ltd v Metcash Trading Ltd (2009) 264 ALR 15; [2009] NSWCA 407 …. 12.1, 13.2, 13.6, 13.10, 21.11 Franknelly Nominees Pty Ltd v Abrugiato [2013] WASCA 285 …. 13.29, 13.33, 13.34 Fraser v BN Furman (Productions) Ltd [1967] 1 WLR 898 …. 19.17 Freshmark Ltd v Mercantile Mutual Insurance (Australia) Ltd (1994) 2 Qd R 390 …. 12.13
Freuhauf Finance Corporation Pty Ltd v Zurich Australian Insurance Ltd (1993) 32 NSWLR 735 …. 20.7 Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21 …. 29.1, 29.5, 29.14 Friends Provident Life & Pensions Ltd v Sirius International Insurance Corp [2004] EWHC 1799 (Comm) …. 18.45 — v Sirius International Insurance [2005] EWCA Civ 601 …. 12.6, 12.24 Friere v Woodhouse (1817) Holt 572; 171 Eng Rep 345 573 …. 8.10 Fuji Finance Inc v Aetna Life Insurance Co Ltd [1997] Ch 173 …. 1.2 Furness Shipbuilding Co Ltd v London and North Eastern Railway Co (1934) 50 TLR 257 …. 19.51
G Gallie v Lee [1969] 2 Ch 17 …. 26.1 Galloway v Guardian Royal Exchange (UK) Ltd [1997] EWCA Civ 2487; [1999] 2 Lloyd’s Rep IR 209 …. 23.1, 23.5, 23.6, 23.7 Garneau v Industrial Alliance Insurance and Financial Services Inc 2014 ONSC 1495 …. 7.26 Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; [1986] HCA 3 …. 5.45 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50 …. 21.5 Gedeon v First State Super Trustee Corporation [2005] NSWIR Comm 62 …. 17.48 Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 …. 9.1 Genders v GIO (NSW) [1959] HCA 30; (1959) 102 CLR 363 [1996] QCA 529 …. 18.13 General Accident Fire and Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 …. 2.29 General Accident Insurance Association Ltd v Sakr [2001] NSWCA 402; (2001) 11 ANZ Ins Cas 61-508 …. 17.36 General Motors Acceptance Corporation Australia v RACQ Insurance Ltd [2003] QSC 80 …. 25.11, 25.12 Genesis Housing Association Ltd v Liberty Syndicate Management Ltd [2012] EWHC 3105 …. 8.55 Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in Liquidation) (No 2) [2011] FCA 1124 …. 8.55 Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd and Insurance and General Brokers Services Pty Ltd [2000] QCA 524; (2001) 11 ANZ Ins Cas 61-484 …. 22.9, 22.32 Gibbs v Haoma Mining NL [No 6] [2017] WADC 67 …. 25.53, 26.4 — v Mercantile Mutual Insurance (Australia) Ltd (2003) 214 CLR 604; [2003] HCA 39 …. 2.3, 2.5, 3.13 Gideons International Service Mark [1991] RPC 141 …. 1.17 Giles v The National Mutual Life Association of Australasia Ltd (1986) 4 ANZ Ins Cas 60-751 …. 17.46 Gilmore v AMP General Insurance Co Ltd (1996) 67 SASR 387; (1997) 9 ANZ Ins Cas 61-372 …. 2.36, 12.32
GIO Australia Ltd v P Ward Civil Engineering Pty Ltd [2000] NSWSC 371 …. 25.12 GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299 …. 8.41, 8.48 GIO Insurance Ltd v Leighton Contractors Pty Ltd (unreported decision of the Supreme Court of New South Wales, 17 November 1995) …. 7.50 GIO of New South Wales v City of Penrith [1999] NSWCA 42 …. 19.44 GL Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 …. 13.27 Gleeson v Wippell [1977] 1 WLR 510 …. 21.22, 21.23 Glencore International v Alpina Insurance [2003] EWHC 2792; [2004] 1 All ER (Comm) 766 …. 21.18 Glendalough Holdings Pty Ltd v Militaire Nominees Pty Ltd [2013] WASC 457 …. 9.1 Glengallan Investments Pty Ltd v Arthur Andersen [2001] QCA 115; [2002] 1 Qd R 233 …. 26.24 Glicksman v Lancashire and General Assurance [1925] 2 KB 593 …. 5.31 Global Process Systems Inc v Berhad [2011] UKSC 5; [2011] 1 Lloyd’s Rep 560 …. 15.9, 15.16, 19.51 — v Syarikat Takaful Malaysia Berhad, The Cendor MOPU [2011] UKSC 5 …. 1.12, 1.14 Gloxinia Investments Ltd v Low [2013] NSWSC 1889 …. 21.4, 21.7 Godin v The London Assurance Company (1758) 1 Burr 489; 97 ER 419 …. 3.42 Gold Star Insurance Co Ltd v Dominion Adjusters Ltd [1982] 2 NZLR 38 …. 5.2 Golden Key Ltd, Re [2009] EWCA Civ 636 …. 13.6 Golding v London and Edinburgh Insurance Co Ltd (1932) 43 L1 1 Rep 487 …. 20.18 Good v Elliott (1790) 3 Term Reports 693; 100 ER 808 …. 3.13 Goodwin v SGIO (Queensland) [1994] 2 QR 15 …. 21.8 Goodyear Rubber & Supply v Great Am Ins Co (9th Cir 1976) 545 F.2d 95 …. 16.22 Gosford City Council v GIO General Ltd [2003] NSWCA 34; (2003) 12 ANZ Ins Cas 61-566 …. 18.51, 22.7 Gould v Curtis [1913] 3 KB 84 …. 1.9 Government Insurance Office of NSW v Atkinson-Leighton Joint Venture [1981] HCA 9; (1981) 146 CLR 206 …. 24.1 Government Insurance Office of NSW v Crowley [1975] 2 NSWLR 78 …. 29.24 — v RJ Green & Lloyd Pty Ltd (1966) 114 CLR 437; [1996] HCA 6 …. 18.66 GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd [2000] QCA 495; (2001) 11 ANZ Ins Cas 61-482 …. 27.21 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd (1986) 4 ANZ Ins Cas 60689 …. 17.24 Grant v Downs (1976) 135 CLR 674; [1976] HCA 63 …. 26.11, 26.14 GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83; (1985) 3 ANZ Ins Cas 60-622 …. 17.6, 29.1, 29.24 Green v AMP Life Ltd (2005) 13 ANZ Ins Cas 90-124; [2005] NSWSC 370 …. 13.28, 14.4, 20.16 Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 10 ANZ Ins Cas 61-423 …. 22.26
Grey v Motor Accident Commission (1998) 196 CLR 1; [1998] HCA 70 …. 7.27 Groom v Crocker [1939] 1 KB 194 …. 8.13, 27.102, 28.15, 28.17 Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011] EWHC 124 (Comm); [2011] PNLR 15 …. 5.15, 5.35, 5.39 Guardian Assurance Co v Underwood Constructions [1974] 48 ALJR 307 …. 13.1, 16.1, 16.8, 16.26 Guild Insurance Ltd v Hepburn [2014] NSWCA 400 …. 18.51, 22.7 Guthrie House Ltd v Cornhill Insurance Co Ltd (1982) 2 ANZ Ins Cas 60-466 …. 12.18
H H Cousins & Co v D & C Carriers [1971] 2 QB 230 …. 27.31 Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145; [1854] Eng R 296 …. 7.32, 12.30, 16.1, 20.4, 20.14, 20.18 Hall Bros Steamship Co Ltd v Young [1939] 1 KB 748 …. 18.13 Halliday v High Performance Personnel Pty Ltd (formerly Sacs Group Pty Ltd) (1993) 113 ALR 637; [1993] HCA 13 …. 27.9 Halpin v Lumley General Insurance Ltd [2009] NSWCA 372 …. 26.31 Hamilton v Mendes (1761) 2 Burr 1198; 97 ER 787 …. 3.40 — v Merck & Co Inc [2012] CSOH 144 …. 27.10 — v New South Wales [2016] NSWSC 1213 …. 26.15 Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd [2002] NSWSC 1006 …. 13.20, 13.26 Hance v Commissioner of Taxation [2008] FCAFC 196 …. 1.17 Hancock Family Memorial Foundation Ltd v Fieldhouse (No 3) [2010] WASC 223 …. 1.15, 1.21, 3.24 Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216 …. 13.13 Hannover Life Assurance Re of Australasia Ltd v Membrey (2004) 210 ALR 462; [2004] FCA 1095 …. 20.13 Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214 …. 17.56 Haridemos and Haridemos v Insurance Australia Ltd [2013] ACTSC 130 …. 26.31 Harris Paper Pty Ltd v FAI General Insurance Co Ltd (1995) 8 ANZ Ins Cas 61-276 …. 17.21 Harrison v Zurich Australian Insurance Ltd [1996] NSWSC 309 …. 20.16 Hartz v Ajax Insurance Company Ltd (1973) 3 DCR (NSW) 132 …. 19.10 Haseldine v Hosken [1933] 1 KB 822 …. 2.22 Haydon v Lo & Lo [1997] UKPC 2; [1997] 1 WLR 198 …. 24.1 Haynes v Hirst (1927) 27 SR (NSW) 480; 44 WN (NSW) 138 …. 21.7 Hedley Byrne v Heller [1963] UKHL 4; [1964] AC 465 …. 3.44 Hellenic Mutual War Risks Association (Bermuda) Ltd v Harrison (‘The Sagheera’) [1997] 1 Lloyd’s Rep 160 …. 28.23 Helvering v Le Gierse, 312 US 531 (1941) …. 1.2 Hendry Rae & Court v FAI General Insurance Co Ltd (1991) 5 WAR 376 …. 8.60 Hennessey Glass & Aluminium Systems Pty Ltd v Eagle Star Trustees Ltd …. 18.82
Hepburn v A Tomlinson (Hauliers) Ltd [1966] AC 451 …. 2.31 Herbohn v NZI Life Ltd [1998] QSC 122; (1998) 10 ANZIC 61-410 …. 8.43 Herde v Oxford Aviation Academy (Australia) Pty Ltd [2011] NSWCA 385 …. 27.10, 28.13 Higgins v Orion Insurance Co Ltd [1985] 17 DLR (4th) 90 …. 2.34 Highway Hauliers Pty Ltd v Matthew Maxwell [2012] WASC 53 …. 7.32 HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd [2007] EWCA Civ 710 …. 5.28 — v Chase Manhattan Bank [2003] UKHL 6; [2003] 2 Lloyd’s Rep 61 …. 7.50, 8.26, 8.28 — v Insurance Australia (No 2) [2006] VSC 128; (2006) 14 ANZ Insurance Cases 61-685 …. 20.10 — v New Hampshire Insurance Co [2001] EWCA Civ 735; 2 Lloyd’s Rep 161 …. 12.7, 12.11 — v Pluim Constructions Pty Ltd (2000) 11 ANZ Ins Cas 61-477; [2000] NSWCA 281 …. 29.8, 29.9 — v Waterwell Shipping Inc (1998) 43 NSWLR 601 …. 15.15 HIH Casualty and General Insurance v AXA Corporate Solutions [2002] EWCA Civ 1253; [2003] Lloyd’s Rep IR 1 …. 12.13 HIH Claims Support Ltd v Insurance Australia Ltd (2009) 15 ANZ Insurance Cases 61-824; [2009] VSC 434 …. 18.74, 29.15 — v — [2010] VSCA 255 …. 27.20, 29.5 — v — (2011) 244 CLR 72; [2011] HCA 31 …. 27.18, 27.20, 29.5 HIH Insurance Ltd (in liq), Re; De Bortoli Wines (Superannuation) Pty Ltd v McGrath [2014] NSWSC 774 …. 21.22 Hill v Mercantile [1996] 1 WLR 1239 …. 1.43 Hitchens v Zurich Australia Ltd [2015] NSWSC 825 …. 8.9 HL (Qld) Nominees Pty Ltd v Jobera Pty Ltd [2009] SASC 165 …. 25.9 HLB Kidsons (A Firm) v Lloyds Underwriters Subscribing to Lloyds Policy No 621/PKID00101 [2007] EWHC 1951 (Comm); [2007] 1 All ER (Comm) 769; [2008] Lloyd’s Rep IR 237 …. 2.22, 2.32, 18.55 — v — [2008] EWCA Civ 1206; [2009] 1 Lloyd’s Rep 8 …. 18.45, 18.55, 18.58, 18.61 Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 …. 26.26 Hollis v Vabu Pty Ltd t/as Crisis Couriers [1999] NSWCA 334 …. 25.6 Holmes v GRE Insurance Ltd [1988] TASSC 14; Tas R 147; (1988) 5 ANZ Ins Cas 60-984 …. 2.34 Homburg Houtimport BV v Agrosin Ltd [2003] UKHL 12; [2004] 1 AC 715 …. 13.6 Hope v Bathurst City Council (1980) 144 CLR 1; [1980] HCA 16 …. 6.24 Horbury Building Systems Ltd v Hampden Insurance NV [2004] EWCA Civ 418; [2007] Lloyd’s Rep IR 237 …. 26.1 Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368 …. 19.51 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41; [1984] HCA 64 …. 7.26 House of Peace Pty Ltd v Bankstown City Council (2000) 48 NSWLR 498; [2000] NSWCA 44 …. 13.16, 13.18 Housing Guarantee Fund Ltd v Ryan [2005] VSC 214 …. 20.8
Howard v Pickford Tool Co Ltd [1951] 1 KB 417 …. 14.21 Hume Steel Ltd v Peart [1947] HCA 34; (1947) 75 CLR 242 …. 17.40 Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8 …. 20.1, 20.13, 20.14 Hunt v Watkins; Watkins v GRE (UK) Ltd [2003] NSWCA 155 …. 25.15 Hussey v Crickitt (1811) 3 Campbell 168; 170 ER 1343 …. 3.28
I I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109; [2002] HCA 41 …. 15.2 Ian Charles Tucker v Westfield Design and Construction Pty Ltd (1993) 123 ALR 278; [1993] FCA 176 …. 16.7 Imbree v McNeilly (2008) 236 CLR 510; [2008] HCA 40 …. 26.5 Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; [1993] HCA 27 …. 17.33, 21.4, 21.18 Incitec Ltd v Alkimos Shipping Corporation (2004) 206 ALR 558; [2004] FCA 698 …. 6.8 Inland Revenue Commissioners v Raphael [1935] AC 96 …. 13.10 Insurance Co of North America v Atlantic National Insurance Company (4th Circuit 1964) 329 F.2d 769 …. 21.9 Insurance Commission of Western Australia v Container Handlers Pty Ltd (2004) 218 CLR 89; [2004] HCA 24 …. 13.1, 15.11, 18.69 — v Kightly (2005) 30 WAR 380; 13 ANZ Ins Cas 61-656; [2005] WASCA 154 …. 2.12, 17.38, 27.1, 27.2, 27.3 Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1997] EWHC Comm 373; [1998] Lloyd’s Rep IR 151 …. 8.21, 21.8 Insurances Ltd v City of Brighton (1972) 126 CLR 655; [1972] HCA 70 …. 16.6 Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1987] EWCA Civ 6; [1989] QB 433 …. 7.2 Inversiones Manria SA v Sphere Drake Insurance Co plc (The Dora) [1989] 1 Ll R 69 …. 8.23 Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 …. 13.18 ‘IR’ and NRMA Insurance, Insurance Australia Ltd [2016] AICmr 37 …. 4.29 Iron Trades Mutual Insurance Co Ltd v Companhia de Seguros Imperio [1991] 1 Re LR 213 …. 8.7 Irving v Manning (1847) 1 HLC 287; 9 ER 766 …. 17.1
J Jabbour v Custodian of Absentee Property for the State of Israel [1954] 1 WLR 139 …. 14.6 James v CGU Insurance Plc [2001] EWHC 489 (Comm) …. 8.21 Jeans v Bruce [2004] NSWSC 539 …. 18.75 Jermyn v Spargos Mining NL [2001] WASCA 149 …. 26.25 JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (Miss Jay Jay) [1987] 1 Lloyd’s Rep 32 …. 15.15, 16.35
JLW (Vic) Pty Ltd v Tsiloglou [1994] VicRp 16; [1994] 1 VR 237 …. 7.33 Joel v Law Union & Crown Insurance Co [1908] 2 KB 863 …. 8.24 John v Rawlings (1984) 36 SASR 182; 3 ANZ Ins Cas 60-623 …. 23.23, 29.24 John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd’s Rep IR 420 …. 19.37 Johnson Tiles Pty Ltd & Dean v Esso Australia Pty Ltd [2003] VSC 27; (2003) Aust Torts Reports ¶81-692 …. 26.5 Johnson v American Home Assurance Co (1998) 192 CLR 266; [1998] HCA 14 …. 13.20 — v Australian Casualty Co (1992) 7 ANZ Ins Cas 61–109 …. 7.35 — v Triple C Furniture & Electrical Pty Ltd (2010) 243 FLR 336; [2010] QCA 282 …. 13.14, 20.22, 22.11, 22.16, 22.17, 22.29, 22.33 Johnston v Endeavour Energy [2015] NSWSC 1117 …. 27.10 — v Salvage Association (1887) 29 QBD 458 …. 14.20 Jones v Bartlett [2000] HCA 56; (2000) 205 CLR 166 …. 25.9 — v Environcom Ltd [2010] EWHC 759 (Comm); Lloyd’s Rep IR 676 …. 5.15, 5.16, 5.17 Joyce v Australasian United Steam Navigation Company Ltd (1939) 62 CLR 160; [1939] HCA 31 …. 18.16 JSM Management Pty Ltd v QBE Insurance (Australia) Ltd [2011] VSC 339 …. 1.14 Jumna Khan v Bankers & Traders Insurance Co Ltd (1925) 37 CLR 451; [1925] HCA 48 …. 5.1 Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-315 …. 18.55
K K & M Prodanovski Pty Ltd v Calliden Insurance Ltd [2012] NSWCA 117 …. 17.33 K/S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters (The ‘Mercandian Continent’) [2001] Lloyd’s Rep 563; [2001] EWCA Civ 1275 …. 23.4 Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd [2008] EWHC 83 (TCC) …. 18.56, 18.57, 18.61 Kalabakas v Chubb Insurance Company of Australia Ltd [2015] VSC 705 …. 8.36 Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 …. 16.1 Kausar v Eagle Star Insurance Co Ltd [2000] 2 Lloyd’s Rep IR 154 …. 19.1 Kazakstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij NV [2000] EWCA Civ 41 …. 12.24 Kelly v New Zealand Insurance (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317 …. 22.11 — v R (2004) 218 CLR 216; [2004] HCA 12 …. 6.23 — v National Insurance Company of New Zealand Ltd (1995) 8 ANZ Ins Cas 61-239 …. 2.35 Kennedy v Cynstock Pty Ltd (1993) 3 NTLR 108; [1993] NTSC 98 …. 28.12, 28.20, 28.21 Kerr, Re [1943] SASR 8 …. 11.1, 11.10 Ketteman v Hansel Properties Ltd [1984] 1 WLR 1275 …. 16.15 Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622; [1984] HCA 55 …. 6.21, 7.4, 7.15, 7.21, 8.23, 8.26, 21.1 Kim v Cole [2002] QCA 176 …. 19.5
King v Brandywine Re Insurance Co (UK) Ltd [2004] Lloyd’s Rep IR 554; [2004] EWHC 1033 (Comm) …. 13.16, 16.19, 16.40 — v Victoria Insurance Co Ltd [1896] AC 250 …. 27.8 Kirby v Centro Properties Ltd [2009] FCA 695 …. 26.5 Kiriacoulis Lines SA v Compangnie d’Assurances Maritime Aeriennes et Terrestres [2002] 1 Lloyds’s Rep IR 795 …. 15.17 Kler Knitwear Ltd v Lombard General Insurance Company Ltd [2000] Lloyd’s Rep 47 …. 12.11, 12.21 Knight of St Michael [1898] P 30 …. 16.15 Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231 …. 12.7, 12.23, 12.24, 12.27 Koebel v Saunders (1864) 17 CB (NS) 71; 144 ER 29 …. 1.14 Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 …. 12.5, 12.13 Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2007] EWHC 458 (Comm); All ER 92 …. 12.14 Kuzmanovski v New South Wales Lotteries Corporation [2010] FCA 876 …. 13.17 Kyles Transport Pty Ltd v Zurich Australian Insurance Ltd (1984) 3 ANZ Ins Cas 60-600 …. 11.6 Kyriackou v ACE Insurance Ltd [2013] VSCA 150 …. 18.13 Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Association (Europe) [2000] 1 Lloyd’s Rep 505 …. 17.10, 17.16
L La Banque Financière de la Cite SA v Westgate Insurance Co Ltd [1990] 1 QB 665 …. 8.7 Lacey, Ex parte (1802) 6 Ves 625; 31 ER 1228 …. 28.5 Lacey v Attorney-General of Queensland (2011) 242 CLR 573; [2011] HCA 10 …. 6.16, 6.18 Laidlaw v Organ 15 US (2 Wheat) 178 (1817) …. 8.3 Lake v Hartford Fire Insurance Co [1966] WAR 161 …. 17.33, 17.34 Lake Cumbeline Pty Ltd v Effem Foods Pty Ltd t/as Uncle Ben’s of Australia (1994) 126 ALR 58 …. 25.36 Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 …. 8.2 Lamb v Cotogno [1987] HCA 47; (1987) 164 CLR 1 …. 18.15 Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485 …. 8.17 Lambert Cooperative Insurance Society Ltd (1975) 2 Lloyd’s Law Reports 485 …. 11.10 Lambert Leasing Inc v QBE Insurance (Australia) Ltd [2016] NSWCA 254 …. 7.20, 29.7, 29.10, 29.20 — v — [2015] NSWSC 750 …. 27.18, 29.5 Lancashire Insurance Co Ltd v Commissioners of Inland Revenue [1899] 1 QB 353 …. 2.15 Larratt v Bankers & Traders Insurance Co Ltd (1941) 41 SR (NSW) 215 …. 14.7, 14.16 Larson-Juhl Australia LLC v Jay West International Pty Ltd [2001] NSWCA 260 …. 27.21 Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (2005) 13 ANZ Ins Cas 61-643;
[2005] NSWCA 66 …. 13.1, 15.1, 15.8, 15.9, 15.14, 19.51 Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623 …. 20.17 Lazard Bros & Co v Brooks (1932) 43 Lloyd’s LR 372 …. 13.8 Lazarevic v United Super Pty Ltd [2014] NSWSC 96 …. 17.53, 17.56, 17.59 Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd [2011] VSC 467 …. 8.38, 9.2 Leask Timber and Hardware Pty Ltd v Thorne (1961) 106 CLR 33 …. 22.34 Legal & General Assurance Society Ltd v Commonwealth of Australia (1985) 3 ANZ Ins Cas 60-621 …. 19.26 Legal and General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390; 4 ANZ Ins Cas 60749 …. 12.25, 13.5, 13.6, 13.15, 19.16, 22.31 Lehman Brothers Australia Limited v Wingecarribee Shire Council [2009] FCAFC 63 …. 26.8 Leibler v Air New Zealand Ltd [1999] 1 VR 1 …. 13.32 Lek v Mathews (1927) 29 LIL Rep 145 …. 23.1, 23.6 Leppard v Excess Insurance Co Ltd [1979] 1 WLR 512 …. 17.2 Lerner Corp v Assurance Co of America 120 Md. App. 525, 707 A.2d 906 (1998) …. 16.13 Leyland Shipping Company Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 …. 15.8, 15.10 Liberty National Life Insurance Company v Weldon, 267 Ala. 171, 100 So. (2d) 696 (1957) (Ala 1964) …. 10.1 Lickbarrow v Mason (1787) 2 Term Reports 63; 100 ER 35 …. 3.38 Life Association of Scotland v Foster (1873) 11 M 351 …. 7.11 Lindsay v CIC Insurance (1989) 16 NSWLR 673; 5 ANZ Ins Cas 60-913 …. 8.6, 8.21 Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 …. 3.44 Liverpool & London & Globe Insurance Ltd v Canadian General Electric Co Ltd [1981] 1 SCR 600 …. 16.15, 16.16 Livingstone v Roskilly [1992] 3 NZLR 230 …. 7.2 Lloyd v Grace, Smith & Co [1912] AC 716 …. 8.25 Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd [2001] EWCA Civ 1643; [2002] Lloyd’s Rep IR 113 …. 24.4, 24.5 — v — [2000] EWHC 198 (Comm); [2001] Lloyd’s Rep IR 237 …. 16.37, 24.1, 24.4 — v — [2003] UKHL 48; Lloyd’s Rep IR 623 …. 24.1, 24.4 Locker and Woolf Ltd v Western Australian Insurance Co [1936] 1 KB 408 …. 8.21 Lofthouse v ACN 081 121 495 Pty Ltd [2003] VSC 253 …. 19.12 Logudice, Re (1982) 2 ANZ Ins Cas 60-471 …. 27.31 Lombard Australia Ltd v NRMA Insurance Ltd (1968) 72 SR (NSW) 45 …. 2.33 Lomsargis v National Mutual Life Association of Australia Ltd [2005] QSC 199; 2 Qd R 295 …. 20.5 Lonsdale & Thompson Ltd v Black Arrow Group plc [1993] Ch 361 …. 10.1, 17.2 Lord Napier and Ettrick v Hunter [1993] AC 713 …. 19.53, 27.6, 27.29, 27.30 Lotus Manufacturing Co Ltd v Sun Alliance Insurance Ltd (1987) 4 ANZ Ins Cas 60-782 …. 9.13
Lucas v The New Zealand Co Ltd [1983] 1 VR 698 …. 17.2, 17.6 Lucena v Craufurd (1806) 2 Bos & PNR 269; 127 ER 630 …. 10.2, 10.5 Luckins v Highway Motel (Carnarvon) Pty Ltd [1975] HCA 50; (1975) 133 CLR 164 …. 4.5 Luke v Lyde (1759) 2 Burr 882; 97 ER 614 …. 3.41 Lumbermens Mutual Casualty Company v Bovis Lend Lease Ltd [2005] 1 Lloyd’s Rep 494 …. 18.76, 18.78, 29.21 Lumley General Insurance Ltd v Port Phillip City Council [2013] VSCA 367 …. 19.51 Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 …. 13.13 Lynch v Dalzell (1729) IV Brown 431; 2 ER 292 …. 9.27 — v Lynch (1991) 25 NSWLR 411 …. 3.44 Lynes v HIH Casualty and General Insurance Ltd [1999] WADC 68 …. 22.45
M Macaura v Northern Assurance Company [1925] AC 619 …. 10.3 Macdonald v CE Heath Underwriting & Insurance (Australia) Ltd (1997) 9 ANZ Ins Cas 61362; [1997] NSWSC 185 …. 25.12 Mackie v European Assurance Co (1869) 21 LT 102 …. 11.4 Macquarie Bank v National Mutual Life Association (1996) 40 NSWLR 543 …. 8.6 Maggbury Pty Ltd v Hafele Aust Pty Ltd (2010) 210 CLR 181; [2001] HCA 70 …. 13.4 Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23 …. 28.5 Mahkutai [1996] AC 650 …. 25.54 Mahoney v McManus (1981) CLR 370; [1981] HCA 54 …. 29.12 — v Salt [2012] QSC 43 …. 26.22 Mahony v J Kruschich (Demolitions) Pty Ltd [1985] HCA 37; (1985) 156 CLR 522 …. 16.1 Mainstream Aquaculture Pty Ltd v Calliden Insurance Ltd [2011] VSC 286 …. 17.26 Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184 …. 13.19 Major Engineering Pty Ltd v CGU Insurance Ltd [2011] VSCA 226 …. 20.21 Mander v Clements (2005) 30 WAR 46; [2005] WASCA 67 …. 13.30 Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] UKHL 1; [2003] 1 AC 469 …. 7.4, 7.7, 7.12, 7.17, 7.21, 7.24, 7.50, 8.26, 9.17, 23.5, 23.6, 23.10 — v — [1995] Lloyd’s Rep 651 …. 7.24 Mann v Carnell (1999) 201 CLR 1; [1999] HCA 66 …. 26.16, 26.17 Mannai Ltd v Eagle Star Assurance Co Ltd [1997] AC 749 …. 17.33 Manufacturers Life Insurance Company v Executive Centre at Manulife Place Inc (2011) ABQB 189 …. 7.2 Manufacturers’ Mutual Insurance Ltd v Queensland Government Railways (1968) 118 CLR 314; [1968] HCA 52 …. 19.28, 19.29 Mappouras v Waldrons Solicitors [2002] EWCA Civ 842 …. 7.33 Marac Life Assurance Ltd v Commissioner of IR [1986] 1 NZLR 694 …. 1.2 Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336 …. 13.29, 13.32
March v Stramare Pty Ltd (1991) 171 CLR 506; [1991] HCA 12 …. 15.1, 15.3 Mark Rowlands Ltd v Berni Inns Ltd [1986] 1 QB 211 …. 3.35, 27.23 Marks v GIO Australia Holdings (1998) 196 CLR 494; [1998] HCA 69 …. 5.46 Markus v Provincial Insurance Co Ltd (1983) 25 NSWCCR 1 …. 26.31 Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127 …. 7.3 Marshall v Adamson [1936] 4 DLR 383 …. 28.24 Mason v Sainsbury (1782) 3 Dougl 61; 99 ER 538 …. 3.42, 27.19 Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 …. 7.32, 14.7, 14.16, 20.14, 22.11, 22.17 Matthews v AusNet Electricity Services Pty Ltd [2014] VSC 663 …. 27.32, 27.34 Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) [2015] QSC 72 …. 7.19, 7.30, 7.38, 20.18 Mattress Innovations Pty Ltd v Suncorp Metway Insurance Ltd [2013] QCA 377 …. 13.1 Matzat v The Gove Flying Club Inc [1996] NTSC 92 …. 19.20 Maulder v National Insurance Co of New Zealand Ltd [1993] 2 NZLR 35 …. 2.34 Maurice Blackburn Cashman v Brown [2011] HCA 22; (2011) 242 CLR 647 …. 21.23 Mauritius v Goldsborough Mort & Co Ltd (New South Wales) [1939] UKPC 32; AC 452 …. 17.18 Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 …. 13.14, 20.3, 20.4 — v — (2014) 252 CLR 590; [2014] HCA 33; [2014] HCTrans 51 …. 6.14, 13.14, 22.9, 22.11, 22.15, 22.16, 22.17, 22.29 Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14; [1924] HCA 26 …. 8.25, 9.18 Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 …. 8.4, 8.16, 11.2, 11.8 McArthur v Mercantile Mutual Life Insurance Co Ltd (2001) 11 ANZ Ins Cas 61-501; [2001] QCA 317; [2002] 2 Qd R 197 …. 17.56, 25.11 McCann v Parsons (1954) 93 CLR 418; [1954] HCA 70 …. 28.17 — v Switzerland Insurance (2000) 203 CLR 579; [2000] HCA 65 …. 13.1, 13.5, 13.15, 13.25, 19.51 McCarthy v St Paul International Insurance Co Ltd (2007) 157 FCR 402; 14 ANZ Ins Cas 61725; [2007] FCAFC 28 …. 15.15, 15.17, 15.19, 19.35, 24.1 McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance plc (No 3) [2009] VSC 94 …. 20.7, 20.9 McCourt v Cranston [2012] WASCA 60 …. 13.12 McGowan v Commissioner of Stamp Duties [2001] QCA 236; [2002] 2 Qd R 499 …. 13.6 McGrath v Riddell [2008] UKHL 21; [2008] 1 WLR 852 …. 25.50 McGraw-Hinds (Aust) Pty Ltd v Smith (1979) 144 CLR 633; [1979] HCA 19 …. 6.23 McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2001] QSC 388 …. 18.81 McInerney v Schultz (1981) 28 SASR 542 …. 12.27 McLennan v Insurance Australia Ltd [2014] NSWCA 300 …. 20.21 McManus (t/a McManus Seddon Runhams (a firm)) v European Risk Insurance Company [2013] EWHC 18 (Ch); LL Rep IR 534 …. 18.54, 18.59
McNealy v The Pennine Insurance Company Ltd [1978] 2 Lloyd’s Rep 18 …. 5.21 Medical Defence Union Ltd v Department of Trade [1980] 1 Ch 2 …. 1.16, 1.32 Melrose Cranes and Rigging Pty Ltd v Manitowoc Crane Group Australia Pty Ltd [2012] NSWSC 904 …. 26.13, 26.20 Mental Distress Damages for Breach of Commercial Contracts (1997) 3 NZBLQ 130 …. 7.37 Mentha, in the matter of Arrium Ltd (administrators appointed) [2016] FCA 1357 …. 19.51 Mercandian Continent’ [2001] EWCA Civ 1275; 2 Lloyd’s Rep 563 …. 8.11 Mercantile Mutual Insurance (Australia) Ltd v Gibbs [2001] WASCA 271 …. 8.11 — v QBE Workers Compensation (NSW) Ltd (2004) 61 NSWLR 655; [2004] NSWCA 409 …. 29.17 Mercantile Mutual Insurance (NSW Workers Compensation) Ltd v Murray (2004) 13 ANZ Ins Cas 61-612; [2004] NSWCA 151 …. 26.17, 26.18, 28.9 Mercantile Mutual Insurance Co Ltd v Amburla 1982) 2 ANZ Ins Cas 60-469 …. 17.3 Mercer v Allianz Australia Insurance (2013) 273 FLR 459; [2013] TASSC 11 …. 25.35 — v Petroleum Drilling Services (Australia) Pty Ltd (1985) 39 SASR 277; 3 ANZ Ins Cas 60623 …. 29.23 Mesa Operating Ltd Partnership v Amoco Canada Resources Ltd (1994) 19 Alta LR (3d) 38 (CA) …. 7.2 Messagemate Aust Pty Ltd v National Credit Insurance (Brokers) Pty Ltd [2002] SASC 327 …. 5.12, 5.13, 5.22 MetLife Insurance Ltd v RGA Reinsurance Company of Australia Ltd [2017] NSWCA 56 …. 13.7 Metropolitan Fire and Emergency Services Board v Capricorn Mutual Ltd [2007] VSC 413 …. 1.15 Mickovski v Financial Ombudsman Service Ltd (2012) 91 ACSR 106; [2012] VSCA 185 …. 4.48 Midaz Pty Ltd v Peter McCarthy Insurance Brokers Pty Ltd (1998) 10 ANZ Insurance Cases 61-394; [1999] 1 Qd R 279 …. 8.36 Midland Mainline Ltd v Commercial Union Assurance Company Ltd [2003] EWHC 1771 (Comm); [2004] 1 Lloyd’s Rep IR 22 …. 1.14, 24.2 Miller Heiman Pty Ltd v Sales Principles Pty Ltd [2017] NSWCA 106 …. 21.11 Miller v Miller (2011) 242 CLR 446; [2011] HCA 9 …. 9.19, 9.20 Milton Furniture Ltd v Brit Insurance Ltd [2014] EWHC 965 (QB) …. 19.7 Milton Keynes Borough Council v Nulty [2011] EWHC 2847 …. 12.29 Mineralogy Pty Ltd v Sino Iron Pty Ltd [2017] FCAFC 55 …. 21.11 Mining Technologies Australia Ltd, Re [1999] 1 Qd R 60 …. 16.27 Minister for Immigration and Border Protection v Kumar [2017] HCA 11 …. 6.21 Mitchell v Great Lakes Reinsurance (UK) Plc [2010] ScotCS CSOH 59 …. 17.44 Mitsubishi Electric Australia Pty Ltd v Victorian WorkCover Authority [2002] VSCA 59 …. 26.13 M’Lanahan v The Universal Insurance Co 26 US (1 Pet) 170 …. 7.7 MMI (Australia) Ltd v Gibbs [2001] WASCA 271 …. 11.10 MMI General Insurance Ltd v Baktoo [2000] NSWCA 70; (2000) 11 ANZ Ins Cas 61-466 ….
2.35 Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2016] NSWSC 912 …. 21.17 Moltoni Corporation Pty Ltd v QBE Insurance Ltd (2001) 205 CLR 149; [2001] HCA 73 …. 22.37, 22.38, 22.39 Moonacre [1992] 2 Lloyd’s Rep 501 …. 3.31, 10.2, 10.5 Moore v Evans [1917] 1 KB 458 …. 17.21 — v Evans [1918] AC 185 …. 3.41 — v National Mutual Life Association of Australasia Ltd [2011] NSWSC 416 …. 21.4, 21.5, 21.20, 21.21 — v — [2012] NSWCA 380 …. 21.21 Morley v Moore [1936] 2 KB 359 …. 27.16 Morris v Betcke (2005) 13 ANZ Ins Cas 61-665; [2005] NSWCA 308 …. 25.5, 25.41, 25.42 Moses v Macferlan (1760) 2 Burr 1005; 97 ER 676 …. 21.20 Moss v Sun Alliance Australia (1990) 55 SASR 145; 6 ANZ Ins Cas 60-967 …. 20.3 Moss & Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 6 ANZ Ins Cas 60-967 …. 7.32 Motor Accident Mutual Insurance Pty Ltd v Kelly (1999) 10 ANZIC 61,420 …. 7.36 Motor Accidents Insurance Board v O’Neill (1981) 1 ANZ Ins Cas 60-448 …. 14.15 Motor Vehicle Insurance Trust v Scarborough Bus Service Pty Ltd [1968] WAR 10 …. 18.70 Moulis v Owen [1907] 1 KB 746 …. 3.28 Mowie Fisheries Pty Ltd v Switzerland Insurance Australia Ltd [1996] FCA 888 …. 12.12 MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789 …. 7.50 Muinos v Johnson and Johnson Retirement Benefits Ltd (SC (NSW), 5 December 1996, BC9605916, unreported) …. 17.48 Multiplex Constructions Pty Ltd v Irving; Fugen Holdings Pty Ltd v Irving [2004] NSWCA 346 …. 2.20, 18.10 Munro, Brice & Co v War Risks Association [1918] 2 KB 78 …. 20.21 Murdock v Lipman [2012] NSWSC 983 …. 25.26, 25.30 Murphy and Allen v Swinbank [1999] NSWSC 934 …. 24.1 Mutual Community General Insurance Pty Ltd v Khatchmanian [2013] VSCA 144 …. 23.23 MyEnvironment v VicForests [2013] VSCA 356 …. 6.19
N National Employers’ Mutual General Insurance Association Ltd v Waind (1979) 141 CLR 648; [1979] HCA 11 …. 26.21 National Foods Milk Ltd v McMahon Milk Pty Ltd (No 2) [2009] VSC 150 …. 16.1 National Insurance and Guarantee Corporation Plc v Imperio UK Ltd and Russell Tudor-Price Jones & Co (1997 WL 1102971, QB Div (Comm Ct), 30 September 1997, unreported) …. 5.39 National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation (1959) 102 CLR 29; [1959] HCA 6 …. 1.2 National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582 …. 16.13
National Vulcan Engineering Insurance Group Ltd v Transfield Pty Ltd [2003] NSWCA 327 …. 21.9 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; [1992] HCA 66 …. 23.22 Nelson Marketing International Inc v Royal & Sun Alliance Insurance Company of Canada [2005] BCSC 772 …. 7.24 Nelson Marketing International Inc v Royal & Sun Alliance Insurance Co of Canada, 2006 BCCA 327 …. 1.14 Netherlands Insurance Co Est 1845 Ltd v Karl Ljungberg & Co AB (‘The Mammoth Pine’) [1986] 3 All ER 767 …. 16.25, 16.28 New Cap Reinsurance Corporation Ltd (in liq) v AE Grant (2008) 221 FLR 164; [2008] NSWSC 1015 …. 14.10 — v Daya [2010] NSWSC 1226 …. 5.1 New Hampshire Insurance Co v MGN Ltd; Maxwell Communications plc v New Hampshire Insurance Co [1996] EWCA Civ 838; [1997] LRLR 24; [1996] CLC 1692 …. 2.32, 9.3, 25.5 New South Wales Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1986) 6 NSWLR 740 …. 13.34 New South Wales Solicitors Mutual Indemnity Fund v The Hancock Family Memorial Foundation Ltd [No 2] [2009] WASCA 146 …. 25.25 New South Wales v Public Transport Ticketing Corporation [2011] NSWCA 60 …. 26.10 New Zealand Society of Accountants v ANZ Banking (NZ) Ltd [1996] 1 NZLR 283 …. 27.15 Newbigging v Adam (1886) 34 Ch D 582 …. 8.28 Newcastle City Council v GIO General Ltd (1997) 191 CLR 85; [1997] HCA 53 …. 6.17, 18.52 Newnham v Baker [1989] 1 Qd R 393 …. 12.25 Nicholas v Wesfarmers Curragh Pty Ltd [2010] QSC 447 …. 25.5 Nicholson v Icepak Coolstores Ltd (1999) 10 ANZ Ins Cas 61-449; [1999] 3 NZLR 475 …. 28.27 Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235 …. 7.19, 7.23, 7.42, 18.25, 21.12, 27.24, 28.13 Noble v Kennoway (1780) 2 Douglas 510; 99 ER 326 …. 8.10 Nominal Defendant v Gabriel (2007) 71 NSWLR 150; [2007] NSWCA 52 …. 21.17 Norsworthy & Encel v SGIC [1999] SASC 496 …. 6.2, 25.24 North of England Oil-cake Co v Archangel Insurance Co (1875) LR 10 QB 249 …. 9.35 North Star Shipping Ltd v Sphere Drake Insurance Plc [2005] EWHC 665; 2 Lloyd’s Rep 76 …. 8.23 North v Marina (2003) 11 BPR 21,359; [2003] NSWSC 64 …. 13.24 Northern Assurance Co Ltd v Cooper [1968] Qd R 46 …. 7.40, 29.14 Northern Territory v Collins [2008] HCA 49; (2008) 235 CLR 619 …. 6.16, 6.18 Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd (1984) 157 CLR 149; [1984] HCA 59 …. 5.33 Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd [1981] VR 981; (1981) 1
ANZ Ins Cas 60-446 …. 5.1 NRG Victory Australia Ltd v Hudson [2003] WASCA 291 …. 8.25, 8.63 NRMA Insurance Ltd v Collier (1996) 9 ANZ Ins Cas 61-337 …. 13.1 — v Tatt (1989) 92 ALR 299 …. 20.6 Nsubuga v Commercial Union [1998] 2 Lloyd’s Rep 682 …. 23.2
O Ocean Harvester Holdings Pty Ltd v MMI General Insurance Ltd (2004) 13 ANZ Ins Cas 61592; [2004] QCA 41 …. 23.24 Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44; [2011] 1 Lloyd’s Rep 96 …. 26.23, 26.29 Odyssey Re (Bermuda) v Reinsurance Australia [2001] NSWSC 266 …. 14.10, 14.11, 14.13 Ofulue v Bossert [2009] UKHL 16; 1 AC 990 …. 26.24 O’Grady v Northern Queensland Company Ltd (1990) 169 CLR 356; [1990] HCA 16 …. 7.30, 7.44, 19.51 Ohio Casualty Insurance Co v Bazzi Construction Co Inc 815 F 1146 …. 18.19 Old Papa’s Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd [2003] WASCA 11 …. 26.26, 26.28, 26.29 Oliver v Commonwealth Bank of Australia (No 1) [2011] FCA 1440 …. 7.31 O’Loughlin v Tower Insurance Ltd [2013] NZHC 670 …. 19.57 Olsson v Dyson (1969) 120 CLR 365; [1969] HCA 3 …. 25.1 Omega Proteins Ltd v Aspen Insurance UK Ltd [2010] EWHC 2280 (Comm) …. 18.78, 19.21 O’Neill v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2015] NSWSC 1248 …. 20.10 O’Neill v Phillips [1999] UKHL 24; [1999] 1 WLR 1092 …. 7.16, 16.22 Orakpo v Barclays Insurance Services [1995] LRLR 443 …. 7.19, 23.2, 23.9 — v Barclays Insurance Services Co Ltd [1994] CLC 373 …. 7.16 Orb Holdings Pty Ltd v Lombard Insurance Company (Australia) Ltd [1995] 2 Qd R 51 …. 8.44 O’Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 …. 8.25, 23.22 Orica Australia Pty Ltd v Limit (No 2) Ltd [2011] VSC 65 …. 16.6, 16.13 Orica Ltd v CGU Insurance Ltd (2003) 59 NSWLR 14; 13 ANZ Ins Cas 61-596; [2003] NSWCA 331 …. 2.15, 18.10 Oswald v Bailey (1987) 11 NSWLR 715 …. 25.40 Overseas Commodities Ltd v Style [1958] 1 Lloyd’s Rep 546 …. 12.15 Owners — Strata Plan No 50530 v Walter Construction Group Ltd (in liquidation) (2007) 14 ANZ Ins Cas 61-734; [2007] NSWCA 124 …. 25.43 Owners Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 …. 21.9, 27.2 Owners Strata Plan 66601 v Majestic Constructions Pty Ltd [2008] NSWSC 735 …. 27.10
P
P Samuel and Co Ltd v Dumas [1924] AC 431 …. 2.28 Page v Sheerness Steel Plc [1996] PIQR Q26 …. 27.38 Pagnon v WorkCover Queensland [2000] QCA 421 …. 25.29 Palgo Holdings Pty Ltd v Gowans (2005) 221 CLR 249; [2005] HCA 28 …. 6.16 Palmdale AGCI Ltd v Workers’ Compensation Commission (NSW) [1977] HCA 69; (1977) 140 CLR 236 …. 5.1 Pan Atlantic Insurance v Pine Top Ltd [1995] 1 AC 501 …. 8.5, 8.17 Parker v The National Farmers Union Mutual Insurance Society Ltd [2012] EWHC 2156 (Comm) …. 12.29 Paterson v Powell (1832) 9 Bing 320 …. 3.35 Patrick v Capital Finance Corporation (Australasia) Pty Ltd (2004) 211 ALR 272; [2004] FCA 1249 …. 26.17 — v Royal London Mutual Insurance Society Ltd [2007] Lloyd’s LR 85 …. 19.30 Pawson v Watson (1778) 2 Cowp 785; 98 ER 1361 …. 3.42 Pech v Tilgals (1994) 94 ATC 4206; 28 ALJR 197 …. 18.39 Pegrum v Fatharly (1996) 14 WAR 92 …. 28.14 Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; [1981] HCA 3 …. 5.10, 5.33 Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564 …. 14.20 Pentagon Construction (1969) Co Ltd v United States Fidelity & Guaranty Co [1978] 1 Lloyd’s Rep 93 …. 19.27 Peregrine Mineral Sands Pty Ltd v Wentworth Shire Council [2014] NSWSC 429 …. 13.29 Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2003) 214 CLR 514; [2003] HCA 25 …. 8.33, 8.36, 8.41 — v — (2001) 50 NSWLR 679; [2001] NSWCA 20 …. 5.1, 8.33 — v — (2003) 214 CLR 514; [2003] HCA 25 …. 5.1 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; [1982] HCA 29 …. 12.26 Petersen v Union des Assurances de Paris IARD (1995) 8 ANZ Ins Cas 61-244 …. 22.31 Petrofina (UK) Ltd v Magnaload Ltd [1984] 1 QB 127 …. 27.21 Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2; AC 827 …. 14.6 Pihiga Pty Ltd v Roche [2011] FCA 240 …. 26.23, 26.26, 26.29 Pilmer v Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 …. 28.2 Pioneer Concrete UK Ltd v National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd’s Rep 274 …. 12.24 Pirelli General Plc v Gaca [2004] 3 All ER 248; [2004] EWCA Civ 373 …. 27.38 Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400 …. 8.56 Plaza Glass Manufacturing Ltd v Cardinal Insurance Co (1994) 22 CCLI (2d) 161 …. 7.26 PMB Australia Ltd v MMI General Insurance Ltd (2002) 12 ANZ Ins Cas 61-537; [2002] QCA 361 …. 16.13 — v — [2000] QSC 329 …. 16.13
PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Services (1995) 184 CLR 301; [1995] HCA 36 …. 7.30, 7.44, 19.51 Podrebersek v Australian Iron and Steel Pty Ltd (1985) 59 ALJR 492; [1985] HCA 34 …. 5.39 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; [1981] HCA 45 …. 21.22, 21.23, 26.2 Porter v Zurich Insurance Company [2009] EWHC 376 (QB) …. 19.4, 19.31 Powell v Brodhurst [1901] 2 Ch 160 …. 2.38 Pratt v Aigaion Insurance Co SA (‘The Resolute’) [2008] EWCA Civ 1314; [2009] 1 Lloyd’s Rep 225 …. 12.19 Pratt Holdings Pty Ltd v Commissioner of Taxation (2004) 207 ALR 217; [2004] FCAFC 122 …. 26.12, 26.13 Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; [2013] NSWCA 252 …. 8.4, 8.8, 8.61, 22.9, 22.17, 22.18, 23.1 Prepaid v Atradius (No 2) [2014] NSWSC 21 …. 8.62 President of India v Lips Maritime Corp [1988] AC 395 …. 20.1 Preston v AIA Australia Ltd [2014] NSWCA 165 …. 17.44 Project 28 Pty Ltd v Barr [2005] NSWCA 240 …. 28.17 Project Blue Sky v Australian Broadcasting Association (1998) 194 CLR 355; [1998] HCA 28 …. 6.18 Prosperity Advisers Pty Ltd v Secure Enterprises Pty Ltd t/a Strathearn Insurance Brokers Pty Ltd [2011] NSWSC 35 …. 5.31 — v — [2012] NSWCA 192 …. 5.31, 5.33 Provincial Insurance v Consolidated Wood (1991) 25 NSWLR 541 …. 13.18 Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541 …. 5.19, 5.20, 5.22, 5.24, 5.31, 5.32 Prudential Insurance Co v Inland Revenue Commissioners (Prudential) [1904] 2 KB 658 …. 1.2, 1.9, 1.11 Public Service Board of NSW v Osmond (1986) 159 CLR 656; [1986] HCA 7 …. 17.54
Q QBE Insurance Ltd v MGM Plumbing Pty Ltd (2003) 12 ANZ Ins Cas 61-555; [2003] QSC 27 …. 24.11 — v Nguyen (2008) 100 SASR 560; [2008] SASC 138 …. 18.17, 18.79 QBE Insurance (Australia) Ltd v Cape York Airlines Pty Ltd [2011] QCA 60 …. 17.33 — v CGU Workers Compensation (NSW) Ltd [2012] NSWSC 377 …. 29.22 — v Lois Nominees Pty Ltd [2012] WASCA 186 …. 18.75, 18.79, 21.23, 21.27 — v Lumley General Insurance Ltd [2009] VSCA 124 …. 29.4, 29.20 — v Wesfarmers General Insurance Ltd [2010] NSWSC 855 …. 12.3 — v Vasic [2010] NSWCA 166 …. 13.6, 13.11 QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd [2003] NSWCA 356 …. 8.6, 8.36 Quinlan v Safe International Forsakrings AB [2005] FCA 1362 …. 6.8, 25.15 Quinta Communications v Warrington [1999] EWCA Civ 1450; 2 All ER 123 …. 16.8
R R v Cohen Ex parte Motor Accidents Insurance Board (1979) 141 CLR 577; [1979] HCA 46 …. 1.25, 1.26, 1.27, 1.28, 4.5, 6.10, 9.14 — v Holmes; Ex parte Manchester Unity Independent Order of Oddfellows in Victoria (1980) 147 CLR 65; [1980] HCA 46 …. 1.28, 4.5 Ranicar v Frigmobile Pty Ltd (1983) 2 ANZ Ins Cas 60-525 …. 17.23 Rathbone Brothers Plc v Novae Corporate Underwriting [2013] EWHC 3457 (Comm) …. 27.22 Rayner v Preston (1881) 18 ChD 1 …. 9.26, 17.32, 25.18 Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356 …. 17.19 Registrar-General of New South Wales v LawCover [2013] NSWSC 1471 …. 25.38 Rego v Connecticut Insurance Placement Facility (1991) 593 A2d 491 …. 7.24 Reichman v Beveridge [2006] EWCA Civ 1659 [2007] Bus LR 412; [2006] EWCA Civ 1659 …. 16.1 Reid Crowther & Partners Ltd v Simcoe & Erie General Insurance Co (1993) 99 DLR (4th) 741; [1993] 1 SCR 252 …. 2.22 Reid v Campbell Wallis Moule & Co Pty Ltd [1990] VR 853; (1990) 6 ANZ Ins Cas 60-950 …. 21.8 Rejfek v McElroy (1965) 112 CLR 517; [1965] HCA 46 …. 8.25, 23.22 Rex v Webb (1811) 14 East 406; 104 ER 658 …. 3.21 Richard v Mills [2003] WASCA 97 …. 27.38 Ripper v Gatenby [2002] TASSC 45; (2002) 10 Tas R 435 …. 25.11 Ritchie v Woodward [2016] NSWSC 1715 …. 18.38, 19.51, 24.10 Robinson v Harman [1848] EngR 135; (1848) 1 Exch 850; 154 ER 363 …. 16.1 Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288 …. 5.13 Rodgers v Rodgers [1964] HCA 25; (1964) 114 CLR 608 …. 26.26, 26.27 Rodriguez v United States 480 US 522 (1987) …. 6.1 Roles v Nathan [1963] 2 All ER 908 …. 22.1, 22.47 Romford Ice & Cold Storage Co v Lister [1956] UKHL 6; [1957] AC 55 …. 27.27 Ronson International Ltd v Patrick [2005] EWHC 1767 …. 12.6 Rose v Borisko Bros Ltd (1981) 125 DLR (3d) 671 …. 27.15 Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 …. 5.15 Rothenberger Australia Pty Ltd v Lumley General Insurance Ltd [2003] NSWSC 788 …. 14.8 Royal Boskalis [1997] LRLR 523 …. 23.3 Royal Brompton Hospital NHS Trust v Hammond [2002] UKHL 14; [2002] 1 All ER (Comm) 897 …. 29.13 Royal Sun Alliance Insurance Australia Ltd v Mihailoff [2002] SASC 32; (2002) 81 SASR 585 …. 16.21 Ruckman v Suncorp Metway Insurance Ltd [2013] QCA 56 …. 5.35 Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 …. 26.24
Russell Young Abalone Pty Ltd v Traders Prudent Insurance Company Ltd [1993] TASSC 57 …. 14.21 Rust v Abbey Life Assurance Co Ltd [1979] 2 Ll Rep 334 …. 9.13 Ryledar Pty Ltd v Euphoric Pty Ltd (2007) 69 NSWLR 603; [2007] NSWCA 65 …. 13.30, 13.34
S S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 82 FLR 130 …. 22.31 Sagl v Chubb Insurance Company of Canada (2009) Ontario Court of Appeal 388 …. 7.1, 7.19 San Pedro Properties, Inc v Sayre & Toso, Inc 203 Cal App 2d 750 …. 2.22 Saraswati v R [1991] HCA 21; (1991) 172 CLR 1 …. 6.16 Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40 …. 17.33, 17.34, 21.4, 21.5 Saskatchewan Government Insurance v Wilson, 2012 SKCA 106 …. 7.27 Satef-Huttenes Albertus SpA v Paloma Tercera Shipping (1981) 1 Lloyd’s Rep 175 …. 16.1 Sayseng v Kellogg Superannuation Pty Ltd [2003] NSWSC 945 …. 25.3 — v — (2007) 213 FLR 174; [2007] NSWSC 857 …. 20.9 Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182 …. 8.57 Scholefield Goodman and Sons Ltd v Zyngier [1986] 1 AC 562 …. 27.19 Schoolman v Hall [1951] 1 Lloyd’s Rep 139 …. 8.8 Schreuder v Murray (No 2) (2009) 41 WAR 169; [2009] WASCA 145 …. 26.15 Sciacca v Langshaw Valuations Pty Ltd [2013] NSWSC 1285 …. 25.28 Scott v Copenhagen Reinsurance Co (UK) Ltd [2003] Lloyd’s Rep IR 696 …. 24.6 — v Wawanesa Mutual Insurance Co (1989) 59 DLR (4th) 660 …. 2.25 Secure Funding Pty Ltd v Insurance Australia Ltd [2010] FCA 1094 …. 19.30 Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336; [2010] HCA 37 …. 13.22, 19.36 — v — [2009] QCA 286 …. 19.51 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4 …. 29.22 Sempra Metals Ltd v Revenue [2007] UKHL 34; [2008] 1 AC 56 …. 20.1 Sentinel Management Co v New Hampshire Insurance Company 563 NW 2d 296 (Minn App 1997) …. 1.2, 1.11 Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40; 8 ANZ Ins Cas 61-209 …. 20.12 Shaw v Robberds (1837) 6 Adolphus and Ellis 75; 112 ER 29 …. 18.12 Shepherd v National Mutual Life Association of Australasia Ltd (1995) 8 ANZ Ins Cas 61-233 …. 8.50 Shevill v Builders Licensing Board [1982] HCA 47; (1981) 149 CLR 620 …. 20.16 Shinedean Ltd v Alldown Demolition (London) Ltd [2006] EWCA Civ 939; [2006] 1 WLR 2696 …. 12.24 Shuetrim v FSS Trustee Corporation [2015] NSWSC 464 …. 17.52
Shulman v SH Simon (Electrical) Ltd [2010] EHWC 2762 (QB); [2010] All ER (D) 69 …. 27.1 Sibthorpe v London Borough of Southwark [2011] 2 All ER 240; [2011] EWCA Civ 25 …. 1.3 Simic v New South Wales Land and Housing Corporation [2016] HCA 47 …. 13.1, 13.29, 13.30, 13.34 SIMU Mutual Insurance Association v Minson’s Ltd [1938] NZLR 829 …. 19.9 Siu v Eastern Insurance Co Ltd [1994] 2 AC 199 …. 3.35 Skandia International Corp v NRG Victory Reinsurance Ltd [1998] EWCA Civ 467 …. 18.76, 29.21 Skyward Aviation 2008 Ltd v Tower Insurance Ltd [2013] NZHC 1856 …. 17.33 Small Business Consortium at Lloyd’s Consortium No 9056 v Angas Securities Ltd [2015] NSWSC 1511 …. 27.4 Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd [2015] NSWSC 392 …. 25.35 Smith v National Mutual Fire Insurance [1974] 1 NZLR 278 …. 11.2, 11.4 Smith (MH) (Plant Hire) Ltd v Mainwaring [1986] 2 Lloyd’s Rep 244 …. 27.13 Smits v Roach (2006) 228 ALR 262; [2006] HCA 36 …. 5.1 Snelgrove v Great Southern Managers Australia Ltd (in liq) [2010] WASC 51 …. 26.8 Sobrany v UAB Transtira [2016] EWCA Civ 28 …. 29.7 Sofi v Prudential Assurance Co Ltd [1993] 2 Lloyd’s Rep 559 …. 19.17 Soia v Bennett [2014] WASCA 27 …. 28.2 Sola Optical Australia Pty Ltd v Judith Ann Mills (1987) 163 CLR 628; [1987] HCA 57 …. 8.16 Sotiros Shipping Inc v Sameiet Solholt(The Solholt) [1983] 1 Lloyd’s Rep 605 …. 16.1, 16.7 South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd; Mortensen v Laing [1992] 2 NZLR 282 …. 5.3, 7.20, 7.31, 7.37 — v New Zealand Security Consultants & Investigations Ltd; Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1939) 39 SR (NSW) 174 …. 11.6 Sovereign Capital Ltd and Australian Securities and Investments Commission [2008] AATA 901 …. 4.19 Soya GmbH Mainz KG v White [1983] 1 Lloyd’s Rep 122 …. 1.14 Spain v Union Steamship Co of New Zealand Ltd (1923) 32 CLR 138 …. 14.8, 14.9 Spector v Ageda [1973] 1 Ch 30 …. 28.2 Spencer v Aetna Life & Casualty Ins Co 611 P 2d 149; 227 Kan. 914 …. 1.36 Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd (2000) 23 WAR 291; 11 ANZ Ins Cas 61-485; [2000] WASCA 408 …. 1.26, 19.52, 27.12, 27.18, 27.20, 29.5 — v Metals & Minerals Insurance Pte Ltd (2009) 253 ALR 364; [2009] WASCA 31 …. 21.22, 27.1, 27.2, 27.6, 29.10, 29.13, 29.18 Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; VR 501 …. 28.2 Spotless Group Ltd v Premier Building & Consulting Group Pty Ltd (2006) 16 VR 1; [2006] VSCA 201 …. 26.17 Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111; [1997] CLC 70 …. 14.6, 14.8, 16.5, 20.1 St Paul Travelers Insurance Company Ltd v Dargan and Edwards (joint liquidators of Ballast Plc) and Mott Macdonald Ltd [2006] EWHC 3189 (Ch) …. 27.30
Standard Life Assurance Ltd v ACE Europe Group [2012] EWHC 104 (Comm) …. 16.25, 16.31, 16.32, 16.36, 17.13, 18.10 Standard Life Assurance Ltd v Oak Dedicated Ltd [2008] Lloyd’s Rep IR 552; [2008] EWHC 222 (Comm) …. 5.39 Standard Oil Co v United States 340 US 54 (1950) …. 15.4 Stanley v Western Insurance Company (1868) LR 3 Exch 71 …. 16.8 Stapleton v NTI Ltd [2002] QDC 204 …. 22.11 Starfire Diamond Rings Ltd v Angel [1962] 2 Ll Rep 217 …. 19.7 Starlink International Group Pty Ltd v Coles Supermarket Australia Pty Ltd [2011] NSWSC 1154 …. 7.3 State Bank of New South Wales Ltd v Alexander Stenhouse Ltd (1997) Aust Torts Reports 81423 …. 21.25 State Farm Fire & Casualty Co v Kleckner, 194 Ill. App. 3d 371; 551 NE 2d 224 (1990) …. 21.2 State Government Insurance Commission (SA) v Paneros (1988) 5 ANZ Ins Cas 60-857 …. 28.20, 28.24 State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR 228; [1969] HCA 59 …. 18.14, 18.23, 18.25, 27.5, 27.6 State Government Insurance Office (Qld) v Crittenden (1966) 117 CLR 412; [1966] HCA 56…. 19.51 State Government Insurane Commission v Sinfein Pty Ltd (1996) 15 WAR 434 …. 15.5 State Insurance General Manager v Meekings-Stewart (1992) 7 ANZ Ins Cas 61-127 …. 19.33 State of Netherlands v Youell [1997] EWCA Civ 2715 …. 16.8 State of New South Wales v Betfair Pty Ltd (2009) 180 FCR 543; [2009] FCAFC 160 …. 26.16 — v Jackson [2007] NSWCA 279 …. 26.12 State of the Netherlands v Youell and Hayward [1997] 2 Lloyd’s Rep 440 …. 2.29 Steadfast Insurance Co Ltd v F & B Trading Co Pty Ltd (1971) 125 CLR 578; [1971] HCA 68…. 1.5, 9.13, 9.23, 11.2, 11.7 Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Ltd [2017] NSWCA 71 …. 8.8, 8.40 Steeds v Steeds [1889] 22 QBD 537 …. 2.38 Stemson v AMP General (NZ) Ltd [2006] UKPC 30; [2006] Lloyd’s Rep IR 17 …. 23.8 Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 …. 8.65, 23.18 Stewart v Oriental Fire and Marine Insurance Co [1985] QB 988 …. 9.21 Stock v Inglis (1884) 12 QBD 564 …. 10.8 Stockton v Mason (1978) 2 Lloyd’s Rep 430 …. 11.2 Stone v ACN 000 337 940 Pty Ltd (2008) 68 ACSR 242; [2008] NSWSC 1058 …. 25.29 Strachan v The Scottish Boatowners’ Mutual Insurance Association [2001] ScotCS 138 …. 14.5 Stratti v Stratti (2000) 50 NSWLR 324; [2000] NSWCA 358 …. 27.3, 27.18, 27.20, 29.5 Strive Shipping Corp v Hellenic Mutual War Risks Association ‘Grecia Express’ [2002] EWHC 203; 2 Lloyd’s Rep 88 …. 8.23 Stuart v Guardian Royal Exchange Assurance of New Zealand Ltd [1988] 5 ANZ Ins Cas
75,274 …. 7.35 Sudesh Sharma v Insurance Australia Ltd t/as NRMA Insurance [2017] NSWCA 55 …. 7.20, 7.32, 29.20 Summer Hill Business Estate Pty Ltd v Equititrust Ltd [2011] NSWCA 149 …. 21.19 Sun Alliance and Royal Insurance Australia Ltd v Switzerland Insurance Australia Ltd (1997) 9 ANZ Ins Cas 61-353 …. 20.11 Sun Fire Office v Hart (1889) 14 App Cas 98 …. 11.17 Suncorp Metway Insurance Ltd v Clonmel Pty Ltd [2000] QSC 135 …. 25.35 — v Landridge Pty Ltd (2005) 12 VLR 290; [2005] VSCA 223 …. 13.4 Super Chem Products Ltd v American Life and General Insurance Co Ltd [2004] UKPC 2; [2004] Lloyd’s Rep IR 446 …. 23.25 Super Chem Products Ltd v American Life and General Insurance Co Ltd [2004] UKPC 2; Lloyd’s Rep IR 446 …. 20.17 Sutherland Professional Funding v Bakewells [2011] EWHC 2658 (QB) …. 19.50 Swann Insurance (Aust) Pty Ltd v Fraillon [1991] 1 VR 401 …. 6.12 Sweeney v Boylan Nominees Pty Ltd (2006) 226 CLR 161; [2006] HCA 19 …. 10.56 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; [1994] HCA 4 …. 18.81 Sweeney v Boylan Nominees Pty Ltd (2006) 226 CLR 161; [2006] HCA 19 …. 5.9 Swift v New Zealand Insurance Co [1927] VLR 183 …. 17.35 Switzerland Insurance Australia Ltd v Dundean Distributors Pty Ltd [1998] VSC 244; 4 VR 692 …. 17.25 Sydney Airports Corporation Ltd v Singapore Airlines Ltd [2005] NSWCA 47 …. 26.12 Sydney Turf Club v Crowley (1972) 126 CLR 420; [1972] HCA 25 …. 27.17, 29.6, 29.16, 29.18 Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union) [2010] EWHC 2583 …. 5.19, 5.39 Szuster v Hest Aust Ltd [2000] SADC 2 …. 17.54
T T & N Ltd (In administration) v Royal & Sun Alliance Plc [2003] 2 All ER (Comm) 939 …. 12.33 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8 …. 16.1 TAL Life Ltd v Shuetrim; MetLife Insurance Ltd v Shuetrim [2016] NSWCA 68 …. 17.50, 17.53, 17.55 Talga v MBC International Ltd (1976) 133 CLR 622 …. 8.65, 23.18 Teal Assurance Co Ltd v WR Berkley Insurance (Europe) Ltd [2013] UKSC 57; CLC 390 …. 18.7 Technical Products Pty Ltd v SGIO (Qld) (1989) 167 CLR 45; [1989] HCA 24 …. 19.51 Territory Insurance Office v Adlington (1992) 2 NTLR 55; 7 ANZ Ins Cas 61-149 …. 7.40, 21.12, 21.14 The ‘Demetra K’ [2002] 1 Lloyd’s Rep IR 795 …. 15.17
Theiss Contractors Pty Ltd v Norcon Pty Ltd [2001] WASCA 364; (2001) 11 ANZ Ins Cas 61509 …. 18.29, 27.39, 27.40 Thiel v Federal Commissioner of Taxation [1990] HCA 37; (1990) 171 CLR 338 …. 4.5 Thomas Cheshire and Co v Vaughan Brothers and Co [1920] KB 240 …. 3.33 Thompson v NSW Land and Housing Corporation (No 3) [2013] NSWSC 1658 …. 20.1 Thorman v New Hampshire Insurance Co (UK) Ltd and Home Insurance Co [1988] 1 Lloyd’s Rep 7 …. 24.1 Till v National Mutual Life Association of Australasia Ltd [2004] ACTCA 26 …. 20.16 Tilley v Lawless (2007) VSC 103 …. 19.16 Times Fire Assurance Company v Hawke (1859) 28 LJ Ex 317; 185 ER 783 …. 2.9, 14.1, 16.6, 17.28 Timms v FAI Insurance Ltd (1976) 12 ALR 506 …. 22.31 TJK (NZ) Ltd v Mitsui Sumitomo Insurance Company Ltd [2013] NZHC 298 …. 17.5 To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 11 ANZ Ins Cas 61-490; [2001] VSCA 48 …. 22.7, 23.1, 23.3, 23.9, 23.14, 23.19, 23.21 Todd v Alterra at Lloyds (2016) 239 FCR 12; [2016] FCAFC 15 …. 1.2, 1.18, 1.31 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 …. 13.24 Tomlinson v Ramsey Food Processing Pty Ltd (2015) 256 CLR 507; [2015] HCA 28 …. 21.23 Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC) …. 23.20 Toomey (of Syndicate 2021) v Banco Vitalicio de Espana SA de Seguros y Reasseguros [2004] EWCA 622 …. 12.11 Toomey v Scolaro’s Concrete Constructions Pty Ltd (No 3) [2001] VSC 477 …. 27.27 — v — (No 5) (2002) 12 ANZ Ins Cas 61-519; [2002] VSC 48 …. 19.45 Tosich v Tasman Investment Management Ltd (2008) 250 ALR 274; [2008] FCA 377 …. 5.1, 8.36 Towry Law v Chubb Insurance [2008] NSWSC 1352 …. 2.22, 18.31, 18.36 Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 …. 12.5 Trans Pacific Insurance Corporation [2009] NSWSC 308 …. 14.14 Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd [2012] WASCA 165 …. 7.3 Transfield Constructions Pty Ltd v GIO Australia Holdings Pty Ltd (1996) 9 ANZ Ins Cas 60336 …. 17.27 Transfield Services (Australia) v Hall; Hall v QBE Insurance (Australia) [2008] NSWCA 294 …. 13.23, 13.24, 18.21, 19.19 Transfield Shipping v Mercator Shipping Inc [2008] UKHL 48; [2009] 1 AC 61 …. 16.1 Transmarket Trading Pty Ltd v Sydney Futures Exchange Ltd [2010] FCA 534 …. 4.12 Trans-Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675 …. 7.50 Transport Accident Commission v CMT Construction of Metropolitan Tunnels (1988) 165 CLR 436; [1988] HCA 46 …. 27.4 Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VLR 125; (1996) 9 ANZ Ins Cas 61-385 …. 8.25, 23.22 Travellers Casualty v Arkwright [2004] EWHC 1704 (Comm) …. 20.19
Travellers Indemnity Co v Sumner Co (1960) 27 DLR (2d) 562 (NBSCA) …. 19.4 Triden Properties Ltd v Capita Financial Group Ltd (1996) 12 BCL 402 …. 18.34 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; [1988] HCA 44 …. 9.16, 21.1, 25.1, 25.2, 25.7, 25.10, 26.3 Triple Five Corp v Simcoe & Erie Group (1994) 159 AR. 1; 29 C.C.L.I.(2d) 219 (QB) …. 19.41 Tropicus Orchids Flowers and Foliage Pty Ltd v TIO [1998] NTSC 74; (1998) 10 ANZ Ins Cas 61-412 …. 20.3 Truran Earthmovers Pty Ltd v Norwich Union Fire Insurance Society Ltd (1976) 17 SASR 1 …. 10.4 Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 …. 19.51 Truta v Avis Rent-A-Car System Inc (1987) 193 Cal App 3d 802 …. 1.2, 1.4 TSB Bank plc v Robert Irving & Burns (Colonia Baltica Insurance Ltd, third party) [2000] 2 All ER 826 …. 28.20, 28.25 Turcan, Re (1889) 40 Ch D 5 …. 9.31 Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919; (1990) 6 ANZ Ins Cas 60-954 …. 8.41 TWS Analytical Pty Ltd v The University of Western Australia [2017] WASCA 67 …. 13.13 Tzaidas v Child (2004) 208 ALR 651; [2004] NSWCA 252 …. 25.3 — v — [2009] NSWSC 465 …. 25.32, 25.34, 25.35
U Underwriters at Lloyd’s, London v Osting-Schwinn 613 F 3d 1079 (11th Cir, 2010) …. 3.24 Unilever PLC v The Proctor & Gamble Co Ltd (2000) 1 WLR 2436 …. 26.24, 26.29 Union Insurance Society of Canton Ltd v George Wills & Co [1916] 1 AC 281 …. 12.25 United Farm Bureau Mutual Insurance Company v Hanley 360 N.E.2d 247 (1977) …. 19.39 United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177 …. 7.3 United States v Oberhellmann 946 F 2d 50, 53 (7th Cir. 1991) …. 15.1 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38 …. 5.33, 18.81 Universal Underwriters Ins. Co v Travelers Ins. Co 451 S.W.2d 616 (1970) …. 13.1 University of Newcastle v GIO General Insurance Ltd (1995) 8 ANZ Ins Cas 61-281 …. 17.30, 17.35 Usanovic v Penncorp Life Insurance Company, 2017 ONCA 395 …. 7.20
V VACC Insurance Ltd v BP Australia Ltd (1999) 47 NSWLR 716; [1999] NSWCA 427 …. 19.17, 21.23, 21.26 Vallejo v Wheeler (1774) 98 ER 1012 …. 13.15 VBAS v Minister for Immigration & Multicultural & Indigenous Affairs [2005] FCA 212 …. 6.16 Veltri v QBE Insurance Ltd [1997] SASC 6166 …. 26.21
Ventouris v Trevor Rex Mountain (The Italia Express (No 2)) [1992] 2 Lloyd’s Rep 281 …. 14.2, 16.5, 20.1 Verna Trading Pty Ltd v New India Assurance Ltd [1991] 1 VR 129 …. 12.28 Vero Insurance Ltd v Australian Prestressing Services Pty Ltd [2013] NSWCA 181 …. 16.30 — v Baycorp Advantage [2004] NSWCA 390 …. 18.82 Versloot Dredging BV v HDI Gerling Industrie Versicherung AG (Rev 1) [2013] EWHC 1666 (Comm) …. 23.1 — v — [2016] UKSC 45 …. 23.21 Verson Clearing International Pty Ltd v Ward & Partners (1996) 9 ANZ Ins Cas 61-352; [1996] SASC 5909 …. 28.15, 28.19 Victims Compensation Fund v Scott Brown [2002] NSWCA 155 …. 6.19 Victorian WorkCover Authority v Esso Australia Ltd (2001) 207 CLR 520; [2001] HCA 53 …. 14.1 Vidovic v Email Superannuation Pty Ltd (unreported, Supreme Court of New South Wales, Bryson J, 3 March 1995 BC9504297) …. 17.53 Vintix Pty Ltd v Lumley General Insurance Ltd (1992) 24 NSWLR 627 …. 17.36 Virk v Gan Life Holdings Plc [1999] EWCA Civ 2047 …. 12.24 Vollstedt v Calibre Enterprises Pty Ltd (1999) 10 ANZ Ins Cas 61-440 …. 25.25 VYMP International Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1991) 6 ANZ Ins Cas 61-058 …. 17.34
W W & K Holdings (NSW) Pty Ltd v Laureen Margaret Mayo [2013] NSWSC 1063 …. 13.28 Wakim v McNally [2002] FCAFC 208 …. 26.2 Wales v Wadham (1977) 1 WLR 199 …. 7.1 Walker v Phoenix Assurance Company of Australia (1980) 1 ANZ Ins Cas 60-045 …. 9.35 Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd (2010) 240 CLR 444; [2010] HCA 9 …. 2.17, 2.21, 6.23, 20.20, 22.31 Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 …. 18.34 — v Colonial Mutual Life Assurance Society Ltd (2004) 13 ANZ Ins Cas 61-620; [2004] NSWSC 616 …. 23.19, 22.7 Wan v Mcdonald [1992] FCA 4; (1992) 105 ALR 473 …. 28.2 Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40; [2009] 2 CLC 320 …. 13.2, 13.6, 14.15 WASA International Insurance Company v Lexington Insurance Company [2009] UKHL 40; [2010] 1 AC 180 …. 1.2, 1.43, 11.1 Water v Sun Alliance & London Insurance Ltd [1997] 2 Lloyd’s Rep 21 …. 16.36 Watkins Syndicate 0457 at Lloyds v Pantaenius Australia Pty Ltd [2016] FCAFC 150 …. 6.14, 22.10 Watts v Morrow [1991] EWCA Civ 9; (1991) 1 WLR 1421 …. 7.34 — v Rake [1960] HCA 58; (1960) 108 CLR 158 …. 16.1, 16.8
Wayland v Bird [2017] NSWCA 26 …. 25.42, 25.43 Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] QB 57 …. 15.16, 15.17, 15.18, 15.19, 16.38 Wayne v Staples, Inc (2006) 135 Cal App, 4th 466 …. 1.4 Webb v Estate of Darryl Arthur Herbert [2006] WASCA 43 …. 25.25 Webster v General Accident Fire and Life Assurance Corporation [1953] 1 Lloyd’s Rep 123 …. 17.21 Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2017] NSWSC 259 …. 18.73, 18.80 Weld-Blundell v Stephens [1920] AC 956 …. 15.1, 15.20 West of England Fire Insurance Co v Isaacs [1897] 1 QB 226 …. 27.6 West Wake Price & Co v Ching [1957] 1 WLR 45 …. 18.4 Western Australia v Commonwealth (1975) 134 CLR 201; [1975] HCA 46 …. 6.1 Western Australian Bank v Royal Insurance Co (1908) 5 CLR 533; 14 ALR 189; [1908] HCA 11 …. 9.26, 12.24, 12.25, 17.2 Western Australian Insurance Co Ltd v Dayton (1924) 35 CLR 355; [1924] HCA 58 …. 5.1, 8.13, 8.16 Western Suburbs Hospital v Currie (1987) 9 NSWLR 511 …. 3.44 White and Carter (Councils) Ltd v McGregor [1962] AC 413 …. 16.1 White v Republic Fire Insurance Co (1869) 57 Maine Reports 91 …. 16.15 Whiten v Pilot Insurance Company (1999) 42 OR (3d) 641 …. 7.27 Whitworth Street Estates Ltd v Miller [1970] AC 583 …. 13.13 Williams v Baltic Insurance Association of London Ltd [1924] 2 KB 282 …. 3.29, 10.1, 10.9 Wilson v Jones (1867) LR 2 Ex 139 …. 1.10 Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290; 13 ANZ Ins Cas 61-657; [2005] WASCA 106 …. 7.22, 7.24, 7.25, 7.47, 12.14, 21.1, 21.5 Winter v Irish Life Assurance plc [1995] 2 Lloyd’s Rep 274 …. 8.5 Wise Underwriting Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962 …. 8.7, 8.9 Wolenberg v Royal Co-operative Collecting Society (1915) 84 LJKB 1316 …. 9.18 Wolff v Horncastle (1798) 1 Bos & P 316; 126 ER 924 …. 3.42, 7.11 Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (1999)10 ANZ Ins Cas 61430; [1999] WASCA 1024 …. 25.2, 27.2, 27.14, 27.15, 27.21, 27.22 Woolcott v Excess Insurance Co Ltd [1978] 2 Lloyd’s Rep 430 …. 8.7 Woolfall and Rimmer Ltd v Moyle [1942] 1 KB 66 …. 19.18, 23.6 World Trade Center Properties v Hartford Fire Insurance Co [2003] 345 F. 154 …. 24.6 Worth Recycling Pty Ltd v Waste Recycling & Processing Pty Ltd [2009] NSWCA 354 …. 28.4 WR Berkley Insurance (Europe) Ltd v Teal Assurance Company Ltd [2017] EWCA Civ 25 …. 18.7 Wright Patton Shakespeare Capital Limited and Australian Securities and Investments Commission [2008] AATA 1068 …. 5.57
Y
Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410; [1978] HCA 42 …. 9.19, 9.20, 9.21 Yasuda Fire & Marine Insurance Company of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] 3 QB 174 …. 5.43 Yokogawa Aust Pty Ltd v Alstom Power Ltd [2009] SASC 377; (2009) 262 ALR 738 …. 26.11 Yorkshire Insurance Co v Nisbet Shipping Co [1962] 2 QB 330 …. 27.32 Yorkshire Water Services Ltd v Sun Alliance & London Insurance Plc [1997] 2 Lloyd’s Rep 21; [1997] CLC 213 …. 16.7, 16.19, 16.28 Yorkville Nominees Pty Ltd v Lissenden (1986) 160 CLR 475; [1986] HCA 6 …. 12.13, 12.16, 13.8 Youell v Bland Welch & Co Ltd (The ‘Superhulls’ cover case) (No 2) [1990] 2 LLR 431 …. 5.39
Z Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang [2016] NSWCA 370 …. 13.13, 13.18 Ziel Nominees Pty Ltd v VACC Insurance Co Ltd (1975) 180 CLR 173; [1975] HCA 40 …. 9.26, 25.18 Zisopoulos v Barry Johnston (Insurance Brokers) Pty Ltd (1982) 2 ANZ Ins Cas 60-461 …. 5.14 Zurich Australian Insurance Ltd v GIO General Ltd [2011] NSWCA 47 …. 18.80, 29.17, 29.22 — v Metals & Minerals Insurance Pte Ltd (2009) 240 CRL 391; [2009] HCA 50 …. 25.10, 25.41, 29.7, 29.10, 29.11 — v Regal Pearl Pty Ltd [2006] NSWCA 328 …. 19.21 Zurich Australian Insurance Ltd, Re [1998] QSC 209 …. 7.50 Zurich General Accident and Liability Insurance Co v Leven (1940) SC 406 …. 8.24
TABLE OF STATUTES References are to paragraph numbers
Commonwealth Acts Interpretation Act 1901 …. 6.23 s 15AB …. 6.20 s 15AB(2) …. 6.20 Australian Constitution …. 3.47 s 51(xiv) …. 6.2 s 109 …. 3.37, 10.10 Australian Consumer Law …. 6.12, 6.13 s 23 …. 6.12 Australian Prudential Regulation Authority Act 1998 …. 4.2 s 5(2)(c) …. 4.5 s 7 …. 4.2 s 7(1) …. 4.5, 4.6 s 8(2) …. 4.8 s 9 …. 4.5 s 10(1) …. 4.6 s 10(2) …. 4.6 s 11 …. 4.6 s 13 …. 4.2 s 93 …. 4.6 Australian Securities and Investments Commission Act 2001 …. 4.1, 4.16, 4.23, 5.1, 5.44, 6.12, 6.13 Pt 2 …. 4.23 Pt 2 Div 2 …. 6.12 Pt 2 Div 2 Subdiv BA …. 4.23, 6.12, 6.13 Pt 2 Div 2 Subdiv C …. 4.23, 5.45, 6.12 Pt 2 Div 2 Subdiv D …. 4.23, 5.45, 6.12 Pt 2 Div 2 Subdiv E …. 4.23, 6.12 Pt 2 Div 2 Subdiv G …. 4.23 Pt 2 Div 2 Subdiv GA …. 4.23
s 8 …. 4.2 s 12A(2) …. 4.2 s 12BF …. 6.12, 6.14 s 12BF(1) …. 6.14 s 12BI …. 6.14 s 12CA …. 6.12 ss 12CA–12CC …. 5.45 s 12CB …. 6.12 s 12CC(1)(h) …. 4.40 s 12CC(3) …. 4.40 s 12DA …. 4.45, 6.12 s 12DA(1) …. 5.45 ss 12DA–12DN …. 5.45 s 12DB …. 6.12 s 12ED …. 6.12 s 12ED(3) …. 6.12 s 12GF …. 5.45 s 12GF(1) …. 5.45 s 15 …. 6.12 Banking Act 1959 s 8 …. 9.20 Bankruptcy Act 1966 …. 25.48 Pt 4 Div 2 …. 25.47 s 58(3)(b) …. 26.8 s 108 …. 25.47 s 117 …. 25.47, 26.3, 26.6 s 301 …. 25.48 Civil Aviation Regulations 1988 reg 5.81 …. 22.12 Competition and Consumer Act 2010 …. 4.16, 4.23 Pt XI Div 2 …. 4.23, 5.44 s 51AB …. 4.41 s 51ACA(1) …. 4.40, 4.41 s 51AE …. 4.41 s 131A …. 4.23 Sch 2 …. 4.23, 5.44 Corporations Act 2001 …. 4.12, 4.19, 12.1, 14.8, 25.49, 25.51 Ch 5A …. 25.28 Ch 7 …. 3.49, 4.1, 4.2, 4.12, 4.13, 4.16, 4.17, 4.18, 4.19, 5.1, 5.47, 5.50, 5.52, 6.13, 8.1, 8.68, 8.74, 8.75, 9.13, 12.1 Ch 7 Pt 7.6 …. 9.24
Ch 7 Pt 7.6 Div 11 …. 9.24 Ch 7 Pt 7.7 Div 3 …. 8.77 Ch 7 Pt 7.7 Div 4 …. 8.76 Ch 7 Pt 7.9 …. 8.78 Pt 5.6 Div 6 Subdiv D …. 25.49 Pt 7.2 …. 4.18 Pt 7.5 …. 4.18 Pt 7.6 …. 4.17, 4.18 Pt 7.6 Div 3 …. 4.17, 4.19 Pt 7.8 …. 4.17, 4.20 Pt 7.8 Div 2 …. 4.20 Pt 7.8 Div 3 …. 4.20 Pt 7.8 Div 4 …. 4.20 Pt 7.8 Div 7 …. 4.20 Pt 7.9 Div 5 …. 4.17, 4.22 Pt 7.10 …. 4.17, 4.21 Pt 7.10 Div 2 …. 4.21 Pt 7.10 Div 2A …. 4.21 Pt 7.10 Div 4 …. 4.21 Pt 7.11 …. 4.18 s 5 …. 4.13 s 5B …. 4.2 s 9 …. 4.14, 4.18 s 95A …. 14.8, 14.12 s 247A …. 26.7 s 471B …. 26.8 s 555 …. 25.49 s 562 …. 25.49, 26.3, 26.6 s 562A …. 25.49, 25.50 s 562A(4) …. 25.50 s 563 …. 25.49 s 596D(2) …. 26.9 s 601AD(1) …. 25.28 s 601AG …. 25.24, 25.28, 25.29, 25.30, 25.31, 25.32, 25.34, 26.3, 26.6 s 601AG(a) …. 25.32 s 601AG(b) …. 25.32, 25.34 s 601AH(2) …. 25.29, 25.35 s 760A …. 4.12 ss 760A–1101JJ …. 4.12 s 761A …. 4.14, 4.22 s 761G(4) …. 4.16
s 761G(5) …. 4.16 s 761G(5)(b) …. 4.16, 8.78 s 761G(12) …. 4.16 s 764A(1)(d) …. 3.37, 4.14, 4.22, 10.10 s 764A(1)(e) …. 3.37, 4.14, 10.10 s 764A(1)(f) …. 3.37, 4.14, 10.10 s 764A(1A) …. 4.14 s 764A(1B) …. 4.14 s 764A(2) …. 4.14 s 765A(1)(c)–(g) …. 4.14 s 766A(1)(a) …. 4.14 s 766A(1)(b) …. 4.14 s 766B(1) …. 4.15 s 766B(1A) …. 4.15 s 766B(3) …. 4.15 s 766B(4) …. 4.15 s 766B(6) …. 4.15 s 766B(7) …. 4.15 s 766B(9) …. 4.15 s 766C(1)(b) …. 4.14 s 911A(1) …. 4.18 s 911A(2) …. 4.18, 5.48 s 911A(2)(g) …. 4.18 s 911B(1) …. 4.18 s 912A(1)(a) …. 4.19 s 912A(1)(aa) …. 4.19 s 912A(1)(b) …. 4.19 s 912A(1)(c) …. 4.19 s 912A(1)(ca) …. 4.19 s 912A(1)(d) …. 4.19 s 912A(1)(d) …. 5.51 s 912A(1)(e) …. 4.19 s 912A(1)(f) …. 4.19 s 912A(1)(g) …. 4.19 s 912A(1)(h) …. 4.19, 5.51 s 912A(2)(b)(i) …. 4.43 s 912B …. 4.19, 5.51 s 916E …. 5.50 s 917B …. 5.49 s 917C …. 5.49 s 917D …. 5.49
s 923A …. 5.51 s 941A …. 5.51 s 941C …. 5.52 s 941C(2) …. 8.75 s 941D …. 5.52 s 942B …. 5.52 s 942B(6A) …. 5.53 s 944A …. 8.77 s 945A(1) …. 5.55 s 945B …. 8.77 s 945B(1) …. 5.55 s 946A …. 5.56, 8.77 s 947B(2) …. 8.77 s 947B(3) …. 8.77 s 947B(6) …. 5.60, 8.77 s 947C …. 5.59 s 947C(3) …. 5.57 s 947D …. 5.58, 8.77 s 947E …. 5.59, 8.77 s 949A(2) …. 5.54, 8.76 s 949A(3) …. 5.54, 8.76 s 951A …. 8.75 s 961B(1) …. 4.15, 8.77 s 981A …. 5.62 s 981B …. 5.62 s 981C …. 5.62 s 981E …. 5.62 s 985B …. 4.20 s 985B(1) …. 5.63 s 985B(2) …. 5.63 s 985B(3) …. 5.63 s 985C(2) …. 4.20 s 985D …. 4.20 s 991A …. 4.20 s 992A(1) …. 4.20 s 992A(3) …. 4.20 s 992A(3)(a)–(e) …. 4.20 s 992A(3A) …. 4.20 s 992A(5) …. 4.20 s 1012A(3) …. 8.78 s 1012B(3) …. 8.78
s 1012C(3) …. 8.78 s 1012C(4) …. 8.78 s 1012D(9) …. 8.78 s 1013C(3) …. 8.83 s 1013D(1) …. 8.80, 8.81 s 1013D(1)(f) …. 8.80 s 1013E …. 8.81 s 1013F(1) …. 8.81 s 1014A …. 8.82 s 1016E(1)(a) …. 8.82 s 1016E(1)(b) …. 8.82 s 1019A …. 4.22 ss 1021C–1021P …. 8.84 s 1022B …. 8.84 s 1022C …. 8.84 s 1041B …. 4.12 s 1041B(2)(b)(ii)(A) …. 4.12 s 1041B(2)(b)(ii)(B) …. 4.12 s 1041E …. 4.21 s 1041G …. 4.21 s 1041H …. 4.21 s 1041I …. 4.21 s 1101A …. 4.31 s 1101I …. 3.37, 10.10 s 1311(1) …. 4.18 Corporations Law s 459G …. 14.11 Corporations Regulations 2001 reg 1.0.22 …. 4.18 reg 7.1.17A …. 4.16, 8.77, 8.78 reg 7.1.33(1) …. 4.18 reg 7.1.33(2) …. 4.18 reg 7.6.01(1)(e) …. 4.18 reg 7.6.01(1)(ea) …. 4.18 reg 7.6.01(1)(p) …. 4.14 reg 7.6.02AA …. 4.19, 5.51 reg 7.6.02AAA …. 4.19, 5.51 reg 7.6.02AAA(3)(i) …. 4.19 reg 7.7.10 …. 8.77 reg 7.9.15C(4) …. 8.80 reg 7.9.15C(5) …. 8.80
reg 7.9.15D …. 8.81 reg 7.9.15E …. 8.80 reg 7.9.15F …. 8.81 Evidence Act 1995 s 118 …. 26.14 s 119 …. 26.14 Financial Sector (Collection of Data) Act 2001 …. 4.1, 4.11, 4.26 s 3(1) …. 4.26 s 3(2) …. 4.26 Financial Sector (Shareholdings) Act 1998 …. 4.1, 4.24 s 13 …. 4.24 Insurance Acquisitions and Takeovers Act 1991 …. 4.24, 4.25 s 36 …. 4.25 s 50 …. 4.25 Insurance Act 1932 …. 3.48 Insurance Act 1973 …. 1.1, 1.43, 3.48, 4.1, 4.2, 4.3, 4.4, 4.8, 4.9, 4.11, 9.21, 9.22 s 2A …. 3.48 s 2A(1) …. 4.4, 9.21 s 2A(2) …. 4.4 s 2A(2)(c) …. 1.43 s 3(1) …. 4.5, 4.6, 4.10 s 8 …. 4.2, 4.8 s 9(1) …. 9.21 s 10(1) …. 9.21 s 12 …. 4.6, 4.9 s 15 …. 4.9 s 16 …. 4.9 s 32 …. 4.10 s 35 …. 4.10 s 52(1) …. 4.11 s 62K …. 4.11 s 62T(2) …. 4.11 s 62X …. 4.11 s 62ZW …. 4.7 s 99 …. 4.1 s 100 …. 4.1 Insurance Contracts Act 1984 …. 2.1, 2.6, 2.25, 2.26, 3.37, 3.51, 4.1, 4.2, 4.23, 4.33, 5.1, 6.1, 6.2, 6.3, 6.4, 6.5, 6.6, 6.7, 6.8, 6.9, 6.10, 6.13, 6.14, 6.15, 6.16, 6.18, 6.20, 6.21, 6.22, 6.23, 6.24, 6.25, 6.26, 7.1, 7.23, 7.28, 7.29, 7.30, 7.43, 7.47, 8.1, 8.33, 8.63, 8.68, 8.69, 9.9, 9.13, 9.18, 9.26, 10.1, 10.10, 10.11, 11.1, 11.5, 12.1, 12.8, 12.9, 12.17, 14.7, 16.1, 17.12, 18.6, 18.24, 18.39, 18.41, 18.43, 18.63, 18.64, 19.52, 20.5, 20.12, 22.2, 22.3, 22.10, 22.47, 23.1, 23.12, 23.15, 23.16, 25.2, 25.19
Pt II …. 7.28, 7.29, 8.30 Pt IV …. 6.22, 8.1, 8.30, 22.2 Pt IV Div 1 …. 8.30, 8.32 Pt IV Div 2 …. 8.30, 8.53 Pt IV Div 3 …. 8.30, 8.59 Pt IV Div 4 …. 8.30, 8.66 Pt V Div 3 …. 22.4 Pt V s 54 …. 22.2 s 7 …. 6.4, 9.18 s 8 …. 6.1, 6.5 s 8(1) …. 6.6 s 8(2) …. 6.6, 6.7 s 9 …. 1.1, 6.1, 6.5, 6.6, 6.9 s 9(1)(d) …. 2.1 s 9(1)(e)(i) …. 7.23 s 9(1)(e)(ii) …. 18.64 s 9(2) …. 6.2 s 9A …. 2.1 s 10 …. 4.14, 6.1, 6.10 s 10(2) …. 6.10, 9.14 s 11 …. 6.23, 7.29, 8.44 s 11(1) …. 2.1, 5.1, 8.70, 8.71, 25.10, 27.26 s 11(2) …. 11.2 s 11(6) …. 2.1, 2.6 s 11(7) …. 2.15 s 11(9) …. 8.31, 8.34 s 11(10)(a) …. 8.51 s 11(10)(b) …. 8.51 s 11A …. 4.2 s 12 …. 7.28, 8.30 s 13 …. 6.10, 6.13, 7.28, 7.29, 7.30, 7.47, 12.9, 16.1, 18.82, 19.1, 21.16, 22.30, 27.6 s 13(1) …. 7.30, 7.32, 7.44, 7.46 s 13(2) …. 7.30 s 13(4) …. 7.29 s 14 …. 6.10, 6.13, 7.28, 7.31, 7.47, 12.9, 16.1, 19.1, 21.16 s 14(1) …. 7.39, 7.40, 7.41, 7.46 s 14(2) …. 7.47 s 14(3) …. 7.31, 7.47 s 14A …. 7.48, 7.49 s 15 …. 6.1, 6.11, 6.12 s 16 …. 3.37, 9.29, 10.10
s 17 …. 10.11, 25.16 s 18 …. 3.37, 10.10 s 20 …. 25.15 s 21 …. 5.1, 5.18, 7.28, 8.30, 8.31, 8.48, 8.57, 8.70 s 21(1) …. 8.32, 8.33, 8.35, 8.36, 8.57 s 21(1)(a) …. 8.39, 8.41 s 21(1)(b) …. 8.39 s 21(2) …. 8.42, 8.43 s 21(3) …. 8.42, 8.44 s 21A …. 5.1, 5.18, 8.30, 8.31, 8.32, 8.44, 8.45, 8.46, 8.48, 8.70 s 21B …. 5.1, 5.18, 8.30, 8.32, 8.44, 8.45, 8.47, 8.48, 8.70 s 21B(10) …. 8.47 s 22 …. 5.18, 8.30, 8.47, 8.48, 8.50, 8.51, 8.70 s 22(2) …. 8.48 s 22(3) …. 8.52 s 22(6) …. 8.52 s 23 …. 8.53 ss 23–27 …. 8.30 s 24 …. 8.53, 8.54, 8.55, 12.17, 22.6 s 26 …. 8.53, 8.56, 8.57 s 26(1) …. 8.56 s 26(2) …. 8.56, 8.57 s 27 …. 8.53, 8.58 ss 27A–33 …. 8.30 s 28 …. 8.48, 8.55, 8.59, 8.61, 8.63, 8.70 s 28(1) …. 8.32, 8.60 s 28(2) …. 2.26, 8.61, 8.63, 9.18 s 28(3) …. 8.61, 8.62, 8.64 s 29 …. 8.59 s 31 …. 8.63, 8.65 s 31(1) …. 8.65 s 31(2) …. 8.65 s 31(4) …. 8.65 s 31A …. 8.48, 8.70 s 33 …. 8.30 s 33A …. 8.30, 8.66 s 33B …. 8.30, 8.66 s 33C …. 8.30, 8.66 s 33C(5) …. 8.66 s 33D …. 8.30, 8.66 s 35 …. 6.13, 8.71
s 35(2) …. 8.80 s 36 …. 13.26 s 37 …. 6.13, 8.70, 8.80 s 38(1) …. 11.9 s 38(2)(c) …. 11.5 s 38(2)(d) …. 11.5 s 38(2)(e) …. 11.5 s 40 …. 2.22, 6.17, 18.35, 18.41, 18.43, 18.45, 18.48, 18.49, 18.50, 18.52 s 40(1) …. 6.17, 18.52 s 40(3) …. 18.42, 18.47, 18.51, 18.54, 22.7, 22.30, 22.43 s 41 …. 19.12, 20.15 s 41(2) …. 19.12 s 41(3) …. 19.12 s 42 …. 17.12, 18.6 s 44 …. 17.14, 17.15 s 44(1) …. 8.70 s 44(3) …. 17.15 s 44(4) …. 17.15 s 45 …. 9.23, 27.20, 29.8, 29.9 s 45(1) …. 19.25, 25.10, 29.8, 29.10, 29.11 s 45(2) …. 29.8, 29.9 s 48 …. 9.16, 25.10, 25.12, 25.13, 26.3, 29.10 s 48(1) …. 25.11, 25.12, 25.14 s 48(2) …. 25.11 s 48(3) …. 25.11, 25.13 s 48AA …. 25.13 s 49 …. 2.31, 17.1, 25.16 s 49(1) …. 8.72 s 49(2) …. 25.17 s 49(3) …. 25.17 s 50 …. 9.16, 9.26, 25.18, 25.19 s 51 …. 4.46, 6.10, 9.14, 9.16, 23.15, 25.22, 25.23, 25.26, 25.41, 26.3, 26.6 s 51(1) …. 25.22, 25.24, 25.27, 25.30, 25.33, 25.34 s 51(1)(a) …. 25.25 s 52 …. 6.5, 18.39, 22.4 s 54 …. 2.22, 6.8, 6.13, 6.14, 7.39, 12.9, 12.30, 13.14, 15.3, 18.35, 18.71, 18.72, 19.1, 20.21, 22.1, 22.3, 22.4, 22.5, 22.6, 22.7, 22.8, 22.9, 22.10, 22.11, 22.14, 22.15, 22.16, 22.18, 22.19, 22.21, 22.23, 22.24, 22.26, 22.27, 22.29, 22.30, 22.31, 22.32, 22.33, 22.40, 22.41, 22.47, 23.19, 25.43 s 54(1) …. 18.46, 18.51, 18.62, 22.1, 22.23, 22.31, 22.32, 22.33, 22.34, 22.36, 22.37, 22.38, 22.40, 22.41, 22.42, 22.43, 22.44
s 54(2) …. 22.1, 22.23, 22.31, 22.32, 22.33, 22.35 s 54(3) …. 22.32, 22.35 s 54(4) …. 22.35 s 54(5)(b) …. 22.1, 22.35, 22.45 s 54(6) …. 22.20 s 55 …. 22.4 s 55A …. 7.49, 22.4 s 56 …. 22.7, 23.13, 23.14, 23.15, 23.16, 23.19, 23.21 s 56(1) …. 23.17 s 56(2) …. 23.18 s 56(3) …. 23.18 s 57 …. 12.31, 14.7, 20.1, 20.4, 20.5, 20.6, 20.7, 20.8, 20.9, 20.12, 20.13 s 57(1) …. 20.5 s 57(4) …. 20.6, 20.13 s 57(5) …. 20.6 s 58 …. 8.69, 8.73, 11.11 s 58(1) …. 11.11 s 58(2) …. 11.12 s 58(3)(b) …. 11.11 s 58(4) …. 11.13 s 58(5) …. 11.13 s 58(6) …. 11.13 s 59 …. 11.12, 11.15, 11.17 s 59(2) …. 11.5, 23.17 s 60 …. 7.47, 11.17 s 60(1)(b) …. 8.67 s 60(1)(e) …. 23.17 s 60(4) …. 11.15 s 61 …. 11.17 s 63 …. 11.17 s 64 …. 27.26 s 65 …. 2.37, 27.25, 27.26 s 65(2) …. 2.37, 27.26 s 65(3) …. 27.26 s 65(4) …. 27.26 s 66 …. 27.25, 27.27, 27.28 s 67 …. 27.29, 27.31, 27.32, 27.33, 27.34 s 67(2) …. 27.33 s 67(3) …. 27.33 s 67(4) …. 27.33 s 67(5) …. 27.33
s 67(6) …. 27.33 s 67(7) …. 27.33 s 67(10) …. 27.33 s 68 …. 18.24, 27.5 s 68(1) …. 8.70, 27.5 s 68(2) …. 27.5 s 69 …. 8.49 s 71 …. 8.69 s 71(1) …. 5.18, 8.48 s 75(1) …. 9.9 s 76 …. 9.23, 29.11 Insurance Contracts Amendment (Unfair Terms) Bill 2013 …. 6.13 Insurance Contracts Regulations 1985 …. 6.23, 8.71 reg 2B …. 8.45 reg 4A …. 8.66 reg 4B …. 8.66 reg 4C …. 8.66 reg 32 …. 20.6 Insurance Regulations 2002 Pt 4A …. 4.7 reg 6 …. 4.5 Sch 2 …. 4.5 Life Assurance Companies Act 1905 …. 3.48 Life Insurance Act 1945 …. 3.48 Life Insurance Act 1995 …. 2.1, 2.6, 3.48, 4.1, 4.3 s 3 …. 2.6, 3.48 s 9(1) …. 2.7 s 9(2) …. 2.7 Marine Insurance Act 1909 …. 2.1, 2.3, 2.5, 3.50, 4.1, 6.9, 22.10 s 6 …. 2.1 s 7 …. 2.2 s 8 …. 2.5 s 9(2) …. 2.2 s 23 …. 7.11 s 28 …. 9.11 s 29 …. 9.11 s 40(2) …. 12.13 s 84 …. 16.24 Sch 2 …. 3.13 Sch 2 r 7 …. 2.4 Privacy Act 1988 …. 4.1, 4.27, 4.28, 12.1
s 6 …. 4.27 Sch 1 …. 4.27 Social Services Act 1947–57 …. 27.36 Terrorism Insurance Act 2003 …. 19.49 Trade Practices Act 1974 s 52 …. 5.45 s 82 …. 5.45
Australian Capital Territory Civil Law (Wrongs) Act 2002 s 206 …. 25.46 s 207 …. 25.46
New South Wales Criminal Records Act 1991 s 12 …. 8.22 Insurance Act 1902 s 18 …. 6.21 Insurance (Application of Laws) Act 1986 s 5(1) …. 6.2 Law Reform (Miscellaneous Provisions) Act 1946 s 6 …. 21.26, 25.38, 25.39, 25.40, 25.41, 25.43, 25.45, 25.46, 26.3, 26.6 s 6(4) …. 25.45 s 6(6) …. 25.45 Legal Profession Uniform Law …. 28.3 Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 r 9 …. 28.3 r 9.2 …. 28.3 r 11 …. 28.3 Motor Vehicles (Third Party Insurance) Act 1942 …. 25.39 Partnership Act 1892 …. 27.18 Real Property Act 1900 s 42(b) …. 22.25, 22.26 Workers Compensation Act 1987 …. 7.23, 25.39 s 159(2) …. 25.37
Northern Territory Anti-Discrimination Act 1996 s 19(q) …. 8.22
Law of Property Act s 56 …. 25.9 Law Reform (Miscellaneous Provisions) Act s 26 …. 25.46
Queensland Property Law Act 1974 s 55 …. 25.9 s 58 …. 25.20 s 63 …. 25.18, 25.19
Tasmania Anti-Discrimination Act 1998 s 16(q) …. 8.22 Conveyancing and Law of Property Act 1884 s 90E …. 25.20
Victoria Credit Act 1984 …. 6.12 Crimes Act 1958 s 179 …. 5.51 Health Records Act 2001 …. 4.30 Sale of Land Act 1962 s 35 …. 25.18, 25.19
Western Australia Civil Judgments Enforcement Act 2004 …. 25.52 s 46(1) …. 25.52 s 49 …. 26.4 s 49(1) …. 25.52 Civil Liability Act 2002 s 5K …. 5.39 Gaming and Betting (Contracts and Securities) Act 1985 …. 3.37, 10.10 Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 s 4(1) …. 5.39 s 7(1)(c) …. 22.23, 25.27, 25.34, 25.35 Law Reform (Joint Tortfeasors and Contribution) Act 1947 s 7(1)(c) …. 18.13, 18.22, 18.26, 18.30 Limitation Act 2005
s 13(1) …. 27.44 s 27 …. 27.42, 27.43 s 27(2) …. 27.42 Motor Vehicle (Third Party Insurance) Act 1943…. 18.64, 18.67, 18.68, 18.69, 18.70, 18.71, 19.24 s 3(7) …. 15.5, 15.11, 18.66, 18.67 s 3G …. 18.66, 18.67 s 4(1) …. 15.5, 15.11, 18.65, 18.66 s 4(3)(a) …. 18.65 s 7(2) …. 25.37 s 7(3) …. 25.37 s 10 …. 18.72 Motor Vehicle (Third Party Insurance) Amendment Act 1987 …. 18.68 Police Act 1892 …. 10.2 Property Law Act 1969 s 11 …. 25.9, 26.3 s 11(2) …. 9.16, 25.9 s 20 …. 9.31 s 64(3) …. 17.31, 25.20 Rules of the Supreme Court O 13 r 2(1) …. 14.8 O 13 r 7(1) …. 14.8 Supreme Court Act 1935 s 32 …. 20.6 Workers’ Compensation and Injury Management Act 1981 …. 18.67 s 22 …. 18.67
New Zealand Law Reform Act 1936 s 9 …. 25.38 Transport (Drivers Licensing) Regulations 1987 reg 31(1)(b) …. 19.33 reg 31(1)(c) …. 19.33 Transport (Vehicle and Driver Registration and Licensing) Act 1986 …. 19.33 s 37 …. 19.33 s 37(1) …. 19.33 Workers’ Compensation Act 1908 s 42 …. 25.38
United Kingdom
Contracts (Rights of Third Parties) Act 1999 …. 25.54 Elizabeth Statute of 1601, 43 Eliz c 12 of 1601 …. 3.14, 3.33 Financial Services Act 1986 …. 24.4, 24.5 Gambling Act 2005 …. 3.36 Gaming Act 1845, 8 and 9 Vict, c 109 …. 3.31, 3.36, 10.2 s 18 …. 3.36 Insurance Companies Act 1974 …. 1.16, 9.21 Insurance Contract Act 2015 …. 7.50 Life Assurance Act 1774, 14 Geo 3 c 48 (Gambling Act 1744) …. 3.31, 3.34, 3.35, 3.36, 10.2, 10.9 Lloyd’s Act 1871, 34 and 35 Vict c 21 …. 3.23 Preamble …. 3.23 Marine Insurance Act 1745, 19 Geo II c 37 …. 3.31, 3.32, 3.33, 3.35, 3.36, 10.2 Marine Insurance Act 1906 …. 3.50 s 17 …. 7.11 Sch 1 …. 3.13 Occupiers’ Liability Act 1957 …. 22.1 Rebuilding of London Act 1666, 18–19 Chas II c 8 …. 3.19 Preamble …. 3.19 Road Traffic Act 1930 …. 25.54 Third Parties (Rights against Insurers) Act 1930 …. 25.54 Third Parties (Rights against Insurers) Act 2010 …. 25.54 Workers’ Compensation Act 1897 s 5 …. 25.38
United States of America Restatement (Second) of Contracts 1981 s 205 …. 7.1 Uniform Commercial Code …. 7.1 Art 203 …. 7.1
CONTENTS Preface Acknowledgments Tables of Cases Table of Statutes
Part 1
Background
Chapter 1
Insurance: A Risk Transfer, Loss-Spreading Arrangement Introduction The nature of insurance The essential characteristics of general insurance: risk transfer and loss spreading The non-essential characteristics of general insurance: contract, indemnity, premium and profit The differences between an insurance arrangement, a wager (bet), a guarantee or indemnity and a manufacturer’s warranty How insurance works Reinsurance
Chapter 2
Dividing Insurance into Categories Introduction Marine insurance Life insurance
General insurance
Chapter 3
A Short History of Insurance Introduction Early commercial risk transfer arrangements The spread of insurance The history of loss spreading Insurance in Australia Conclusion
Chapter 4
Regulation Of General Insurers Introduction Overview The Insurance Act 1973 (Cth) and APRA The Corporations Act 2001 (Cth) Ch 7 The Australian Securities and Investments Commission Act 2001 (Cth) The Financial Sector (Shareholdings) Act 1998 (Cth) and the Insurance Acquisitions and Takeovers Act 1991 (Cth) Financial Sector (Collection Of Data) Act 2001 (Cth) The Privacy Act 1988 (Cth) Self-regulation: The General Insurance Code of Practice and the Financial Ombudsman Service
Chapter 5
Insurance Intermediaries Introduction When is an insured fixed with an insurance broker’s knowledge? The liability of loss adjusters, loss assessors and Investigators in contract and in tort The liability of an insurance agent in contract and in
tort and the liability of an insurer for the actions of its agent The liability of an insurance broker in contract and in tort The fiduciary obligations of an insurance agent and an insurance broker The Australian Securities and Investments Commission Act 2001 (Cth) The Corporations Act 2001 (Cth) Ch 7 Self-regulation: The Insurance Brokers Code of Practice 2014 and the Financial Ombudsman Service Concluding observation
Chapter 6
Introduction to the Insurance Contracts Act 1984 (Cth) Introduction Background Application of the ICA: ss 8 and 9 The extended application of the ICA: s 10 Limited relief elsewhere: s 15 The approach to construing a provision of the ICA
Part 2
Period Leading up to and Including the Formation of an Insurance Contract
Chapter 7
Utmost Good Faith Introduction Do all contracts have to be performed in good faith? Is there a tort of bad faith? Utmost good faith at common law Utmost good faith under the ICA
And yet
Chapter 8
Pre-Contractual Disclosure Introduction No common law requirement for pre-contractual disclosure in relation to contracts generally The common law pre-contractual duty of disclosure in relation to insurance contracts An insured’s pre-contractual duty of disclosure under the ICA Pt IV: Disclosures and Misrepresentations An insurer’s pre-contractual common law duty of disclosure is not affected by the ICA An insurer’s pre-contractual requirement to inform under the ICA An insurer’s pre-contractual disclosure obligations under the Corporations Act 2001 (Cth) Ch 7
Chapter 9
Formation of an Insurance Contract Introduction Intention to create legal relations Offer and acceptance Consideration Statutory illegality Assignment and novation
Chapter 10 Insurable Interest Introduction The common law and statutes other than the Insurance Contracts Act 1984 (Cth) Contracts subject to the Insurance Contracts Act 1984 (Cth)
Chapter 11 Duration of an Insurance Contract
Introduction Interim insurance Renewal, extension and cancellation of an insurance contract
Chapter 12 The Layout of an Insurance Policy: Recitals, Insuring Clause, Exclusions, Policy Terms and Definitions Introduction The recitals The insuring (operative) clause and exclusions Policy terms Warranties Terms descriptive of the risk Conditions Definitions
Chapter 13 Construing an Insurance Contract Introduction Construing a parliamentary drafted insurance contract Construing a privately drafted insurance contract What the dictionaries say The approach to construction will usually favour the insured Rectification
Chapter 14 The Nature of an Insurer’s Promise to Indemnify Introduction What an insurer agrees to do when it promises to indemnify an insured The nature of an insurance claim for indemnity
Is an insurance claim for indemnity a claim under an insurance contract or a claim for damages for breach of contract? When does an insured’s cause of action for an indemnity accrue?
Chapter 15 Causation Introduction The context in which the causation inquiry is conducted Proximate cause
Chapter 16 Mitigation in Insurance Law Introduction Part 1 Part 2 Part 3 Conclusion
Chapter 17 First Party Insurance Introduction Property insurance (indemnity insurance) Sickness and accident insurance (contingency insurance)
Chapter 18 Liability (Third Party) Insurance Introduction Public (general) liability insurance Product liability insurance ‘Claims made’ and ‘claims made and notified’ liability insurance Compulsory insurance for liability to pay compensation
for death or personal injury related to the use of a motor vehicle Proving entitlement to indemnity
Chapter 19 Some Common Policy Terms Introduction Some common conditions Some common exclusions Some common causal connectors Some other common policy terms
Part 3
The Claim
Chapter 20 Broken Promises Introduction An insurer’s obligation to pay a claim within a reasonable time An insured’s right to s 57 interest for late payment of a claim An insured’s right to damages and other relief if an insurer wrongly denies, or delays, payment of a claim An insured’s choices if an insurer repudiates a policy Onus of proof
Chapter 21 Election, Estoppel and Abuse of Process Introduction Waiver, election (waiver by election) and estoppel Granting indemnity and reserving rights An insurer’s entitlement to repayment of a claim paid by mistake Res judicata, issue estoppel and ‘anshun’ estoppel
Abuse of process in the context of a liability insurance policy
Chapter 22 Section 54 Introduction The need for reform Text and context When s 54 is not in play When s 54 is in play If engaged, is the relief in s 54(1) or s 54(2)? How s 54(2) operates How s 54(1) operates on an ‘occurrence-based’ policy How s 54(1) operates on ‘claims made’ and ‘claims made and notified’ policies The scope of s 54(5)(b) Concluding observation
Chapter 23 Fraudulent Claims Introduction The nature of a fraudulent claim An insurer’s common law remedy for a fraudulent claim An insurer’s remedy under the ICA for a fraudulent claim Collateral lies (formerly known as ‘fraudulent devices’) Some procedural and evidential matters
Chapter 24 How Many Claims (Aggregation Clauses)? Introduction Aggregation clauses Some English and Australian cases
Chapter 25 Claiming the Benefit of Another Person’s
Insurance Contract Introduction Part 1: The common law and statutory provisions that give direct access to another person’s insurance contract Part 2: Statutory provisions that give a third party the direct benefit of a liability insurance contract Part 3: Statutory provisions that enable a judgment creditor to ‘garnishee’ the amount of an insurer’s liability to the judgment debtor Concluding observation
Chapter 26 Some Insurance-Related Procedures
Civil
Litigation
Introduction Liability insurance Client legal privilege and ‘without prejudice’ privilege An insurer denying its insured access to a nonprivileged expert’s report
Part 4
Recovery of an Insurer’s Loss from Third Parties and Other Insurers
Chapter 27 Subrogation Introduction An insurer’s right of subrogation Exercising a right of subrogation No subrogation rights against another insurer; subrogation rights against a non-insurer indemnifier Circumstances in which an insurer has no, or limited, subrogation rights against a negligent third party Allocating the proceeds of recovery
A third party’s liability to pay damages is not reduced by an insured’s access to insurance The limitation period for exercising a right of subrogation
Chapter 28 The Duties Owed by a Lawyer When Retained by an Insurer Introduction A lawyer’s duties to a client generally Insurer’s lawyer investigating a third party claim against the insured Insurer’s lawyer informing insured they will be indemnified for a third party claim against them Insurer’s lawyer acting in the insured’s interests in relation to a third party claim against the insured Limits on the free flow of information and documentation from an insurer’s lawyer to the insurer and the insured
Chapter 29 Double Insurance and Contribution Introduction Double insurance ‘Other insurance’ clauses The equitable right to contribution Proving the right to contribution and determining the amount to be used for the contribution calculation The contribution calculation Index
[page 1]
PART 1 Background
[page 3]
Chapter 1 INSURANCE: A RISK TRANSFER, LOSS-SPREADING ARRANGEMENT The sharing of risks is the essential brilliant idea of insurance.1
INTRODUCTION This text is about Australian general insurance law. It is intended as a first reference for insurance law students, lawyers generally, lawyers who practise in insurance law, underwriters, claims officers, insurance agents and brokers, and loss adjusters and assessors. Although mention is made of marine insurance and life insurance, the reader should consult specialist texts for an insight into those areas of insurance law. Apart from some brief references to reinsurance, workers’ compensation insurance and compulsory motor vehicle third party death and personal injury insurance, this text does not deal with any of the insurances listed in s 9 of the Insurance Contracts Act 1984 (Cth) (ICA). This first chapter discusses: the nature of insurance; the essential characteristics of general insurance: risk transfer and loss spreading; the non-essential characteristics of general insurance: contract, indemnity, premium and profit; the differences between an insurance arrangement, a wager (bet), a
■ ■ ■ ■
guarantee or indemnity and a manufacturer’s warranty; [page 4]
■how insurance works; and ■reinsurance. THE NATURE OF INSURANCE 1.1 It is important to be able to recognise whether an arrangement is insurance because: certain common law and equitable principles operate uniquely in relation to insurance arrangements (for example, the duty of utmost good faith and subrogation); if it is, it will be subject to Commonwealth, state or territory legislation or self-regulating codes of practice directed at insurance arrangements; and if it is, there are free services — such as the Financial Ombudsman Service (FOS) — available to assist consumers to resolve some of their disputes with insurers arising out of their insurance arrangements. It is also important to be able to determine whether an entity is carrying on insurance business because: Commonwealth legislation regulates entry into the Australian insurance market (for example, the Insurance Act 1973 (Cth)); and Commonwealth, state and territory legislation and self-regulating codes of practice regulate the activities of entities carrying on business in the insurance market.
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1.2 Insurance is a risk transfer,2 loss-spreading arrangement.3 Generally speaking, it involves an insured4 transferring to an insurer the burden
[page 5] of a certain type of financial loss the insured might suffer if an event specified in the arrangement: fortuitously occurs5 during the period of the arrangement (‘occurrence’ insurance); or is the subject of a claim first made against the insured, or of circumstances first notified to the insurer, during the period of the arrangement (‘claims made’ liability insurance).6 The period of the arrangement (insurance period) is a fundamental aspect of an insurance arrangement.7 An insurer takes on that financial burden by promising it will make good such loss by paying money or a corresponding benefit (money’s worth) to the insured as required by the arrangement: Prudential Insurance Co v Inland Revenue Commissioners (Prudential).8
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THE ESSENTIAL CHARACTERISTICS OF GENERAL INSURANCE: RISK TRANSFER AND LOSS SPREADING 1.3 Allocating risk is an important but incidental aspect of most contracts.9 Transfer of risk is the sole or primary purpose of an insurance contract.10 A contract that contains insurance and non-insurance type provisions is an insurance contract if, taken as a whole, its primary purpose is to insure.11 1.4 In Truta v Avis Rent-A-Car System Inc (1987) 193 Cal App 3d 802,12 the Court of Appeal for the First District of California identified risk transfer and loss spreading as the essence of insurance (at 811– 812): In analyzing whether a contract constitutes insurance it is advised that two inquiries be
made: ‘To what extent, in each case, did the specific transactions or the general line of business at issue involve one or more
[page 6] of the evils at which the regulatory statutes were aimed? And were the elements of risk transference and risk distribution, characteristic of transactions at which the regulatory statutes were aimed, a central and relatively important element of the transactions or instead merely incidental to other elements that gave the transactions their distinctive character?’ …
Risk transfer Primary purpose 1.5 The risk transfer aspect of insurance is effected by a private arrangement made solely or primarily for that purpose.13 So, for example, a lease is not an insurance arrangement even if it contains an indemnity clause that transfers specified risks to the lessee, because the purpose of a lease is to grant exclusive possession of property to a lessee. The transfer of risk pursuant to the indemnity clause is an incidental aspect of the lease, not its sole or primary purpose. A contract that intends to transfer risk can be insurance even if the risk is not transferred because of something done or not done by the insured before or at the time of a loss.14
Adverse affect 1.6 Insurance involves an insurer promising to make good a specified category of loss (for example, by indemnifying or paying ‘an amount to cover loss or injury’) if the insured suffers such a loss as a result of a transferred risk eventuating.15 The risk transferred must be a risk that would adversely affect the interest of the insured or the beneficiaries of an insurance arrangement if it eventuates; otherwise, what is the point of the arrangement? For example, see Australian Health Insurance Association Ltd v Esso Australia Pty Ltd.16 In that case, Sheppard J concluded (at [39]) that the Esso Supplemental Health and Dental Care Plan evidenced an insurance
contract because it secured ‘to the employees … the payment of a sum of money upon the happening of an event which may or may not happen and is thus uncertain and, which, if it does happen, will be adverse to the employees’ interests’. 1.7 This ‘adverse affect’ issue is not the same as the requirement for an ‘insurable interest’ imposed by statute (see Chapters 3 and 10). ‘Adverse affect’ is a reference to the potentially adverse financial impact of a risk eventuating on an insured or the beneficiaries of an [page 7] insurance contract. Without that potential, what risk is being transferred? By contrast, ‘insurable interest’ is a reference to the relationship between the insured and the subject matter of the insurance. If there is legislation that requires an insured to have an insurable interest in the subject matter of the insurance at a particular time and he or she has none at that time, the insurance contract will be unenforceable. 1.8 As discussed in Chapter 2, insurance is either ‘indemnity’ or ‘contingency’. By an indemnity insurance contract, an insurer promises to indemnify against a certain type of financial loss suffered by an insured as a result of the happening of a transferred risk. If a transferred risk eventuates but does not hurt the insured financially, then the insurer has nothing to indemnify against. With indemnity insurance, the nature of the contract requires that the risk transferred be adverse to the interest of the insured or the beneficiaries of an insurance arrangement. On the other hand, by a contingency insurance contract, an insurer promises to pay an agreed amount upon the happening of a contingent event irrespective of the actual financial loss that an insured or the beneficiaries of the contract would suffer if such an event happens. 1.9
In Prudential (a case involving a contingency insurance
arrangement), Channell J (at 664) described an insurance contract as: … a contract for the payment of a sum of money, or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have some amount of uncertainty about it, and must be of a character more or less adverse to the interest of the person effecting the insurance.
Channell J concluded (at 664) that a person who could insure his life for six pence a week must be a poor person who has to earn his own living. As he gets towards 65 years of age his capacity to earn a living will probably diminish: ‘That is an event which is sufficiently adverse to the interest of a poor person to make it a proper subject against which to insure’. Almost a decade later, in Gould v Curtis,17 Cozens Hardy MR (at 92) and Buckley LJ (at 95) said Channell J was wrong to think that it is essential to a contingency insurance contract that the risk transferred be adverse to the interest of the insured or the beneficiaries of the insurance. Accordingly, Mr Gould was entitled to deduct from his income for taxation purposes the premium he paid for a policy by which the insurer promised to pay £100 if Mr Gould died before 1 March 1923 and double that amount if he was alive that day. The other member of the Court of Appeal (Kennedy LJ) agreed with Channell J (at 99) that ‘adverse effect’ was an essential characteristic of insurance, although he observed that it might be too strong a description of the necessary effect in some circumstances. [page 8] 1.10 If, when a contingency contract is made, there is no expectation that the interest of an insured or a beneficiary of the insurance would be adversely affected if the risk described in the contract eventuates, then the contract looks more like a straight investment or a wager18 than an insurance contract. To distinguish between these arrangements, it seems necessary to include as an insurance requirement that when the contract is made there is at least an expectation that the interest of the insured or
the beneficiaries of the insurance might be adversely affected if the risk eventuates.19
Uncertainty (fortuity) 1.11 The notion of risk transfer requires uncertainty (fortuity);20 there can be no transfer of risk if there is no risk to transfer. Channell J put it this way in Prudential (at 663): [There] must be either uncertainty whether the event will happen or not, or, if the event is one which must happen at some time, there must be uncertainty as to the time at which it will happen.
1.12 Generally speaking, the happening of a specified event is not uncertain or fortuitous if it is inevitable immediately before the insurance period commences that the event will occur during the insurance period. ‘Inevitability’ might be as an objective physical fact, or from the point of view of the insured or of a reasonable person in the insured’s position (it is not clear which is the appropriate test or whether it is a combination of both).21 1.13 The ‘uncertainty’ (fortuity) requirement means that unless the arrangement expressly provides otherwise, property insurance will not cover an insured for damage to or destruction of property if the insured deliberately caused the loss.22 For example, an insured cannot recover for insured property destroyed by fire if she was involved in deliberately setting fire to the property. However, there is a distinction ‘between damage caused by an intentional act of the insured, and, on the other hand, damage intentionally caused by the insured’.23 So, for example, subject to the policy wording, an insured who lights a wood-fired barbeque in the [page 9] backyard which accidentally spreads to her house and destroys it can recover under a policy covering damage to or destruction of the house
by fire even though she deliberately lit the fire that burned her house down. First party insurance policies commonly contain an exclusion for loss or damage deliberately caused by an insured. Recklessly causing loss or damage is probably not caught by the exclusion.24 So an insured who lights a wood-fired barbeque in the middle of summer on a hot and windy day might not be regarded as having ‘deliberately’ set fire to her house if the fire from her barbeque spreads to her house.25 1.14 The ‘uncertainty’ requirement also means that, subject to the policy wording, property insurance will not cover an insured for damage to or destruction of property brought about by: ‘wear and tear’ if some wear and tear is inevitable during the insurance period. In insurance, this means deterioration of an item as a result of ordinary conditions operating upon the item.26 The fact that the emergence or spread of damage by wear and tear is unpredictable or that it could have been prevented by proper maintenance is irrelevant.27 ‘inherent vice.’28 In insurance, this means the deterioration of an item ‘as a result of [its] natural behaviour in the ordinary course of [things] … without the intervention of any fortuitous external accident or casualty’.29 In Global Process Systems Inc v Syarikat Takaful Malaysia Berhad, The Cendor MOPU,30 Lord Saville put it this way (at [31]):
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… where the only fortuity operating on the goods comes from the goods themselves, the proximate cause of the loss can properly be said to be the inherent vice or nature of the subject matter insured …
In the same case, Lord Clarke said (at [122]) that ‘the critical distinction is between damage caused by an external fortuity and damage resulting solely from the intrinsic nature of the insured goods’. [page 10]
Legally binding
1.15 There is only insurance if an ‘insurer’ is legally bound to accept the financial burden of a specified event if it happens.31 The essential characteristic of risk transfer is missing if an arrangement allows an ‘insurer’ to choose whether or not to pay for a loss that falls within the scope of the risks described in the arrangement.32 1.16 In Medical Defence Union Ltd v Department of Trade,33 members of the Medical Defence Union were practising doctors and dentists. The Union mainly defended legal proceedings against its members and indemnified them if the proceedings against them were successful. Union members had the right to ask for assistance or an indemnity, not the right to those benefits. If the Union carried on insurance business, it was regulated by the Insurance Companies Act 1974 (UK), which gave the Department of Trade the power, amongst other things, to take steps to ensure its financial health. The Act did not define ‘insurance business’, and so whether the Union carried on insurance business fell to be determined by the common law. Sir Robert Megarry VC said (at 95) that words such as ‘insure’, ‘assure’ and ‘ensure’ conveyed a sense of something certain and not merely a hope or expectation, no matter how well grounded. He concluded that the Union did not carry on insurance business because insurance would require that the Union be legally bound to accept a risk if it eventuated. It was not sufficient that a Union member’s right to request assistance or indemnity had some value in that the Union was legally bound to properly consider such a request.
Payment of money or some corresponding benefit (money’s worth) 1.17 An essential characteristic of an insurance arrangement is that an ‘insurer’ promises to pay an ‘insured’ money or ‘some corresponding benefit’ (money’s worth34) for an insured loss.35 For example, instead of promising to pay an ‘insured’ money, an ‘insurer’ might promise to lend an insured a car whilst her car is being repaired, or itself arrange for the
repair or replacement of goods damaged or destroyed by an insured event. [page 11]
Loss spreading 1.18 Loss spreading is the primary characteristic of the public aspect of insurance36 in that insurance works by a large number of insureds with similar risk profiles each privately transferring the same class of risk to the one insurer or group of insurers. In this way, an insurer or group of insurers spreads amongst the many the cost of the losses that will happen to the few.37 1.19 If payable, ‘premium’ is the price paid by each insured to join a premium pool established by an insurer or group of insurers. Because each insured’s risk of loss is spread across all the insureds participating in the pool, the premium is usually tiny compared with the size of a loss an insured might suffer if an insured event occurs. The terms and conditions of each insured’s private arrangement with an insurer or group of insurers will determine the insured’s entitlement to payment out of the premium pool in the event of a loss. 1.20 This public loss-spreading aspect of insurance is reflected in the Preamble to the first English statute specifically concerned with insurance (43 Eliz c 12, enacted in 1601): … upon the loss or perishing of any ship there followeth not the undoing of any man, but the loss lighteth rather easily upon many than heavy upon few, and rather upon them that adventure not than upon those who do adventure; whereby all merchants, specially those of the younger sort, are allured to venture more willingly and more freely.
1.21 A mutual or self ‘insurance’ scheme is not insurance if it only involves the sharing or spreading of the risk of each contributor across all those contributing to the premium pool. It is described as mutual or self ‘insurance’ because each contributor (member) is insurer and insured.38 An outside entity might manage the pool, but it is only insurance if an outside entity assumes at least a part of each risk:39 ‘a
part’ rather than ‘the whole’, because, in most insurance arrangements, some of the risk remains with the insured, for example, by the insured agreeing to bear the first part of any loss (an excess or deductible) or any part of a loss in excess of an agreed sum insured or limit of indemnity. 1.22 If premium is payable, it might only be insurance if premium is paid into, and claims are paid out of, a premium pool.40 [page 12] 1.23 An entity that accepts a transfer of risk in a one-off private transaction is not engaged in insurance because it is not a ‘loss spreader’; although the transaction shifts the risk of loss, it does not spread it.
THE NON-ESSENTIAL CHARACTERISTICS OF GENERAL INSURANCE: CONTRACT, INDEMNITY, PREMIUM AND PROFIT 1.24 Some characteristics regularly feature in insurance arrangements but are not essential to insurance. For example, insurance arrangements: are usually contractual, but can be created by statute; are often based on a relationship of indemnity, but can be contingency; usually require the payment of premium, but sometimes do not; and are often entered into by an insurer endeavouring to make a profit, but not always.
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Contract 1.25 Insurance arrangements are usually created by contract, but can be the product of statute. In R v Cohen; Ex parte Motor Accidents Insurance Board,41 the High Court considered whether the Board was carrying on the business of insurance. If it was, its employees were eligible for membership of the Australian Insurance Employees’ Union. The Board was obliged by statute to indemnify the owners and users of registered motor vehicles against third party claims for death or bodily injury arising out of the use of those vehicles. The Board did not issue an insurance policy. Mason J held (at [25]–[26]) that the existence of a contract is not essential to the concept of insurance: [I]t is the relationship of indemnity that exists between insurer and insured, rather than the source of that relationship, that is the essence of the concept of insurance, so that it matters not whether the relationship arises by statute or contract … the fact that the Board is required to indemnify the owners and users of motor vehicles in respect of third party liabilities associated with motor vehicle accidents, is certainly sufficient to justify the conclusion that the Board’s function … is that of ‘insurance’, in the popular sense of that term.
[page 13]
Indemnity 1.26 In R v Cohen, Mason J said (at [25]–[26]) that the essence of the concept of insurance is ‘the relationship of indemnity’. As a general proposition that is not true, because not all: insurance is indemnity (insurance can be indemnity or contingency (see Chapter 2)); and indemnity arrangements are insurance (for example, an indemnity clause in a lease does not necessarily give rise to an insurance relationship between the parties to the lease).42
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Premium 1.27 Insurance usually involves an insured paying to an insurer a fixed amount (premium) in consideration for the transfer of risk to the insurer, but that is not a necessary element of insurance.43 Premium will not usually be a feature of an insurance arrangement if the arrangement is created by deed or statute.
Profit 1.28 In California-Western States Life Insurance Co v State Board of Equalization,44 Van Dyke, Presiding Justice of the District Court of Appeal, Third District, California, said (at [21]): Regardless of the noted similarities in so many of the provisions contained in the plan to those found in annuity policies regularly sold by insurers, the great dissimilarity which inheres in the total absence of profit motive — never ignored by successful insurers — compels a conclusion that the establishment and maintenance of the respondent’s employees’ retirement plan cannot be classified as insurance business done by it in this state. Such was not its purpose and such was not its nature.
In Australia, the profit motive is not a necessary element of an insurance arrangement.45 [page 14]
THE DIFFERENCES BETWEEN AN INSURANCE ARRANGEMENT, A WAGER (BET), A GUARANTEE OR INDEMNITY AND A MANUFACTURER’S WARRANTY The differences between an insurance arrangement and a wager (bet) 1.29
An insurance arrangement is aleatory (random)46 because the
dollar value of the parties’ respective performance is unequal.47 That is because, when the arrangement is made, the parties to it: know the cost (premium) payable for the risk transfer (if any); but do not know if an event specified by the arrangement will happen during the insurance period and, if it does, how much the insurer will be obliged to pay the insured.
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1.30 By a wager (bet), the parties agree that one of them will pay money or money’s worth to the other depending on the outcome of an uncertain event, usually with neither party having any interest in the transaction other than that created by the wager.48 A wager has some of the characteristics of insurance in that it is aleatory and involves the promise of payment dependent on an uncertain future event. However, a wager is not insurance because: a wager creates a risk of loss for each of the wagering parties, whereas insurance involves the transfer of an existing or anticipated risk of loss from one party to another. Put another way, a gambler seeks to take advantage of, whereas an insured tries to protect against, a future random event; each party enters into a wager in the hope of making a profit, whereas an insured only enters into an insurance arrangement for the purpose of protecting itself against the risk of loss; and in insurance, both parties hope the risk will not eventuate, whereas in a wager at least one of the parties hopes the risk will eventuate.
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[page 15]
The differences between an insurance arrangement and a guarantee or indemnity 1.31
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The object or purpose of: a guarantee and an indemnity is to make good the financial position of a creditor of someone other than the guarantor or
indemnifier. They are a species of financial accommodation to support the credit risk of the principal debtor and to hold the creditor harmless; an indemnity insurance contract is the sharing the risk of, or spreading loss from, a risk that may or may not eventuate, or in the case of life insurance where the timing of the insured event is not known.49 Provision of a guarantee or indemnity is usually ancillary to a larger transaction, whereas indemnity is the sole or primary purpose of an indemnity insurance contract.
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The differences between an insurance arrangement and a manufacturer’s warranty 1.32 By warranting its product, a manufacturer agrees to pay or provide to the purchaser of its product money or money’s worth for the purpose of making good a financial loss the purchaser might suffer if any of the events specified in the arrangement between the manufacturer and the purchaser fortuitously occur during the period of the arrangement. What is the difference between this and an insurance arrangement? Some suggest the difference is in the control that a manufacturer has over an event that triggers payment,50 in that: when a manufacturer warrants its product, it is only promising to put right that which was within its control to do right in the first place; and an insurer has no control over whether an insured event happens or not.
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1.33 A better explanation for the difference between the two is that, in the usual case of a warranty as part of a sale transaction, the provision of the warranty does not involve the transfer of a risk of loss (the subject of the warranty) by, to or from the manufacturer, the distributor or the purchaser. Although the sale transaction transfers property to the purchaser, the manufacturer — by providing the
warranty — retains the risk of loss in relation to the subject matter of the warranty. The purchaser [page 16] cannot transfer a risk to the manufacturer that was not transferred to the purchaser in the first place. On the other hand, a manufacturer’s warranty is arguably an insurance arrangement if a manufacturer: gives a warranty independently of the sale transaction and for a distinct cost. In this case, the risk which is the subject of the warranty passes to the purchaser on the making of the sale transaction and is transferred back to the manufacturer by the provision of the warranty; or offers to do more than simply warrant its products against manufacturing defects; for example, by promising to replace its product if it is damaged by a cause unrelated to the manufacturing process, or to provide a recovery service for purchasers of its cars if a purchaser’s car runs out of petrol or suffers a flat tyre not due to a tyre defect. By the provision of this sort of warranty, the purchaser transfers risks to the manufacturer that are initially assumed by the purchaser as an incident of the sale transaction. Repeatedly warranting someone else’s products will usually amount to insurance.51
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1.34 In Re Digital Satellite Warranty Cover Ltd,52 Digital Satellite provided extended warranties in respect of satellite television dishes and other equipment. The warranties covered repairs commencing after the expiration of the manufacturer’s warranty, on a repair or replacement basis, subject to certain exclusions (including for fire and theft). Warren J concluded that at common law, the extended warranties constituted insurance contracts even though they provided for ‘money’s worth’ (the provision of repairs or replacement items) rather than the payment of money.
In a July 2009 Issues Paper entitled Consumer Rights: Statutory Implied Conditions and Warranties, the Commonwealth Consumer Affairs Advisory Council explained (at p 26) that extended warranties issued by a ‘third party … who does not have an interest in the product sold by the retailer or dealer, or control over the quality of the product that is the subject of the extended warranty’ may be considered a miscellaneous financial risk product and that such an: … extended warranty will not be covered by the incidental product exemption … [because it] is not merely incidental to the sale but is a separate financial product which will require the consumer to make a separate decision about whether to acquire it or not to manage their financial risk.
[page 17]
HOW INSURANCE WORKS 1.35 Every day, there is a risk that something will happen that causes you financial loss; for example, you might be injured, or property belonging to you might be damaged or stolen. You can usually do something to reduce the likelihood of that risk eventuating, but nothing to entirely avoid the risk. If the risk occurs and you suffer a financial loss, you will bear the loss unless responsibility for it is shifted to someone else, for example to: the Commonwealth Government through the social security or health systems; a contractor who is obliged by a term in a contract to indemnify you against your loss; a person upon whom the law of tort imposes the burden of your loss; your employer, pursuant to workers’ compensation legislation; or an insurer, pursuant to an insurance arrangement made by you or for your benefit.
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1.36
Spreading loss through insurance benefits the community by:
insurers absorbing financial loss that would otherwise be randomly distributed throughout the community; insurers managing the risks offered or transferred to them by: ■ setting premiums having regard to the magnitude and nature of the risks and the likelihood of them occurring; ■ including conditions in insurance policies rewarding insureds who do not make claims on their policies (for example, by providing a ‘no claims bonus’ in a motor vehicle policy); ■ requiring insureds to reduce risks as a condition of offering insurance (for example, by making it a condition of a home and contents insurance policy that the insured fit a burglar or fire alarm or a sprinkler system); and ■ including conditions in insurance policies requiring insureds to take reasonable precautions to protect their property or to avoid personal injury; allowing insureds to save, spend or invest funds that might otherwise have been set aside for a catastrophe. For example, by taking out insurance, a business does not need to keep in reserve sufficient money to repair or replace premises, plant, equipment or products that might be damaged or destroyed by insurable risks at some time in the future. It only needs to annually fund a relatively small insurance premium to protect against the financial consequences of any of these risks eventuating.
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[page 18] Insurance benefits individual insureds by assisting them to manage their financial risk and giving them some peace of mind.53 Insurance will work for an insured if: the premium for the insurance is substantially less than the financial loss the insured would suffer if the worst, or a run, of the risks specified in the insurance arrangement eventuates; and the insured is confident that the insurer will promptly pay a claim
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if the insured suffers a loss covered by the insurance arrangement. Insurance will be viable for a commercial insurer if it can create a premium pool large enough for it to be confident about making a profit after prompt payment of all proper claims. The insurer will make a profit if it: collects enough premium to promptly pay all proper claims as and when they fall due; and successfully invests the premium it collects until claims are paid. Insurance can be profitable for commercial insurers. According to the Australian Prudential Regulation Authority (APRA) Quarterly General Insurance Performance Statistics for September 2016 (released 17 November 2016), the 109 Australian authorised general insurance companies, including 99 direct insurers and 10 reinsurers, had: net assets of $28 billion (as at 30 September 2016); net earned premium of $30.6 billion and gross incurred claims of $31.1 billion (approximately $84 million per day) for the year ended 30 September 2016; total underwriting expenses of $7.9 billion for the year ended 30 September 2016; and a net profit after tax of $3.1 billion in the year ended 30 September 2016.54
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1.37 Some say you can judge the economic vitality of a city by counting the number of cranes on the skyline. Similarly, you do not need the above statistics to persuade you of the profitability of the insurance business. Just walk through the central business district of any major city and count the number of insurers with signage on high-rise commercial buildings. Or note the amount of advertising space taken up by insurers for the purpose of protecting or increasing their share of a competitive and valuable market. 1.38 Insurers, like insureds, are risk averse. So how does an insurer profit from pooling risks when every risk it includes in the pool is by its [page 19]
nature uncertain, and if a risk eventuates it is likely to cost the insurer far more than it was paid by way of premium for that risk?
The Law of Large Numbers 1.39 In the insurance context, Jacob Bernoulli’s Law of Large Numbers55 refers to the principle that the larger the number of insureds pooling similar risks with the one insurer, the more accurately the insurer is able to predict the number and size of losses the group will experience over the relevant period and therefore how much it needs to charge each member of the group to pay claims as and when they eventuate. The uncertainty of loss for any one insured in the group becomes certain across the group. Put another way, an insurer, with the use of actuaries (specialists in the mathematics of risk), can predict reasonably accurately how many of its insureds will suffer loss during the relevant period and the extent of their combined losses, even though it can only make an educated guess as to which of its insureds will suffer loss during the relevant period and of those that suffer loss, the extent of their loss. By pooling risks, the insurer effectively spreads amongst all its insureds the financial loss that only some of them will suffer during the relevant period, thereby allowing each insured ‘to enjoy the advantage provided by the Law of Large Numbers’.56 1.40 How does the Law of Large Numbers operate? You are invited to choose from one of two containers. One container holds a $100 note, the other a $50 note. You have a 50:50 chance of choosing the container holding the $100 note and the same chance of choosing the container holding the $50 note. Would you benefit by pooling your selection chance with the selection chances of another 99 people given the same opportunity? If each of 100 people is allowed to choose one of the two containers, they might each choose the container holding a $100 note, in which case the group will take $10,000. On the other hand, the group will only take $5,000 if each chooses the container holding a $50 note. On average, half will choose the container holding a $100 note and
half will choose the container holding a $50 note, generating a group take of $7,500. If, before selecting from the containers, the 100 people agree to share equally in the group take and the predicted average occurs, each member of the group will get $75 instead of $50 or $100. Each member of the group will get more or less than $75, depending on how close the average of the group choices approaches the predicted average. [page 20] 1.41 Would you pay a $5 fee to share equally in the group take of a 100-person pool or would you prefer to take your own chances for nothing? If you pay a $5 fee to a third party to join the pool and 100 people choose the container holding a $50 note, you will end up with $45 ($50 less $5). On the other hand, if 100 people choose the container holding a $100 note, you will end up with $95 ($100 less $5). If the predicted average occurs, you will end up with $70 ($75 less $5). If you pay a $5 fee to a third party to join a 100-person pool selecting $50 or $100 notes for a certain $75 payment by the third party to each member of the pool, the law of averages predicts the third party will make a profit of $500 (100 people × $5). If the actual choices fall below the predicted average, the third party has each person’s $5 participation fee to contribute towards the shortfall. For example, if 40 people choose the container holding the $100 note and 60 people choose the container holding the $50 note, the third party will be $500 short of what it needs to pay $75 to each person in the pool. The $5 fee will cover the shortfall, leaving the third party without a profit from the venture. On the other hand, the third party’s profit will be greater than $500 if it only agrees to pay, for example, $70 to each member of the pool or if the group chooses more than the predicted average of 50 × $100 notes. The third party can increase its profit by creating a substantial delay between collecting the $5 fees and the date on which the selection takes
place or when its payment becomes due. During the delay, the third party can invest the $5 fees. 1.42 Based on its prediction of the insureds’ combined losses during the relevant period, a commercial insurer calculates the premium it needs to generate in order to create a premium pool large enough to pay claims out of its risk pool as and when they fall to be paid and make a profit for its shareholders. The premium pool will not be large enough if the insurer does not collect sufficient premium (either because the premium it charges is too low or because the premium is so high it loses potential insureds to premium pools created by other insurers or puts potential insureds off insuring altogether) or it does not generate sufficient return from the investment of the premium pool whilst it is waiting to pay claims out of the pool.
REINSURANCE 1.43 Reinsurance is an independent arrangement between a reinsurer and a reinsured (the original insurer, also known as the ‘cedant’) in which the subject matter reinsured is the subject matter of the original insurance;57 In other words, insurance of the same subject matter but with different ‘insureds’. [page 21] Insurers take out reinsurance for the same reason as bookmakers offload some of their risk with the equivalent of a Totalisator Agency Board. Obviously, reinsurance is a bit more sophisticated than an insurer taking a ‘wad’ of cash to a reinsurer and getting issued with a ticket that promises a payout if a particular horse wins or runs a place. The Insurance Act 1973 (Cth) and APRA determined prudential standards seek to achieve the main object of the Act (to protect insureds
and prospective insureds) amongst other things, by requiring general insurers to take out reinsurance: s 2A(2)(c). A reinsured’s cause of action against a reinsurer accrues when the reinsured’s liability to the insured has been ascertained by a judgment, an arbitration award or a settlement.58
1.
Observation by The Hon Michael Kirby AC CMG in his speech to launch the Allens Arthur Robinson, 2004 Volume of the Annual Review of Insurance and Reinsurance Law, Sydney, 23 February 2005. 2. Commissioner of Inland Revenue v Motorcorp Holdings Ltd [2005] NZCA 33 at [48] and [55] (Hammond J). The requirement of ‘transfer of risk’ is a necessary aspect of indemnity insurance. It may not be necessary in the case of life insurance, a form of investment or savings which depends on the timing of the life or death of the life insured: Marac Life Assurance Ltd v Commissioner of IR [1986] 1 NZLR 694, 697 (Cooke J); Fuji Finance Inc v Aetna Life Insurance Co Ltd [1997] Ch 173 at 189 (Morritt LJ); at 198–9 (Hobhouse LJ). But see Helvering v Le Gierse 312 US 531 (1941) at 539, in which the US Supreme Court said: ‘[T]he amounts must be received as the result of a transaction which involved an actual “insurance risk” at the time the transaction was executed. Historically and commonly insurance involves risk-shifting and risk-distributing. That life insurance is desirable from an economic and social standpoint as a device to shift and distribute risk of loss from premature death is unquestionable. That these elements of risk-shifting and riskdistributing are essential to a life insurance contract is agreed by courts and commentators’. 3. Todd v Alterra at Lloyds [2016] FCAFC 15; (2016) 239 FCR 12 at [38] (Allsop CJ and Gleeson J); Truta v Avis Rent-A-Car System Inc (1987) 193 Cal App 3d 802 at [811–812]. 4. In this text ‘insured’ rather than ‘assured’ is used in all contexts. Historically, ‘insured’ was used in indemnity insurance and ‘assured’ in life ‘assurance’. However, there does not seem to be much point in continuing the distinction: National Mutual Life Association of Australasia Ltd v Federal Commissioner of Taxation [1959] HCA 6; (1959) 102 CLR 29 at [7] (Windeyer J). 5. In broad terms and subject to the policy wording, an event is ‘fortuitous’ if it not known in advance by the insured: Sentinel Management Co v New Hampshire Insurance Company 563 NW 2d 296 (Minn App 1997). It is not ‘fortuitous’ if it is intentional or inevitable: CCR Fishing Ltd v Tomenson Inc (The ‘La Pointe’) [1991] 1 Lloyd’s Rep 89 at 91. 6. See Chapter 2 for a description of ‘occurrence’ and ‘claims made’ liability insurance. 7. WASA International Insurance Company v Lexington Insurance Company [2009] UKHL 40; [2010] 1 AC 180 at [3], [39], [74] and [77]. 8. [1904] 2 KB 658 at 663 (Channell J); Department of Trade and Industry v St Christopher Motorists’ Association Ltd [1974] 1 WLR 99 at 106 (Templeman J). 9. Brick Protection Corporation v Alberta (Provincial Treasurer) 2011 ABCA 214 at [48] (Côté J). 10. See fnn 2 and 3.
11. Sibthorpe v London Borough of Southwark [2011] EWCA Civ 25; 2 All ER 240 at [59] (Lord Neuberger MR); FSA v Digital Satellite Warranty Cover Ltd [2011] EWCA Civ 1413 at [84] (Waller J). 12. See also Wayne v Staples, Inc (2006) 135 Cal App 4th 466 at [4]–[6] (Perluss PJ). 13. See fnn 2 and 3. 14. Steadfast Insurance Co Ltd v F & B Trading Co Pty Ltd [1971] HCA 68; (1971) 125 CLR 578 at [8] (Walsh J). 15. Re Commonwealth Homes and Investment Co Ltd [1943] SASR 211 at 231 (Mayo J). 16. [1993] FCA 376; (1993) 7 ANZ Ins Cas 61–195. 17. [1913] 3 KB 84. 18. A wager is not an insurance contract: Wilson v Jones (1867) LR 2 Ex 139 at 146 and 150– 1; Re FAI Insurances Ltd v Custom Credit Corporation Ltd [1980] FCA 32; (1980) 44 FLR 431. 19. Re FAI Insurances Ltd v Custom Credit Corporation Ltd (see fn 18). 20. Beresford v Royal Insurance Company Ltd [1938] AC 586 at 595 (Lord Atkin); Callery v Gray [2001] EWCA Civ 1246 at [38]; Sentinel Management Co v New Hampshire Insurance Company (see fn 5). 21. Global Process Systems Inc v Berhad [2011] UKSC 5 at [51] (Lord Mance); British and Foreign Marine Insurance Company Ltd v Gaunt [1921] 2 AC 41. 22. Australian Associated Motor Insurers Ltd v Elmore Haulage Pty Ltd [2013] VSCA 54 at [77] (Kaye AJA). 23. Australian Associated Motor Insurers Ltd v Elmore Haulage Pty Ltd (see fn 22) at [78] (Kaye AJA). 24. Australian Associated Motor Insurers Ltd v Elmore Haulage Pty Ltd (see fn 22) at [79] (Kaye AJA). 25. Although the insurer might be entitled to refuse to pay the claim if the policy contains a ‘reasonable precautions’ condition: see Chapter 19. 26. JSM Management Pty Ltd v QBE Insurance (Australia) Ltd [2011] VSC 339 at [32] (Osborne J). 27. Midland Mainline Ltd v Commercial Union Assurance Company Ltd [2003] EWHC 1771 (Comm); [2004] Lloyd’s Rep IR 22 at [106] (Steel J). 28. In Koebel v Saunders (1864) 17 CB (NS) 71; 144 ER 29, Byles J (at 79) gave as examples of inherent vice the liability ‘of fruit, flour, or rice … to heat or perish on the voyage’; JSM Management Pty Ltd v QBE Insurance (Australia) Ltd (see fn 26) at [17]–[48] (Osborn J). 29. Soya GmbH Mainz KG v White [1983] 1 Lloyd’s Rep 122 (Lord Diplock); Nelson Marketing International Inc v Royal & Sun Alliance Insurance Co of Canada 2006 BCCA 327 at [12]–[13] (Lowry J). 30. [2011] UKSC 5. 31. The Barclay MIS Group of Companies Pty Ltd (ACN 056321 272) v Australian Securities and Investments Commission [2002] FCA 1606; Metropolitan Fire and Emergency Services Board v Capricorn Mutual Ltd [2007] VSC 413 at [65] (Williams J). 32. The Hancock Family Memorial Foundation Ltd v Fieldhouse (No 3) [2010] WASC 223 at [50] (Le Miere J).
33. [1980] 1 Ch 2. 34. In ordinary language, ‘money’s worth’ means ‘equivalent to money in the sense of being something essentially material’: Gideons International Service Mark [1991] RPC 141 (a trademark case); Hance v Commissioner of Taxation [2008] FCAFC 196 at [99]–[100] (a tax case). 35. Digital Satellite Warranty Cover Ltd v Financial Services Authority [2013] UKSC 7 at [19] (Lord Sumption). 36. Todd v Alterra at Lloyds (see fn 3) at [38] (Allsop CJ and Gleeson J). 37. In Callery v Gray [2001] EWCA Civ 1117; Lloyd’s Rep IR 743, the Court of Appeal said (at [67]) that it ‘is a basic principle of insurance that the many pay for the few’. 38. Firma C-Trade SA v Newcastle P & I Association [1991] 2 AC 1 at 23 (Lord Brandon). 39. Australian Health Insurance Association Ltd v Esso Australia Pty Ltd [1993] FCA 376; (1993) 7 ANZ Ins Cas 61-195 at [34] (Northrop J); The Hancock Family Memorial Foundation Ltd v Fieldhouse (No 3) (see fn 32) at [46]–[47] (Le Miere J). 40. Australian Health Insurance Association Ltd v Esso Australia Pty Ltd (see fn 39) at [51] (Northrop J); Commissioner of Inland Revenue v Motorcorp Holdings Ltd [2005] NZCA 33 at [55] (Hammond J). 41. [1979] HCA 46; (1979) 141 CLR 577. 42. Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd [2000] WASCA 408; (2000) 23 WAR 291 at [167]–[168] (Wheeler J). 43. R v Cohen [1979] HCA 46; (1979) 141 CLR 577 at [24] (Mason J); Australian Health Insurance Association Ltd v Esso Australia Pty Ltd (see fn 39) at [19] (Black CJ), [51] (Northrop J); Bayswater Car Rental Pty Ltd v Hannell [1999] WASCA 34; (1998–9) 10 ANZ Ins Cas 61-437. 44. (1957) 312 P 2d 19. 45. R v Holmes; Ex parte Manchester Unity Independent Order of Oddfellows in Victoria [1980] HCA 46; (1980) 147 CLR 65 at [18] (Mason J); R v Cohen (see fn 43) at [24] (Mason J). 46. A contract is either ‘aleatory’ or ‘commutative’. An aleatory contract is one in which one party promises to pay the other on the happening of a fortuitous event. A commutative contract is one in which the parties’ respective obligations are equivalent; for example, the amount that A promises to pay to buy B’s product is generally equivalent to the value of the product. 47. Caisse Populaire de Maniwaki v Giroux [1993] 1 SCR 282 (Gonthier J), quoting Jean Louis Baudouin, Les Obligations, 3rd ed, Yvon Blais, Cowansville, 1989, p 57. 48. Carlill v Carbolic Smoke Ball Co [1892] 2 QB 484 (Hawkins J). 49. Todd v Alterra at Lloyds (see fn 3) at [36]–[38] (Allsop CJ and Gleeson J). 50. This issue was raised by Mr Chadwick for the Department in Department of Trade and Industry v St Christopher Motorists’ Association Ltd (see fn 8), and again in Medical Defence Union Ltd v Department of Trade [1980] 1 Ch 2, but Templeman J (at 106) and Sir Robert Megarry (at 89) respectively declined to deal with it as it was not necessary for their respective decisions. 51. Re Digital Satellite Warranty Cover Ltd [2011] EWHC 122 (Ch) (Warren J). 52. See fn 51.
53. Spencer v Aetna Life & Casualty Ins Co 611 P 2d 149, 152; 227 Kan 914, 918; (Supreme Court of Kansas 1980 Herd J). 54. Copyright Commonwealth of Australia; reproduced by permission. 55. Ars conjectandi (The Art of conjecturing), 1713. 56. P L Bernstein, Against the Gods: The Remarkable Story of Risk, John Wiley, New York, 1996, p 204. 57. WASA International Insurance Company v Lexington Insurance Company [2009] UKHL 40; [2010] 1 AC 180 at [33] (Lord Mance). 58. Hill v Mercantile [1996] 1 WLR 1239 at 1251 (Lord Mustill).
[page 23]
Chapter 2 DIVIDING INSURANCE INTO CATEGORIES There are two types of people: those who divide people into two types, and those who don’t.1
INTRODUCTION This chapter begins with a brief discussion of marine insurance and life insurance for the purpose of distinguishing them from general insurance. It then deals with each of the following four categories of general insurance: indemnity and contingency; first party and liability (third party); ‘occurrence’ and ‘claims made’; and joint and composite. Insurance can be divided into the categories of general, marine, life and health2 insurance. As mentioned at the beginning of Chapter 1, this text is about general insurance. The Insurance Contracts Act 1984 (Cth) (ICA) distinguishes between general insurance contracts and: marine insurance contracts by excluding from the operation of the ICA, insurance contracts to which the Marine Insurance Act 1909 (Cth) (MIA) applies: s 9(1)(d); life insurance contracts by defining: ■ a ‘general insurance contract’ as ‘an insurance contract that is not a life insurance contract’ (s 11(6));
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a ‘life insurance contract’ as ‘a contract that constitutes a life
■ policy within the meaning of the Life Insurance Act 1995’: s 11(1).
[page 24] General insurance can be divided into the following overlapping categories: indemnity and contingency; first party and liability (third party); ‘occurrence’ and ‘claims made’; and joint and composite. Most insurance arrangements fall into one of the two subcategories of each category listed above. Which sub-category an insurance arrangement falls into can determine which legislation applies to it, how the arrangement or the individual terms within it are to be construed, and the particular common law principles that are relevant to the way in which it operates.
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MARINE INSURANCE 2.1 The MIA is concerned with insurance contracts that provide cover against losses incident to a marine adventure. It applies to all marine insurance, except: state marine insurance that does not extend beyond the limits of the state concerned (s 6); and marine insurance contracts ‘made in respect of a pleasure craft (other than in connection with the pleasure craft’s capacity as cargo)’. These are governed by the ICA: s 9A. The ICA does not apply to any other type of marine insurance contract to which the MIA applies: ICA s 9(1)(d).
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2.2
A marine insurance contract is an insurance contract that
indemnifies against ‘losses incident to marine adventure’: MIA s 7. There is a ‘marine adventure’ (MIA s 9(2)) where: (a) any ship, goods or other movables are exposed to maritime perils. Such property is in this Act referred to as ‘insurable property’; (b) the earning or acquisition of any freight, passage money, commission, profit, or other pecuniary benefit, or the security for any advances, loan, or disbursements, is endangered by the exposure of insurable property to maritime perils; (c) any liability to a third party may be incurred by the owner of, or other person interested in or responsible for, insurable property, by reason of maritime perils.
‘Maritime perils’ means the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seizures, restraints, and detainments of princes and peoples, jettisons, barratry, and any other perils, either of the like kind, or which may be designated by the policy. [page 25] 2.3 The MIA does not define ‘the sea’. At common law, it includes inland waters to the extent they are affected by the ‘ebb and flow of the tide’.3 2.4 The term ‘perils of the seas’ in the definition of ‘maritime perils’ ‘refers only to fortuitous accidents or casualties of the seas. It does not include the ordinary action of the winds and waves’: MIA Sch 2 r 7. In an oft-cited passage from Canada Rice Mills Ltd v Union Marine General Insurance Co,4 Lord Wright described the fortuity element of ‘perils of the seas’ in the following terms (at 68–9): Where there is an accidental incursion of seawater into a vessel at a part of the vessel and in a manner where seawater is not expected to enter in the ordinary course of things and there is consequent damage to the thing insured, there is prima facie a loss by perils of the seas. The accident may consist in some negligent act, such as improper opening of a valve, or a hole made in a pipe by mischance, or it may be that seawater is admitted by stress of weather or some like cause bringing the sea over openings ordinarily not exposed to the sea or, even without stress of weather, by the vessel heeling over owing to some accident or by the breaking of hatches or other coverings. These are merely few amongst many possible instances in which there may be a fortuitous incursion of seawater. It is the fortuitous entry of the seawater which is the peril of the sea in such cases. Whether in any particular case there is such a loss is a question of fact for the jury.
2.5 A contract can be a marine insurance contract for the purposes of the MIA even if it also covers land risks, as long as the subject matter insured is substantially a marine adventure: s 8.5
LIFE INSURANCE 2.6 The Life Insurance Act 1995 (Cth) (LIA) sets out to protect the owners and beneficiaries of life insurance policies by controlling the entry of companies into the life insurance market and the way in which companies in the market carry on life insurance business: s 3. The ICA contains provisions that affect the rights and obligations of the parties to, and beneficiaries of, a life insurance contract ‘that constitutes a life policy within the meaning of the Life Insurance Act 1995’: ICA s 11(6). [page 26] 2.7 By s 9(1) of the LIA, the following constitute a life insurance policy, except to the extent that they fall within the description contained in s 9(2): (a) a contract of insurance that provides for the payment of money on the death of a person or on the happening of a contingency dependent on the termination or continuance of human life; (b) a contract of insurance that is subject to payment of premiums for a term dependent on the termination or continuance of human life; (c) a contract of insurance that provides for the payment of an annuity for a term dependent on the continuance of human life; (d) a contract that provides for the payment of an annuity for a term not dependent on the continuance of human life but exceeding the term prescribed by the regulations for the purposes of this paragraph; (e) a continuous disability policy; (f) a contract (whether or not it is a contract of insurance) that constitutes an investment account contract; (g) a contract (whether or not it is a contract of insurance) that constitutes an investment linked contract.
Section 9(2) states:
A contract that provides for the payment of money on the death of a person is not a life policy if: (a) by the terms of the contract, the duration of the contract is to be not more than one year; and (b) payment is only to be made in the event of: (i) death by accident; or (ii) death resulting from a specified sickness.
GENERAL INSURANCE Indemnity and contingency insurance 2.8 General insurance can be either indemnity or contingency; most insurance is indemnity.
Indemnity insurance 2.9 By entering into an indemnity insurance contract, an insurer promises to indemnify against financial loss suffered by an insured as a result of the happening of a risk transferred to the insurer by the contract. Subject to the express terms of the contract, an insurer’s promise to indemnify is a promise to ‘make good’ any financial loss suffered by an insured as a result of an insured event occurring, by paying to an insured the amount of the loss.6 The scope of indemnity is invariably expressly [page 27] dealt with in the contract. For example, a contract insuring home contents might define indemnity by reference to: the cost of replacing destroyed items with items of like age, quality and condition (the common law position); or the ‘as new’ replacement cost of destroyed goods (‘new for old’).
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2.10
It is lawful for an insured to take out more than one indemnity
insurance contract for the same risk of loss. However, between them, the insurers will not be liable to pay more than the loss suffered by the insured if the risk eventuates.7 So an insured has nothing to gain by buying more than one indemnity insurance contract to cover the same risk of loss for the same level of cover. 2.11 Upon indemnifying or agreeing to indemnify an insured for their loss, an insurer is entitled to subrogate itself to the insured’s rights against third parties for the purpose of diminishing its loss: see Chapter 27.
Contingency insurance 2.12 Contingency insurance protects against the adverse financial impact of a contingent event that: cannot, or cannot easily, be calculated (for example, the financial value of the loss of an eye); or the insurer does not want to fully indemnify against (for example, actual loss of income as a result of sickness or accident). By entering into such a contract, the insurer promises to pay an agreed amount upon the happening of a contingent event, irrespective of the actual financial loss that an insured or the beneficiaries of the contract would suffer if such an event were to happen. As a contingency insurance contract does not indemnify against financial loss, upon a claim being made there is no reason for an insurer to investigate the actual financial loss to the insured or the beneficiaries of the contract as a result of the insured event. Payment of a claim under a contingency insurance contract does not give the insurer a right of subrogation, except to the extent that the payment is by way of indemnity, for example reimbursement of medical expenses or perhaps loss of earnings.8
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2.13 A personal accident and sickness policy is an example of contingency insurance. In this type of insurance, the parties agree at the time the contract is made what the insurer will pay if the insured suffers any one or more of a set of listed injuries during the period of
[page 28] insurance, or becomes unable to work because of an accident or sickness occurring during the period of insurance. The amounts are set by reference, amongst other things, to the amount of premium the insured is prepared to pay for the policy and, in the case of cover for loss of earnings, how much the insured is earning at the time the insurance is taken out. The amounts are not intended to indemnify the insured for the actual financial loss they will suffer if an event happens that entitles them to payment under the policy.
First party and liability (third party) insurance 2.14 Marine insurance and general insurance is either first party or liability (third party).9 2.15 First party insurance protects an insured against the risk of their own loss. It involves a transfer to an insurer of the risk that during the period of insurance an insured might be injured, or might suffer loss or destruction of, or damage to, property in which they have a financial interest. That part of a home and contents policy that covers an insured for loss or destruction of, or damage to, the insured’s home and its contents is an example of this type of insurance. On the other hand, liability insurance protects an insured against the risk of their incurring a legal liability to a third party for personal injury, property damage or financial loss (not for a third party’s personal injury, property damage or financial loss simply because an act or omission of the insured might have caused it).10 One of its main purposes is to protect the insured against ‘certain types of tortious liability’.11 It involves the transfer to an insurer of the risk that the insured might be held legally liable to a third party for personal injury, property damage or financial loss suffered by the third party. For a definition of liability insurance, see s 11(7) of the ICA. 2.16 Broadly speaking, with first party insurance there are two relevant parties: the insurer and the insured. With liability insurance
there are three relevant parties: the insurer, the insured and the third party claimant. [page 29] 2.17 Depending on the nature of the cover, first party insurance can be indemnity or contingency insurance. Liability insurance is always indemnity insurance.12
‘Occurrence’ and ‘claims made’ insurance 2.18
General insurance is either ‘occurrence’ or ‘claims made’.
Occurrence 2.19 First party insurance is almost invariably ‘occurrence’. In occurrence-based insurance, the insurer’s promise to pay is triggered by the happening of an occurrence or the happening of a loss during the insurance period. A motor vehicle first party property damage policy is an example of occurrence-based insurance. In this type of insurance, and subject to the policy wording, the insurer’s promise to pay is activated by either: the happening of an event that causes damage to the insured’s motor vehicle; or damage to the motor vehicle itself occurring, during the insurance period. A fidelity guarantee policy is a first party policy that more closely resembles ‘claims made’ than ‘occurrence’ insurance, at least if the trigger for coverage is the insured’s discovery of fraud during the insurance period or a subsequent ‘grace’ period (rather than fraud occurring during the insurance period). Insurers underwrite on this basis because employee fraud is ‘long tail’ (see the discussion of ‘long tail’ under the next heading); with the best will in the world it can go undetected for a considerable period of time.
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2.20 Liability insurance can be either ‘occurrence’ or ‘claims made’. In occurrence-based liability insurance, the insurer’s promise to pay is triggered by the insured incurring a liability to a third party during the insurance period, even if the settlement, judgment or arbitration award that resolves the third party’s claim against the insured occurs after the insurance period has ended.13
‘Claims made’ and ‘claims made and notified’ liability insurance 2.21 Occurrence-based liability insurance works well when a third party’s injury or loss is immediately obvious and happens at about the same time, or soon after, an insured’s negligent act or omission, for example [page 30] a motor vehicle accident caused by an insured’s negligent driving. In this type of case, the insured usually informs their liability insurer about the accident shortly after it happens, enabling the insurer to set aside a realistic reserve for the claim within about one year of issuing the insurance policy (assuming, as is mostly the case, that the insurance period is 12 months). However, occurrence-based liability insurance can be problematic if a liability is potentially ‘long tail’. In liability insurance, ‘long tail’ generally refers to circumstances in which a substantial amount of time can elapse between a third party suffering an injury or an insured incurring a liability and the insured becoming aware that they have incurred the liability. For example, this may be when a third party: suffers not immediately obvious brain damage as a result of being medically mismanaged at birth, and does not make a claim for the brain damage against the insured medical practitioner until many years later; or contracts malignant mesothelioma many years after being
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negligently exposed to the risk of that happening by the insured supplier of an asbestos product, and the insured (and the third party) does not find out about the third party inhaling an asbestos fibre until it manifests itself as malignant mesothelioma. Some of the potential insurance problems for a ‘long tail’ claim when it finally comes home to roost include: identifying the insurer that issued the policy and the details of the policy (including the policy wording and limits of liability), if, for example, the insured has lost or misplaced the schedule or certificate of insurance;14 identifying the responsible insurer amongst a series of insurers. This is a problem if the insured changed insurers from time to time; it might then have difficulty proving which particular insurance policy or policies respond(s) to the claim. If nothing else, it will probably result in ‘finger pointing’ between the insurers at risk; the policy wording and limits of liability being ‘out of date’ by the time the third party’s claim against the insured is settled or decided in court or by arbitration. For example, a limit of liability of $1 million in a 1975 policy insuring against liability to pay compensation for personal injury might be well short of an award in a personal injury case resolved 30 or 40 years later; an insurer setting aside an appropriate reserve for claims it does not know about but anticipates. Both under-reserving (underestimating the number of ‘as yet’ undisclosed claims) and setting aside excessive
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[page 31] reserves (overestimating the number of ‘as yet’ undisclosed claims) are a problem. The first risks the insurer having set aside insufficient funds to pay claims when it finally finds out about the true number of ‘as yet’ undisclosed claims. The second risks the
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insurer losing business by setting uncompetitively high premiums (to meet anticipated claims); and an insurer not being able to ‘close its books’ on an insurance period until years or decades after the expiry of that period.
2.22 As early as the 1930s, Lloyd’s of London offered ‘claims made’ instead of occurrence-based liability insurance as a way of dealing with the potential problems associated with solicitors’ ‘long tail’ risks.15 By the 1960s, Lloyd’s were offering ‘claims made’ insurance in the United States of America.16 With a ‘claims made’ liability insurance policy, the insurer’s promise to pay is triggered by a claimant first making a claim against the insured during the insurance period. A variant on the ‘claims made’ policy is the ‘claims made and notified’ liability insurance policy (both also known as a ‘discovery policy’).17 Subject to the policy wording and ss 40 and 54 of the ICA (see Chapters 18 and 22), with a ‘claims made and notified’ policy, the insurer’s promise to pay is triggered by: a claimant first making a claim against the insured during the insurance period; and the insured notifying the claim to the insurer during the insurance period, or in some policies, within a ‘grace period’ after the expiry of the insurance period. In both types of policy, it does not matter when the insured incurred the liability or when the act or omission occurred that gave rise to the insured’s liability, unless it happened before a date nominated in the policy as the ‘retroactive date’. A ‘retroactive date’ in a policy indicates that the insurer will not be liable for a claim that arises out of an act or omission that occurred before the ‘retroactive date’.18 The ‘retroactive date’ is often the date the insured first took out ‘claims made’ insurance with that insurer.
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[page 32] ‘Claims made’ and ‘claims made and notified’ insurances have the
following advantages over occurrence-based insurance in relation to the writing of ‘long tail’ risks: the insurer and the policy details are usually more easily identified and retrieved; policy wordings and limits of liability are more up to date; the insurer pays claims closer to when premiums were set for the policies that respond to those claims; the insurer ‘closes its books’ nearer to when the relevant policies were issued; and the level of premium the insurer needs to charge is more accurately calculated having regard to the increased level of certainty achieved by the above.19
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2.23 Nowadays, the risk that an insured might be held liable to a third party for loss as a result of the supply of hazardous products, professional malpractice or a company director’s or officer’s errors or omissions, is usually written as ‘claims made’ or ‘claims made and notified’, rather than occurrence-based, insurance.
Joint and composite (several) insurance 2.24 Insurance contracts often cover the interests of more than one insured. In general terms, a joint insurance contract is a contract in which each insured has an identical interest in the subject matter of the insurance; a composite insurance contract is a contract in which the insureds have different interests in the subject matter of the insurance. First party insurance covering the partners’ interests in partnership property is an example of joint insurance.20 First party insurance covering the interests of a lessor and a lessee in the lessor’s property is an example of composite insurance. 2.25 Each of the rights and obligations in an insurance contract that covers two or more insureds (co-insureds) is either joint or composite (several). Subject to the ICA, whether a particular right or obligation is joint or composite might determine:
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the extent of a co-insured’s right to recover under a first party insurance contract for loss or destruction of, or damage to, the subject matter of the contract; or [page 33]
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effect on innocent co-insureds’ rights of a co-insured’s precontractual non-disclosure or misrepresentation or postcontractual non-compliance with, or breach of, a contractual obligation. In Scott v Wawanesa Mutual Insurance Co,21 the Supreme Court of Canada managed to retain its sense of humour when considering the circumstances in which an innocent co-insured’s ability to recover under an insurance contract might be detrimentally affected by the prior acts or omissions of a not-so-innocent co-insured: The decisions of the trial judge and the Court of Appeal, then, are representative of two divergent streams of jurisprudence dealing with the problem posed when an innocent insured seeks to recover for a loss occasioned by the wrongful act of a co-insured. The most common scenario in the case reports, and one that decidedly does not serve as an encomium to matrimonial bliss, sees husband or wife burn down the matrimonial home.22
2.26 The ICA does not distinguish between joint and composite obligations. The effect of a provision of the ICA on the rights and obligations of the parties to an insurance contract is determined by the language of the provision, not by whether the relevant rights or obligations are characterised as joint or composite. For example, whether the duty of disclosure is characterised as joint or composite will not affect an insurer’s ability to avoid an insurance contract pursuant to s 28(2) of the ICA for fraudulent non-disclosure or fraudulent misrepresentation by a co-insured.23
Joint insurance 2.27
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Insurance is ‘joint’ if it covers: jointly owned property for a joint loss;
■property, some of which is jointly owned and some of which is separately owned, as long as the policy applies indifferently to the joint and separately owned property and treats separately owned property as jointly owned.24
2.28 Every right and obligation in a joint insurance contract is joint, so that: if there is a loss, any co-insured can claim the full amount of the loss; and a co-insured’s pre-contractual non-disclosure or misrepresentation or post-contractual non-compliance with, or breach of, a contractual
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[page 34] obligation will affect the rights of innocent co-insureds: P Samuel and Co Ltd v Dumas,25 in which Viscount Cave said (at 445–6): … when two persons are jointly insured and their interests are inseparably connected so that a loss or gain necessarily affects them both, the misconduct of one is sufficient to contaminate the whole insurance.
Composite insurance 2.29 If the subject matter of a composite insurance contract is damaged or destroyed, the amount of a particular co-insured’s loss will depend: … on the nature of his interest, and the covenant of indemnity which the policy gives must, in such a case, necessarily operate as a covenant to indemnify in respect of each individual different loss which the various persons named may suffer.26
2.30 Just because an insurance contract is composite does not mean that all of the co-insureds’ obligations are composite; some might be joint.27 Whether a particular obligation in a composite insurance contract is joint or composite is primarily a matter of construction, the rule being
that the obligation will be construed to be joint or composite according to the respective interests of the parties.28
Recovery by a co-insured under a composite first party insurance contract 2.31 In the case of a composite first party insurance contract and subject to the following qualification, if there is a loss, a co-insured can only recover to the extent of their limited interest: British Traders’ Insurance Company Ltd v Monson.29 That case concerned a tenant who insured the property for its full insurable value. The tenant was not obliged to reinstate the property if it was destroyed. Fire destroyed the property. The High Court held that the tenant could only recover the amount of his actual loss (the value of the balance of the lease) because he did not intend to benefit the lessor under the policy. The High Court rejected the argument that the tenant could recover the full amount of the loss and hold the balance of any money recoverable on trust for the [page 35] owner, notwithstanding the fact that the owner, believing the property was adequately covered by the tenant’s insurance, had no insurance himself. The qualification is this: a co-insured can recover the full value of the subject matter of a first party composite insurance contract if that is what each of the co-insured intended and if the insurance contract can be construed as giving each co-insured that right.30 In these circumstances, a co-insured who recovers in excess of their interest is liable to account to the other co-insureds for the amount of the excess. For example, a bailee of goods is usually regarded as intending to insure the whole of the interest in the goods, thereby covering his own interest in the goods and holding the balance for the owners. Arguably not so if the policy makes clear that the bailee is only insuring the goods to the extent of his own responsibility for them, in which case he is only
covered for the extent to which he is legally liable to the bailor for loss or damage to the goods.31 A person who is not an insured but who has an interest in the subject matter may recover to the extent of their loss pursuant to s 49 of the ICA: see Chapter 17.
Pre-contractual non-disclosure and misrepresentation 2.32 As it is only one contract,32 at common law, avoidance of a composite policy by the insurer for a co-insured’s pre-contractual nondisclosure or misrepresentation will leave the innocent co-insureds without cover.33 English law appears (wrongly) to have taken a different tack. It suggests that, generally speaking, in the case of a composite contract, non-disclosure by one co-insured will not allow an insurer to avoid cover for an innocent co-insured. That is because the English cases treat composite insurance as a series of separate insurance contracts, rather than one contract insuring the several interests.34 [page 36]
Post-contractual non-compliance with, or breach of, a contractual obligation 2.33 of:
A co-insured’s post-contractual non-compliance with, or breach
■a joint obligation in a composite insurance contract has the same ■
effect as a co-insured’s non-compliance with, or breach of, an obligation in a joint insurance contract; a composite obligation will not affect an innocent co-insured’s right of recovery. Wallace ACJ explained the position in Lombard Australia Ltd v NRMA Insurance Ltd:35 Where the promise by the insurer to the two assured (they not being joint owners) is a several promise in respect of their respective interests in a motor car (in this case, the owner and hirer of the car), a deliberate action of the hirer in causing damage to the vehicle cannot prejudice the owner’s claim that his or its loss derived from accidental causes.
2.34 A court will sometimes go to great lengths to treat a breach of a joint obligation as if it were a breach of a composite obligation if that will protect the interests of an innocent co-insured from a gross breach of obligation by another co-insured. For example, in Higgins v Orion Insurance Co Ltd36 and Holmes v GRE Insurance Ltd,37 the respective courts allowed innocent co-insureds to recover for their half-interest in joint property deliberately destroyed by their co-insureds, on the basis that the contract insured joint property for the co-insureds’ respective rights and interests. In Higgins, this novel proposition suited Robbins JA’s indignation with the insurer’s declinature, which he said (at [110]– [111]) was unfair and unjust as it sought to punish an innocent coinsured for a co-insured’s crime. The more recent case of Maulder v National Insurance Co of New Zealand Ltd38 concerned a husband who deliberately set fire to the matrimonial home. The court held that the innocent wife could recover under the insurance contract on the basis that the policy should be construed as composite, supposedly reflecting the modern attitude to marriage in New Zealand. 2.35 Subsequent cases suggest that insurance of property owned by a domestic or business partnership should be treated as joint rather than composite, thereby preventing an innocent co-insured from claiming for a loss caused by a co-insured’s post-contractual non-compliance or breach.39 For example, in MMI General Insurance Ltd v Baktoo,40 the Court of Appeal held that the words ‘any act or neglect of an individual party will not prejudice the rights of the other party/parties’ in a policy issued to [page 37] a husband and wife’s restaurant business was ‘not directed to the fraud of one of two jointly insured parties’. Accordingly, MMI was entitled to decline a claim by an innocent wife arising out of her husband having deliberately set fire to the restaurant.
2.36 For a helpful review of many of the relevant cases on the distinction between joint and composite terms of an insurance contract and how they affect a co-insured’s claim, see the judgment of Cox J in Gilmore v AMP General Insurance Co Ltd.41 2.37 If an insurer indemnifies an innocent wife for her husband’s deliberate destruction of the home she jointly owns with him, the insurer might seek to subrogate itself to the wife’s rights against her husband for the purpose of attempting to recover what it has paid her. Section 65 of the ICA would not prevent the insurer from doing so as the husband’s conduct would be regarded as ‘serious or wilful’: s 65(2). The risk for the insurer would be the husband seeking to resist the claim on the basis that the insurer’s indemnification of his wife was voluntary because it is not liable to indemnify her in these circumstances.
Discharge of an insurer’s liability 2.38 Unless an insurer has a contrary direction or is aware of a relevant dispute between joint insureds (for example, the breakdown of a marriage or a business partnership), it will discharge its liability to all joint insureds by paying one of them,42 as payment to one of them satisfies their joint demand.43 Nevertheless, the prudent course for an insurer intending to discharge its liability to joint insureds is to obtain a written acknowledgment from all of the insureds that payment will discharge its obligations to all insureds, and to make its settlement cheque payable to: all joint insureds; or some of them, but only if all of them provide the insurer with a written direction to pay the settlement cheque to some of them.
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2.39 As a composite policy involves a separate promise to each of the insureds for their respective interests, subject to the terms of the policy, an insurer will only discharge its liability to those insureds it pays. The prudent course for an insurer intending to discharge its liability to composite insureds is to: obtain a written acknowledgment from the relevant insured that
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■ 1. 2. 3.
4. 5.
6.
7. 8. 9.
10.
11. 12. 13.
14. 15. 16.
payment will discharge its obligations to that insured; and make its settlement cheque payable to that insured.
Barth’s distinction. Health insurance only earns its own category because of the intense legislative regulation of it, making it an area of study on its own. Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] HCA 39; (2003) 214 CLR 604 at [17] (Gleeson CJ). McHugh J (dissenting) suggested it would not have occurred to a ‘Perth resident who had spent a day picnicking by the shores of the Swan River [that they had just] spent a day at the sea-side’. [1940] UKPC 56; (1941) AC 55. Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226; Gibbs v Mercantile Mutual Insurance (Australia) Ltd (see fn 3) at [123]–[124] (Kirby J). Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 at [7] (a surety case); CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384, Brennan CJ, Dawson, Toohey and Gummow JJ citing The Times Fire Assurance Company v Hawke (1859) 28 LJ Ex (NS) 317 at 318 (Bramwell B). Albion Insurance Co Ltd v Government Insurance Office (NSW) [1969] HCA 55; (1969) 121 CLR 342 at [4] (Barwick CJ, McTiernan and Menzies JJ). Insurance Commission of Western Australia v Kightly [2005] WASCA 154; (2005) 13 ANZ Ins Cas 61-656. Often an insurance contract will provide both types of cover. For example, a home and contents policy will usually cover the insured for damage to, or destruction of, the home building and contents (first party cover) and also against any liability incurred by the owners or occupiers of the home to a third party (liability cover). Similarly, motor vehicle insurance. Orica Ltd v CGU Insurance Ltd [2003] NSWCA 331; (2003) 13 ANZ Ins Cas 61-596 at [13] (Spigelman CJ); Lancashire Insurance Co Ltd v Commissioners of Inland Revenue [1899] 1 QB 353 at 359 (Bruce J). Bartoline Ltd v Royal Sun Alliance Insurance Plc [2006] EWHC 3598 (QB); [2008] Env LR 1 at [110] (Hegarty J). Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd [2010] HCA 9; (2010) 240 CLR 444 at [4]. Multiplex Constructions Pty Ltd v Irving; Fugen Holdings Pty Ltd v Irving [2004] NSWCA 346 at [60] (Ipp JA); Orica Ltd v CGU Insurance Ltd (see fn 10) at [67] (Mason P). It happens; see Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd (see fn 12). Haseldine v Hosken [1933] 1 KB 822 (a solicitor’s liability policy). San Pedro Properties, Inc v Sayre & Toso, Inc 203 Cal App 2d 750 [Dist Ct App Calif 1962] (civil engineers’ and surveyors’ liability policy).
17. In FAI Insurance Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641, McHugh, Gummow and Hayne JJ said (at [23]) that a ‘claims made’ and ‘claims made and notified’ policy is better described as a ‘discovery’ policy because ‘the critical facts under the contract are the insured’s discovery of the making of a claim on it or its discovery (its ‘becom[ing] aware’) of an occurrence which may give rise to a claim. In the end, however, the application of labels to the contract may obscure more than it illuminates’. 18. Towry Law v Chubb Insurance [2008] NSWSC 1352 at [69]–[70] (McDougall J). 19. For further discussion of these matters, see Chapter 18. See also Reid Crowther & Partners Ltd v Simcoe & Erie General Insurance Co [1993] 1 SCR 252; (1993) 99 DLR (4th) 741 at [14]–[16] (McLachlin J); HLB Kidsons (A Firm) v Lloyds Underwriters Subscribing to Lloyds Policy No 621/PKID00101 [2007] EWHC 1951 (Comm); [2008] Lloyd’s Rep IR 237 (Gloster J). 20. Amaca Pty Ltd formerly known as James Hardie and Co Pty Ltd v CSR Ltd [2001] NSWSC 324 at [116] (Bergin J). 21. (1989) 59 DLR (4th) 660. 22. At 664 (Dickson CJ, La Forest and Sopinka JJ). 23. Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 at [31] (Mason CJ, Dawson, Toohey and Gaudron JJ). 24. Advance (NSW) Insurance Agencies Pty Ltd v Matthews (see fn 23) at [2] (Deane J). 25. [1924] AC 431. 26. General Accident Fire and Life Assurance Corporation Ltd v Midland Bank Ltd [1940] 2 KB 388 at 405 (Sir Wilfred Greene). In State of the Netherlands v Youell and Hayward [1997] 2 Lloyd’s Rep 440, Rix J (at 447–8) described Sir Wilfrid Greene’s judgment as ‘the classic statement of the difference between a joint and a composite insurance’ which, although obiter, has ‘been regarded as authoritative for more than 50 years’. 27. Advance (NSW) Insurance Agencies Pty Ltd v Matthews (see fn 23) at [31] (Mason CJ, Dawson, Toohey and Gaudron JJ). 28. Federation Insurance Ltd v Wasson [1987] HCA 34; (1987) 163 CLR 303 at [4] (Gaudron J). 29. [1964] HCA 24; (1964) 111 CLR 86 at 92–3 (Kitto, Taylor and Owen JJ). 30. Castellain v Preston (1883) 11 QBD 380 at 398–9 (Bowen LJ). 31. Hepburn v A Tomlinson (Hauliers) Ltd [1966] AC 451 at 467–8 (Lord Reid); Allstate Explorations NL v Blake Dawson Waldron (a firm) [2010] WASC 97 at [32] (Heenan J). 32. Federation Insurance Ltd v Wasson (see fn 28) at [19] (Mason CJ, Wilson, Dawson and Toohey JJ). 33. Deaves v CML Fire & General Insurance Co Ltd [1979] HCA 12; (1979) 143 CLR 24 at [15] (Gibbs ACJ). 34. New Hampshire Insurance Co v MGN Ltd; Maxwell Communications plc v New Hampshire Insurance Co [1996] EWCA Civ 838; [1997] LRLR 24 at 57–8 (Staughton LJ); HLB Kidsons (A Firm) v Lloyds Underwriters Subscribing to Lloyds (see fn 19) at [93] (Gloster J); FNCB Ltd v Barnet Devanney (Harrow) Ltd [1999] Lloyd’s Rep IR 459. 35. (1968) 72 SR (NSW) 45 at 48. 36. [1985] 17 DLR (4th) 90.
37. [1988] TASSC 14; Tas R 147; (1988) 5 ANZ Ins Cas 60-984. 38. [1993] 2 NZLR 35. 39. Kelly v The National Insurance Company of New Zealand Ltd (1995) 8 ANZ Ins Cas 61239 at 75,709 (McKay J). 40. [2000] NSWCA 70; (2000) 11 ANZ Ins Cas 61-466. 41. (1996) 67 SASR 387; (1997) 9 ANZ Ins Cas 61-372. 42. Powell v Brodhurst [1901] 2 Ch 160 at 164 (Farwell J). 43. Steeds v Steeds [1889] 22 QBD 537 at 541 (Wills J).
[page 39]
Chapter 3 A SHORT HISTORY OF INSURANCE1 ‘I’ve been making arguments about what we are and what art at Mona is since it opened. It is a philosophical vehicle more than just a bunch of pictures on the walls … I want Mona to be a ship afloat on a sea of chance, a deliverer of the alternate idea … an antidote to certainty.’2 ‘[H]istory, in illuminating the past, illuminates the present, and in illuminating the present, illuminates the future.’3
INTRODUCTION This chapter discusses: early commercial risk transfer arrangements; the spread of insurance; the history of loss spreading; and insurance in Australia. It is important to know something about the history of insurance; in particular, to follow the transition from commercial contracts with incidental risk transfer provisions to insurance contracts where risk transfer is the sole or primary purpose of the transaction. The spread of insurance is perhaps more ‘detail’ than ‘concept’, but is no less interesting for that.
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EARLY COMMERCIAL RISK TRANSFER ARRANGEMENTS The Code of Hammurabi 3.1 The story of insurance begins with a visit to the Near Eastern Antiquities’ department of the Louvre Museum in Paris. For more than a century, a two-metre high black diorite stele has stood there. The stele was engraved with the Code of Hammurabi in around 1750 BCE. Hammurabi4 commissioned the stele and others like it. A French expedition found the stele in old Susa, Iran, at the beginning of the 20th century. It is the only one that has been found entirely intact. The Code is in cuneiform script and consists of three parts: a prologue, 282 laws and an epilogue. As the following passage from the epilogue shows, the Code is a record of the laws of the empire so that its citizens could readily find out what their civil and commercial obligations were (the Code does not touch on religious obligations): … let the oppressed, who has a case at law, come and stand before this my image as king of righteousness; let him read the inscription, and understand my precious words: the inscription will explain his case to him; he will find out what is just, and his heart will be glad …5
3.2 When the Code was engraved on the stele, Babylon was at the crossroads of the land-based trading world. At that time, merchants commonly advanced produce, goods or money to travelling traders, amongst other things, on the basis that the merchant bore the risk of the trader being robbed on his trip. That is reflected in Law 103: If, while on the journey, an enemy take away from him anything that he had, the broker shall swear by God and be free of obligation.6
3.3 The Code of Hammurabi is the first permanent record of a risk transfer arrangement, in this case, allocating to the merchant the incidental risk of the trader being robbed in the course of the venture.
Phoenician risk allocation arrangements
3.4 The Phoenicians were a major seagoing commercial power from around the 16th to the 4th century BCE. They were located in presentday Lebanon on the Mediterranean east coast. They adapted [page 41] the Babylonian land-based risk allocation arrangements to suit their seagoing ventures by: extending the circumstances in which a trader did not have to repay the value of borrowed produce, goods or money exposed to perils of the sea; and introducing an early form of the loan upon bottomry.7 A loan upon bottomry is like a maritime loan in that it is: for a marine adventure; only repayable if the ship arrives at its destination; and repayable at a higher rate of interest than other loans, because the lender takes the risk of the venture. It has the additional characteristic suggested by its name;8 the ship is security for repayment of the loan.
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Rome offers an indemnity to merchants for a war effort and for helping to solve its grain shortage in a time of drought 3.5 According to Livy,9 in 215 BCE the Scipio brothers wrote to Rome to say the Second Punic War in Iberia was going well but that the army urgently needed supplies. The Republic responded by paying private merchants to ship clothing and grain to them, with the Republic agreeing to indemnify the merchants against the risks of enemy attack and bad weather. This is an early example of the State getting involved in commercial arrangements with an incidental risk transfer provision. 3.6
In The Life of Claudius,10 Suetonius reports (at [18], p 190) that
once, after a series of droughts, Emperor Claudius (10 BCE–54 CE) offered to bear the risk of bad weather to merchants that shipped grain to Rome. This looks very much like insurance in that the sole purpose of the arrangement was for the State to indemnify each of the shippers against the risk of loss by bad weather. For whatever reason, it seems to have been limited to a one-off public offering and not to have been identified by the private sector as a profit-making opportunity. [page 42]
The Church prohibits usury 3.7 Initially, the Church and the State tolerated the payment of interest on loans11, but in a series of pronouncements in the 12th, 13th and 14th centuries12 the Church condemned usury, which it regarded as any return on a loan in excess of the principal advanced. This encouraged the Lombard merchants of the northern Italian port cities of Genoa, Pisa and Venice to look for ways to allocate some of the risks of a marine adventure and profit from it without crossing the Church on usury. Initially, this was achieved by a fictional sale or loan contract. By a fictional sale contract, often made when a marine venture was already under way: the ‘buyer’ would contract to buy cargo for a set price and would pay the price if the ship carrying the cargo failed to reach its destination because of a maritime peril;13 the ‘seller’ paid the ‘buyer’ a premium which the ‘buyer’ would keep whether the ship reached its destination or not; the parties agreed that if the ship reached its destination, the contract would be cancelled (or the ‘seller’ would buy the cargo back at the set price). By a fictional loan contract, an adventurer would pretend to advance money to a ‘borrower’ that the ‘borrower’ would only have to ‘repay’ if the ship failed to reach its destination because of a maritime peril.
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3.8 Towards the end of the Middle Ages (around the 14th century), a new form of contract appeared in northern Italy: the marine insurance contract. The marine insurance contract reflected the reality of these fictional sales and loans, being an arrangement: solely or primarily concerned with the risk of a venture failing because of a maritime peril; that transferred the risk from those directly concerned with the venture (sellers, buyers, lenders, borrowers and shippers) to a party remote from the venture (the insurer); for payment after a loss;
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■that involved a payment to the party taking on the risk (premium) which was not in the nature of ‘interest’ or profit sharing.
THE SPREAD OF INSURANCE The earliest known insurance organisation, the earliest known insurance contract, the first insurance legislation and the earliest extant ‘street’ reference to insurance 3.9 If the 18th century work Chronyk van Vlaendern is reliable, it seems that marine insurance was an established commercial activity by the beginning of the 14th century.14 That is reflected in the following statement in the Chronyk:15 … at the request of the inhabitants of Bruges in the year 1310, he (Count Robert of Flanders) sanctioned the establishment in this town of a Chamber of Insurance, wherein merchants might be able to insure their merchandise against risks, marine or otherwise, at a cost of a few deniers per cent, as is the practice today (1735). Moreover, lest the undertaking, of such value to merchants, should be dissolved as soon as it was
established, he made various laws and forms which both the insurers (ie the company) and the merchants (ie the insured) were bound to observe.
3.10 The earliest recorded insurance contract is dated 13 February 1343, albeit disguised as a fictional loan.16 It is held in the Genoan archives. 3.11 The earliest legislation specifically mentioning insurance is a decree of the Doge of Genoa in 1369, aimed at deterring traders from transferring insurance disputes to the ecclesiastical courts, by asserting that insurance might be a form of usury and if so, would not be enforced by these courts.17 3.12 The earliest extant ‘street’ reference to insurance is probably that contained in letters written by the Tuscan merchant Francesco Di Marco Datini (1335–1410), the subject of Iris Origo’s biography, The Merchant of Prato.18 It seems that Datini always insured his merchandise when shipped and complained (at 139) that ‘when [the insurers] insure, it is sweet to them to take the monies; but when disaster comes, it is otherwise and each man draws his rump back, and strives not to pay’. [page 44]
Insurance spreads to England 3.13 In the 14th or 15th century, the Lombard merchants (meaning merchants from northern Italy) introduced marine insurance business to London and to the Hanse merchants of northern Europe.19 The enormous influence of the Lombard merchants on the spread of insurance is reflected by: the name given to the document recording the parties’ rights and obligations under an insurance contract: ‘policy’ (the word ‘policy’ is derived from the Italian word polizza, meaning ‘promise’20, or perhaps from the late Latin word polyptycha, meaning a tablet of several folds, or an account or memorandum book);21
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the name given to a street in the City of London where insurance business was carried on (Lombard Street), originally as part of an area Henry IV of England assigned to the Lombard merchants for living and trading; the Lloyd’s SG policy that appears in Sch 1 to the Marine Insurance Act 1906 (UK) and Sch 2 to the Marine Insurance Act 1909 (Cth), which contains the following paragraph: And it is agreed by us, the insurers, that this writing or policy of assurance shall be of as much force and effect as the surest writing or policy of assurance heretofore made in Lombard Street, or in the Royal Exchange, or elsewhere in London;
pleading in the 1562 Admiralty case, Ridolphye v ■the following 22 Nunez:
The use and custome of makynge bylls of assuraunce in the place comonly called Lumbard Strete of London and likewyse in the Burse of Antwerpe is and tyme out of mynde hath byn emongst merchants usinge and frequentinge the sayde severall places … And such bills of assurance so made have beene by all the said tyme … And further he doothe alledge that commonly merchaunts by all the tyme above declared have and doo cause ther gooddes to be assured from porte to porte …;
■a number of insurance companies around the world with the word ‘Lombard’ in their name. For example, the Lombard Insurance
[page 45] Company Ltd of Johannesburg, Lombard International Assurance SA of Luxembourg and Lombard General Insurance Company of Canada of Toronto. 3.14 The earliest record of an insurance policy issued in London appears in the Pleas Rolls of the City of London. The 10 March 1427 entry records a dispute at the Guildhall arising out of an insurance claim by Alexander Ferrantyn, a Florentine merchant living in London, that a group of London resident Italian insurers owed him £250 arising out of the capture of his vessel Seint Anne of London (with Bordeaux wine aboard) on the high seas by a Spanish privateer.23 The first recorded mention of insurance in England to the wider
public is the observation by Sir Nicholas Bacon in 1559 on the opening of Queen Elizabeth’s first parliament: Doth not the wise merchant, in every adventure of danger, give part to have the rest assured?
In 1574, Queen Elizabeth granted Richard Candler the right to establish an insurance office in the recently constructed Royal Exchange Building, for the purpose of drafting and registering insurance policies. The first English statute specifically concerned with insurance was 43 Eliz c 12 of 1601 (Elizabeth Statute of 1601), which established a Court of Assurance to resolve a limited range of insurance disputes (more in the nature of an arbitration commission than a court).
The emergence of risk theory 3.15 The state, or a community or society small or large, can operate a not-for-profit risk sharing or risk-spreading scheme. To keep the scheme afloat in circumstances where the amount likely to be paid out of the common fund for losses might exceed the amount of the fund, the state can impose or increase taxes, divert existing funds to shore up any losses, or reduce the levels of payout. Except for diverting funds, a community or society can do similar. In both cases, the operator of the scheme can protect it by changing the rules midstream. On the other hand, if a risk-sharing or risk-spreading scheme is to be operated for profit, careful calculation is required to ensure the premium is competitive and affordable for those participating in the scheme and that the premium gathered is sufficiently large to pay all claims and return enough profit for the scheme’s owners to make the enterprise worthwhile. [page 46] 3.16 Initially, merchants of marine risk approached risk assessment with a combination of instinct, inquiry, experience and business nous, and survived on all of that, with the occasional ounce or more of good
luck. This appears to have been adequate for the continued success of marine insurance for the first 400 years, but it was insufficient as a platform for the penetration of insurance into other activities.24 It was the work of probability theorists in the middle of the 17th century that gave potential insurers the confidence that fortuitous events were sufficiently predictable for them to believe that they could turn a profit in mass markets beyond marine, such as fire, life, accident and liability. 3.17 At that time, a Flemish punter, Antoine Gombaud, Chevalier de Méré, asked his mathematician friend Blaise Pascal: 1. how many times he would need to throw a pair of dice to have a better than even chance of throwing a pair of sixes (25 times, not 24 times as the good Chevalier had thought); and 2. how to equitably divide betting stakes if a game of chance prematurely ended when each of the players was differently positioned in the game (the Problem of Points).25 Pascal and his friend, the French mathematician Pierre de Fermat, solved both problems in an exchange of letters in 1654,26 and through those letters began to formulate general principles of probability theory. As regards the first problem, the Chevalier knew he had a one in six chance of turning up a six on any one throw (six being the number of faces on a dice), so that it was worth him betting in favour of throwing a six in four throws of the dice. Not surprisingly, the Chevalier extrapolated that he had a better than even chance of throwing a pair of sixes in 24 throws of two die (four is to six as 24 is to 36). He lost money betting on that assumption and consulted Pascal. Pascal calculated that in fact the Chevalier needed 25 throws of the die to turn the odds of throwing a pair of sixes slightly in his favour. This led Pascal to discover the predictability achieved by the operation of the law of averages on a large number of random events of the same type and character (in this case, the throwing of die), an observation fundamental to the success of the modern business of insurance. The work of Pascal and Fermat in part inspired the publication in 1657 of the first mathematical book on probability, entitled Libellus de rationciniis in ludo alae. The book was in Latin; the Dutchman
Christiaan Huygens wrote it. Huygens’ book was published in England in 1714 with the ambitious title, LIBELLUS DE RATIOCINIIS IN LUDO ALAE [page 47] OR, the VALUE of all CHANCES IN Games of Fortune; CARDS, DICE, WAGERS, LOTTERIES, &c., Mathematically Demonstrated.
The emergence of fire insurance 3.18 It seems that someone spoke too soon when they said, less than a decade before the Great Fire of London: There’s no place … better armed against the fury of the fire; for besides the pitched Buckets that hang in Churches and Halls, there are divers new Engines for that purpose.27
3.19 Pascal and Fermat had already died, but the Chevalier was probably still throwing dice when the Great Fire destroyed most of the buildings in London, including St Paul’s Cathedral and the Royal Exchange Building, over a period of four days in the first week of autumn 1666. In the year after the Great Fire, Dr Nicholas Barbon started the first successful specialised fire insurance business, insuring houses and buildings against damage or destruction by fire. By then, the risk of another great fire had been significantly reduced by, amongst other things, the introduction of the Act for the Rebuilding of the City of London (18–19 Chas II, c 8). Its Preamble is in the following terms: For as much as the City of London by reason of a most dreadful fire was for the most part thereof burnt down and now lies buried in its own ruins, for the speedy restoration whereof and for the better regulation, uniformity and gracefulness of such new buildings as shall be erected, and to the end that great and outrageous fires may be reasonably prevented and that all encouragement and expedition may be given and all impediments and obstructions removed, be it therefore enacted that the rules and directions hereafter in this Act prescribed be duly observed by all persons therein concerned.
The Act prescribed road widths, required the outside of new houses to be built of brick or stone (most buildings constructed before the Great Fire were timber framed) and placed limits on the form and
dimensions of new buildings and the distance between them. As other insurers entered the field they engaged private fire-fighting units. All of this improved the odds for insurers. In 1710, Charles Povey set up the Sun Fire Office for insuring houses and their contents against damage or destruction by fire.
Lloyd’s of London 3.20 Lloyd’s of London began life as Edward Lloyd’s Coffee House, which opened in 1688 (the year William Dampier first landed in Australia) on Tower Street, near the River Thames in London. People involved in the shipping industry met there to drink coffee and exchange information about shipping activities. Edward Lloyd was not involved in shipping. He sold coffee and provided shipping information, which is important to [page 48] insurers who want to know about the risks being offered to them and how their ventures are faring. 3.21 Twenty-three years after patrons began drinking at the coffee house (in 1711), a Royal Charter established the Governor and Company of Merchants of Great Britain Trading to the South Seas and Other Parts of America, and for Encouraging the Fishery (not surprisingly, better known as the ‘South Sea Company’) for the dual purposes of: exploiting a British Government-granted monopoly over trade with Spain’s American colonies (the South Seas); and acquiring British national debt by persuading holders of the debt to exchange their debt for shares in the company. In 1719, Parliament amended the South Sea Company’s Charter so that it could acquire more government debt in exchange for shares in the company. That helped fuel the general speculation in shares
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(including those in the company) that became known as the ‘South Sea Bubble’. Lord Ellenborough CJ described the mood of the market at that time in the following terms:28 Subscriptions had about that period been opened to an enormous extent (to as much, it is said, as 300 millions), upon the wildest schemes imaginable: the shares in such adventures were transferable: they were as common an article of sale at market as the stock in the public funds, and had been sold at immense premiums.
In June 1720, Parliament sought to dampen speculation (and also perhaps, advance the position of the South Sea Company) by passing ‘[a]n Act for better securing certain Powers and Privileges intended to be granted by His Majesty by two Charters for Assurances of Ships and Merchandises at Sea, and for lending Money upon Bottomry; and for restraining several extravagant and unwarrantable Practices therein mentioned’, the so-called ‘Bubble Act’ (6 Geo I, c 18). Amongst other things, the Act: granted charters to the Royal Exchange Assurance Corporation and the London Assurance Corporation for the purpose of carrying on the business of marine insurance; prohibited partnerships, societies and companies, other than those two corporations, the South Sea Company and certain other undertakings, from carrying on marine insurance business. The South Sea Company’s share price subsequently increased tenfold. This increase was more to do with the enactment of the Bubble Act and the expectations created by a rising share price than with its prospect of profitable trading.
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[page 49] The ‘South Sea Bubble’ burst in September 1720 (the 18th century version of our own recent Global Financial Crisis) when it became apparent that the predicted extraordinary profits from the South Sea Company’s trading activities in the South Seas would not eventuate. Vast numbers of investors were ruined.
3.22 The Bubble Act unwittingly launched Lloyd’s as a dominant and influential international insurance market by effectively granting to individual underwriters at Lloyd’s a British monopoly on marine insurance business. At the time of its enactment, underwriters at Lloyd’s held the substantial share of the marine insurance market and the Act prevented companies other than the risk conservative Royal Exchange Assurance Corporation and London Assurance Corporation from participating in marine insurance business until it was repealed in 1825. In the 18th and 19th centuries ‘Britannia ruled the waves’ and the Industrial Revolution unfolded, thereby attracting substantial insurance business to the Lloyd’s market. This led to Lloyd’s dominating the international insurance market for around 250 years, starting in the middle of the 18th century. 3.23 Lloyd’s was incorporated by the Lloyd’s Act 1871 (34 and 35 Vict c 21). Its long association with marine insurance is mentioned in the first paragraph of the Preamble to the Act: WHEREAS there has long existed in the Royal Exchange in the City of London an Establishment or Society formerly held at Lloyd’s Coffee House in the Royal Exchange, for the effecting of marine insurance, and generally known as Lloyd’s.
3.24 Today, the Corporation of Lloyd’s manages and regulates the Lloyd’s insurance market. Like Edward Lloyd, it does not carry on insurance business itself. Unincorporated Lloyd’s syndicates carry on the insurance business at Lloyd’s. A Lloyd’s syndicate is comprised of a group of Names (also known as ‘Members’). It ‘is not a legal entity and cannot be sued in the name of the syndicate’.29 A ‘Name’ can be an individual or a corporation. Corporations provide most of the capital at Lloyd’s. Underwriting agents (also known as ‘Member’s agents’) manage Names. Managing agents manage syndicates, which includes engaging professional underwriters to underwrite risks for each syndicate they manage. Each Name is responsible for its own liabilities in relation to the risks
its syndicate underwrites. It is not responsible for the liabilities of other syndicate members. [page 50] For a recent and detailed discussion of the way in which the Lloyd’s insurance market works, see Underwriters at Lloyd’s, London v OstingSchwinn.30 Most insureds taking out insurance with a Lloyd’s syndicate do so through a Lloyd’s-accredited insurance broker. A broker offers a risk to a Lloyd’s syndicate by inviting a syndicate to subscribe to a brokergenerated placing slip. The slip summarises the material terms of the risk offered. A syndicate subscribes to a risk by making any changes to it that it deems appropriate and then initialling the slip and recording the percentage of the risk it is prepared to assume and the premium for taking on that percentage of the risk. The risk is transferred when 100 per cent of the risk is underwritten by Lloyd’s syndicates with or without the participation of corporate insurers. A policy wording is subsequently issued in accordance with the terms of the placing slip. 3.25 Apart from providing an insurance market, Lloyd’s collects and distributes insurance intelligence. Amongst other things, it has published Lloyd’s List (originally known as Lloyd’s News and now only available online) since the end of the 17th century, making it one of the oldest news services in the world.
Life insurance 3.26 From 1602, and perhaps earlier, the Church published weekly statistics in some of England’s larger cities, showing the number of people killed by the plague. These were known as ‘Bills of Mortality’ and were an important source of information about life expectancy for the subsequently formed life insurance companies. 3.27 The first life insurance company in England was The Amicable Society for a Perpetual Assurance Office, incorporated in 1706 by
Charter of Queen Anne. It collected the same fixed contribution from each member and out of that fund distributed a certain amount each year to the widows and orphans of members who had died. Instead of collecting the same fixed contribution from each member, the Equitable Life Assurance Society, established in London in 1762, issued insurance policies with premium calculated on the basis of the insured’s age. The Society employed a mathematician, Dr Richard Price, who, in 1771, produced the Northampton Table of Mortality31 in his paper, Observations on Revisionary Payments, based on the Northampton burial register. The Northampton Table was the first table of mortality produced specifically for the calculation of life insurance premiums. The Society used the table to calculate premium rates and, for a long time, it was the only table used by insurers to calculate premium rates. [page 51]
Gambling and the introduction of the requirement for insurable interest 3.28 By a wager (bet), the parties agree that one of them will pay money or money’s worth to the other depending on the outcome of an uncertain event, usually with neither party having an interest in the transaction other than that created by the wager.32 At common law, a wager is an enforceable contract unless it: is against public policy;33 affects the interests of a third party; or is prohibited by statute. In Da Costa v Jones,34 Lord Mansfield said (at 734–5) that unless restrained by statute, ‘parties may wager or insure at pleasure’, making ‘indifferent wagers upon indifferent matters without interest to either of the parties’. As mentioned below, certain forms of gaming have been restrained by statute, directly or indirectly, since the 14th century.
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3.29 The common law does not require an insured to have an interest, or the expectation of an interest, in the subject matter of a nonmarine indemnity insurance contract when entering into it.35 A wager and an indemnity insurance contract can be distinguished without reference to insurable interest, on the basis that each party enters into a wager in the hope of making a profit, whereas an insured only enters into an indemnity insurance arrangement to protect against the risk of loss. The nature of an indemnity insurance contract prevents an insured from making a profit. See Chapter 1 for the main differences between a wager and an insurance contract. 3.30 The nature of an indemnity insurance contract requires an insured to have an interest in the subject matter of the contract at the time of a loss. Without that interest, the insured suffers no damage by a loss and there is nothing for the insurer to indemnify against. 3.31 The Marine Insurance Act 1745 (UK), the Life Assurance Act 1774 (UK) (also known as ‘the Gambling Act’) and the Gaming Act 1845 (UK) effectively introduced a requirement that an insured have an insurable interest in the subject matter of an insurance contract.36 The first two Acts did so for the express purpose of addressing the perceived abuses [page 52] associated with gambling in the guise of insurance. The third Act did so by simply prohibiting wagering.
The Marine Insurance Act 1745 (UK) 3.32 In the 18th century it was thought that all insurance was indemnity.37 At the time, it was not unusual for insureds to take out ‘policy proof of interest’ (PPI) insurance. PPI insurance was introduced into England towards the end of the 17th century.38 It allowed an insured to recover for a loss under an indemnity insurance contract
without proving an interest in the subject matter of the contract at the time of the loss. Proof of the policy was sufficient proof of the required interest. This type of insurance was useful when a legitimate insured anticipated potential difficulty proving a loss or the value of it to them. As to be expected, some insureds took out PPI insurance in circumstances where they had no (and no expectation of gaining an) interest in the subject matter of the insurance. This was not indemnity insurance. It was simply gambling in the guise of insurance. In this way, PPI insurance gave the dishonest an incentive to deliberately bring about a loss covered by the policy. 3.33 The Marine Insurance Act 1745 (19 Geo II c 37)39 made PPI policies unenforceable. The Preamble explained that the Act was needed because PPI insurance was: … productive of many pernicious practices, whereby great numbers of ships, with their cargoes, have either been fraudulently lost or destroyed, or taken by the enemy in time of war … and by introducing a mischievous kind of gaming, or wagering, under the pretence of assuring the risk on shipping and fair trade, the institution and laudable design of making assurances hath been perverted, and that which was intended for the encouragement of trade and navigation has, in many instances, become hurtful and destructive to the same.
In other words, although insurance is intended to promote commerce, the dishonest use of PPI insurance undermines it. Instead of taking out PPI insurance to mitigate losses, the dishonest took it out to generate profits. In effect, the Act required an insured to have a financial interest in the subject matter of a marine insurance contract at the time of a loss, as was required by the nature of a non-PPI indemnity insurance contract. The Act did not define the type of interest the insured was required to have in the subject matter of the contract; it left that to the common law: see Chapter 10. [page 53] Almost 200 years after the enactment of the Marine Insurance Act
1745, Scrutton LJ described the circumstances in which PPI insurance continued to flourish despite it being prohibited by statute:40 For many years, there has been an unfortunate conflict between the statute law and the practice of businessmen. It has been extremely common to place in policies a PPI clause providing that there shall be no necessity to prove the amount of loss, although all the time there was a statute which said that such a clause was either illegal or null and void … Apart from the fact that the clause facilitates fraud, as it does in many cases, a practice has arisen with regard to it which places judges in great difficulty. It is the duty of judges, if they know that a policy has that clause on it, to treat it as null and void under the Act, and a practice has grown up of deceiving the court by parties tearing off the clause which they have put on the policy in the hope that the court will not know that there is such a clause and will give effect to the policy … that is the practice, and the only thing to be said to businessmen who carry on business in that way is that, if they persistently enter into contracts which are null and void under a statute, they must not complain if the courts obey the statute rather than their commercial practice.
The Life Assurance Act 1774 (UK) (the ‘Gambling Act’) 3.34 As wagers were generally enforceable in the 18th century, it was also not uncommon at the time for persons to ‘insure’ the lives of strangers. Like PPI insurance, this was simply gambling in the guise of insurance. It risked tempting those betting on an early demise of an insured life to take steps to bring that about. Even if that did not happen, in the case of insurance in respect of the life of a well-known person (as was common), it was usually not conducive to long life for the person to read in a newspaper or hear that people were ‘betting’ that they only had a short time to live. 3.35 This led to the enactment of the Life Assurance Act 1774 (14 Geo 3 c 48),41 which rendered an insurance contract (other than contracts in respect of goods, merchandises and ships) void unless the beneficiary of the policy had an interest in the subject matter of the contract when it was made (it did not matter if the insured’s interest in the subject matter ceased after the making of the contract).42 Like the Marine Insurance Act 1745, this Act also left to the common law the type of interest the insured was required to have in the subject matter of the contract. The object of the Act was to: … prevent gambling under the form and pretext of a policy of insurance by parties who have no interest in the subject matter of such assurance.43
[page 54] Despite its broad language and its enactment at a time when it was thought that all insurance was indemnity,44 the Act does not apply to indemnity insurance.45
The Gaming Act 1845 (UK) 3.36 Although various statutes enacted from the 14th to the 18th centuries prohibited certain gambling activities directly and indirectly, it was not until the Gaming Act 1845 (8 and 9 Vict, c 109)46 that Parliament tackled gambling head on by rendering all wagers void and unenforceable: s XVIII. The Gaming Act 1845 did not apply to indemnity insurance contracts generally because, by their nature, they do not allow an insured to profit from a loss. The Act repeated the prohibition on gambling in the guise of insurance brought about by the Marine Insurance Act 1745 and the Life Assurance Act 1774.
Australia 3.37 In Australia there is legislation regulating gaming in each state and territory.47 That legislation does not render void or unenforceable the following insurance contracts, even if the insured had no (and no expectation of an) interest in the subject matter of the insurance when entering into the contract: the general and other insurance contracts described by s 764A(1) (d), (e) and (f) of the Corporations Act 2001 (Cth). Section 1101I of the Corporations Act expressly overrides state- and territorybased gaming legislation on this particular issue; and insurance contracts subject to the Insurance Contracts Act 1984 (Cth) (ICA). The ICA effectively overrides state-based gaming legislation on this particular issue48 by providing that a general insurance contract is not void simply because the insured does not have an interest in the subject matter of the contract when the contract is made: s 16. It is the same for a life insurance contract or ‘a contract that provides
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for the payment of money on the death of a person by sickness or accident’: s 18. [page 55]
The contribution of Lord Mansfield 3.38 William Murray, 1st Earl of Mansfield, was born in Perthshire, Scotland. He began his education at Perth Grammar School before moving to London in his teenage years to complete his secondary education at Westminster School. Lord Mansfield became Chief Justice of the Court of King’s Bench in 1756 and stayed for 32 years. He is regarded as having created modern commercial law because of his substantial efforts to reform the existing law through the cases he decided.49 3.39 Until the 18th century, English commercial arrangements were transacted according to the ‘law merchant’ (lex mercatoria), a loose collection of local and other customs and rules developed in the Middle Ages to accommodate merchants travelling from fair to fair, market town to market town, and port to port. Until the 17th century, private merchant courts50 resolved disputes relating to their transactions promptly so that the parties could quickly move on to other business.51 How that came about has been described in the following terms: Merchants began to transact business across local boundaries, transporting innovative practices in trade to foreign markets. The mobility of the merchant carried with it a mobility of local custom from region to region. The laws of particular towns, usually trade centers, inevitably grew into dominant codes of custom of transterritorial proportions.52
Although the common law at the time comfortably resolved local disputes, it was out of its depth in relation to disputes with an international flavour, a point cheekily made by Sir Josiah Child in the following passage: … the defendant brings his writ of prohibition, and removes the case into his Majesty’s court of king’s bench, where after great expenses of time and money, it is well if we can make our own counsel (being common lawyers), understand one half of our case, we
being amongst them as in a foreign country, our language strange to them, and theirs as strange to us.53
3.40 Lord Mansfield set about incorporating the law merchant into the common law, thereby bringing it into line with the law in Europe, observing that: … the daily negotiations and property of merchants ought not to depend on subtleties and niceties, but upon rules easily learned and easily retained because they are dictates of common sense drawn from the truth of the case.54
[page 56] 3.41 Lord Mansfield also made a substantial contribution to the development of marine insurance law,55 underpinned by his observation in Luke v Lyde56 (at 617) that: … maritime law is not the law of a particular country, but the general law of nations.
The French academic Balthazard Marie Emerigon echoed that when he said in 1783:57 This [marine insurance] is a law not peculiar to one, but common to all commercial nations. Whence is it derived but from natural reason, existing in all men, and reaching the same results in all countries alike? … Hence a law that is universal necessarily forms part of the law of nations …
3.42 Today, Lord Mansfield’s most well known specific contribution to insurance law is his seminal judgment in the marine insurance case Carter v Boehm,58 in which he successfully entrenched the notion that an insurance contract was one of ‘good faith’,59 although failing in his larger attempt to introduce it to commercial contracts generally. That is not to underestimate the importance of his contribution to other areas of insurance law, for example ‘warranties’,60 subrogation61 and double insurance.62
Personal accident insurance 3.43 Personal accident insurance began in England in 1849 with the establishment of the Railway Passenger Assurance Company which, as the name suggests, insured against death or injury caused by a railway
accident. In 1852, the company’s charter was amended so as to allow it to insure against other accidents as well.
Liability insurance 3.44 Liability insurance first appeared towards the end of the 19th century. Today it is commonplace in Australia, mainly due to: the emergence of the law of negligence as a separate and identifiable tort63 towards the end of the 19th century and its continued development
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[page 57] since the seminal cases of Donoghue v Stevenson64 and Hedley Byrne v Heller;65 the introduction of employers’ liability legislation in England and Australia at the end of the 19th century and the beginning of the 20th century, which increased the range of circumstances in which an employer might be held liable for injuries suffered by its employees; the introduction of legislation in Australia in the 20th century compelling employers and motor vehicle owners to insure against some of their potential liability for death or personal injury caused to their employees or caused by the use of their motor vehicle respectively. The establishment of a market for liability insurance encouraged the courts to expand the range of circumstances in which a person might be held liable for negligence, as they could do so in the knowledge that ‘long pocketed’ insurers stood behind many of the allegedly negligent defendants that came before them.66 Compulsorily insured defendants (employers and motor vehicle owners and drivers) were amongst those most exposed to this development; too bad for defendants who are liable to reimburse the compulsory insurer for some or all of the loss, for example, because of a breach of a term of their insurance contract.
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The wide range of activities that may give rise to an insured’s legal liability to a third party has led to the development of tailor-made liability insurance contracts, reflecting that range of activities. Readily available insurance products have been designed to cater for specific liability insurance needs such as employers’ liability, product liability, liability for motor vehicle property damage, professional liability, and directors’ and officers’ liability. These policies are taken out in addition to, not instead of, a public (general) liability policy, which provides a scope of cover for everyone’s ordinary liability insurance needs. [page 58]
THE HISTORY OF LOSS SPREADING 3.45 Sharing and spreading loss and the risk of loss are features of all family and communal life. An early extant record of a compulsory loss-sharing arrangement is in the Sententiae of Paulus, written around 200 CE (Book ii, Title 7),67 which acknowledges Rhodian Sea Law of about 900 BCE when providing for the application of general average68 in the following terms: (1) When jettison of goods takes place for the purpose of lightening a ship, let that which has been jettisoned on behalf of all be restored by the contribution of all.
Ancient communities and societies formed within communities often shared the burial costs of members. Roman Collegia are an example, as are Roman military societies, although sometimes the latter might also pay an annuity69 or a lump sum if a member stayed alive until a certain date. Merchant and craft guilds, which might have developed from the Roman Collegia, first appeared in the years leading up to the Middle Ages.70 Amongst other things, they used their funds to pay for a member’s loss in a wide variety of fortuitous circumstances, including fire and robbery.
INSURANCE IN AUSTRALIA Colonisation 3.46 In the course of the 18th and 19th centuries, Great Britain established six self-governing colonies in Australia.71 Each colony inherited the English common law and every English statute in force on the day it was colonised [page 59] (to the extent that it could reasonably be applied to the conditions of the colony at the time). 3.47 On 1 January 1901, the colonies became states when they joined together to form the Commonwealth of Australia. The Australian Constitution divides legislative, executive and judicial power between the Commonwealth and the state governments. As is apparent from the discussion below, legislation enacted by the Commonwealth Government regulates the insurance market and insurance contracts.
Regulation of the insurance market 3.48 In 1905, the Commonwealth Parliament passed its first Act in relation to insurance: the Life Assurance Companies Act 1905 (Cth); an Act that limited the amount of insurance payable on the lives of children. The first Commonwealth Act to regulate the entry and participation of companies in the insurance market was the Insurance Act 1932 (Cth), which required insurers carrying on business in Australia to lodge a deposit with the Commonwealth Treasurer as security for their liability to policy holders. This Act was replaced by the Insurance Act 1973 (Cth), which regulates the minimum levels of capital and solvency for companies wanting to enter the insurance market and for insurers in
the market: s 2A. It is aimed at ensuring that insurers will be able to pay claims as and when they fall due for payment. In the year following the end of World War II the Commonwealth enacted the Life Insurance Act 1945 (Cth). That Act repealed the Life Assurance Companies Act 1905 (Cth) and was itself superseded by the Life Insurance Act 1995 (Cth). The latter Act sets out to protect the owners of life insurance policies by controlling the entry of companies into the life insurance market and the way in which companies in the market carry on life insurance business: s 3. 3.49 Depending on the nature of their business, Ch 7 of the Corporations Act 2001 (Cth), amongst other things, regulates the way in which most insurers and insurance agents and brokers carry on business in Australia and how they deal with the people they do business with and intend to do business with. See Chapter 4 for a discussion of regulation of the insurance industry.
Regulation of insurance contracts 3.50 The Marine Insurance Act 1909 was the first Commonwealth Act to regulate insurance contracts (in this case, as the title of the Act suggests, marine insurance contracts). In the second reading speech in the House of Representatives,72 the Commonwealth Attorney-General, Mr Groom, described the need for the Act in the following terms: [page 60] At the present time, in each of the States of Australia, any one who desires to ascertain what the law as to marine insurance is, has to consult common law authorities and decisions. Of these there are no less than 2,000 in existence. Under these circumstances, of course the law is in some cases difficult to ascertain. In some instances, the authorities are uncertain; on some points where certainty is required, no certainty can be gathered; and some decisions rest upon old conditions which have now become obsolete … Marine insurance is a highly technical branch of the law. It requires for the complete mastery of it years of careful research and practice. At the same time it is a branch of the law which greatly affects the commerce of our people. It is, therefore, above all things highly desirable that this branch of the law should be made clear, definite and certain.
The Act substantially replicated the Mackenzie Chalmers’ drafted Marine Insurance Act 1906 (UK), which was expressly intended as a codification of marine insurance law.73 The latter Act was introduced as a Bill in the early 1890s and was still languishing at that stage in 1901, when Mackenzie Chalmers said this about its long gestation:74 The future which awaits the Bill is uncertain. Mercantile opinion is in favour of codification, but probably the balance of legal opinion is against it. As long as freedom of contract is preserved, it suits the man of business to have the law stated in black and white. The certainty of the rule is more important than its nicety. It is cheaper to legislate than to litigate; moreover, while a moot point is being litigated and appealed, pending business is embarrassed. The lawyer, on the other hand, feels cramped by codification … No code can provide for every case that may arise, or always use language which is absolutely accurate. The cases which come before lawyers are the cases in which the code is defective. In so far as it works well it does not come before them. Every man’s view of a question is naturally coloured by his own experience, and a lawyer’s view of insurance is perhaps affected by the fact that he sees mainly the pathology of business. He does not often see its healthy physiological action.
3.51 The Insurance Contracts Act 1984 is the second Commonwealth Act to regulate insurance contracts. It brought largely within its scope a ‘bewildering variety of laws’, including the common law and imperial, Commonwealth and state legislation.75 See Chapter 6 for an introduction to the ICA.
CONCLUSION 3.52 Insurance is business. Its aim is certainty. Mona is art. It doesn’t have the same aim.
1.
2. 3.
In preparing this chapter, I have relied for the early history on Dr C F Trennery’s scholarly and easily readable work, The Origin and Early History of Insurance Including the Contract of Bottomry, The Law Book Exchange Ltd, Clark, New Jersey, 2009. As noted in its foreword, Dr Trennery intended to submit the original to the University of London as a thesis and then shorten it for publication. Dr Trennery died in 1911 and the manuscript languished until it was picked up by the editors E L Gover and A S Paul and first published by P S King & Son Ltd in London in 1926. We should all be grateful for that. David Walsh of Mona (Museum of Old and New Art), Hobart, reported in the Weekend Australian, 22/23 October 2016. B N Cardozo, The Nature of the Judicial Process, Yale University Press, 1921, p 53 (based
4.
5. 6. 7. 8.
9. 10. 11.
12.
13.
14.
15. 16. 17. 18. 19.
20.
on the Storrs lectures Cardozo gave at Yale University in 1921). Hammurabi, the sixth First Dynasty King of the city-state Babylon, ruled the Amorite Kingdom of Babylonia for 43 years. Babylonia was located in present-day Iraq, across the valleys of the Tigris and Euphrates Rivers. The Code of Hammurabi, trans. L W King (1910), the Avalon Project, Yale University, 2007. The Code of Hammurabi (see fn 5). C F Trennery, see fn 1, Ch I, App B; J R Ziskind, ‘Sea Loans at Ugarit’ (1974) 94(1) Journal of the American Oriental Society 134–7. The word ‘bottomry’ is derived from the Flemish word for a ship’s keel or hull and is used to refer to the ship as a whole. The loan upon bottomry was fully developed by the 4th century BCE, as described by Demosthenes (384–22 BCE) in his oration against Lacritus. Titus Livius, The History of Rome, Book 23, pp 48–9, F G Moore, Prof Emeritus (ed), Columbia University. Gaius Suetonius Tranquillus, The Lives of the Twelve Caesars, Penguin Classics, London, first pub. 1957, trans. R Graves. For example, the 533 CE edict of the Byzantine Roman Emperor Justinian allowed interest at up to 6 per cent on ordinary loans. It also allowed up to 12 per cent on maritime loans and loans upon bottomry, the extra interest representing compensation to the lender for bearing the risk of the venture failing because of a maritime peril. For example, the Second and Third Lateran Councils under Pope Innocent II in 1139 and 1179 respectively; the 12th century Decretum Gratiani (a summary of canon law and church teachings compiled by Gratian); Pope Gregory IX’s decretal Naviganti vel eunti ad nundinas in around 1237; and the Council of Vienne under Pope Clement V in 1311–12. The ‘seller’ could only sell the goods if they owned them. This led to the insurance law requirement that after being indemnified for a total loss, the ‘seller’ (insured) abandoned to the ‘buyer’ (insurer) whatever remained of the goods (salvage). F Martin, The History of Lloyd’s and of Marine Insurance in Great Britain, MacMillan and Co, London, 1876, Ch 1 (rep Law Book Exchange Ltd, Clark, New Jersey, 2004). J P Van Niekerk claims the Chronyk is unreliable: Development of the Principles of Insurance Law in the Netherlands from 1500 to 1800, Juta, South Africa, 1999, Vol 1, p 7, n 13. Trennery, see fn 1, Introduction at 39. H O Nelli, ‘The Earliest Insurance Contract: A New Discovery’ (1972) 39(2) Journal of Risk and Insurance 215–20. J P Van Niekerk, see fn 14, Vol 1, Ch IV, p 199. Penguin Books in association with J Cape, London, 1992. In the 12th century, merchants of the Hanse cities and guilds of Germany formed a trade alliance known as the ‘Hanseatic League’ that continued for hundreds of years. At one time, the league, based in Lübeck, controlled all the trade of northern Europe. In London, Hanse merchants lived in a walled community in an area known as ‘the Steelyard’. Gibbs v Mercantile Mutual Insurance (Australia) Ltd [2003] 214 CLR 604 at [47] (McHugh J). Or perhaps the French word for ‘promise’: Lord Mansfield in Foster v Thackeray Tr 21 Geo 3, B R Vide ante, 1 Vol 57, cited by Grose J in Good v Elliott (1790) 3 Term Reports 693 at 702; 100 ER 808.
21. A diptych is a painting consisting of two panels; a triptych is a painting consisting of three panels etc. 22. Select Pleas in the Court of Admiralty, Selden Society, London, 1894, ii, 52–3. 23. A H Thomas (ed), Calendar of Plea and Memoranda Rolls Preserved Among the Archives of the Corporation of the City of London at the Guildhall, AD 1413–1437, Cambridge, Cambridge University Press, 1943, pp 208–210. 24. At this time, ‘the statistical knowledge which has rendered those [insurance] contracts possible in modern times, was wholly wanting’: W S Holdsworth, ‘The Early History of the Contract of Insurance’ (1917) 17(2) Columbia Law Review 96 at 110. 25. In cricket circles, known as the search for an early version of the Duckworth-Lewis system for determining the winner of a rain-interrupted cricket match. 26. As regards the second problem, only for a two-player game. 27. J Howel, Londinopolis; An Historical Discourse; or, Perlustration of the City of London, J Streeter, London, 1657, p 398. 28. Rex v Webb (1811) 14 East 406 at 416; 104 ER 658. 29. The Hancock Family Memorial Foundation Ltd v Fieldhouse (No 3) [2010] WASC 223 at [72] (Le Miere J). 30. 613 F 3d 1079 (11th Cir, 2010). 31. A ‘table of mortality’ is a table of rates of death according to age, and is based on empirical information. 32. Carlill v Carbolic Smoke Ball Co [1892] 2 QB 484 (Hawkins J). 33. Moulis v Owen [1907] 1 KB 746 at 758 (Fletcher Moulton LJ); Hussey v Crickitt (1811) 3 Campbell 168; 170 ER 1343, where the court held that a wager as to who was the older, of a rump and dozen (a good dinner and plenty of wine for everyone) made by the plaintiff and the defendant when ordering dinner at a tavern, was enforceable. 34. (1778) 2 Cowper 729; 98 ER 1331. 35. Williams v Baltic Insurance Association of London Ltd [1924] 2 KB 282 at 291 (Roche J). 36. The Moonacre [1992] 2 Lloyd’s Rep 501 at 509–11 (Colman QC). 37. Feasey v Sun Life Assurance Company of Canada [2003] EWCA Civ 885; [2003] Lloyd’s Rep IR 637 at [54] (Waller LJ). 38. John Millar, Elements of the Law Relating to Insurances, 1787, Edinburgh, p 214. 39. The first statute specifically concerned with insurance since the Elizabeth Statute of 1601. 40. Thomas Cheshire and Co v Vaughan Brothers and Co [1920] KB 240 at 252. 41. Also known as the Gambling Act 1774. 42. Dalby v The India and London Life Assurance Company (1854) 15 CB Reports 365; 139 ER Rep 465; Feasey v Sun Life Assurance Company of Canada (see fn 37) at [73] (Waller LJ). 43. Paterson v Powell (1832) 9 Bing 320 at 327 (Tindal CJ). 44. In 1854, the Court of Exchequer Chamber held that life insurance was contingency, not indemnity: Dalby v The India and London Life Assurance Company (see fn 42); Feasey v Sun Life Assurance Company of Canada (see fn 37); at [54] (Waller LJ). 45. Mark Rowlands Ltd v Berni Inns Ltd [1986] 1 QB 211 at 227; Siu v Eastern Insurance Co Ltd [1994] 2 AC 199 at 211.
46. The Gaming Act 1845 has since been replaced by the Gambling Act 2005 (UK). 47. For example, the Gaming and Betting (Contracts and Securities) Act 1985 (WA). 48. Australian Constitution s 109, which provides for the supremacy of Commonwealth legislation where it directly conflicts with state legislation. 49. In Lickbarrow v Mason (1787) 2 Term Reports 63; 100 ER 35, Buller J said (at 73; 40) Lord Mansfield ‘may be truly said to be the founder of the commercial law of this country’. 50. Also known as ‘piepowder courts’, piepowder being a derivation of a French word referring to the dusty feet of travellers. 51. The precursor to the business of arbitration. 52. L E Trakman, ‘The Evolution of the Law Merchant: Our Common Heritage’ (1980) 12 Journal of Maritime Law and Commerce 1 at 3. 53. J Child, A New Discourse of Trade, London, 1693, p 100. 54. Hamilton v Mendes (1761) 2 Burr 1198 at 1214; 97 ER 787 at 795. 55. Amongst other things, Lord Mansfield shaped the law of constructive total loss based upon notice of abandonment: Moore v Evans [1918] AC 185 (Lord Atkinson). 56. (1759) 2 Burr 882 at 887; 97 ER 614. 57. Treatise on Insurances, translated from the French with an introduction and notes by S Meredith (1850), The Lawbook Exchange Ltd, Clark, New Jersey, 2005, Chapters 1, 21, 22. 58. (1766) 3 Burr 1905; 97 ER 1162. 59. The first reference to ‘utmost good faith’ in the context of insurance appears in the 1798 case, Wolff v Horncastle (1798) 1 Bosanquet and Puller 316; 126 ER 924, in which Buller J said: ‘From the language of the two statutes, as well as the consideration that we are construing a contract uberrimae fide; viz. a policy of insurance, we must avoid bearing harder upon the Plaintiffs than is absolutely necessary’. 60. Pawson v Watson (1778) 2 Cowp 785; 98 ER 1361. 61. Mason v Sainsbury (1782) 3 Dougl 61; 99 ER 538. 62. Godin v The London Assurance Company (1758) 1 Burr 489; 97 ER 419. 63. Civil wrongdoing. 64. (1932) UHKL 100; [1932] AC 562. 65. [1963] UKHL 4; [1964] AC 465. 66. F James, ‘Accident Liability Reconsidered: The Impact of Liability Insurance’ (1948) 57(4) Yale Law Journal 549; M Davies, ‘The End of the Affair: Duty of Care and Liability Insurance’ (1989) 9 Legal Studies 67. In Western Suburbs Hospital v Currie (1987) 9 NSWLR 511, Kirby P said in a negligence case (at 518): ‘Although, by conventional theory, insurance must be ignored as irrelevant, its impact has inevitably been felt in the definition of the circumstances in which the consequences of an injury will be left with the injured party or shifted, by means of negligence law, in whole or part to some other person or body upon whom it is considered more fair in the circumstances to cast the burden, or some of it’. See also Lynch v Lynch (1991) 25 NSWLR 411 at 415–6 (Clarke JA). A decade earlier, Sir Ninian Stephen said in Caltex Oil (Australia) Pty Ltd v The Dredge ‘Willemstad’ (1976–77) 136 CLR 529 at [51], that the fact that a defendant in a tort case might be insured should be deliberately disregarded by the court in determining liability
67.
68. 69.
70.
71. 72. 73. 74. 75.
because the court’s task is ‘loss fixing, rather than loss spreading’. See also Lister v Romford Ice and Cold Storage Co Ltd [1957] AC 555 at 576–7 (Viscount Simonds). In the Digest of Justinian 533 AD (Dig XIV, Title 2) under the heading, ‘On the Rhodian Law respecting jettison’, Paulus’s description of general average is in the following form: ‘By the Rhodian law it is provided that when a jettison of goods takes place for the purpose of lightening a ship, that which has been jettisoned on behalf of all is restored by the contribution of all’. In this context, ‘average’ means ‘loss’, average being derived from the Italian word avaria or the French word avarie meaning ‘loss by damage’. In general terms, an annuity involves the purchaser paying a lump sum to a certain entity in exchange for the entity’s promise to pay a regular amount to the purchaser during the purchaser’s life. On the other hand, life insurance involves someone promising to pay an insurer a regular amount for the period of the insured’s life in exchange for the insurer’s promise to pay the insured’s estate or nominated beneficiaries a certain amount on the insured’s death. Both involve risk relating to the timing of a death. In the case of an annuity, the person paying the annuity takes the risk of a late death. In the case of life insurance, the insurer takes the risk of an early death. The word ‘guild’ is derived from a similar looking Anglo-Saxon word meaning ‘to pay’, a reference to the subscription paid by members to belong to the guild. The first mention of a guild in the context of risk sharing is in a capitulare issued by Charlemagne in 779 CE banning the making of an oath as part of becoming a member of a guild, on the basis that oaths should only be made to Charlemagne. New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia. Commonwealth Hansard, 6 October 1908, at 764. Second Reading Speech of the Earl of Halsbury, House of Lords, 1 March 1906, Hansard, Vol 152, cc 1251–2. M D Chalmers and D Owen, A Digest of the Law Relating to Marine Insurance, William Clowes and Sons Ltd, London, 1901, p xiii. Australian Law Reform Commission, Insurance Contracts, Report 20, December 1982, Ch 4 at [16].
[page 61]
Chapter 4 REGULATION OF GENERAL INSURERS … the UK approach to regulation has been to make sure that insurers are in a financial position to make payment, and not to require or encourage them to do so. Payment is a matter of private contract, governed almost exclusively by common law principles which for the most part have their origins in eighteenthcentury maritime practice.1
INTRODUCTION This chapter discusses the regulation of general insurers by Commonwealth legislation, by the Australian Prudential Regulation Authority (APRA) and by general insurers’ self-imposed regulation, under the following headings: the Insurance Act 1973 (Cth) and APRA; the Corporations Act 2001 (Cth) Ch 7; the Australian Securities and Investments Commission Act 2001 (Cth); the Financial Sector (Shareholdings) Act 1998 (Cth) and the Insurance Acquisitions and Takeovers Act 1991 (Cth); the Financial Sector (Collection of Data) Act 2001 (Cth); the Privacy Act 1988 (Cth); and self-regulation: the General Insurance Code of Practice and the Financial Ombudsman Service. The Insurance Contracts Act 1984 (Cth) (ICA) regulates insurance contracts. This text is largely about its operation, so the ICA gets an introductory chapter of its own: Chapter 6.
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Regulation of insurers by the Marine Insurance Act 1909 (Cth) and the Life Insurance Act 1995 (Cth) is outside the scope of this text, as is the regulation of health insurers. [page 62] State and territory legislation regulating insurers (for example, in their compulsory motor vehicle third party personal injury and workers’ compensation schemes) is not affected by the Insurance Act 1973 (Cth)2 and is outside the scope of this text.
OVERVIEW 4.1 In Australia, regulation is about government doing what it can to ensure insurers have the financial resources to pay claims and that meritorious claims are paid promptly, by legislating to: give an insured confidence that its insurer will be trading and will have the financial resources to pay their claim when called on to do so; limit an insurer’s ability to allocate rights and obligations in an insurance contract as it pleases; and impose high standards of conduct on insurers in their dealings with insureds, intending insureds and insurance intermediaries. Insureds need the protection sought by the: first objective, because of the size of premium pools created and controlled by insurers and the significant amount of time that often elapses between an insurer receiving the premium and paying claims; and second and third objectives, because of the inequality of bargaining power between an insurer and most insureds.
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4.2
Insurers are regulated by Commonwealth, state and territory
legislation (some specific to insurers and some of general application) and by: the prudential regulator — APRA. APRA was established by the Australian Prudential Regulation Authority Act 1998 (Cth) (APRA Act): ss 7 and 13. It is responsible, amongst other things, for the general administration of the Insurance Act 1973 (Cth) subject to the Commonwealth Treasurer’s directions: Insurance Act 1973 (Cth) s 8; and the corporate regulator — the Australian Securities and Investments Commission (ASIC). ASIC was established by the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act): s 8. It is responsible, amongst other things, for: ■ the general administration of the ICA subject to the Commonwealth Treasurer’s directions: ICA s 11A; ■ monitoring and promoting market integrity and consumer protection in relation to the Australian financial system: ASIC Act s 12A(2); and
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■ the licensing and conduct of insurers, insurance intermediaries and others in relation to the provision of financial services: Corporations Act 2001 (Cth) Ch 7 and s 5B.
THE INSURANCE ACT 1973 (CTH) AND APRA The Insurance Act 1973 (Cth) 4.3 In broad terms, the Insurance Act 1973 (Cth) is concerned with regulating: insurers that carry on general insurance business; and
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■entry to the market by those seeking to carry on general insurance
business. The Life Insurance Act 1995 (Cth) does the same for life insurance business. 4.4 The main object of the Insurance Act 1973 is to protect insureds and intending insureds ‘under insurance policies (issued by general insurers and Lloyd’s underwriters) in ways that are consistent with the continued development of a viable, competitive and innovative insurance industry’: s 2A(1). Protecting ‘insureds and intending insureds’ is a reference to ensuring that in all reasonably foreseeable circumstances, general insurers and Lloyd’s underwriters operating in Australia will have the financial resources (sufficient capital reserves and levels of solvency)3 to pay proper claims on their insurance contracts as and when they fall due for payment. By s 2A(2), the Act and the prudential standards determined by APRA under the Act, set out to achieve their central objective, mainly by: (a) restricting who can carry on insurance business in Australia by requiring general insurers, and the directors and senior management of general insurers, to meet certain suitability requirements; and (b) imposing primary responsibility for protecting the interests of policyholders on the directors and senior management of general insurers; and (c) imposing on general insurers requirements to promote prudent management of their insurance business …; and (d) providing for the prudential supervision of general insurers by APRA; and (e) providing for judicial management of general insurers whose continuance may be threatened by unsatisfactory management or an unsatisfactory financial position, so as to protect the interests of policyholders and financial system stability in Australia; and
[page 64] (f)
providing for APRA to pay valid claims on policies issued by certain general insurers that are under judicial management and that APRA believes are insolvent before they would receive payment in a winding up of the general insurers.
4.5 Only a body corporate, a Lloyd’s underwriter or a person with a determination by APRA under s 7(1) can carry on ‘insurance business’ in Australia: s 9. Section 3(1) broadly defines ‘insurance business’ and specifically excludes from its ambit life, health and various other insurance business. Workers’ compensation and various other types of insurance business are excluded from the application of the Act: s 5(2)(c) and the Insurance Regulations 2002 (Cth) reg 6 and Sch 2. The phrase ‘carry on business’ would usually require ‘the doing of a [series, repetition or] succession of acts designed to advance some enterprise of the company pursued with a view to pecuniary gain’.4 Nevertheless, an insurer can ‘carry on insurance business’ without ‘a view to pecuniary gain’.5 4.6 A body corporate can only carry on ‘insurance business’ in Australia if it is a general insurer or a person with a determination by APRA under s 7(1): s 10(1). A ‘general insurer’ includes a ‘foreign general insurer’ as defined in s 3(1). A ‘general insurer’ is a body corporate authorised by APRA under s 12 to carry on insurance business: s 11. Unless it has a determination by APRA under s 7(1), a Lloyd’s underwriter can only carry on insurance business in Australia for as long as s 93 has effect in relation to that underwriter: s 10(2). 4.7 The Financial Claims Scheme (FCS) set up by ‘Pt VC – Financial claims scheme for policyholders with Insolvent general insurers’ (s 62ZW) of the Insurance Act 1973 (Cth) provides that if the relevant Minister makes a declaration about a general insurer that: is under judicial management; and APRA believes is insolvent, then, ■ certain persons who have claims on certain of that insurer’s policies are entitled to be paid certain amounts by APRA before they would receive payment in a winding up of the insurer (the policies covered by the Scheme are listed in Pt 4A of the Insurance Regulations 2002 (Cth)); and
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[page 65]
■ APRA is substituted for those persons as a creditor of the insurer to the extent of the entitlements. Insurance policies held by medium and large businesses are covered by the FCS if the claim is under $5,000. In certain circumstances: claims greater than $5,000 will be paid; and a third party’s claim will be paid.
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APRA 4.8 APRA is the prudential regulator. Amongst other things, it is responsible for the: prudential regulation of entities that provide services for deposit taking, general insurance, life insurance and superannuation; and general administration of the Insurance Act 1973 (Cth) subject to the Commonwealth Treasurer’s directions: Insurance Act 1973 (Cth) s 8. In performing and exercising its functions and powers, APRA is obliged ‘to balance the objectives of financial safety and efficiency, competition, contestability and competitive neutrality and, in balancing these objectives, is to promote financial system stability in Australia’: APRA Act s 8(2).
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4.9 Under the Insurance Act 1973 (Cth), APRA is responsible for granting or refusing applications for a s 12 authorisation to carry on ‘insurance business’ in Australia and: can revoke a general insurer’s s 12 authorisation in the circumstances described in s 15; and must revoke a general insurer’s s 12 authorisation in the circumstances described in s 16.
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4.10 APRA can determine prudential standards relating to prudential matters that some or all general insurers or non-operating holding companies (NOHCs) or their subsidiaries must comply with: ss 32 and
35 of the Insurance Act 1973 (Cth). ‘Prudential matters’ are defined in s 3(1) as matters relating to: (a) the conduct by the insurer, non-operating holding company (NOHC) or subsidiary of any of its affairs in such a way as: (i) to keep itself in a sound financial position; or (ii) not to cause or promote instability in the Australian financial system; or (b) the conduct by the insurer, NOHC or subsidiary of any of its affairs with integrity, prudence and professional skill.
The following APRA-issued Prudential Standards govern general insurers (GPS are specific to general insurers; CPS are common to all industry sectors): GPS 001: Definitions; GPS 110: Capital Adequacy;
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[page 66]
■GPS 112: Capital Adequacy: Measurement of Capital; ■GPS 113: Capital Adequacy: Internal Model-based Method; ■GPS 114: Capital Adequacy: Investment Risk Capital Charge; ■GPS 115: Capital Adequacy: Insurance Risk Capital Charge; ■GPS 116: Capital Adequacy: Concentration Risk Capital Charge; ■GPS 120: Assets in Australia; ■GPS 220: Risk Management; ■CPS 232: Business Continuity Management; ■GPS 222.1: Risk Assessment and Business Continuity ■ ■ ■ ■ ■
Management; GPS 230: Reinsurance Management; CPS 231: Outsourcing; GPS 310: Audit and Actuarial Reporting and Valuation; GPS 410: Transfer and Amalgamation of Insurance Business for General Insurers; CPS 510: Governance; and
■CPS 520: Fit and Proper. Amongst other things, the standards require a Level 1 (individual) general insurer to maintain a capital base in excess of its Minimum Capital Requirement (MCR).6 In Prudential Practice Guide GPG 110 — Capital Adequacy: Capital Management, [2], APRA describes ‘capital’ as: … the cornerstone of an insurer’s financial strength. It supports an insurer’s operations by providing a buffer to absorb unanticipated losses from its activities and, in the event of problems, enables the insurer to continue to operate in a sound and viable manner while the problems are addressed or resolved.
4.11 By s 52(1) of the Insurance Act 1973 (Cth), APRA has the power to investigate a general insurer or authorised NOHC where ‘information in its possession calls for the investigation of the whole or any part of the business of a general insurer or authorised NOHC’ or, more specifically, where it appears to APRA that: a general insurer or authorised NOHC: ■ is, or is likely to become, unable to meet its liabilities; or ■ has not complied with the requirements of the Insurance Act 1973 or the Financial Sector (Collection of Data) Act 2001; or there is, or may be: ■ a risk to the security of a general insurer’s or authorised NOHC’s assets; or
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■ a sudden deterioration in a general insurer’s or authorised NOHC’s financial condition. APRA also has the power to apply to the Federal Court for an order that a general insurer be placed under judicial management: s 62K. Amongst other things, a general insurer under judicial management cannot issue insurance policies without the leave of the Federal Court: s 62T(2). A judicial manager is subject to the control of the Federal Court: s 62X.
THE CORPORATIONS ACT 2001 (CTH) CH 7 4.12 Chapter 7 of the Corporations Act 2001 (Cth) regulates financial services and markets. Its main object (s 760A) is to promote: (a) confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and (b) fairness, honesty and professionalism by those who provide financial services; and (c) fair, orderly and transparent markets for financial products7; and (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.
Chapter 7 consists of 12 Parts and over 600 sections, stretching from s 760A to s 1101JJ. Many of the sections contain subsections, subsubsections and sub-sub-subsections, and in the case of s 1041B, mindbending sub-sub-sub-subsections 1041B(2)(b)(ii)(A) and (B), with an explanatory note! Necessarily, what follows can only be an overview of Ch 7 and its relevance to the general insurance industry — and a ‘broad brush’ overview at that. A detailed analysis of the Corporations Act 2001, and Ch 7 in particular, is outside the scope of this text. 4.13 In broad terms, a general insurer that provides financial services to ‘retail clients’ must hold an Australian Financial Services Licence (AFSL) and must conduct itself and provide product and advice disclosure as required by Ch 7. Not all of the obligations imposed by Ch 7 on an AFSL holder are directly linked to the services it provides to ‘retail clients’. Amongst other things, Ch 7 imposes pre-contractual disclosure obligations on a general insurer in its dealings with retail clients. These are discussed in Chapter 8 of this text. [page 68] The concepts of ‘financial services’, ‘financial product advice’, ‘retail
clients’ and ‘wholesale clients’ are central features of Ch 7. Each of these concepts is discussed below. A person provides a ‘financial service’ if, for example, they: provide ‘financial product’ advice: ss 761A (Definition section) and 766A(1)(a); or deal in a ‘financial product’: ss 761A (Definition section) and 766A(1)(b).8 A ‘financial product’ includes the general and other insurance contracts described by s 764A(1)(d), (e) and (f) (general insurance product). It does not include the insurance products listed in s 765A(1) (c)–(g), such as reinsurance, health insurance, insurance provided by the Commonwealth, a state or territory, or other insurance described in the Regulations, such as workers’ compensation insurance: reg 7.6.01(1)(p). Section 764A(1A) and (1B) describes the application of s 764A(1)(d) to circumstances in which a general insurance product ‘provides 2 or more kinds of cover’ or ‘provides a kind of cover in relation to 2 or more kinds of asset’. A general insurance product includes a contract that: 4.14
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(a) … would ordinarily be regarded as a contract of insurance even if some of its provisions are not by way of insurance; and (b) … includes provisions of insurance in so far as those provisions are concerned, even if the contract would not ordinarily be regarded as a contract of insurance.9
4.15 ‘Financial product advice’ is defined in s 766B(1) as ‘a recommendation or a statement of opinion, or a report of either of those things’ that is intended to influence, or could reasonably be regarded as being intended to influence, a person in making a decision in relation to a type of financial product. ‘Financial product advice’ does not include: the communication of objectively ascertainable information (information that is not reasonably open to question)10, unless it is expressed in a way that suggests or implies a recommendation or statement of opinion; the provision of an exempt document or statement as defined in s 766B(9): s 766B(1A) (if the document or statement contains
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personal advice relating to a financial product it is probably not exempt); or [page 69]
■the kind of ‘insurance’ advice described in s 766B(6) and (7), such
as the inquired-about cost or likely cost of an insurance product. ‘Financial product advice’ is either ‘personal’ or ‘general’. It is: ‘personal’ if it is given or directed to a person in circumstances where (s 766B(3)); ■ the insurer ‘has considered one or more of the person’s objectives, financial situation and needs’; or ■ a reasonable person might expect the insurer to have considered one or more of those matters; ‘general’ if it is not ‘personal advice’: s 766B(4). If a general insurer gives ‘personal advice’ to a ‘retail client’, the insurer ‘must act in in the best interests of the client in relation to the advice’: s 961B(1).
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4.16 A ‘retail client’ (s 761G(5)) loosely approximates a ‘consumer’ as defined by the ASIC Act and the Competition and Consumer Act 2010 (Cth) (CCA). A person is only a ‘retail client’ in relation to the provision of a financial product or service that relates to a general insurance product if: the person is an individual or the product is or would be used in connection with a small business11; and the product is a motor vehicle, home building or contents, sickness and accident, consumer credit, travel, personal and domestic property or medical indemnity insurance (added by reg 7.1.17A) or another kind of general insurance product prescribed by the Regulations: s 761G(5)(b). If a client is not a ‘retail client’ it is a ‘wholesale client’: s 761G(4). An
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underlying theme of Ch 7 is that ‘wholesale clients’ do not need the same protection as ‘retail clients’. 4.17 7:
Set out below is a brief discussion of the following aspects of Ch
■Part 7.6, which requires a general insurer that provides financial ■ ■ ■ ■
services to ‘retail clients’ to hold an AFSL; Part 7.6 Div 3, which imposes obligations on an AFSL holder; Part 7.8, which regulates an AFSL holder’s conduct in relation to financial services other than disclosure; Part 7.10, which prohibits market misconduct in relation to financial services; and Part 7.9 Div 5, which gives a retail client a 14-day cooling-off period after purchasing a financial product.
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Part 7.6: The licensing of providers of financial services 4.18 Unless exempt, a person who carries on a ‘financial services’ business in ‘this jurisdiction’12 must hold an AFSL covering the provision of the ‘financial services’: s 911A(1). To do so without an AFSL is an offence: s 1311(1). A person is exempt from the requirement to hold an AFSL in the circumstances described in s 911A(2), including where that person is: regulated by APRA and its services are regulated by APRA and are only provided to ‘wholesale clients’: s 911A(2)(g); a representative of a person who either has an AFSL or is exempt from the requirement to hold one: s 911B(1); or appointed by a general insurer to distribute their ‘general insurance products’.13 It follows that a general insurer that provides financial services to
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‘retail clients’ must hold an AFSL. A person does not have to hold an AFSL if they are simply: advising on the handling or settlement of insurance claims: Corporations Regulations 2001 (Cth) reg 7.1.33(1) and (2); or providing referrals, in particular informing other people that the holder of an AFSL or their representative can give a particular financial service or telling other people how to contact them: Corporations Regulations 2001 (Cth) reg 7.6.01(1)(e) and (ea).
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Part 7.6 Div 3: The obligations of an AFSL holder 4.19
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A general insurer that is the holder of an AFSL is obliged to: do everything necessary to ensure that it provides financial services efficiently, honestly and fairly: s 912A(1)(a); have adequate arrangements in place for managing conflicts of interest: s 912A(1)(aa); comply with the conditions of its licence: s 912A(1)(b); comply with the financial services laws: s 912A(1)(c);14 [page 71]
■take reasonable steps to ensure that its representatives comply with
the financial services laws: s 912A(1)(ca); maintain the competence to provide the financial services: s 912A(1)(e); ensure that its representatives are properly trained and competent to provide the financial services: s 912A(1)(f); and have a dispute resolution system for services provided to retail clients: s 912A(1)(g). Unlike other holders of an AFSL, a general insurer, because it is regulated by APRA, is not required by Ch 7 to have adequate: resources to provide the financial services and carry out supervisory arrangements: s 912A(1)(d); or
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■risk management systems: s 912A(1)(h). Nor is a general insurer required to have professional indemnity insurance (reg 7.6.02AAA(3)(i)) as protection against any liability it may have for loss or damage suffered by retail clients as a result of breaches of the Ch 7-imposed obligations: see s 912B and regs 7.6.02AA and 7.6.02AAA.
Part 7.8: Provisions relating to conduct connected with financial products and services, other than financial product disclosure 4.20 Part 7.8 Divs 2 and 3 relate to dealings by an AFSL holder who is not an insurer with client’s money and client’s property respectively. Division 4 is headed ‘Special provisions relating to insurance’. It deals with the following issues: the status of amounts paid to an AFSL holder in respect of an insurance contract: s 985B; the requirements that an AFSL holder must comply with in relation to the money situations described in s 985C(2); and the requirement that an AFSL holder or an authorised representative of an AFSL holder not deal in a general insurance product in the circumstances described in s 985D. Division 7 is headed ‘Other rules of conduct’. It prohibits an AFSL holder from: engaging in conduct in relation to the provision of a financial service ‘that is, in all the circumstances, unconscionable’: s 991A. A person who suffers loss or damage because an AFSL holder engages in unconscionable conduct ‘may recover the amount of the loss or damage’ from the holder. There is a six-year limitation period; and
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[page 72]
offering to issue or sell to a retail client, or inviting a retail client to
■apply for or offer to buy, a financial product ‘in the course of, or because of (s 992A(3), (3A) and (5)): (aa) an unsolicited telephone call to another person; or (ab) an unsolicited contact with another person in another way that is prescribed by the regulations for the purposes of this paragraph …’
… except in the circumstances described in s 992A(3)(a)–(e) (which includes the client being given a Product Disclosure Statement before becoming bound to buy a financial product). A failure to comply with s 992A(3) gives the client a limited amount of time to return the product and obtain a refund: s 992A(5). ASIC can exempt a financial product from the provisions of s 992A(1) or (3).
Part 7.10: Market misconduct and other prohibited conduct relating to financial products and financial services Division 2 prohibits a person from: making a materially misleading statement or disseminating misleading information that is likely to induce someone to apply for a financial product if they do not care whether the statement or information is true or they know, or ought reasonably to have known, that the statement or information was materially misleading: s 1041E (to do so is an offence); engaging ‘in dishonest conduct in relation to a financial product or financial service … in the course of carrying on a financial services business in this jurisdiction’: s 1041G. To do so is an offence; and engaging in misleading or deceptive conduct in this jurisdiction ‘in relation to a financial product or a financial service’: s 1041H. It is not an offence to do so. A contravention of s 1041E, 1041G or 1041H may give rise to civil liability under s 1041I to anyone who suffers loss or damage by the contravention. In the case of s 1041H, Div 4 might provide relief 4.21
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against the liability. There is a six-year limitation period for commencing such an action. Division 2A sets out the circumstances of proportionate liability for a contravention of s 1041H.
Part 7.9 Div 5: Cooling-off period 4.22 A client has the right to return a risk insurance product (in broad terms, a general insurance contract as defined by ss 761A and 764A(1)(d)) to a general insurer and to have their money returned if, within the 14-day period described in s 1019A, they comply with the requirements of that section. [page 73]
THE AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION ACT 2001 (CTH) 4.23 Part 2 of the ASIC Act deals with ‘consumer protection in relation to financial services’ in the following Subdivisions: C: Unconscionable conduct; D: Consumer protection; E: Conditions and warranties in consumer transactions; G: Enforcement and remedies; and GA: Proportionate liability for misleading and deceptive conduct. Subdivision BA Unfair contract terms does not apply to insurance contracts subject to the ICA. The ‘consumer protection’ provisions of the CCA (Pt XI Div 2 and Sch 2) do not apply to financial services (CCA s 131A) because they are dealt with by the ASIC Act.
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THE FINANCIAL SECTOR (SHAREHOLDINGS) ACT 1998 (CTH) AND THE INSURANCE ACQUISITIONS AND TAKEOVERS ACT 1991 (CTH) 4.24 The Financial Sector (Shareholdings) Act 1998 (Cth) requires ministerial approval for a proposal to hold a 15 per cent or more stake in an insurer: s 13. 4.25 The Insurance Acquisitions and Takeovers Act 1991 (Cth) requires ministerial approval for a proposal to: acquire 15 per cent or more of an insurer’s assets: s 36; or link an entity controlling an interest in an insurer of 15 per cent or more with a director of that insurer: s 50.
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FINANCIAL SECTOR (COLLECTION OF DATA) ACT 2001 (CTH) 4.26 The object of the Financial Sector (Collection of Data) Act 2001 is to enable APRA to collect from financial sector entities, including general insurers, information to assist it in the prudential regulation and monitoring of bodies in the financial sector and to facilitate the formulation of monetary policy: s 3(1). To achieve that object, the Act (s 3(2)): (a) provides for certain corporations to be registered, and divided into categories, by APRA; and (b) authorises APRA to determine reporting standards for corporations that are so registered and for certain other bodies that it regulates or monitors and to require them to provide APRA with information about their businesses and activities.
[page 74]
THE PRIVACY ACT 1988 (CTH) 4.27 The 13 Australian Privacy Principles (APPs), which appear in Sch 1 to the Privacy Act 1988 (Cth), regulate the collection, storage, use, disclosure and disposal of personal and sensitive information. They apply to general insurers because they are private sector entities with an annual turnover in excess of $3 million. Section 6 of the Privacy Act 1988 defines: ‘personal information’ as information or an opinion about an identified individual or an individual who is reasonably identifiable, whether or not the information or opinion is true or is recorded in a material form; ‘sensitive information’ as including information or an opinion about an individual’s: ■ racial or ethnic origin, political opinions, religious beliefs or affiliations, sexual orientation or practices, or criminal record, that is also personal information; and ■ health or genetic information about an individual that is not otherwise health information.
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4.28
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In brief: APP1 requires an insurer to manage personal information openly and transparently; APP3 describes the circumstances in which an insurer can collect solicited personal and sensitive information and how it can collect the information (by lawful and fair means); APP4 describes how an insurer is to treat unsolicited personal information; APP5 requires an insurer to notify a person that it has collected personal information about that person; APP6 deals with an insurer’s use and disclosure of personal information; APP7 deals with the use of personal information for the purpose of direct marketing;
APP10 requires an insurer to make sure that personal information collected by it is accurate, up to date and complete; APP11 requires an insurer to keep personal information secure; and APP12 and 13 give a person the right to access personal information collected about them and to have it corrected if it is inaccurate, out of date, incomplete, irrelevant or misleading. A serious breach or repeated breaches of the Privacy Act can attract a fine of up to $1.7 million.
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[page 75] 4.29 An individual is entitled to compensation for a breach of an APP. For example, in ‘IR’ and NRMA Insurance, Insurance Australia Ltd,15 the complainant held: a number of NRMA insurance policies jointly with her husband; and an NRMA home building policy jointly with Ms X. NRMA sent the complainant and Ms X a home building renewal certificate that contained details of the home building and all of the other assets the complainant insured with NRMA. The complainant complained for herself and her husband to the Office of the Australian Information Commissioner about the disclosure of her assets to Ms X. The Acting Australian Information Commissioner found that NRMA had: not breached the APP in relation to the complainant’s husband because his identity was not reasonably identifiable to anyone other than the complainant; breached APP 6 in relation to the complainant in that even if ‘disclosure was for a secondary related purpose, it was not commensurate with the complainant’s reasonable expectations’;
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and breached APP 11 by not taking reasonable steps to protect the complainant’s personal information from disclosure to Ms X. The Acting Commissioner declared that NRMA had to: issue a written apology to the complainant and pay $3,000 as compensation for the interference with her privacy; and alter its practices so as to comply with the APPs.
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4.30 Some states have also enacted privacy legislation regulating the management of personal information; for example, the Health Records Act 2001 (Vic) addresses the management of health information in the Victorian public and private sectors.
SELF-REGULATION: THE GENERAL INSURANCE CODE OF PRACTICE AND THE FINANCIAL OMBUDSMAN SERVICE The General Insurance Code of Practice 4.31 The General Insurance Code of Practice 2014 is a self-regulatory code that binds all general insurers who are signatories to it. ASIC has approved the Code pursuant to s 1101A of the Corporations Act 2001 (Cth) and ASIC Regulatory Guide 183: Approval of financial services [page 76] sector codes of conduct. ASIC’s approval does no more than inform consumers that they can have confidence in the Code: ASIC Regulatory Guide 183. The Code covers all general insurance (not reinsurance) products except workers’ compensation, marine insurance, medical indemnity insurance and compulsory third party insurance: para 3.5.
It does not apply to life and health insurance products issued by life or registered health insurers: para 3.6. The Code is voluntary. By adopting the Code, an insurer: enters into a contract with the Insurance Council of Australia (ICA) to abide by the Code: para 1.5. Accordingly, contractual remedies are available for a breach of the Code or non-compliance with a sanction imposed for breach of the Code; commits to upholding minimum standards when providing services covered by the Code: para 1.1; acknowledges that its customers and its relationships with them are the foundations of the insurer’s business: para 1.2; and agrees to be open, fair and honest in its dealings with its insureds and third party beneficiaries: para 1.3. The objectives of the Code (para 2.1) are to: commit insurers to high standards of service; promote better, more informed relations between insurers and insureds and third party beneficiaries; maintain and promote trust and confidence in the general insurance industry; provide fair and effective mechanisms for the resolution of complaints and disputes between insurers and insureds and third party beneficiaries; and promote continuous improvement of the general insurance industry through education and training.
4.32
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4.33
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The Code requires an insurer that has adopted it to: conduct the process of selling insurance efficiently, honestly, fairly and transparently: para 4.4; provide its employees and authorised representatives ‘with, or require them to receive, appropriate education and training to provide their services competently and to deal with [the insured and third party beneficiaries] professionally …’: para 5.1; ensure that its service suppliers provide their services in an honest,
efficient, fair and transparent manner: para 6.2; [page 77]
■handle claims in an honest, fair, transparent and timely manner ■
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(paras 7.2) and in accordance with the timetable set out in paras 7.3–7.18 and 7.21 and 7.22; respond to an event the ICA declares to be a catastrophe ‘in an efficient, professional and practical way, and in a compassionate manner’: para 9.2. A ‘catastrophe’ includes a fire, flood or earthquake which results in a large number of claims involving a number of insurers; and handle complaints about its products or services (including its complaints handling service) in a fair, transparent and timely manner: para 10.4.
4.34 If an insurer denies an insurance claim, it must give written reasons for its decision and inform the person claiming of their right to have the decision reviewed by one of the insurer’s employees (other than the person that made the original decision to deny the claim), in accordance with the insurer’s internal complaints process: para 10.13. If the person claiming is unhappy with the outcome of the review, they can take their complaint to the Financial Ombudsman Service (FOS) within a certain timeframe and subject to the FOS having jurisdiction to deal with the complaint. 4.35 The Code Governance Committee (CGS) is an ‘independent body responsible for monitoring and enforcing compliance with [the] Code’: paras 12.1, 12.3 and 13.7. 4.36 An insurer that has adopted the Code is obliged to report a significant breach to the CGS within 10 days of becoming aware of the breach: para 13.3. 4.37
FOS may report possible Code breaches to the CGS: para 13.17.
4.38
If an insurer breaches the Code, the CGS can, pursuant to para
13.15: require the insurer to take particular steps to rectify the breach within a specified period of time; require the insurer to undertake a compliance audit; require the insurer to undertake corrective advertising; and arrange publication of the insurer’s non-compliance. Insurers stand or fall on their reputation, so publication of an insurer’s non-compliance is a strong deterrent. The Australian Productivity Commission Submission to the Hockey Taskforce on Industry Self-Regulation in Consumer Markets in 2000 said, ‘public shaming is like being “dumped into custard — it is a soft landing, but it sticks”’.
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4.39 The Code, like other ASIC-approved codes, does not include amongst its sanctions financial penalties. Financial penalties would only deter if the amounts of the penalties were significant. And if that were the case, the Code would need to ensure natural justice for those facing penalties. [page 78] 4.40 A court may have regard to the Code in determining whether a supplier’s conduct is unconscionable: s 12CC(1)(h) and (3) of the ASIC Act and s 51ACA(1) of the CCA. 4.41 The prohibition on a corporation in trade or commerce contravening an applicable industry code is limited to a prescribed code: CCA ss 51ACA(1), 51AB and 51AE. The General Insurance Code of Practice is not a prescribed or declared code.
The Financial Ombudsman Service What FOS does 4.42 Financial Ombudsman Service Limited (FOS) is a company limited by guarantee. Amongst other things (for example, systemic
issues management and code monitoring), it conducts a dispute resolution scheme known as the Financial Ombudsman Service: Constitution clause 2.1(a). The scheme is governed by Terms of Reference (TOR), 1 January 2015. 4.43 Insurers that have adopted the General Insurance Code of Practice are bound by the Code to participate in FOS by becoming a member of FOS. FOS is partly financed by the insurance industry. FOS’s Constitution and TOR govern the contractual relationship between FOS and its members.16 The FOS scheme is a self-described ‘independent forum to resolve Disputes between Applicants and Financial Services Providers’: TOR para 1.1. It is ASIC-approved pursuant to s 912A(2)(b)(i) of the Corporations Act 2001 (Cth). The scheme: … enables individuals and small business clients to make a complaint against the member in relation to certain matters. If the matter falls within its jurisdiction, FOS may proceed to resolve the dispute in accordance with its … TOR and Constitution as they apply from time to time. It does this by facilitating settlement discussions between the member and the complainant, by making recommendations and, in some cases, binding determinations as to what must be done to resolve the dispute. Its determinations are binding on the member if the complainant elects to accept the determination made by FOS. The member must pay fees for the service operated by FOS.17
4.44 FOS is obliged to resolve disputes co-operatively, efficiently, timeously, fairly, transparently (subject to confidentiality and privacy obligations) and ‘with the minimum formality and technicality’: TOR para 1.2. [page 79] In deciding a dispute and the appropriate remedy (if any), FOS: is not bound by the rules of evidence: TOR para 8.1; and will ‘do what in its opinion is fair in all the circumstances, having regard to’ legal principles, the General Insurance Code of Practice, good industry practice and previous decisions of FOS (it is not
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bound by these decisions): TOR para 8.2. TOR para 6 describes the application process. Paragraph 7 describes the dispute resolution methods used by FOS to resolve a dispute, including negotiation, conciliation, mediation and making a recommendation and then, if necessary, a determination. Paragraph 8 describes how disputes are decided if they cannot be resolved by agreement between the applicant and the insurer. Paragraph 9 lists the courses of action FOS can require an insurer to undertake.
The FOS process 4.45 A person who is unhappy with an insurer’s decision can ask the representative of the insurer dealing with the matter to refer it to the insurer’s internal dispute resolution (IDR) process. All insurers have this process available. If a person does not agree with the outcome of the insurer’s IDR process and the dispute falls within the TOR, they are entitled to lodge the dispute with FOS for resolution. FOS will only consider a dispute if it is lodged with FOS within the earlier of: six years of the date when they first knew or ought reasonably to have known that they suffered the loss; and two years of the date on which they received the insurer’s IDR response (if that occurred before they lodged the dispute with FOS), or longer if ‘FOS considers that exceptional circumstances apply’: TOR para 15.2.
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4.46 FOS can deal with any dispute between an insurer and an applicant if FOS and all parties so agree: TOR para 4.4. Otherwise, it only has jurisdiction to deal with a dispute lodged by (TOR paras 4.1– 4.3): a) b)
an individual or individuals (including those acting as a trustee, legal personal representative or otherwise); a partnership comprising of individuals — if the partnership carries on a business, the business must be a Small Business; [A ‘Small Business’ is ‘a business that, at the time of the act or omission of the
c)
[insurer] that gave rise to the Dispute’ had less than 20 employees, or if the business manufactures goods, less than 100 employees: TOR para 14.1.] the corporate trustee of a self-managed superannuation fund or a family trust — if the trust carries on a business, the business must be a Small Business;
[page 80] d)
a Small Business (whether a sole trader or constituted as a company, partnership, trust or otherwise); e) a club or incorporated association — if the club or incorporated association carries on a business, the business must be a Small Business; f) a body corporate of a strata title or company title building which is wholly occupied for residential or Small Business purposes; or g) the policy holder of a group life or group general insurance policy, where the dispute relates to the payment of benefits under that policy; [and] … (a) that arises from a contract or obligation arising under Australian law; and (b) that arises from or relates to: … (iv) an entitlement or benefit under [one of the following policies] by a person who is specified or referred to in the policy … as a person to whom the policy extends; [a Retail General Insurance Policy; a Residential Strata Title Insurance Product; a Small Business Insurance Product; a Medical indemnity insurance product; or]
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… (vi) a claim under another person’s motor vehicle insurance policy for property damage to an Uninsured Motor Vehicle caused by a driver of the insured motor vehicle – but only where a valid claim has been lodged by the owner of the insured motor vehicle and any relevant excess has been paid (unless the claim is being made pursuant to section 51 of the Insurance Contracts Act 1984) …
The exclusions from FOS’s jurisdiction are set out in TOR para 5.1. FOS also has the discretion not to consider, or continue to consider, a dispute that otherwise falls within its jurisdiction: TOR para 5.2. 4.47 FOS makes its decisions in writing with reasons and usually on the basis of written submissions and documents provided by the applicant and the insurer, without the need for anyone to attend a hearing. Lawyers can appear in FOS, but it is actively discouraged.
Use of FOS is free of charge (TOR para 1.1) and ‘without prejudice’ (TOR para 7.7), and the applicant is not bound by its decision; TOR para 8.9. If the applicant is unhappy with the result, it can sue the insurer in a court for the same claim. By contrast, the insurer is bound by an FOS decision on a first party indemnity insurance claim for up to $280,000 excluding compensation for costs and interest (if FOS and both parties agree at the outset, FOS will consider a dispute worth up to $500,000 but cannot award more than $280,000): TOR paras 3 and 4.4, Schs 1 and 2 and para 5.1(o). [page 81] Amongst other things, FOS is entitled to direct an insurer to compensate an insured for direct and consequential loss as a result of an insurer not paying a claim: TOR 9.2 and 9.3. The maximum amount it can award for consequential loss is $3,000. It is not clear what is the difference between direct and consequential loss for these purposes. FOS cannot award compensation for consequential loss if the policy expressly excludes it: TOR 9.3(c). Presumably that is why some insurance policies carry this exclusion. This type of exclusion in a policy can give rise to difficult issues with respect to what the policy covers, on the basis that an exclusion from cover generally proceeds from the assumption that in the absence of the exclusion, the cover would be available under the insuring clause. This is not the place to tease out those issues.
Review of a FOS decision 4.48 A court will review a FOS determination for the purposes of enforcing the tripartite contractual arrangement between FOS, the FOS member and the complainant.18 Persuading a court that it should interfere with a FOS determination will be a rarity, because a review will not succeed if:
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1. 2. 3. 4.
5.
6. 7.
8.
9. 10. 11. 12.
13.
the determination was within the FOS jurisdiction and not ‘affected by fraud or dishonesty or lack of good faith’;19 and ‘a reasonable person, acting rationally and with regard to the matters in cl 5 of the TOR, could have formed the opinion that [the FOS determination] was fair in all the circumstances …’20
R Merkin and J Steele, Insurance and the Law of Obligations, Oxford University Press, Oxford, 2013 at 4.3.1, with permission of Oxford University Press. Insurance Act 1973 (Cth) ss 99, 100; Palmdale AGCI Ltd v Workers’ Compensation Commission (NSW) [1977] HCA 69; (1977) 140 CLR 236. The regulatory objective is that insurers be financially sound or solid. In Sweden, this notion is termed ‘solidetet’. Luckins v Highway Motel (Carnarvon) Pty Ltd [1975] HCA 50; (1975) 133 CLR 164 at [10] (Gibbs J); Thiel v Federal Commissioner of Taxation [1990] HCA 37; (1990) 171 CLR 338 at [11] (Dawson J). R v Holmes; Ex parte Manchester Unity Independent Order of Oddfellows in Victoria [1980] HCA 46; (1980) 147 CLR 65 at [18] (Mason J); R v Cohen; Ex parte Motor Accidents Insurance Board [1979] HCA 46; (1979) 141 CLR 577 at [24]. Prudential Standard GPS 110: Capital Adequacy. In Transmarket Trading Pty Ltd v Sydney Futures Exchange Ltd [2010] FCA 534, Perram J said (at [95]) that ‘the notion of a fair, orderly and transparent market … [has] at least two concepts at its core. One relates to a state of affairs in which all market participants are placed in an equal position such that there is a level playing field. The second, which is encompassed by the word “orderly”, is the notion of reliable market operations displaying price continuity and depth and in which unreasonable price variations between sales are avoided. I do not think that the pursuit of orderly markets carries with it the eradication of volatile or unpredictable markets’. A person deals in a financial product, amongst other things, if they issue a financial product, whether as principal or agent: s 766C(1)(b). ‘Issue’ includes ‘circulate, distribute and disseminate’: s 9. Section 764A(2), an echo of ICA, s 10. ASIC, Regulatory Guide 36: Licensing: Financial product advice and dealing, July 2007. A ‘small business’ is a business that employs less than 20 people, or in the case of a business that is or includes the manufacture of goods, 100 people: s 761G(12). For the purposes of Ch 7 (other than Pts 7.2, 7.5 and 7.11), ‘this jurisdiction’ means the Commonwealth of Australia and the territories of Christmas Island and of Cocos (Keeling) Islands for the purpose of superannuation and RSA (retirement savings account) products and the financial services that relate to them. Otherwise, it only means the Commonwealth of Australia. See ss 5, 9 and reg 1.0.22 of the Corporation Regulations 2001. A general insurer can appoint an agent to distribute its general insurance products without appointing the agent as an authorised representative: ASIC Class Order 05/1070. The general insurer will be responsible for the acts of the distributors it appoints.
14. The ‘financial services laws’ are the other provisions of the Corporations Act 2001 (Cth) and the ASIC Act ‘which regulate the conduct of providers of financial services businesses’: Sovereign Capital Ltd and Australian Securities and Investments Commission [2008] AATA 901 at [14]. 15. [2016] AICmr 37 (27 June 2016). 16. Financial Ombudsman Services Ltd v Pioneer Credit Acquisition Services Pty Ltd [2014] VSC 172 at [4] (Ferguson J). 17. Financial Ombudsman Services Ltd v Pioneer Credit Acquisition Services Pty Ltd (see fn 16) at [2] (Ferguson J). 18. Mickovski v Financial Ombudsman Service Ltd [2012] VSCA 185; (2012) 91 ACSR 106; Bilaczenko v Financial Ombudsman Service Ltd [2013] FCCA 420. 19. Mickovski v Financial Ombudsman Service Ltd (see fn 18) at [41] (Beach AJA). 20. Financial Ombudsman Services Ltd v Utopia Financial Services Pty Ltd [2016] WASC 55 at [31] (Le Miere J).
[page 83]
Chapter 5 INSURANCE INTERMEDIARIES ‘It’s impossible to get a straight answer from him,’ said Xanthippe, the wife of Socrates, to the dauntless Alcibiades, who was devilish enough to ask her directly if the report he had heard about Socrates was true. Xanthippe would neither confirm nor deny that she had emptied a chamber pot on his head. ‘You don’t know what he’s really like.’ ‘Tell me.’ ‘If you ask him a question,’ Xanthippe raced on, ‘he wants to know what you mean. If you tell him to do something he’ll pretend he doesn’t understand and ask you to explain. When you’ve finished explaining he’ll make you explain some more. When you think you’ve explained he will ask you still another question and make you continue explaining.’ Alcibiades had no trouble believing her. ‘See what you have to go through to get him to take out the garbage.’ What was garbage, Socrates would ask. ‘If I tell him he’s getting deaf he pretends he doesn’t hear. If I tell him he’s dumb he calls me a sophist. Try making him empty a chamber pot. Then you show him how!’ He was driving her mad with his endless illustrations of cobblers and herdsmen and physicians and builders.1
INTRODUCTION This chapter discusses insurance intermediaries under the following headings: when an insured is fixed with an insurance broker’s knowledge; the liability of loss adjusters, loss assessors and investigators in contract and in tort; the liability of insurance agents in contract and in tort and the liability of an insurer for the actions of its agents; the liability of insurance brokers in contract and in tort; the fiduciary obligations of insurance agents and insurance
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brokers; the Australian Securities and Investments Commission Act 2001 (Cth); [page 84]
■the Corporations Act 2001 (Cth) Ch 7; and ■self-regulation — the General Insurance Brokers Code of Conduct
and the Financial Ombudsman Service. Insurance is delivered to the community by insurers directly and by insurance agents and brokers. Insurance agents and insurance brokers are intermediaries, insofar as they act as agents of insurers or intending insureds for the purpose of concluding insurance contracts between insurers and intending insureds. Except as mentioned below, insurance agents only act for insurers. Their job is to ‘procure persons to insure with [their] principal, the insurer’.2 They are ‘gatherers’ of insurance business, engaged by insurers ‘to direct … the flow of premiums [into their] coffers’.3 An insurance agent closely resembles an insurer’s full-time employee when they act for only one insurer. Some act for more than one insurer. In certain circumstances, what an insurance agent says or does may result in them being treated as an insured’s agent for a particular purpose. For example, in the heavily criticised case of Jumna Khan v Bankers & Traders Insurance Co Ltd,4 the High Court held that an insurer was not responsible for false statements in a proposal for home insurance completed by its agent because, for that purpose, the agent was agent for the illiterate Afghan intending insured, not agent for the insurer. Higgins J explained that ‘the agent was agent to receive proposals [for his insurer], not to fill in proposals on behalf of persons desiring to insure’. Insurance brokers carry on an independent business of: advising intending insureds on the range of insurance products available on the market so that they can get the product best suited
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to them on the right terms and at the right price; acting as agent for intending insureds in concluding insurance contracts with insurers;5 and assisting insureds with insurance contract administration and performance, including claims handling and risk management. Sometimes, insurance brokers act for insurers. This occurs when an insurer gives them limited authority to issue cover notes or authorises them, under a ‘binder’, to conclude insurance contracts on behalf of that insurer in certain areas of risk and subject to specified limits.
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[page 85] The idea that insurance agents and brokers are intermediaries in relation to concluding insurance contracts is picked up by the Insurance Contracts Act 1984 (Cth) (ICA), which defines an insurance intermediary (s 11(1)) as a person who: (a) for reward; and (b) as an agent for one or more insurers or as an agent for intending insureds; arranges contracts of insurance in Australia or elsewhere, and includes an insurance broker.
Loss adjusters and loss assessors investigate and assess insurance claims for the purpose of advising their client whether a claim is covered by the relevant insurance contract and, if so, how much it is worth. Loss adjusters usually do this for insurers; loss assessors usually do this for insureds. Although they do not assist anyone with concluding an insurance contract, the concept of intermediary (although not as defined by the ICA) can be extended to them as they often mediate between insurer and insured for the purpose of achieving an outcome for an insurance claim that is fair and reasonable to both.
WHEN IS AN INSURED FIXED WITH AN
INSURANCE BROKER’S KNOWLEDGE? 5.1 At common law, where an insurance broker is authorised to arrange insurance for an insured, the insured is fixed with the broker’s acts and knowledge (state of mind), including fraud.6 It is not clear whether the insured is fixed with the broker’s knowledge for the purpose of pre-contractual disclosure under ss 21, 21A and 21B of the ICA.7 Until the High Court decides the issue, as a matter of prudence, a trial judge should admit evidence of the broker’s knowledge so that it is available to be relied on or rejected by an appellate court.8
THE LIABILITY OF LOSS ADJUSTERS, LOSS ASSESSORS AND INVESTIGATORS IN CONTRACT AND IN TORT Liability to the client in contract and in tort 5.2 The liability of a loss adjuster, a loss assessor or an investigator to their client is governed by the terms of their retainer. Subject to those [page 86] terms, they owe their client a common law duty to exercise reasonable care and skill in their performance of the retainer. That is a duty in tort (a civil wrongdoing). A breach of the duty of care is often described as negligence. Gold Star Insurance Co Ltd v Dominion Adjusters Ltd9 provides an example of an insurer successfully suing a loss adjuster for breaching that common law duty of care by not properly investigating an insurance claim for the insurer. The case concerned a motor vehicle insurance policy over a taxi that excluded cover if the taxi driver was
under the influence of intoxicating liquor at the time of an accident. On a dry, fine, summer’s afternoon, the taxi collided with another vehicle when the taxi driver drove on the wrong side of the road. The taxi driver died in the accident. A subsequent inquest into his death found that he was driving under the influence of alcohol at the time of the accident. The adjuster appointed by the insurer to investigate the accident knew about the inquest but did not attend it, and said nothing in his report to the insurer about the driver’s blood alcohol level. The insurer, in reliance on the report, paid the claim ($4,438.88) and sued the adjuster when it discovered information some years later about the taxi driver’s blood alcohol level. The Court of Appeal concluded that the adjuster negligently failed to discover and report on the taxi driver’s blood alcohol level and ordered the adjuster to compensate the insurer for its payment to the insured. 5.3 In South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd; Mortensen v Laing,10 the Court of Appeal of New Zealand, after careful consideration, decided that absent special circumstances, a professional investigator engaged by an insurer to investigate and report to it on an insurance claim did not owe the insured a common law duty to exercise reasonable care and skill in the investigation of the claim. That was despite the vulnerability of an insured who is obliged by the insurance contract and its duty of utmost good faith to co-operate with the insurer and its agents in their investigation of a claim.
THE LIABILITY OF AN INSURANCE AGENT IN CONTRACT AND IN TORT AND THE LIABILITY OF AN INSURER FOR THE ACTIONS OF ITS AGENT Liability to the insurer client in contract and in tort 5.4
An insurance agent’s liability to its insurer client is governed by
the terms of its agency agreement. Subject to those terms, an insurance agent [page 87] owes its insurer client a common law duty to exercise reasonable care and skill in the performance of the agreement.
Limited duty of care owed to the insured 5.5 Like an insurer’s sales employee, the common law duty of care owed by an insurance agent to an intending insured is commensurate with the duty of care owed by anyone ‘who sells any product having technical qualities beyond the knowledge or understanding of the general public’.11 Any higher duty would usually directly conflict with the agent’s duty to its insurer client. 5.6 An intending insured asking an insurance agent ‘to obtain … a particular, nominated policy, or a particular type of cover provided by a standard policy of the agent’s principal’ does not give rise to a duty on the agent’s part to: advise the intending insured about cheaper or better policies offered by other insurers; advise the intending insured to consider taking out another type of cover; inform the intending insured that the insurer does not provide a good claims service; bring to the intending insured’s attention the exclusions in the requested policy; or explain to the intending insured the meaning and effect of the exclusions in the requested policy.12 Having said that, an insurance agent will come under a common law duty of care to an intending insured if they say or do something to indicate to the intending insured that they assume some particular
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responsibility for the intending insured’s interests in relation to some aspect of the transaction. For example, an insurance agent completing an insurance proposal for an intending insured will give rise to a duty on the part of the agent to complete the proposal accurately on the intending insured’s instructions.13 5.7 The existence and scope of the duty of care owed by an insurance agent to an intending insured were canvassed in Caldwell v JA Neilson Investments Pty Ltd.14 In that case, at the request of Mr Caldwell’s de facto spouse, JA Neilson Investments Pty Ltd (an insurance agent that only acted for AMP), arranged for an AMP public liability insurance policy to be issued to Mr Caldwell. An exclusion in the policy limited [page 88] cover to liability arising out of Mr Caldwell’s occupation of a farm near Cooma known as ‘Pusha Park’. His previous CGU policy did not contain a similar exclusion. During the insurance period, one of Mr Caldwell’s heifers escaped from a farm at which it was agisted (not ‘Pusha Park’) and struck a Holden Monaro being driven by Mrs Campbell. AMP relied on the exclusion in denying Mr Caldwell indemnity for Mrs Campbell’s claim against him. Mr Caldwell did not have an answer to the denial and sued JA Neilson for negligently failing to bring the exclusion to his attention at the time his de facto spouse asked it to arrange the AMP policy. The Court of Appeal concluded that JA Nielson owed no duty to bring the exclusion to the attention of Mr Caldwell or his de facto spouse, even though JA Nielson knew or ought to have known that it was not uncommon for farmers in the area to agist their animals.
Liability of an insurer for the actions of its agent 5.8 At common law, an insurer is bound by the acts of its agent as long as they are: within the scope of the agent’s actual (express or implied) or
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apparent (ostensible) authority; or subsequently ratified by the insurer.
5.9 In Colonial Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative Assurance Co of Australia Ltd,15 Colonial Mutual Life engaged Mr Ridley, an independent agent, to sell its life policies. The contract expressly forbade Mr Ridley using language that would bring any person or institution into disrepute. While gathering business for Colonial Mutual Life, Mr Ridley made defamatory statements about another life insurance company. The other company sued Colonial Mutual Life for the slander. The High Court held that Colonial Mutual Life was liable for Mr Ridley’s slander. In Sweeney v Boylan Nominees Pty Ltd,16 the majority explained (at [22]) that: Colonial Mutual Life establishes that if an independent contractor is engaged to solicit the bringing about of legal relations between the principal who engages the contractor and third parties, the principal will be held liable for slanders uttered to persuade the third party to make an agreement with the principal. It is a conclusion that depends directly upon the identification of the independent contractor as the principal’s agent (properly so called) and the recognition that the conduct of which complaint is made was conduct undertaken in the course of, and for the purpose of, executing that agency.
[page 89] 5.10 Subject to the terms of its agency agreement, an insurer who is liable to an insured because of its agent’s act or omission (for example, the agent misleading the intending insured about the coverage provided by a particular policy) has a cause of action in damages against the agent (effectively amounting to an indemnity) against that liability.17
THE LIABILITY OF AN INSURANCE BROKER IN CONTRACT AND IN TORT 5.11
An insurance broker’s liability to its client is governed by the
terms of its retainer. Like other professionals, insurance brokers rarely promise clients that they will achieve a particular outcome. Usually their promise is limited to exercising reasonable care and skill in attempting to achieve the outcome. The latter is the same as the common law duty of care owed by brokers to their clients. The rest of this section deals with that liability. To succeed in a claim for damages based on an alleged breach of an insurance broker’s duty of care, a plaintiff must prove: the broker owed it a duty of care; the broker breached its duty of care; the breach caused the plaintiff’s loss (causation); and what the plaintiff has lost as a result of the broker’s breach (measure of damages).
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Duty of care Duty generally 5.12 Subject to the terms of its retainer, an insurance broker owes its client a duty to exercise reasonable skill and care in the performance of its retainer. The standard of care is ‘assessed in the specialist context in which the broker [operates]’.18 It is likely a broker will also owe a limited duty of care to those intended to be covered by the insurance obtained for the client.19 The existence and scope of the duty will depend on the circumstances. [page 90] 5.13 At the time an insurance broker is retained, its duty of care requires it to: be familiar with the general principles of insurance law and agency law;20 be ‘well versed in the apparent differences between the various
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standard policies available in the market’21 that are relevant to the retainer; appreciate the special legal problems and pitfalls associated with the particular area of insurance in which it operates; and22 point out to its client ‘pitfalls … which might arise in the course of effecting a valid insurance cover, insofar as they are not otherwise known or made known to the insured, and in securing cover necessary to the insured’s disclosed or ascertained needs’.23
5.14 Before recommending that a client take out insurance with a particular insurer, an insurance broker should take reasonable steps to satisfy itself that the insurer is financially sound. In that regard, it should take into account the insurer’s annual reports and any media or market speculation about the insurer’s financial future.24 In Zisopoulos v Barry Johnston (Insurance Brokers) Pty Ltd,25 the insured sued its insurance broker for recommending that he take out motor vehicle insurance with an insurer that subsequently became insolvent. Connor J concluded (at 77,576) that the broker negligently recommended the insurer because it ought to have known the insurer ‘was in a doubtful financial position and should have warned the plaintiff of it and advised him to get cover from another insurer’. 5.15 Where an insurance broker’s duty is to advise or explain (see the examples below), simply handing the client standard form written materials may not be enough to discharge the duty. The broker may also need to advise or explain orally so as to satisfy themselves that the client understands the advice or explanation.26 [page 91]
Duty to advise the client about their pre-contractual duty of disclosure 5.16 An insurance broker engaged by a client to obtain or renew an insurance contract, owes a duty to:
■advise the client of their pre-contractual duty of disclosure; ■explain an insurer’s rights if the client breaches their duty ■ ■
of
disclosure; indicate to the client the sort of matters they need to disclose in order to discharge their duty of disclosure; and take reasonable steps to find out from the client matters that ought to be disclosed but which might not occur to the client to disclose.27
5.17 In Jones v Environcom Ltd,28 Steel J explained (at [56]) that an insurance broker is required to assist its client with the duty of disclosure because: … it is an unusual obligation for a contracting party, and an area of the law which can have harsh consequences, not least because any nondisclosure relied upon by the underwriter to avoid the policy may have no causative significance as regards the claim that will as a result not be paid. This makes it all the more important that the lay client is told of the paramount duty to disclose and what it involves. Further, in case the client does not appreciate what may be material, (as will often be the situation) he needs to be advised to err on the side of caution so as to disclose anything that might impinge on the judgment of a competent underwriter in assessing the risk and be helped to unearth such matters.
In a similar vein, Reynolds JA said in the pre-ICA case Fanhaven Pty Ltd v Bain Dawes Northern Pty Ltd29 (at 62): The obligation of disclosure in respect of contracts of insurance is not widely known or understood by laymen. The ordinary person who answers the question in a proposal form honestly and to the best of his ability believes that no more is required of him. Even if there is reference to material facts or to matters likely to affect the risk this is virtually meaningless to the ordinary person. This being the position, the signing of the proposal involves a concealed trap. The duty of disclosure is a pervasive duty and a failure involves drastic consequences. One of the reasons a broker is employed is so that a valid and enforceable contract is procured and if the broker does not alert his client to the pitfalls he fails to exercise due care and skill because whilst he knows of the requirements of the law in this respect the unwary client does not and the agent therefore fails to use his best endeavours to procure that which he was employed to procure.
[page 92] 5.18
The imposition on an insurance broker of a duty to advise its
client about their ICA pre-contractual duty of disclosure (ss 21, 21A and 21B) is consistent with s 71(1) of the ICA. Section 71(1) provides that an insurer does not have to inform an intending insured of its duty of disclosure (as required by s 22 of the ICA) in relation to an insurance contract concluded by an insurance broker acting for the intending insured. If the intending insured does not hear about their duty of disclosure from the insurer, then their only source is their insurance broker, and the broker knows or ought to know that.
Duty leading up to and around the time the client enters into an insurance contract 5.19 Upon being asked to obtain insurance, and subject to the terms of its retainer, the insurance broker’s first task is to ascertain its client’s insurance wants and needs.30 That involves finding out what insurance the client wants the broker to obtain. This is usually straightforward, because in most cases the client generally knows what it wants. But sometimes the client is unaware of what it wants or needs or what cover it would like if it knew that cover was available. In that case, the broker’s obligation is to step into the client’s shoes and identify what insurance the client might ask for if it had the benefit of the broker’s expert knowledge about its business and about the insurance market. Amongst other things, this involves the broker asking the client questions relevant to its insurance wants and needs. At the very least, it will usually require that the broker meet with the client. 31 The questions to be asked are those ‘which a competent broker might have been expected to ask in the circumstances … a broker will not be negligent if he fails to ask questions about the risk which he had no reason to ask or if he does ask appropriate questions and the insured does not disclose important information to the broker’.32 5.20 Upon identifying the client’s wants and needs and discussing them with the client, the insurance broker’s next task is to find out what particular insurance the client wants the broker to arrange.33 For that purpose, the broker should advise the client of the range of insurance that would meet the client’s wants and needs and the relevant
differences between them. The advice should include the broker recommending a particular policy or range of policies and explaining why it has so recommended. That would usually require the broker to take the client through the recommended policy or policies, including any exclusions [page 93] and any onerous or unusual terms or conditions, and their nature and effect. This will give the client an understanding of the scope of cover available and give them the opportunity to ask about the possibility of the insurer agreeing to delete or amend exclusions or conditions in a policy or to extend cover by issuing an endorsement to a policy, even if this means higher premium or higher excesses.34 5.21 In McNealy v The Pennine Insurance Company Ltd,35 the insurer declined a claim on a comprehensive motor vehicle insurance policy following a motor vehicle accident, on the basis that the insured played the guitar part-time, including as a member of a band on cruise ships. The insured successfully sued his insurance broker for negligently failing to ask him before he took out the policy whether he fitted into any of the occupations listed in an exclusion that excluded cover, amongst other things, for full- or part-time musicians, bookmakers, jockeys, journalists, press photographers and service personnel. This was despite the fact that the insured only mentioned ‘property repairer’ in response to a question in the insurance proposal about his occupation. 5.22 An insurance broker is not a lawyer, and on most occasions will not be expected to advise about nice legal points relating to the cover offered by an insurer. However, a broker is obliged to point out ‘legal pitfalls which might arise in the course of effecting a valid insurance cover’.36 In some circumstances, a broker should recommend the client consult a lawyer about ‘the significance of differences between the various policies on offer in the market.’37
5.23 If there is uncertainty about the scope of cover offered in a policy, the broker should take reasonable care to make certain what is not certain. The client should not be unnecessarily exposed to a subsequent dispute with its insurer about the scope of cover. In FNCB Ltd v Barnet Devanney (Harrow) Ltd,38 Morritt LJ put it this way (at [21]): … it is not the function of an insurance broker to take a view on undetermined points of law. The protection to be afforded to the client should, if reasonably possible, be such that the client does not become involved in legal disputes at all. As in the case of a solicitor the insurance broker should protect his client from unnecessary risks including the risk of litigation.
[page 94] 5.24 The broker should take reasonable care to promptly procure the cover the client instructs it to obtain.39 Depending on the circumstances, this duty would usually extend beyond the client to those intended to benefit under the cover the broker has been instructed to take out.40 5.25 The broker should promptly inform the client if it has not been able to obtain the cover it was instructed to obtain and explain why it has not been able to do so.41 5.26
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Before or upon obtaining cover, an insurance broker should: generally explain to the client the relevant terms of the cover it has procured or is about to procure (premium, scope of cover, exclusions etc); and specifically draw the client’s attention to its obligations during the performance of the contract (for example, to promptly notify the insurer of a loss or of circumstances that might give rise to a claim, or to install and keep activated a fire alarm (if that is a term of the policy)).
Duty during the insurance period 5.27 The scope of the broker’s duty of care during the insurance period depends on its retainer. As a matter of prudence, if the broker
does not want to take on any responsibility during this period it should clearly agree that with the client. The following assumes an ongoing relationship with the client following the obtaining of insurance or arranging renewal. 5.28 If the broker becomes aware of information during the insurance period that suggests cover might be jeopardised, it should specifically draw this to the client’s attention and make recommendations and obtain instructions in relation to it.42 5.29 Upon the client informing the broker of an insurance claim or of circumstances that might give rise to a claim, the broker’s task is to: ‘get a grip on the proposed notification, to appraise it and to ensure that the information [is] relayed to the right place in the correct form’;43 and settle on a ‘clear strategy’ for the handling of the notification.44
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[page 95] 5.30 When renewal comes around, the process is repeated, with the additional obligation that the broker should inform the client in good time before expiry of the policy so that renewal can be arranged and be in place on or before expiry of the existing policy.
Proving breach of the duty of care 5.31 An insurance broker will have breached its duty of care if what the broker did fell short of what it ought to have done. Proving the breach usually requires a plaintiff to call expert evidence as to ‘what a reasonably careful insurance broker would have done in particular circumstances’.45 That is not necessary if the broker’s breach of duty is ‘rudimentary and obvious’,46 or as Scrutton LJ said in another context: ‘I entirely agree with Roche J, that the nature of the facts may be such that you do not need anybody to come and say, [t]his is material’.47
Proving causation
5.32
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The plaintiff will establish causation if it proves that: the policy obtained by the insurance broker does not cover the risk that occurred, but if the broker had exercised reasonable care and skill, on a balance of probabilities, the client would have instructed the broker to seek cover for the risk and there was a substantial, not a speculative, prospect that the broker would have arranged cover for the risk by that policy or another policy;48 the policy obtained by the insurance broker does not cover the risk that occurred, but if the broker had exercised reasonable care and skill, the client would have avoided the risk or avoided liability for the risk by other means. For example, if the broker had said to the plaintiff that the policy did not cover the risk, the plaintiff might not have embarked on the activity that entailed the risk; or an otherwise proper insurance claim is valueless or reduced in value because of the insurance broker’s failure to exercise reasonable care and skill. For example, where the plaintiff promptly informed the broker of circumstances that might give rise to a claim on the policy and the broker delayed passing the information on to the insurer, [page 96] thereby allowing the insurer to reduce its liability for the claim by the extent to which it was prejudiced by the breach of a prompt notification condition.
Proving the measure of damages 5.33 The four leading cases on the measure of damages in relation to a claim against an insurance broker are the two Western Australian cases of Norwest Refrigeration Services Pty Ltd v Bain Dawes (WA) Pty Ltd49 and Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd50 and the two New South Wales’ cases of Pennant Hills Restaurants Pty
Ltd v Barrell Insurances Pty Ltd51 and Prosperity Advisers Pty Ltd v Secure Enterprises Pty Ltd t/a Strathearn Insurance Brokers.52 5.34 In Norwest Refrigeration, a fishermen’s co-operative arranged insurance for Norwest over its fishing vessel (the Sonoma) by arranging with its insurance broker (Bain Dawes) for the Sonoma to be added to the co-operative’s fleet policy. The policy excluded cover for a vessel without a current certificate of survey at the time of a casualty. Norwest did not know that. Neither the co-operative nor Bain Dawes sent Norwest the policy wording or informed Norwest of the exclusion. It was not mentioned in the proposal for insurance completed by Norwest. A fire subsequently destroyed the Sonoma while she was moored at a wharf in Cossack. She was out of survey at the time. Norwest sued the insurer, the co-operative and Bain Dawes. The insurer successfully relied on the exclusion. Norwest failed against Bain Dawes because Bain Dawes only ever had any contact with the co-operative. Norwest proved that the co-operative negligently failed to inform it of the exclusion and that if it had done so, Norwest would have obtained a current certificate of survey for the Sonoma before the fire. Accordingly, Norwest’s damages were what it would have been paid under the cooperative’s insurance if not for the exclusion. 5.35 In Unity Insurance Brokers, the broker obtained an Industrial Special Risks policy for the insured’s business premises and contents. A fire during the insurance period caused about $1.7 million in damage to insured property. The insurer declined the claim for non-disclosure, the broker having only disclosed one of the insured’s 12 insurance claims over the previous 13 years. The insurer said it would not have insured the risk if there had been proper disclosure. The insured, on legal advice, settled its claim against the insurer for $900,000. The insured successfully sued the broker for the $800,000 shortfall on the basis that the insured would have obtained the same insurance with the insurer [page 97]
or a reasonable insurer with full disclosure and the settlement with the insurer was reasonable. The following propositions are relevant to an insured establishing that a settlement it reached with its insurer was reasonable: The test of reasonableness is an objective one. Evidence of the legal advice which the insured received to induce it to enter into the settlement is not proof in itself of the reasonableness of the settlement advised. Evidence of receipt of legal advice is relevant, but what will usually be much more important is the reasoning that supported that advice because that will usually disclose why it was thought reasonable to compromise the claim. The reasonableness of a settlement depends on the circumstances existing at the time, provided the plaintiff has acted reasonably in discovering the circumstances material to the settlement at that time. Reasonableness is not to be judged according to whether material which was obtained later shows that a different result might have been obtained. Consideration will often be required of whether the party maintaining that the settlement was reasonable had made sufficient inquiries and had sufficient information available to it to warrant reaching the compromise. In making that inquiry, attention may need to be given to whether the cost of seeking further information would outweigh the benefit that it was reasonable to expect may be obtained from doing so. What is a reasonable compromise of the claim will almost always require consideration of the chances of the parties succeeding in their respective claims or defences, and that prediction of likely outcomes is always imperfect and imprecise.53 In evaluating the reasonableness of a settlement, the court is not involved in reaching a final decision on whether the insurer had a good defence to the insured’s claim (unless the answer is clear). That is because the court:
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… is testing the reasonableness of the settlement by reference to the perception as to success or failure which the parties would have been expected to hold at the time when the settlement was entered into and the issues remained unresolved.54
[page 98] The value of the insured’s lost chance is the difference between: the settlement (to the extent it was reasonable); and the value of the claim the insured would have had against, or what it would have reasonably recovered from, its insurer if the broker had discharged his or her duty of care.55
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5.36 In Pennant Hills Restaurants, an insurance broker negligently failed to obtain workers’ compensation insurance for its client. A Pennant Hills’ employee became a paraplegic in a work-related accident during the period when the insurance should have been running. As an uninsured employer, Pennant Hills was obliged to reimburse a statutory fund for the workers’ compensation payments the fund had made and would make to the injured employee for the rest of his life. The High Court ordered the broker to compensate Pennant Hills for its liability to make payments into a statutory fund in respect of the worker’s entitlements. Presumably, there was a deduction for the premium Pennant Hills would have paid if the broker had done its job. 5.37 In Prosperity Advisers, Tobias AJA said (at [75]–[79]) that if the client proves that: if the broker had exercised reasonable care and skill, on a balance of probabilities, the client would have instructed the broker to seek cover for the risk; and there was a substantial, not a speculative, prospect that the broker would have arranged cover for the risk by that policy or another policy, the court will do its best to value the lost opportunity, even if the chances of the risk being covered falls below 51 per cent, so long as it is not so low as to be speculative.
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Mitigation 5.38 As the insured’s claim against the broker is for damages, the insured is obliged to mitigate its loss where it can.
Contributory negligence 5.39 Legislation around Australia allows for the reduction of a plaintiff’s damages against an insurance broker for contributory negligence.56 In each case, the legislation describes how the court should approach the task. [page 99] In this context, contributory negligence is an insured’s failure to take reasonable care for its own interests.57 Ascertaining the extent to which an insured’s negligence claim against its broker should be reduced for contributory negligence: … involves a comparison both of culpability, ie of the degree of departure from the standard of care of the reasonable man … and of the relative importance of the acts of the parties in causing the damage … It is the whole conduct of each negligent party in relation to the circumstances of the accident which must be subjected to comparative examination. The significance of the various elements involved in such an examination will vary from case to case; for example, the circumstances of some cases may be such that a comparison of the relative importance of the acts of the parties in causing the damage will be of little, if any, importance.58
Generally speaking, courts are reluctant to reduce claims against professionals for contributory negligence.59 Set out below are three English cases in which insurance brokers sought to reduce their client’s damages for contributory negligence. In each case the client was an insurer. In National Insurance and Guarantee Corporation Plc v Imperio UK Ltd and Russell Tudor-Price Jones & Co,60 Colman J said this about a reduction for contributory negligence in a claim by an insurer against its reinsurance broker: The defect in the wording of the … endorsement … should have been obvious to any
insurer in Mr Rapley’s position and with his professional experience, even on a cursory examination. This was not a matter of fine detail or great complexity. The wording was a very long way from giving effect to his instructions. On the other hand, given that RTP were being paid to give effect to their instructions and were relied upon as experts in the broking field, the reduction in damages which would be just and equitable in this case must not be so great as to ignore their primary responsibility to procure an indorsement having a particular effect. In considering the appropriate discount I have had regard to the level of discount for the insurance brokers negligence in Youell v Bland Welch, supra … The degree of blameworthiness in this case presents itself to me as more serious than in Youell. The reduction which I hold to be just and equitable having regard to NIGC’s responsibility is therefore 30 per cent.
[page 100] More recently, in Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union),61 Flaux J (at [238]) would have reduced the client’s damages as against its broker by 90 per cent for contributory negligence if he had concluded that the brokers had breached the duty of care they owed to the client. To put the issue into context, in Standard Life Assurance Ltd v Oak Dedicated Ltd,62 Tomlinson J (at [109]) unceremoniously rejected a contributory negligence defence in a case by a life insurer against the insurance broker it retained to arrange professional indemnity insurance: This defence was memorably described by Mr Railton at an early stage of the trial as ‘limp’. Mr Railton was not of course involved in this particular argument between Aon and SLAC, but his evaluation was in my view not uncharitable. To be fair to Mr Weitzman it was not an argument which he pursued with any more enthusiasm than his professional duty required, and with characteristic frankness he recognised that Aon would if this point were reached have to bear the greater part of the responsibility. He contended for only a modest reduction in SLAC’s recovery. In my view no reduction is appropriate.
5.40 How much more difficult would it be to reduce a claim by a lay client, even a sophisticated lay client, for contributory negligence?
THE FIDUCIARY OBLIGATIONS OF AN INSURANCE AGENT AND AN INSURANCE BROKER 5.41
Fiduciary obligations arise:
… because a person has come under an obligation to act in another’s interests. As a result, equity imposes on the fiduciary proscriptive obligations: not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict. If these obligations are breached, the fiduciary must account for any profits and make good any losses arising from the breach.63
Fiduciary obligations are distinct from: … the contractual aspects of the adviser–client relationship. The duty to provide ‘best advice’ and to disclose knowledge and information arise out of the adviser’s ‘undertaking’, and are therefore implied terms of the contractual retainer. And disclosure may also relieve the adviser from the fundamental fiduciary duty not to ‘assume a position where his self-interest might conflict with the honest and impartial giving of advice’.64
Accordingly, an insurance agent or broker may be in a fiduciary relationship as to some aspects of its relationship with a client but not others.65 [page 101] 5.42 An insurance broker owes fiduciary obligations to its client to the extent that it ‘undertakes to act in the interests of the client and not solely in [its] own interests, and the client is in a position of vulnerability’.66 The scope of the broker’s fiduciary obligations will depend on the terms of its contract with the client and the surrounding circumstances. Similarly, an insurance agent acting for only one insurer will owe fiduciary obligations to that insurer. An insurance agent acting for more than one insurer also has fiduciary obligations to their clients, but not of the same scope. 5.43
Subject to the terms of their retainer, insurance agents and
brokers are: … under a general duty to keep and provide records of all the transactions into which they had entered on behalf of [their clients].67
THE AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION ACT 2001 (CTH) 5.44 See Chapter 4 for brief mention of a ‘consumer’s’ rights against a financial service provider for breach of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). One of the important advantages of these rights over the common law is that the plaintiff does not have to prove that the provider owed it a duty of care. If an insurance agent or broker is not providing financial services as defined by the ASIC Act, the same conduct will be caught by the consumer protection provisions of the Competition and Consumer Act 2010 (Cth) (CCA) Pt XI Div 2 and Sch 2. 5.45 Gates v City Mutual Life Assurance Society Ltd68 indicates the scope of a claim for damages pursuant to s 12GF of the ASIC Act for a contravention of s 12DA(1) of that Act. Both sections had their counterpart in the Trade Practices Act 1974 (Cth) ss 52 and 82. Section 12DA(1) is in the following terms: A person must not, in trade or commerce, engage in conduct in relation to financial services that is misleading or deceptive or is likely to mislead or deceive.
Section 12GF(1) provides as follows: A person who suffers loss or damage by conduct of another person that contravenes a provision of Subdivision C (sections 12CA to 12CC) or Subdivision D (sections 12DA to 12DN) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
[page 102]
In Gates, the plaintiff proved that an insurance agent contravened s 52 of the Trade Practices Act 1974 (Cth) by misleading him about the scope of his disability insurance policy. He sued the insurer for the agent’s conduct. The High Court observed that damages under s 82 of the Trade Practices Act 1974 (Cth) are assessed on a tort-like basis. It went on to hold that the plaintiff was entitled to the value of the premium he paid for the policy, but not an amount equivalent to the benefits represented to him, because he did not prove that he would have obtained another policy that would have covered him for the loss if the misrepresentation had not been made. 5.46 The remedy for misleading conduct is not to put the plaintiff in the position it would have been in if the ‘conduct’ had been true. That is the measure of damages in contract. It is the difference between the plaintiff’s position now and what it would have been if the defendant had not engaged in the conduct. In Marks v GIO Australia Holdings,69 McHugh, Hayne and Callinan JJ explained the reason for this (at [48]): A party that is misled suffers no prejudice or disadvantage unless it is shown that that party could have acted in some other way (or refrained from acting in some way) which would have been of greater benefit or less detriment to it than the course in fact adopted.
THE CORPORATIONS ACT 2001 (CTH) CH 7 5.47 See Chapter 4 for an introduction to the regulatory framework imposed by Ch 7 of the Corporations Act 2001 (Cth) on the insurance market. Set out below is how Ch 7 regulates insurance agents and brokers. The concepts ‘financial services’, ‘financial product advice’, ‘personal advice’, ‘general advice’, ‘retail clients’ and ‘wholesale clients’ are central features of Ch 7. Each of these concepts is discussed in Chapter 4 of this text.
Insurance agents
5.48 An insurance agent appointed by a general insurer to distribute their ‘general insurance products’ is exempt from the requirement to hold an Australian Financial Services Licence (AFSL) or be appointed as an authorised representative of the insurer: s 911A(2); ASIC Class Order 05/1070. The class order limits distributors to dealing with the products; it does not allow them to advise on them. The insurer is only entitled to the benefit of the class order if it takes: responsibility for the distributor’s conduct; and
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■reasonable steps to inform retail clients about:
■ the availability of its dispute resolution system; ■ the capacity in which the distributor is acting; and ■ the distributor’s remuneration.
If an insurance agent is agent for: only one insurer, that insurer is liable: s 917B; more than one insurer, then depending on the circumstances, all the insurers may be jointly and severally liable (s 917C), for any loss or damage suffered by a client as the result of the agent’s conduct (within or outside the agent’s authority), but only if the client: could reasonably be expected to rely on the conduct; and relied on the conduct in good faith. That is the case unless the agent acted outside its authority and the agent disclosed its lack of authority to the client before the client relied on it: s 917D. 5.49
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Insurance brokers 5.50 An insurance broker that provides financial services must hold an AFSL and must conduct itself and provide product and advice disclosure as required by Ch 7.
An insurance broker can be an authorised representative — under a ‘binder’ — to conclude insurance contracts on behalf of an insurer even though the broker holds its own AFSL: s 916E.
Obligations of an insurance broker with an AFSL 5.51 The obligations of an insurance broker with an AFSL are the same as those described in Chapter 4 for a general insurer with an AFSL. In addition, the broker is obliged to: have available adequate resources to provide the financial services covered by the licence and to carry out supervisory arrangements: s 912A(1)(d); have adequate risk management systems: s 912A(1)(h); have compensation arrangements for financial services provided to retail clients: s 912B (The type of compensation arrangement is described in s 912B and regs 7.6.02AA and 7.6.02AAA. The main requirement is to have professional indemnity insurance covering its liability to retail clients.); and refrain from using the words ‘independent’, ‘impartial’ or ‘unbiased’ to describe itself in the circumstances listed in s 923A.
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[page 104] Also of relevance to insurance brokers is the need to steer clear of ‘secret commissions’, the taking of which is a criminal offence across Australia; for example, see s 179 of the Crimes Act 1958 (Vic).
An insurance broker’s disclosure requirements 5.52 Amongst other things, Ch 7 imposes pre-contractual disclosure obligations on an insurance broker in its dealings with retail clients. Except in the circumstances described in s 941C, an insurance broker must give a ‘retail client’ a Financial Services Guide (FSG) before a financial service is provided: ss 941A and 941D. That will usually be at the first meeting with the intending client.
The FSG explains the service the insurance broker is offering and is intended to assist the client in deciding whether to acquire the service. The main requirements for the content of an FSG are set out in s 942B. They include: the broker’s name and contact details; information about the kinds of financial services the broker is authorised by its licence to provide and the kinds of financial products to which those services relate; information about the broker’s remuneration; information about any association with others ‘that might reasonably be expected to be capable of influencing the [broker] in providing any of the authorised services’; and information about what a client can do to have a complaint about the broker dealt with by the broker’s internal dispute resolution procedures and the client’s right to take the complaint to an independent dispute resolution scheme.
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5.53 The information in an FSG ‘must be worded and presented in a clear, concise and effective manner’: s 942B(6A).
General advice 5.54 If an insurance broker gives general advice to a retail client, it must warn the client at the same time as the advice is given (s 949A(3)), that (s 949A(2)): (a) the advice has been prepared without taking account of the client’s objectives, financial situation or needs; and (b) because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs; and (c) if the advice relates to the acquisition, or possible acquisition, of a particular financial product then the client should obtain a Product Disclosure Statement relating to the product and consider the statement before making any decision about whether to acquire the product.
[page 105]
Personal advice: Statement of advice 5.55 An insurance broker can only give personal advice to a retail client if (s 945A(1)): (a) the [broker]: (i) determines the relevant personal circumstances in relation to giving the advice; and (ii) makes reasonable inquiries in relation to those personal circumstances; and (b) having regard to information obtained from the client in relation to those personal circumstances, the [broker] has given such consideration to, and conducted such investigation of, the subject matter of the advice as is reasonable in all of the circumstances; and (c) the advice is appropriate to the client, having regard to that consideration and investigation.
By s 945B(1), if: (a) the advice is based on information relating to the client’s relevant personal circumstances that is incomplete or inaccurate; and (b) the [broker] knows that the information is incomplete or inaccurate, or is reckless as to whether it is incomplete or inaccurate; the [broker] must, in accordance with subsections (2) and (3), warn the client that: (c) the advice is, or may be, based on incomplete or inaccurate information relating to the client’s relevant personal circumstances; and (d) because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s relevant personal circumstances.
5.56 In certain circumstances, if an insurance broker gives personal advice to a retail client, it must give the client a Statement of Advice (SOA): s 946A. The main requirements for the content of a SOA are set out in s 947C. They include: the broker’s name and contact details; the advice and information about the basis on which it is or was given; information about the remuneration the broker might earn ‘that might reasonably be expected to be or have been capable of influencing the [broker] in providing the advice’; and information about associations with others ‘that might reasonably be expected to be or have been capable of influencing the [broker] in providing the advice’.
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5.57 The level of detail ‘required is such as a person would reasonably require for the purpose of deciding whether to act on the advice as a retail client’: s 947C(3). [page 106] In determining the relevant level of disclosure to a ‘retail client’, a court will have regard to a retail client that is: … reasonably intelligent; at a minimum, the decision-maker should not assume the retail investor is obtuse, unusually stupid, or prone to behave like a ‘moron in a hurry’ … While not expert in matters of finance, the retail client will exercise ordinary common sense and be reasonably diligent and reflective when deciding whether to make an investment. He or she may be less interested in technical details than regulators sometimes assume. The retail client can read what is plainly explained without drawing unlikely or off-beat conclusions. He or she has a reasonable tolerance for risk, especially where the investment opportunity in question involves financing property development. I do not suggest the individual will be incautious, but he or she is unlikely to approach a document with the lawyer’s forensic eye for nuance and heightened sensitivity to risks, both real and imagined [citations omitted].70
5.58 There are additional requirements for the SOA when the advice recommends the replacement of one financial product with another: s 947D. 5.59 An SOA cannot be combined in a single document with an FSG: s 947E. 5.60 The information in an SOA ‘must be worded and presented in a clear, concise and effective manner’: s 947B(6).
Payments to an insurance broker with an AFSL 5.61 At common law and subject to any arrangement between an insurance broker and the insurer to the contrary, if an insurance broker becomes insolvent after receiving the premium for the insurance from the client but before passing it onto the insurer, the client must pay the premium again.71 The broker is the insured’s agent, not the insurer’s agent, for the receipt of premium.
5.62 An insurance broker with an AFSL that receives money from a client in connection with a financial product (other than by way of remuneration) must pay it into an account and deal with it as described by ss 981A, 981B and 981C. The money is treated as money held in trust by the broker for the client and is not capable: (a) of being attached or otherwise taken in execution; or (b) of being made subject to a set-off, charge or charging order, or to any process of a similar nature; except at the suit of a person who is otherwise entitled to the money or investment (s 981E).
[page 107] 5.63 Payment by an insured or an intending insured to an insurance broker with an AFSL in relation to an insurance contract arranged or to be arranged by the broker (for example, in respect of premium) discharges the insured’s liability to the insurer to the extent of the payment: s 985B(1) and (2). Payment by an insurer to an insurance broker with an AFSL in relation to an insurance contract (for example, payment of a claim) does not discharge the insurer’s liability to the insured: s 985B(3). In short, it is the insurer, not the insured, that wears the risk of an insurance broker’s insolvency in relation to payments by the insured or the insurer to the broker that do not make it to the insurer or insured respectively.
SELF-REGULATION: THE INSURANCE BROKERS CODE OF PRACTICE 2014 AND THE FINANCIAL OMBUDSMAN SERVICE 5.64
The National Insurance Brokers Association of Australia (NIBA)
is the national trade association for licensed life and general insurance brokers in Australia. It created the first self-regulating Insurance Brokers Code of Practice in 1996. The Code is designed to ‘set high standards relating to the role of an insurance broker when acting for [clients]’. It is binding on NIBA members and on any other entity that has agreed with NIBA to be bound by the Code. The Financial Ombudsman Service (FOS) administers the Code and monitors compliance with it. According to the Australian Securities and Investments Commission’s website, most brokers offering retail services in Australia subscribe to the Code. The Code commits those bound by it (p 7) to: high standards of customer service; promote professional, informed and effective relationships between brokers and their customers, insurers and others involved in the insurance industry; a free and transparent complaints and compliance review process; and abide by any binding sanctions imposed under the Code for any breach. The Code applies to general and life insurance and associated services (p 7). The Code sets out the responsibilities of those bound by it, requires them to have in place an internal dispute resolution process, and provides for binding orders or sanctions to be imposed on them, with no monetary penalties. 5.65
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5.66 Chapter 4 briefly describes the workings of the external dispute resolution system (known as FOS) in relation to disputes with general [page 108] insurers. FOS operates in the same fashion for a complaint against a general insurance broker, except that:
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definitions of ‘Retail General Insurance Policy’ and ‘Small Business Insurance Product’ differ depending on whether the dispute is with a general insurance broker or not: para 14.1; and for a dispute lodged with FOS after 1 January 2012, FOS’s jurisdiction is limited to $150,000, except where the claim solely concerns the broker’s conduct in relation to a life insurance policy: FOS Terms of Reference (TOR) para 9.7 and Sch 2. The limits do not include compensation for costs and interest payments: Schs 1 and 2. FOS will consider a claim of up to $500,000 with the consent of FOS and both parties (TOR paras 3 and 4.4, Schs 1 and 2 and para 5.1(o)), but cannot award more than the amounts mentioned above.
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CONCLUDING OBSERVATION 5.67 Unfortunately, insurance intermediaries do not have the benefit of Xanthippe’s self-help remedy, and so they must continue to explain and listen to their clients for as long as it takes until their obligations are discharged.
1. 2. 3. 4. 5. 6.
7.
Joseph Heller, Picture This, Picador (Pan MacMillan UK), London, 1989, p 84. Norwich Fire Insurance Society Ltd v Brennans (Horsham) Pty Ltd [1981] VR 981 at 984 (Lush J); (1981) 1 ANZ Ins Cas 60-446. Western Australian Insurance Co Ltd v Dayton [1924] HCA 58; (1924) 35 CLR 355 (Isaacs ACJ). [1925] HCA 48; (1925) 37 CLR 451. Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd [1986] HCA 14; (1986) 160 CLR 226 at [5]. Permanent Trustee Australia Company Ltd v FAI General Insurance Company Ltd [2001] NSWCA 20; (2001) 50 NSWLR 879 at [87]–[90] (Handley JA); Smits v Roach [2006] HCA 36; (2006) 228 ALR 262 at [47] (Gleeson CJ, Heydon and Crennan JJ). Permanent Trustee Australia Company Ltd v FAI General Insurance Company Ltd [2003] HCA 25; (2003) 214 CLR 514 at [30] (McHugh, Kirby and Callinan JJ); contrast Gummow and Hayne JJ at [86]; New Cap Reinsurance Corporation Ltd (in liquidation) v Daya [2010] NSWSC 1226 at [16]–[22] (White J).
8. 9. 10. 11. 12. 13. 14. 15. 16. 17.
18. 19. 20. 21. 22. 23. 24. 25. 26.
27.
28. 29. 30. 31. 32.
Tosich v Tasman Investment Management Ltd [2008] FCA 377 at [93(6)] (Gyles J). [1982] 2 NZLR 38. [1992] 2 NZLR 282. Caldwell v JA Neilson Investments Pty Ltd [2007] NSWCA 3; (2007) 14 ANZ Ins Cas 61724 at [112] (Ipp JA). Caldwell v JA Neilson Investments Pty Ltd (see fn 11) at [115] (Ipp JA). Caldwell v JA Neilson Investments Pty Ltd [2007] (see fn 11) at [112]–[114] (Ipp JA). [2007] NSWCA 3; (2007) 14 ANZ Ins Cas 61-724. [1931] HCA 53; (1931) 46 CLR 41. [2006] HCA 19; (2006) 226 CLR 161. Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd [1981] HCA 3; (1981) 145 CLR 625 at [2] (Gibbs J); Advision Pty Ltd v Preservatrice Skandia Insurance Ltd and Sedgwick Pty Ltd (1984) 3 ANZ Ins Cas 60-574 at 78,448 (O’Bryan J). Messagemate Aust Pty Ltd v National Credit Insurance (Brokers) Pty Ltd [2002] SASC 327 at [83] (Williams J). BP plc v Aon Limited & Aon Risk Services of Texas Inc (2006) EWHC 424 (Comm) at [230] (Colman J) (duty of a sub-broker to the broker’s client). Messagemate Aust Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (see fn 18) at [85] and [86] (Williams J). Messagemate Aust Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (see fn 18) at [85] and [86] (Williams J). Messagemate Aust Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (see fn 18) at [85] (Williams J). Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288 at 76,201 (Steytler J). Beck Helicopters Ltd v Edward Lumley & Sons (NZ) Ltd (1990) 6 ANZ Ins Cas 60-995 at 76,643 (Hillyer J). (1982) 2 ANZ Ins Cas 60-461. Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434 at [148] and [151] (Kirby J); Jones v Environcom Ltd [2010] EWHC 759 (Comm); Lloyd’s Rep IR 676 at [63] (Steel J); Elilade Pty Ltd v NonPareil Pty Ltd & CIC Insurance Ltd [2002] FCA 909 at [110]–[111] (Mansfield J); Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd [2011] EWHC 124 (Comm); PNLR 15 at [78] (Blair J). Jones v Environcom Ltd [2010] EWHC 759 (Comm); Lloyd’s Rep IR 676 at [54] (Steel J). This summarises the relevant parts of the FSA Insurance Conduct of Business Handbook, May 2007. Nevertheless, it appears to accurately reflect the common law position. [2010] EWHC 759 (Comm); Lloyd’s Rep IR 676. (1982) 2 NSWLR 57. Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (1991) 25 NSWLR 541 at 556 (Kirby P). Bronfman v BFL Canada Risk, 2013 ONSC 5372 at [47]–[48] (Stewart J). Synergy Health (UK) Ltd v CGU Insurance Plc (t/a Norwich Union) [2010] EWHC 2583 (Comm) at [206] (Flaux J).
33. Elilade Pty Ltd v Nonpareil Pty Ltd (see fn 26) at [100]–[101] (Mansfield J). 34. Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (see fn 30) at 556 (Kirby P). 35. [1978] 2 Lloyd’s Rep 18. 36. Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (see fn 30) at 555 (Kirby P). 37. Messagemate Aust Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (see fn 18) at [85] (Williams J). 38. [1999] LIRL 459. 39. Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (see fn 30) at 555 (Kirby P). 40. Bromley London Council v Ellis [1971] 1 Lloyd’s Rep 97. 41. Caldwell v JA Nielson Investments Pty Ltd (see fn 11) at [103] (Ipp JA). 42. HIH Casualty & General Insurance Ltd v JLT Risk Solutions Ltd [2007] EWCA Civ 710 at [116] (Longmore LJ). 43. Alexander Forbes Europe Ltd v SBJ Ltd [2003] Lloyd’s Rep IR 432 at [32] (David Mackie QC). 44. Alexander Forbes Europe Ltd v SBJ Ltd [2003] Lloyd’s Rep IR 432 at [32] (David Mackie QC). 45. Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (see fn 30) at 543 (Kirby P); Prosperity Advisers Pty Ltd v Secure Enterprises Pty Ltd t/a Strathearn Insurance Brokers Pty Ltd [2011] NSWSC 35 at [28], [32] and [33] (Ball J); Prosperity Advisers Pty Ltd v Secure Enterprises Pty Ltd t/a Strathearn Insurance Brokers [2012] NSWCA 192 at [73] (Tobias AJA). 46. Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (see fn 30) at 556 (Kirby P). 47. Glicksman v Lancashire and General Assurance [1925] 2 KB 593 at 609. 48. Provincial Insurance Australia Pty Ltd v Consolidated Wood Products Pty Ltd (see fn 30) at 543 (Kirby P). 49. [1984] HCA 59; (1984) 157 CLR 149. 50. [1998] HCA 38; (1998) 192 CLR 603. 51. [1981] HCA 3; (1981) 145 CLR 625. 52. [2012] NSWCA 192. 53. In Ruckman v Suncorp Metway Insurance Ltd [2013] QCA 56, White JA referred to them with approval (at [15]), as listed by the primary judge (citations omitted), drawing on Unity Insurance Brokers (see fn 50) and Prosperity Advisers (see fn 52) at [39–41] (Ball J). 54. BP plc v AON Ltd (No 2) [2006] 1 CLC 881 at [282] (Colman J). 55. Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd (see fn 26) at [124] (Blair J). 56. See, for example, s 4(1) of the Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA) and s 5K of the Civil Liability Act 2002 (WA). 57. Astley v Austrust Ltd [1999] HCA 6; (1999) 197 CLR 1 at [21] (Gleeson CJ, McHugh, Gummow and Hayne JJ): Youell v Bland Welch & Co Ltd (The ‘Superhulls’ cover case) (No 2) [1990] 2 LLR 431 at 460 (claim against an insurance broker).
58. Podrebersek v Australian Iron and Steel Pty Ltd [1985] HCA 34; (1985) 59 ALJR 492 at [10]. 59. Ground Gilbey Ltd v Jardine Lloyd Thompson UK Ltd (see fn 26) at [131] (Blair J). 60. (1997 WL 1102971, QB Div (Comm Ct), 30 September 1997, unreported). 61. [2010] EWHC 2583 (Comm). 62. [2008] EWHC 222 (Comm); Lloyd’s Rep IR 552. 63. Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 at [41] (Gaudron and McHugh JJ). 64. Aequitas v Aefc [2001] NSWSC 14; (2001) 19 ACLC 1006 at [287] (Austin J). 65. Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (ACN 113 114 832) (No 4) [2007] FCA 963 at [285] (Jacobson J). 66. Aequitas v Aefc (see fn 64) at [310] (Austin J). 67. Yasuda Fire & Marine Insurance Company of Europe Ltd v Orion Marine Insurance Underwriting Agency Ltd [1995] 3 QB 174 at 185 (Colman J). 68. [1986] HCA 3; (1986) 160 CLR 1. 69. [1998] HCA 69; (1998) 196 CLR 494. 70. Wright Patton Shakespeare Capital Limited and Australian Securities and Investments Commission [2008] AATA 1068 at [15] (Senior Member McCabe). 71. Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (see fn 5).
[page 109]
Chapter 6 INTRODUCTION TO THE INSURANCE CONTRACTS ACT 1984 (CTH) To read words into any statute is a strong thing and, in the absence of clear necessity, a wrong thing …1 [N]o legislation pursues its purposes at all costs. Deciding what competing values will or will not be sacrificed to the achievement of a particular objective is the very essence of legislative choice …2
INTRODUCTION This chapter introduces the Insurance Contracts Act 1984 (Cth) (ICA) under the following headings: background; the application of the ICA: ss 8 and 9; the extended application of the ICA: s 10; limited relief elsewhere: s 15; and the approach to construing a provision of the ICA.
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BACKGROUND 6.1 In the 18th and 19th centuries (insurance’s formative legal years), Britannia ruled the waves, the Industrial Revolution unfolded, and the prevailing economic philosophy was free market3 and laissez faire.4
Insurance fitted neatly into the picture as an important encouragement to business to create, invent and innovate without fear of some of the [page 110] insurable risks of business.5 Against this backdrop, legislators sought to protect the insurance market, and the judiciary allowed insurers to allocate risk in their insurance contracts as they pleased. The shift in political and economic focus in the last 30 years or so — from business promotion to consumer protection — is reflected by the ICA, the world’s first comprehensive consumer-oriented insurance contract legislation. 6.2 The ICA came into effect on 1 January 1986. It was enacted pursuant to the Commonwealth Government’s power under s 51(xiv) of the Australian Constitution to make laws with respect to ‘insurance, other than State insurance; also State insurance extending beyond the limits of the State concerned’. For the purpose of s 51(xiv), ‘State insurance’ includes insurance: ‘of a type offered by a State as insurer’;6 and written by an instrumentality established by a state government for that purpose.7 The limit on the Commonwealth’s power to legislate for state insurance explains why s 9(2) of the ICA excludes from the ICA’s application:
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… contracts and proposed contracts of insurance entered into, or proposed to be entered into, in the course of State insurance or Northern Territory insurance …
Although the ICA does not extend to state insurance, some state insurers expressly make their insurance arrangements subject to the ICA. For example, in New South Wales, state insurance is made subject to the ICA by the laws of New South Wales (s 5(1) of the Insurance (Application of Laws) Act 1986 (NSW)). 6.3
The ICA is almost identical to the Bill recommended by the
Australian Law Reform Commission (ALRC) in its Report No 20, Insurance Contracts (1982). As explained in its Long Title, the ICA was enacted to: … reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts operate fairly …
6.4 The ICA is not a complete code of insurance contract law. It does not ‘affect the operation of any other law of the Commonwealth, the operation of law of a state or territory or the operation of any principle [page 111] or rule of the common law (including the law merchant) or of equity’, except to the extent that it does so ‘expressly or by necessary intendment’: s 7. As it is not a complete code, any aspect of insurance law not covered by the ICA ‘expressly or by necessary intendment’ is to be found in other Commonwealth legislation and in: state or territory legislation; and the common law of Australia.
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6.5 The parties to an insurance contract cannot contract out of the ICA where this would prejudice someone other than the insurer: s 52.
APPLICATION OF THE ICA: SS 8 AND 9 6.6 Subject to s 9, the ICA applies to ‘contracts of insurance … the proper law of which is or would be the law of [an Australian] State or … Territory …’: s 8(1). The ‘proper law’ of a contract is the legal system with which the contract has its closest and most real connection.8 In determining the proper law of an insurance contract, the court will:
consider a number of factors, including ‘the places of residence or business of the parties, the place of contracting, the place of performance, and the nature and subject matter of the contract [including the location of the risk]’;9 and ignore an express provision in the contract nominating the law of another country as the law of the contract: s 8(2). Section 8(2) is only brought into play if the parties have expressly chosen the law of another country to govern the contract. They will have done so if:
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… upon the proper construction of the contract (which may include an expression of choice in direct language) … the parties exercised liberty given by the common law to choose a governing law for their contract.10
6.7 In Akai Pty Ltd v The Peoples Insurance Company Ltd,11 the majority in the High Court said that in determining the application of the ICA to a credit insurance policy issued by The Peoples Insurance to Akai, s 8(2) required the court to ascertain the proper law of the contract without reference to a ‘choice of law and forum’ clause (which chose English law as the governing law of the contract and England as the forum for any dispute arising out of the contract). [page 112] 6.8 A ‘choice of foreign forum’ clause in an insurance contract will not exclude the operation of the ICA, but will leave an Australian court with a discretion whether to stay Australian proceedings. A court will decline a stay if a stay would deprive the plaintiff of the ICA’s protection (if a court of the foreign country would not apply the ICA to the dispute).12 In the absence of that consideration, a stay would be granted in the absence of strong countervailing reasons.13 It is worth noting here that although the High Court in Akai rejected The People’s Insurance Company Ltd’s application to stay the Australian proceedings on the basis that a stay would deprive Akai of the protective benefit of s 54 of the ICA, the English High Court subsequently concluded that the ICA did not apply to the insurance contract because the contract was
governed by English law pursuant to the ‘choice of law and forum’ clause.14 6.9 Section 9 states that except as otherwise provided by the ICA, the ICA does not apply to, or in relation to, contracts or proposed contracts: (1) … (a) of reinsurance; or (b) and (ba) of insurance entered into, or proposed to be entered into, by a private health insurer … in respect of its health insurance [or health-related] business …; or … (c) of insurance entered into, or proposed to be entered into, by a friendly society; or (ca) of insurance entered into, or proposed to be entered into, by the Export Finance and Insurance Corporation, other than short term insurance contracts …; or (d) to or in relation to which the Marine Insurance Act 1909 applies; or (e) entered into or proposed to be entered into for the purposes of a law (including a law of a State or Territory) that relates to: (i) workers’ compensation; or (ii) compensation for the death of a person, or for injury to a person, arising out of the use of a motor vehicle. (f) entered into or proposed to be entered into: (i) for the purposes of a law (including a law of a State or Territory) that relates to workers’ compensation; and (ii) to provide insurance cover in respect of an employer’s liability under a rule of the common law that requires payment of damages to a person for employment-related personal injury. (1A) and (1B) [addresses the application of the ICA to a ‘bundled’ contract of insurance. That is, a contract of insurance that includes different types
[page 113] of cover some of which, if contained in separate insurance contracts would be subject to the ICA and some of which would not.] (2) … entered into, or proposed to be entered into, in the course of State insurance or Northern Territory insurance, including contracts and proposed contracts entered into, or proposed to be entered into, by: (a) a State or the Northern Territory; and (b) some other insurer; as joint insurers.
THE EXTENDED APPLICATION OF THE ICA: S 10 6.10 The ICA applies to insurance contracts and to the ‘provisions of insurance’ in a contract that would not ordinarily be regarded as an insurance contract: s 10(2). An indemnity clause in a non-insurance arrangement, such as a lease or a sale of goods or supply of services agreement, is a ‘provision of insurance’ because the risk transfer effected by such a clause is an essential characteristic of an insurance arrangement.15 In Bayswater Car Rental Pty Ltd v Hannell16, the Full Court of the Supreme Court of Western Australia concluded that an indemnity clause in a car hire agreement was a ‘provision of insurance’ for the purposes of s 10(2) of the ICA. Accordingly if, as required by the terms of the hiring agreement, the person whose car was damaged by the hirer’s negligent driving of the hire car had obtained a judgment against the hirer, he could have sued the car rental company direct pursuant to s 51 of the ICA (the hirer could not be found after reasonable enquiry). If nothing else, this means the overarching duty of utmost good faith (ss 13 and 14 of the ICA) applies to the operation of an indemnity clause in a non-insurance contract and perhaps to other provisions of such a contract.
LIMITED RELIEF ELSEWHERE: S 15 6.11 Section 15 prevents an ICA-governed insurance contract from being made the subject of the following relief (not including compensatory damages) under any other Australian legislation (Commonwealth, state or territory): the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable; or relief for insureds from the consequences in law of making a misrepresentation.
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[page 114] 6.12 Amongst other things, s 15 prevents an insured from seeking17 the above relief under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) Pt 2 Div 2, in particular, Subdiv: BA, unfair contract terms (s 12BF renders a term of a standard form consumer contract void if the term is unfair). The Australian Consumer Law (ACL) contains similar unfair contract terms provisions: s 23; C, unconscionable conduct (ss 12CA and 12CB);18 and D, consumer protection (ss 12DA and 12DB, misleading or deceptive conduct or false or misleading representations). The ASIC Act itself specifically excludes insurance contracts from the application of Subdiv E — Conditions and warranties in consumer transactions (s 12ED): s 12ED(3). In Swann Insurance (Aust) Pty Ltd v Fraillon,19 the Full Court of the Supreme Court of Victoria held that s 15 of the ICA prevented relief being granted under the Credit Act 1984 (Vic).
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6.13 If passed, the Insurance Contracts Amendment (Unfair Terms) Bill 2013 (Cth) will amend the ICA to introduce an unfair contracts terms scheme for standard form consumer general insurance contracts similar to that in Pt 2 Div 2 Subdiv BA of the ASIC Act. The Labor Party introduced the Bill into the Commonwealth Parliament on 26 June 2013. The Bill lapsed when Parliament was prorogued for the 2013 federal election. Is there a need for such a regime? The presence of: the Long Title to, and ss 13, 14, 35, 37 and 54 of, the ICA; Ch 7 of the Corporations Act 2001 (Cth); the external dispute resolution service available to insureds courtesy of the Financial Ombudsman Service; and
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■the General Insurance Code of Practice 2014 and the Insurance
Brokers Code of Practice 2014, suggest that extending the ASIC Act unfair contract terms provisions to insurance contracts governed by the ICA would add a layer of complexity to the sale, purchase and performance of insurance contracts governed by the ICA without any significant advantage to consumers. [page 115] In that regard, has the ASIC Act or ACL unfair contract terms provisions been successfully applied to insurance contracts not governed by the ICA? If not, or if only rarely, why is it thought that extending those provisions to insurance contracts governed by the ICA would bring any discernible benefit to consumers, particularly when the ICA already provides strong protection to consumers as described? 6.14 Section 54 of the ICA is an important feature of the ICA (see Chapter 22) and has regularly generated litigation over the three decades the ICA has been in force, with the most recent High Court decision on the section published three years ago,20 and the most recent appellate court decisions last year.21 Section 54 ‘does not operate to relieve the insured of restrictions or limitations that are inherent in that claim’.22 By s 12BI of the ASIC Act, s 12BF (which renders an ‘unfair term’ void), ‘does not apply to a term of a contract referred to in [s 12BF(1)] to the extent that … the term … defines the main subject matter of the contract’. Applying the notion of a term that ‘defines the main subject matter of the contract’ to insurance contracts governed by the ICA will inevitably give rise to debate and litigation concerned with how close that notion is to the s 54 notion of ‘restrictions or limitations that are inherent in [a] claim’.
THE APPROACH TO CONSTRUING A PROVISION OF THE ICA The extent to which the ICA is a statutory code 6.15 To the extent the ICA is a statutory code, intended to replace the common law: … the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited.23
The purposive approach 6.16 The court’s duty is to give the words in the ICA the meaning the legislature intended them to have. This does not mean the court has to try to ascertain the legislature’s ‘objective collective mental state’. Ascertainment of legislative intention is asserted as a statement of compliance with the rules of construction, common law and statutory,
[page 116] which have been applied to reach the preferred results and which are known to parliamentary drafters and the courts.24
This requires a court to construe a provision of the ICA ‘according to the terms in which it has been expressed’.25 In so doing, regard must be had to: ‘the purpose, language and context of the provision’;26 and ‘the subject, scope and objects’ of the ICA.27 In Commissioner of Taxation v Consolidated Media Holdings Ltd,28 the High Court said the task of statutory construction must start and end with a consideration of the statutory text:
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… in its context. That context includes legislative history and extrinsic materials. Understanding context has utility if, and in so far as, it assists in fixing the meaning of the statutory text. Legislative history and extrinsic materials cannot displace the meaning of the statutory text. Nor is their examination an end in itself. (citations omitted)
In Certain Lloyd’s Underwriters v Cross,29 Kiefel J said (at [89]) that
the purpose of resorting to extrinsic materials: is, generally speaking, to identify the policy of the statute in order to better understand the language and intended operation of the statute. An understanding of legislative policy by these means does not provide a warrant for departing from the process of statutory construction and attributing a wider operation to a statute than its language and evident operation permit.
The common law approach to the construction of a statute is purposive.30 This means that if the literal or grammatical meaning of a provision of the ICA is ‘“absurd”, “extraordinary”, “capricious”, “irrational” or “obscure”’31 or does not conform to or promote the ICA’s underlying purpose or object, it ‘must give way to a construction which will promote’32 that purpose or object. That is because such meaning cannot therefore ‘be regarded as “the ordinary meaning” …’33 A court [page 117] can achieve this by adding to, omitting from, or clarifying, a provision of the ICA,34 bearing in mind the force of this chapter’s epigraphs. 6.17 Section 40 of the ICA provides an example of the purposive approach in action. If s 40(1) is read literally, s 40 does not apply to a ‘claims made’ policy. This is because it is not an effect of such a policy that: … the insurer’s liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract.
Unlike a ‘claims made and notified’ policy, ‘claims made’ cover does not depend on the insurer being notified of the claim during the insurance period. However, in Newcastle City Council v GIO General Ltd,35 the High Court held that s 40 should be read as applying to ‘claims made’ policies because that was clearly Parliament’s intention.
Considerations 6.18
At common law, determining the meaning of a provision of the
ICA involves the court identifying the statutory purpose of the provision. It is a text-based activity36 because: … [t]he purpose of a statute is not something which exists outside the statute. It resides in its text and structure, albeit it may be identified by reference to common law and statutory rules of construction.37
This requires a court to consider: the ‘ordinary and grammatical sense’ of the words of the provision.38 That is because the ‘language which has actually been employed in the text of legislation is the surest guide to legislative intention’;39 the context of the provision (even if it is not ambiguous).40 This includes: ■ ensuring that the meaning of the provision ‘is consistent with the language and purpose of all the provisions of the [ICA]’;41
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[page 118]
■ giving such meaning so that ‘no clause, sentence or word shall prove superfluous, void, or insignificant, if by any other construction they may all be made useful and pertinent’; 42 ■ construing a provision on the prima facie basis that ‘it is intended to give effect to harmonious goals’; 43 ■ considering the relevant ‘legislative history, admissible parliamentary materials and background documents, such as law reform reports’ (in this case, ALRC Report No 20);44 and ■ identifying ‘the general purpose and policy of a provision, in particular the mischief it is seeking to remedy’.45 6.19 Nevertheless, as this chapter’s epigraphs suggest, the overall purpose of the legislation is not determinative of the meaning of a particular provision. As Spigelman CJ (dissenting) said in Victims Compensation Fund v Scott Brown:46 … the respondent submitted that the purpose was to compensate victims. Even if I were to accept a legislative purpose stated at that level of generality, that would not entail that
any ambiguity must be construed in such a way as to maximise compensation … In any event, the very specificity of the provisions of the legislation indicate that the legislative purpose is to provide compensation in accordance with the Act and not otherwise.
In MyEnvironment v VicForests,47 Warren CJ said similarly (at [16]): … even when a single, or significant, legislative purpose can be clearly perceived, such a purpose may be articulated at a level of generality that makes it unhelpful when construing a particular provision which manifests a more specific legislative intent.
6.20 In CIC Insurance Ltd v Bankstown Football Club Ltd,48 Brennan CJ, Dawson, Toohey and Gummow, JJ described the task in the following terms (at 408): It is well settled that at common law, apart from any reliance upon s 15AB of the Acts Interpretation Act 1901 (Cth), the court may have regard to reports of law reform bodies to ascertain the mischief which a statute is intended to cure. Moreover, the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise,
[page 119] and (b) uses ‘context’ in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy … Instances of general words in a statute being so constrained by their context are numerous. In particular … if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent.
Having regard to the common law purposive approach to the construction of a statute, it will usually not be necessary to rely on s 15AB(2) of the Acts Interpretation Act 1901 (Cth) for the use of extrinsic materials in determining the meaning of a provision of a Commonwealth statute such as the ICA.
Some pointers to construction of a provision of the ICA 6.21
The ICA is not a codification of the common law relating to
insurance contracts at the time of its enactment. It is remedial legislation and should therefore be construed: ‘in a manner that gives effect to the remedy and secures the result which it is the purpose of the legislation to achieve’;49 and ‘so as to give the most complete remedy which is consistent “with the actual language employed” and to which its words “are fairly open”’.50 In particular, if there is a choice between a narrow or literal reading of the ICA and a reading that protects the insured, a court should prefer the latter construction.51
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6.22 As the ICA is remedial legislation, the state of the common law immediately before it came into effect is of limited assistance in construing the ICA.52 Nevertheless, knowledge of the common law is invaluable for a general understanding as to why the ICA invokes particular concepts and why it uses particular terminology. For example, the common law notion of non-disclosure in the insurance context uses terms such as ‘material facts’ and ‘prudent insurer’. As that part of the ICA that deals with non-disclosure (Pt IV) does not use those terms, their meaning is not directly relevant to a construction of the provisions of Pt IV. [page 120] But knowledge of the common law meaning of those terms helps to understand what the drafters of those provisions were trying to leave behind and what they were trying to achieve. 6.23 Most of the important words or phrases used by the ICA are defined in s 11. Other definitions appear in the Acts Interpretation Act 1901 (Cth). Definitions are almost invariably an aid to the construction of the substantive provisions of the ICA — not substantive rules themselves.53 The appropriate course is to read the definition into the relevant provision of the ICA and then construe the provision. 54 In the absence of an ICA definition, there is a weak presumption,
easily overridden by context, that a word, phrase or expression in the ICA should be given the same meaning throughout the ICA.55 A court cannot use the Insurance Contracts Act Regulations 1985 (Cth) to construe a provision of the ICA.56 6.24 Whether the facts of a case fall within a provision of the ICA is a question of law. Whether a word or phrase in the provision is to be understood in its ordinary sense or otherwise is also a question of law. If a word or phrase is to be read in its ordinary sense, then the meaning of the word or phrase is a question of fact.57 6.25 The doctrine of judicial precedent obliges a court to follow a decision of a higher court in the same judicial hierarchy. Although a court of an Australian state or territory is not bound by a decision of a court in another state or territory or by a decision of the Federal Court, it should follow a decision by a state, territory or federal intermediate appellate court on the interpretation of the ICA unless it is ‘convinced that the interpretation is plainly wrong’.58
Balancing the interests of the insurer and the insured 6.26 For hundreds of years, insurers developed their policy wordings with one eye on profit and the other on the competition. The insured was simply the person that funded that venture. This led to a seriously skewed, and common law supported, allocation of rights and obligations in insurance contracts in favour of insurers, who were allowed to indulge [page 121] their interest by drafting almost incomprehensible policy wordings with a view to keeping claim payouts to a minimum. The ICA was introduced to try and achieve a fairer balancing of the interests of: the insured, who, for the lowest possible premium, would like to
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be indemnified for every financial loss suffered as a result of a fortuitous event; and the insurer, who, year in and year out, wants to collect sufficient premium to pay all claims and make a good profit for its shareholders. The ICA made radical changes to the common law for the purpose of achieving that balance. Construction of the provisions of the ICA generally, and proposed changes to any of them, should bear in mind the need to preserve or achieve that balance, having regard to everyone’s interest in seeing insurers stay profitable and in business.
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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.
13.
14. 15.
16. 17.
Western Australia v The Commonwealth [1975] HCA 46; (1975) 134 CLR 201 at [6] (Stephen J). Rodriguez v United States 480 US 522 (1987) at 525–6. Articulated by Adam Smith in the Wealth of Nations (published 1776) and other writings. Translated into English by the late New Zealand-born Australian comedian John Clarke as ‘leave it to the fairies’. See, for example, the preamble to 43 Eliz c 12 enacted in 1601 (Chapter 3). Australian Health Insurance Association Ltd v Esso Australia Ltd [1993] FCA 376; (1993) 7 ANZ Ins Cas 61-195 at [28] (Black CJ). Norsworthy and Encel v SGIC [1999] SASC 496 at [35] (Olsson J). Bonython v Commonwealth [1950] HCA 37; (1950) 81 CLR 486 at [25] (Lord Simonds). Akai Pty Ltd v The People’s Insurance Company Ltd [1996] HCA 39; (1996) 188 CLR 418 at 437 (Toohey, Gaudron and Gummow JJ). Akai Pty Ltd v The People’s Insurance Company Ltd (see fn 9) at 437 (Toohey, Gaudron and Gummow JJ). [1996] HCA 39; (1996) 188 CLR 418. Akai Pty Ltd v The People’s Insurance Company Ltd (see fn 9) at 437 (Toohey, Gaudron and Gummow JJ); Quinlan v Safe International Försäkrings AB [2005] FCA 1362 at [49] (Nicholson J). Akai Pty Ltd v The People’s Insurance Company Ltd (see fn 9) at 437 (Toohey, Gaudron and Gummow JJ); Incitec Ltd v Alkimos Shipping Corporation [2004] FCA 698; (2004) 206 ALR 558 at [42]–[43] (Allsop J). Akai v PICC [1998] 1 Lloyd’s Rep 90. R v Cohen; Ex parte Motor Accidents Insurance Board [1979] HCA 46 at [24]; (1979) 141 CLR 577; Bayswater Car Rental Pty Ltd v Hannell [1999] WASCA 34; (1998–9) 10 ANZ Ins Cas 61-437. See fn 15. Proceedings contrary to s 15 are liable to be struck out as soon as they are commenced:
18.
19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38.
39. 40.
41.
Australian Competition and Consumer Commission v IMB Group Pty Ltd [2002] FCA 402; (2003) 12 ANZ Ins Cas 61-545 at [105] (Drummond J). The s 15 exemption applies where a contract contains provisions that operate unconscionably on a party to a contract or where the contract was concluded in circumstances involving unconscionable conduct by a party to the contract: Australian Competition and Consumer Commission v IMB Group Pty Ltd (see fn 17) at [110] (Drummond J). [1991] 1 VR 401. Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33; (2014) 252 CLR 590. Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25; Watkins Syndicate 0457 at Lloyds v Pantaenius Australia Pty Ltd [2016] FCAFC 150. Watkins Syndicate 0457 at Lloyds v Pantaenius Australia Pty Ltd (see fn 21) at [41]. Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 at [22] (Mason CJ, Dawson, Toohey and Gaudron JJ). Lacey v Attorney-General of Queensland [2011] HCA 10; (2011) 242 CLR 573 at [43]. Northern Territory v Collins [2008] HCA 49; (2008) 235 CLR 619 at [16] (Gummow ACJ and Kirby J). VBAS v Minister for Immigration & Multicultural & Indigenous Affairs [2005] FCA 212 at [20] (Crennan J). Allianz Australia Insurance Ltd v GSF Australia Pty Ltd [2005] HCA 26; (2005) 221 CLR 568 at [41]–[42] (McHugh J). [2012] HCA 55; (2012) 293 ALR 257 at [39]. [2012] HCA 56; (2012) 248 CLR 378. Bropho v Western Australia [1990] HCA 24; (1990) 171 CLR 1 at [16]; Palgo Holdings Pty Ltd v Gowans [2005] HCA 28; (2005) 221 CLR 249 at [40] (Kirby J). Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation [1981] HCA 26; (1981) 147 CLR 297 at [25] (Mason and Wilson JJ). Saraswati v R [1991] HCA 21; (1991) 172 CLR 1 at [8] (McHugh J). Saraswati v R (see fn 32) at [8] (McHugh J). Saraswati v R (see fn 32) at [8] (McHugh J). [1997] HCA 53; (1997) 191 CLR 85. Northern Territory v Collins (see fn 25) at [16] (Gummow ACJ and Kirby J). Lacey v Attorney-General of Queensland (see fn 24) at [44]. Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at [4] (French CJ) at [47] (Hayne, Heydon, Crennan and Kiefel JJ); Asset Insure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) [2006] HCA 13; (2006) 225 CLR 331 at [87] (Kirby and Hayne JJ). Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (see fn 38) at [47] (Hayne, Heydon, Crennan and Kiefel JJ). CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 at 634–5 (Brennan CJ, Dawson, Toohey and Gummow JJ); Certain Lloyd’s Underwriters v Cross [2012] HCA 56; (2012) 248 CLR 378 at [23]–[24], [69] and [88]. Project Blue Sky v Australian Broadcasting Association [1998] HCA 28; (1998) 194 CLR
42. 43. 44. 45. 46. 47. 48. 49. 50.
51. 52. 53. 54. 55. 56. 57. 58.
355 at [69]. Project Blue Sky Inc v Australian Broadcasting Authority (see fn 41) at [71] (McHugh, Gummow, Kirby and Hayne JJ). Project Blue Sky Inc v Australian Broadcasting Authority (see fn 41) at [70] (McHugh, Gummow, Kirby and Hayne JJ). AssetInsure Pty Ltd v New Cap Reinsurance Corporation Ltd (in liq) (see fn 38); Lacey v Attorney-General of Queensland (see fn 24) at [44]. Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (see fn 39) at [47] (Hayne, Heydon, Crennan and Kiefel JJ). [2002] NSWCA 155 at [10]. [2013] VSCA 356. [1997] HCA 2; (1997) 187 CLR 384. Minister for Immigration and Border Protection v Kumar [2017] HCA 11 at [72] (Gageler J). Khoury v Government Insurance Office (NSW) [1984] HCA 55; (1984) 165 CLR 622 at [29] (Mason, Brennan, Deane and Dawson JJ) (a case concerning the construction of s 18 of the Insurance Act 1902 (NSW)). FAI General Insurance Company Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641 at [50] (Kirby J). Advance (NSW) Insurance Agencies Pty Ltd v Matthews (see fn 23) at [22] (Mason CJ, Dawson, Toohey and Gaudron JJ). Allianz Australia Insurance Ltd v GSF Australia Pty Ltd [2005] HCA 26; (2005) 221 CLR 568 at [12] (McHugh J). Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 at [103] (McHugh J). McGraw-Hinds (Aust) Pty Ltd v Smith [1979] HCA 19; (1979) 144 CLR 633 at 643 (Gibbs J). Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd [2010] HCA 9; (2010) 240 CLR 444 at [21]. Hope v Bathurst City Council [1980] HCA 16; (1980) 144 CLR 1 at [10]–[12] (Mason J). Farah Constructions Pty Ltd v Say-dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [135]; Australian Securities Commission v Marlborough Gold Mines Ltd [1993] HCA 15; (1993) 177 CLR 485 at [4].
[page 123]
PART 2 Period Leading up to and Including the Formation of an Insurance Contract
[page 125]
Chapter 7 UTMOST GOOD FAITH I construct lines and color combinations on a flat surface, in order to express general beauty with the utmost awareness.1 The principle of uberrimae fides is a curious animal: arising from an indefinite source, with an undetermined content, and appl[ies] to a small (but nonetheless uncertain) range of situations.2
INTRODUCTION This chapter discusses ‘utmost good faith’ under the following headings: do all contracts have to be performed in good faith? Is there a tort of bad faith? utmost good faith at common law; and utmost good faith under the Insurance Contracts Act 1984 (Cth) (ICA). Insurance contracts hold a special place in the law of contract because they are not like most other contracts; they are contracts of utmost good faith (uberrimae fides).3 This means that insurer and insured are held ‘to a standard of utmost good faith in their dealings with each other’.4 Utmost good faith manifests itself pre-contractually in the duty of disclosure. That is dealt with in Chapter 8. It also controls insurer and insured in their performance of the contract. The extent to which utmost good faith does that at common law is not settled.
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[page 126]
DO ALL CONTRACTS HAVE TO BE PERFORMED IN GOOD FAITH? IS THERE A TORT OF BAD FAITH? 7.1 Most civil law codes require contracts to be performed in good faith. In the United States of America (USA) (a series of common law jurisdictions apart from Louisiana): the Uniform Commercial Code (UCC), a model code adopted by every state of the USA (with minor variations from state to state), requires the listed commercial contracts (including sale agreements, leases and negotiable instruments) to be performed with good faith (see, for example, Art 203); and section 205 of the American Law Institute’s Restatement (Second) of Contracts 1981 states that ‘[e]very contract imposes on each party a duty of good faith and fair dealing in its performance and its enforcement’.
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7.2 In England (a common law jurisdiction), there is no general common law requirement that contracts be formed or performed in good faith.5 It is the same in Canada6 (a common law jurisdiction, apart from Quebec, which is a civil code Province)7. In New Zealand (a common law jurisdiction), there have been murmurs about a general common law requirement that contracts be performed in good faith,8 but the murmurs have remained just that. 7.3
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In Australia (a common law jurisdiction), there is no: general common law requirement that contracts be performed in good faith.9 However, a term that the parties to a commercial contract will perform it in good faith might be implied, depending on ‘the particular contractual provision in question, the particular contract, [and] the particular circumstances of the case’.10 The scope
[page 127]
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of an implied term will depend on its context and on the particular contract;11 or duty in the law of tort to act in good faith.12 Accordingly, unlike in the USA, it is not possible to sue in tort for damages for bad faith by an insurer or by anyone else.
UTMOST GOOD FAITH AT COMMON LAW 7.4 Generally speaking, the common law requires insurer and insured, as an incident of their relationship,13 to deal with each other with the utmost good faith. This concept does not derive ‘from civil law and … has been regarded as unnecessary in civilian systems’.14 7.5 The requirement in civil law countries and in the USA that contracts be performed in good faith probably partly explains why, in those parts of the world, the pre-contractual requirement that the insurer and the intending insured deal with each other in good faith attracts far more attention than the post-contractual requirement that insurer and insured do so. On the other hand, the absence of a general common law requirement in Australia, England and Canada (apart from Quebec) that contracts be performed in good faith explains why, in these common law jurisdictions, utmost good faith is fundamentally important to the insurer/insured relationship pre- and post-contractually. 7.6 There is no universally accepted definition of ‘good faith’ across or between civil and common law jurisdictions. Nevertheless, it seems that in civil law jurisdictions, post-contractual ‘good faith’ gives rise to an obligation on the parties to act ‘fairly’. In common law jurisdictions (other than the USA), the pre- and post-contractual standard of dealing
in relation to an insurance contract is ‘utmost good faith’, not just ‘good faith’.
Utmost good faith generally 7.7 Utmost good faith is a feature of all types of insurance, not just marine insurance.15 [page 128] 7.8 In 1828, Story J described utmost good faith as ‘enlightened moral policy’.16 Almost 200 years later, McKeown J said its precontractual aspect: was grounded both in morality and efficiency; insureds were considered morally obligated to disclose all information material to the risk the insurer was asked to shoulder, but such a principle was also an economic necessity where insurers had no reasonable means of obtaining this information efficiently, without the ubiquity of telephones, email, digital photography, and air travel.17
7.9 Utmost good faith as the distinctive feature of an insurance contract can be traced back to the seminal case of Carter v Boehm,18 a case decided when: … the world was a little different. It was a simpler if not, in some respects, a gentler place. The business of insurance was very different. Then, policies of insurance were issued most frequently to cover a vessel, or its cargo. The contract was issued for the benefit of the insured. It was the owner as insured who would have the detailed knowledge of the vessel or its cargo. No one would know better than the owner of the incipient dry rot or the tendency of the ship to take on water in a fresh breeze. This was knowledge that the insurance company could not readily attain and it was appropriate to relieve the insurer of all responsibility for obtaining it. That principle held true in 1766. It can hold true today where the policy is for the exclusive benefit of the insured. However, I do not think it should be applicable to the situation presented in this case … The [compulsory liability insurance held by a commercial air carrier] is primarily for the benefit of the flying public and not for the air carrier. If it can be so readily frustrated by the automatic application of principles enunciated by a court two hundred years ago in a different time and circumstances then the law seems grossly unfair.19
7.10 Carter v Boehm concerned a marine insurance policy Deputy Governor Roger Carter took out against the risk of loss of private
goods he kept at his headquarters, Fort Marlborough, a trading settlement designed to withstand attacks by the native tribes of Sumatra.20 The fort was taken by a French privateering expedition led by the Count D’Estaing. Carter made a claim on his policy for the loss. The insurer, Charles Boehm, denied indemnity on the basis that Carter’s failure to disclose the vulnerability of the fort to attack by European forces constituted material concealment. Lord Mansfield found for Carter, saying that Boehm probably knew more than Carter about the chances [page 129] that European forces might attack the fort and could have easily found out about the condition of the fort if he had wanted to do so. In doing so, Lord Mansfield described the doctrine of good faith in the following passage (at ER 1164), which is likely to be cited, often in full, whenever discussion turns to utmost good faith in the insurance law context: First. Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risqué, as if it did not exist. The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risqué run is really different from the risqué understood and intended to be run, at the time of the agreement. The governing principle is applicable to all contracts and dealings.21 Good faith forbids either party by concealing what he privately knows to draw the other into a bargain, from his ignorance of that fact and his believing the contrary.
Amongst other things, Lord Mansfield’s judgment established the following common law propositions:
■an insurance contract is based on utmost good faith; ■utmost good faith requires pre-contractual disclosure of material ■
facts by insured and insurer; and avoidance of an insurance contract is the only remedy available to an innocent party for another party’s failure to discharge its precontractual duty of disclosure.
7.11 Lord Mansfield spoke only of ‘good faith’. The first reference in the law books to ‘utmost good faith’ in the insurance context appears in the late 18th-century case Wolff v Horncastle,22 in which Buller J (Lord Mansfield’s protégé) said: From the language of the two statutes, as well as the consideration that we are construing a contract uberrimae fide; viz. a policy of insurance, we must avoid bearing harder upon the Plaintiffs than is absolutely necessary.
The formulation ‘utmost good faith’ found a solid base in s 17 of the Marine Insurance Act 1906 (UK) (replicated in s 23 of the Marine Insurance Act 1909 (Cth)), a codification of marine insurance law at the [page 130] time of its enactment. Sir Mackenzie Chalmers drafted the Digest upon which the 1906 Act was based. 7.12 The adjective ‘utmost’ connotes ‘the most extensive, rather than the greatest, good faith’.23 It is used in the same way as it is used in the sentence ‘They explored the Swan River to its utmost reaches’, or as Piet Mondrian used it in one of this chapter’s epigraphs, as connoting the highest level of sensitivity. In this sense, ‘utmost’ requires insurer and insured to deal with each other in good faith to the limit they can, as far and as best as they can, to the nth degree, and so on. Or, put another way, that insurer and insured be scrupulously open, honest and fair with the other. Until a court concludes that a party before it has acted in good faith, but not with the utmost good faith, we will continue to speculate about whether the adjective ‘utmost’ has any real work to do.
Utmost good faith pre-contractually 7.13 When an intending insured approaches an insurer about the possibility of taking out insurance, they usually know far more about the risk to be transferred than the insurer. On occasions, an insurer knows something about the risk an intending insured does not know.24 7.14 Pre-contractually, utmost good faith manifests itself as the duty of disclosure. The general common law principle caveat emptor (buyer beware) has no role to play in insurance law. The duty of disclosure operates as a legal mechanism to achieve a ‘true and fair agreement for the transfer of risk’ by requiring the insurer and the intending insured to exchange material information about the risk before they decide to transfer it.25 In particular, it requires each of them to: disclose to each other information known to them which is material to the risk to be transferred; and not misrepresent information material to the risk to be transferred. See Chapter 8 for the content of the pre-contractual duty of disclosure.
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7.15 The only remedy for a breach of the duty of disclosure is avoidance of the contract from the beginning.26 Damages are not available, because the ‘common law imposes [the obligation] as an incident of the [page 131] relationship between the parties to the insurance transaction’, not as an implied term of the contract.27
Utmost good faith post-contractually Generally 7.16
There is no doubt that utmost good faith requires insurer and
insured to deal with each other openly, honestly and fairly in their performance of the contract, with due regard for their own interests and for the legitimate interests of the other.28 In Orakpo v Barclays Insurance Services Co Ltd,29 Hoffmann LJ (at 383) explained the reason for this: I do not see why the duty of good faith on the part of the assured should expire when the contract has been made. The reasons for requiring good faith continue to exist. Just as the nature of the risk will usually be within the peculiar knowledge of the insured, so will the circumstances of the casualty; it will rarely be within the knowledge of the insurance company. I think that the insurance company should be able to trust the assured to put forward a claim in good faith.
The issues are as to the scope of that requirement and an innocent party’s remedy if it is not met. 7.17 The utmost good faith requirement of open, honest and fair dealing does not work pre-contractually in the same way as it does postcontractually30 because: pre-contractually the requirement is directed to the insurer and the intending insured; post-contractually it is directed to the insurer and the insured (the insured will usually be the intending insured, but may include others intended to benefit by the contract); pre-contractually utmost good faith is concerned with achieving a ‘true and fair agreement for the transfer of risk’; post-contractually it is not (the risk having already transferred);31 and avoidance of the contract from the beginning is an appropriate remedy for a pre-contractual failure to act openly, honestly and fairly; post-contractually it is not.32
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[page 132]
Utmost good faith in the performance of the contract 7.18 At common law, utmost good faith manifests itself postcontractually in obligations on the part of: an insured to be open, honest and fair with its insurer in relation to the making of claims, perhaps including an insured’s duty to take
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reasonable steps to try to avoid or mitigate an insured loss33; and an insurer to be open, honest and fair with its insureds in relation to: ■ the handling of claims; ■ exercising a discretion under the insurance contract, for example in deciding whether an insured is totally and permanently disabled under a policy which defines ‘total and permanent disablement’ in terms requiring the insurer to be satisfied that is the case. In The Distillers Company Biochemicals (Australia) Pty Ltd v Ajax Insurance Company Ltd,34 Stephen J said in the context of claims handling (at [53]–[54]) that good faith required an insurer to have regard to an insured’s interests when deciding whether to accept or reject an offer of settlement by a third party, if to do either would leave the insured with an uninsured liability. In the former case, that will be so if the settlement amount will exceed the policy limits and, in the latter, if the action can be settled for an amount within the policy limits and an adverse judgment might exceed the policy limits. In the latter, it is in the insured’s interests that the action settle, but as noted by Craig Brown in Insurance Law in Canada:35
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… the insurer may consider it to be in its own interest to let the matter go to court, calculating that the case is winnable by the defence. An insurer must resolve this dilemma with care. If it guessed wrong and loses the case and the damages exceed the policy limits, it may have to pay the full amount despite the limits. The test to be used is whether the insurer gave at least equal consideration to the customer’s interest as it did its own interest. In practice, insurers seek to meet this standard by obtaining independent legal advice on whether a case is winnable or what damages are likely to be awarded.
7.19 Utmost good faith is straightforward insofar as it requires each of the parties to be open and honest with each other. So, for example, it obliges an insured to: be full and frank with its insurer about a claim on the policy36 or a notification of circumstances that might give rise to a claim on the policy, and about: ■ the circumstances giving rise to the claim or notification;37 and
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[page 133]
■ any subsequent change in circumstances or discovery of information that an insured knows, or a reasonable insured would think, the insurer might like to know about for the purpose of dealing with the claim; respond promptly to an insurer’s reasonable request for cooperation, information or documentation relevant to the insurer’s handling of a claim on the policy. Similarly, it obliges an insurer to be full and frank with its insured about: its handling of a claim or notification of circumstances; the reasons for its decision to reject a claim or not accept a notification of circumstances (if that is its decision); the reasons for its decision to pay its insured less than what the insured is claiming (if that is its decision); and the progress of a subrogated claim or the defence of a third party claim it is conducting in the insured’s name.38 There are limits to the requirement to act ‘openly’. For example, although an insurer must explain to an insured why it has decided to decline a claim, it is not obliged in a litigated dispute with the insured about the declinature to give the insured access to documents relevant to its decision and over which the insurer is entitled to claim client legal privilege (unless it waives that privilege).39
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7.20 Similarly, it seems reasonably clear that post-contractually, utmost good faith requires an insurer to act or deal ‘fairly’ with the insured, in particular to: promptly investigate and fairly consider a claim on the policy or notification of circumstances;40 take care with who it appoints to investigate a claim if it decides to outsource an investigation;41 promptly make, and communicate to the insured, a decision about whether or not to pay a claim and to promptly pay a claim (if that
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is what it has decided to do);42 [page 134]
■have
due regard to the insured’s interests when exercising a discretion given to it by the policy; (in relation to a liability policy) have due regard to the insured’s interests when deciding whether to settle a claim against the insured or fight it, particularly if doing one or other risks leaving the insured with an uninsured exposure; have due regard to the insured’s interests when deciding whether to take a legal point or waive a right or entitlement that would affect its liability to pay a claim on the policy or the extent of such a payment; and suggest to the insured that it get independent legal advice if the insurer intends to take a step that might leave the insured with an uninsured exposure. The ‘fairness’ requirement does not oblige either party to ‘surrender any commercial advantage which they may seek to take advantage of during negotiations in favour of the other party’.43 Nor does it require an insurer to inform its insured when their claim against the insurer might become statute barred.44
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The innocent party’s remedy 7.21 Avoidance is not an appropriate remedy for a post-contractual failure to act openly, honestly and fairly, because such a failure cannot retrospectively undermine the basis on which the contract was made (although it might be sufficient to support a termination of the contract for the future). If the source of the post-contractual requirement to act openly, honestly and fairly is an implied term of an insurance contract, then all the normal contractual remedies for a breach of it are available, including damages. Although that has been suggested as a possibility,45
it is probably not the common law position in Australia, at least in relation to pre-contractual disclosure.46 If it was, it would open up the possibility of the parties expressly agreeing that it is not a term of the contract. 7.22 If avoidance of the contract from the beginning, and damages are inappropriate or unavailable remedies or are of limited value, in many [page 135] circumstances an appropriate remedy for another person’s postcontractual failure to act openly, honestly and fairly might be: a declaration that the impugned conduct simply does not achieve the other person’s desired purpose; an order requiring the other person to act in a particular way if not to do so would be a failure by the other person to act openly, honestly and fairly; or an order preventing the other person from acting in a particular way if to do so would be a failure by the other person to act openly, honestly and fairly.47
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7.23 The adverse consequences for an insurer that exercises a right under the contract without due regard for the insured’s legitimate interests is illustrated by Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd.48 Nigel Watts concerned an insurance contract entered into for the purposes of a law relating to workers’ compensation. That law required Nigel Watts to insure for its workers’ compensation and common law liability to its workers. Accordingly, the contract was governed by the common law, not by the ICA.49 The injured worker was a director of and shareholder in his employer, Nigel Watts, which was insured with GIO. He sued the occupier of a building for injuries suffered when entering a lift in the building. The occupier sought from Nigel Watts:
■a contribution towards its liability to the worker, on the basis that
it negligently contributed to the worker’s injuries; and an indemnity, pursuant to a contractual indemnity in the lease of the building made between the occupier and Nigel Watts. The contribution claim was covered by the insurance contract; the indemnity claim was not. GIO instructed lawyers to conduct the defence of the third party proceedings for Nigel Watts. Neither the insurer nor the lawyers told Nigel Watts that the GIO policy covered it for the contribution claim but not the indemnity claim. At trial, the court dismissed the contribution claim and allowed the indemnity claim. GIO declined to cover Nigel Watts for the indemnity claim. The New South Wales Court of Appeal held that GIO was estopped from denying cover to Nigel Watts for the indemnity claim. Kirby P said (at 75,643):
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The reality of the present case would appear to be that neither party, nor any of those acting for them, turned their attention to the problem which
[page 136] is now presented. At least none did until virtually the very last moment. Only then did the problem loom up as an unexpected iceberg in a dark litigious sea. Had only the parties turned their attention to the pleading of the third party notice and the terms of the insurance policy, comparing one to the other, the correct course would have been obvious … The insurer’s legal representatives may, by the contract, have the carriage of the proceedings. But that entitlement does not absolve them from their duties as legal practitioners acting in a particular interest. Nor does it absolve the insurer of the obligation of good faith to the insured and specifically the obligation to avoid the giving of instructions to the solicitors which would involve a conflict of interest and duty.
Kirby P went on to say that utmost good faith required GIO to be open in its dealings with Nigel Watts, in particular to inform Nigel Watts that: the GIO policy covered the contribution claim but not the indemnity claim; Nigel Watts was not covered to the extent it was held liable for the indemnity claim for an amount in excess of its liability for the
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contribution claim; and the risk to Nigel Watts of not being fully covered for the occupier’s claims meant it should get independent legal advice on how to proceed in the action. Kirby P said that if Nigel Watts had obtained independent legal advice, it might have persuaded the worker to abandon his common law claim and instead pursue his rights under the Workers Compensation Act 1987, or try to settle his workers’ compensation and common law claims at the same time. In this way, the worker would not be left in the position of having secured a common law judgment against an uninsured Nigel Watts. Nigel Watts also lost the opportunity to decide for itself whether to contribute towards settlement of the worker’s claim before trial. As Handley JA noted, at one stage of the settlement negotiations the parties were only just over $5,000 apart, and if Nigel Watts had been involved in the negotiations and known it was not covered for the indemnity claim, it might have contributed this amount to achieve a settlement. If the case had been dealt with on the basis of utmost good faith rather than estoppel, it might have simply resulted in an order preventing GIO from denying indemnity on the basis that its denial was tainted by its failure to act openly, honestly and fairly in the way described by Kirby P.
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When does utmost good faith cease to operate? 7.24 Utmost good faith ceases to operate in relation to a claim on an insurance policy when insurer and insured embark on litigation to [page 137] determine the insured’s rights in relation to that claim.50 At that time, the rules of court take over, although utmost good faith might influence the court in the exercise of any relevant discretion.51 In Nelson
Marketing International Inc v Royal & Sun Alliance Insurance Company of Canada,52 the trial judge put it this way (at [229]): … once the parties are in litigation, the principle of law requiring utmost good faith, in large measure, is subsumed into the regulatory scheme of the litigation process.
7.25 Utmost good faith probably continues to apply in relation to a particular claim on a liability policy after an insurer has denied coverage, having regard to the need for any dispute between the insured and a third party to be conducted and managed with due regard to the interests of insurer and insured.53 The fact that a claim is disputed does not affect the requirement to act openly, honestly and fairly in respect of other claims or other aspects of the insurance contract.
The parties to an insurance contract are not normally in a fiduciary relationship 7.26 In a fiduciary relationship, the party with the fiduciary obligations is required to act altruistically; to subordinate its own interests or prefer the interests of another party to the contract to its own; and to give the other party the ‘single-minded loyalty of his fiduciary’.54 Although utmost good faith requires an insurer to have regard for the legitimate interests of others in its performance of the contract; it does not oblige the insurer to prefer anyone else’s interests to its own, as the normal insurance relationship arises out of a commercial arm’s-length contract. Insurer and insured are not in a fiduciary relationship55 unless specific circumstances call for the imposition of such a duty.56 [page 138]
Exemplary or punitive damages for a failure to act openly, honestly and fairly 7.27
In Canada and New Zealand, courts will award exemplary or
punitive damages for extreme cases of an insurer’s failure to act openly, honestly and fairly.57 Australian courts award exemplary or punitive damages for an independent or separate tort.58 As a failure to act openly, honestly and fairly in relation to an insurance contract is not a tort in Australia,59 exemplary or punitive damages will not be awarded for a failure to do so.
UTMOST GOOD FAITH UNDER THE ICA Sections 12, 13 and 14 7.28 The ICA Part II — The Duty of the Utmost Good Faith makes utmost good faith an implied term of an insurance contract: s 13. Part II is not limited by any other provisions of the Act or any other law, and does not impose on an insured a general duty of disclosure (before or after the making of the contract) other than the duty of disclosure described in s 21: s 12. This allows for the possibility that the statutory utmost good faith might require more from an insurer than the general duty of disclosure at common law might require (although it is not clear what that might be). 7.29 An insurance contract to which the ICA applies is based on utmost good faith, and there is an implied term in the contract that requires each of the parties to it and third party beneficiaries (TPBs)60 to act towards each other with the utmost good faith ‘in respect of any matter arising under or in relation to’ the contract: s 13. The implied term only applies to TPBs after the contract is made: s 13(4). Section 13 does not say what ‘utmost good faith’ means, and so resort must be had to the common law for its meaning as used in Part II. 7.30 The leading case on s 13 is CGU Insurance Ltd v AMP Financial Planning Pty Ltd.61 In this complex case, the High Court dismissed
AMP’s claim that because of CGU’s involvement in AMP’s settlement of investors’ claims and the way in which it handled AMP’s claim for [page 139] indemnity under the CGU professional risks policy, statutory utmost good faith required CGU to indemnify it against the payment of those settlement moneys (amongst other things, without AMP proving the settlements were objectively reasonable). In the course of their judgment, Gleeson CJ and Crennan J accepted (at [15]): … the wider view of the requirement of utmost good faith adopted by the majority in the Full Court, in preference to the view that absence of good faith is limited to dishonesty. In particular, we accept that utmost good faith may require an insurer to act with due regard to the legitimate interests of an insured, as well as to its own interests. The classic example of an insured’s obligation of utmost good faith is a requirement of full disclosure to an insurer; that is to say, a requirement to pay regard to the legitimate interests of the insurer. Conversely, an insurer’s statutory obligation to act with utmost good faith may require an insurer to act, consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. Such an obligation may well affect the conduct of an insurer in making a timely response to a claim for indemnity.[citation omitted].
Put another way, s 13(1) requires the parties to an insurance contract and third party beneficiaries to act openly, honestly and fairly in their dealings with each other in the performance of the contract, each with due regard for their own interests and for the legitimate interests of the others. The words ‘in relation to’ in s 13 are of wide import62 and arguably extend the duty of the parties to the contract and TPBs beyond the reach of common law utmost good faith. A breach of the term implied by s 13 is a breach of contract and a breach of the ICA: s 13(2). It is not an offence against the ICA. Section 13(1) does not create a statutory duty.63 Accordingly, a breach of the implied term is not a breach of a statutory duty. 7.31
In Bonner v Cox,64 Waller LJ said (at [105]):
There is nothing wrong in taking advantage of an advantageous contract.
That might not be the case in Australia65, but whatever the common law position, s 14 of the ICA prevents an insurer from relying on a provision of an insurance contract if it would be a failure to act with the utmost good faith to do so. In deciding whether there has been a [page 140] failure, a court will have regard to any notification of the provision by the insurer: s 14(3).
Remedies for a failure to act with the utmost good faith A contract of insurance buys an insured ‘peace of mind’66 rather than commercial advantage. 7.32 Damages for breach of the term implied by s 13(1) of the ICA are available67 and are assessed in the way contractual damages are normally assessed, including the rule in Hadley v Baxendale.68 The rule in Hadley v Baxendale states that the plaintiff is entitled: to recover such damages as arise naturally, that is, according to the usual course of things, from the breach of contract, or such damages as may reasonably be supposed to have been in the contemplation of both parties concerned at the time they made the contract as the probable result of the breach.69
So, for example, in Highway Hauliers Pty Ltd v Matthew Maxwell,70 Corboy J awarded the insured damages for loss of profits as a consequence of the insurer’s wrongful refusal to indemnify the insured against the cost of repairing or replacing two of its prime movers and trailers damaged in separate accidents. In Sudesh Sharma v Insurance Australia Ltd t/as NRMA Insurance, the insured claimed the insurer’s failure to act with the utmost good faith by promptly admitting his insurance claim caused him to injure himself by falling off a ladder. He said he would not have been on the ladder but for the insurer’s breach. The Court of Appeal of New South Wales quickly dispatched that claim to the boundary.71
7.33 If an innocent party cannot prove financial loss as a result of another party’s breach of contract, the court will award nominal damages.72 The purpose of such an award is vindicatory.73 It is for a [page 141] breach of contract rather than for the consequences of a breach. It is recognition that a wrong has been done.74 At the very least, a court will award nominal damages for breach of the duty of utmost good faith. Achieving an award of nominal damages after a trial is likely to be a pyrrhic victory. That is because a nominal damages award will usually be accompanied by an order that the party awarded nominal damages pay the other side’s costs (assuming that is the only damages recovered by the innocent party). This is what happened in Mappouras v Waldrons Solicitors,75 in which the Court of Appeal awarded the claimant £15 by way of nominal damages and ordered him to pay the defendant’s trial and appeal costs. 7.34 The general rule is that damages for disappointment and distress are not recoverable in an action for damages for breach of contract, except, for example, where ‘the very object of the contract has been to provide pleasure, relaxation or freedom from molestation’.76 Certain types of insurance contract have as their object an insured’s peace of mind, 77 for example ‘personal lines’ insurance contracts.78 7.35 An insurer must contemplate that an insured might suffer distress, anguish and inconvenience if they have: a) insured their home, their home is destroyed and the insurer does not promptly pay the claim; 79 b) an income protection policy, they become totally disabled and the insurer does not promptly pay the benefits under the policy for total disablement.80 7.36
A court may award an insured damages for emotional distress
arising out of an insurer’s failure to pay a claim even if the insured has not sought medical treatment for the distress.81 [page 142] A number of propositions may be drawn from the above: a ‘natural person’ insured can claim damages for disappointment and distress for breach of a ‘personal lines’ insurance contract, as this is obviously insurance an insured takes out for ‘peace of mind’;82 an insured’s claim for damages for disappointment and distress will usually be triggered by an insurer’s declinature or delay in making a decision on indemnity. In these circumstances, it is not clear whether the claim for damages is for breach of the duty of utmost good faith or for the insurer’s failure to pay the claim within a reasonable time or at all; medical evidence is not necessary to prove disappointment and distress but it would probably help; and an award of damages for disappointment and distress is likely to be modest. Perhaps enough to buy you a cappuccino a day at your local cafe for the next few years. It is an open question whether: a corporate insured is entitled to an award of damages for disappointment and distress; or a ‘natural person’ insured is entitled to an award of damages for disappointment and distress in the context of commercial lines insurance.
7.37
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When might the duty of utmost good faith broaden cover beyond that provided by a fair reading of the policy wording? 7.38
A claim for damages for breach of the duty of utmost good faith
is not an alternative to a claim for indemnification. In Matton Developments Pty Ltd v CGU Insurance Ltd (No 2),83 Flanagan J put it this way: A breach ‘does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith.’ … Contractual damages in the form of indemnification resulting from an alleged breach of the duty of utmost good faith necessarily requires proof of the entitlement to indemnity itself. … It follows that a breach of the contract of insurance through a denial of indemnity that collaterally breaches the duty of utmost good faith would simply result in damages to be assessed in accordance with ordinary contractual principles. …
7.39 Assume an insurer is entitled to decline a claim for breach of warranty or condition or because the circumstances fall within the scope of an exclusion. [page 143] If s 14(1) applies, the duty of utmost good faith, in effect, extends cover to an insured beyond that provided by a fair reading of the relevant warranty, condition or exclusion. If not, perhaps s 54 will assist the insured. 7.40 Can s 14(1) broaden the scope of an insuring clause in a liability policy? The case of Territory Insurance Office v Adlington84 might help to answer the question posed by this sub-heading. In this case, the issue was whether the Territory Insurance Office (TIO) was estopped from denying that a liability insurance policy responded to a claim. The insured, a builder, was sued when a verandah he had built collapsed and injured the plaintiff. He sought indemnity against the plaintiff’s claim under his insurance policy. A TIO employee assured the builder that the claim was covered by the policy. The TIO’s solicitors subsequently took over the defence of the claim. Eventually, the solicitors wrote to the builder to tell him that they could no longer act because the policy was not current at the time of the accident. In terms of the elements that needed to be established in order for an
estoppel to be made out, it was found at trial that: the TIO had represented that the policy covered the claim; the TIO induced the builder to act on that representation; and in reliance on the representation, the builder allowed the TIO to conduct the defence of the claim against him. The only issue for the Northern Territory Court of Appeal was whether the builder would suffer detriment if the representation was not fulfilled. In the opinion of Mildren J, in order for there to be a detriment sufficient to found an estoppel, the party alleging estoppel must show that the detriment is more than a mere possibility; it must be ‘material’ or ‘real’, although pecuniary loss may not be necessary. In this case, the detriment was entirely speculative and no real detriment was established. An order for costs (that the TIO had undertaken to pay) was not a sufficient detriment.85
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7.41 If the builder could have invoked s 14(1) to prevent the TIO from withdrawing indemnity, he would have avoided having to prove each element of an estoppel, with the possibility he might fail on a technicality. However, it is doubtful s 14(1) would have assisted the builder. That is because, in terms of s 14(1), the TIO would not be seeking to rely on a provision of the policy in support of its withdrawal of indemnity. It would simply be arguing that the circumstances of the claim fell outside the scope of the insuring clause. [page 144] 7.42 Although it seems the duty of utmost good faith cannot broaden the scope of an insuring clause, an award of damages for an insurer’s breach of the duty might reduce the impact of the uninsured component of an insured’s liability to a third party. This can be illustrated by reference to the decision of the New South Wales Court of Appeal in Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd.86 The relevant aspects of this case are described in 7.23.
7.43 If the Nigel Watts’ policy had been subject to the ICA, what would the court have awarded Nigel Watts by way of damages for the GIO’s breach of the implied term of utmost good faith? 7.44 Arguably, the GIO’s refusal to cover the contractual indemnity claim would fall within s 13(1), because Nigel Watts would be alleging a breach of duty by the GIO on the basis that the GIO had conducted itself as if the claim was covered by the Nigel Watts’ policy. In other words, Nigel Watts would invoke the duty of utmost good faith because the GIO’s conduct of the claim until it declined indemnity was, in terms of s 13(1), ‘in respect of any matter arising under or in relation to’ the Nigel Watts’ policy.87 7.45 If a court concluded the GIO breached its duty of utmost good faith by not disclosing to Nigel Watts that it was not covered for the contractual indemnity claim, the court would seek to put Nigel Watts in the position it would have been in if the GIO had discharged its duty of utmost good faith. In this case, Nigel Watts would measure its loss by the difference between the position it was in and the position it would have been in if it had negotiated a settlement of the worker’s claim in the knowledge that the GIO would not be covering it for the indemnity claim. Those damages would go to reduce the impact of Nigel Watts’ uninsured liability for the contractual indemnity claim. 7.46 Although a breach of the s 13(1) duty of utmost good faith ‘does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith’,88 in certain circumstances: damages for breach of the s 13(1) duty might reduce the impact of the uninsured component of an insured’s liability to a third party; and s 14(1) might prevent an insurer from declining a claim for breach of warranty or condition or because the circumstances fall within the scope of an exclusion.
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[page 145] 7.47 Subject to the ICA, in addition to damages, the following remedies may be available to an innocent party or innocent TPB in the face of a failure by another party to the contract or TPB to act with the utmost good faith. The innocent party or TPB may: 1. avoid the contract;89 2. require the other party or TPB to act in a particular way if not to do so would be a failure by the other party or TPB to act with the utmost good faith; 3. prevent the other party or TPB from acting in a particular way if to do so would be a failure by the other party or TPB to act with the utmost good faith; 4. prevent the other party or TPB from relying upon a term of the contract if it would be a failure to act with the utmost good faith for the other party or TPB to do so.90 The court will have regard to any notification of a term by the insurer in deciding whether reliance on the term by the insurer would be a failure to act with the utmost good faith: s 14(3). Section 14 does not limit the operation of s 13: s 14(2); or 5. cancel the contract: s 60. The remedies in 2, 3 and 4 above might also be available in the face of a threatened failure to act with the utmost good faith. 7.48 If an insurer fails to act with the utmost good faith in the handling of a claim or potential claim or settlement of a claim, the Australian Securities and Investments Commission (ASIC) can vary, suspend or cancel its licence or ban a person from providing financial services as if it was a failure by the insurer to comply with a financial services law: s 14A. This enables ASIC to address systemic failures by an insurer to act with the utmost good faith. 7.49 Section 14A should be read in conjunction with s 55A of the ICA, which enables ASIC to bring or take over and continue a representative action on behalf of an insured against an insurer.
AND YET 7.50 It is now more than 250 years since Lord Mansfield decided that an insurance contract is based on good faith, and 30 years since Paul Matthews described the ‘principle of uberrimae fides’ in insurance law as arising ‘from an indefinite source, with an undetermined content, and appl[ies] to a small (but nonetheless uncertain) range of situations’. [page 146] That we are still grappling with the nature and scope of utmost good faith at common law and, in particular, how it operates and applies to an insurance contract post-contractually is reflected in the debate as to whether utmost good faith, at common law is: a ‘separately existing, independent free standing duty’.91 If it is, perhaps a party could sue for damages for breach of it. But they cannot;92 or an interpretative principle,93 a general organising principle94 or a norm95 or standard of behaviour that manifests itself in obligations on the part of: ■ an insurer and an intending insured to deal with each other openly, honestly and fairly in the formation of the contract; and ■ an insurer and an insured to deal with each other openly, honestly and fairly in the performance of the contract.96 As things have unfolded, it has been easier to legislate the answer than chance upon it.
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1. 2.
3.
Letter from the artist Piet Mondrian to H P Bremmer, 29 January 1914. P Matthews, ‘Uberrima Fides in Modern Insurance Law’, in Francis D Rose (ed), New Foundations for Insurance Law, Current Legal Problems, Stevens & Sons, London, 1987, 39 at 54. Contracts of partnership and surety require utmost good faith: Wales v Wadham (1977) 1 WLR 199 at 214 (Tudor Evans J). Cases of trustee and cestuie que trust and of a company issuing a prospectus and an applicant for shares also require utmost good faith: Bell v
4. 5.
6.
7.
8. 9. 10.
11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24.
Lever Bros Ltd [1932] AC 161 at 232 (Lord Thankerton). Sagl v Chubb Insurance Company of Canada (2009) Ontario Court of Appeal 388 at [51] (Epstein JA). European Roma Rights Centre, R (on the application of) v Immigration Officer at Prague Airport [2004] UKHL 55; [2005] 1 All ER 527 at [59] (Lord Hope of Craighead); Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1987] EWCA Civ 6; [1989] QB 433 at 439 (Bingham LJ). Mesa Operating Ltd Partnership v Amoco Canada Resources Ltd (1994) 19 Alta LR (3d) 38 (CA) at 43–4; Manufacturers Life Insurance Company v Executive Centre at Manulife Place Inc (2011) ABQB 189 at [13]–[14] (Veit J). Civil Code of Quebec (1994), Book Five Obligations, in particular Art 1375, which is in the following terms: ‘The parties shall conduct themselves in good faith both at the time the obligation is created and at the time it is performed or extinguished’. Livingstone v Roskilly [1992] 3 NZLR 230 at 238 (Thomas J). Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127 at [121]– [122]. Council of the City of Sydney v Goldspar Australia Pty Ltd [2006] FCA 472; (2006) 230 ALR 437 at [168] (Gyles J); Starlink International Group Pty Ltd v Coles Supermarket Australia Pty Ltd [2011] NSWSC 1154; Trans Petroleum (Australia) Pty Ltd v White Gum Petroleum Pty Ltd [2012] WASCA 165 at [150] (Buss JA). United Group Rail Services Ltd v Rail Corporation New South Wales [2009] NSWCA 177 at [61]–[70] (Allsop P). CGU Workers Compensation (NSW) Ltd v Garcia [2007] NSWCA 193; (2007) 14 ANZ Ins Cas 61-746. Khoury v Government Insurance Office of (NSW) [1984] HCA 55; (1984) 165 CLR 622 at [28] (Mason, Brennan, Deane and Dawson JJ). Manifest Shipping Company Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] UKHL 1; [2003] 1 AC 469 at [5] (Lord Clyde). Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd (‘The Star Sea’) (see fn 14) at [47] (Lord Hobhouse). M’Lanahan v The Universal Insurance Co 26 US (1 Pet) 170. Certain Underwriters at Lloyds, London v Inlet Fisheries Inc 380 F Supp 2d 1145, 2005 US Dist Lexis 37397 (D Alaska, 2005). (1766) 3 Burr 1905; 97 ER 1162. Coronation Insurance Co v Taku Air Transport Ltd [1991] 3 SCR 622 (Cory J). Fort Marlborough is alive, well preserved and worth visiting. It is on the west coast of Sumatra in the city of Bengkulu (population over 300,000). Lord Mansfield’s attempt to apply the duty of good faith to all contracts did not succeed. Things have changed since then, but not enough to prove Lord Mansfield right: see 7.3. (1798) 1 Bosanquet and Puller 316; 126 ER 924. See also Life Association of Scotland v Foster (1873) 11 M 351 at 359 (Lord President Inglis). Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd (see fn 14) at [44] (Lord Hobhouse). See, for example, Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd [1991] 2
25. 26. 27. 28.
29. 30. 31. 32. 33. 34. 35. 36. 37. 38.
39. 40.
41. 42.
43. 44. 45.
46.
AC 249. Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705; Lloyd’s Rep IR 746 at [24] (Mance J). Carter v Boehm (see fn 18) at 1164 (Lord Mansfield). Banque Keyser Ullmann SA v Skandia (UK) Insurance Co Ltd (see fn 24). Khoury v Government Insurance Office of (NSW) (see fn 13) at [28] (Mason, Brennan, Deane and Dawson JJ). See CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1 at [15] (Gleeson CJ and Crennan J); O’Neill v Phillips [1999] UKHL 24; 1 WLR 1092, in which Lord Hoffmann discussed the concept of fairness in the context of a claim by a shareholder that a company’s affairs were being conducted in a manner unfairly prejudicial to his interests. [1994] CLC 373. Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd (‘The Star Sea’) (see fn 14) at [7] (Lord Clyde), [57] (Lord Hobhouse). Brotherton v Aseguradora Colseguros SA (see fn 25) at [24] (Mance J). Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd (‘The Star Sea’) (see fn 14) at [51] (Lord Hobhouse). AFG Insurances Ltd v City of Brighton [1972] HCA 70; (1972) 126 CLR 655 at [12] (Mason J). [1974] HCA 3; (1974) 130 CLR 1. Looseleaf ed, Carswell, Toronto, 1999, Ch 10-4 at 10–20. Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) [2015] QSC 72 at [246] (Flanagan J); Sagl v Chubb Insurance Company of Canada (see fn 4) at [76] (Epstein JA). Orakpo v Barclays Insurance Services [1995] LRLR 443 at 451 (CA) (Hoffmann LJ). Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235 (Kirby P); Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (see fn 36) at [246] (Flanagan J). Agapitos v Agnew [2002] EWCA Civ 247; [2003] QB 556. Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (formerly GIO Insurance Ltd) [2006] NSWSC 223 at [1109] (Einstein J): Allianz Australia Insurance Ltd v BlueScope Steel Ltd [2014] NSWCA 276 at [40] (Basten JA). South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd; Mortensen v Laing [1992] 2 NZLR 282 at 315 (Hardie Boys J). Lambert Leasing Inc v QBE Insurance (Australia) Ltd [2016] NSWCA 254 at [72] (Payne JA); Sudesh Sharma v Insurance Australia Ltd t/as NRMA Insurance [2017] NSWCA 55 at [109]–[110]. Allianz Australia Insurance Ltd v Anthony Vitale [2014] NSWSC 364 at [125] (Sackar J). Usanovic v Penncorp Life Insurance Company, 2017 ONCA 395. Manifest Shipping Company Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) (see fn 14) at [52] (Lord Hobhouse); Bonner v Cox Dedicated Corporate Member Ltd [2004] EWHC 2963 at [228]–[230] (Comm) (Morison J). Khoury v Government Insurance Office of (NSW) (see fn 13) at [28] (Mason, Brennan,
47. 48. 49. 50.
51. 52. 53. 54.
55.
56. 57.
58. 59. 60.
61. 62.
63. 64. 65.
Deane and Dawson JJ). Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd [2005] WASCA 106; (2005) 13 ANZ Ins Cas 61-657 at [66] (Steytler P). See fn 38. ICA s 9(1)(e)(i) (at the time). Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (see fn 47) at [75] (Steytler P); Manifest Shipping Company Ltd v Uni-Polaris Insurance Co Ltd (‘The Star Sea’) [1995] Lloyd’s Rep 651 (Tuckey LJ); Manifest Shipping Company Ltd v Uni-Polaris Insurance Co Ltd (‘The Star Sea’) (see fn 14) at [75]–[77](Lord Hobhouse), [110] (Lord Scott); Agapitos v Agnew (see fn 39) at 577–8 (Mance LJ); Rego v Connecticut Insurance Placement Facility (1991) 593 A2d 491, per Callahan AJ. Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd (‘The Star Sea’) (see fn 14) at [77] (Lord Hobhouse). [2005] BCSC 772. Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (see fn 47) at [66] (Steytler P). Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41 (Dawson J); Bristol & West Building Society v Mothew [1998] Ch 1 at 18 (Millett LJ). Bonner v Cox Dedicated Corporate Member Ltd (see fn 45) at [226]–[228] (Morison J); Plaza Glass Manufacturing Ltd v Cardinal Insurance Co (1994) 22 CCLI (2d) 161 at 166– 8 (Robins JA); Garneau v Industrial Alliance Insurance and Financial Services Inc 2014 ONSC 1495 at [25] (Smith J). Plaza Fibre Glass Manufacturing Ltd v Cardinal Insurance Co (see fn 55) at 166–8 (Robins JA). Whiten v Pilot Insurance Company (1999) 42 OR (3d) 641 (Ontario CA); Saskatchewan Government Insurance v Wilson, 2012 SKCA 106 (Saskatchewan Court of Appeal); Cedenco Funds Ltd v State Insurance Ltd (1997) 6 NZBLC 102 at [235] (overturned on the facts on appeal: CA 216/97, 6 August 1998). Grey v Motor Accident Commission [1998] HCA 70; (1998) 196 CLR 1. CGU Workers Compensation (NSW) Ltd v Garcia (see fn 12) at [57] (Mason P). The ICA defines a ‘third party beneficiary’ as ‘a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends’: s 11. [2007] HCA 36; (2007) 235 CLR 1. O’Grady v Northern Queensland Company Ltd [1990] HCA 16; (1990) 169 CLR 356 at [10] (Brennan J), [1] (Dawson J), [27] (McHugh J); PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service [1995] HCA 36; (1995) 184 CLR 301 at [65] (Toohey and Gummow JJ). Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (see fn 36) at [271] (Flanagan J). [2005] EWCA Civ 1512; [2006] 2 Lloyd’s Rep 152 (a reinsurance claim). In Oliver v Commonwealth Bank of Australia (No 1) [2011] FCA 1440, Perram J suggested (at [27]–[33]) that in certain circumstances, exercise of a contractual right or breach of a contractual obligation might involve a failure to act with the utmost good
66. 67. 68.
69. 70. 71. 72. 73. 74. 75. 76. 77. 78.
79. 80. 81. 82.
83. 84. 85. 86. 87.
faith. South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd; Mortenson v Laing (see fn 41) at 313 (Casey J). Moss & Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; (1990) 6 ANZ Ins Cas 60-967 (Bollen J). [1854] Eng R 296; (1854) 9 Exch 341. See Brescia Furniture Pty Ltd v QBE Insurance (Australia) Ltd (2007) NSWSC 598; 14 ANZ Ins Cas 61740 at [511] (Hammerschlag J); Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 at [97] (McLure P), [155] (Murphy JA). European Bank Ltd v Robb Evans of Robb Evanns & Associates [2010] HCA 6; (2010) 240 CLR 432, the plurality at [13]. [2012] WASC 53. Sudesh Sharma v Insurance Australia Ltd t/as NRMA Insurance (see fn 42) at [116]–[117]. JLW (Vic) Pty Ltd v Tsiloglou [1994] VicRp 16; 1 VR 237. Baltic Shipping Company v Dillon (1991) 22 NSWLR 1 at 9 (Gleeson CJ). J Edelman, ‘Vindicatory Damages’, paper presented to the TC Beirne School of Law Conference, Private Law in the 21st Century, Brisbane, 15 December 2015. [2002] EWCA Civ 842. Baltic Shipping Company v Dillon [1993] HCA 4; (1993) 176 CLR 344 at [39] (Mason J); Watts v Morrow [1991] EWCA Civ 9; (1991) 1 WLR 1421 at 1445 (Bingham LJ). Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd [2013] NSWSC 1975 at [698]–[700] (Sackar J). For example home building or home contents insurance, travel insurance, health insurance, private motor vehicle or pleasure craft insurance, personal liability insurance and disability insurance. Stuart v Guardian Royal Exchange Assurance of New Zealand Ltd [1988] 5 ANZ Ins Cas 75,274 at 75,281 (Heron J). Johnson v Australian Casualty Co (1992) 7 ANZ Ins Cas 61–109 at 77,522 (McDonald J). Motor Accident Mutual Insurance Pty Ltd v Kelly (1999) 10 ANZIC 61,420 at 74,719 (Rolfe AJA). South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd; Mortenson v Laing (see fn 41) at 313 (Casey J); D W McLauchlan, Mental Distress Damages for Breach of Commercial Contracts (1997) 3 NZBLQ 130 at 137. [2015] QSC 72 at [287]; CGU Insurance Ltd v AMP Financial Planning Pty Ltd (see fn 28) at [16]) (Gleeson CJ and Crennan J). (1992) 2 NTLR 55; 7 ANZ Insurance Cases 61-149. Compare Northern Assurance Co Ltd v Cooper [1968] Qd R 46. See fn 38. The phrase ‘in relation to’ in s 13(1) is of wide import: O’Grady v Northern Queensland Company Ltd (see fn 62) at [10] (Brennan J), [1] (Dawson J), [27] (McHugh J); PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service (see fn 62) at [65] (Toohey and Gummow JJ).
88. CGU Insurance Ltd v AMP Financial Planning Pty Ltd (see fn 28) at [16] (Gleeson CJ and Crennan J). 89. Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (see fn 47) at [66] (Steytler P). 90. ICA s 14; AAMI Ltd v Ellis (1990) 6 ANZ Ins Cas 60-957; Baccanello v ANZ Life Insurance Company Ltd (unreported, DC (SA), 27 May 1992). 91. In CGU Workers Compensation (NSW) Ltd v Garcia (see fn 12), Mason P (at [137]) agreed with Chesterman J in Re Zurich Australian Insurance Ltd [1998] QSC 209 (at [37]–[86]) that Stephen J took the matter too far in The Distillers Company Biochemicals (Australia) Pty Ltd v Ajax Insurance Company Ltd [1974] HCA 3; (1974) 130 CLR 1, when (at [54]) he referred to a duty to act in good faith. 92. HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6; 2 Lloyd’s Rep 61 at [75] (Lord Hoffmann); Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) (see fn 14) at [46] (Lord Hobhouse). 93. Explanatory Notes to the Insurance Contract Act 2015 (UK) at [116]. 94. For a discussion of good faith as a general organising principle in the context of employment law, see Bhasin v Hrynew, 2014 SCC 71. For a dampener on that idea, see MSC Mediterranean Shipping Company SA v Cottonex Anstalt [2016] EWCA Civ 789 at [45] (Moore-Bick LJ). 95. GIO Insurance Ltd v Leighton Contractors Pty Ltd, unreported decision of the Supreme Court of New South Wales, 17 November 1995, Young J at p 10. 96. The Distillers Company Biochemicals (Australia) Pty Ltd v Ajax Insurance Company Ltd (see fn 91) at [53]–[54] (Stephen J); CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25 at [38–40] (Mahoney JA); CGU Insurance Ltd v AMP Financial Planning Pty Ltd (see fn 28) at [15] (Gleeson CJ and Crennan J); Trans-Pacific Insurance Co (Australia) Ltd v Grand Union Insurance Co Ltd (1989) 18 NSWLR 675; Allianz Australia Insurance Ltd v BlueScope Steel Ltd (see fn 40) at [40] (Basten JA).
[page 147]
Chapter 8 PRE-CONTRACTUAL DISCLOSURE The sound philosophical basis of the duty of disclosure in an insurance context is that a true and fair agreement for the transfer of risk on an appropriate basis depends on equality of information.1
INTRODUCTION There are three distinct periods in the course of an insurance relationship: the pre-contractual period; the period between the making of a contract and a loss occurring; and the period beginning with a loss occurring. This chapter is concerned with the pre-contractual period and is arranged under the following headings: no common law requirement for pre-contractual disclosure in relation to contracts generally; the common law pre-contractual duty of disclosure in relation to insurance contracts; an insured’s pre-contractual duty of disclosure under the Insurance Contracts Act 1984 (Cth) (ICA) Part IV — Disclosures and Misrepresentations; an insurer’s pre-contractual common law duty of disclosure is not affected by the ICA; an insurer’s pre-contractual requirement to inform under the ICA;
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and an insurer’s pre-contractual disclosure obligations under the Corporations Act 2001 (Cth) Ch 7. [page 148]
NO COMMON LAW REQUIREMENT FOR PRE-CONTRACTUAL DISCLOSURE IN RELATION TO CONTRACTS GENERALLY 8.1 Marcus Tullius Cicero, a leading Roman lawyer and orator, walked the streets of Rome just over 2,000 years ago; that is, until he was assassinated, aged 63. In his publication De Officiis, Cicero posed the following example (Book III, xi–xii) for the purpose of determining the existence and scope of a duty of disclosure prior to the making of a commercial contract:2 Suppose a time of death and famine at Rhodes, with provisions at fabulous prices; and suppose that an honest man has imported a large cargo of grain from Alexandria and that on his voyage to Rhodes he has seen several other importers sailing from Alexandria, their vessels laden with grain and bound for Rhodes. Should he report that to the Rhodians or keep it secret from them and sell his grain at the highest market price?
Cicero sought to answer the question by reporting an imaginary dialogue between his contemporary Antipater of Tyre and Diogenes of Babylon. Antipater argued that the information should be disclosed because every person has a duty to have due regard for the interests of others. On the other hand, Diogenes argued that the merchant could keep quiet as long as he did not mislead. Cicero gave another example, this time of an honest man offering to sell a house with defects only he knows about. He wondered whether a contract for the sale of the house would be dishonourable if the vendor did not tell prospective purchasers about the defects. Antipater said it would be, because ‘if he didn’t he would be
deliberately leading a man astray’. Diogenes responded by asking: Did the vendor advise or compel the purchaser to buy the house? He advertised for sale what he did not like; you bought what you did like. If people are not considered guilty of swindling when they place upon their placards ‘FOR SALE: A FINE VILLA, WELL BUILT’, even when it is neither good nor properly built, still less guilty are they who say nothing in praise of their house. What would be more stupid than for a vendor to recount all the faults in the article he is offering for sale? And what would be so absurd as for an auctioneer to cry, at the owner’s bidding, ‘Here is an unsanitary house for sale’?
8.2 Later in the text (Book III, xiii), Cicero suggested the grain dealer owed a duty to disclose the facts to the Rhodians. That is not the common law in Australia for contracts generally. In Lam v Ausintel Investments [page 149] Australia Pty Ltd,3 Gleeson CJ favoured Diogenes argument in the following terms (at 475): [W]here parties are dealing at arms’ length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice.
8.3 In Laidlaw v Organ,4 Marshall CJ introduced the idea of caveat emptor (buyer beware) to the American common law. The facts were as follows. In 1815, the British Navy was offshore New Orleans enforcing a blockade that, amongst other things, resulted in tobacco transported down the Mississippi River accumulating in New Orleans’ warehouses. On the evening of 18 February 1815, Hector Organ, a New Orleans tobacco merchant, was negotiating to buy tobacco from Peter Laidlaw Company by its agent, Francis Girault. Organ left without agreeing on the price. At about the same time, an American military delegation was discussing various matters with the British Navy, including a prisoner exchange and the return of escaped slaves to the Americans. During the
meeting, the British informed the delegation that the Treaty of Ghent had been signed, ending the British/American war and lifting the blockade. The delegation came ashore that evening and one of them conveyed the information about the lifting of the blockade to his brother (a partner of Organ in the proposed purchase of the tobacco). Soon after sunrise next morning, Organ contacted Girault and they agreed on a price for the tobacco. Girault did not know about the lifting of the blockade and Organ said nothing to him about it. The price of tobacco rose sharply shortly after the lifting of the blockade became public knowledge. Organ sued Laidlaw in the District Court for the Louisiana District5 for refusing to deliver the tobacco. In the United States Supreme Court, Marshall CJ ruled that Organ was not obliged to disclose the information about the lifting of the blockade to Girault before a price was agreed for the tobacco. [page 150]
THE COMMON LAW PRECONTRACTUAL DUTY OF DISCLOSURE IN RELATION TO INSURANCE CONTRACTS The scope of the pre-contractual duty to disclose 8.4 Pre-contractually, utmost good faith (see Chapter 7) operates as a legal mechanism to achieve a ‘true and fair agreement for the transfer of risk’ by requiring insurer and intending insured to exchange material information about the risk before entering into an insurance contract and again before renewing, extending or varying it.6 In particular, utmost good faith requires each of them to:
disclose to the other information known to them which ■voluntarily is material to the risk to be transferred; and ■not to misrepresent information material to the risk to be
transferred. How much information needs to be disclosed depends, in part, upon the type of insurance contract involved. Nevertheless, an insured’s duty of disclosure when taking out interim insurance is as demanding as when taking out longer term insurance.7 8.5 An intending insured misrepresents information if they make an incorrect representation of fact to the insurer. An incomplete statement can amount to a misrepresentation even if it is literally true.8 In practice, it can be difficult to discern whether there has been nondisclosure or a misrepresentation.9 It mostly does not matter which it is. 8.6 For the purpose of the duty of disclosure, information known to an intending insured includes information: they actually know and that they would have known if they had not ‘wilfully shut their eyes to the truth’ (Nelsonian blindness — putting the telescope to the blind eye);10
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[page 151]
■they have in their ‘consciousness’ or is readily available to them
from a record in their possession, for example information appearing on their driver’s licence;11 their ‘relevant agent’ knows, for example, what: ■ their insurance broker knows, even if the broker acquired the knowledge before the agency relationship commenced;12 and ■ is known by the insured’s employee or by an agent appointed by the insured to arrange the insurance or manage its subject matter.13 Information known to an intending insured does not include information they do not know, even if:
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■in the ordinary course of business they ought to know it;14 or ■they would have become aware of it if they had made some inquiries for the purpose of discovering it.
8.7
An insurer will discharge the duty if it discloses facts known to it:
… which are material either to the nature of the risk sought to be covered or the recoverability of a claim under the policy which a prudent insured would take into account in deciding whether or not to place the risk for which he seeks cover with that insurer.15
An intending insured will discharge the duty if they make ‘a fair presentation of the risk to the insurer’.16 The ‘fairness’ test is objective. It does not depend on what an insured thinks is fair. There will be disclosure to an insurer if the disclosure is made to the insurer or to its agent in circumstances where the agent is authorised to receive that information.17 8.8 An insurer cannot waive an insured’s obligation to make ‘a fair presentation’, but it can limit the scope of the obligation by waiving its need for certain information.18 It can do that by specifically informing the intending insured that it does not require certain information. Or it can happen as a consequence of the range of questions asked in a proposal [page 152] for insurance or of the answers to them.19 For example, if a question in a proposal asks about an intending insured’s driving record over the previous five years, ‘a fair presentation’ might not require the insured to mention a drink-driving conviction seven years earlier. In Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Ltd,20 Meagher JA said (at [53]): There were no questions in the proposal directed to the identity of associates of the insured or its directors. Instead the proposal focussed on whether the owner, or directors of a corporate owner, had been charged with or convicted of any criminal offence in the last five years. If it was relevant to the insurer to know of the fact of any general association between the insured or its directors and any particular activity or
organisation, a reasonable person might reasonably have expected that there would have been questions addressed to that subject.
If upon a fair and reasonable construction an answer to a question in a proposal for insurance is true, an insurer cannot complain that the answer was incomplete or irrelevant, or that the question was directed to something different.21 The meaning of the answer is to be determined objectively, considering the question and answer together: … the question by reference to what a reasonable proponent would fairly have understood it to mean and the answer by reference to what that reasonable person would fairly have understood it to convey to the insurer.22
8.9 If an intending insured gives an incomplete or vague answer to a question in a proposal for insurance, the fact that a reasonably careful insurer would follow it up but the insurer did not, might lead a court to conclude that there was ‘a fair presentation’ of the risk or that the insurer waived the need for further disclosure on that issue.23 This would be on the basis that by not following up on the answer, the insurer indicated that it did not need further information about that matter in order to decide whether to accept the risk and if so, on what terms.24 Similarly, if an intending insured mentions in an answer to a question in a proposal that she has been in hospital for an extended period of time, the insurer cannot complain about non-disclosure of the circumstances of the intending insured’s admission to hospital if it did not follow up with any enquiries about that on receiving the completed proposal.25 [page 153] 8.10 An intending insured is not obliged to disclose a material fact if the insurer ought to know the fact because the insurer: can readily find out about it from a publicly available source of information, such as the media;26 insures a particular industry and the fact relates to the practices of that industry or is well known by persons in that industry;27 or
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■insures a particular class of business and the fact relates to the risks
that affect that class of business. The transferred risk includes any aggravation of the risk during the insurance period. Accordingly, unless the policy contains an express term to the contrary, an insured is not obliged to disclose changes in the risk that occur during the insurance period (material or otherwise).28 Having said that, the policy will not cover the changed risk if it takes ‘the risk outside that which was in the reasonable contemplation of the parties at the time the policy was issued’.29 8.11
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The pre-contractual duty of disclosure arises again in relation to: an agreed variation of the risk during the period of insurance. Any remedy for a breach of the duty of disclosure or for misrepresentation in relation to the variation is limited to the variation. It does not affect the original contract;30 and renewal of an insurance contract.31 Unless informed otherwise, an insurer is entitled to assume that the answers in the original proposal for insurance apply to the renewal.32
8.12 The duty of disclosure will be breached by an innocent (including negligent) or fraudulent non-disclosure or misrepresentation. Accordingly, an insured will be in breach of the duty even if they did not intend to conceal the fact or did not think it was material.33 8.13 Whether a party has not disclosed or has misrepresented a material fact is a question of fact.34 [page 154]
What is a material fact? 8.14 The duty requires disclosure of facts, not opinions. Having said that, the fact that a proposed insured held a particular opinion might require disclosure in certain circumstances. 8.15
Determining whether a fact is material is a two-stage process.35
8.16 First, the court must decide whether, in the circumstances (including the knowledge, practice and conduct of the insurer), the nondisclosed or misrepresented fact would have reasonably influenced or affected the insurer as a prudent insurer, in deciding whether to accept the risk and if so, on what terms, even if a prudent insurer would have made the same decision if it had known the fact.36 In the United Kingdom, a fact can be material even if it would not have had a notionally decisive effect on the mind of a prudent insurer.37 It seems the test of materiality in Australia is slightly different. In Akedian Co Ltd v Royal Insurance Australia Ltd,38 Byrne J agreed with Samuels J in Mayne Nickless v Pegler39 that a fact is material if it would have reasonably affected the mind of the prudent insurer in determining whether he will accept the insurance, and if so, at what premium and on what conditions. In the earlier case Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd,40 Kirby P said (at [517]) that a fact is material if its effect on a prudent insurer’s mind is: … something more than the effect produced by information which the insurer would have been generally interested to have. If, though interested to have it, such information would not, in the end, have determined for a reasonably prudent insurer the acceptance or rejection of insurance, the setting of the premium or the attachment of conditions, there is not such effect on the mind as requires disclosure by the insured. The information, although of interest, is not material. As such it is not information which must be disclosed by the insured.
Sola Optical Australia Pty Ltd v Judith Ann Mills41 concerned an application for an extension of the three-year limitation period for the commencement of an action for damages in respect of personal injuries. The relevant provision enabled a court to extend the period if it is satisfied that ‘facts material to the plaintiff’s case were not ascertained [page 155] by him until some point of time occurring within twelve months before the expiration of the period of limitation’. The High Court concluded (at [12]) that a:
… fact is material to the plaintiff’s case if it is both relevant to the issues to be proved if the plaintiff is to succeed in obtaining an award of damages sufficient to justify bringing the action and is of sufficient importance to be likely to have a bearing on the case. The Shorter Oxford English Dictionary defines the word ‘material’, inter alia, to mean ‘Of such significance as to be likely to influence the determination of a cause’. Although a definition attributed to the 16th century, in our opinion it provides an apt guide to the intention of the legislature in choosing to refer, without any elaboration, to ‘facts material to the plaintiff’s case’.
If Sola Optical (a non-insurance case) can be applied to precontractual disclosure in the insurance context, a fact will be material if it is: relevant to a prudent insurer’s decision whether to accept a risk and if so on what terms; and of ‘sufficient importance to be likely to have a bearing’ on the prudent insurer’s decision. What is a prudent insurer? It is a hypothetical insurer that knows its business and carries it on ‘carefully, without exceptional timidity or boldness’.42
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8.17 Second, the court must decide whether the non-disclosed or misrepresented fact was material to the actual insurer. This is tested by asking whether the fact induced the actual insurer to accept the risk on the terms it did.43 Just because a fact influenced an insurer to accept a risk on the terms it did, does not give rise to a presumption that the insurer was actually induced by the non-disclosed or misrepresented fact to accept the risk on the terms it did.44 For inducement, the fact must be an effective, but not necessarily the only, cause of the insurer accepting the risk on the terms it did.45 The requirement, since Pan Atlantic Insurance v Pine Top Ltd,46 that an insurer prove it was induced by the insured’s non-disclosure of material facts to accept the risk on the terms it did went some way towards alleviating the harshness of the requirement that an insured voluntarily disclose material facts. That harshness is illustrated by Lambert
[page 156] v Co-operative Insurance Society Ltd,47 in which Mrs Lambert renewed the insurance of some jewellery. The insurer did not ask Mrs Lambert about previous convictions and she did not disclose her husband’s conviction for stealing cigarettes before they entered into the original policy almost a decade previously or his imprisonment for handling stolen goods in the year before the last renewal of the policy. When Mrs Lambert claimed £311 for lost jewellery, the insurer declined indemnity on the basis of non-disclosure. The Court of Appeal agreed with the insurer that Mrs Lambert should have disclosed the conviction even though a reasonable person in her position would not have appreciated the necessity for her to do so. Mackenna J commented on the unfairness of the legal position when he said (at 491): The present case shows the unsatisfactory state of the law. Mrs Lambert is unlikely to have thought that it was necessary to disclose the distressing fact of her husband’s recent conviction when she was renewing the policy on her little store of jewellery. She is not an underwriter and has presumably no experience in these matters … [T]he defendant company would act decently if, having established the point of principle, they were to pay her. It might be thought a heartless thing if they did not, but that is their business, not mine.
Making a finding about actual inducement involves the court speculating on what an insurer would have done if it had known the non-disclosed or misrepresented fact before it accepted the risk. That may involve the court considering an insurer’s practices and procedures and the decisions the particular underwriter who accepted the risk has made in the recent past in similar circumstances.48 8.18 In Drake Insurance plc (in prov liq) v Provident Insurance plc,49 an insurer sought to avoid a motor vehicle insurance policy on the basis that it would have charged a higher premium if the applicant for insurance had disclosed a speeding conviction. The Court of Appeal held that the insurer had not been induced to issue the policy by the undisclosed speeding conviction because if the intending insured had disclosed the conviction, the insurer would have made inquiries that would have revealed information that would have led to it issuing the policy on the same terms for the same premium.
Proving a fact was material 8.19 For the purpose of proving a fact was material at trial, the actual insurer would usually, but not invariably, adduce: a. expert evidence from an independent reputable underwriter or insurance broker as to how a prudent underwriter would have responded to the non-disclosed or misrepresented fact; [page 157] b.
the following evidence in relation to whether it was induced by the non-disclosed or misrepresented fact to write the risk on the terms it did: its underwriting manuals and similar documents for the purpose of showing how it expected its underwriters to approach the risk and the processes in place which allocated responsibility within the company for underwriting the risk; evidence showing how it dealt with similar risks at about the same period of time; evidence of the decisions the particular underwriter who accepted the risk has made in the recent past in similar circumstances; and evidence from the particular underwriter that accepted the risk of their state of mind in relation to accepting the risk and decisions they made in the recent past in similar circumstances. An insurer is unlikely to succeed on the inducement issue without calling the underwriter to give evidence;50 if appropriate, evidence from the person the underwriter that accepted the risk reported to.
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c.
Delay
8.20 A fact is material if a prudent insurer would have delayed making a decision about offering cover if the intending insured had complied with the duty of disclosure, and an investigation by the insurer would have uncovered a fact which would have led to it declining to enter into the insurance contract on the same terms.51
The materiality of physical, moral and other hazards 8.21 The duty of disclosure requires an intending insured to inform an insurer about facts known to it: that are relevant to the risk of an insured event fortuitously occurring during the insurance period as a result of the intrinsic nature of the subject matter of the insurance. In property insurance, this is commonly known as ‘physical’ hazard. It refers to the direct operation of the events specified in the insurance contract on the subject matter of the insurance, for example the likelihood of fire in a wooden building.52 ‘Physical’ hazard has nothing to do with the history or personal characteristics of an intending insured. Generally speaking, it can be observed and scientifically measured;
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[page 158]
■that are relevant to ‘moral hazard’.53 ‘Moral’ hazard refers to a
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person’s probity, integrity, honesty and morality and in particular, to the probability that upon obtaining insurance, they will deliberately cause, invent or exaggerate a loss.54 Generally speaking, a moral hazard cannot be observed or scientifically measured; and (other than those relevant to ‘physical’ or ‘moral’ hazard) that would influence a prudent insurer in deciding whether to accept the risk and if so, on what terms.55 For example, a dangerous driving conviction two years earlier is a material fact if an insured
is seeking first party motor vehicle insurance. The conviction has nothing to do with the physical attributes of the motor vehicle or the person’s integrity, but might be relevant to their propensity to disobey the rules of the road and the consequent risk of being involved in a motor vehicle accident. Similarly, an intending insured asking for insurance over a building should inform the insurer if a brothel is operating out of the building. That a brothel is operating out of the building is not a physical hazard and does not necessarily reflect on the intending insured’s integrity, but it might present a higher risk of damage to the building because of the extra risk of violence by customers or unethical competitors.56 8.22 Anti-discrimination legislation in Tasmania57 and the Northern Territory58 prevents an insurer from discriminating against an applicant for insurance (by rejecting a request for insurance) on the basis of ‘irrelevant criminal record’. Although information about an intending insured’s prior criminal activity might be material to a risk to be transferred, legislation throughout Australia: allows an intending insured to decline to provide information about a ‘spent’ conviction;59 and prevents disclosure of information about criminal proceedings involving a child.
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[page 159]
The materiality of rumours and allegations of serious misconduct or fraud 8.23
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An intending insured is obliged to disclose a relevant: ‘well-founded’ rumour (as opposed to a ‘loose’ or ‘idle’ rumour), even if it turns out that the rumour is unfounded;60 and allegation of fraud or serious misconduct,61 even if there is
■‘exculpatory evidence’.62 Onus of proof in relation to innocent (including negligent) non-disclosure or misrepresentation 8.24 An insurer seeking to rely on an innocent non-disclosure or misrepresentation bears the onus of proving every element of it,63 in particular: in the case of non-disclosure, that the intending insured did not disclose a fact known to them; in the case of misrepresentation, that the intending insured made an incorrect representation of fact; the fact was material; and64 it not knowing the fact induced it to enter into the contract on the terms it did. An insurer does not have to prove the intending insured intended to conceal or misrepresent the relevant fact, or that it knew the fact was material as this is all irrelevant.65 A practical difference between non-disclosure and misrepresentation is that to prove non-disclosure, the innocent party must prove the nondisclosing party knew the material fact.66
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[page 160]
Fraudulent non-disclosure and misrepresentation 8.25 Non-disclosure of a material fact is fraudulent if an intending insured knew the fact and deliberately concealed it because they believed the insurer might decline the risk or only accept it on special terms if they disclosed the fact.67 Misrepresentation of a material fact is fraudulent if an intending insured made it: without actually and honestly believing it was true, or recklessly
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indifferent to whether it was true or not;68 and with the intention of it being acted on.69 Fraudulent non-disclosure or misrepresentation by an intending insured’s director, officer, partner, employee or agent is treated as the intending insured’s fraud if they were acting within the scope of their actual or apparent authority in relation to the fraud.70 To succeed in a fraudulent non-disclosure or misrepresentation defence, an insurer must prove on a balance of probabilities (the civil standard of proof), an actual persuasion of the mind as to the fraud.71 The seriousness of the allegation affects the clarity of proof required.72 The more serious the allegation, the more cogent the evidence required to prove the allegation.73 But the degree of proof never reaches that degree of certainty required to prove a conviction upon a criminal charge.74 The court must be very careful when applying the civil burden to allegations of fraud.75
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Remedies 8.26
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For a general contract: there is no common law remedy for innocent pre-contractual nondisclosure, because there is no pre-contractual duty of disclosure for contracts generally; [page 161]
■rescission
(avoidance of the contract from the beginning) is an equitable remedy for an innocent, negligent or fraudulent precontractual misrepresentation. Rescission might not be available if the contract has been partly performed because avoidance requires the parties to be substantially restored to the position they were in immediately before entering into the contract. The innocent party is not entitled to damages, although it might be awarded some form of indemnity; and
are available ■damages misrepresentation.
for
a
negligent
or
fraudulent
In the case of an insurance contract, an innocent party is: entitled to avoid an insurance contract from the beginning for an innocent, negligent or fraudulent breach of the pre-contractual duty of utmost good faith (non-disclosure or misrepresentation of a material fact). Avoidance is available even if the contract has been partly performed; not entitled to damages for innocent, negligent or fraudulent precontractual non-disclosure.76 That is because the ‘common law imposes [the duty of disclosure] as an incident of the relationship between the parties to the insurance transaction’ — it is not an implied term of the contract;77 not entitled to damages for innocent pre-contractual misrepresentation, although the court might order some sort of indemnity; entitled to damages for negligent pre-contractual misrepresentation; entitled to damages for fraudulent pre-contractual misrepresentation (the tort of deceit), including circumstances where fraudulent non-disclosure amounts to fraudulent misrepresentation.78 The insurer is also entitled to keep premium already paid.79 Although damages are available for negligent or fraudulent precontractual misrepresentation by an intending insured, there are no Australian insurance cases on this issue, presumably because avoidance is almost invariably an adequate and sufficient remedy for an insurer.
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8.27 Avoidance is available because an insurance contract is of the utmost good faith and, in the case of a breach of the duty of disclosure or [page 162]
the duty not to misrepresent, ‘the risque run is really different from the risque understood and intended to be run, at the time of the agreement’.80 The availability of the remedy of avoidance for pre-contractual nondisclosure or misrepresentation by an: insured has the unfortunate side effect of encouraging insurers to defer spending time and money properly considering or investigating the adequacy of pre-contractual disclosure until after a claim is made on the policy; insurer is not likely to be a practical remedy for an insured because avoidance deprives the insured of the only benefit to it of the contract; namely, to have claims paid.81 Of course, it will be of value if an insured simply wants its premium repaid.
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8.28 Avoidance is brought about ‘by act of the innocent party operating independently of the court’. It is effective immediately upon the innocent party communicating to the other party its decision to avoid the contract.82 If an insurer elects to avoid a contract, it: must repay the premium, unless the non-disclosure or misrepresentation was fraudulent, in which case it is forfeited to the insurer;83 and can recover money already paid under the contract.84
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8.29 In certain circumstances, it is arguable that utmost good faith might prevent an insurer from avoiding a contract for non-disclosure or misrepresentation. For example, in certain types of insurance, an intending insured might be obliged to disclose an allegation that they have been involved in bribery and corruption. If an insured can prove that by the time of a subsequent avoidance of the contract the insurer ‘knew or was shutting its eyes’ to facts that disproved the allegation, the insurer might be prevented from avoiding for non-disclosure of the allegation even if the insurer can prove that the non-disclosure induced it to enter into the contract: Drake Insurance plc (in prov liq) v Provident Insurance plc.85 In a differently constituted Court of Appeal in the same year,86 Mance LJ said the duty would not prevent the
insurer from avoiding the contract, on the basis that the insurance would not have been written if the proper disclosure had been made and that was an end of the matter. [page 163]
AN INSURED’S PRE-CONTRACTUAL DUTY OF DISCLOSURE UNDER THE ICA PT IV: DISCLOSURES AND MISREPRESENTATIONS The intent of Pt IV is to fairly balance: the extent to which an insured should be obliged to voluntarily disclose information insurers might need to properly assess the risks they are being asked to take on; the consequences for an insured of not meeting that obligation; and the investigation costs insurers might incur to make up for any limitation on that obligation, with the consequent effect on premiums and policy terms that would entail. Part IV divides aspects of an insured’s pre-contractual duty of disclosure and duty not to misrepresent into: Division 1: The duty of disclosure (ss 21, 21A, 21B and 22); Division 2: Misrepresentations (ss 23–27); Division 3: Remedies for non-disclosure and misrepresentation (ss 27A–33); and Division 4: Key Facts Sheets (ss 33A, 33B, 33C and 33D). The duty of utmost good faith (ICA Pt II) does not impose on an insured, ‘in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure’: s 12. The remedies in Pt IV are the insurer’s only remedies for an insured’s pre-contractual non-disclosure, misrepresentation or incorrect 8.30
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statement.87 Part IV replaces the common law, which might have historical interest or give some context to the provisions of Pt IV, but will rarely assist the interpretation of them.88 The available remedies depend on whether the insured was fraudulent or innocent (including negligent). 8.31 An insured must comply with the duty of disclosure before entering into a general insurance contract and again before it is renewed, extended or varied.89 [page 164]
Division 1: The insured’s pre-contractual duty of disclosure An insured’s pre-contractual duty of disclosure not governed by ss 21A and 21B: s 21(1) 8.32 Section 21(1) deals with an insured’s duty of disclosure in relation to insurance contracts not governed by ss 21A and 21B (see below). Unlike ss 21A and 21B, it does not limit an insured’s duty of disclosure to answering an insurer’s specific questions. It requires broader disclosure as follows: (1) Subject to this Act, an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that: a) the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or b) a reasonable person in the circumstances could be expected to know to be a matter so relevant, having regard to factors including, but not limited to: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and
the class of persons who would ordinarily be expected (ii) to apply for insurance cover of that kind. The scope of the duty of disclosure required by s 21(1) is delineated by the answer to the following question: Before the insurance contract was made, did the intending insured know of a matter that: it knew was relevant; or a reasonable person in the circumstances would be expected to know was relevant, to the insurer’s decision whether to accept the risk and if so, on what terms? If so, it ought to be disclosed. Even if an intending insured does not discharge its duty of disclosure, the insurer has no remedy unless it would not have entered into the contract for the same premium and on the same terms and condition if the intending insured had discharged its duty of disclosure: s 28(1).
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8.33 The scope of the s 21(1) duty of disclosure is not the same as the scope of the common law duty in relation to contracts not governed by the ICA. Amongst other things, the s 21(1) duty: rests on the notion of ‘relevant matters’ rather than ‘material facts’; and is dependent on what an insured knows, or a reasonable person in the circumstances could be expected to know, to be relevant to a
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[page 165] particular insurer, not on what a prudent insurer would regard as relevant to the risk.90 8.34 The reference to a general insurance contract being ‘entered into’ includes renewal, extension or variation of an existing insurance contract or reinstatement of a previous insurance contract: s 11(9).
The references in s 21(1) to ‘insured’ are references to: an insured who is a party to the contract;91 and each co-insured who is a party to the contract, so that the duty of disclosure is not limited to what is known to all of the coinsureds.92 Depending on the circumstances, a person who knows insurance is being arranged for them might owe a duty of disclosure by reason of a duty of utmost good faith (not by reason of s 21(1)).93 8.35
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8.36 What an insured ‘knows’ of a ‘matter’ is a question of fact.94 An insured only ‘knows’ a ‘matter’ if they actually ‘know’ the ‘matter’. Constructive knowledge (what the insured ought to know) is insufficient.95 In QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd,96 Sheller JA said (at [56]): The obligation to disclose something ‘known’ can attach only to something which, at the time for disclosure, a person actually has in his or her consciousness or else something which exists in some record or other source of information which the person actually knows about and to which the person has access. So, for example, I ‘know’ my driving licence number for the purposes of s 21(1) ICA even though I cannot recite it offhand because I actually know that it is to be found in the plastic card in my wallet.
Similarly, just because an insured does not remember the dates of his or her traffic infringements does not mean he or she does not ‘know’ them and therefore does not have to disclose them.97 [page 166] A company, knows about a ‘matter’ that is: contained in its current records; actually known to a person ‘with the authority of the company or is so closely connected with the company that his acts can be said to be its acts’;98 or actually known to a director, officer or employee of the company responsible for or involved in arranging the insurance.99
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A newspaper extract in a company’s possession ‘does not amount to [the company’s] knowledge, it is merely a source from which knowledge can be gained. Access to a means of knowledge is not sufficient’.100 The jury is still out on the question whether the knowledge of an insured’s agent or broker is attributed or imputed to the insured for the purpose of s 21(1).101 In Tosich v Tasman Investment Management Ltd,102 Gyles J suggested that a trial judge should take the view that an insured knows a matter that is known by its agent until the High Court decides otherwise. In that way, the evidence is available to the appellate court. An insured does not ‘know’ a ‘matter’: if they only ‘believe’ or ‘strongly suspect’ it;103 that they ought to know104 or that they should infer from other matters known them.105
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8.37 The requirement that an intending insured disclose matters known to them that they know are relevant, or that a reasonable person would know are relevant, to the insurer’s decision whether to accept the risk and, if so, on what terms protects the: insurer ‘against claims where the insured’s disclosure is inadequate because the insured is unreasonable, idiosyncratic or obtuse’; and
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[page 167]
■insured ‘from exclusion from cover, provided he or she does not fall below the standard of a reasonable person in the same position’.106
8.38 The questions an insurer asks an intending insured in the lead up to the making of an insurance contract is important in assessing what ‘a reasonable person in the circumstances could be expected to know to be a matter so relevant’ to that insurer. They ‘are a guide to an insured (and a reasonable person) as to those matters in which the insurer is likely to be interested when making its decision, they do not necessarily
set the boundaries of what a reasonable person would know to be relevant to the insurer’s decision’.107 8.39 What ‘a reasonable person in the circumstances could be expected to know’ takes into account, amongst other things, the matters identified in s 21(b). 8.40 In Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Ltd,108 Meagher JA suggested (at [31]) that an insured might not need to disclose something which the insurer might have taken into account but might ultimately be: … discarded as not affecting the underwriting decision which would otherwise have been made. …
8.41 A ‘matter relevant’ to the decision of an insurer whether to accept the risk and, if so, on what terms: might include threats to seriously injure an insured or damage insured property;109 might include an insured’s criminal convictions for drug-related offences (but see 8.22);110 will not include matters relating to an insurer’s commercial willingness to accept the risk, or emotional decisions by an insurer;111 and might not extend to matters related to ‘moral hazard’. In Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq),112 McHugh, Kirby and Callinan JJ said (at [32] and [36]) that ‘moral hazard’ would be a ‘matter relevant’ if s 21(1)(a) said ‘enter into the contract of insurance’ instead of saying ‘accept the risk’. They left to
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[page 168] another day the argument whether the word ‘risk’ in s 21(1)(a) refers to ‘physical’ and ‘moral’ hazard or is limited to ‘physical’ hazard.
The particular insurer’s underwriting guidelines and procedure manual and its practice at the time the risk was written (for example, how it dealt with proposals for similar risks) will usually be a good guide to what might be ‘relevant to the decision of the [particular] insurer whether to accept the risk and, if so, on what terms’.113 From the insurer’s point of view, evidence of the underwriter that accepted the risk would usually be critical to the outcome. 8.42 Insurance terms will become more onerous for insureds if insurers do not have the benefit of information about risk other than physical hazard. This is because insurers might respond by incurring the expense of investigating those aspects of the risk before offering insurance, or by increasing premium or adding terms to the policy, including exclusions, to take account of the uncertainty about those aspects of the risk.
Section 21(2) and (3): Exceptions to an insured’s pre-contractual duty of disclosure 8.43 Section 21(2) lists the matters an insured need not disclose, being matters: that diminish the risk; that are of common knowledge; that an insurer knows, or in the ordinary course of its business as an insurer ought to know. What an insurer ‘knows’ means what the insurer actually knows. It may include information contained in a newspaper extract if it is part of the insurer’s formal records or is filed in a place where the insurer’s relevant employees have seen it or could be expected to see it in the performance of their duties114. What the insurer knows ordinarily, but not necessarily, includes what its agent knows;115 and as to which compliance with the duty of disclosure is waived by the insurer.
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8.44
Section 21(3) provides that if an intending insured does not
answer, or gives an obviously incomplete or irrelevant answer to, a question in a proposal form about a matter: … the insurer shall be deemed to have waived compliance with the duty of disclosure in relation to the matter.
[page 169] By the section, ‘obviously incomplete information puts the insurer on inquiry and, if it omits to inquire, it has waived its right to rely upon the insured’s failure to disclose or misrepresentation’.116 The section is not an exhaustive description of the circumstances in which an insurer will be held to have waived compliance with an insured’s pre-contractual duty of disclosure.117 A proposal form is ‘a document containing questions to which a person is asked to give answers … where the answers are intended … to be used in connection with a proposed contract of insurance’: ICA s 11. It probably includes an online proposal.118
Sections 21A and 21B: An insured’s precontractual duty of disclosure in relation to ‘eligible contracts’ and other insurance contracts nominated by the insurer 8.45 Sections 21A and 21B concern pre-contractual disclosure in relation to an ‘eligible’ insurance contract. An ‘eligible’ insurance contract is: a motor vehicle, home buildings, home contents, sickness and accident, consumer credit or travel insurance contract; and any other insurance contract in respect of which the insurer has given the prescribed notice.119
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8.46 Section 21A applies to original (new) insurance business in relation to an ‘eligible’ insurance contract. In short, it limits the insured’s duty of disclosure to answering the insurer’s specific questions
relevant to its decision whether to accept a risk and, if so, on what terms. An insured will discharge their duty of disclosure if they answer each question by disclosing each matter they know and a reasonable person in the circumstances could be expected to have disclosed in answer to that question. 8.47 Section 21B applies to renewal of an ‘eligible’ contract (not to an extension, variation or reinstatement of an insurance contract, unless that amounts to renewal). Section 21B allows an insurer to: ask an insured specific questions relevant to an insurer’s decision whether to accept a risk and, if so, on what terms. An insured will discharge their duty of disclosure if they answer each question by disclosing each matter they know and a reasonable person in the circumstances could be expected to have disclosed in answer to that question; or
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[page 170]
■give an insured a copy of its previous disclosure and ask if anything has changed. If the insured does not disclose any changes, they will be taken to have informed the insurer that there has been no change: s 21B(10).
An insurer cannot rely on an insured’s precontractual innocent (including negligent) nondisclosure unless it gives notice to the insured in terms of s 22 8.48 By s 22, an insurer cannot rely on an insured’s innocent (including negligent) pre-contractual non-disclosure for the purpose of exercising any of the remedies available in s 28 unless the insurer, before the insurance contract is made, clearly informs the insured in writing of the:
nature and effect of the duty of disclosure described in s ■general 21; ■general nature and effect of s 21A or s 21B if it applies to the
contract; and the effect of s 31A if it is a life insurance contract.120 If the contract is a life insurance contract, the insurer must also comply with s 22(2). The section does not say how long before the contract is made that the insurer’s notice must be given or whether the notice must include information about the consequences of a breach of the duty of disclosure in addition to information about its nature and effect.121
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8.49 An insurer can give the information orally if it is not ‘reasonably practicable’ for it to be given in writing before the contract is made, as long as the information is given in writing within 14 days of the making of the contract.122 8.50 An insured cannot ‘waive or otherwise dilute’ the requirements of s 22.123 8.51 It is not necessary for an insurer to provide an insured with the information described in s 22 at or before: ‘any subsequent renewal, extension or reinstatement of’ an insurance contract if it gave that information before the original contract was made: s 11(10)(a); or ‘a variation of the relevant contract of insurance except where the variation is involved in a renewal, extension or reinstatement of the contract’: s 11(10)(b).
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[page 171] 8.52 If an insurer accepts an insured’s offer to insure or makes a counter offer to insure more than two months after the insured’s most recent disclosure, the insurer will not be able to rely on any nondisclosure after the last disclosure unless (s 22(3) and (6)):
■it reminds the insured at the time of the acceptance or counter offer ■
that the insured’s duty of disclosure applies until the insured contract is entered into; or the non-disclosure of the new matter is fraudulent.
Division 2: Sections 23, 24, 26 and 27: Misrepresentation in relation to a general insurance contract 8.53 If a ‘reasonable person in the circumstances’ would have understood a question in an insurance proposal to have a certain meaning and the person who answered the question apparently seemed to understand it to have that same meaning, the question is deemed to have that meaning: s 23. 8.54 Section 24 renders ‘basis of contract clauses’124 ineffective by deeming a contractual warranty about ‘the existence of a state of affairs’ to have the effect of a pre-contractual representation, not a warranty.125 8.55 A ‘basis of contract clause’ is a clause, usually found in a proposal for insurance: which makes the proposal the basis of the insurance contract; and by which the insured confirms the contents of the proposal are true (alternatively, true to the best of the insured’s knowledge and belief). If the contents are untrue, the insurance contract is void and unenforceable. 126 Section 24 provides as follows:
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A statement made in or in connection with a contract of insurance, being a statement made by or attributable to the insured, with respect to the existence of a state of affairs does not have effect as a warranty but has effect as though it were a statement made to the insurer by the insured during the negotiations for the contract but before it was entered into.
Section 24 converts a warranty as ‘to the existence of a state of affairs’ into a pre-contractual representation, thereby limiting the
insurer’s remedy for a breach of the ‘warranty’ (misrepresentation) to that provided by s 28.127 [page 172] 8.56 Section 26 deems an untrue pre-contractual statement by an insured not to be a misrepresentation: if the insured believed the statement to be true, and a reasonable person in the circumstances would have believed the statement to be true: s 26(1); unless the insured knew (a subjective test) or a reasonable person in the circumstances of the insured would have known (an objective test), that the statement would be relevant to the insurer’s decision to accept the risk and, if so, on what terms: s 26(2). The insured bears the onus of proving the elements of s 26(1); the insurer bears the onus of proving the elements of s 26(2).128
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8.57 A misleadingly incomplete statement may be a non-disclosure within the scope of s 21 and a misrepresentation if it is not excluded by s 26. Except ‘in this possible area of overlap, the application to the same facts of s 21(1), on the one hand, and, on the other, of s 26(2) may yield different results’.129 8.58 By s 27, an insured will be taken not to have made a misrepresentation in relation to a question asked in an insurance proposal that the insured has: not answered; or responded to with an obviously incomplete or irrelevant answer. For the purpose of s 27, a proposal form probably includes an online proposal.130
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Division 3: Remedies for pre-contractual nondisclosure and misrepresentation: ss 28 and 29
8.59 Section 28 describes the remedy for pre-contractual nondisclosure or misrepresentation in relation to a general insurance contract. Section 29 does the same for a life insurance contract. Only s 28 is dealt with here.
Section 28(1): No remedy for non-disclosure or misrepresentation if the insurer would have entered into a general insurance contract on the same terms 8.60 By s 28(1), an insurer has no remedy for an insured’s precontractual non-disclosure (innocent or fraudulent) under a general insurance contract if it would have entered into the contract on the same [page 173] terms if the non-disclosure had not occurred or the misrepresentation had not been made.131 It is in the following terms: (1) This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into: (a) failed to comply with the duty of disclosure; or (b) made a misrepresentation to the insurer before the contract was entered into; but does not apply where the insurer would have entered into the contract, for the same premium and on the same terms and conditions, even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into.
Remedy for innocent (including negligent) precontractual non-disclosure: s 28((3)
8.61
Section 28 continues:
… (3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subs (2) or otherwise) has not done so, the liability of the insurer in respect of a claim is reduced to the amount that would place the insurer in a position in which the insurer would have been if the failure had not occurred or the misrepresentation had not been made.
Accordingly, an insurer cannot avoid a contract for an insured’s innocent pre-contractual non-disclosure or misrepresentation. However, in this case, and subject to s 28(1), the insurer’s liability for a claim is reduced to an amount that would put the insurer in the position it would have been in if the non-disclosure had not occurred or the misrepresentation had not been made. In Prepaid Services Pty Ltd v Atradius Credit Insurance NV,132 the Court of Appeal said (at [71]) that s 28(3): … requires an inquiry as to the position the insurer would have been in if the relevant misrepresentation had not been made. It is the same as would be made if the insurer was claiming damages for misrepresentation in the amount by which it seeks to have the insured’s claim reduced. Accordingly, it must establish on the balance of probabilities what it says its position would have been if the misrepresentation had not occurred. That is so notwithstanding that the hypothesis upon which the reduction of liability is based is not an historical fact. By its defence Atradius claimed it was entitled to reduce its liability to nil because it would not have entered into any policy which would have covered all or part of the appellants’ claim. Accordingly, it was necessary for the primary judge to determine whether Atradius had established on the balance of probabilities that it would not have issued a policy to the appellants which would have provided any insurance of the BXP defaults.
[page 174] So, for example, if an insurer proves it would: have charged a higher premium if there had been proper disclosure (no misrepresentation), the insurer’s liability will be reduced by the amount of the notional increase in premium. In some overseas jurisdictions, an insurer’s liability for a claim in these circumstances is reduced by the proportion that the actual premium charged by the insurer bears to the premium the insurer
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would have charged if there had been proper disclosure. So, for example, if an insurer charged premium of $1,000 and would have charged premium of $2,000 if there had been proper disclosure, then the amount payable for any claim under the policy will be reduced by half. In those jurisdictions, this is the remedy for negligent nondisclosure (there is no remedy for innocent non-negligent nondisclosure in those jurisdictions). Accordingly, it involves the insured bearing some pain for their careless non-disclosure. That is not the case under s 28(3), which focuses on compensating the insurer, not penalising the insured or making them accountable. Australia is now virtually alone in the world in allowing an insurer a remedy for an innocent non-negligent non-disclosure by an insured who broadly falls within the ‘consumer’ category; have inserted a different term into the contract if there had been proper disclosure (no misrepresentation), the insurer will only be liable to the extent that it would have been if the term had been inserted. If the term would have excluded liability for the claim, the insurer’s liability will be reduced to nil;133 not have entered into the contract at all if there had been proper disclosure (no misrepresentation), the insurer’s liability will be reduced to nil, although it will be required to return the premium (unless the non-disclosure or misrepresentation was fraudulent).
8.62 In Prepaid v Atradius (No 2),134 the trial judge (McDougall J) said s 28(3) does not require an insurer to make its own inquiries for the purpose of filling gaps left by the insured by its non-disclosure.
Remedy for fraudulent non-disclosure or misrepresentation: ss 28 and 31 8.63 Subject to s 28(1), an insurer is entitled to avoid an insurance contract for fraudulent non-disclosure or fraudulent misrepresentation: s 28(2). The ICA does not define fraudulent non-disclosure or
[page 175] fraudulent misrepresentation. Accordingly, its meaning is derived from the common law.135 8.64 If an insurer is entitled to avoid for fraud but elects not to do so, its remedy is limited to the remedy it has under s 28(3) for innocent non-disclosure or misrepresentation, namely to reduce ‘its liability to an amount that would put the insurer in the position it would have been if the non-disclosure had not occurred or the misrepresentation not been made’. 8.65 If an insurer decides to avoid for fraudulent non-disclosure, a court can disregard the avoidance in respect of a loss that is the subject of the proceedings before it ‘if it would be harsh and unfair not to do so’: s 31. Disregarding an avoidance does not reinstate the contract: s 31(4). A court will only disregard an insurer’s avoidance if ‘the insurer has not been prejudiced by the failure … or, if the insurer has been so prejudiced, the prejudice is minimal or insignificant’: s 31(2). If the avoidance is disregarded, the court will allow the insured ‘to recover the whole, or such part as the court thinks just and equitable in the circumstances, of the amount that would have been payable if the contract had not been avoided’: s 31(1). The phrase ‘just and equitable’: allows a wide discretion, to be ‘exercised judicially in the light of the whole of the circumstances surrounding the relevant subject matter’;136 and does not allow ‘unfettered individual opinion [or] discretion of an arbitrary kind’.137 That wide discretion is limited by s 31(1), which provides that in determining how much an insured can recover, the court shall: have regard to the need to deter fraudulent conduct in relation to insurance; and
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■weigh the extent of the culpability of the insured in the fraudulent
conduct against the magnitude of the loss that would be suffered by the insured if the avoidance were not disregarded, but may also have regard to any other relevant matter.
[page 176]
Division 4: Key Facts Sheets (ss 33A, 33B, 33C and 33D) 8.66 An insurer is obliged to provide an intending insured with a Key Facts Sheet in relation to a home buildings or home contents insurance contract138 at the time and in the circumstances provided by reg 4C of the Insurance Contracts Regulations 1985 (Cth). Not to do so is an offence: ICA, s 33C(5). The Sheet is intended to enable a consumer to quickly check the key provisions of an insurance contract and compare it with similar insurance contracts for the purpose of deciding which policy to choose. The information to be included in a Key Fact Sheet is prescribed by reg 4B.
Cancellation of a contract for non-disclosure or misrepresentation 8.67 An insurer can cancel a contract for an insured’s pre-contractual non-disclosure or misrepresentation: s 60(1)(b).
AN INSURER’S PRE-CONTRACTUAL COMMON LAW DUTY OF DISCLOSURE IS NOT AFFECTED BY THE ICA 8.68
An insurer’s pre-contractual common law duty of disclosure and
duty not to misrepresent are unaffected by the ICA, as there is nothing in the ICA about them. However, the ICA and Ch 7 of the Corporations Act 2001 (Cth) do impose pre-contractual obligations on an insurer to inform in certain circumstances. These are addressed in the next two sections of this chapter.
AN INSURER’S PRE-CONTRACTUAL REQUIREMENT TO INFORM UNDER THE ICA 8.69 As mentioned, the ICA does not affect an insurer’s common law pre-contractual duty of disclosure and duty not to misrepresent. However, it does prevent an insurer from taking advantage of various rights, benefits or entitlements unless it informs an intending insured of certain matters prior to the making of the insurance contract. Most of these are mentioned below. Generally speaking, providing the required information to an insurance broker acting for an intending insured will be sufficient notice to the intending insured in all of the following cases except the statutory policy described in s 58: s 71. [page 177] 8.70
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An insurer cannot rely on: an insured’s innocent pre-contractual non-disclosure for the purpose of exercising any of the remedies available to it under s 28 unless, before the insurance contract is made, it clearly informs the insured in writing of the general nature and effect of the duty of disclosure described in s 21 and of ss 21A, 21B and 31A if they apply to the contract: s 22; ‘a provision … in [a contract that is not a prescribed contract] … of a kind that is not usually included in contracts of insurance that
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provide similar insurance cover unless, before the contract was entered into the insurer clearly informed the insured in writing of the effect of the provision’: s 37. In s 37, ‘insured’ is a reference to a party to the contract. If this is not right and ‘insured’ is a reference to a party to the contract and to a ‘third party beneficiary’ (as defined by the ICA s 11(1)), the insurer is going to have a very difficult time protecting itself; ‘an average provision … in a contract of general insurance unless, before the contract was entered into, the insurer clearly informed the insured in writing of the nature and effect of the provision including whether the provision is based on indemnity or on replacement value of the property that is the subject-matter of the contract’: s 44(1); a provision of an insurance contract ‘that has the effect of excluding or limiting the insurer’s liability in respect of a loss by reason that the insured is a party to an agreement that excludes or limits a right of the insured to recover damages from a person other than the insurer in respect of the loss … unless the insurer clearly informed the insured in writing, before the contract of insurance was entered into, of the effect of the provision’: s 68(1).
8.71 A ‘prescribed contract’ must provide the minimum cover described in the Insurance Contracts Regulations 1985 (Cth) unless, before the contract is made, the insurer brings the difference in cover to the insured’s attention, or the insured knew, or a reasonable person in the circumstances could be expected to have known, about the difference in cover: ICA s 35. In these sections, ‘insured’ is a reference to a party to the contract. Again, if this is not right and ‘insured’ is a reference to a party to the contract and to a ‘third party beneficiary’ (as defined by the ICA s 11(1)), the insurer is going to have a very difficult time protecting itself. 8.72 An insurer is obliged under a first party property policy to cover an interest in the property ‘that is not the insured’s interest’, unless ‘before the contract was entered into, the insurer clearly informed the
insured in writing that the insurance cover provided by the contract would not extend to such an interest’: s 49(1). 8.73 An insured is automatically covered by a statutory policy commencing upon the expiry of a general insurance contract with [page 178] ‘renewable insurance cover’ if the insurer does not inform the insured at least 14 days before the expiry of the contract ‘of the day on which and the time at which the cover will expire and whether the insurer is prepared to negotiate to renew or extend the cover’: s 58.
AN INSURER’S PRE-CONTRACTUAL DISCLOSURE OBLIGATIONS UNDER THE CORPORATIONS ACT 2001 CH 7 8.74 In Chapter 4 of this text, there is a brief description of the regulatory framework of Ch 7 of the Corporations Act 2001 (Cth) insofar as it affects general insurers. The following discussion assumes some familiarity with that framework and in particular, with the distinctions between ‘wholesale’ and ‘retail’ clients and between ‘general’ and ‘personal’ advice. 8.75 What follows is a description of the information Ch 7 obliges a general insurer to disclose to a ‘retail client’ about its products and services before entering into an insurance contract with the client. An insurer cannot contract out of these obligations: s 951A. One of the pre-contractual disclosure documents required by Ch 7 is a Financial Services Guide (FSG). A general insurer is not obliged to issue an FSG: s 941C(2).
Disclosure that must accompany ‘general
advice’: Ch 7 Pt 7.7 Div 4 8.76 By s 949A(2) and (3), if a general insurer with an Australian Financial Services Licence (AFSL) gives ‘general advice’ to a ‘retail client’, it must warn the client at the same time as the advice is given, that: (a) the advice has been prepared without taking account of the client’s objectives, financial situation or needs; and (b) because of that, the client should, before acting on the advice, consider the appropriateness of the advice, having regard to the client’s objectives, financial situation and needs; and (c) if the advice relates to the acquisition, or possible acquisition, of a particular financial product — the client should obtain a Product Disclosure Statement … relating to the product and consider the Statement before making any decision about whether to acquire the product. This disclosure is commonly found in a Product Disclosure Statement (PDS) (see below).
Disclosure that must accompany ‘personal advice’: Ch 7 Pt 7.7 Div 3 8.77 A general insurer with an AFSL that gives ‘personal advice’ to a ‘retail client’ in relation to sickness and accident insurance or consumer [page 179] credit insurance must give the client a Statement of Advice (SOA): ss 944A and 946A. An SOA is not required if the advice relates to a motor vehicle, home building or contents, travel, personal and domestic property, medical indemnity insurance (added by reg 7.1.17A) or other kind of general insurance product prescribed by the Regulations: reg 7.7.10. The SOA must contain the ‘personal advice’, the basis for it and a
description of the things that might affect it so that the client can make an informed decision about whether to follow the advice or not. The main requirements for the content of a general insurer’s SOA are set out in s 947B(2) and (3). They include: (2) a) b) c) d)
… a statement setting out the advice; and information about the basis on which the advice is or was given; and a statement setting out the name and contact details of the [general insurer]; and information about any remuneration (including commission) or other benefits that any of the following is to receive that might reasonably be expected to be or have been capable of influencing the [general insurer] in providing the advice … e) information about: (i) any other interests … of the [general insurer] or of any associate of the [general insurer]; and … that might reasonably be expected to be or have been capable of influencing the [general insurer] in providing the advice; and (f) if s 945B [see below] requires a warning to be given to the client in relation to the advice – a statement setting out, or recording, the warning required by that section; and (g) any other statements or information required by the regulations; and (h) unless in accordance with the regulations, for information to be disclosed in accordance with paragraph (d) and subparagraph (e)(i), any amounts are to be stated in dollars. (3) Subject to subs (4), the level of detail about a matter that is required is such as a person would reasonably require for the purpose of deciding whether to act on the advice as a retail client.
If a general insurer gives ‘personal advice’ to a ‘retail client’, the insurer ‘must act in in the best interests of the client in relation to the advice’: s 961B(1). There are additional requirements for the SOA when the advice recommends the replacement of one financial product with another: s 947D. The information in a SOA ‘must be worded and presented in a clear, concise and effective manner’: s 947B(6). An SOA cannot be combined in a single document with a PDS: s 947E. [page 180]
PDS 8.78 Chapter 7 Pt 7.9 requires a general insurer with an AFSL to provide a ‘retail client’ with a PDS when: giving personal advice ‘that consists of, or includes, a recommendation to acquire a financial product’, in the situations described in s 1012A(3); offering to issue or issuing a financial product, in the situations described in s 1012B(3); or offering to sell a financial product, in the situations described in s 1012C(3) and (4). In this context, a financial product is an insurance contract mentioned in s 761G(5)(b), namely motor vehicle, home building or contents, sickness and accident, consumer credit, travel, personal and domestic property, medical indemnity insurance (added by reg 7.1.17A) or other kind of general insurance product prescribed by the Regulations. A PDS is not required where the insurance is an interim contract of insurance (that is, a cover note); however, a PDS must be given when the contract is replaced by a policy (if the client is a retail client): s 1012D(9).
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8.79 The PDS must be provided to the ‘retail client’ before the parties enter into the contract as it is intended to enable the client to make an informed decision about whether to enter into the contract, having regard to the availability of similar contracts on the market: Revised Explanatory Memorandum to the Financial Service Reform Bill 2001, para 14.18. 8.80 A PDS must include ‘information about any other significant characteristics or features of the product or of the rights, terms, conditions and obligations attaching to the product’ (s 1013D(1)(f)), as well as (reg 7.9.15E of the Corporations Regulations 2001 (Cth)): the policy terms and conditions (the Certificate or Schedule of Insurance can be separate to the PDS); information that if the [general insurer] were seeking to rely on
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35(2) and s 37 of the Insurance Contracts Act 1984, [it] ■subs would have had to provide to the insured before the contract of insurance was entered into. The other important requirements for the contents of a PDS are set out in s 1013D(1) as follows: (a) [the insurer’s name and contact details]; (b) information about any significant benefits to which [the insured] will or may become entitled, the circumstances in which and times at which those benefits will or may be provided, and the way in which those benefits will or may be provided; and … [page 181] (f)
information about any other significant characteristics or features of the [insurance contract] or of the rights, terms, conditions and obligations attaching to the [insurance contract]; and (g) information about the dispute resolution system that covers complaints by holders of the [insurance contract] and about how that system may be accessed; and … (i) information about any cooling-off regime that applies in respect of acquisitions of the [insurance contract]; and … (k) any other statements or information required by the regulations; and … (m) unless in accordance with the regulations, for information to be disclosed in accordance with paragraphs (b) … any amounts are to be stated in dollars. As a general insurer can only calculate premium for a particular insured after a standard form PDS has been produced (because the insurer can only assess the risk after finding out information about the risk from the intending insured and what level the intending insured requires), an insurer is relieved from having to state in the PDS the
premium to be charged for the insurance. However, it is obliged to include in the PDS the amount of premium as a range of amounts in dollars, as a percentage of a matter that is mentioned in the PDS or as a description: reg 7.9.15C(4) and (5). 8.81
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A PDS does not have to include: some of the information set out in s 1013D(1): reg 7.9.15D; the extra information otherwise required by s 1013E: reg 7.9.15F; information ‘if it would not be reasonable for a person considering, as a retail client, whether to acquire the product to expect to find the information in the Statement’: s 1013F(1).
8.82 By s 1014A, a general insurer must issue a Supplementary Product Disclosure Statement (SPDS) to: correct a misleading or deceptive statement in the PDS; or correct an omission from the PDS of information it is required to contain; or update, or add to, the information contained in the PDS; or change a statement of a kind referred to in paragraph 1016E(1)(a) or (b).
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8.83 The information in a PDS ‘must be worded and presented in a clear, concise and effective manner’: s 1013C(3). 8.84 Sections 1021C–1021P create a range of offences for breaching the PDS requirements. A person who suffers loss or damage as a result of a general insurer breaching the PDS requirements may be entitled to damages or an order declaring the contract void: ss 1022B and 1022C.
1. 2.
3. 4. 5.
Brotherton v Aseguradora Colseguros SA [2003] EWCA Civ 705; Lloyd’s Rep IR 746 at [24] (Mance J). In Contractual Non-Disclosure: An Applied Study in Modern Contract Theory, Longman Professional, Melbourne, 1994, Duggan, Bryan and Hanks suggest that a chronological discussion of pre-contractual non-disclosure begins with the writings of Cicero. (1989) 97 FLR 458. 15 US (2 Wheat) 178 (1817). Louisiana is the only state of the United States with a legal system based on the Spanish
6.
7. 8. 9. 10. 11. 12. 13.
14. 15. 16. 17. 18. 19. 20. 21.
22. 23. 24. 25. 26. 27. 28.
and French civil law rather than the common law. Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252 at [100] (Meagher JA); Alexander Stenhouse Ltd v Austcan Investments Pty Ltd [1993] HCA 22; (1993) 7 ANZ Ins Cas 61-166 at [11]. When a renewed policy is backdated, the duty continues in relation to the ‘renewed’ policy until renewal is effected, that is after the date from which the policy is renewed: Australian Associated Motor Insurers Ltd v Goss [1983] 1 VR 725 at 731 (King J). Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 (Samuels J); Brooks v Sirius Insurance Company Ltd (1985) 3 ANZ Ins Cas 60-601 at 78,657 (Yeldham J). Winter v Irish Life Assurance plc [1995] 2 Lloyd’s Rep 274. Pan Atlantic Insurance v Pine Top Ltd [1995] 1 AC 501 at 549 (Lord Mustill). Economides v Commercial Union Co plc [1998] QB 587 at 602 (Simon Brown LJ). QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd [2003] NSWCA 356 at [56] (Sheller JA). Macquarie Bank v National Mutual Life Association (1996) 40 NSWLR 543 at 610–14 (Powell JA). Lindsay v CIC Insurance (1989) 16 NSWLR 673; 5 ANZ Ins Cas 60-913; A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 [2006] FCA 520 at [726]–[728] (Dowsett J). Australian Law Reform Commission, Insurance Contracts, Report 20, 1982 at [151]. La Banque Financiére de la Cite SA v Westgate Insurance Co Ltd [1990] 1 QB 665 at 772 (Slade LJ). Iron Trades Mutual Insurance Co Ltd v Companhia de Seguros Imperio [1991] 1 Re LR 213 at 224 (Hobhouse J). Woolcott v Excess Insurance Co Ltd [1978] 2 Lloyd’s Rep 430; Blackley v National Mutual Life Association of Australasia [1972] NZLR 1038 at 1049 (Turner P). Wise Underwriting Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962 at [60]– [62] (Longmore LJ). Schoolman v Hall [1951] 1 Lloyd’s Rep 139 at 143 (Asquith LJ). [2017] NSWCA 71. Condogianis v Guardian Assurance Company Ltd [1921] 2 AC 125 at 131; Deaves v CML Fire & General Insurance Co Ltd [1979] HCA 12; (1979) 143 CLR 24 at [8] (Mason J). Prepaid Services Pty Ltd v Atradius Credit Insurance NV (see fn 6) at [65] (Meagher JA). Prepaid Services Pty Ltd v Atradius Credit Insurance NV (see fn 6) at [67] and [68] (Meagher JA). Wise Underwriting Ltd v Grupo Nacional Provincial SA (see fn 18) at [110]–[111] (Longmore LJ). Hitchens v Zurich Australia Ltd [2015] NSWSC 825 at [147] and [156] (White J). Friere v Woodhouse (1817) Holt 572; 171 Eng Rep 345 at 573, in which the underwriters could have discovered the relevant information from Lloyd’s printed Lists. Noble v Kennoway (1780) 2 Douglas 510 at 513; 99 ER 326 (Lord Mansfield). See Ferrcom Pty Ltd v Commercial Union Assurance Company of Australia Ltd [1993] HCA 5; (1993) 176 CLR 332; 7 ANZ Ins Cas 61-156 for an example of a condition of
29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.
44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56.
that type. Ansari v New India Assurance Ltd [2009] EWCA Civ 93 at [41] and [45] (Moore-Bick LJ). ‘Mercandian Continent’ [2001] EWCA Civ 1275; 2 Lloyd’s Rep 563 at [22] (Longmore LJ). Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (see fn 6) at [11]. Mercantile Mutual Insurance (Australia) Ltd v Gibbs [2001] WASCA 271 at [28] (Kennedy J); The ‘Moonacre’ [1992] 2 Lloyd’s Rep at 501 at 521 (Anthony Colman QC). Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162 (Lord Mansfield). Western Australian Insurance Company Ltd v Dayton [1924] HCA 58; (1924) 35 CLR 355 (Isaacs ACJ and Starke J). Akedian Co Ltd v Royal Insurance Australia (1997) 148 ALR 480; 10 ANZ Ins Cas 61398 at 74,286 (Byrne J). Western Australian Insurance Company Ltd v Dayton (see fn 34) (Isaacs ACJ and Starke J); Mayne Nickless Ltd v Pegler (see fn 7) at 239 (Samuels J). Pan Atlantic Insurance Co Ltd v Pinetop Insurance Co Ltd (see fn 9). (1997) 148 ALR 480. [1974] 1 NSWLR 228. (1987) 8 NSWLR 514. [1987] HCA 57; (1987) 163 CLR 628. Pan Atlantic Insurance Co Ltd v Pinetop Insurance Co Ltd (see fn 9) at 517 (Lord Goff), 531 (Lord Mustill). Pan Atlantic Insurance Co Ltd v Pinetop Insurance Co Ltd (see fn 9). Like the general law of contract, an insurer cannot avoid an insurance contract unless a material misrepresentation ‘induce’ it to enter into the contract. See Lord Mustill at 549. Assicurazioni Generali SpA v Arab Insurance Group (BSC) [2002] EWCA Civ 1642; [2003] Lloyd’s Rep IR 131 at [62] (Clarke LJ). Assicurazioni Generali SpA v Arab Insurance Group (BSC) (see fn 44) at [59] (Clarke LJ). [1995] 1 AC 501. [1975] 2 Lloyd’s Rep 485. Akedian Co Ltd v Royal Insurance Australia (see fn 35) at 494 (Byrne J). [2003] EWCA Civ 1834; [2004] 1 Lloyd’s Rep 268. Assicurazioni Generali SpA v Arab Insurance Group (BSC) (see fn 44) at [81] (Clarke LJ). Davis v Westpac Life Insurance Services Ltd [2007] NSWCA 175 at [73] (McColl JA). James v CGU Insurance Plc [2001] EWHC 489 (Comm) at [100] (Moore-Bick J). Locker and Woolf Ltd v Western Australian Insurance Co [1936] 1 KB 408 at 414 (Slesser LJ). Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1997] EWHC 373 (Comm); [1998] Lloyd’s Rep IR 151 at 157 (Mance J). Insurance Corporation of the Channel Islands v The Royal Hotel Ltd (see fn 54) at 156 (Mance J). Lindsay v CIC Insurance Ltd (see fn 13). See also Commercial Union Assurance Company
57. 58. 59. 60. 61.
62. 63. 64. 65. 66.
67. 68.
69. 70. 71. 72.
73. 74. 75. 76.
of Australia Ltd v Beard [1999] NSWCA 422; [2000] 11 ANZ Ins Cas 61-458, which discussed the need for an insured to disclose his association with a well-known Sydney identity, not necessarily because it reflected upon the integrity of the insured, but because that person might attract trouble that might result in damage to the premises. Anti-Discrimination Act 1998 (Tas) s 16(q). Anti-Discrimination Act 1996 (NT) s 19(q). For example, the Criminal Records Act 1991 (NSW) s 12. Strive Shipping Corp v Hellenic Mutual War Risks Association ‘Grecia Express’ [2002] EWHC 203; 2 Lloyd’s Rep 88 (Colman J). Khoury v Government Insurance Office of (NSW) [1984] HCA 55; (1984) 165 CLR 622 at [18] (Mason, Brennan, Deane and Dawson JJ); Brotherton v Aseguradora Colseguros SA (see fn 1) at [28] (Mance LJ); Inversiones Manria SA v Sphere Drake Insurance Co plc (The Dora) [1989] 1 Ll R 69 (Phillips J). North Star Shipping Ltd v Sphere Drake Insurance Plc [2005] EWHC 665; 2 Lloyd’s Rep 76 at [209]–[210] (Colman J). Drake Insurance plc (in prov liq) v Provident Insurance plc [2003] EWCA Civ 1834; [2004] 1 Lloyd’s Rep 268. The insurer bears the onus of proving both parts of the two-stage process in its favour: Assicurazioni Generali SpA v Arab Insurance Group (BSC) (see fn 45) at [53] (Clarke LJ). Carter v Boehm (see fn 33). Zurich General Accident and Liability Insurance Co v Leven (1940) SC 406 at 415 (Lord President Normand); Joel v Law Union & Crown Insurance Co [1908] 2 KB 863 at 884 (Fletcher Moulton LJ). Dalgety & Co Ltd v Australian Mutual Provident Society [1908] VLR 481 at 499 (Cussen J). NRG Victory Australia Ltd v Hudson [2003] WASCA 291 at [5] (Steytler J), [32] (Parker J), citing Sutton, Insurance Law in Australia, 3rd ed, LBC Information Services, 1999 at [3.138]. Dr Gregory Moore v The National Mutual Life Association of Australasia Ltd [2011] NSWSC 416 at [71] (Ball J). Lloyd v Grace, Smith & Co [1912] AC 716; Maye v Colonial Mutual Life Assurance Society Ltd [1924] HCA 26; (1924) 35 CLR 14 (Isaacs ACJ). O’Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 at 220, citing Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362 (Dixon J). Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VLR 125; (1996) 9 ANZ Ins Cas 61-385 at [129]–[130] (Winneke P); Benson-Brown v HIH Casualty & General Insurance Ltd [2001] WASC 6 at [29] (Wheeler J). Briginshaw v Briginshaw (see fn 71) at 362 (Dixon J). Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517 at [11]. Briginshaw v Briginshaw (see fn 71) at 362 (Dixon J). HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6; 2 Lloyd’s Rep 61 at [75] (Lord Hoffmann); Manifest Shipping Co Ltd v Uni-Polaris Shipping Co Ltd (‘The Star Sea’) [2001] UKHL 1; [2003] 1 AC 469 at [46] (Lord Hobhouse).
77. Khoury v Government Insurance Office of (NSW) (see fn 61) at [28] (Mason, Brennan, Deane and Dawson JJ). 78. HIH Casualty and General Insurance Ltd v Chase Manhattan Bank (see fn 76) at [23] (Lord Bingham). 79. Chapman v Fraser (1793) BR Trin 33 Geo 111. 80. Carter v Boehm (see fn 33). 81. Banque Financiere de la Cite v Westgate Insurance Co Ltd [1991] 2 AC 249. 82. Brotherton v Aseguradora Colseguros SA (see fn 1) at [27] and [45] (Mance J). 83. HIH Casualty and General Insurance Ltd v Chase Manhattan Bank (see fn 76) at [73] (Lord Hoffmann). 84. Newbigging v Adam (1886) 34 Ch D 582. 85. [2003] EWCA Civ 1834; [2004] 1 Lloyd’s Rep 268 at [91] (Rix LJ). 86. Brotherton v Aseguradora Colseguros SA (see fn 1) at [28]–[32] (Mance J). 87. ICA s 33: Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 at [22] (Mason CJ, Dawson, Toohey and Gaudron JJ). 88. Advance (NSW) Insurance Agencies Pty Ltd v Matthews (see fn 87) at [22] (Mason CJ, Dawson, Toohey and Gaudron JJ). 89. Sections 21, 21A and 11(9); see Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (see fn 6) at [9]–[12]. 90. Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [70] (Gummow and Hayne JJ); Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd [2001] NSWCA 20; (2001) 50 NSWLR 679 at [32] (Handley JA). 91. ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 at [1634]–[1646]; CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25 at 36 (Mahoney JA) at 46 (Clarke JA); 7 ANZ Ins Cas 61-199. 92. Advance (NSW) Insurance Agencies Pty Ltd v Matthews (see fn 87) at [25] and [28] (Mason, Dawson, Toohey and Gaudron JJ). 93. CE Heath Casualty and General Insurance Ltd v Grey (see fn 91). 94. Commercial Union Assurance Company of Australia Pty Ltd v Beard [1999] NSWCA 422; [2000] 11 ANZ Ins Cas 61-458 at [37] (Davies AJA). 95. QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd (see fn 11) at [56] (Sheller JA). 96. [2003] NSWCA 356. 97. Allen v QBE Syndicate 1886 at Lloyds [2010] QDC 4 at [25] (Clare SC DCJ). 98. Entwell Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059 (Ipp J). 99. Commercial Union Assurance Company of Australia Pty Ltd v Beard (see fn 94) at [62]– [63] (Davies AJA); Entwell Pty Ltd v National and General Insurance Co Ltd (see fn 98); Re Akron Roads Pty Ltd (in liquidation) (No 3) [2016] VSC 657 at [414] (Robson J). 100. Commercial Union Assurance Company of Australia Pty Ltd v Beard (see fn 94) at [63] (Davies AJA). 101. Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [30] (McHugh, Kirby and Callinan JJ); Kalabakas v Chubb
102. 103. 104.
105.
106. 107. 108. 109. 110. 111. 112. 113. 114. 115.
116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126.
Insurance Company of Australia Ltd [2015] VSC 705 at [29]–[35] (McMillan J). [2008] FCA 377; (2008) 250 ALR 274 at [93]. Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) [2003] HCA 25; (2003) 214 CLR 514 at [30] (McHugh, Kirby and Callinan JJ). A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 [2006] FCA 520 at [725] (Dowsett J); Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 at 74,998 (Young J). Midaz Pty Ltd v Peter McCarthy Insurance Brokers Pty Ltd (1998) 10 ANZ Insurance Cases 61-394; [1999] 1 Qd R 279 at 283–4 (Pincus JA); A & D Douglas Pty Ltd ACN 008 404 180 v Lawyers Private Mortgages Pty Ltd ACN 010 556 751 (see fn 104) at [724] (Dowsett J). CGU Insurance Ltd v Porthouse [2008] HCA 30; (2008) 235 CLR 103 at [53]. Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd [2011] VSC 467 at [79] (MacAuley J). [2017] NSWCA 71. GIO General Ltd v Wallace [2001] NSWCA 299; (2001) 11 ANZ Ins Cas 61-506 at [36] (Heydon JA). Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd [1990] VR 919; (1990) 6 ANZ Ins Cas 60-954. Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (in liq) (see fn 103) at [32] (McHugh, Kirby and Callinan JJ). See fn 103. Bauer Tonkin Insurance Brokers v CIC (1996) 9 ANZ Ins Cas 61-298. Commercial Union Assurance Company of Australia Pty Ltd v Beard (see fn 94) at [63] (Davies AJA). Herbohn v NZI Life Ltd [1998] QSC 122; (1998) 10 ANZIC at 61-410 (Lee J). What the insurer knew did not extend to confidential medical information known to its agent, a medical practitioner. Orb Holdings Pty Ltd v Lombard Insurance Company (Australia) Ltd [1995] 2 Qd R 51 at 53 (Fitzgerald P). ABN AMRO Bank NV v Bathurst Regional Council (see fn 91) at [1710]. Celik v NRMA [2000] NSWC 380 at [10], [29]–[33] (James J). Insurance Contracts Regulations 1985 (Cth) reg 2B. Section 22 does not apply if the insurance is arranged by an insurance broker acting for the prospective insured: s 71(1). GIO General Ltd v Wallace (see fn 109) at [56] and [58] (Heydon JA). Section 69. Shepherd v National Mutual Life Association of Australasia Ltd (1995) 8 ANZ Ins Cas 61-233 (Hedigan J). A ‘basis of contract’ clause is typically in the form ‘the particulars contained in this proposal for insurance forms the basis of the contract’. Section 24 does not affect promissory warranties. Genesis Housing Association Ltd v Liberty Syndicate Management Ltd [2012] EWHC
127. 128.
129. 130. 131. 132. 133. 134. 135. 136.
137. 138.
3105 (TCC) at [38(c)] (Akenhead J). See also, Condogianis v Guardian Assurance Company Ltd (see fn 21); Australian Provincial Assurance Association Ltd v Producers & Citizens Cooperative Assurance Company of Australia Ltd [1932] HCA 34; (1932) 48 CLR 341. Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in Liquidation) (No 2) [2011] FCA 1124 at [16] (Perram J). Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400. It is worth mentioning that Clarke JA (at 414–5) alone proceeded on the basis that the insurer bore the onus of proof under s 26(1), as the parties had proceeded on that basis. Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182 at [32]– [33] (Davies JA). Celik v NRMA (see fn 117) at [10], [29]–[33] (James J). Hendry Rae & Court v FAI General Insurance Co Ltd (1991) 5 WAR 376. [2013] NSWCA 252; (2013) 302 ALR 732. Reduction of the claim to nil is possible: Ferrcom Pty Ltd v Commercial Union Insurance Co of Australia Ltd (see fn 28) at [14]–[15]. [2014] NSWSC 21 at [132]. NRG Victory Australia Ltd v Hudson [2003] WASCA 291 at [23] (Parker J). Amaca Pty Ltd v McGrath as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 at [67] (Barrett J); Talga v MBC International Ltd (1976) 133 CLR 622 at 634 (Stephen, Mason and Jacobs JJ); Cominos v Cominos (1972) 127 CLR 588 at 599 (Gibbs J); Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]–[47] (Barrett J). Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 at 113 (Sheller JA). ICA ss 33A and 33C; Insurance Contracts Regulations 1985 (Cth) reg 4A.
[page 183]
Chapter 9 FORMATION OF AN INSURANCE CONTRACT I was never ruined but twice: once when I lost a lawsuit and once when I won one.1
INTRODUCTION This chapter discusses the formation of an insurance contract under the following headings: intention to create legal relations; offer and acceptance; and consideration. Other ‘formation’ issues, such as capacity to contract, rarely arise in the insurance context and so will not be dealt with here. The chapter ends with discussion of statutory illegality and assignment and novation. The formation of an insurance contract is governed by ordinary contractual principles.2 As in the law of contract, an insurance contract is formed if the parties intended to make a concluded agreement and succeeded in doing so.3 As Beech J said in Glendalough Holdings Pty Ltd v Militaire Nominees Pty Ltd,4 there:
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… is some overlap between the questions of intention to create legal relations and questions of certainty or completeness. … The more the parties have not dealt with in their discussions, the more it may be said that it is objectively unlikely that they intended to conclude a bargain.
[page 184]
INTENTION TO CREATE LEGAL RELATIONS 9.1 An insurance contract will only be legally binding if the parties objectively intended to subject their agreement to the adjudication of the courts. In this context, ‘intention’: … describes what it is that would objectively be conveyed by what was said or done, having regard to the circumstances in which those statements and actions happened … It is not a search for the uncommunicated subjective motives or intentions of the parties.5
9.2 Intention to create legal relations was an issue in Leading Synthetics Pty Ltd v Adroit Insurance Group Pty Ltd.6 Leading Synthetics, a supplier of synthetic resins, instructed its insurance broker Adroit (trading as Austbrokers) to arrange insurance against the risk that one of its customers might default in payments. The broker approached Atradius Credit Insurance NV, a credit risk insurer, for cover. Macaulay J concluded that a reasonable person in Austbrokers’ position would understand that Atradius would go on risk from 1 April and that the failure of Atradius to issue a policy document or an invoice for the premium and Leather Synthetic not paying a premium for the policy were administrative oversights.
OFFER AND ACCEPTANCE 9.3 For there to be an insurance contract, there must be an ‘offer and acceptance’ that deals with every material term of the contract. The material terms are: the identity of the parties to the contract: the insurer and the insured. In this context, the insured refers to a party to an insurance contract. In other contexts it can refer to someone entitled to the benefits of the contract (whether a party to it or
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not);7 the description of the risk transferred; the period of cover; the amount of the premium (if any), but see 9.14; and the amount payable by the insurer in the event of a loss. An offer and acceptance does not have to be in writing.
9.4 The formal part of the process leading to the making of an insurance contract usually begins with an insurer asking an intending insured to answer a series of questions relating to the type of insurance sought by [page 185] them. Amongst other things, the questions will usually seek information relating to the subject matter of the insurance and the personal circumstances and insurance history of the intending insured. With life and accident or illness insurance, information will also be sought about the intending insured’s medical history. 9.5 An intending insured might give the answers by handwriting them in a document (typically entitled ‘Proposal for Insurance’), by speaking to an insurer’s representative over the telephone, or by completing an electronic form at an insurer’s website. 9.6 Depending on the circumstances, delivery of the information to the insurer might be regarded as an invitation to the insurer to offer insurance to the intending insured.8 9.7 Upon receiving the information, the insurer will decide whether to offer insurance and if so, on what terms. Sometimes the information will cause the insurer to ask an intending insured for more information or to make independent enquires in that regard before deciding whether to offer insurance. 9.8
There are many reasons why an insurer might decide not to offer
insurance. In a free market, an insurer should be able to choose for itself what risks it takes on. In the case of compulsory insurance, such as insurance against an employer’s liability to pay workers’ compensation, insurers licensed to operate in the market are obliged to offer insurance to anyone seeking that type of cover within a range of premium dictated by parliament. If they did not have to do so, it would open up the possibility of someone obliged by law to take out that cover not being able to readily access it. If they could not access the cover, they would have to cease the activity. In that case, insurers would be the default arbiters of who is able to carry on that activity and who is not. 9.9 An insurer’s decision not to offer insurance after an invitation from an intending insured to do so can cause a problem if the intending insured subsequently seeks cover from another insurer. This is because one of the questions most insurers ask an intending insured is whether any insurers have previously declined to offer the same or similar insurance to the intending insured. If the answer is ‘yes’, the later insurer might: decide not to offer cover, simply on the basis that it has been declined by a previous insurer; or try to find out from the declining insurer or the intending insured why insurance was not previously offered before deciding whether to make its own offer to insure.
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[page 186] In relation to contracts subject to the Insurance Contracts Act 1984 (Cth) (ICA), s 75(1) seeks to avoid confusion or lack of information about why a previous insurer decided not to offer cover by requiring that insurer, in the circumstances described, to give to an intending insured a written statement explaining why it did not offer insurance. Similarly, the General Insurance Code of Practice 2014 requires a signatory to it to give an intending insured reasons why it declined to
offer cover (para 4.8(a)). The intending insured can then pass that information on to the later insurer. 9.10 If an insurer is comfortable with the information provided by an intending insured and the result of any enquiries it makes, it will inform the intending insured that it is prepared to insure them for a particular premium and on the terms of its standard form policy wording relevant to that type of insurance, as amended by written endorsement. An endorsement is a standard form variation to a standard form policy wording, or a variation to a standard form policy wording that has been tailored to the intending insured’s particular circumstances. Endorsements mostly deal with extensions or limitations on the cover provided by a standard form policy wording. 9.11 An insurer’s policy wording and any endorsements to it are given legal effect by the making of an insurance contract.9 The distinction between a policy and an insurance contract is referred to in ss 28 and 29 of the Marine Insurance Act 1909 (Cth). An endorsement issued by an insurer after a contract is made is only effective if and when the other parties to the contract consent to it and there is consideration for it. 9.12 The next step is for the intending insured to decide whether to take out insurance with the insurer for the premium and on the terms described. Subject to the particular circumstances, the contract is made when the intending insured: informs the insurer in writing or orally that its offer is accepted; or by conduct, makes it clear that the offer is accepted, for example, by paying the premium sought by the insurer. At a minimum, the contractual documentation will usually consist of the following insurer generated documents: a standard form policy wording; and a Certificate or Schedule of Insurance which summarises the important terms of the insurance contract, including the type of policy, the identity of the parties to the contract, the identity of any additional non-party insureds, a description of the risk, the policy
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period, the [page 187] sum insured or limit of indemnity, any applicable excess and the premium paid or payable, and identifies the applicable policy wording and endorsements to it. The contract will sometimes expressly incorporate the completed Proposal for Insurance. 9.13 Subject to the ICA and Ch 7 of the Corporations Act 2001 (Cth), an insured will be bound by an insurer’s usual terms for that type of insurance (to the extent they are not inconsistent with anything expressly agreed by the parties), even if: the insurance is arranged orally and neither party refers to those terms;10 or the insured has not been shown, read or expressly agreed to those terms.11
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CONSIDERATION 9.14 Insurance usually involves an insured paying to an insurer a fixed amount (known as ‘premium’) in consideration for the transfer of risk to the insurer, but that is not a necessary element of insurance.12 There might be insurance in the absence of premium in a variety of situations, for example: in the context of a compulsory insurance scheme like the one considered in R v Cohen; Ex parte Motor Accidents Insurance Board;13 if the insurance is by way of a deed; or in the case of a ‘provision of insurance’ found in a non-insurance contract, like the rental agreement considered by the court in Bayswater Car Rental Pty Ltd v Hannell.14
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9.15 Where the parties to an insurance contract assume the insured will pay premium but for one reason or another do not expressly deal with premium or the amount of it when the contract is made, the court will, if asked, set a reasonable rate for the premium based on what the insurer [page 188] would likely have charged for that type of insurance if it had put its mind to it.15 9.16 A non-party can sue on an insurance contract even if it has not paid premium for it, as long as the contract intended to benefit the nonparty.16 See Chapter 25 for a discussion of the circumstances in which a non-party can claim the benefit of an insurance contract. 9.17 If there has been a total failure of consideration or if an insurer avoids a contract from the beginning (other than for fraud), the insurer must repay the premium.17 In the case of avoidance, a right to avoid is restitutionary and: … applies retrospectively. It enables the aggrieved party to rescind the contract ab initio. Thus he totally nullifies the contract. Everything done under the contract is liable to be undone.18
A contract avoided from the beginning (ab initio) is not a contract that never existed because no one (not even a judge) ‘can turn the clock back to have that literal effect, and a contract avoided ab initio is not, in Newspeak, an uncontract’.19 9.18 At common law, if an insurer avoids a policy for fraud, the premium is forfeited to the insurer.20 As the ICA is not a code (s 7) and is silent as to what is to happen to the premium on an avoidance for fraud, an insurer ought to be able to forfeit the premium in the case of avoidance for fraudulent non-disclosure or misrepresentation pursuant to s 28(2) of the ICA. Subject to the terms of the contract, an insured is not entitled to a return of premium if they cancel the contract after the risk has
commenced, for example where the insured sells a car or house the subject of the contract during the insurance period.21 However, insurance contracts usually contain an express term requiring the insurer to repay a time-proportionate part of the premium less administrative costs if a contract is cancelled in this type of circumstance. [page 189]
STATUTORY ILLEGALITY Generally 9.19 A court will not enforce ‘a contract whose making or performance’ is directly (expressly or impliedly) prohibited by statute or by public policy.22 A contract is prohibited by public policy in circumstances where it is not directly prohibited by statute, if it is ‘associated with or in furtherance of illegal purposes’.23 In determining whether a contract is prohibited by public policy, regard will be had to ‘the scope and purpose of the statute to consider whether the legislative purpose will be fulfilled without regarding the contract as void and unenforceable’.24 9.20 Whether a statute directly (expressly or impliedly) prohibits a contract is a matter of statutory construction, having ‘regard not only to its language … but also to the scope and purpose of the statute from which inferences may be drawn as to the legislative intention regarding the extent and the effect of the prohibition which the statute contains’.25 In Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (Yango Pastoral),26 First Chicago sued Yango Pastoral on a mortgage. Yango Pastoral defended the claim on the basis that the mortgage was unenforceable because at all material times, First Chicago was in breach of s 8 of the Banking Act 1959 (Cth) by carrying on banking business
without a licence or an authority. Nothing in the Banking Act specifically prohibited the making of the mortgage. Yango Pastoral argued that the unauthorised carrying on of banking business by First Chicago necessarily meant that any transaction made in the course of that business was unenforceable. Mason J said (at [18]) that where: … a statute imposes a penalty for contravention of an express prohibition against carrying on a business without a licence or an authority and the business is carried on by entry into contracts, the question is whether the statute intends merely to penalize the person who contravenes the prohibition or whether it intends to go further and prohibit contracts the making of which constitute the carrying on of the business. In deciding this question the court will take into account the scope and purpose of the statute and the consequences of the suggested implication with a view to ascertaining whether it would conduce to, or frustrate, the object of the statute.
The party alleging illegality bears the onus of proving it. [page 190]
The insurance context 9.21 In the insurance context, an illegality defence is most likely to be raised by a reinsurer in response to a reinsurance claim. Instead of working through a reinsurance scenario, the relevant issues will be highlighted by giving the unlikely example of an ‘insurer’ defending an insurance claim on the basis that it issued the policy in the course of a business carried on in contravention of s 9(1) or s 10(1) of the Insurance Act 1973 (Cth). Yango Pastoral strongly suggests that an insured would be able to enforce an insurance contract against an entity that promotes itself as an authorised Australian insurer but is prohibited from doing so by the provisions of the Insurance Act 1973 (Cth). The main object of the Act, which governs entry into the insurance market and regulation of that market, ‘is to protect the interests of policyholders and prospective policyholders under insurance policies … in ways that are consistent with the continued development of a viable, competitive and innovative insurance industry’: Insurance Act 1973 (Cth) s 2A(1).
The strong suggestion appears from a paraphrasing of Mason J in Yango Pastoral (at [21]): … there is little to be said for the view that the [Insurance Act 1973 (Cth)] intends to prohibit [insurance] contracts made by unauthorized [insurers] in the course of carrying on [insurance] business. To do so would be to prejudice [insureds], not to protect them. The implication of such a prohibition would deny to innocent [insureds] the right to recover moneys [under insurance contracts entered into] unlawfully with persons carrying on [insurance] business because ex hypothesi the prohibited contract would be illegal and void. To place the defendants’ interpretation upon the statute would confer an extraordinary advantage on the wrongdoer in enabling it to resist [payment under insurance contracts made by it].
In a similar vein, Leggatt J said in Stewart v Oriental Fire and Marine Insurance Co,27 that the Insurance Companies Act 1974 (UK): … does not regulate rights and liabilities of insurer and insured inter se: It is principally designed to ensure the financial soundness of the insurers. The prohibition which it contains … is exclusively directed to the protection of insured persons. To render individual contracts of insurance void would indeed be not merely inconsistent with the policy of the 1974 Act but would be repugnant to it.
9.22 If an insurer is likely to fail on an illegality defence in the above circumstances, it should follow that a reinsurer’s illegality defence is also likely to fail in similar circumstances, notwithstanding that the object of the Insurance Act 1973 (Cth) is to protect insureds in their dealings with insurers rather than insurers in their dealings with reinsurers. That is because an insurer’s inability to recover from its reinsurer may leave it without the funds to cover its liability to its insureds. [page 191] 9.23 On very rare occasions, it might be in the insured’s interests to claim that an insurance contract is illegal and therefore unenforceable. For example, an insured might enter into a non-ICA governed insurance contract that it cannot rely on if it is valid and enforceable because it is already insured and the terms of its existing insurance are such that cover will cease if the insured subsequently enters into a contract covering the same risk.28 In that case, it is in the insured’s interests to
argue that the later contract is illegal (if there is a basis for saying so). For a similar circumstance, although not in the context of illegality, see Steadfast Insurance Co Ltd v F & B Trading Co Pty Ltd.29 In that case the insured entered into two insurance contracts that were both expressed to be unenforceable if the insured had already, or subsequently, entered into another insurance contract without telling the insurer or getting its permission to do so. The High Court concluded that the insured could recover under the first contract on the basis that the second contract, by its terms, did not become effective. 9.24 The enforceability of an insurance contract made with a ‘general insurer’ that does not have, but should have, an Australian Financial Services Licence, is described in detail in the Corporations Act 2001 (Cth) Ch 7 Pt 7.6 — ‘Licensing of Providers of Financial Services’, Div 11.
ASSIGNMENT AND NOVATION 9.25
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An insured has two main ‘assignment-type’ options: assignment or novation of the insurance contract; or assignment of the right to the proceeds of an existing or future insurance claim.
Assignment or novation of an insurance contract 9.26 An insurance contract is a personal contract that insures the insured’s interest in its subject matter, not the subject matter itself.30 Subject to express policy wording to the contrary and with some exceptions,31 the insurance does not run with the subject matter of the contract. Accordingly and subject to the operation of the ICA (for example, s 50), a person who acquires an interest in the subject matter of an insurance contract taken out by, for or on behalf of someone else, does not also acquire the benefit of the contract32 unless they become [page 192]
a party to it (by assignment or novation) or the benefit of the contract is expressly extended to them. 9.27 An insured can assign an insurance contract, but only with the consent of: the insurer;33 and any other parties to the contract.
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9.28 From an assignee’s perspective, there is no point taking an assignment of a first party indemnity insurance contract unless the insured also transfers to the assignee their interest in the subject matter of the insurance contract before a loss. Unless the assignee has an interest in the subject matter of the contract at the time of a loss, it will have no claim on the contract. 9.29 Some authorities suggest that at common law, an assignment of a non-marine first party indemnity insurance contract is ineffective unless the contract and the subject matter of the contract are assigned to the same person at exactly the same time. This is right if an insured is required to have an interest in the subject matter when they enter into it. In Chapter 3, it is suggested this is not the case for non-marine indemnity insurance. Even if it is, it does not apply to an ICA-governed contract: s 16 of the ICA (a general insurance contract is not void just because an insured does not have an interest in the contract when they entered into it). 9.30 On an assignment of an insurance contract, the assignee becomes a party to the contract and can enforce it in their own name. In effect, an assignment constitutes a novation of the insurance contract in that it: involves the replacement of one of the parties to the contract with another; and transfers all the rights and obligations of the replaced party to the new one.
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Assignment of the proceeds of an existing or future insurance claim
First party insurance 9.31 An insurance claim is a chose in action.34 Accordingly, an insured can assign the proceeds of an existing or future insurance claim, leaving the insured as the insured party under the contract. Subject to the policy wording, this type of assignment does not require the insurer’s consent,35 [page 193] but it does require the insured to comply with certain formalities, including notifying the insurer of the assignment.36 9.32 An assignment of the proceeds of an existing or future insurance claim means that the assignee can enforce the claim in its own name if the formalities have been complied with. If not, the assignee can only enforce the claim in the assignor’s name. The insured’s rights under an insurance contract pass to their personal representatives on death, bankruptcy, and in the case of a company, to its liquidator.37
Liability (third party) insurance 9.33 The considerations in relation to the assignment of the proceeds of a claim for indemnity under a liability (third party) insurance contract are similar to the considerations in relation to a first party insurance contract, except that difficult issues can arise. If an assignment is being considered, it is worth carefully reading the decision of the High Court in CGU Insurance Ltd v One.Tel Ltd (in liq).38 In that case, Mr Greaves, a former director and Chairman of the Board of Directors of One.Tel Ltd, faced with a court order to pay $20 million to One.Tel and $350,000 to the Australian Securities and Investments Commission, assigned to his trustee in bankruptcy his rights under a CGU directors and officers liability policy to be indemnified against that liability. The High Court decided in favour of the trustees in their claim
for indemnity under the policy in relation to Mr Greaves’ liability to One.Tel Ltd.
The value of assignment or novation to an assignee or novated party 9.34 The value of an assigned or novated insurance contract to the assignee or novated party depends, amongst other things, on the insured’s past performance of the contract (pre-contractual disclosure, duty of utmost good faith, compliance with and discharge of conditions of the policy etc). 9.35 An assignment of the right to the proceeds of an existing or future claim on the policy does not make the assignee a party to the contract. It follows that the value to an assignee of an assignment of the right to the proceeds of: an existing insurance claim depends, amongst other things, on the insured’s past and future performance of the contract; future insurance claims depends, amongst other things, on: ■ the insured’s past and future performance of the contract; and
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■ the insured not disposing of its interest in the subject matter of the contract before a loss occurs. For example, if the contract is a first party indemnity policy in relation to a car or a boat and the insured sells or disposes of it before a loss occurs, the assignee will not recover anything because it will not be able to prove the insured suffered a loss as a result of the insured event.39 In the circumstances, before participating in an assignment or novation, an intending assignee or replacement party, at the very least, should ask the insurer whether there are any problems with the insurance arising out of the insured’s past performance of the contract.
1. 2. 3. 4. 5.
6. 7. 8. 9.
10. 11.
12.
13. 14. 15. 16. 17. 18. 19. 20. 21. 22.
François-Marie Arouet (Voltaire). Halsbury’s Laws of England, 4th ed, Vol 25, (2003 Reissue) at [70]. Geebung Investments Pty Ltd v Varga Group Investments (No 8) Pty Ltd (1995) 7 BPR 14,551 at 14,552 (Gleeson CJ). [2013] WASC 457 at [118]. Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 at [25] (Gaudron, McHugh, Hayne and Callinan JJ); Conway v Critchley [2012] NSWSC 1405 at [6] (Pembroke J). [2011] VSC 467. New Hampshire Insurance Co v MGN Ltd; Maxwell Communications plc v New Hampshire Insurance Co [1996] EWCA Civ 838; [1997] LRLR 24. Carlill v Carbolic Smoke Ball Company [1893] 1 QB 256. CE Heath Underwriting and Insurance (Australia) Pty Ltd v Edwards Dunlop and Co Ltd [1993] HCA 21; (1993) 176 CLR 535 at [5] (Deane J), [14] (Dawson, Toohey and McHugh JJ). Lotus Manufacturing Co Ltd v Sun Alliance Insurance Ltd (1987) 4 ANZ Ins Cas 60-782 at 74,779 (Smellie J). Steadfast Insurance Co Ltd v F & B Trading Co Pty Ltd [1971] HCA 68; (1971) 125 CLR 578 at [5] (Walsh J); Rust v Abbey Life Assurance Co Ltd [1979] 2 Ll Rep 334 at 339 (Brandon LJ). R v Cohen; Ex parte Motor Accidents Insurance Board [1979] HCA 46; (1979) 141 CLR 577 at 578–9 (Mason J); Bayswater Car Rental Pty Ltd v Hannell [1999] WASCA 34; (1998–9) 10 ANZ Ins Cas 61-437; Australian Health Insurance Association Ltd v Esso Australia Pty Ltd [1993] FCA 376; (1993) 116 ALR 253; 7 ANZ Ins Cas 61-195 at [19] (Black CJ), [51] (Northrop J). [1979] HCA 46; (1979) 141 CLR 577 (third party liability for personal injury or death resulting from the use of a motor vehicle). [1999] WASCA 34; (1999) 10 ANZ Ins Cas 61–437 (in the context of the operation of ss 10(2) and 51 of the ICA). Canberra Pools Pty Ltd v MMI General Insurance Ltd [2000] FCA 751 at [39]–[44]. Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107; Property Law Act 1969 (WA) s 11(2); ICA ss 48, 50 and 51. Australian Widows’ Fund Life Assurance Society Limited v National Mutual Life Association of Australasia Ltd [1912] HCA 32; (1912) 14 CLR 141 (Isaacs J). Manifest Shipping v Uni-Polaris Insurance Co (the ‘Star Sea’) [2003] 1 AC 469 at [51] (Lord Hobhouse). FAI General Insurance v Ocean Marine Mutual [1998] LRIR 24 at 28 (Giles CJ). Maye v Colonial Mutual Life Assurance Society Ltd [1924] HCA 26; (1924) 35 CLR 14 (Starke J). Wolenberg v Royal Co-operative Collecting Society (1915) 84 LJKB 1316 at 1319 (Lush J). Equuscorp Pty Ltd v Haxton [2012] HCA 7; (2012) 246 CLR 498 at [23] (French CJ, Crennan and Kiefel JJ).
23. Equuscorp Pty Ltd v Haxton (see fn 22) at [23] (French CJ, Crennan and Kiefel JJ). 24. Miller v Miller [2011] HCA 9; (2011) 242 CLR 446 at [25]; Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd [1978] HCA 42; (1978) 139 CLR 410 at 434. 25. Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (see fn 24) at [13] (Mason J); Miller v Miller (see fn 24) at [24]. 26. [1978] HCA 42; (1978) 139 CLR 410. 27. [1985] QB 988 at 1010. 28. Reference is to a non-ICA governed insurance contract because if the contract is governed by the ICA, ss 45 and 76 would protect the insured in these circumstances. 29. [1971] HCA 68; (1971) 125 CLR 578. 30. Castellain v Preston (1883) 11 QBD 380 at 397 (Bowen LJ); Western Australian Bank v Royal Insurance Co [1908] HCA 11; (1908) 5 CLR 533 at 564 (O’Connor J). 31. For example, a compulsory motor vehicle third party personal injury or death policy where the contract runs with the vehicle. 32. Ziel Nominees Pty Ltd v VACC Insurance Co Ltd [1975] HCA 40; (1975) 180 CLR 173; Rayner v Preston (1880–1) 18 Ch D 1. 33. Although an insurance contract is a chose in action, because it is a personal contract, an assignment is only effective if the insurer consents to it: Lynch v Dalzell (1729) IV Brown 431; 2 ER 292. 34. BOS International (Australia) Ltd v Babcock & Brown International Pty Ltd [2011] NSWSC 1382 at [33] (Rein J). 35. In Re Turcan (1889) 40 Ch D 5. 36. Clerical Mutual General Insurance v ANZ Banking Group [1995] 3 All ER 987; Property Law Act 1969 (WA) s 20 and its equivalent in other Australian states and territories. 37. BOS International (Australia) Ltd v Babcock & Brown International Pty Ltd (see fn 34) at [34] (Rein J). 38. [2010] HCA 26; (2010) 16 ANZ Ins Cas 61-855. 39. Walker v Phoenix Assurance Company of Australia (1980) 1 ANZ Ins Cas 60-045; North of England Oil-cake Co v Archangel Insurance Co (1875) LR 10 QB 249 at 254 (Cockburn CJ).
[page 195]
Chapter 10 INSURABLE INTEREST [T]he [insurers] seem to be of the opinion that the insurable interest rule is to protect insurance companies. We do not agree. The rule is designed to protect human life. Policies in violation of the insurable interest rule are not dangerous because they are illegal; they are illegal because they are dangerous.1 The whole law as to what amounts to an insurable interest and when it is required, is derived from the statutory avoidance of wagering contracts …2
INTRODUCTION This chapter discusses the notion of insurable interest: at common law and under statutes other than the Insurance Contracts Act 1984 (Cth) (ICA); and in relation to insurance contracts subject to the ICA. The history of the requirement that an insured have an ‘insurable interest’ in the subject matter of a contract is briefly described in Chapter 3. As mentioned in Chapter 1, the requirement for an ‘insurable interest’ imposed by statute is not the same as the ‘adverse affect’ issue. ‘Insurable interest’ is a reference to the relationship between an insured and the subject matter of the insurance. If the relevant legislation requires an insured to have an insurable interest in the subject matter of the insurance at a particular time, and he or she has none at that time, the insurance contract will be unenforceable. By contrast, ‘adverse affect’ is a reference to the potentially adverse financial impact of a risk eventuating on the insured or the beneficiaries of the insurance contract. Without that potential, what risk is being transferred?
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THE COMMON LAW AND STATUTES OTHER THAN THE INSURANCE CONTRACTS ACT 1984 (CTH) Indemnity insurance 10.1 The common law does not require an insured to have an interest, or the expectation of an interest, in the subject matter of an indemnity insurance contract when entering into it.3 However, the nature of an indemnity insurance contract does require an insured to have an interest in the subject matter of the contract at the time of a loss. Without that interest, the insured suffers no loss and there is nothing for the insurer to indemnify against. 10.2 As mentioned in Chapter 3, the Marine Insurance Act 1745 (UK), the Life Assurance Act 1774 (UK) and the Gaming Act 1845 (UK) effectively introduced a requirement that an insured have an insurable interest in the subject matter of an insurance contract.4 Each of the Australian colonies inherited the first two of these Acts (as amended or replaced) to the extent that they were in force on the day they were colonised. In the colony of Western Australia, the Police Act 1892 (as amended the following year) included provisions regulating gaming and betting modelled on the Gaming Act 1845 (UK) and other related United Kingdom legislation. Trying to define the legislatively required ‘insurable interest’ is not easy.5 In Lucena v Craufurd,6 Lord Eldon said (at 321) it was ‘a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the position or enjoyment of the party’. In the same case, Lawrence J suggested (at 302) more broadly, that to have an insurable interest in something was to ‘be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction’.
10.3 Lord Eldon’s view prevailed in Macaura v Northern Assurance Company,7 in which an insured assigned ownership of his timber to a company of which he was the only substantial shareholder, the company having paid for the timber by an allotment of shares. The insured then insured the timber in his name. A fire subsequently destroyed most of the timber and the insured claimed on the policy. The insurer declined the claim on the basis that the insured had no insurable interest in the timber at the time of the fire. [page 197] The House of Lords dismissed the insured’s claim. Although the insured was a creditor of the company and its only substantial shareholder, he did not have an insurable interest in the timber because he did not have a legal or equitable interest in the company’s property. The probability that the company would be less able to pay its debts if its assets were destroyed was not enough to constitute an insurable interest. 10.4 Half a century later, and on the other side of the world, the South Australian Supreme Court decided Truran Earthmovers Pty Ltd v Norwich Union Fire Insurance Society Ltd.8 In this case, Truran and the owner of a bulldozer agreed that Truran would buy the bulldozer at some time in the future at a price to be agreed. In the meantime, they agreed that they would deduct money Truran loaned the owner from time to time for maintenance of the bulldozer from the purchase price for the bulldozer. As the owner could not afford to insure the bulldozer, Truran took out a policy in its own name. The bulldozer was damaged by fire. The Supreme Court dismissed Truran’s claim for the loss of the bulldozer. Truran’s expectation that it would own the bulldozer at some time in the future and its status as a creditor of the owner of the bulldozer did not give it an insurable interest in the bulldozer. 10.5
Over the last 25 years, the English common law has aligned
itself more closely to Lawrence J’s description of an insurable interest in Lucena v Craufurd.9 In The Moonacre,10 Mr Sharp bought the yacht Moonacre, insured it in his name and registered it in the name of a tax-inspired company. The company granted Mr Sharp two powers of attorney, which allowed him to use the yacht exclusively for his own purposes. The insurer rejected Mr Sharp’s claim for loss of the yacht by fire on the basis that he had no insurable interest in it. Colman QC said that although Mr Sharp did not have a legal or equitable interest in the yacht, he had an insurable interest in it because (at 512) the powers of attorney were a: … valuable benefit which would be lost if the vessel were lost. The legal relation in which he stood to the vessel was that for as long as the powers of attorney remained he was entitled to use it for his own purposes and to exercise over it such control as he saw fit. His powers were such that he could even abandon it to the insurers in the event of a constructive total loss; a relation to the goods sometimes considered decisive on the issue of title to sue …
10.6 In light of Feasey v Sun Life Assurance Company of Canada, generally speaking,11 an insured will now be regarded as having the [page 198] required insurable interest if they have a pecuniary interest in the subject matter of a general insurance contract. 10.7 Determining whether an insured has the required insurable interest is a three-stage process12: in the first stage the court identifies the subject matter of the contract by reference to context and terms of the policy wording; in the second stage it analyses the nature of the insured’s interest in the subject matter; and in the third stage it decides whether the insured’s interest amounts to an insurable interest. 10.8 A court will be very reluctant to find against an insured on the issue of insurable interest because, having taken the premium, an insurer’s ‘no insurable interest’ defence is likely to be regarded as an opportunistic technical objection.13
Contingency insurance 10.9 As mentioned in 10.1, the common law does not require an insured to have an insurable interest in the subject matter of an insurance contract.14 The Life Assurance Act 1774 (UK) effectively introduced a requirement in the Australian colonies that an insured have an insurable interest in the subject matter of a life (contingency) insurance contract at the time the policy was made.15 The intention was to prevent gaming dressed up as insurance by rendering an insurance contract null and void unless, when entering into the contract, there is an expectation that the insured or the beneficiaries of the insurance would be adversely affected financially if the transferred risk eventuates.
CONTRACTS SUBJECT TO THE INSURANCE CONTRACTS ACT 1984 (CTH) 10.10 In Australia, there is legislation regulating gaming in each state and territory.16 The legislation does not render void or unenforceable the following insurance contracts even if, like a wager, the insured had no interest, and no expectation of an interest, in the subject matter of the insurance when entering into the contract: general and other insurance contracts described by s 764A(1)(d), (e) and (f) of the Corporations Act 2001 (Cth). This is because s 1101I of the Corporations Act 2001 (Cth) expressly overrides state-based and territory-based gaming legislation on this particular issue;17 and
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■insurance contracts subject to the ICA.
This is because the ICA effectively overrides state-based gaming legislation on this particular issue18 by providing that a general insurance contract is not void just because the insured does not have an interest in the subject matter of the contract when the contract is made: ICA s 16.
Similarly for a life insurance contract or ‘a contract that provides for the payment of money on the death of a person by sickness or accident’: s 18. 10.11 The ICA came into effect when it seemed that an insured could only recover under an indemnity insurance contract if they had a legal or equitable interest in the subject matter of an insurance contract at the time of a loss. The ICA alleviates that requirement by providing that an insured will be regarded as having an insurable interest in the subject matter of a general insurance contract if they suffer a pecuniary or economic loss as a result of the insured property being damaged or destroyed, even if that does not amount to a legal or equitable interest in that property (s 17). The notion of insurable interest is almost certainly irrelevant to indemnity insurance subject to the ICA, because if an insured can prove they have suffered a loss, they will satisfy the ‘s 17’ test for insurable interest.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
Liberty National Life Insurance Company v Weldon 267 Ala 171, 100 So (2d) 696 (1957) (Ala 1964) (Lawson J). Lonsdale & Thompson Ltd v Black Arrow Group plc [1993] Ch 361 at p 368 (Jonathan Sumption QC sitting as a deputy High Court judge). Williams v Baltic Insurance Association of London Ltd [1924] 2 KB 282 at 288 (Roche J). The Moonacre [1992] 2 Lloyd’s Rep 501 at 509–11 (Colman QC). Feasey v Sun Life Assurance Company of Canada [2003] EWCA Civ 885; Lloyd’s Rep IR 637 at [71] (Waller LJ). (1806) 2 Bos & PNR 269; 127 ER 630. [1925] AC 619. (1976) 17 SASR 1. (1806) 2 Bos & PNR 269; 127 ER 630. [1992] 2 Lloyd’s Rep 501. [2003] EWCA Civ 885; Lloyd’s Rep IR 637 at [97] (Waller LJ). Feasey v Sun Life Assurance Company of Canada (see fn 5) at [80] (Waller LJ). Stock v Inglis (1884) 12 QBD 564 at 571 (Brett MR). Williams v Baltic Insurance Association of London Ltd (see fn 3) at 288 (Roche J).
15. Dalby v India & London Life (1854) 15 CB 365. 16. For example, the Gaming and Betting (Contracts and Securities) Act 1985 (WA). 17. Australian Constitution s 109, which provides for the supremacy of Commonwealth legislation where it directly conflicts with state legislation. 18. Australian Constitution s 109, which provides for the supremacy of Commonwealth legislation where it directly conflicts with state legislation.
[page 201]
Chapter 11 DURATION OF AN INSURANCE CONTRACT [T]he whole world of insurance itself interests me greatly, but my present work is dreary.1 … a ‘renewal’ is descriptive of a repetition of the whole arrangement by substituting the like agreement in place of that previously subsisting, to be operative over a new period, whereas an ‘extension’ betokens a prolongation of the subsisting contract by the exercise of a power reserved thereby to vary one of its provisions, that is, by enlarging the period.2
INTRODUCTION Although the period of insurance is a fundamental aspect of an insurance arrangement3, there is no minimum or maximum period for a general insurance contract, either at common law or under the Insurance Contracts Act 1984 (Cth) (ICA). Nevertheless, most general insurance contracts are for a period of 12 months or thereabouts. In that context, this chapter discusses the duration of an insurance contract under the following headings: interim insurance; and renewal, extension and cancellation of an insurance contract.
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INTERIM INSURANCE 11.1 Obtaining an insurance contract can take longer than an intending insured wants in a variety of circumstances. For example: a purchaser of a motor vehicle might want insurance for the vehicle
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as soon as they drive it out of the showroom, but may not have even [page 202]
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thought about insurance when they are about to take delivery of the vehicle; or a person might want personal accident insurance as soon as they decide they need it. But there may be a delay even after they submit a proposal to an insurer if the insurer, after reading the proposal, decides to make enquiries about the intending insured’s medical history or to arrange a medical examination before deciding whether or not to offer insurance.
11.2 A written or oral4 arrangement that temporarily insures a person during the delay between deciding they want insurance and obtaining long-term insurance is commonly known as ‘interim insurance’.5 Interim insurance is defined in s 11(2) of the ICA as an insurance contract intended by an insurer: (a) to provide temporary insurance cover; and (b) to be replaced or superseded by another insurance contract, whether or not the contract is evidenced by a cover note.
A ‘cover note’ is a standard form document generated by an insurer, or an insurance agent or broker acting on behalf of an insurer, which records the granting of interim insurance.6 11.3 By its nature, interim insurance is short term (mostly 30 days or less). If a time period is not expressly agreed, there is an implied term the cover will continue for a reasonable period of time.7 11.4 At common law, interim insurance can be terminated before the expiry of an agreed or implied period of time by: the insured terminating the insurance; the insurer terminating the insurance, but only if it expressly reserved to itself the right to do so;8 or
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■the insurer issuing the insured with a long-term contract. At common law, if an insurer does not issue a long-term contract during the period of the interim insurance, the interim insurance will expire at the end of its period, even if the insurer is still considering a proposal submitted by the insured when the cover ceases.9 [page 203] 11.5 If, during the period of an interim insurance contract subject to the ICA, the insured submits a proposal to the insurer for long-term insurance to replace the interim insurance, the insurer continues to be liable on the interim insurance until the earliest of the time: the insured commences to be covered by the same or another insurer under another insurance contract (interim or long-term) intended to replace the interim insurance: s 38(2)(c); the interim insurance is cancelled: ss 38(2)(d) and 59(2); or the insured withdraws its proposal for insurance: s 38(2)(e).
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11.6 If an insurer issues a long-term contract to an insured during the period of the interim insurance (having accepted the insured’s proposal for insurance), the long-term contract supersedes the interim insurance from the date the long-term contract was issued.10 If the insurer backdates the long-term contract to the date the interim insurance commenced, the insurance will commence on that date for the purpose of calculation of the premium, but not for the scope of cover.11 11.7 Interim insurance is subject to the insurer’s usual terms for that type of insurance even if the insurance is recorded in a cover note that does not refer to those terms.12 Most cover notes expressly state that the interim insurance is subject to the insurer’s usual terms for that type of insurance. If interim insurance is subject to the insurer’s usual terms and the usual terms are: inconsistent with the terms of the interim insurance, the terms of
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the interim insurance will prevail to the extent of the inconsistency; or inappropriate to the interim insurance, they will not be imported into it.13
11.8 At common law, an insurer is entitled to avoid interim insurance from the beginning if it is expressly conditional on the insured submitting a ‘satisfactory’ proposal before the end of the period of the interim insurance and the insured does not do that, either because it does not submit any proposal, or because it submits an ‘unsatisfactory’ proposal. An unsatisfactory proposal is one that the actual insurer has decided is unsatisfactory and that a prudent insurer could regard as unsatisfactory.14 [page 204] It is not fair for an insured to be deprived of cover for a loss if: no proposal was submitted during the interim insurance period because the insured became incapacitated or died before completing it; or the insurer rejects the proposal after the loss because it is unsatisfactory, thereby giving the insured no opportunity to amend the proposal to make it satisfactory (if that is possible). In order to avoid such situations, s 38(1) of the ICA renders a ‘subject to satisfactory proposal’ condition void. 11.9
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RENEWAL, EXTENSION AND CANCELLATION OF AN INSURANCE CONTRACT
Renewal and extension by agreement 11.10 An existing insurance contract is: renewed when the parties, by mutual consent, agree to replace an existing insurance contract with a fresh contract commencing at about the time the existing contract expires and on substantially the same terms as the existing contract. A renewed insurance contract attracts a fresh duty of disclosure;15 or extended when the parties agree, or one of the parties elects pursuant to a unilateral right or power, to extend the contract.16 An extended contract does not attract a fresh duty of disclosure. Whether an insurance contract has been renewed or extended is a question of construction.17
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Statutory renewal: ICA s 58 11.11 At common law and subject to any agreement to the contrary, an insurer is not obliged to inform an insured that insurance is due for renewal.18 Section 58 of the ICA seeks to overcome this ‘mischief’ by creating a statutory insurance policy in the circumstances described below if, in relation to an existing general insurance contract, an insurer does not give an insured at least 14 days prior written notice: of the time and date on which the contract is due to expire; and whether it is prepared to negotiate to renew or extend the contract.
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[page 205] A statutory policy is created if: the existing general insurance contract is ‘for a particular period of time’ and ‘is of a kind that it is usual to renew or for the renewal of which it is usual to negotiate’: s 58(1); and the insured has not arranged insurance with another insurer to replace the existing contract before the cover expires: s 58(3)(b).
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11.12 If, before the start of the 14-day notice period, an insurer gives written notice to the insured of its intention to cancel a contract in apparent compliance with s 59 of the ICA, a statutory policy will not come into existence, whether the insured accepts or disputes the cancellation, because ‘the insurance cover of which section 58(2) speaks will not be set to expire within 14 days’.19 11.13 The benefit of a statutory policy to an insured is that they do not have to pay premium for the policy unless they make a claim on it: s 58(4). If premium becomes payable, it is calculated in accordance with the formulae described in s 58(5) and (6). 11.14 The statutory policy provides the same cover as that provided by the original contract, except that it starts immediately after the cover provided by the original contract expires and ends, unless it is cancelled, at: the expiration of a period equal to the period during which cover was provided by the original contract; or the time when the insured obtains from the same or another insurer cover to replace that provided by the original contract, whichever is the earlier.
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11.15 A statutory insurance policy can be cancelled at any time by an insured, or by an insurer complying with the requirements of s 59 of the ICA: s 60(4).
Cancellation 11.16 It is not unusual for an insured to want to cancel an insurance contract, for example if they sell the subject matter of a first party insurance contract, say, a house, a car or a horse. The contract usually expressly provides that the insurer will return to the insured a timeproportionate part of the premium, less an amount for administrative costs if the contract is cancelled in these circumstances. If it does not, the insured is not entitled to a refund of any part of the premium. 11.17 At common law, an insurer that reserves to itself the power to cancel a contract unilaterally is entitled to do so at any time. This can
unfairly prejudice the insured, as it allows an insurer to cancel if it gets jittery about the possibility of an insured loss during the balance of the [page 206] insurance period, even though it agreed at the outset to take on the risk for the insurance period.20 Section 63 of the ICA deals with this issue by only allowing an insurer to cancel a contract of general insurance in the circumstances described in ss 60 and 61 of the ICA. Section 59 lays down the procedure for cancellation by an insurer. 11.18 Cancellation operates from the time of the cancellation. It does not affect an insured’s right to be paid for insured losses that occurred before the cancellation.
1. 2. 3. 4.
5. 6. 7. 8. 9. 10. 11. 12. 13.
Franz Kafka letter, 1907, K Wagenbach, Kafka, Haus Publishing, London, 2003. Re Kerr [1943] SASR 8 at 16 (Mayo J). WASA International Insurance Company v Lexington Insurance Company [2009] UKHL 40; [2010] 1 AC 180 at [3], [39], [74] and [77]. Interim insurance is sometimes arranged orally: Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 at 234 (Samuels J); Smith v National Mutual Fire Insurance [1974] 1 NZLR 278 at 282 (Mahon J). Steadfast Insurance Co Ltd v F & B Trading Co Pty Ltd [1971] HCA 68; (1971) 125 CLR 578 at [11] (Menzies J). Stockton v Mason (1978) 2 Lloyd’s Rep 430 at 431 (Lord Diplock). Burns v MMI-CMI Insurance Ltd (1995) 8 ANZ Ins Cas 61-287 at 76,176 (Hansen J); Canberra Pools Pty Ltd v MMI General Insurance Ltd [2000] FCA 751 at [38]. Smith v National Mutual Fire Insurance (see fn 4). Mackie v European Assurance Co (1869) 21 LT 102 at 104. Southern Cross Assurance Co Ltd v Australian Provincial Assurance Association Ltd (1939) 39 SR (NSW) 174 at 186 (Jordan CJ and Nicholas J). Kyles Transport Pty Ltd v Zurich Australian Insurance Ltd (1984) 3 ANZ Ins Cas 60-600 at 78,641. Action Scaffolding Ltd v AMP Fire & General Insurance Co (NZ) Ltd (1990) 6 ANZ Ins Cas 60-970 at 76,457 (Wallace J). Steadfast Insurance Co Ltd v F & B Trading Co Pty Ltd (see fn 5) at [12] (Menzies J).
14. Mayne Nickless Ltd v Pegler (see fn 4) at 243 (Samuels J). 15. Lambert Cooperative Insurance Society Ltd (1975) 2 Lloyd’s Law Reports 485 at 487 (MacKenna J); MMI (Australia) Ltd v Gibbs [2001] WASCA 271 at [28] (Kennedy J). 16. Re Kerr (see fn 2) at 16 (Mayo J); CE Heath Underwriting & Insurance (Australia) Pty Ltd v Edwards Dunlop & Co Ltd [1993] HCA 21; (1993) 176 CLR 535 at [12] (Dawson Toohey and McHugh JJ), [10] (Gaudron J). 17. CE Heath Underwriting & Insurance (Australia) Pty Ltd v Edwards Dunlop & Co Ltd (see fn 16) at [12] (Dawson, Toohey and McHugh JJ). 18. Barry v The Australian Mutual Provident Society [1920] 22 Gazette LR 447 (Stout CJ). 19. CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 (Brennan CJ, Dawson, Toohey and Gummow JJ). 20. Sun Fire Office v Hart (1889) 14 App Cas 98.
[page 207]
Chapter 12 THE LAYOUT OF AN INSURANCE POLICY: RECITALS, INSURING CLAUSE, EXCLUSIONS, POLICY TERMS AND DEFINITIONS The term ‘policy’ is popularly used to refer to the terms and conditions of insurance which continue over a number of years, notwithstanding that renewal of the policy results in a fresh contract from year to year … Thus, it has been recognized that a reference to a ‘policy’ may be a reference to ‘a person’s condition or state of being insured’ … notwithstanding that a contract or series of contracts is necessary to give the policy legal force.1
INTRODUCTION As mentioned in Chapter 9, at a minimum, an insurance contract will usually consist of the following insurer-generated documents: a standard form policy wording; and a Certificate or Schedule of Insurance which summarises the important terms of the insurance contract. This chapter focuses on the distinct layout of a policy, which is usually contained in a document that begins with an ‘information section’ in which the insurer introduces itself and discharges the disclosure obligations imposed on it by one or more of the Insurance Contracts Act 1984 (Cth) (ICA), the Corporations Act 2001 (Cth) Ch 7 (if the insurance contract is for a ‘retail client’ as defined by the Act), the Privacy Act 1988 (Cth), and the General Insurance Code of Practice. The policy wording itself
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[page 208] is typically divided into the following sections (although not necessarily described as such or in the following order): recitals; insuring (operative) clause and then exclusions; policy terms (warranties, terms descriptive of risk and conditions); and definitions. This chapter is similarly divided.
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THE RECITALS 12.1 Some policy wordings contain one or more recitals. A recital usually briefly describes the circumstances that have led to the making of the contract and the parties’ intentions in making the contract. A recital is not legally binding on the parties, but ‘can be used as an aid to construction of an operative provision … without a need to find ambiguity in the words of the operative provisions. The recitals are a means by which the surrounding circumstances and purpose of the transaction can be ascertained’.2
THE INSURING (OPERATIVE) CLAUSE AND EXCLUSIONS The insuring (operative) clause 12.2 If there are recitals, they are invariably immediately followed by an insuring (operative) clause that records the primary promise of the insurer to pay for loss caused by an insured risk. Generally speaking, the clause defines the scope of cover in its broadest terms and is qualified by the subsequently appearing exclusions and policy terms.
The following is an example of an insuring clause in a liability (third party) policy: We agree to pay to You or on Your behalf, all sums which You become legally liable to pay as compensation in respect of: (a) Personal injury; or (b) Damage to property, happening during the Period of Insurance within the Geographical limits and directly caused by an Occurrence in connection with the Business.
The word ‘Occurrence’ is usually defined as ‘an event including continuous or repeated exposure to substantially the same general conditions’. [page 209] By this combination of insuring clause and ‘Occurrence’ definition, the event ‘is the mishap or accident or conditions which cause the Personal Injury or Property Damage, as distinct from the happening of that injury or damage. That is a well recognized distinction in this context’.3
Exclusions 12.3 Exclusion clauses also define the scope of cover by describing risks that fall within the scope of the insuring clause but are not covered by the contract.4 Exclusion clauses are often used to exclude particular risks that are more appropriately covered by another policy wording specifically tailored for those risks. For example, general liability policy wordings invariably contain an exclusion clause similar to the following: You are not insured against any claim for personal injury to a person employed by you under a contract of service if the personal injury arises out of or in the course of the contract of service.
The insured can obtain cover for this excluded risk by taking out a readily available employers’ indemnity policy with the same or another insurer.
12.4 The difference between an exclusion and a term of the policy is that the former delineates the scope of the cover, whereas the latter, if it does not relate to an insurer’s obligation, imposes a duty or responsibility on an insured.5
POLICY TERMS 12.5 The terms of a general contract can be divided into three categories:6 1. Essential terms (sometimes known as ‘conditions’), breach of which will give an innocent party a right to terminate the contract. The test of essentiality: … is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of a strict or a substantial performance of the promise, as the case may be, and that this ought to have been apparent to the promisor. If the innocent party would not have entered into the contract unless assured of a strict and literal performance of the promise, he may in general treat himself as discharged upon any breach of the promise, however slight. If he
[page 210] contracted in reliance upon a substantial performance of the promise, any substantial breach will ordinarily justify a discharge. In some cases it is expressly provided that a particular promise is essential to the contract, eg, by a stipulation that it is the basis or of the essence of the contract; but in the absence of express provision the question is one of construction for the Court, when once the terms of contract have been ascertained;7
2.
Inessential terms (sometimes known as ‘warranties’), breach of which will give an innocent party a right to damages only; 3. Intermediate or innominate terms, breach of which will give an innocent party a right to damages and a right to terminate the contract if the breach is sufficiently serious. An innocent party will also have a right to terminate a contract if another party, by its conduct, repudiates the contract by evincing an
unwillingness or inability to be bound by, or to render substantial performance of, the contract. 12.6 The terms of an insurance contract can also be divided into three categories: warranties, which unlike their namesake in the general law of contract, are essential terms of the contract: see [12.10]–[12.18]; terms descriptive of the risk: see [12.19]–[12.22]; and conditions, which unlike their namesake in the general law of contract, are inessential terms of the contract: see [12.23]–[12.31]. If there is a separate category of innominate terms in insurance law (terms that hover between a warranty and a condition), an insurer will not be entitled to repudiate the contract in reliance on an insured’s breach of or non-compliance with such a term, no matter how serious the breach or non-compliance.8 An insurer should only be able to repudiate for breach of or non-compliance with such a term if it has clearly reserved to itself the right to do so.
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12.7 How a term of an insurance contract is characterised is a matter of construction.9 How the parties themselves characterise a term is indicative but not conclusive.10 The more drastic the consequences of a breach or non-compliance, the clearer the intention of the parties needs to be in order to categorise the term as one attracting those consequences. [page 211] 12.8 For contracts not subject to the ICA, characterisation of a term of an insurance contract is important for the: procedural purpose of identifying the party who bears the onus of proving breach of, or non-compliance with, the term; and substantive purpose of ascertaining the remedy if the term is breached or not complied with.
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12.9
For contracts subject to the ICA, characterisation is important
for determining who bears the onus of proof and an insurer’s remedy subject to the application of ss 13 and 14 (duty of utmost good faith) and s 54 of the ICA.11 Although s 54 has significantly blunted an insurer’s weaponry in the face of an insured’s breach of, or non-compliance with, a term of an insurance contract, the issue of breach or non-compliance will not get s 54 ‘air time’ unless: the insurer discharges the burden of proving breach or noncompliance or the operation of an exclusion (to the extent that it bears the onus of proof); or the insured fails to discharge the onus of proving it did not breach or fail to comply with the relevant term or that an exclusion does not operate (to the extent that it bears the onus of proof). The following discussion is subject to the application of ss 13, 14 and 54 of the ICA.
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WARRANTIES Generally 12.10 A warranty is an express or implied promise or representation by an insured to an insurer: that an existing or past fact (a ‘snapshot’ at the time the policy is incepted12) is true (an ‘affirmatory’ warranty); or about future conduct or that a state of affairs will continue after the contract is entered into (a ‘promissory’ warranty).13
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12.11 A promise or representation is a ‘warranty’ if:14 it goes to the root of the transaction;
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[page 212]
■it bears materially on the risk of loss, rather than being descriptive
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of the risk;15 damages would be an unsatisfactory or inadequate remedy for breach of it; or the parties clearly intend it to be a ‘warranty’. In this regard, use of the word ‘warranty’, ‘warranted’ or ‘warrants’ or the phrase ‘it is warranted that’, indicates that the parties intend the promise or representation to be a warranty, but it is not conclusive.16
12.12 A warranty must be literally, strictly and exactly complied with; substantial performance is insufficient.17 In De Hahn v Hartley,18 insurance was taken out over the vessel Juno for an intended voyage from Africa to the West Indies. The margin of the policy contained the words ‘Sailed from Liverpool with 14 sixpounders, swivels, small arms, and 50 hands or upwards; coppersheathed’. The vessel sailed from Liverpool with 46 men. Six hours later it took on six more men at Anglesea. It was subsequently captured off the coast of Africa and the owner claimed on the insurance. The voyage from Africa to the West Indies was not affected by there being only 46 men during the voyage from Liverpool to Anglesea. Nevertheless, Lord Mansfield said: There is a material distinction between a warranty and a representation. A representation may be equitably and substantially answered: but a warranty must be strictly complied with. Supposing a warranty to sail on the 1st of August, and the ship did not sail till the 2nd, the warranty would not be complied with. A warranty in a policy of insurance is a condition or a contingency, and unless that be performed, there is no contract. It is perfectly immaterial for what purpose a warranty is introduced; but, being inserted, the contract does not exist unless it be literally complied with. Now in the present case, the condition was the sailing of the ship with a certain number of men; which not being complied with, the policy is void.
12.13 In a general contract, a warranty is of minor importance, in that breach of it only gives rise to a claim for damages.19 In the insurance context, the consequence of a breach of, or non-compliance with: [page 213]
■an affirmatory warranty, is that the insurance contract is voidable
at the election of the insurer. That is because an affirmatory warranty is an essential condition of the contract rather than a condition precedent to attachment of the risk;20 a promissory warranty, is that the insurer is automatically discharged from its liability under the contract from the moment the warranty is breached or not complied with,21 unless it is estopped, or prevented by the duty of utmost good faith, from relying on the breach or non-compliance.22 A breach of warranty cannot be remedied.23
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12.14 An insurer can waive non-compliance with a promissory warranty in the sense of choosing ‘not to insist on the performance of a provision inserted in a contract for its benefit’.24 An insurer cannot elect not to rely on a breach of, or non-compliance with, a promissory warranty because it is not choosing between inconsistent rights.25 12.15 The consequences for an insured are the same, whether the breach or non-compliance is innocent, trivial or not causally related to the loss.26 That is because a warranty defines the risk, so that breach or non-compliance alters the risk.27 The altered risk is not the risk the insurer agreed to accept.
‘Basis of contract’ clauses 12.16 ‘Basis of contract’ clauses sometimes appear at the foot of an insurance proposal. By the clause, the intending insured declares that the proposal forms the basis of the insurance contract and is incorporated into it. If the clause is expressly incorporated into the contract by the policy wording, it elevates every answer in the proposal from a representation [page 214]
into a warranty by the insured as to the truth of the statement.28 Whether a ‘Basis of contract’ clause not expressly incorporated into the contract by the policy wording forms part of the insurance contract or is collateral to it will depend upon the circumstances.29 12.17 For contracts subject to the ICA, s 24 converts a warranty with respect to the existence of a state of affairs into a pre-contractual representation. Accordingly, a ‘Basis of contract’ clause in an insurance proposal is ineffective to the extent that it deals with a statement of existing fact (as opposed to a promise about the future).30
Onus of proof 12.18 The insurer bears the onus of proving a breach of, or noncompliance with, a warranty.31 The insured bears the onus of proving that an estoppel, a waiver or the duty of utmost good faith prevents an insurer from relying on a breach of, or non-compliance with, a promissory warranty.32 It is the same for an affirmatory warranty, except that an insured might also have an ‘election’ defence available to it.
TERMS DESCRIPTIVE OF THE RISK 12.19 Terms descriptive of the risk limit the circumstances in which cover is provided by the contract. There is cover when those circumstances prevail; there is no cover when those circumstances do not prevail. Like a duck, an insured can bob in and out of cover as the circumstances prevail or not. These terms are also known as ‘warranties descriptive of the risk’,33 ‘suspensive conditions’34 or ‘delimiting warranties’.35 12.20 Century Insurance Company of Canada v Case Existological Laboratories Ltd (‘The BAMCELL II’)36 illustrates the distinction between a warranty and a term descriptive of the risk. It involved the sinking of a vessel as a result of the negligent operation of an air
pressure valve that allowed the vessel to take on too much water. The case turned on the characterisation of the following clause in the policy: [page 215] … [w]arranted that a watchman is stationed on board the BAMCELL II each night from 2200 hours to 0600 hours with instructions for shutting down all equipment in an emergency.
Case Existological did not have a watchman. The vessel sank in the early afternoon, well before a watchman would have started the night shift. The Supreme Court of Canada agreed (at 55–6) with Lambert JA in the British Columbia Court of Appeal that the absence of a watchman on board the vessel during the night shift: … had absolutely no bearing whatever on the loss of the vessel which occurred in midafternoon. The clause would only have been effective if the loss had occurred between 2200 hours and 0600 hours, and it was proved that there was no watchman stationed aboard during those hours. To this extent the condition in the clause constituted a limitation of the risk insured against but it was not a warranty.
12.21 In Kler Knitwear Ltd v Lombard General Insurance Company Ltd,37 the property policy held by Kler Knitwear contained a ‘sprinkler warranty’ in the following terms: It is warranted that within 30 days of renewal the sprinkler installations … must be inspected by a LPC approved sprinkler engineer with all necessary rectification work commissioned within 14 days of the inspection report being received.
An LPC-approved sprinkler engineer who inspected the system 60 days late did not recommend any rectification work. About three months later, Kler Knitwear’s premises suffered storm damage. Lombard denied liability for the damage, arguing that the ‘sprinkler warranty’ was a promissory warranty and that it was discharged from any liability for losses suffered after the expiry of the 30-day period allowed for inspection of the sprinkler installations. Moreland J concluded that the ‘sprinkler warranty’ was a suspensive condition, so that cover was suspended from the date on which the required inspection should have taken place until the date on which it did take
place. Kler Knitwear succeeded in its claim because the storm damage occurred after the engineer’s inspection. 12.22 A term is likely to be regarded as descriptive of the risk if it is only relevant to the risk of loss while it is breached or not complied with. If the risk is increased by a breach or non-compliance beyond the period of the breach or non-compliance, the term is more likely to be regarded as a promissory warranty. The insurer bears the onus of proving that an insured has not complied with a term descriptive of risk. [page 216]
CONDITIONS Generally 12.23 In broad terms, three types of condition find their way into an insurance contract: conditions precedent; conditions subsequent; and conditions that are not conditions precedent or subsequent. The category a condition falls in will determine the remedies available to the innocent party as a result of the condition being breached or not complied with. A condition:
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… may be a condition going to the operation of the policy as a binding document, or it may be a condition affecting only the insurer’s liability to pay under what is admittedly a binding document … That is, it may be a condition a breach of which is intended to entitle the insurer to treat the policy as a document which never became binding on him, or to treat a policy which had become binding on him as no longer binding, or, on the other hand, it may be a provision a breach of which is intended merely to entitle him, according to the terms of the document, to refuse to make a payment under it, either because the breach prevented an accrual of liability to pay or because it operated to release the insurer from a liability which had in the first instance accrued … Which of these characters should be attributed to any particular condition or provision is a
question of construction depending on its language and context. The mere fact that a provision is in terms called a condition precedent will not make it such if it is incapable of operating otherwise than as a condition subsequent or incapable of operating as a condition at all …38
Conditions precedent and subsequent Condition precedent 12.24 A condition precedent describes a ‘conditional link’ between the respective obligations of the insured and the insurer.39 It can be a condition precedent to: the formation, existence or validity of the contract, so that if it is not complied with, the contract is inoperative or unenforceable (not void);40 the commencement of the risk, so that if it is not complied with, although the contract is operative the risk does not begin to run.
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[page 217] Depending on the wording of the condition, the risk might begin to run when the condition is complied with or it might never begin to run; or the liability of the insurer to pay a claim, having regard to: ■ the circumstances existing at the time of an insured loss; for example, that the insured property have an activated burglar alarm or a smoke-triggered sprinkling system; or ■ steps taken or not taken by an insured after an insured loss; for example, that the insured provide the insurer with detailed information about a loss soon after notifying the insurer of the loss. Depending on the wording of the condition and its context, noncompliance with a condition precedent to the liability of an insurer to pay a claim might allow the insurer to: refuse to pay any claim under the policy. The courts will strain
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against this construction of a condition precedent;41 refuse to pay the claim to which the breach relates.42 This will leave the insurer exposed to subsequent claims on the policy; or suspend payment of the claim to which the breach relates, or of any claim under the policy until the condition is complied with.43 Subject to the policy wording, the consequences for an insured are the same, even if the non-compliance is innocent or trivial44 and did not prejudice the insurer.45
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12.25 If an insurer wants to condition its broad promise to indemnify, it must make that clear. A term of the policy will not necessarily be a condition precedent just because the parties describe it as one. Nor does a term of the policy need to describe itself as a condition precedent for it to be one.46 [page 218] For example, in Aspen Insurance UK Ltd v Pectel Ltd,47 Teare J considered a prompt notification condition and an ‘observance’ condition which made the insurer’s liability conditional on the insured complying with the prompt notification condition. The ‘observation’ condition did not describe itself as a ‘condition precedent’. Teare J concluded that by the ‘observation’ condition, the parties intended there to be a conditional link between the insured’s obligation to give prompt notice and the insurer’s obligation to pay the claim. As the insured failed to comply with the prompt notification clause, it was not entitled to indemnity under the policy. A court will not regard a provision as a condition precedent: unless it is capable of being a condition precedent having regard to its commercial purpose;48 if to do so would ‘strike fundamentally at the purpose of the policy’.49
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12.26
Having regard to the draconian consequences of the latter, a
court will prefer a construction of a condition precedent that leads to the conclusion that it is a condition precedent to the liability of the insurer to pay a particular claim, rather than a condition precedent to: the liability of the insurer under the policy;50 or the formation, existence or validity of the contract.51
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Condition subsequent 12.27 Depending on the policy wording, a condition subsequent, if not complied with, will avoid a contract or relieve an insurer from a performance obligation arising out of an insured’s accrued right.52 It is usually related to an insurer’s investigation or control of a claim on the policy. A condition in a liability policy that requires an insured not to make any admissions of liability is an example of a condition subsequent.53 With this condition, the insured has an accrued right to a claim on the policy for an insured loss upon the happening of the loss, but the insurer will be relieved of liability for the claim if the insured makes an admission of liability. [page 219]
Onus of proof 12.28 The insurer bears the onus of proving that a condition subsequent has occurred because it is seeking to be relieved of its obligation to perform. Which party bears the onus of proof in relation to a condition precedent is not settled in Australia. In CGU Insurance Ltd v Lawless,54 Redlich JA concluded (at [38]) that: in Victoria and New South Wales, the insured bears the onus of proving compliance with a condition precedent, but only if the insurer pleads breach or non-compliance;55 and in the United Kingdom, New Zealand, South Australia, Queensland and the Northern Territory, the insurer bears the onus of proving breach of, or non-compliance with, a condition
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precedent. In Barrie Toepfer Earthmoving and Land Management Pty Ltd v CGU Insurance Ltd,56 Meagher JA said (at [41]–[50]) that subject to context, an insurer bears the onus of proving a condition precedent has been breached or not complied with, on the basis that ‘he who alleges must prove’.
A condition that is not a condition precedent or subsequent 12.29 There are some conditions of an insurance contract that are neither a condition precedent nor a condition subsequent.57 A condition in an insurance contract that is not a condition precedent or subsequent resembles a warranty in a general contract. Depending on the policy wording, breach of such a condition by an insured may entitle the insurer: to claim damages for the breach. Damages are assessed on the loss of a chance to be in the position it would have been in if the insured had performed the condition.58 So for example, if an insured, by breaching a condition or by fraudulently making or supporting a claim on the policy, puts the insurer to the unnecessary expense of investigating a claim, the insurer can claim from the insured the expense it incurs in investigating the claim;59 or if the breach amounts to a repudiation of the contract, to accept the repudiation.
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[page 220] The insurer bears the onus of proving that a condition that is not a condition precedent or subsequent has been breached or not complied with. That is because it is seeking relief for the breach or noncompliance.
12.30 Of course, some conditions in an insurance contract impose obligations on an insurer. Section 54 of the ICA does not affect the remedies available to an insured for an insurer’s non-compliance with, or breach of, a term of an insurance contract. If an insurer breaches such a condition, the insured can claim damages at large.60 Damages will be recoverable if they fall within the rule in Hadley v Baxendale,61 which provides that damages for a contractual breach are recoverable (at 151): … such as may fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.
12.31 If an insurer unreasonably delays payment of a proper claim, it will be liable to pay the insured interest pursuant to s 57 of the ICA, and perhaps damages. This is discussed in Chapter 20.
DEFINITIONS 12.32 Most policy wordings contain a definition section at the front or back of the policy wording. Definitions are designed to ‘streamline and save space’62 or ‘aid the construction of’ a provision that contains the defined term in the context of the insurance contract as a whole.63 12.33 A court will usually give effect to an agreed definition in preference to the common meaning of a word.64
1. 2.
3. 4.
CE Heath Underwriting and Insurance (Australia) Pty Ltd v Edwards Dunlop and Co Ltd [1993] HCA 21; (1993) 176 CLR 535 at [14] (Dawson, Toohey and McHugh JJ). Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at [379]–[390] (Campbell JA); Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 at [35] (French CJ, Hayne, Crennan and Kiefel JJ). Australian Rail Track Corporation Ltd v QBE Insurance (Europe) Ltd [2013] NSWCA 175 at [22] (Meagher JA). QBE Insurance (Australia) Ltd v Wesfarmers General Insurance Ltd [2010] NSWSC 855 at [57] (Garling J).
5. 6. 7. 8.
9. 10. 11. 12. 13.
14.
15. 16.
17.
18. 19. 20. 21.
22.
23. 24.
Bond Air Services Ltd v Hill [1955] 2 QB 417 at 426 (Lord Goddard CJ). In Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd [2007] HCA 61; (2007) 233 CLR 115 at [48]–[49]. Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 641– 2 (Jordan CJ). Friends Provident Life & Pensions Ltd v Sirius International Insurance [2005] EWCA Civ 601 at [29]–[33] (Mance J); Ronson International Ltd v Patrick [2005] EWHC 1767 (QB) at [41] (Seymour QC). Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (1942) 42 SR (NSW) 231 at 234 (Jordan CJ). HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co [2001] EWCA Civ 735; 2 Lloyd’s Rep 161 at [101] (Rix LJ). See Chapter 7 for the application of ss 13 and 14 and Chapter 22 for the application of s 54. Forfar Weavers Ltd v MSF Pritchard Syndicate (2006) SLT (Sh Ct) 19 (Sheriff CAL Scott). A promissory warranty is, in effect, a condition precedent to the insurer’s liability under the insurance contract: Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Limited (‘The Good Luck’) [1992] 1 AC 233 at 263 (Lord Goff). HIH Casualty and General Insurance Ltd v New Hampshire Insurance Co (see fn 10) at [101] (Rix LJ); Toomey (of Syndicate 2021) v Banco Vitalicio de Espana SA de Seguros y Reasseguros [2004] EWCA 622 at [40] (Thomas LJ). Dawson v Mercantile Mutual Insurance Co Ltd [1932] VLR 380 at 388 (Mann J). Kler Knitwear Ltd v Lombard General Insurance Company Ltd [2000] Lloyd’s Rep 47 (Morland J); Forfar Weavers Ltd v MSF Pritchard Syndicate [2006] ScotSC 83 at [17] (Sheriff Principal Taylor). De Hahn v Hartley (1786) 1 TR 343; 99 ER 1130; Mowie Fisheries Pty Ltd v Switzerland Insurance Australia Ltd [1996] FCA 888 (Tamberlin J). In Allison Pty Ltd v Lumley General Insurance Ltd [2006] WASC 104; (2006) 14 ANZ Ins Cas 61-708, Heenan J did not insist on strict compliance with the term of a warranty which, on the face of it, was breached when the captain of a vessel, on good advice, unsuccessfully tried to move her out of the path of a cyclone. (1786) 1 Term Reports 343; 99 ER 1130. Koompahtoo Local Aboriginal Land Council v Sanpine Pty Ltd (see fn 6). Yorkville Nominees Pty Ltd v Lissenden [1986] HCA 6; (1986) 160 CLR 475 at [3] (Wilson and Deane JJ). It does not avoid the insurance contract ab initio: Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Limited (‘The Good Luck’) (see fn 13) at 263 (Lord Goff). Freshmark Ltd v Mercantile Mutual Insurance (Australia) Ltd (1994) 2 Qd R 390; HIH Casualty and General Insurance v AXA Corporate Solutions [2002] EWCA Civ 1253; [2003] Lloyd’s Rep IR 1. See Chapter 19 for a discussion of ‘estoppel’ in the insurance context. Section 40(2) of the Marine Insurance Act 1909 (Cth). Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd [2005] WASCA 106; (2005) 30
25. 26.
27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.
44.
45.
46.
WAR 290 at [48] (Steytler P). Kosmar Villa Holidays plc v Trustees of Syndicate 1243 [2007] EWHC 458 (Comm); All ER 92 at [66]–[68] (Gross J). Dawsons Ltd v Bonnin [1922] 2 AC 413 at 423 (Viscount Haldane); Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Limited (‘The Good Luck’) (see fn 13) at 262–3; Australian Law Reform Commission, Review of the Marine Insurance Act 1909, Report 91, May, 2001, paras 4.31, 9.4, 9.8, 9.9, 9.129. Overseas Commodities Ltd v Style [1958] 1 Lloyd’s Rep 546 at 558–9. Yorkville Nominees Pty Ltd v Lissenden (see fn 20) at [3] (Wilson and Deane JJ). Deaves v CML Fire and General Insurance Co Ltd [1979] HCA 12; (1979) 143 CLR 24 at [15] (Mason J) at [4] (Jacobs J). Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 at [18] (Mason CJ, Dawson, Toohey and Gaudron JJ). Bond Air Services Ltd v Hill [1955] 2 QB 417 at 426–8 (Lord Goddard CJ); Guthrie House Ltd v Cornhill Insurance Co Ltd (1982) 2 ANZ Ins Cas 60-466. Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274 at 283 (Bowen LJ). Forfar Weavers Ltd v MSF Pritchard Syndicate (see fn 16) at [17] (Sheriff Principal Taylor). AC Ward & Son Ltd v Catlin (Five) Ltd [2009] EWHC 3122 (Comm) at [161] (Flaux J). Pratt v Aigaion Insurance Co SA (‘The Resolute’) [2008] EWCA Civ 1314; [2009] 1 Lloyd’s Rep 225 at [13] (Clarke MR). [1983] 2 SCR 47, affirming (1982) 35 BCLR 364. [2000] Lloyd’s Rep IR 47. Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (see fn 9) at 234 (Jordan CJ). See Friends Provident Life & Pensions Ltd v Sirius International Insurance at [2005] EWCA Civ 601 at [31] (Mance LJ). Australian Widows’ Fund Life Assurance Society Ltd v National Mutual Life Association of Australasia Ltd [1912] HCA 32; (1912) 14 CLR 141 (Griffiths CJ). Kazakstan Wool Processors (Europe) Ltd v Nederlandsche Credietverzekering Maatschappij NV [2000] EWCA Civ 41. Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (see fn 9) at 234 (Jordan CJ). Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (see fn 9) at 234 (Jordan CJ); Western Australian Bank v Royal Insurance Co [1908] HCA 11; (1908) 5 CLR 533. Alfred McAlpine v BAI [1998] 2 Lloyd’s Rep 694 at [700] (Coleman J); Pioneer Concrete UK Ltd v National Employers Mutual General Insurance Association Ltd [1985] 1 Lloyd’s Rep 274 at 279–81 (Bingham J); (1985) 2 All ER 395. Shinedean Ltd v Alldown Demolition (London) Ltd [2006] EWCA Civ 939; [2006] 1 WLR 2696 at [22] (May LJ) at [28] (Sir Anthony Clarke MR); Virk v Gan Life Holdings Plc [1999] EWCA Civ 2047 at [13] (Potter LJ). Barrie Toepfer Earthmoving and Land Management Pty Ltd v CGU Insurance Ltd [2016]
47.
48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59.
60. 61. 62. 63. 64.
NSWCA 67; Newnham v Baker [1989] 1 Qd R 393 at 401–2 (Derrington J); Western Australian Bank v Royal Insurance Co [1908] HCA 11; (1908) 5 CLR 533 (Griffiths CJ). [2008] EWHC 2804 (Comm); [2009] Lloyd’s Re IR 440; Union Insurance Society of Canton Ltd v George Wills & Co [1916] 1 AC 281 at 287–8; Western Australian Bank v Royal Insurance Co (see fn 46). Denso Manufacturing UK Ltd v Great Lakes Reinsurance (UK) Plc [2017] EWHC 391 (Comm) [28] and [37]–[42] (Ms Sara Cockerill QC). Legal & General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 394 and 396 (Kirby P), 402 and 405 (Glass JA). Cox v Bankside [1995] 2 Lloyd’s Rep 437 at 453 (Phillips J). Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537 at [17] (Mason J). McInerney v Schultz (1981) 28 SASR 542 at 561 (Williams J). Kodak (Australasia) Pty Ltd v Retail Traders Mutual Indemnity Insurance Association (see fn 9) at 234 (Jordan CJ). [2008] VSCA 38. Body Corporate Strata Plan No 4303 [1982] VR 699 at 702 (Kaye J); Verna Trading Pty Ltd v New India Assurance Ltd [1991] 1 VR 129 at 148 (Kaye J). [2016] NSWCA 67. Re Bradley and Essex and Suffolk Accident Indemnity Society Ltd [1911–13] All ER Rep 444. Milton Keynes Borough Council v Nulty [2011] EWHC 2847 (TCC) at [271] (EdwardsStuart J). Parker v The National Farmers Union Mutual Insurance Society Ltd [2012] EWHC 2156 (Comm) at [205] (Teare J); AIA Australia Ltd v Richards (No 3) [2017] FCA 1069 at [70] (Allsop CJ). Brescia v QBE [2007] NSWSC 598; (2007) 14 ANZ Ins Cas 61-740 at [511] (Hammerschlag J). (1854) 9 Ex 341; 156 ER 145. Gilmore v AMP General Insurance Co Ltd (1996) 67 SASR 387; (1997) 9 ANZ Ins Cas 61-372 at 77,090 (Cox J). Allianz Australia Insurance Ltd v GSF Aust [2005] HCA 26; 221 CLR 568 at [12] (McHugh J), a case on statutory interpretation. T & N Ltd (In administration) v Royal & Sun Alliance Plc [2003] 2 All ER (Comm) 939 at [190] (Lawrence Collins J).
[page 221]
Chapter 13 CONSTRUING AN INSURANCE CONTRACT The making of a contract depends not on the agreement of two minds in one intention, but on the agreement of two sets of external signs, - not on the parties’ having meant the same thing but on their having said the same thing.1 The question for constructional purposes is not about the real intentions of the parties, not what the parties meant to say, but what they actually said.2
INTRODUCTION This chapter discusses the court’s approach to construing an insurance contract under the following headings: construing a parliamentary drafted insurance contract; construing a privately drafted insurance contract; what the dictionaries say; the approach to construction will usually favour the insured; and rectification. In days thankfully gone by, many policy wordings in the market were ‘cut and paste jobs’, the result of a long line of underwriters cobbling together wordings by adding their own words to an existing policy or by cutting and pasting wordings generated by their colleagues, either in response to an unwelcome claim or because each thought they could improve the existing wording. For the most part, little thought was given to the internal inconsistencies created by this method of policy drafting. Policy wordings became so opaque that many claims handlers chose not to try to make sense of them at all, preferring instead to process claims in the way their predecessors or superiors told them
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the policy wordings were intended to operate. This was the state of affairs for hundreds of [page 222] years, as reflected in the observations by Kenyon CJ and Buller J in a marine insurance case3 at the end of the 18th century: only Lombard Street and ‘the uniform practice of merchants and underwriters had rendered [insurance policies] intelligible’; and the standard form marine policy wording was ‘an absurd and incoherent instrument; but it is founded on usage, and must be governed and construed by usage’. Nothing much changed over the next couple of centuries, with Mason J observing that a contract works policy before the High Court in Guardian Assurance Co v Underwood Constructions:
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… is made up of a jumble of ill-assorted documents expressed in that distinctive style which insurance companies have made their own.4
To continue the theme, in 1970 the Court of Appeals of Kentucky said its judgment in Universal Underwriters Ins Co v Travelers Ins Co:5 … represents our honest effort to make detailed answers to the conflicting arguments of the parties relative to the construction of an insurance policy. It would be somewhat ludicrous for us to say this policy is not ambiguous. It is. But no more so than most others. Ambiguity and incomprehensibility seem to be the favorite tools of the insurance trade in drafting policies. Most are a virtually impenetrable thicket of incomprehensible verbosity. It seems that insurers generally are attempting to convince the customer when selling the policy that everything is covered and convince the court when a claim is made that nothing is covered. The miracle of it all is that the English language can be subjected to such abuse and still remain an instrument of communication. But, until such time as courts generally weary of the task we have just experienced and strike down the entire practice, we feel that we must run with the pack and attempt to construe that which may well be impossible of construction.
Things began to improve with the emergence of the consumer rights’ movement in Australia in the 1970s and the subsequent demand for plain language commercial documents. The impetus for change amongst general insurers began with the first General Insurance Code of Practice in 1994, which required insurers who subscribed to the Code to begin
the task of ‘translating’ their policy wordings into plain language. Underwriters were often surprised by the translation, usually because it did not reflect what they thought they were covering, or not covering. In the early days of the Code, one insurer’s attempt at a plain language policy (presumably a marked improvement on the previous version) attracted the attention of the inimitable Meagher JA, who complained that the policy: … is supposed to be expressed in ‘plain English’. If the attempt to reduce documents to ‘plain English’ is going to end in having to wrestle with
[page 223] documents like the policy in the present case, the sooner the attempt is abandoned the better.6
There are still pockets of resistance, as noted recently by Fraser JA:7 The trial judge acknowledged, as appears not to have been in dispute, that General Condition 16 was ‘infelicitously drafted’ and marked by ‘poor word choice, and a lack of conceptual clarity as a matter of ordinary English’, but held that the insurer’s construction was correct.
Plain language policy documents are now ubiquitous. This has not necessarily reduced the number of disputes over policy wordings, but has given the average insured a better understanding of their rights and obligations under their policy and the opportunity to meaningfully debate with their insurer and others (for example, the Financial Ombudsman Service if their dispute is being ventilated in that forum) how their policy works, or is meant to work.
CONSTRUING A PARLIAMENTARY DRAFTED INSURANCE CONTRACT 13.1 In construing a parliamentary drafted insurance contract (for example, a compulsory employers’ liability policy), the primary object ‘is to uphold the purpose of the legislature in enacting that form of
policy’.8 Nevertheless, an insurance contract required by statute ‘is a commercial contract which should be given a businesslike interpretation’.9
CONSTRUING A PRIVATELY DRAFTED INSURANCE CONTRACT Giving effect to the objective common intention of the parties 13.2 In construing a contract, the court’s primary task is to give effect to the objective common intention of the parties at the time they entered into the contract.10 That ‘will start, and usually finish, by asking what is the ordinary meaning of the words used’.11 [page 224] 13.3 In Black Box Control Pty Ltd v Terravision Pty Ltd,12 the Court of Appeal helpfully summarised (at [42]) the principles relevant to the proper construction of a contract (citations omitted): (1) The process of construction is objective. The meaning of the terms of an instrument is to be determined by what a reasonable person would have understood the terms to mean. (2) The construction of a contract involves determination of the meaning of the words of the contract by reference to its text, context [the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract] and purpose. (3) The commercial purpose or objects sought to be secured by the contract will often be apparent from a consideration of the provisions of the contract read as a whole. Extrinsic evidence may nevertheless assist in identifying the commercial purpose or
(4)
(5)
(6)
(7)
(8)
objects of the contract where that task is facilitated by an understanding of the genesis of the transaction, its background, the context and the market in which the parties are operating. Extrinsic evidence may also assist in determining the proper construction where there is a constructional choice, although it is not necessary in this case to determine the question of whether matters external to a contract can be resorted to in order to identify the existence of the constructional choice. If an expression in a contract is unambiguous and susceptible of only one meaning, evidence of surrounding circumstances cannot be adduced to contradict its plain meaning. To the extent that a contract, document or statutory provision is referred to, expressly or impliedly, in an instrument, that contract, document or statutory provision can be considered in construing the instrument, without any need for ambiguity or uncertainty of meaning. There are important limits on the extent to which evidence of surrounding circumstances (when admissible) can influence the proper construction of an instrument. Reliance on surrounding circumstances must be tempered by loyalty to the text of the instrument. Reference to background facts is not a licence to ignore or rewrite the text. The search is for the meaning of what the parties said in the instrument, not what the parties meant to say. There are also limits on the kind of evidence which is admissible as background to the construction of a contract, and the purposes for which it is admissible. Insofar as such evidence establishes [page 225] objective background facts known to the parties or the genesis, purpose or objective of the relevant transaction, it is admissible.
Insofar as it consists of statements and actions of the parties reflecting their actual intentions and expectations it is inadmissible. Such statements reveal the terms of the contract which the parties intended or hoped to make, and which are superseded by, or merged into, the contract. (9) An instrument should be construed so as to avoid it making commercial nonsense or giving rise to commercial inconvenience. However, it must be borne in mind that business common sense may be a topic on which minds may differ. (10) An instrument should be construed as a whole. A construction that makes the various parts of an instrument harmonious is preferable. If possible, each part of an instrument should be construed so as to have some operation. (11) Definitions do not have substantive effect. A definition is not to be construed in isolation from the operative provision(s) in which the defined term is used. Rather, the operative provision is ordinarily to be read by inserting the definition into it. 13.4
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Construing a contract: so as to avoid ‘it making commercial nonsense or giving rise to commercial inconvenience’, may require the court to give a ‘strained’ meaning if that is what is necessary to give effect to its commercial purpose. That will happen if the court concludes that something has ‘gone wrong with the language’;13 and ‘that makes the various parts of an instrument harmonious’ may lead to a court departing ‘from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument’.14
13.5 A privately drafted insurance contract is a commercial contract freely entered into by the parties and should be given a businesslike interpretation.15 The underlying purpose of an insurance contract ‘is to spread the risk insured against’.16 Its precise purpose depends on its terms.
[page 226] 13.6 The construction of an insurance contract attracts the ‘ordinary rules of interpretation’.17 As a commercial contract, it should be ‘read in its totality, commercially and sensibly’18 and construed: on the assumption (unless otherwise indicated) ‘that the parties … intended to produce a commercial result’;19 ‘fairly and broadly, without being too astute or subtle in finding defects’;20 so as to prefer a construction “which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, ‘even though the construction adopted is not the most obvious, or the most grammatically accurate’”;21 so as to give greater weight to a provision specially chosen for inclusion in the insurance contract (for example, an agreed endorsement to the contract) than a standard provision in the contract, on the basis that ‘pre-printed terms [are] probably devised to cover very many situations to which the particular contracting parties have never addressed their minds’;22 so as to give meaning to an ambiguous term in one of the contractual documents by using a clear term dealing with the same subject matter in another of the contractual documents. The former approach of mechanically rejecting an earlier provision in favour of an inconsistent later provision is ‘now so unfashionable that one hesitates to mention it’;23 by, if necessary, rejecting or limiting the effect of a provision that is irreconcilably inconsistent with another provision of the contract or a provision that would otherwise ‘strike fundamentally at the purpose of the policy’.24
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[page 227]
13.7 In the case of competing constructions, the process involves testing each construction against text, context and purpose, ‘an interative process of “checking each of the rival meanings against the other provisions of the document and investigating its commercial consequences”’.25 13.8 Unless otherwise indicated, if an insurance proposal is incorporated into an insurance contract and the wording of the proposal and the contract wording are inconsistent, the contract wording, being the later and more formal document, will prevail.26 The unambiguous expression of an idea in the operative part of the wording trumps the articulation of the same idea in an ambiguous recital.27
Surrounding circumstances (also known as the ‘factual matrix’28) 13.9
When permissible, recourse to surrounding circumstances:
is not a roving inquiry into the detailed history of the pre-contract communications and business dealings between the parties to a contract. This is because the fundamental starting point is the terms within the contract itself, and recourse to the surrounding circumstances of the contract is to serve the purpose of giving meaning to those terms.29
13.10 Evidence of surrounding circumstances might include evidence of: mutually known or notoriously known facts; the ‘genesis’ and objectively the ‘aim’ of a transaction; the market in which the parties operate; and prior negotiations and draft agreements, but only if they go to establish the facts, not if they simply go to a party’s subjective intentions or expectations.30 The recitals or preamble to an insurance contract are part of the surrounding circumstances.31
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13.11 Surrounding circumstances will not include facts not known to all parties to the contract at the time the contract was made.
[page 228] So, for example, in QBE Insurance Australia Ltd v Vasic,32 the insurers QBE and MMI sought to tender into evidence surrounding circumstances in the form of a proposal and a policy wording relating to insurance taken out by the insured with another insurer and a statement by an insurance broker. The Court of Appeal ruled that the proposal and policy wording were inadmissible because, although the insured knew about them at the time the insurance with QBE and MMI was entered into, there was no evidence QBE and MMI did. The broker’s evidence was inadmissible because it simply related to his subjective aims and intentions and none of the parties knew about them when the insurance was taken out.33 13.12 As a practical matter, if a trial judge is in doubt about whether to admit evidence of surrounding circumstances, serious consideration should be given to allowing that evidence to be given even if the trial judge ultimately decides it is inadmissible. In that way, if an appeal court decides the evidence was admissible, it will be able to deal with the appeal instead of sending it back for retrial.34
Evidence of the parties’ conduct after the contract is made 13.13 Although not beyond doubt, it seems a court should not admit evidence of the parties’ communications and conduct after the making of a contract for the purpose of ascertaining the meaning of the contract.35 In Whitworth Street Estates Ltd v Miller,36 Lord Reid explained that if such evidence could be admitted: … one might have the result that a contract meant one thing the day it was signed, but by reason of subsequent events meant something different a month or a year later.
Evidence of the parties’ conduct after a contract is made is admissible for the purpose of: proving the contract was made;37
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[page 229]
■identifying the subject matter 39of the contract if that is not clear ■
from a reading of the contract; or ‘cast[ing] light on the surrounding circumstances known to the parties at the time the contract was entered …’40
WHAT THE DICTIONARIES SAY The judicial dictionary 13.14 The doctrine of judicial precedent obliges a court construing a particular word, phrase or provision in an insurance contract to follow a decision of a higher court in the same judicial hierarchy on the identical word, phrase or provision in indistinguishable circumstances. An Australian court in one of the Australian jurisdictions should follow a decision by an intermediate appellate court in another Australian jurisdiction, unless it is ‘plainly wrong’.41 In Maxwell v Highway Hauliers Pty Ltd,42 McLure P thought just that, declining to follow the Court of Appeal of the Supreme Court of Queensland in Johnson v Triple C Furniture & Electrical Pty Ltd43 on the basis that it required an unduly restricted scope for s 54 of the Insurance Contracts Act 1984 (Cth) (ICA).44 13.15 If not bound by judicial precedent or comity, a court should nevertheless ‘be slow to introduce confusion into the insurance industry by departing from’ a settled meaning of a word, phrase or provision.45 As Kirby P said in Legal and General Insurance Australia Ltd v Eather,46 it makes sense for courts to work towards providing ‘an objectively ascertainable and commonly known or knowledgeable
dictionary by which the respective rights and obligations of insurers and insureds can readily be found’. The need for this is heightened if the contract: is written for application in more than one jurisdiction; or has a commercial character where the parties might have obtained advice from lawyers or insurance brokers in the negotiations of the contract wording.47
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[page 230] Lord Mansfield recognised the importance of predictability 250 years ago: In all mercantile transactions the great object should be certainty: and therefore, it is of more consequence that a rule should be certain, than whether the rule is established one way or the other. Because speculators in trade then know what ground to go upon.48
Our ‘everyday’ dictionaries 13.16 If there is no exact judicial precedent that indicates how the words in a contract should be construed, the next step is to refer to our ‘everyday’ dictionaries for an appropriate definition of the relevant words.49 This is not as straightforward as it might first seem, because words in a dictionary turn and tumble in and upon themselves and each other like a rotating lexical kaleidoscope. Why? Because we look up a word in a dictionary to find out what other words are used to define that word. And those other words are defined in the same dictionary by each other and by the word we originally looked up to find out what it meant. So, although we turn to a dictionary for certainty in relation to the meaning of words, it is partly illusory because the ‘trail may be endless; sometimes, it is circular. Using a dictionary definition simply pushes the problem back’.50 In addition: the meaning of a word can change over time and vary from state to
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state and country to country; the same word may be defined differently in dictionaries published at about the same time for the same territory; and many words have more than one meaning. For example, depending on the context, the word ‘heel’ can refer to a part of a foot, shoe or boot, or to a command given to a pet.
13.17 There is no one dictionary to which all defer for the meaning of all words at all times.51 Each has its strengths and weaknesses. For example, our own Macquarie Dictionary can be quirky. Consider the example given in definition 5 of ‘insurance’ in the 5th ed, 2009:52 Colloquial an alternative to fall back on if one’s main objective is lost: she already has a boyfriend, so this bloke is just insurance.
[page 231] 13.18 Consulting a dictionary is only the start of the construction task because ‘language is contextual’53 and the meaning of a document, contract or statute is not just ‘a matter of dictionaries and grammars’.54 Dictionaries ‘are not a substitute for the judicial determination of the interpretation and then construction of statutes and other documents’.55 ‘They can illustrate usage in context, but can never enter the particular interpretative task confronting a person required to construe a particular document for a particular purpose’.56
Punctuation 13.19 Punctuation, if used consciously, informs and can control meaning, for instance, by the placement of a comma.57
THE APPROACH TO CONSTRUCTION WILL USUALLY FAVOUR THE INSURED
Generally 13.20 A court will interpret an insurance contract liberally in favour of an insured to the extent it can do so having regard to ‘the ordinary and natural meaning of the words used’.58 This is because: an insurer’s business is taking on risk, and it is therefore usually in a far better position than a prospective insured to make sure the policy wording, whether drafted by it or not, clearly and precisely describes the scope of the risk it intends to take on;59 and the duty of utmost good faith owed by an insurer to an insured obliges it to take great care to ensure its policy wordings properly reflect the risk it intends to take on.60 Nevertheless, there ‘is no general rule of construction of insurance contracts that limiting terms, such as exclusion clauses, are to be construed strictly or narrowly’.61
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[page 232] Depending on its terms, an insuring clause might include cover for an insured’s activities that fall outside the scope of a licence under which it operates (for example, an Australian Financial Services Licence).62 13.21 In construing a policy term, a court will favour the performance of the contract over a remedy which enables the insurer not to pay a claim. As Lord Roskill said in The Hansa Nord (a sale of goods case):63 In my view, a Court should not be over ready, unless required by statute or authority so to do, to construe a term in a contract as a ‘condition’ any breach of which gives rise to a right to reject rather than as a term any breach of which sounds in damages — I deliberately avoid the use of the word ‘warranty’ at this juncture. In principle contracts are made to be performed and not to be avoided according to the whims of market fluctuation and where there is a free choice between two possible constructions, I think the Court should tend to prefer that construction which ensure performance and not encourage avoidance of contractual obligations.
Construing an exclusion
13.22 An exclusion will be given its ‘natural and ordinary meaning, read in the light of the contract as a whole’.64 13.23 If an exclusion is capable of bearing two meanings, one that would ‘severely circumscribe’ the cover mapped out by the insuring clause and the other that would not, the latter is to be preferred as the former would be an ‘uncommercial and unreasonable result’ which the parties could not have intended.65
The contra proferentem rule 13.24 The contra proferentem rule (verba chartarum fortius accipiuntur contra proferentem) is ‘well established in insurance law, whatever its status might be in other areas of contractual interpretation’.66 The rule requires an ambiguity to be construed against the party substantially responsible for the drafting of the document. It relies on the existence of an ambiguity — it cannot be used to create one.67 [page 233] A provision of a policy is ambiguous if it is reasonably capable of bearing more than one meaning.68 The rule does not apply if one of the meanings is ‘an unrealistic or unlikely construction of the contract’.69 13.25
Reliance on the rule is one of last resort. A judge:
… should struggle with the words actually used as applied to the unique circumstances of the case and reach their own conclusions by reference to the logic of the matter, rather than by using mechanical formulae. Nevertheless, dictionaries, facts and logic alone will sometimes not provide an answer to the contest before the court.70
13.26 The rule will favour the insured if the contract: was substantially drafted by the insurer, as is almost always the case; or is a prescribed contract for the purposes of the ICA and the dispute is about the construction of a ‘prescribed event’: s 36. On the other hand, the rule will favour an insurer in the few cases
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where the insured or its agent (an insurance broker) substantially drafted the wording.71 An insurer that unsuccessfully defends an insurance claim at trial on the basis of a dubious construction of a policy wording runs the real risk that it will be ordered to pay the insured’s costs on an indemnity basis.72 13.27 Sometimes a commercial contract contains a clause in the following or similar terms: … no rules of construction shall apply to the disadvantage of one party on the basis that that party put forward this Agreement.
The idea is to exclude the contra proferentem rule. It may be effective,73 although it is not clear where the parties might be left without this ‘last resort’ rule. It can probably safely be said that it would be a breach of an insurer’s duty of utmost good faith to include such a clause in a standard form policy.
RECTIFICATION 13.28 A party seeking to correct a mistake in a document should: invoke the common law process of construction of a contractual provision to correct a mistake that is obvious on the face of a document; or
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[page 234]
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for the equitable rectification remedy if a mistake is not obvious on the face of the document, and the party seeking the correction wants to ‘rely on prior negotiations between the parties, the actual or subjective intentions of the parties or parol evidence’ to support its claim for rectification.74 The rectification remedy is only available in relation to: those contracts which were intended by the parties to be wholly expressed in writing, or
of those parts of the partly written contract which were intended to be expressed in writing.75
13.29 Rectification is an equitable remedy ‘which is concerned with a mistake as to an aspect of what an instrument records and with the conscience of the parties’.76 It involves a court changing the words of a contractual document to reflect the parties’ intention. It does not involve modifying the parties’ agreement.77 The purpose of the remedy is to: … make the instrument conform to the true agreement of the parties where the writing by common mistake fails to express that agreement accurately.78
The rationale for the remedy is that: it is unconscientious for a party to a contract to seek to apply the contract inconsistently with what he or she knows to be the common intention of the parties at the time the written contract was entered into.79
13.30 A court has a discretion to rectify the words of a document if it is persuaded by clear and convincing evidence80 that at the time the instrument was made there was ‘an “identical corresponding contractual intention on each side”’81 in relation to the terms of the contract, but that the intention was incorrectly recorded in the document by using the wrong language.82 [page 235] The existence of an antecedent agreement is not essential to the grant of the rectification remedy.83 13.31 If a party used lawyers to draft the relevant documents, it may be taking a risk if it does not call its lawyers to corroborate the common intention of the parties.84 13.32 Rectification is only available in cases of common mistake. However, a party cannot claim that a mistake in a contractual document in his favour is not a common mistake if he knows about the mistake at the time the document is created and does nothing to correct it.85
13.33 Equity will correct a mistake as to the form or effect of a document,86 but will not correct a mistake: that ‘relates only to the expected consequences or advantages of a contract or transaction, and not to the expression in the instrument of what the parties actually agreed or intended’;87 about ‘consequences which the parties did not have in their mind when the deed was executed even if, had they thought of them, they would have intended them’.88
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13.34 Unlike the approach to the construction of a contract, on a claim for rectification the following is admissible: parol evidence;89 evidence of the parties’ common actual (subjective) intention as evidenced by their words or conduct;90 evidence about the common intention of the parties arising out of conduct after the contract: NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd,91 which contains a useful discussion of the issues involved in a claim for rectification in an insurance context.
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13.35 The usual defences to an equitable claim (for example, laches) are available in response to a claim for rectification.
1. 2.
Address by Oliver Wendell Holmes at Boston University School of Law, 1897. Simic v New South Wales Land and Housing Corporation [2016] HCA 47 at [18] (French CJ). 3. Brough v Whitmore (1791) 4 Term Rep 206; 100 ER 976 at 208–10 and 977–8. 4. [1974] 48 ALRJ 307, 308. 5. 451 S.W.2d 616 (1970) at 622–3. 6. NRMA Insurance Ltd v Collier (1996) 9 ANZ Ins Cas 61-337 at 76,719. 7. Mattress Innovations Pty Ltd v Suncorp Metway Insurance Ltd [2013] QCA 377 at [9]. 8. Insurance Commission of Western Australia v Container Handlers Pty Ltd [2004] HCA 24; (2004) 218 CLR 89 at [99] (Kirby J); Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd [2005] NSWCA 66 at [51]–[52] (McColl JA). 9. McCann v Switzerland Insurance [2000] HCA 65; (2000) 203 CLR 579 at [22] (Gleeson CJ). 10. Australian Broadcasting Commission v Australasian Performing Right Association Ltd
11. 12. 13.
14. 15. 16. 17. 18. 19.
20.
21. 22.
23. 24.
25. 26. 27. 28.
[1973] HCA 36; (1973) 129 CLR 99 at [3] (Gibbs J); Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 264 ALR 15 at [4]–[24] (Allsop P), [240] ff (Campbell JA); Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40; 2 CLC 320 at [45] (Lord Mance). Charter Reinsurance Co Ltd (In liquidation) v Fagan [1997] AC 313 at 384 (Lord Mustill). [2016] WASCA 219. Maggbury Pty Ltd v Hafele Aust Pty Ltd [2001] HCA 70; (2010) 210 CLR 181 at [43] (Gleeson CJ, Gummow and Hayne JJ); Suncorp Metway Insurance Ltd v Landridge Pty Ltd [2005] VSCA 223; (2005) 12 VLR 290 at [24] (Nettle JA); Ashmere Cove Pty Ltd v Beekink [2009] FCA 564 at [105] (Barker J). Australian Broadcasting Commission v Australasian Performing Right Association Ltd (see fn 10) at [3] (Gibbs J). McCann v Switzerland Insurance (see fn 9) at [22] (Gleeson CJ). Legal and General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390 at 394 (Kirby P). Australian Casualty Co Ltd v Federico [1986] HCA 32; (1986) 160 CLR 513 at [6] (Gibbs CJ). QBE Insurance Australia Ltd v Vasic [2010] NSWCA 166 at [37] (Allsop P). Re Golden Key Ltd [2009] EWCA Civ 636 at [28] (Arden LJ), cited with approval by the majority in Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7 at [35]. Australian Broadcasting Commission v Australasian Performing Right Association Ltd (see fn 10) at [3] (Gibbs J); Franklins Pty Ltd v Metcash Trading Ltd (see fn 10) at [4]–[24] (Allsop P), [240] ff (Campbell JA); Wasa International Insurance Co Ltd v Lexington Insurance Co (see fn 10) at [45] (Lord Mance). Australian Broadcasting Commission v Australasian Performing Right Association Ltd (see fn 10) at [3] (Gibbs J). Homburg Houtimport BV v Agrosin Ltd [2003] UKHL 12; [2004] 1 AC 715 at [11] (Lord Bingham of Cornhill); AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWC 985 at [13] (Ball J). McGowan v Commissioner of Stamp Duties [2001] QCA 236; [2002] 2 Qd R 499 at [22] (McPherson JA). AFC Holdings Pty Ltd v Shiprock Holdings Pty Ltd [2010] NSWC 985 at [13] (Ball J); Legal & General Insurance Australia Ltd v Eather (see fn 16) at 396 (Kirby P), 402 and 405 (Glass JA). MetLife Insurance Ltd v RGA Reinsurance Company of Australia Ltd [2017] NSWCA 56 at [100]–[101] (Leeming JA). Yorkville Nominees Pty Ltd v Lissenden [1986] HCA 6; (1986) 160 CLR 475 at [5] (Gibbs CJ). Lazard Bros & Co v Brooks (1932) 43 Lloyd’s LR 372 at 377 (Lord Warrington of Clyffe). Cape Lambert Resources Ltd v MCC Australia Sanjin Mining Pty Ltd [2013] WASCA 66 at [53] (Martin CJ).
29. Alstrom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 at [118] (Bleby J). 30. Codelfa Constructions Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at [23] (Mason J); DTR Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423 at [15] (Stephen, Jacobs and Mason JJ); Franklins Pty Ltd v Metcash Trading Ltd (see fn 10) at [24] (Allsop P). 31. Franklins Pty Ltd v Metcash Trading Ltd (see fn 10) at [388]–[390] (Allsop P); Inland Revenue Commissioners v Raphael [1935] AC 96. 32. (2010) NSWCA 166. 33. See also ABN AMRO Bank NV v Bathurst Regional Council [2014] FCAFC 65 at [1755]– [1756]. 34. McCourt v Cranston [2012] WASCA 60 at [25]–[26] (Pullin JA). 35. Agricultural and Rural Finance Pty Limited v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [35] (Gummow, Hayne and Kiefel JJ); Hancock Prospecting Pty Ltd v Wright Prospecting Pty Ltd [2012] WASCA 216 at [10] (McLure P); Fishlock v The Campaign Palace Pty Ltd [2013] NSWSC 531 at [104]–[114] (Sackar J). 36. [1970] AC 583 at 603. 37. TWS Analytical Pty Ltd v The University of Western Australia [2017] WASCA 67 at [49] (Buss P and Newnes JA). 38. Lym International Pty Ltd v Marcolongo [2011] NSWCA 303 at [138]–[144] (Campbell JA); The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 at [2664]–[2672] (Owen J). 39. Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang [2016] NSWCA 370 at [78] (Leeming JA). 40. Centennial Coal Company Ltd v Xstrata Coal Pty Ltd [2009] NSWCA 341; (2009) 76 NSWLR 129 at [48] (Campbell JA). 41. Farah Constructions Pty Ltd v Say-dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [135]. In part, this reflects the idea that there is only one common law of Australia. 42. [2013] WASCA 115 at [85]. 43. [2010] QCA 282; (2010) 243 FLR 336. 44. This led to the High Court granting Maxwell special leave to appeal to the High Court on unusual terms: Maxwell v Highway Hauliers Pty Ltd [2014] HCTrans 51. 45. Australian Casualty Co Ltd v Federico (see fn 17) at [3]. 46. (1986) 6 NSWLR 390 at 394. 47. McCann v Switzerland Insurance (see fn 9) at [74] (Kirby J). 48. Vallejo v Wheeler (1774) 98 ER 1012 at 1017. 49. King v Brandywine Re Insurance Co (UK) Ltd [2004] EWHC 1033 (Comm); Lloyd’s Rep IR 554 at [86] (Colman J). 50. Randolph J of the United States Court of Appeals for the District of Columbia Circuit, Dictionaries, Plain Meaning and Context in Statutory Interpretation (1994) 17 Harvard Journal of Law and Public Policy 71 at 72, cited with approval by Mason P in House of Peace Pty Ltd v Bankstown City Council [2000] NSWCA 44; (2000) 48 NSWLR 498 at [28]. 51. Kuzmanovski v New South Wales Lotteries Corporation [2010] FCA 876 at [37]–[40] (Rares J).
52. Susan Butler (ed), Macquarie Dictionary Publishers. 53. Zhang v ROC Services (NSW) Pty Ltd; National Transport Insurance by its manager NTI Ltd v Zhang (see fn 39) at [68] (Leeming JA). 54. Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 at 912 (Lord Hoffmann). 55. Provincial Insurance v Consolidated Wood (1991) 25 NSWLR 541 at 560 (Mahoney JA). 56. House of Peace Pty Ltd v Bankstown City Council [2000] NSWCA 44; (2000) 48 NSWLR 498. 57. Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; (2014) 89 NSWLR 633 at [105] (Leeming JA). 58. Australian Casualty Co Ltd v Federico (see fn 17) at [6] (Gibbs CJ). 59. Johnson v American Home Assurance Co [1998] HCA 14; (1998) 192 CLR 266 at [19] (Kirby J). 60. Re Bradley and Essex and Suffolk Accident Indemnity Society [1912] 1 KB 415 at 430 (Farwell LJ); Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd [2002] NSWSC 1006 at [27]–[28] (Palmer J). 61. Allianz Insurance Ltd v Inglis [2016] WASCA 25 at [25]–[26] (McLure P). 62. ABN AMRO Bank NV v Bathurst Regional Council (see fn 33) at [1770]. 63. Cehave NV v Bremer Handelsgesellschaft mbH (The Hansa Norde) [1976] QB 44 at 70–1. 64. Selected Seeds Pty Ltd v QBEMM Pty Ltd [2010] HCA 37; (2010) 242 CLR 336 at [29]; Allianz Insurance Ltd v Inglis (see fn 61) at [25]–[26] (McLure P). 65. Fitzpatrick v Jobs Engineering [2007] WASCA 63 at [268]–[270] (Buss JA); Transfield Services (Australia) v Hall; Hall v QBE Insurance (Australia) Ltd [2008] NSWCA 294 at [191] (Campbell JA). 66. Transfield Services (Australia) v Hall; Hall v QBE Insurance (Australia) Ltd (see fn 65) at [191] (Campbell JA). 67. Cole v Accident Insurance Company (1889) 5 TLR 736 at 737 (Lindley LJ); Cornish v Accident Insurance Company (1889) 23 QBD 453 at 456 (Lindley LJ). 68. Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at [40]. 69. North v Marina [2003] NSWSC 64; (2003) 11 BPR 21,359 at [75] (Campbell J). 70. McCann v Switzerland Insurance Australia (see fn 9) at [74] (Kirby J). 71. Eastern Associated Coal Corp v Aetna Casualty and Surety Co 632 F 2d 1068 (3d Cir 1980). 72. Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd [2002] NSWSC 1006 at [27]–[29] (Palmer J). 73. GL Nederland (Asia) Pty Ltd v Expertise Events Pty Ltd [1999] NSWCA 62 at [26] (Giles JA). 74. W & K Holdings (NSW) Pty Ltd v Laureen Margaret Mayo [2013] NSWSC 1063 at [48]– [55] (Sackar J). 75. Green v AMP Life [2005] NSWSC 370 at [171] (Campbell J). 76. Simic v New South Wales Land and Housing Corporation [2016] HCA 47 at [48] (Kiefel J). 77. Franknelly Nominees Pty Ltd v Abrugiato [2013] WASCA 285 at [176] (Buss JA).
78. Maralinga Pty Ltd v Major Enterprises Pty Ltd [1973] HCA 23; (1973) 128 CLR 336 at [13] (Mason J); Simic v New South Wales Land and Housing Corporation (see fn 76) at [32] (Kiefel J). 79. Peregrine Mineral Sands Pty Ltd v Wentworth Shire Council [2014] NSWSC 429 at [220] (Ward JA). 80. Ryledar Pty Ltd v Euphoric Pty Ltd [2007] NSWCA 65; (2007) 69 NSWLR 603 at [269]– [316] (Campbell JA); Carlow Castle Pty Ltd trading as Greenhill Capital Partners v Aztec Resources Ltd [2014] NSWCA 123 at [100] (Bergin CJ in Eq). 81. Simic v New South Wales Land and Housing Corporation (see fn 76) at [40]–[41] (Kiefel J). 82. Mander v Clements [2005] WASCA 67; (2005) 30 WAR 46 at [85]–[87] (McLure J); Ryledar Pty Ltd v Euphoric Pty Ltd (see fn 80) at [122]–[143] (Tobias JA). 83. Simic v New South Wales Land and Housing Corporation (see fn 76) at [41] (Kiefel J). 84. Carlow Castle Pty Ltd trading as Greenhill Capital Partners v Aztec Resources Ltd [2014] (see fn 80) at [110] (Bergin CJ in Eq). 85. Maralinga Pty Ltd v Major Enterprises Pty Ltd (see fn 78) at [20] (Mason J); Leibler v Air New Zealand Ltd [1999] 1 VR 1. 86. Franknelly Nominees Pty Ltd v Abrugiato (see fn 77) at [178] (Buss JA). 87. Franknelly Nominees Pty Ltd v Abrugiato (see fn 77) at [179] (Buss JA). 88. Franknelly Nominees Pty Ltd v Abrugiato (see fn 77) at [180] (Buss JA). 89. Ryledar Pty Ltd v Euphoric Pty Ltd (see fn 80) at [269]–[316] (Campbell JA). 90. Simic v New South Wales Land and Housing Corporation (see fn 76) at [42]–[43] (Kiefel J). 91. (1986) 6 NSWLR 740. See also: Franknelly Nominees Pty Ltd v Abrugiato (see fn 77) at [182] (Buss JA).
[page 237]
Chapter 14 THE NATURE OF AN INSURER’S PROMISE TO INDEMNIFY [T]he liability of the insurer to make good the loss under the policy is one discharged by payment in money to the insured.1
INTRODUCTION This chapter discusses: what an insurer agrees to do when it promises to indemnify an insured; the nature of an insurance claim for indemnity; whether an insurance claim for indemnity is a claim under an insurance contract or a claim for damages for breach of contract; and when an insured’s cause of action for indemnity accrues.
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WHAT AN INSURER AGREES TO DO WHEN IT PROMISES TO INDEMNIFY AN INSURED 14.1 At common law, a promise to indemnify is a promise to save and keep an indemnified person harmless from loss.2 14.2 In England, an insurer’s promise to indemnify is regarded as a promise to prevent an insured from suffering an insured loss as a result
of an insured event occurring.3 For the following reasons, this is hard to credit. In the case of first party insurance, an insured usually suffers a loss the moment an insured event occurs, for example when a fire starts burning [page 238] down an insured home or an insured car is stolen. Even if some time elapses between the happening of an insured event and a loss, it is unlikely that space in time will be sufficient to enable an insurer to prevent the loss. Amongst other things, this is because insurers usually find out about a loss after it has happened. In the circumstances, why would an insurer promise to prevent a loss, and why would an insured believe that is what the insurer promised? In the case of liability (third party) insurance, an insurer promises to indemnify an insured for their legal liability to a third party. An insurer only becomes bound to deliver on its promise when, for the purpose of the contract, the insured suffers a loss. The insured suffers a loss when its liability to a third party is established by a court judgment, an arbitration award or a binding settlement, even though the event that triggered policy response occurred at an earlier point in time.4 There is nothing a liability insurer can do to prevent an insured from incurring a liability to a third party. So, why would an insurer promise to do that, and why would an insured believe that is what the insurer promised? 14.3 With first party and liability insurance, the insurer saves and keeps an insured harmless in the only practical way it can, not by preventing an insured from suffering a loss, but by making good a loss, in the case of: first party insurance, by paying the insured the amount of their loss or providing money’s worth; liability insurance, by paying;
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■ the insured the amount of their liability to the third party; or ■ the amount of the insured’s liability direct to the third party on the insured’s behalf. 14.4 In Australia, an insurer’s promise to indemnify is regarded as a promise to make good a loss suffered by an insured as a result of an insured event occurring, by paying the amount of their loss or providing money’s worth ‘in accordance with’ the terms of the contract.5 Paying the amount of the loss saves and keeps the insured harmless in a practical way, and accords with what insurers intend by their promise to indemnify and how they deliver on that promise every day of the week. [page 239]
THE NATURE OF AN INSURANCE CLAIM FOR INDEMNITY The United Kingdom 14.5 In Scotland, an insurance claim for indemnity is a claim for the amount of the insured’s loss or the provision of money’s worth.6 14.6 In England, an insurance claim for indemnity is a claim for unliquidated damages for breach of contract, not a claim under the insurance contract.7 This is because at common law: an indemnifier is liable for unliquidated damages for breach of contract for failing to prevent an indemnified person from suffering a loss;8 an insurer’s primary contractual obligation is to hold an insured harmless by preventing them from suffering a loss;9 an insurer is in breach of its primary obligation the moment a loss occurs because it did not prevent the loss; and breach of an insurer’s primary obligation gives rise to the insurer’s
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10
obligation to pay damages. ■secondary The idea that the claim is for damages is unusual because there is no suggestion that the claim arises out of the insurer doing anything less than what the parties realistically expected it to do.11
Australia 14.7 In Australia, an insurance claim for indemnity is a claim for the amount of the loss or the provision of money’s worth ‘in accordance with’ the terms of the insurance contract.12 It is a claim for payment in satisfaction of an insurer’s promise to indemnify, not a claim for damages for an insurer’s broken promise to indemnify.13 [page 240] Accordingly, if an insurer denies a valid claim: without repudiating the contract; or in circumstances which amount to a repudiation of the contract but the insured does not accept the repudiation, the insured is entitled to payment of the claim under the insurance contract and damages for breach of contract,14 together with s 57 interest (in the case of an ICA governed contract). On the other hand, if an insured accepts an insurer’s repudiation of the contract, the insured’s claim is for damages at large, not for payment of the claim.15
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IS AN INSURANCE CLAIM FOR INDEMNITY A CLAIM UNDER AN INSURANCE CONTRACT OR A CLAIM FOR DAMAGES FOR BREACH OF
CONTRACT? Introduction 14.8 The law distinguishes between a claim in debt, a claim for an unliquidated sum, a claim for liquidated damages and a claim for unliquidated damages.16 A claim: in debt is not a claim for damages.17 It is a claim for a liquidated sum that ‘can be ascertained by calculation or fixed by any scale of charges or other positive data’: Spain v Union Steamship Co of New Zealand Ltd.18 In that case, the High Court concluded that an employee’s claim for reimbursement of reasonable expenses was a claim in debt, even though the court would need to decide on the reasonableness of the expenses before the claim could succeed; for an unliquidated sum is a claim which: ■ accrues under a contract, but not because the contract has been breached; and ■ cannot ‘be ascertained by calculation or fixed by any scale of charges or other positive data’;
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[page 241]
■for
liquidated damages is a claim for damages ‘recoverable in satisfaction of a right of recovery created by the contract itself and accruing by reason of breach’;19 for unliquidated damages is a claim for ‘compensation as assessed by the court for loss occasioned by breach’ (damages at large).20 It is an uncertain amount requiring the court to make evaluative decisions before the amount payable is ascertained. Sometimes, it is important to make these or similar distinctions. For example: in ascertaining when a cause of action accrues (see the discussion at
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14.17–14.21); or on an application for a default judgment. In Western Australia, for example, a plaintiff who indorses a Writ with a claim for a liquidated sum is entitled to final judgment against a defendant who fails to enter an appearance to the Writ within time.21 On the other hand, a plaintiff who indorses a Writ with a claim for an unliquidated sum or unliquidated damages is entitled to interlocutory judgment against a defendant who fails to enter an appearance to the Writ within time, with the unliquidated sum or unliquidated damages to be assessed by the court;22 in determining whether: ■ a court should order a company to be wound up on the ground of insolvency; ■ there is a liability on the part of the directors of a company because the company traded whilst insolvent;23 ■ a creditor is entitled to serve a statutory demand (which can result in the court appointing a liquidator or provisional liquidator); or ■ payment of an insurance claim is a voidable transaction because the claim was paid when the company was insolvent.
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14.9 The short answer to the question ‘Is an insurance claim for indemnity a claim under an insurance contract or a claim for damages for breach of contract?’ is that, subject to context: [page 242]
■an insurance or reinsurance claim for indemnity under a liability ■
policy in respect of a judgment, an arbitration award or a settlement is a claim in debt; in Australia, an insurance or reinsurance claim for indemnity in respect of a first party loss is a claim under an insurance contract because:
■ it is not a claim for liquidated or unliquidated damages for breach of contract; and ■ like a claim for goods sold and delivered or work and labour done, it is a claim for a liquidated sum calculated by reference to a formula provided by the contract. In particular, it ‘can be ascertained by calculation or fixed by any scale of charges or other positive data’. Alternatively, it is a claim for an unliquidated sum that accrues under the contract, not because of a breach of contract.24 As a claim for indemnity is a claim under an insurance contract, not a claim for damages for breach of contract, it is not subject to issues of remoteness of loss or mitigation.25
Some reinsurance cases that support the proposition that a claim for indemnity is a claim in debt 14.10 As is apparent from the decisions in Odyssey Re (Bermuda) v Reinsurance Australia26 and New Cap Reinsurance Corporation Ltd (in liq) v AE Grant,27 Australian courts have been wrongfooted on this ‘under the contract or damages for breach of contract’ issue by the English cases, which start from the proposition that an insurance claim under an indemnity insurance contract is a claim for damages for breach of contract. 14.11 In Odyssey Re (Bermuda), Odyssey (a reinsurer) paid its cedents (reinsureds) for losses arising out of an earthquake in Turkey in August 1999 that measured 6.7 on the Richter scale. It then issued a statutory demand in respect of those losses against its retrocessionaire (Reinsurance Australia Corporation Ltd) pursuant to s 459G of the Corporations Law. The retrocessionaire applied to set aside the statutory demand, amongst other things, on the basis that Odyssey’s claim was for unliquidated damages for breach of contract, not for debt. Windeyer J followed the [page 243]
English authorities in concluding (at [17]) that an insurance/reinsurance/retrocession claim is a claim for unliquidated damages for breach of contract, not for debt. 14.12 In New Cap, New Cap (a reinsurer) paid its cedents (AE Grant and other members of a Lloyd’s syndicate) under various excess of loss reinsurance policies. The issue for the Supreme Court of New South Wales was whether the payments were voidable transactions. They were if, when New Cap made them, it was unable to pay its debts and was therefore insolvent for the purposes of s 95A of the Corporations Act 2001 (Cth). Although s 95A did not define ‘debt’ or ‘debts’, White J found that ‘debt’ did not include a liability to pay unliquidated damages for breach of contract. White J believed (at [71]) he was bound to reach that conclusion because that is what the Court of Appeal of New South Wales decided in Box Valley Pty Ltd v Kidd28 notwithstanding the earlier inconsistent decision of the High Court in Bank of Australasia v Hall.29 Consequently, a critical issue for consideration was whether New Cap’s liability under the reinsurance policies (indemnity insurance contracts), was a liability in debt or for unliquidated damages for breach of contract (at [54] and [72]). After mentioning that he did not have the benefit of submissions on this issue, White J began this part of his judgment by noting that an insurance claim is ‘typically’ regarded as a claim for unliquidated damages for breach of contract, not a claim in debt (at [87]). After a careful review of most of the relevant English and Australian authorities, White J listed four reasons for the state of the law and then proceeded to distinguish them as follows: An insurer can discharge its obligation under a liability insurance policy by paying the insured or by paying the third party direct. In this case, the cedents had already paid their insureds (at [91]– [92]). An insured must prove and quantify its loss. As the cedents had already paid their insureds, the calculation of the value of New Cap’s indemnity ‘involve[d] no element of
■ ■
■
assessment … opinion or estimation … A claim may lie in debt although the quantum is not ascertained at the date of contract. It is sufficient that it is ascertainable when payment is due’ (at [93]– [94]). In every case supporting the proposition that an insurance claim is for damages for breach of contract for non-payment, the underlying losses were unpaid (at [95]–[99]). [page 244]
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of an insurance claim is discharge of a secondary obligation to pay damages for breach of contract, not a primary obligation to pay the claim. White J observed that this ‘is merely a corollary of the proposition that the insured’s … remedy is by way of damages [for breach of contract]. It does not explain why that must be so in all cases’ (at [100]–[112]).
14.13 White J distinguished Odyssey (at [105]–[110]) on the basis that Windeyer J did not consider whether: the retrocessionaire’s obligation to pay was a primary or a secondary obligation; the cedent’s claim for indemnity against paid losses was in debt or for unliquidated damages for breach of contract; or the cedent had a claim against its retrocessionaire ‘on a common indebitatus count for money paid’.
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14.14 After acknowledging that the weight of authority was against him, White J concluded that an insurance or reinsurance claim for indemnity against a liability already discharged by an insured or reinsured was a claim in debt, not a claim for unliquidated damages for breach of contract, because it ‘could be recovered on a common count for money paid’ (at [108]–[112]). In Trans Pacific Insurance Corporation,30 Barrett J agreed with
White J (at [27]–[31] and [37]) that an insurance claim for indemnity against an ascertained liability to a third party is a claim in debt, not a claim for damages for breach of contract. 14.15 Subject to the policy wording, reinsurance involves reinsurance of the risk insured by the cedent reinsured,31 not reinsurance of the cedent’s liability to its insured.32 This means that subject to the policy wording, a cedent pursuing a reinsurance claim must prove its liability to its insured and its entitlement to indemnity under the reinsurance contract.33 If a reinsurance contract contains a ‘follow the settlements’ or ‘full reinsurance’ clause, the cedent reinsured does not have to prove that but for the settlement it would have been held liable to the insured. Instead, [page 245] the clause requires a ‘reinsurer to follow settlements of the insurer’, but only if: the claim is covered by the reinsurance contract; and ‘the insurers acted honestly and took all proper and business-like steps in making the settlement’.34 This suggests that it is not as clear as White J suggests that a reinsurance claim for indemnity in relation to a discharged liability does not involve the court in any ‘element of assessment … opinion or estimation’.35
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Some more support for the proposition that a claim for indemnity is a claim under an insurance contract and not for damages for breach of it 14.16 Once it is concluded that an insurance claim for indemnity is for payment in accordance with the terms of the insurance contract, subject to context, it should follow that it is a claim under the insurance contract because it is clearly not a claim for liquidated or unliquidated
damages for breach of it. Aside from the reinsurance cases mentioned above, there is some support for this argument in: Larratt v Bankers & Traders Insurance Co Ltd.36 In Larratt, Jordan CJ said (at 223) that if the insurer had repudiated the policy, the insured could ignore the repudiation (that is, affirm the policy) and:
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… sue to recover a liquidated sum under the policy, or else … avail himself of the invalid repudiation as a ground for himself putting an end to the contract and suing for unliquidated damages for the breach …
■CIC Insurance Ltd v Bankstown Football Club Ltd,37 in which Brennan CJ, Dawson, Toohey and Gummow JJ said (at 402):
The fundamental obligations of CIC under the Policy after the occurrence of the first fire were, within a reasonable time of the receipt of the claim … to acknowledge liability and then to pay the liquidated sum, for the computation of which the Policy provided.
In a subsequent footnote on the same page, the same Justices cryptically (in light of the above passage) distinguished: … between an unliquidated claim under the policy and a claim for damages in respect of repudiation of the contract of insurance …; and
[page 246]
■Matthew
Maxwell v Highway Hauliers Pty Ltd,38 in which Murphy JA said (at [154]) that although a claim under an indemnity insurance policy is an unliquidated claim:
… it is a claim for payment of a sum under the policy not dissimilar in nature to liquidated claims for goods sold and delivered or work and labour done.
WHEN DOES AN INSURED’S CAUSE OF ACTION FOR AN INDEMNITY ACCRUE? 14.17 A cause of action accrues when all the facts have occurred which the plaintiff must prove in order to succeed.39 14.18
As mentioned above, the English position is that an insurer is
in breach of its promise to indemnify when it fails to prevent an insured from suffering a loss. So, in Chandris v Argo,40 Megaw J concluded (at 74) that an insured’s cause of action against an insurer accrues on the happening of the loss. Consequently, an insured can succeed in a claim against an insurer without: having to prove it has sought indemnity from its insurer and that the insurer had declined indemnity; or quantifying its claim, on the basis that the amount of the claim is a matter of evidence, not an element of the cause of action.
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14.19 Consistently with the discussion about the nature of an insurer’s promise to indemnify and the nature of an insured’s cause of action for an indemnity, it is submitted that in Australia, subject to the terms of the contract, a cause of action for an insured’s claim for payment in accordance with the terms of the policy also accrues on the day the insured suffers a loss, because that is the day the insurer becomes liable to make good the loss. On the other hand, a cause of action for damages for an insurer’s failure to pay a claim within a reasonable time accrues upon the expiry of the reasonable time after the insured makes the claim. The insured’s delay in making a claim does not delay or postpone accrual of a cause of action for payment by way of indemnity. So, concerns about accrual of a cause of action for payment by way of indemnity depending on the whim of an insured are unfounded, because an insured’s delay in making a [page 247] claim will not of itself expose the insurer to a claim for damages at large for not promptly making payment by way of indemnity.41 14.20 Carillion Construction Ltd v AIG Australia Ltd42 is inconsistent with the above. In that case, Barclay Mowlem Constructions Ltd and others constructed a wharf at the Darwin East Arm Port. American Home Assurance Company (AHA), by a contracts
works policy, insured against damage to the wharf works. The wharf was damaged during construction. In 1999, Barclay Mowlem sued AHA for indemnity for the damage. In 2001, the parties settled the action on terms that included AHA paying Barclay Mowlem $3.5 million. Some time prior to December 1999, tie rods, which kept the wharf’s sheet pile retaining walls in place, became structurally impaired. In 2005, Barclay Mowlem spent $13.75 million fixing the tie rod damage. In 2015, Carillion, Barclay Mowlem’s assignee, sued AIG (which had assumed AHA’s obligations under the policy) for a declaration of its entitlement to indemnity under the policy in respect of the cost of fixing the tie rod damage. Stevenson J said (at [156]): As Giles J pointed out,43 a distinction is to be drawn between the time when an insured’s entitlement to indemnity arises and the time when its entitlement to sue for damages for breach of contract arises …. It may well be that an insured under an indemnity policy would be entitled, immediately on the occurrence of the peril, to seek a declaration of its entitlement to indemnity. But its entitlement to sue for damages for breach of the promise of indemnity only arises only when the insurer has not done “what was required of it” under the policy.
As an aside, in CGU Insurance Ltd v Watson (as trustee of the deed of arrangement in respect of Greaves),44 Giles JA (the same Giles J in Penrith) said (at [64]): Mr Greaves may have had a remedy in specific performance of the contract of insurance. Ordinarily specific performance will not be granted if damages are an adequate remedy. However, as Lindley LJ said in Johnston v The Salvage Association45 (at 460–1): In equity a contract to indemnify can be specifically enforced before there has been any such breach of the contract as would sustain an action at law. In equity the plaintiff need not pay or
[page 248] perhaps ruin himself before seeking relief. He is entitled to be relieved from liability.
Stevenson J held that the Deed of Release barred Carillion’s claim.
His Honour also concluded that Carillion’s claim was statute barred because its claim was for damage to property and: cause of action on an indemnity policy for first party damage accrues when an ■ainsurer has not done ‘what was required of it’ under the policy, not when the damage occurs; Carillion’s cause of action arose when AIG denied liability for the claim, not when the tie rod damage occurred: (at [194]).
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Stevenson J said that to hold otherwise would mean that the cause of action might accrue and become statute barred before anyone was aware of it. On the other hand, if a cause of action accrues when an insurer denies indemnity, the insured can delay the start of the limitation period by delaying making a claim on the policy. This is not the last word on the subject. Until decided by an Australian intermediate court, insureds, as a matter of prudence, would be well advised to calculate the relevant limitation period in a first party indemnity policy from the date of damage (when the loss occurs), not from the date on which the insurer declines the claim. 14.21 If an insurer wrongfully repudiates an insurance contract, the insured’s cause of action will accrue on the date on which the insured accepts the insurer’s wrongful repudiation (if it does so), not the date on which the insurer wrongfully repudiates the policy. That is because until the insurer’s repudiation is accepted by the insured, it ‘is a thing writ in water and of no value to anybody; it confers no legal rights of any sort or kind’.46
1.
2. 3. 4. 5.
CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1987) 187 CLR 384 (Brennan CJ, Dawson, Toohey and Gummow JJ), citing The Times Fire Assurance Company v Hawke (1859) 28 LJ Ex (NS) 317 at 318 (Bramwell B). Victorian WorkCover Authority v Esso Australia Ltd [2001] HCA 53; (2001) 207 CLR 520 at [16] (Gleeson CJ, Gummow, Hayne and Callinan JJ). Ventouris v Trevor Rex Mountain (The Italia Express (No 2)) [1992] 2 Lloyd’s Rep 281 (Hirst J). AMP Workers’ Compensation Services (NSW) Ltd v QBE Insurance Ltd [2001] NSWCA 267; (2001) 53 NSWLR 35 at [9] (Handley JA). Bofinger v Kingsway Group Ltd [2009] HCA 44 at [7] (a surety case); CIC Insurance Ltd v Bankstown Football Club Ltd (see fn 1) (Brennan CJ, Dawson, Toohey and Gummow JJ); Brescia v QBE [2007] NSWSC 598; (2007) 14 ANZ Ins Cas 61-740 at [498]
6. 7. 8. 9. 10. 11. 12.
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23.
24.
25. 26. 27. 28. 29.
(Hammerschlag J); Green v AMP Life [2005] NSWSC 370 at [139] (Campbell J). Strachan v The Scottish Boatowners’ Mutual Insurance Association [2001] ScotCS 138 at [15]–[16] (Lord Eassie). Edmunds v Lloyd Italico e L’Ancora Cia Di Assicurazioni e Riassicurazioni SpA (1986) 2 ALL ER 249 at 250 (Sir John Donaldson). Firma C-Trade SA v Newcastle P&I Association (‘The Fanti’) [1991] 2 AC 1 at 35 (Lord Goff). Firma C-Trade SA v Newcastle P&I Association (‘The Fanti’) (see fn 8) at 35 (Lord Goff); Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111; [1997] CLC 70. Photo Production Ltd v Securicor Transport Ltd [1980] UKHL 2; AC 827 at 849 (Lord Diplock). Jabbour v Custodian of Absentee Property for the State of Israel [1954] 1 WLR 139 at 143 (Pearson J). Bofinger v Kingsway Group Ltd (see fn 5) at [7]; CIC Insurance Ltd v Bankstown Football Club Ltd (see fn 1) (Brennan CJ, Dawson, Toohey and Gummow JJ); Brescia v QBE (see fn 5) at [498] (Hammerschlag J). Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 at [95] (McLure P). Brescia v QBE (see fn 5) at [510] (Hammerschlag J); Matthew Maxwell v Highway Hauliers Pty Ltd (see fn 13) at [95] (McLure P). Larratt v Bankers & Traders Insurance Company (1941) 41 SRNSW 215 at 223 (Jordan CJ). Sprung v Royal Insurance (UK) Ltd (see fn 9) at 76 (Evans LJ). Rothenberger Australia Pty Ltd v Lumley General Insurance Ltd [2003] NSWSC 788 at [26]–[27] (Barrett J). (1923) 32 CLR 138 (Knox CJ and Starke J). Rothenberger Australia Pty Ltd v Lumley General Insurance Ltd (see fn 17) at [26]–[27] (Barrett J). Alexander v Ajax Insurance Co Ltd [1956] VLR 436 at 444. Order 13 Rule 2(1) of the Rules of the Supreme Court. Order 13 Rule 7(1). A company is insolvent if it cannot pay all its debts ‘as and when they become due and payable’ (Corporations Act 2001 (Cth) s 95A). The Act does not define the word ‘debt’. At the very least and subject to context, it is an obligation to pay money or provide money’s worth. Spain v Union Steamship Co of New Zealand Ltd (1923) 32 CLR 138 (Knox CJ and Starke J); CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1987) 187 CLR 384 (Brennan CJ, Dawson, Toohey and Gummow JJ). ABN Amro Commercial Finance Plc v McGinn [2014] EWHC 1674 (Comm) at [57] (Flaux J). [2001] NSWSC 266. [2008] NSWSC 1015; (2008) 221 FLR 164. [2006] NSWCA 26; (2006) 24 ACLC 471. (1907) 4 CLR 1514 at 1527, 1536–7 and 1546–7.
30. [2009] NSWSC 308. 31. Wasa International Insurance Co Ltd v Lexington Insurance Co [2009] UKHL 40; 2 CLC 320 at [33] (Lord Mance). 32. Wasa International Insurance Co Ltd v Lexington Insurance Co (see fn 31) at [2] (Lord Phillips of Worth Matravers). 33. Wasa International Insurance Co Ltd v Lexington Insurance Co (see fn 31) at [35] (Lord Mance), [58]–[59] (Lord Collins of Mapesbury). 34. Wasa International Insurance Co Ltd v Lexington Insurance Co (see fn 31) at [35] (Lord Mance). 35. See, for example, Motor Accidents Insurance Board v O’Neill (1981) 1 ANZ Ins Cas 60448, in which Neasey J concluded that the Board’s claim for a statutory indemnity from the driver of a vehicle was for unliquidated damages because it had to prove that its payments were properly made under the Act. 36. (1941) 41 SR (NSW) 215. 37. [1997] HCA 2; (1997) 187 CLR 384. 38. [2013] WASCA 115. 39. Do Carmo v Ford Excavations Pty Ltd [1984] HCA 17; (1984) 154 CLR 234 at 245 (Wilson J); CIGNA Insurance Asia Pacific Ltd v Packer [2000] WASCA 415; (2000) 23 WAR 159 at [31] (Malcolm CJ). 40. [1963] 2 Lloyd’s Rep 64. 41. CIGNA Insurance Asia Pacific Ltd v Packer [2000] WASCA 415; (2000) 23 WAR 159 at [78] (Pidgeon J). 42. [2016] NSWSC 495. 43. In Penrith City Council v Government Insurance Office of New South Wales (1991) 24 NSWLR 564. 44. [2007] NSWCA 301. 45. (1887) 29 QBD 458. 46. Howard v Pickford Tool Co Ltd [1951] 1 KB 417 at 421 (Asquith J); Russell Young Abalone Pty Ltd v Traders Prudent Insurance Company Ltd [1993] TASSC 57 at [7] (Underwood J).
[page 249]
Chapter 15 CAUSATION Causation is a complex, contextually variable concept, in law as in life.1
INTRODUCTION This chapter discusses causation in the insurance context under the following headings: the context in which the causation inquiry is conducted; and proximate cause. To succeed in an insurance claim, an insured must prove, amongst other things, a connection between an insured event and their loss (the causation issue). Unless the contract expressly otherwise provides, an insured event must be a proximate cause of their loss.
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THE CONTEXT IN WHICH THE CAUSATION INQUIRY IS CONDUCTED 15.1 The connection between ‘cause’ and ‘effect’ is essentially a question of fact. It is to be resolved simply, practically and as a matter of commonsense.2 The inquiry ‘is to be understood as the man in the street … would understand it’.3 It is ‘not a scientific inquest into a mixed sequence of phenomena or an historical investigation of the chapter of events’.4 The ‘but for’ test (whether the loss would have happened ‘but for’ a particular cause) is not a decisive test, but it can be a useful tool for determining whether the necessary causal link exists.5
[page 250] 15.2 How the inquiry into ‘What caused an effect?’ is conducted and resolved will depend on the purpose of the inquiry, for example whether it is to decide: someone’s guilt in criminal proceedings; or whether a plaintiff should succeed in a claim for damages for breach of contract or for negligence, and if so, how much they should be awarded. Lord Hoffmann illustrated the relevance of the purpose of the inquiry when he said that causation questions:6
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often arise for the purpose of attributing responsibility to someone, for example, so as to blame him for something which has happened or to make him guilty of an offence or liable in damages. In such cases, the answer will depend upon the rule by which responsibility is being attributed. Take, for example, the case of the man who forgets to take the radio out of his car and during the night someone breaks the quarterlight, enters the car and steals it. What caused the damage? If the thief is on trial, so that the question is whether he is criminally responsible, then obviously the answer is that he caused the damage. It is no answer for him to say that it was caused by the owner carelessly leaving the radio inside. On the other hand, the owner’s wife, irritated at the third such occurrence in a year, might well say that it was his fault. In the context of an inquiry into the owner’s blameworthiness under a non-legal, common sense duty to take reasonable care of one’s own possessions, one would say that his carelessness caused the loss of the radio.
15.3 In insurance law, the causation inquiry arises in a contractual or statutory context. It is about whether the connection between an insured event and a loss is sufficiently close to trigger an insurer’s promise to pay. In the case of an exclusion from cover, it is about whether the connection between the exclusion and the loss takes the circumstances outside the scope of the insurer’s promise to pay. Causation is also an issue when an insured seeks to rely on s 54 of the Insurance Contracts Act 1984 (Cth) (ICA). By way of contrast, causation in the law of negligence involves a normative judgment. In March v Stramare Pty Ltd,7 Deane J said (at [6]) that in the law of negligence the causation issue arises: in the context of the attribution of fault or responsibility: whether an identified negligent
act or omission of the defendant was so connected with the plaintiff’s loss or injury that, as a matter of common sense and experience, it should be regarded as a cause of it.
[page 251] 15.4
In Standard Oil Co v United States,8 Frankfurter J said (at 66):
Unlike obligations flowing from duties imposed upon people willy-nilly, an insurance policy is a voluntary undertaking by which obligations are voluntarily assumed. Therefore the subtleties and sophistries of tort liability for negligence are not to be applied in construing the covenants of [an insurance] policy. It is one thing for the law to impose liability by its own notions of responsibility [as in a tort context] and quite another to construe the scope of engagements bought and paid for [as in an insurance context].
15.5 The decision of the Full Court of the Supreme Court of Western Australia in SGIC v Sinfein Pty Ltd9 illustrates, at least in part, how asking similar questions about causation in the one set of circumstances can lead to very different answers, depending on whether the question is posed in the context of the law of negligence or that of insurance law. Sinfein concerned a compulsory third party insurance policy issued by the State Government Insurance Commission (SGIC) to Sinfein Pty Ltd as the owner of a registered truck. The policy, issued pursuant to s 4(1) of the Motor Vehicle (Third Party Insurance) Act 1943 (WA) (MVA), required the SGIC to indemnify Sinfein and the driver of the truck: … in respect of all liability for negligence which may be incurred by [the] owner or other person in respect of the death of or bodily injury to any person directly caused by, or by the driving of, that motor vehicle …
The policy, reflecting s 3(7) of the MVA, also provided that injury to a person ‘shall not be taken to have been caused by a vehicle if it is not a consequence of the driving of that vehicle or of the vehicle running out of control’. 15.6 Due to the unsafe configuration of the truck’s exhaust system, straw or chaff became caught against the exhaust pipes whilst Mr Miller (a Sinfein employee) was driving the truck in a paddock during harvesting. The heat of the exhaust ignited the straw or chaff, which
then dropped into the stubble, starting a fire. Mr Miller parked the truck in another paddock before he realised that it had started a fire. In the course of helping others to fight the fire, Mr Miller stood on burnt out stubble whilst using a jerry can of fuel to refuel a herbicide pump. Some fuel spilled onto the ground and ignited. This led to further spillage onto Mr Miller’s clothes which caught fire. He was badly burnt. The District Court concluded that Sinfein negligently caused Mr Miller’s injuries by allowing him to drive the truck across stubble with an unsafely configured exhaust system. [page 252] 15.7 On appeal, the issue was whether the SGIC policy covered Sinfein for its liability to Mr Miller, in particular, whether Mr Miller’s injuries were directly caused by the truck or the driving of it. Ipp J said (at 458) that the circumstances which led to Mr Miller’s injuries included ‘deliberate acts of Mr Miller, without which the injuries would not have occurred’ and: … negligent acts of Mr Miller unrelated to the driving of the fire truck … There was a considerable lapse of time between the cessation of driving and the spilling of fuel on the stubble by Mr Miller. During this time many incidents occurred, without which the injuries would not have been sustained, and which were unconnected to the driving. The injuries were caused by a concatenation of random acts and omissions, involving deliberate conduct, coincidence, inadvertence and neglect. These matters, together with the significant passage of time that elapsed between the driving of the vehicle and the injuries, lead me to the conclusion that the injuries suffered by Mr Miller were so remote from the driving of the vehicle that it could not be said that they were directly caused by the driving of the vehicle.
Although the District Court held that the fire and Mr Miller’s injuries were caused by Sinfein’s negligence in allowing him to drive the truck through the stubble, the Full Court held that the SGIC policy did not respond because, for the purpose of the policy, the driving of the truck through the stubble was not the direct cause of Mr Miller’s injuries.
PROXIMATE CAUSE What is proximate cause? 15.8 Unless the insurance contract expressly provides otherwise, the insured can only succeed in a claim for a loss if they prove an insured event was a ‘proximate cause’ of the loss. The need for an insured to prove proximate cause is based upon the presumed intention of the contracting parties.10 Accordingly, the parties are free to bargain for a different connection, for example that the insurer will pay a claim if an insured can prove that the loss ‘arose out of’ an insured event.11 See Chapter 19 for a brief discussion of the meaning of some common causal connections. In an insurance contract, the connection indicated by the words ‘caused by’ or ‘directly caused by’ is the same as that indicated by proximate cause.12 15.9
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Proximate cause means: the ‘cause that is proximate in efficiency’;13 [page 253]
■the ‘real efficient cause’;14 ■the effective, dominant, predominant or operative cause;15 in motion the train of ■the ‘“active, efficient cause” … which set 16 events which brought about the damage’.
The leading case on proximate cause 15.10 The leading insurance case on the meaning of proximate cause is Leyland Shipping Company Ltd v Norwich Union Fire Insurance Society Ltd,17 in which the House of Lords disabused the insurance market of the notion that the proximate cause of a loss is the cause proximate in time. In that case, Norwich Union insured the steamship
Ikaria under a time policy against ‘perils of the sea’. The policy contained the following clause: Warranted free of capture, seizure and detention, and the consequences thereof, or any attempt thereat, piracy excepted, and also from all consequences of hostilities, or warlike operations, whether before or after declaration of war.
On 30 January 1915, Ikaria managed to make it into the nearby outer harbour of Le Havre after being torpedoed by a German submarine. The harbour authority sent the ship to a berth inside the outer breakwater to avoid the risk of her sinking in the harbour. The ship sank a few days later as a result of the action of the sea. She would not have sunk if she had remained in the harbour. The House of Lords concluded that Norwich Union was not liable to pay for the loss of the Ikaria because the proximate cause (causa proxima) of her loss was torpedoing, not the perils of the sea. Lord Dunedin said (at 362–3): … we have had … much discussion on what is the true meaning of causa proxima. Yet I think the case turns on a pure question of fact to be determined by commonsense principles. What was the cause of the loss of the ship? I do not think the ordinary man would have any difficulty in answering she was lost because she was torpedoed … The solution will always lie in settling as a question of fact which of the two causes was what I will venture to call … the dominant cause of the two. In other words, you seek for the causa proxima, if it is well understood that the question of which is proxima is not solved by the mere point of order in time.
[page 254]
Two other cases on proximate cause 15.11 Insurance Commission of Western Australia v Container Handlers Pty Ltd18 concerned a compulsory third party insurance policy issued by the Insurance Commission of Western Australia (ICWA) to Container Handlers as the owner of a registered prime mover and a registered low loader. The policy, issued pursuant to s 4(1) of the Motor Vehicle (Third Party Insurance) Act 1943 (WA) (MVA), required ICWA to indemnify Container Handlers and the driver of the prime mover and low loader:
… in respect of all liability for negligence which may be incurred by the owner or other person in respect of the death of or bodily injury to any person directly caused by, or by the driving of, that motor vehicle …
The policy, reflecting s 3(7) of the MVA, also provided that injury to a person: … shall not be taken to have been caused by a vehicle if it is not a consequence of the driving of that vehicle or of the vehicle running out of control.
15.12 In mid-March 1998, the prime mover was transporting a crane on the back of the low loader in the remote outback of northern Western Australia. Mr Sutton, the crane operator, was a passenger in the prime mover because the driver (Mr Reibel) was giving him a lift to the crane’s destination, a copper mine near Port Hedland. At about midday, Mr Reibel decided to remove both wheels from one of the rear wheel hubs of the low loader because of mechanical problems. He jacked up an axle to secure it to the bed of the low loader. Mr Sutton assisted by crouching underneath the low loader for the purpose of connecting chains to secure the axle to the tray. Mr Sutton was holding onto the chassis when the jack slipped. The axle crushed his hand against the chassis, leaving him with what his counsel at trial described as a ‘brutal injury’. The trial judge found that Container Handlers negligently caused Mr Sutton’s injuries by not repairing the power unit before the prime mover commenced its journey (the power unit enables the tray to be lowered and raised) and failing to provide: a trolley jack of sufficient lifting capacity to lift an axle; braces or supports for the axle or planks or blocks to give the trolley jack a secure footing; and chains of sufficient length to enable an axle to be secured to the bed of the tray.
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[page 255] The trial judge also found Container Handlers vicariously liable for
Mr Reibel negligently failing to take a number of precautions relating to the way in which he attempted to remove both wheels. Container Handlers lost its third party proceedings against ICWA at trial, won its appeal to the Full Court of the Supreme Court of Western Australia and lost ICWA’s appeal to the High Court. 15.13 In the High Court, Container Handlers conceded that the driving of the prime mover did not directly cause Sutton’s injury, so the only question was whether the injury was: directly caused by a motor vehicle; and a consequence of the driving of the vehicle or its running out of control. McHugh J said (at [21]) that directly caused by a vehicle ‘looks to the vehicle as the harm-causing instrument and requires a direct and immediate connection between the vehicle as the harm-causing instrument and the death and bodily injury’. McHugh J also said (at [38]–[39]) that the Full Court was correct to conclude Mr Sutton’s injury was ‘directly caused by the low loader because its axle fell and crushed his hand against the chassis’. In separate judgments, each member of the High Court held that Mr Sutton’s injury was not a consequence of the driving of the vehicle. McHugh J said (at [18]):
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Both scientific and modern common law doctrines of causation as well as common sense … deny that inert objects such as vehicles cause anything. Whilst the use of inert objects may have effects, this is because they are the instruments by which living creatures bring about those effects … [T]he notion that a vehicle may cause death or bodily injury without human intervention is not easy to understand.
McHugh J also said (at [52]) that operation and control of the direction driver is no longer driving a vehicle after of the vehicle. The phrase ‘consequence of driving’ between Mr Sutton’s injury and some vehicle.
driving refers to ‘the actual and speed of the vehicle’. A they have stopped and got out required a causal connection feature of the driving of the
[45] … in the context of the Act the expression ‘a consequence of’ emphasises the result or effect of the driving rather than the driving causing the result. This distinction is
important in an insurance context where cause is frequently — perhaps usually — equated with ‘proximate’ or ‘dominant’ cause. Although ‘consequence’ involves notions of causation, the term ‘consequence’ — with its emphasis on effect — places less emphasis on the proximity of cause and effect than the term ‘cause’ may do in various contexts … [65] Nothing in the evidence suggests that some feature of the driving, such as running into a drain or avoidable pothole or driving
[page 256] at excessive speed, caused the low loader’s wheel bearings to fail or the wheels to lose their shape. If some feature of the driving had this effect, it might plausibly be suggested that Mr Sutton’s injury was a consequence of that driving, because it led to the repair work which in turn led to the injury … [66] The mere fact that Mr Sutton’s injury would not have occurred if the vehicle had not been driven from Port Hedland to Camp Tracey and then to Nifty or from Nifty to Port Hedland does not mean that, for the purpose of the Act, the injury to Mr Sutton was a consequence of the driving of the vehicle. The use of the vehicle to transport a heavy crane and a mine transport truck on bad roads was a necessary precondition for the sustaining of the injury. However, the injury was not a consequence of any feature of the driving of the prime mover and its attached load. The injury was not a result or effect of some feature of the driving of the vehicle … Once it is understood that using the vehicle is not equivalent to the driving of it, it is impossible to hold that the injury to Mr Sutton was a consequence of the driving of the prime mover and low loader. His injury was not a consequence of any feature of the driving of the vehicle.
15.14 In Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd,19 QBE insured Lasermax ‘in respect of physical loss or damage to … (b) contents … directly caused by’ fire. A fire occurred on a power pole about 55 metres from Lasermax’s premises, where it used laser machines to weld, cut and treat materials. The fire caused the upper arm of the power pole to fail, allowing wiring on the upper arm to come into contact with wiring supported by the lower arm. The contact caused a high voltage/low voltage intermix, which caused a power surge to a Lumonics AM 356 laser machine on Lasermax’s premises. The question for the New South Wales Court of
Appeal was: ‘Did the fire “directly” cause the damage to the laser machine?’ Ipp JA concluded (at [9]) that the policy responded to the claim because ‘the fire was the predominant cause of the loss’. McColl JA reached the same conclusion, saying (at [115]): … the real and effective cause of the damage to the Laser was the fire. It was the ‘active, efficient cause’ … which set in motion the train of events which brought about the damage to the Laser. There was no intervening force which started from a new and independent source. The effective agency which brought about the result was the fire. It was the fire which triggered the sequence of events which led to the power surge and hence (on the assumed facts) the damage to the Laser.
[page 257]
Competing causes 15.15 Where a loss results from two or more concurrently operating interdependent proximate causes, the loss is attributable to each of them.20 Subject to the following qualifications and assuming an insurance contract requires an insured to prove that a loss was proximately caused by an insured event, the insurer will be liable for an insured’s loss if one of two or more proximate causes of a loss was an insured event, even if another of the proximate causes of the loss was not an insured event: JJ Lloyd Instruments Ltd v Northern Star Insurance Co Ltd (Miss Jay Jay).21 In the Miss Jay Jay, the competing causes of damage to a motor cruiser were the insured peril ‘external accidental means’ and the uninsured peril defective design. The insured recovered under the policy because the insured peril and defective design were equally efficient in bringing about the loss and defective design was not excluded by the policy.22 15.16 If one of two or more proximate causes of a loss is an insured peril, an insurer will not be liable for the loss if the contract requires the insured peril to be the sole or exclusive cause of the loss, and another proximate cause of the loss is not an insured peril.
Nor will the insurer be liable if another concurrent and interdependent proximate cause of the loss is an excluded peril (the ‘Wayne Tank’ principle).23 15.17 The Wayne Tank’ principle24 starts from the proposition that there can be more than one proximate cause of a loss.25 In The ‘Demetra K’,26 Lord Phillips of Worth Matravers described its operation: Where a policy provides cover against one of two or more concurrent causes of a casualty, a claim will lie under the policy provided that there is no relevant exclusion. Where, however, a policy contains an express exclusion of cover in respect of loss resulting from a specified cause, underwriters will be under no liability in respect of a loss resulting
[page 258] from that cause, notwithstanding the fact that there may have been a concurrent cause of the loss which falls within the cover. The effect of an exception is to save the insurer from liability for a loss which but for the exception would be covered. The effect of the cover is not to impose on the insurer liability for something which is within the exception …
15.18 Wayne Tank concerned circumstances in which Wayne Tank (engineers) installed equipment for storing and conveying liquid wax (stearine) at Harbutt’s plasticine factory. Stearine is one of the main ingredients of plasticine. It is highly inflammable at high temperatures. A fire destroyed the factory. The fire resulted from: Wayne Tank’s use of a pipeline made of unsuitable and dangerous plastic material wrapped in heating tape and attached to a useless thermostat; and a Wayne Tank employee, as part of a trial run, switching on the heating tape and leaving it unattended overnight without first testing the equipment. The employee switched on the heating tape because Wayne Tank wanted the stearine molten the following day so that the system could be tested. The durapipe melted and started a fire that destroyed the factory. The
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fire would not have occurred if the durapipe had been suitable or if the equipment had been supervised overnight. Employers Liability Insurance Corporation Ltd agreed by a liability policy to indemnify Wayne Tank: … against all sums which [Wayne Tank] shall become legally liable to pay as damages consequent upon …. damage to property as a result of accidents as described in the schedule.
A policy exclusion provided that Employers Liability would not indemnify Wayne Tank: … in respect of liability consequent upon … (5) death injury or damage caused by the nature or conditions of any goods or the containers thereof sold or supplied by or on behalf of [Wayne Tank] …
The Court of Appeal concluded that the loss was proximately caused by the dangerous nature of the equipment installed, rather than the conduct of Wayne Tank’s employee, which had merely precipitated or triggered the fire. Lord Denning and Roskill LJ said that if they were wrong and there were two causes that were equal or nearly equal in their efficiency in bringing about the damage, Wayne Tank would fail because one of the causes was within an exclusion clause. Lord Denning MR said (at 67): … I will assume, for the sake of argument, that I am wrong about this: and that there was not one dominant cause, but two causes which were equal or nearly equal in their efficiency in bringing about the
[page 259] damage. One of them is within the general words and would render the insurers liable. The other is within the exception and would exempt them from liability. In such a case it would seem that the insurers can rely on the exception clause.
Cairns LJ concluded there were two causes, each of which could properly be described as an effective cause of the loss. He said that since one cause came within the exception of the policy, there could be no recovery on it. 15.19 The ‘Wayne Tank’ principle comes into play where there are two proximate causes that are ‘concurrent and interdependent, in the
sense that neither would have caused the loss without the other … the two causes can be seen as inseparable and so, in effect, as joint’: McCarthy v St Paul International Insurance Co Ltd.27 Allsop J continued: 103 . Given that the two causes are interdependent and that the loss would not have occurred without the operative effect of the excluded cause, the non-response of the policy can be comfortably and logically accepted as the intended result of the revealed agreement of the parties … 104 … More difficulty may be encountered in circumstances where a policy excludes one cause, includes another and the loss is occasioned by the two causes operating concurrently, but independently, in the sense that each would have caused the loss without the other. At the outset, it may doubted that the solution in any given case is to be found in the application of any principle of insurance law, other than one which states that the rights of the parties to the policy are to be determined by reference to the terms of the contract as found. This was the principle applied by all three Lords Justices in Wayne Tank. Thus, it is always essential to pay close attention to the terms of any policy and the commercial context in which it was made, for it is out of these matters that the answer to the application of the policy to the facts will be revealed …
In McCarthy, Allsop J referred (at [107]) to Countrywide Finance Ltd v State Insurance Ltd,28 in which a restaurant that operated from a permanently moored ferry boat sank in two feet of water. The ferry sank because of worm damage and dry rot. The restaurant’s policy excluded worm damage but not dry rot. After referring to Wayne Tank, Hammond J said (at 756): … if there are two approximately equal, or, I would say, co-mingled causes, the insurer can effectively rely on one of those causes not being within the policy. In my view, the insurer has established that (at least) one of two effectively co-mingled causes was within the exception. If there had been appropriate evidence, it might have been possible to make a finding that both causes were within the exception, but as I have said, I decline to
[page 260] speculate in the absence of evidence and the law is that the insurer need demonstrate only one.
Allsop J also said in McCarthy (at [109]): In these cases [including Countrywide Finance], even though it could be posited that the
damage may or would have occurred in any event by the cause that was not excluded, the fact is that the policy in each case was construed as excluding damage caused in a particular way. As a matter of fact the damage was caused in that way (whether or not there was another concurrent cause). Thus, recognising the limits of the cover agreed upon, the loss fell outside the terms of the policy. Wayne Tank has become the best known illustration of this result. But the result is not the consequence of the application of a principle other than that which truly underlay Wayne Tank — the ascertainment and application of the contractual intentions of the parties.
Intervening cause 15.20 The effect of an insured peril can be brought to an abrupt end by a person’s free, deliberate and informed act or omission.29
Deliberate cause 15.21 Unless the policy expressly provides otherwise, an insured: cannot recover for a loss if they deliberately ‘caused the loss or the event upon which the insurance moneys were expressed to be payable’;30 is not prevented from recovering for a loss deliberately caused by their employee or agent without their knowledge or consent unless, in the case of an insured company, that person acted ‘with the authority of the company or is so closely connected with the company that his acts can be said to be its acts’.31 Accordingly, an insured cannot recover for a building destroyed by fire if they were involved in deliberately setting fire to the building. They may be able to recover if they deliberately lit a fire, say for heating purposes, which accidentally led to the destruction of the building.
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1. 2. 3. 4. 5. 6.
United States v Oberhellmann 946 F 2d 50, 53 (7th Cir 1991) (Posner J). Chappel v Hart [1998] HCA 55; (1998) 195 CLR 232 at [93] (Kirby J); Banque Bruxelles v Eagle Star [1995] QB 375 at 406 (Sir Thomas Bingham MR). Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd [2005] NSWCA 66; (2005) 13 ANZ Ins Cas 61-643 at [110] (McColl JA). Weld-Blundell v Stephens [1920] AC 956 at 986 (Lord Sumner). March v Stramare Pty Ltd [1991] HCA 12; (1991) 171 CLR 506. Empress Car Company (Abertillery) Ltd v National Rivers Authority [1998] UKHL 5; [1999] 2 AC 22 at [29]. See also I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty
7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.
21. 22. 23.
24. 25. 26. 27. 28. 29. 30.
31.
Ltd [2002] HCA 41; (2002) 210 CLR 109, in which Gleeson CJ noted (at [26]) that the inquiry is not conducted in the abstract. [1991] HCA 12; (1991) 171 CLR 506. 340 US 54 (1950). (1996) 15 WAR 434. Leyland Shipping Company Ltd v Norwich Union Fire Insurance Society Ltd [1918] AC 350 at 365 (Lord Atkinson). Dickinson v Motor Vehicle Insurance Trust [1987] HCA 49; (1987) 163 CLR 500. Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (see fn 3) at [5] (Ipp J). Global Process Systems Inc v Berhad [2011] UKSC 5; 1 Lloyd’s Rep 560 at [19] (Lord Saville). Global Process Systems Inc v Berhad (see fn 13) at [49] (Lord Mance). Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (see fn 3) at [5] and [9] (Ipp JA). Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (see fn 3) at [115] (McColl JA). [1918] AC 350. [2004] HCA 24; (2004) 218 CLR 89. [2005] NSWCA 66; (2005) 13 ANZ Ins Cas 61-643. City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 739 at 745 (Clarke J); McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) 157 FCR 402 at [93] (Allsop J). [1987] 1 Lloyd’s Rep 32 at 40–1 (Slade LJ). See also HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 612 (Sheller JA). Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corporation Ltd [1974] 1 QB 57; Global Process Systems Inc v Berhad (see fn 13) at [22] (Lord Saville); City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (see fn 20) at 744 (Clarke J). The name is derived from the case Wayne Tank & Pump Co Ltd v Employers Liability Assurance Corp Ltd (see fn 23). McCarthy v St Paul International Insurance Co Ltd (see fn 20) at [90]–[91] (Allsop J). [2002] 1 Lloyd’s Rep IR 795. [2007] FCAFC 28; (2007) 157 FCR 402 at [93] (Allsop J). [1993] 3 NZLR 745. Allianz Australia Insurance Ltd v Waterbrook [2009] NSWCA 224 at [106] (Ipp JA); Weld-Blundell v Stephens [1920] AC 956. Fire & All Risks Insurance Co Ltd v Powell [1966] VR 513 at 517 (O’Bryan and Pape JJ); Clayton v Mutual Community General Insurance Pty Ltd [1995] SASC 5080; (1995) 8 ANZ Ins Cas 61-263 at [5]–[17] (King CJ). Entwell Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059 (Ipp J).
[page 261]
Chapter 16 MITIGATION IN INSURANCE LAW The [insurer’s] submission in all its unattractive simplicity is that, although the respondent would be indemnified if it stood by and allowed the office block to collapse, it is not indemnified when it incurs expense in preventing or minimising damage or liability.1
INTRODUCTION This chapter is in three parts. The first part concerns the extent to which an insured can recover insured losses sustained as a result of an insured taking, or not taking, steps in mitigation. This is dealt with under the headings: introduction to mitigation in insurance law; the consequences of mitigating or not mitigating: a ‘causation’ issue; no recovery for insured loss sustained as a result of taking steps in anticipation of an insured event; and recovery of insured loss sustained as a result of taking steps to avoid or mitigate an imminent insured event. The second part tackles the difficult issue of when an insured can claim the cost of taking mitigating steps where the policy says nothing about mitigation or mitigation costs, or where it contains a clause that requires an insured to take steps to mitigate but says nothing about who is to bear the cost of taking those steps. The third part concerns the situation where the policy contains an express term requiring the insurer to meet mitigation costs, and with the case of intervening events.
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[page 262] There is nothing in the Insurance Contracts Act 1984 (Cth) touching on any of these issues, although ss 13 or 14 (duty of utmost good faith) may come into play depending on the circumstances. This chapter is not concerned with mitigation in the context of a claim by the insured for damages arising out of an insurer’s repudiation of the insurance contract or wrongful denial of a claim (briefly dealt with in Chapter 20). It is concerned with an insured’s obligation to mitigate in circumstances where the insurer has done nothing wrong. Mitigation in insurance should be straightforward; and it is when the issue is whether steps taken by an insured to mitigate an insured loss constitute the necessary causal link between an insured event and an insured loss, or whether any part of an insured loss is unrecoverable because it is due to the insured not taking steps to mitigate. It becomes challenging when an insured claims the cost of taking steps in mitigation. In Australia, mitigation in insurance law is unlike mitigation in the ordinary law of contract because in insurance law mitigation is not related to breach of an insurance contract. As an issue, it is enlivened as soon as an imminent insured event threatens insured loss.
PART 1 Introduction to mitigation in insurance law Mitigation in the law of contract 16.1 A party who breaches a contract is liable to pay damages for the breach. The ‘ruling principle’,2 as stated by Parke B in Robinson v Harman,3 is to place the innocent party: … so far as money can do it … in the same situation, with respect to damages, as if the contract had been performed.4
The ‘ruling principle’ is qualified by the innocent party’s need to
prove that the breach caused their loss and that their loss is not too remote. The ‘ruling principle’ is also qualified by the duty to mitigate, which is a requirement that the innocent party take reasonable steps to avoid or limit the loss flowing from a breach of contract. This qualification is intended to discourage an innocent party from wasting resources by idly standing by and watching their loss unfold, when they could so easily avoid or limit it. [page 263] The duty to mitigate is not in fact a duty because in the absence of an express term requiring mitigation, an innocent party can choose to mitigate or not: The ‘Solholt’5. In The ‘Solholt’, Donaldson MR put it this way (at 608): A plaintiff is under no duty to mitigate his loss, despite the habitual use by lawyers of the phrase ‘duty to mitigate’. He is completely free to act as he judges to be in his best interests. On the other hand, a defendant is not liable for all loss suffered by the plaintiff in consequence of his so acting. A defendant is only liable for such part of the plaintiff’s loss as is properly to be regarded as caused by the defendant’s breach of duty.6
The duty is not a ‘breach of contract’ issue because not mitigating does not: mean the innocent party was wrong or was at fault; give rise to a claim for damages. Mitigation is a ‘causation’ issue, in the sense that if an innocent party: takes reasonable steps to mitigate the loss flowing from a breach of contract, they will be entitled to recover loss resulting from,7 and expenses incurred in,8 taking those steps. Why? Because such loss and expense conforms to the principle in Hadley v Baxendale,9 in that they:
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… may fairly and reasonably be considered either arising naturally, ie, according to the usual course of things, from such breach of contract itself, or such as may
reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it …; or
■does not take reasonable steps to mitigate the loss flowing from a
breach of contract, they will be precluded from recovering their loss to the extent that it results from their being aware of the opportunity to mitigate but choosing not to do so.10 [page 264] In this context the ‘causation’ question is not about the extent to which the loss arose as a natural or contemplated result of the breach, but rather the extent to which the loss was due to the plaintiff not taking reasonable steps to mitigate the loss. As the High Court explained in the workers’ compensation case Fazlic v Milingimbi Community Inc: … one and the same ultimate physical state of disability can scarcely be said to have been ‘caused’ by the initial injury if the refusing worker was at the time unaware of certain facts concerning a recommended treatment (and hence was not unreasonable in his refusal) but to lack the necessary causal relationship when his refusal was made with knowledge which should have led to his acceptance of that treatment.11
Whether an innocent party has not mitigated (acted unreasonably) is a question of fact.12 It is: … not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might has been taken.13
Not mitigating limits an innocent party’s recovery of damages for a breach of contract; it does not affect a party’s recovery of the price of performance of a contract: White and Carter (Councils) Ltd v McGregor.14 In that case, a garage owner’s sales manager, without the garage owner’s authority, agreed with the pursuers (plaintiffs) that the pursuers would display advertisements for the garage owner for three
years on street-side litter bins the pursuers supplied to local authorities. The garage owner found out about the agreement the day it was made and immediately, and wrongly, repudiated the agreement. The pursuers chose to perform the agreement rather than accept the repudiation. They then displayed the advertisements and at the end of the three-year period sued the garage owner for the contract price. The House of Lords held that as the pursuers were not suing for damages for breach of contract, they were not obliged to mitigate their loss, for example by offering someone else the opportunity to display advertising on their bins. [page 265] Although not directly relevant here, in certain circumstances an innocent party might be limited to claiming damages for nonperformance of a contract, without the option of claiming specific performance of the contract.15 Although the plaintiff bears the onus of proving its loss was caused by a breach of contract, the defendant bears the onus of proving the plaintiff did not mitigate, the extent to which it did not mitigate and the consequences of that.16 Accordingly, a plaintiff will not be able to recover its loss to the extent the defendant pleads and proves that: the plaintiff was aware of reasonable steps that could have been taken to mitigate the loss, but chose not to take those steps; and not taking those steps resulted in the loss.17
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Mitigation in insurance law What do they know of the law of the insurance contract who only the law of contract know?18 16.2 To succeed in an insurance claim, an insured must prove, amongst other things, the necessary causal connection between an insured event and an insured loss. The loss may be: damage to, or loss of, insured property;
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■injury to, or sickness or death of, an insured person; or ■an insured’s legal liability for a third party’s death or
personal
injury, property damage or financial loss. Unless the insurance contract expressly provides otherwise, an insured event must be a proximate (direct) cause of an insured loss. The rest of this chapter proceeds on the assumption that the contract provides cover for insured loss proximately caused by an insured event. Here are two scenarios to illustrate this aspect of the chapter.
Scenario 1 16.3
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A farmer is insured for fire damage to: his farmhouse; [page 266]
■his farm storage shed; and ■the hay he stores in the shed. A fire escapes from a nearby shire tip and destroys the farmhouse, the shed and the hay. All things being equal, the farmer will be indemnified for his loss because: the farmhouse, the shed and the hay are all insured property; and the insured event ‘fire’ was the proximate cause of their destruction.
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Scenario 2 16.4 Same as Scenario 1, except the hay is not insured. The farmer will be indemnified for the loss of the farmhouse and the shed, but not for the loss of the hay because the hay is not insured property.
The consequences of mitigation or not mitigating: A ‘causation’ issue 16.5 In England, an insurer’s promise to indemnify is regarded as a promise to prevent an insured from suffering insured loss as a result of an insured event.19 Whilst this is hard to credit, it does mean that mitigation as understood in the law of contract is easily transplanted into English insurance law. That is because in English insurance law, an insured’s claim on a policy is a claim for damages for the insurer’s failure to prevent the insured from suffering a loss. 16.6 On the other hand, in Australia an insurer’s promise to indemnify is regarded as a promise to make good a loss suffered by an insured as a result of an insured event, by paying for their loss ‘in accordance with’ the terms of the insurance contract.20 It follows that the idea of mitigation in Australian insurance law is not derived from the law of contract, at least in circumstances where an insured is simply seeking payment of what an insurer promised to pay, rather than damages. An insured has a duty to mitigate.21 The duty is not demanding. In general terms, it requires the insured to take ‘practical and reasonable steps as a matter of self-help which his own self-interest would dictate’ for the purpose of avoiding or limiting an insured [page 267] loss.22 The duty does not oblige an insured ‘to sacrifice its commercial interest in favour of the insurer’.23 The High Court considered mitigation in the insurance context in AFG Insurances Ltd v City of Brighton.24 In this case, the City of Brighton held a 35-year lease from the Crown of land in Brighton. The Municipal City Baths and a building were on the land. The building consisted of Captain Cook’s Restaurant and a manager’s flat above it.
The City sub-leased the restaurant to J & B Levin Nominees Pty Ltd. The restaurant was destroyed by fire. The City exercised its option to cancel the sub-lease and claimed for the damage to the building under a fire policy issued by AFG Insurances Ltd. If the Crown lease had not contained a covenant to repair and a liability to reimburse the Crown for the cost of any repairs it carried out, the City’s loss would have been limited to the cost of reinstating the manager’s flat and the present value of the loss of future rent. Mason J refrained from exploring the nature and extent of an insured’s duty to mitigate, limiting himself to the following observation (at [12]): Sometimes it is put that the duty [to mitigate] is but an instance of the duty of the insured to the insurer to observe good faith … At other times the opinion is expressed that a breach of the duty will, or may, amount to a cause of loss which is independent of the fire …
AFG Insurances Ltd argued that the City ought to have mitigated its loss by exercising its right to remove the building under clause 3(e) of the Crown lease, thereby avoiding its liability to the Crown under the repair covenant. Mason J dealt with this submission in the following passages: 14 To say … that the insured should take reasonable steps to extinguish the fire, … to remove his property to a place of safety … is to say no more than that the insured should take those practical and reasonable steps as a matter of self-help which his own selfinterest would dictate. It is quite another thing to say that after the fire has taken place and caused loss the insured should exercise a legal right in circumstances where its exercise will work a radical change in the nature of the property of which the insured is lessee and will diminish the value which the right would otherwise have for him. The consequence to the [City] would be to make it the lessee of unimproved land for the balance of the lease and to leave it liable on the covenant to pay rent. Plainly it would be to the advantage of the [City] to obtain the insurance moneys and rebuild the premises. …
[page 268] 15 When regard is had to these circumstances it cannot be said that the respondent was under a duty to the appellant to exercise the right conferred by cl. 3(e) of the lease.
To so hold would be to compel the respondent to pursue a course which was disadvantageous to it and which would work a detriment to it.
16.7 CGU Workers Compensation (NSW) Ltd v Garcia25 gives some support to the idea that an insured’s duty to mitigate is generated by his duty of utmost good faith. In that case, Mason P said the role of utmost good faith is limited to giving rise to specific duties such as the precontractual duty of disclosure or the insured’s post-contractual duty to mitigate an insured loss, and to make an insurer accountable to the insured for the way in which it might exercise a power or discretion under the policy. It is arguable that mitigation is not a ‘breach of contract’ or a ‘duty of utmost good faith’ issue because: like the law of contract, an insured’s duty to mitigate is not in fact a duty, because in the absence of an express term requiring an insured to mitigate, the insured can choose to mitigate or not.26 And what basis would there be for implying such a term? an insurer cannot require an insured to mitigate, or prevent an insured from not mitigating; and not mitigating does not: ■ mean an insured was wrong or was at fault for not mitigating; or ■ give rise to a claim by an insurer for damages for not mitigating.
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16.8
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Mitigation is a ‘causation’ issue, in the sense that an insured: is entitled to recover insured loss consequent on taking steps to mitigate insured loss, even if taking those steps causes insured loss different to, or beyond, what would have eventuated if the insured had not taken steps to mitigate.27 Why? Because insured loss resulting from an insured taking steps to mitigate insured loss is regarded as having been proximately caused by an insured event. For example, in Stanley v The Western Insurance Company,28 Kelly CB said (at 74) that any loss: resulting from an apparently necessary and bona fide effort to put out a fire, whether it be by spoiling the goods by water, or
[page 269] throwing the articles of furniture out of window, … in a word, every loss that clearly and proximately results, whether directly or indirectly, from the fire, is within the policy.29
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In Canada Rice Mills Ltd v Union Marine & General Insurance Company,30 the vessel’s master ordered ventilators to be closed to stop sea water damaging insured cargo. Closed ventilators resulted in condensation, which damaged the cargo. The Privy Council allowed the insurance claim on the basis that cargo damaged by condensation was damage caused by a ‘peril of the seas’, because a ‘peril of the seas’ prompted the master to order the closing of the ventilators;31 is precluded from recovering for insured loss to the extent that it results from their not mitigating.32 In this context, it is arguable that the ‘causation’ question is not about whether the insured loss was proximately caused by an insured event, but rather whether the insured loss is recoverable to the extent it was due to the insured not taking reasonable steps to mitigate the loss. To paraphrase the High Court in Fazlic v Milingimbi Community Inc:33 One and the same insured loss can scarcely be said to have been ‘proximately caused’ by an insured event if the insured was at the time unaware of certain facts concerning a mitigation opportunity (and hence was not unreasonable in not taking up the opportunity) but to lack the necessary causal relationship when his not taking up the opportunity was made with knowledge which should have led to his taking up the opportunity.
Having said that, there is a counter-argument that in the insurance law context, the issue is whether insured loss resulting from an insured not taking steps to mitigate was proximately caused by an insured event. That is because in Australia there is support at the highest level for the proposition that an insured has a duty to mitigate, not a choice as to whether to mitigate or not.34 If that is right, the question becomes whether breach of the duty is sufficient to displace the insured peril as the proximate cause of the insured loss.
[page 270] Whichever the correct approach, it will only be in the rarest of cases that an insured will be held not to have met its obligation to mitigate.35 An insured cannot recover for damage to, or loss of, uninsured property that results from their mitigating, unless that damage or loss can be regarded as a cost of mitigating and the cost of mitigating is covered by the policy. Three more scenarios.
Scenarios 3 and 4 16.9 Scenario 3 is the same as Scenario 1 (the farmer has fire insurance over his farmhouse, his shed and the hay in his shed), except that whilst the fire is heading towards his farm, the farmer moves all of the hay from his shed to a place between the farmhouse and the fire and then soaks the hay with water in the hope that this will halt the fire’s progress towards the farmhouse. And it does as intended. 16.10 Scenario 4 is the same as Scenario 3, except that a change in the wind direction and speed after the farmer soaks the hay diverts the fire away from the farm before it reaches the hay. Irrespective of whether the farmhouse and shed are ultimately destroyed by the fire, in Scenarios 3 and 4, the insurer is liable for the loss of the hay because: the farmer moving and soaking the hay were steps taken to avoid or mitigate an imminent danger to insured property (destruction of the more valuable farmhouse and shed) by an insured event (fire) that had started to operate; the hay is insured property; and the insured event ‘fire’ (not water) is the proximate cause of its destruction.
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Scenario 5
16.11 Same as Scenario 3, except that the farmer did not properly soak the hay and as a result the hay catches fire and that results in the farmhouse and the shed catching fire and being destroyed by it. If the farmer had not moved the hay into the way of the fire, the farmhouse and shed would not have caught fire because a change in the wind direction and speed after the farmer moved the hay would have diverted the fire away from the farm before it reached the farmhouse. The insurer is liable for the loss of the hay because: the farmer moving and soaking the hay were steps taken to avoid or mitigate an imminent danger to insured property (destruction of the
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[page 271] more valuable farmhouse and shed) by an insured event (fire) that had started to operate. A court will not harshly judge the insured’s failure to properly soak the hay in an emergency situation;36 the hay is insured property; and the insured event ‘fire’ (not water) is the proximate cause of its destruction. Although an insured bears the onus of proving an insured loss was proximately caused by an insured event, the insurer bears the onus of proving an insured did not mitigate and the consequences of that. Accordingly, an insured will not be able to recover an insured loss to the extent the insurer pleads and proves that: the insured was aware that reasonable steps could have been taken to mitigate, but chose not to take those steps; and not taking those steps resulted in insured loss.37
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No recovery for insured loss sustained as a result of not taking mitigating steps in anticipation of an
insured event 16.12 An insured cannot recover for an insured loss that results from taking steps to mitigate in anticipation of an insured event (as opposed to in the face of an imminent insured event — see below). 16.13 In PMB Australia Ltd v MMI General Insurance Ltd,38 PMB supplied roasted shelled peanuts to Kraft Foods to be used in peanut butter products. Between March and June 1996, members of the public contracted salmonellosis from eating Kraft peanut butter. The outbreak of salmonellosis was traced back to the PMB supplied peanuts. Kraft recalled its peanut butter products and refused to take more peanuts from PMB until it was satisfied that the risk of another outbreak had been eliminated. The Queensland Health Department (QHD) stopped PMB supplying peanuts until it met certain testing requirements. PMB cleaned and tested its plant and QHD carried out testing. QHD then allowed PMB to restart production. PMB also carried out capital works to avoid the risk of another outbreak of salmonellosis. Mullins J held PMB’s business interruption insurer liable for business interruption due to cleaning and testing arising out of the [page 272] outbreak of salmonellosis (an insured event), but not liable for business interruption due to PMB carrying out capital works to avoid the risk of another outbreak (in anticipation of an insured event). In Lerner Corp v Assurance Co of America,39 the Court of Special Appeals said: It is admirable that appellants did the ‘right thing,’ as their contract required. By correcting the problem, they may have prevented an actual ‘occurrence’ or ‘accident’ for which there could be coverage. Still, such preventative actions, especially when the action taken is an obligation imposed by contract, are not a sufficient basis for an alternative interpretation of the insurance contract.
Doing the ‘right thing’ does not always mean you will be insured for
the cost of doing the right thing. That will depend on the terms of the policy.
Recovery of insured loss sustained as a result of taking mitigating steps to avoid or mitigate an imminent insured event 16.14 An insured is entitled to recover insured loss if it was due to the insured taking steps to avoid or mitigate an imminent insured event. That is because the loss is regarded as having been proximately caused by an insured event.40 16.15 White v Republic Fire Insurance Co41 concerned a claim for damaged goods based upon the moving of goods out of a warehouse (which ultimately was not destroyed) onto the street where the goods in fact were damaged. The courts of the State of Maine said (at 95): … the imminence of the peril must be apparent, and such as would prompt a prudent uninsured person to remove the goods; it must be such as to inspire a conviction that to refrain from removing the goods would be the violation of a manifest moral duty.
16.16 In Liverpool & London & Globe Insurance v Canadian General Electric Ltd, Estey J, speaking for the Supreme Court of Canada, said: Essential to an understanding of the rule and its application is the condition that before liability arises there must be an operating peril of the type or category described in the insurance contract. The danger must be present in the sense that unless something is done, damage will ensue. It may be that in the vagaries of nature, actual damage may not have yet been suffered (as in the Maine case, supra), but if the peril has actually arisen and damage can be reasonably anticipated from the
[page 273] peril (assuming it to be in the contract an enumerated risk), then damage suffered as a result of the preventive measures taken by the insured will be recoverable. …42
An ‘imminent event’ is an event that ‘is likely to arise soon’ and ‘how long soon was in any case would depend upon the facts and would be a matter of degree’.43
16.17 This issue is illustrated by The Knight of St Michael,44 which concerned the charter of the plaintiff’s four-masted steel vessel The Knight of St Michael to charterers transporting coal from Newcastle, New South Wales to Valparaíso, Chile. The plaintiffs insured the freight on the voyage, amongst other things, against ‘fire … and of all other perils, losses and misfortunes that have or shall come to the hurt, detriment, or damage of the aforesaid subject-matter of this insurance or any part thereof’. Within a day of the voyage commencing, it was discovered that part of the coal was hot and rapidly getting hotter. On the recommendation of surveyors, the master deviated to Sydney and discharged almost half the coal, with a consequent loss of freight for the plaintiffs. The plaintiffs claimed for the freight they would have earned on the discharged cargo had it been unloaded at Valparaíso. Gorell Barnes J found (at 33) that: … it was reasonably certain that if she had continued on her direct voyage the temperature of the coal would have continued to rise until spontaneous combustion ensued, and that had she so continued the ship and cargo would in all probability have been destroyed by fire [and that] no part of the coal was ever actually on fire.
And at 34–5: … a loss caused by steps taken in consequence of fear of peril and not to avert an existing peril is not covered by an ordinary marine policy. … if fire had in any degree actually broken out, and the loss in question had happened to avert its consequences, the plaintiffs could recover directly from the defendants. … the condition of things was such that there was an actual existing state of peril of fire, and not merely a fear of fire. The danger was present, and, if nothing were done, spontaneous combustion and fire would follow in natural course. But in order to give rise to general average there must have been imminent danger to ship and cargo - that is to say, real substantial danger. I have found that such danger existed in this case. Then does it make any difference that the fire had not actually broken out? I think not in the circumstances. There was imminent danger of fire, and an existing condition of things producing this danger.
[page 274]
PART 2
Who bears the cost of mitigating in the absence of an express clause in the insurance contract to that effect? Assuming there is no common law obligation on an insured to mitigate and the policy says nothing about mitigation or mitigation costs 16.18 If mitigation is a ‘causation’ issue rather than a ‘breach of contract’ or ‘duty of utmost good faith’ issue, it is difficult to see why an insurer should bear an insured’s mitigation costs if there is no common law obligation on an insured to mitigate and the policy does not expressly or impliedly address mitigation or mitigation costs. 16.19 In King v Brandywine Reinsurance Co (UK) Ltd (formerly Cigna Re Co (UK) Ltd),45 Colman J said (at [143]): … the cost of intervening to prevent an insured peril causing an insured loss is not generally recoverable unless the policy contains an express term to that effect or in the exceptional case where a term is to be implied to give business efficacy.
Colman J dismissed the contrary view expressed in Bridgeman v Allied Mutual Insurance Ltd,46 by saying (at [147]) that he found: … the reasoning in Bridgeman profoundly unconvincing, both as regards the basis upon which the judge distinguished Yorkshire Water and as regards the conceptual relevance of the The Knight of St Michael.
16.20 In AstraZeneca Insurance Co Ltd v XL Insurance (Bermuda) Ltd,47 Flaux J said (at [137]): … as a matter of English law, in non-marine liability insurance, there is no concept of ‘sue and labour’, so that, if the insured acts to defend a claim and thereby avoids the insurer being under any liability, there is no entitlement to an indemnity against the costs and expenses incurred in defending successfully the liability which would otherwise have arisen under the insurance, in the absence of some express provision to that effect.
16.21 In Royal Sun Alliance Insurance Australia Ltd v Mihailoff,48 an arbitrator ordered a builder to pay Mihailoff an amount relating to the builder’s breach of statutory warranties and an amount for legal costs. As the builder was insolvent, Royal Sun Alliance paid its insured Mihailoff the amount relating to the breach of statutory warranties. It
declined to cover Mihailoff for the legal costs Mihailoff incurred in pursuing the [page 275] builder, costs which Royal Sun Alliance would have incurred if it had brought a subrogated claim against the builder. Gray J said (at [58]): In the present case, the policy did not place an obligation on the insured for the benefit of the insurer. The insured were not obliged to submit their dispute to arbitration. The decision to do so was undertaken of their own initiative for their own benefit. This action could not be considered to be for the benefit of the insurer.
Gray J (at [62] and [63]) rejected the insured’s submission that the subrogation provisions in the policy ‘carried with them an implication that the “loss” should include legal costs incurred by the insured in pursuing the builder’: Subrogation allows an insurer to protect its position by conducting legal action in the name of its insured with a view to reimbursing itself with respect to indemnity paid. At common law it is well accepted that an insurer exercising rights of subrogation is required to indemnify the insured as to the costs involved in the legal action. However, this principle does not assist in the interpretation of this policy. The reason why the insurer is required to meet the legal costs involved is that in substance the insurer is the real litigant in person and in pursuing the litigation for its own benefit. In these circumstances there is a clear basis for implying a term that the insurer is responsible for the costs. It cannot be inferred from the subrogation clauses that the policy contemplates covering an insured for costs incurred in enforcing a statutory warranty. While an insured’s costs may be covered in cases where an insurer exercises its right of subrogation, these conditions do not extend that indemnity to cases other than subrogation.
And (at [67]): Even if arbitral or legal proceedings were necessary it does not follow that fact leads to an implied term that the insurer would be obliged to meet the costs incurred. Business efficacy does not require such a construction. In my view the earlier considerations referred to militate against such a construction.
The final scenario.
Scenario 6 16.22
Same as Scenario 3, except that the hay is not insured property.
As the hay is not insured property, the farmer is not entitled to recover for its destruction unless the insured can claim the loss of hay as a mitigation cost and: the policy expressly or impliedly covers mitigation costs; or the duty of utmost good faith requires the insurer to pay mitigation costs. The situation of the policy expressly or impliedly covering mitigation costs is discussed below. In the meantime, does the duty of utmost good faith require an insurer to pay mitigation costs incurred by the insured?
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[page 276] Utmost good faith requires the insurer and the insured to deal with each other openly, honestly and fairly in their performance of the contract, with due regard for their own interests and for the legitimate interests of the other.49 At a minimum, the requirement is about process. In the context of a claim on a policy, it is about how an insured goes about making the claim and how the insurer handles the claim. Openness and honesty do not have much to do with identifying who should bear mitigation costs. Does fairness? Across the Atlantic, the United States Court of Appeals, 9th Circuit50 thought so, saying that it: … would be a strange kind of justice, and a stranger kind of logic, that would hold the defendant to be liable for as much as $450,000 if the barge and its contents had been consumed by fire, but free of liability for a much lesser amount because of the fortuity of rescue.
Similarly, in City of Laguna Beach v Mead Reinsurance Corp,51 the court said that as an insured’s duty to mitigate is intended to benefit the insurer by limiting the amount that might be payable under the policy, the insured is entitled to be reimbursed the cost of mitigating. How does fairness present itself in this context? In one sense, it is unfair, as illustrated by the cases mentioned in the previous paragraphs,
that an insurer should gain a significant benefit by successful mitigation by an insured without being obliged to contribute towards the costs incurred by the insured in mitigating. On the other hand, should an insurer be required to reimburse mitigation costs incurred by an insured after an insured event has commenced to operate: where the insurer has not agreed to indemnify the insured for damage to uninsured property (in this case, the mitigation costs)? where the insurer is not liable to reimburse mitigation costs incurred by an insured in anticipation of an insured event? where the insurer is not liable for damage to insured property to the extent the damage results from the insured not taking steps to mitigate? if the costs are out of all proportion to the benefit? And should an insurer be responsible for the costs of an unsuccessful attempt at mitigation?
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[page 277] So it seems the requirement of utmost good faith does not take the matter any further.
Assuming there is a common law obligation on an insured to mitigate or the policy contains a clause that requires an insured to mitigate, but the policy is silent as to who is to bear mitigation costs 16.23 What if an insured has a common law obligation to mitigate or the insurance policy contains a clause that requires an insured to mitigate (‘mitigation clause’), but the policy is silent as to who is to bear mitigation costs? In this case, a mitigation clause imposes on an insured an obligation to mitigate which he already has. By making it a term of the contract, the insurer becomes entitled to damages if the insured breaches it. Nevertheless, in one sense, this type of clause is superfluous
because even without the clause, an insured cannot recover his loss to the extent that it resulted from him not taking steps to mitigate.52 16.24 In the lightly reasoned Fenton v The Queensland Insurance Company Ltd,53 a 20-ton mobile crane that ran on rails was being used to construct a breakwater at Ulverstone on the north-west coast of Tasmania. Fenton held a non-marine insurance policy that insured the crane for £100 against total loss. A storm hurled the crane from the breakwater on to the beach. In awarding Fenton the cost of recovering the crane, Crisp J relied on s 84 of the Marine Insurance Act 1909 (Cth), which he said, ‘reiterate[d] the law as it stood before, viz., that the assured is bound to do all in his power to save the property’, but not ‘to his detriment for the benefit of the insurers’. Crisp J dismissed Fenton’s claim for the cost of repairing the crane on the basis that the policy only covered a total loss. 16.25 In Netherlands Insurance Co Est 1845 Ltd v Karl Ljungberg & Co AB (‘The Mammoth Pine’),54 Lord Goff, in the face of a clause in a marine policy that required the insured ‘to take such measures as may be reasonable for the purpose of averting or minimising a loss and to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised’, said (at 771): Their Lordships do not feel able to accept that, as a general proposition, the mere fact that an obligation is imposed on one party to a contract for the benefit of the other carries with it an implied term that the latter shall reimburse the former for his costs incurred in performance of the obligation.
[page 278] In this case, the Privy Council implied a term to that effect. Lord Goff explained: In the present case, the relevant obligation is indeed for the benefit of the insurers … and when that factor is considered together with all the other factors which their Lordships have set out, they consider that a term must be implied in the contract, in order to give business efficacy to it, that expenses incurred by an assured in performing his obligations … shall be recoverable.
How marine insurance resolves this issue does not necessarily determine how the issue is resolved in a non-marine insurance context.55 16.26 In Guardian Assurance Co v Underwood Constructions,56 the Castlemaine Perkins Brewery at Milton engaged Underwood Constructions to excavate and construct the first stage of a new cellar block at the brewery. The excavation site was near existing buildings at the brewery. Excavation advanced to where a concrete wall was located. Part of the wall had to be demolished for the excavation to proceed. Demolition resulted in a fall of earth and rock from behind the wall, which imperilled two nearby buildings at the brewery. One of the buildings was underpinned to safeguard it from collapse. Underwood claimed the cost of remedial work under a policy which covered it for material damage to insured property and liability to third parties, and which contained a condition which required it to take all reasonable precautions to prevent loss, damage or liability. Mason J found that the remedial work done to prevent further damage to the excavation fell within the cover provided by the material damage section of the policy. As to the insured’s claim for the cost of mitigating, Mason J said (at 309): The [insurer’s] submission in all its unattractive simplicity is that, although the respondent would be indemnified if it stood by and allowed the office block to collapse, it is not indemnified when it incurs expense in preventing or minimising damage or liability.
Mason J did not decide the issue, but left it open for future debate with these words (at 309): It may be that costs reasonably incurred by an insured person pursuant to a contractual obligation or in the fulfilment of a duty to prevent or minimize liability to a third party should be regarded as falling within an indemnity against liability to others.
16.27 Re Mining Technologies Australia Ltd57 is invariably mentioned in judicial or academic discussion about who should ultimately bear an insured’s cost of mitigating. This case concerned 16 Addcars (mining
[page 279] equipment) owned by Mining Technologies Australia Pty Ltd (MTA). The Addcars, valued at $1.82 million, were accidentally buried under rock and earth when the roof of a tunnel caved in. MTA spent $725,000 retrieving the Addcars and claimed that from EJ Hampson & Others Syndicate 1204 under an insurance contract that covered MTA’s equipment against loss or damage. It was reasonable for MTA to spend $725,000 retrieving the Addcars. By an express term of the policy, EJ Hampson could: at its option, as far as circumstances permit: Repair, reinstate or replace the parts thereof or its accessories, spare parts … in a reasonably sufficient manner; or Replace the item(s) or pay the amount of the loss or damage not exceeding the market value of the item(s) at the time of the loss or damage, or the sum insured whichever is the lesser amount. The policy described the consequences of a partial or a total loss in the following terms:
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PARTIAL LOSS In the event of partial loss or damage under this insurance the Underwriters shall be liable only for the actual cost of (and shall have the option of) repairing, re-building or, if necessary replacing the parts damaged or destroyed to restore the machinery to a condition equal to that immediately prior to the loss. … TOTAL LOSS In the event of total loss the insurance shall be declared as totally expended and shall cancel forthwith without refund of premium. Further, if as the result of a claim made by the Insured, the Underwriters settle on the basis of a total loss or constructive total loss of the insured vehicle, the Insured shall if so required by the Underwriters, transfer its title and interest in such vehicle to the Underwriters who shall be entitled to dispose of the vehicle and to retain the proceeds of any salvaged thereof.
The policy excluded liability for ‘any loss, … which could have been avoided by the exercise of reasonable care on the part of the insured …’. No express term in the policy covered the insured for mitigation costs.
In chambers, White J declared that MTA was entitled to the cost of retrieving the equipment because of an implied term in the policy to that effect. Her Honour explained: If the peril insured against is sufficiently imminent or has eventuated it would, in my view, be unjust in the absence of a term to the contrary in the policy of insurance if an insured expended money to avert or reduce the risk of the insurer becoming liable under the policy without a correlative obligation on the part of the insurer to pay for that expenditure.
[page 280] EJ Hampson’s appeal to the Queensland Court of Appeal failed because: Davies JA implied the necessary term into the policy. Pincus JA (dissenting) refused to imply such a term into the policy; McPherson JJA did not have to decide the point; and McPherson JA concluded that for the purpose of the policy, the cost of retrieving the equipment constituted ‘repair’ of the equipment. A generous construction of the word ‘repair’. Davies and Pincus JJA thought otherwise. Accordingly, Re Mining Technology is slim authority for the implication of a term in a policy to the effect that an insurer should pick up the cost of mitigating if there is a clause in the policy that effectively requires the insured to take reasonable steps to mitigate a loss (in this case, by way of an exclusion) but says nothing about mitigation costs. Nevertheless, it illustrates the lengths a court might travel to find for an insured in that regard. Hard as it may be to imply into a first party policy a term requiring an insurer to reimburse mitigation costs incurred by an insured, implying such a term in a liability policy is harder because such costs are first party, not third party.
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16.28 In Yorkshire Water v Sun Alliance & London Insurance Ltd,58 Yorkshire Water’s non-marine liability policy contained the following mitigation clause:
The insured at his own expense shall take reasonable precautions to prevent any Occurrence or to cease any activity which may give rise to liability under this Policy and to maintain all buildings furnishings ways works machinery plant and vehicles in sound condition.
After citing Lord Goff’s advice in Netherlands Insurance Co Est 1845 Ltd v Karl Ljungberg & Co AB (‘The Mammoth Pine’)59 with approval, Stuart-Smith LJ said (at 225–6): It is clear that the mere fact that an obligation is imposed on one party for the benefit of another is not sufficient for the implication of a term that the latter will reimburse the expenses of performing it.60
Stuart-Smith LJ (at 225–6) rejected the implication of a term requiring the insurer to pick up the insured’s mitigation costs, amongst other things, because such a term: … would be virtually unworkable. I do not see how, short of expensive litigation, it would be possible to decide what expenditure of the insured was reasonable. It is not just a question of considering whether the cost
[page 281] of the works themselves are reasonably priced, they must be proportional to the cost of the damage prevented.
The policy contains a clause that requires an insured to mitigate at its own expense 16.29 A court will not imply a term into an insurance contract requiring an insurer to pay mitigation costs if that is inconsistent with an express term of the contract. 16.30 In Vero Insurance Ltd v Australian Prestressing Services Pty Ltd,61 the respondents sought to imply such a term into a Vero policy that contained the following condition: In the event of an Occurrence likely to result in a claim under this Policy the Insured shall: (a) at the Insured’s expense, take such immediate action as may be necessary to minimise the extent of Personal Injury and/or Property Damage;
Meagher JA (at [55]) refused to imply the term sought on the basis
that it was inconsistent with that condition.
PART 3 An insured’s entitlement to recover mitigation costs under an express clause in the insurance contract requiring the insurer to pay mitigation costs 16.31 If a policy contains a clause that expressly requires the insurer to bear mitigation costs incurred by the insured, the insured’s sacrifice of the hay (Scenario 6) will be regarded as a mitigation cost, and subject to the precise terms of the clause, the insurer will be obliged to reimburse the farmer for the value of the hay to him.
Recovery of mitigation costs: Standard Life Assurance Ltd v ACE Europe Group62: Another global financial crisis-generated case 16.32 In evidence, the Standard Life Chief Executive Officer Sir Sandy Crombie explained, with specific reference to Lord Blackwell’s email on 7 January 2009, that ‘doing the right thing’ was ‘something of a mantra of mine in the company: at all times seek to do the right thing’.63
The facts 16.33 In 2007, Standard Life Assurance Ltd operated its Pension Sterling Fund, which had been set up 11 years earlier. Standard Life [page 282] marketed the Fund as a temporary home for short-term funds, with
some Standard Life literature referring to it as being invested in ‘cash’ and even as being the equivalent of putting money on deposit. In 2007, the Fund’s assets included asset-backed securities. From 2007, as the credit crunch took hold, and especially after Lehman Brothers collapsed in September 2008, asset-backed securities became increasingly illiquid, making their valuation increasingly subjective. The pricing sources upon which Standard Life relied to value the assetbacked securities in the Fund became ‘stale’, in the sense there were no recent trades in particular securities upon which to base up-to-date prices. Standard Life decided to switch to another source of prices with effect from 14 January 2009. The result was a one-off one-day fall in value of units in the Fund of around 4.8 per cent of the Fund’s value (about £100 million). This generated a mass of complaints and claims from customers and independent financial advisers and severe pressure from the Financial Services Authority (FSA) and the media. Between 14 January and 10 February 2009, Standard Life thought about how best to respond to the issues raised by customers and by the FSA. By early February 2009, Standard Life appreciated that unless it acted quickly it was exposed to the possibility of a substantial loss of present and future business affecting retail customers and corporate clients (damage to the Standard Life brand). During this period, Standard Life considered two main options: Option 1 Set up a complaints process and invite claims. Standard Life’s research indicated that about 64 per cent (by value) of customers would have valid claims against Standard Life for compensation for the fall on the basis that Standard Life literature misdescribed the Fund. This was equivalent to about £124 million, assuming every customer with a claim would make a claim. For Standard Life, this was accompanied by brand damage, which it costed out at £300 million. Option 2 Restore the one-day 4.8 per cent fall in the Fund and set up a complaints process and invite claims.
Restoring the fall would cost close to £102 million.
At the time, some individuals within Standard Life appreciated that Option 2 would provide a ‘windfall’ to the 36 per cent of customers (by value) who might not have a claim against Standard Life; that is, of the cash injected under Option 2, about £36 million would be paid into the Fund for the benefit of customers who might not have a claim against Standard Life. Standard Life decided to go with Option 2. [page 283] As Tomlinson LJ said in the Court of Appeal,64 Standard Life formed the view that: … implementation of Option 2 would generally reduce the levels of indignation which had built up amongst policy holders and their advisers, reinstatement of the Fund value being expected to be perceived as ‘the right thing to do’. Certainly the CEO, Sir Sandy Crombie, thought that if Option 2 were implemented the cost of additional claims over and above the reinstatement of value to the January 2009 level would be confined to single digit millions of pounds. The thinking was therefore that implementation of Option 2 would lead to a much reduced level of claims for compensation for the additional losses sustained over the life of the Fund than would be likely to result from adoption of Option 1.
On 11 February 2009, Standard Life paid close to £102 million into the Fund (almost £82 million plus almost £20 million for customers who sold units between 14 January and 11 February 2009) to compensate customers in full for the 4.8 per cent price fall (Cash injection). Standard Life also paid almost £5 million to customers who pursued complaints for losses exceeding the 4.8 per cent fall. All these payments, including the Cash injection were referred to as the ‘Remediation payments’.
The policy 16.34 The insurance policy held by Standard Life’s parent company contained a Schedule and three main sections. Section 1 was entitled ‘Professional Indemnity’. The opening words stated: The indemnity provided by this Section of the Policy applies to the Assured’s legal liability to third parties, all as more fully provided for herein.
The Section 1 Insuring Clause stated: This Policy provides an indemnity to the Assured in respect of the Assured’s Civil Liability for any third party claims made against an Assured during the Policy Period, provided such claims arise out of the provision of (or failure to provide) Financial Services by the Assured … This Policy shall also indemnify the Assured for Mitigation Costs.
The policy defined ‘Civil Liability’ as: (a) a legally enforceable obligation to a third party for compensatory damages in accordance with an award of a court or tribunal by whose jurisdiction the Assured is bound; or (b) a legally enforceable obligation to a third party for compensatory damages acknowledged by an agreement made, with the consent of the Underwriters … between the Assured and third party in settlement of a claim; or (c) any compensatory damages pursuant to any award, directive, order, recommendation or similar act of a regulatory authority, self regulatory organisation or ombudsman or following arbitration or other alternative dispute resolution processes whose findings are binding upon the Assured. …
[page 284] Compensatory damages shall include civil compensation or damages, compensatory restitution, any other compensatory payment of money or delivery of property of any kind and any settlement agreed by the Underwriters.
Eder J said (at [189]): This definition of ‘Civil Liability’, whilst tailored to the financial services context of a regulated entity which can be compelled or directed to act by those under whose regulatory or supervisory jurisdiction it comes, reflects the essence of liability insurance that indemnity is (special wording apart) only to be provided upon both the existence and amount of the third party liability having been established, and not before. This reflects the general principle that liability insurance provides an indemnity against actual established liability, as opposed to mere allegations … .
The policy (clause 7) defined ‘a third party claim’ as a claim: … first made against the Assured during the Policy Period. For the purposes of this Policy, a third party claim is considered to be first made against the Assured when the ERMC first: a)
receives a written demand for damages of the type covered by this Policy, including the service of suit or institution of legal or arbitration proceedings; or
b) c)
becomes aware of the intention of any person to make such a demand against them; or becomes aware of any fact, circumstance or event which could reasonably be anticipated to give rise to such a demand (or to give rise to Mitigation Costs) at any future time.
Standard Life sought to recover its Remediation payments (policy limit £100 million), less its £10 million deductible, from ACE as ‘Mitigation Costs’ under Section 1 of the policy. The policy (clause 9) defined ‘Mitigation Costs’ as: … any payment of loss, costs or expenses reasonably and necessarily incurred by the Assured in taking action to avoid … or to reduce a third party claim (or to avoid or reduce a third party claim which may arise from a fact, circumstance or event) of a type which would have been covered under this Policy … .
Accordingly, the Remediation Payments were only ‘Mitigation Costs’ if:
■they came within the description ‘any payment of loss, costs or
expenses’; Standard Life ‘reasonably and necessarily incurred’ them; Standard Life incurred them ‘in taking action to avoid … or to reduce a third party claim’; and they were ‘of a type which would have been covered under this Policy’. Did the Remediation Payments come within the description ‘any payment of loss, costs or expenses’?
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[page 285] Eder J concluded that the Remediation Payments were a ‘cost’ and/or a ‘payment of loss’ within the definition of ‘Mitigation Costs’ and that they were reasonably and necessarily incurred. Were the Remediation Payments ‘incurred by [Standard Life] in taking action to avoid … or to reduce a third party claim’? ACE argued the phrase means action taken for the purpose, in the sense of with the motive, of avoiding or reducing claims. ACE’s case
was that Standard Life’s ‘sole’ or ‘dominant’ purpose/motive or the ‘key factor’ in making the Cash Injection was to protect its commercial reputation and ‘brand’, not to avoid or reduce third party claims. Eder J disagreed because: the language of the clause favoured the relevant purpose as the ‘intended objective’ of the payment rather than the ‘motive’ for it; and ACE’s construction would be absurd. Eder J posed the following example. Say an insured faces a legal liability of a type covered by the policy and that if the matter goes to trial, the insured will lose and the whole of the claim will be covered under the policy. Just before the trial starts, the insured gets the opportunity to settle the claim for 90 per cent of the claim. Assume such a settlement is reasonable and necessary and that it is impossible or impracticable to obtain insurers’ prior consent to the settlement. The insured settles the claim. Could the insurer avoid liability by showing the insured’s motive for settling was to avoid a public judgment which would impact on its ‘brand’? No. As long as the settlement was made in taking action to avoid or to reduce a claim of a type that would have been covered under the policy, the insured’s motive in making the payment is irrelevant. As a matter of practicality, it would be odd that an insured’s entitlement to recover under a professional indemnity policy should depend on ‘motive’. For example, how is ‘motive’ to be proved in a large company? In particular, whose ‘motive’ is relevant? Were the Remediation payments ‘of a type that would have been covered under the Policy’? Eder J agreed with ACE that the policy did not cover Standard Life for its liability to customers for a fall in value of the Fund, only to those customers who suffered a fall in the value of their units because of misselling by Standard Life. Eder J concluded (at [245]) that:
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… in order to qualify as ‘Mitigation Costs’, the relevant ‘payment’ does not have to be
made to discharge a particular liability to a particular third party claimant. In my view, … the requirement is simply that the payment is reasonably and necessarily incurred in taking action to avoid or to reduce one or more third party claims of the relevant type.
[page 286] Eder J concluded that, irrespective of brand damage, the: Remediation Payments including the Cash Injection were made in order to avoid or to reduce third party claims of a type which would have been covered under the Policy within the meaning of ‘Mitigation Costs’ as defined in the Policy. In summary … v) … in Standard Life’s belief - and on any reasonable view of the matter - the number and value of third party claims was expected to be very substantially less if the 4.8 per cent price fall was reversed by adopting Option 2 than if no such action was taken and Standard Life simply wrote to all customers informing them how to complain.
Eder J continued (at [246]): I … accept that there was no legal necessity to make such payment. However, the existence of a legal obligation is not … the relevant test of ‘necessity’ and the relevant ‘payment’ does not have to be made to discharge a particular liability of a particular third party claimant. I also … accept that … when the Cash Injection was made and absent any ‘recommendation’ from the FSA, it was no doubt open for Standard Life to have adopted Option 1, waited for the claims to come in and then considered each claim in turn. That was certainly a possible course of action and, to that extent, … the adoption of Option 2 and the immediate payment of the Cash Injection might be said to be not ‘necessary’ in that sense. However … the ‘realities’ did mean that the Cash Injection was necessarily incurred to avoid or to reduce relevant third party claims. As discussed above, it seems to me important to read the various parts of the definition as a whole. In other words, it was necessarily incurred bearing in mind the stipulated purpose. … as stated above, I accept the Insurers’ submissions that the Cash Injunction was also incurred in order to avoid or to reduce ‘brand damage’. However, in my view, both intended objectives were equally efficacious and, for the reasons stated above, this does not affect SLAL’s entitlement. Thus, it is my conclusion that SLAL is, in principle, entitled to recover all the Remediation Payments including the Cash Injection without apportionment subject only to the questions of Exclusion 18(iii) and aggregation (including the appropriate deductible) … …
Apportionment of mitigation costs 16.35 On appeal,65 ACE argued that subject to policy terms, generally mitigation costs should be apportioned by reference to the respective insured and uninsured interests at risk and sought to be
preserved by those costs. In this case, brand damage and liabilities to third parties in excess of £100 million were uninsured interests. In the Court of Appeal, Tomlinson LJ said (at [22]) that any: … apportionment of [mitigation] costs would involve [ACE] failing to honour [its] promise to indemnify [Standard Life] for Mitigation Costs. … On the facts of the present case the argument for apportionment is I think manifestly unfounded when one bears in mind that the Cash Injection was one indivisible sum which had to be paid in full in order to restore the value of the Fund. Option 2 could not be performed by a payment of less than the full amount of the Cash Injection, since only by payment of that amount could the value of the Fund be restored. Given
[page 287] the undertaking to pay Mitigation Costs, there is simply no basis upon which Insurers could perform their promise other than by payment of the full amount, subject of course to any applicable limits.
In the next paragraph, Tomlinson LJ agreed with Standard Life that: … a useful analogy is to be found in the principle enunciated in JJ Lloyd Instruments v Northern Star Insurance Company Limited … to the effect that where a loss is caused by an insured peril, the entitlement of the insured to an indemnity is not affected by the fact that there is another equally effective cause of the loss which is uninsured.
Tomlinson LJ (at [37]) rejected ACE’s argument as follows: The approach in that field [the field of marine property insurance] derives from the practice of adjusting marine losses of ship or cargo upon the assumption that the subject matter assured is fully covered by insurance. That assumption is inapposite and in any event unworkable in the field of liability insurance to which the principle cannot therefore be transferred.
Tomlinson LJ also said (at [51]) in relation to a subsidiary ground of appeal: The judge found that the payment was both reasonably and necessarily incurred in taking action to avoid or reduce third party claims of a type which would have been covered under the policy. The payment was indivisible. The fact that it produced a windfall to some investors seems to me quite irrelevant to its recoverability. The payment was indivisible and could not have been made in a reduced amount if it was to achieve its purpose. There is no basis upon which insurers can resist indemnifying SLAL in respect of the entirety of the Cash Injection.
16.36 Although the mitigating clause in Standard Life did not prove ‘unworkable’,66 the decisions at first instance and on appeal have
probably sent insurers back to the drawing board in terms of drafting a satisfactory cost of mitigating clause wording.
INTERVENING CAUSE IN INSURANCE 16.37 A loss will not be proximately caused by an insured event if it is interrupted by a novus actus interveniens (new intervening act) that is not an insured event. That will only happen if the act is of such impact that it ‘obliterates’ or ‘eclipses’ the effect of the insured event.67 Reckless conduct by an insured is usually enough to break the chain of causation.68 Merely unreasonable conduct by an insured will not necessarily be enough to break the chain of causation.69 [page 288] The difference between a novus actus interveniens and not mitigating is that the former does not have to be committed by an insured and if it is, it is not for the purpose of mitigating an insured loss. 16.38 In Wayne Tank and Pump Co Ltd v Employers Liability Assurance Corporation Ltd,70 Lord Denning (at 66–7) cautioned against a preoccupation with the concept of novus actus interveniens in the insurance context: I must say that I do not care for this emphasis on novus actus interveniens. It seems to me to be going back to the old and forsaken test of the latest in time. I would reject novus actus. I would ask, as a matter of common sense, what was the effective or dominant cause …?
CONCLUSION 16.39 In contract law, mitigation only arises for consideration if the innocent party is claiming damages. In insurance law, mitigation becomes an issue as soon as an imminent insured event threatens insured loss. Not taking steps to mitigate will preclude an insured from
claiming an insured loss to the extent it results from not taking those steps. An insured is entitled to recover insured loss that results from taking steps to mitigate an insured loss even if it is different to, or beyond what the loss would have been if the insured had not taken mitigating steps. 16.40 An insurer is liable for mitigation costs if: the mitigation costs are insured property; there is an express term in the policy to that effect; or there is an implied term in the policy to that effect (an ‘exceptional’ case71). Otherwise it seems an insured must bear mitigation costs incurred by it, as neither ‘causation’ nor the duty of utmost good faith seems to take the matter any further. Having said that, when mitigation costs are not significant, insurers are likely to pay them as they motivate insureds in the future to do what they can to avoid or limit what would be payable if no mitigation is attempted.
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16.41 Perhaps the justice and logic involved in leaving an insured to bear mitigation costs incurred by him is not so strange in circumstances where an insured has not bargained with his insurer for that protection.
1. 2. 3. 4. 5. 6. 7. 8. 9.
Guardian Assurance Co v Underwood Constructions [1974] 48 ALJR 307 at 309 (Mason J). Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 at [13] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ). [1848] EngR 135; (1848) 1 Exch 850 at 855; 154 ER 363 at 365. By contrast, the purpose of an award of damages for negligence is to place the innocent party in the position they would have been in if the tort had not been committed. The ‘Solholt’ [1983] 1 Lloyd’s Rep 605 at 608 (Donaldson MR); Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] (Giles JA). [1983] 1 Lloyd’s Rep 605 at 608. Mahony v J Kruschich (Demolitions) Pty Ltd [1985] HCA 37; (1985) 156 CLR 522. National Foods Milk Ltd v McMahon Milk Pty Ltd (No 2) [2009] VSC 150 at [19] (Hargrave J). (1854) 9 Ex 341; 156 ER 145, 151. In Transfield Shipping v Mercator Shipping Inc [2008]
10. 11. 12. 13. 14. 15.
16. 17. 18. 19. 20.
21. 22.
23. 24. 25. 26.
UKHL 48; [2009] 1 AC 61, the House of Lords (at 66–8) agreed with Robert Goff J in Satef-Huttenes Albertus SpA v Paloma Tercera Shipping (1981) 1 Lloyd’s Rep 175 at 181– 3 that ‘the principle in Hadley v Baxendale is now no longer stated in terms of two rules, but rather in terms of a single principle — though it is recognised that the application of the principle may depend on the degree of relevant knowledge held by the defendant at the time of the contract in the particular case’. That is also the position in Australia: Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1992) 174 CLR 64 at [51] (Mason CJ and Dawson J). Watts v Rake [1960] HCA 58; (1960) 108 CLR 158 at [1] (Dixon CJ); Arnott v Choy [2010] NSWCA 259 at [155] (McColl JA). [1982] HCA 3; (1982) 150 CLR 345 at [17]. Karacominakis v Big Country Developments Pty Ltd (see fn 5) at [188] (Giles JA). Banco de Portugal v Waterlow & Sons [1932] AC 452 at 506 (Lord McMillan). See also Karacominakis v Big Country Developments Pty Ltd (see fn 5) at [187] (Giles JA). [1962] AC 413. White and Carter (Councils) Ltd v McGregor [1962] AC 413 at 431 (Lord Reid); Clea Shipping Corp v Bulk Oil International, The Alaskan Trader [1984] 1 All ER 129 at 137 (Lloyd J); Reichman v Beveridge [2006] EWCA Civ 1659; [2007] Bus LR 412; [2006] EWCA Civ 1659 at [17] (Lloyd J). See also Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; (1946) 72 CLR 435 for a discussion by Dixon J of the circumstances in which an innocent party’s claim was for damages in the case of nonperformance of ‘certain forms of executory contract’. Karacominakis v Big Country Developments Pty Ltd (see fn 5) at [187] (Giles JA). Watts v Rake (see fn 10) at [1] (Dixon CJ). Edwin H Woodruff, Selection of Cases on the Law of Insurance, 2nd ed, Baker, Voorhis & Co, New York, 1924, p 5. Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111; Ventouris v Trevor Rex Mountain (The Italia Express (No 2)) [1992] 2 Lloyd’s Rep 281 (Hirst J). Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 at [7] (a surety case); CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1987) 187 CLR 384 (Brennan CJ, Dawson, Toohey and Gummow JJ), citing The Times Fire Assurance Company v Hawke (1859) 28 LJ Ex (NS) 317 at 318 (Bramwell B); Brescia v QBE [2007] NSWSC 598; (2007) 14 ANZ Ins Cas 61-740 at [498] (Hammerschlag J). AFG Insurances Ltd v City of Brighton [1972] HCA 70; (1972) 126 CLR 655 at [12] and [14] (Mason J). AFG Insurances Ltd v City of Brighton (see fn 21) at [12] and [14] (Mason J); EK Nominees Pty Ltd v Indemnity Corporation Pty Ltd (1990) 6 ANZ Ins Cases 61-008, 76,740 (Cole J). AFG Insurances Ltd v City of Brighton (see fn 21) at [14]–[16] (Mason J); Orica Australia Pty Ltd v Limit (No 2) Ltd [2011] VSC 65 at [19] (Pagone J). [1972] HCA 70; (1972) 126 CLR 655. [2007] NSWCA 193; (2007) 69 NSWLR 680. The ‘Solholt’ (see fn 5) at 608 (Donaldson MR); Yorkshire Water Services Ltd v Sun Alliance & London Insurance Plc (1997) 2 Lloyd’s Rep 21 at 30 (Stuart-Smith LJ);
27. 28. 29. 30. 31.
32. 33. 34. 35. 36. 37.
38. 39. 40.
41. 42. 43. 44. 45. 46. 47. 48. 49.
50. 51. 52.
53. 54.
Darbishire v Warren [1963] 1 WLR 1067 (Pearson LJ). Ian Charles Tucker v Westfield Design and Construction Pty Ltd [1993] FCA 176; (1993) 123 ALR 278 at [21]. (1868) LR 3 Exch 71. As long as the loss relates to insured property. [1941] AC 55. See also Quinta Communications v Warrington [1999] EWCA Civ 1450; 2 All ER 123 at [132] (Clarke J), in which concert promoters claimed for losses incurred as a consequence of the cancellation of a Barcelona concert due to be given by Michael Jackson. Watts v Rake (see fn 10) at [1] (Dixon CJ). [1982] HCA 3; (1982) 150 CLR 345 at [17]. AFG Insurances Ltd v City of Brighton (see fn 21) at [12] (Mason J); Guardian Assurance Co v Underwood Constructions (see fn 1) at 309 (Mason J). State of Netherlands v Youell [1997] EWCA Civ 2715 (Phillips LJ). Banco de Portugal v Waterlow & Sons (see fn 13) at 506 (Lord McMillan). Allison Pty Ltd v Lumley General Insurance Ltd [2006] WASC 104; (2006) 200 FLR 394 at [124] (Heenan J); National Oilwell (UK) Ltd v Davy Offshore Ltd [1993] 2 Lloyd’s Rep 582 at 618 (Colman J); Orica Australia Pty Ltd v Limit (No 2) Ltd (see fn 23) at [16] (Pagone J). [2000] QSC 329, affirmed on appeal [2002] QCA 361; (2002) 12 ANZ Ins Cas 61-537. 120 Md App 525, 707 A 2d 906 (1998). Liverpool & London & Globe Insurance Ltd v Canadian General Electric Co Ltd [1981] 1 SCR 600 at 620; Allison Pty Ltd t/a Pilbara Marine Port Services v Lumley General Insurance Ltd (see fn 37) at [126] (Heenan J). (1869) 57 Maine Reports 91. [1981] 1 SCR 600, 616. Ketteman v Hansel Properties Ltd [1984] 1 WLR 1275 at 1290 (Lawton LJ). [1898] P 30. [2004] EWHC 1033 (Comm). [2000] 1 NZLR 433 (Nicholson J). [2013] EWHC 349 (Comm). [2002] SASC 32; (2002) 81 SASR 585 at [58]. See CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1 at [15] (Gleeson CJ and Crennan J); O’Neill v Phillips [1999] UKHL 24; 1 WLR 1092 (Lord Hoffmann). Goodyear Rubber & Supply v Great Am Ins Co (9th Cir 1976) 545 F 2d 95 at [17]. 226 Cal App 3d 822 (Cal App 4 Dist 1990). Can an insured be in breach of a mitigation clause by not taking steps to mitigate in the ‘causation’ sense? If so, what damages could an insurer claim for the breach? If not, what is the point of a mitigation clause? (1915) 11 Tas LR 125. [1986] 3 All ER 767.
55. Standard Life Assurance Ltd v ACE European Group [2012] EWHC 104 (Comm) at [178] (Eder J). 56. See fn 1. 57. [1999] 1 Qd R 60. 58. [1997] 2 Lloyd’s Rep 21; [1997] CLC 213. 59. [1986] 3 All ER 767. 60. See also Bartoline Ltd v Royal Sun Alliance Insurance Plc [2006] EWHC 3598 (QB); [2008] Env LR 1 at [139]–[140] (HH Judge Hegarty QC). 61. [2013] NSWCA 181. 62. [2012] EWHC 104 (Comm); Lloyd’s Rep IR 655 (Eder J). Upheld on appeal: Ace European Group v Standard Life Assurance Ltd [2012] EWCA Civ 1713; All ER (D) 159. 63. Standard Life Assurance Ltd v ACE Europe Group (see fn 55) at [64] (Eder J). 64. Ace European Group v Standard Life Assurance Ltd (see fn 62) at [17]. 65. Ace European Group v Standard Life Assurance Ltd (see fn 62). 66. Water v Sun Alliance & London Insurance Ltd [1997] 2 Lloyd’s Rep 21 at [225]–[226] (Stuart-Smith LJ). 67. Borealis AB v Geogas Trading SA [2010] EWHC 2789 (Comm); [2011] 1 Lloyd’s Rep 482 at [44] (Gross LJ) citing Clerk & Lindsell on Torts, 19th ed, Sweet & Maxwell, United Kingdom at [2-78]; Lloyds TSB General Insurance Holdings Ltd v Lloyds Bank Group Insurance Company Ltd [2000] EWHC 198 (Comm) at [27] (Moore-Bick J). 68. Borealis AB v Geogas Trading SA (see fn 67) at [45] (Gross LJ). 69. Borealis AB v Geogas Trading SA (see fn 67) at [45] (Gross LJ). 70. (1974) QB 57. 71. King v Brandywine Reinsurance Co (UK) Ltd (formerly Cigna Re Co (UK) Ltd) [2004] EWHC 1033 (Comm) at [143] (Colman J).
[page 289]
Chapter 17 FIRST PARTY INSURANCE A policy of assurance is not a perfect contract of indemnity.1
INTRODUCTION This chapter discusses first party insurance under the following headings: property insurance (indemnity insurance); and sickness and accident insurance (contingency insurance). As mentioned in Chapter 2, first party insurance protects an insured against the risk of their own loss. Generally speaking, it involves a transfer to an insurer of the risk that during the period of insurance an insured might: suffer loss or destruction of, or damage to, property in which the insured has an interest; or be injured, become sick or die. Depending on the nature of the cover, first party insurance can be indemnity or contingency insurance. Property insurance and sickness and accident insurance are typical first party insurances. The former is indemnity insurance; the latter is contingency insurance. Both types of insurance are discussed below.
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PROPERTY INSURANCE (INDEMNITY INSURANCE) 17.1
First party property insurance is indemnity insurance, usually
with physical property as its subject matter. It protects the insured against the risk of loss or destruction of, or damage to, property belonging to the insured or in which the insured has a financial interest. Depending on the wording, policy response is almost invariably triggered by either an event or a loss occurring during the period of insurance. [page 290] 17.2 Property insurance covers the insured’s interest in the subject matter of the insurance, not the subject matter itself.2 So a house policy insures the interest of the insured in the house, not the house itself. Accordingly, property insurance is concerned with the value of the property to the insured, not the value of the property ‘in an abstract sense’.3 Subject to s 49 of the Insurance Contracts Act 1984 (Cth) (ICA), an insured with a limited interest in the subject matter of the insurance can only claim on the policy to the extent of that interest,4 unless she: has insured the whole interest in the subject matter; and is accountable to the others with an interest in the subject matter for the value of their interest in the subject matter. In Londsdale & Thompson v Black Arrow,5 Jonathan Sumption QC (sitting as a deputy High Court judge) explained (at 368-9):
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If the assured has only a limited interest in the property, being, for example, a tenant or reversioner, a trustee, a mortgagee or a bailee, the value of his own interest may have diminished by much less than the value of the property or the cost of its reinstatement. But it does not necessarily follow that if the assured recovers the whole diminution in the value of the property or the whole cost of reinstatement he will be getting more than an indemnity. That must depend on what his legal obligations are as to the use of the insurance proceeds when he has got them. If he is accountable for the proceeds to the owners of the other interests, then he will not be receiving more than an indemnity if the insurer pays the full amount for which the property was insured. This will be so, whether the assured is accountable to the owners of the other interests as a trustee of the proceeds of the insurance or simply on the basis that he owes them a contractual obligation to pay those proceeds over to them or to employ them in reinstatement. None of this means that a party with a limited interest who insures the entire interest in the property is insuring on behalf of the others as well as for himself. All that it means is
that his obligations as to the use of the insurance moneys once they have been paid are relevant in determining whether he will recover more than an indemnity by getting the measure of loss provided for in that policy.
So, subject to the terms of the contract and the particular circumstances of the case, if an insured’s house is destroyed by an insured event when: the insured is living in it, indemnity will probably be measured by reference to what it would cost to rebuild the house to a substantially ‘as new’ condition or to the condition it was in immediately before it was destroyed;
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[page 291]
■it is for sale, indemnity will probably be measured by reference to
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what the house (not the land on which it is built) could have sold for immediately before it was destroyed, not its replacement cost, because what it could have sold for was the value of the house to the insured;6 or it is about to be demolished, the insured might not be able to recover the sale or replacement value of the house, because immediately before it was destroyed it was not worth anything to the insured.7
17.3 In Falcon Investments Corp (NZ) Ltd v State Insurance General Manager,8 the insured purchased a property with an old house on it with a view to demolishing it and erecting a block of flats on the land. State Insurance agreed to insure the house. The house burnt down before the insured began to demolish it. State Insurance rejected the insured’s claim on the policy for the value of the house. O’Regan J accepted the house was worth $6,500, but said that having regard to the insured’s intention to demolish it, the house was not worth anything to the insured, except for the rent the insured otherwise would have earned before the house was demolished. Accordingly, State Insurance’s payout was limited to the capital value of the lost rent, less what the insured saved on demolition costs.
Across the Tasman and seven years later, Connolly J in Mercantile Mutual Insurance Co Ltd v Amburla9 reached a different conclusion on similar facts; he was not persuaded the house only had token value to the insured. He said that just because an insured is not putting a building to productive use and does not intend to do so at the time of loss does not mean that it has no value to the insured. 17.4 The measure of indemnity available under a property insurance contract will depend on how the contract describes it. For example, a contract might define indemnity for the risk of an insured motor vehicle being destroyed or damaged beyond repair, by reference to what the insured: could have sold the vehicle for on the open market immediately before the loss; would have to pay on the open market, within a reasonable time after the loss, for the same make and model vehicle of like age, quality and condition; or would have to pay for a new vehicle of similar make and model. The market value of property might depend on the insured ‘moving’ it or ‘tarting it up’ in order to achieve its ‘real’ value. In those circumstances, the market value will be the value of the property moved or ‘tarted up’,
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[page 292] less what it cost, or what it would have cost, to move it or ‘tart it up’. For example, in Franke v CIC General Insurance Ltd (The Coral),10 an insured dredge disappeared whilst being towed from Brisbane to India to be sold and then scrapped. The New South Wales Court of Appeal held that the dredge’s value was its sale price in India, less the cost of towing it to India with insurance. 17.5 If the policy describes indemnity by reference to the cost of reinstatement, the insurer will be required to pay what it would cost to repair, rebuild or restore the insured property to the condition it was in
immediately before the loss.11 Diminution in the market value of the property by reason of the insured event might be relevant to indemnity value, but not to the cost of reinstatement. 17.6 If the policy describes indemnity by reference to the value of the property on the open market and there is no market for that type of property, the insurer might be obliged to pay for the property to be repaired, rebuilt or restored to the condition it was in immediately before the loss or replaced with property similar in type and at least as good.12 17.7 A claim for damage to insured property will only succeed if, at the time the claim on the policy is to be determined or settled, the insured has suffered a loss. For example, an insured mortgagee has no claim for insured fire damage to the property secured by its mortgage if the mortgagor restores the property before the mortgagee’s claim is determined or settled.13 17.8 Subject to the policy terms, if insured property is partially damaged in an insured event and before it is repaired it is totally destroyed in another insured event, the insured is only entitled to recover for the total destruction of the insured property, not for the repair cost resulting from the first event and then for the total destruction resulting from the second event.14 17.9 If an insurer indemnifies an insured for a loss as required by the contract, it is subrogated to any right of action the insured may have against anyone legally liable for the loss.
The sum insured 17.10 Except in the case of an agreed value policy (see below), in a property policy, the insurer agrees to indemnify the insured for their [page 293] actual loss up to a maximum amount, usually referred to as the sum
insured, the policy limit or the limit of indemnity. The sum insured is the limit, not the measure of recovery.15 It is not evidence of the value, or any agreement between the parties as to the value, of the subject matter of the insurance. In British Traders’ Insurance Co Ltd v Monson,16 Kitto, Taylor and Owen JJ described (at [3]) the nature of a sum insured in the following passage: It is far too late to doubt that by the common understanding of business men and lawyers alike the nature of such a policy controls its obligation, implying conclusively that its statement of the amount which the insurer promises to pay merely fixes the maximum amount which in any event he may have to pay, and having as its sole purpose, and therefore imposing as its only obligation, the indemnification of the insured, up to the amount of the insurance, against loss from the accepted risk.
17.11 The parties agree the amount of the sum insured when the contract is made. The insurer usually leaves it to the insured to nominate the amount and will usually agree it as long as it reasonably reflects the commercial value of the insured property. Generally speaking, the higher the sum insured, the higher the premium charged for the insurance. 17.12 If, for a general insurance contract subject to the ICA, an insurer would have agreed to insure the subject matter of the insurance for a higher sum insured for the same premium and on the same terms, the maximum liability of the insurer is the highest amount of cover the insurer would have given for that same premium and on those same terms: s 42.
Underinsurance (co-insurance, average) 17.13 Insureds sometimes nominate a sum insured that is significantly less than the actual value of the insured property (underinsurance) because they do not: want to pay the premium required to insure the actual value (the amount of the premium is usually directly proportional to the amount of the sum insured); or know (or have not kept up with) the value of the insured property. If this happens, and if the contract does not contain an ‘average’
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or ‘co-insurance’ clause, the insurer is obliged to pay the full amount of a partial or total loss up to the sum insured.17 [page 294] Property insurance contracts often contain an ‘average’ clause in terms similar to the following: If the amount of the sum insured is less than 80 per cent of the value of the insured property at the time the policy is issued, the insured shall be its own insurer for the difference and shall bear any loss in accordance with that proportion.
An ‘average’ clause limits the amount an insured can recover for a loss if the sum insured was less than the actual value of the property when the policy was taken out. It does that by averaging: … the loss for which indemnity is given to a proportion in value of the insured’s property based on a comparison between the value of that for which the insured sought cover with that for which the insurer was in fact at risk. The term ‘co-insurance’, although arguably a misnomer, is intended to reflect that the insured chooses to be its own insurer in respect of a proportion of property for which it fails to seek cover, whether or not that is based on a failure to place full value on the assets insured.18
Sensibly, instead of penalising an insured for non-disclosure or misrepresentation as a result of nominating a sum insured significantly less than the actual value of the property, insurers use an ‘average’ clause to deal with the problem.19 17.14 Subject to s 44 of the ICA, averaging means that if, for example, an insured agrees on a sum insured for a home contents insurance contract (say, $100,000) that significantly underestimates the total value of the home contents (say, $150,000), the insurer will be entitled, pursuant to an ‘average’ clause, to reduce the amount of any claim made for damaged contents (say, $60,000) by a percentage which reflects the extent that the value of the property was underestimated. In this example, the insured will only be able to claim $40,000 for the damaged contents.
Averaging only occurs with a partial loss; if the insured property is destroyed, the insured’s claim is simply limited to the sum insured. 17.15 Section 44 of the ICA limits the effect of an ‘average’ clause in certain home and contents policies by preventing an insurer from relying on an ‘average’ clause: unless before the contract was made it clearly informed the insured in writing of the nature and effect of the clause, including whether
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[page 295] it is based on indemnity or replacement value of the property the subject matter of the insurance; if: ■ the insurance is for loss of, or damage to, a house or to the contents of a house (or both) used primarily and principally as the insured’s residence, or as the residence of persons with whom they have a family or personal relationship (or both); and ■ the sum insured at the time the contract is made is 80 per cent or more of the value of the house or its contents (as the case may be). If the sum insured for a contract described in subs (b)(i) is less than 80 per cent of the value of the insured property, an insurer cannot use an ‘average’ clause to reduce the insured’s claim by more than the following formula (ICA s 44(3)):
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(3) Where: (a) the sum insured in respect of property that is the subject matter of such a contract is less than 80% of the value of the property; and (b) but for this subsection, an average provision included in the contract would have the effect of reducing the liability of the insurer in respect of loss of or damage to the property to an amount that is less than the amount ascertained in accordance with the formula
where:
A is the number of dollars equal to the amount of the loss or damage. S is the amount of the sum insured under the contract in respect of the property; and P is 80% of the number of dollars equal to the value of the property. the average provision has the effect of reducing the liability of the insurer to the amount so ascertained.
Throughout s 44, ‘value’ means ‘indemnity value’ if that is the basis for settlement under the contract, or ‘replacement value’ if reinstatement or replacement value is the basis for settlement under the contract: s 44(4). In either case, the value is determined at the time the contract is made.
Agreed value insurance contract 17.16 An agreed value insurance contract is one in which the parties, when the contract is made, agree that the insured property will be regarded as having a particular value if a loss occurs. The purpose of the contract is still to indemnify the insured; it is just that the contract [page 296] requires that assessment of a loss must proceed on the basis of the agreed value.20 A policy will be regarded as an agreed value policy even if the words ‘agreed value’ or ‘valued at’ are not used, as long as the parties clearly intended: … a specified agreed value, proposed by the assured and accepted by the underwriter … the use of the term ‘sum insured’ will normally indicate … the maximum amount insured under the policy or the ceiling on recovery (not the agreed value).21
17.17 If a contract is an agreed value contract and the insured property is destroyed, the insurer pays the agreed value. If the loss is partial, the insurer pays:
Is the cover for more than just the cost of repair
or replacement? 17.18 An insurer’s core promise in a property insurance contract is to pay the cost of repairing or replacing property lost, damaged or destroyed by an insured event during the insurance period. Sometimes an insurer promises to cover more than that. For example, a policy insuring an investment property might include an express promise by the insurer to pay, for a limited period, what the insured loses in rent whilst the property is being repaired or rebuilt after damage or destruction by an insured event. Or in the case of a motor vehicle policy, the insurer might expressly promise to pay, again for a limited period, what it costs the insured to hire a replacement vehicle whilst the insured vehicle is being repaired. Some cases and texts suggest that property insurance does not cover indirect or consequential losses, as if it is a general principle of law. It is not. The extent of cover will always depend on the wording of the contract. Having said that, the insuring clause in a first party policy that describes the cover as damage to property will not cover indirect or consequential loss as a result of the damage to property.22 17.19 Outside insurance law and depending on the context, a clause in a commercial contract that excludes the liability of one of the contractual parties for ‘indirect or consequential loss’ suffered by another contractual party might be regarded as excluding the former party’s liability for loss [page 297] of profits. For example, in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd,23 the Victorian Court of Appeal distinguished between: normal loss, being ‘loss that every plaintiff in a like situation will suffer’; and consequential loss, being ‘anything beyond the normal measure,
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such as profits lost or expenses incurred through breach’. Some insurance policies contain an express exclusion for ‘indirect or consequential loss’. The relevance of the exclusion in a first party policy is anyone’s guess.24 However, one thing is for sure: unless it specifically mentions ‘loss of profits’, it will not exclude an insurer’s liability for loss of profits to the extent that the insuring clause of, or an endorsement to, the policy expressly covers loss of profits. That is because any ambiguity in the exclusion will be read in favour of the insured. In this case, a court will say that if the insurer wanted to exclude loss of profits, it should have specifically said so in the exclusion. 17.20 Although a policy might not cover anything more than the cost of repairing or replacing property, an insured might be able to recover more than that from an insurer by way of damages for an insurer’s breach or wrongful repudiation of the contract: see Chapter 20.
The meaning of ‘loss of’ 17.21 In a property damage policy that covers ‘loss of or damage to insured property’, ‘loss of’ can refer to loss of possession of the property or damage to it. Under this heading, ‘loss of’ is discussed in the context of loss of possession of property. The next heading covers ‘loss of’ in the context of damage to property. Subject to the policy wording, an insured will have suffered loss of possession of property if: they have lost the physical possession they once had of the property;25 or it is certain the property will not be recovered, or uncertain whether the property will be recovered after the insured has taken reasonable steps to do so.26
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[page 298] 17.22
Temporary deprivation of insured property is insufficient to
constitute ‘loss of property’.
The meaning of ‘damage’ and ‘physical damage’ 17.23 The meaning of a particular word in an insurance contract depends on its context. The meaning of ‘damage’ in a contract that covers ‘damage to property’ is no different.27 In Ranicar v Frigmobile Pty Ltd,28 insured frozen scallops were rejected for export because they were accidentally stored at a temperature higher than that prescribed in the relevant export regulation. The insured sold the scallops on the Australian market, but would have sold them for more if it had exported them. Green CJ held (at 78,000) that ‘damage’ in the policy included ‘a physical alteration or change, not necessarily permanent or irreparable, which impairs the value or usefulness of the thing said to have been damaged’. Green CJ concluded (at 78,001) that for the purpose of the policy, the scallops were damaged because the alteration in temperature at which they were stored ‘involve[d] a physical change to a substance and … that change had the effect of removing one of the primary qualities which the scallops had — their exportability’. 17.24 Graham Evans & Co (Qld) Pty Ltd v Vanguard Insurance Co Ltd29 concerned a policy which covered Graham Evans & Co, a painting contractor, ‘against all risks of physical loss of or damage to property of every kind … for which the Insured may be responsible’. Graham Evans & Co painted the outside of a high-rise block of units. This required the application of a primer, an undercoat and then a finishing coat. The finishing coat started to deteriorate soon after the painting finished because the primer coat was too diluted, which meant it did not adhere properly to the walls. That resulted in the following coats not adhering. To fix the problem, Graham Evans & Co stripped away a significant area of paint in order to repaint it. Foster J said the policy covered the loss of the second and third coats because they were rendered useless by the failure of the primer coat. 17.25 In a case concerning insured computer hardware and software, Phillips JA said that property suffered ‘damage’ for the purpose of the
policy if it was ‘interfered with in such a way as to render it less useful or valuable and in consequence time and money are required to restore that use or value’.30 [page 299] 17.26 In Mainstream Aquaculture Pty Ltd v Calliden Insurance Ltd,31 Croft J concluded (at [40]) in the context of a business interruption policy that: … a ruptured (or ‘tripped’) fuse is … ‘damaged’, despite the fact that it is designed to operate in this manner (that is, to rupture or be ‘tripped’) to stop a potentially damaging overload of current … That is to say, a fuse that has ruptured is physically altered; once ‘tripped’, it can no longer fulfil its protective function, and time (and resources) must be expended to repair or replace it.
17.27 In some contexts, loss of usefulness of property might amount to ‘damage’ but not ‘physical damage’. The inability to use property is not the same as physical damage to it: Transfield Constructions Pty Ltd v GIO Australia Holdings Pty Ltd.32 In that case, the New South Wales Court of Appeal concluded that a piece of machinery was not ‘physically damaged’ even though it had been rendered useless by the blocking of certain pipes.
An insurer’s obligation is to pay money 17.28 An insurer’s obligation is to pay money, unless the insurance contract expressly requires or gives the insurer the option of delivering on its promise by itself arranging the repair or replacement of damaged or destroyed property.33 17.29 If, as is usually the case, an insurance contract defines indemnity by reference to the reasonable cost of repairing or replacing insured property and: does not expressly require the insured to incur that cost before the insurer’s liability to pay arises, the insurer must pay the insured the reasonable cost of repairing or replacing even if the insured neglects or chooses not to repair or replace;34 or
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■requires the insured to incur that cost before the insurer’s liability to pay arises, the insurer must pay the insured the reasonable cost of repairing or replacing as soon as the insured has agreed with a third party to pay that cost.35
17.30 Insurance contracts sometimes give an insured the option of being paid the cost of reinstating (repairing, rebuilding or restoring) insured property to a substantially ‘as new’ condition, as long as they commence [page 300] reinstatement within a specified period of time (usually a relatively short period) after the loss. If the insured commences reinstatement within the required time and: a contractor engaged by the insured performs the reinstatement work defectively, the insurer is liable to pay the cost incurred by the insured in getting another contractor to fix the defective work;36 or the cost of reinstatement is increased by a supervening event such as a fire or a storm which destroys work in progress, the insurer bears that extra cost.37 If the insured does not commence reinstatement within the required time, then the policy usually limits indemnity to the cost of repairing or replacing the damaged or destroyed property to the condition it was in immediately before the loss.
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17.31 An insured is not obliged to use the proceeds of an insurance claim to repair or replace lost, damaged or destroyed insured property, unless there is an express provision to that effect in the policy (which is almost never). However, an insured might be required to do so by: some other contract (for example, a lease or mortgage) over the insured property; or a statute (for example, s 64(3) of the Property Law Act 1969
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(WA)).38
The insurer’s reinstatement option 17.32 Property insurance contracts often give an insurer the option of itself reinstating (repairing, rebuilding or restoring) insured property to a substantially ‘as new’ condition (reinstatement option), instead of paying money to the insured for the cost of doing so. Amongst other things, the inclusion of a reinstatement option in a contract acts as a disincentive to arson and fraud.39 A reinstatement option does not alter the nature of the contract. It remains a contract to pay money, subject to the insurer electing to substitute a different mode of discharging its liability.40 [page 301] 17.33 An insurer’s election to itself reinstate the property must: be unqualified and communicated to the insured by clear or unequivocal words or conduct, in the sense that the insurer’s words or conduct must be inconsistent with not having elected to reinstate.41 An insurer can elect reinstatement without intending to do so;42 and take place within a reasonable time after the insurer receives the claim. What is a reasonable time is a question of fact and depends on the circumstances.43 Whether an insurer has elected to itself reinstate the property is: a question of fact that depends on the circumstances of the case;44 decided by reference to ‘the reasonable man exercising his common sense in the context and in the circumstances of the particular case. It is not an absolute clarity or an absolute absence of any possible ambiguity which is desiderated’.45 In Cape York Airlines Pty Ltd v QBE Insurance (Australia) Ltd,46 Daubney J rejected the insurer’s submission that it had elected in correspondence to carry out repairs to a damaged aircraft, saying:
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[120] But it is also clear that a party purporting to make an election can only make a choice between the suite of options available under the relevant contract. In a case such as the present, where a suite of choices is available, the electing party is plainly limited in its range of choices. A purported election by it of an option which is not within the available range is no election at all … [123] This letter was not, in my view, clear and unequivocal notification of the option ‘to repair’ given under the Policy. What it was, rather, was a request by the defendant for the plaintiff to instruct ASIC ‘to proceed with the repairs to the Aircraft as per their estimate’. That was not one of the options within the suite available to the defendant under the Policy.
17.34 If an insurer elects to itself reinstate the property: it cannot retract its election;47
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[page 302]
■it must reinstate within a reasonable time of making the election. ■
An insured cannot force an insurer to reinstate within that time, but is entitled to damages for an insurer’s failure to do so;48 and the insured must co-operate with the insurer in the reinstatement, for example by providing the insurer with existing plans or drawings of the property. That is required by the insured’s duty of utmost good faith.
17.35 The consequences for an insurer of electing to reinstate the property itself are that: the election is treated as a binding promise to reinstate. To the extent that reinstatement involves the provision of goods or services, it arguably attracts common law and statutory rights and obligations and remedies relevant to contracts for the provision of those goods or services; it is liable to complete reinstatement even if events (including uninsured events) happen after the election which make it more expensive to do so, for example if a relevant building code changes or a fire or storm interferes with the progress of the reinstatement work;49 it is responsible for the way in which the work is carried out; for
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if the work is defective, the insurer is liable to redo the ■example, work;50 and insured or to the value of the ■its liability is not limited to the sum 51 insured’s interest in the property.
Betterment 17.36 Betterment occurs when an insurer paying the full amount of a claim would result in the insured being in a better financial position than they were in before the loss. Subject to the contract wording, an insurance payment is usually reduced by the extent of betterment.52 If an insured does not want a future claim on the policy to be reduced for betterment, they should insist on a policy wording that does not require it (for which they will probably be required to pay a higher premium); for example, there is no deduction for betterment if indemnity is on the basis of ‘new for old’. [page 303] The insured bears the onus of proving the amount of their loss, but the evidential onus is on the insurer to raise betterment as an issue.53
Salvage 17.37 If an insurer pays for a total loss, it is entitled to what is left of the insured property (salvage), otherwise the insured would be more than indemnified for their loss.54 For example, if an insured motor vehicle is ‘written off’ in an accident, subject to the terms of the contract, the insurer will become entitled to ownership of the wreck upon paying the insured the pre-accident value of the vehicle.
SICKNESS AND ACCIDENT INSURANCE (CONTINGENCY INSURANCE)
17.38 Sickness and accident insurance is contingency insurance; the benefits payable under the contract (apart from any cover for medical and related expenses and perhaps loss of earnings) are not intended to indemnify the insured against their loss.55 Subject to the policy wording, this type of insurance protects an insured against some of the economic consequences of a sickness or injury occurring during the period of insurance. The benefits payable fall into the following categories: a lump sum amount for an insured’s death or a permanent loss of function of a specified part of the insured’s body, for example a limb or an eye. The parties agree when the contract is made on the amount payable to the insured. The amounts payable relate directly to the premium the insured is prepared to pay for the cover and, amongst other things, to the insured’s age, occupation and state of health; compensation for loss of earnings if a sickness or injury prevents an insured from working. Again, the amount of compensation payable relates directly to the amount of premium that an insured is prepared to pay for the cover, usually calculated as a fixed percentage of the actual amount of earnings the insurer estimates the insured would lose as a result of a disablement (for example, 75 per cent of pre-disablement earnings). The policy will usually provide that the benefits are reduced by the insured’s entitlements to workers’ compensation (if the sickness or injury is work related); and reimbursement of medical expenses.
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[page 304] Sickness and accident insurance contracts sometimes provide that the benefits payable differ, depending on whether a sickness or injury resulted from an accident or a disease. Set out below are meanings of the words ‘sickness’, ‘disease’, ‘injury’ and ‘accident’ as they appeared in
the particular policies and circumstances before the court. They are only a guide to what those words mean in any particular policy.
Sickness and disease 17.39
Sickness includes:
… bodily disorder sustained otherwise than as the identifiable result of a traumatic occurrence, such as sickness or disease contracted as the result of contagion or the operation of natural causes such as old age, congenital or insidious disease or the natural progression of some constitutional physical or mental defect.56
Disease denotes: … a morbid condition of the body. It may be initiated by some external cause or be idiopathic or autogenous. Quite clearly, when such a condition is idiopathic or autogenous, it will not qualify as an injury in the normal use of language.57
Injury 17.40 In a policy, ‘injury’, ‘personal injury’ and ‘bodily injury’ mean much the same thing, and depending on the policy wording can include ‘sickness’ or ‘disease’.58 Injury is: … a disturbance of the normal physiological state which may produce physical incapacity and suffering or death.59
Injury can be external or internal. It can include: ‘any physical damage to the human body sustained as the identifiable result of a traumatic occurrence such as the external application of force or the internal application of pressure generated by personal exertion’;60 the detachment of the lining of an artery;61 an infection by a virus that enters the body;62
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[page 305]
■the inhalation of asbestos fibres;63 or ■psychological damage, particularly if it can be shown that there is
physiological change by reason of psychological problems.64 17.41 A person with a claim on a policy with different levels of cover depending on whether they are sick or injured, will do better or worse depending on whether their condition is one or the other. Determining which category they fall into might not be an easy task. It will depend: … on the aetiology of the pathological condition. It is not necessary to define where the boundary between sickness and injury is to be drawn, but only to note that a pathological condition to which some external force has contributed may or may not be an injury. If the pathological condition is occasioned by no more than the buffeting encountered in ordinary living acting on a body that is infirm, a resulting disability should be attributed to the body’s infirmity — that is, to sickness — rather than to injury. If there is no antecedent infirmity of body, however, a disability resulting from a pathological condition to which external force has contributed cannot be attributed to sickness; it must be attributed to ‘injury’. If some antecedent infirmity of body and some external force both contribute to a pathological condition, it may be a question of degree whether a resulting disability is to be attributed to sickness or to injury. Mr Federico’s total disability must be attributed to injury, for he suffered from no antecedent infirmity.65
Injury by accident 17.42
Where a policy covers ‘injury by accident’, it is:
… necessary to distinguish between the bodily injury and the means by which it was caused, and that the means will not necessarily be accidental even though the injury itself can properly be described as accidental.66
An accident is an unintended and unexpected event from the point of view of an ordinary reasonable person in the insured’s position, with the insured’s knowledge, information and experience.67 An injury is not by accident or an accidental injury if it is the ‘foreseeable and natural progression of diseases or degeneration processes such as heart disease … or injuries caused by foreseeable exposure to natural elements such as sunstroke aboard a ship’.68 Just because a disease manifests itself suddenly, does not make it an accident.69 [page 306]
17.43 In Australian Casualty Co Ltd v Federico,70 the High Court considered the phrase ‘bodily injury caused by an accident’ in a sickness and accident policy held by Mr Federico. Mr Federico, a tiler, constantly used a scrimmer in the course of his work to level a bed of a dampened mixture of sand and cement. On occasions, an operator who is squatting or bending needs to exert considerable force to draw the straight edge of the scrimmer towards them. Mr Federico suffered a massive central disc prolapse when using a scrimmer to level a dampened mixture. The insurer stopped paying benefits to Mr Federico after two years because he was totally disabled as a result of sickness. Mr Federico claimed he was entitled to benefits beyond two years because his disability resulted from ‘bodily injury caused by an accident’. Gibbs CJ concluded (at [7]) that Mr Federico’s injury was caused by an accident, because although he intended to draw the scrimmer towards him, he must have inadvertently exerted unusual force in doing so which unexpectedly put additional pressure on his back and caused the disc prolapse. Otherwise, there was no explanation for how a fit and healthy Mr Federico had managed to do the same work for around 15 years without a similar incident.
Caused solely, directly and independently of any pre-existing condition or any other cause 17.44 Sickness and accident policies sometimes provide that certain benefits are only payable if ‘an accidental injury results in total disability solely, directly and independently of any pre-existing condition or any other cause’. Subject to the policy wording, the phrase only works against an insured if there is more than one proximate cause of the injury.71 A useful starting point for the application of the phrase is Preston v AIA Australia Ltd,72 in which Sackville AJA said (at [80]–[81]) that, subject to the policy terms and the circumstances, an insured will probably: be entitled to benefits under the policy if a ‘dormant or inactive
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condition creates a propensity in the insured to suffer disabling consequences from what otherwise might be a relatively minor injury’; not be entitled to benefits under the policy if a ‘significant medical or physical condition is aggravated by the injury or combines with the injury so as to result in disability’. In this case, the injury will be regarded as ‘one of two concurrent causes’; and be entitled to benefits under the policy if the one accident causes the insured an injury to his arm and an aggravation of a preexisting back injury, each of which independently would result in total disability. [page 307]
17.45 In American Home Assurance v Saunders,73 Kirby P (dissenting) said: The use of the adverbs ‘solely’ and ‘directly’ connotes a degree of temporal proximity if only because the passage of time will inevitably introduce the possibility of other causes (and thereby run the risk of disqualification because of the requirement involved in the word ‘solely’) or indirect processes (which, if proved, will disqualify the bodily injury because it is not caused ‘directly’). …
17.46 Giles v The National Mutual Life Association of Australasia Ltd74 concerned a chiropractor who consulted a specialist in November 1979 about lower back problems that were preventing him from working. X-rays showed an abnormality in the base of the spine. He returned to work within six months and, at the same time, attended university in the afternoons for research work and study for a further degree. In January 1981, he suffered further back pain and was advised to concentrate more on his academic pursuits. Approximately 18 months later, he again consulted a doctor because of continuing pain. At the end of 1982, whilst manipulating a patient, the insured felt a tearing sensation in his back. He experienced considerable pain and saw the specialist he had consulted in 1979. A thoracic spinal strain was diagnosed, although it was not possible to identify a specific cause.
Whenever the insured attempted to return to chiropractic practice, the pain was aggravated and on medical advice, he gave up his practice the following year. He then became a full-time student and attained further qualifications. The insured claimed benefits under a sickness and accident policy that covered him for bodily injury ‘caused solely and directly by … accidental means … and directly and independently of any other cause’, resulting in total and permanent disablement. The insured argued that the relevant bodily injury was sustained whilst manipulating a patient at the end of 1982. Pidgeon J found for the insurer on the basis that the injury sustained by the insured at the end of 1982 was neither the sole, nor the direct, cause of the insured’s disablement. As explained in the following passage, the pre-existing degenerative condition of the insured’s spine was an important factor in Pidgeon J reaching that conclusion (at [74,525]): If there had been a healthy spine causing no trouble and then there was established an incident and if there followed that incident the pain and disability to a significant degree then the inference ought to be made that the incident is the cause. The previous history of the spine and the evidence to which I have referred relating to it including its degenerative condition is such that I do not consider that any inference can be made in this area. I consider that there was a spine in a degenerative condition that was likely to be aggravated by events of a minor nature … I am
[page 308] not satisfied that there was any greater incident than a normal type of aggravation that one would expect with a spine in the condition it was. I do not consider such an aggravation would be either the sole or direct cause of the condition and injury that was developing and subsequently developed.
Total and permanent disablement 17.47 Most sickness and accident policies pay the greatest benefits for sickness or injury that totally and permanently incapacitates an insured from working. The definition of ‘total and permanent disablement’ varies from policy to policy. For example, a policy might provide that
benefits are only payable if an insured’s ‘total and permanent disablement’ prevents them from engaging in one or other of the following: any occupation; their usual occupation; or their usual occupation or some other occupation for which they are reasonably suited by education, training or experience.
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17.48 Whether an insured satisfies a contractual definition relating to the extent to which they are incapacitated for work must be considered in the context of the real world,75 having regard to the range of jobs available to them within a reasonable travelling distance of their home, and their: level of education and training; work experience; and physical and mental capacity to work. As McLelland CJ said (at [8]) in Muinos v Johnson and Johnson Retirement Benefits Ltd76:
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… it is in the context of the real world, not that of some theoretical abstraction, that the criterion provided by the definition of total and permanent disablement needs to be applied.
A job available to an insured in which practically no work is required will not usually prevent an insured from fulfilling the terms of a disablement definition.77 17.49 Alessi v National Mutual Life Association of Australasia Ltd78 concerned a roofing carpenter with a policy that provided for the [page 309] payment of benefits for total and permanent incapacity for work if the insured was: … disabled by bodily injury or disease to such an extent that he has been throughout the immediately preceding continuous period of six months wholly prevented from engaging in his occupation or any similar occupation or from engaging in any other occupation
for which he is fitted by his knowledge, training, status and abilities and will be so disabled for the remainder of his life.
Wickham J said that although the insured did not have to show an inability to do any kind of work to satisfy the definition of total and permanent disablement, he had to show he was unable to carry on some kind of occupation generally related to that of a carpenter. For example, he would fail if he could do light carpentry work (at [77,725]): There is another question and that is whether he has been so prevented from engaging in any occupation for which he is fitted by his knowledge, training, status and abilities … I do interpret the clause in the policy as applying not merely to any ability to do any kind of work at anything but, in the case of this insured, to relate to him being prevented from carrying on any occupation which his abilities allow him to carry on, having regard to his knowledge, training and status as a carpenter and, specifically, as a roofing carpenter. I would, however, conclude that it would not be sufficient for the plaintiff to show merely that he was not able to carry on as a roofing carpenter unless he also showed that he was not able to carry on some kind of occupation generally related to that of a carpenter. If, for example, he was capable of carrying on light work as a carpenter and that was in accordance with his abilities, or abilities which he could with reasonable diligence acquire, then I would conclude that he has not demonstrated that the risk covered by the policy had, in fact, been incurred by him in this particular case. On the evidence, the insured could not carry out carpentry or similar work. At best the only work he would be able to do was of a kind such as supervisor or watchman or tally clerk.
17.50 Depending on the definition of total disablement, a plaintiff’s ability to work part time may be sufficient for them to be regarded as not totally disabled.79 17.51 Sometimes, payments of benefits for total disablement are conditional on the insured being under the regular care and attention of a medical practitioner. This ‘connotes … more than one visit to a doctor. Regular care connotes repetitive medical assistance and regular attendance connotes a series of appointments’.80 [page 310] 17.52 Subject to the terms of the policy, whether an insured suffers from the relevant disablement is:
… determined at the time and by reference to the facts that exist at the time the member first suffers from [the relevant] disablement in accordance with the policy. It is at that time, and by reference to those facts, that the … insurer [is] required to consider the question whether the member suffers from [the relevant disability]. … that is when … the qualifying period before any benefit is payable expires … .81
Medical reports and other evidence that come into existence after the relevant time are admissible if they relate to the plaintiff’s condition at the relevant time.82
In the insurer’s opinion 17.53 Many policies provide that an insured will only satisfy the required level of disability if the insurer forms an opinion favourable to the insured in that regard. A plaintiff’s challenge to an insurer’s opinion involves the court in a two-stage process: Did the insurer act unreasonably in forming its opinion that the plaintiff did not satisfy the required level of disability? If so, did the plaintiff satisfy the required level of disability?83 Although the insurer forms its opinion on a balance of probabilities,84 forming that opinion is not the same as a ‘judicial or arbitral decision of a disputed question … There is no onus of proof on any person; there are no adversaries’.85 Subject to the policy terms, it would be wrong of an insurer to form an opinion on the basis that the insured bore the onus of proving the required level of incapacity.86
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17.54 Acting reasonably requires an insurer to make inquiries for the purpose of uncovering information the insurer thinks may be relevant.87 It also requires an insurer contemplating declining a claim to tell the insured why it is thinking about doing that, so that the insured has a fair opportunity to persuade the insurer otherwise.88 In particular, the [page 311] insurer, before reaching its opinion, should tell the insured about ‘the
type of material the insurer wishes to consider in reaching its opinion’ and give the insured: a copy of the relevant materials the insurer has, whether or not it intends to rely upon them; and an opportunity to make submissions to the insurer on all matters favourable or unfavourable to the insured.89 Insurers usually seek to discharge this obligation by sending an insured a ‘procedural fairness letter’, which informs the insured of the opinion the insurer is likely to form and inviting the insured to make submissions in that regard. An insured is entitled to question an insurer’s decision to decline their claim, even if the insurer has not given reasons for the declinature.90
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17.55 In TAL Life Ltd v Shuetrim; MetLife Insurance Ltd v Shuetrim,91 TAL agreed to pay total and permanent disability benefits if, to its satisfaction, a member: has become incapacitated to such an extent as to render [him] unlikely ever to engage in or work for reward in any occupation or work for which he … is reasonably qualified by reason of education, training or experience. (TPD definition)
Leeming JA said: a)
b)
c)
the TPD definition: (i) turned on the insurer’s state of mind, not upon whether the plaintiff is in fact unlikely ever to undertake employment: [60]; (ii) did not turn on the insurer being satisfied that the plaintiff will never be able to resume employment, but on the lesser threshold that he is ‘unlikely ever’ to do so: [64]; a real chance the plaintiff will return to relevant work, even if it is less than a 50% chance, will preclude him being unlikely ever to return to relevant work: [89] and [111]; If there is merely a remote or speculative possibility that the plaintiff will at some time in the future return to relevant work, the insurer would not, acting reasonably and in compliance with their duties, be able to be satisfied that he is not TPD: [89]. in most cases, expressing likelihood in percentage terms will only have “the illusion of mathematical precision”: [88].
17.56 A court would usually substitute its own opinion for an insurer’s opinion if it decides the two-stage process in the plaintiff’s favour.92 In doing so, subject to the policy terms, it can take into account evidence
[page 312] that was not before or available to the insurer at the relevant date (for example, the date on which the insurer made, or should have made its decision). Otherwise insurers might be encouraged to make the relevant decision on inadequate materials.93
An employee’s rights against the trustee of their employer’s retirement fund and against the trustee’s insurer 17.57 In the first paragraph of his judgment in Erzurumlu v Kellogg Superannuation Pty Ltd,94 Ball J described the typical arrangements put in place by an employer for the protection of its employees against the consequences of an accident or illness: The plaintiff, Mr Erzurumlu, was employed by Kellogg (Aust) Pty Ltd … During the time he was employed, he was a contributing member of the Kellogg Retirement Fund … . The Fund was established by a trust deed … The first defendant, Kellogg Superannuation Pty Limited … is the trustee of the Fund. Under the terms of the Trust Deed a member is entitled to the payment of a benefit on becoming totally and permanently disabled whilst employed by Kellogg. Under cl 25.1(n) of the Trust Deed the Trustee has power to take out and maintain insurance in respect of its liability to make payments in accordance with the Trust Deed. In exercise of that power, the Trustee has insured its liability to pay total and permanent disability benefits with the second defendant, Hannover Life Re of Australasia Limited (the Insurer), under a Group Life Contract No VGL 8034 … .
17.58 Ball J explained the respective roles of the trustee and the insurer in this arrangement as follows: 53 The Trustee has a duty to apply the trust assets in accordance with the Trust Deed. In performing that duty, it is required to inform itself properly of the relevant facts … It is also required to act in good faith, on a real and genuine consideration of the material before it and for sound reasons, although it is not obliged to give reasons for its decision … If, for any reason, the Trustee has failed to discharge its duties in considering the member’s claim, the appropriate order is to refer the matter back to the Trustee. The court generally does not itself seek to execute the trust … 54 Although a member is not a party to the contract with the insurer who provides insurance cover to the trustee of a superannuation fund, the member has standing to enforce the contract as a beneficiary of the trust which holds the insurance policy as one of its assets. The member does not have a personal claim but is entitled to seek an order
that the insurer pay to the trustee the amount due to the trustee under the contract … An insurer, when considering a claim, must comply with its obligation of utmost good faith … Although the obligations of the trustee and the
[page 313] insurer are expressed in different terms, from a practical point of view, the grounds on which the decision of each may be challenged are similar …95
17.59 A court would usually remit a matter back to the trustee for reconsideration if it concluded that the trustee’s decision ‘could be vitiated for miscarriage of discretion’.96
Limitation period for a disablement claim 17.60 A cause of action accrues when all the facts have occurred which the plaintiff must prove in order to succeed.97 17.61 Subject to the policy wording, where a sickness and accident contract (a contingency contract) requires an insurer to form an opinion as to the extent of an insured’s disability or its effect on their ability to work, the insured’s cause of action accrues on the date the insurer forms its opinion. If the contract does not involve the insurer forming an opinion, the cause of action accrues when the insured satisfies the definition of disablement in the contract.98 The insurer bears the onus of proving that a claim is statute barred.99
1. 2. 3. 4. 5. 6. 7. 8.
Irving v Manning (1847) 1 HLC 287 at 306; 9 ER 766 at 774 (Patteson J). Castellain v Preston (1883) 11 QBD 380 at 397 (Bowen LJ); Western Australian Bank v Royal Insurance Co [1908] HCA 11; (1908) 5 CLR 533 at 563–4 (O’Connor J). Lucas v The New Zealand Co Ltd [1983] 1 VR 698 at 701–2 (Crockett J). British Traders’ Insurance Co Ltd v Monson [1964] HCA 24; (1964) 111 CLR 86 at [6] (Kitto, Taylor and Owen JJ). [1993] Ch 361. Leppard v Excess Insurance Co Ltd [1979] 1 WLR 512. Falcon Investments Corp (NZ) Ltd v State Insurance General Manager [1975] 1 NZLR 520. [1975] 1 NZLR 520.
9. (1982) 2 ANZ Ins Cas 60-469. 10. (1994) 33 NSWLR 373. 11. Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd [2013] NSWSC 1975 at [91] (Sackar J); TJK (NZ) Ltd v Mitsui Sumitomo Insurance Company Ltd [2013] NZHC 298 at [33] (Miller J). 12. Lucas v The New Zealand Co Ltd (see fn 3) at 700–1 (Crockett J); GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83 at 105. 13. Collyear v CGU Insurance Ltd [2008] NSWCA 92; (2008) 15 ANZ Ins Cas ¶61-760 at [30]–[31] (Hodgson JA), [52] (Handley AJA). 14. Crystal Imports Ltd v Certain Underwriters at Lloyd’s of London [2013] NZHC 3513 at [117] (Cooper J). 15. Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Association (Europe) [2000] 1 Lloyd’s Rep 505 (Thomas J). 16. See fn 4. 17. Standard Assurance Ltd v ACE Europe Group [2012] EWHC 104 (Comm) at [178] (Eder J). 18. CIC Insurance Ltd v Barwon Region Water Authority [1998] VSCA 77 at [31] (Ormiston JA). 19. Economides v Commercial Assurance Co Plc [1997] EWCA Civ 1754; [1998] QB 587 at 603–4 (Simon Brown LJ, citing MacGillivray and Parkington on Insurance Law, 8th ed, Sweet & Maxwell, London, 1988 at [1730]). 20. British Traders Insurance Co Ltd v Monson (see fn 4) at [4] (Kitto, Taylor and Owen JJ). 21. Kyzuna Investments Ltd v Ocean Marine Mutual Insurance Association (Europe) (see fn 15) (Thomas J). 22. Mauritius v Goldsborough Mort & Co Ltd (New South Wales) [1939] UKPC 32; AC 452 at [3]. 23. [2008] VSCA 26 at [87]. See also Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356 at [88]–[96] (K Martin J). 24. By its Terms of Reference, the Financial Ombudsman Service can order an insurer to compensate an insured for consequential financial loss up to a $3,000 per claim, unless the policy expressly excludes such liability: 9.3. Perhaps this is why the exclusion appears in some policies. 25. Harris Paper Pty Ltd v FAI General Insurance Co Ltd (1995) 8 ANZ Ins Cas 61-276 at 76,063 (Ashley J). 26. Moore v Evans [1917] 1 KB 458 at 471 (Bankes LJ); Webster v General Accident Fire and Life Assurance Corporation [1953] 1 Lloyd’s Rep 123. 27. For a detailed review of some of the cases on the meaning of ‘damage’ in the context of a property insurance contract, see Axa Global Risks (UK) Ltd v Haskins Contractors Pty Ltd [2004] NSWCA 138; (2004) 13 ANZ Ins Cas 61-611 at [41]–[50] (Mason P). 28. (1983) 2 ANZ Ins Cas 60-525. 29. (1986) 4 ANZ Ins Cas 60-689. 30. Switzerland Insurance Australia Ltd v Dundean Distributors Pty Ltd [1998] VSC 244; 4 VR 692 at 714. 31. [2011] VSC 286.
32. (1996) 9 ANZ Ins Cas 60-336 at [76,716] (Meagher JA). 33. The Times Fire Assurance Company v Hawke (1859) 28 LJ Ex 317 at 318 (Bramwell B); 185 ER 783; CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 at 396 (Brennan CJ, Dawson, Toohey and Gummow JJ). 34. City Realties (Holdings) Ltd v National Insurance Co of NZ Ltd (1985) 4 ANZ Ins Cas 60-695 at 74,139]. 35. CIC Insurance Ltd v Bankstown Football Club Ltd (1994) 8 ANZ Ins Cas 61-232 at 75,564 (Kirby P). 36. University of Newcastle v GIO General Insurance Ltd (1995) 8 ANZ Ins Cas 61-281 at 76,113 (Rolfe J). 37. CIC Insurance Ltd v Bankstown Football Club Ltd (see fn 33) (Brennan CJ, Dawson, Toohey and Gummow JJ); University of Newcastle v GIO General Insurance Ltd (see fn 36) at 76,113 (Rolfe J). 38. CIC Insurance Ltd v Bankstown Football Club Ltd (see fn 33) at 396 (Brennan CJ, Dawson, Toohey and Gummow JJ). 39. CIC Insurance Ltd v Bankstown Football Club Ltd (see fn 33) at 396 (Brennan CJ, Dawson, Toohey and Gummow JJ). 40. Rayner v Preston (1881) 18 ChD 1 at 9 (Brett LJ). 41. Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 at [16] (Stephen J); Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26 at 30 (Brennan J), 39 (Deane, Toohey, Gaudron and McHugh JJ). 42. Sargent v ASL Developments Ltd (see fn 41) at [16] (Stephen J); Champtaloup v Thomas [1976] NSWLR 264 at 274–5 (Mahoney JA). 43. Lake v Hartford Fire Insurance Co [1966] WAR 161 at 166 (Jackson J); K & M Prodanovski Pty Ltd v Calliden Insurance Ltd [2012] NSWCA 117 at [48] (Meagher JA). 44. Skyward Aviation 2008 Ltd v Tower Insurance Ltd [2013] NZHC 1856 at [113] (Gendall J). 45. Mannai Ltd v Eagle Star Assurance Co Ltd [1997] AC 749 at 782 (Lord Clyde). 46. [2010] QSC 313. Appeal dismissed: QBE Insurance (Australia) Ltd v Cape York Airlines Pty Ltd [2011] QCA 60. 47. Lake v Hartford Fire Insurance Co (see fn 43) at 166 (Jackson J); Sargent v ASL Developments Ltd (see fn 41) at [31] (Stephen J), [27] (Mason J). 48. VYMP International Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1991) 6 ANZ Ins Cas 61-058 at 77,129 (Kirby P). 49. CIC Insurance Ltd v Bankstown Football Club Ltd (see fn 33) at 397 (Brennan CJ, Dawson, Toohey and Gummow JJ). 50. University of Newcastle v GIO General Insurance Ltd (see fn 36) at 76,113 (Rolfe J). 51. Cape York Airlines Pty Ltd v QBE Insurance (Aust) Ltd (see fn 46) at [128]–[129] (Daubney J); Swift v New Zealand Insurance Co [1927] VLR 183 at 187 (Mann J). 52. Vintix Pty Ltd v Lumley General Insurance Ltd (1992) 24 NSWLR 627 at 634 (Giles J). 53. General Accident Insurance Association Ltd v Sakr [2001] NSWCA 402; (2001) 11 ANZ Ins Cas 61-508 at [78] (Hodgson JA).
54. The Dane v Mortgage Insurance Corporation Ltd [1894] 1 QB 54 at 61 (Lord Esher MR). 55. Insurance Commission of Western Australia v Kightly [2005] WASCA 154; (2005) 13 ANZ Ins Cas 61-656. 56. Australian Casualty Co Ltd v Federico [1986] HCA 32; (1986) 160 CLR 513 at [11] (Wilson, Deane and Dawson JJ). 57. Favelle Mort Ltd v Murray [1976] HCA 13; (1976) 133 CLR 580 at [15] (Barwick CJ). 58. Deeble v Nott [1941] HCA 11; (1941) 65 CLR 104 (Williams J). 59. Hume Steel Ltd v Peart [1947] HCA 34; (1947) 75 CLR 242 at 252–3 (Latham CJ) (a workers’ compensation case). 60. Australian Casualty Co Ltd v Federico (see fn 56) at [11] (Wilson, Deane and Dawson JJ). 61. Hume Steel Ltd v Peart (see fn 59) at 252–3 (Latham CJ). 62. Favelle Mort Ltd v Murray (see fn 57) at [4] (McTiernan J). 63. Alcan Gove Pty Ltd v Zabic [2015] HCA 33 at [47]. 64. Deeble v Nott (see fn 58) (Williams J). 65. Australian Casualty Co Ltd v Federico (see fn 56) at [2] (Brennan J). 66. Australian Casualty Co Ltd v Federico (see fn 56) at [5] (Gibbs CJ). 67. AF & G Robinson v Evans Bros Pty Ltd [1969] VR 885. 68. Bradford Insulation (SA) Pty Ltd v CGU Insurance Ltd [2004] NSWDDT 47 at [30] (Curtis J). 69. Commonwealth v Hornsby [1960] HCA 27; (1960) 103 CLR 588 at 608 (Windeyer J). 70. See fn 56. 71. Mitchell v Great Lakes Reinsurance (UK) Plc [2010] ScotCS CSOH 59 at [17] (Lord Hodge). 72. [2014] NSWCA 165. 73. (1987) 11 NSWLR 363 at 370. 74. (1986) 4 ANZ Ins Cas 60-751. 75. Gedeon v First State Super Trustee Corporation [2005] NSWIR Comm 62 at [32] (Marks J): Folan v United Super Pty Ltd [2014] NSWSC 343 at [67]–[70] (Nicholas AJ). 76. SC (NSW), 5 December 1996, BC9605916, unreported. 77. Cavill Power Products Pty Ltd v Royle (1991) 42 IR 229; BC9100201 at [11] (Matheson J, SC (SA)(FC)). 78. (1982) 2 ANZ Ins Cas 60-481. 79. TAL Life Ltd v Shuetrim; MetLife Insurance Ltd v Shuetrim [2016] NSWCA 68 at [67] (Leeming JA). 80. Atton v National Mutual Life Association (2007) NSWSC 310 at [24] (Gzell J). 81. Erzurumlu v Kellogg Superannuation Pty Ltd [2013] NSWSC 1115. 82. Shuetrim v FSS Trustee Corporation [2015] NSWSC 464 (24 April 2015) at [81] (Stevenson J). 83. TAL Life Ltd v Shuetrim; MetLife Insurance Ltd v Shuetrim (see fn 79) at [156]–[188] (Leeming JA). 84. Lazarevic v United Super Pty Ltd [2014] NSWSC 96 at [97] (Hallen J). 85. Vidovic v Email Superannuation Pty Ltd, unreported, Supreme Court of New South
86. 87. 88. 89. 90. 91. 92.
93. 94. 95. 96. 97.
98. 99.
Wales, Bryson J, 3 March 1995, BC9504297, a case about the construction of a superannuation trust deed; Chapman v United Super Pty Ltd [2013] NSWSC 592 at [70] (Young AJ). Lazarevic v United Super Pty Ltd (see fn 84) at [158] (Hallen J). Finch v Telstra Super Pty Ltd [2010] HCA 36 at [66], a case about the construction of a superannuation trust deed. Public Service Board of NSW v Osmond [1986] HCA 7; (1986) 159 CLR 656 at [7] (Gibbs CJ). Szuster v Hest Aust Ltd [2000] SADC 2 at [41] and [73] (Herriman J). Public Service Board of NSW v Osmond (see fn 88) at [7] (Gibbs CJ). [2016] NSWCA 68. Hannover Life Re of Australasia Ltd v Sayseng [2005] NSWCA 214; (2005) 13 ANZ Ins Cas 90-123 at [47] (Santow JA); Lazarevic v United Super Pty Ltd (see fn 84) at [11] (Hallen J). McArthur v Mercantile Mutual Life Insurance Co Ltd [2001] QCA 317; [2002] 2 Qd R 197 at [23]–[24] (McPherson JA); [73]–[74] (Muir J). [2013] NSWSC 1115. See also Finch v Telstra Super Pty Ltd (see fn 87) for the responsibilities of a trustee of a superannuation trust deed. Lazarevic v United Super Pty Ltd (see fn 84) at [11] (Hallen J). Do Carmo v Ford Excavations Pty Ltd [1984] HCA 17; (1984) 154 CLR 234 at 245 (Wilson J); CIGNA Insurance Asia Pacific Ltd v Packer [2000] WASCA 415; (2000) 23 WAR 159 at [31] (Malcolm CJ). CIGNA Insurance Asia Pacific Ltd v Packer (see fn 97) at [35] (Malcolm CJ). CIGNA Insurance Asia Pacific Ltd v Packer (see fn 97) at [31]–[35] (Malcolm CJ), [84]– [89] (Pidgeon J).
[page 315]
Chapter 18 LIABILITY (THIRD PARTY) INSURANCE Accordingly, it is submitted that in determining the liability of the insurer under a policy known and sold as ‘accident insurance’ but insuring against death or injury by ‘accidental means’ only, the question that the court should resolve should be: Was there an accidental death or injury? If so, recovery should be allowed unless the insurer has, by specific, obvious, and clear exception in the policy and in plain terminology, understandable in its implications as well as its apparent scope, excluded the particular kind of accidental death or injury involved. In conclusion, and in the words of the Supreme Court of Colorado in its comment upon the prophecy of Mr Justice Cardozo to the effect that ‘the attempted distinction between accidental results and accidental means will plunge this branch of law into a Serbonian bog’ ‘Whatever kind of bog that is, we concur.’1
INTRODUCTION1 This chapter discusses liability (third party) insurance by focusing on four types of liability insurance: public (general) liability insurance; product liability insurance; ‘claims made’ liability insurance; and compulsory insurance for liability to pay compensation for death or personal injury related to the use of a motor vehicle. The chapter then discusses how an insured goes about proving entitlement to indemnity under a liability policy.
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[page 316]
As mentioned in Chapter 2, the main purpose of liability insurance is to protect the insured against ‘certain types of tortious liability’.2 Broadly stated, it: involves the transfer to an insurer of the risk that an insured might be held legally liable for a third party’s death or personal injury, property damage or financial loss; can be either ‘occurrence’ or ‘claims made’; and is indemnity insurance and consequently, after indemnifying or agreeing to indemnify an insured, an insurer has the right to be subrogated to the insured’s rights against anyone else for the purpose of diminishing its insured loss. Subject to the policy terms, an insurer’s promise to indemnify covers the full extent of an insured’s legal liability to a third party, subject to a limit of liability, and sometimes an excess. Some liability policies specifically exclude from cover certain types of losses for which an insured might be held legally liable to a third party, for example loss of profits. Such an exclusion often appears in the liability section of insurance taken out by a business involved in the transport of goods by road, usually on the assumption that the insured’s contractual arrangements with their customers specifically exclude or limit the insured’s liability to their customers if the goods transported do not make it to their destination, or in the condition they were in immediately before transportation.
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PUBLIC (GENERAL) LIABILITY INSURANCE 18.1 As the name suggests, public (general) liability insurance is ‘everyman’s’ liability insurance. It provides a scope of cover that suits everyone’s ordinary liability insurance needs. As mentioned in Chapter 3, the wide range of activities that may give rise to an insured’s legal liability to a third party has led to the development of insurance policies specially designed to cater for specific
liability insurance needs, such as employers’ liability, product liability, liability for property damage caused by a motor vehicle, professional liability, and directors’ and officers’ liability. These policies are taken out in addition to, not instead of, a public (general) liability policy. In the circumstances, it is important to be familiar with the structure and terms of a public liability policy. 18.2 The insuring (operative) clause, exclusions and policy terms in a public liability insurance contract are in fairly standard form. One or more of these may require careful consideration depending on [page 317] the circumstances that have given rise to an insured’s claim for indemnity and the conduct of that claim. Some of the litigated aspects of an insuring (operative) clause in a standard form public liability insurance contract are discussed below. Some of the exclusions and conditions that appear in a liability policy are discussed in Chapter 18.
The insuring (operative) clause 18.3 The insuring (operative) clause records an insurer’s primary promise to indemnify an insured against their legal liability to a third party. This promise is modified by the exclusions and policy terms that follow. The insuring clause in an occurrence-based liability policy will be in the following or similar form: We agree to indemnify You up to the Limit of Indemnity in respect of all sums which You shall become legally liable to pay as damages [compensation] for: (a) bodily injury (which expression includes death and illness); or (b) damage to property (which expression includes loss of property), occurring during the Period of Insurance, as a result of an Occurrence and happening in connection with the Business carried on, at and from any place specified under ‘Location’ in the Schedule.
Some of the phrases in the insuring clause are discussed below.
‘… the Insurer hereby agrees to indemnify the Insured’ 18.4 An insured only suffers a loss in terms of a liability policy if they incur a legal liability to a third party. If the insured does not incur a legal liability to a third party, they suffer no loss and there is nothing for the insurance to respond to.3 Having said that, liability policies often include cover for the legal costs incurred by an insured in investigating and defending a claim against it even if the claim ultimately fails. 18.5
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Unless the policy expressly provides otherwise, an insured is not: entitled to be indemnified for a third party loss if they deliberately caused it;4 and prevented from recovering for a third party loss deliberately caused by their employee or agent without their knowledge or consent unless, in the case of an insured company, that person acted ‘with the authority of the company or is so closely connected with the company that his acts can be said to be its acts’.5 [page 318]
‘… up to the Limit of Indemnity’ 18.6 The limit of indemnity (sometimes known as the ‘limit of liability’ or the ‘sum insured’) is the maximum amount payable by the insurer for a claim under the policy. Chapter 17 discusses this concept in more detail. If, for a general insurance contract subject to the Insurance Contracts Act 1984 (Cth) (ICA), an insurer would have agreed to a higher limit of indemnity for the same premium and on the same terms, the maximum liability of the insurer is the highest amount of cover the insurer would have given for that same premium and on those same terms: s 42. 18.7 Subject to the policy wording, an insurer is liable to pay each claim on the policy up to the limit of indemnity, even if the total value of claims on the policy exceeds the limit of indemnity. Liability insurers
often include an ‘aggregate limit of liability’ clause in their policies so as to limit the total value of claims made under the policy. Depending on the policy wording, the clause states the maximum amount payable by the insurer for all claims under the policy. In circumstances where the aggregate value of third party claims against an insured exceeds the aggregate limit of liability, the insurer, subject to its duty of utmost good faith, is free to handle individual claims as it sees fit. Although it is not bound to resolve claims in any particular order, it is bound to pay claims as and when they are finalised by a settlement, a judgment or an arbitration award.6 As Lord Mance explained in Teal Assurance Co Ltd v WR Berkley Insurance (Europe) Ltd:7 17 … Where an insurance has a limit, it makes no sense to speak of the insured having causes of action or recoverable claims which together would exceed that limit. If the limit is US$10m and the insured incurs ascertained third party liability of US$10m in respect of each of two successive third party claims, it makes no sense to speak of the insured having two causes of action or two recoverable claims against its insurer totalling US$20m. Likewise if its liability is ascertained at US$7.5m each claim, the insured will have two causes of action or claims against its insurer, but the second will only be for US$2.5m. The ascertainment, by agreement, judgment or award, of the insured’s liability gives rise to the claim under the insurance, which exhausts the insurance either entirely or pro tanto. … 19 The policy thus serves the purpose of meeting each ascertained loss when and in the order in which it occurs. An insured can forbear from notifying, or can withdraw or abandon, a claim under an insurance in respect of expenses or third party liability. The insurance will not then
[page 319] be exhausted by that claim, and the next claim will be recoverable in the ordinary course under the insurance. …
18.8 An ‘aggregate limit of liability’ clause is not the same as an ‘aggregation’ clause, which treats multiple claims under a policy as one claim under the policy if there is a sufficient link between them. Aggregation clauses are discussed in Chapter 24.
‘… in respect of all sums which the Insured shall become
legally liable to pay’ 18.9 Subject to the policy wording, a liability policy does not cover a voluntary ex gratia payment in the absence of legal liability made by the insured to a third party for commercial reasons.8 18.10 In occurrence-based liability insurance, an insurer’s promise to indemnify is usually triggered by: a personal injury or damage to property; or an event giving rise to personal injury or damage to property, occurring during the insurance period, not by the entry of a judgment against the insured in favour of the third party during the insurance period (which might or might not happen).9 In Orica Ltd v CGU Insurance Ltd,10 Mason P (at [67]) rejected the latter meaning of ‘liable’ on the basis that it:
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… would effectively rob the insurer’s promise of indemnity of content, because it would relegate the employer’s cover to the vagaries and delays of the litigation process and would not even address the situation where the employer’s legal responsibility was too plain to require the worker to sue …
18.11 An insured’s cause of action against an insurer for indemnity accrues when the insured suffers a loss, which is when their liability to the third party crystallises in a judgment, an arbitration award or a settlement.11 18.12 The fact that a loss was caused by the insured’s negligence, rather than the negligence of someone for whom the insured is liable, is irrelevant: Shaw v Robberds.12 In that case, Lord Denman CJ said (at ER 83–4): One argument remains to be noticed, viz. that the loss here arose from the plaintiff’s own negligent act, in allowing the kiln to be used for a purpose
[page 320] to which it was not adapted. There is no doubt that one of the objects of insurance against fire is to guard against the negligence of servants and others; and, therefore, the simple fact of negligence has never been held to constitute a defence. But it is argued that there is a distinction between the negligence of servants or strangers and that of the
assured himself. We do not see any ground for such a distinction; and are of opinion that, in the absence of all fraud, the proximate cause of the loss only is to be looked to.
‘… as damages [compensation]’ 18.13 In the context of liability insurance, ‘damages [compensation]’ mean sums ‘which fall to be paid by reason of some breach of duty or obligation, whether that duty or obligation is imposed by contract, by the general law, or legislation’.13 In other words, the event that gives rise to an insured’s liability to a third party must involve an actionable wrong (fault) on the insured’s part.14 A legal liability in debt or for restitution or a civil penalty is not a liability for damages or compensation,15 nor is a liability for workers’ compensation or social security benefits. Damages include the amount an insured is ordered to pay by way of contribution as a tortfeasor (wrongdoer) towards the damages awarded in favour of a plaintiff against another tortfeasor pursuant to s 7(1)(c) of the Law Reform (Joint Tortfeasors and Contribution) Act 1947 (WA).16 18.14 How a third party formulates their claim against an insured will not determine whether the insured is covered for their liability to the third party. For example, a third party may claim an indemnity from an insured against a liability to a plaintiff in negligence pursuant to a prior contractual arrangement made between the insured and the third party. A liability insurance policy that only covers an insured for liability for negligence will respond to the claim to the extent that the insured would have been held liable in damages to the plaintiff in negligence irrespective of the contract between the insured and the third party.17 18.15 Exemplary (punitive or aggravated) damages come within the description of ‘damages’.18 However, conduct that leads to a court awarding exemplary damages may, in certain circumstances, cause the claim to fall outside the cover provided by the contract, for example because the conduct was not accidental as required by the insuring clause, or because the conduct amounted to a breach of a condition of
[page 321] the policy requiring the insured to take reasonable precautions against causing injury or damage. Almost invariably, liability insurance contracts expressly exclude cover for liability for exemplary damages. 18.16 Sometimes a contract will use the word ‘compensation’ instead of ‘damages’. Ordinarily, ‘compensation’ means a pecuniary remedy awarded irrespective of fault. However, in the context of a liability policy, it would usually mean compensation by way of damages.19
‘… for bodily injury or damage to property’ 18.17 An amount ‘which You shall become legally liable to pay as damages for bodily injury or damage to property’ does not cover a contractually assumed liability to indemnify another party for its liability to a third party for bodily injury or property damage.20 See below for further discussion about a liability insurer’s obligation to cover an insured for a contractually assumed liability to indemnify another party for its liability to a third party for personal injury. 18.18 See Chapter 17 for a discussion of the meaning of ‘bodily injury’. 18.19 A liability policy insures against liability to a third party for damage to property, not for: … the costs associated with repairing or replacing the insured’s defective work and products, which are purely economic losses … finding coverage for the cost of replacing or repairing work would transform the policy into something akin to a performance bond.21
‘… as a result of an Occurrence’ 18.20 Although many policies now use the word ‘occurrence’ instead of ‘accident’, it is worth discussing the meaning of ‘accident’ because it is usually an integral part of the definition of ‘occurrence’ in a liability policy. In AF & G Robinson v Evans Bros Pty Ltd,22 the plaintiffs owned
and operated a market garden that was adjacent to the defendant’s brickworks. In early 1966, the plaintiffs lost their crop of brussels sprouts after the sprouts developed brown spots and scorching of the leaves. The same symptoms appeared in crops subsequently planted by the plaintiffs. The plaintiffs told Evans, the defendant’s managing director, that they thought the damage to the sprouts was due to emissions from the chimney stack at the defendant’s brickworks. Evans engaged a consultant to investigate the problem. The consultant concluded that the damage to the sprouts was caused by emissions of fluoride from the chimney stack. [page 322] In August 1966, as a result of inquiries and testing by the consultant and others, the defendant substantially increased the height of the chimney stack in an effort to prevent further damage to foliage in the vicinity of the brickworks. The plaintiffs sued the defendant for damages for the loss of their brussels sprouts, some of which occurred before and some of which occurred after the defendant substantially increased the height of the chimney stack. The defendant settled the action and claimed the amount of the settlement from its public liability insurer. The defendant was insured against its liability to the public in respect of ‘accidental damage to property, arising out of an accident’ by a policy which expired on 30 June 1967 and a policy which commenced the next day. Starke J concluded (at [896]) that the expression ‘accidental damage to property, arising out of an accident’ was concerned with the quality of the damage rather than the cause of the damage: If it can be fairly said in this case that the damage to the sprouts was an unintended and unexpected loss or hurt, then I think it can be said that the risk contemplated in the policy has eventuated and the third party is liable to indemnify the defendant.
The defendant did not intend to damage the plaintiffs’ crops of brussels sprouts. Was the damage unexpected? The test was whether an ordinary reasonable person in the position of the defendant’s
responsible officers and with their knowledge, information and experience would have expected (or perhaps, would not be surprised by) the damage to the sprouts. In relation to the damage to the brussels sprouts that occurred before the chimney stack was substantially increased in height, Starke J found that the damage was not accidental because it was not unexpected. He said the defendant knew there was a risk of damage to foliage if it continued operations with a low chimney stack. The defendant gambled on the damage to surrounding foliage not being caused by the emissions from the chimney stack. The gamble did not pay off. Starke J concluded that although the damage was not hoped for, it was not unexpected. Therefore the first policy did not respond to this part of the claim. Starke J thought that different considerations applied to the damage to the brussels sprouts which occurred after the chimney stack was substantially increased in height; after the stack was increased in height, the damage to the sprouts was unintended and unexpected from the defendant’s point of view. He said (at [897]): The stack had been increased in height in August 1966 in accordance with the requirements of the Health Department, and this was done with the very purpose of eliminating the risk of fluorine pollution of foliage. No damage occurred after the stack was increased in height before this damage. In these circumstances, in my opinion, an ordinary reasonable man in the position of Evans with his knowledge, information and experience, would certainly not expect any damage to foliage in the
[page 323] vicinity. Accordingly, in my view, the damage to these sprouts was an accident within the meaning of the policy.
Subject to the wording, in a liability policy, ‘occurrence’ will usually carry ‘a meaning that the occurrence is causally relevant to that liability’.23
‘… happening in connection with the Business’ 18.21 The core scope of the ‘Business’ will usually be described in the Schedule to the policy. Activities incidental to the core scope of the
business are included in the description of the business. In Transfield Services (Australia) v Hall; Hall v QBE Insurance (Australia),24 Campbell JA put it this way (at [178]): If a person in the course of carrying on business as an X carries out a certain type of activities that are incidental to that business, those activities are part of carrying on business as an X, even if, were activities of that type to be the only activity that some other entrepreneur engaged in, the business of that entrepreneur would be characterised as something different to carrying on business as an X … Thus, the fact that carrying out inspection of and reporting on ropes training courses does not of itself fall within the language ‘sale, installation & training of ropes confidence courses’ is not enough to show that that inspection and reporting is not an incident of the business of selling such courses.
Does the insuring clause cover an insured for their liability pursuant to a contractual indemnity clause to indemnify another party for its liability to a third party for personal injury? 18.22 If two or more tortfeasors cause a loss, each is severally liable for the whole of that loss.25 Section 7(1)(c) of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 (WA)26 grants a tortfeasor the right to claim a contribution from another tortfeasor towards its liability to a plaintiff for the same loss, unless the former contractually agreed before the loss to indemnify the latter against such a loss. As already mentioned (18.13), an insuring clause similar to that described above will cover an insured tortfeasor for their liability to another tortfeasor for contribution pursuant to s 7(1)(c). But will it cover an insured for their liability to a third party pursuant to a contractual indemnity (a clause in a non-insurance contract by which one of the parties agrees to indemnify another party to the contract for loss, damage or liability as described in the clause)? [page 324] 18.23
Subject to the terms of the policy, an insured will not be in
breach of its obligations under a liability insurance policy by granting a contractual indemnity in favour of a third party before a loss.27 18.24 An insured’s entitlement to indemnity under a policy will be excluded or limited if: an insurance policy that is subject to the ICA contains a term that excludes or limits indemnity for an insured’s liability pursuant to a contractual indemnity granted by it to a third party; and the insurer gave pre-contractual notice pursuant to s 68 of the ICA. Section 68 provides that in relation to contracts subject to the ICA: an insurer cannot rely on an express or implied term in the contract that purports to exclude or limit its liability to indemnify the insured for a loss if they have agreed before the loss, to indemnify another person against such a loss (unless the insurer clearly informed the insured in writing of the effect of the provision before the insurance contract was made); and the duty of disclosure does not require an insured to disclose the existence of a contractual indemnity in favour of another party to a contract. The following discussion assumes policy coverage for a contractual indemnity granted by an insured to a third party is not excluded or limited: at all, in the case of a contract not subject to the ICA; or in accordance with the provisions of s 68 (in relation to a contract subject to the ICA).
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18.25 If an insured is liable to indemnify a third party against the latter’s liability to an injured plaintiff pursuant to a contractual indemnity granted by the insured to the third party, the insured will not be covered for that liability if: the insured is not directly liable to the plaintiff for the injury; and the insuring clause only covers the insured for their liability ‘for’ personal injury. This is because the insured’s liability to indemnify the third party is
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‘for’ the risk transferred by the third party to the insured pursuant to the contractual indemnity, not ‘for’ personal injury.28 On the other hand, and subject to the policy terms (for example, the presence of an exclusion for contractual liability), if the insuring clause [page 325] covers the insured for their liability ‘in respect of’ personal injury, the insured will be covered for their contractual liability to indemnify the third party for the third party’s liability to an injured plaintiff, because that liability is ‘in respect of’ the personal injury suffered by the plaintiff.29 18.26 An insurer must cover the whole of an insured’s liability to a plaintiff as a tortfeasor; that is the risk the insured transferred to the insurer when the insurance contract was made. It does not matter to an insured if it is not covered for its liability to a third party pursuant to a contractual indemnity (for example, because the cover is ‘for’, rather than ‘in respect of’, personal injury), because it is entitled to be indemnified by its insurer for the whole of its tortious liability to the plaintiff and it has no extra exposure to the claim.30 The other tortfeasor will not pursue a claim against the insured pursuant to s 7(1) (c) or the contractual indemnity because the insurance proceeds will cover everything owing to the plaintiff. 18.27 If an insurer wants to limit its exposure to an insured’s percentage tortfeasor’s share of its liability to a third party, it can easily achieve this by contract language plain in its terminology and clear in its intent. If it does not, that indicates the insurer did not intend cover to be so limited.
Does the insuring clause cover an insured for their liability for damages for breach of an insurance procurement clause? 18.28
Some non-insurance contracts include a clause (insurance
procurement clause) requiring one of the contracting parties (Party B) to take out insurance cover for another contracting party (Party A). 18.29 The clause usually requires Party B to procure two types of insurance. The first type is to be taken out entirely for the benefit of Party B. This is to ensure that Party B is financially able to continue with the performance of the contract if an insured event happens which causes financial loss. The other type of insurance is taken out for the benefit of Parties A and B. It does so by requiring Party B to arrange that the insurance it takes out extends to Party A as an insured (for example, by ensuring that a liability insurance policy includes a principal’s indemnity extension). If Party B breaches such a clause and Party A is held liable to a third party for a loss that would have been covered by insurance if Party B had arranged the insurance as promised, Party B is liable to Party A for that part of the loss that would have been covered by that insurance even if Party A is insured for the loss by its own insurance. As far as Party B is concerned, Party A and its insurer are one, and Party A’s insurance contract is res inter alios acta (nothing to do with) the insured.31 [page 326] The curious feature about this result is that Party A’s insurer (if there is one) benefits in a way that it could not have done if Party B had met its contractual obligation. If Party B had arranged the insurance as promised, then in accordance with double insurance principles, Party A’s insurer would have had to share the burden of the liability to the third party with the insurer that would have been arranged by Party B. In other words, although Party B’s breach deprives Party A of the opportunity to claim indemnity under an insurance contract arranged and paid for by Party B, that same breach puts Party A’s insurer in a better position than it would have been in if Party B had met its contractual obligation. Accordingly, in terms of legal rights and obligations:
■Party A is not financially affected by Party B’s breach (it can claim ■
indemnity from its own insurer against its liability to the third party); and Party A’s insurer gains a windfall because it can subrogate itself to Party A’s right to claim damages for breach of contract by Party B instead of being limited to a right of contribution on double insurance principles.32
18.30 An insuring clause similar to that mentioned above will not cover Party B for their loss as a result of breaching an insurance procurement clause. That is because Party B’s liability to Party A is for their failure to arrange appropriate insurance, not ‘for’ or ‘in respect of’ personal injury. That will not matter if Party B’s liability otherwise falls within the policy terms. Unlike the contractual indemnity which precludes any right of contribution pursuant to s 7(1)(c) of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 (WA)33 from arising, the insurance procurement clause does not preclude Party B’s right of contribution from arising. It is Party B’s subsequent breach of the insurance procurement clause at the time of the third party’s accident that effectively prevents it from seeking a contribution from Party A.
PRODUCT LIABILITY INSURANCE 18.31 Public liability insurance contracts usually exclude legal liability incurred by the insured for bodily injury or property damage to a third party arising out of the defective nature of goods manufactured or supplied by the insured. Product liability insurance is readily available, either in a policy document also containing public liability cover (known as a ‘broadform’ policy) or as a stand-alone policy. It is intended to insure against an
[page 327] insured’s liability to third parties for its defective products arising out of events occurring after the insured has parted company with its products. The definition of ‘products’ in the policy usually: includes the container in which the product is stored; and excludes oral advice given at about the time the product is sold. The date of manufacture or sale of the product is irrelevant to coverage, unless there is a retroactive date. Depending on the wording, a retroactive date excludes liabilities arising out of the sale or supply of goods manufactured or sold prior to the retroactive date.34
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‘CLAIMS MADE’ AND ‘CLAIMS MADE AND NOTIFIED’ LIABILITY INSURANCE Coverage for a claim first made against an insured during the period of insurance 18.32 For a brief introduction to ‘claims made’ and ‘claims made and notified’ insurance, see Chapter 2 where this type of insurance is discussed for the purpose of contrasting it with ‘occurrence’-based insurance. 18.33 The insuring clause in a ‘claims made’ policy is typically in the following or similar form: The insurer agrees to indemnify the Insured against any claim for compensation first made against the Insured during the Period of cover: for breach of professional duty in the conduct of the Business by reason of any negligence …35
As is apparent, the insurer’s promise to pay is triggered by a claimant first making a claim against the insured during the insurance period, not by the insured’s breach of professional duty occurring during the insurance period.
18.34 Subject to the policy wording, a ‘claim’ is: ‘a demand for something as due, an assertion of a right to something’;36 and made against an insured when ‘the substance of the claim is in fact “brought home to”’ the insured.37
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[page 328] 18.35 A variant on the ‘claims made’ policy is the ‘claims made and notified’ policy (both also known as a ‘discovery policy’38). Subject to the policy wording and ss 40 and 54 of the ICA, with a ‘claims made and notified’ policy the insurer’s promise to pay is triggered by: a claimant first making a claim against the insured during the insurance period; and the insured notifying the claim to the insurer during the insurance period, or in some policies, within a ‘grace period’ after the expiry of the insurance period.
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18.36 In both types of policy, it does not matter when the insured incurred the liability or when the act or omission occurred that gave rise to the insured’s liability, unless it happened before a date nominated in the policy as the ‘retroactive date’. Subject to the policy wording, a ‘retroactive date’ in a policy indicates that the insurer will not be liable for a claim that arises out of an act or omission that occurred before the ‘retroactive date’.39 The ‘retroactive date’ is often the date the insured first took out ‘claims made’ insurance with that insurer. 18.37 Proposals for this type of insurance invariably require that an intending insured disclose circumstances that they know about which might give rise to a future claim against them. If an intending insured knows of such circumstances and: discloses them, the insurer will, as night follows day, endorse its policy with an exclusion for claims first made during the insurance period that arise out of the disclosed circumstances; or
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■does not disclose them, the insurer will probably reject for pre-
contractual non-disclosure any subsequent claim that arises out of the non-disclosed circumstances. In either case, the insurer acts on the basis that an intending insured should be notifying, or should have notified, its insurer at the time it first became aware of such circumstances, and it should look to that insurer to cover it for any subsequent claim that arises out of such circumstances.
Exclusion for ‘known circumstances’ and the ‘continuity’ clause 18.38 ‘Claims made’ and ‘claims made and notified’ policies invariably contain a ‘known circumstances’ exclusion, which excludes indemnity for claims that arise out of circumstances the insured knew about before the insurance contract was entered into, and which it knew or ought to have [page 329] known might give rise to a claim against the insured during the insurance period. Below is an example of a ‘known circumstances’ exclusion: This policy shall not cover Loss in connection with any Claim arising out of or attributable to any circumstance the Insured knew about at the inception of this policy, and that the Insured knew or could reasonably be expected to have known might give rise to a Claim.
For the exclusion to apply: … there must be an appropriate connection between the known circumstances and the Claim. That is to say, the circumstances may give rise to a Claim if they would immediately suggest to a reasonable person in the proposed insured’s position, who reflected upon those known circumstances, that the bringing of a Claim against the insurer in respect of those circumstances was a definite risk, or was a real possibility or was on the cards. … It is necessary to inquire about the possibility, not the certainty, of a Claim being made. That does not call for any judgment or draw any conclusion about
the prospects of success of a possible Claim or the strength of possible defences to it. The question of whether circumstances fall within the meaning of the words of the exclusion is ultimately one of fact.40
18.39 As with the disclosure requirement, the exclusion appears in the policy on the basis that the insured should have notified its insurer at the time it first became aware of such circumstances, and it should look to that insurer to cover it for any subsequent claim that arises out of such circumstances. This type of exclusion is not rendered void by s 52 of the ICA because it does not have the effect of excluding, restricting or modifying, to the prejudice of the insured, the operation of the provisions of the ICA dealing with misrepresentation and non-disclosure.41 18.40 This type of policy sometimes contains a ‘continuity’ clause, which will override non-disclosure issues and negate the effect of a ‘known circumstances’ exclusion in relation to circumstances the insured first became aware of after the ‘continuity date’42 and before the inception of the relevant policy.43 Below is an example of a ‘continuity’ clause: Except in the case of fraudulent non-disclosure, where a Claim that would otherwise be covered by this policy is excluded by the ‘Known Circumstances’ exclusion, then this policy will cover that Claim:
■but only if the Insured first became aware of the facts that might ■
give rise to the Claim after the Continuity Date; and on the terms and conditions of the policy in force when the Insured first became aware of those facts. [page 330]
Coverage for a claim first made against an insured after the insurance period 18.41 The aim of a ‘claims made’ and a ‘claims made and notified’ policy is to limit coverage to a claim first made or a claim first made
and notified during the policy period; their nature demands that they respond to certain claims first made after that. A claim first made against an insured after the insurance period might be covered if, during the insurance period, the insured becomes aware of circumstances that might give rise to a claim against them. Such a claim might be covered if: the policy includes: ■ a definition of ‘claim’ that includes an intimated claim; or ■ a term deeming such a claim to have been made during the insurance period (a ‘deeming clause’); or s 40 of the ICA applies to the claim (for contracts subject to the ICA).
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Definition of ‘claim’ that includes an intimated claim 18.42 ‘Claims made’ and ‘claims made and notified’ policies sometimes include a definition of ‘claim’ that expands the common law definition of ‘claim’ by including the intimation of a claim. In this way, a claim first made against an insured after the insurance period is covered by: a ‘claims made’ policy, if the claim was first intimated to the insured during the insurance period; or a ‘claims made and notified’ policy, if the claim was first intimated to the insured and notified to the insurer during the insurance period. In the absence of an expanded definition of ‘claim’ and subject to other provisions of the policy (such as a ‘deeming provision’) and to the operation of s 40(3) of the ICA (discussed below), an insured would not be covered for a claim first intimated to, but not made against, the insured during the insurance period. Nor, subject to other provisions of the policy (such as a ‘continuity clause’), would a subsequent policy cover a claim first intimated to the insured before the making of the subsequent policy. The reason for this is described in 18.37–18.40 above.
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18.43 A claim first made against an insured after the insurance period might also be covered if the insured notifies the insurer during the insurance period of circumstances which they first became aware of during the insurance period that might give rise to a claim of that nature. Such a claim would be covered because of either: a term in the policy to the effect that such a claim will be deemed to have been made during the insurance period (a ‘deeming clause’); or the effect of s 40 of the ICA (for contracts subject to the ICA).
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[page 331]
A ‘deeming clause’ 18.44 In days gone by (in Australia), ‘claims made’ and ‘claims made and notified’ policies often contained a ‘deeming clause’ in the following or similar terms: A claim first made against the insured after the insurance period will be deemed to have been made during the insurance period, but only if the insured notifies the insurer during the insurance period of circumstances which they first become aware of during the insurance period which may give rise to a subsequent claim of that nature against the insured.
By the ‘deeming clause’, a claim first made against an insured after the insurance period is covered if circumstances relating to the subsequent claim were notified to the insurer during the insurance period. A ‘deeming clause’ is not necessary if a subsequent policy contains a ‘continuity’ clause; that clause will override non-disclosure issues and negate a ‘known circumstances’ exclusion in relation to circumstances the insured first becomes aware of after the ‘continuity date’ and before the inception of the relevant policy. 18.45 In HLB Kidsons (A Firm) v Lloyd’s Underwriters Subscribing to Lloyd’s Policy No 621/PK1D00101,44 Toulson LJ explained why a
deeming clause or the availability of s 40 of the ICA is necessary for the proper operation of ‘claims made’ insurance: It is common for a proposal form for [claims made] professional indemnity insurance to ask the proposer to state whether he is aware, after inquiry, of any circumstances which may (or perhaps ‘are likely to’) give rise to a claim against the would-be insured and, if so, to provide details. Even if such a question is not asked, information about potential claims … is likely to be material to the prospective insurer and therefore disclosable in any event. The prospective insurer is then likely to exclude cover in respect of any claims which may arise from circumstances disclosed to him prior to the policy being agreed. In order to secure protection for the insured against such claims it is also standard for professional indemnity policies … to contain a provision enabling the risk of a later claim to attach to the policy where it arises from circumstances of which the insured becomes aware and gives notice to the insurer. It is not merely the insured’s awareness of the circumstances, but his giving of notice of them to the insurer, which causes the risk to attach to the policy. These two features of professional indemnity insurance fit together. Their essence is simple and well understood by the market, but they can give rise to a variety of problems, especially when there is a change of insurer between different years.
[page 332] In a similar vein, Moore-Bick J said in Friends Provident Life & Pensions Ltd v Sirius International Insurance Corp:45 When seeking insurance for the following year [the insured] would be bound to disclose the existence of any circumstances, but might well find it impossible to obtain insurance in respect of that potential loss at a commercially acceptable premium, if indeed at all. As a result the practice has grown up of including in ‘claims made’ policies a term extending cover to losses arising from circumstances that may give rise to a claim in the future provided that they have been notified to the underwriters during the period of cover. So significant are these factors that … a ‘claims made’ policy could hardly work on any other basis.
18.46 In FAI General Insurance Ltd v Australian Hospital Care Pty Ltd,46 the High Court held that s 54(1) extends cover to a claim first made against an insured after the insurance period, if the policy contains a ‘deeming clause’, and the insured: first became aware of circumstances during the insurance period that may subsequently give rise to a claim of that nature against the insured; and
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■despite the benefit offered by the ‘deeming clause’, did not notify
the insurer of such circumstances during the insurance period. If the insured’s failure to notify attracts the application of s 54(1), it will require the insurer to pay the claim, but allow it to reduce its liability ‘by the amount that fairly represents the extent to which the [insurer’s] interests were prejudiced as a result of’ the insured’s failure to inform the insurers of everything it knew by the end of the Insurance period. 18.47 Deeming clauses have fallen into desuetude in Australia because of the decision in FAI General Insurance and the availability of their statutory equivalent, s 40(3) of the ICA. As is apparent from the following, s 40(3) and ‘deeming clauses’ work in substantially similar ways.
Section 40 of the ICA 18.48 Section 40(3) is the statutory equivalent of a deeming clause. As is obvious, it is a part of s 40, which is in the following terms: (1) This section applies in relation to a contract of liability insurance the effect of which is that the insurer’s liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract. [page 333] (2) The insurer shall, before the contract is entered into: (a) clearly inform the insured in writing of the effect of subsection (3); and (b) if the contract does not provide insurance cover in relation to events that occurred before the contract was entered into, clearly inform the insured in writing that the contract does
not provide such cover. (c) Penalty: 300 penalty units. (3) Where the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired, the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiration of the period of the insurance cover provided by the contract. 18.49 Australian Law Reform Commission (ALRC) Report No 20, Insurance Contracts, describes the intention for s 40 as follows (Ch 9 at [265]): Professional indemnity policies often contain a clause covering claims made after the period of insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Extensions are also available to cover claims made within the period of cover in respect of occurrences before the commencement of that period, unless covered by a preceding insurance. Consequently, the Commission suggested that insurers should be required to include in their policies a clause covering claims made outside the period of cover provided they arose out of occurrences notified within the period of cover. Some restriction on variety is justified by the severe complexity of this area of insurance … An insurer should be required to provide cover in respect of a claim made after the expiration of the contract provided it was notified as soon as reasonably practicable, and before the contract expired, of facts that might give rise to a claim.
The Explanatory Memorandum that accompanied the Insurance Contracts Bill 1984 in its passage through Parliament explained (at 126–7) what s 4047 was designed to achieve (ALRC Report 20 cl 40(3) para 265): Present Law: Insurance may be taken out against various forms of legal liability which the insured may incur to third parties eg professional indemnity insurance, public liability insurance in respect of liabilities in connection with particular buildings and employer’s liability insurance. The contract is one of indemnity and no obligation arises on the part of the insurer until the insured has suffered a loss. Professional indemnity policies often contain a clause covering claims made after the period of
[page 334]
the insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Some contracts of liability insurance apply to claims made during the period of cover rather than to events which occurred during that period. Thus an insurer may be entitled to refuse a claim made after the expiration of the cover even though it was made in respect of an event occurring within the period and the facts were notified to the insurer. Proposed Law: Clause 40 applies to contracts which exclude or limit an insurer’s liability because notice of the insured’s claim is not given before the expiration of the period of the cover (clause 40(1)). Provided the insured gave the insurer written notice as soon as reasonably practicable of the facts giving rise to the claim and did so before the cover expired, the insurer will not be relieved of liability merely because the claim is made after the expiration of the cover.
18.50 By s 40(3), a ‘claims made and notified’ policy covers a claim first made against an insured after the insurance period if the insured gives sufficient notice to the insurer during the insurance period of facts which the insured first became aware of during the insurance period that might give rise to a claim of that nature. 18.51 Section 54(1) does not extend cover to a claim first made against an insured after the insurance period in the circumstances described above if: the policy does not contain a ‘deeming clause’;48 and the insured did not notify the insurer of the circumstances during the insurance period. In other words, although s 54(1) cures an insured’s failure to notify circumstances during the insurance period if the policy contains a ‘deeming clause’, it does not cure an insured’s failure to take advantage of the notification provisions of s 40(3) of the ICA. That is because it is the effect of a statutory provision (s 40(3)), not of the contract, that enables the insurer to refuse to pay such a claim. Insurers reacted by ceasing their practice of including ‘deeming clauses’ in Australian ‘claims made’ and ‘claims made and notified’ policies, thereby leaving their insureds to rely on s 40(3) of the ICA to protect them against the insurance issues created by the absence of a ‘deeming clause’.
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18.52 If s 40(1) is read literally, s 40 does not apply to a ‘claims made’ policy. It is not an effect of such a policy that ‘the insurer’s
liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiration of the period of the insurance cover provided by the contract’. Unlike a ‘claims made and notified’ policy, the cover does not depend on the insurer being notified of the claim during the insurance period. [page 335] In Newcastle City Council v GIO General Ltd,49 the High Court held that s 40 should be read as applying to ‘claims made’ policies as that was clearly the intention of the legislature.
The first part of the battle: Is the notification of circumstances valid? 18.53 A prudent insured might be inclined to notify an insurer of circumstances at little more than ‘the drop of a hat’. That is because the risk of not being covered for a subsequent claim without a notification would usually outweigh the prospect of being lumped with a higher premium on renewal because of a plethora of notifications. 18.54 If an insurer believes a notification of circumstances is not a valid notification because it is too vague, it will usually respond by informing the insured that the notification is not a valid notification, or that it intends to reserve its right to argue that if and when a subsequent claim is made against the insured. Whatever the case, a court: would usually be prepared to decide a dispute about whether a notification is a valid notification of circumstances for the purpose of a ‘deeming clause’ or of s 40(3) of the ICA; and is unlikely to grant declaratory relief to an insured to the effect that a notification of circumstances will capture subsequent claims made against the insured within its ambit. As Rose J said when declining to grant declaratory relief in McManus (t/a McManus Seddon Runhams (a firm)) v European Risk Insurance Company:50
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… issues about the limits of the circumstances notified and the range of claims that might be said to arise from them are matters better left to be determined if and when a claim arises. It may be that no further claims come in, or that any that are made display so many of the features described in the Notification Letter that European Risk will accept its liability to pay without demur.
18.55 A valid notification of circumstances requires, amongst other things, that: the insured first became aware of the facts during the insurance period;51 the insured was aware of those facts when the notice is given;
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[page 336]
■when the notice was given, the insured was aware that a claim ■
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might be made against it in connection with those facts, regardless of whether it thought that such a claim would have any merit;52 the notice explains why the insured thinks a claim might be made against it in connection with those facts. This would usually involve identifying a possible basis for such a claim or referring to the relevant actions of the party that might make the claim. Otherwise, an insured could give the most general notice of facts and thereby capture every subsequent claim and a reasonable insurer would have no idea as to what was being notified or why;53 and a reasonable insurer receiving the notice would appreciate that the notice is being given for the purpose of triggering coverage under the policy if a claim is subsequently made against the insured after the insurance period in connection with those facts.54
18.56 An insured’s written notice of facts to an insurer will be ‘interpreted objectively on the basis of the words used, having regard to the factual context in which it was served’.55 18.57 Although an insured can give notice of ‘a “hornet’s nest” or “can of worms” type of circumstance’, there needs to be some
specificity in the circumstances notified. For example, an insured can give notification ‘in respect of the particular project to the effect that it has come to the insured’s attention that a named individual’s possible incompetence on other projects might well have been repeated on the particular project in question’.56 18.58 HLB Kidsons (a firm) and Lloyd’s Underwriters subscribing to Lloyd’s policy No 621/PK1D0010157 concerned a company, Solutions at Fiscal Innovation Ltd, which was owned and managed by HLB Kidsons, a firm of chartered accountants. Solutions marketed tax avoidance schemes. Some of Solutions’ clients made claims against them, claiming that they had been wrongly advised to enter into a scheme. [page 337] HLB Kidsons’ insurance covered Solutions for claims first brought against them during the insurance period. It also covered them for claims first brought against them after the insurance period in the circumstances described in General Condition 4, a ‘deeming provision’ in the following terms: The Assured shall give to the Underwriters notice in writing as soon as practicable of any circumstance of which they shall become aware during the period specified in the Schedule which may give rise to a loss or claim against them. Such notice having been given any loss or claim to which that circumstance has given rise which is subsequently made after the expiration of the period specified in the Schedule shall be deemed for the purpose of this Insurance to have been made during the subsistence hereof.
In their letter to insurers dated 31 August 2001 (described in the Court of Appeal as a part of the ‘Second Presentation’), HLB Kidsons said ‘the Inland Revenue, if minded, could be critical of some procedures followed in certain cases’. The letter accompanied a bordereau that said across from the heading ‘NATURE OF CLAIM’, ‘possible tax errors in fiscal engineering work’. The trial judge held that this was insufficient notification for the purpose of the policies because it was ‘far too vague and nebulous’. The
Appeal Court disagreed, concluding (at [92]) that it was sufficient notice ‘that the implementation of certain of Solutions at FI’s products might be criticised, and thus might give rise to possible claims or losses’. 18.59 McManus v European Risk Insurance Co58 is a recent ‘blanket’ notification case. In this case the Claimants, a firm of solicitors, took over a firm of solicitors that had previously taken over another firm of solicitors (‘SF’). The defendant insured the Claimants under a ‘claims made’ professional indemnity policy. After the policy incepted, the Claimants notified the defendant of a series of claims made by clients against SF for breach of fiduciary duty, breach of contract or negligence. The defendant accepted the claims. The Claimants and a third party engaged by them reviewed these files and 15 other files involving one of SF’s clients, as well as some randomly selected files. The reviews indicated a ‘consistent pattern of breaches’ by SF. The Claimants then notified the defendant that more than 5,000 files SF worked on during the relevant period were ‘more likely than not to contain examples of malpractice negligence’ in reliance on the following insuring clause in the policy: The Insurer will indemnify each Insured against civil liability to the extent that it arises from private legal practice in connection with the Insured Firm’s practice, provided that a claim in respect of such liability … (b) is made against an Insured during or after the period of insurance and arising from circumstances first notified to the Insurer during the period of insurance.
[page 338] The insurer accepted notification for the files identified by the reviews but said the ‘blanket’ notification of the 5,000 plus files was not a valid notification for the purposes of the insuring clause. The Claimants sought a declaration that the notification was valid. Rose J: concluded (at [56]) that the notification was valid even though it did not identify particular clients or transactions. That was because there was ‘a substratum of underlying external fact, over and
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above the [insured’s] mere concerns’; and declined to order a declaration to that effect [62], saying (at [63]) that the:
… precise scope of the circumstances validly notified in the Notification Letter is an issue to be determined as and when it arises in the context of an actual claim.59
18.60 As a practical matter, it is worth considering the following two questions when deciding what circumstances can or should be notified, and what would be regarded as a proper notification of circumstances: When an insured arranges renewal of a policy or takes out a similar policy with another insurer, would the pre-contractual duty of disclosure require notification of the circumstances? Do the circumstances sufficiently identify the facts and a basis upon which a claim against the insured might arise? Answering those two questions suggests that a notification to an insurer ‘I am a doctor and a patient might sue me’ would not amount to a valid notification of circumstances. Amongst other things, that is because those ‘circumstances’ are precisely what the policy is intended to cover; the pre-contractual duty of disclosure does not come into it.
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The second part of the battle: Is the subsequent claim caught by the notification of circumstances? 18.61 Notification of circumstances is only half the battle for the insured. The critical issue for the insured is when a claim comes in after the expiration of the insurance period. That claim will only be covered by the policy if it is ‘sufficiently causally related to the [circumstances notified during the insurance period] … that it can be fairly said to have [page 339] arisen out of [them]’.60 The link between the claim and the notification must be causal; a coincidental link is not enough.61
A claim can be ‘sufficiently causally related’ to notified circumstances even if ‘the claim[s] actually made [was] not the claim[s] envisaged at the time of the notification’. 18.62 As can be seen from Chapter 22, it is an unusual feature of s 54(1) of the ICA that it can operate to extend the scope of a: ‘claims made’ and a ‘claims made and notified’ policy with a ‘deeming clause’, to cover an insured for a claim first made after the insurance period if the insured first became aware of circumstances during the insurance period that might give rise to a claim of that nature but did not notify the insurer of those circumstances until after the insurance period; and ‘claims made and notified’ policy to cover an insured for a claim first made against the insured during the insurance period, even though the insurer was not made aware of the claim until after the insurance period.
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COMPULSORY INSURANCE FOR LIABILITY TO PAY COMPENSATION FOR DEATH OR PERSONAL INJURY RELATED TO THE USE OF A MOTOR VEHICLE 18.63 Compulsory liability insurance, such as employer’s liability insurance and insurance against liability to pay compensation for death or personal injury related to the use of a motor vehicle: involves regulation of the insurers in the relevant market and their activities, the level of premium charged for the relevant insurance and levels of cover; protects insureds from the financial consequences that might otherwise result from them choosing not to insure or inadvertently not buying insurance; and
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protects third party claimants from the risk that the person who has incurred a liability to them disappears or does not have the financial resources to meet a judgment or settlement. This brief discussion is limited to the compulsory motor vehicle third party liability insurance scheme in Western Australia, as this will highlight some of the issues that arise with compulsory liability insurance, including how it differs from private insurance subject to the ICA.
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[page 340] 18.64 In 1943, the Western Australian Government brought into effect the Motor Vehicle (Third Party Insurance) Act 1943 (MVA), which established a scheme of compulsory liability insurance for death or personal injury arising out of the use of a motor vehicle. By that year, similar schemes were already operating in all Australian states, in England and in New Zealand. The ICA does not apply to this type of insurance: s 9(1)(e)(ii). 18.65 The current scheme requires the owner of a vehicle registered in Western Australia to insure with the statutory insurer (s 4(1)): … against any liability which may be incurred by the owner or any person who drives the motor vehicle (and whether with or without the owner’s consent) in respect of the death of or bodily injury to any person directly caused by or by the driving of the motor vehicle …
A vehicle owner commits an offence if they use, or cause or permit a vehicle to be used, on a public road without an insurance contract as required by the MVA: s 4(3)(a). An insurance contract taken out with the statutory insurer separately indemnifies the policyholder (the owner of the vehicle) and the driver of the vehicle for third party liability to each other and to members of the public.62
The nature of the liability insured against
18.66 Section 3(7) of the MVA qualifies s 4(1). It provides that the ‘death of or bodily injury to any person shall not be taken to have been caused by a vehicle if it is not a consequence of the driving of that vehicle or of the vehicle running out of control’.63 Subject to s 3G, the policy will respond if: an owner or driver of a vehicle is liable for the death or personal injury of a third party; and the third party’s death or personal injury is caused by, or by the driving of, the vehicle. Policy response does not depend on the owner or driver proving that their liability to the third party arose out of the negligent driving of the vehicle.64
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18.67 Section 3G applies if the death of or bodily injury to a third party is directly caused by, or by the driving of, a vehicle in circumstances giving rise to the owner (owner includes any person for whose negligence the owner is legally responsible) being liable to pay compensation under the Workers’ Compensation and Injury Management Act 1981 (WA) in [page 341] respect of that death or bodily injury or which would have given rise to liability of that kind but for s 22 of that Act (there is no compensation if the worker is guilty of serious and wilful misconduct). If s 3G applies, then neither the MVA nor an insurance contract under the MVA apply in respect of liability for negligence which may be incurred by the owner in respect of the death or bodily injury, other than liability for the negligent driving of the motor vehicle.65 18.68 The formula ‘in respect of the death of or bodily injury to any person directly caused by, or by the driving of, [a] motor vehicle’ was introduced into the MVA in October 1987 by the Motor Vehicle (Third Party Insurance) Amendment Act 1987 (WA) (Amendment Act).
Before the Amendment Act, the statutory policy used the phrase ‘in respect of the death of or bodily injury to any person caused by or arising out of the use of such [a] motor vehicle’. In Dickinson v Motor Vehicle Insurance Trust,66 the High Court held that injuries caused to a child left in a stationary vehicle without parental supervision, which subsequently caught fire as a result of another child playing with matches in the vehicle, arose out of the use of the vehicle. The Amendment Act was introduced to limit insurance under the Act to the owner’s or driver’s liability for death or injury to a third party directly caused by, or by the driving of, a vehicle. 18.69 Insurance Commission of Western Australia v Container Handlers Pty Ltd67 is the leading case on the scope of the MVA. The issue for the High Court was whether a third party’s injury was: directly caused by a motor vehicle; and a consequence of the driving of the vehicle or of the vehicle’s running out of control. The facts and some extracts from the judgment of McHugh J about the meaning of the word ‘driving’ for the purpose of the MVA are set out at 15.11 and 15.12. In that case, Callinan J said (at [133]) that ‘driving’:
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… is the operation of a motor vehicle while it is in the control of a driver in the course of putting it into, keeping it in, or bringing its motion to a conclusion.
Heydon J said (at [153]) that the core meaning of driving for the purpose of the MVA: … is the activity conducted by a human being in the driver’s seat who manages and directs the course of its movement by operating the controls — preparing to start, starting, accelerating, braking, steering,
[page 342] giving appropriate signals, operating the horn and lights appropriately, stopping and turning the engine off. In contrast, when the vehicle runs out of control, it is because the course of its movement has ceased to be managed and directed by the operation of the controls, or because, while stationary, its brakes have failed or it has been struck by another vehicle and it has moved off out of control.
The High Court concluded that the statutory policy did not respond. Although the third party’s injury was directly caused by the vehicle, it was not consequent on the driving of the vehicle.
Warranties and notice provisions 18.70 Insurance under the MVA is subject to the owner complying with the warranties contained in the contract and the provisions of the MVA. One of the warranties is that the vehicle will not be ‘driven in an unsafe or damaged condition’. This warranty operates if anything relating to the vehicle is defective and likely to increase the risk of injury to persons.68 18.71 The statutory insurer can rely on a breach of the warranty even if there is no causal connection between the unsafe condition of the vehicle and the accident causing the loss. All it has to do is establish that the vehicle was being used or driven in an unsafe condition at the time of the accident. Compare this with the operation of s 54 of the ICA (see Chapter 22). A breach of the warranty allows the statutory insurer to refuse to indemnify the vehicle’s owner or driver, but does not allow it to refuse to pay the injured third party if the insured does not satisfy the third party’s judgment against it: s 7. After all, one of the purposes of the MVA is to ensure that injured third parties are properly compensated for their injuries. However, if a warranty is breached, the statutory insurer is entitled to recover from the vehicle’s owner or driver the amount that it has paid to the injured third party. 18.72 Section 10 requires the driver and the person in charge of a vehicle involved in: (1) any accident which … caused bodily injury to any person and is directly caused by or by the driving of a motor vehicle … [to] give written notice forthwith to [the statutory insurer] and such notice … shall set forth the following information with as full particulars as the driver and the person in charge of the vehicle as aforesaid is or are able to give — (a) the facts of the accident; (b) the time and place at which it occurred; (c) the circumstances of the accident;
(d) the name and address of any person killed or injured therein; (e) the names and addresses of any witnesses to the accident.
[page 343] (2) When neither the driver nor the person in charge of the motor vehicle is the owner of the motor vehicle concerned the owner thereof shall give a like notice immediately upon the accident coming to his knowledge. (3) An insured person … immediately upon any claim being made upon him in respect of an accident, shall give notice of the claim to [the statutory insurer] and supply to [the statutory insurer] such particulars of the claim as it requires. … (6) [The statutory insurer] shall be entitled to recover from any person who has failed to comply with any provision of this section, or, if 2 or more persons have so failed, from them jointly and severally, all monies paid and costs incurred by [the statutory insurer] in relation to any claim arising out of the accident in respect of which such failure has occurred.
A breach of s 10 by the vehicle’s owner or driver does not deprive the owner or driver of their entitlement to an indemnity from the statutory insurer, but it does enable the statutory insurer to recover from the owner or driver any monies paid out by the statutory insurer to a third party arising out of the statutory insurer’s indemnity of the owner and driver. Again, compare this with the operation of s 54 of the ICA (see Chapter 22).
PROVING ENTITLEMENT TO INDEMNITY What must an insured prove? 18.73 To prove its entitlement to indemnity under a liability insurance contract, an insured must prove: the circumstances and amount of the third party claimant’s loss; its liability to the third party for its loss; the terms of the insurance contract; and that the insurance contract responds to its liability to the third party.69
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Proof of liability where the insurer is bound by the outcome of an action or the judgment or award is on the merits 18.74 Proving its liability to a third party is straightforward if its liability insurer participated or involved itself in the lead-up to a judgment, arbitration award or settlement. In these circumstances, the insurer is bound by the outcome of the proceedings because it: was a party to the proceedings (usually a third party); or conducted the insured’s defence of the proceedings or was involved in settling the proceedings, in which case it will be regarded as a ‘privy’ of the insured.70
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[page 344] 18.75 Even if they did not participate or involve themselves in the lead-up to a judgment or award, most insurers will accept a judgment or award against their insured on the merits as proof of the insured’s legal liability to the third party. In any event, it is arguable that: an insurer is bound by a judgment or award on the merits if it declined or refused to defend the action on behalf of the insured after being informed of it;71 or contesting a judgment or award on the merits is an abuse of process.72
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Proof of liability in other circumstances 18.76 A liability insurer is less likely to readily accept a consent or ‘flawed’ judgment or arbitration award or a settlement as proof of the insured’s legal liability to the third party in circumstances where it did not participate or involve itself in the lead-up to a judgment, award or settlement. For the purpose of this discussion, a judgment or award is ‘flawed’ if:
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the insured did not properly defend the third party claim in a material way;73 or it is by default, pending appeal,74 or liable to be set aside, for example for fraud or collusion.75
18.77 A ‘flawed’ judgment or award or a settlement of a third party claim establish that the insured suffered a loss.76 Do they establish an insured’s legal liability to a third party? There are two lines of authority, both focusing on the meaning of the words ‘legal liability’ in the insuring clause. [page 345]
The English line of authority 18.78 The leading English case (with a pedigree77) is AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd,78 in which the Court of Appeal held that the words ‘legal liability’ in the insuring clause refer to an ‘actual’ legal liability. The adjudication of liability by a court or an arbitrator and a settlement are each evidence of an insured’s ‘actual’ legal liability to a third party, but are not determinative of that issue as between insurer and insured. Clarke LJ put it this way (at [17]): In the event of dispute the existence of liability has to be established to the satisfaction of the insurer, or, failing that, by the judge or arbitrator who has jurisdiction to decide such a dispute. It is not, therefore, necessarily sufficient for the insured to show that he has been held liable to a claimant by some court or tribunal or that he has agreed to settle with him. In practice the fact that this has occurred may cause or persuade the insurer to pay, but, if it does not, the insured must prove that he was actually liable. Under English law the ultimate arbiter of whether someone is liable, if insured and insurer cannot agree, is the tribunal which has to resolve their disputes (or any relevant appeal body). It may hold that there was in fact no actual liability and that an insured who thought, or another tribunal which decided, that there was, liability was in error either on the facts or the law or both.
The Australian line of authority 18.79
An adjudication by a court or an arbitrator on the merits may
bind an insurer as a matter of construction of the: insuring clause, even if the insurer did not participate or involve itself in the lead-up to the judgment or award;79 words ‘legally liable’ in the insuring clause. In QBE Insurance Ltd v Nguyen,80 Doyle CJ said (at [55]) that the ‘ordinary and natural meaning’ of the words ‘legally liable’ in the insuring clause refer to an adjudication of liability by a court or an arbitrator, including under a default judgment. The weakness in this approach is that it prevents an insurer disputing that an insured is ‘legally liable’ to a third party where the liability is established by a ‘flawed’ judgment in circumstances where there was never any prospect of the insured being held liable on the merits. In this
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[page 346] regard, it is possible to imagine circumstances in which an insurer will not be protected by the policy terms or the insured’s duty of utmost good faith. For example, an insured might choose not to defend a legal action if it cannot afford a defence. If the insured is in this financial predicament, it is likely the insured will not be in breach of its duty of utmost good faith by choosing not to defend the action. But why should that effectively bind the insurer? 18.80 If: an insurer wrongly repudiates its liability to indemnify the insured for a third party claim; and the insured subsequently settles the third party claim without the insurer’s consent, the insured can prove its ‘legal liability’ by proving the reasonableness of the settlement. It does not have to prove it would have been held liable to the third party regardless of the settlement.81 If, on the other hand: an insured settles a third party claim without the insurer’s consent;
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and the insurer has not made a decision about indemnifying the insured for its liability to the third party, it seems the insured can only prove its ‘legal liability’ by proving it would have been held liable to the third party regardless of the settlement.
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18.81 A settlement is reasonable if, judged objectively, it is for a reasonable amount having regard to the third party’s prospects of succeeding on liability and the quantum of the claim if the third party proves liability.82 The reasonableness of the amount of the settlement is judged by reference to the material available to the parties at the time of settlement, not material that became available subsequently or that might have been discovered at trial. Legal advice to the insured regarding settlement is admissible but not conclusive.83 The advice is not as important as the reasoning supporting it, as that will ordinarily reveal why it was thought reasonable to settle the claim as it was.84 [page 347] In effect, this requires the insured to: adduce evidence which indicates that the insured would have been held liable to the third party (regardless of the settlement, judgment or award); prove on a balance of probabilities that the third party had a ‘more than negligible or speculative chance’ of proving that the insured would have been held liable to the third party (regardless of the settlement, judgment or award).85 A settlement is not reasonable to the extent that commercial considerations increase the amount of settlement. The insured’s financial position, their desire to avoid bankruptcy and their concern about the potential costs of the litigation if the matter does not settle may explain why an insured settled for the amount they did. But those
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same considerations can lead to the conclusion that on an objective view, a settlement is excessive.86 18.82 Hennessey Glass & Aluminium Systems Pty Ltd v Eagle Star Trustees Ltd87 concerned the owner of a city building who engaged a contractor to do work on the building. The contractor engaged Hennessey Glass, a glazing specialist, as a sub-contactor. The owner sued the contractor and Hennessey Glass when defective panes of glass installed by Hennessey Glass on the exterior of the building shattered and fell. Other claims related to the replacement of scratched panes, the cost of future detection and replacement of other defective panes, and the cost of erection of a canopy below to protect the passing public. The contractor claimed an indemnity from Hennessey Glass in respect of any liability it had to the owner pursuant to a contractual term which required Hennessey Glass to indemnify the contractor for the consequences of its breach of contract. During the trial, the owner’s claim against the contractor settled for close to $1 million plus costs. The trial proceeded against Hennessy Glass and the trial judge ordered Hennessey Glass to: pay the owner around $40,000 less than the settlement amount; and indemnify the contractor for the settlement amount. On appeal, Derrington J said the contractor’s claim for indemnity against Hennessey Glass would succeed in full if the contractor proved
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[page 348] the settlement was reasonable and genuine88 even though the contractor’s actual liability to the owner but for the settlement was around $40,000 less than the settlement amount.
Common ground 18.83
It is common ground as between the English and Australian
lines of authority that a judgment, award or settlement does not relieve an insured from proving policy issues not covered by the judgment, award or settlement. For example, a judgment might prevent the insured from disputing that the insured is legally liable to the third party (the Australian line of authority) or be evidence of the insured’s liability to the third party (the English line of authority), but it leaves open other policy issues, such as whether the policy trigger occurred during the period of insurance, whether the liability incurred in connection with the ‘Business’, whether the injury or damage occurred as a result of an ‘Occurrence’ and so on.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
12. 13. 14. 15. 16. 17.
Comment note following Burr v Commercial Travellers’ Mutual Accident Assurance Co (1946) 166 Am LR 462 at 478–9. Bartoline Ltd v Royal Sun Alliance Insurance Plc [2006] EWHC 3598 (QB); [2008] Env LR 1 at [110] (Hegarty J). West Wake Price & Co v Ching [1957] 1 WLR 45 at 49 (Devlin J). Clayton v Mutual Community General Insurance Pty Ltd [1995] SASC 5080; (1995) 8 ANZ Ins Cas 61-263 at [5]–[17] (King CJ). Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059 (Ipp J). WR Berkley Insurance (Europe) Ltd v Teal Assurance Company Ltd [2017] EWCA Civ 25 at [4] (Sir Stephen Tomlinson). [2013] UKSC 57; CLC 390. Standard Life Assurance Ltd v ACE Europe Group [2012] EWHC 104 (Comm) at [189] (Eder J). Multiplex Constructions Pty Ltd v Irving; Fugen Holdings Pty Ltd v Irving [2004] NSWCA 346 at [60] (Ipp JA). [2003] NSWCA 331; (2003) 59 NSWLR 14. AMP Workers’ Compensation Services (NSW) Ltd v QBE Insurance Ltd [2001] NSWCA 267; (2001) 53 NSWLR 35 at [9] (Handley JA); Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212 at [126] (Emmett JA and Ball J). (1837) 6 Adolphus and Ellis 75; 112 ER 29. Hall Bros Steamship Co Ltd v Young [1939] 1 KB 748 at 756 (Sir Wilfred Greene MR). Bartoline Ltd v Royal Sun Alliance Insurance Plc (see fn 2) at [108] (Hegarty J). Kyriackou v ACE Insurance Ltd [2013] VSCA 150 at [51]–[52] (Harper JA). Genders v GIO (NSW) [1959] HCA 30; (1959) 102 CLR 363 at [6]. There is equivalent legislation in each Australian state and territory. State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd [1969] HCA 59; (1969) 123 CLR 228 at [7] (Walsh J).
18. Lamb v Cotogno [1987] HCA 47; (1987) 164 CLR 1 at [15]. 19. Joyce v Australasian United Steam Navigation Company Ltd [1939] HCA 31; (1939) 62 CLR 160 (Latham CJ). 20. QBE Insurance Ltd v Nguyen [2008] SASC 138 at [36] (Doyle CJ). 21. Ohio Casualty Insurance Co v Bazzi Construction Co Inc 815 F 1146, United States Court of Appeals, 7th Circuit at [9]. 22. [1969] VR 885. 23. Dellavedova v HIH Casualty & General Insurance Ltd (1997) 9 ANZ Ins Cases 61-383 at 27,206 (Cooper J). 24. [2008] NSWCA 294. 25. Barisic v Devenport [1978] 2 NSWLR 111 at 140 (Samuels JA). 26. There is equivalent legislation in each Australian state and territory. 27. State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (see fn 17) at [28] (Barwick CJ). 28. Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235 at 75,642 (Kirby P). 29. State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (see fn 17) at [20] (Barwick CJ). 30. Byrne v People Resourcing (Qld) Pty Ltd [2014] QSC 269 (Carmody CJ). 31. Theiss Contractors Pty Ltd v Norcon Pty Ltd [2001] WASCA 364; (2001) 11 ANZ Ins Cas 61-509 at [17] (Steytler J). 32. Of course, the practical insurance aspects of this issue are far more complicated than that both prior to and after a loss. 33. There is equivalent legislation in each Australian state and territory. 34. Towry Law v Chubb Insurance [2008] NSWSC 1352 at [69]–[70] (McDougall J). 35. This is a variation of the clause the subject of FAI General Insurance Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; 204 CLR 641. 36. Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 82 (Bowen JA). 37. Triden Properties Ltd v Capita Financial Group Ltd (1996) 12 BCL 402 (Sheller JA). 38. In FAI General Insurance Ltd v Australian Hospital Care Pty Ltd (see fn 35), McHugh, Gummow and Hayne JJ said (at [23]) that a ‘claims made’ and ‘claims made and notified’ policy is better described as a ‘discovery’ policy because ‘the critical facts under the contract are the insured’s discovery of the making of a claim on it or its discovery (its “becom[ing] aware”) of an occurrence which may give rise to a claim. In the end, however, the application of labels to the contract may obscure more than it illuminates’. 39. Towry Law v Chubb Insurance (see fn 34) at [69]–[70] (McDougall J). 40. Ritchie v Woodward [2016] NSWSC 1715 at [568] (Emmett AJA). 41. Pech v Tilgals (1994) 94 ATC 4206; 28 ALJR 197. 42. Usually the date the insured first took out ‘claims made’ or ‘claims made and notified’ cover with that insurer. 43. Instead of issuing an insured with a loyalty card, an insurer includes a ‘continuity clause’ in its policy, which rewards an insured for its loyalty in renewing its policy with the same
44. 45. 46. 47. 48. 49. 50. 51. 52. 53.
54.
55. 56. 57. 58. 59.
60. 61. 62. 63. 64. 65. 66. 67.
insurer. [2008] EWCA Civ 1206; [2009] 1 Lloyd’s Rep 8. [2004] EWHC 1799 (Comm) at [13]. [2001] HCA 38; (2001) 204 CLR 641. It is in substantially the same terms as cl 41 of the Draft Insurance Contracts Bill 1982 appended to the ALRC Report No 20. Guild Insurance Ltd v Hepburn [2014] NSWCA 400 at [23] (Macfarlan JA); Gosford City Council v GIO General Ltd [2003] NSWCA 34; (2003) 12 ANZ Ins Cas 61-566. [1997] HCA 53; (1997) 191 CLR 85. [2013] EWHC 18 (Ch). FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89 at 93 (Gleeson CJ), 96 (Kirby P); 7 ANZ Ins Cas 61-164. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999) 153 FLR 448; 10 ANZ Ins Cases 61-445 at [10]–[12] (Derrington J). Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-315; BC9600797; HLB Kidsons v Lloyd’s Underwriters subscribing to Lloyd’s policy No 621/PK1D00101 [2007] EWHC 1951 (Comm); 1 All ER (Comm) 769. Antico v CE Heath Casualty and General Insurance Ltd (1996) 38 NSWLR 681 at 712 (Powell JA), 699 and 702–3 (Kirby P, suggesting a lesser threshold); (1996) 9 ANZ Ins Cas 61-304; HLB Kidsons v Lloyd’s Underwriters subscribing to Lloyd’s policy No 621/PK1D00101 [2008] EWCA Civ 1206 [2009]; 1 Lloyd’s Rep 8at [74] (Gloster J). Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd [2008] EWHC 83 (TCC) at [99(h)] (Akenhead J). Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd (see fn 55) at [99(a)] (Akenhead) J. [2008] EWCA Civ 1206; [2009] 1 Lloyd’s Rep 8. [2013] EWHC 18 (Ch); LL Rep IR 534. In the course of dismissing an appeal on costs and a cross appeal on the decision not to grant a declaration, Davis LJ said Rose J set out the facts ‘fully and with exemplary clarity’: European Risk Insurance Company HF v McManus (t/a McManus Seddon Runhams (A Firm) [2013] EWCA Civ 1545 at [3]. HLB Kidsons v Lloyds Underwriters subscribing to Lloyd’s policy No 621/PK1D00101 (see fn 54) at [78] (Gloster J). Kajima UK Engineering Ltd v The Underwriter Insurance Company Ltd (see fn 56) at [99(f)] (Akenhead J). Fawcett v BHP By-Products Pty Ltd [1960] HCA 59; (1960) 104 CLR 80 at [6] (Menzies J). A difficult section to construe, being a double negative in the passive voice. Government Insurance Office of NSW v RJ Green & Lloyd Pty Ltd [1996] HCA 6; (1966) 114 CLR 437 at [13] (Barwick CJ). Simpler to construe than s 3(7), but still drafted in the negative and in the passive voice. [1987] HCA 49; (1987) 163 CLR 500. [2004] HCA 24; (2004) 218 CLR 89.
68. Motor Vehicle Insurance Trust v Scarborough Bus Service Pty Ltd [1968] WAR 10 at 15 (Negus J). 69. Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance [2017] NSWSC 259 at [118] (Hammerschlag J). 70. Australian Associated Motor Insurers Ltd v NRMA Insurance Ltd [2002] FCA 1061 at [74] (Conti J); HIH Claims Support Ltd v Insurance Australia Ltd [2009] VSC 434; (2009) 15 ANZ Insurance Cases 61-824 at [44] (Hollingworth J); CE Heath Casualty & General Insurance Ltd v Pyramid Building Society (in liquidation) [1997] 2 VR 256 at 293–4 (Phillips JA). 71. Jeans v Bruce [2004] NSWSC 539 at [319]–[321] (Einstein J). 72. QBE Insurance (Australia) Ltd v Lois Nominees Pty Ltd [2012] WASCA 186 at [41]–[45] (McLure P), [110]–[115] (Newnes JA), [202]–[204] (Murphy JA). 73. Skandia International Corp v NRG Victory Reinsurance Ltd [1998] EWCA Civ 467 (Potter LJ). 74. Lumbermens Mutual Casualty Company v Bovis Lend Lease Ltd [2005] 1 Lloyd’s Rep 494 at [43] (Coleman J); Skandia International Corp v NRG Victory Reinsurance Ltd (see fn 74) (Potter LJ). 75. Cheltenham & Gloucester Plc v Royal & Sun Alliance Insurance Co Plc [2000] ScotCS 254 at [9] (Lord Carloway); Skandia International Corp v NRG Victory Reinsurance Ltd (see fn 74) (Potter LJ). 76. AMP Workers’ Compensation Services (NSW) Ltd v QBE Insurance Ltd [2001] NSWCA 267; (2001) 53 NSWLR 35 at [9] (Handley JA); Chubb Insurance Company of Australia Ltd v Moore (see fn 11) at [126] (Emmett JA and Ball J). 77. Enterprise Oil v Strand Insurance Co Ltd [2007] Lloyd’s Rep IR 186 at [65] and [72] (Aiken J); Omega Proteins v Aspen Insurance UK Ltd [2010] EWHC 2280 (Comm); Lumberman’s Mutual Casualty Co v Bovis Lend Lease Ltd (see fn 75) (Colman J); AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd [2013] EWHC 349 (Comm) at [39] (Flaux J). 78. [2013] EWCA Civ 1660 at [16]–[23] (Clarke LJ). Also, see AstraZeneca Insurance Company Ltd v XL Insurance (Bermuda) Ltd (see fn 78) at [39] (Flaux J). 79. QBE Insurance (Australia) Ltd v Lois Nominees Pty Ltd [2012] WASCA 186 at [23] (McLure P). 80. [2008] SASC 138; (2008) 100 SASR 560. See also at [54]–[59] (Doyle CJ), [112] and [128] (Gray J), [185] (Layton J). 81. Zurich Australian Insurance Ltd v GIO General Ltd [2011] NSWCA 47 at [58] (Giles JA); Weir Services Australia Pty Ltd v AXA Corporate Solutions Assurance (see fn 70) at [120]–[122] (Hammerschlag J). 82. AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [120]. 83. McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2001] QSC 388 at [53] (Chesterman J). 84. Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603 at [129] (Hayne J); AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [131]. 85. By analogy with the ‘loss of a chance’ cases, see Sellars v Adelaide Petroleum NL [1994]
HCA 4; (1994) 179 CLR 332 at [39] (Mason CJ, Dawson, Toohey and Gaudron JJ). 86. McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (see fn 83) at [63] (Chesterman J); AMP Financial Planning Pty Ltd v CGU Insurance Ltd [2005] FCAFC 185 at [133]. 87. [1996] QCA 529. 88. The requirement that the settlement be genuine arises out of the duty of utmost good faith owed by insured to insurer: ICA s 13; Vero Insurance v Baycorp Advantage [2004] NSWCA 390 at [68] (Tobias JA).
[page 349]
Chapter 19 SOME COMMON POLICY TERMS The gambling known as business looks with austere disfavor upon the business known as gambling.1
INTRODUCTION This chapter discusses some common terms found in general insurance contracts under the following headings: some common conditions; some common exclusions; some common causal connectors; and other common policy terms. Within each section, the terms are listed in alphabetical order. The construction suggested for these terms may differ from that discussed below, depending on their precise wording and the context in which they appear. At common law, the consequences to an insured of not complying with or breaching a term of an insurance contract or of the relevant circumstances falling within the scope of an exclusion can be drastic. Sections 13, 14 and 54 of the Insurance Contracts Act 1984 (Cth) (ICA) limit the common law right of an insurer to refuse indemnity in these circumstances, as does the common law duty of utmost good faith. The following terms should be read with this in mind.
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SOME COMMON CONDITIONS
Aggravation of risk clause This insurance shall cease to be in force if there is any material alteration to the Premises or any material change in the facts stated in the Proposal [page 350] Form or other facts supplied to the Insurer unless the Insurer agrees in writing to continue the insurance. 19.1 The terms of this condition reflect the common law position.2 It is intended to protect an insurer against a significant change in the facts during the period of insurance from the facts it understood formed the basis on which it accepted the risk. 19.2 Ansari v New India Assurance Ltd3 concerned a fire at Mr Ansari’s commercial premises. In his insurance proposal, Mr Ansari correctly said the premises were fitted with an automatic sprinkler system. At the time of the fire, the system was not turned on. The Court of Appeal concluded (at [50]) that as Mr Ansari had not informed the insurer during the insurance period and before the fire that the system had been turned off indefinitely and was no longer providing the protection that the statement in the proposal form indicated, the insurer was entitled to decline the claim on the basis of the ‘Aggravation of risk’ clause. Moore-Bick LJ said (at [41] and [45]) that: ‘material change’ in this type of clause refers to ‘alterations or changes in facts of a kind that take the risk outside that which was in the reasonable contemplation of the parties at the time the policy was issued’; and ‘material’ in this context is a much more demanding threshold than ‘material’ in the context of an insured’s duty of pre-contractual disclosure. The central issue is the level of abstraction at which the condition
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operates. At a high level of abstraction (risk of fire damage) there was no relevant change in the risk. At a lower level of abstraction there was a relevant change in the risk if the issue was the difference between premises continuously protected by an operating automatic sprinkler system and premises that would not be protected by an operating automatic sprinkler system for the foreseeable future.
‘Duty to co-operate’ condition You must give Us any information and assistance we require to investigate and finalise your claim. 19.3
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This condition requires an insured to assist the insurer with: investigating a claim; pursuing a subrogation claim in the name of the insured against a third party; [page 351]
■defending a third party claim against the insured (in the case of
liability insurance); and settling a claim by or against the insured. The condition is probably commensurate with what is required of an insured by the duty of utmost good faith.
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19.4
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An insured will be in breach of the condition if: they fail to co-operate with the insurer when reasonably asked to do so; and the failure is substantial and material.4
‘Compliance with law’ condition You must comply with all laws and the requirements of government and statutory authorities. 19.5
Subject to context, this condition arguably requires an insured to
comply with legislation, not just to take reasonable care to do so.5 ‘Reasonable care’ will only come into it if a conviction on the particular legislative requirement depends on the insured failing to take reasonable care.6 19.6 Some statutes prohibit an insurer from relying on a conviction under it for the purpose of proving a breach of this condition.7
Left unattended 19.7
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Depending on context (which is everything), in relation to: a car, it means: … that there must be someone able to keep it under observation, that is, in a position to observe any attempt by anyone to interfere with it, and who is so placed as to have a reasonable prospect of preventing any unauthorised interference with it …8; and
■premises, it is ‘broadly akin to “left unoccupied”’.9 [page 352]
‘No admission without consent’ condition You shall not, without Our prior written consent, make any admission, offer, promise or payment in connection with any occurrence or claim. 19.8 This condition is intended to avoid an insured prejudicing an insurer’s subrogated claim against a third party or defence of a third party claim against the insured, particularly where it might be tempting for the insured to do so (for example, where the third party is a relative or friend of the insured or where there is a close commercial relationship between the insured and the third party). 19.9 Depending on the policy wording, an admission of fault by an insured to a third party might not breach this condition, as it does not necessarily amount to an admission of liability to pay damages.10
19.10 An insured will not breach this condition if, without the insurer’s consent, they: plead guilty to a criminal offence arising out of the events which gave rise to the insured’s claim on the policy.11 An accused person is free to choose whether to plead guilty to a criminal charge. To interfere with that freedom of choice would be contrary to public policy and the public interest;12 or make a forensic admission, for example in the course of answering interrogatories or giving evidence in a hearing.13
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19.11 Notwithstanding the broad scope of the condition, an insurer’s freedom to withhold consent to a settlement which an insured wishes to make with a third party is limited by the insurer’s duty of utmost good faith, which requires it to act fairly and with due regard for the interests of the insured.14 19.12 The practical problems for an insured arising out of this type of condition led to the enactment of s 41 of the ICA.15 Section 41 provides for circumstances where an insured or a third party beneficiary (claimant) has made a claim on a policy and wants to settle a third party’s claim against them or make a payment or admission [page 353] in respect of such claim, but the insurer neglects or refuses to consent to the claimant proceeding in that fashion. Without more, the claimant would be in breach of this condition if they settled the third party’s claim or made an admission or payment in respect of it. A claimant who has made a claim on a liability policy can, at any time, give notice to an insurer requiring it to inform the claimant in writing whether the insurer admits that the policy responds to the claim and, if it does so admit, that the insurer proposes to conduct, on behalf of the claimant, the negotiations and any legal proceedings in respect of the claim: s 41(2).
If the insurer does not, within a reasonable time, inform the claimant that it admits that the policy responds to the claim and that the insurer proposes to conduct, on behalf of the claimant, the negotiations and any legal proceedings in respect of the claim, the insurer may not refuse payment of the claim and cannot reduce the amount payable in respect of the claim just because the insured has breached the condition: s 41(3).
‘Prompt notification’ condition Notice in writing shall be given immediately/forthwith/as soon as possible/as soon as practicable to the Insurer of an occurrence or circumstances in respect of which liability under the policy might arise. 19.13 An insurer will usually want to investigate a claim, or circumstances that might give rise to a claim, against the insured as soon as possible so that it can take steps to avoid or limit any insured loss.16 This condition is intended to assist the insurer in that regard. 19.14 The condition requires notice of the happening of the described events to be given to the insurer (not necessarily by an insured) as soon as reasonably possible after they happen. How long that is will depend on ‘factors subjective to the insured’, including when the insured became aware of the described events. 19.15 The phrase ‘circumstances in respect of which liability under the policy might arise’ refers to circumstances that might give rise to ‘a real as opposed to a fanciful risk of the underwriters having to indemnify the assured’.17 The test is objective. That the insured thinks ‘a claim [might] not be made, or even is uncertain, or does not know that the particular accident is covered by the policy’ is irrelevant.18 [page 354]
‘Reasonable precautions’ condition
The Insured shall take all reasonable precautions to prevent bodily injury or damage to property. 19.16 This condition is intended to encourage an insured to take steps to avoid or reduce the risk of an insured loss. Its meaning is well settled.19 It operates in the same way in first party and liability insurance.20 19.17 The word ‘reasonable’ in the condition means reasonable as between the insurer and the insured (rather than as between the insured and a third party) having regard to the commercial purpose of the insurance, which in broad terms is to insure against the insured’s liability for negligence.21 An insured will not be in breach of the term by simply being negligent. To be in breach, the insured: … must be at least reckless, that is to say, made with actual recognition by the insured himself that a danger exists, and not caring whether or not it is averted.22
The test is subjective, not objective.23 19.18 The duty to take precautions is the personal duty of the insured, so an insured will not breach the condition if it took proper precautions in the selection and instruction of its employees and it was its employees alone that did not take the required precautions.24
SOME COMMON EXCLUSIONS ‘Advice given for a fee’ exclusion This policy does not indemnify the Insured against any liability for advice given for a fee. 19.19 This exclusion applies if, in all the circumstances (including, if it be the case, the raising of an invoice), the advice: was specifically and separately charged for; or ‘given “for a fee” … [was] a significant part of a package of services for the whole of which a fee is charged’.25
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[page 355]
‘Assumed liability’ exclusion This policy does not indemnify the Insured against any liability assumed by contract unless such liability would have attached to the Insured notwithstanding such contract. 19.20 This exclusion is intended to avoid coverage to the extent that it arises out of an insured expressly promising a third party that it will: perform its contractual obligations at a higher level than the general law would impose on it;26 or indemnify it irrespective of fault on the insured’s part.27 In broad terms, it reflects the insurer’s intention to cover an insured for a liability to a third party arising from the insured’s negligence, but not for the insured’s liability for breach of a contractual promise not arising from the insured’s negligence.
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19.21 The exclusion does not apply to the extent that an insured’s liability arises from an implied term of a contract or a duty of care imposed by law as an ordinary legal incident of the relationship created by the contract.28 So, for example, the exclusion will not apply to a bailor’s liability to a bailee for damages where the bailor’s liability arises simply because of the bailment, rather than because of an express clause in the bailment agreement imposing a higher duty on the bailee than imposed by the general law.
‘Compulsory insurance’ exclusion This policy does not indemnify the Insured against any liability that the Insured was required by any law in force at the date on which the event giving rise to the liability to have indemnity under another policy of insurance. or
This policy does not indemnify the Insured against any
liability arising out of the use of a vehicle owned by the Insured in respect of which insurance is required by virtue of any legislation relating to vehicles. 19.22 Unless someone has made a mistake, these exclusions invariably appear, in one form or another, in a general liability policy. [page 356] 19.23 The first exclusion is intended, amongst other things, to exclude risks that ought to be covered by an insured’s compulsory employer’s indemnity insurance policy. 19.24 Both exclusions are intended to exclude risks that ought to be covered by an insured’s compulsory motor vehicle third party personal injury insurance, such as that required by the Motor Vehicle (Third Party Insurance) Act 1943 (WA).29 It only applies if it is the insured who is required by law to insure the vehicle. 19.25 Section 45(1) of the ICA allows this exclusion for ‘other insurance’, as it is insurance the insured is required by law to have.
‘Defective design’ exclusion This policy does not indemnify the Insured in respect of a liability caused by or arising out of any defective design or error in formula or in specification of any of the Products. 19.26 The design of a product and its construction are distinct matters. The design of a product is the conception of the product as manufactured.30 It is ‘a plan or a scheme conceived in the mind of something to be done, the preliminary conception of an idea that is to be carried into effect by action’.31 The ‘design’ contemplates a situation in which elements of shape, configuration or arrangement are important, not incidental.32 The plans and specifications reflect the design.33
19.27 In Pentagon Construction (1969) Co Ltd v United States Fidelity & Guaranty Co,34 Robertson J said the word ‘design’ in a contractor’s all-risk policy expressed a concept of the finished product of the work to be done under the contract and that concept found its expression in the plans and specifications. Detailed instructions about how to carry out the construction were not part of the design of the task. Consequently, the lack of instructions in relation to the order in which welding and testing of the tank were to be done did not constitute faulty or improper design. [page 357] 19.28 A design: ‘is defective if it is not as adequate for the purposes as art or skill can make it’;35 can be defective even if the designer was not negligent.36
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19.29 Sometimes a contract will use the word ‘faulty’ instead of ‘defective’. There is no distinction between them.37
‘Deliberate acts’ exclusion This policy does not indemnify You for any deliberately or wilfully caused damage to insured property by You, Your family or anyone:
■You live with; ■invited into Your home by anyone living in your home; ■with Your consent; or ■entitled to benefit under the policy. 19.30 This exclusion is intended to protect the interests of an insurer by preventing an innocent insured from recovering under a first party insurance contract for losses deliberately caused by someone close to them.
It:
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the common law insofar as it excludes cover for loss suffered by an insured as a result of that insured deliberately or recklessly bringing about the loss;38 and extends beyond the common law position insofar as it also prevents an innocent insured from recovering under a first party insurance contract for losses deliberately or wilfully caused by a range of persons, including co-insureds (regardless of whether the policy is joint or composite). If a person with a limited interest in a first party policy (for example, a mortgagee) wants to avoid being left with no cover because of such a deliberate act, it should obtain an endorsement to the policy that protects its interests in that regard, or take out its own insurance policy.39
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[page 358] 19.31 If an insured is insane at the time he takes the steps that bring about the damage, the exclusion will not apply because he will not be regarded as having deliberately or wilfully brought about the damage.40
‘Driving without a licence’ exclusion You are not insured under sections 1 and 2 of this Policy while the Vehicle is being driven, towed, operated by or in the charge of a person who did not have a licence required by law, unless the Insured did not know and could not reasonably have known, that the driver did not have the required licence. 19.32 The intent of the exclusion is clear. If a driver did not have a driving licence at all at the time of a loss and the insured: knew the driver was driving the vehicle; and knew or ought reasonably to have known that the driver did not have the required licence,
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the insured is not covered under sections 1 and 2 of the Policy (first party and liability insurance respectively). 19.33 Does the exclusion operate if the driver had a licence but was not complying with the conditions of the licence at the time of the loss? A licence ‘is an authority to do something which would otherwise be wrongful or illegal or inoperative’.41 State Insurance General Manager v Meekings-Stewart42 concerned an accident that occurred when the insured vehicle was being driven by the insured’s 17-year-old daughter. Section 37(1) of the Transport (Vehicle and Driver Registration and Licensing) Act 1986 (NZ) (Transport Act) provided that: [n]o person shall drive a motor vehicle in any road unless that person is the holder of a driver’s licence for the time being in force which authorises that person to drive a motor vehicle of that class on a road and that person is driving in accordance with the conditions of the licence’. Regulation 31(1)(c) of the Transport (Drivers Licensing) Regulations 1987 (NZ) provided that the holder of a restricted licence must not drive ‘while there is any passenger in that vehicle who is not a dependant of that holder, unless the holder is accompanied in the vehicle by a person who … (ii) has attained the age of 20 years …
There was a breach of reg 31(1)(c) in that at the time of the accident there was a passenger who was not a dependant of the driver and she was not accompanied by a person of 20 years or over in the vehicle. General exception 1(b) of the insurance policy provided that the insurer shall not [page 359] be liable in respect of an accident if the driver is not the holder of a motor driver’s licence which is in full force and effect under the Transport Act. The Court of Appeal of New Zealand said (at 77,639) that s 37: … distinguishes between a licence for the time being in force and driving in accordance with the conditions of the licence. If the driving is not in accordance with the conditions the licence does not authorise it, but the licence itself remains in force.
In the circumstances, depending on the wording of the exclusion, it
might not apply if the driver had a licence but was not complying with the conditions of the licence at the time of the loss.
‘Dishonesty’ exclusion This policy does not indemnify the Insured against a claim that arises directly or indirectly from a dishonest or fraudulent act or omission of that insured. 19.34 In Barlow Clowes International Ltd (in liq) v Eurotrust International Ltd,43 the Privy Council said: … [a]lthough a dishonest state of mind is a subjective mental state, the standard by which the law determines whether it is dishonest is objective. If by ordinary standards a defendant’s mental state would be characterised as dishonest, it is irrelevant that the defendant judges by different standards.
19.35 In McCarthy v St Paul International Insurance Co Ltd,44 Kiefel J described dishonesty in the following terms: [33] MDRN submitted that dishonest conduct … must be deliberate in the sense that there was an intention on the part of Mr Blackadder to deceive. Knowing that statements were false and might deceive, but being reckless or careless about whether they might have that effect was not enough. So much may be accepted. … [34] A conclusion that something is said dishonestly requires reference to the state of the speaker’s mind. A conclusion of dishonesty cannot be reached if they believe in the truth of the statement … A person is deceitful if they know or believe that that which they say is false … Deceit of course involves dishonesty. Dishonesty is assessed by reference to the standard of ordinary, honest persons and is not a term of art … It is not however necessary that the person making the false statement understood it to be dishonest by that standard. … it is incongruous to ask whether a person accused of dishonesty appreciated that to be the case. Ordinary honest persons determine whether a person’s act is dishonest by reference to that person’s knowledge or belief as to some fact relevant to the act in question or
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[page 360] the intention with which it was done. They do not enquire whether the accused must have realised the act was dishonest. The ordinary person would consider it to be dishonest to assert as true something which is known to be false. (Citations omitted)
‘Efficacy’ exclusion This policy does not indemnify the Insured for liability for personal injury or damage to property caused by or arising out of any failure of products sold or supplied by you to meet the level of performance, quality, fitness or durability warranted or represented by you expressly or impliedly. 19.36 Selected Seeds Pty Ltd v QBEMM Pty Ltd45 is the leading case on the operation of an efficacy exclusion. In that case, R and J Shrimp purchased seed represented to be Jarrah grass seed. Jarrah grass is highquality stock feed. A merchant originally sold the seed to Selected Seeds Pty Ltd (a seed and grain merchant). It then passed through a number of hands until it reached the Shrimps, who purchased it from Landmark Operations Pty Ltd. The Shrimps planted the seed but it grew Summer grass. Summer grass is low-quality stock feed. It is regarded as a weed when present in commercial hay and seed crops. The Shrimps sued Landmark, amongst other things, for the damage to their land caused by planting the Summer grass seed; in particular, for the cost of eradicating the Summer grass and the loss of use of their land by reason of the Summer grass. Selected Seeds was joined into the litigation. QBEMM refused to indemnify Selected Seeds for the claim against it, partly in reliance on an efficacy exclusion in the following terms: This Policy does not cover any liability arising directly or indirectly from or caused by, contributed to by or arising from: a. the failure of any Product to germinate or grow or meet the level of growth or germination warranted or represented by the Insured; or
b. the failure of any Product to correctly fulfil its intended use or function and/or meet the level of performance, quality, fitness or durability warranted or represented by the Insured.
The High Court concluded (at [35] and [41]) that the efficacy exclusion did not apply because Selected Seeds’ liability to the Shrimps was ‘for what the seed did [damaged their land by contaminating it by weed]; not what it failed to achieve [produce Jarrah grass]’. 19.37 An efficacy exclusion will exclude from cover an insured’s liability for damage that it was the very purpose of the product to prevent, but which it did not prevent because the product malfunctioned. [page 361] So, for example, the exclusion will exclude cover for the insured’s liability for: property damage caused by a fire, if the fire spread to the property because of a malfunction in a fire alarm supplied by the insured; property stolen in a burglary, if the property was stolen because of a fault in a burglar alarm supplied by the insured; the loss of use of a product as a result of the unintended introduction of a contaminant, if the contaminant was introduced because of a malfunction in a filter supplied by the insured for the purpose of preventing the introduction of that contaminant; or a disease contracted by a patient if the disease was contracted because of a fault in a drug supplied by the insured for the purpose of preventing that disease.46
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19.38 An efficacy exclusion will not exclude from cover an insured’s liability for damage unrelated to the purpose for which the product was supplied, but that just happens to be caused by its malfunction.
Householder’s exclusion This policy does not cover your legal liability for a personal injury claim
made by any person: a) b)
who normally lives with you; or entitled to benefit under this policy.
19.39 By including a household exclusion in a house and contents policy, a liability insurer hopes to avoid the prospect of paying a fraudulent or exaggerated property damage or personal injury claim as a result of collusion between members of the same household.47
‘Insured v Insured’ exclusion This policy does not cover a Loss in connection with a Claim made by or on behalf of any Insured against another Insured. 19.40 In part, this exclusion is the ‘opposite’ of a ‘cross-liability clause’ (see below). It is intended to avoid coverage for claims: between those who might collude with each other to obtain an insurance payout; or the result of infighting amongst the insured.
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[page 362] The United States Court of Appeals, Ninth Circuit, explained the emergence of this type of exclusion in Biltmore Associates LLC v Twin City Fire Insurance Company: As shareholder’s derivative suits and class actions against directors and officers became more common, people began to demand that companies indemnify them against the risks of liability if they were to serve as directors and officers. Corporations accordingly bought liability insurance for their directors and officers to induce qualified people to serve … Insured versus insured exclusions are boilerplate in these and other kinds of liability policies … Directors and officers liability policies are colloquially called “D & O insurance.” The exclusion arose in D & O policies as a reaction to several lawsuits in the mid-1980s in which insured corporations sued their own directors to recoup operational losses caused by improvident or unauthorized actions … Such lawsuits created problems of moral hazard, collusion, and unintended expansion of coverage. The reasonable expectations of the parties were that they were protecting against claims by outsiders, not intracompany claims. … Because risks such as collusion and moral hazard are much greater for claims by one
insured against another insured on the same policy than for claims by strangers, liability policies typically exclude them from coverage. Allowing such claims would turn liability insurance into casualty insurance, because the company would be able to collect from the insurance company for its own mistakes, since it acts through its directors and officers.48
‘Mechanical breakdown’ exclusion This policy does not indemnify the Insured against damage to property directly or indirectly caused by mechanical breakdown. 19.41 ‘Mechanical breakdown’ is a functional or operational failure of a machine (the machine not operating properly or ceasing to work) for a reason internal to the machine itself, for example because of a mechanical defect of a moving or non-moving part or parts of the machine or depending on the context, a design error. A failure of a machine because it was not properly assembled is not mechanical breakdown.49
‘Property belonging to or in the insured’s custody, care or control’ exclusion in a liability policy This policy does not indemnify the Insured against any liability for damage to property belonging to or in the custody, care or control of the Insured or any member of his or her family ordinarily residing with the Insured or with whom the Insured ordinarily resides. 19.42 Property owned, leased, hired, borrowed, bailed to or held by an insured or a family member with whom the insured ordinarily lives will [page 363] fall within the scope of this exclusion. If an insured wishes to be covered
for damage to this class of property, they or others should take out first party insurance over the property.
‘Professional duty’ exclusion This policy does not indemnify the Insured against any liability arising out of the rendering of or failure to render professional advice or service by the Insured or error or omission connected therewith. 19.43 Most general liability policies contain this exclusion. If an insured wants cover for breach of a ‘professional duty’, they can take out professional indemnity insurance. Professional indemnity insurance, as a tailor-made variety of liability insurance, was probably first issued to lawyers and doctors because historically they were two of the three original professions (the other being professions related to the Church).50 As time went by, they were probably issued to anyone with a traditional university degree: dentists, engineers etc. Now they are issued to all manner of persons who have had some training or exercise some skill; for example, valuers and surveyors. 19.44 Whether a person is rendering ‘professional advice or service’ depends on: the insurance arrangement that has given rise to the claim, in particular whether the issue arises in the context of an insuring clause in a professional indemnity contract or an exclusion in a general liability contract; the nature of the business in the course of which the advice was given or the service provided; whether the person who gave the advice or provided the service was professionally qualified. If the person was not professionally qualified, it is unlikely they rendered a ‘professional advice or service’. By the same token, just because they were professionally qualified does not mean they performed the relevant action in a professional capacity. That is a factual question to be determined
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in the context of each case;51 the task the person was performing, in particular, whether the advice or service was of a ‘skilful character according to a discipline’ (perhaps the most important factor).
19.45 In Toomey v Scolaro’s Concrete Constructions Pty Ltd (No 5),52 the trial judge concluded that the professional duty exclusion did not apply because the relevant actions of a carpenter employed by the insured (a project manager) were not performed in a professional capacity. [page 364] Kenny J came to the same conclusion in the case of a project manager’s company officer who made an allegedly misleading and deceptive statutory declaration in support of a progress claim that included details of payments made to subcontractors.53 19.46 In Chubb Insurance Company of Australia Ltd v Robinson,54 Chubb insured Reed Constructions Australia Pty Ltd, a construction company, under a directors and officers insurance policy for its liability to third parties, subject to an exclusion in respect of loss occasioned by ‘any actual or alleged act or omission … in the rendering of, or actual or alleged failure to render any professional services to a third party’. Reed entered into a design and construct contract with 470 St Kilda Road Pty Ltd for the redevelopment of an office building and the construction of residential apartment building at 470 St Kilda Road, Melbourne. By the contract, Reed was required to verify its progress claims by one of its officers or employees swearing a statutory declaration in support of each claim. Reed made Progress Claim No 15, supported by a statutory declaration made by Reed’s Chief Operating Officer, Glenn Robinson. Reed subsequently went into liquidation. St Kilda sued Mr Robinson for negligence and misleading and deceptive conduct, on the basis that
by Progress Claim No 15, Reed had sought payments to which it was not lawfully entitled. Mr Robinson claimed indemnity from Chubb for any liability he might have to St Kilda. Chubb denied the claim on the basis that St Kilda’s claim fell within the professional services exclusion. The obvious purpose of the exclusion (at [115]) was: to exclude activities that are truly professional in nature, such as architectural design, engineering, surveying and quantity surveying. The clause was not intended to apply to the routine activities of Reed or of its executives. The provision of progress claims under the D&C Contract were routine activities and did not constitute the rendering of a professional service to St Kilda or to anyone else.
The Full Court dismissed the appeal, amongst other things, because: Chubb did not prove project management was a profession at the relevant time. the making of the statutory declaration and its submission to St Kilda did not constitute (at [163]):
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the rendering of any service to St Kilda …. Rather, those … were acts done … in the proper discharge of the contractual obligations owed by it to St Kilda [They] amounted to nothing more than the routine compilation of factual material in order to secure a contractual payment.
[page 365] 19.47 Simply passing on factual information does not fall within the activities anticipated by this exclusion, even if the person passing on the information holds professional qualifications.55 19.48 A manufacturer supplying an operating manual with a product is not providing professional services for the purpose of this exclusion. It is simply part of the service a manufacturer provides to the end user of the product.56
‘Terrorism’ exclusion This policy does not indemnify the Insured against any liability: (a) directly or indirectly caused by or arising out of or in connection
with an: i. Act of Terrorism; or ii. action taken to control, prevent or suppress or attempt to control, prevent or suppress an Act of Terrorism; or (b) for costs or expenses incurred in connection with taking action to control, prevent or suppress or attempt to control, prevent or suppress an Act of Terrorism. 19.49 This type of exclusion began to take root in insurance and reinsurance policies as a result of the 11 September 2001 terrorist attack on the World Trade Centre. The Commonwealth Government responded to that development with the scheme established by the Terrorism Insurance Act 2003 (Cth). In general terms, the Act provides that a ‘terrorism’ exclusion in an ‘eligible insurance contract’57 has no effect in relation to a loss or liability arising from a declared terrorist incident. An insurer can retain this risk or if it chooses, reinsure it with the Australian Reinsurance Pool Corporation (a statutory corporation established by the Act) or another reinsurer.
Trading liability exclusion This policy does not indemnify the Insured against any liability arising out of a trading liability incurred by the Insured. 19.50 In Sutherland Professional Funding v Bakewells,58 Hegarty QC discussed (at [148]) this exclusion in the context of a solicitor’s professional indemnity policy: For my part, I can see no answer to the proposition that it did amount to a “trading debt”. The practice of the law is a business as well as a profession.
[page 366] Though some might not care for the analogy, a solicitor sells his services just as a market trader sells the goods he displays on his stall. In the course of his practice, a solicitor will inevitably incur debts and liabilities of a business nature in order to enable him to pursue
and promote his professional activities. He will require offices, equipment, secretarial assistance and the like and may well require overdraft or loan facilities from his bank or other sources. In the ordinary course of events, it could hardly be said that his liability for rent, hiring charges or wages and salaries could be anything other than business debts and liabilities. The same would seem to apply with equal force to any debts and liabilities incurred in respect of financial accommodation provided by his bankers.
SOME COMMON CAUSAL CONNECTORS 19.51 Subject to the nature and purpose of the phrase and the context in which it appears, the following causal phrases have the meanings ascribed to them:59 ‘proximately caused by’60 refers to: ■ the ‘cause that is proximate in efficiency’;61 ■ the ‘real efficient cause’;62 ■ the effective, dominant, predominant or operative cause;63 or ■ the ‘“active, efficient cause” … which set in motion the train of events which brought about the damage’.64 ‘caused by’ and ‘directly caused by’ mean the same as ‘proximately caused by’; ‘arising out of’ involves some causal or consequential relationship. It does not require a direct or proximate relationship,65 but does require more than ‘the mere existence of connecting links’;66 ‘arises from’. Something ‘arises from’ a circumstance if it ‘originates in, springs from or has its foundation in that’ circumstance;67 ‘as a result of’. In Comcare v Martin,68 the High Court said:
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[page 367] an employee has suffered a disease “as a result of” administrative action if the administrative action is a cause in fact of the disease which the employee has suffered. The administrative action need not be the sole cause. … What is
necessary is that the taking of the administrative action is an event without which the employee’s ailment or aggravation would not have been a disease: it would not have been contributed to, to a significant degree, by the employee’s employment …
■‘brought about by’. In McCann v Switzerland Insurance69 (a case about the operation of a ‘dishonesty’ exclusion), Hayne J said (at [130]) that the phrase: … although redolent of causation, identifies a different kind of connection between the two elements. One of those elements (the liability) is ‘brought about by’ the other (a dishonest or fraudulent act or omission) if the latter is a component of the former. A liability is brought about by a dishonest or fraudulent act or omission only if the liability is one in which that dishonest or fraudulent act or omission could be a material fact in pleading the claim. It is not brought about by such an act or omission simply because there were dishonest or fraudulent acts or omissions committed at about the time of the events giving rise to liability or because those acts or omissions were committed in the course of some overall relationship between the insured and the claimant. …
■‘in connection with’ is ‘of wide import’.70 It requires a relationship
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between things, one of which is bound up, involved or having to do, with another.71 In most cases, the phrase does not have a causal connotation.72 For example, in Furness Shipbuilding Co Ltd v London and North Eastern Railway Co,73 it was held that a loss was ‘in connection with’ the rebuilding of a bridge even though the loss was caused by a porter negligently failing to close a train’s carriage door when it left the station; ‘relating to’ and the similar phrase ‘in relation to’74 require an ‘“association” which is “relevant” or “appropriate”’.75 These phrases are ‘wide enough to cover every conceivable connexion’;76 and [page 368]
■‘in respect of’ is difficult to define, but has ‘the widest possible
meaning of any expression intended to convey some connexion or relation between the two subject-matters to which the words
refer’.77 Nevertheless, an employer’s negligence in failing to provide a safe system of work is not a liability ‘in respect of’ a registered trailer if the trailer was merely present at the scene of the accident when it happened.78
SOME OTHER COMMON POLICY TERMS ‘Cross-liability’ clause For the purposes of this policy, ‘Insured’ shall be considered as applying to each person comprising the Insured in the same manner as if a separate policy had been issued to each of them. 19.52 A cross-liability clause in an insurance contract is intended to protect the interests of each co-insured by treating every obligation in it as if it were a composite obligation. In part, it is the ‘opposite’ of an ‘Insured v Insured’ exclusion (see above). Subject to the express terms of the insurance contract and the ICA, the clause protects the interests of each co-insured by requiring the parties to: treat the cover provided by the insurance contract as if the insurer had issued a separate insurance policy to each co-insured on the same terms and conditions (without increasing the insurer’s overall limit of liability); and read each clause of the contract distributively as if it only applies to the party seeking to recover under the contract.79 Accordingly, in the presence of a cross-liability clause, noncompliance or breach by a co-insured during the insurance period will not affect another co-insured’s coverage, and an exclusion will only be applied by its terms to the co-insured making the claim.
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Excess (deductible)
19.53 An excess (also known as ‘a deductible’) is the first part of any claim made by an insured on an insurance contract and is the insured’s responsibility. Subject to the policy wording, payment of an excess by the [page 369] insured is not a condition precedent to the insurer’s liability. It is simply that part of a claim an insurer is not responsible for.80 In effect, an insured is self-insured for that part of a loss that falls within the excess and for that part of a loss that exceeds the sum insured.81 19.54 Insurers include excesses in insurance contracts to avoid paying small claims and to limit the amount of premium charged for that type of policy. An excess keeps premium down because the insurer thereby avoids incurring the disproportionately high costs associated with handling claims that fall within the excess. Some insurers offer to reduce premium on a particular policy in return for an increase in the amount of the excess on that policy. An excess sometimes motivates insureds to take extra care to avoid losses, because they know that if a loss occurs they will have to bear the amount of the excess.
‘Non-vitiation’ (‘non-invalidation’) clause This insurance shall not be invalidated by any act or omission of an insured or any material increase in the risk of Damage You do not know about or which is beyond Your control, provided that upon becoming aware of it You will immediately give Us notice of it and pay any additional premium We require. 19.55 A non-vitiation (non-invalidation) clause is similar to a crossliability clause. Subject to its precise terms, it protects innocent co-
insureds by providing that a co-insured’s pre-contractual non-disclosure or misrepresentation or post-contractual failure to comply with a condition precedent or breach of warranty or condition that might otherwise have resulted in the policy being avoided for all co-insured’s (the ‘vitiating’ act or omission), will not avoid the policy for the innocent co-insureds.
Principal’s indemnity extension This policy covers a principal for its liability to a third party arising out of the insured’s performance of a contract made between the insured and the principal, but only to the extent the contract requires the insured to take out a principal’s extension and subject to the terms of this policy. 19.56 Contracts requiring delivery of services at a principal’s premises (for example, catering services delivered at a mine site) often require that the contractor take out this extension to a contractor’s liability policy. The extension typically: [page 370]
■covers the principal in respect of its vicarious liability to a third
party for the insured’s negligence in the performance of the service contract. This will not usually be of much assistance to a principal because broadly speaking a principal is not liable for the negligence of an independent contractor retained by it.82 Sometimes the extension will cover a principal in respect of its liability to a third party for its own negligent conduct; and limits cover to the scope of cover the contract requires the insured to take out. The extension makes a principal an insured under the contractor’s liability policy. Accordingly, the principal can claim directly against the contractor’s insurer for indemnity for a liability falling within the scope
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of the extension. The principal may choose to do that instead of claiming on its own liability insurance policy. If the principal has a choice as to which policy it claims on, the insurer behind the policy it claims on can claim a contribution towards its liability from the other insurer on double insurance principles on the basis that both insurers insure the same insured (the principal) against the same risk (the principal’s liability to a third party). See Chapter 29.
Repair, replace or reinstate We replace, reinstate or repair the part of Your Home that is damaged or destroyed as far as possible to its as-new condition or, at Our option, pay the cost for You to do so. 19.57 In this basis of settlement clause, subject to the policy terms: ‘replace’ means to ‘put back in place, to take the place of, succeed, be substituted for or provide substitution’;83 and ‘as new’ in relation to a house that has been destroyed does not mean that the replaced or reinstated house has to be ‘an exact replica in terms of its physical position on the site or dimensions. It has to be comparable to the original house as when new. So a house that was not of new condition or was materially smaller in size or did not offer comparable amenities, would not qualify’84.
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1. 2. 3. 4.
5.
6. 7.
Ambrose Bierce, The Devil’s Dictionary, 2015. Kausar v Eagle Star Insurance Co Ltd [2000] 2 Lloyd’s Rep IR 154 at 156 (Saville LJ). [2009] EWCA Civ 93 at [40]–[41]. Porter v Zurich Insurance Company [2009] EWHC 376 (QB) at [128]–[130] (Coulson J); Travellers Indemnity Co v Sumner Co (1960) 27 DLR (2d) 562 (NBSCA) at 565 (West JA); G Hilliker, Liability Insurance Law in Canada, 3rd ed, Butterworths, Toronto 2001, pp 41–2. Kim v Cole [2002] QCA 176 at [37], [40] and [41] (McPherson JA); Casino Show Committee v Norris (1984) 3 ANZ Insurance Cases 60-580 (Priestley JA). But see Buckley v Metal Mart Pty Ltd [2008] ACTSC 79 at [46]–[47] (Stone J). Dargham v Kovacevic [2011] NSWSC 2 at [125]–[126] (Hislop J). CGU Workers Compensation v Panoy Pty Ltd [2012] NTSC 26 at [27]–[28] (Mildren J); Booksan Pty Ltd v Wehbe, Elmir [2006] NSWCA 3; (2006) 14 ANZ Insurance Cases 61678 at [213] (Ipp JA).
8. Starfire Diamond Rings Ltd v Angel [1962] 2 Ll Rep 217 (Lord Denning MR). 9. Milton Furniture Ltd v Brit Insurance Ltd [2014] EWHC 965 (QB) at [144] (Jay J). 10. SIMU Mutual Insurance Association v Minson’s Ltd [1938] NZLR 829 at 838–9 (Myers J). 11. For example, a prosecution under occupational health and safety legislation. 12. Hartz v Ajax Insurance Company Ltd (1973) 3 DCR (NSW) 132 (Redapple DCJ); see also Booksan Pty Ltd v Wehbe (see fn 7) at [213] (Ipp JA). 13. Distillers Company Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1 at [15] (Menzies J). 14. Distillers Company Biochemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (see fn 13) at [42] (Stephen J). 15. Lofthouse v ACN 081 121 495 Pty Ltd [2003] VSC 253 at [38] (Hansen J); Australian Law Reform Commission, Insurance Contracts, Report 20, December 1982 at [233]– [235]. 16. Aspen Insurance UK Ltd v Pectel Ltd [2008] EWHC 2804 (Comm); [2009] Lloyd’s Rep IR 440; 2 All ER (Comm) 873 at [65] (Teare J). 17. Aspen Insurance UK Ltd v Pectel Ltd (see fn 16) at [9] (Teare J). 18. Bowling v Weinert [1978] 2 NSWLR 282 at 289–290 (Lee J). 19. Tilley v Lawless (2007) VSC 103 at [36]–[42] (Cavanough J). 20. Legal and General Insurance Australia Ltd v Eather (1986) 6 NSWLR 390; 4 ANZ Ins Cas 60-749. 21. VACC Insurance Ltd v BP Australia Ltd [1999] NSWCA 427 at [58] (Brownie AJA). 22. Fraser v BN Furman (Productions) Ltd [1967] 1 WLR 898 at 905–6 (Diplock LJ). The same test applies to a reasonable precautions condition in a property insurance policy: Sofi v Prudential Assurance Co Ltd [1993] 2 Lloyd’s Rep 559 at 565 (Lloyd LJ). 23. Brescia v QBE [2007] NSWSC 598; (2007) 14 ANZ Ins Cas 61-740 at [121] (Hammerschlag J). 24. Woolfall and Rimmer Ltd v Moyle [1942] 1 KB 66 at 74–5 (Lord Greene MR); Booksan Pty Ltd v Wehbe (see fn 7) at [188] (Ipp JA). 25. Transfield Services (Australia) v Hall; Hall v QBE Insurance (Australia) [2008] NSWCA 294 at [200] (Campbell JA). 26. Allstate Explorations NL v Blake Dawson Waldron (a firm) [2010] WASC 97 at [156] (Heenan J). 27. Matzat v The Gove Flying Club Inc [1996] NTSC 92 at [159]–[161] (Mildren J). 28. Zurich Australian Insurance Ltd v Regal Pearl Pty Ltd [2006] NSWCA 328 at [117]–[118] (Spigelman CJ); Allstate Explorations NL v Blake Dawson Waldron (a firm) (see fn 26) at [156] (Heenan J). The English position appears to be different, in that the issue appears to be what the insured’s liability would have been if it had not entered into a contract with the third party at all: Omega Proteins Ltd v Aspen Insurance UK Ltd [2010] EWHC 2280 (Comm) at [23] (Clarke J). 29. There is equivalent legislation in each Australian state and territory. 30. Bird Constructions v United States Fire Insurance Co (1985) 24 DLR (4th) 104 at 108 (Vancise JA).
31. Legal & General Assurance Society Ltd v Commonwealth of Australia (1985) 3 ANZ Ins Cas 60-621 at 78,805 (Ryan J quoting the Oxford Dictionary), in which the court held that an insured’s failure to follow a code resulted in a defect in design rather than a defect in performance. 32. Beavers v Westhaven Boatyard (1987) 4 ANZ Ins Cas 60-809 at 74,969 (Thorp J). 33. Bird Constructions v United States Fire Insurance Co (see fn 30) at 108 (Vancise JA). 34. [1978] 1 Lloyd’s Rep 93 at 97. 35. Chalmers Leask Underwriting Agencies v Mayne Nickless Ltd (1982) 2 ANZ Ins Cas 60463 at 77,581 (Hutley JA). 36. Manufacturers’ Mutual Insurance Ltd v Queensland Government Railways [1968] HCA 52; (1968) 118 CLR 314 at [8] (Barwick CJ, McTiernan, Kitto and Menzies JJ) at [5] (Windeyer J). 37. Manufacturers’ Mutual Insurance Ltd v Queensland Government Railways (see fn 36) at [8] (Barwick CJ, McTiernan, Kitto and Menzies JJ) at [5] (Windeyer J). 38. Britton v Royal Insurance Co (1866) 4 F & F 905 at 908; Patrick v Royal London Mutual Insurance Society Ltd [2007] Lloyd’s LR 85 at [16] (Tuckey LJ). 39. Secure Funding Pty Ltd v Insurance Australia Ltd [2010] FCA 1094 at [20] (Middleton J). 40. Porter v Zurich Insurance Company [2009] EWHC 376 (QB) at [23] and [109] (Coulson J). 41. Federal Commissioner of Taxation v United Aircraft Corporation (1943) 68 CLR 525 at 533 (Latham CJ). 42. (1992) 7 ANZ Ins Cas 61-127. 43. [2005] UKPC 37; [2006] 1 WLR 1476 at [10]. 44. [2007] FCAFC 28. 45. [2010] HCA 37; (2010) 242 CLR 336. 46. John Wyeth & Brothers Ltd v Cigna Insurance Company of Europe SA/NV [2001] EWCA Civ 175; [2001] Lloyd’s Rep IR 420. 47. United Farm Bureau Mutual Insurance Company v Hanley 360 NE 2d 247 (1977), 252 (Buchanan J); Bjork v State Farm Fire and Casualty Company (2007) 157 Cal App 4th 1. 48. 572 F 3d 663 (9th Cir 2009). 49. Triple Five Corp v Simcoe & Erie Group (1994) 159 AR 1; 29 CCLI (2d) 219 (QB) at [201]–[211] (Wilson J). 50. Commissioners of Inland Revenue v Maxse [1919] 1 KB 647 at 657 (Scrutton LJ). 51. GIO of New South Wales v City of Penrith [1999] NSWCA 42. 52. [2002] VSC 48; (2002) 12 ANZ Ins Cas 61-519. 53. 470 St Kilda Road Pty Ltd v Robinson [2013] FCA 1420. 54. [2016] FCAFC 17. 55. FAI General Insurance Co Ltd v Gold Coast City Council [1995] 2 Qd R 341; (1992) 7 ANZ Ins Cas 61-153 (a letter written in the name of the town clerk did not fall within the indemnifying clause of a professional indemnity policy because the letter simply provided information ascertained from council’s records). 56. Fitzpatrick v Job t/a Job’s Engineering [2007] WASCA 63; (2007) 14 ANZ Ins Cas 61731.
57. An ‘eligible insurance contract’ includes a range of first and third party liability insurances relating to the ownership of commercial property. 58. [2011] EWHC 2658 (QB). 59. PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Services [1995] HCA 36; (1995) 184 CLR 301 at [26] (Brennan CJ and Gaudron and McHugh JJ); Mentha, in the matter of Arrium Ltd (administrators appointed) [2016] FCA 1357 at [78] (Davies J). 60. Surprisingly, although ‘proximate cause’ is the default position in every insurance contract, it is rarely used in policy wordings. 61. Global Process Systems Inc v Berhad [2011] UKSC 5; 1 Lloyd’s Rep 560 at [19] (Lord Saville). 62. Global Process Systems Inc v Berhad (see fn 61) at [49] (Lord Mance). 63. Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd [2005] NSWCA 66; (2005) 13 ANZ Ins Cas 61-643 at [5] and [9] (Ipp JA). 64. Lasermax Engineering Pty Ltd v QBE Insurance (Australia) Ltd (see fn 63) at [115] (McColl JA). 65. Dickinson v Motor Vehicle Insurance Trust [1987] HCA 49; (1987) 163 CLR 500. 66. F & D Normoyle Pty Ltd v Transfield Pty Ltd [2005] NSWCA 193; (2005) 63 NSWLR 502 at [90] (Ipp JA). 67. Ritchie v Woodward [2016] NSWSC 1715 at [550] (Emmett AJA). 68. [2016] HCA 43 at [45]. 69. [2000] HCA 65; 203 CLR 579. 70. Brown v Rezitis [1970] HCA 56; (1970) 127 CLR 157 at [16] (Barwick CJ). 71. Horsell International Pty Ltd v Divetwo Pty Ltd [2013] NSWCA 368 at [169]–[178] (McColl JA); Lumley General Insurance Ltd v Port Phillip City Council [2013] VSCA 367 at [108]–[120] (Santamaria JA). 72. Selected Seeds Pty Ltd v QBEMM Pty Ltd [2009] QCA 286 at [22]; Drayton v Martin [1996] FCA 1504; (1996) 67 FCR 1 at [107] (Sackville J). 73. (1934) 50 TLR 257 at 258 (Lord Atkin). 74. BOS International (Australia) Ltd v Babcock & Brown International Pty Ltd [2011] NSWSC 1382 at [22] (Rein J). 75. PMT Partners Pty Ltd (In Liq) v Australian National Parks & Wildlife Service [1995] HCA 36; (1995) 184 CLR 301 at [65] (Toohey and Gummow JJ). 76. O’Grady v Northern Queensland Company Ltd [1990] HCA 16; (1990) 169 CLR 356 at [1] (Dawson J). 77. State Government Insurance Office (Qld) v Crittenden [1966] HCA 56; (1966) 117 CLR 412 at [4] (Taylor J), adopting the comments of Mann CJ in Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 at 111. 78. Technical Products Pty Ltd v SGIO (Qld) [1989] HCA 24; (1989) 167 CLR 45 at [7] (Brennan, Deane and Gaudron JJ). 79. Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd [2000] WASCA 408; (2000) 23 WAR 291 at [143]–[153] (Wheeler J). 80. Calliden Insurance Ltd v Chisholm [2009] NSWCA 398 at [13]–[14].
81. 82. 83. 84.
Lord Napier and Ettrick v Hunter [1993] AC 713. Sweeney v Boylan Nominees Pty Ltd [2006] HCA 19; (2006) 226 CLR 161. Chemainus Properties Ltd v Continental Insurance Co [1990] ILR 1-2574 at [40]. O’Loughlin v Tower Insurance Ltd [2013] NZHC 670 at [177] (Asher J).
[page 373]
PART 3 The Claim
[page 373]
Chapter 20 BROKEN PROMISES … the purpose of s 57 is to diminish the incidence of unreasonable delay on the part of insurers in meeting claims and to compensate the insured in the event such delay occurs.1
INTRODUCTION This chapter discusses: an insurer’s obligation to pay a claim within a reasonable time; an insured’s right to s 57 interest for late payment of a claim; an insured’s right to damages and other relief if an insurer wrongly denies, or delays, payment of a claim; an insured’s choices if an insurer repudiates a policy; and onus of proof.
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AN INSURER’S OBLIGATION TO PAY A CLAIM WITHIN A REASONABLE TIME In England 20.1 As mentioned in Chapter 14, in England, an insurer’s promise to indemnify is regarded as a promise to prevent an insured from suffering a loss as a result of an insured event occurring.2 Accordingly, an insurer breaches its promise the moment a loss occurs because it did not prevent the loss. That breach gives rise to the insurer’s secondary obligation to pay damages.
[page 374] On the basis that there is no such thing as a cause of action in damages for late payment of damages,3 the English courts have refused to award common law damages against an insurer for late payment of an insurance claim.4 A court might award an insured interest pursuant to statute for late payment, but not damages. For example, assume an insured’s home is damaged by fire and that by the insurer unreasonably delaying payment for the fire damage, the insured has to rent a house for six weeks longer than it would have had to do if the insurer had paid the claim promptly. Unless the insurance contract expressly covers the extra six weeks rent, the insured is not entitled to compensation for the extra rent because that would be allowing damages against an insurer for late payment of damages.
In Australia 20.2 In Australia, an insurer’s promise to indemnify is regarded as a promise to make good a loss suffered by an insured, by paying the amount of the loss or monies’ worth ‘in accordance with’ the terms of the contract.5 20.3 Subject to the terms of the policy, an insurer is obliged to acknowledge liability for, and pay a meritorious claim on a first party policy within a reasonable time of the insured making the claim and providing the insurer with information it reasonably requests for the purpose of considering the claim. The obligation arises out of the nature of an insurer’s promise to indemnify6 or out of its duty of utmost good faith.7 A number of cases suggest that this obligation is an implied term of an indemnity insurance contract.8 But why is it necessary to imply such a term if the insurer is already liable to: make good the loss; and pay the claim within a reasonable time by reason of the nature of the promise to indemnify or its duty of utmost good faith?
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[page 375] 20.4 If an insurer breaches its obligation to pay a claim within a reasonable time, it will be liable to pay the insured interest pursuant to s 57 of the Insurance Contracts Act 1984 (Cth) (ICA). It might also be liable to pay damages for the breach or for a breach of the insurer’s ICA-imposed duty of utmost good faith (an insurer is not liable to pay damages for a breach of its common law duty of utmost good faith).9 Damages will be recoverable if they fall within the rule in Hadley v Baxendale.10 Amongst other things, an insured that is a natural person may be entitled to damages for distress, pain, suffering or physical inconvenience caused by the insurer not paying a claim within a reasonable time. That is because one of the objects of an insurance contract is peace of mind.11
AN INSURED’S RIGHT TO S 57 INTEREST FOR LATE PAYMENT OF A CLAIM 20.5 An insurer liable to make a payment under an insurance contract subject to the ICA or under the ICA is liable to pay interest for late payment in accordance with s 57 of the ICA (s 57(1)). An insured’s entitlement to an award of interest under s 57 is as of right: it does not depend on the court exercising a discretion in the insured’s favour.12 20.6 Section 57 goes on to provide a formula for calculating the period and rate of interest: (2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days: (a) the day on which the payment is made; (b) the day on which the payment is sent by post to the person to whom it is payable.
The rate at which interest is payable in respect of a day included in the period (3) referred to in subsection (2) is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by, the [Insurance Contracts Regulations 1985 (Cth) reg 32]. (4) This section applies to the exclusion of any other law that would otherwise apply. (5) In subsection (4):
[page 376] law means: (a) a statutory law of the Commonwealth, a State or a Territory; or (b) a rule of common law or equity.
By s 57(4) and (5), an insured is limited to a claim for interest under s 57; it is not entitled to claim interest pursuant to s 32 of the Supreme Court Act 1935 (WA) or its equivalent elsewhere in Australia.13 20.7 Section 57 applies to pre- and post-judgment interest.14 In unusual circumstances, an insured might be limited to the rate of interest on a judgment debt, but only from a date after a court has ordered the payment of s 57 interest and the insurer has paid s 57 interest.15 20.8 The right to interest given by s 57 is an additional right provided by statute. Subject to the policy wording, it is not incorporated into the contract and does not increase the scope of the indemnity provided by the contract.16 20.9 The reasonable period allowed by s 57 is a ‘discretionary determination’ by the court17 and: starts when an insurer learns of an insured’s intention to make a claim on its policy; and ends when the insurer has had a reasonable amount of time to investigate whether the policy responds to the claim and how much it should pay for the claim. The length of the period is a question of fact to be determined in light of the circumstances.18 It does not depend on the bona fides of the insurer or whether it has good reason for not making payment before
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the end of the reasonable period.19 In effect, an insurer is deemed to have known of its liability to pay when the reasonable period ends. 20.10 In O’Neill v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme,20 Slattery J said (at [30]): The evidence that will inform the Court’s decision as to the date from which it was unreasonable for the insurer to have withheld payment
[page 377] comprises the objective facts of the claim that the insurer had to consider. Whether the time at which the insurer actually paid the claim was delayed because it acted in good faith or bad faith or because it received poor advice, no advice or misconstrued the advice it did receive, does not matter. Such facts have been held not to be relevant to the objective determination of what time would have been reasonable for payment. Rather the task is for the Court to determine on what day a reasonable insurer would have paid out the claim.
In HIH Casualty & General Insurance v Insurance Australia (No 2),21 Bongiorno J explained why the way in which the insurer in fact handled the claim is irrelevant: Once the court has rejected the insurer’s defence to a policyholder’s claim, that defence becomes irrelevant as does the fact that the insurer had a bona fide belief in its efficacy. To hold otherwise would put a premium on erroneous advice. Taken to its logical extreme, an insurer which relied upon incorrect legal advice or an inadequate report of a loss adjuster to form a belief as to the possibility of its successfully defending a policyholder’s claim would be advantaged by having obtained bad legal or loss adjusting advice. The successful policyholder would be correspondingly disadvantaged by the same irrelevant circumstance.
20.11 In Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd,22 Perry J regarded 10 weeks as a reasonable time for the insurer to investigate suspected arson on the part of the insured. In Elilade Pty Ltd v Nonpareil Pty Ltd,23 the Federal Court regarded 11 months as a reasonable time for an insurer to investigate an insurance claim concerning damage to stock and plant of a business caused by water inundation. 20.12 Section 57 does not apply to a claim for contribution by one insurer against another on double insurance principles, because the right
to contribution is not pursuant to a liability under a contract of insurance or under the ICA.24
AN INSURED’S RIGHT TO DAMAGES AND OTHER RELIEF IF AN INSURER WRONGLY DENIES, OR DELAYS, PAYMENT OF A CLAIM 20.13 At common law, damages for breach of a contractual obligation to make a payment on time can include compensation for loss of the use of money paid out by the plaintiff as a result of the breach and can be calculated as compound interest.25 [page 378] Consistent with s 57(4), an insurer that unreasonably delays payment to an insured is liable to the insured: for s 57 interest; and if the delay amounts to a breach of the contract or of its ICAimposed duty of utmost good faith, the amount (if any) by which Hungerfords v Walker26 damages for the lost opportunity of the use of the same money for which the s 57 interest is awarded exceeds the amount of the s 57 interest.27 The insured will only recover damages for loss of use by adducing evidence in support of its loss.28
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20.14 Apart from Hungerford v Walker damages, an insured is entitled to damages for an insurer’s breach of its promise to pay a claim, measured in accordance with the rule in Hadley v Baxendale.29 In Matthew Maxwell v Highway Hauliers Pty Ltd,30 that included the insured’s claim for loss of profits as a result of it being unable to replace
the damaged insured vehicles from its own resources and without the benefit of a payment by the insurers under the policy. 20.15 Of itself, an insurer delaying payment of, or not paying, a claim within a reasonable time might not relieve an insured of the obligation to comply with the terms of the contract that would apply if the insurer had paid, or agreed to pay, the claim.31 However, if an insurer: denies a claim; or not paying or not agreeing to pay a claim within a reasonable time amounts to a denial of the claim, the insured will be relieved of the obligation to comply with the terms of the contract that relate to that claim.32 For example, a liability insurance policy might require the insured to obtain the insurer’s prior consent to the compromise of a claim against the insured. The insured will be relieved of its obligation to obtain that consent if the insurer declines to indemnify the insured for that claim. If the insurer admits or does not make a decision on a claim, the insured should
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[page 379] avail itself of the benefit of s 41 of the ICA if it wants to settle a claim against it in circumstances where the insurer has not consented to the settlement. See also 21.2 as to the circumstances in which an insurer might have waived compliance with the terms of the policy.
AN INSURED’S CHOICES IF AN INSURER REPUDIATES A POLICY 20.16 An insurer denying a claim might amount to a repudiation of the contract.33 It will if the insurer, by its denial of the claim or the way it denies the claim, renounces its liabilities under the contract. This will
be the case if it ‘evinces an intention no longer to be bound by the contract … or shows that [it] intends to fulfil the contract only in a manner substantially inconsistent with [its] obligations and not in any other way’.34 That will not lightly be inferred.35 It won’t be inferred if the insurer is simply denying: … liability under the contract and on a basis for which the contract provides. The resistance of a claim and the bases for a claim, in circumstances where there is reliance on non-compliance with policy conditions as a ground for relieving the insurer from liability, is not a denial of the contract, but an affirmation of it. Accordingly, the repudiation, in those circumstances, is of the liability under the contract and not of the contract itself …36
20.17 Whether an insurer has repudiated its policy does not depend on its state of mind; it depends on: … the conduct, whether verbal or other, of the [insurer] which conveys to [the insured, the insurer’s] … intention not to perform [the contract] or to fulfil it only in a manner substantially inconsistent with [its] obligations and not in any other way.37
Even denying a claim for fraud by an insured might not amount to repudiation of the policy.38 20.18 If an insurer denying a claim amounts to a repudiation of the contract, the insured is at liberty to accept the repudiation and sue the insurer for unliquidated damages for the lost bargain, measured in [page 380] accordance with Hadley v Baxendale.39 If the insured does not accept the repudiation, the contract remains on foot,40 leaving the insured with a claim for damages for the insurer’s breach of contract.
ONUS OF PROOF 20.19 Generally speaking, in an insured’s action for a declaration as to its entitlements under an insurance policy, for payment under a policy, for damages for an insurer’s breach of a term of a policy or for an insurer’s repudiation of a policy, the insured bears the onus of
proving an alleged fact (affirmative or negative in form) if it is essential to its cause of action. Unless an insurer’s defence is a bare denial of a fact essential to the insured’s cause of action, it bears the onus of proving a fact which: … if established, will constitute a good defence, that is, an ‘avoidance’ of the claim which, prima facie, the [insured] has.41
The onus of proof does not switch if an insurer is suing for a declaration that an insured is not entitled to benefits under a policy,42 but as a declaration is a discretionary remedy, the insurer must persuade the court that there is a dispute that it genuinely wants tried and that such a declaration would be ‘useful’.43 An insured might respond to such an application with a counterclaim seeking indemnity under the policy. 20.20 An insured can only succeed in a claim on an insurance contract if it proves that the loss falls within the scope of the insuring clause or an express extension of it (for example, in an endorsement to the policy).44 In the case of indemnity insurance, that will require the insured to prove that an insured event has caused it actual loss related to the subject matter of the insurance.45 If the insured establishes a prima facie case to that effect, the insurer bears the evidentiary onus of establishing the contrary. [page 381] The insurer bears the onus of proving any limitations on the cover directly related to the insuring clause; for example, a sum insured or limit of liability that may appear in a Certificate or Schedule of Insurance rather than the policy wording.46 20.21 If an insured proves its loss falls within the scope of the insuring clause, an insurer will usually avoid liability if it proves the loss also falls within the scope of a pleaded exclusion,47 unless, amongst other things, s 54 of the ICA applies or the insured proves a pleaded exception to the exclusion.48
Sometimes it is necessary to determine whether a limitation in cover qualifies the whole of the scope of the insuring clause or whether it simply excludes particular classes of risk from the scope of the insuring clause. In the former case, the insured bears the onus of proving the circumstances do not fall within the limitation; in the latter, the insurer bears the onus of proving that the circumstances fall within the limitation.49 So, for example, the insuring clause might be construed as covering damage by non-deliberately caused fire. In that case, the insured bears the onus of proving the fire was not deliberately lit. On the other hand, the insuring clause might be construed as covering damage by fire with an exclusion for fire deliberately lit. In this case, the insurer bears the onus of proving the fire was deliberately lit. It will be interesting to see whether this distinction will be maintained in light of the distinction made in s 54 cases between what is and what is not an inherent restriction or limitation in a claim (see Chapter 22). Both seek to resolve the relevant issue by reference to an insurer’s ‘core’ promise but have the potential to be inconsistent in their approach. 20.22 Often, an insurer can only rely on a pleaded exclusion by proving a negative. For example, in Johnson v Triple C Furniture & Electrical Pty Ltd,50 an aviation insurance policy excluded liability if the pilot had not satisfactorily completed a flight review within the last two years. Chesterman JA said it was not necessarily helpful to try to analyse the evidence in terms of shifting or evidential burdens of proof. His Honour said (at [59]): [page 382] Few, if any, civil cases where both parties go into evidence will be determined by the application of the rules as to onus of proof. The totality of evidence, such as it is, will prove or disprove facts which one party or the other must establish to make out its case or defence.
In saying so, Chesterman JA had in mind the following oft-quoted passage from the judgment of Lord Mansfield in Blatch v Archer:51 It is certainly a maxim that all evidence is to be weighed according to the proof which it
was in the power of one side to have produced, and in the power of the other to have contradicted.
1. 2. 3.
4. 5.
6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19.
Thompson v NSW Land and Housing Corporation (No 3) [2013] NSWSC 1658 at [17] (Hislop J). Ventouris v Trevor Rex Mountain (The Italia Express (No 2)) [1992] 2 Lloyd’s Rep 281 (Hirst J). President of India v Lips Maritime Corp [1988] AC 395 at 425 (Lord Brandon); Sempra Metals Ltd v Revenue [2007] UKHL 34; [2008] 1 AC 56 at [214] (Lord Mance). The Lips Maritime Corp case has been the subject of criticism at the highest level in Australia: Hungerfords v Walker [1989] HCA 8; (1989) 171 CLR 125 at [16]–[33] (Mason CJ and Wilson J). Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111; (1997) CLC 70. Bofinger v Kingsway Group Ltd [2009] HCA 44 at [7] (a surety case); CIC Insurance Ltd v Bankstown Football Club Ltd [1997] HCA 2; (1997) 187 CLR 384 (Brennan CJ, Dawson, Toohey and Gummow JJ); Brescia v QBE [2007] NSWSC 598; (2007) 14 ANZ Ins Cas 61-740 at [498] (Hammerschlag J). Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115 at [153] (Murphy JA). Moss v Sun Alliance Australia (1990) 55 SASR 145; 6 ANZ Ins Cas 60-967 at 76,431 (Bollen J). See, for example, Tropicus Orchids Flowers and Foliage Pty Ltd v TIO [1998] NTSC 74; (1998) 10 ANZ Ins Cas 61-412 at [7.4] (Mildren J). Maxwell v Highway Hauliers Pty Ltd (see fn 6) at [87]–[91] (McLure P); Brescia v QBE (see fn 5) at [511] (Hammerschlag J). (1854) 9 Ex 341; 156 ER 145. Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd [2013] NSWSC 1975 at [698]–[699] (Sackar J). Lomsargis v National Mutual Life Association of Australia Ltd [2005] QSC 199; 2 Qd R 295 at [12] (McMurdo J). NRMA Insurance Ltd v Tatt (1989) 92 ALR 299 at 315 (McHugh J). Freuhauf Finance Corporation Pty Ltd v Zurich Australian Insurance Ltd (1993) 32 NSWLR 735 at 743 (Giles J). McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance plc (No 3) [2009] VSC 94 (Hansen J). Housing Guarantee Fund Ltd v Ryan [2005] VSC 214 at [14] (Mandie J). Sayseng v Kellogg Superannuation Pty Ltd [2007] NSWSC 857; 213 FLR 174 at [7] (Nicholas J). McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance plc (No 2) (see fn 15) at [38] (Hansen J). Bankstown Football Club Ltd v CIC Insurance Ltd (SC (NSW), Cole J, 17 December 1993, unreported); Sayseng v Kellogg Superannuation Pty Ltd (see fn 17) (Nicholas J); Fitzgerald v CBL Insurance Ltd [2014] VSC 493 at [415] (Sloss J).
20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.
[2015] NSWSC 1248. [2006] VSC 128; (2006) 14 ANZ Insurance Cases 61-685. (1994) 62 SASR 40; 8 ANZ Ins Cas 61-209. [2002] FCA 909. Sun Alliance and Royal Insurance Australia Ltd v Switzerland Insurance Australia Ltd (1997) 9 ANZ Ins Cas 61-353 (Rolfe J). Hungerfords v Walker (see fn 3) at [16]–[33] (Mason CJ and Wilson J). [1989] HCA 8; (1989) 171 CLR 125. Brescia v QBE (see fn 5) at [511] (Hammerschlag J); Hannover Life Assurance Re of Australasia Ltd v Membrey [2004] FCA 1095; (2004) 210 ALR 462 at [43] (Crennan J). Dumitrov v S C Johnson and Son Superannuation Pty Ltd (No 2) [2007] NSWSC 42 at [29] (Gzell J). (1854) 9 Ex 341; 156 ER 145. [2013] WASCA 115 at [95]–[100] (McLure P). Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd [1974] HCA 3; (1974) 130 CLR 1 at [41] (Stephen J). DA Constable Syndicate 386 v Auckland District Law Society Inc [2010] NZCA 237 at [84]. Green v AMP Life Ltd [2005] NSWSC 370; (2005) 13 ANZ Ins Cas 90-124 at [151]
(Campbell J). 34. Shevill v Builders Licensing Board [1982] HCA 47; (1981) 149 CLR 620 at [6] (Gibbs CJ). 35. Shevill v Builders Licensing Board (see fn 34) at [8] (Wilson J). 36. Harrison v Zurich Australian Insurance Ltd [1996] NSWSC 309 (Rolfe J). See also: Till v National Mutual Life Association of Australasia Ltd [2004] ACTCA 26 at [23]–[30]. 37. Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd [1989] HCA 23; (1989) 166 CLR 623 at [14] (Brennan J). 38. Super Chem Products Ltd v American Life and General Insurance Co Ltd [2004] UKPC 2; Lloyd’s Rep IR 446 at [12]. 39. (1854) 9 Ex 341; 156 ER 145. See also: Brescia v QBE (see fn 5) at [512] (Hammerschlag J); Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) [2015] QSC 72 at [226] (Flanagan J). 40. Golding v London and Edinburgh Insurance Co Ltd (1932) 43 L1 1 Rep 487 at 488 (Scrutton LJ). 41. Currie v Dempsey (1967) 69 SR (NSW) 116 at 125 (Walsh AJ). 42. Travellers Casualty v Arkwright [2004] EWHC 1704 (Comm) at [93] (Hirst QC); Centrebet Pty Ltd v Baasland [2013] NTSC 59 at [112]–[124] (Hiley J). 43. BP International Ltd v Energy Infrastructure Group Ltd [2003] EWHC 2924 (Comm) at [21] (Morison J). 44. Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 at 461 (Sholl J). 45. Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd [2010] HCA 9; (2010) 240 CLR 444 at [28]–[30].
46. Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd (see fn 45) at [30]–[32]. 47. Major Engineering Pty Ltd v CGU Insurance Ltd [2011] VSCA 226 at [47] (Bongiorno JA); Munro, Brice & Co v War Risks Association [1918] 2 KB 78 at 87 (Bailhache J). 48. Boonham v CE Heath Underwriting & Agency Services (NZ) Ltd (1993) 7 ANZ Ins Cas 61-189 at 78,107 (Barker J). 49. McLennan v Insurance Australia Ltd [2014] NSWCA 300 at [6]–[19]. 50. [2010] QCA 282; (2010) 243 FLR 336. 51. (1774) 1 Cowp 63 at [65]; 98 ER 969 at 970.
[page 383]
Chapter 21 ELECTION, ESTOPPEL AND ABUSE OF PROCESS We doubt that the doctrine of estoppel provides an adequate protection of the legitimate expectations of such persons and, even if it does, the rights of persons under a policy of insurance should not be made to depend on the vagaries of such an intricate doctrine.1
INTRODUCTION This chapter discusses: waiver; election (waiver by election) and estoppel; granting indemnity and reserving rights; an insurer’s entitlement to repayment of a claim paid by mistake; res judicata (cause of action) estoppel, issue estoppel and ‘Anshun’ estoppel; and abuse of process in the context of a liability insurance policy. Subject to what the High Court might say next, it seems there is an independent doctrine of waiver distinct from election and estoppel. It most often arises in the insurance context when an insurer chooses ‘not to insist on performance of a provision inserted in [an insurance] contract for its benefit’.2 When raised within the confines of the doctrine of election, it adds little if anything to a discussion of that doctrine.3 Depending on the circumstances, an insured might be able to rely on waiver, election or estoppel as a defence to an insurer’s attempt to
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[page 384] avoid an insurance contract or decline a claim for breach of the duty of disclosure or non-compliance with, or breach of, a contractual term. Although rarely raised, an insurer can rely on election and estoppel to defend an insurance claim.4 Res judicata, issue estoppel, ‘Anshun’ estoppel and abuse of process sometimes arise for consideration in the context of a claim for indemnity under a liability policy.
WAIVER, ELECTION (WAIVER BY ELECTION) AND ESTOPPEL 21.1 Waiver and election focus on the conduct of the waiving/electing party, whereas estoppel focuses on the response to another party’s representation.5 Following discussion of waiver, election and estoppel is a brief comment on why reliance by the parties on the duty of utmost good faith will probably result in waiver, election and estoppel falling into disuse in the insurance context.
Waiver 21.2 An insurer will be held to have unilaterally and irrevocably waived6 the need for an insured to comply with a provision in an insurance contract (usually a collateral condition) if it was inserted in the contract for the sole benefit of the insurer and the waiver was: intentional; with knowledge of its right to insist on the insured complying with the provision; communicated to the insured by clear and unequivocal words or conduct; and inconsistent with insisting that the insured comply with the
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provision.7 Waiver is a conclusion of law. It is determined objectively and can be express or implied. Unlike waiver by election, ‘simple’ waiver does not require a choice between inconsistent rights. It does require a choice between inconsistent positions.8 [page 385] Generally speaking, an insurer cannot, by waiver, expand the scope of the risks covered by the insurance contract.9
Election (waiver by election) 21.3 The doctrine of election prevents the ‘electing party’ from exercising rights that would have been available to it if it had not conducted itself inconsistently with the availability of those rights. So, for example: … the exercise, despite knowledge of a breach entitling one party to be discharged from its future performance, of rights available only if the contract subsists, will constitute an election to maintain the contract on foot.10
21.4
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The elements of an election are: a party choosing between two mutually exclusive legal rights.11 The electing party has a reasonable time within which to choose which legal right to exercise, as long as the delay does not prejudice the other party.12 In the meantime, ‘it must continue to comply with its obligations under the contract’.13 It follows that making payments under a contract might be consistent with a party’s performance of it, rather than with an election between mutually exclusive choices;14 the ‘electing party’ having full knowledge of so much of the facts giving rise to the election ‘that a reasonable person in that position would consider relevant to the choice to be made’.15 Generally speaking, constructive knowledge is insufficient;16 and an unqualified election communicated to the other party by clear
and unequivocal words or conduct.17 The election does not need to be communicated by the party electing.18 [page 386] It follows that a party can make an election without intending to do so.19 21.5 It is not clear to what extent election requires knowledge by the electing party of the rights it must choose between.20 Having said that: the electing party will be taken to know of the rights conferred by the contract;21 where a right arises under a contract read with the provisions of an Act of Parliament, knowledge of the terms of the contract and of the Act will probably be imputed to the electing party;22 and knowledge of statutory obligations and delegated legislation referred to in the contract will probably also be imputed to the electing party.23
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21.6
An election once made is irrevocable.
21.7 It is hard to imagine circumstances in which an election could be made ‘without prejudice’. In Haynes v Hirst,24 Long Innes J put it this way: A party cannot, except in a strictly limited class of cases, protect himself against the legal consequences of his act by stating that he does them without prejudice. No one, for instance, would suggest that a person could protect himself against liability for a breach of promise of marriage by taking the precaution of making the offer without prejudice. … In plain language, a man can only elect once, and once he has elected he is bound by his election and cannot again avail himself of his former option, merely because he claimed in the first instance to exercise his election without prejudice. A man, having eaten his cake, does not still have it, even though he professed to eat it without prejudice.
21.8 In the insurance context, election25 often occurs when an insurer, knowing of circumstances that enable it to:
[page 387]
■avoid a contract, appears to choose instead to treat the contract as
continuing on foot; or decline a claim, appears to choose instead to entertain the claim. An insurer risks being regarded as having elected to treat an insurance contract as continuing on foot or to entertain a claim if, after becoming aware of circumstances giving rise to a right to avoid the contract or decline the claim and without reserving its rights (see ‘Reserving rights’ at 21.18 and 21.19), it: asks for information about a loss; negotiates for the repair of damaged insured property; accepts premium;26 or continues to conduct, or takes over the conduct of, the defence of a third party claim against the insured.27
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21.9 If an insurance contract does not cover a loss, an insurer purporting to accept a claim for the loss has not ‘elected’ to pay the claim, because it does not, by simply accepting the claim, choose between mutually exclusive legal rights. The insurer does not have a right or power under a contract to reject a claim for a loss that is not covered by the contract; the contract simply does not cover the loss.28 However, an insurer might be held to have ‘elected’ not to invoke an exclusion if it conducts an insured’s defence of a third party action pursuant to a term in the insurance contract.29 Also, an insured might be able to hold its insurer to acceptance of the claim by invoking the duty of utmost good faith, estoppel (if they relied on the acceptance of the claim to their detriment), or perhaps in the rarest of cases, a variation of the contract. 21.10 An insurer who can decline a claim on the basis that the insurance contract does not cover a loss or on the basis of an insured’s breach of contract, is not confronted with mutually exclusive legal rights if it chooses to decline the claim on one basis rather than the
other. Declinature in reliance on either ground is consistent with declinature in reliance on the other ‘because they each lead to a denial [page 388] of liability. The inconsistent course would have been for [the insurer] to accept liability rather than to deny liability. If that had happened it might be held to have elected not to deny liability’.30
Estoppel 21.11
Equitable (promissory) estoppel enables a court to:
… do what is required, but not more, to prevent a person who has relied upon an assumption as to a present, past or future state of affairs (including a legal state of affairs), which assumption the party estopped has induced him to hold, from suffering detriment in reliance upon the assumption as a result of the denial of its correctness. A central element of that doctrine is that there must be a proportionality between the remedy and the detriment which is its purpose to avoid. It would be wholly inequitable and unjust to insist upon a disproportionate making good of the relevant assumption.31
On the other hand, common law estoppel (estoppel by conduct or conventional estoppel) operates as a rule of evidence, which prevents the estopped party from denying the truth of the assumed state of affairs. The elements of a conventional estoppel are: the parties have adopted an assumption about their legal relationship and have conducted their relationship on the basis of that mutual assumption; each party knows or intends that the other will act on that basis; and departure from the assumption will cause detriment to one of them.32 As is apparent, a conventional estoppel does not allow for a remedy proportionate to the detriment.33
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21.12 In the insurance context, estoppel sometimes arises for consideration in circumstances where a liability insurer continues to conduct, or takes over the conduct of, an insured’s defence to a third
party claim. Depending on the terms of the insurance contract and the circumstances (including an attempt by the insurer to reserve its rights — see ‘Reserving rights’ at 21.18 and 21.19), taking this step might amount to a representation by the insurer that the third party claim is covered by the policy. If there is a representation to that effect, the central issue [page 389] is usually whether the insured can prove that it acted to its detriment on the representation. A detriment suffered by the insured: will be sufficient to found an estoppel if it is ‘material’ or ‘real’ (pecuniary loss may not be necessary);34 or will not be sufficient to found an estoppel if it is a mere possibility. Detriment might be established if, by relying on an insurer’s representation that the contract covers the loss, the insured loses: the opportunity to control the conduct of the litigation;35 or a real chance of doing better from the litigation than the result achieved by the insurer.36
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Waiver, election, estoppel and the duty of utmost good faith 21.13 The potential reliance by an insured on waiver, election or estoppel for the purpose of defeating an insurer’s denial of a claim is fraught with difficulty. This is because there are still unanswered questions in relation to certain aspects of these doctrines. They are technical and the insured must surmount significant hurdles in order to succeed on them. In the circumstances, it is likely that insureds will allow these doctrines to fall by the wayside and instead rely on the more flexible duty of the insurer to perform the contract with the utmost good faith. Kirby J sowed the seeds in Agricultural and Rural Finance Pty Ltd v
Gardiner:37 Cases of estoppel and binding election are the clearest examples of such a manifest unfairness. However, I would accept a residual category of manifest unfairness at common law that is distinct from estoppel and election. The law will provide relief by upholding a ‘waiver’ in circumstances where not to do so would be manifestly unfair to the beneficiary of the ‘waiver’.
How much stronger is the case in insurance law, where the parties are obliged to act towards each other in the performance of an insurance contract with the utmost good faith? 21.14 How this might occur can be illustrated by asking how Territory Insurance Office v Adlington38 might have been decided if the Northern Territory Court of Appeal had considered the operation of the duty of utmost good faith. [page 390] In Adlington, the issue was whether an insurer was estopped from denying that a liability insurance policy responded to a claim. The insured, a builder, was sued when a verandah he built collapsed and injured the plaintiff. He sought indemnity against the plaintiff’s claim under his insurance policy. An employee of the insurer assured the builder that the claim was covered by the policy. The insurer’s solicitors subsequently took over the defence of the claim. Eventually, the insurer’s solicitors wrote to the insured to tell him that they could no longer act because the policy was not current at the time of the accident. In terms of the elements that needed to be established in order for an estoppel to be made out, it was found at trial that: the insurer had represented that the policy covered the claim; the insurer induced the insured to act on that representation; and in reliance on the representation, the insured allowed the insurer to conduct the defence of the claim. The only issue for the Court of Appeal was whether the insured would suffer detriment if the representation was not fulfilled. In the opinion of Mildren J, in order for there to be a detriment sufficient to
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found an estoppel, the party alleging estoppel must show that the detriment is more than a mere possibility; it must be ‘material’ or ‘real’, although pecuniary loss may not be necessary. In this case, the detriment was entirely speculative and no real detriment was established. An order for costs (that insurers had undertaken to pay) was not a sufficient detriment.39 21.15 As mentioned in Chapter 7, the duty of utmost good faith is a matter of process and requires the parties to an insurance contract to perform the contract honestly, openly and fairly. ‘Honestly’ and ‘openly’ were not issues in Adlington. The question is therefore whether the insurer acted fairly having regard for its own interests and the insured’s legitimate interests when it tried to withdraw its grant of indemnity. In answering that question, the court would take into account the following circumstances: by its terms, the policy did not respond to the claim; the insurer mistakenly informed the insured that the policy responded to the claim and conducted the defence of the claim for a period of time on that basis; the insured could have easily checked for himself whether the policy responded to the claim; and
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[page 391]
■the
insured would suffer no real detriment if the insurer was allowed to rectify its mistake by withdrawing indemnity for the claim. In fact, he benefitted by the insurer conducting the defence at its own cost. If the court decided that the insurer would be acting unfairly if it withdrew indemnity, it would prevent the insurer from withdrawing its indemnity. The insured would not be required to prove each element of an estoppel, with the possibility that one or other party might fail on a technicality. The result would accord with the paramountcy of the duty of utmost good faith in insurance law.
21.16 Can the duty of utmost good faith operate so as to require an insurer to pay for a loss outside the scope of the risks covered by the policy? Arguably, an insurer’s conduct leading to that result would fall within s 13 of the Insurance Contracts Act 1984 (Cth) (ICA) because the only reason a breach of the duty is alleged against it is that it conducted itself initially on the basis that the contract covered the claim. In other words, an insured can invoke the duty of utmost good faith because the insurer’s conduct of the claim until it decided to decline indemnity was, in terms of s 13 of the ICA, ‘in respect of any matter arising under or in relation to it, with the utmost good faith’. On the other hand, the insured would probably be unable to invoke s 14 of the ICA because the insurer would not be declining to indemnify in reliance on a ‘provision of the contract’. It would be relying on the fact that the policy simply does not cover the risk.
GRANTING INDEMNITY AND RESERVING RIGHTS Granting indemnity: An ‘out of court’ admission of liability 21.17 A grant of indemnity: is an admission of liability; and is a qualified admission of liability if indemnity is granted subject to the terms of the insurance contract and on information known.40 As an ‘out of court’ admission, a grant of indemnity:
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is merely an item of evidence that the court might ultimately accept or reject. It is open to a party who has made such an admission to seek to demonstrate, through other evidence, that the admission was made under a misapprehension, or at a time when the person who made the admission did not have all the relevant information, or that there is some other reason why the court ought not accept that the admission states the truth about the matter admitted. In that way, an admission that is an item of evidence made outside court proceedings can be qualified or explained away.41
[page 392]
Reserving rights 21.18 Depending on the circumstances, a party may be able to reserve its rights so that its words or conduct are not seen as a waiver, an election, a representation that might found an estoppel, or as a foundation for a claim based on a breach of its duty of utmost good faith.42 If an insurer is uncomfortable about making a final decision to indemnify an insured for a claim when it is first made, it will usually inform the insured in writing that it intends to investigate the claim and that the investigation is ‘without prejudice’ to its right to decline indemnity for the claim upon completion of the investigation. It is not uncommon for liability insurers to grant indemnity to an insured after a preliminary investigation of the facts, but to send the insured a ‘reservation of rights’ letter at the same time to the effect that indemnity is granted subject to: the terms of the policy; and it reserving to itself the right to withdraw indemnity at some time in the future if it subsequently learns of facts that would have entitled it to decline indemnity at the outset of the claim.
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21.19 The effectiveness of a reservation of rights will depend on the terms of the insurance contract, the terms of the reservation of rights’ letter and on the circumstances. For example, ‘the outright exercise of one such right usually constitutes an election not to exercise the other, whatever reservation might have been made’.43
AN INSURER’S ENTITLEMENT TO REPAYMENT OF A CLAIM PAID BY MISTAKE
21.20 A court may order an insured to repay to an insurer the proceeds of a claim if, after paying the claim, the insurer discovers that it mistakenly made the payment because it thought the policy responded to the claim when it did not. The basis for a claim for repayment at common law is discussed in David Securities Pty Ltd v Commonwealth Bank of Australia.44 In that case, Dawson J referred with approval (at [9]) to the following formulation of the common law position by Robert Goff J: (1) If a person pays money to another under a mistake of fact which causes him to make the payment, he is prima facie entitled to recover it as money paid under a mistake of fact.
[page 393] (2) His claim may however fail if: (a) the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge, and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; or (c) the payee has changed his position in good faith, or is deemed in law to have done so.45
21.21 In Moore v The National Mutual Life Association of Australasia Ltd,46 Dr Gregory Moore established a ‘change of position’ defence by spending on living expenses payments mistakenly made by an insurer under an income protection and business expense policy. Ball J said (at [105]): Although generally … the payment of living expenses is not regarded as a relevant change of position, I do not think that principle applies where the payments are made for the purpose of enabling the recipient to meet those expenses and the recipient would have taken other steps to meet living expenses or to reduce them if those payments had not been made. …
In Western Australia, subject to issues of waiver, election, estoppel and the duty of utmost good faith, a court may order repayment of the proceeds of a claim for a mistake of fact or law, unless the insured:
… received the payment in good faith and has so altered his position in reliance on the validity of the payment that in the opinion of the Court, having regard to all possible implications in respect of the parties (other than the plaintiff or claimant) to the payment and of other persons acquiring rights or interests through them, it is inequitable to grant relief, or to grant relief in full.47
RES JUDICATA, ISSUE ESTOPPEL AND ‘ANSHUN’ ESTOPPEL Res judicata (cause of action estoppel) 21.22 ‘Once judgment is entered in respect of a cause of action, the cause of action is merged in the judgment of the court and ceases to exist apart from the judgment.’48 [page 394] This is the doctrine res judicata (cause of action estoppel). It prevents the re-litigation of an already adjudicated cause of action by the same parties or their privies.49 In this context, it prevents a liability insurer from disputing with its insured or a third party claimant, a final judgment on the merits in favour of the third party claimant against its insured, if the insurer: was a party to the proceedings;50 or defended the proceedings for the insured. In these circumstances, the court regards the insurer as the dominus litis in the defence of the third party action, and thereby a privy of the insured in relation to its defence of the action.51
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Issue estoppel and ‘Anshun’ estoppel 21.23 A party cannot litigate an issue: finally decided in a previous court action between the same parties or their privies, in relation to:
■
… those matters which the prior judgment, decree or order necessarily established as the legal foundation or justification of its conclusion [issue estoppel];52
■which, although not raised in a previous action between the same parties or their privies:
… was so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it [‘Anshun’ estoppel].53
In this context, it prevents a liability insurer from disputing with its insured or a third party claimant, such an issue if the insurer: was a party to the proceedings;54 or defended the proceedings for the insured.55 In these circumstances, the court regards the insurer as the dominus litis in the defence of the third party action, and thereby a privy of the insured in relation to its defence of the action.
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[page 395] Otherwise, an insurer is free to dispute such issues,56 unless relitigating them would amount to an abuse of process (see below).
ABUSE OF PROCESS IN THE CONTEXT OF A LIABILITY INSURANCE POLICY Preventing re-litigation of a previous dispute between an insured and a third party claimant 21.24
The doctrine abuse of process:
… is an intangible principle that is used to bar proceedings that are inconsistent with the objectives of public policy. … engages the inherent power of the court to prevent the misuse of its procedure, in a way that would be manifestly unfair to a party to the litigation before it or would in some other way bring the administration of justice into disrepute. It is a flexible doctrine unencumbered by the specific requirements of concepts such as issue estoppel …57
21.25
One circumstance in which abuse of process has been applied is
where the litigation before the court is found to be, in essence, an attempt to re-litigate facts that a court has already determined.58 In Ball v Norwich Union Fire Assurance Society,59 an injured truck driver obtained default judgment against Ball for damages and costs when Ball failed to enter an appearance to a Summons. Ball applied to the court to set the judgment aside, claiming he did not receive the Summons or any of the many letters posted to him by the driver’s lawyers and the court. The judge hearing the application did not accept Ball’s evidence and so dismissed his application. Ball was insured with Norwich Union under a liability policy. Norwich Union denied Ball’s claim on the policy on the basis that he had breached a prompt notification condition, in that Ball did not tell Norwich Union about the action until after default judgment was entered against him. Norwich Union argued it would be an abuse of process for Ball to relitigate the issue of whether he received the Summons or the letters posted to him by the driver’s lawyers or the court for the purpose of denying that he breached the notification condition. Brown LJ agreed, on the basis that the issue was most appropriately dealt with in the driver’s action against Ball. [page 396] 21.26 In VACC Insurance v BP Australia60 (application for Special Leave to appeal to the High Court refused), VACC insured Geselle Investments Pty Ltd for its legal liability to pay compensation (but not exemplary or punitive damages) to third parties for bodily injury. The VACC policy contained a reasonable precautions condition that required Geselle to: … take all reasonable precautions to prevent bodily injury … and … reasonable measures to maintain all premises furnishings fittings appliances and plant in a sound condition.
A fire occurred at a BP service station operated by Geselle when a petrol bowser unexpectedly and spontaneously sprayed fuel while being
operated by one of Geselle’s employees. Mr Clark, a customer for petrol, was burnt in the fire. Mr Clarke sued Geselle and BP in the District Court. Geselle did not join VACC as a third party to the action. After trial, Kirkham DCJ awarded Mr Clark: compensatory damages for negligence against Geselle, on the basis that Geselle had allowed the petrol bowser to be used when it knew the bowser was prone to malfunction from time to time; exemplary damages against Geselle, as Geselle had displayed ‘recklessness in the extreme’; and compensatory damages for negligence against BP, on the basis that there was an inherent design fault with the petrol bowser which BP should have known about. Kirkham DCJ apportioned liability 75:25 per cent in BP’s favour. Geselle went into liquidation and BP paid Mr Clarke the whole of the judgment for compensatory damages. BP then sued VACC pursuant to s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), claiming the benefit of the VACC policy. BP could only succeed against VACC if Geselle was entitled to be indemnified by VACC against its liability to Mr Clarke. Bowden ADCJ awarded judgment for BP, rejecting VACC’s argument that Geselle had breached the reasonable precautions condition on the basis that an insured only breaches such a condition if it recognises the danger and deliberately courts it, or does not care whether or not it was averted. On appeal, VACC argued that Kirkham DCJ awarding exemplary damages against Geselle for acting recklessly estopped BP from denying that Geselle had breached the reasonable precautions condition.
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[page 397] Brownie AJA (dissenting) would have dismissed the appeal on the basis that Kirkham DCJ did not need to decide and did not decide:
[67] … that Geselle itself had acted recklessly, in the sense that Geselle acted in breach of the policy condition, as distinct from his having decided earlier that Geselle acted recklessly, in the sense necessary to found an award of exemplary damages. The question about the policy was simply not before his Honour … [70] [There was] no issue estoppel as between BP and VACC, on the issue relating to the policy condition, because there was not a sufficient identity of issues. To the extent that the judgments of Kirkham DCJ dealt with matters going to the issue of compliance with the policy condition, those judgments dealt with evidentiary matters only, and not facts that were essential to a decision about compliance with the policy condition. … [72] [Nor were Geselle and VACC] privies in the relevant sense, so that there was a sufficient identity of parties.
Fitzgerald JA joined in allowing the appeal, saying an insured is not necessarily free: [29] … to relitigate against its insurer findings made against the insured in the proceeding in which the judgment in favour of a third party relied on by the insured against the insurer was given against the insured … [34] … it would not be conscionable for Geselle, and it is not conscionable for BP, to allege against VACC [that Geselle was not in breach of the reasonable precautions condition when that] contradicts the basis upon which the amount which BP is entitled to recover from Geselle was determined, [that Geselle displayed recklessness in the extreme].
Preventing re-litigation of a previous dispute between a liability insurer and a third party claimant 21.27 On occasions, in the course of proceedings by a third party claimant against an insured, the third party will seek to join the insured’s liability insurer to the litigation for the purpose of obtaining a declaration that the insurer is liable to indemnify the insured for any liability it has to the third party. It occurs when, for various reasons, an insured shows no interest in itself joining the insurer to the proceedings (for example, because the insured is impecunious or because it thinks there is no hope of overcoming a policy exclusion). It is arguable that if the insurer is joined and such a declaration is made in favour of the third party claimant (with or without the insurer actively participating in the proceedings), it would be an abuse of
process for the insurer to dispute the result in a subsequent claim by the insured for indemnity under the policy.61
1. 2.
3.
4. 5. 6. 7. 8. 9. 10. 11.
12. 13. 14. 15. 16. 17.
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 at [32] (Mason CJ and Wilson J). Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd [2005] WASCA 106; (2005) 30 WAR 290; 13 ANZ Ins Cas 61-657 at [48] (Steytler P); Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 at [12] (McLure P). Agricultural and Rural Finance Pty Ltd v Gardiner [2008] HCA 57; (2008) 238 CLR 570 at [56] (Gummow, Hayne and Kiefel JJ). In Craine v Colonial Mutual Fire Insurance Co Ltd [1920] HCA 64; (1920) 28 CLR 305, the High Court used the term ‘waiver’ in the sense of ‘election’. CSR Ltd v Cigna Insurance Australia Ltd [1997] HCA 33; (1997) 189 CLR 345. Khoury v Government Insurance Office (NSW) [1984] HCA 55; (1984) 165 CLR 622 at [19] (Mason, Brennan, Deane and Dawson JJ). Abandoned, relinquished, renounced, given up for good. Craine v Colonial Mutual Fire Insurance Co Ltd (see fn 3); Bowen v Alsanto Nominees Pty Ltd (see fn 2) at [16] (McLure P), [95]–[99] (Newnes JA). Craine v Colonial Mutual Fire Insurance Co Ltd (see fn 3); Bowen v Alsanto Nominees Pty Ltd (see fn 2) at [99] (Newnes JA). ‘Insurance coverage cannot be “waived” into existence’: State Farm Fire & Casualty Co v Kleckner 194 Ill App 3d 371; 551 NE 2d 224 (Second District, 1990). Agricultural and Rural Finance Pty Ltd v Gardiner (see fn 3) at [58] (Gummow, Hayne and Kiefel JJ). Sargent v ASL Developments Ltd [1974] HCA 40; (1974) 131 CLR 634 at [16] (Stephen J); Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd [2006] EWCA Civ 50; 1 WLR 1492 at [31] (Longmore LJ). Sargent v ASL Developments Ltd (see fn 11) at [28] (Mason J); Athlone Pty Ltd v General Accident Fire & Life Assurance Corp (1985) 3 ANZ Ins Cas 60-648 at 78,992 (Foster J). Moore v The National Mutual Life Association of Australasia Ltd [2011] NSWSC 416 at [74] (Ball J). Moore v The National Mutual Life Association of Australasia Ltd (see fn 13) at [83] (Ball J). Moore v The National Mutual Life Association of Australasia Ltd (see fn 13) at [81] (Ball J). Moore v The National Mutual Life Association of Australasia Ltd (see fn 13) at [78] (Ball J). Sargent v ASL Developments Ltd (see fn 11) at [16], [18], [19], [29] (Stephen J); Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) [1993] HCA 27; (1993) 182 CLR 26 at [30] (Brennan J) at [39] (Deane, Toohey, Gaudron and McHugh JJ).
18. Gloxinia Investments Ltd v Low [2013] NSWSC 1889 at [22] (Young AJ). 19. Sargent v ASL Developments Ltd (see fn 11) at [16] (Stephen J); Champtaloup v Thomas [1976] NSWLR 264 at 274–5 (Mahoney JA). 20. GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50 at [357] (Finn J); Moore v The National Mutual Life Association of Australasia Ltd (see fn 13) at [79] (Ball J). 21. Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (see fn 2) at [48] (Steytler P); Ellison v Lutre Pty Ltd [1999] FCA 399; (1999) 88 FCR 116 at [58]. 22. Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (see fn 2) at [50] (Steytler P), a case concerning alleged breach of delegated legislation dealing with the safety of persons. 23. Sargent v ASL Developments Ltd (see fn 11) at [16] (Stephen J); Champtaloup v Thomas (see fn 19) at 274–5 (Mahoney JA). 24. (1927) 27 SR (NSW) 480; 44 WN (NSW) 138; Gloxinia Investments Ltd v Low (see fn 18) at [22]–[23] (Young AJ). 25. The principles of election in the context of contracts of insurance are summarised by Mance J in Insurance Corporation of the Channel Islands v The Royal Hotel Ltd [1997] EWHC Comm 373; [1998] Lloyd’s Rep IR 151 at 161–3 and by Tadgell J in Reid v Campbell Wallis Moule & Co Pty Ltd [1990] VR 853 at 874–5; (1990) 6 ANZ Ins Cas 60-950. 26. Goodwin v SGIO (Queensland) [1994] 2 QR 15 at 21–2. 27. ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374. 28. Owners-Strata Plan 6258 v Mestrez Pty Ltd [2012] NSWSC 1259 at [167] (Lindsay J); National Vulcan Engineering Insurance Group Ltd v Transfield Pty Ltd [2003] NSWCA 327 at [64] (Santow JA); Insurance Co of North America v Atlantic National Insurance Company (4th Circuit 1964) 329 F 2d 769 at [22]–[28]. 29. CE Heath Underwriting and Insurance (Australia) Pty Ltd v Campbell Wallis Moule and Corp Pty Ltd [1992] 1 VR 386 at 393–5 (Brooking J); (1991) 6 ANZ Insurance Cases 61071; Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd (see fn 11) at [32] (Longmore LJ). 30. Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd (see fn 11) at [32] (Longmore LJ); CE Heath Underwriting and Insurance (Australia) Pty Ltd v Campbell Wallis Moule and Corp Pty Ltd (see fn 29) at 393–5 (Brooking J); (1991) 6 ANZ Insurance Cases 61-071. 31. Commonwealth v Verwayen (‘Voyager case’) [1990] HCA 39; (1990) 170 CLR 394 at [28] and [36] (Mason CJ). 32. Mineralogy Pty Ltd v Sino Iron Pty Ltd [2017] FCAFC 55 at [332]. 33. The Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) [2008] WASC 239 at [3458], [3512], [3514] and [3551] (Owen J), but see Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407 at [34] (Allsop P), [577] (Campbell JA); Miller Heiman Pty Ltd v Sales Principles Pty Ltd [2017] NSWCA 106 at [69]–[70] (Macfarlan JA). 34. Territory Insurance Office v Adlington (1992) 2 NTLR 55; 7 ANZ Ins Cas 61-149 at 77,785. 35. (Re Cutujar) Bradford Insulation (SA) Pty Limited v CGU Insurance Ltd [2004] NSWDDT 51 at [54]–[63] (Curtis J).
36. Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235 at 75,654 (Handley JA); Territory Insurance Office v Adlington (see fn 34) at 77,781. 37. [2008] HCA 57; (2008) 238 CLR 570 at [145]. 38. (1992) 2 NTLR 55; 7 ANZ Insurance Cases 61-149. 39. Compare Northern Assurance Co Ltd v Cooper [1968] Qd R 46. 40. Mobis Parts Australia Pty Ltd v XL Insurance Company SE [2016] NSWSC 912 at [19]– [22] (Bergin CJ in Eq). 41. The Nominal Defendant v Gabriel [2007] NSWCA 52; (2007) 71 NSWLR 150 at [113] and [167] (Campbell JA). 42. Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (see fn 17) at [3] (Brennan J); Glencore International v Alpina Insurance [2003] EWHC 2792; [2004] 1 All ER (Comm) 766 at [308] (Moore-Bick J). 43. Summer Hill Business Estate Pty Ltd v Equititrust Ltd [2011] NSWCA 149 at [26] (Macfarlan JA). 44. [1992] HCA 48; (1992) 175 CLR 353. See also Moore v The National Mutual Life Association of Australasia Ltd (see fn 13) at [99]–[104] (Ball J). 45. [2011] NSWSC 416. The ‘change of position defence’ has its origins in the judgment of Lord Mansfield in Moses v Macferlan (1760) 2 Burr 1005; 97 ER 676: Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd [2014] HCA 14 at [23] (French CJ). 46. [2012] NSWCA 380 at [161]; Moore v The National Mutual Life Association of Australasia Ltd (see fn 13) at [99]–[104] (Ball J). 47. Property Law Act 1969 (WA) ss 124 and 125. 48. Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd [2009] WASCA 31; (2009) 253 ALR 364 at [242] (Beech JA). 49. Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589 at [20] (Gibbs CJ, Mason and Aicken JJ). 50. Gleeson v Wippell [1977] 1 WLR 510 at [516] (Sir Robert Megarry V-C); FAI v Interchase Corp Ltd [1998] QCA 180 (Byrne J). 51. In the matter of HIH Insurance Ltd (in liq); De Bortoli Wines (Superannuation) Pty Ltd v McGrath [2014] NSWSC 774 at [59], [77]–[78] (Brereton J). 52. Blair v Curran [1939] HCA 23; (1939) 62 CLR 464 at 531 (Dixon J); Maurice Blackburn Cashman v Brown [2011] HCA 22; (2011) 242 CLR 647 at [40]. 53. Port of Melbourne Authority v Anshun Pty Ltd (see fn 49) at [37] (Gibbs CJ, Mason and Aicken JJ); Tomlinson v Ramsey Food Processing Pty Ltd [2015] HCA 28; (2015) 256 CLR at [22] (French CJ, Bell, Gageler & Keane JJ). 54. Gleeson v Wippell (see fn 50) at [516] (Sir Robert Megarry V-C); FAI v Interchase Corp Ltd [1998] QCA 180 (Byrne J). 55. QBE Insurance (Australia) Ltd v Lois Nominees Pty Ltd [2012] WASCA 186 at [24] (McLure P). 56. VACC Insurance v BP Australia [1999] NSWCA 427 at [28]–[29] (Fitzgerald JA). 57. Canam Enterprises Inc v Coles (2000) 51 OR (3d) 481 at [31] (Finlayson J), [55]–[56] (Goudge JA). 58. For a list of the relevant factors, see State Bank of New South Wales Ltd v Alexander
Stenhouse Ltd (1997) Aust Torts Reports 81-423 at 64,089 (Giles CJ). 59. [1999] EWCA Civ 562. 60. [1999] NSWCA 427; (1999) 47 NSWLR 716. 61. QBE Insurance (Australia) Ltd v Lois Nominees Pty Ltd (see fn 55) at [24] (McLure P). See also Chapter 26 at 26.3 and following.
[page 399]
Chapter 22
SECTION 54 The Occupiers’ Liability Act, 1957 (UK) has been very beneficial. It has rid us of those two unpleasant characters, the invitee and the licensee, who haunted the courts for years, and it has replaced them by the attractive figure of a visitor, who has so far given no trouble at all.1
INTRODUCTION The operation of s 54 is discussed under the following headings: the need for reform; text and context; when s 54 is not in play; when s 54 is in play; if engaged, is the relief in s 54(1) or s 54(2)?; how s 54(2) operates; how s 54(1) operates on an ‘occurrence-based’ policy; how s 54(1) operates on ‘claims made’ and ‘claims made and notified’ policies; and the scope of s 54(5)(b).
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THE NEED FOR REFORM 22.1 Not surprisingly, the ability of an insurer to refuse to pay for a loss because of a trivial or non-causative breach of, or non-compliance with, a contractual term (see Chapter 12) attracted the attention of the Australian Law Reform Commission (ALRC) in its 1982 Insurance Contracts report (ALRC Report 20). Clause 54 of the Draft Insurance Contracts Bill 1982 contained in Appendix A to the Report2 sought to strike a fairer balance between the interests of the insurer and the insured in these circumstances.
[page 400] The ALRC Report 20 explained (at [224]) that the parties’ rights in the event of a breach of, or non-compliance with, a contractual term should depend on ‘matters of substance’, not on whether a term is characterised as a warranty or a condition, or on the difference in effect between a breach of warranty and an occurrence caught by a temporal exclusion. The Explanatory Memorandum that accompanied the Insurance Contracts Bill 1984 in its passage through Parliament delivered the same message: 182 — Rationale The existing law is unsatisfactory in that the parties’ rights are determined by the form in which the contract is drafted rather than by reference to the harm caused. The present law can also operate inequitably in that breach of the term may lead to termination of the contract regardless of whether or not the insurer suffered any prejudice as a result of the insured’s breach. The proposed law will concentrate on the substance and effect of the term and ensure that a more equitable result is achieved between the insurer and the insured.
22.2 The Insurance Contracts Act 1984 (Cth) (ICA) came into effect on 1 January 1986. It is remedial legislation. As explained in the Long Title, it was enacted to: … reform and modernise the law relating to certain contracts of insurance so that a fair balance is struck between the interests of insurers, insureds and other members of the public and so that the provisions included in such contracts, and the practices of insurers in relation to such contracts operate fairly …
Two of the ICA’s most significant reforms preclude an insurer, in a wide range of circumstances, from refusing to pay a claim because of an insured’s: pre-contractual non-disclosure or misrepresentation: Pt IV; or post-contractual non-compliance with, or breach of, a contractual term, or failure to exercise a right, choice or liberty available under the insurance contract: Pt V s 54.
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22.3 This chapter is concerned with that part of the reform of insurance law effected by s 54, which, consistently with the Long Title
to the ICA, is to be construed according to ‘the breadth of its language, its remedial purpose, its application to substance rather than form and the inadmissibility of adopting a narrow approach by reference to preexisting law or supposed assumptions inherent in the insurance contract between the parties’ [citations omitted].3 [page 401]
TEXT AND CONTEXT 22.4 Section 54 is only concerned with acts or omissions that happen during the post-contractual period, that is, the period following the making of an insurance contract.4 It appears in the ICA Pt V (The contract) Div 3 (Remedies), which also contains ss 55 and 55A (Representative actions by the Australian Securities and Investments Commission). Sections 54 and 55 are in the following terms: 54 Insurer may not refuse to pay claims in certain circumstances (1) Subject to this section, where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act. (2) Subject to the succeeding provisions of this section, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim. (3) Where the insured proves that no part of the loss that gave rise to the claim was caused by the act, the insurer may not refuse to pay the claim by reason only of the act. (4) Where the insured proves that some part of the loss that gave rise to the claim was not caused by the act, the insurer may not refuse to pay the claim, so far as it concerns that part of the loss, by reason only of the act. (5) Where: (a) the act was necessary to protect the safety of a person or to preserve property; or
(b) it was not reasonably possible for the insured or other person not to do the act; the insurer may not refuse to pay the claim by reason only of the act. (6) A reference in this section to an act includes a reference to: (a) an omission; and (b) an act or omission that has the effect of altering the state or condition of the subject matter of the contract or of allowing the state or condition of that subject matter to alter. 55 No other remedies The provisions of this Division with respect to an act or omission are exclusive of any right that the insurer has otherwise than under this Act in respect of the act or omission.
[page 402] A contractual term that purports to limit or exclude the operation of s 54 to the prejudice of a person other than the insurer, is void: s 52.
WHEN S 54 IS NOT IN PLAY 22.5 Section 54 precludes an insurer from refusing to pay a claim ‘where the effect of a contract of insurance would, but for this section, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into’. Section 54 limits the ability of an insurer to refuse to pay a claim; it does not affect the remedies available to an insured for an insurer’s noncompliance with, or breach of, a term of an insurance contract. 22.6 As the premise of s 54 is an act or omission that occurs after an insurance contract is made, it is not brought into play: by a pre-contractual non-disclosure or misrepresentation; by a breach of a warranty of existing fact, because a warranty of existing fact has the effect of a pre-contractual representation: ICA s 24;5 in the case of a ‘claims made’ policy, if the breach or noncompliance took place before the policy was issued; or
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■if there is simply no cover (see discussion below). 22.7
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Nor is s 54 triggered by: a fraudulent claim within the scope of s 56 of the ICA,6 because it is the effect of a statutory provision (s 56), not the effect of an insurance contract, that enables the insurer to refuse to pay a fraudulent claim;7 or an insured’s failure to give the notice anticipated by s 40(3) of the ICA, again because it is the effect of a statutory provision (s 40(3)), not the effect of an insurance contract, that enables the insurer to refuse to pay a claim first made after the insurance contract was made.8
Section 54 is not brought into play if there is simply no cover 22.8 Section 54 is not brought into play by circumstances that do not give rise to a claim for an insured loss because the policy does not cover, [page 403] deal with, respond or extend to those circumstances.9 That is because the section ‘does not operate to relieve the insured of restrictions or limitations that are inherent in that claim’.10 22.9 What is or is not an ‘inherent’ restriction or limitation in a claim is a matter of judgment, depends on substance, not form and is determined ‘by reference to the characteristics of the event or circumstance to which the policy responds’.11 Generally speaking, with a ‘losses occurring’ policy, an insurer’s ‘core’ promise will coincide with the scope of the insuring clause. Accordingly, circumstances falling outside the scope of the clause will usually be regarded as falling outside the insurer’s ‘core’ promise and will therefore not attract the application of s 54. So, for example, the operation of s 54 is attracted in the case of a motor vehicle policy with an insuring clause that covers:
■‘accidental damage to your roadworthy vehicle’; ■‘accidental damage to your vehicle, unless/but
not while it is
unroadworthy’; or ‘accidental damage to your vehicle’ and an exclusion for ‘accidental damage to your vehicle while it is being driven in an unroadworthy condition’, if accidental damage occurs and the insurer disputes its liability to pay for the damage because it occurred whilst the vehicle was unroadworthy.12 That is because in this context and however drafted, the relevant ‘substance’, ‘effect’, ‘core’ or ‘essence’13 of the insurer’s ‘contractual promise’14 is that it will pay for accidental damage to the vehicle, whatever the vehicle’s characteristics, qualities or attributes when the damage occurs.15 Section 54 operates because it is not an inherent limitation or restriction in the claim that, subject to s 54, allows the insurer to refuse to pay for the damage, but rather the act of driving the vehicle after the contract was made and whilst it has the attribute of being unroadworthy that has that effect. The operation of s 54 is also attracted in the following cases: An insurance contract covers fire damage to a warehouse. It includes a condition which provides that if there is a material alteration in
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[page 404] the nature of the occupation of the warehouse during the insurance period which might increase the risk of a claim being made, ‘then no benefits will be payable … unless You have advised Us in writing as to any such changes and We have agreed to them’. During the insurance period, a plastics manufacturer moves into the warehouse. The insured does not notify the insurer of the arrival of the plastics manufacturer. If it had done so, the insurer would have chosen not to cover the increased risk. The insurer refuses to pay a claim for fire damage to the warehouse after the
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arrival of the plastics manufacturer because it did not agree to cover the increased risk. The operation of s 54 is attracted because the relevant ‘core’ of the insurer’s ‘contractual promise’ is that it will pay for fire damage to the warehouse, whatever the characteristics, qualities or attributes of the warehouse (in this case, its occupation by a plastics manufacturer without the insurer’s knowledge or agreement to the increased risk). It is not an inherent limitation or restriction in the claim that, subject to s 54, allows the insurer to refuse to pay the claim, but rather the insured’s act of allowing the plastics manufacturer to move into the warehouse, or its omission in not notifying the insurer of that after the contract was made, that has that effect.16 An insurance contract covers legal costs incurred by the insured in defending third party claims, but only if the insured obtains the insurer’s prior written consent to the incurring of the legal costs. The insured incurs $1 million worth of legal costs in defending a third party claim. The insurer refuses to pay for the legal costs because the insured incurred them without obtaining the insurer’s prior written consent to their being incurred. The operation of s 54 is attracted because the relevant ‘core’ of the insurer’s ‘contractual promise’ is that it will pay for ‘legal costs incurred by the insured in defending a third party claim’, whatever the characteristics, qualities or attributes of the legal costs (in this case, that they were incurred without the insurer’s prior consent). It is not an inherent limitation or restriction in the claim that, subject to s 54, allows the insurer to refuse to pay the claim, but rather the insured’s omission in not obtaining the insurer’s prior agreement to incurring the costs after the contract was made that has that effect.17 [page 405]
22.10
In Watkins Syndicate 0457 at Lloyds v Pantaenius Australia
Pty Ltd,18 Arthur Phillips insured his luxury yacht, the Froia II, under overlapping insurance policies issued by Pantaenius and Watkins (Nautilus policy). Both policies were governed by the ICA, not by the Marine Insurance Act 1909 (Cth). The yacht was lost when she ran aground off Cape Talbot, Western Australia, on her return to Australia from a race from Fremantle to Bali. Pantaenius paid for the loss of the yacht and sued Watkins for contribution on double insurance principles. Watkins defended the claim on the basis that: although its policy covered the yacht up to ‘250 nautical miles off mainland Australia and Tasmania’, cover was suspended:
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when your boat clears Australian Customs and Immigration for the purpose of leaving Australian waters and will recommence when it clears Australian Customs and Immigration on return …; and
■the yacht cleared customs and immigration on leaving Australia,
but had not cleared Australian customs and immigration when she ran aground. In dismissing Watkin’s appeal, the Full Court said: subject to s 54 of the ICA, Watkins was entitled to refuse to pay the claim because cover was suspended when the grounding occurred; the yacht being within 250 nautical miles of Australia was a restriction or limitation inherent in the claim; and s 54 applied because of the post-contractual act of clearing customs on leaving Australia without re-clearance on the yacht’s return to Australia.
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22.11 On the other hand, the operation of s 54 is not attracted in the following cases: 1. a motor vehicle policy covers accidental damage to a vehicle: during the period 8 September 2013 to 8 September 2014. The insurer refuses to pay a claim for accidental damage to the vehicle because it occurred on 19 September 2014;19 during journeys of up to 450 kilometres. The insurer refuses to
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pay a claim for accidental damage to the vehicle because it occurred whilst the vehicle was on a journey of more than 450 kilometres;20 [page 406]
■in Australia. The insurer refuses to pay a claim for accidental
damage to the vehicle because it occurred whilst the vehicle was in New Zealand;21 2. a personal valuables policy covers theft of items of jewellery specified by the insured. The insurer refuses to pay a claim for stolen jewellery not specified by the insured prior to them being stolen;22 3. a liability policy indemnifies against liability for damage to property incurred in connection with construction contracts for works valued at up to $1 million. The insurer refuses to pay a claim where the insured’s liability for property damage is incurred in connection with a construction contract for works valued at more than $1 million; and 4. a ‘claims made and notified’ policy (without an expanded definition of ‘claim’ or a ‘deeming provision’). The insurer refuses to pay a claim where a third party does not make a claim against the insured during the insurance period.23 Section 54 does not apply in cases 1–4 because the reason the insurer is refusing to pay the claim is that the circumstances that gave rise to a claim on the policy do not fall within the ‘core’ of the insurer’s ‘contractual promise’. The refusal is simply because the insured did not have cover for those circumstances and did not choose to expand or extend the insurer’s contractual promise to cover those circumstances;24 it is not because of an omission of the insured ‘to exercise a right, choice or liberty which the insured enjoys under the contract of insurance’.25 The distinction between the two is not always easy to make. Two cases illustrate the issue: Johnson v Triple C Furniture and Electrical Pty Ltd26 and Highway Hauliers Pty Ltd v Matthew Maxwell.27
22.12 Johnson v Triple C concerned the following circumstances. Mr and Mrs Johnson had a family company, Triple C Furniture and Electrical Pty Ltd. They were its only directors and shareholders. Triple C owned a Cessna 206 aircraft, which crashed on take-off as a result of pilot error. The pilot, Mr Johnson, died. Mrs Johnson and the other passenger were seriously injured. Mrs Johnson sued Triple C on the basis that the pilot’s negligence caused her injuries and, as the pilot’s employer, it was vicariously liable [page 407] for his negligence. Triple C sought indemnity from Rural & General Insurance Ltd under an aviation insurance policy for any liability it had to Mrs Johnson. By the insuring clause in the policy, Rural & General promised to: indemnify [Triple C] for all sums for which [it] become(s) legally liable to pay … in respect of; … (a) accidental bodily injury … to passengers whilst … on board … the aircraft … .
The relevant exclusion provided that: … this policy does NOT apply whilst the aircraft, with the knowledge of [Triple C] or [its] agent … is; … (a) operated in breach of; … (ii) an Appropriate Authority’s, … ‘communications’.
The relevant ‘communication’ was Regulation 5.81 of the Civil Aviation Regulations 1988 (Cth), which provided: Private (aeroplane) pilot: regular flight reviews required (1) A private (aeroplane) pilot must not fly an aeroplane as pilot in command if the pilot has not, within the period of 2 years immediately before the day of the proposed flight, satisfactorily completed an aeroplane flight review.
22.13 Rural & General denied indemnity in reliance on the exclusion, in particular, because the aircraft crashed when, to Triple C’s or its agent’s (Mr Johnson’s) knowledge, it was operating (flying) in breach of the Regulation, in that Mr Johnson had not ‘satisfactorily completed an aeroplane flight review’ in the two years prior to the crash.
22.14 One of the issues was whether Triple C’s incurring of a liability to Mrs Johnson fell within Rural & General’s ‘core’ promise. The Queensland Court of Appeal concluded that even if Mr Johnson’s not having satisfactorily completed the required flight review could be regarded as an omission, it was not an omission for the purpose of s 54 because it was outside the scope of Rural & General’s ‘core’ promise, as defined by the insuring clause when read with the exclusion (at [83]). 22.15 In Highway Hauliers v Maxwell, the High Court said (at [28]) that the Queensland Court of Appeal was wrong to conclude the exclusion was a part of Rural & General’s ‘core’ promise. Rather, it simply suspended Rural & General’s ‘core’ promise whilst a Triple C aircraft operated in breach of the Authority’s ‘communications’. Accordingly, Triple C’s liability to Mrs Johnson fell within the scope of Rural & General’s ‘core’ promise and, but for s 54, the exclusion allowed Rural & General to refuse to pay the claim by reason of a postcontractual act by the insured or ‘some other person’; in particular, the aircraft being flown by a pilot who had not satisfactorily completed the required flight review. 22.16 In Highway Hauliers v Maxwell, various Lloyd’s underwriters insured Highway Hauliers under a Commercial Vehicle Policy for the [page 408] risk of damage to a fleet of prime movers and trailers it used to transport freight between Perth and the eastern states. Two of Highway Hauliers’ prime movers and trailers were damaged in separate accidents during the insurance period. The insurers rejected Highway Hauliers’ claims for the cost of repairing or replacing the damaged vehicles on the ground that the policy contained exclusions which provided that Highway Hauliers was not indemnified if, as was the case in each accident, the driver of a prime mover:
■had not achieved a minimum score on a driver test known as the
‘PAQS test’; and was a non-declared (not an insurer-approved) driver. The primary judge concluded (at [86]) that it was Highway Hauliers’ act of:
■
… operating the vehicles by allowing them to be driven by drivers who were nondeclared and who did not satisfy the PAQS endorsement or the act of those drivers driving the vehicles in those circumstances that entitled the Insurers to refuse the claims under the policy.
And: [101] … the substance of the policy was the provision of cover for vehicle damage or loss and third party liability arising out of the use of an insured vehicle. The PAQS endorsement conditioned the Insurers’ obligation to meet a particular claim that otherwise fell within the scope of cover; it did not form part of the way in which the scope of the policy was defined. [102] … the [non-declared driver] exclusion did not form part of the scope of the policy. The insured could submit a driver declaration after an occurrence and the Insurers could impose an additional excess if they concluded that they would have provided cover had the declaration been submitted prior to the occurrence.
Accordingly, the circumstances of the two accidents fell within the scope of the insurers’ ‘core’ promise and that brought s 54 into play. The trial judge distinguished Johnson v Triple C on the facts. 22.17 In dismissing the underwriters’ appeal,28 the Western Australian Court of Appeal criticised the ‘core promise’ aspect of the Court of Appeal’s decision in Johnson v Triple C as being inconsistent with Australian Hospital Care (McLure P at [85]).29 McLure P said: 73 The only restriction or limitation inherent in a claim under an occurrence/eventbased insurance policy identified by the plurality in FAI is that the event must have occurred within the period of insurance. That is consistent with the restrictions or limitations being related to the type
[page 409] or kind of policy, not the detail of the cover or the terms and conditions thereof. Potentially, the restrictions or limitations inherent in a claim made under the insurance
contract arguably extend to, but no further than, the occurrence of the type of event itself (being property damage to an insured vehicle) within the period of insurance. 76 … It is not an inherent restriction or limitation on the Insured’s claim that drivers of the damaged Vehicles on the specified routes must have satisfactorily completed the PAQS test. That is most obviously a matter of detail of the particular policy, not the type or kind of policy. …
Murphy JA said: 143 The essential character of the risk, or type of cover provided for, in substance, by the contract of insurance in this case is an Australia-wide material damage/third party liability indemnity insurance in respect of events occurring within the period of insurance relating to certain nominated vehicles. The respondent (insured) made claims for such indemnity, and whilst a driver PAQS profile of 36 conditioned (it may be assumed for present purposes) the scope of the cover, on the proper construction of the policy, it was not an inherent limitation or restriction qualifying any claims under such insurance. …
In one of its shorter judgments, the High Court unanimously dismissed the underwriters’ appeal.30 22.18 In Prepaid Services Pty Ltd v Atradius Credit Insurance NV,31 Meagher JA said s 54 is: … intended to prevent reliance upon temporal exclusions … as well as other provisions which operated, because of an act or omission occurring after the insurance was entered into, to suspend cover or entitle the insurer to deny a claim irrespective of whether the insurer had suffered any prejudice as a result.
WHEN S 54 IS IN PLAY 22.19 In summary, s 54 is in play if: the circumstances that gave rise to a claim on the policy fall within the ‘core’ of the insurer’s contractual promise; and but for s 54, the effect of the contract is that the insurer could refuse to pay some or all of the actual claim made32 because of some act of the insured or of some other person after the insurance contract was made.
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[page 410]
22.20 An ‘act’ includes an ‘omission’: s 54(6). The act or omission can be ‘of the insured or of some other person’. That ‘some other person’ is unlikely to be a party to the insurance contract.33 It is never the insurer.34 22.21 Section 54 does not qualify the act or omission by reference to the word ‘breach’ or to the nature or characteristics of the relevant contractual term. Accordingly, it applies to acts or omissions relevant to all types of contractual term, no matter how characterised.35 In Antico v Heath Fielding Australia Pty Ltd,36 Brennan CJ said (at 660–1) s 54: … focuses not on the legal character of a reason which entitles an insurer to refuse to pay a claim — falling outside a covered risk, coming within an exclusion or noncompliance with a condition — but on the actual conduct of the insured, that is, on some act which the insured does or omits to do. The legal classification of the act or omission is immaterial. The act or omission must have occurred ‘after the contract was entered into’ so that sub-s (1) does not operate to alter the contractual promise of the insurer to pay a claim. It is engaged when the doing of an act or the making of an omission would excuse the insurer from an obligation to pay a claim for a loss actually suffered by the insured.
22.22 The act or omission does not have to be the only reason why the insurer is entitled to refuse to pay the claim.37
What is an ‘act’? 22.23 In Allianz Australia Insurance Ltd v Inglis,38 the Court of Appeal distinguished between an ‘act’ for the purpose of s 54 and a ‘state of affairs’ or ‘description of a relationship’. Stuart and Linda Inglis lived with their school-aged children, James and Georgia. Their Allianz insurance policy covered the family for legal liability. James drove his parents’ ride-on lawnmower to the home of his friend Stephen Sweeney. Whilst riding the lawnmower, Stephen accidentally ran over Georgia. Georgia sued Stephen and his parents for damages for negligently causing her injuries. The Sweeneys issued third party proceedings against James and Stuart for a contribution pursuant to s 7(1)(c) of the Law Reform (Contributory Negligence and Tortfeasors Contribution) Act 1947 (WA) on the basis that they also negligently caused Georgia’s injuries.
[page 411] Stuart and James issued fourth party proceedings against Allianz for indemnity under the policy, which Allianz defended on the basis of a standard home policy exclusion for liability for: ‘injury to any person who normally lives with you.’ Stuart and James argued that if the exclusion applied, s 54(1) of the ICA prevented Allianz from relying on it. The Court of Appeal allowed Allianz’s appeal from the primary judge on the basis that: subject to s 54, Allianz was entitled to rely on the exclusion to decline the claim; Georgia normally living with Stuart and James was not a restriction or limitation inherent in their claim for indemnity; if s 54 applied, the claim came within the scope of s 54(1), not s 54(2), because although it might increase the financial risk, Georgia normally living with Stuart and James could not reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover was provided by the policy; and s 54 did not apply because Georgia normally living with Stuart and James was not a post-contractual ‘act’ as required by s 54 (something done or being done by a person). Rather, it was a postcontractual ‘state of affairs or description of a relationship’ in that Georgia normally living with Stuart and James depended ‘on the drawing of an inference from the conduct of all relevant persons over an extended period and [did] not depend on there being any act on the relevant day’.
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■
What is an ‘omission’? 22.24 For the purpose of s 54, an ‘omission’ can be inadvertent, careless or deliberate,39 and includes a failure to perform a contractual
obligation40 or ‘exercise a right, choice or liberty which the insured enjoys under the contract of insurance’.41 22.25 In Dobbie v Davidson,42 Priestley JA (at 630, 635 and 660) concluded that for the purposes of s 42(b) of the Real Property Act 1900 (NSW), ‘omission’ meant nothing more than something ‘left out’ or ‘not there’. In reaching that conclusion, His Honour said (at 647): [page 412] … This is the use of the idea of ‘omission’ in a colourless sense, imputing neither fault nor praise for the omission but merely describing what the word normally involves. If qualities of praise or blame are to be attributed to the word, they add a gloss to its primary meaning which must be justified by something more than the word ‘omission’, that is, by the elaborated statutory purpose of the word in this section as shown from the statutory history or context …
22.26 In Greentree v FAI General Insurance Co Ltd,43 Handley JA (who sat with Priestley JA in Dobbie) said (at 723) in relation to the primary meaning of ‘omission’: … in the Oxford English dictionary is ‘the action of omitting, or fact of being omitted’. The secondary meaning is ‘the non-performance or neglect of action or duty’. Dobbie v Davidson (1991) 23 NSWLR 625 provides an illustration of the former meaning in s 42(b) of the Real Property Act. In my opinion it is used in s 54 in its secondary sense and refers to the failure of the insured or someone else to perform an act for the benefit of the insured under the policy.
22.27 In FAI Insurance Ltd v Australian Hospital Care Pty Ltd,44 Kirby J (who also sat with Priestley JA in Dobbie) rejected (at [79]) Handley JA’s approach to the meaning of ‘omission’ in s 54 as being inconsistent with Antico v Heath Fielding Australia Pty Ltd,45 and said in that context: ‘No duty or obligation on the part of the insured (or of some other person) is posited, simply a failure to act’. 22.28 In Antico, Brennan CJ said (at 661) that ‘an omission is the non-performance of an act which, if done, would disentitle the insurer to refuse to pay a claim’. Two years later, Derrington J said in the Queensland Court of Appeal46 that it ‘is an essential connotation of the term [omission] that the act omitted is capable of being performed’.
22.29 In Johnson v Triple C, (the facts are summarised at 22.12) the Queensland Court of Appeal added the qualification that the act omitted must have been ‘within the power of the omitter to have done’. The High Court said nothing about this issue in Maxwell v Highway Hauliers Pty Ltd,47 so it is left to another day whether there is only an omission for the purpose of s 54 if the act omitted was ‘within the power of the omitter to have done’. [page 413]
Section 54 and the duty of utmost good faith 22.30 Section 54 limits an insurer’s remedy for an insured’s breach of the duty of utmost good faith, not the scope of the duty.48 It operates because s 13 of the ICA makes the duty an implied term of the insurance contract, so that an insurer’s refusal to pay a claim by reason of an insured’s breach of the duty is due to the effect of the contract, not of a statutory provision (unlike s 40(3)): see 18.48–18.51.
Onus of proof 22.31 The operation of s 54 is only triggered if: the insured proves that the circumstances that gave rise to a claim on the policy fall within the ‘core’ of the insurer’s contractual promise;49 the insurer persuades the court that subject to s 54, it is entitled to refuse to pay for all or part of a loss because: ■ it has discharged a relevant onus of proof; for example: ■ a limitation on cover, such as a sum insured or limit of liability which may appear in a Schedule of insurance which cannot be found;50 or ■ that a loss falls within the scope of an exclusion;51 or ■ the insured has failed to discharge a relevant onus of proof; for example:
■ ■
■ in some parts of Australia,52 that the insured complied with a condition precedent to the liability of the insurer to pay the claim (the insurer having raised the issue in its defence); ■ that the insurer is estopped or prevented by the duty of utmost good faith from relying on a breach of, or non-compliance with, a contractual term;53 ■ the operation of an exception to an exclusion;54 and [page 414]
■the insured proves that a reason for the insurer refusing to pay the
claim is an act or omission ‘of the insured or of some other person … that occurred after the contract was entered into’. In other words, the characterisation of a contractual term as a condition precedent, for example, will not circumvent the substantive protection s 54 gives to an insured, but who bears the onus of proving it has been complied with or not complied with might determine whether an insurer can persuade the court that the contractual effect of the term, but for s 54, would be that the insurer could refuse to pay the claim. If the insurer does not persuade the court of this, there is no work for s 54 to do. Who bears the onus of proof in relation to the balance of the s 54 issues depends on whether the relevant ‘act or omission’ falls within s 54(1) or s 54(2), as to which, see the discussion under the next heading.
IF ENGAGED, IS THE RELIEF IN S 54(1) OR S 54(2)? 22.32 If engaged, the relief allowed by s 54 depends on whether the relevant ‘act or omission’: ‘could reasonably be regarded as being capable of causing or contributing to’ an insured loss: s 54(2); or
■
could not reasonably be regarded as capable of causing or contributing to an insured loss: s 54(1). Which of s 54(1) or s 54(2) the relevant act or omission falls into is not always clear. The test is objective (‘reasonably’). It was the issue in Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd and Insurance and General Brokers Services Pty Ltd,55 a case in which Gibbs was insured for damage to a warehouse by fire. Clause 2 of the policy (entitled ‘Alteration’) provided that if there is an alteration in the nature of the occupation of the insured building after the commencement of the policy, which might increase the risk of any claim being made, ‘then no benefits will be payable under these Policies unless You have advised Us in writing as to any such changes and We have agreed to them’. During the insurance period, a plastics manufacturer moved into the warehouse. Gibbs did not notify Mercantile Mutual Insurance (MMI) of this. If it had done so, MMI would have chosen to go off risk. The warehouse was subsequently destroyed by fire. The fire had nothing to do with the presence of the plastics manufacturer. Whether an ‘act of the insured’ fell within s 54(1) or s 54(2) required the court to identify the relevant ‘act’. The court identified three choices: 1. Gibbs allowing the plastics manufacturer to move into the building; 2. Gibbs not notifying MMI of the plastics manufacturer’s move into the building; or 3. a composite of (1) and (2).
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[page 415] Thomas and Mackenzie JJA held (at [37] and [74] respectively) that s 54(1) applied because the ‘act of the insured’ that entitled MMI to refuse to pay the claim (but for s 54) was Gibbs’s failure to notify MMI of the plastics manufacturer’s move into the building, and that could
not reasonably be regarded as capable of causing or contributing to an insured loss. Pincus JA decided (at [15]) that the ‘act or omission’ of the insured was a composite of (1) and (2) and that it fell within s 54(2) because Gibbs’ allowing the plastics manufacturer to move into the building (being part of the act or omission of the insured) could reasonably be regarded as being capable of causing or contributing to an insured’s loss. Where the ‘act of the insured’ is a composite, ‘it is wrong to consider only that part of the composite which … could not possibly cause any loss to the insured and to ignore that part which could do so’. That the ‘act of the insured’ was a composite of (1) and (2) was relevant to s 54(3), because all parts of the ‘act of the insured’ (all parts of the composite) had to be considered in order to determine whether MMI’s refusal to pay the claim was by reason only of the ‘act of the insured’ (at [9] per Pincus JA). Pincus JA concluded that MMI was bound to pay Gibbs under s 54(3); Gibbs proved that no part of the loss that gave rise to the claim was caused by the whole of the relevant act or omission of the insured. Pincus JA distinguished Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd56 on the basis that in Ferrcom, the change from unregistered to registered crane (the equivalent of Gibbs allowing the plastics manufacturer to move into the building) could not reasonably be regarded as being capable of causing or contributing to an insured loss and, accordingly, s 54(2) could not apply. 22.33 In Johnson v Triple C (see 22.12), Chesterman JA concluded (at [97]) that if s 54 applied (his Honour had already concluded that it did not apply), what His Honour identified as an ‘omission’ (Mr Johnson not satisfactorily completing a flight review within the previous two years)57 fell within s 54(2) rather than s 54(1) as it ‘could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract’.58 That is because (at [96]) a flight review: [page 416]
… is a defence against pilot error which might cause an aircraft to crash. Its function is to ensure pilots have an appropriate level of skill and apply that skill to the task of flying. It is performed by qualified instructors whose responsibility is to observe practices or habits of a pilot that might affect flight safety, even in those pilots who endeavour to conceal their shortcomings.
22.34 What about a motor vehicle accident involving an insured driving without a licence in circumstances where their liability policy included a ‘Driving without a licence’ exclusion in the following terms? This policy does not indemnify the Insured against any liability incurred while the Vehicle is being driven, towed, operated by or in the charge of a person who did not have a licence required by law, unless the insured did not know and could not reasonably have known, that the driver did not have the required licence.
Arguably, the circumstances fall within s 54(1) because not having a vehicle licence could not reasonably be regarded as capable of causing or contributing to an insured loss.59
HOW S 54(2) OPERATES 22.35 If an act or omission could reasonably be regarded as being capable of causing or contributing to an insured loss, it will fall into the category described by s 54(2) and the insurer can refuse to pay the claim, except to the extent that the insured proves that the act or omission did not cause or contribute to the loss: s 54(3) and (4). Below is an example of how s 54(2) operates. An insured vehicle with faulty brakes is damaged when the owner unintentionally drives it into the back of another vehicle. The insurer can refuse to pay the owner’s claim for the damage to the insured vehicle if: the insurance contract excludes cover for a loss that occurs whilst the vehicle is being driven in an unroadworthy condition; and faulty brakes could reasonably be regarded as being capable of causing or contributing to an insured loss. These circumstances fall into the category described by s 54(2), so that leaving aside s 54(5)(b), the owner will only be able to recover the
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cost of repairing the damage to the insured vehicle to the extent he or she proves the faulty brakes had nothing to do with the accident. [page 417]
HOW S 54(1) OPERATES ON AN ‘OCCURRENCE-BASED’ POLICY60 22.36 If an act or omission could not reasonably be regarded as being capable of causing or contributing to an insured loss, it will fall into the category described by s 54(1) and the insurer cannot refuse to pay the claim; it can only reduce its liability to pay the claim by the extent to which it has been prejudiced by the act or omission. Below is an example how s 54(1) operates on an ‘occurrence-based’ policy. An insured vehicle is damaged when the owner unintentionally drives it into the back of another vehicle. The insurance contract contains a term that requires the insured to promptly notify the insurer of any accident involving the insured vehicle. The insured breaches the term by taking three months to notify the insurer of the accident. As the insured’s breach of the term requiring it to promptly notify the insurer of the accident could not reasonably be regarded as capable of causing or contributing to an insured loss, the insurer cannot refuse to pay the claim; it can only reduce its liability to pay the claim by the extent to which it has been prejudiced by the late notification of the accident. 22.37 Prejudice is measured by reference to the ‘actual financial damage’ suffered by the insurer by reason of the act or omission. In Moltoni Corporation Pty Ltd v QBE Insurance Ltd,61 QBE insured Moltoni, which carried on a demolition business, under an employers’ liability policy. Condition 2 of the policy required Moltoni to: give notice to QBE of any disability or personal injury or of any
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incapacity arising from it as soon as practicable after Moltoni became aware of it; and forward to QBE, forthwith after it receives it, a copy of every written notice of claim or proceedings ‘and all information as to any verbal notice of claim or proceedings’. In November 1992, Mr Symons injured his back in an accident that happened during the course of his employment with Moltoni. Moltoni notified QBE of the accident about 18 months later (April 1994). In January 1993, Mr Symons’s own doctor certified him fit to return to work. Mr Symons successfully sued Moltoni for negligently causing the accident. QBE appealed against the District Court’s order that it indemnify Moltoni in respect of its liability to Mr Symons. QBE claimed that pursuant to s 54(1), its liability to indemnify Moltoni should be reduced by the prejudice it had suffered as a result of the substantial delay in Moltoni notifying it of the accident. That prejudice was the loss of an opportunity to reduce the extent of its liability to indemnify Moltoni against Mr Symons’s claim by:
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[page 418]
■investigating the accident shortly after it happened; and ■arranging for Mr Symons to see an orthopaedic surgeon
or an
occupational specialist soon after the accident. QBE called evidence from medical specialists who said that if this had been done, the orthopaedic surgeon or occupational specialist would have advised Mr Symons to stop doing heavy work, he would have stopped doing heavy work and consequently, his injuries would not have been as severe. In the High Court, the majority said (at [16]–[17]) that the amount that fairly represents the extent of the insurer’s prejudice: … invites attention to, and requires identification of, the amount of damage which the insurer suffered as a result of the act or omission in question. Because the act or omission may not always constitute a breach of the contract of insurance by the insured, that damage will not always be identifiable as the amount that would be allowed as
compensatory damages on a claim by the insurer for breach of contract. Nonetheless, like an amount allowed for compensatory damages for breach of contract, the amount of which s 54(1) speaks, as fairly representing the extent to which the insured’s interests were prejudiced, will be the actual financial damage that has been or will be sustained as a result of the relevant act or omission. … Thus, although relevant prejudice may be found to consist in the existence of a liability which would not have been borne if there had not been the relevant act or omission, the quantification of the amount representing the extent of the insured’s prejudice as a result of the act requires the identification of what are the financial consequences that, in fact, have been, or will be, caused by that act or omission [emphasis added].
22.38 If an insurer can prove that it would not have continued on risk if the act or omission had not occurred, then its prejudice is the amount of the claim. This is illustrated by Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd,62 in which the insured was initially covered for the risk of damage to an unregistered mobile crane. The insured subsequently registered the crane so that it could be driven on the road. The crane was damaged when it overturned whilst lifting some steel structures. The insured claimed for the damage. The insurer sought to reduce its liability to pay the claim, in accordance with s 54(1), on the basis that the insured had not complied with a condition in the insurance contract which required it to promptly notify the insurer of a change in material facts during the period of the insurance, in this case, the fact that it registered the crane during the insurance period. The court found that if the insured had promptly notified the insurer of the registration of the crane, the insurer would have cancelled cover for the crane before the accident. Although it probably would have then provided cover for the crane under a different type of policy, that other policy would [page 419] have excluded cover for loss as a result of overturning. The High Court concluded (at [14]) that: … the amount which ‘fairly represents’ the prejudice suffered by Commercial Union in losing the opportunity to go off risk is the equivalent of the liability prima facie imposed
on Commercial Union by s 54(1). The prima facie liability imposed by s 54(1) is thus ‘reduced’ to nil.
On the other hand, if an insured’s act or omission would not have led to the insurer going off risk, the insurer’s prejudice is measured by what would have happened (not what could or might have happened) if the act or omission had not occurred.63 For example, if the act or omission not occurring would have resulted in the insurer charging a higher premium for the insurance, then the insurer’s prejudice is measured by the extra premium it would have earned if the act or omission had not occurred.
Onus of proof 22.39 The insurer bears the onus of proving: that the relevant act or omission prejudiced its interest; and the ‘actual financial damage’ it suffered by reason of the act or omission.64
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HOW S 54(1) OPERATES ON ‘CLAIMS MADE’ AND ‘CLAIMS MADE AND NOTIFIED’ POLICIES65 22.40 The ‘core’ of an insurer’s contractual promise in a ‘claims made’ policy is cover for a claim first made against the insured during the insurance period. Subject to the policy wording (for example, an expanded definition of ‘claim’ or the presence of a deeming provision), s 54 does not assist an insured in relation to a claim first made against it after the insurance period because there is no cover for it, not because of the act of the claimant in making the claim after the insurance period instead of during it. 22.41 Subject to the policy wording, s 54(1) extends the scope of a ‘claims made and notified’ policy to cover a claim first made against an insured during an insurance period that is not notified to the insurer during the insurance period.66 That is because the ‘core’ of the insurer’s
contractual promise in a ‘claims made and notified’ policy is cover for a claim first made against the insured during the insurance period. Section 54 operates because it is not an inherent limitation or restriction in the claim that, [page 420] subject to s 54, allows the insurer to refuse to pay a claim first made against the insured during the insurance period but not notified to the insurer until after the insurance period, but rather the act or omission of the insured in failing to notify the insurer of the claim during the insurance period that has that effect. 22.42 In FAI Insurance Ltd v Australian Hospital Care Pty Ltd,67 the High Court held that s 54(1) also extends cover to a claim first made against an insured after the insurance period, if the policy contains a deeming provision (see Chapter 18), and the insured: first became aware of circumstances during the insurance period that may subsequently give rise to a claim of that nature against the insured; and despite the benefit offered by the deeming provision, did not notify the insurer of such circumstances during the insurance period.
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22.43 Deeming clauses have fallen into desuetude in Australia because of the decision in FAI Insurance and the availability of their statutory equivalent, s 40(3) of the ICA. Section 54(1) does not cure an omission to notify under s 40(3) because it is the effect of a statutory provision (s 40(3)), not of the contract, that enables the insurer to refuse to pay such a claim. See Chapter 18 for a discussion of the application of s 40(3) on ‘claims made’ and ‘claims made and notified’ insurance policies. 22.44 If the operation of s 54(1) is attracted, it will require the insurer to pay the claim, but allow it to reduce its liability ‘by the amount that fairly represents the extent to which the [Insurers’] interests
were prejudiced as a result of’ the insured’s failure to inform the insurers of everything it knew by the end of the insurance period.
THE SCOPE OF S 54(5)(B) 22.45 By s 54(5)(b), where ‘it was not reasonably possible for the insured or other person not to do the act … the insurer may not refuse to pay the claim by reason only of the act’. Lynes v HIH Casualty and General Insurance Ltd68 concerned a bloodstock mortality insurance policy taken out by Lynes and others over their newly acquired horse, Dujuma. The policy contained an exclusion: … for loss arising directly or indirectly from … 7 the administration of any medication (except vitamins) unless by a Veterinarian or experienced personnel directed by him/her.
Within a week or so of the commencement of the policy, Dujuma’s trainer injected the horse with the antibacterial agent Tridene in an effort [page 421] to treat a troubled foot that had appeared a few days earlier. Dujuma had an anaphylactic reaction to the Tridene and shortly afterwards ‘convulsed and fell down to the ground dead’. The owners claimed on the policy. HIH denied liability to indemnify, amongst other things, in reliance on exclusion 7, on the basis that the trainer was not a veterinarian or under the direction of a veterinarian when he administered the injection. Nisbet DCJ held that s 54(5)(b) did not assist the owners because the relevant ‘act’ was that of administering the injection and it was reasonably possible for the trainer not to have done that, in that he ‘could easily have waited and called Dr Johnson [a veterinarian who had assessed Dujuma a few days earlier] without placing the horse in any immediate danger to its life or mobility’.
22.46 Assume a motor vehicle policy that excludes cover whilst an insured vehicle is unroadworthy, and assume the vehicle is involved in an accident because it has defective brakes. It is arguable the section would prevent the insurer from refusing to pay the claim if immediately before the accident the vehicle’s owner did not know or suspect, and it was not reasonably possible for the owner to know or suspect, that the brakes were defective. The relevant act is driving the vehicle in an unroadworthy condition. As the owner did not know or suspect that the vehicle had defective brakes, it was not reasonably possible for him not to drive the vehicle with defective brakes, or so the argument goes.69
CONCLUDING OBSERVATION 22.47 To paraphrase the quotation from Lord Denning’s judgment in Roles v Nathan that begins this chapter: The ICA has been very beneficial. It has almost rid us of those two unpleasant contractual terms, the ‘warranty’ and the ‘condition precedent’, that haunted insureds for hundreds of years, and it has replaced them with the attractive s 54, which has so far given us no trouble that we couldn’t handle.
1. 2. 3.
Roles v Nathan [1963] 2 All ER 908 (Lord Denning). It is identical in substance, but marginally different in form, to s 54 of the ICA. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [2001] HCA 38; (2001) 204 CLR 641 at [50] (Kirby J). 4. The date the insurer commences to be on risk does not always coincide with the date on which the parties enter into the insurance contract. 5. Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 at [18] (Mason CJ, Dawson, Toohey and Gaudron JJ). 6. Walton v The Colonial Mutual Life Assurance Society Ltd [2004] NSWSC 616; (2004) 13 ANZ Ins Cas 61-620 at [44]–[47] (Einstein J). 7. To v Australian Associated Motor Insurers Ltd [2001] VSCA 48; (2001) 11 ANZ Ins Cas 61-490 at [28] (Buchanan JA). 8. Guild Insurance Ltd v Hepburn [2014] NSWCA 400 at [23] (Macfarlan JA); Gosford City Council v GIO General Ltd [2003] NSWCA 34; (2003) 12 ANZ Ins Cas 61-566. 9. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [40]–[44] (McHugh, Gummow and Hayne JJ), [84] (Kirby J). 10. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [41]
11. 12.
13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35.
36.
(McHugh, Gummow and Hayne JJ). Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252 at [137] (Meagher JA). Australian Law Reform Commission, Insurance Contracts, Report 20, December 1982 at [229]; Maxwell v Highway Hauliers Pty Ltd [2014] HCA 33; (2014) 252 CLR 590 at [20]. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [50] (Kirby J), [60] (Kirby J). Antico v Heath Fielding Australia Pty Ltd [1997] HCA 35; (1997) 188 CLR 652 at 660–1 (Brennan CJ). A car is a car is a car. Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Australia) Ltd and Insurance and General Brokers Services Pty Ltd [2000] QCA 524; (2001) 11 ANZ Ins Cas 61-484. Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 661 (Brennan CJ). [2016] FCAFC 150. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [42] (McHugh, Gummow and Hayne JJ). Stapleton v NTI Ltd [2002] QDC 204 at [34] (McGill DCJ). Stapleton v NTI Ltd (see fn 20) at [34] (McGill DCJ). Kelly v New Zealand Insurance (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [42] (McHugh, Gummow and Hayne JJ). FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [40]–[44] (McHugh, Gummow and Hayne JJ), [84] (Kirby J). Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 669 (Dawson, Toohey, Gaudron and Gummow JJ). [2010] QCA 282; (2010) 243 FLR 336. Maxwell v Highway Hauliers Pty Ltd (see fn 12). Matthew Maxwell v Highway Hauliers Pty Ltd [2013] WASCA 115. As did Meagher JA in Prepaid Services Pty Ltd v Atradius Credit Insurance NV (see fn 11) at [140]. Maxwell v Highway Hauliers Pty Ltd (see fn 12). [2013] NSWCA 252 at [140]. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [41] (McHugh, Gummow and Hayne JJ). Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 670 (Dawson, Toohey, Gaudron and Gummow JJ). Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 661 (Brennan CJ). The application of s 54 to the provisions of an insurance contract depends on substance, not form: Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 670 (Dawson, Toohey, Gaudron and Gummow JJ). See fn 14.
37. Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 672–3 (Dawson, Toohey, Gaudron and Gummow JJ). 38. [2016] WASCA 25. 39. Drayton v Martin (1996) 67 FCR 1; 9 ANZ Ins Cas 61-322 at [99] (Sackville J); FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [35] (McHugh, Gummow and Hayne JJ). 40. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (see fn 3) at [22] (McHugh, Gummow and Hayne JJ). 41. Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 669 (Dawson, Toohey, Gaudron and Gummow JJ). 42. (1991) 23 NSWLR 625. 43. (1998) 44 NSWLR 706; 10 ANZ Ins Cas 61-423. 44. See fn 3. 45. See fn 14. 46. FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999) 153 FLR 448; 10 ANZ Ins Cas 61-445 at [20]. 47. See fn 12. 48. Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 ANZ Ins Cas 61-059 at 77,136 (Ipp J). 49. Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd [2010] HCA 9; (2010) 240 CLR 444 at [28]. 50. Wallaby Grip Ltd v QBE Insurance (Australia) Ltd; Stewart v QBE Insurance (Australia) Ltd (see fn 49) at [35]–[36]. 51. Alex Kay Pty Ltd v General Motors Acceptance Corporation [1963] VR 458 at 461 (Sholl J); Petersen v Union des Assurances de Paris IARD (1995) 8 ANZ Ins Cas 61-244 at 75,749 (Rolfe J). 52. CGU Insurance Ltd v Lawless [2008] VSCA 38; (2008) 15 ANZ Ins Cas 61-755 at [37] (Redlich JA); Legal and General Insurance Australia Ltd v Eather [1986] 6 NSWLR 390; (1986) 4 ANZ Ins Cas 60-749; Timms v FAI Insurance Ltd (1976) 12 ALR 506 (Muirhead J); S & Y Investments (No 2) Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1986) 82 FLR 130 at [60]–[65] (Maurice J). 53. Bentsen v Taylor, Sons & Co (No 2) [1893] 2 QB 274 at 283 (Bowen LJ). 54. Boonham v CE Heath Underwriting & Agency Services (NZ) Ltd (1993) 7 ANZ Ins Cas 61-189 at 78,107 (Barker J). 55. [2000] QCA 524; (2001) 11 ANZ Ins Cas 61-484. 56. [1993] HCA 5; (1993) 176 CLR 332. 57. The relevant act or omission was not Mr Johnson not satisfactorily completing a flight review within the previous two years, but rather Mr Johnson flying the aircraft without having satisfactorily completed a flight review within the previous two years. The result is the same in terms of whether the act or omission falls within s 54(1) or (2). 58. At [97], Chesterman JA says the test is whether the act or omission ‘could reasonably be regarded as being capable of contributing to the loss’, when it is whether it ‘could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract’ (emphasis added). But in this case, the
59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69.
result would be the same. Leask Timber and Hardware Pty Ltd v Thorne (1961) 106 CLR 33 at [9] (Kitto J). See Chapter 2 for a description of the nature of an ‘occurrence-based’ policy. [2001] HCA 73; (2001) 205 CLR 149. [1993] HCA 5; (1993) 176 CLR 332. Moltoni Corporation Pty Ltd v QBE Insurance Ltd [2001] HCA 73; (2001) 205 CLR 149 at [18] (Gleeson CJ, Gaudron, McHugh, Kirby and Hayne JJ). Moltoni Corporation Pty Ltd v QBE Insurance Ltd (see fn 63) at [24] (Gleeson CJ, Gaudron, McHugh, Kirby and Hayne JJ). See Chapter 18 for a description of the nature of ‘claims made’ and ‘claims made and notified’ policies. Antico v Heath Fielding Australia Pty Ltd (see fn 14) at 661 (Brennan CJ). See fn 3. [1999] WADC 68. ALRC Report 20, Ch 8 at [230].
[page 423]
Chapter 23 FRAUDULENT CLAIMS The making of dishonest insurance claims has become all too common. There seems to be a widespread belief that insurance companies are fair game, and that defrauding them is not morally reprehensible.1
INTRODUCTION This chapter discusses fraudulent claims under the following headings: the nature of a fraudulent claim; an insurer’s common law remedy for a fraudulent claim; an insurer’s remedy for a fraudulent claim under the Insurance Contracts Act 1984 (Cth) (ICA); collateral lies (formerly known as ‘fraudulent devices’); and some procedural and evidential matters.
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THE NATURE OF A FRAUDULENT CLAIM 23.1 An insurance claim is fraudulent if a false statement made in connection with the claim is: deliberately false, or is made with reckless indifference as to whether it is true or false ‘in the sense in which the representor intended it to be understood’;2 and made with the intention of creating a false belief in the insurer for the purpose of obtaining money or some other benefit.3
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[page 424]
The claim is fraudulent even if the insured does not believe he is acting dishonestly, as long as he ‘knows facts which make his conduct, objectively viewed, dishonest’.4 A claim might be fraudulent: even if the false statement was not made for the purpose of obtaining money or some other benefit; for example, if it was made to save the insured from personal embarrassment;5 or if it was initially honest, but is pursued after the insured became aware that it was unintentionally exaggerated when first made.6
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23.2 An insurance claim is fraudulent if it is grossly and deliberately or recklessly exaggerated.7 Within reason, exaggerating the value of a claim should not be regarded as fraudulent, because: an insured should be given some latitude on values when putting forward a claim; and an insurer will usually have access to sufficient evidence to determine for itself the appropriate value range for the claim. For example, a court should not readily conclude that a claim is fraudulent where the insured is ‘horse trading’ or trying to establish a bargaining position in the course of progressing a claim, even if the claim is for more than the insured ‘reasonably believed he would recover’.8 In Orakpo v Barclays Insurance Services,9 Lord Hoffmann explained (at 451):
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… where nothing is misrepresented or concealed and the loss adjuster [appointed by the insurer to assess the claim] is in as good a position to form a view of the validity of the claim as the insured, it will be a legitimate reason that the assured was merely putting forward a starting figure for negotiation.
In the earlier case of Entwells Pty Ltd v National and General Insurance Co Ltd,10 Ipp J said (at 77,135) that claiming for stock that never existed is fraudulent, but that is not the same as exaggerating the value of stock to negotiate the best possible insurance payment. [page 425]
23.3 that:
An insurer can succeed on a fraudulent claim without proving
knew or believed they were not entitled to the benefit ■the insured 11
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sought; the false statement was material, in the sense that it ‘would influence a prudent insurer’s decision to accept, reject or compromise a claim’.12 That is because, unlike a pre-contractual fraudulent non-disclosure or misrepresentation, materiality ‘is built into the concept of a fraudulent claim’; 13 or the false statement actually induced it to pay the claim or a part of it.14 Again, this can be contrasted with the requirement that an insurer prove inducement in the case of a pre-contractual fraudulent non-disclosure or misrepresentation.
AN INSURER’S COMMON LAW REMEDY FOR A FRAUDULENT CLAIM 23.4 Many insurance contracts include a term providing that if an insured makes a fraudulent claim, they forfeit all benefits under the contract and the insurer may terminate the contract, for example: If the insured makes a claim knowing it to be fraudulent, the policy shall become void and all claims under it forfeited.
This reflects the common law position.15 The following discussion is about an insurer’s common law remedies for a fraudulent claim in the absence of such a term. 23.5 An insurer is not liable to pay a fraudulent claim because of a special common law rule relating to fraudulent insurance claims.16 It is not because a fraudulent claim is a breach of an insured’s duty of utmost good faith or of an implied term of the contract that it not make a fraudulent claim. An insurer is entitled to refuse to pay the whole of a claim even if it is only partly fraudulent.17 There would be no disincentive for fraud if, in the case of a claim that
was partly fraudulent, an insurer could only avoid paying the [page 426] fraudulent part.18 If that was the case, an insured might think it worthwhile trying to get away with some fraud, because he would not be risking the valid part of his claim if the fraud was discovered.19 23.6
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An insurer can only refuse to pay a fraudulent claim if: the insured is involved in the fraudulent aspect of the claim;20 An insured company’s claim will be regarded as fraudulent if a director or officer, employee or agent of the company is relevantly fraudulent and that person acted ‘with the authority of the company or is so closely connected with the company that his acts can be said to be its acts’.21 Amongst other things, it will depend on the extent to which the person is in control of the relevant areas of the company’s activities; and the fraudulent part of the claim is substantial.22 The fraudulent part of a claim is substantial if it is not trivial, insignificant or de minimis.23 In Galloway v Guardian Royal Exchange (UK) Ltd,24 Millet LJ said (at 215) that the fraudulent part of a claim will be regarded as substantial if it is ‘sufficiently serious to justify stigmatising it as a breach of [the insured’s] duty of good faith so as to avoid the policy’. At the time Millet LJ said this, it was thought that the making of a fraudulent claim might be a breach of an insured’s duty of utmost good faith.25 Perhaps this test of substantiality is not the right test if the source of the insurer’s remedy for a fraudulent claim is not the duty of utmost good faith.
23.7 Where a claim is partly genuine and partly fraudulent, whether the fraudulent part is substantial is to be tested by looking at it on its own, not ‘by reference to the proportion of the entire claim which is represented by the fraudulent claim’.26
Danepoint Ltd v Allied Underwriting Insurance Ltd,27 is an example of the fraudulent part of a claim contaminating the whole claim. Danepoint concerned premises that had been subdivided into 13 flats. Danepoint claimed for reinstatement costs relating to a fire at the premises. [page 427] Loss adjusters appointed by Allied agreed reinstatement costs at £83,000. Allied paid £25,000 on account of reinstatement costs. The builder subsequently rendered invoices totalling £60,000, even though only about £25,000 worth of work and materials had been performed or provided. Danepoint also claimed £53,000 for loss of rent, on the basis that all the tenants moved out of the premises straight after the fire. Coulson J said payments by Allied after it paid the £25,000 on account would depend on inspections of the reinstatement work by Allied’s loss adjuster. The builder’s inflated invoices were not material because they were a ‘try-on which could not hope to get past [Allied’s] scrutiny’. Coulson J concluded that: the claim for loss of rent was fraudulent because many of the tenants did not leave the flats after the fire, and those that did not leave probably continued to pay rent to Danepoint; and Danepoint’s claims for the cost of reinstatement and loss of rent amounted to one claim on the policy for two different heads of loss. As the claim for loss of rent was fraudulent, the entire claim failed and Danepoint had to repay the £25,000 paid by Allied on account of reinstatement costs. Galloway v Guardian Royal Exchange (UK) Ltd28 is another example of the fraudulent part of a claim tainting the whole claim. In that case, Galloway validly claimed just over £16,000 for his loss. He
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also claimed £2,000 for a computer that did not exist. That was enough for the court to deny recovery for the whole claim. 23.8 As an insurer can succeed on a fraudulent claim without proving it was induced by the fraud to pay the claim, the insured subsequently withdrawing the fraudulent part of the claim is irrelevant to the fraud defence. 29 23.9
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As well as refusing to pay a fraudulent claim, an insurer can: recover interim payments already made to the insured in relation to the claim;30 seek damages for the tort of deceit, which would include the reasonable costs incurred by the insurer in investigating the claim; and avoid the contract.31 This is because the fraud ‘goes to the root of the contract and entitles the insurer to be discharged’.32 [page 428]
In Orakpo v Barclays Insurance Services, Sir Roger Parker said (at 452) that an insurer is entitled to avoid the contract for a fraudulent claim because: … it is contrary to reason to allow an insurer to avoid a policy for material nondisclosure or misrepresentation on inception, but to say that, if there is subsequently a deliberate attempt by fraud to extract money from the insurer for alleged losses which had never been incurred, it is only the claim which is forfeit.
23.10 If an insurer elects to avoid a contract for a fraudulent claim, does the avoidance take effect from the outset of the contract or is it prospective? Avoiding a policy from the beginning can be disproportionate to the damage done by a fraudulent claim if it involves the insured having to repay honest claims already paid.33 On the other hand, prospective termination would avoid the fraudulent claim and all future claims, but leave the insured’s accrued rights alone. The better view is that an insurer is only entitled to avoid a policy
prospectively.34 23.11 An insurer who has repudiated liability on incorrect grounds can rely on a fraud that occurred before it repudiated liability, even if the insurer does not discover the fraud until after it has repudiated liability.35
AN INSURER’S REMEDY UNDER THE ICA FOR A FRAUDULENT CLAIM 23.12 In its report on Insurance Contracts,36 the Australian Law Reform Commission said (at [243]): Fraud. Faced with escalating fraud, insurers strenuously maintain the need to preserve their entitlement to reject fraudulent claims, whatever changes are made to the law relating to other conditions subsequent. Even so, it is doubtful whether many insurers would totally reject a substantial claim merely because the insured had acted fraudulently in relation to a minor part of it. A claim for $3000 lost baggage would usually be met even if a fraudulent claim that a camera worth $200 was included in that baggage was rejected. While fraud must be discouraged, a rule that fraud in respect of one claim taints other claims under the same policy can operate most unevenly between an insured with a number of separate policies and one with a composite policy covering numerous risks. Consistently with the approach adopted in
[page 429] relation to fraudulent statements made by the insured at the time of entering into a contract of insurance, the Commission recommends that the insurer’s right to refuse to pay a claim on the basis of fraud should remain. However, in cases where the total loss of the insured’s claim would be seriously disproportionate to the harm which the insured’s conduct has or might have caused, a court should be entitled to order the insurer to pay to the insured an amount which is just and equitable in all the circumstances. In exercising its discretion, the court should have regard to all relevant factors, including the need to deter fraud. The strict application of the doctrine of utmost good faith might conceivably result in the insurer being entitled to avoid the contract ab initio. If so, an insurer might be entitled to deny a prior claim untainted by fraud or to require repayment of moneys paid by it in connection with such a claim. That would not be acceptable. A breach of the duty of utmost good faith in connection with a claim should only affect the claim in question. Avoidance of the contract ab initio should not be permitted. However, these recommendations should not affect the subsequent
recommendation that, in the event of a fraudulent claim, an insurer should be entitled to cancel all existing contracts …
23.13 Section 56 of the ICA is in the following terms: Section 56 Fraudulent claims (1) Where a claim under a contract of insurance, or a claim made under this Act against an insurer by a person who is not the insured under a contract of insurance, is made fraudulently, the insurer may not avoid the contract but may refuse payment of the claim. (2) In any proceedings in relation to such a claim, the court may, if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair, order the insurer to pay, in relation to the claim, such amount (if any) as is just and equitable in the circumstances. (3) In exercising the power conferred by subsection (2), the court shall have regard to the need to deter fraudulent conduct in relation to insurance but may also have regard to any other relevant matter. 23.14 In To v AAMI Ltd,37 Buchanan JA explained the purpose and scope of s 56 in the following terms: … the changes to the common law position effected by s 56 are only to limit the insurer’s remedy in the event of fraud to the denial of the fraudulent claim rather than avoidance of the policy and to enable the Court to order payment where only a minimal or insignificant part of the claim is fraudulent and it would be harsh and unfair not to pay the remainder. Otherwise the legal position remains unaltered: an insurer need not pay a fraudulent claim, whether or not there is an underlying loss which is covered by the policy. There was a moral or public policy
[page 430] dimension to the common law principle, which is preserved in s 56. While s 56 is remedial, and is to be construed beneficially, its effect cannot be pushed beyond the meaning of the words in the section.
23.15
Section 56 applies to a fraudulently made claim:
■by an insured under an insurance contract; or ■under the ICA against an insurer by a person who is not an insured
(for example, by a third party against an insurer pursuant to s 51 of the ICA).
23.16 The ICA does not define ‘fraudulently’ and so its meaning is derived from the common law. Section 56 does not apply to fraudulent statements made when giving evidence in court38 or in an affidavit filed with the court in connection with the making of an insurance claim.39 23.17 An insurer cannot avoid an ICA-governed contract for a fraudulent claim, but may: refuse to pay the claim (s 56(1)); and cancel the contract pursuant to s 60(1)(e) of the ICA for a fraudulent claim made: ■ under the contract; or ■ under another contract with it or another insurer, if the contract ‘provides insurance cover during any part of the period during which the first-mentioned contract provides insurance cover’. Cancellation takes effect from the time identified by s 59(2).
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23.18 If an insurer refuses to pay a fraudulent claim ‘the court may, if only a minimal or insignificant part of the claim is made fraudulently and non-payment of the remainder of the claim would be harsh and unfair, order the insurer to pay, in relation to the claim, such amount (if any) as is just and equitable in the circumstances’: s 56(2). The insured bears the onus of showing that the part of the claim that was fraudulent was only ‘minimal or insignificant’. The words ‘just and equitable’: allow a wide discretion, to be ‘exercised judicially in the light of the whole of the circumstances surrounding the relevant subject matter’;40 and
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[page 431] individual opinion [or] discretion of an ■do not allow ‘unfettered 41
arbitrary kind’. Notwithstanding the wide discretion, in exercising that power ‘the court shall have regard to the need to deter fraudulent conduct in relation to insurance but may also have regard to any other relevant matter’: s 56(3). 23.19 Section 54 does not apply to a claim caught by s 56.42 Section 54 modifies the contract of insurance, whereas the ability of an insurer to refuse to pay a fraudulent claim is derived from statute.43
COLLATERAL LIES (FORMERLY KNOWN AS ‘FRAUDULENT DEVICES’) 23.20 An insurance claim is also tainted by fraud if an insured, believing a claim is: invalid (even if the claim turns out to be valid);44 or a good one, utilises a collateral lie (a fraudulent means or a device) in an effort to improve the chances the insurer will accept the claim, pay it sooner or pay more for it, and if believed by the insurer, would objectively improve the chances of that happening.45 It is not necessary that the insurer actually be deceived by the collateral lie. Examples of a collateral lie include producing to an insurer a false invoice or receipt or a false witness statement, or deliberately withholding from an insurer evidence the insured is obliged by its duty of utmost good faith to disclose and which might, on the face of it, damage the insured’s case.
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23.21 The leading case on collateral lies is Versloot Dredging BV v HDI Gerling Industrie Versicherung AG.46 Versloot concerned the DC Merwestone, which left Lithuania with a cargo of scrap iron. She was
incapacitated by flooding in the engine room that damaged the main engine beyond repair. In claiming for the loss, Mr Kornet, the relevant person in the vessel’s management, told the lawyers for the vessel’s hull and machinery insurer (HDI Gerling) that the bilge alarm had sounded at about noon on the [page 432] day the vessel became incapacitated, but the crew had been unable to investigate or deal with the leak because of the rolling of the vessel in heavy weather. That was speculation by Mr Kornet, although he believed it to be true. Mr Kornet told the lawyers the crew had told him about the alarm activation. This was a lie, albeit a lie irrelevant to the merits of the claim. HDI Gerling denied the claim on the basis it was embellished by a collateral lie, the lie. At common law, if an insured makes a fraudulent insurance claim, the latter is not liable to pay the claim at all (the fraudulent claim rule). Lord Sumption concluded that a claim supported by a collateral lie (formerly known as a ‘fraudulent device’) is not a fraudulent claim for the purpose of the fraudulent claim rule and so does not result in forfeiture of the claim. That is because (at [26]) ‘the lie is dishonest, but the claim is not’. To decide otherwise would ‘serve only to protect [the insurer] from the obligation to pay, or to pay earlier, an indemnity for which he has been liable in law ever since the loss was suffered’. In To v AAMI Ltd,47 a case that pre-dates Versloot, Buchanan J concluded (at [25]) that s 56 applies to the use of a collateral lie (fraudulent device) and if the collateral lie relates to the whole of the claim, there is no relief for the insured even if the claim is otherwise valid. Versloot suggests s 56 does not apply to a collateral lie. That is because the claim is not made fraudulently; it is embellished fraudulently.
SOME PROCEDURAL AND EVIDENTIAL MATTERS 23.22 To succeed in a fraudulent claim defence, an insurer must prove on a balance of probabilities (the civil standard of proof), an actual persuasion of the mind as to the fraud.48 The seriousness of the allegation affects the clarity of proof required.49 The more serious the allegation, the more cogent the evidence required to prove the allegation.50 This reflects a perception that people: … do not ordinarily engage in fraudulent or criminal conduct … and a judicial approach that a court should not lightly make a finding that, on the balance of probabilities, a party to civil litigation has been guilty of such conduct. 51
[page 433] But the degree of proof never reaches the degree of certainty that is required to prove a conviction upon a criminal charge.52 The court must be very careful when applying the civil burden to allegations of fraud.53 23.23 For obvious reasons, in cases of alleged arson that get to trial, the insurer is usually relying on circumstantial, rather than direct, evidence pointing to the insured as the arsonist. The High Court described the sufficiency of evidence required to prove arson in the unreported decision Bradshaw v McEwans Pty Ltd (27 April 1951):54 Of course as far as logical consistency goes many hypotheses may be put which the evidence does not exclude positively. But this is a civil and not a criminal case. We are concerned with probabilities, not with possibilities. The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while in the latter you need only circumstances raising a more probable inference in favour of what is alleged. In questions of this sort, where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture: … But if circumstances are proved in which it is reasonable to find a balance of
probabilities in favour of the conclusion sought then, though the conclusion may fall short of certainty, it is not to be regarded as a mere conjecture or surmise.
23.24 As the following case illustrates, an insured will not necessarily succeed in their claim on the policy if their insurer fails at trial to prove the insured deliberately caused the loss. Ocean Harvester Holdings Pty Ltd v MMI General Insurance Ltd55 concerned a trawler insured under a marine hull policy for, amongst other things, accidental loss. The trawler sank and Ocean Harvester made a claim under the policy for the loss of the trawler. Cullinane J could not decide which witnesses were telling the truth and so dismissed Ocean Harvester’s claim that the trawler had sunk accidentally and MMI’s defence that the vessel had been scuttled. On appeal, Ocean Harvester submitted that once Cullinane J rejected MMI’s defence of scuttling, he should have found for Ocean Harvester on the basis that the trawler sunk accidentally. In a very brief judgment, McMurdo P disagreed (at [12]): [page 434] Under the contract of insurance the appellant had to establish the ship sank by accident; this was a matter to be determined by his Honour on the evidence at trial, which included Dobbins’ evidence that Kerr and Thompson scuttled the boat. On the accepted evidence, his Honour was not persuaded on the balance of probabilities that Kerr and Thompson had scuttled the boat, a criminal offence, but nor did the evidence satisfy him on the balance of probabilities that the boat was accidentally sunk; the appellant’s claim was unproved and failed. Whilst it is unusual for judges to be left in such a state of uncertainty as to evidence, it is not uncommon in cases of this sort where judges are not lightly persuaded to accept that protagonists have acted with criminal intent but nor are they necessarily satisfied to the civil standard that the claim is made out …
23.25 An insurer can plead fraud, and in the alternative, seek remedies in reliance on terms of the insurance contract. In Super Chem Products Ltd v American Life and General Insurance Co Ltd,56 Super Chem manufactured detergents. American Life insured Super Chem’s premises for fire and other risks. In April 1990, a fire destroyed large parts of Super Chem’s premises. Super Chem sued American Life. American Life alleged arson. American Life also pleaded
breaches of contractual limitation and claims co-operation clauses. The arson allegation failed. Super Chem said once American Life had alleged fraud, they could not rely on alleged breaches of limitation or claims cooperation clauses because alleging fraud was a repudiation of the insurance. The Privy Council decided American Life could allege fraud and defend on the basis of the alleged breaches, because it was contrary to principle and business commonsense to require an insurer to choose between alleging fraud, thereby abandoning the right to rely on a breach of another condition of the policy, or to rely on the breach and thereby give up the right to allege fraud.
1. 2.
3.
4.
5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
Galloway v Guardian Royal Exchange (UK) Ltd [1997] EWCA Civ 2487; [1999] 2 Lloyd’s Rep IR 209 (Millett LJ). Forrest v ASIC [2012] HCA 39; (2012) 247 CLR 486 at [22] and [70] (French CJ, Gummow, Hayne and Kiefel JJ); Prepaid Services Pty Ltd v Atradius Credit Insurance NV [2013] NSWCA 252; (2013) 302 ALR at [39] and [40] (Meagher JA). Lek v Mathews (1927) 29 LIL Rep 145 (Viscount Sumner); To v Australian Associated Motor Insurers Ltd [2001] VSCA 48; (2001) 11 ANZ Ins Cas 61-490 at [19]–[20] (Buchanan JA). Versloot Dredging BV v HDI Gerling Industrie Versicherung AG (Rev 1) [2013] EWHC 1666 (Comm) at [153] (Popplewell J); Abou-Rahmah v Abacha [2006] EWCA Civ 1492 (Comm); [2007] 1 All ER 827 at [66]. To v Australian Associated Motor Insurers Ltd (see fn 3) at [4]–[5] (Callaway JA). Agapitos v Agnew [2002] EWCA Civ 247; [2003] QB 556 at [15] (Mance LJ). Danepoint Ltd v Allied Underwriting Insurance Ltd [2005] EWHC 2318 (TCC); [2006] Lloyd’s Rep IR 429 at [118]–[119] (Coulson J). Orakpo v Barclays Insurance Services [1995] LRLR 443 at 451 (Lord Hoffmann); Nsubuga v Commercial Union [1998] 2 Lloyd’s Rep 682 at 686 (Thomas J). See fn 8. (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059. To v Australian Associated Motor Insurers Ltd (see fn 3) at [20] (Buchanan JA). To v Australian Associated Motor Insurers Ltd (see fn 3) at [24] (Buchanan JA). Royal Boskalis [1997] LRLR 523 at 599 (Rix J). Agapitos v Agnew (see fn 6) at [36] and [37] (Mance LJ). K/S Merc-Scandia XXXXII v Certain Lloyd’s Underwriters (The ‘Mercandian Continent’) [2001] EWCA Civ 1275; (2001) Lloyd’s Rep 563 at [10] (Longmore LJ). AXA General Insurance Ltd v Gottlieb [2005] EWCA Civ 112; 1 All ER (Comm) 445 at [31] (Mance LJ).
17. Galloway v Guardian Royal Exchange (UK) Ltd (see fn 1) (Lord Woolf MR); see Danepoint Ltd v Allied Underwriting Insurance Ltd (see fn 7) at [51]–[52] (Coulson J). 18. Britton v Royal Insurance Company (1866) 4 F&F 905; 176 ER 843 at 909 (Willes J). 19. Manifest Shipping Company Ltd v Uni-Polaris Shipping Co Ltd (The ‘Star Sea’) [2001] UKHL 1; [2003] 1 AC 469 at [62] (Lord Hobhouse). 20. Woolfall and Rimmer Ltd v Moyle [1942] 1 KB 66 at 74–5 (Lord Greene MR). 21. Entwell Pty Ltd v National and General Insurance Co Ltd (1991) 6 WAR 68; 6 ANZ Ins Cas 61-059 (Ipp J). 22. Agapitos v Agnew (see fn 6) at [36] (Mance LJ). 23. Lek v Mathews (see fn 3). 24. See fn 1. 25. Manifest Shipping Company Ltd v Uni-Polaris Shipping Co Ltd (The ‘Star Sea’) (see fn 19) at [62] (Lord Hobhouse). 26. Galloway v Guardian Royal Exchange (UK) Ltd (see fn 1) at 213–4 (Millett LJ). 27. [2005] EWHC 2318 (TCC); [2006] Lloyd’s Rep IR 429. 28. [1997] EWCA Civ 2487; [1999] 2 Lloyd’s Rep IR 209. 29. Stemson v AMP General (NZ) Ltd [2006] UKPC 30; [2006] Lloyd’s Rep IR 173 at [35] (Lord Mance). 30. AXA General Insurance Ltd v Gottlieb (see fn 16) at [31] (Mance LJ). 31. To v Australian Associated Motor Insurers Ltd (see fn 3) at [13] (Buchanan JA). 32. Orakpo v Barclays Insurance Services (see fn 8) at 451 (Lord Hoffmann). 33. Manifest Shipping Company Ltd v Uni-Polaris Shipping Co Ltd (The ‘Star Sea’) (see fn 19) at [51] and [57] (Lord Hobhouse). 34. D Friedman, ‘Contract Law and the Law of Insurance’ (2004) 120 Law Quarterly Review 407 at 410; S Henchcliffe, ‘Insurance Claims: Fraud and the Duty of Good Faith’ (1997) 8 Insurance Law Journal 210 at 228; Manifest Shipping Company Ltd v Uni-Polaris Shipping Co Ltd (The ‘Star Sea’) (see fn 19) at [51] (Lord Hobhouse). 35. Bolton Metropolitan Borough Council v Municipal Mutual Insurance Ltd [2006] EWCA Civ 50; 1 WLR 1492 at [31]–[34] (Longmore LJ). 36. Australian Law Reform Commission, Insurance contracts, Report 20, December 1982. 37. [2001] VSCA 48; (2001) 3 VR 279 at [17]. 38. Brescia v QBE [2007] NSWSC 598; (2007) 14 ANZ Ins Cas 61-740 at [356]–[359] (Hammerschlag J); Allianz Australia Insurance Ltd v Douralis [2008] VSCA 72 at [5]–[6] (Nettle JA). 39. Allianz Australia Insurance Ltd v Douralis (see fn 38) at [5]–[6] (Nettle JA). 40. Amaca Pty Ltd v McGrath as liquidators of HIH Underwriting and Insurance (Australia) Pty Ltd [2011] NSWSC 90 at [67] (Barrett J); Talga v MBC International Ltd (1976) 133 CLR 622 at 634 (Stephen, Mason and Jacobs JJ); Cominos v Cominos (1972) 127 CLR 588 at 599 (Gibbs J); Eddy Lau Constructions Pty Ltd v Transdevelopment Enterprise Pty Ltd [2004] NSWSC 273 at [45]–[47] (Barrett J). 41. Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101 at 113 (Sheller JA). 42. Walton v The Colonial Mutual Life Assurance Society Ltd [2004] NSWSC 616; (2004) 13 ANZ Ins Cas 61-620 at [44]–[47] (Einstein J).
43. 44. 45. 46. 47. 48. 49.
50. 51. 52. 53. 54. 55. 56.
To v Australian Associated Motor Insurers Ltd (see fn 3) at [28] (Buchanan JA). Tonkin v UK Insurance Ltd [2006] EWHC 1120 (TCC) at [176] (Coulson QC). Agapitos v Agnew (see fn 6) at [38] (Mance LJ). [2016] UKSC 45. [2001] VSCA 48; (2001) 3 VR 279 at [25] (Buchanan JA). O’Reilly v Law Society of New South Wales (1988) 24 NSWLR 204 at 220, citing Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 at 362 (Dixon J). Transport Industries Insurance Co Ltd v Longmuir [1997] 1 VLR 125; (1996) 9 ANZ Ins Cas 61-385 at [129]–[130] (Winneke P); Benson-Brown v HIH Casualty & General Insurance Ltd [2001] WASC 6 at [29] (Wheeler J). Briginshaw v Briginshaw (see fn 48) at 362 (Dixon J). Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; (1992) 67 ALJR 170 at [21] (Mason CJ, Brennan, Deane and Gaudron JJ). Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517 at [11]. Briginshaw v Briginshaw (see fn 48) at 361–2 (Dixon J). Cited by the Supreme Court of Victoria Court of Appeal in Mutual Community General Insurance Pty Ltd v Khatchmanian [2013] VSCA 144 at [15]. [2004] QCA 41; (2004) 13 ANZ Ins Cas 61-592. [2004] UKPC 2; Lloyd’s Rep IR 446.
[page 435]
Chapter 24 HOW MANY CLAIMS (AGGREGATION CLAUSES)? Whether or not something which produces a plurality of loss or damage can properly be described as one occurrence … depends on the position and viewpoint of the observer and involves the question of degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible.1
INTRODUCTION Whether one or more claims are being made on an insurance contract is the subject of this chapter. It is divided into a discussion of: aggregation clauses; and some English and Australian cases that illustrate the operation of aggregation clauses. Subject to the policy wording: an insured is liable to pay an excess for each claim on an insurance contract (assuming the contract provides for the payment of an excess); and an insurer is liable to pay each claim on the contract up to the sum insured, even if the total value of the claims exceeds the sum insured. Sometimes it is important to know how many claims are being made on an insurance contract. If there is only one claim, the insured will only have to pay one excess, and will only have the benefit of one sum insured. Depending on the circumstances, the insured may want to argue there is more than one claim. For example, if the total amount
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claimed is less than the sum insured, it will be in the insured’s interests to argue there is only one claim. If the argument is successful, the insured will be fully indemnified for the claim, except to the extent of one excess. [page 436] On the other hand, if the total amount claimed is more than the sum insured, the insured may wish to argue there is more than one claim, so that they get the benefit of a separate sum insured for each claim, even if the price of that is a separate excess for each claim. The issue can also give rise to a dispute between a primary layer insurer and an excess layer (top-up) insurer. For example, if the total amount claimed is more than the primary layer sum insured, the excess layer insurer may wish to argue there is more than one claim, if the result is that the whole of the loss falls entirely within the separate claims on the primary layer policy (or that the extent to which the loss falls into the excess layer is substantially reduced by distributing the claims at the primary layer level). At the same time, the primary layer insurer may want to argue there is only one claim, so that the excess layer insurer is called on to contribute to the claim to the extent that it exceeds the primary layer sum insured. Accordingly, when a court comes to construe the provisions of an insurance contract for the purpose of determining whether there is one or more claims, it should be mindful that in different circumstances, that same construction might benefit any one or more of an insured, an insurer, a primary layer insurer or an excess layer insurer.2 The meaning of the word ‘claim’, and whether there is one or more claims on a policy will depend on the facts of each case and the proper construction of the policy.3 A claim is not the same as a cause of action.4 In the case of a liability policy, the underlying facts determine whether there is one or more claims on the policy, not the way in which
a third party formulates its claim against the insured, although that can be a useful starting point.5 As mentioned in Chapter 2, insurance can be divided into first party insurance and liability insurance, and in turn, liability insurance can be divided into ‘occurrence’ and ‘claims made’ insurance. A decision about the number of claims in relation to one type of policy will not necessarily indicate the same number of claims in relation to another type of policy. Further, there is a limit as to how useful the result in any one case can be in predicting the outcome of a dispute involving a different policy wording in different circumstances. [page 437]
AGGREGATION CLAUSES 24.1 In anticipation of the burden for an insured of having to pay multiple excesses (particularly if an excess is substantial) and the burden for an insurer of being called upon to pay multiple sums insured in the case of a loss or losses that arise out of closely connected circumstances in time and place, many insurance contracts contain an aggregation clause. An aggregation clause is simply a ‘part of the mechanism for determining the particular amount to be paid in performance of the promise to indemnify’.6 The purpose of the clause is to ‘enable two or more separate losses covered by the policy to be treated as a single loss for deductible or other purposes when they are linked by a unifying factor of some kind’.7 Having regard to what is at stake for insured and insurer in the way in which the risk of multiple claims are allocated by an aggregation clause, it can be expected that the language of the clause will be the subject of careful negotiation: Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd.8 Lloyds TSB concerned a policy with a deductible of £1 million ‘each and every claim’ and the following aggregation clause: If a series of third party claims shall result from any single act or omission (or related
series of acts or omissions) then, irrespective of the total number of claims, all such third party claims shall be considered to be a single third party claim for the purposes of the application of the deductible.
24.2 Subject to the particular wording of an aggregation clause, the modern test applied by the English courts for determining the existence of one ‘event’ or ‘occurrence’ in an insurance contract using either or both of those terms, is whether from the point of view of an informed observer in the position of an insured, there is a sufficient degree of unity to justify the label of an event or occurrence. The assessment of unity is made by reference to a number of factors, the most important being time, locality, cause and the intentions of the human agents. The assessment is made analytically and as a matter of intuition and commonsense.9 This approach to the issue developed out of the decision of Michael Kerr QC (later Kerr LJ) sitting as an arbitrator in the Dawson’s Field Arbitration in London in 1972. [page 438] The Dawson’s Field Arbitration arose out of the hijacking of four aircraft. Three were flown to Dawson’s Field airstrip in Jordan where they were blown up within a period of about five minutes. The other was flown to Cairo. The first party policy contained an excess of loss clause that spoke of ultimate net loss sustained in respect of ‘each and every loss and/or occurrence and/or series of occurrences arising out of one event’. Michael Kerr QC held that the order or decision to blow up the three aircraft at Dawson’s Field as closely together in time as possible, constituted a single unifying event. The loss of the aircraft at Cairo was a separate occurrence. He also concluded that the following did not constitute an event for the purpose of the policy: the plan to hijack the aircraft; each explosion; or the intention of the people involved. In his award, Michael Kerr QC said:
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Whether or not something which produces a plurality of loss or damage can properly be
described as one occurrence … depends on the position and viewpoint of the observer and involves the question of degree of unity in relation to cause, locality, time, and, if initiated by human action, the circumstances and purposes of the persons responsible. I consider that I have to approach the present problem by putting myself in the position of an informed observer at Dawson’s Field on 12th September 1970, watching the preparations for the blowing up of the aircraft, the evacuation of the immediate vicinity and the blowing up of the aircraft. During this period he would of course have seen a multiplicity of actions and events including a number of separate explosions which destroyed the aircraft. Would he then say that the destruction of the aircraft was one occurrence or a series of occurrences? The answer must be subjective. No one contended that each explosion was a separate occurrence. In my view there was one occurrence, one event, one happening; the blowing up of three aircraft in close proximity, more or less simultaneously, within the time span of a few minutes, and as the result of a single decision to do so without any one being able to approach the aircraft between the first explosion and their destruction. I cannot regard this as a ‘series of occurrences’ any more than the example of a mass execution by a firing squad, which was one of the illustrations put forward on behalf of the Respondents. It seems to me, with respect, an excellent illustration, but I cannot begin to see how any one could sensibly contend that the victims died in a series of occurrences.
SOME ENGLISH AND AUSTRALIAN CASES 24.3 Resolving the issue of the number of claims depends to some extent on the decision maker’s intuitive feel for the facts. Although the various cases in this area have very little precedent value (because of the wide variety of policy wordings and circumstances), it helps to [page 439] review a few cases for the purpose of gaining an understanding as to how the problem is approached. For that purpose, some English and Australian cases will be briefly considered.
Some English cases 24.4 In Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd,10 the UK Securities and Investments
Board found Lloyds TSB and Abbey National committed widespread breaches of the Financial Services Act 1986 (UK). Amongst other things, they had done so by their representatives persuading individuals to transfer from their occupational pensions to personal pension plans without adequate advice about the risks of doing so. This resulted in about 22,000 people making claims against Lloyds TSB and Abbey National for their losses. The total value of the claims exceeded £125 million, although the largest claim was only about £35,000. Lloyds TSB and Abbey National attempted to recover the losses they incurred in settling the claims under an insurance policy that insured them for liability to third parties arising out of breaches by employees of common law or statutory duties. There was a £1 million deductible for each and every claim. An aggregation clause in the policy provided that if: … a series of third party claims shall result from any single act or omission (or related series of acts or omissions) then, irrespective of the total number of claims, all such third party claims shall be considered to be a single third party claim for the purposes of the application of the deductible.
At first instance,11 Moore-Bick J decided that the claims resulted from: ‘a single act or omission’ (the insured’s failure to properly train their representatives); or a ‘related series of acts or omissions’ (the instances of the insured’s representatives mis-selling themselves, which were ‘related’ by the common failure to train). On appeal, the Court of Appeal12 held that the claims would ‘result from any single act or omission’ if the ‘single act or omission’ was the effective cause of the losses. Here, the loss was caused by the representatives’ failure to follow the best practice requirements of LAUTRO (the Life Assurance and Unit Trust Regulatory Organisation (UK)) when advising clients, not the insured’s failure to train the
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[page 440]
representatives. However, the claims could be aggregated on the basis that the acts of selling pensions to purchasers constituted a ‘related series of acts or omissions’. 24.5 The House of Lords13 agreed with the Court of Appeal that there was no single unifying act or omission (as the relevant act or omission must be the proximate cause of the losses), but did not agree that the losses could be treated as forming a related series. Lord Hoffmann said (at [18]–[20]) the policy required that the unifying factor be a common cause, but that cause must be a single act or omission, or a related series of acts and omissions. The policy defined ‘act or omission’ as a breach ‘in respect of which civil liability arises on the part of the insured’. It followed that the relevant act or omission had to be one sufficient to give rise to the insured’s liability. Lord Hoffmann said (at [22]) that even though the absence of a training or monitoring system was a breach of the rules, no civil liability would arise unless the representatives contravened the Financial Services Act. Further, if a contravention occurs, the insured will be liable, whether or not there was an adequate training and monitoring system. It followed that the absence of a training or monitoring system was not an act or omission from which the liability arose. The House of Lords concluded that the phrase ‘related series of acts or omissions’ would only be relevant if the acts or omissions operated together to give rise to each of the claims. It was not enough that one act should have resulted in one claim and another act in another claim. In this case, the relevant ‘acts or omissions’ were contraventions by the insured’s representatives. Different and separate ‘acts or omissions’ applied to each claim. 24.6 AIOI Nissay Dowa Insurance Company Ltd v Heraldglen Ltd and Advent Capital (No 3) Ltd14 concerned an award by an arbitration tribunal that arose out of the 11 September 2001 terrorist attacks on the Twin Towers of the World Trade Center (WTC) in New York. The tribunal concluded that losses sustained by the liability insurers of American Airlines (for flight AA11, which crashed into the North Tower), United (for flight UA175, which crashed into the South Tower)
and the two security companies responsible for screening passengers on each flight, constituted two separate occurrences (one hijacked aircraft flying into the North Tower and the other hijacked aircraft flying into the South Tower) which did not arise from a single event. The decision concerned the application of policy limits and deductibles in four whole account catastrophe XL reinsurance contracts which [page 441] provided that ‘each and every loss’ is ‘each and every loss or accident or occurrence or series thereof arising from one event’. Field J dismissed the reinsurer’s appeal on the basis that in making the award, the tribunal came to a conclusion open to it, correctly applied the law, took into account relevant matters and did not take into account irrelevant matters. In concluding that the losses were caused by two separate occurrences arising out of separate events, the tribunal relied on the ‘four unities’ test described by Michael Kerr QC in the Dawson’s Field arbitration and affirmed by Rix J in Scott v Copenhagen Reinsurance Co (UK) Ltd.15 The tribunal assessed the application of the test by reference to the viewpoint of an informed objective independent observer in the position of the insured under the outward XL reinsurances, knowing the facts known to the tribunal, rather than how they might have appeared to an observer at the time of the attacks. In relation to: the unity of ‘circumstances and purposes of the persons responsible’ part of the test, the tribunal accepted that the hijackings implemented an Al Qaeda-funded and co-ordinated plan, but said a plan cannot of itself constitute an occurrence or an event for the purposes of a reinsurance contract that refers to each and every loss, occurrence or event. The tribunal noted that the decision of the US Court of Appeals, Second Circuit in World Trade Center Properties v Hartford Fire Insurance Co16 that the damage to the WTC was the result of a single ‘occurrence’ was
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based on a policy wording that referred to losses attributable directly or indirectly to one cause or one series of similar causes; the unity of ‘cause’ part of the test, the tribunal concluded there were two separate causes of loss because there were two successful hijackings of two separate aircraft ‘admittedly in execution of a dastardly plot to turn each into a guided missile each directed at one of the two signature Towers of a single property complex’; the unity of ‘timing’ part of the test, the tribunal said although there were similarities in the timing of the events from the commencement of the flights to contact with the North and South Towers, there were two occurrences and two events: infliction of personal injury and death started in the case of each aircraft shortly after they were hijacked and continued until at least the collapse of each of the North and South Towers, a period of more than two hours in the case of Flight 11, and just over an hour in the case of Flight 175; and [page 442]
■the unity of ‘location’ part of the test, the tribunal held that each
tower was a separate building, albeit connected by a mall. They did not stand or fall together. If only one of the hijackings had succeeded, only one tower would have been destroyed. That both towers were destroyed was attributable to the fact that there were two successful hijackings directed at separate buildings forming part of the WTC.
24.7 In AIG Europe Ltd v Woodman,17 Lord Toulson said in the context of an aggregation phrase ‘a series of related matters or transactions’: Use of the word “related” implies that there must be some inter-connection between the matters or transactions, or in other words that they must in some way fit together … Determining whether transactions are related is therefore an acutely fact sensitive exercise. … it involves “an exercise of judgment, not a reformulation of the clause to be construed and applied”.
In response to the question whether the aggregation clause should be considered from the viewpoint of one party or another, Lord Toulson said (at [25]): … the application of the clause is to be judged not by looking at the transactions exclusively from the viewpoint of one party or another party, but objectively taking the transactions in the round.
Some Australian cases 24.8 The leading Australian case on the issue of one or more claims is Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd.18 In this case, children born severely physically deformed claimed damages against Distillers, which distributed the drug thalidomide in Australia under the trade name ‘Distaval’. The children claimed their deformities resulted from their mothers’ ingestion of Distaval during pregnancy. Distillers applied by Summons for declarations as to its rights under a public liability insurance policy issued to it by Ajax. One of the issues for the High Court was whether £50,000 was the insurer’s limit of liability for all claims against Distillers or whether the limit was £50,000 each claim against Distillers. The contract contained the following endorsement: … the total liability of [Distillers] under this endorsement for all compensation payable to any claimant or number of claimants in respect of or arising out of any one occurrence or in respect of or arising out of all occurrences of a series consequent on or attributable to one source or original cause … during any one period of insurance shall … be limited to £50,000.
At first instance, Helsham J declared that Ajax’s liability to indemnify Distillers in respect of all claims in respect of or arising out of death, [page 443] illness or bodily injury occasioned during any one period of insurance by the ingestion of the drug thalidomide was limited to £50,000. 24.9 In the High Court, Stephen J firstly dealt with the meaning of the word ‘occurrence’ in the aggregation clause (at [15]–[25]):
The debate [about the application of a limit of liability] has, as a rule, concerned the meaning of the particular noun, usually ‘accident’ or ‘occurrence’, employed to describe that to which the limit is to apply, and whether it refers to the mishap itself or to the injury or death of each person involved in it; whether, in other words, it looks at the matter from the viewpoint of the insured or of the injured victim … In the present case the relevant limitations of liability clause … refers to ‘occurrence’ and not to ‘accident’, the latter being more likely to operate favourably to the interest of an insured. Moreover the maximum amount is not expressed to be applicable merely to ‘any one occurrence’; instead still further protection is afforded to the insurer, first by the reference to several claimants in respect of the one occurrence and secondly because claims in respect of two or more occurrences are nevertheless made subject to the one maximum amount of (£50,000) so long as they form a series and are consequent on, or attributable to, one source or original cause … I accordingly conclude that the occurrence or occurrences spoken of in the proviso refer to mishaps in which victims suffer death, injury or illness and not to that which they suffer … Whether or not an occurrence is the mishap or its consequences, as manifested in the victim’s injuries, it seems clear that in the present case there was no one occurrence in respect of which or arising out of which compensation may become payable to all these infant claimants. Only if the links in the chain of causes be traced as far back as the act on the part of the insured in distributing ‘Distaval’ can one event common to each claimant be found and the proviso should not, I think, be construed as including such a remote cause within the meaning of ‘occurrence’. … Whatever may prove ultimately to be the relevant ‘occurrences’ in these cases they will … be found all to be attributable to the one ‘source or original cause’. Whether that be a quite remote one, such as the distribution of a drug containing a dangerous ingredient, or some more proximate one (and this will, of course, depend upon the prior identification of what is the relevant occurrence), it will, I think, necessarily prove to be the same cause in the case of each injured infant. No other outcome appears possible, given the assumptions which are to be made. Thus whatever the ‘occurrences’ may prove to be, the proviso will apply if they be occurrences ‘of a series’.
Stephen J then turned to discuss the meaning of the word ‘series’ in the aggregation clause (at [26]–[31]): The meaning of ‘series’ in the proviso is, I think, that of a number of events of a sufficiently similar kind following one another in temporal succession. By the express words of the proviso, relevant occurrences must have ‘one source or original cause’ and must, by the operation of par. (b) of the proviso, occur within a relatively short time span …
[page 444] In the present case it seems that although the precise nature and extent of the injuries of
the various infants may differ, the precedent events were in each case the same; all involved the ingestion by a pregnant woman of ‘Distaval’, of which the insured was the wholesale marketer in Australia, with, it is to be assumed, consequent harmful effects upon the foetus, produced in each case in the same way by its content of ‘thalidomide’, resulting in deformity on birth of the infant. The assumptions required to be made themselves produce, to my mind, the necessary similarity called for in any ‘series’ of events … I would regard the occurrence or occurrences to which the proviso refers not as the injuries suffered by the individual claimants but rather as the relevant events precedent to that injury, each of which had the same source or original cause and formed, with the others, a series of occurrences such as is referred to in the proviso.
24.10 In Ritchie v Woodward,19 Emmett AJA said (at [587]) the word ‘series’ in an aggregation clause: suggests a number of events of a sufficiently similar kind following each other in temporal succession. Any number of distinct events will, unless, by coincidence, they occur simultaneously, must necessarily occur in a temporal sequence. Accordingly, before the concept of “series” is to be satisfied, the events must, to a sufficient degree, be similar in nature. That is to say, the events must be one of a kind or have some characteristic in common. There must be some integral relationship between the events.
24.11 In QBE Insurance Ltd v MGM Plumbing Pty Ltd,20 MGM Plumbing carried on the business of providing plumbing and fibreglass sealant services and building renovations. Glenwood Homes engaged MGM Plumbing to install waterproof membranes in bathroom areas of 47 houses that were being built or renovated by Glenwood in the Townsville area. Glenwood sued MGM for negligent work and sought to recover the cost of repairing the 47 consecutive water membrane applications. MGM claimed indemnity from QBE under its Industrial Special Risks Policy. The Policy defined the excess and the word ‘occurrence’ as follows: Excess — the amount specified in the Schedule ($300), payable by you on each and every claim arising out of one event under that Policy Section. Should more than one excess be payable under this policy for any claim or series of claims arising from the one event, such excesses shall not be aggregated and the highest single level of excess only shall apply. Occurrence — an event including continuous or repeated exposure to substantially the same general conditions, which results in … Property Damage neither expected nor intended to happen by You.
[page 445]
The issue for the court was: Did MGM have to pay an excess on each and every claim by Glenwood, or only one excess for all the claims by Glenwood, the latter on the basis that all the claims arose out of a single occurrence? Ambrose J concluded that the proximate occurrence was the unworkmanlike and unacceptable installation of each waterproof membrane, and each and every such occasion when it was installed was the event or occurrence against which MGM was entitled to indemnity from QBE. Thus MGM had to pay an excess on each and every installation. His Honour thought that was bound to follow (at [34]– [35]): … unless the words ‘event’ and ‘occurrence’ used in this policy may properly encompass the only thing common to all deficient installations which was the adoption by MGM of the same unworkmanlike and unacceptable method of installation of the waterproof membranes. In my view such a construction would depart from the ordinary meaning of event which is something which has ‘happened at a particular time, at a particular place, in a particular way … an occurrence or an incident’.
1.
Michael Kerr QC, sitting as an arbitrator in the Dawson’s Field Arbitration in London in 1972. 2. AIG Europe Ltd v Woodman [2017] UKSC 18; 1 WLR 1168 at [14] (Lord Toulson). 3. Thorman v New Hampshire Insurance Co (UK) Ltd and Home Insurance Co [1988] 1 Lloyd’s Rep 7 at 15–6 (Stocker LJ); McCarthy v St Paul International Insurance Co Ltd [2007] FCAFC 28; (2007) 14 ANZ Ins Cas 61-725 at [75] (Kiefel J). 4. Murphy and Allen v Swinbank [1999] NSWSC 934 at [492] (Einstein J); Thorman v New Hampshire Insurance Co (UK) Ltd and Home Insurance Co (see fn 3) at 15. 5. Haydon v Lo & Lo [1997] UKPC 2; 1 WLR 198 at [16] (Lord Lloyd of Berwick). 6. Government Insurance Office of NSW v Atkinson-Leighton Joint Venture [1981] HCA 9; (1981) 146 CLR 206 at [22] (Barwick CJ). 7. Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd [2000] EWHC 198 (Comm); [2001] Lloyd’s Rep IR 237 at [24] (Moore-Bick J). 8. [2003] UKHL 48; Lloyd’s Rep IR 623 at [17] (Lord Hoffmann). 9. Midland Mainline Ltd v Commercial Union Assurance Company Ltd [2003] EWHC 1771 (Comm); [2004] 1 Lloyd’s Rep IR 22 at [76] (Steel J). 10. [2003] UKHL 48; Lloyd’s Rep IR 623. 11. Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd (see fn 7). 12. Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd
13. 14. 15. 16. 17. 18. 19. 20.
[2001] EWCA Civ 1643; [2002] Lloyd’s Rep IR 113. Lloyds TSB General Insurance Holdings v Lloyds Bank Group Insurance Company Ltd (see fn 8) at [17] (Lord Hoffmann). [2013] EWHC 154. [2003] Lloyd’s Rep IR 696. [2003] 345 F 154. [2017] UKSC 18; 1 WLR 1168 at [22]. [1974] HCA 3; (1974) 130 CLR 1. [2016] NSWSC 1715. [2003] QSC 27; (2003) 12 ANZ Ins Cas 61-555.
[page 447]
Chapter 25 CLAIMING THE BENEFIT OF ANOTHER PERSON’S INSURANCE CONTRACT The declaration by the Court of Appeal that policies of liability insurance are a common law exception to the doctrine of privity of contract and that the exception has existed for some time may come as a surprise to those who have seen no reference to such an exception in the books.1
INTRODUCTION This chapter concerns the circumstances in which the common law and legislation extends the benefits of an insurance contract to someone who is not a party to it. It discusses: the common law and statutory provisions that give a person direct access to another person’s insurance contract; and statutory provisions that give a third party with a claim for damages against an insured the direct benefit of the insured’s entitlement to be indemnified by its liability insurer against that claim; statutory provisions that enable a judgment creditor to ‘garnishee’ the amount of an insurer’s liability to the judgment debtor. When reading this chapter, bear in mind the difference between first party and liability (third party) insurance (see Chapter 2); the first and third parts of this chapter relate to both, but the second part only relates to the latter.
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[page 448]
PART 1: THE COMMON LAW AND STATUTORY PROVISIONS THAT GIVE DIRECT ACCESS TO ANOTHER PERSON’S INSURANCE CONTRACT 25.1 Until the High Court decided Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,2 the privity rule, with some exceptions, only allowed a party to a contract to sue on it. Generally speaking, a nonparty could not sue on a contract even if the parties to the contract expressly intended the non-party to benefit by it.3 If a party to a contract did not deliver on a promised benefit to a nonparty, the non-party was dependent on another party to the contract suing on the broken promise. That would sufficiently protect the nonparty if a court ordered the defaulting party to specifically perform its promise, but probably not if the remedy was damages, in which case the innocent party’s damages are calculated by reference to its loss, not by reference to the non-party’s loss.4 25.2 In Trident, the High Court allowed a non-party to sue on a liability insurance contract, on the basis that the parties to the contract expressly intended the non-party to benefit by it. By that time, the inequity of the privity rule had prompted various Australian parliaments to promulgate legislation that limited its impact, including the Insurance Contracts Act 1984 (Cth) (ICA).5 Trident General Insurance Co Ltd insured Blue Circle Southern Cement Ltd in relation to construction work being carried out at its limestone crushing plant at Marulan. By the policy, Trident agreed to indemnify ‘“The Assured” against … all sums which the Assured shall become legally … liable to pay in respect of … bodily injury to … any person not being a person who at the time … of the occurrence is engaged in and upon the … service of the Assured under a Contract of
… service …’. The policy defined ‘The Assured as Blue Circle Southern Cement Limited, all its subsidiary, associated and related Companies, all Contractors and Sub-Contractors and/or Suppliers’. McNiece Bros Pty Ltd was the principal contractor on the project. It was not a contractor when the policy was issued. Mr Hammond was seriously injured while driving a crane at the construction site in the course of his employment with a labour hire company [page 449] Faro Constructions. At the time of the accident he was working under the direction of a McNiece site engineer. Mr Hammond successfully sued McNiece for damages in excess of $500,000. McNiece sought indemnity from Trident for the amount of the judgment. Trident unsuccessfully argued in the High Court that McNiece could not sue on the policy because it was not a party to it and had not paid any premium for it. Toohey J said (at [27]): When an insurer issues a liability insurance policy, identifying the assured in terms that evidence an intention on the part of both insurer and assured that the policy will indemnify as well those with whom the assured contracts for the purpose of the venture covered by the policy, and it is reasonable to expect that such a contractor may order its affairs by reference to the existence of the policy, the contractor may sue the insurer on the policy, notwithstanding that consideration may not have moved from the contractor to the insurer and notwithstanding that the contractor is not a party to the contract between the insurer and assured [emphasis added].
In Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd,6 Ipp J pointed out (at 74,863) that the reference in the above passage to ‘such a contractor’ is a reference to: … the class of persons in which the respondent fell. Toohey J was not thereby indicating that it was necessary for the respondent itself to order its affairs by reference to the existence of the policy … [In other words] presumed reliance does not form part of the doctrine in Trident.
25.3 In Sayseng v Kellogg Superannuation Pty Ltd,7 Bryson J concluded (at [78]–[80]) that Mr Sayseng had standing to sue the insurer of a Group Life Contract entered into by the Trustee of the
Kellogg Retirement Fund in relation to the insurer’s rejection of his claim for member’s disablement benefits from the fund, even though: the contract insured the Trustee, not Mr Sayseng; the insurer’s liability was to make insurance payments to the Trustee, not to Mr Sayseng; the contract did not specify or refer to Mr Sayseng by name or otherwise, as a person to whom cover extended; and Mr Sayseng was one of the class of persons referred to in the contract as ‘Insured Persons’ (the insurer did not agree to hold insured persons (including Mr Sayseng) insured themselves, and did not agree to pay benefits directly to them).
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25.4 The next two sections of this part of the chapter address that part of the common law and those statutory provisions that allow a non-party to sue on an insurance contract if the parties to the contract expressly intended the non-party to benefit by it. The last two sections [page 450] of this part address those statutory provisions that give a ‘stranger’8 direct access to a first party insurance contract that covers property in which they have a direct financial interest.
The position at common law The privity rule 25.5 If an insurance contract names only one insurer and one insured, they are the parties to the contract. An insurance contract can, and often does: name two or more insurers as agreeing to provide the relevant cover, either jointly or if severally, then for their respective proportions. All of the insurers named in an insurance contract are parties to the contract; identify two or more insureds as being entitled to the relevant
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cover. For example, your motor vehicle third party property damage policy will indemnify you (the person who took out the policy) and anyone who drives your vehicle with your consent, for legal liability for damage done to someone else’s property caused by the negligent driving of your vehicle. Accordingly, a reference to an ‘insured’ in your policy can be a reference to: ■ you (a party to the contract); or ■ a person who drives your vehicle with your consent (not a party to the contract).9 If an insurance contract identifies two or more insureds, a particular insured is a party to the contract if the contract: expressly describes that insured as a party to it, or if it does not, the objective intention of the parties to the contract is that that insured is a party to it;10 or was ‘taken out’ by11 or for12 that insured. A party to an insurance contract (other than an insurer) will not necessarily be an insured under the contract, for example where a holding company takes out insurance for the companies in the group without itself needing that type of insurance. An insured under an insurance contract will not necessarily be a party to it, for example where the owner of a motor vehicle (the party to the
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[page 451] contract) takes out liability insurance for itself and for anyone who drives the vehicle with the owner’s consent (the insureds under the contract). 25.6 An insured that is a party to an insurance contract not under seal13 can sue on it, as long as: it has paid or agreed to pay some or all of the premium for the insurance;14 or the premium for the insurance has been paid by one or more of the
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other parties to the contract for or on its behalf.15
An exception to the privity rule 25.7 A person named in an insurance contract as an insured, or identified as a person or class of persons intended to benefit by the contract, can sue on it to the extent of their interest in the subject matter of the insurance, even if they are not a party to, and have given no consideration for, the contract.16
Statutory provisions that enable a non-party to sue on an insurance contract 25.8 Generally speaking, the following statutory provisions simply anticipated the common law exception to the privity rule articulated in Trident.
Property Law Act 1969 (WA) s 11; Property Law Act 1974 (Qld) s 55; and Law of Property Act (NT) s 56 25.9 Section 11 of the Property Law Act 1969 (WA) relaxes the privity rule for contracts in general.17 Section 11(2) allows a non-party to sue on a contract in writing18 if it: ‘expressly in its terms purports to confer a benefit directly on’ the non-party.19 The benefit must be conferred expressly, not by implication;20 and
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■identifies the non-party by name or ‘by reference to an existing and
identifiable class or by answering a particular description’ as the person intended to benefit by the contract.21 Section 55 of the Property Law Act 1974 (Qld) and s 56 of the Law of Property Act (NT) also relax the privity rule.22
ICA s 48 25.10 Section 48 of the ICA is headed ‘Contracts of general insurance — entitlement of third party beneficiaries’. It enables a non-party to sue on a general insurance contract if they are specified or referred to in the contract (by name or otherwise) as someone entitled to benefit by it. It is in these terms: (1) A third party beneficiary under a contract of general insurance has a right to recover from the insurer, in accordance with the contract, the amount of any loss suffered by the third party beneficiary even though the third party beneficiary is not a party to the contract. (2) Subject to the contract, the third party beneficiary: (a) has, in relation to the third party beneficiary’s claim, the same obligations to the insurer as the third party beneficiary would have if the third party beneficiary were the insured; and (b) may discharge the insured’s obligations in relation to the loss. (3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured, including, but not limited to, defences relating to the conduct of the insured (whether the conduct occurred before or after the contract was entered into)
A third party beneficiary under an insurance contract is ‘a person who is not a party to the contract but is specified or referred to in the contract, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the contract extends’: ICA s 11(1). In Zurich Australia Insurance Ltd v Metals & Minerals Pte Ltd,23 the majority (at [24]) described the operation of s 48 in the following terms: Section 48 confers a statutory right of recovery upon a non-party referred to or specified in a general contract of insurance as a person insured or to whom cover extends. It does so directly. Its enactment predated the extension, by the decision of this Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd, of common law rights of recovery for non-party insured persons under an insurance policy. Section 48 does not deem such a person to be a party to the insurance contract thus attracting the rights conferred on a party. It does not purport to confer contractual or equitable rights upon such a person. There is therefore no basis in s 48 for assimilating the position of a non-party insured to that of a person who has ‘entered into’ a contract of insurance within the meaning of s 45(1) [citation omitted].
[page 453]
25.11 The word ‘insured’ in s 48(2) and (3) refers to the parties to an insurance contract other than the insurer.24 Depending on the circumstances, the word ‘loss’ in s 48(1) and (2) might extend to a claim by a third party beneficiary for a liquidated sum, for example payment of a predetermined amount for permanent loss of function of a bodily part pursuant to a personal accident and sickness policy.25 25.12 Section 48(1) does not alter rights or obligations under an insurance contract or extend the scope of cover; it simply gives standing to certain non-parties to sue on it.26 In General Motors Acceptance Corporation Australia v RACQ Insurance Ltd,27 General Motors Acceptance Corporation Australia (GMAC) financed an off-road vehicle insured by RACQ. GMAC’s interest in the vehicle was noted on the RACQ policy. The insured, or someone at her direction, deliberately destroyed the vehicle. In response to GMAC’s claim on the policy, Muir J said (at [26]) that s 48(1) ‘does not operate to extend the scope of cover provided by the policy … and a person in the position of the applicant must take the policy as he finds it’. As the policy only covered accidental damage to the vehicle, GMAC’s claim was dismissed. In the earlier case of Macdonald v CE Heath Underwriting & Insurance (Australia) Ltd,28 Priestley JA said (at 77,010): … s 48(1) seems to me to be dealing with cases where (i) cover is provided by a contract of general insurance to a party to that contract and (ii) that cover is extended by the contract to a person specified or referred to in the contract. In those circumstances the person has a right to recover in accordance with the indemnity provided to the contracting party.
In GIO Australia Ltd v P Ward Civil Engineering Pty Ltd,29 Mr Maddison insured his Ford Falcon with GIO. The policy indemnified Mr Maddison against legal liability incurred for damage to property (other than the Ford Falcon) occurring as a result of the use of the vehicle. The indemnity extended to legal liability incurred by anyone in charge of the vehicle with Mr Maddison’s express or implied consent. The policy excluded indemnity for liability incurred by a person (other than Mr Maddison) who at the time the liability was incurred was not
licensed to drive. The exclusion did not apply to damage to the Ford Falcon, or to [page 454] legal liability incurred by Mr Maddison when an unlicensed driver was driving the Ford Falcon, unless Mr Maddison knew or should reasonably have known the driver was unlicensed. Ms Schmitzer was driving the Ford Falcon with Mr Maddison’s authority. She did not have a licence to drive. As a result of Ms Schmitzer’s negligence, the Ford Falcon collided with a vehicle owned by Ward. GIO paid Mr Maddison’s claim for the damage to the Ford Falcon but denied Ms Schmitzer’s claim for indemnity against her liability for the damage to Ward’s vehicle on the basis that she was an unlicensed driver. Simpson J said (at [10]–[11]): Section 48 does not purport to create an extension of the terms of the contract of insurance, other than to provide standing to claim to a person to whom the policy expressly applies but who is not, in terms, a party to the policy. Nor should subs (3) be overlooked. GIO remained entitled to the benefit of any defence it had available to it, including the defence arising from the exclusion. Section 48, as I have indicated, does not alter any legal obligation or entitlement under the policy other than that of standing of certain persons not expressly named. … section 48 would give [Ms Schmitzer] standing to recover under policy but her right to recover is in accordance with the terms of the policy only. The terms of the policy are not overridden by section 48. They specifically exclude recovery by Schmitzer …
Her Honour also said that the fact that GIO waived the exclusion in the claim by Mr Maddison did not prevent it from relying on the exclusion in the claim by Ms Schmitzer. 25.13 The Explanatory Memorandum that accompanied the Insurance Contracts Amendment Bill 2013 described the intention of the new s 48(3) in the following terms: 1.146 The intent of sections 48 and 48AA (as amended) is that third party beneficiaries should be in no better position, in terms of their ability to claim, than the insured. An insurer should be entitled to raise defences relating to the conduct of an insured, including conduct occurring prior to the time the contract was entered into. 1.147 To make it clear that, in defending an action by a third party beneficiary:
an insurer may raise defences relating to the conduct of the insured; and the conduct that may be raised may have occurred either after the contract was entered into or before (for example, non-disclosure).
25.14 Can an entity mentioned in an insurance contract recover against the insurer if they are not a party to the contract or described by the contract as an insured? The ‘mention’ might be that the entity is an ‘interested party’ or is an entity whose interest is ‘noted’. [page 455] Mentioning a person’s interest in an insurance contract: does not make that person a party to the contract or an insured under it; simply records that person as having a financial interest in the subject matter of the contract in addition to the interest of the insured (that person might be a mortgagee or a bailor in relation to the property the subject matter of the contract); should only occur with first party insurance. It makes no sense mentioning a person’s interest in connection with liability insurance — the parties either intend the entity to be an insured or they do not; and does not give that person the right to claim directly against the insurer unless allowed by s 48. Is mentioning a person’s interest in an insurance contract specifying or referring to that person ‘as a person to whom the benefit of the insurance cover provided by the contract extends’? If so, s 48(1) enables that person to recover from the insurer ‘in accordance with the contract, the amount of [their] loss’. Arguably, mentioning a person’s interest in an insurance contract is not sufficient to trigger s 48(1) because the ‘mention’ is not for the purpose of attracting cover under the policy. It is just a way of letting
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the parties to the contract know that the person ‘mentioned’ has an interest in the subject matter of the contract.
ICA s 20 25.15 Section 20 of the ICA provides that an insurer ‘is not relieved of liability under the contract by reason only that the names of the persons who may benefit under the contract are not specified in the policy document’. In general terms, the section is directed to contracts that insure groups of persons, such as partners, employees or contractors. It prevents an insurer from denying a claim by a person who is a member of a group (for example, a group of partners, employees or contractors) just because the contract does not specifically name that person.30
Statutory provisions that enable a ‘stranger’31 to sue on a first party insurance contract ICA s 49 25.16 At common law, a ‘stranger’ is not entitled to the benefit of a first party policy taken out by another person over property in which they [page 456] have an interest. If the property is damaged or destroyed, only the parties to the policy or its intended beneficiaries can claim on it.32 Section 49 extends the benefit of a first party policy to such a stranger, unless before the contract was made, the insurer clearly informed the insured in writing that the contract does not cover a stranger’s interest in the property. Arguably ‘an interest in the property’ means a ‘legal or equitable’ interest rather than simply an economic or pecuniary interest. This is because it would have been easy for the parliamentary drafter to have
used the phrase ‘an insurable interest in the property’ in s 49 if the ‘insurable interest’ test in s 17 of the ICA (economic or pecuniary interest) was intended to be imported into s 49. Or, the drafter could have broadened the scope of s 17 so that it applied to insureds and to persons claiming under s 49. 25.17 The operation of the section hinges on the insurer’s ‘notional liability’, which is the amount for which the insurer would have been liable to the insured for a claim if the insured had the only interest in the property: s 49(2). If the notional liability exceeds the amount of the insurer’s liability to an insured in respect of a loss, and within three months of the loss occurring a stranger with an interest in the property gives written notice to the insurer of their interest, the insurer is liable to pay the stranger for its loss, up to the amount of the difference between the notional liability and the amount of the insurer’s liability to the insured: s 49(3).
ICA s 50; Sale of Land Act 1962 (Vic) s 35; and Property Law Act 1974 (Qld) s 63 25.18 In the briefest of judgments, the High Court, in the pre-ICA case Ziel Nominees Pty Ltd v VACC Insurance Co Ltd,33 concluded that the vendor of a property had no claim on its first party insurer when improvements on its property were substantially destroyed by fire between signing a contract for the sale of the property and completion. That was because the purchaser was obliged to pay the agreed price notwithstanding destruction of the improvements before completion. As the policy was one of indemnity, the vendor had no claim on it as it had suffered no loss. The purchaser had no claim on the policy because it was not a party to, or mentioned by, the policy. The purchaser would have had a claim on the policy if it had been [page 457] a party to, or intended to benefit by, the policy as it had a pecuniary
interest in the property at the time of the loss.34 25.19 The ICA, s 50 gets around this problem in relation to a sale or assignment which will give the purchaser or assignee a right to occupy or use a building, by deeming the purchaser to be an insured under the vendor’s first party policy over the building from the time when the risk of loss or damage to the building passes to the purchaser until the earliest of the times mentioned in s 50. Similar protection is afforded to a purchaser by s 35 of the Sale of Land Act 1962 (Vic) and s 63 of the Property Law Act 1974 (Qld).
Statutory provisions that require the proceeds of a first party insurance contract to be expended for a ‘stranger’ 25.20 There are many statutory provisions around Australia that fit into this category, for example s 64(3) of the Property Law Act 1969 (WA), s 58 of the Property Law Act 1974 (Qld) and s 90E of the Conveyancing and Law of Property Act 1884 (Tas). They generally relate to circumstances in which an insurer is bound to reinstate a damaged or destroyed building for the benefit of a ‘stranger’ with a direct financial interest in the building, rather than make a cash settlement to the insured.
PART 2: STATUTORY PROVISIONS THAT GIVE A THIRD PARTY THE DIRECT BENEFIT OF A LIABILITY INSURANCE CONTRACT 25.21 Unlike Parts 1 and 3 of this chapter, the statutory provisions discussed in this Part 2 are not about a third party’s insurance cover. They are about a third party with a claim for damages against an insured being given the direct benefit of the insured’s entitlement to be
indemnified by its liability insurer against that claim, in circumstances where the insured cannot be identified, or has disappeared, died, become insolvent or been deregistered.
Statutory provisions that enable a third party to sue a liability insurer directly ICA s 51 25.22 Section 51 enables a third party with a claim against an insured or a third party beneficiary who has died or cannot be found, to sue the insured’s liability insurer directly. Section 51(1) is in the following terms: [page 458] If: (a) the insured or any third party beneficiary under a contract of liability insurance is liable in damages to another person; and (b) the contract provides insurance cover in respect of the liability; and (c) the insured or third party beneficiary has died or cannot, after reasonable enquiry, be found; then the other person may recover from the insurer an amount equal to the insurer’s liability under the contract in respect of the liability of the insured or third party beneficiary.
Section 51 creates a new cause of action in a third party against a liability insurer, not for damages, but for payment of the amount payable by the liability insurer in respect of the insured’s liability to the third party.35 25.23 The limitation period for a s 51 claim is that of the underlying action. Although s 51 creates a new cause of action, that cause of action is assimilated to that of the underlying action and so does not give rise to an independent limitation period.36 25.24 Despite the decision of Olsson J in Norsworthy & Encel v SGIC37 to the contrary, s 51(1) does not extend to the deregistration of
a corporation. As to that, see s 601AG of the Corporations Act 2001 (Cth) (discussed below). 25.25 The requirement indicated by the words ‘is liable in damages to another person’ in s 51(1)(a) is not straightforward; ‘liable’ might refer to a fully formed cause of action, or to the subsequent crystallisation of a cause of action in a judgment, arbitration award or settlement. The better view is that the requirement is satisfied if the third party proves in its action against the insurer that it has a judgment or arbitration award on the merits against the insured, or that it would have obtained a judgment or award on the merits if it had sued the insured.38 A settlement with the insured (reasonable or otherwise) would not satisfy the requirement ‘is liable in damages to another party’, unless the third party also proves it would have obtained a judgment on the merits if it had sued the insured. That is because a settlement is [page 459] a compromise of the third party’s claim for damages. It results in the insured being liable to the third party for the settlement amount, not for ‘damages’. 25.26 The effect of s 51 is that on being sued by a third party: the insurer stands in the insured’s shoes in its defence of the third party’s claim; and the third party stands in the insured’s shoes in relation to its claim on the insurance contract.39 Accordingly, the insurer can raise any defences: the insured could have raised to defeat the claim, including the expiry of a limitation period.40 This includes resisting the third party’s application for an extension of the relevant limitation period;41 and it would have had to a claim by the insured for indemnity.42
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25.27
A third party cannot rely on s 51(1) to recover directly against
the liability insurer of a tortfeasor arising out of any claim the third party might have against the insured tortfeasor pursuant to s 7(1)(c) of the Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA).43 Apart from anything else, that is because any liability the insured has to the third party is not a liability ‘in damages’.44
Corporations Act 2001 (Cth) s 601AG 25.28 Section 601AG is contained in the Corporations Act 2001 (Cth), Chapter 5A — Deregistration, and transfer of registration, of companies. It enables a third party with a claim against a deregistered company to sue the company’s liability insurer directly, in other words ‘to put the claimants in the position they would have been in, but for the insured’s deregistration’.45 The deregistration of a company means it no longer exists: s 601AD(1). [page 460] 25.29 In Pagnon v WorkCover Queensland,46 McPherson JA said (at [17]) that the purpose of the section: … is to ‘short-cut’ the need to reinstate the company, and to do so by enabling the ultimate recipient of the insurance proceeds to sue the insurer direct where the company has been dissolved, without imposing the additional trouble and expense of first applying to have it reinstated.
The alternative to suing the insurer directly is for the third party to apply to the court pursuant to s 601AH(2) to exercise its discretion to reinstate the company,47 and then sue the reinstated company,48 leaving it to the company to sort out issues with its liability insurer. A court will not exercise the power to reinstate a deregistered company if s 601AG clearly applies to the third party claim.49 That is because, in those circumstances, the prospective claimant would not be a ‘person aggrieved by’ the deregistration.50 Section 601AG does not ‘completely obviate any need to seek reinstatement’.51 Reinstatement might be granted if it would provide the
plaintiff with the opportunity of obtaining an order that the limitation period for an action against the deregistered company did not run during the period of deregistration.52 Section 601AG is in these terms: A person may recover from the insurer of a company that is deregistered an amount that was payable to the company under the insurance contract if: (a) the company had a liability to the person; and (b) the insurance contract covered that liability immediately before deregistration.
25.30 Like s 51(1) of the ICA: Section 601AG is remedial. It creates a new cause of action in the third party against a liability insurer, not for damages but for payment of the amount payable by the liability insurer in respect of the insured’s liability to the third party.53
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[page 461] The new cause of action is ‘a species of statutory subrogation, in which [the third party] is entitled to be subrogated to the rights of the [insured] as against its insurer’.54 The effect of s 601AG is that: ■ the insurer ‘stands in the shoes of’ the deregistered company in its defence of the third party’s claim; and ■ the third party stands in the insured’s shoes in relation to its claim on the insurance contract.55 Accordingly, the insurer can raise any defences: the deregistered company could have raised against the third party, including the expiry of a limitation period; and it would have had to a claim for indemnity by the deregistered company.56
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25.31 The limitation period for a s 601AG claim is that of the underlying action by the plaintiff against the deregistered company. Although s 601AG creates a new cause of action, that cause of action is
assimilated to that of the underlying action and so does not give rise to an independent limitation period.57 25.32 To succeed in an action under s 601AG, the plaintiff must prove the matters described in subsections (a) and (b). They are not preconditions to the commencement of proceedings under the section.58 25.33 The section is written in the past tense (unlike s 51(1) of the ICA, which is written in the present tense). Accordingly, it refers to circumstances that existed immediately before the company was deregistered, both as to the liability the company had to the third party and to the liability the insurer had to the company.59 25.34 Like s 51(1) of the ICA, the requirement indicated by the words ‘had a liability’ in s 601AG is not straightforward. Subject to the following discussion about s 7(1)(c) of the Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA),60 the better view is that the requirement is satisfied if the third party proves in the recovery action against the insurer that it: has a judgment or arbitration award on the merits against the company; or
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[page 462]
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have obtained a judgment on the merits if it sued the company, in respect of a cause of action that arose before the company was deregistered.61 The requirement that the deregistered company ‘had a liability’ to the third party would be satisfied by a settlement with the company before it was deregistered, as long as the third party proves the settlement was reasonable. Unlike s 51(1) of the ICA, the liability does not have to be ‘in damages’. As to s 601AG(b), the third party only has to prove the insurance policy covered the liability (the risk was within the scope of the policy)
immediately before the insured was deregistered, not that the insurer was obliged to indemnify the insured at that time.62 25.35 A third party can rely on s 601AG to recover directly from the liability insurer of a deregistered company in relation to a claim the third party as a tortfeasor has against the company as a tortfeasor pursuant to s 7(1)(c) of the Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA) (Law Reform Act)63 even if the third party has not already been held liable to a plaintiff pursuant to a settlement, a judgment or an arbitration award. That is because the third party can rely on s 601AG even if it does not have a fully formed cause of action against the deregistered company until that happens.64 A tortfeasor’s liability insurer sued by a third party pursuant to s 601AG cannot seek a contribution from another tortfeasor pursuant to s 7(1)(c), because the insurer is not a tortfeasor (the insured is the tortfeasor and only a tortfeasor is entitled to claim contribution pursuant to s 7(1)(c)).65 The insurer can only diminish its loss by seeking reinstatement of its insured pursuant to s 601AH(2) of the Corporations Act 2001 (Cth) and then exercising its right of subrogation to seek a contribution from the other tortfeasor in its insured’s name. 25.36 A claim a company has for client legal privilege over a document or communication is not lost with deregistration of the company.66 [page 463]
Compulsory workers’ compensation and motor vehicle third party personal injury insurance 25.37 Some of the workers’ compensation schemes around Australia give a worker the right to sue their employer’s indemnity insurer directly, for example s 159(2) of the Workers Compensation Act 1987 (NSW).
It is a feature of some of the compulsory motor vehicle third party personal injury schemes around Australia that an injured person can sue the motor vehicle owner’s or driver’s insurer directly in certain circumstances, for example s 7(2) and (3) of the Motor Vehicle (Third Party Insurance) Act 1943 (WA) (where the judgment is unsatisfied, the driver is dead or the identity of the vehicle cannot be ascertained).
Statutory provisions that create a charge over the proceeds of a liability insurance contract 25.38 In 2013, the Supreme Court of New South Wales lost patience with s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW).67 In Chubb Insurance Company of Australia Ltd v Moore,68 Emmett JA and Ball J said: Section 6 should be repealed altogether or completely redrafted in an intelligible form, so as to achieve the objects for which it was enacted.
On 19 December 2016, the New South Wales Law Reform Commission recommended s 6 be replaced: Report 143 — Third party claims on insurance money. On 1 June 2017, s 6 was replaced by the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW). Because of time constraints, the following discussion is about s 6 of the repealed Act. 25.39
Before it was repealed, s 6 was is in the following terms:
6 Amount of liability to be charge on insurance moneys payable against that liability (1) If any person (hereinafter in this Part referred to as the insured) … entered into a contract of insurance by which the person is indemnified against liability to pay any damages or compensation, the amount of the person’s liability shall on the happening of the event giving rise to the claim for damages or compensation, and notwithstanding that the amount of such liability may not then have been determined, be a charge on all insurance moneys that are or may become payable in respect of that liability. (2) If, on the happening of the event giving rise to any claim for damages or compensation as aforesaid, the insured (being a corporation) is
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(3)
(4)
(5) (6)
(7) (8)
(9)
being wound up, or if any subsequent winding-up of the insured (being a corporation) is deemed to have commenced not later than the happening of that event, the provisions of subsection (1) shall apply notwithstanding the winding-up. Every charge created by this section shall have priority over all other charges affecting the said insurance moneys, and where the same insurance moneys are subject to two or more charges by virtue of this Part those charges shall have priority between themselves in the order of the dates of the events out of which the liability arose, or, if such charges arise out of events happening on the same date, they shall rank equally between themselves. Every such charge as aforesaid shall be enforceable by way of an action against the insurer in the same way and in the same court as if the action were an action to recover damages or compensation from the insured; and in respect of any such action and of the judgment given therein the parties shall, to the extent of the charge, have the same rights and liabilities, and the court shall have the same powers, as if the action were against the insured: Provided that, except where the provisions of subsection (2) apply, no such action shall be commenced in any court except with the leave of that court. Leave shall not be granted in any case where the court is satisfied that the insurer is entitled under the terms of the contract of insurance to disclaim liability, and that any proceedings, including arbitration proceedings, necessary to establish that the insurer is so entitled to disclaim, have been taken. Such an action may be brought although judgment has been already recovered against the insured for damages or compensation in respect of the same matter. Any payment made by the insurer under the contract of insurance without actual notice of the existence of any such charge shall to the extent of that payment be a valid discharge to the insurer, notwithstanding anything in this Part contained. No insurer shall be liable under this Part for any greater sum than that fixed by the contract of insurance between the insurer and the insured. Nothing in this section shall affect the operation of any of the provisions of the Workers Compensation Act 1987 or the Motor Vehicles (Third Party Insurance) Act 1942. Despite subsection (8), this section applies in relation to a policy of workers compensation insurance entered into by an employer (whether entered into before or after the commencement of this subsection), where the employer: (a) being a natural person, has died, or is permanently resident outside the Commonwealth and its Territories, or cannot after due inquiry and search be found, or (b) being a corporation (other than a company that has commenced to be wound up), has ceased to exist, or (c) being a company, corporation, society, association or other body (other than a company that has commenced to be wound up), was at the time when it commenced to employ workers to which the policy relates incorporated outside the Commonwealth and its Territories and registered as a foreign company under the
[page 465] laws of any State or Territory and is not so registered under any such law, or (d) being a company, is in the course of being wound up.
25.40 Section 6 created a statutory charge in favour of a third party with a claim for damages against an insured, over monies that are or might become payable by a liability insurer to the insured under a liability insurance contract in respect of that claim. It was intended to protect third parties by preventing an insured from: … collecting his insurance money and just disappearing … [or] going to his insurance company and releasing it from its liability to him on payment to him of a lump sum which he immediately dissipates or makes away with …69
In Oswald v Bailey,70 Kirby P (at 717–8) described the object of the repealed s 6 in the following terms: … The insured may disappear, die or, if a company, be wound up. Such events could, in the past, stultify the claimant’s prospects of practical recovery. Out of recognition of the modern reality of insurance, the need to protect those with claims for damages or compensation, and the ready ability, normally, to trace insurers entering into contracts of insurance, provision has been made for a direct action against the insurer. The claimant must bring himself within the terms of s 6 of the Act. But if the claimant does, the benefit is secured of a charge on all insurance moneys that are or may become payable in respect of the insured’s liability.
25.41 A pre-condition for the application of s 6 was that the insured against whom the claim is made ‘has … entered into a contract of insurance’. Only the parties to an insurance contract ‘enter into it’.71 Accordingly (arguably), unlike s 51 of the ICA, a third party could not avail itself of s 6 if the insured was not a party to the liability insurance contract. 25.42 To succeed in an application for leave to sue a liability insurer directly, a third party had to persuade the court that they have ‘an arguable case against the insured, an arguable case against the insurer and that there was reason to believe that the insured would be unable to meet any judgment from his or its own resources, ie there was no “perfectly good common law defendant available”’.72
[page 466] 25.43 The repealed s 6 did not apply to: a claims made policy if the event giving rise to an insured’s liability occurred before the insurance period commenced;73 or defence costs payable by an insurer before a judgment, award or settlement in favour of a third party.74 Leave would normally be refused if the insurer persuaded the court that it was entitled to decline liability to indemnify.75 The operation of s 54 of the ICA was relevant to the grant of leave.76
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25.44 In the case of multiple claims, a payment by an insurer before a judgment, award or settlement in satisfaction of a claim against an insured by a third party is a valid discharge of the insurer’s liability to that third party.77 25.45 In Bailey v New South Wales Medical Defence Union Ltd,78 Justices McHugh and Gummow explained that upon a s 6 charge descending: … on the happening of the event giving rise to the claim for damages or compensation, no mutual or unilateral action of insurer or insured which is taken otherwise than under or pursuant to the contract of insurance or the general law as it operates upon the contract may vary, discharge or otherwise qualify or abrogate the contract of insurance so as to deny to the claimant what otherwise would be the fruits of enforcement of the charge by action taken under s 6(4) against the insurer. The contract of insurance is that as it stood when the charge descended. Nor, after the charge has descended, is it open to the insurer to rely upon a payment made under the contract to the insured, unless the payment was made without actual notice of the existence of the claimant’s charge (s 6(6)). In these ways the position of the claimant is protected.
25.46 Section 26 of the Law Reform (Miscellaneous Provisions) Act (NT) and the combination of ss 206 and 207 of the Civil Law (Wrongs) Act 2002 (ACT) are similar in effect to the repealed s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). [page 467]
Statutory provisions that require the proceeds of a liability insurance contract to be paid to a third party Bankruptcy Act 1966 (Cth) s 117 25.47 Sections 108 and 117 of the Bankruptcy Act 1966 (Cth) appear in Pt VI Div 2. Unless the Act otherwise provides, s 108 ranks ‘all debts proved in a bankruptcy’ equally and provides that ‘if the proceeds of the property of the bankrupt are insufficient to meet them in full, they shall be paid proportionately’. Section 117 ‘otherwise provides’. In general terms, it: vests an insured bankrupt’s right to indemnity under a liability insurance contract in the Official Trustee in Bankruptcy; and requires the Official Trustee in Bankruptcy to hold the proceeds of an insured bankrupt’s liability insurance contract for the benefit of a person to whom the insured bankrupt is liable.
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25.48 A person cannot contract out of the provisions of the Act, either before or after becoming bankrupt.79
Corporations Act 2001 (Cth) ss 562 and 562A 25.49 Sections 555, 562 and 562A of the Corporations Act 2001 (Cth)80 appear in the Act in Pt 5.6 Div 6 Subdiv D. Amongst other things, Subdiv D addresses ranking of claims in a winding-up. Unless the Act otherwise provides, s 555 ranks ‘all debts and claims proved in a winding up’ equally and provides that ‘if the property of the company is insufficient to meet them in full, they must be paid proportionately’. Section 562 ‘otherwise provides’. In general terms, it requires a liquidator to hold the proceeds of an insolvent company’s liability insurance contract for the benefit of a person to whom the insolvent company is liable. 25.50
Section 562A:
… confers on all creditors of an insurance company with insurance and reinsurance
claims priority over all other creditors in respect of re-insurance, including retrocession, recoveries. Moreover, section 562A(4) gives the court power, in relation to amounts received under a contract of re-insurance or retrocession, to confer further priority on a particular insurance or re-insurance creditor, in ‘… a manner that the Court considers just and equitable in the circumstances’. Section 562A
[page 468] has no territorial limits. Its application is mandatory so far as Australian liquidators are concerned.81
25.51
A company cannot contract out of the provisions of the Act.82
PART 3: STATUTORY PROVISIONS THAT ENABLE A JUDGMENT CREDITOR TO ‘GARNISHEE’ THE AMOUNT OF AN INSURER’S LIABILITY TO THE JUDGMENT DEBTOR 25.52 All Western Australian state court civil judgments are enforced under the Civil Judgments Enforcement Act 2004 (WA) (CJE Act). On the application of a judgment creditor, a court ‘may’ make a ‘debt appropriation order’ against a person who owes or will or may owe an ‘available debt’ to a judgment debtor to pay all or part of the debt to the judgment creditor rather than the judgment debtor: CJE Act s 49(1). Section 46(1) defines an ‘available debt’ in relation to a judgment debtor as: any obligation on the part of a person to pay money to the debtor … which obligation, at the time a debt appropriation order is made: (a) is current and unconditional, irrespective of whether the money or any part of it is payable at some future time; or … (c) may arise in respect of an existing cause of action; or …
25.53
In other words, in Western Australia at least, in certain
circumstances a judgment creditor can obtain a court order requiring an insurer to pay to the judgment creditor rather than its insured the judgment debtor the amount of the insurer’s liability to the judgment debtor. The insurer’s liability might be under a first party policy in circumstances unrelated to the claim underlying the judgment. More likely, it will be under a liability policy by which the insurer has agreed to indemnify its insured against its liability for the claim underlying the judgment.83 [page 469]
CONCLUDING OBSERVATION 25.54 Steyn LJ was not the only one on the Clapham omnibus to complain about the operation of the privity rule in England when His Honour said in the Court of Appeal in 1995:84 The case for recognising a contract for the benefit of a third party is simple and straightforward. The autonomy of the will of the parties should be respected. The law of contract should give effect to the reasonable expectations of contracting parties. Principle certainly requires that a burden should not be imposed on a third party without his consent. But there is no doctrinal, logical, or policy reason why the law should deny effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties. Moreover, often the parties, and particularly third parties, organise their affairs on the faith of the contract. They rely on the contract. It is therefore unjust to deny effectiveness to such a contract. I will not struggle with the point further since nobody seriously asserts the contrary.
By virtue of Trident and various statutory assaults on the privity rule at Commonwealth and state (territory) level, Australia was well ahead of England in acting on the injustice of the rule by the time Steyn LJ made that observation.85 The tasks for an Australian lawyer today are to apply Trident and keep track of the plethora of legislation that extends the benefit of a contract to third parties, rather than spend time thinking about how to circumvent the privity rule.
1. 2. 3. 4.
5. 6. 7. 8. 9.
10. 11. 12. 13. 14.
15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26.
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107 at [3] (Brennan J). See fn 1. Coulls v Bagot’s Executor & Trustee Co Ltd [1967] HCA 3; (1967) 119 CLR 460 at [16] (Windeyer J); Olsson v Dyson [1969] HCA 3; (1969) 120 CLR 365 at [21]. Coulls v Bagot’s Executor & Trustee Co Ltd (see fn 3) at [29]–[34] (Windeyer J). In Coulls, Windeyer J suggested that the party suing should often be awarded specific performance of the promise because damages would usually be an inadequate remedy. Although the High Court decided Trident after the ICA came into effect, it addressed facts that pre-dated the ICA. [1999] WASCA 1024; 10 ANZ Ins Cas 61-430. [2003] NSWSC 945. In this context, a ‘stranger’ is someone who is not a party to a first party insurance contract, and is not intended by the parties to the contract to benefit by it. New Hampshire Insurance Co v MGN Ltd; Maxwell Communications plc v New Hampshire Insurance Co [1996] EWCA Civ 838; [1997] LRLR 24; [1996] CLC 1692 at 1735. Barroora Pty Ltd v Provincial Insurance Ltd (1992) 26 NSWLR 170 at 174 (Brownie J). Morris v Betcke [2005] NSWCA 308; (2005) 13 ANZ Ins Cas 61-665 at [45] (Hoeben J). Nicholas v Wesfarmers Curragh Pty Ltd [2010] QSC 447 at [27]–[29] (McMeekin J). Almost all insurance contracts are not under seal. The rest of this article proceeds on the basis of an insurance contract not under seal. Dunlop Pneumatic Tyre Company Ltd v Selfridge and Company Ltd [1915] UKHL 1; (1915) AC 847 at 853 (Viscount Haldane LC); Hollis v Vabu Pty Ltd t/as Crisis Couriers [1999] NSWCA 334 at [15] (Sheller JA). Privity and consideration are distinct concepts. Coulls v Bagot’s Executor & Trustee Co Ltd (see fn 3) at [32] (Barwick CJ) at [14] (Windeyer J). Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (see fn 1) at [3] (Brennan J). The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239; (2008) 225 FLR 1 at [3350] (Owen J). The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (see fn 17) at [3371] (Owen J). Jones v Bartlett [2000] HCA 56; (2000) 205 CLR 166 at [146] (Gummow and Hayne JJ). The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (see fn 17) at [3351]– [3361] (Owen J). The Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) (see fn 17) at [3365] (Owen J). HL (Qld) Nominees Pty Ltd v Jobera Pty Ltd [2009] SASC 165 at [293] (Layton J). [2009] HCA 50; (2009) 240 CLR 391. Ripper v Gatenby [2002] TASSC 45; (2002) 10 Tas R 435 at [22] (Blow J). McArthur v Mercantile Mutual Life Insurance Co Ltd [2001] QCA 317; (2001) 11 ANZ Ins Cas 61-501 at [4] (McPherson JA). General Motors Acceptance Corporation Australia v RACQ Insurance Ltd [2003] QSC 80
27. 28. 29. 30. 31. 32. 33. 34. 35.
36. 37. 38.
39. 40. 41. 42. 43.
44. 45. 46. 47. 48. 49. 50.
at [26] (Muir J); GIO Australia Ltd v P Ward Civil Engineering Pty Ltd [2000] NSWSC 371 at [10]–[11] (Simpson J). [2003] QSC 80. [1997] NSWSC 185; (1997) 9 ANZ Ins Cas 61-362. [2000] NSWSC 371. Hunt v Watkins; Watkins v GRE (UK) Ltd [2003] NSWCA 155 at [49] (Handley JA); Quinlan v Safe International Forsakrings AB [2005] FCA 1362 at [32] (Nicholson J). In this context, a ‘stranger’ is someone who is not a party to a first party insurance contract and is not intended by the parties to the contract to benefit by it. British Traders’ Insurance Co Ltd v Monson [1964] HCA 24; (1964) 111 CLR 86 at [8] (Kitto, Taylor and Owen JJ). [1975] HCA 40; (1975) 180 CLR 173. See also Rayner v Preston (1881) 18 Ch D 1. Davjoyda Estates Pty Ltd v National Insurance Co of New Zealand Ltd (1967) 69 SR (NSW) 381. Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd [2005] NSWCA 19; (2005) 62 NSWLR 148 at [19] (Ipp JA); Fairwater Pty Ltd v QBE Insurance (Australia Ltd) [2012] WASCA 270 at [3] (Pullin J). Allianz Australia Insurance Ltd v Mercer [2014] TASFC 3 at [182]–[183] (Porter J). [1999] SASC 496 at [59]–[62]. Vollstedt v Calibre Enterprises Pty Ltd (1999) 10 ANZ Ins Cas 61-440; Webb v Estate of Darryl Arthur Herbert [2006] WASCA 43 at [13] (Wheeler JA); The New South Wales Solicitors Mutual Indemnity Fund v The Hancock Family Memorial Foundation Ltd (No 2) [2009] WASCA 146 at [23] (McLure JA); Allianz Australia Insurance Ltd v Mercer (see fn 36) at [173] (Porter J). Allianz Australia Insurance Ltd v Mercer (see fn 36) at [177] (Porter J). Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (see fn 35) at [35] (Ipp JA). Murdock v Lipman [2012] NSWSC 983 at [69] (McCallum J). Fairwater Pty Ltd v QBE Insurance (Australia Ltd) (see fn 35) at [4] (Pullin J). Section 7(1)(c) provides: ‘Where damage is suffered by any person as the result of a tort any tortfeasor liable in respect of that damage may recover contribution from any other tortfeasor who is or would if sued have been held liable in respect of the same damage’. There is an almost identical provision in similar legislation in each state and territory. Australian Turf Industries Pty Ltd v Dalet Pty Ltd (unreported, Steytler J, SC (WA)(FC), No 980658, 12 November 1998) at [24]. Sciacca v Langshaw Valuations Pty Ltd [2013] NSWSC 1285 at [27] (Adamson J). [2000] QCA 421. The discretion is a wide one: ACCC v ASIC [2000] NSWSC 316; (2000) 174 ALR 688 at [27]–[28] (Austin J). Pagnon v WorkCover Queensland [2000] QCA 421 at [17] (McPherson JA). Murdock v Lipman [2012] NSWSC 983 at [82] (McCallum J). Stone v ACN 000 337 940 Pty Ltd [2008] NSWSC 1058; (2008) 68 ACSR 242 at [18] (Barrett J).
51. Allianz Australia Insurance Ltd v Mercer (see fn 36) at [164] (Porter J). 52. Allianz Australia Insurance Ltd v Mercer (see fn 36) at [163]–[164] (Porter J). 53. Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (see fn 35) at [19] (Ipp JA); Fairwater Pty Ltd v QBE Insurance (Australia Ltd) (see fn 35) at [3] (Pullin J). 54. Murdock v Lipman (see fn 41) at [46] (McCallum J at [46]) (a case on s 601AG of the Corporations Act 2001 (Cth)). 55. Allianz Australia Insurance Ltd v Mercer (see fn 36) at [177] (Porter J). 56. Fairwater Pty Ltd v QBE Insurance (Australia Ltd) (see fn 35) at [4] (Pullin J). 57. Allianz Australia Insurance Ltd v Mercer (see fn 36) at [182]–[183] (Porter J). 58. Tzaidas v Child [2009] NSWSC 465 at [34] (McCallum J). 59. Almario v Allianz Australia Workers Compensation (NSW) Insurance Ltd (see fn 35) at [20] (Ipp JA). 60. There is an almost identical provision in similar legislation in each state and territory. 61. See fn 38. 62. Tzaidas v Child (see fn 58) at [44] and [45] (McCallum J); Smart v AAI Ltd; JRK Realty Pty Ltd v AAI Ltd [2015] NSWSC 392 at [189]–[192] (Beech-Jones J). 63. There is an almost identical provision in similar legislation in each state and territory. 64. Tzaidas v Child (see fn 58) at [25] (McCallum J); Mercer v Allianz Australia Insurance [2013] TASSC 11; (2013) 273 FLR 459 at [24] (Blow CJ). But see: Suncorp Metway Insurance Ltd v Clonmel Pty Ltd [2000] QSC 135 at [21] (Muir J). 65. Only an amendment to the Law Reform Act would seem to get around this problem (by extending the definition of ‘tortfeasor’ to include the liability insurer of a ‘tortfeasor’). 66. Lake Cumbeline Pty Ltd v Effem Foods Pty Ltd t/as Uncle Ben’s of Australia (1994) 126 ALR 58 at 65 (Tamberlin J). 67. Section 6 is almost identical to s 9 of the Law Reform Act 1936 (NZ) and appears to have been inspired by s 5 of the Workers’ Compensation Act 1897 (UK) via s 42 of the Workers’ Compensation Act 1908 (NZ): Bailey v New South Wales Medical Defence Union Ltd [1995] HCA 28; (1995) 184 CLR 399 at [83] (McHugh and Gummow JJ). 68. [2013] NSWCA 212 at [55]. See also Registrar-General of New South Wales v LawCover [2013] NSWSC 1471 at [17] (Harrison J). 69. The Attorney-General’s first reading speech of the Law Reform (Miscellaneous Provisions) Bill, New South Wales, Legislative Assembly, Parliamentary Debates, 5 March 1946, 2nd series, vol 179, p 2456. 70. (1987) 11 NSWLR 715. 71. Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50; (2009) 240 CLR 391 at [26] (French CJ, Gummow and Crennan JJ), [39] (Hayne and Heydon JJ); Morris v Betcke [2005] NSWCA 308; (2005) 13 ANZ Ins Cas 61-665 at [42] (Hoeben J). 72. Morris v Betcke [2005] NSWCA 308; (2005) 13 ANZ Ins Cas 61–665 at [15] (Hoeben J); Wayland v Bird [2017] NSWCA 26 at [24]–[26] (Ward JA). 73. The Owners — Strata Plan No 50530 v Walter Construction Group Ltd (in liquidation) [2007] NSWCA 124; (2007) 14 ANZ Ins Cas 61-734 at [5] Giles JA, [29] and [35]
74. 75. 76. 77. 78. 79. 80. 81.
82. 83. 84.
85.
(Hodgson JA); Chubb Insurance Company of Australia Ltd v Moore [2013] NSWCA 212 at [104] (Emmett JA and Ball J). Chubb Insurance Company of Australia Ltd v Moore (see fn 73) at [135] (Emmett JA and Ball J). Tzaidas v Child [2004] NSWCA 252; (2004) 208 ALR 651 at [23] (Giles JA). Wayland v Bird [2017] NSWCA 26 at [32] (Ward JA). Chubb Insurance Company of Australia Ltd v Moore (see fn 73) at [135] (Emmett JA and Ball J). Bailey v New South Wales Medical Defence Union Ltd [1995] HCA 28; (1995) 184 CLR 399 at [110]. Bankruptcy Act 1966 (Cth) s 301; Folgate London Market Ltd v Chaucer Insurance Plc [2011] EWCA Civ 328 (Rimmer LJ). As do related ss 562A (Application of proceeds of contracts of reinsurance) and 563 (Provisions relating to injury compensation). McGrath v Riddell [2008] UKHL 21; [2008] 1 WLR 852 at [51] (Lord Scott of Foscote). The appeal to the House of Lords concerned four insolvent HIH group Australian insurance companies in compulsory liquidation in Australia and in provisional liquidation in England. The issue was whether the companies’ English assets should be remitted to the Australian liquidators for distribution in accordance with the Australian insolvency regime, or distributed in accordance with the English insolvency regime. Folgate London Market Ltd v Chaucer Insurance Plc (see fn 79). Gibbs v Haoma Mining NL (No 6) [2017] WADC 67 (Staude DCJ). Darlington Borough Council v Wiltshier Northern Ltd [1994] EWCA Civ 6; [1995] 1 WLR 68 at 76. Although Steyn LJ did not mention the High Court’s decision in Trident, its importance was duly acknowledged by Lord Goff in the subsequent judgment of the Privy Council in The Mahkutai [1996] AC 650 at 664–5. At the time, the Third Parties (Rights against Insurers) Act 1930 (UK) (TPRIA) was one of a few legislative incursions into the doctrine of privity (others included the Road Traffic Act 1930 (UK), passed in tandem with the TPRIA). The TPRIA conferred on third parties rights against a liability insurer if its insured became insolvent. The Contracts (Rights of Third Parties) Act 1999 (UK) and the Third Parties (Rights against Insurers) Act 2010 (UK) have since made real inroads into the privity rule.
[page 471]
Chapter 26 SOME INSURANCE-RELATED CIVIL LITIGATION PROCEDURES Litigation is an activity that does not markedly contribute to the happiness of mankind, though it is sometimes unavoidable.1
INTRODUCTION This chapter addresses the following insurance-related civil litigation procedures: Liability insurance: ■ a liability insurer or its insured applying for a declaration as to the insured’s entitlement to indemnity before a third party claimant has commenced court action against the insured; ■ an insured seeking an indemnity from its liability insurer in third party proceedings; ■ a third party claimant joining a liability insurer to its court action against the insured; ■ a judgment creditor ‘garnisheeing’ an amount owing by an insurer to its insured (the judgment debtor); ■ a third party claimant obtaining access to the documents comprising a liability insurance contract; ■ representation in court; client legal privilege and ‘without prejudice’ privilege; and an insurer denying its insured access to a non-privileged expert’s report.
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[page 472]
LIABILITY INSURANCE A liability insurer or its insured applying for a declaration as to the insured’s entitlement to indemnity before a third party claimant has commenced court action against the insured 26.1 Every now and then, a liability insurer or its insured will apply to a court for a declaration as to an insured’s entitlement to indemnity for a third party’s claim against it before the third party claimant commences court action against the insured. A court is unlikely to consider making such a declaration without deciding the facts or the parties agreeing the facts underlying the dispute.2 Different courts have expressed this in different ways. In AMP Fire and General Insurance Company Ltd v Dixon,3 the Full Court of the Supreme Court of Victoria said: In ordinary third party proceedings the peculiarity is that the third party is often allowed to contest the liability of the plaintiff to the defendant and his liability to the defendant before the former is established. It is however another thing altogether to say that the liability of an insurer to a defendant can be litigated in independent proceedings before the defendant’s liability to the plaintiff has been established or admitted.
In Horbury Building Systems Ltd v Hampden Insurance NV,4 Keene LJ said: To be asked to determine whether liability for certain losses would fall within the terms of the policy without knowing on what legal basis the insured would be liable for those losses is unsatisfactory, both because one is having to proceed to arrive at an interpretation in the abstract and because these present proceedings may be unnecessary if the claimant is not liable in law for those losses.
An insured seeking an indemnity from its liability insurer in third party proceedings 26.2 Generally speaking, a person cannot sue another person unless they have a cause of action against that other person. Application of the general rule would prevent an insured from commencing proceedings
against its liability insurer for an indemnity against the insured’s liability to a third party claimant until after that liability had been established by a settlement, judgment or arbitration award. The problem is avoided by court procedures that allow an insured to commence third party proceedings against its insurer before the insured’s liability to the third party is established.5 [page 473] Subject to the policy wording and certain exceptional circumstances, upon being found liable to a third party claimant, an insured can apply to the court in the third party proceedings for a declaration that it is entitled to indemnity under a liability insurance policy and for an order that the insurer set aside a fund to meet that liability before it has paid the third party or to pay the amount due directly to the third party.6
A third party claimant joining a liability insurer to its court action against the insured 26.3 A party to an insurance contract or a person specified or referred to in an insurance contract as someone to whom the benefit of the cover extends can sue an insurer direct.7 For the purpose of this discussion, a ‘stranger to an insurance contract’ is not such a person. In certain circumstances, a ‘stranger’ has a statutory cause of action against a liability insurer.8 CGU Insurance Ltd v Blakeley9 concerned the circumstances in which a ‘stranger’ can join a liability insurer to an action where it has no statutory cause of action against the insurer. The liquidators of Akron Roads Pty Ltd commenced an insolvent trading claim against its former directors Trevor Crewe and Crewe Sharp Pty Ltd (Crewes). The Crewes’ professional indemnity insurer, CGU, denied the Crewes indemnity for the liquidators’ claim in reliance on exclusions in the policy. Crewe Sharp went into liquidation. Mr Crewe did not have the assets to satisfy a judgment against him.
The Victorian Supreme Court granted the liquidators leave to join CGU to the action for the purpose of seeking a declaration that CGU was liable to indemnify the Crewes under its policy. On CGU’s appeal, the High Court said (at [67]–[68]): a) the Court’s power to join CGU to the action depended on there being a “justiciable controversy”, that is a controversy in which Akron has a real interest; b) there was a “justiciable controversy” because of CGU’s denial of liability and Akron’s interest in the insurance proceeds payable to Mr Crewe’s trustee in bankruptcy (if he became bankrupt) pursuant [page 474] to s 117 of the Bankruptcy Act 1966 (Cth) and to Crew Sharp’s liquidator pursuant to s 562 of the Corporations Act 2001 (Cth). It would be distinctly to ignore this reality if the liquidators’ interest in this regard could be defeated by reason of inaction on the part of Crewe Sharp and Mr Crewe against CGU given that the statutory provisions … deprive Crewe Sharp and Mr Crewe of all incentive to pursue a claim under the Policy. c) in circumstances in which the relevant insureds were parties to the action, it was unlikely that they or CGU would be permitted to re-litigate the indemnity issue in subsequent proceedings. The alternatives to applying for a joinder is for a third party claimant to: commence an action against the insured and its insurer. In these circumstances, the insurer might apply to strike out the action against it on the same basis as the insurer would resist joinder; take an assignment from the insured’s trustee in bankruptcy or liquidator of its rights against the insurer under the policy or from the insured itself (if there is no trustee in bankruptcy or liquidator) of its rights to the proceeds of the insurance; or
■ ■
■fund an action by the insured’s trustee in bankruptcy or liquidator against the insurer for indemnity under the policy.
A judgment creditor ‘garnisheeing’ an amount owing by an insurer to its insured (the judgment debtor) 26.4 As mentioned at 25.52 and 25.53, in Western Australia at least, in certain circumstances a judgment creditor can obtain a court order requiring an insurer to pay to the judgment creditor rather than its insured (the judgment debtor) the amount of the insurer’s liability to the judgment debtor.10 An insurer is exposed to this process under a liability policy by which it has agreed to indemnify its insured against any liability the insured has for the claim underlying the judgment.11 For the judgment creditor, it is an alternative to applying to join the insurer into the action brought by the judgment creditor against the judgment debtor (before judgment). In jurisdictions where ‘garnisheeing’ is only available in relation to ‘debts’, the question will be whether the insurer’s liability to its insured is a debt, as to which see Chapter 14. [page 475]
A third party obtaining access to the documents comprising a liability insurance contract 26.5 From time to time, a plaintiff applies to a court for an order that a defendant produce the documents comprising its liability insurance contract, on the grounds of proper case management, in preparation for mediation or as part of the discovery process. If, as is often the case, the contract is not relevant to the existence or extent of the defendant’s potential liability to the plaintiff,12 such applications are usually unsuccessful,13 that is, unless there is a statutory provision or specific Rule of Court supporting production.
For two cases involving non-insurers where an insurance policy was held to be relevant, see Barrick Gold of Australia Ltd v FL Smidth Inc (No 3)14; and Johnson Tiles Pty Ltd & Dean v Esso Australia Pty Ltd.15 26.6 A person who is not a party to a liability insurance contract or entitled to benefit by it is entitled to production of the contractual documents for the purpose of enforcing rights conferred on them by legislation such as s 51 of the Insurance Contracts Act 1984 (Cth), ss 562 and 601AG of the Corporations Act 2001 (Cth) and s 117 of the Bankruptcy Act 1966 (Cth) (they all specifically mention an insured holding liability insurance). 26.7 A member of a company or registered managed investment scheme might be entitled to production of the documents comprising the company’s or scheme’s liability insurance contract pursuant to an application under s 247A of the Corporations Act 2001 (Cth) for inspection of the books of the company or scheme for the purpose of deciding whether or not to sue the company or scheme (as long as the applicant is acting in good faith and the inspection is for a proper purpose).16 26.8 A person who is not a party to a liability insurance contract or entitled to benefit by it might also be entitled to production of the documents comprising such a contract in the following circumstances: for the purpose of preventing an abuse of the court process;17 on an application for leave to proceed against an insolvent company under s 471B of the Corporations Act 2001 (Cth) or s 58(3)(b) of the Bankruptcy Act 1966 (Cth).
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[page 476] 26.9 In Banksia Securities Ltd (Receivers and Managers Appointed),18 the Victorian Supreme Court, on the ex parte application of Banksia’s receivers pursuant to s 596D(2) of the Corporations Act
2001 (Cth), ordered the production of MB+M Business Solutions’ professional indemnity insurance policy and related documents for the purpose of the receivers investigating whether a potential claim against Mr Hall would be met if they obtained a judgment against him.
Representation in court 26.10 The basic rule is that each party to a court action is only allowed one set of representation. A defendant insured will only be permitted to have one firm of solicitors and/or counsel appearing for its interests and a separate firm of solicitors and/or counsel appearing for its insurer’s interests on rare occasions and only for the purpose of avoiding injustice. Buses + 4WD Pty Ltd v Oz Snow Adventures Pty Ltd19 was one of those rare occasions. In these circumstances, the insurer should also think about relinquishing control over the defence and the defendant should think about commencing third party proceedings against its insurer. That is unless they can think of a practical alternative.20
CLIENT LEGAL PRIVILEGE AND ‘WITHOUT PREJUDICE’ PRIVILEGE The following discussion is subject to whatever ‘privilege’ regime is imposed by Commonwealth, state or territory ‘evidence’ legislation, all of which leave some room for the operation of the common law.21
Client legal privilege Generally 26.11 Early in the course of civil litigation, the parties to the litigation are almost invariably obliged to disclose to each other a list of documents in their possession, custody or power relevant to their dispute or a specified aspect of it. A party can refuse to produce to the other parties to the litigation any document on the list that is the subject of client legal privilege (for ease of reference, this includes common law
legal professional privilege). A party can also refuse to allow such a document [page 477] or an oral communication the subject of client legal privilege to be produced or used at a hearing or a trial (although a court might ask to consider the document or communication for itself for the purpose of deciding whether it is privileged). Client legal privilege is a rule of substantive law, not a procedural rule.22 A party claiming client legal privilege has the onus of proving it. The relevant rules of court may impose on the other party the evidential onus of displacing the claim for privilege.23 26.12 Subject to the discussion at 26.13 below, at common law a client is entitled to claim client legal privilege for: the confidential contents of a document; or a confidential written or oral communication: ■ between the client (or the client’s agent) and the client’s lawyer; or ■ between the client (or the client’s lawyer or other agent) and a third party, if the document or communication came into existence for the dominant purpose of: the client obtaining or being provided with legal advice, whether or not in connection with litigation pending or reasonably apprehended (advice privilege); or being used in pending or reasonably apprehended litigation (litigation privilege).24 In AWB Ltd v Cole (No 5),25 Young J helpfully listed 12 general principles relating to claiming client legal privilege. The ‘dominant’ purpose is the ruling, prevailing, most influential, or
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clearly paramount purpose. The primary or substantial purpose falls short of the ‘dominant’ purpose.26 [page 478] Litigation is ‘reasonably apprehended’ if there is ‘a real prospect of that litigation, as distinct from a mere possibility, but it does not have to be more likely than not’.27 26.13 One line of authority suggests that advice privilege is available even if the communication is with a third party who is not the agent of the client.28 Another line of authority suggests not.29 Accordingly, it is not clear that advice privilege is available where the insurer itself engages an investigator to report to the insurer or the insurer’s lawyer for the purpose of obtaining legal advice. That is because the investigator is arguably not the insurer’s agent for that purpose. That led Campbell J to say, in Melrose Cranes and Rigging Pty Ltd v Manitowoc Crane Group Australia Pty Ltd:30 … the retention [by the insurer] of a loss adjustor, investigator or expert to prepare a report about the cause and origin of the fire which damaged the crane, which it is contemplated will be submitted to lawyers for advice, is not the retaining of a third party to act as an agent to communicate with the lawyer on behalf of the client. On this basis I would have held that the documents enumerated in MFI 1 were not protected from disclosure by ‘advice privilege’.
26.14 In Grant v Downs,31 Stephen, Mason and Murphy JJ explained that client legal privilege: … promotes the public interest because it assists and enhances the administration of justice by facilitating the representation of clients by legal advisers, the law being a complex and complicated discipline. This it does by keeping secret their communications, thereby inducing the client to retain the solicitor and seek his advice, and encouraging the client to make a full and frank disclosure of the relevant circumstances to the solicitor. The existence of the privilege reflects, to the extent to which it is accorded, the paramountcy of this public interest over a more general public interest, that which requires that in the interests of a fair trial litigation should be conducted on the footing that all relevant documentary evidence is available. As a head of privilege legal professional privilege is so firmly entrenched in the law that it is not to be exorcised by judicial decision. None the less there are powerful considerations which suggest that the privilege should be confined within strict limits.
Uniform Evidence Acts promulgated by the Commonwealth and some Australian states affect the scope of client legal privilege (for example, Evidence Act 1995 (Cth) ss 118 and 119). [page 479]
Joint and common interest privilege 26.15 A holder of client legal privilege in relation to a document or communication cannot claim privilege for that document or communication as against anyone with a ‘joint’ or ‘common’ interest in the subject matter of a dispute to which the document or communication relates.32 In Cia Barca de Panama SA v George Wimpey & Co Ltd,33 Stephenson LJ said: In the ordinary way … a third party cannot possibly claim to have disclosed to him in an action against a second party documents which are relevant to that second party’s claim against somebody else, the first party, or a defence to a claim brought against him by that first party. But if the so called third party is not a total stranger but is a person who has a joint or common interest with the defendants whom he has sued in claims which they have made or which have been made against them in other proceedings, then he is not a stranger to those proceedings and if his interest is sufficient, I would have thought it must follow in fairness and common sense … that he would be entitled to see those documents …
In the same case, Bridge LJ said (at 615): If A and B have a common interest in litigation against C and if at that point there is no dispute between A and B, then if subsequently A and B fall out and litigate between themselves and the litigation against C is relevant to the disputes between A and B, then in the litigation between A and B, neither A nor B can claim legal professional privilege for documents which came into existence in relation to the earlier litigation against C.
In Commercial Union Assurance Co PLC v Mander,34 Moore-Bick J said: [T]he right to obtain disclosure of documents in this context depends upon their having been obtained by one party in furtherance of a joint interest, and in that sense on behalf of all those who share it. In a case where the documents contain legal advice that joint interest must exist at the time the advice is sought …
Two or more persons will be regarded as having a: ‘joint’ interest in the subject matter of a dispute if they have the
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same interest in it at the time the relevant document comes into existence or the relevant communication takes place. Partners defending a claim by, or pursuing a claim against, a third party, typically have a ‘joint’ interest in the subject matter of the dispute with the third party; or ‘common’ interest in the subject matter of a dispute if they have a common, similar or shared interest (not a joint interest) in it at the time the relevant document comes into existence or the relevant [page 480]
communication takes place. Insurer and insured is a type of relationship that can give rise to a ‘common’ interest.35 Using the same lawyer or having such similar interest that they could have used the same lawyer is not the test for ‘common interest’. It is a question of fact in each case. Having said that, the same interest in the outcome of a court action might be sufficient to establish ‘common interest’.36
Waiver of privilege 26.16 A holder of client legal privilege in relation to a particular document or communication can waive their privilege. By waiving privilege, the holder gives up the right to claim privilege for that document or communication as against the rest of the world. The party claiming privilege has been waived bears the onus of showing it.37 The High Court explained waiver of privilege in Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd:38 30. According to its strict legal connotation, waiver is an intentional act done with knowledge whereby a person abandons a right (or privilege) by acting in a manner inconsistent with that right (or privilege). It may be express or implied. In most cases concerning waiver, the area of dispute is whether it is to be implied. In some cases waiver will be imputed by the law with the consequence that a privilege is lost, even though that consequence was not intended by the party losing the privilege. The courts
will impute an intention where the actions of a party are plainly inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. 31. In Craine v Colonial Mutual Fire Insurance Co Ltd, it was explained that “‘[w]aiver’ is a doctrine of some arbitrariness introduced by the law to prevent a man in certain circumstances from taking up two inconsistent positions … It is a conclusion of law when the necessary facts are established. It looks, however, chiefly to the conduct and position of the person who is said to have waived, in order to see whether he has ‘approbated’ so as to prevent him from ‘reprobating’. In Mann v Carnell, it was said that it is considerations of fairness which inform the court’s view about an inconsistency which may be seen between the conduct of a party and the maintenance of confidentiality, though “not some overriding principle of fairness operating at large”. (citations omitted)
26.17 In certain circumstances, a person can waive privilege: to only a part of a document; in relation to certain persons and not others; or
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[page 481]
■for a limited purpose only. To protect against the possibility that provision of documents to a third party might amount to a waiver of privilege, it: … is necessary to show that the documents were provided to the third party on a confidential basis for a limited or specific purpose.39
A privilege holder will be held to have deliberately or inadvertently waived privilege over a particular document or communication if their conduct ‘is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect’.40 A privilege holder does not waive privilege in relation to a particular document or communication by disclosing it to a person with a ‘joint’ or ‘common’ interest in the subject matter of a dispute.41 Privilege holders with a joint interest in the subject matter of a dispute only waive privilege over a particular document or communication if privilege over that document or communication is waived by all of them.42 It is possible for one of the privilege holders with a common interest in the subject matter of a dispute to waive
privilege over a document or communication without the knowledge or consent of the other common interest privilege holders.43
Insurer or insured claiming client legal privilege against a third party 26.18 The interests of an insured and a liability insurer who has agreed to indemnify its insured against a third party claim, in the outcome of the claim entitles each of them to claim privilege against the third party in relation to documents and information the subject of client legal privilege in favour of the insurer or the insured. This is on the basis that their interest in the dispute with the third party is: ‘joint’, for example if the insurance policy contains a term that requires the insured to co-operate with the insurer in handling a claim;44 or ‘common’, if they cannot claim joint interest privilege.45
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[page 482] 26.19 In certain circumstances, an insured providing a privileged document to its insurer will waive client legal privilege over the document as against the world. That is what happened in Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Limited (No 2),46 in which Bromberg J concluded Asahi (the applicant) waived privilege over an expert report as against the respondent when it gave the report to its warranty and indemnity insurer. That was because (at [83]): … the [report] was being provided to what must have been recognised as a potential adversary; The terms of the Policy did not expressly require the Insurer to keep material provided by the applicants confidential, and no assurances as to confidentiality were sought or obtained from the Insurer … despite the fact that the disclosure was made as between sophisticated commercial parties and facilitated by a lawyer;
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The Policy included a process by which material which was privileged could be provided to the Insurer on terms that would limit its use and maintain its confidentiality. Whilst that process was directed to Third Party claims, it nevertheless provided an agreed process which could readily be adopted for other claims; … the material provided was not “obviously sensitive” or “obviously privileged” such that a reader of it would readily understand that the confidentiality of the material was intended to be maintained; At the time the Notice of Claim was lodged and some two weeks prior to the disclosure, the Insurer was informed that legal proceedings would shortly be instituted against various of the respondents. The terms of the letter providing that information and the terms of the claim made on the Insurer would have made it apparent to the Insurer (as must have been known to the applicants) that the same or similar claims of misleading or deceptive conduct which supported ILNZ’s claim under the Policy were about to be pursued against the respondents in this Court; and … it must have been appreciated (at least by the applicants) that there was a possibility that the manner and extent to which the applicants had properly pursued any rights to recovery of their alleged loss against the Insurer would become (as it has become) an issue in this proceeding. The prospect that the claim upon the Insurer could become (as it has become) an issue in this proceeding would have been understood as making it even more unlikely that sensitive material would have been [page 483] provided to the Insurer or if provided, provided without express undertakings maintaining confidentiality designed to protect the
applicants against the very kind of application which they currently face (citations omitted).
Insurer claiming client legal privilege for investigator’s report against insured and the world 26.20 In the context of an insurer claiming privilege for an investigator’s report: the intention of the insurer (or its lawyer) in commissioning the report; and the communications between the insurer, its lawyer and the investigator in relation to the preparation of the report, are relevant to a court determining objectively whether the ‘dominant purpose’ or ‘reasonably apprehended litigation’ test is satisfied.47 In Melrose Cranes and Rigging Pty Ltd v Manitowoc Crane Group Australia Pty Ltd,48 Campbell J said the insurer could not claim ‘litigation’ privilege over any investigator’s reports prepared prior to the insurer admitting the insured’s claim for damage to an insured crane. That was because he was not satisfied that prior to admitting the insured’s claim, the purpose of investigating a possible recovery claim for damage to the crane ‘enjoyed clear paramountcy’ over the insurer’s need to know facts which would enable it to decide whether to accept the insured’s claim for the damage under the policy. That changed once the insurer decided to admit the insured’s claim for damage to the crane.
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26.21 Ensham Resources Pty Ltd v AIOI Insurance Company Ltd49 concerned an Ensham-owned and operated open-cut coal mine on the flood plain of the Nagoa River in Queensland. AIOI insured Ensham under an Industrial Special Risks policy for property damage and business interruption. As a result of heavy rain, the Nagoa River and a creek overflowed and breached earth levies surrounding three pits of the mine. The overflow flooded the three pits, damaging Ensham’s property and interrupting its business. AIOI retained a firm of solicitors and a firm of loss adjusters
(Crawfords) to work on the flood. The solicitors subsequently retained Crawfords direct. [page 484] Crawfords prepared 10 reports. Ensham disputed AIOI’s claim that Crawfords’ second, fourth and ninth reports and part of their eighth and tenth reports were the subject of client legal privilege, and sought an order for inspection of them. The issue for the court was whether these reports were ‘created for the dominant purpose of being used in anticipated litigation’. That depended on the state of mind of AIOI’s solicitor, not on Crawford’s state of mind. In the course of his reasons, Cowdroy J said (at [27]) the: … purpose of an insurer’s conducting its insurance business, which may include placing an amount in money terms on its contingent liability, formulating its attitude to future business relations with the insured, informing head office to obtain necessary instructions or decisions and complying with reporting requirements, is not sufficient to attract the privilege …
Cowdroy J concluded that the identified reports were prepared for the dominant purpose of providing legal advice in anticipation or contemplation of litigation and were therefore the subject of client legal privilege. In relation to the issue of whether litigation was reasonably anticipated, His Honour explained: 48 … the consequences of the flood on the mine were catastrophic and entailed massive damage to the applicant’s business and property. Very costly remedial measures were known to be required to dewater the mine and there was a very real possibility that the cost of those measures would well exceed the applicable policy limits. 49 … at least since 18 February 2008 … the question whether the levee bank was included as an insurable item of property under the policy was a contentious issue. This question alone could found a reasonable view that there was a real prospect of litigation, since a substantial portion of the applicant’s insurance claim would be directed towards the business loss it suffered as a result of the apparent failure of the levee. … the fact that the levee bank was not included on the list of insured property raises a significant issue in respect of the applicant’s possible, and now actual, claim.
26.22 The court will not allow client legal privilege to be claimed if the insurer’s instructions to its lawyers to retain an investigator to
prepare a report ‘involve[s] a ruse designed to shroud with privilege a document not properly the subject of legal professional privilege’.50
‘Without prejudice’ privilege 26.23 In the course of most disputes, the parties communicate with each other in an effort to settle the dispute. [page 485] Subject to the exceptions described below, if such a communication (oral or in writing or by conduct51) is ‘without prejudice’, it is inadmissible in evidence and therefore cannot be produced or used at a hearing or a trial of: the dispute; or another dispute ‘connected with the same subject matter’ as the original dispute, even if the subsequent dispute involves different parties,52 although a court might ask to consider the communications for itself for the purpose of deciding whether they are privileged. Depending on the circumstances, a ‘without prejudice’ communication might not be able to be disclosed to a third party without the consent of all parties to the communication.53 In other words, the description of a communication by one person to another as ‘without prejudice’ is shorthand for saying it is without prejudice to the first person’s position if the dispute does not settle.
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26.24 The ‘without prejudice’ privilege is ‘generous in its application’.54 It is founded on public policy and on the express or implied agreement of the parties55 and is intended to encourage parties to settle their disputes without resort to litigation or a trial or hearing. It does so by allowing the parties to speak freely and openly with each other in settlement negotiations, in the knowledge that anything said by them about factual or legal matters (including admissions, concessions and observations about the strengths and weaknesses of the case of one
or other of the parties to the dispute) for the purpose of trying to settle the dispute, including communications reasonably incidental to the negotiations, will not be used against them in court if the negotiations fail.56 It is arguable that the privilege extends to the internal communications of a party to the ‘without prejudice’ communication if it formed part of the negotiations for settlement of the dispute or was incidental to it.57 [page 486] 26.25 The rule against using ‘without prejudice communications in litigation is very strong. It is to be applied in a commonsense and practical way without drawing too fine distinctions’.58 26.26 For a communication to be without prejudice: there must be a dispute;59 the negotiations must be a genuine attempt to settle the dispute60 and that must be obvious on the face of the negotiations. A genuine offer is one in which the party ‘gives something away’.61 An invitation to capitulate or a derisory or nominal offer is not a genuine offer62; the parties to the communication must be litigating the dispute, or must contemplate, or reasonably contemplate, that one might sue the other if they do not settle the dispute.63 If a communication is ‘without prejudice’, then ‘the whole course of the negotiations is privileged’.64
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26.27 Speaking or writing the words ‘without prejudice’ indicates that a party intends the discussion or document to be ‘without prejudice’, but it is not conclusive as to whether the discussion or document is ‘without prejudice’.65 26.28 A settlement of a dispute following the exchange of ‘without prejudice’ communications is contractually binding and is not ‘without
prejudice’, although the negotiations leading up to the settlement remain ‘without prejudice’.66 26.29 A ‘without prejudice’ communication is admissible in evidence with the consent of all the parties to the communication.67 It is also admissible for the purpose of: ascertaining whether a dispute has settled;68
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[page 487]
■deciding 69whether a document recording a settlement ought to be ■ ■ ■ ■ ■ ■ ■
rectified; ascertaining ‘the true construction of the agreement as part of its factual matrix or surrounding circumstances’;70 deciding whether a settlement ought to be set aside for misrepresentation, fraud or undue influence; deciding whether a statement made by one party and relied upon by another gives rise to an estoppel (even if a settlement is not reached); deciding whether a statement made by one party involves a contravention of a statutory provision prohibiting misleading conduct; deciding whether someone has committed perjury, blackmail or some other ‘unambiguous impropriety’; explaining or justifying delay or acquiescence, for example on a late application to bring a strike out application for want of prosecution; or showing that a person acted reasonably in mitigating its losses by its attempts to negotiate a settlement.71
26.30 A party is entitled to produce their ‘without prejudice’ communication to a court after judgment on the question of costs if they made it clear to the other party to the communication at the time they sent or made it that although the communication was ‘without
prejudice’ to their position in relation to the dispute, it was not ‘without prejudice’ on the question of costs.
AN INSURER DENYING ITS INSURED ACCESS TO A NON-PRIVILEGED EXPERT’S REPORT 26.31 In Haridemos and Haridemos v Insurance Australia Ltd,72 the plaintiffs made a claim on their motor vehicle policy for the theft of their vehicle. The insurer declined the claim, believing the plaintiffs arranged the theft. On an interlocutory application, the insurer asked the court to exercise the Markus discretion,73 to allow it not to produce nonprivileged reports commissioned by the insurer from a firm engaged in forensic locksmith services and communications between the insurer and the firm. [page 488] Master Harper concluded (at [17]) that the reports: … are not reports which might advance the case for the plaintiffs or damage the case for the defendant. They are reports which, if disclosed, might tempt the plaintiffs to tailor their evidence to meet them. It is therefore in the interest of justice to exempt the defendant from the general obligation to disclose the reports as part of discovery.
1. 2. 3. 4. 5. 6.
Gallie v Lee [1969] 2 Ch 17 at 41 (Russell LJ). Byrne v People Resourcing (Qld) Pty Ltd [2014] QSC 39 at [4] and [5] (Applegarth J); Bass v Perpetual Trustee Co Ltd [1999] HCA 9; (1999) 198 CLR 334 at [45]. [1982] VR 833. [2004] EWCA Civ 418; [2007] Lloyd’s Rep IR 237 at [13]; see also Mance LJ at [29]. Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589 at [12] (Gibbs CJ, Mason and Aickin JJ). Wakim v McNally [2002] FCAFC 208 at [19]–[20]; Re Abigroup Ltd v Gennaro
7.
8.
9. 10. 11. 12. 13.
14. 15. 16. 17. 18. 19. 20.
21.
22.
23.
24.
25. 26. 27. 28.
Abignano [1992] FCA 567; (1992) 39 FCR 74 at [31]. Trident General Insurance Co Ltd v McNiece Bros Pty Ltd [1988] HCA 44; (1988) 165 CLR 107; s 11 of the Property Law Act 1969 (WA) and its equivalent throughout Australia; s 48 of the Insurance Contracts Act 1984 (Cth). For example, pursuant to s 51 of the Insurance Contracts Act 1984 (Cth); s 601AG of the Corporations Act 2001 (Cth); and s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). [2016] HCA 2. Section 49 of the Civil Judgments Enforcement Act 2004 (WA). Gibbs v Haoma Mining NL (No 6) [2017] WADC 67 (Staude DCJ). Imbree v McNeilly [2008] HCA 40; (2008) 236 CLR 510 at 682–690 (Kirby J). Kirby v Centro Properties Ltd [2009] FCA 695 at [28] (Ryan J) (party seeking access to another party’s liability insurance policy for the purpose of preparing for a court-ordered mediation). [2009] WASC 364. [2003] VSC 27; (2003) Aust Torts Reports ¶81-692. Snelgrove v Great Southern Managers Australia Ltd (in liq) [2010] WASC 51 (Le Miere J). Lehman Brothers Australia Limited v Wingecarribee Shire Council [2009] FCAFC 63 (applicant unsuccessful). [2013] VSC 416 at [25]–[26] (Gardiner AsJ). [2016] NSWSC 1017 at [27]–[50] (Adamson J). For example, by engaging counsel to appear solely in the interests of the defendant, with a formula to deal with a judgment that does not account for the difference between the interests of the insurer and the defendant. For example, on the return of a subpoena when the person claiming privilege is not the person to whom the subpoena is addressed: New South Wales v Public Transport Ticketing Corporation [2011] NSWCA 60 at [26]–[32] (Allsop P). Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission [2002] HCA 49; (2002) 213 CLR 543 at [9] (Gleeson CJ, Gaudron, Gummow and Hayne JJ). Grant v Downs [1976] HCA 63; (1976) 135 CLR 674 at [28] (Stephen, Mason and Murphy JJ); Yokogawa Aust Pty Ltd v Alstom Power Ltd [2009] SASC 377; (2009) 262 ALR 738 at [104]–[105]; CMA Assets Pty Ltd v John Holland Pty Ltd (No 2) [2012] WASC 126 at [23]–[24] (Allanson J). Esso Australia Resources Ltd v Federal Commissioner of Taxation [1999] HCA 67; (1999) 201 CLR 49 at [35] and [62] (Gleeson CJ, Gaudron and Gummow JJ); Pratt Holdings Pty Ltd v Commissioner of Taxation [2004] FCAFC 122; (2004) 207 ALR 217 at [42] and [50] (Finn J), [105] (Stone J); Archer Capital 4A Pty Ltd as trustee for the Archer Capital Trust 4A v Sage Group plc (No 2) [2013] FCA 1098 at [22] (Wigney J). (2006) 155 FCR 30. Sydney Airports Corporation Ltd v Singapore Airlines Ltd [2005] NSWCA 47 at [7] and [55] (Spigelman CJ). State of New South Wales v Jackson [2007] NSWCA 279 at [67] (Giles JA). Pratt Holdings Pty Ltd v Commissioner of Taxation (see fn 24) at [41]–[43] (Finn J),
29. 30. 31. 32.
33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43.
44. 45.
46. 47. 48. 49.
50. 51. 52.
[103]–[107] (Stone J). Mitsubishi Electric Australia Pty Ltd v Victorian WorkCover Authority [2002] VSCA 59 at [9] (Batt JA). [2012] NSWSC 904 at [41]. See fn 23 at [19]. Farrow Mortgage Services Pty Ltd (in liq) v Webb [1996] NSWSC 259; (1996) 39 NSWLR 601 at 608 (Sheller JA); Schreuder v Murray (No 2) [2009] WASCA 145; (2009) 41 WAR 169 at [86] (Buss JA); Cia Barca de Panama SA v George Wimpey & Co Ltd [1980] 1 Lloyd’s Rep 598. See fn 32 at 613–4. [1996] 2 Lloyd’s Rep 640 at 645–6. Hamilton v New South Wales [2016] NSWSC 1213 at [70] (Beech-Jones J). Hamilton v New South Wales (see fn 35) at [69]–[73] (Beech-Jones J). State of New South Wales v Betfair Pty Ltd [2009] FCAFC 160; (2009) 180 FCR 543 at [54]. [2013] HCA 46; (2013) 250 CLR 303. Spotless Group Ltd v Premier Building & Consulting Group Pty Ltd [2006] VSCA 201; (2006) 16 VR 1 at [85] (Neave JA). Mann v Carnell [1999] HCA 66; (1999) 201 CLR 1 at [29] (Gleeson CJ, Gaudron, Gummow and Callinan JJ). Mercantile Mutual Insurance (NSW Workers Compensation) Ltd v Murray [2004] NSWCA 151; (2004) 13 ANZ Ins Cas 61-612 at [42] (Mason P). Farrow Mortgage Services Pty Ltd (in liq) v Webb (see fn 32). Farrow Mortgage Services Pty Ltd (in liq) v Webb (see fn 32) at 619 (Sheller JA); Patrick v Capital Finance Corporation (Australasia) Pty Ltd [2004] FCA 1249; (2004) 211 ALR 272 at [23] (Tamberlin J). Mercantile Mutual Insurance (NSW Workers Compensation) Ltd v Murray (see fn 41) at [44] (Mason P). Bulk Materials (Coal Handling) Services Pty Ltd v Coal & Allied Operations Pty Ltd (1988) 13 NSWLR 689 at 695 per Giles J; Mercantile Mutual Insurance (NSW Workers Compensation) Ltd v Murray (see fn 41) at [43] (Mason P). [2014] FCA 481. Melrose Cranes and Rigging Pty Ltd v Manitowoc Crane Group Australia Pty Ltd (see fn 30) at [18]–[20] (Campbell J). See fn 30 at [24]–[25]. [2012] FCA 710. See also National Employers’ Mutual General Insurance Association Ltd v Waind [1979] HCA 11; (1979) 141 CLR 648 (the leading case); Veltri v QBE Insurance Ltd [1997] SASC 6166. Mahoney v Salt [2012] QSC 43 at [28] (Boddice J). Field v Commissioner for Railways for New South Wales [1957] HCA 92; (1957) 99 CLR 285 at [7]. Oceanbulk Shipping & Trading SA v TMT Asia Ltd [2010] UKSC 44; [2011] 1 Lloyd’s Rep 96 at [22] (Lord Clarke); Pihiga Pty Ltd v Roche [2011] FCA 240 (Lander J).
53. Glengallan Investments Pty Ltd v Arthur Andersen [2001] QCA 115; [2002] 1 Qd R 233 at [32]–[37] (Williams JA). 54. Ofulue v Bossert [2009] UKHL 16; 1 AC 990 at [12] (Lord Hope). 55. Unilever PLC v The Proctor & Gamble Co Ltd (2000) 1 WLR 2436 at 2448–9 (Robert Walker LJ). 56. Field v Commissioner for Railways for New South Wales (see fn 51) at [7] (Dixon CJ, Webb, Kitto and Taylor JJ); Rush & Tompkins Ltd v Greater London Council [1989] AC 1280 at 1300 (Griffiths LJ). 57. CMA Assets Pty Ltd v John Holland Pty Ltd (No 2) (fn 23) at [20]–[22] (Allanson J). 58. Jermyn v Spargos Mining NL [2001] WASCA 149 at [1] (Anderson J). 59. Rodgers v Rodgers [1964] HCA 25; (1964) 114 CLR 608 at [7]. 60. Rodgers v Rodgers (see fn 59) at [7]. 61. Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 368 (Giles J). 62. Commissioner of State Revenue v Challenger Listed Investments Ltd (No 2) [2011] VSCA 398. 63. Pihiga Pty Ltd v Roche (see fn 52). 64. Old Papa’s Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd [2003] WASCA 11 at [91] McLure J. 65. Rodgers v Rodgers (see fn 59) at [7]; Bhagat v Global Custodians Ltd [2002] NSWCA 160 at [28] (Spigelman CJ). 66. Old Papa’s Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd (see fn 64) at [92] McLure J. 67. Old Papa’s Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd (see fn 64) at [91] McLure J. 68. Old Papa’s Franchise Systems Pty Ltd v Camisa Nominees Pty Ltd (see fn 64) at [93] McLure J. 69. Oceanbulk Shipping & Trading SA v TMT Asia Ltd (see fn 52) at [33] (Lord Clarke). 70. Oceanbulk Shipping & Trading SA v TMT Asia Ltd (see fn 52) at [30], [35] and [36] (Lord Clarke). 71. Unilever PLC v The Proctor & Gamble Co Ltd (see fn 55) at 2444–6 (Robert Walker LJ); Pihiga Pty Ltd v Roche (see fn 52). 72. [2013] ACTSC 130. 73. Markus v Provincial Insurance Co Ltd (1983) 25 NSWCCR 1; Halpin v Lumley General Insurance Ltd [2009] NSWCA 372.
[page 489]
PART 4 Recovery of an Insurer’s Loss from Third Parties and Other Insurers
[page 491]
Chapter 27 SUBROGATION My one regret in life is that I am not someone else.1
INTRODUCTION This chapter discusses the doctrine of subrogation in the insurance context under the following headings: an insurer’s right of subrogation; exercising a right of subrogation; no subrogation rights against another insurer; subrogation rights against a non-insurer indemnifier; circumstances in which an insurer has no, or limited, subrogation rights against a negligent third party; allocating the proceeds of recovery; a third party’s liability to pay damages is not reduced by an insured’s access to insurance; and the limitation period for exercising a right of subrogation. For ease of reference: the following discussion is limited to indemnity insurance contracts. Nevertheless, it also applies with appropriate adjustment to the indemnity provisions of a contingency insurance contract; in this chapter, a reference to an insured is a reference to all those described by the contract as an insured, along with the beneficiaries of a policy not described as an insured.2
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[page 492]
Subrogation only arises in relation to indemnity insurance contracts and the indemnity provisions of contingency insurance contracts.3 The following is an ‘everyday’ example of how subrogation works. A’s vehicle is damaged in a motor vehicle accident caused by B’s negligent driving of another vehicle. A’s first party insurer pays A the cost to repair his vehicle and then exercises a right of subrogation by suing B in A’s name to recover A’s loss, and thereby diminish its own loss under the insurance contract. Subject to the policy terms, an insurer is obliged to pay a claim on its policy even if its insured has a claim against a third party in respect of the same loss. That is because the insurer does not pay its insured just because an event happens; it pays because it promised to pay the insured if an event described by the policy happens.4
AN INSURER’S RIGHT OF SUBROGATION 27.1 An insured would be more than indemnified for a loss if they could keep their insurance payout and any compensation paid to them by a third party for the same loss.5 The primary purpose of the doctrine of subrogation in the insurance context is to prevent that happening.6 27.2 An insurer’s right of subrogation is founded upon equitable principles,7 which: generally rest upon a contract, and the terms of the particular contract must be consulted in order to determine whether, and how, they operate.8
The right of subrogation arises out of the presumed common intention of the parties to an indemnity insurance contract that: an insurer will indemnify its insured for a loss covered by the contract, no more and no less;9 and
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[page 493]
the transfer of risk to the insurer under the contract leaves intact
■the insured’s right to recover their loss (including the insured part of their loss) from a responsible third party.10
27.3 Upon the making of an indemnity insurance contract and subject to its express terms, an insurer becomes entitled to the benefit of all potential rights its insured might have against a third party to be compensated for a loss that is at least partly insured by the contract. This benefit is an insurer’s right of subrogation.11 The potential rights are wide ranging. They include any rights: … in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished. That seems to me to put this doctrine of subrogation in the largest possible form, and if in that form, large as it is, it is short of fulfilling that which is the fundamental condition, I must have omitted to state something which ought to have been stated.12
An insurer’s right of subrogation is limited to whatever rights its insured has against a third party.13 An insurer’s right of subrogation has two aspects: an insurer’s right to bring a claim in an insured’s name against a third party responsible for a loss suffered by the insured, for the purpose of diminishing the insurer’s own loss; and an insured’s obligation, after an insurer has paid a claim, to account to the insurer for any subsequent payment to the insured that diminishes the insured loss, up to the amount of the insurance payout.14 So, in the example given at the beginning of this chapter, if the negligent driver, B, paid A for the cost of repairing his vehicle after A’s insurer had paid A for the cost of repairing his vehicle, A would have to account to his insurer for the moneys received from B. Otherwise, A would make a profit from his loss. An insured only has to account to an insurer for subsequent payments that diminish the insurer’s loss. So, for example, an insured is not accountable to an insurer for a gift intended to benefit the insured, not the 27.4
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[page 494] insurer, in relation to the insured’s loss.15 This is illustrated by Burnand v Rodocanachi,16 a case that concerned an insured ship destroyed by a Confederate cruiser in the American Civil War. The insurers paid the agreed value for the ship. The United States Government subsequently sent a gift of money to the insured out of a fund set up by a statute. The insurer asked the insured to account for the gift. The House of Lords held that the statute intended the gift to benefit the insured separately from any monies it received from its insurer. Accordingly, the insured did not have to account to the insurer for it. 27.5 An insured cannot interfere with an insurer’s right of subrogation. For example, subject to the terms of the policy, an insured will be in breach of the policy if they compromise a claim against a third party for an insured loss without obtaining the insurer’s prior consent to the compromise.17 On the other hand, subject to the terms of the insurance contract, an insured will not be in breach of the contract if, for example, they enter into an agreement to provide catering services to a mine operator and the agreement contains a term by which they promise not to make any claim against the mine operator for a contribution towards any liability they may have to a third party arising out of their performance of the agreement (a claim the insured might have been able to make if not for the inclusion of that term).18 Entering into an agreement that contains such a term is not a breach of the insurance contract, because an insured cannot compromise a right they did not have before they entered into the agreement. Some insurers attempt to garner the value of the benefit of a right they would have had in the absence of such a term by including in an insurance contract a provision that reduces cover by the value of the claim the insured would otherwise have had against another party to the agreement. A provision of that sort is affected by s 68(1) of the Insurance Contracts Act 1984 (Cth) (ICA) which provides as follows: Where a contract of general insurance includes a provision that has the effect of
excluding or limiting the insurer’s liability in respect of a loss by reason that the insured is a party to an agreement that excludes or limits a right of the insured to recover damages from a person other than the insurer in respect of the loss, the insurer may not rely on the provision unless the insurer clearly informed the insured in writing, before the contract of insurance was entered into, of the effect of the provision.
[page 495] Section 68 only allows an insurer to rely on such a provision if it ‘clearly informed the insured in writing’ of the effect of the provision before the insurance contract was made. An intending insured’s duty of disclosure in relation to a contract of general insurance does not require them to disclose to the insurer that they have entered into an agreement that excludes or limits the insured’s right to recover damages: s 68(2). 27.6 Settlement of an insured’s claim against a third party that is negotiated by the insured without the insurer’s approval: will protect the third party from an insurer’s subrogated claim if, when the settlement was entered into, the third party was not aware of the existence of the insurance or if it was, had no reason to suspect the insurer might not know about or approve of the proposed settlement.19 However, it will expose the insured to a claim by the insurer for breach of the insurance contract by compromising the insured’s rights against the third party without the insurer’s prior consent;20 might not protect the third party from an insurer’s subrogated claim if, when the settlement was entered into, the third party knew or reasonably suspected there was insurance and that the insurer might not know about or approve the proposed settlement.21
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EXERCISING A RIGHT OF
SUBROGATION 27.7 Although an insurer’s right of subrogation arises on the making of an indemnity insurance contract, subject to the terms of the insurance contract, it can only exercise the right upon indemnifying, or agreeing to indemnify, the insured for their loss to the full extent promised by the contract.22 The right can be exercised even if the extent of the indemnity falls short of the whole of the insured’s loss, for example if the insured’s loss exceeds the limit of indemnity or an excess is payable.23 As a practical matter, not allowing an insurer to exercise a right of subrogation where indemnity under the insurance contract fell short of the insured’s loss would, on occasions, effectively deprive an insurer of the benefit of an insured’s rights against a third party, for example if the insured does not intend to pursue those rights. [page 496] 27.8 An insurer is entitled to exercise a right of subrogation even if it turns out that the insurer was not obliged to indemnify the insured, as long as the insurer honestly and reasonably intended the payment as satisfaction of a loss under the policy.24 27.9 Insurance policies often contain a term that enables an insurer to stand in its insured’s shoes to recover from a third party before indemnifying the insured against its loss. In these circumstances, indemnification of the insured is not a pre-condition to the insurer exercising its contractual right.25 27.10 In general terms, the person entitled to control a court action is the party with ‘“the true interest in the cause”, in the sense of “the whole interest for all practical purposes”’ (the dominus litis).26 In the insurance context, an insurer is entitled to control the conduct of an action for recovery of an insured’s loss if: it has indemnified the insured for all of her loss (insured and
or ■uninsured); term of the insurance policy clearly gives it the right to ■an express 27
do so. Otherwise, the insured is entitled to control the conduct of an action for recovery of her loss.28 Having said that, most insureds are content for their insurers to conduct the litigation even if they have only been indemnified in terms of the policy. Whoever has control of the litigation has that control subject to the terms of the contract and their duty of utmost good faith.29 27.11 The amount of any payment by a third party to an insured by way of compensation for a loss before an insurer has indemnified its insured for the loss reduces the amount of the insured’s claim against the insurer.30 The insured’s receipt of the payment has nothing to do with subrogation; in these circumstances, there is nothing for the insurer’s right of subrogation to fix upon. [page 497] 27.12 An insurer cannot exercise a right of subrogation if it has contributed on double insurance principles towards the indemnification of the insured by another insurer, rather than directly indemnified the insured.31 27.13 Subrogation is pursued in an insured’s name because upon the making of an insurance contract, the insurer becomes entitled to the benefit of the insured’s rights as against third parties. An insurer cannot pursue a third party in its own name, as the making of the contract does not assign those rights to, or vest them in, the insurer.32 An insurer can only pursue a third party in its insured’s name with the insured’s approval. If the insured refuses to give their approval, the insurer can apply to a court for an order requiring the insured to allow the insurer to sue the third party in the insured’s name.33 The court will
usually make that order, subject to the insurer agreeing to indemnify the insured against any liability for legal costs that might be incurred in the name of the insured arising out of the insurer’s pursuit of the third party. An insurer can sue a third party in its own name if the insured assigns to the insurer their cause of action against the third party.34 Subject to its terms, an insured’s assignment of a cause of action to an insurer will allow the insurer to retain for itself any recovery in excess of the amount of the insurance payout.35 27.14 An insurer does not have to plead that its court action against a third party in its insured’s name is brought by way of subrogation.36 27.15 A third party: has all the defences to a subrogated claim that it has to a claim brought by the insured alone; and can challenge an insurer’s right to subrogate itself to the insured’s claim against the third party.37 A third party wishing to challenge an insurer’s right of subrogation must plead that in its defence.38
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[page 498] 27.16 An insurer with a right of subrogation cannot prevent an insured taking their own action against a third party to recover the insured’s loss if the insurer: has not fully indemnified the insured in terms of the insurance contract; or having fully indemnified the insured in terms of the insurance contract, declines, neglects or chooses not to take action against the third party.39
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NO SUBROGATION RIGHTS AGAINST
ANOTHER INSURER; SUBROGATION RIGHTS AGAINST A NON-INSURER INDEMNIFIER 27.17 A right of subrogation does not allow an insurer to subrogate itself to its insured’s right to claim under another insurance contract covering the same risk.40 As it would be unjust for one insurer to benefit another insurer by indemnifying the insured in circumstances where both contracts respond to the claim, the insurer indemnifying the insured is entitled to a contribution from the other insurer towards its indemnification of the insured. This is known as ‘double insurance’ and is discussed in Chapter 29. 27.18 There are conflicting cases as to whether an insurer is entitled to exercise a right of subrogation for the purpose of pursuing an insured’s right to be indemnified for a loss by a non-insurer indemnifier. In Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd,41 Wheeler J said that subject to the wording of the indemnity, that will usually be possible. Five days earlier, the New South Wales Court of Appeal decided in Stratti v Stratti42 that the insurer of a partner in a business was not entitled to exercise a right of subrogation against another partner in the business who was liable to indemnify the insured partner pursuant to the provisions of the Partnership Act 1892 (NSW). Fitzgerald JA said (at [21]) the appropriate remedy for the insurer was a claim for contribution from the partner indemnifier as the liabilities of the insurer and the partner indemnifier were co-ordinate. Rein J has since cast doubt on the application of Stratti beyond its own facts: The decision of Stratti v Stratti might appear to be inconsistent with these authorities [Caledonia North Sea Ltd v London Bridge Engineering Ltd and HIH Claims Support Ltd v Insurance Australia Ltd] but that case is dealing with quite unusual circumstances and a narrowly confined issued
[page 499]
based on s 24(2) of the Partnership Act 1892 (NSW) as the judgment makes clear … and predates HIH Claims and I do not think it can be relied on in the present context.43
In Speno, Hamersley Iron Pty Ltd contracted Speno Rail Maintenance Pty Ltd to provide rail grinding services for Hamersley. It was a term of the contract that Speno would indemnify Hamersley against Hamersley’s liability to Speno’s employees for personal injury in the course of Speno’s rail grinding services (indemnity clause). Two Speno employees were travelling in a Speno-owned HIRail vehicle (a Toyota motor vehicle adapted for travel on rails) along a Hamersley-owned railway upon which Speno’s rail grinding services were being performed. They were injured when the HIRail vehicle derailed. The derailment occurred as a result of the negligent changing of the points by a Hamersley-employed train controller. Speno held public liability insurance with Zurich Australian Insurance Ltd under a combined liability policy. Amongst other things, Zurich argued that its and Speno’s liability to indemnify Hamersley against Mr Nolan’s claim (Zurich pursuant to the combined liability policy and Speno pursuant to the indemnity clause) were co-ordinate, and persons under a co-ordinate liability to make good the one loss must share the burden pro rata. Wheeler J (at [168]) held that Zurich had no right of contribution against Speno because, amongst other things, their respective liabilities to Hamersley were not co-ordinate; the indemnity clause was the primary (ultimate) source of liability and the insurance a secondary source of liability. 27.19 In Caledonia North Sea Ltd v British Telecommunications Plc (Scotland),44 Lord Hoffmann described the consequences of a liability being primary or secondary: … a person who has more than one claim to indemnity is not entitled to be paid more than once. But there are different ways of giving effect to this principle. One is to say that the person who has paid is entitled to be subrogated to the rights against the other person liable. The other is to say that one payment discharges the liability. The authorities show that the law ordinarily adopts the first solution when the liability of the person who paid is secondary to the liability of the other party liable. It adopts the second solution when the liability of the party who paid was primary or the liabilities are equal and co-ordinate.
The liability of a person is primary if that is the person identified by the question ‘Who is first liable?’45 The answer has nothing to do with who is liable first in time. [page 500] Lord Mackay explained (at [57]): There is no reason in the present case why the contract between the operator and the insurance company should be construed as placing the insurance company on an equal footing with the parties to the contract … There is no reason … why the operator and the insurer should have the intention that the insurer should put himself on an equal footing with the contractor in respect of the indemnity which the contractor has given under the contract.
At the end of the day, the issue is whether an indemnity insurer is on the ‘same level of liability’ as a non-insurer indemnifier.46 Put another way, are the liabilities of an indemnity insurer and a non-insurer indemnifier ‘of the same nature and to the same extent’?47 Why did the House of Lords in Caledonia North Sea regard the indemnity insurer and the non-insurer indemnifier as on different ‘level(s) of liability’? Is it because ‘everyone knows’ that insurance is only called upon once the primary liabilities between the parties, including ‘garden variety indemnities’, are allocated? If so, it may be a ‘well-known fact’ to insurers, but not to most insureds whose concern is whether they will be covered for a loss, not what an insurer can or cannot do to diminish its loss. 27.20 All is not lost for an insurer if, subject to the wording of an insurance contract and the relevant indemnity, it can be said in reliance on Stratti that the liabilities of an insurer and a non-insurer indemnifier are co-ordinate. It is open to an insurer that wants to benefit, for example, by a non-insurer’s indemnity in favour of its insured (instead of having a right of contribution against the non-insurer indemnifier), to draft its policy so that the policy only responds in excess of the value of any rights its insured might have against a non-insurer third party pursuant to an indemnity in the insured’s favour. Such a provision
would not fall foul of s 45 of the ICA as that section is only concerned with the relationship between insurance policies. There is a practical downside to the decision in Speno: if the issue is contribution, the loss will be spread between an insurer and a noninsurer indemnifier on the basis of an equitable apportionment between them, rather than the indemnifier (or its insurer) wearing the whole of the loss. This would make settlement of claims easier. Such a result may not have any net detrimental effect on premiums for future insureds. In light of the conflict between Speno and Stratti, it seems only a matter of time before the High Court is called upon again to consider the difficult conceptual issues associated with ‘co-ordinate liabilities’.48 [page 501]
CIRCUMSTANCES IN WHICH AN INSURER HAS NO, OR LIMITED, SUBROGATION RIGHTS AGAINST A NEGLIGENT THIRD PARTY Insurer gives up subrogation rights: The waiver of subrogation clause 27.21 As the existence of a right of subrogation arises out of the common intention of the parties to the insurance contract, they can agree to modify the right.49 This is usually achieved by the inclusion of a ‘waiver of subrogation’ clause in the contract. The clause will usually prevent an insurer from exercising subrogation rights against some or all of the parties insured by the contract and sometimes against parties not insured by the contract.50 Taking out one insurance contract for the whole of a construction, engineering or similar project instead of requiring each of those involved in the project to take out their own insurance and including in
that one contract a ‘waiver of subrogation’ clause, will prevent the project’s insurer from exercising rights of subrogation against those parties intended to benefit by the clause. Amongst other things, this will allow the principal and its contractors to focus on their performance of the project rather than be distracted in time and cost by arguments about who is responsible for an insured loss if it occurs.51 In addition, having one insurance contract for the project may reduce the cost of the project, insofar as the premium for one contract might be less than the total of the premium that each contractor would have had to pay if it had taken out its own insurance for the project. Its description as a ‘waiver of subrogation’ clause is misleading. If such a clause is contained in an insurance contract, it: prevents an insurer’s right to pursue a claim against a third party in the insured’s name from arising on the making of the insurance contract, rather than it arising and the insurer subsequently waiving it;52 and does not affect that aspect of the right of subrogation which requires an insured, after an insurer has paid a claim, to account to the insurer for any subsequent payment to the insured that diminishes the insured loss.
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[page 502] In the circumstances, perhaps the clause should be called a ‘limitation on subrogation’ clause rather than a ‘waiver of subrogation’ clause. That’s probably past praying for.
An insurer’s subrogation rights against a coinsured 27.22 An insurer cannot pursue a subrogated action against a coinsured: if the insurer has waived subrogation rights against the co-insured (see above);
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the insurer has promised to indemnify the co-insured for that ■ifliability; 53 ■in the case of a joint insurance contract, because ‘the interests of
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the joint insured are so inseparably connected that the several insureds are to be considered as one’;54 and in the case of a composite (several) insurance contract ‘if the different interests [of the insureds] are pervasive and if each relates to the entire property, albeit from different angles, [because] again … the several insureds must be regarded as one …’.55
Insured, by a pre-loss contract, gives up potential rights against negligent third parties 27.23 An insurer cannot pursue a subrogated action against a third party if the pre-loss contractual arrangements between the insured and the third party require the insured to look to its insurer rather than the third party to cover its loss. For example, in Mark Rowlands Ltd v Berni Inns Ltd,56 a tenant negligently started a fire that destroyed leased premises. The lease required the landlord to insure the premises and to apply any insurance monies to reinstating the premises. The landlord’s insurer sued the tenant for the cost of reinstating the premises. The insurer’s subrogated action failed because the intention of the lease was that the landlord would look to its insurer rather than the tenant (who contributed to the premium but was not named as an insured) to compensate it for fire damage to the premises. In Bit Badger Pty Ltd v Cunich,57 a lease provided that the tenant was liable for fire damage, unless it did not cause the fire. The tenant allegedly caused a fire that damaged the premises. White J rejected the tenant’s defence of the landlord’s insurer’s subrogated action. [page 503] In summary, an insurer’s ability to pursue a subrogated action in the name of one party to a contract against another party to the same
contract is fact sensitive and will depend on the specific terms of the contract.58 27.24 An insurer’s duty of utmost good faith requires it to have due regard for the insured’s legitimate interests when exercising its right of subrogation.59
Sections 65 and 66 of the ICA 27.25
Sections 65 and 66 affect an insurer’s subrogated rights.
27.26 Section 65 limits an insurer’s right of subrogation against a third party (other than an insured’s employees). It is in the following terms: 65 Subrogation to rights against family etc. (1) Subject to subsection (2), this section applies where: (a) an insurer is liable under a contract of general insurance in respect of a loss; (b) but for this section, the insurer would be entitled to be subrogated to the rights of the insured against some other person (in this section called the third party); and (c) the insured has not exercised those rights and might reasonably be expected not to exercise those rights by reason of: (i) a family or other personal relationship between the insured and the third party; or (ii) the insured having expressly or impliedly consented to the use, by the third party, of a road motor vehicle that is the subject-matter of the contract. (2) This section does not apply where the conduct of the third party that gave rise to the loss: (a) occurred in the course of or arose out of the third party’s employment by the insured; or (b) was serious or wilful misconduct. (3) Where the third party is not insured in respect of the third party’s liability to the insured, the insurer does not have the right to be subrogated to the rights of the insured against the third party in respect of the loss. (4) Where the third party is so insured, the insurer may not, in the exercise of the insurer’s rights of subrogation, recover from the third party an amount that exceeds the amount that the third party may recover under his contract of insurance in respect of the loss. (5) An insured need not comply with a condition requiring the insured to assign those rights to the insurer in order to be entitled to payment in respect of the loss and an insurer shall not purport to impose such a
[page 504] condition on the making of such a payment or, before making such a payment, invite the insured so to assign those rights, or suggest that the insured so assign them. Penalty: 300 penalty units. (6) An assignment made in compliance with such a condition or in pursuance of such an invitation or suggestion is void. (7) In subsection (1), road motor vehicle means a motor vehicle that is so constructed as to be capable of carrying by road at least one person other than the driver.
A reference to an ‘insured’ in the section includes a reference to a third party beneficiary: s 64. Section 11(1) defines the term ‘third party beneficiary’. In short, if an insured has not exercised a right against a third party (other than an employee) and might reasonably be expected not to because of the insured’s family or other personal relationship with the third party, or if an insured has consented to a third party’s use of an insured motor vehicle, then where the third party is: not insured, the insurer cannot exercise a right of subrogation: s 65(3) (unless the third party has been guilty of serious or wilful misconduct: s 65(2)); or insured, the insurer cannot pursue a subrogated action for an amount in excess of the amount which the third party can recover under its own insurance contract: s 65(4) (unless the third party has been guilty of serious or wilful misconduct: s 65(2)).
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27.27 Section 66 prevents an insurer from exercising a right of subrogation against an insured’s employee in respect of conduct in the course of or arising out of the employment, unless the employee was guilty of serious or wilful misconduct. The section outflanks Romford Ice & Cold Storage Co v Lister,60 in which the House of Lords held that a liability insurer could subrogate itself to its insured employer’s right to claim an indemnity from an employee who had negligently caused a fellow employee’s injuries. For the purpose of s 66, an ‘employee’: ■ is a person employed under a contract of service;61 and
■ includes a former employee.62 27.28 In Boral Resources (Qld) Pty Ltd v Pyke,63 the majority concluded that s 66 allowed an employer’s insurer to exercise a right of subrogation against a truck driver employee who was guilty of ‘wilful misconduct’ because he drove his employer’s truck in the course of his employment when he felt tired and after drinking alcohol. [page 505]
ALLOCATING THE PROCEEDS OF RECOVERY At common law 27.29 How are the proceeds of a settlement with, or judgment against, a third party that diminishes the insured’s loss divided up between an insurer and an insured if the settlement or judgment proceeds are insufficient to pay the whole of the insured’s loss (including the costs of any recovery action)? Subject to the terms of the policy and s 67 of the ICA (see below), an insured bears a loss from the ground up and accounts for the proceeds of a settlement with, or judgment against, a third party from the top down.64 For example, consider a first party insurance contract with a $1,000 excess and a $100,000 limit of indemnity and: the insured suffers a $140,000 loss; the insurer pays the insured $99,000 for the loss ($100,000 limit of indemnity less $1,000 excess); and the insured subsequently recovers $120,000 from a negligent third party. The $120,000 recovered from the third party will be allocated as follows. The first part of the $120,000 will be used to reimburse the costs
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incurred by the party that paid the legal fees for the action against the negligent third party, less whatever was recovered from the third party by way of legal costs. The next part of the $120,000 will be used to reimburse the insured for the $40,000 of the insured’s loss in excess of the $100,000 limit of indemnity (including the excess), as the insured is regarded as their own insurer for that $40,000. Put another way, the insured only agreed to bear a loss above the $100,000 limit of indemnity (including the excess) if the parties responsible for the first $100,000 limit of indemnity (including the excess) paid first. Whatever is left of the $120,000 goes first to reimburse the insurer for the $99,000 it paid out, and last, to reimburse the insured for their $1,000 excess.
27.30 If an insurer has paid a claim, it has an equitable proprietary right in the form of a lien (charge) over the proceeds of a judgment or settlement of its insured’s claim against a third party.65 As long as the proceeds form an identifiable separate fund, the lien is enforceable by injunction preventing the disposal of the proceeds other than to the insurer. [page 506] An insurer does not have a proprietary interest in its insured’s cause of action against a third party.66 27.31 Subject to the terms of the policy and s 67 of the ICA (see below), if a court awards interest on a subrogated claim pursuant to a statute, the interest that accrues prior to the insurer’s indemnity payment is retained by the insured; interest accrued after the insurer’s indemnity payment must be paid over by the insured to the insurer.67 Either way, a third party does not get an interest-free period either leading up to or following the date on which an insurer made its indemnity payment.68
27.32 Subject to the terms of the policy and s 67 of the ICA, the insured collects any surplus on a recovery.69
Section 67 of the ICA 27.33 Over the course of 10 subsections, s 67 allocates the proceeds of a recovery between insurer and insured depending on whether the amount is recovered by: the insurer exercising its right of subrogation (subs (2)); the insured (subs (3)); or the insurer and the insured jointly (subss (4), (5), (6) and (7)). The principles underlying the s 67 approach to allocation of proceeds of recovery are concisely described at 1.184 of the Explanatory Memorandum that accompanied the Insurance Contracts Amendment Bill 2013. Importantly, this allocation of the proceeds of a recovery is subject to the terms of the insurance contract and of any agreement made by insurer and insured after a loss: s 67(10).
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27.34 It is not clear how s 67 operates in a class action or group proceedings where the plaintiffs are claiming insured and uninsured losses.70 [page 507]
A THIRD PARTY’S LIABILITY TO PAY DAMAGES IS NOT REDUCED BY AN INSURED’S ACCESS TO INSURANCE 27.35 The extent of a third party’s liability to a plaintiff in damages is not reduced by private or public gifts or donations to the plaintiff (assuming they are not made for the purpose of benefiting the third party), because ‘justice, reasonableness and public policy’ require that
charity given to the plaintiff to ease the loss should benefit the plaintiff, not the wrongdoer.71 27.36 In National Insurance Co of New Zealand Ltd v Espagne,72 Dixon CJ said (at [4]) that amounts paid to a plaintiff by someone other than a wrongdoer will not be deducted from a plaintiff’s award of damages against the wrongdoer if they are: conferred on the plaintiff independently of any rights the plaintiff may have against a wrongdoer; or intended for the plaintiff’s enjoyment and not to relieve the liability of a wrongdoer. In National Insurance, the trial judge, in assessing the amount of Espagne’s common law damages for injuries caused by the negligent driving of a motor vehicle, did not take into account the amount he had received and would in the future receive by way of an invalid pension pursuant to the Social Services Act 1947–57 (Cth). Espagne did not have an automatic right to the pension and, in certain circumstances, it could be cancelled, suspended or reduced. Dixon CJ (at [4]) agreed with the trial judge that certain benefits will not reduce a person’s damages even if it is intended that he or she receive the benefits in the circumstances in which he or she was injured:
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There are certain special services, aids, benefits, subventions and the like which in most communities are available to injured people. Simple examples are hospital and pharmaceutical benefits which lighten the monetary burden of illness. If the injured plaintiff has availed himself of these, he cannot establish or calculate his damages on the footing that he did not do so. On the other hand there may be advantages which accrue to the injured plaintiff, whether as a result of legislation or of contract or of benevolence, which have an additional characteristic. It may be true that they are conferred because he is intended to enjoy them in the events which have happened. Yet they have this distinguishing characteristic, namely they are conferred on him not only independently of the existence in him of a right of redress against others but so that they may be enjoyed by him although he may enforce that right: they are the product of a disposition in his favour intended for his enjoyment and not provided in relief of any liability in others fully to compensate him. This is readily seen in the case of benevolence.
[page 508]
In the same case, Windeyer J said (at [22]) that: … benefits that a plaintiff has received or is to receive from any source other than the defendant are not to be regarded as mitigating his loss, if: (a) they were received or are to be received by him as a result of a contract he had made before the loss occurred and by the express or implied terms of that contract they were to be provided notwithstanding any rights of action he might have; or (b) they were given or promised to him by way of bounty, to the intent that he should enjoy them in addition to and not in diminution of any claim for damages. The first description covers accident insurances and also many forms of pensions and similar benefits provided by employers: in those cases it is immaterial that … the contract may require a refund of moneys paid, or an adjustment of future benefits to be made after the recovery of damages. The second description covers a variety of public charitable aid and some forms of relief given by the State as well as the produce of private benevolence. In both cases the decisive consideration is, not whether the benefit was received in consequence of, or as a result of the injury, but what was its character: and that is determined, in the one case by what under his contract the plaintiff had paid for, and in the other by the intent of the person conferring the benefit. The test is by purpose rather than by cause.
Finally, Menzies J (at [9]) said that Espagne’s damages were not reduced by the amount of the pension, because he was granted and paid a pension under the provisions of the Social Services Act 1947–57 (Cth), not simply because of the accident. 27.37 The reasoning in National Insurance supports the proposition that a third party’s liability in damages to an insured is not reduced by the extent to which an insured is covered by an insurance contract taken out by the insured or for the insured’s benefit and with which the third party has no connection. For example, a third party who negligently causes a fire which burns down an insured’s home cannot reduce their liability to the insured by the extent to which the insured is covered for its loss by a first party insurance contract taken out over the home. There would be no point to the right of subrogation if a third party could defend a subrogated claim on that basis. 27.38 English law requires that the proceeds of insurance be deducted from a plaintiff’s damages, unless the plaintiff ‘paid or contributed in some way to the payment of the premium’ for the policy.73 In that regard, an employee’s contribution to an insurance plan arranged by their employer ‘whether paid for directly or by a reduced hourly wage, reflected in a collective bargaining agreement, will be sufficient’.74
[page 509] By way of contrast, in Richard v Mills,75 Anderson J said the damages awarded to a plaintiff who successfully sued a motor vehicle driver for negligence should not be reduced by the benefits she received under an income protection policy taken out by her employer and in relation to which she made no contributions. He said (at [45]) that it was immaterial ‘that the respondent did not contribute by direct monetary payment or by a nominated salary sacrifice the premiums payable to the insurance company …’. Later in the judgment, Anderson J said (at [51]): The purpose of the benefits is not to compensate the respondent for the damages she sustained in the accident nor is it a payment in lieu of salary any more than any other pension is a payment in lieu of salary. It is simply one of the fruits of the respondent’s past service, payable upon the onset of disability. It is a benefit ‘both independent of and cumulative upon whatever right of redress against others might arise out of the circumstances of’ the onset of that disability …
27.39 It is not unusual for an agreement, such as a lease or a contract for substantial work to be performed by an independent contractor, to include an insurance procurement clause. This is a clause that requires one of the parties to the agreement to take out a range of insurances, sometimes naming another party to the agreement as a co-insured or as someone having an interest in some or all of the insurance contracts so arranged. Set out below is a typical extract from an insurance procurement clause. Insurances The Contractor shall arrange public liability insurance in the names of the Principal, Contractor and Subcontractors in the sum of $50 million in respect of any one occurrence and unlimited in the aggregate, insuring against liability for or in respect of: (a) death of or bodily injury (including illness) to any person; and (b) damage to or loss of property of every kind, arising out of work performed under or in connection with the agreement. The policy of insurance shall include a cross liability clause and waiver of subrogation in favour of the Principal.
If a third party enters into an agreement which contains an insurance procurement clause but does not obtain the required insurance, the third party will be liable to indemnify the party who would have benefited by that insurance against any risk that eventuates and which should have been covered by that insurance, even if the other party has taken out its own insurance against that risk.76 [page 510] 27.40 In Theiss Contractors Pty Ltd v Norcon Pty Ltd,77 a worker suffered a spinal injury when he tripped on a piece of uncapped reinforcing steel at a construction site in Perth. He sued his employer, Theiss Contractors Pty Ltd (the main contractor and occupier of the site) and Norcon Pty Ltd (Theiss’s sub-contractor). Theiss issued a contribution notice against Norcon claiming, amongst other things, damages for Norcon’s breach of an insurance procurement clause which required it to take out insurance in the joint names of Theiss and Norcon, covering liability for the type of claim made by the worker. Norcon defended the claim on the basis that even if it breached the insurance procurement clause, Theiss suffered no loss because it was insured for the same liability under its own insurance policy. On appeal, the defence was struck out on the basis that Norcon’s contractual breach deprived Theiss of the benefit of the proposed insurance policy and it was irrelevant that it could claim indemnity under its own insurance policy if it so wished. As far as Norcon was concerned, Theiss and its insurer were one and Theiss’s insurance was res inter alios acta (had nothing to do with) Norcon. The result of the case is odd, as it left Theiss’s insurer better off than it would have been if Norcon had taken out the required insurance; if Norcon had taken out the required insurance there would have been double insurance and Theiss’s insurer would have had to contribute towards Theiss’s liability to the worker. 27.41
It is worth digressing here briefly for an observation on the
maxim res inter alios acta as a basis for preventing a third party from reducing its liability to an insured to the extent the insured is covered by independently arranged insurance. The long form of the maxim is res inter alios acta alteri nocere non debet, meaning that a person ought not be prejudiced by what has taken place between others.78 Apart from the application of the maxim being inappropriate in these circumstances (the third party is not prejudiced by the insurance arrangement, it is simply not advantaged by it), the maxim simply states the result without explaining why the third party should not get the advantage of the insured’s insurance arrangements. In National Insurance Co of New Zealand Ltd v Espagne,79 Dixon CJ put it this way: In the context terms like ‘collateral’ or ‘res inter alios acta’ as a description of the advantage to be disregarded and ‘causa sine qua non’ as a description of the relation of the injury to the advantage tell me nothing. Nor is there much assistance to be found in contemplating, as seems sometimes to be recommended, the supposed injustice of relieving the wrongdoer or his insurer.
[page 511] Similarly, in Atlas Tiles Ltd v Briers,80 Stephen J said the maxim ‘is often employed, albeit inaccurately, to justify benefits which a plaintiff may derive from third parties being excluded from consideration …’.
THE LIMITATION PERIOD FOR EXERCISING A RIGHT OF SUBROGATION 27.42 Section 27 of the Limitation Act 2005 (WA) sets a limitation period for the commencement of an insurer’s subrogation action by providing that: … an equitable action cannot be commenced after the only or later of such of the
following events as are applicable: (a) the elapse of 6 years since the cause of action accrued; or (b) the elapse of 3 years since time started running, on equitable principles, for the commencement of the action.
‘Equitable action’ is defined in s 27(2) as an action: (a) in which the relief sought is in equity; and (b) for which (had a limitation period not been provided for under subsection (1) or section 13) the limitation period would not be determined in equity by analogy to the limitation period for any other kind of action.
27.43 The limitation period imposed by s 27 will only be relevant as a practical matter if it is shorter than the limitation period for an insured’s cause of action against a third party or if the insurer has taken longer than the limitation period to seek an account from the insured of monies received by the insured from third parties which would diminish the insurer’s loss. 27.44 By s 13(1) of the Limitation Act 2005 (WA), an insurer cannot pursue a contractual right of subrogation after six years from the date on which the insurer’s cause of action accrued. 27.45 Subject to the provisions of an express term, the limitation period for a claim for: the first aspect of subrogation probably starts to run against the insurer from the date on which it indemnified or agreed to indemnify the insured according to its obligation under the insurance contract. This limitation period will only rarely be relevant because it will usually extend beyond the limitation period for the insured’s cause of action against a third party; and the second aspect of subrogation probably starts to run against the insurer from the date on which it becomes aware that the insured has received a payment from a third party which diminishes the insurer’s loss.
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1.
Woody Allen, Getting Even, First Vintage Books ed, Random House, New York, 1971, under the heading ‘About the author’. In insurance law, exercising a right of subrogation is the closest an insurer gets to being ‘someone else’.
2.
3. 4. 5. 6. 7. 8. 9.
10. 11. 12. 13. 14.
15. 16. 17. 18. 19. 20. 21.
22.
This is because an insurer that has indemnified such a beneficiary can subrogate itself to any rights the beneficiary has against a third party for the same loss. For example, subrogation is available to an insurer who reimburses medical expenses incurred by the beneficiary of a group scheme insurance policy taken out by the beneficiary’s employer for the purpose of providing benefits to employees. In these schemes, the insured is the employer, not the beneficiaries (the beneficiaries are often expressly excluded from the definition of ‘insured’: Shulman v SH Simon (Electrical) Ltd [2010] EHWC 2762 (QB); All ER (D) 69 (Mackie J)). Insurance Commission of Western Australia v Kightly [2005] WASCA 154; (2005) 30 WAR 380. Bradburn v The Great Western Railway Co (1874) LR 10 Exch 1 at 3 (Pigott B). AFG Insurances Ltd v City of Brighton [1972] HCA 70; (1972) 126 CLR 655 at [18] (Mason J). Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd [2009] WASCA 31 at [201] (Beech JA). Bofinger v Kingsway Group Ltd [2009] HCA 44; (2009) 239 CLR 269 at [90] (a surety case); Insurance Commission of Western Australia v Kightly (see fn 3) at [26] (Steytler P). The Owners Strata Plan 62658 v Mestrez Pty Ltd [2012] NSWSC 1259 at [110] (Lindsay J). Banque Financiere de la Cite v Parc (Battersea) Ltd [1998] UKHL 7; [1999] AC 221 (Lord Hoffmann); Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd [1999] WASCA 1024; (1999) 10 ANZ Ins Cas 61-430 at 74,852 (Ipp J). Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (see fn 6) at [201] (Beech JA). Insurance Commission of Western Australia v Kightly (see fn 3) at [26] (Steytler P). Castellain v Preston (1883) 11 QBD 380 at 388 (Brett LJ). Stratti v Stratti [2000] NSWCA 358; (2000) 50 NSWLR 324 at [19] (Fitzgerald JA). In Small Business Consortium at Lloyd’s Consortium No 9056 v Angas Securities Ltd [2015] NSWSC 1511 at [35], Ball J queried whether this is in fact an aspect of subrogation. Transport Accident Commission v CMT Construction of Metropolitan Tunnels [1988] HCA 46; (1988) 165 CLR 436 at [11] (Wilson, Dawson, Toohey and Gaudron JJ). (1882) 7 App Cas 333. State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd [1969] HCA 59; (1969) 123 CLR 228 at [22] (Barwick CJ). State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (see fn 17) at [27] (Barwick CJ). Buckland v Palmer [1984] 1 WLR 1109; West of England Fire Insurance Co v Isaacs [1897] 1 QB 226 at 230 (Lord Esher MR). Boag v Standard Marine Insurance Co Ltd [1937] 2 KB 113 at 128 (Scott LJ); ICA s 13. State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (see fn 17) at [22] (Barwick CJ); Baltic Shipping Co v Merchant ‘Mikhail Lermontov’ (1994) 36 NSWLR 361 at 370 (Handley JA). AFG Insurances Ltd v City of Brighton (see fn 5) at [17] (Mason J); Speno Rail
23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45.
46.
Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (see fn 6) at [196] (Beech JA). Lord Napier and Ettrick v Hunter [1993] AC 713 at 731–4 (Lord Templeman), 747E (Lord Jauncey). King v Victoria Insurance Co Ltd [1896] AC 250; Bupa Australia Pty Ltd v Shaw (as Joint Executor of the Estate of Norman Shaw) [2013] VSC 507 at [58] (Almond J). Halliday v High Performance Personnel Pty Ltd (formerly Sacs Group Pty Ltd) [1993] HCA 13; (1993) 113 ALR 637 at [9]–[10] (Mason CJ). Hamilton v Merck & Co Inc [2012] CSOH 144 at [25] (Lord Drummond Young). The Owners Strata Plan 66601 v Majestic Constructions Pty Ltd [2008] NSWSC 735 at [40] (Rein J). Johnston v Endeavour Energy [2015] NSWSC 1117 (Garling J); Angas Securities Ltd v Small Business Consortium No 9056 [2016] NSWCA 182 at [71] (Sackville AJA). Groom v Crocker [1939] 1 KB 194 at 203 (Sir Wilfred Greene MR); Herde v Oxford Aviation Academy (Australia) Pty Ltd [2011] NSWCA 385 at [12]–[17] (Giles JA). British Traders’ Insurance Co Ltd v Monson [1964] HCA 24; (1964) 111 CLR 86 at [5] (Kitto, Taylor and Owen JJ). Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (see fn 6) at [211] (Beech JA). Esso Petroleum Company Ltd v Hall Russell & Co Ltd [1989] AC 643 at 663F (Lords Jauncey and Goff). Esso Petroleum Company Ltd v Hall Russell & Co Ltd (see fn 32) at 663F (Lords Jauncey and Goff). Smith (MH) (Plant Hire) Ltd v Mainwaring [1986] 2 Lloyd’s Rep 244 at 245 (O’Connor LJ), 246 (Kerr LJ). Compania Colombiana de Seguros v Pacific Steam Navigation Co [1965] 1 QB 101 at 121 (Roskill J). Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (see fn 9) at 74,851 (Ipp J). New Zealand Society of Accountants v ANZ Banking (NZ) Ltd [1996] 1 NZLR 283 at 286–8; Rose v Borisko Bros Ltd (1981) 125 DLR (3d) 671 (O’Brien J). Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (see fn 9) at 74,851 (Ipp J). Morley v Moore [1936] 2 KB 359 at 366 (Sir Boyd Merriman P), 369 (Scott LJ). Sydney Turf Club v Crowley [1972] HCA 25; (1972) 126 CLR 420. [2000] WASCA 408; (2001) 11 ANZ Ins Cas 61-485 at [165]–[168]. See fn 13. Lambert Leasing Inc v QBE Insurance Ltd [2015] NSWSC 750 at [215]. [2002] UKHL 4; Lloyd’s Rep IR 261 at [92]. First posed by Lord Mansfield in Mason v Sainsbury (1782) 3 Dougl 61 at 64; Caledonia North Sea Ltd v British Telecommunications Plc (Scotland) (see fn 44) at [14] (Lord Bingham of Cornhill), [53]–[57] (Lord Mackay of Clashfern), [92]–[94] (Lord Hoffmann). Scholefield Goodman and Sons Ltd v Zyngier [1986] 1 AC 562 at 575.
47. Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 209 CLR 282 at [15]–[16] (Gaudron ACJ and Hayne J), [38] (McHugh). 48. In HIH Claims Support v Insurance Australia Ltd [2011] HCA 31, on appeal from HIH Claims Support Ltd v Insurance Australia Ltd [2010] VSCA 255, the majority mentioned the issue at [40]–[41] without developing it, as it was not necessary for the decision. 49. Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (see fn 9) at 74,852 (Ipp J). 50. Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (see fn 9) at 74,853 (Ipp J); GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd [2000] QCA 495; (2001) 11 ANZ Ins Cas 61-482; Larson-Juhl Australia LLC v Jay West International Pty Ltd [2001] NSWCA 260. 51. Petrofina (UK) Ltd v Magnaload Ltd [1984] 1 QB 127 at 136 (Lloyd J); Co-operative Bulk Handling Ltd v Jennings Industries Ltd (1996) 17 WAR 257 at 269–271; 9 ANZ Ins Cas 61-355. 52. Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (see fn 9) at 74,853 (Ipp J). 53. Woodside Petroleum Development Pty Ltd v H&R-E&W Pty Ltd (see fn 9) at 74,864 (Ipp J); Rathbone Brothers Plc v Novae Corporate Underwriting [2013] EWHC 3457 (Comm) at [66] (Burton J). 54. Commonwealth Construction Co Ltd v Imperial Oil Ltd (1977) 69 DLR (3d) 558 at 561. 55. Commonwealth Construction Co Ltd v Imperial Oil Ltd (see fn 54) at 561. 56. [1986] 1 QB 211. 57. [1996] QSC 100; (1996) 9 ANZ Ins Cas 61-312. 58. Brand Hwy Pty Ltd v Hay Australia Pty Ltd [2015] WASC 375 (Master Sanderson on an unsuccessful summary judgment application). 59. See Chapter 7 for a discussion of the duty of utmost good faith. See also Distillers Company Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Company Ltd [1974] HCA 3; (1974) 130 CLR 1 (Stephen J); Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235. 60. [1956] UKHL 6; [1957] AC 555. 61. Deutz Australia Pty Ltd v Skilled Engineering Ltd [2001] VSC 194 at [52]–[53] (Ashley J). 62. Toomey v Scolaro’s Concrete Constructions Pty Ltd (No 3) [2001] VSC 477 at [56] (Eames J). 63. (1989) 93 ALR 89; 5 ANZ Ins Cas 60-942. 64. Lord Napier and Ettrick v Hunter (see fn 23) at 730 (Lord Templeman). 65. Lord Napier and Ettrick v Hunter (see fn 23). 66. St Paul Travelers Insurance Company Ltd v Dargan and Edwards (joint liquidators of Ballast Plc) and Mott Macdonald Ltd [2006] EWHC 3189 (Ch) at [109] (Collins J). 67. H Cousins & Co v D & C Carriers [1971] 2 QB 230 (Widgery LJ). 68. Re Logudice (1982) 2 ANZ Ins Cas 60-471 at 77,682 (Moffitt P); H Cousins & Co Ltd v D & C Carriers Ltd (see fn 67) at 243 (Widgery LJ). 69. Yorkshire Insurance Co v Nisbet Shipping Co [1962] 2 QB 330, but see Matthews v AusNet Electricity Services Pty Ltd [2014] VSC 663, in which Osborn JA at [398],
70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80.
suggests the possibility that the insurer should collect the surplus or that it should be divided pro rata between insurer and insured. Matthews v AusNet Electricity Services Pty Ltd (see fn 69) at [397]–[398] (Osborn JA). British Transport Commission v Gourley [1956] AC 185 at 206–7 (Lord Goddard). [1961] HCA 15; (1961) 105 CLR 569. Pirelli General Plc v Gaca [2004] EWCA Civ 373; 3 All ER 248 at [50] (Dyson LJ); Page v Sheerness Steel Plc [1996] PIQR Q26 at Q33 (Dyson J). Cunningham v Wheeler [1994] 1 SCR 359; 113 DLR (4th) 1 (Cory J writing for the majority); Pirelli General Plc v Gaca (see fn 73) at [56] (Dyson). [2003] WASCA 97. Theiss Contractors Pty Ltd v Norcon Pty Ltd [2001] WASCA 364; (2001) 11 ANZ Ins Cas 61-509 at [14] (Steytler J). See fn 76. Australian Legal Dictionary, Butterworths, Sydney, 1997. [1961] HCA 15; (1961) 105 CLR 569 at [3]. [1978] HCA 37; (1978) 144 CLR 202 at [9].
[page 513]
Chapter 28 THE DUTIES OWED BY A LAWYER WHEN RETAINED BY AN INSURER The exact date that lawyers came into existence is unknown, although the first complaints about them were recorded in the twelfth century.1
INTRODUCTION The discussion in this chapter is under the following headings: a lawyer’s duties to a client generally; insurer’s lawyer investigating a third party claim against the insured; insurer’s lawyer informing the insured they will be indemnified for a third party claim against them; insurer’s lawyer acting in the insured’s interests in relation to a third party claim against the insured; and limits on the free flow of information and documentation from an insurer’s lawyer to the insurer and its insured. For ease of discussion, this chapter does not deal with the issues that arise for a lawyer involved in an insurer’s subrogated claim against a third party. However, the issues are similar and much of what is discussed here applies to that situation. Nor does this chapter deal with a third party’s direct claim against an insurer, as that will not usually give rise to a conflict for a lawyer between the interests of an insurer and an insured. An insurer will find itself in dispute with a third party, no matter how
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short-lived, if: it conducts an insured’s defence to a third party claim with the insured’s agreement or pursuant to its right to do so under a liability insurance policy;
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[page 514]
■it exercises a right of subrogation in an insured’s name against a
third party for the purpose of reducing its loss; or a third party makes a direct claim against it. If a liability insurer has tried unsuccessfully, or does not want, to resolve a third party claim against its insured on its own, it will usually ask a lawyer to help out. This chapter is concerned with the issues that arise for a lawyer so retained. It begins with a brief discussion of the duties owed by a lawyer to a client generally, and then goes on to deal with a lawyer’s duties when retained by a liability insurer to: investigate a third party claim against its insured; inform its insured that it will be indemnified for a third party claim against it; or act in its insured’s interests in relation to a third party claim against its insured.
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A LAWYER’S DUTIES TO A CLIENT GENERALLY 28.1 A lawyer’s duty to a client is governed by the terms of their retainer. Subject to those terms, a lawyer owes their client a common law duty to act with reasonable care, skill and diligence in the conduct of the task the client retains the lawyer to perform. 28.2
As lawyer and client are in a fiduciary relationship (a
relationship of trust and confidence), a lawyer also owes a client a fiduciary duty. The duty comes to an end when the retainer ends.2 The character and scope of the relationship depends on the express terms of the retainer and ‘the course of dealing actually pursued by’ the lawyer.3 The duty is proscriptive, not prescriptive.4 In that context, it requires the lawyer to act with single-minded loyalty to the client’s interest, without regard to any interest of the lawyer or anyone else.5 In particular, the lawyer must put their knowledge, skill and experience at the client’s disposal6 and not: [page 515] conflicting interests ■act for two or more clients with potentially 7
without the informed consent of both; disclose confidential information learned from acting for a client to another person (including another client).8 This aspect of the duty continues on after the lawyer has completed the task that the client retained them to perform;9 and ‘obtain any unauthorised benefit from the relationship and not … be in a position of conflict’.10 The content of the fiduciary duty is derived from the task a client retains a lawyer to perform, not from the status of the lawyer/client relationship.11 Just because a lawyer owes a client fiduciary duties in relation to the lawyer acting for or advising a client in a particular matter does not mean that the fiduciary duties extend to all of their dealings with each other.12
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28.3 Professional conduct rules are another source of a lawyer’s obligations to a client. Of relevance here, by way of example, are Rules 9 and 11 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, made by the Legal Services Council under the Legal Profession Uniform Law. They are in the following terms:
9.
Confidentiality 9.1 A solicitor must not disclose any information which is confidential to a client and acquired by the solicitor during the client’s engagement to any person who is not: 9.1.1 a solicitor who is a partner, principal, director or employee of the solicitor’s law practice; 9.1.2 a barrister or an employee of, or person otherwise engaged by, the solicitor’s law practice or by an associated entity for the purposes of delivering or administering legal services in relation to the client, EXCEPT as permitted in Rule 9.2. 9.2 A solicitor may disclose information which is confidential to a client if: 9.2.1 the client expressly or impliedly authorizes disclosure; 9.2.2 the solicitor is permitted or compelled by law to disclose; 9.2.3 the solicitor discloses the information in a confidential
[page 516] setting, for the sole purpose of obtaining advice in connection with the solicitor’s legal or ethical obligations; 9.2.4 the solicitor discloses the information for the sole purpose of avoiding the probable commission of a serious criminal offence; 9.2.5 the solicitor discloses the information for the purpose of preventing imminent serious physical harm to the client or to another person; or 9.2.6 the information is disclosed to the insurer of the solicitor, law practice or associated entity. 11. Conflict of duties concerning current clients 11.1 A solicitor and a law practice must avoid conflicts between the duties owed to two or more current clients, except where permitted by this Rule. 11.2 If a solicitor or law practice seeks to act for two or more clients in the same or related matters where the clients’ interests are adverse and there is a conflict or potential conflict of the duties to act in the best interests of each client, the solicitor or law practice must not act, except where permitted by Rule 11.3. 11.3 Where a solicitor or law practice seeks to act in the circumstances specified in Rule 11.2, the solicitor or law practice may, subject always to each solicitor discharging their duty to act in the best interests of their client, only act if each client: 11.3.1 is aware that the solicitor or law practice is also acting for another client; and 11.3.2 has given informed consent to the solicitor or law practice so acting. 11.4 In addition to the requirements of Rule 11.3, where a solicitor or law practice is in possession of information which is confidential to a client (the first client) which might reasonably be concluded to be material to another client’s current
11.5
matter and detrimental to the interests of the first client if disclosed, there is a conflict of duties and the solicitor and the solicitor’s law practice must not act for the other client, except as follows: 11.4.1 a solicitor may act where there is a conflict of duties arising from the possession of confidential information, where each client has given informed consent to the solicitor acting for another client; and 11.4.2 a law practice (and the solicitors concerned) may act where there is a conflict of duties arising from the possession of confidential information where an effective information barrier has been established. If a solicitor or a law practice acts for more than one client in a matter and, during the course of the conduct of that matter, an actual conflict arises between the duties owed to two or more of those clients, the solicitor or law practice may only continue to act for one of the clients (or a group of clients between whom there is no conflict) provided the duty of confidentiality to other client(s) is not put at risk and the parties have given informed consent.
[page 517] 28.4 A lawyer can act for two or more clients in the same matter as long as their respective interests coincide. However, as soon as the lawyer perceives a ‘real and sensible possibility’ (not just a conceivable possibility) of conflict between the clients’ respective interests, they must cease acting for all of them.13 28.5 A lawyer might be able to sidestep a conflict of interest or a breach of confidentiality by obtaining the express and fully informed consent of the relevant client or clients;14 for example, the clients might jointly instruct the lawyer to share confidential information amongst them. The burden of proving fully informed consent is heavy: Ex parte Lacey,15 in which Lord Eldon said that a consent will be ‘watched with infinite and the most guarded jealousy’. A lawyer does not have a duty to obtain informed consent. Instead: … the existence of an informed consent [goes] to negate what otherwise was a breach of duty.16
INSURER’S LAWYER INVESTIGATING A THIRD PARTY CLAIM AGAINST THE INSURED 28.6 A liability insurer’s first instruction to its lawyer might be to investigate an insured’s claim on the policy for indemnity in relation to a third party claim against the insured, and advise the insurer as to: whether the policy responds to the insured’s claim for indemnity; and what the insured’s exposure is to the third party claim. Upon accepting the instruction, the lawyer will come under an obligation to the insurer, as the client, to conform to the duties described above.
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28.7 Insofar as investigation of a claim involves an insurer-appointed lawyer communicating directly with an insured, the lawyer needs to be mindful of the duty of utmost good faith owed by the insurer to the insured, and in particular the insurer’s duty to be open and transparent in its dealings with the insured. In light of this and having regard to the duty of care owed by a lawyer to their insurer client, when the lawyer first makes contact with the insured for the purpose of obtaining relevant [page 518] information and documentation as part of their investigation into the claim, they should clearly inform the insured of the following matters: 1. The lawyer is acting for the insurer, not the insured. 2. The lawyer has contacted the insured pursuant to the insurer’s instructions to investigate the claim and advise: a) whether the policy responds to the insured’s claim for indemnity; and
b) what the insured’s exposure is to the third party claim. 3. The insurer has not yet decided whether to indemnify the insured for the claim. Until the insurer makes a decision on indemnity, the insured should act as a prudent uninsured as regards the third party. 4. Investigation of the claim is ‘without prejudice’ to the insurer’s right to decline to indemnify the insured for the claim after consideration of the results of the investigation. 5. Some of the information and documentation that the insured or its officers, employees or agents might make available to the lawyer in response to the lawyer’s request for assistance may influence the insurer’s decision whether or not to grant indemnity to the insured. 6. In light of points 1–5, the insured might want to retain their own lawyer before providing any information or documentation to the lawyer. A direction to act as a ‘prudent uninsured’: requires an insured do what a prudent uninsured person would do17 to: ■ preserve its rights against a third party; and ■ not allow its position as regards a third party to deteriorate; and arguably allows the insured a licence to ignore the procedural requirements of the policy that might otherwise get in the way of acting as a prudent uninsured; for example, obtaining the insurer’s consent to a settlement.18 Depending on the circumstances, it might be worthwhile making this clear to the insured. Apart from taking care to ensure that their client complies with its duty of utmost good faith in relation to the investigation, the communication of this information to the insured is important for the purpose of trying to reduce the risk of the insured successfully arguing later that something
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[page 519] about the investigation, or the insurer’s or lawyer’s conduct in relation to it: amounts to an election by the insurer to indemnify the insured for the claim, or gives rise to an estoppel that prevents the insurer from declining to indemnify the insured for the claim; or requires the insurer to indemnify the insured for the claim because not to do so would be a breach of the insurer’s duty of utmost good faith having regard to the way in which the investigation was carried out.
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28.8 An independent lawyer retained by the insured would be expected to advise the insured that the duty of utmost good faith requires them to make full and frank disclosure to the insurer of the requested information and documentation (to the extent it is relevant). The real benefits of the independent lawyer to the insured are that they might: more precisely articulate the relevant information, which might reduce the risk of an insurer declining or limiting indemnity based on inaccurate information; and be able to identify information or documentation not requested by an insurer’s lawyer that might assist the insured with insurance coverage.
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28.9 As they are not acting for the insured or in the insured’s interests at this stage, the insurer-appointed lawyer does not owe the insured the duty of care or fiduciary duty it would owe a client, and has no ‘conflict of interest’ or ‘confidentiality’ issues that might impede the free flow of information and documentation from the insured to the insurer via the lawyer, whether it relates to indemnity or not.19
INSURER’S LAWYER INFORMING
INSURED THEY WILL BE INDEMNIFIED FOR A THIRD PARTY CLAIM AGAINST THEM 28.10 If a liability insurer instructs a lawyer to inform an insured that they will be indemnified for a third party claim against them, the lawyer, in exercising the duty of care owed to the insurer, should protect the insurer’s interests by informing the insured that indemnity for the claim is granted, subject to: the terms of the policy; known facts; and the insurer reserving to itself the right to withdraw indemnity if it subsequently discovers facts that would have allowed it to decline indemnity if it had known those facts when indemnity was granted.
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[page 520] By qualifying the grant of indemnity in this fashion, the lawyer reduces the risk of the insured successfully arguing that the grant of indemnity prevents the insurer from subsequently denying liability for a third party claim that would otherwise fall outside the scope of the policy.
INSURER’S LAWYER ACTING IN THE INSURED’S INTERESTS IN RELATION TO A THIRD PARTY CLAIM AGAINST THE INSURED 28.11
This section is divided into the following headings: limits on a liability insurer’s ability to conduct a defence to, or
a third party claim as it sees fit; ■settle, ■duties owed by an insurer’s lawyer to the insurer and its insured;
and conflicts of interest for the lawyer. The following discussion is in the context of an insurerappointed lawyer acting in an insured’s interests in relation to a third party claim against the insured.
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Limits on a liability insurer’s ability to conduct a defence to, or settle, a third party claim as it sees fit 28.12 Liability insurance policies invariably include an express term that gives the insurer the option of conducting an insured’s defence to, or settling, a third party claim that falls, or potentially falls, within the scope of the indemnity promised by the contract. By exercising that option, a liability insurer gives itself the opportunity to exert some influence over the outcome of the claim. An insured can also agree, independently of the terms of the policy, to an insurer conducting their defence to a third party claim. The wording of an express term usually allows an insurer to exercise the option whether or not it has agreed to indemnify the insured against the third party claim.20 28.13 Taking on the conduct of an insured’s defence of a third party claim does not give an insurer the right to conduct the defence or settle the claim however it sees fit.21 First, an insurer can only act within the scope of the rights given to it by the terms of the policy or by the agreement that gives it the right to conduct the insured’s defence. For example, in Groom v Crocker,22 the court concluded that an insurer was not entitled to settle a third party [page 521]
claim against its insured on terms that had nothing to do with the insured’s policy or the merits of the claim against its insured. The case concerned a collision between a car driven by William Groom and a lorry owned by Tear Bros. Aubrey Groom, who was a passenger in his brother William’s car when the collision occurred, sued William and Tear Bros for the injuries he suffered as a result of the collision. William was insured for any liability he had to Aubrey under a Firemen’s Union Mutual insurance policy. Firemen’s Union Mutual, as it was entitled to do under the policy, instructed Crockers, a firm of lawyers, to defend the action on behalf of William. Tear Bros was insured for any liability it had to Aubrey under a Motor Union Insurance Co Ltd insurance policy. Although Firemen’s Union Mutual and Crockers agreed with William that Tear Bros was solely responsible for the collision, Motor Union Insurance and Fireman’s Union Mutual agreed to share their liability to Aubrey equally, with Firemen’s Union Mutual filing a defence for William admitting he negligently caused the collision. The benefit for Firemen’s Union Mutual was a favourable apportionment of liability in an unrelated matter it had with Motor Union Insurance. The deal was done without William’s agreement. William subsequently sued Crockers in contract, tort and for libel. Crockers defended the action on the basis that they acted in accordance with the instructions of their client, Firemen’s Union Mutual. Sir William Greene MR said (at 203) that the policy gave Firemen’s Union Mutual: … the right to decide upon the proper tactics to pursue in the conduct of the action, provided that they do so in what they bona fide consider to be the common interest of themselves and [William]. But [Firemen’s Union Mutual] are in my opinion clearly not entitled to allow their judgment as to the best tactics to pursue to be influenced by the desire to obtain for themselves some advantage altogether outside the litigation in question with which [William] has no concern … [The policy gave Firemen’s Union Mutual] an absolute right to control [William’s] defence; but the scope of this right was, in my view, subject to certain implied boundaries and limitations. It was not one which they would be entitled to exercise arbitrarily. They were bound to exercise a real discretion upon each question as it arose in the conduct of the defence, making each decision after due consideration of the circumstances of the particular case … [Firemen’s Union Mutual] here in making [its] profitable bargain with the Motor Union were acting as much outside that discretion as if [it] had accepted a bribe from a stranger
in consideration of [its] instructing [Crockers] to put on record in Aubrey’s action an admission of [William’s] negligence. The inclusion of the other action in which [William] had no interest whatever, as a circumstance material to the exercise of [its] discretion, of itself imported a failure to exercise the discretion which by the contract they had undertaken to exercise, and was therefore a breach of their contract, and that initial breach invalidated the whole of their consequent instructions to [Crockers]. The policy conferred upon [it] no right to call upon [Crockers] to act on [its] mandate, and the solicitors derived no authority from it to do what they did.
[page 522] Second, an insurer is limited in what it can do by its duty of utmost good faith, which requires it to have due regard for its insured’s legitimate interests.23 Amongst other things, the duty requires an insurer to consider an insured’s interests when deciding whether to: settle a third party claim. A factor to be weighed up against settling with a third party would be if a settlement in the terms contemplated by the insurer would leave the insured with an uninsured liability; for example, the amount of an excess or the extent to which the settlement amount would exceed the policy limit of liability; or take a third party claim to trial. A factor to be weighed up against taking a third party claim to trial would be if an adverse judgment might leave the insured with an uninsured liability; for example, if it might exceed the policy limit of liability. This does not mean that an insurer cannot settle a third party claim or take it to trial without the insured’s consent, just that the insurer must have due regard for the insured’s interests when making a decision about how to resolve the claim.
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Duties owed by an insurer’s lawyer to the insurer and its insured 28.14 Liability insurers often take on the conduct of an insured’s defence to a third party claim and at the same time, retain a lawyer to act in the insured’s interests in relation to the claim.
Upon accepting the retainer, the lawyer will come under an obligation to the insurer, as the client, to conform to the duties described above. It is arguable that a lawyer/client relationship will also come into being between the lawyer and the insured when the lawyer informs the insured that they are acting in the insured’s interests or, at the latest, when the lawyer, in the insured’s name, communicates with a third party about its claim, because at either point in time: the lawyer acts, and assumes responsibility to act in the insured’s interests within the scope of that communication; and the insured is reliant on the lawyer applying expert skill and knowledge in that regard, particularly if the insurer has not agreed to indemnify the insured for the claim or if the insured has an uninsured exposure to the claim even if indemnity is granted. Assumption of responsibility and reliance are ‘elements which lie at the heart of the ordinary relationship between a solicitor and his client’.24
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[page 523] Even if the insured does not become the lawyer’s client in these circumstances, the lawyer will clearly owe a duty of care to the insured in relation to any communications they have with the insured and the third party on behalf of their insurer client. The content of the duty will depend on the terms of the policy, the extent of the insured’s uninsured exposure to the claim (if any), the scope of the retainer by the insurer and the precise nature of the communications between the lawyer, the insured and the third party. 28.15 An insurer-appointed lawyer acting for an insured in a dispute resolution process with a third party (such as court or arbitration proceedings or a mediation) has a lawyer/client relationship with the insurer and the insured in relation to those proceedings.25 Accordingly, the lawyer owes each of the insurer and the insured an obligation to
conform to the common law and fiduciary duties and professional conduct rules such as described above in relation to that process. Upon going on the court record for an insured, an insurer-appointed lawyer owes duties to the insurer and the insured, but their paramount duty is to the court.26
Conflicts of interest for the lawyer 28.16 There is obvious potential for a ‘real and sensible possibility’ of conflict of interest for a lawyer in a tripartite arrangement27 with a liability insurer and an insured arising out of the liability insurer retaining the lawyer to act in the insured’s interests in a dispute resolution process with a third party. The discussion below concerns some of the circumstances that can give rise to a conflict of interest for the lawyer in the course of such an arrangement and how the lawyer ought to deal with a conflict if it arises. 28.17 If a liability insurer and its insured give the lawyer conflicting instructions in relation to how to conduct the defence to, or settle, a third party claim, the lawyer can act solely on the insurer’s instructions if the insurance contract gives the insurer absolute control in relation to those instructions and the insurer’s instructions are consistent with the duty of utmost good faith owed by the insurer to the insured.28 Depending on the circumstances, it might be prudent for the lawyer, before acting on the [page 524] insurer’s instructions, to suggest to the insured that they seek independent legal advice on the insurer’s right to insist on those instructions being acted upon. 28.18 If an insured’s liability to a third party is only partly insured, there is the potential for a conflict of interest for the lawyer at critical points in the dispute with the third party; for example, when decisions are or should be made about settlement or taking the claim to trial. The
lawyer cannot advise both clients what each ought to contribute towards a settlement because every dollar contributed by one client may well save their other client a dollar (the third party is usually not interested in separating its claim into insured and uninsured components). The lawyer can avoid a conflict by advising and representing the insurer in its efforts to resolve the insured aspects of the claim, as long as the lawyer: does not also act for the insured in trying to resolve the uninsured aspects of the claim and informs the insured of that; informs the insured of the insurer’s intention to try to resolve the insured aspects of the claim. This is required by the respective duties of the insurer and the lawyer to be open and transparent with the insured in relation to matters that might affect resolution of the third party claim against the insured; recommends to the insured that it obtain independent legal advice on how to resolve the uninsured aspects of the claim; and recommends to the insured that it arrange separate legal representation in any negotiations the lawyer has with the third party where the uninsured aspects of the claim are an issue in the negotiations.
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28.19 In Verson Clearing International Pty Ltd v Ward & Partners,29 the South Australian Full Court suggested that a lawyer can never advise their insurer client on indemnity while also acting for an insured because that would conflict with the duty of loyalty the lawyer owes to the insured. Perry J put it this way (at [26]–[28]): That situation should never have arisen. When a solicitor acts for an insurer exercising its right of subrogation under a policy of insurance and conducts the defence of proceedings in the name of the insured, there is always the potential that the interests of the insurer may not coincide with those of the insured. The existence of the potential for that to happen does not have any effect upon the ability of the solicitor properly to act for both. But if at any stage the insurer raises any question such as its obligation to indemnify the insured, the solicitor cannot continue to act for both. A solicitor cannot act for two clients whose interests conflict … Once it was apparent that a question arose as to the liability of SGIC to indemnify the respondent, the appellant should have intimated to
[page 525] SGIC that it was not in a position to offer any advice as to that, but that SGIC would have to engage other solicitors if they wished advice or legal representation as to that aspect of the matter … To the extent that the advice dealt with SGIC’s obligation to indemnify the respondent, it should not have been given while the appellant acted for the respondent. The appellant should have diverted SGIC elsewhere when the need to give advice on that topic arose.
In the same case, Lander J said (at [63]–[64]): In my opinion therefore the appellant ought to have advised both the insurer and the insured that it could not act as soon as it appeared to it that there was a possibility that the respondent would not be entitled to indemnity under the policy. At that stage both of the parties ought to have been advised that they needed to obtain separate advice in relation to that matter. That would mean that the appellant ought to have ceased acting by 20 April 1995 if not earlier. It was inappropriate for the solicitors to thereafter offer an opinion to SGIC, which it did on 8 August 1995 which opinion gave advice and made recommendations to SGIC adverse to its other client, the respondent. The appellant did not claim to cease to act for the respondent until 9 August 1995.
In Chersinoff v Allstate Insurance Company,30 Aikins J said: It is unnecessary to express any comment on the advisability of the same solicitors acting in the joint interest of insurer and insured on the issues of liability and damages and at the same time acting for and advising the insurer on the issue of liability to indemnify on which insurer and insured are parties are adverse in interest, beyond saying that taking such a course will often raise substantial difficulties.
Notwithstanding the clear direction in Verson, it is arguable a lawyer can advise their insurer client about the extent to which an insured is covered for a third party claim if the lawyer expressly agrees with the insured at the outset that they are: only acting for the insured or in the insured’s interests in relation to the insured’s defence to the third party claim; not acting for, or advising, the insured in relation to insurance coverage; and advising, or reserve the right to advise, the insurer on insurance issues.31 The lawyer should suggest to the insured that they seek independent legal advice on such an arrangement before agreeing to it.
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28.20 The following passages assume a lawyer can advise their insurer client on indemnity while acting for an insured. [page 526] If an insurer-appointed lawyer intends to seek information or documentation from an insured for the purpose of advising an insurer on insurance coverage, the lawyer should, before acting on that intention: inform the insured that that is the lawyer’s intention; and recommend that the insured obtain independent legal advice on whether they should disclose the relevant information or documentation to the lawyer.32 If an insurer informs its lawyer that it wants to limit the scope of the indemnity granted to an insured, the lawyer should recommend to the insured that they obtain independent legal advice about the extent to which there is insurance for the third party claim. If a dispute arises about the extent to which there is insurance for a third party claim, the lawyer must cease acting for the insurer (whatever the precise nature of the dispute) and advise the insurer and the insured to obtain independent legal advice. In these circumstances, the lawyer is faced with an actual conflict of interest because ‘he cannot breach [his clients’] respective confidences to him, or act without their authority, or act contrary to the interests of either of them’.33 The lawyer’s duty is to:
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… recommend to both insurer and insured that they obtain independent advice. He cannot simultaneously represent two clients with conflicting interests in litigation, actual or contemplated. He cannot as a matter of professional ethics continue to act in litigation where there is a real and sensible possibility of a conflict of interest between his clients … If necessary, he must withdraw entirely from the litigation; he must do so where there is a substantial risk that information given to him in confidence by the insured may be disclosed to or used by the insurer against the insured in the coverage issue. He cannot then represent the insurer on the coverage issue against the insured … Should the insured lose the benefit of his privilege in his communications with his lawyer, because the lawyer in breach of duty discloses those communications to the insurer, the insured will have remedies against the lawyer.34
28.21 If an insurer declines indemnity or if there is a dispute about coverage, the lawyer can continue to act for the insured in the dispute with the third party, but as anticipated in Kennedy v Cynstock,35 the lawyer: cannot act for the insurer or the insured in relation to any aspect of the matter concerning insurance coverage; can only act in the dispute with the third party on the joint instructions of the insurer and the insured separately legally advised; and
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[page 527]
■cannot
act if the lawyer is privy to confidential information relating to indemnity that is not known to all of their clients, unless all clients agree that in those circumstances the lawyer is not to disclose such information to the other clients.
28.22 An insured requires the leave of the court to have separate representation for its insured and uninsured losses.36
LIMITS ON THE FREE FLOW OF INFORMATION AND DOCUMENTATION FROM AN INSURER’S LAWYER TO THE INSURER AND THE INSURED 28.23 Subject to the following, for as long as a lawyer acts for a liability insurer and its insured, the lawyer is obliged to make available to both of them information and documents relevant to a third party’s claim against the insured, as they have a ‘joint’ or ‘common’ interest in the subject matter of the third party claim.37 28.24
Subject to the policy terms, if an insured gives a lawyer
confidential information or documentation that might entitle the insurer to avoid or limit the extent to which it will cover the insured for the third party claim, the joint retainer of the lawyer ends and the duty of confidentiality owed by the lawyer to the insured prevents the lawyer from making that information or documentation available to the insurer.38 Almost certainly, the lawyer will not be able to continue acting for either party. If an insurer somehow gets access to that information or documentation, it cannot use it in court for the purpose of denying or limiting insurance coverage.39 Any attempt to do so can be restrained by injunction.40 28.25 Depending on the circumstances, a lawyer’s fiduciary duty will probably require them to cease acting for the insurer and the insured and not to divulge to either of them information or documentation that might affect the scope of indemnity, if the lawyer has obtained that information or documentation from a potential witness (independent of the insurer and the insured) while acting for the insurer and the insured. 28.26 There is no impediment to a lawyer passing onto the insurer and the insured information or documentation that might affect the scope of indemnity provided by the third party in the usual course of the dispute [page 528] resolution process, because neither the insurer nor the insured can argue that that information or documentation is confidential to either of them. Of course, the lawyer will have to cease acting for the insurer and perhaps the insured as well if this leads to the insurer declining indemnity or to a dispute about insurance coverage: see [28.20] and [28.21]. 28.27 In Australia and New Zealand, a contract term requiring an insured to give to an insurer ‘all necessary information and assistance and to forward all documents’ to it does not entitle the lawyer acting
for both to pass on to the insurer confidential information provided to the lawyer by the insured relating to insurance coverage; that information is the subject of client legal privilege in favour of the insured.41 A contractual term would need to be clearer than that to override a lawyer’s obligations of loyalty and confidentiality to an insured.42 In Brown v Guardian Royal Exchange Assurance plc,43 the Court of Appeal thought that the terms of the insurance contract in that case were clear enough to override the client legal privilege the insured would otherwise have been able to claim as against the insurer. 28.28 Insurers sometimes seek to overcome the problem of a lawyer withholding from the insurer confidential information about insurance coverage obtained from an insured, by having the insured sign a ‘waiver’ letter at about the time the lawyer starts acting for the insured (usually after giving the insured the opportunity to obtain independent legal advice on whether they should sign the ‘waiver’ letter). By the letter, the insured agrees to waive client legal privilege in relation to any confidential information or documentation that the insured subsequently makes available to the lawyer. The intention is that the lawyer can then pass that information or documentation onto the insurer, even if it may detrimentally affect the insured’s claim for indemnity. The effectiveness of a ‘waiver’ letter is very doubtful having regard to: the generality with which it is usually drafted; and the fiduciary duty owed by the lawyer to the insured and the duty of utmost good faith owed by the insurer to the insured, both at the time the ‘waiver’ letter is presented to the insured for signing and when a confidentiality issue arises; and professional conduct rules concerning disclosure of one client’s confidential information to another client.
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[page 529] Perhaps the only way for a lawyer to deal with an issue about
protecting the confidentiality of information or documentation for the benefit of an insured is for the lawyer to send the insured for independent advice as to whether they ought to disclose the relevant information or documentation to the insurer. If the insured decides it does not want that to happen, the lawyer must not divulge the information or documentation to the insurer and must also cease acting for the insurer and the insured.
1. 2. 3. 4. 5.
6. 7. 8. 9. 10. 11. 12. 13.
14. 15. 16. 17.
Attributed to David Oppenheim in Norman R Augustine, Augustine’s Laws, 6th ed, American Institute of Aeronautics and Astronautics, Inc, Virginia, USA, 1997, p 64. Beach Petroleum NL v Abbott Tout Russell Kennedy [1999] NSWCA 408; (1999) 48 NSWLR 1 at [205]. Birtchnell v The Equity Trustees, Executors and Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384 at 408 (Dixon J). Breen v Williams [1996] HCA 57; (1996) 186 CLR 71 at [41] (Gaudron and McHugh JJ); Pilmer v The Duke Group Ltd (in liq) [2001] HCA 31; (2001) 207 CLR 165 at [74]. Bristol and West Building Society v Mothew [1996] EWCA Civ 533; [1998] Ch 1 at 18 (Millett LJ); Spincode Pty Ltd v Look Software Pty Ltd [2001] VSCA 248; VR 501 at [42] (Brooking JA). Spector v Ageda [1973] 1 Ch 30 at 48 (Megarry J); Wan v Mcdonald [1992] FCA 4; (1992) 105 ALR 473 at [45] (Burchett J). Beach Petroleum NL v Abbott Tout Russell Kennedy (see fn 2) at [466]. This is sometimes referred to as the ‘double employment rule’. Bokiah v KPMG [1998] UKHL 52; [1999] 2 AC 222 at 235–6 (Lord Millett); Belan v Casey [2002] NSWSC 58 at [18] and [21] (Young CJ). Cooper v Winter [2013] NSWCA 261 at [97]. Breen v Williams (see fn 4) at [41] (Gaudron and McHugh JJ); Pilmer v The Duke Group Ltd (in liq) (see fn 4) at [74]. Beach Petroleum NL v Abbott Tout Russell Kennedy (see fn 2) at [188]. Soia v Bennett [2014] WASCA 27 at [57]–[58] (Pullin JA). Beach Petroleum NL v Abbott Tout Russell Kennedy (see fn 2) at [203] and [425]. Worth Recycling Pty Ltd v Waste Recycling & Processing Pty Ltd [2009] NSWCA 354 at [42] (Hodgson JA). Bokiah v KPMG (see fn 8) (Lord Millett). (1802) 6 Ves 625 at [626]; 31 ER 1228 at 1228. Maguire v Makaronis [1997] HCA 23; (1997) 188 CLR 449 at 467 (Brennan CJ, Gaudron, McHugh and Gummow JJ). What a prudent uninsured is required to do is ‘determined objectively by reference to what was or was not done in the circumstances that existed’: Compagnie Francaise D Assurance Pour le Commerce Exterieur t/a Coface Australia v Sims Group Australia Holdings Ltd
18. 19. 20. 21. 22. 23.
24. 25. 26. 27.
28.
29. 30. 31. 32.
33. 34. 35. 36. 37. 38.
39.
[2013] NSWCA 418 at [73] and [74] (Ward JA). CGU Insurance Ltd v AMP Financial Planning Pty Ltd [2007] HCA 36; (2007) 235 CLR 1 at [8] and [13] (Gleeson CJ and Crennan J), [120] (Kirby J). Mercantile Mutual Insurance (NSW Workers Compensation) Ltd v Murray [2004] NSWCA 151; (2004) 13 ANZ Ins Cas 61-612 (Mason P). Kennedy v Cynstock Pty Ltd [1993] NTSC 98; (1993) 3 NTLR 108 at [116] (Kearney J). Groom v Crocker [1939] 1 KB 194 at 203 (Sir Wilfred Greene MR); Herde v Oxford Aviation Academy (Australia) Pty Ltd [2011] NSWCA 385 at [12]–[17] (Giles JA). See fn 21. Distillers Company Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Company Ltd [1974] HCA 3; (1974) 130 CLR 1 (Stephen J); Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Ins Cas 61-235. Pegrum v Fatharly (1996) 14 WAR 92 at 102 (Anderson J). Groom v Crocker (see fn 21); Verson Clearing International Pty Ltd v Ward & Partners [1996] SASC 5909; (1996) 9 ANZ Ins Cas 61-352 at [54] (Lander J). D’Orta-Ekenaike v Victoria Aid [2005] HCA 12; (2005) 223 CLR 1 at [109]–[113] (McHugh J). A term used by Neill LJ in Brown v Guardian Royal Exchange Assurance PLC [1994] 2 Lloyd’s Rep 325; and Derrington J in FAI General Insurance v ACN 010 087 573 Pty Ltd [1999] QCA 524 at [39], to describe the situation. Groom v Crocker (see fn 21); McCann v Parsons [1954] HCA 70; (1954) 93 CLR 418 at [12]–[14] (Dixon CJ, Fullagar, Kitto and Taylor JJ); Project 28 Pty Ltd v Barr [2005] NSWCA 240 at [71] (Ipp JA). See fn 25. (1968) 69 DLR (2d) 653; [1969] 65 WWR 449 (BCSC). See also Carter v Kerr (1989) 2814 (BCSC); (1989) 39 BCLR (2d) 345 at [13]–[23]. A Scotford, M Newton and L Zadkovich, Geoff Masel Lecture Series, ‘Walking the Tightrope’, Australian Insurance Law Association, September–October 2006. TSB Bank plc v Robert Irving & Burns (Colonia Baltica Insurance Ltd, third party) [2000] 2 All ER 826; CE Heath Underwriting & Insurance (Aust) Pty Ltd v Campbell Wallis Moule & Co Pty Ltd (1991) 6 ANZ Ins Cas 61-071; State Government Insurance Commission (SA) v Paneros (1988) 5 ANZ Ins Cas 60-857 at [75], [374]–[375] (Lunn AJ). Kennedy v Cynstock Pty Ltd (see fn 20) at [33] (Kearney J). Kennedy v Cynstock Pty Ltd (see fn 20) at [34] (Kearney J). See fn 20. Elphick v Westfield Shopping Centre Management Company Pty Ltd [2011] NSWCA 356 (this issue does not arise if the insured has issued third party proceedings the insurer). Hellenic Mutual War Risks Association (Bermuda) Ltd v Harrison (‘The Sagheera’) [1997] 1 Lloyd’s Rep 160 at 165 (Rix J). TSB Bank plc v Robert Irving & Burns (a firm) (Colonial Baltica Insurance Ltd, third party) (see fn 32) at 834 (Morritt LJ); ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd [1997] SASC 6338; (1997) 69 SASR 374 at 394 (Olsson J). Marshall v Adamson [1936] 4 DLR 383 at 386 (McTague J).
40. State Government Insurance Commission (SA) v Paneros (see fn 32) at [75], [374–375] (Lunn AJ). 41. Boyce v Goodyear Australia Ltd (unreported, CA (NSW), 16 September 1996, BC9607060). 42. Campbell v The Members of Lloyd’s Syndicate QBE Casualty 386 [2014] VSC 655 at [57] (Almond J); Nicholson v Icepak Coolstores Ltd [1999] 3 NZLR 475 at [499]; (1999) 10 ANZ Ins Cas 61-449 (Penlington J). 43. See fn 27.
[page 531]
Chapter 29 DOUBLE INSURANCE AND CONTRIBUTION [C]ontribution is an attempt by equity to distribute equally, among those having a common obligation, the burden of performing it, so that without that common obligation there can be no claim for contribution.1
INTRODUCTION This chapter discusses: double insurance; ‘other insurance’ clauses; the equitable right to contribution; proving the right to contribution and determining the amount to be used for the contribution calculation; and the contribution calculation. In broad terms, double insurance describes circumstances in which two or more insurers, by independent indemnity insurance contracts, insure the same person against the same risk of loss.2 If, in those circumstances, an insurer under one of the insurance contracts pays the loss, it may be entitled to a contribution from the other ‘double insurers’ towards that payment.
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DOUBLE INSURANCE The claim certainly has its foundation in the clearest principles of natural justice; for, as all are equally bound and are equally relieved, it seems but just that in such a case all should contribute in proportion towards a benefit obtained by all … And the doctrine
has an equal foundation in morals; since no one ought to profit by another man’s loss where he
[page 532] himself has incurred a like responsibility. Any other rule would put it in the power of the creditor to select his own victim; and, upon motives of mere caprice or favouritism, to make a common burden a most gross personal oppression. It would be against equity for the creditor to exact or receive payment from one, and to permit, or by his conduct to cause, the other debtors to be exempt from payment … It can be no matter of surprise, therefore, to find, that courts of equity, at a very early period, adopted and acted upon this salutary doctrine, as equally well founded in equity and morality.3
29.1 Double insurance describes circumstances in which two or more insurers, by independent indemnity insurance contracts, insure the same person against the same risk of loss.4 There can be double insurance even if: one or more of the contracts is by way of interim insurance;5 the person is not a party to each contract, as long as they are a party to, or a person intended to benefit by, each contract;6 the contracts do not cover the same range of risks.7 For example, there will be double insurance when a person has an item of jewellery stolen and they are insured for theft of that item by one insurer under a home and contents policy and by another insurer under a personal valuables policy. The difference in the range of risks might affect the amount of contribution ordered, but not the fact of double insurance.
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29.2 The leading Australian case on double insurance is Albion Insurance Co Ltd v Government Insurance Office (NSW).8 In that case, Albion insured AV Bence Pty Ltd under an employers’ indemnity policy and GIO insured Bence against its liability as owner of a motor vehicle to a person injured by the use of the vehicle. Albion obtained contribution from GIO after indemnifying Bence against a judgment obtained by its employee for damages for personal injuries caused by Bence’s negligence. The High Court rejected GlO’s defences that double insurance did not exist because of the significant differences between:
■the subject matter of the two policies;9 and [page 533]
■the
respective rights and liabilities of the parties under the two policies.
29.3 It is lawful for an insured to take out more than one indemnity insurance contract for the same risk of loss, but between them, the insurers will not be liable to pay more than the loss suffered by the insured.10 Accordingly, double insurance usually only occurs as a result of: an insured buying an indemnity insurance contract: ■ without remembering or appreciating that they are insured for the same risk of loss under an existing contract; ■ to replace an existing contract and then forgetting to cancel the existing contract; ■ to cover risks of loss not covered by an existing contract, and some of the risks covered by the new contract overlapping with the cover provided by the existing contract; or someone other than the insured buying an indemnity insurance contract in order to discharge a contractual obligation that person has to a third party, and the ‘new’ contract insuring risks of losses covered by an existing indemnity insurance contract held by or for the benefit of the insured.
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29.4 Whether double insurance exists is determined at the time of the event that gives rise to each insurer’s liability to indemnify the insured, unless that ‘would subvert rather than promote the underlying rationale and purpose of the contribution principle’.11 Generally speaking, it is not determined at any later time when one of the insurers might be able to point to a post-contractual act or omission of the insured that might enable them to avoid or reduce their liability to the insured. 29.5
There is only double insurance if the parties share ‘co-ordinate
liabilities or a common obligation to make good the one loss, where the liabilities [are] of the same nature and to the same extent’.12 Subject to the effect of the decision in Stratti v Stratti13 and in light of the observations of the High Court in HIH Claims Support v Insurance Australia Ltd,14 the law in Australia and the United Kingdom appears to be that in ordinary circumstances (not invariably), there is no double insurance as between an indemnity insurer and a non-insurer where the [page 534] latter has agreed to indemnify the insured in respect of the same losses covered by the insurance contract, because their respective liabilities are not of the same nature. The non-insurer’s liability to indemnify is a primary obligation and the insurer’s liability to indemnify is a secondary, not a co-ordinate obligation.15 Lord Hoffmann put it this way in Caledonia North Sea Ltd v London Bridge Engineering Ltd:16 It is certainly a general principle … that a person who has more than one claim to indemnity is not entitled to be paid more than once. But there are different ways of giving effect to this principle. One is to say that the person who has paid is entitled to be subrogated to the rights against the other person liable. The other is to say that one payment discharges the liability. The authorities show that the law ordinarily adopts the first solution when the liability of the person who paid is secondary to the liability of the other party liable. It adopts the second solution when the liability of the party who paid was primary or the liabilities are equal and co-ordinate.
In the same case, Lord Mackay of Clashfern said (at [62]): … generally liabilities incurred in tort or delict, or in contract will be primary while the liability of the indemnity insurer of the injured party will be secondary.
29.6 The absence of ‘double insurance’ between an indemnity insurer and a non-insurer contractual indemnifier appears to rest on the premise that payment under an insurance contract does not relieve a third party from its liability to compensate the insured for its loss in contract, tort or by statute.17 That is, unless the claim is against an insurer under an insurance contract, in which case the insurer has a claim for contribution against the other insurer, not a right of
subrogation.18 In other words, a non-insurer indemnifier’s liability to indemnify an insured is not discharged by an insurer’s indemnification of the insured. As they are both indemnifiers, this can only be on the basis that everyone knows, and always have known, that non-insurer contractual indemnifiers have a primary liability to the indemnitee/insured because they are not insurers, and that insurers have a secondary liability to the indemnitee/insured because they are insurers. It may always have been known to insurers and their advisors, but it can hardly be said that it was always known, and is known by noninsurer contractual indemnifiers or insureds. [page 535] It is submitted that the liabilities of non-insurer indemnifiers and insurers are co-ordinate and if insurers want their liability to be secondary, they should ensure that express words to that effect appear in their insurance contracts. For further discussion on this issue, see 27.18–27.20.
‘OTHER INSURANCE’ CLAUSES 29.7 The purpose of an ‘other insurance’ clause is to exclude or limit an insurer’s liability to an insured if there is double insurance. If not for the clause, the insurer would be obliged to indemnify its insured in full and then seek contribution from the other insurer on double insurance principles. Depending on the language used, such a clause may exclude cover altogether or reduce the level of cover, both without reducing or returning any of the premium paid for it. There are three main types of ‘other insurance’ clause.19 There are those which: exclude cover for a loss if the insured is covered under another contract for the same risk of loss. This type of clause prevents an insured from claiming under the contract unless the other insurer
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has a similar ‘other insurance’ clause, in which case the clauses cancel each other out;20 limit liability to a rateable proportion of the loss if the insured is covered under another contract for the same risk of loss. If both contracts contain this type of clause, the insured must claim under both contracts to recover the full amount of their loss. The insured will have a problem if one of the insurers is insolvent; and limit liability to the amount by which the loss exceeds the amount recovered or recoverable under another insurance contract. Again, the insured may have a problem if one of the insurers is insolvent. These ‘other insurance’ exclusions or limitations on cover are effected by a contractual term that:21 requires the insured to: ■ disclose to the insurer when they enter into the insurance contract whether they are covered under another contract for the same risk of loss; or ■ immediately give written notice to the insurer if they obtain cover under another contract for the same risk of loss during the period of the contract; or
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[page 536]
■excludes or limits liability if the insured is covered under another contract for the same risk of loss.
29.8 Section 45 of the Insurance Contracts Act 1984 (Cth) (ICA) is in the following terms: (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. (2) Subsection (1) does not apply in relation to a contract that provides insurance cover in respect of some or all of so much of a loss as is not covered by a contract of insurance that is specified in the first mentioned contract.
Section 45 renders an ‘other insurance’ clause void: except to the extent it limits or excludes liability by reason that the insured has entered into a compulsory insurance contract, for example a compulsory workers’ compensation or compulsory motor vehicle third party personal injury insurance contract: s 45(1); unless it is contained in a true excess policy. For example, an insured might have a liability policy with a limit of liability of $1.5 million and a second liability policy with a limit of liability of $5 million over and above (in excess of) the first liability policy limit of liability of $1.5 million. For the purpose of s 45(2), the second liability policy would be regarded as a ‘true excess’ policy, as long as it specified the first liability policy, in other words, that it identifies the ‘other’ contract by detailed description or by reference to it having been issued by a particular insurer: s 45(2).22
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29.9 In HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd,23 s 45 rendered an ‘other insurance’ clause void because the insurer was not able to prove that its policy specified the other contract. In that case, Pluim Constructions Pty Ltd was doing building work at the premises of the Mingara Recreation Club. Pursuant to the building contract, the Club arranged liability insurance with Commercial Union Assurance Company of Australia Ltd in favour of the Club and Pluim. HIH also insured Pluim against public liability risks. Condition 7 of the HIH policy (entitled ‘Principal-arranged Insurance’) provided that if a Principal agreed to arrange insurance to indemnify Pluim ‘for any liability arising out of the performance of the Works’, HIH would only indemnify Pluim ‘for such liability not covered by the policy of insurance provided by the Principal’. Glass shards lodged in the knee of Mr Knight (not a [page 537] Pluim employee) whilst he was assisting Pluim to remove debris from
the site. The court held Pluim liable to Mr Knight for not ensuring that glass was separated from the debris. HIH denied liability to indemnify Pluim on the basis that it was insured under the Commercial Union policy and therefore Condition 7 applied to exclude HIH’s liability to indemnify. Mason P said (at [44], [45] and [48]) that whatever the scope of s 45(2) of the ICA, the phrase ‘the policy of insurance provided by the Principal’ in Condition 7 was not sufficient to specify a policy such as the Commercial Union policy for the purpose of s 45(2) because: the HIH policy was not ‘a type of layered insurance or excess insurance’; the building contract described the type of insurance to be taken out by the Club ‘in terms of the broadest generality and with no reference to conditions or exclusions’; Condition 7 did not identify ‘any particular policy with any particular insurer’; the fact that the insurance would be ‘principal-arranged’ emphasised ‘its futurity, contingency and lack of relevant specificity’; and Condition 7 referred to any policy of insurance. This is the antithesis of ‘a specified contract’ within s 45(2). Mason P did not comment on whether a policy described as ‘X’s standard Construction Policy with an excess of Y’ would be ‘specified’ for the purposes of s 45(2).
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29.10 Section 45(1) only voids a provision in an insurance contract if the insured is a party to that contract and becomes a party to another insurance contract. A provision in an insurance contract will not be void if the insured is expressly intended to benefit under either contract, for example, by the operation of s 48 of the ICA. This is because the word ‘insured’ in the section is followed by the phrase ‘has entered into some other contract of insurance’.24 The phrase ‘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’ refers to the intended effect of the
‘other insurance clause’ at the time the contract that contains it is made, should the insured enter ‘into some other contract of insurance’. It does not refer to the effect of the other insurance clause having regard to the terms of another insurance contract actually entered into by an insured.25 [page 538] 29.11 The word ‘provision’ in s 45(1) refers to a clause or proviso in an insurance contract that provides for ‘some particular matter’. A term of an insurance contract may contain a number of provisions. In a term with several provisions, where one offends against s 45(1) and the others do not, only the offending provision will be rendered void, unless the other provisions are so intertwined with the offending provision that the entire term is rendered void. It is a question of construction of the term; the issue of severance does not arise.26 Section 76 of the ICA prevents an insurer from relying on an ‘other insurance’ clause for the purpose of resisting an insured’s claim. The section does not affect an insurer’s right to contribution from another insurer on double insurance principles.
THE EQUITABLE RIGHT TO CONTRIBUTION 29.12 If there is double insurance and a shared loss eventuates, fairness demands that the insurer who has paid, or is about to be required to pay,27 the loss, has a right to contribution from another insurer who insured the same person against the same risk of loss under another indemnity insurance contract.28 The right to contribution: is based on the equitable doctrine of equality, not contract, express or implied;29
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■ depends on matters of substance, not form.30 29.13 Contribution ‘is an adjustment of the equities between the two parties who were equally liable to indemnify the insured’.31 It rests: upon a fundamental, intuitive principle of natural justice, common to law and equity, that equal exposure to coordinate liabilities demands equal contribution.32
In Royal Brompton Hospital NHS Trust v Hammond,33 Lord Bingham of Cornwall said (at [2]) that the right to contribution: … first developed to cover parties to a common maritime adventure … extended to cover co-sureties, co-trustees, co-contractors, partners, co-insurers, co-mortgagors, codirectors and co-owners.
[page 539] 29.14 If not for the right to contribution, the second insurer would be unjustly advantaged by the first insurer’s payment because: it is usually a matter of accident or chance that an insured asks the first rather than the second insurer for payment; and the payment wholly or partly discharges the second insurer’s liability to pay the loss under its own contract.34 The payment discharges the second insurer’s liability because under an indemnity policy, an insured can never recover more than is required to indemnify the insured for their loss.35
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29.15 In HIH Claims Support Ltd v Insurance Australia Ltd,36 Hollingworth J described (at [88]) the way in which the right to contribution worked in the following terms: With a claim to contribution, as is the position generally with the intervention of equity to apply its doctrines or to afford its remedies, the plaintiff must show the presence of ‘an equity’ founding the case for that intervention. The ‘natural justice’ in the provision of the remedy for contribution is the concern that the common exposure of the obligors to the obligee and the equality of burden should not be disturbed or defeated by the accident or chance that the obligee has selected or may select one or some rather than all for recovery. So, equity does not interfere with the action of the obligee, but seeks to ensure the sharing of the burden between those subjected to it (citations omitted).
29.16
In a case of double insurance, a paying insurer claims
contribution in its own name from another insurer.37 It cannot subrogate itself to its insured’s rights under another indemnity insurance contract. Although subrogation is a right an insurer has to diminish its loss by exercising an insured’s rights against third parties, that right cannot be exercised against other insurers.38
An extension of the right to contribution 29.17 The right to contribution typically arises out of an insured choosing to seek indemnity from one insurer rather than another. It also arises in the following circumstances: Insurer A insures C and D under a liability insurance policy; Insurer B insures D under a liability insurance policy; C and D are liable for a third party claimant’s loss;
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[page 540]
■the third party chooses to seek compensation from C rather than
D; and Insurer A pays the third party on behalf of C, leaving it ‘with the whole burden’ of the loss, unless it can claim contribution from Insurer B as if it had paid the third party on behalf of D.39 This is what happened in AMP Workers Compensation Services (NSW) Ltd v QBE Insurance Ltd,40 in which Mr Mitchell obtained a consent judgment against his fellow employee Mr Graupner for damages for injuries caused by Mr Graupner’s negligent driving of a truck during the course of his employment. QBE insured Mr Graupner and his employer Mudgee Refrigerated Transport Pty Ltd under a liability insurance policy issued to Mudgee as the truck’s owner. AMP insured Mudgee for its common law liability to its workers. QBE satisfied the judgment against Mr Graupner by paying Mr Mitchell. It then successfully sued AMP for contribution on the basis of double insurance principles despite: Mr Mitchell not obtaining judgment against Mudgee (which was
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vicariously liable for Mr Graupner’s negligence); AMP not insuring Mr Graupner for his liability to Mr Mitchell; Mudgee’s right to indemnity from QBE and AMP never accruing (because its liability to Mr Mitchell did not crystallise in a judgment or settlement); and statute providing that Mudgee was not liable to indemnify Mr Graupner against his liability to Mr Mitchell (because Mr Graupner was insured by QBE against his liability to Mr Mitchell) (see Handley JA at [10]–[11]). The Court of Appeal of New South Wales reached the result because at the time for determining the existence of double insurance (the date of Mr Mitchell’s accident): Mudgee was insured by QBE and AMP for any liability it had to Mr Mitchell arising out of Mr Graupner’s negligence; and a right of contribution would arise if: ■ Mr Mitchell chose to claim against Mudgee as well as or instead of Mr Graupner; and ■ either QBE or AMP, on behalf of their common insured (Mudgee), paid more than its fair share to Mr Mitchell.
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[page 541]
Contrasting the right to contribution with the right of subrogation 29.18 The purpose of the equitable right to contribution is to prevent a double insurer gaining an unjust advantage at the expense of a paying insurer by requiring the former to contribute towards an indemnity payment by the latter. Accordingly, a contribution claim is brought in the name of one insurer against another.41 On the other hand, the primary purpose of the equitable right of subrogation is to prevent double recovery by an insured (once from its insurer and once from a third party).42 Subrogation enables an insurer
to seek to diminish its loss by exercising its insured’s recovery rights against third parties (other than insurers).43 Accordingly, an insurer brings a subrogated claim in the name of its insured against a third party.
PROVING THE RIGHT TO CONTRIBUTION AND DETERMINING THE AMOUNT TO BE USED FOR THE CONTRIBUTION CALCULATION 29.19 There are three steps in a paying insurer obtaining a contribution from another insurer. First, a paying insurer must establish a right to contribution. Second, the amount to be used for the contribution calculation must be determined. Third, there is the calculation of the contribution amount. This last step is described at 29.23–29.27. 29.20 To establish a right to contribution, a paying insurer must prove: the circumstances and amount of its insured’s loss; the terms of its and another insurer’s respective insurance contracts with the insured; that both insurance contracts respond to the loss; and the extent to which it has paid, or is about to be required to pay,44 for the loss, and the extent to which the other insurer has not paid for the loss.45 The fact of payment in terms of indemnity under the policy is more important than the way the paying insurer and the insured characterised the payment. In particular, for the purpose of contribution, it does not
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[page 542]
matter that the payment was made ‘voluntarily without a contest’, ‘without an admission of liability’ or as a ‘limited recourse loan’. 46 If an insurer establishes a right to contribution, the amount to be used for the contribution calculation is the lesser of the amount: of the insured’s loss; and the paying insurer paid for the loss.
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29.21 Determining whether an insurer has a right to contribution, and if so the amount to be used for the contribution calculation, is straightforward in the case of first party insurance. How straightforward it is with liability (third party) insurance depends on how the insured’s loss (its liability to a third party claimant) has crystallised. If an insured’s liability to a third party has crystallised in a judgment or arbitration award on the merits: 1. the insured’s loss is the amount of the judgment or award; and 2. the amount to be used for the contribution calculation is the amount in (1) or the amount paid by the insurer to satisfy the judgment or award, whichever is less. Proving an insured’s loss is not straightforward if an insured’s liability to a third party has crystallised in a settlement of the insured’s liability to the third party or in a consent or ‘flawed’ judgment or arbitration award and the insurer did not participate in, or was not involved with, the settlement, judgment or award. For the purpose of this discussion, a judgment or award is flawed if: the insured or the paying insurer did not properly defend the third party claim in a material way;47 it is by default, pending appeal,48 or liable to be set aside, for example, for fraud or collusion.49
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29.22 Of itself, a settlement or a consent or flawed judgment or award is evidence of an insured’s loss but not of its liability to the third party (assuming, as is usually the case, that the other insurer did not participate in and was not involved with, the settlement, judgment or award).50
[page 543] In these circumstances, to succeed in a claim for contribution, a liability insurer does not have to prove on a balance of probabilities that but for the settlement, judgment or award, the insured would have been held liable to the third party.51 But it must prove the extent to which the settlement, judgment or award ‘reflected a genuine assessment of the claimant’s loss’.52 A genuine assessment of the claimant’s loss will take into account: the likelihood that but for the settlement, judgment or award, the insured would have been held liable to the third party; and the quantum of the third party’s claim if it had been successful in proving liability against the insured. In effect, this requires the insurer seeking contribution to: adduce evidence to show that, but for the settlement, judgment or award, the insured would have been held liable to the third party;53 or prove on a balance of probabilities that the third party had a ‘more than negligible or speculative chance’ of proving that but for the settlement, judgment or award, the insured would have been held liable to the third party;54 The amount to be used for the contribution calculation is the lesser of the amount: which reflects a genuine assessment of the claimant’s loss; and the paying insurer paid for the loss.
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THE CONTRIBUTION CALCULATION The three main methods 29.23 If an insurer has established a right to contribution and proved the amount to be used for the contribution calculation, the next question is how the amount of contribution should be calculated.
The amount of the contribution depends on the number of different sets of insurers, not the number of insurance contracts. So, for example, if Insurer A covers the risk of loss under two contracts and Insurer B [page 544] covers the risk of loss under one contract, the insured’s loss will be divided between the two insurers, not between the three contracts.55 29.24 The three main methods for calculating contribution are: 1. The maximum potential liability method. In this case, each insurer’s contribution is the proportion that its maximum potential liability bears to the aggregate of maximum potential liabilities under all relevant policies.56 This may be an appropriate method ‘in a case where the amount of the cover bears some direct relationship to the amount of the loss, such as where each policy relates solely to the loss in question’.57 2. The independent actual liability method. In this case, each insurer’s contribution is the proportion that its independent liability bears to the total of the independent liabilities under all relevant policies.58 In Australia this method of apportionment is usually applied in cases of property insurance and liability insurance.59 3. The equal actual liabilities method. In this case, the loss is shared equally between the insurers until it reaches the amount insured by the contract with the lower policy limit. As contribution is an equitable right, the imperative is to calculate contribution in a way that is fair and just to the parties in the particular circumstances. Usually, that will be by one of the above methods, but that is not necessarily so.
Applying the three main methods: first party loss that is less than one policy limit and more than
the other policy limit 29.25 For example, Insurer A pays for its insured’s $2 million loss. The loss is covered by policies issued by Insurer A (sum insured $4 million) and Insurer B (sum insured $1 million). Applying the maximum potential liability method, the relevant apportionment is as follows:
[page 545] Applying the independent actual liability method, the relevant apportionment is as follows:
Applying the equal actual liabilities method, the relevant apportionment is as follows: Insurer A pays $1.5 million, paying $0.5 million in sharing the loss equally with Policy A until the loss reaches the Policy B sum insured, then the $1 million balance of the loss. Insurer B pays $0.5 million, sharing the loss equally with Policy A until the loss reaches the Policy B sum insured.
Applying the three main methods: first party loss
that is equal to or more than both policy limits 29.26 For example, Insurer A pays for its insured’s $4 million loss. The loss is covered by policies issued by Insurer A (sum insured $4 million) and Insurer B (sum insured $1 million). Applying the maximum potential liability method and the independent actual liability method, the relevant apportionment is as follows:
Applying the equal actual liabilities method, the relevant apportionment is as follows: Insurer A pays $3.5 million, paying $0.5 million in sharing the loss equally with Policy A until the loss reaches the Policy B sum insured, then the $3 million balance of the loss. Insurer B pays $0.5 million, sharing the loss equally with Policy A until the loss reaches the Policy B sum insured.
Drayton v Martin 29.27 Drayton v Martin60 is an example of the application of the different methods for calculating contribution. In that case, Mr Martin, an investment advisor and accountant, held a professional indemnity policy [page 546] in respect of his accounting practice (FAI General Insurance Company Ltd) and a separate Accountant’s Professional Indemnity Policy to cover him in respect of a liability arising from his investment advice practice.
Mr Martin recommended to the Draytons to enter a cash flow program which involved taking out endowment policies issued by National Mutual. The Draytons suffered a loss as a result of taking out the endowment policies. FAI indemnified Mr Martin and then claimed a contribution on the basis of double insurance from the accounting insurers. The court held that Mr Martin breached his duty of care to the Draytons by inadequately explaining the cash flow plan and failing to warn them of risks that he knew or ought to have known. Martin’s advice to invest in the cash flow plans was inextricably interwoven with his role as their accountant and his business or profession as an investment advisor. In the circumstances, both policies responded to his liability to the Draytons. Sackville J (at [133]) applied the independent actual liability test in preference to the maximum potential liabilities test because: both policies covered a wide range of risks; and the premium for each policy was relatively modest ($296.50 for the professional indemnity policy and $448.95 for the accountant’s policy).
■ ■
1. 2. 3. 4. 5. 6. 7. 8. 9.
Friend v Brooker [2009] HCA 21; (2009) 239 CLR 129 at [39] (French CJ, Gummow, Hayne and Bell JJ). Albion Insurance Co Ltd v Government Insurance Office (NSW) [1969] HCA 55; (1969) 121 CLR 342 at [4] (Barwick CJ, McTiernan and Menzies JJ). Joseph Story, Commentaries on Equity Jurisprudence, 3rd ed, Sweet & Maxwell, London, 1920, §493. Albion Insurance Co Ltd v Government Insurance Office (NSW) (see fn 2) at [4] (Barwick CJ, McTiernan and Menzies JJ). GRE Insurance Ltd v QBE Insurance Ltd [1985] VR 83; (1985) 3 ANZ Ins Cas 60-622. Esanda Finance Corp Ltd v Colonial Mutual General Insurance Co Ltd [1993] VicSC 576; (1993) 217 ALR 180 at 189–190 (Hayne J). Albion Insurance Co Ltd v Government Insurance Office (NSW) (see fn 2) at [4] (Barwick CJ, McTiernan and Menzies JJ). See fn 2. Although the policies covered the same risk (the risk that the insured might incur a liability to a third party), one of the policies was concerned with the insured’s liability as an employer and the other the insured’s liability as a vehicle owner.
10. Albion Insurance Co Ltd v Government Insurance Office (NSW) (see fn 2) at [4] (Barwick CJ, McTiernan and Menzies JJ). 11. QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd [2009] VSCA 124 at [69]–[70]; AMP Workers’ Compensation Services (NSW) Pty Ltd v QBE Insurance Ltd [2001] NSWCA 267; (2001) 53 NSWLR 35; 11 ANZ Ins Cas 61-502 at [17] (Handley JA). 12. Friend v Brooker (see fn 1) at [40] (French CJ, Gummow, Hayne and Bell JJ). 13. [2000] NSWCA 358; (2000) 50 NSWLR 324, as to which see Chapter 27 and in particular, Lambert Leasing Inc v QBE Insurance Ltd [2015] NSWSC 750 at [215] (Rein J). 14. [2011] HCA 31; (2011) 244 CLR 72 at [40]–[41], on appeal from HIH Claims Support Ltd v Insurance Australia Ltd [2010] VSCA 255. 15. Speno Rail Maintenance Australia Pty Ltd v Hamersley Iron Pty Ltd [2000] WASCA 408; (2000) 23 WAR 291; 11 ANZ Ins Cas 61-485 at [166]–[167] (Wheeler J). 16. [2002] UHKL 4; 1 Lloyd’s Rep 553 at [92]. 17. Caledonia North Sea Ltd v London Bridge Engineering Ltd [2002] UHKL 4; 1 Lloyd’s Rep 553 at [89] (Lord Hoffmann). 18. Sydney Turf Club v Crowley [1972] HCA 25; (1972) 126 CLR 420; Dawson v Bankers and Traders Insurance Co Ltd [1957] VR 491 at 503 (Sholl J). 19. Australian Law Reform Commission, Insurance Contracts, Report 20, December 1982, [281]. 20. Lambert Leasing Inc v QBE Insurance (Australia) Ltd [2016] NSWCA 254 at [176]–[178] (Payne JA); Sobrany v UAB Transtira [2016] EWCA Civ 28 at [43] (Christopher Clarke LJ). 21. Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd [2009] HCA 50; (2009) 240 CRL 391 at [13] (French CJ, Gummow and Crennan JJ). 22. HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd [2000] NSWCA 281; (2000) 11 ANZ Ins Cas 61-477 at [44], [45] and [48] (Mason P). 23. See fn 22. 24. Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (see fn 21) at [26] (French CJ, Gummow and Crennan JJ); Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd [2009] WASCA 31 at [3] (Martin CJ); Lambert Leasing Inc v QBE Insurance (Australia) Ltd (see fn 20) at [131] (Payne JA). 25. Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (see fn 24). 26. Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (see fn 21) at [29]–[31] (French CJ, Gummow and Crennan JJ), [42] (Hayne and Heydon JJ). 27. Belan v Casey [2003] NSWSC 159; (2003) 57 NSWLR 670 at [68] (Campbell J); Mahoney v McManus [1981] HCA 54; (1981) CLR 370 at [14] (Gibbs CJ). 28. Burke v LFOT Pty Ltd [2002] HCA 17; (2002) 209 CLR 282 at [41] (McHugh J). 29. Burke v LFOT Pty Ltd (see fn 28) at [22] (Gaudron ACJ and Hayne J), [38] (McHugh J). 30. Burke v LFOT Pty Ltd (see fn 28) at [40] (McHugh J). 31. Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (see fn
32. 33. 34. 35. 36. 37. 38. 39.
40. 41. 42. 43. 44. 45. 46.
47. 48.
49.
50. 51.
52. 53. 54.
24) at [217] (Beech JA]. AMP Bank Ltd v Brown and Kavanagh [2017] NSWC 313 at [38] (Kunc J). [2002] UKHL 14; 1 All ER (Comm) 897. Friend v Brooker (see fn 1) at [38] (French CJ, Gummow, Hayne and Bell JJ); Burke v LFOT Pty Ltd (see fn 28) at [38] (McHugh J). Albion Insurance Co Ltd v Government Insurance Office (NSW) (see fn 2) at [4] (Barwick CJ, McTiernan and Menzies JJ). [2009] VSC 434; (2009) 15 ANZ Insurance Cases 61-824. Sydney Turf Club v Crowley (see fn 18). Dawson v Bankers and Traders Insurance Co Ltd (see fn 18) at 503 (Sholl J). Mercantile Mutual Insurance (Australia) Ltd v QBE Workers Compensation (NSW) Ltd [2004] NSWCA 409; (2004) 61 NSWLR 655 at [11] (Handley JA); Zurich Australian Insurance Ltd v GIO General Ltd [2011] NSWCA 47 at [45] (Giles JA). See fn 11. Sydney Turf Club v Crowley (see fn 18). Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (see fn 24) at [201] (Beech JA). Dawson v Bankers and Traders Insurance Co Ltd (see fn 18). See fn 27. Drayton v Martin [1996] FCA 1504; (1996) 9 ANZ Ins Cas 61-322 at [39] (Sackville J); QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd (see fn 11) at [69]–[70]. Lambert Leasing Inc v QBE Insurance (Australia) Ltd (see fn 20) at [211]–[215] and [222] (Payne JA); Sudesh Sharma v Insurance Australia Ltd t/as NRMA Insurance [2017] NSWCA 55 at [109]–[110]. Skandia International Corp v NRG Victory Reinsurance Ltd [1998] EWCA Civ 467 (Potter LJ). Lumbermens Mutual Casualty Company v Bovis Lend Lease Ltd [2005] 1 Lloyd’s Rep 494 at [43] (Coleman J); Skandia International Corp v NRG Victory Reinsurance Ltd (see fn 47) (Potter LJ). Cheltenham & Gloucester Plc v Royal & Sun Alliance Insurance Co Plc [2000] ScotCS 254 at [9] (Lord Carloway); Skandia International Corp v NRG Victory Reinsurance Ltd (see fn 47) (Potter LJ). Drayton v Martin (see fn 45) at [45] (Sackville J). Zurich Australian Insurance Ltd v GIO General Ltd (see fn 39) at [57] (Giles JA), but see QBE Insurance (Australia) Ltd v CGU Workers Compensation (NSW) Ltd [2012] NSWSC 377 at [36]–[37] (Beech-Jones J). Drayton v Martin (see fn 45) at [45] (Sackville J); Zurich Australian Insurance Ltd v GIO General Ltd (see fn 39) at [57] (Giles JA). Drayton v Martin (see fn 45) at [45] (Sackville J); Zurich Australian Insurance Ltd v GIO General Ltd (see fn 39) at [57] (Giles JA). By analogy with the ‘loss of a chance’ cases: see Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at [39] (Mason CJ, Dawson, Toohey and Gaudron JJ).
55. John v Rawlings (1984) 36 SASR 182; 3 ANZ Ins Cas 60-623; Mercer v Petroleum Drilling Services (Australia) Pty Ltd (1985) 39 SASR 277; 3 ANZ Ins Cas 60-623. 56. Drayton v Martin (see fn 45) at [130] (Sackville J); Commercial Union Assurance Co Limited v Hayden [1977] QB 804. 57. Government Insurance Office of NSW v Crowley [1975] 2 NSWLR 78 at 84 (Helsham J). 58. Drayton v Martin (see fn 45) at [131] (Sackville J). 59. John v Rawling (1984) 36 SASR 182; 3 ANZ Ins Cas 60-623; GRE Insurance Ltd v QBE Insurance Ltd (see fn 5); Government Insurance Office (NSW) v Crowley (see fn 57) at 84 (Helsham J). 60. See fn 45 at [130]–[135] (Sackville J).
INDEX References are to paragraph numbers
A Abuse of process …. 21.24–21.25 Accident insurance see Sickness and accident insurance meaning of …. 18.20 Agents see Insurance intermediaries Aggregation clauses ‘aggregate limit of liability’, distinguished …. 18.8 Australian cases …. 24.3, 24.8–24.11 English cases …. 24.4–24.7 generally …. 24.1–24.2 ‘occurrence’, meaning of …. 24.2, 24.6–24.9 ‘series’, meaning of …. 24.1–24.2, 24.4 unity assessment …. 24.2, 24.6 Agreed value insurance contract …. 17.16–17.17 Ambiguity …. 12.1, 13.24–13.27 Assignment first party insurance …. 9.31–9.32 generally …. 9.25–9.35 liability insurance …. 9.33 subrogation, and …. 27.13
Australian Financial Services Licence (AFSL) …. 4.18, 5.51, 5.61–5.63 Australian Privacy Principles (APPs) …. 4.27–4.28 Australian Prudential Regulation Authority (APRA) …. 4.2, 4.7–4.11 Australian Securities and Investments Commission (ASIC) …. 4.2 Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) …. 4.23, 5.44–5.46, 6.12 Avoidance of contract consideration, and …. 9.17–9.18 pre-contractual disclosure, and …. 8.26–8.29 utmost good faith, and …. 7.11, 7.15, 7.17, 7.18, 7.21–7.22, 7.47, 8.27
B Bankruptcy …. 25.47–25.48 ‘Basis of contract’ clauses …. 12.16–12.17 Brokers see Insurance intermediaries
C Cancellation of contract consideration, and …. 9.18 generally …. 11.16–11.18 misrepresentation or non-disclosure, and …. 8.67 statutory renewal, and …. 11.12 Causation causal phrases …. 19.51 context of inquiry …. 15.1–15.7 duty of care, breach of …. 5.31 generally …. 15.1
mitigation …. 16.5–16.11 proximate cause …. 15.8–15.19 cases …. 15.10–15.14 competing causes …. 15.15–15.19 deliberate cause …. 15.21, 19.30–19.31, 23.24 generally …. 15.8–15.9 intervening cause …. 15.20, 16.37–16.38 public liability insurance …. 18.10–18.12 sickness and accident insurance …. 17.44–17.46 Caveat emptor (buyer beware) …. 7.14, 8.3 Certificate of Insurance …. 9.12 Civil litigation client legal privilege …. 26.11–26.30 generally …. 26.11–26.14 investigator’s report, for …. 26.20–26.22 joint or common interest …. 26.15 third party, against …. 26.18 waiver of …. 26.16–26.22, 28.28 ‘without prejudice’ privilege …. 26.23–26.30 declaration, applying for …. 26.1–26.2 expert’s report, denial of access to …. 26.31 fraudulent claims …. 23.13, 23.22–23.24 representation in court …. 26.10 third party access to contractual documents …. 26.5–26.9 third party claimant joining insurer …. 26.3–26.4 Claims assignment of proceeds …. 9.25–9.35 first party insurance …. 9.31–9.32 liability insurance …. 9.33 subrogation, and …. 27.12
causation issue see Causation delayed payment of …. 20.1–20.22 damages for …. 20.13–20.15 insurer’s obligation to pay within reasonable time …. 20.1–20.4 interest for …. 20.5–20.12 onus of proof …. 20.19–20.22 repudiation, insured’s choices upon …. 20.16–20.19 denial of …. 20.16–20.19 disablement limitation period for …. 17.60–17.61 fraudulent see Fraudulent claims indemnity, for …. 14.5–14.7 Australia, in …. 14.7 England, in …. 14.5–14.6 in debt versus for damages …. 14.8–14.16 ‘inherent’ restriction or limitation in …. 22.8–22.9, 22.10, 22.17, 22.41 ‘long tail’, potential problems with …. 2.21–2.22 meaning of …. 18.34, 18.41 non-party, by …. 9.16 number of …. 24.1–24.11 paid by mistake repayment of …. 21.20–21.21 refusal to pay see Refusal to pay claim subrogated see Subrogation, right of ‘Claims made and notified’ policy see ‘Claims made’ policy ‘Claims made’ policy ‘continuity’ clause …. 18.40 coverage after insurance period …. 18.41–18.43 during insurance period …. 18.32–18.37
‘deeming clauses’ …. 18.44–18.47 generally …. 2.21–2.23 Insurance Contracts Act, under …. 6.17, 18.48–18.52, 22.40–22.44 insuring (operative) clause …. 18.33 intimation of a claim …. 18.42 ‘known circumstances’ exclusion …. 18.38–18.39 notification of circumstances intimation of a claim …. 18.42 subsequent claim, and …. 18.61–18.62 validity of …. 18.53–18.60 ‘occurrence’ policy compared …. 2.22–2.23 retroactive date …. 2.22, 18.31, 18.36 Client legal privilege generally …. 26.11–26.14 investigator’s report, for …. 26.20–26.22 joint or common interest …. 26.15 third party, against …. 26.18 waiver of …. 26.16–26.22, 28.28 ‘without prejudice’ privilege …. 26.23–26.30 Collateral lies generally …. 23.20 leading case on …. 23.21 Competition and Consumer Act 2010 (Cth) …. 4.16, 4.23, 4.40, 4.41 Composite (several) insurance discharge of liability …. 2.38–2.39 generally …. 2.24–2.26, 2.29–2.30 post-contractual non-compliance or breach of obligation …. 2.33–2.37 pre-contractual non-disclosure and misrepresentation …. 2.32 recovery under …. 2.31
Compulsory liability insurance generally …. 18.63 motor vehicle see Motor vehicle insurance workers’ compensation …. 25.37 Conditions common aggravation of risk clause …. 19.1–19.2 ‘compliance with law’ …. 19.5–19.6 ‘duty to co-operate’ …. 19.3–19.4 left unattended …. 19.7 ‘no admission without consent’ …. 19.8–19.12 ‘prompt notification’ …. 19.13–18.15 ‘reasonable precautions’ …. 19.16–19.18 conditions precedent …. 12.24–12.26 conditions subsequent …. 12.27 generally …. 12.5–12.6, 12.23 not precedent or subsequent …. 12.29–12.31 onus of proof …. 12.28 Confidentiality …. 28.3–28.5, 28.23–28.28 see also Client legal privilege Conflict of interest …. 28.3–28.5, 28.16–28.22 Consideration …. 9.14–9.18 Contingency insurance case law …. 1.9 first party insurance …. 2.16, 2.17 generally …. 1.8–1.10, 2.8, 2.12–2.13 insurable interest …. 10.9 personal accident and sickness see Sickness and accident insurance subrogation see Subrogation, right of
‘Continuity’ clause …. 18.40 Contra proferentem rule …. 13.24–13.27 Contract of insurance see Insurance contract Contribution, right to calculation of …. 29.23–29.27 extension of …. 29.17–29.18 generally …. 29.12–29.18 proving …. 29.19–29.22 subrogation, distinguished from …. 27.17–27.20, 27.37 Corporations Act 2001 (Cth) Chapter 7 …. 4.12–4.22, 6.13 disclosure requirements …. 5.52–5.60, 8.74–8.84 ‘financial product advice’, definition of …. 4.15 ‘financial service’, concept of …. 4.14 insurance intermediaries …. 5.47–5.63 objective …. 4.12 Part 7.6 …. 4.18–4.19 Part 7.7 …. 8.77–8.78 Part 7.8 …. 4.20 Part 7.9 …. 4.22 Part 7.10 …. 4.21 ‘retail client’ and ‘wholesale client’ concepts …. 4.13, 4.16 direct benefit to third party …. 25.28–25.35, 25.49–25.51 insurable interest …. 10.10 ‘Cross-liability’ clause …. 19.52
D Damages claim for
claim in debt, distinguished …. 14.8–14.16 delayed payment of claim, for …. 20.13–20.15 measure of damages, proving …. 5.33–5.38 public liability insurance …. 18.13–18.16 third party’s liability to pay, subrogation and …. 27.34–27.40 utmost good faith, breach of …. 7.32–7.38 Debt, claim in claim for damages, distinguished …. 14.8–14.16 Deductible (excess) aggregation clauses, and …. 24.1 generally …. 19.53–19.54 ‘true excess’ policy …. 29.8 ‘Deeming clauses’ …. 18.43–18.47 Definitions …. 12.32–12.33 Disclosure lawyer’s duty of …. 28.2, 28.8, 28.23–28.28 pre-contractual see Pre-contractual disclosure ‘Discovery’ policy see ‘Claims made’ policy Double insurance contribution, right to …. 29.12–29.27 calculation of …. 29.23–29.27 extension of …. 29.17–29.18 generally …. 29.13–29.18 proving …. 29.19–29.22 subrogation, distinguished from …. 27.17–27.20, 27.40 generally …. 29.1–29.6 ‘other insurance’ clauses …. 29.7–29.11 Duty of care advise client about pre-contractual duty of disclosure, to …. 5.16–5.18
breach of …. 5.31–5.38 causation …. 5.32 measure of damages …. 5.33–5.37 mitigation …. 5.38 generally …. 5.12–5.15 insurance period, during …. 5.27–5.30 insurer’s investigator …. 5.3 leading up to around the time client enters into insurance contract …. 5.19–5.26 limited …. 5.5–5.7
E Election client legal privilege, waiver of …. 26.16–26.22, 28.28 duty of utmost good faith, and …. 21.13–21.16 elements of …. 21.4 estoppel, distinguished from …. 21.1 irrevocable …. 21.6 reservation of rights …. 21.18–21.19 rights of electing party …. 21.5 waiver …. 21.1–21.10 duty of utmost good faith …. 21.13–21.16 ‘without prejudice’ …. 21.7, 26.23–26.30 Estoppel ‘Anshun’ estoppel …. 21.23 duty of utmost good faith, and …. 21.13–21.16 election, distinguished from …. 21.1 generally …. 21.11–21.12 issue estoppel …. 21.23 res judicata (cause of action estoppel) …. 21.22
reservation of rights …. 21.18–21.19 Excess (deductible) aggregation clauses, and …. 24.1 generally …. 19.53–19.54 ‘true excess’ policy …. 29.8 Exclusion clauses common ‘advice given for a fee’ …. 19.19 ‘assumed liability’ …. 19.20–19.21 ‘compulsory insurance’ …. 19.22–19.25 ‘defective design’ …. 19.26–19.29 ‘deliberate acts’ …. 19.30–19.31 ‘dishonesty’ …. 19.34–19.35 ‘driving without a licence’ …. 19.32–19.33, 22.34 ‘efficacy’ …. 19.36–19.38 householder’s exclusion …. 19.39 ‘insured v insured’ exclusion …. 19.40 ‘mechanical breakdown’ …. 19.41 ‘professional duty’ …. 19.43–19.48 ‘property belonging to or in the insured’s custody, care or control’ …. 19.42 ‘terrorism’ …. 19.49 trading liability …. 19.50 construction of …. 13.22–13.23 generally …. 12.3–12.4 ‘known circumstances’ …. 18.38–18.39
F Factual matrix …. 13.9–13.12 Fiduciary obligations …. 5.41–5.43, 7.26, 28.2
Financial Ombudsman Service (FOS) …. 4.42–4.48, 5.64–5.66 Financial Sector (Collection of Data) Act 2001 (Cth) …. 4.26 Financial Sector (Shareholdings) Act 1998 (Cth) …. 4.24 Financial Services Guide (FSG) …. 5.52, 8.75 Fire insurance …. 3.18–3.19, 22.9, 23.25 First party insurance assignment …. 9.31–9.32 claiming benefit of another person’s contract …. 25.1–25.54 generally …. 25.1–25.4, 25.54 common law position …. 25.5–25.7 statutory provisions …. 25.8–25.51 charge over proceeds of contract …. 25.38–25.46 proceeds to be expended for ‘stranger’ …. 25.20 ‘stranger’ enabled to sue …. 25.16–25.19 contingency …. 2.17 fidelity guarantee policy …. 2.19 generally …. 2.14–2.17, 17.1 indemnity …. 2.17 see also Indemnity insurance joint and composite …. 2.24, 2.31 liability insurance, distinguished …. 2.15, 2.16 occurrence-based …. 2.19–2.20 ‘claims made’ policy compared …. 2.22–2.23 Insurance Contracts Act, under …. 22.36–21.39 ‘long tail’ risks …. 2.21–2.22 public liability insurance …. 18.20 promise to indemnify …. 14.2–14.3 property see Property insurance recovery under …. 2.31 relevant parties …. 2.16
Fraud allegations of, materiality of …. 8.23 avoiding policy for …. 9.18 insurer can plead …. 23.25 Fraudulent claims causation …. 23.24 civil litigation …. 23.13, 23.22–23.24 collateral lies see Collateral lies ‘dishonesty’ exclusion …. 19.34–19.35 generally …. 23.1–23.3 partly fraudulent …. 23.5, 23.7 procedural and evidential matters …. 23.22–23.25 remedies for common law, at …. 23.4–23.11 Insurance Contracts Act, under …. 23.12–23.19 Section 56 of the ICA …. 23.13–23.19 Fraudulent devices see Collateral lies
G Gaming insurable interest requirement …. 10.2, 10.10 introduction of …. 3.28–3.37 legislation Australian …. 3.37, 10.10 English …. 3.36, 10.2 wager, insurance distinguished from …. 1.29–1.30, 3.29 General insurance agents and brokers see Insurance intermediaries ‘claims made’ see ‘Claims made’ policy classification of …. 2.8–2.39
composite (several) …. 2.24–2.26, 2.29–2.30 discharge of liability …. 2.38–2.39 post-contractual non-compliance or breach of obligation …. 2.33–2.37 pre-contractual non-disclosure and misrepresentation …. 2.32 recovery under …. 2.31 contingency see Contingency insurance contracts see Insurance contracts essential characteristics of …. 1.3–1.23 first party see First party insurance indemnity see Indemnity insurance joint …. 2.24–2.28 breach of obligation by co-insured …. 2.33–2.37 discharge of liability …. 2.38–2.39 subrogation, right of …. 27.22 liability (third party) see Liability (third party) insurance occurrence-based …. 2.19–2.20 regulation of see Regulation General Insurance Code of Practice (Code of Practice) …. 4.31–4.41, 6.13 plain language policies …. 13.3 Good faith see Utmost good faith Guarantee insurance, distinguished from …. 1.31
H History of insurance Australia, in colonisation …. 3.46–3.47 insurance contracts, regulation of …. 3.50–3.51
insurance market, regulation of …. 3.48–3.49 Church prohibits usury …. 3.7 Code of Hammurabi …. 3.1–3.3 earliest references …. 3.9–3.12 England, in …. 3.13–3.14 fire insurance …. 3.18–3.19 gambling and insurable interest requirement …. 3.28–3.37 liability insurance …. 3.44 life insurance …. 3.26–3.27, 3.34–3.35, 3.48 Lloyd’s of London …. 3.20–3.25 Lord Mansfield, contribution of …. 3.38–3.42 loss spreading …. 3.45 marine insurance …. 3.8, 3.9, 3.32–3.33, 3.41–3.42, 3.50 personal accident insurance …. 3.43 Phoenician risk allocation arrangements …. 3.4 pre-contractual disclosure …. 8.1–8.3 risk theory, emergency of …. 3.15–3.17 Roman indemnity offers …. 3.5–3.6
I Illegality, statutory …. 9.19–9.24 Indemnity claim for, nature of …. 14.5–14.7 Australia, in …. 14.7 debt versus for damages, in …. 14.8–14.16 England, in …. 14.5–14.6 entitlement to, proving …. 18.73–18.83 generally …. 1.26, 14.1–14.4 grant of, qualification of …. 28.10 insured’s cause of action …. 14.17–14.21, 18.11–18.12
public liability insurance …. 18.4–18.8 Indemnity clause …. 1.5, 1.26 Insurance Contracts Act 1984 (Cth) …. 6.10 public liability insurance …. 18.22 Indemnity insurance first party insurance …. 2.17 generally …. 1.8, 2.9–2.11 insurable interest …. 3.28–3.37, 10.1–10.8 liability insurance …. 2.17 making good a loss …. 1.6 professional indemnity insurance …. 18.45, 18.49, 18.59, 19.43–19.44 property see Property insurance subrogation see Subrogation, right of wager, distinguished from …. 3.29 Insurable interest common law, at …. 10.1–10.9 contingency insurance …. 10.9 generally …. 1.7, 10.1 indemnity insurance …. 3.29–3.36, 10.1–10.8 statutory law, under …. 10.1–10.9 Insurance Contracts Act …. 10.10–10.11 Insurance aleatory nature of …. 1.29–1.30 certainty, and …. 3.52 civil litigation related to see Civil litigation classification of …. 1.8 discrimination against applicant …. 8.22 double see Double insurance fire …. 3.18–3.19, 22.9, 23.25 general see General insurance
history of see History of insurance insurable interest see Insurable interest life see Life insurance marine see Marine insurance nature of …. 1.1–1.2 guarantee, distinguished from …. 1.31 loss spreading see Loss spreading manufacturer’s warranty, distinguished from …. 1.32–1.34 non-essential characteristics …. 1.24–1.28 risk transfer see Risk transfer wager, distinguished from …. 1.29–1.30, 3.29 operation of …. 1.35–1.42 premium see Premium reinsurance …. 1.43 claim for indemnity …. 14.10–14.15 Insurance Acquisition and Takeovers Act 1991 (Cth) …. 4.25 Insurance Act 1973 (Cth) …. 4.3–4.6 Insurance Brokers Code of Practice 2014 …. 6.13 Insurance contract …. 1.25 avoidance remedy consideration, and …. 9.17–9.18 pre-contractual disclosure, and …. 8.26–8.29 cancellation of …. 8.67, 11.16–11.18 consideration, and …. 9.18 misrepresentation or non-disclosure, and …. 8.67 statutory renewal, and …. 11.12 characterisation of …. 12.7–12.9 ‘choice of foreign forum’ clause …. 6.8 claiming benefit of another person’s contract …. 25.1–25.54 common law position …. 25.5–25.7
generally …. 25.1–25.4, 25.54 statutory provisions …. 25.8–25.51 charge over proceeds of contract …. 25.38–25.46 non-party enabled to sue …. 25.8–25.15 proceeds required to be paid to third party …. 25.47–25.51 proceeds to be expended for ‘stranger’ …. 25.20 ‘stranger’ enabled to sue …. 25.16–25.19 third party enabled to sue directly …. 25.22–25.37 composite (several) …. 2.24–2.26, 2.29–2.30 discharge of liability …. 2.38–2.39 post-contractual non-compliance or breach of obligation …. 2.33–2.37 pre-contractual non-disclosure and misrepresentation …. 2.32 recovery under …. 2.31 construction of …. 13.1–13.27 dictionaries ‘everyday’ dictionaries …. 13.16–13.18 judicial dictionary …. 13.14–13.15 insured, approach favouring …. 13.20–13.27 contra proferentem rule …. 13.24–13.27 exclusion …. 13.22–13.23 parliamentary drafted contract …. 13.1 privately drafted contract …. 13.2–13.13 evidence of conduct …. 13.13 objective intention of parties, giving effect to …. 13.2–13.8 surrounding circumstances (factual matrix) …. 13.9–13.12 rectification …. 13.28–13.35 cooling-off period …. 4.22 description of …. 1.9 disclosure requirements see Pre-contractual disclosure documentation …. 9.12, 12.1
duration of …. 11.1–11.18 interim insurance …. 11.1–11.9 renewal and extension by agreement …. 11.10 statutory renewal …. 11.11–11.15 endorsement …. 9.10–9.11 enforceability …. 9.19–9.24 formation of …. 9.1–9.35 assignment and novation …. 9.25–9.35 first party insurance …. 9.31–9.32 liability insurance …. 9.33 subrogation, and …. 27.12 value to assignee …. 9.34–9.35 consideration …. 9.14–9.18 intention …. 9.1–9.2, 13.2–13.8 offer and acceptance …. 9.3–9.13 statutory illegality …. 9.19–9.24 good faith, in see Utmost good faith history of earliest recorded …. 3.10 regulation …. 3.50–3.51 joint …. 2.24–2.28 breach of obligation by co-insured …. 2.33–2.37 discharge of liability …. 2.38–2.39 subrogation, right of …. 27.22 life insurance …. 2.7 marine insurance …. 2.2 material terms …. 9.3 policy layout …. 12.1 definitions …. 12.32–12.33
exclusions see Exclusion clauses insuring (operative) clause …. 12.2 ‘claims made’ policy …. 18.33 public liability insurance …. 18.3–18.30 policy terms see Policy terms recitals …. 12.1 ‘prescribed contract’ …. 8.71 regulation see Insurance Contracts Act 1984 (Cth) (ICA) repudiation of …. 12.29, 20.16–20.19 subject matter of, main …. 6.14 third party access to …. 26.5–26.9 unfair terms in …. 6.12–6.14 utmost good faith, and …. 7.11, 7.15, 7.17, 7.18, 7.21–7.22, 7.47, 8.27 Insurance Contracts Act 1984 (Cth) (ICA) background …. 6.1–6.5, 22.1–22.2 cancellation of contract …. 11.17 ‘claims made’ policy …. 6.17, 18.41, 18.45–18.49 exclusions to …. 6.8–6.9 insurable interest …. 10.11 insurance classification under …. 2.1 Part IV …. 8.30–8.67 pre-contractual disclosure insured’s duty …. 8.30–8.67 insurer’s duty …. 8.68–8.73 proposed amendments to …. 6.13 provision of, construction of considerations …. 6.18–6.20 definitions in …. 6.23 interests of insurer and insured, balancing …. 6.26 judicial precedent doctrine …. 6.25, 13.14
pointers to …. 6.21–6.25 purposive approach …. 6.16–6.17 statutory code, ICA as …. 6.15 renewal of contract …. 11.11–1.15 scope of …. 6.16 Sections 8 and 9 …. 6.6–6.9 Section 10 …. 6.10 Sections 12, 13 and 14 …. 6.13, 7.28–7.50 Section 15 …. 6.11–6.1 Section 20 …. 25.15 Section 21 …. 8.32–8.47 Section 22 …. 8.48–8.52 Sections 23, 24 and 26 …. 8.53–8.57 Section 27 …. 8.58 Section 28 …. 8.59–8.64 Section 31 …. 8.65 Section 33 …. 8.66 Section 35 …. 6.13 Section 37 …. 6.13 Section 48 …. 25.10–25.14 Section 49 …. 25.16–25.17 Section 50 …. 25.18–25.19 Section 51 …. 25.22–25.27 Section 54 …. 6.8, 6.13, 6.14, 22.1–22.47 generally …. 22.1–22.3, 22.47 duty of utmost good faith, and …. 22.30 ‘omission’, meaning of …. 22.24–22.29 onus of proof …. 22.31 s 54(1) ‘claims made’ policy …. 22.40–22.44 ‘occurrence-based’ policy …. 22.36–22.39
s 54 (2), distinguished …. 22.32–22.34 s 54(2) …. 22.35 s 54(5)(b) …. 22.45–22.46 text and context …. 22.4 when s 54 is in play …. 22.19–22.31 when s 54 is not in play …. 22.5–22.18 Section 56 …. 23.13–23.19 Section 57 …. 20.5–20.12 Section 65 …. 27.26 Section 66 …. 27.25, 27.27–27.28 subrogation …. 27.25–27.28 utmost good faith …. 7.28–7.50 Insurance Contracts Amendment (Unfair Terms) Bill 2013 (Cth) …. 6.13 Insurance intermediaries broker’s knowledge, attribution of …. 5.1 disclosure requirements …. 5.52–5.60 Statement of Advice (SOA) …. 5.55–5.60, 8.77 duty of care …. 5.5–5.7 breach of …. 5.31–5.38 insurance brokers …. 5.12–5.30 insurer’s investigator …. 5.3 fiduciary obligations …. 5.41–5.43 generally …. 5.1 liability breach, proving …. 5.31 causation, proving …. 5.32 contributory negligence …. 5.39–5.40 insurance agents …. 5.4–5.10 insurance brokers …. 5.11–5.40
insurer’s agents …. 5.4, 5.8–5.10 loss adjusters and assessors …. 5.2 measure of damages, proving …. 5.33–5.37 mitigation …. 5.38 obligations …. 5.67 payments to …. 5.61–5.63 regulation Australian Financial Services License (AFSL) …. 4.19, 5.51, 5.61–5.63 Australian Securities and Investments Commission Act 2001 (Cth) …. 5.44–5.46 Corporations Act 2001 (Cth) …. 5.47–5.63 Financial Ombudsman Service …. 5.64–5.66 Insurance Brokers Code of Practice 2012 …. 5.64–5.66 Insured cause of action for indemnity, accrual of …. 14.17–14.21 claim by see Claims contract construction favouring …. 13.20–13.27 contra proferentem rule …. 13.24–13.27 exclusion …. 13.22–13.23 declaration sought and obtained by …. 26.1–26.2 disclosure requirements see Pre-contractual disclosure dispute with third party claimant re-litigation of …. 21.24–21.26 independent legal advice retained by …. 28.8, 28.17–28.20 insurable interest see Insurable interest mitigation costs paid by …. 16.29–16.30 recovery from insurer …. 16.31–16.36 Insurer bound to accept financial burden …. 1.15–1.16 disclosure requirements see Pre-contractual disclosure
dispute with third party claimant re-litigation of …. 21.27 fraud, can plead …. 23.25 lawyer retained by see Lawyer’s duties mitigation costs paid by …. 16.31–16.36 ‘notional liability’ …. 25.17 obligation to pay claim within reasonable time …. 20.1–20.4 promise to indemnify see Indemnity refusal to pay claim see Refusal to pay claim repayment of claim made by mistake …. 21.20–21.21 subrogation see Subrogation, right of Intention …. 9.1–9.2, 13.2–13.8 Interest insurable see Insurable interest late payment of claim, for …. 20.5–20.12 subrogated claim, on …. 27.31 Interim insurance …. 11.1–11.9 ‘cover note’ …. 11.2, 11.7 deprivation of cover …. 11.9 long-term insurance, replacement with …. 11.5–11.6 termination of …. 11.4 terms of …. 11.7 time period …. 11.3
J Joint insurance breach of obligation by co-insured …. 2.33–2.37 discharge of liability …. 2.38–2.39 generally …. 2.24–2.28 subrogation, right of …. 27.22
K Key Facts Sheets …. 8.66
L Law of Large Numbers …. 1.38–1.42 Lawyer’s duties confidentiality …. 28.3–28.5, 28.23–28.28 see also Client legal privilege conflict of interest …. 28.3–28.5, 28.16–28.22 disclosure …. 28.2, 28.8, 28.23–28.28 generally …. 28.1–28.5 acting for more than one client …. 28.3 common law, at …. 16.1 fiduciary relationship …. 28.2 professional conduct rules …. 28.3–28.5 independent legal advice retained by insured …. 28.8, 28.17–28.20 third party claim against insured …. 28.11–28.22 conflict of interest …. 28.16–28.22 duties to insurer and its insured …. 28.14–28.15 duty of utmost good faith, and …. 28.7–28.8, 28.13, 28.17, 28.28 free flow of information …. 28.23–28.28 informing insured as to indemnity …. 28.10 investigation of …. 28.6–28.9 limits on insurer’s ability to defend or settle claim …. 28.12–28.13 Liability (third party) insurance abuse of process …. 21.24–21.25, 21.27 assignment …. 9.33 causation …. 15.10–15.12 claiming benefit of another person’s contract …. 25.1–25.54 common law position …. 25.5–25.7 generally …. 25.1–25.4, 25.54
statutory provisions …. 25.8–25.51 charge over proceeds of contract …. 25.38–25.46 non-party enabled to sue …. 25.8–25.15 proceeds required to be paid to third party …. 25.47–25.51 proceeds to be expended for ‘stranger’ …. 25.20 ‘stranger’ enabled to sue …. 25.16–25.19 third party enabled to sue directly …. 25.22–25.37 ‘claims made’ see ‘Claims made’ policy compulsory …. 18.63 motor vehicle see Motor vehicle insurance first party insurance, distinguished …. 2.15 generally …. 2.14–2.17, 18.1–18.2 history of …. 3.44 indemnity …. 2.17 entitlement to, proving …. 18.73–18.83 insuring (operative) clause …. 12.2 ‘claims made’ policy …. 18.33 public liability insurance …. 18.3–18.30 ‘long tail’ risks …. 2.21–2.22 occurrence-based …. 2.20, 18.20 product liability insurance …. 18.31 professional indemnity insurance …. 18.45, 18.49, 18.59, 19.43–19.44 promise to indemnify …. 14.2–14.3 public liability insurance see Public (general) liability insurance relevant parties …. 2.16 Life insurance …. 2.6–2.7 history of …. 3.26–3.27, 3.34–3.35, 3.48 insurable interest …. 10.10 regulation of …. 4.3 Lloyd’s of London …. 3.20–3.25
Loss adjusters and assessors see Insurance intermediaries Loss spreading benefits of …. 1.36 essence of insurance …. 1.3–1.4, 1.18–1.23 history of …. 3.45
M Manufacturer’s warranty insurance, distinguished from …. 1.32–1.34 Marine insurance …. 2.1–2.5 causation …. 15.10 common law …. 2.3 contract …. 2.2, 2.5 first party and liability (third party) …. 2.14–2.17 history of …. 3.8, 3.9, 3.32–3.33, 3.41–3.42, 3.50 insurable interest …. 10.2 insurable property …. 2.2 maritime perils …. 2.2, 2.4 sea, common law understanding of …. 2.3 statute, under …. 2.1–2.5 Misconduct allegations of, materiality of …. 8.23 Corporations Act 2001 (Cth), under …. 4.21 Misrepresentation fraudulent …. 8.25, 8.63–8.65 pre-contractual …. 2.32 ICA Part IV, under …. 8.53–8.67 onus of proof in relation to …. 8.24 remedies …. 8.26–8.29, 8.63–8.65
Mitigation ‘causation’ issue …. 16.5–16.11 contract law, in …. 16.1 cost of absence of express clause, in …. 16.18–16.22 insured required to mitigate at own expense …. 16.29–16.30 policy silent on who is to bear costs …. 16.23–16.28 apportionment of …. 16.35–16.36 express clause requiring insurer to pay …. 16.31–16.36 generally …. 16.39–16.41 insurance law, in …. 16.2–16.4 insured loss sustained as result of anticipation of insured event …. 16.12–16.13 avoidance of imminent insured event …. 16.14–16.17 intervening cause …. 16.37–16.38 Motor vehicle insurance ‘compulsory insurance’ exclusion …. 19.22–19.25 direct benefit to third party …. 25.37 ‘driving without a licence’ exclusion …. 19.32–18.33, 22.34 generally …. 18.63–18.69 ‘inherent’ restriction or limitation …. 22.9 unroadworthy vehicle exclusion …. 18.71, 22.46 warranties and notice provisions …. 18.70–18.72 Mutual insurance scheme …. 1.21
N Negligence contributory negligence …. 5.39–5.40 liability insurance …. 2.21, 18.12 pre-contractual non-disclosure …. 8.48–8.52, 8.63–8.65
Non-disclosure fraudulent …. 8.25, 8.63–8.65 pre-contractual …. 2.32 ICA Part IV, under …. 8.59–8.67 onus of proof in relation to …. 8.24 remedies …. 8.26–8.29, 8.61–8.65 ‘Non-vitiation’ (non-invalidation) clause …. 18.11–18.12, 19.55 Novation …. 9.25–9.35 Novus actus interveniens …. 16.37–16.38
O Occurrence-based insurance aggregation clauses …. 24.2, 24.6–24.11 ‘claims made’ policy compared …. 2.22–2.23 generally …. 2.19–2.20 Insurance Contracts Act, under …. 22.36–22.39 ‘long tail’ risks …. 2.21–2.22 public liability insurance …. 18.20 Offer and acceptance …. 9.3–9.13 Onus of proof characterisation, and …. 12.9 conditions, and …. 12.28 delayed payment of claim …. 20.19–20.22 fraudulent claims …. 23.22 Insurance Contracts Act, Section 54, under …. 22.31, 22.39 non-disclosure or misrepresentation, and …. 8.24 warranties, and …. 12.18 ‘Other insurance’ clauses …. 29.7–29.11
P Personal accident policy see Sickness and accident insurance Policy terms ambiguity …. 12.1, 13.24 causal connectors …. 19.51 conditions see Conditions ‘cross-liability’ clause …. 19.52 definitions …. 12.32–12.33 excess (deductible) …. 19.53–19.54 exclusions see Exclusion clauses generally …. 12.5–12.9 intermediate or innominate terms …. 12.5 mitigation clauses …. 16.23–16.36 non-compliance with …. 12.6–12.9 ‘non-vitiation’ (non-invalidation) clause …. 19.55 ‘other insurance’ clauses …. 29.7–29.11 principals’ indemnity extension …. 19.56 repair, replace or reinstate …. 19.57 risk, terms descriptive of …. 12.6, 12.19–12.22 scope of rights, and …. 28.13 ‘waiver of subrogation’ clause …. 27.21 warranties see Warranties Pre-contractual disclosure common law, at …. 8.1–8.3 scope of …. 8.4–8.13 generally …. 8.1 insured’s duty …. 8.30–8.68 cancellation of contract …. 8.67 exceptions …. 8.43–8.44 insurance not covered by Section 21 …. 8.32–8.42
Key Facts Sheets …. 8.66 misrepresentation or non-disclosure …. 8.53–8.67 notice to the insured …. 8.48–8.52 insurer’s duty …. 8.68–8.84 common law, at …. 8.68 Corporations Act, under …. 8.75–8.84 Insurance Contracts Act, under …. 8.69–8.73 Product Disclosure Statement …. 8.79–8.84 material fact delay, and …. 8.20 determination of …. 8.14–8.18 non-disclosure of …. 8.25 physical, moral and other hazards …. 8.21–8.22 proving …. 8.19 rumours and allegations of misconduct or fraud …. 8.23 non-disclosure or misrepresentation …. 2.32, 8.53–8.67 fraudulent …. 8.25, 8.63–8.65 onus of proof in relation to …. 8.24 remedies …. 8.26–8.29, 8.61–8.66 requirements for …. 5.52–5.60 utmost good faith …. 7.13–7.15 Premium …. 1.27 forfeiture of, in case of fraud …. 9.18 insurance in the absence of …. 9.14 payment of, as acceptance …. 9.12 premium pool …. 1.19–1.22, 1.38–1.42 rate of …. 9.15 return of …. 9.18 Principals’ indemnity extension …. 19.56 Privacy Act 1988 (Cth) …. 4.27–4.30
Privity rule …. 25.5–25.8, 25.54 Product Disclosure Statement (PDS) …. 8.78–8.84 Product liability insurance …. 18.31 Product warranty insurance, distinguished from …. 1.32–1.34 Professional indemnity insurance …. 18.45, 18.49, 18.59, 19.43–19.44 Profit …. 1.28 Property insurance agreed value insurance contract …. 17.16–17.17 betterment …. 17.36 breach of obligation by co-insured …. 2.35–2.37 ‘damage’, meaning of …. 17.23–17.27 exclusions ‘deliberate acts’ …. 19.30–19.31 ‘mechanical breakdown’ exclusion …. 18.41 ‘property belonging to or in the insured’s custody, care or control’ …. 19.42 extent of cover …. 17.18–17.20 generally …. 17.1–17.9 insurer’s obligation to pay money …. 17.28–17.31 insurer’s reinstatement option …. 17.32–17.35 ‘loss of’, meaning of …. 17.21–17.22 ‘physical damage’, meaning of …. 17.23–17.27 ‘physical’ hazards …. 8.21 public liability insurance, and …. 18.19 salvage …. 17.37 sum insured …. 17.10–17.12 under insurance (co-insurance, average) …. 17.13–17.15
Proposal for Insurance document …. 9.5, 9.12 Proximate cause cases …. 15.10–15.14 competing causes …. 15.15–15.19 deliberate cause …. 15.21, 19.30–19.31, 23.24 generally …. 15.8–15.9 intervening cause …. 15.20, 16.37–16.38 Public (general) liability insurance accident, meaning of …. 18.20 compensation …. 18.16 exclusion …. 18.9 generally …. 18.1–18.2 insuring (operative) clause …. 18.3–18.30 bodily injury …. 18.17 business, in connection with …. 18.21 causation …. 18.10–18.12 damages …. 18.13–18.16 damages for breach of procurement clause …. 18.28–18.30 indemnity …. 18.4–18.8 occurrence …. 18.20 property damage …. 18.19 third party …. 18.22–18.27 product liability insurance …. 18.31
R Recitals …. 12.1 Rectification …. 13.28–13.35 Refusal to pay claim fraudulent claims see Fraudulent claims ICA, Section 54 …. 22.1–22.47
duty of utmost good faith, and …. 22.30 generally …. 22.1–22.3, 22.47 ‘omission’, meaning of …. 22.24–21.29 onus of proof …. 22.31 s 54(1) ‘claims made’ policy …. 22.40–22.44 ‘occurrence-based’ policy …. 22.36–22.39 onus of proof …. 22.39 s 54 (2), distinguished …. 22.32–22.34 s 54(2) …. 22.35 s 54(5)(b) …. 22.45–22.46 text and context …. 22.4 when s 54 is in play …. 22.19–22.22 when s 54 is not in play …. 22.5–22.18 Regulation Australian Financial Services Licence (AFSL) …. 4.19, 5.51, 5.61–5.63 Australian Prudential Regulation Authority (APRA) …. 4.2, 4.7–4.11 Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) …. 4.23, 5.44–5.46, 6.12 Competition and Consumer Act 2010 (Cth) …. 4.16, 4.23, 4.40 Corporations Act see Corporations Act 2001 (Cth) Financial Sector (Collection of Data) Act 2001 (Cth) …. 4.26 Financial Sector (Shareholdings) Act 1998 (Cth) …. 4.24 generally …. 4.1–4.2 Insurance Acquisition and Takeovers Act 1991 (Cth) …. 4.25 Insurance Act 1973 (Cth) …. 4.3–4.6 Insurance Contracts Act see Insurance Contracts Act 1984 (Cth) (ICA) Privacy Act 1988 (Cth) …. 4.27–4.30 self-regulation Financial Ombudsman Service (FOS) …. 4.42–4.48, 5.64–5.66
General Insurance Code of Practice …. 4.31–4.41 Insurance Brokers Code of Practice 2014 …. 5.64–5.66 Reinsurance …. 1.43 claim for indemnity …. 14.10–14.15 Repair, replace or reinstate clause …. 19.57 Repudiation of contract …. 12.29, 20.16–20.19 Risk terms descriptive of …. 12.6, 12.19–12.22 Risk transfer adverse affect …. 1.6–1.10 consideration for …. 9.14 essence of insurance …. 1.3–1.4 exclusion clauses …. 12.3 history of Church prohibits usury …. 3.7 Code of Hammurabi …. 3.1–3.3 Phoenician risk allocation arrangements …. 3.4 risk theory, emergency of …. 3.15–3.17 Roman indemnity offers …. 3.5–3.6 legally binding …. 1.15–1.16 payment or corresponding benefit (money’s worth) …. 1.17 primary purpose …. 1.5 uncertainty (fortuity) …. 1.11–1.14
S Schedule of Insurance …. 9.12 Self insurance scheme …. 1.21 Self-regulation Financial Ombudsman Service (FOS) …. 4.42–4.48, 5.64–5.66
General Insurance Code of Practice …. 4.31–4.41 Insurance Brokers Code of Practice 2014 …. 5.64–5.66 Sickness and accident insurance causation …. 17.44–17.46 disablement claim, limitation period for …. 17.60–17.61 employee’s rights, against trustee’s insurer …. 17.57–17.59 generally …. 17.38 history of …. 3.43 injury …. 17.40–17.41 accident, by …. 17.42–17.46 meaning of …. 17.40–17.41 insurer’s opinion, in …. 16.53–16.56 nature of …. 2.13 sickness and disease, meaning of …. 17.39 total and permanent disablement …. 17.47–17.52 State insurance …. 6.2 Statement of Advice (SOA) …. 5.55–5.60, 8.77 Subrogation, right of another insurer, against …. 27.17 co-insured, against …. 27.22 contingency insurance …. 2.12 contribution, distinguished from …. 27.17–27.20 double insurance principles …. 27.12, 27.17, 27.39 exercising …. 27.7–27.16 limitation period for …. 27.42–27.45 generally …. 27.1–27.6 insured’s employee, against …. 27.27–27.28 joint insurance …. 27.22 limitations on …. 27.21–27.28 generally …. 27.16–27.24
Insurance Contracts Act, under …. 27.25–27.28 ‘waiver of subrogation’ clause …. 27.21 negligent third parties, against …. 27.23–27.24 non-insurer indemnifier, against …. 27.18–27.20 proceeds of recovery, allocation of …. 27.29–27.34 Sections 65 and 66 of the ICA …. 27.25–27.28 third party’s liability to pay damages …. 27.35–27.41 utmost good faith, and …. 27.24 Surrounding circumstances …. 13.9–13.12 ‘Terrorism’ exclusion …. 19.49
T Third party insurance see Liability (third party) insurance
U Utmost good faith (uberrimae fides) avoidance of contract, and …. 7.11, 7.15, 7.17, 7.18, 7.21–7.22, 7.47, 8.27 breach of, remedies for …. 7.32–7.37 broadening cover …. 7.38–7.49 cessation of operation …. 7.24–7.25 civil law codes, requirement under …. 7.1, 7.5 common law, at …. 7.2–7.6, 7.50 damages, exemplary or punitive …. 7.27 election, and …. 21.13–21.16 estoppel, and …. 21.13–21.16 fiduciary obligations …. 7.26 generally …. 7.1, 7.7–7.12 Insurance Contracts Act, under …. 7.28–7.50, 22.30 insurer’s opinion …. 17.53–16.56
lawyer’s duties, and …. 28.7–28.8, 28.13, 28.17, 28.28 post-contractually …. 7.16–7.23, 7.50 innocent party’s remedy …. 7.21–7.23 performance of contract, in the …. 7.18–7.20 pre-contractually …. 7.13–7.15 see also Pre-contractual disclosure subrogation, and …. 27.24
W Wager see also Gaming insurance, distinguished from …. 1.29–1.30, 3.29 Waiver see Election Warranties affirmatory warranty …. 12.10, 12.13, 12.18 ‘basis of contract’ clauses …. 12.16–12.17 breach of …. 12.14–12.15 compliance, strict …. 12.12 compulsory liability insurance …. 18.70–18.71 generally …. 12.5, 12.10–12.13 insurance, distinguished from …. 1.32–1.34 onus of proof …. 12.18 pre-contractual disclosure, and …. 8.54 promise …. 12.11 promissory warranty …. 12.10, 12.13–12.14, 12.18, 12.21–12.22 representation …. 12.11 Workers’ compensation …. 6.8, 25.37
RELATED LEXISNEXIS TITLES Derrington & Ashton, The Law of Liability Insurance, 3rd edition, 2013 Graw et al, Understanding Business Law, 8th edition, 2016 Miller, Personal Financial Services for Lawyers, 2017 Mo, International Commercial Law, 6th edition, 2015 Sweeney, O’Reilly & Coleman, Law in Commerce, 6th edition, 2016 Traves, Commercial Law, 4th ed, 2016