Mann's annotated Insurance Contracts Act [Seventh edition, revised.] 9780455500096, 0455500096

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Mann’s Annotated Insurance Contracts Act

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Mann’s Annotated Insurance Contracts Act SEVENTH EDITION REVISED

by

PETER MANN LLB (Tas) LLM (Syd) ANZIIF (Fellow) CIP Barrister, Ground Floor Wentworth Chambers, Sydney Adjunct Lecturer, Faculty of Law, University of Sydney

and CANDACE LEWIS BA LLM (Hons) (Syd), Lawyer and Claims Consultant

LAWBOOK CO. 2016

Published in Sydney by Thomson Reuters (Professional) Australia Limited ABN 64 058 914 668 19 Harris Street, Pyrmont, NSW The Cataloguing-in-Publication entry is available from the National Library of Australia. ISBN 9780 455 50009 6 © 2016 Thomson Reuters (Professional) Australia Limited This publication is copyright. Other than for the purposes of and subject to the conditions prescribed under the Copyright Act, no part of it may in any form or by any means (electronic, mechanical, microcopying, photocopying, recording or otherwise) be reproduced, stored in a retrieval system or transmitted without prior written permission. Inquiries should be addressed to the publishers. Editorial Team: Catherine Yan (project manager), Angela Bandiera (legislation editor), Ariel Galapo (editor) Technical production: Patrick Harper Indexer: Puddingburn Product developer: Catherine Fitzgerald Cover Photograph: Peter Mann Printed by Ligare Pty Ltd, Riverwood, NSW This book has been printed on paper certified by the Programme for the Endorsement of Forest Certification (PEFC). PEFC is committed to sustainable forest management through third party forest certification of responsibly managed forests. For more info: http://www.pefc.org

To M.L.M and P.N.M

Preface It has been two years since the last edition of this book. This seventh edition is an anniversary edition. It is the 30th anniversary of the commencement of the Insurance Contracts Act 1984 (ICA) on 1 January 1986. In fact it is a double anniversary edition. 2016 is also the sestercentennial, or as some would describe it, the quarter-millennial of Lord Mansfield’s important watershed judgment in Carter v Boehm. Lord Mansfield’s 1766 judgment is the most important judgment in the genesis of the duty of utmost good faith. The comprehensive legislative amendments to the ICA by way of the Insurance Contracts Amendment Act 2013 (ICAA 2013) have now commenced. They had a staggered commencement. Some of the amendments commenced on Royal Assent on 28 June 2013. Others commenced on other dates; 28 December 2013, 28 June 2014 and 28 December 2015. The ICAA 2013 amended sections generally apply to contracts of insurance entered into or renewed or varied after the respective commencement dates. Commencement criteria vary according to the amendment and whether the amended section concerns general insurance or life insurance. For some time to come, care will have to be taken in determining whether the pre amendment “old section” or the post amendment “new section” applies to a particular contract of insurance. The ICAA 2013 has effected significant changes to the ICA in several areas. There are changes to the areas of: utmost good faith, electronic communication, the powers of ASIC, disclosure and misrepresentations, remedies under contracts of life insurance, the rights of third party beneficiaries and subrogation. It is notable, at the time of the anniversary of Carter v Boehm, that whilst the ICA 2013 amendments have taken the duty of utmost good faith under the ICA even further away from the common law duty, some of elements formulated by Lord Mansfield remain. The most significant additions since the last edition have been to the commentary on sections 13 (utmost good faith), 21 (disclosure) and 54 (remedies). Over 20 cases have been added to the commentary. Amongst them, the High Court decision of Maxwell v Highway Hauliers which was heralded in the last edition. Our general goals remain the same. This book is aimed at a wide audience and thus it is necessarily comprehensive. It incorporates a background/synopsis to the sections of the legislation, extensive references to relevant case law, a generous use of direct quotations and commentary. The book’s headings, sub-headings, cross referencing of sections, examination of the relationship between sections and the description of the level of legal authority, are all designed for ease of use. In the sections which have a great deal of commentary, paragraph numbers correspond with section and sub-section to assist in recognition. Peter Mann Sydney – June 2016

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Table of Contents Preface ..............................................................................................................

vii

Contents............................................................................................................

ix

About this Publication...................................................................................

xi

Table of Cases.................................................................................................

xiii

Table of Abbreviations...................................................................................

xxix

INSURANCE CONTRACTS ACT Part I – Preliminary .......................................................................................

11

Part IA – Administration ..............................................................................

51

Part II – The duty of the utmost good faith .............................................

61

Part III – Insurable interests ........................................................................

155

Part IV – Disclosures and misrepresentations .........................................

165

Part V – The contract ....................................................................................

303

Part VI – Claims ............................................................................................

493

Part VII – Expiration, renewal and cancellation .....................................

531

Part VIII – Subrogation ................................................................................

551

Part IX – Information, notices and reasons ..............................................

569

Part X – Miscellaneous .................................................................................

583

INSURANCE CONTRACTS REGULATIONS Part 1 – Preliminary ......................................................................................

593

Part 4 – Disclosures and misrepresentations ............................................

597

Part 5 – The contract – standard cover .....................................................

603

Part 10 – Miscellaneous ...............................................................................

625

Part 11 – Transitional arrangements...........................................................

631

Schedule 1 – Writing to inform of duty of disclosure ...........................

632

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Schedule 1A – Writing to inform persons to be insured by others .....

635

Schedule 1B – Writing to remind of duty of disclosure .......................

636

Schedule 2 – Words to inform of duty of disclosure for eligible contracts of insurance....................................................................................

637

Schedule 3 – Key facts sheets.....................................................................

638

CODES OF PRACTICE

x

General Insurance Code of Practice ...........................................................

643

Insurance Brokers Code of Practice ...........................................................

662

Index .................................................................................................................

679

Mann’s Annotated Insurance Contracts Act

ABOUT THIS PUBLICATION SCOPE OF THIS WORK Mann’s Annotated Insurance Contracts Act, 7th edition, provides insurance practitioners, banking and financial corporations, and regulators with an in-depth and practical annotated guide to the Insurance Contracts Act 1984 (Cth). The authors, Peter Mann and Candace Lewis, annotate the key Act in a clear and concise manner, illustrating the major provisions through references to the most recent case law. LEGISLATION Mann’s Annotated Insurance Contracts Act contains the following legislation fully consolidated to 1 Jul 2016: • Insurance Contracts Act 1984 • Insurance Contracts Regulations 1985 LEGISLATIVE AMENDMENTS IN THIS EDITION Mann’s Annotated Insurance Contracts Act, 7th edition, takes account of the amendments listed below. For provisions of amending legislation that have not yet commenced, see the section below headed “Future commencements”. Insurance Contracts Act 1984 Amending Acts • Insurance Contracts Amendment Act 2013 – Act 75 of 2013 • Territories Legislation Amendment Act 2016 – Act 33 of 2016 Insurance Contracts Regulations 1985 Amending Regulations • Insurance Contracts Amendment Regulation 2012 (No 2) – SLI 250 of 2012 • Insurance Contracts Amendment Regulation 2015 (No 1) – SLI 50 of 2015 HISTORY NOTES The history notes have been entered into an abbreviated form using the number and year of the amending Act or regulation and a descriptor (eg “insrt”) to show the effect of the amending Act or regulation. The abbreviations used in the historical notes are as follows: • insrt – inserted • am – amended • subst – substituted • rep – repealed • reinsrt – reinserted • renum – renumbered • reloc – relocated Example: History note under subsection 9(1A) of Insurance Contracts Act 1984 (Cth): [Subs (1A) insrt Act 75 of 2013, s 3 and Sch 1 item 9]

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This note indicates that subsection (1A) in s 9 was inserted by Act 75 of 2013, Schedule 1 item 9. S 3 is a reference to the enacting provision. Details of the short title of the amending Act or regulation, assent/gazettal/ registration and commencement dates are located in the Table of Amending Legislation following the Table of Provisions. CROSS-REFERENCES Cross-references have been integrated into this publication to indicate where where a particular provision of the Insurance Contracts Regulations 1985 (Cth) affects a section of the Insurance Contracts Act 1984 (Cth). Example: Cross-reference under section 11 of the Insurance Contracts Act 1984 (Cth). [Cross Reference: Insurance Contracts Regulations 1985: reg 2A identifies a class of contracts as consumer credit insurance for para (b) of the definition of consumer credit insurance in s 11(1).]

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TABLE OF CASES A A & D Douglas Pty Ltd v Lawyers Private Mortgages Pty Ltd (2006) 14 ANZ Ins Cas 61-709; [2006] FCA 520 ...................................................................................... 21.10.5 ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65 ........... 21.10.3, 21.10.5, 21.20.3, 21.30.1, 21.30.3, 48.10.1, 48.10.2, 48.20.2 ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374 .............................................................................................................. 14.10.9 ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) v National Mutual Life (2014) ANZ Ins Cas 61-992; [2013] VSCA 241 (27 November 2013) ... 13.40.11 AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2005) 146 FCR 447; 13 ANZ Ins Cas 61-658; [2005] FCAFC 185 ..................................................... 13.10.5, 13.40.2 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 .................. 21.10.2, 21.10.5, 21.10.6, 23.50, 28.10.1, 28.20.1, 28.20.2, 28.30.1 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1988) 12 NSWLR 250; 93 FLR 164; 5 ANZ Ins Cas 60-850 ................................ 17.20, 21.10.2, 28.10.1, 28.20.1 Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 ............. 1.40, 7.10, 21.10, 21.10.2, 21.10.7, 26.20, 28.10.1, 28.30.1, 48.30.2, 54.10.11 Agapitos v Agnew [2003] QB 556 ............................................................................ 13.10.3 Akai Pty Ltd v People’s Insurance Co Ltd (1995) 126 FLR 204; 8 ANZ Ins Cas 61-254 ............................................................................................................. 8.30, 52.30 Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418; 71 ALJR 156; 9 ANZ Ins Cas 61-347 ........................................................................... 7.10, 8.30, 52.20, 52.30 Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22 ........ 4.10, 21.10.4, 22.90, 28.10.2, 28.30.1, 54.10.10, 54.20 Allianz Australia Insurance Ltd v Douralis (2008) 217 FLR 452; 15 ANZ Ins Cas 61-763; [2008] VSCA 72 ..................................................................................... 56.10.1 Allianz Australia Insurance Ltd v Haddad (2015) 18 ANZ Ins Cas 62-072; [2015] NSWCA 186 ............................................................................................................ 58.30 Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25 ......... 54.10.2, 54.10.7, 54.20 Allianz Australia Insurance Ltd v Mercer (2014) 18 ANZ Ins Cas 62-016; [2014] TASFC 3 .................................................................................................................. 51.30 Allianz Australia Insurance Ltd v Vitale (2014) 18 ANZ Ins Cas 62-013; [2014] NSWSC 364 ............................................................................. 13.10.6, 13.20.2, 13.30.5 Anderson v AON Risk Services Australia Ltd [2004] QSC 49; 13 ANZ Insurance Cases 61-614 ............................................................................................................ 56.60 Angus v Clifford [1891] 2 Ch 449 ............................................................................ 28.20.2 Antico v CE Heath Casualty & General Insurance Ltd (1995) 8 ANZ Ins Cas 61-268 .............................................................................................. 40.26.3, 54.10.7 Antico v CE Heath Casualty & General Insurance Ltd (1996) 38 NSWLR 681; 125 FLR 270; 9 ANZ Ins Cas 61-304 ................................ 11.70, 40.26.1, 54.10.7, 54.10.8

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Antico v CE Heath Casualty & General Insurance Ltd (unreported, NSW Sup Ct, Hunter J, 17 December 1998) ............................................................................ 54.10.13 Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 ...... 33.20, 40.30, 54.10.2, 54.10.4, 54.10.5, 54.10.6, 54.10.7, 54.10.8, 54.10.9, 54.10.13, 54.10.14, 54.20, 54.60, 55.20 Aspioti v Leigh [2003] NSWSC 1224 ......................................................................... 51.15 Asteron Life Ltd v Zeiderman (2004) 59 NSWLR 585; 13 ANZ Ins Cas 90-120; [2004] NSWCA 47 ............................................................................ 46.20, 47.10, 47.20 Aussie Tax Pty Ltd v Markel Capital Ltd (2009) 15 ANZ Ins Cas 61-809; [2008] VSC 592 ......................................................................................................... 54.10.4, 54.10.15 Austcan Investments Pty Ltd v Sun Alliance Insurance Ltd (1992) 7 ANZ Ins Cas 61-116 ....................................................................................................................... 54.20 Australasian Medical Insurance Ltd v CGU Insurance Ltd (2010) 271 ALR 142; 16 ANZ Ins Cas 61-857; [2010] QCA 189 ................................................................. 45.13 Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd (1960) 2 Lloyd’s Rep 241 ................................................................................................................. 21.10.5 Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 .... 13.30.1, 14.10.2, 14.40, 22.50, 22.70, 31.40, 37.60, 54.10.11, 54.10.13, 54.25 Australian Associated Motor Insurers Ltd v To (1999) 151 FLR 384; 10 ANZ Ins Cas 61-444; [1999] VSC 287 ...................................................................................... 56.10.4 Australian Casualty & Life Ltd v Hall (1999) 151 FLR 360 .................... 21.10.5, 28.20.2 Australian Competition and Consumer Commission v IMB Group Pty Ltd (2002) 12 ANZ Ins Cas 61-545; [2002] ATPR (Digest) 46-221; [2002] FCA 402 .... 15.25, 15.40 Australian Mutual Provident Society v Lose (1997) 9 ANZ Ins Cas 61-381 ............ 26.35 Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 ......................................................................................................................... 54.10.7 Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; 5 ANZ Ins Cas 60-933 ......................................................................... 21.10.5, 21.10.7, 21.10.9, 28.30.1

B Banditt v The Queen [2005] HCA 80; 224 CLR 262 .............................................. 28.20.2 Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (“The Good Luck”) [1990] 1 QB 818 ................................................................ 12.20, 12.30.2 Banks v NRMA Insurance Ltd (unreported, NSW Sup Ct, Brownie J, 1 September 1988) ...................................................................................................................... 14.10.3 Bankstown Football Club Ltd v CIC Insurance Ltd (unreported, NSW Sup Ct, Cole J, 17 December 1993) ........................................................................ 57.10.3, 57.20, 58.30 Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1988] NLJR 287; (1988) 5 ANZ Ins Cas 60–881; [1989] 2 All ER 952 ............................. 12.20, 12.30.2 Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1991] 2 AC 249; (1990) 6 ANZ Ins Cas 60-987 ............................................................................. 12.30.2 Baradom Contracting Pty Ltd v GIO General Ltd (unreported, NSW Sup Ct, Allen J, 13 June 1996) ........................................................................................................ 14.10.7 Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170; 7 ANZ Ins Cas 61-103 ................................................... 16.30, 20.30, 48.10.1, 48.30.4, 48.30.5 Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 .................................................................................... 21.20.3, 21.30.1 Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (2006) ANZ Ins Cas 61-701; [2006] NSWSC 223 .......................................................... 13.40.2, 13.45.4 Bayswater Car Rental Pty Ltd v Hannell (1999) 29 MVR 35; 10 ANZ Ins Cas 61-437; [1999] WASCA 34 ............................................................................ 10.30, 11.70, 51.30 xiv

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Bergman v CGU Insurance Ltd [2016] VSC 81 ........................................... 23.50, 28.10.3 Berkeley v Berkeley [1946] AC 555 ............................................................................ 45.18 Beverley v Tyndall Life Insurance Co Ltd (1999) 21 WAR 327; 10 ANZ Ins Cas 61-453; [1999] WASCA 198 ................................................................................ 13.40.3 Birdsall v Motor Trades Association of Australia Superannuation Fund Pty Ltd [2015] NSWCA 104 ......................................................................................................... 13.10.4 Black King Shipping Corp v Massie (The “Litsion Pride”) [1985] 1 Lloyd’s Rep 437 ................................................................................................................. 12.30.2 Boekenstein v Tyndall Life Insurance Co Ltd [1997] NSWSC 38 .......... 29.10.6, 29.20.2, 31.20.2, 31.30.2 Boral Resources (Qld) Pty Ltd v Pyke [1992] 2 Qd R 25 ....... 66.30, 66.40, 66.50, 66.60 Brescia Furniture Pty Ltd v QBE Insurance (Aust) Ltd (2007) 14 ANZ Ins Cas 61-740; [2007] NSWSC 598 .............................................................................................. 56.10.1 Breville Appliances Pty Ltd v Ducrou (1992) 7 ANZ Ins Cas 61-125 ...... 21.40, 54.10.14 Briginshaw v Briginshaw (1938) 60 CLR 336 ............................................................ 56.60 British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86; 38 ALJR 20 ...... 49.20 Bunting v Australian Associated Motor Insurers Ltd [1994] TASSC 9 ..................... 54.20 Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187 ......................................................................................................... 13.10.6 Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228; 8 ANZ Ins Cas 61-287 ............................................... 21.10.7, 22.20, 28.20.1, 28.30.1, 31.10.3, 31.20.2 Butler v Dunn Monumental Masons Pty Ltd (1996) 5 Tas R 487 ............................... 9.40

C CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388 .......... 40.23, 40.30, 40.35, 54.10.4, 54.10.7, 54.10.15, 54.60 CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199 ............... 13.10.4, 14.10.5, 21.10.3, 48.10.1, 48.30.1, 48.30.2, 48.30.3, 48.30.4, 48.30.5, 54.10.9, 54.22, 54.70, 56.40 CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 81 ALJR 1551; 14 ANZ Ins Cas 61-739 ... 13.10.2, 13.10.5, 13.10.6, 13.10.8, 13.40.5, 13.40.12 CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; 82 ALJR 1135; 15 ANZ Ins Cas 61-768; [2008] HCA 30 .................................................................. 21.10.7, 21.10.8 CGU Workers Compensation (NSW) Ltd v Garcia (2007) 69 NSWLR 680; 14 ANZ Ins Cas 61-746; [2007] NSWCA 193 ....................................................... 12.20, 13.10.6 CHU Underwriting Agencies Pty Ltd v Wise (2012) 17 ANZ Ins Cas 61-938; [2012] WASCA 123 .......................................................................................................... 48.10.1 CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Ins Cas 61-232 .................................................................................................... 57.20, 58.30 CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 71 ALJR 312; 9 ANZ Ins Cas 61-348; [1997] HCA 2 ..................................... 1.30, 57.20, 58.30 CIC Insurance Ltd v Bankstown Football Club Ltd (No 2) (unreported, NSW Sup Ct CA, Kirby P, Priestley and Powell JJA, 7 April 1995) .......................................... 57.20 CIC Insurance Ltd v Barwon Region Water Authority (1998) 100 LGERA 136; 147 FLR 353; 10 ANZ Ins Cas 61-425; [1998] VSCA 77 .......... 12.10.1, 13.10.3, 13.10.5, 14.10.8 CIC Insurance Ltd v Midaz Pty Ltd (1998) 10 ANZ Ins Cas 61-394; [1998] QCA 21 ..................................................................................................... 21.10.5 CIC Insurance Ltd v Tancredi (1996) 9 ANZ Ins Cas 61-302 ................................ 13.10.3 ©

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Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd (2014) 18 ANZ Ins Cas 62-000; [2013] NSWSC 1975 .......... 13.10.2, 13.10.3, 13.10.5, 13.10.6, 13.40.13, 13.45.5 Cameron MacIntosh Pty Ltd v CE Heath Underwriting & Insurance (Aust) Pty Ltd (unreported, Vic Sup Ct, Ormiston J, 25 September 1991) ................................ 13.30.2 Carden v CE Heath Casualty & General Insurance Ltd (1992) 7 ANZ Ins Cas 61-147 ................................................................. 14.10.5, 21.10.3, 48.10.1, 48.30.2 Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162 ....................................... 12.30, 12.30.1 Celik v NRMA Insurance Ltd [2000] NSWSC 380 .................................... 11.110, 21.30.3 Coastal Estates Pty Ltd v Melevende [1965] VR 433 ............................................. 21.10.5 Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; (2000) 11 ANZ Ins Cas 61-458; [1999] NSWCA 422 ......................... 21.10.5, 21.20.2 Commercial Union Assurance Co of Australia Ltd v Beard (2000) 11 ANZ Ins Cas 61-458 .................................................................................................................... 21.10.5 Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389; 6 ANZ Ins Cas 61-042 ............................................................. 1.30, 1.40 Commercial Union Assurance Company of Australia Ltd v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735 ........................................................................................ 21.20.3 Commercial and General Insurance Co Ltd v GIO (NSW) (1973) 129 CLR 374; 47 ALJR 612 ................................................................................................................. 66.10 Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 66 ALJR 123; 104 ALR 1 .................................................................................................................... 13.10.8 Commonwealth Bank of Australia v Baltica General Insurance Co Ltd (1992) 28 NSWLR 579; 7 ANZ Ins Cas 61-133 .......................... 48.10.3, 48.30.1, 48.30.2, 54.22 Compagnie Francaise D’Assurance Pour le Commerce Exterieur t/as Coface Australia v Sims Group Australia Holdings Ltd (2014) 18 ANZ Ins Cas 61-995; [2013] NSWCA 418 ....................................................................................................... 54.10.13 Compania Naviera Vascongada v British & Foreign Marine Insurance Co Ltd (The Gloria) (1936) 54 LIL Rep 35 ................................................................................ 56.60 Countrywide Finance Ltd v State Insurance Ltd [1993] 3 NZLR 745 .................... 28.10.3 Cusmano v Pinner (1998) 157 ALR 61 .................................................................... 50.30.2

D Davis v Westpac Life Insurance Services Ltd (2007) 226 FLR 285; (2008) 15 ANZ Ins Cas 90-132; [2007] NSWCA 175 .......................................................... 29.30.1, 29.30.2 Dawes Underwriting Australia Pty Ltd v Roth (2009) 15 ANZ Ins Cas 61-813; [2009] NSWCA 152 ......................................................................................................... 28.20.2 De Smeth v NSW Fire Brigades Superannuation Pty Ltd [2013] NSWSC 19 ......... 57.20, 57.30 DellaVedova v HIH Casualty & General Insurance Ltd (1997) 9 ANZ Ins Cas 61-383 ............................................................................................................... 22.40 Delphin v Lumley General Insurance Ltd (1989) 6 SR (WA) 161; 5 ANZ Ins Cas 60-941 .................................................. 21.10.7, 21.10.8, 21.40, 22.40, 28.10.5, 28.30.1 Derrington J in Newnham v Baker [1989] 1 Qd R 393 .......................................... 13.10.5 Derry v Peek (1889) 14 App Cas 337 ........................................................ 28.20.2, 29.20.2 Deutz Australia Pty Ltd v Skilled Engineering Ltd (2001) 162 FLR 173; [2001] VSC 194 ............................................................................................................................ 66.25 Devine v Sun Alliance Aust Ltd (unreported, NSW Sup Ct, Giles J, 18 June 1992) ........................................................................................................ 21.20.3 Dew v Suncorp Life and Superannuation Ltd [2001] QCA 459 ............................. 21.10.8 Dew v Suncorp Life and Superannuation Ltd [2001] QSC 252 ............... 21.10.8, 21.30.2 xvi

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Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; 2 ALR 321; 48 ALJR 136; [1974] HCA 3 ................. 13.10.4, 13.10.6, 41.20, 41.70 Drayton v Martin (1996) 67 FCR 1; 137 ALR 145; 9 ANZ Ins Cas 61-322 ........... 41.80, 54.10.14 Dumitrov v SC Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372 ... 13.10.4, 37.40 Dumitrov v SC Johnson & Son Superannuation Pty Ltd (No 2) (2007) 14 ANZ Ins Cas 61-722; [2007] NSWSC 42 .................................................................................. 57.10.3 Duthie v Rolf H Wick & Assoc (Aust) Pty Ltd (1994) 120 ACTR 1; 120 FLR 49; 8 ANZ Ins Cas 61-223 ............................................................................................ 28.30.1 Dwyer v Long; CE Heath Casualty & General Insurance (Third Party) (1992) 58 SASR 102; 7 ANZ Ins Cas 61-120 ....................................................... 21.10.7, 28.30.1

E East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092 ........... 33.20, 40.30, 54.10.2, 54.10.4, 54.10.13, 54.10.14, 54.60 Edwards v The Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 .............................................................................................. 13.10.4, 13.10.6 Einfeld v HIH Casualty & General Insurance Ltd (1999) 152 FLR 211; 10 ANZ Ins Cas 61-450; [1999] NSWSC 867 .................................. 14.10.10, 40.30, 54.10.7, 54.60 Elders Ltd v Swinbank (2000) 96 FCR 303; [2000] FCA 56 .................................. 57.10.3 Elilade Pty Ltd v Nonpareil Pty Ltd (2002) 124 FCR 1; 12 ANZ Ins Cas 61-535; [2002] FCA 909 ....................................................................................................... 57.30 Engel v South British Insurance Co Ltd (1983) 2 ANZ Ins Cas 77-938 ................ 56.10.4 Ensham Resources Pty Ltd v Aioi Insurance Co Ltd (2012) 209 FCR 1; [2012] FCAFC 191 ............................................................................................. 13.10.3, 13.40.2 Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 .............. 12.10.2, 13.20.3, 13.20.4, 54.50, 54.80, 56.10.1, 56.10.3, 56.10.4, 56.20, 56.30, 56.50, 60.40 Erzurumlu v Kellogg Superannuation Pty Ltd [2013] NSWSC 1115 ..................... 13.10.4 Esanda Finance Corporation Ltd v Colonial General Insurance Co Ltd (1993) 217 ALR 180 ............................................................................................................................ 60.40 Estate of Watson v Conolly [2012] NSWSC 741 ..................................................... 48.20.2 Evans v Sirius Insurance Co Ltd (1986) 4 ANZ Ins Cas 60-755 ............ 21.20.2, 31.10.3, 31.20.2

F FAI General Insurance Co v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164 ... 33.20 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999) 153 FLR 448; 10 ANZ Ins Cas 61-445; [1999] QCA 243 ................................... 13.45.3, 54.10.7 FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38 .... 33.20, 40.30, 40.35, 54.10.2, 54.10.4, 54.10.5, 54.10.6, 54.10.7, 54.10.14, 54.10.15, 54.60 FAI General Insurance Co Ltd v Hendry Rae & Court (1993) 10 WAR 322; 115 FLR 50; 7 ANZ Ins Cas 61-200 ..................................................................... 28.10.5, 28.30.1 FAI General Insurance Co Ltd v McSweeney (1998) 10 ANZ Ins Cas 61-443 ..... 28.10.3 FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164 ..................................................... 40.30, 54.10.7, 54.10.14, 54.10.15, 54.60 FAI General Insurance Ltd v Jarvis (1999) 46 NSWLR 1; 150 FLR 96; 10 ANZ Ins Cas 61-426; [1999] NSWCA 23 ........................................................................ 54.10.13 ©

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Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 ................................................................................................. 45.12 Farkas v Northcity Financial Services Pty Ltd [2004] NSWSC 206 ......................... 47.20 (1991) 22 NSWLR 389; (1991) 6 ANZ Ins Cas 61-042 ....................... 54.10.12, 54.10.14 Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1989) 5 ANZ Ins Cas 60-907 ...................................................................................... 28.30.1, 54.10.12 Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156 ......... 28.30.1, 54.10.3, 54.10.11, 54.10.12, 54.20, 54.40, 54.90, 63.30 Fidock v Legal Profession Complaints Committee [2013] WASCA 108 ................ 28.20.2 Fogarty v CGU Insurance Ltd [2015] ACTSC 44 ................................... 13.10.5, 13.40.12 Forrest v Australian Securities and Investments Commission [2012] HCA 39; 86 ALJR 1183 ....................................................................................................................... 28.20.2 Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014 ......... 21.10.7, 23.20, 23.30, 23.40, 26.20, 28.30.1, 28.30.2, 28.30.3, 28.40 Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1993) 32 NSWLR 735; 7 ANZ Ins Cas 61-202 ........................................................................... 7.20, 57.40

G GIO Australia Ltd v P Ward Civil Engineering Pty Ltd (2000) 11 ANZ Ins Cas 61-467; [2000] NSWSC 371 ............................................................................... 48.10.3, 48.30.3 GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299 .................................................................. 11.120, 21.10.5, 21.10.8, 22.40 GIO General Ltd t/a GIO Aust v Newcastle City Council (1996) 38 NSWLR 558; 9 ANZ Ins Cas 61-301 ............................................................................................... 40.23 GIO Insurance Ltd v Leighton Contractors Pty Ltd (1995) 8 ANZ Insurance Cases 61-293 .................................................................................................................... 12.30.2 GIO Insurance Ltd v Leighton Contractors Pty Ltd (1996) 8 ANZ Ins Cas 61-293 ... 12.30 GIO Insurance Ltd v Nader (unreported, Vic Sup Ct, Nathan J, 7 April 1994) ..... 21.10.4 GRE Insurance Ltd v Allinghams Removals Pty Ltd (t/a Allinghams Removals and Mac Hodges Removals) (1996) 9 ANZ Ins Cas 61-354 ........................................ 57.30 Galaxy Homes Pty Ltd v National Mutual Life Association of Australasia Ltd (No 2) (2012) 116 SASR 1; [2012] SASC 235 .................................................................. 47.10 Galaxy Homes Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2013] SASCFC 66 ...................................................................... 47.10, 47.15, 47.20 Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Aust Pty Ltd (1987) 163 CLR 236 ........................................................................................................... 21.10 Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236; 61 ALJR 415; [1987] HCA 30 ............................................. 7.10 Garage Fashions Pty Ltd v Insurance Australia Ltd trading as NRMA Insurance [2011] NSWSC 968 ................................................................................................. 57.20, 57.30 General Accident Insurance Asia Ltd v Sakr (2001) 11 ANZ Ins Cas 61-508; [2001] NSWCA 402 ......................................................................................................... 21.20.3 General Accident Insurance Co Australia Ltd v Kelaw Pty Ltd (1997) 9 ANZ Ins Cas 61-369 .................................................................................................................... 21.10.7 General Motors Acceptance Corporation Australia v RACQ Insurance Ltd (2003) 12 ANZ Ins Cas 61-574; [2003] QSC 080 ............................................................... 48.10.3 Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) (2011) 205 FCR 295; 284 ALR 72; [2011] FCA 1124 ............................... 24.20, 33.20 Gibbs v Mercantile Mutual Insurance (Aust) Ltd (2003) 214 CLR 604; 77 ALJR 1396; 12 ANZ Ins Cas 61-570; [2003] HCA 39 ................................................................ 9.30 xviii

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Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [2002] 1 Qd R 17; (2002) 11 ANZ Ins Cas 61-484; [2000] QCA 524 ................................ 54.10.13, 54.20 Gibson v Parkes District Hospital (1991) 26 NSWLR 9 .............................. 12.20, 12.30.2 Gimson v Victorian WorkCover Authority [1995] 1 VR 209 ..................................... 12.20 Gorczynski v W & FT Osmo Pty Ltd (2010) 77 NSWLR 62; 241 FLR 242; 16 ANZ Ins Cas 61-852; [2010] NSWCA 163 ....................................................... 54.10.5, 54.22 Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511 ......................................... 40.30, 40.35, 54.10.4, 54.10.7, 54.10.15, 54.60 Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; 12 ANZ Ins Cas 61-566; [2003] NSWCA 34 ................. 40.30, 40.35, 54.10.4, 54.10.7, 54.10.15, 54.60 Gray v Mercantile Mutual Insurance (Aust) Ltd (1994) 63 SASR 154; 119 FLR 140; (1995) 8 ANZ Ins Cas 61-241 ................................................................... 35.40, 202.20 Green v CGU Insurance Ltd (2005) 215 ALR 612; 13 ANZ Ins Cas 61-650; [2005] NSWSC 254 .............................................................................................. 48.10.1, 51.15 Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 147 FLR 422; 158 ALR 592; 10 ANZ Ins Cas 61-423 ............ 54.10.2, 54.10.5, 54.10.6, 54.10.7, 54.10.9 Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104 .............. 13.20.3, 13.20.4, 13.45.1, 54.50, 54.80, 56.10.4, 56.20, 56.50 Gutteridge v Commonwealth of Australia (unreported, Ambrose J, Qld Sup Ct, 25 June 1993) ....................................................................................................... 13.10.5, 13.40.2

H HIH Casualty & General Insurance Australia Pty Ltd v DellaVedova (1999) 10 ANZ Ins Cas 61-431 ...................................................................................................... 54.10.7 HIH Casualty & General Insurance Ltd v Insurance Australia Ltd (No 2) (2006) 14 ANZ Ins Cas 61-685; [2006] VSC 128 .................................................................. 57.20 HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd (2000) 11 ANZ Ins Cas 61-477; [2000] NSWCA 281 ..................................................................... 45.20 Hadchiti v NRMA Insurance Ltd (unreported, NSW Sup Ct, Giles J, 7 February 1992) ............................................................................... 10.20, 43.20, 52.20 Hajjar v NRMA Insurance Ltd (1985) 3 ANZ Ins Cas 60-647 ............................... 31.20.2 Halloran v Harwood Nominees Pty Ltd (2010) 16 ANZ Ins Cas 90-142; [2007] NSWSC 913 .......................................................................................................... 13.40.3 Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd (2002) 12 ANZ Ins Cas 61–553; [2002] NSWSC 1006 ............................................................... 13.40.8, 21.10.5 Hammoud Brothers Pty Ltd v Insurance Australia Ltd [2004] NSWCA 366; 13 ANZ Insurance Cases 161-639 ......................................................................................... 56.60 Hams v CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525; [2002] NSWSC 273 ... 35.50 Hams v CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-542; [2002] NSWSC 843 ... 57.20 Hancock Family Memorial Foundation Ltd v Fieldhouse (No 3) (2010) 16 ANZ Ins Cas 61-869; [2010] WASC 223 .............................................................................. 10.50 Hancock Family Memorial Foundation Ltd, The v Lowe [2015] WASCA 38 ......... 51.30, 52.40 Hancock Memorial Foundation Ltd, The v Fieldhouse (No 5) [2013] WASC 121 ... 51.30 Hannell v Bayswater Car Rental Pty Ltd (1997) 10 ANZ Ins Cas 61-387 .... 10.30, 11.70 Hannover Life Assurance Re of Australasia Ltd v Membrey (2005) 210 ALR 462; 13 ANZ Ins Cas 90-122; [2004] FCA 1095 ............................................................. 57.10.3 Hannover Life Re of Australasia Ltd v Farm Plan Pty Ltd (2001) 11 ANZ Ins Cas 90-109; [2001] FCA 796 ...................................................................................... 54.10.9 Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214 .................................................. 13.10.4, 13.40.3, 48.30.5, 48A.20 ©

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Hansen Development Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1999] NSWCA 127 .............................................................................................................. 9.30 Harrison v Retail Employees Superannuation Pty Ltd (2016) 19 ANZ Ins Cas 62-091; [2015] NSWSC 1665 ............................................................................................ 54.10.7 Harrison v Zurich Australian Insurance Ltd [1996] NSWSC 309 .............................. 57.20 Harrison v Zurich Australian Insurance Ltd (unreported, NSW Sup Ct, Rolfe J, 30 July 1996) ......................................................................................................................... 57.30 He Kaw Teh v The Queen [1985] HCA 43; (1985) 157 CLR 523 ......................... 54.10.7 Hendry Rae & Court v FAI General Insurance Co Ltd (1991) 5 WAR 376; 7 ANZ Ins Cas 61-101 .............................................................................................. 28.10.3, 28.10.5 Herbohn v NZI Life Ltd (1998) 149 FLR 21; 10 ANZ Ins Cas 61-410 ..... 21.20.2, 25.30 Highway Hauliers Pty Ltd v Maxwell (2012) 17 ANZ Ins Cas 61-925; [2012] WASC 53 ........................................................................................................................... 54.10.7 Hitchens v Zurich Australia Ltd (2011) 17 ANZ Ins Cas 61-915; [2011] NSWSC 1198 ............................................................................................. 11.05, 29.30.3 Hitchens v Zurich Australia Ltd (2015) 18 ANZ Ins Cas 62-076; [2015] NSWSC 825 .............................................................................................. 21.20.3, 27.25 Hoare v Mercantile Mutual Life Assurance Co Ltd (2000) 12 ANZ Ins Cas 90-110; [2000] NSWSC 1026 ............................................................................................ 29.10.6 Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 ...... 13.40.4, 57.10.3 Horbelt v State Government Insurance Commission (unreported, SA Sup Ct, Bollen J, 26 June 1992) ........................................................................................................ 13.10.3 Howard v Australian Jet Charter Pty Ltd (1991) 6 ANZ Ins Cas 61-054 .................. 16.40 Hungerfords v Walker (1989) 171 CLR 125 ............................................................ 57.10.3

I Ibrahim v Greater Pacific Life Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-330 ... 14.10.6, 217.10, 217.20 Ilievska-Dieva v SGIO Insurance Ltd [2000] WASCA 161 ........................................ 12.20 Imaging Applications Pty Ltd v Vero Insurance Ltd [2008] VSC 178 .... 13.10.2, 13.10.3, 13.40.10 Ingham v Vita Pacific Ltd (1994) 20 MVR 342; (1995) 8 ANZ Ins Cas 61-272 ..... 66.40, 66.50 Insurance Manufacturers of Australia Pty Ltd v Heron (2005) 14 ANZ Ins Cas 61-669; [2005] VSC 482 ..................................................................................... 13.20.4, 56.10.4

J Jiwira Pty Ltd v MMI General Insurance Ltd (unreported, NSW Sup Ct, Cohen J, 7 February 1997) ............................................................................................. 57.20, 57.30 John Connell Holdings Pty Ltd v Mercantile Mutual Holdings Ltd (1999) 10 ANZ Ins Cas 61-454 ............................................................................................................ 40.26.2 John Kaldor Fabricmaker Pty Ltd v Mitchell Cotts Freight (Aust) Pty Ltd (1989) 18 NSWLR 172; 98 FLR 99; 6 ANZ Ins Cas 60-960 ......................................... 7.30, 8.30 John McGrath Motors (Canberra) Pty Ltd v Applebee [1964] HCA 1; 110 CLR 656 ......................................................................................................... 28.20.2 Johnson v Australian Casualty Co Ltd (1992) 7 ANZ Ins Cas 61-109 ...................... 60.40 Johnson v Triple C Furniture & Electrical Pty Ltd (2010) 243 FLR 336; 16 ANZ Ins Cas 61-866; [2010] QCA 282 ................................................................... 54.10.7, 54.20 Jovanovic v Broers (1979) 25 ACTR 39; 45 FLR 453 ............................................... 48.10 xx

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Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1996) 130 FLR 85; 9 ANZ Ins Cas 61-315 ............................................................................................ 40.26.2, 54.10.14

K Kalabakas v Chubb Insurance Company of Australia Ltd (2016) 19 ANZ Ins Cas 62-088; [2015] VSC 705 ...................................................................................... 28.10.3 Kelaw Pty Ltd v General Accident Insurance Co of Australia Ltd (1995) 8 ANZ Ins Cas 61-285 ............................................................................................................... 22.50 Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197 ............... 13.10.5, 13.30.3, 14.10.4, 54.10.7 Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317 ........................................... 13.10.5, 13.30.3, 14.10.4, 54.10.7, 54.10.14 Kenan Berk v Westpac Securities Administration Ltd (unreported, NSW Sup Ct, Nicholas J, 4 February 2010) ............................................................................... 29.10.6 Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164; 61 ALJR 319; 4 ANZ Ins Cas 60-790 .................................................................................... 50.10 Khoury v GIO (NSW) (1984) 165 CLR 622; 54 ALR 639 ..................................... 21.10.5 Komorowski v Australian Associated Motor Insurers (1995) 9 ANZ Ins Cas 61-303 ............................................................................................................ 13.40.5 Kotku Bread Pty Ltd v Vero Insurance Ltd (2012) 17 ANZ Ins Cas 61-930; [2012] QSC 109 ................................................................................................................ 21.20.2 Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 69 ALJR 629; 130 ALR 1; [1995] HCA 68 ..................................................................................................... 28.20.2

L Lambert Leasing Inc v QBE Insurance Ltd (2015) 18 ANZ Ins Cas 62-067; [2015] NSWSC 750 ............................................................................................ 13.40.14, 45.12 Le v Williams [2005] NSW ConvR 56-109; [2004] NSWSC 645 ............................. 16.30 Le Lievre v Gould [1893] 1 QB 491 ........................................................................ 28.20.2 Lee v Phair (unreported, NSW Sup Ct, 31 October 1996) ......................................... 10.50 Lennock Motors Pty Ltd v Pastrello (1990) 101 FLR 405; (1991) 6 ANZ Ins Cas 61-033 ....................................................................................................................... 65.40 Liga Knitting Mills v Lombard Insurance Co Ltd (1984) 3 ANZ Ins Cas 60-551 ... 21.20.3 Limit No 2 Ltd v AXA Versicherung AG [2009] Lloyd’s Rep I.R. 396 ................. 28.10.3 Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673; 5 ANZ Ins Cas 60-913 ... 21.10.5, 21.10.8, 28.30.1 Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560 .......... 59.30 Lipari v Union des Assurances de Paris IARD (1998) 44 NSWLR 652; 10 ANZ Ins Cas 61-415 ............................................................................................................ 54.10.4 Lister v Romford Ice & Cold Storage Co Ltd [1957] AC 555; [1957] 1 All ER 125; [1957] 2 WLR 158 .................................................................................................. 66.10 Lockwood & Lockwood v Insurance Australia Ltd (t/as SGIC Insurance) (2010) 107 SASR 299; 16 ANZ Ins Cas 61-843; [2010] SASC 140 ....................................... 35.50 Lofthouse v ACN 081 121 495 Pty Ltd [2003] VSC 253 ........ 41.40, 41.50, 41.60, 41.70 Lomsargis v National Mutual Life Association of Australasia Ltd [2005] 2 Qd R 295; (2005) 192 FLR 400; (2006) 14 ANZ Ins Cas 61-671; [2005] QSC 199 ........... 12.20, 13.10.8 Lukies v Ripley (1994) 6 BPR 13,471; [1994] NSW ConvR 55-707 ........................ 50.40 Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Ins Cas 60-986 .... 21.40, 22.40, 22.60 ©

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M MLC Ltd v J & W Management Services Pty Ltd (2001) 11 ANZ Ins Cases 61-511; [2001] VSC 241 ....................................................................................................... 59.20 MMI General Insurance Ltd v Baktoo (2000) 48 NSWLR 605; 155 FLR 230; 11 ANZ Ins Cas 61-466; [2000] NSWCA 70 .................................................................... 56.10.4 MacDonald v CE Heath Underwriting and Insurance (Aust) Ltd (1997) 9 ANZ Ins Cas 61-362 .................................................................................................................... 48.10.3 Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (unreported, NSW Sup Ct, Cole J, 15 June 1994) ...... 21.10.5, 25.40, 29.10.3, 31.10.1 Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543 ................................................................................ 21.10.5, 25.40, 29.10.3 Macquarie Underwriting Pty Ltd v Permanent Custodians Ltd (2007) 240 ALR 519; [2007] FCAFC 60 .................................................................................................... 33.20 Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062 .......................................................................... 26.30, 28.30.3, 54.10.10, 57.10.1 Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001] 2 WLR 170; [2001] 1 All ER 743 .......................................................................... 13.20.4 Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The “Star Sea”) [2001] UKHL 1; (2001) 1 Lloyd’s Rep 389 ................................................................... 13.10.3 Manufacturers Mutual Insurance Ltd v Murray River North Pty Ltd (2005) 14 ANZ Ins Cas 61-674; [2004] WASCA 276 ....................................................................... 54.10.13 Marsh v CGU Insurance Ltd (t/as Commercial Union Insurance) (2003) 175 FLR 403; 12 ANZ Ins Cas 61-569; [2003] NTSC 71 ............................................................ 35.50 Marsh v CGU Insurance Ltd (t/as Commercial Union Insurance) (2004) 13 ANZ Ins Cas 61-594; [2004] NTCA 1 ................................................................................... 35.50 Massoud v NRMA Insurance Ltd (1995) 62 NSWLR 653; 8 ANZ Ins Cas 61-257 ............................................................................................................ 13.40.6 Matthews v AusNet Electricity Services Pty Ltd [2014] VSC 663 ............................ 67.30 Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (2015) 18 ANZ Ins Cas 62-061; [2015] QSC 72 ................... 13.10.5, 13.10.6, 13.10.7, 13.10.8, 13.40.5, 54.20 Maxwell v Highway Hauliers Pty Ltd (2013) 45 WAR 297; 275 FLR 64; 17 ANZ Ins Cas 61-967 ................................................................................................. 54.10.7, 54.40 Maxwell v Highway Hauliers Pty Ltd (2014) 88 ALJR 841; 18 ANZ Ins Cas 62-035; [2014] HCA 33 ............................................................. 54.10.2, 54.10.5, 54.10.7, 54.20 Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 .............................................. 21.10.7 McCabe v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-119; [2003] WASCA 162 .................................................... 21.10.7, 21.10.8, 29.30.2 McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance (No 3) (2009) 226 FLR 84; [2009] VSC 94 .................................................................................. 57.40 McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance Plc (No 2) (2009) 15 ANZ Ins Cas 61-794; [2009] VSC 49 ................................................... 57.20 McNeill v O’Kane (2003) 12 ANZ Ins Cas 61-554; [2002] QSC 144 ........ 29.30.4, 54.20 Medical Defence Union Ltd v Department of Trade (1980) 1 Ch 82 ........................ 10.50 Melin v Mutual Community General Insurance Pty Ltd (1991) 6 ANZ Ins Cas 61-057 ............................................................................................................... 57.30 Mercantile Mutual Insurance (Aust) Ltd v Gibbs (2001) 24 WAR 453; 163 FLR 455; [2001] WASCA 271 ................................................................................................... 9.30 Mercantile Mutual Insurance (Aust) Ltd v Schigulski (1993) 172 LSJS 173 ............ 54.20 Messagemate Australia Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (2002) 85 SASR 303; 12 ANZ Ins Cas 61-546; [2002] SASC 327 ................................. 37.40 Moltoni Corporation Pty Ltd v QBE Insurance Ltd (2001) 205 CLR 149; 76 ALJR 337; 11 ANZ Ins Cas 61-512; [2001] HCA 73 ....................... 9.40, 54.10.11, 54.10.13 xxii

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Montclare v MetLife Insurance Ltd (2015) 18 ANZ Ins Cas 62-070; [2015] VSC 306 ........................................................................... 21.20.2, 22.40, 203.10 Morris v Betcke (2005) 13 ANZ Ins Cas 61-665; [2005] NSWCA 308 .................... 51.15 Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967 ...................................... 7.20, 13.10.8, 13.20.5, 13.40.2, 57.10.1, 57.10.3, 57.30 Moxia Pty Ltd v AMP General Insurance Ltd (unreported, Vic Sup Ct, Beach J, 21 September 1992) ........................................................................................ 56.10.4, 56.20 Murphy v Swinbank [1999] NSWSC 1098 .............................................................. 13.45.2 Mutual Community General Insurance Pty Ltd v Khatchmanian (2013) 17 ANZ Ins Cas 61-974; [2013] VSCA 144 ..................................................... 56.10.4, 57.20, 57.30

N NRG Victory Australia Ltd v Hudson (2003) 13 ANZ Ins Cas 90-121; [2003] WASCA 291 ............................................................................................... 26.30, 28.20.2, 29.20.2 NRMA Insurance Ltd v Tatt (1989) 94 FLR 339; 92 ALR 299; 5 ANZ Ins Cas 60-902 ....................................................................... 7.10, 7.20, 57.10.1 NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1985) 4 NSWLR 107 .......................................................................................................... 12.30.2 Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; 110 ALR 449 ............................................................................................................................ 56.60 Nelson v Hollard Insurance Co Pty Ltd (2010) 77 NSWLR 313; 16 ANZ Ins Cas 61-841; [2010] NSWSC 199 ................................................................................... 46.20 New Cap Reinsurance Corporation Ltd (in liq) v Daya [2010] NSWSC 1226 ..... 28.10.4, 28.20.1 Newcastle City Council v GIO General Ltd (1997) 191 CLR 85; 72 ALJR 97; 9 ANZ Ins Cas 61-380 .............................................................................................. 40.23, 40.25 Nicholas v Wesfarmers Curragh Pty Ltd (2010) 16 ANZ Ins Cas 61-871; [2010] QSC 447 ................................................................................................................. 45.12, 45.14 Nicol v Whiteoak (2011) 16 ANZ Ins Cas 61-893; [2011] NSWSC 168 ............... 48.10.2 Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Insurance Cases 61-235 ......................................................................................................... 12.30.2 Nino v MLC Ltd [2009] NSWSC 400 ......................................................................... 57.20 Norsworthy v SGIC [1999] SASC 496 ..................................................... 9.30, 9.50, 51.50

O Orb Holdings Pty Ltd v Lombard Insurance Co (Aust) Ltd [1995] 2 Qd R 51; (1994) 8 ANZ Ins Cas 61-221 ................................................................... 21.30.2, 27.30, 28.30.1 O’Farrell v Allianz Australia Insurance Ltd (2015) 18 ANZ Ins Cas 62-059; [2015] NSWCA 48 .............................................................................................................. 22.40

P PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301; 69 ALJR 829; 131 ALR 377; [1995] HCA 36 .............................. 43.10 Pacific Dunlop Ltd v Maxitherm Boilers Pty Ltd (1996) 9 ANZ Ins Cas 61-357 ... 17.40, 20.30, 48.40 Palamisto General Enterprises v Ocean Marine Insurance Co Ltd (1972) 2 QB 625 ..................................................................................................................... 56.60 Palmer v Harker Transport Services P/L [2003] QCA 513 ........................................... 9.40 Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyd’s (2016) 19 ANZ Ins Cas 62-090; [2016] FCA 1 ........................................................................ 54.10.7, 54.20 ©

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Pech v Tilgals (1994) 28 ATR 197; 94 ATC 4206 ...................................................... 52.40 Permanent Custodians Ltd v ARMA Pty Ltd (2006) 14 ANZ Ins Cas 61-707; [2006] FCA 640 ................................................................................................................... 33.20 Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679; 160 FLR 435; 11 ANZ Ins Cas 61-491; [2001] NSWCA 20 .... 21.10.5, 21.10.7, 26.25, 28.20.2 Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529; 10 ANZ Ins Cas 61-408 ......................... 21.10.5, 21.10.7, 33.20, 54.10.5, 54.10.7 Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; 77 ALJR 1070; 12 ANZ Ins Cas 61-565; [2003] HCA 25 .............. 21.10.5, 21.10.7, 26.25, 28.10.4, 28.20.2 Phillips v ING Life Ltd (2009) 15 ANZ Ins Cas 90-139; [2009] FCA 283 .......... 21.20.3, 29.40 Pilmer v HIH Casualty & General Insurance Ltd (No 3) [2005] SASC 302 (8 August 2005) ...................................................................................................................... 13.40.9 Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926 ................. 21.10.8, 21.20.1, 28.20.1, 28.20.2, 31.10.3, 31.10.4, 31.20.1, 31.20.2, 31.30.1 Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; 95 ALR 305; 6 ANZ Ins Cas 60-964 .............. 26.40, 26.60, 28.30.3, 31.10.1, 31.20.2, 31.50 Poole v Chubb Insurance Company of Australia Ltd (2014) 18 ANZ Ins Cas 62-029; [2014] NSWSC 1832 ............................................................................. 21.30.2, 28.20.2 Porter v GIO Australia Ltd (2003) 12 ANZ Ins Cas 61-573; [2003] NSWSC 668 ... 14.30, 31.20.2, 33.20, 37.40, 40.24 Post Office v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 ............. 51.30 Prepaid Services v Atradius (2012) 17 ANZ Ins Cas 61–937; [2012] NSWSC 608 ......................................................................................... 14.10.12, 21.20.2 Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252 ................ 14.10.12, 21.10.5, 27.25, 27.30, 28.20.2, 54.10.2, 54.10.4, 54.10.6, 54.10.7 Preseed Pty Ltd v Colonial Mutual General Insurance Co Ltd (unreported, NSW Sup Ct, Brownie J, 5 March 1992) ............................................................... 56.10.3, 56.10.4 Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028 ..................................... 21.10.4, 21.10.5, 21.10.6, 21.10.7, 21.10.9, 28.30.2 Protean (Holdings) Ltd v American Home Assurance Co (1985) 4 ANZ Ins Cas 60-683 ................................................................................................. 12.20, 48.10.1 Prudential Insurance Co v Commissioners of Inland Revenue [1904] 2 KB 658 .... 10.30, 10.40, 11.70 Public Trustee v Lumley Life Ltd [2012] QSC 061 ................................................... 57.20

Q QBE Insurance (Aust) Ltd v Lumley General Insurance Ltd (2009) 24 VR 326; 15 ANZ Ins Cas 61-807; [2009] VSCA 124 ............................................................ 48.20.1 QBE Insurance Ltd v Giampaolo [1993] ACTSC 106 ................ 21.10.7, 21.20.3, 28.30.1 QBE Insurance Ltd v Moltoni Corporation Pty Ltd (2000) 22 WAR 148; 155 FLR 379; 11 ANZ Ins Cas 61-468; [2000] WASCA 82 ........................................... 9.40, 54.10.13 QBE Insurance Ltd v Nguyen (2008) 100 SASR 560; [2008] SASC 138 ............ 57.10.1, 57.10.2 QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd (2004) 13 ANZ Ins Cas 61-586; [2003] NSWCA 356 .................................................................... 13.40.8, 21.10.5, 37.70 xxiv

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Quinlan v Safe International Forsakrings AB (2005) 14 ANZ Ins Cas 61-693; [2005] FCA 1362 ................................................................................................................... 8.20

R RACV Insurance Pty Ltd v Alam (2001) 35 MVR 399; [2001] VSC 503 ................ 22.40 Rail Corporation NSW v Vero Insurance Ltd [2012] NSWSC 632 ........................... 51.60 Rawley Pty Ltd ACN 009 027 454 v Bell (No 2)(Corrigendum dated 20 June 2007) [2007] FCA 583 ....................................................................................................... 59.30 Rejfek v McElroy (1965) 112 CLR 517; 39 ALJR 177 .............................................. 56.60 Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948 ............................................. 56.60 Ricciardi v Suncorp Metway Insurance Ltd [2001] QCA 190 ................................... 56.20 Ripper v Gatenby (2002) 10 Tas R 435; 12 ANZ Ins Cas 61-532; [2002] TASSC 45 ................................................................................................................ 51.15 Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288 ......................................................... 21.20.3, 21.30.2, 28.30.1, 44.30, 71.60 Roumeli Food Stores (NSW) Pty Ltd v New India Assurance Co Ltd [1972] 1 NSWLR 227 ............................................................................................................. 57.20 Russell v NRMA Insurance Ltd (unreported, NSW Sup Ct, Rogers CJ Comm D, 8 November 1988) ................................................................................................... 13.30.8

S Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (2011) 16 ANZ Ins Cas 61-885; [2011] FCAFC 53 ........................................................................... 26.60, 27.30 Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (No 4) (2010) 268 ALR 108; 16 ANZ Ins Cas 61-842; [2010] FCA 482 ......................................... 26.60, 27.30 Sayseng v Kellogg Superannuation Pty Ltd [2003] NSWSC 945 ............. 13.10.4, 13.40.3 Sayseng v Kellogg Superannuation Pty Ltd (2007) 213 FLR 174; 14 ANZ Ins Cas 61-738; [2007] NSWSC 857 ........................................................................ 57.20, 57.30 Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182 .................... 26.40, 26.50, 29.10.6, 29.30.1, 29.30.2, 29.30.4 Seery v John R Carr and Associates Pty Ltd (unreported, NSW Sup Ct, Giles CJ Comm D, 3 November 1995) ............................................................................... 54.10.9 Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1990) 159 LSJS 84 .............................................................................................................................. 12.20 Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40; 8 ANZ Ins Cas 61-209 ................................................... 7.20, 57.10.1, 57.20, 57.30 Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262 ...... 56.10.1, 56.60 Sheldon v Sun Alliance Ltd (1989) 53 SASR 97 ..................................................... 13.10.5 Shepherd v National Mutual Life Association of A/asia Ltd (1994) 8 ANZ Ins Cas 61-233 ....................................................................................................................... 22.80 Sherry v FAI General Insurance Co Ltd (in liq) (2002) 12 ANZ Ins Cas 61-516; [2002] SASC 3 ................................................................................................................ 14.10.11 Shuetrim v FSS Trustee Corporation [2015] NSWSC 464 ........................ 13.10.4, 13.40.3 Sienkiewicz (As Trustee for the Sienkiewicz Superannuation Fund) v Salisbury Group Pty Ltd (in Liquidation) (No 2) [2015] FCA 147 ............................... 54.10.7, 54.10.10 Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd; Greaves v CGU Insurance Ltd (2003) 57 NSWLR 469; 12 ANZ Ins Cas 61-571; [2003] NSWCA 203 ........................................................................................................... 13.10.3, 13.40.5 Simon v NRMA Insurance Ltd (unreported, NSW Sup Ct CA, Samuels AP, Clarke and Handley JJA, 22 October 1992) .............................................................................. 56.60 ©

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Skandia Insurance case [Banque Keyser Ullmanns SA, The v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665] .................................................................................... 12.30.2 Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Ltd [2015] NSWSC 1511 .................................................. 10.25, 13.10.3, 13.10.5, 14.10.14 Smart v Westpac Banking Corporation (2011) 282 ALR 400; 16 ANZ Ins Cas 61-901; [2011] FCA 829 .................................................................................................... 13.20.2 Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd (2000) 23 WAR 291; (2001) 11 ANZ Ins Cas 61-485; [2000] WASCA 408 ................................ 13.30.4 Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (2009) 226 FLR 306; 253 ALR 364; 15 ANZ Ins Cas 61-793; [2009] WASCA 31 ................................................................... 13.10.2, 13.10.3, 13.10.6 State Bank of New South Wales Ltd v Stephenson (1996) 124 FLR 434; 9 ANZ Ins Cas 61-306 ............................................................................................................ 50.30.1 State Government Insurance Commission v Sharp (1994) 8 ANZ Ins Cas 61-243 ... 35.40 State Rail Authority of New South Wales v Blacktown City Council (unreported, NSW Sup Ct, Greenwood M, 16 December 1996) .......................................................... 45.40 Stealth Enterprises Pty Ltd t/a The Gentleman’s Club v Calliden Insurance Ltd (2016) 19 ANZ Ins Cas 62-095; [2015] NSWSC 1270 ................................... 12.10.1, 21.10.7 Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101; 9 ANZ Ins Cas 61-314 .................................................................................................................... 50.30.1 Summers v National Mutual Life Association of Australasia (No 2) [2012] TASSC 9 .................................................................................................................. 57.20 Summerton v SGIC Life Ltd (1999) 10 ANZ Ins Cas 90-102; [1999] SASC 121 ... 21.10.4, 29.10.4 Sun Alliance & Royal Insurance Aust Ltd v Switzerland Insurance Aust Ltd (1996) 9 ANZ Ins Cas 61-353 ............................................................................................... 57.50 Suncorp General Insurance Ltd v Cheihk (1999) 10 ANZ Ins Cas 61-442; [1999] NSWCA 238 ................................................................................................. 22.40, 35.50 Swann Insurance (Aust) Pty Ltd v Fraillon [1992] 1 VR 401; 6 ANZ Ins Cas 61-055; [1991] ASC 56–075 ................................................................................................. 15.40 Swanson v Guild Insurance Co Ltd (unreported, Qld Sup Ct, Derrington J, 17 August 1990) ......................................................................................................................... 57.20 Syddall v National Mutual Lfe Association of Australasia Ltd (2012) 17 ANZ Ins Cas 90-149 .................................................................................................................... 31.20.2

T TBI Pty Ltd v AON Financial Planning Ltd [2004] VSC 40; 13 ANZ Insurance Cases 61-601 .................................................................................................................... 40.26.2 Tatt v NRMA Insurance Ltd (1988) 5 ANZ Ins Cas 60-834 ........... 7.20, 57.10.1, 57.10.3 Tatterson v Wirtanen (unreported, Vic Sup Ct, Gillard J, 30 September 1998) ......... 51.30 Territory Insurance Office v Tropicus Orchids Flowers [1999] NTSC 16 ................... 9.50 Thompson v Government Insurance Office of New South Wales (unreported, NSW Sup Ct, Rolfe J, 15 June 1994) ....................................................... 21.10.5, 21.10.7, 21.10.9 Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48 .......... 13.20.4, 54.80, 56.10.1, 56.10.4, 56.20, 56.50 Todd v Alterra at Lloyd’s Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15 ...................................................................... 54.10.7, 54.10.10 Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 15 NSWLR 641; 94 FLR 362; 5 ANZ Ins Cas 60-903 .......................... 21.10.7 Tosich v Tasman Investment Management Ltd (2008) 250 ALR 274; [2008] FCA 377 ................................................................................................................ 21.10.5 xxvi

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Towry Law PLC v Chubb Insurance Co of Europe SA [2009] NSWSC 434 ........... 58.20 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270; 4 ANZ Ins Cas 60-771 .............................................................................. 48.30.4, 48.30.5 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873; [1988] HCA 44 .... 13.10.4, 16.30, 45.14, 48.30.4, 48.30.5, 54.10.9, 56.40 Trident Properties Ltd v Capita Financial Group Ltd [1995] NSWCA 543; (1996) 12 BCL 402 ................................................................................................................ 54.10.5 Triffitt v Australiansuper Pty Ltd (2007) 214 FLR 407; [2007] NSWSC 1167 ........ 57.20, 57.30 Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Office (1998) 148 FLR 441; 10 ANZ Ins Cas 61–412 ........................................................................... 9.50 Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 ............................... 11.70 Tsorotes v RACV Insurance Pty Ltd (unreported, Vic Sup Ct FC, 30 November 1993) ...................................................................................................... 56.20 Tuua v Savings Australia Pty Ltd as Trustee for Superannuation Trust of Australia [2006] FCA 1816 .................................................................................................. 31.10.2 Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661; 6 ANZ Ins Cas 60-954 ................ 21.10.6, 21.10.7, 21.10.8, 28.20.1, 28.30.1 Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445 ....... 11.05, 21.10.4, 28.20.1, 28.20.2, 29.10.4, 29.10.6, 29.20.2, 31.20.2

U United Super Pty Ltd v Built Environs Pty Ltd (2000) 80 SASR 513; 12 ANZ Ins Cas 90-113; [2001] SASC 339 ......................................................................... 10.40, 13.40.7 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1997) 9 ANZ Ins Cas 61-343 .................................................................................................................... 28.30.1 Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; 72 ALJR 937; 10 ANZ Ins Cas 61-396; [1998] HCA 38 ........................................ 28.30.1

V VL Credits Pty Ltd v Switzerland General Insurance Co Ltd [1990] VR 938; (1989) 5 ANZ Ins Cas 60-936 ................................................................................. 48.30.4, 56.40 VL Credits Pty Ltd v Switzerland General Insurance Co Ltd (No 2) [1991] 2 VR 311 ....................................................................................................... 57.10.1, 57.30 Vermeulen v SIMU Mutual Insurance Association (1987) 4 ANZ Ins Cas 60-812 .................................................................................................................... 13.10.5 Vero Insurance Ltd v QBE Insurance (Aust) Ltd (2011) 16 ANZ Ins Cas 61-912; [2011] NSWSC 593 ................................................................................................. 45.14 Vidal v NRMA Insurance Ltd [2005] NSWCA 390 ................................................... 56.60 Visic v State Government Insurance Commission (1990) 3 WAR 122; 6 ANZ Ins Cas 61-021 .................................................................................................................... 48.30.5 Vollstedt v Calibre Enterprises Pty Ltd (1999) 10 ANZ Ins Cas 61-440 ........ 51.30, 51.40 Von Braun v Australian Associated Motor Insurers Ltd (1998) 135 ACTR 1; 10 ANZ Ins Cas 61-419 ........................................................... 21.10.7, 28.20.2, 31.20.2, 31.30.2

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W WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962; [2004] 2 All ER (Comm) 613; [2004] 2 Lloyd’s Law Rep 483 ................ 21.20.3 Walker v FAI Insurance Ltd (1991) 6 ANZ Ins Cas 61-081 ..................... 57.10.1, 57.10.3 Walton v Colonial Mutual Life Assurance Society Ltd (2004) 13 ANZ Ins Cas 61-620; [2004] NSWSC 616 ................................................................. 12.10.2, 13.20.3, 56.10.1 Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 ............................................................................................................ 54.10.5 Waterman v Gerling Australia Insurance Co Pty Ltd (2005) 65 NSWLR 300; 13 ANZ Ins Cas 61-664; [2005] NSWSC 1066 ................................................................... 59.30 Webb v Estate of Darryl Arthur Herbert C/The Public Trustee (2006) 31 WAR 492; [2006] WASCA 43 ................................................................................................... 51.30 Werenfridus v Bincrest Pty Ltd (unreported, Qld Sup Ct, Cullinane J, 1 July 1993) ... 49.40 Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290; 13 ANZ Ins Cas 61-657; [2005] WASCA 106 ......................................................... 13.10.3 WorkCover Queensland v Royal and Sun Alliance Insurance Australia Ltd (2001) 11 ANZ Ins Cas 61-489; [2001] QSC 066 .................................................................. 45.16 Workers’ Compensation Board of Queensland v Workcover Authority of New South Wales (1995) 36 NSWLR 732 .................................................................................. 9.40 Wyllie v National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324; [1997] NSWSC 146 ............................................................................... 13.10.4, 13.40.3

X Xerri v Kingmill Pty Ltd (1998) 28 MVR 569 ........................................................... 51.60

Y You v Thomas [2014] VSC 255 ................................................................................... 20.30

Z Zhang v Popovic [2016] NSWSC 407 ........................................................... 46.20, 230.10 Ziel Nominees Pty Ltd v VACC Insurance Co Ltd (1975) 180 CLR 173; 50 ALJR 106; 7 ALR 667 ............................................................................................................... 50.10 Ziogos v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2015] NSWSC 1385 ............................................................... 13.10.4, 13.40.2, 13.40.3 Zollo v National Australia Bank (No 2) [1997] SASC 6060 ................................. 54.10.13 Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd [1991] 2 VR 146; (1990) 6 ANZ Ins Cas 60-984 ................................................................ 28.10.1, 28.30.1, 28.30.3 Zurich Australian Insurance Ltd v Fruehauf Finance Corp Pty Ltd (1993) 7 ANZ Ins Cas 61-177 ................................................................................................. 57.10.1, 57.30 Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2007) 209 FLR 247; [2007] WASC 62 ................................................................................. 13.10.6 Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50 ....... 11.90, 13.20.2, 45.12, 45.14, 45.18, 45.50, 48.10.1, 48.50, 76.40 Zurich Australian Insurance Ltd, Re [1999] 2 Qd R 203; (1999) 10 ANZ Ins Cas 61-429; [1998] QSC 209 ............................. 12.30.2, 13.10.5, 13.30.1, 13.40.2, 14.10.2

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TABLE OF ABBREVIATIONS ACT Sup Ct.....................................Supreme Court of the Australian Capital Territory ALRC ..............................................Australian Law Reform Commission ALRC 16 .........................................Australian Law Reform Commission Report 16 – Insurance Agents and Brokers ALRC 20 .........................................Australian Law Reform Commission Report 20 – Insurance Contracts ALRC 91 .........................................Australian Law Reform Commission Report 91 – Review of the Marine Insurance Act 1909 (Cth) ASIC ................................................Australian Securities and Investments Commission CJ in Eq...........................................Chief Judge in Equity Cl .....................................................clause Comm D ..........................................Commercial Division Cth ...................................................Commonwealth Eq.....................................................Equity Explanatory Memorandum..............Unless stated otherwise, the Explanatory Memorandum to the Insurance Contracts Bill 1984 (House of Representatives incorporating amendments made in the Senate) FC ....................................................Full Court Fed Ct ..............................................Federal Court of Australia Final Report (June 2004) ................Cameron A and Milne N, Review of the Insurance Contracts Act 1984 (Cth) - Final Report on Second Stage: Provisions other than Section 54 (Australian Government, Canberra, June 2004) HC....................................................High Court of Australia High Court.......................................High Court of Australia IABA ...............................................Insurance (Agents and Brokers) Act 1984 IABDP .............................................Insurance (Agents and Brokers) Decision-making Principles No 1 of 1994 ICA ..................................................Insurance Contracts Act 1984 ICAA 2013 ......................................Insurance Contracts Amendment Act 2013 ICAB 2013 ......................................Insurance Contracts Amendment Bill 2013 ILAB 93 ..........................................Insurance Law Amendment Bill 1993 ILAB (No 2) 93 ..............................Insurance Law Amendment Bill (No 2) 1993 Imp...................................................Imperial ISC...................................................Insurance and Superannuation Commissioner KFS..................................................Key Facts Sheet NSW Sup Ct....................................Supreme Court of New South Wales

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NSW Sup Ct CA.............................Court of Appeal of the Supreme Court of New South Wales NT Sup Ct .......................................Supreme Court of the Northern Territory PDS..................................................Product Disclosure Statement Qld Sup Ct ......................................Supreme Court of Queensland Qld Sup Ct CA................................Court of Appeal of the Supreme Court of Queensland reg ....................................................regulation Review Panel...................................Cameron A and Milne N who were commissioned by the Australian Government in 2003 to review the ICA RSA .................................................Retirement Savings Account s........................................................section ss ......................................................sections SA Sup Ct........................................Supreme Court of South Australia SR ....................................................Statutory Rules subs ..................................................subsection Sup Ct..............................................Supreme Court Tas Sup Ct .......................................Supreme Court of Australia Vic Sup Ct.......................................Supreme Court of Victoria WA Dist Ct ......................................District Court of Western Australia WA Sup Ct ......................................Supreme Court of Western Australia

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ICA ss 1-20

INSURANCE CONTRACTS ACT 1984 PART I – PRELIMINARY 1 2 3 4 5 6 7 8 9 9A 10 11 11AA

Short title............................................................................................. 11 Commencement.................................................................................. 14 Repeals............................................................................................... 14 Previous contracts.............................................................................. 15 Crown to be bound............................................................................. 16 Extension to external Territories......................................................... 17 Effect of Act on other laws..................................................................17 Application of Act................................................................................ 20 Exceptions to application of Act..........................................................23 Exclusion of pleasure craft from the Marine Insurance Act 1909................................................................. 34 Contracts of insurance........................................................................ 35 Interpretation....................................................................................... 38 Application of the Criminal Code........................................................ 49

PART IA – ADMINISTRATION 11AAA 11A 11B 11C 11D 11DA 11E 11F 11G 11H

Definition............................................................................................. 51 ASIC responsible for general administration of Act............................51 Powers of the ASIC............................................................................ 52 Supervisory powers—ASIC may obtain insurance documents.......................................................................... 53 Supervisory powers—ASIC may review administrative arrangements etc.........................................................54 Supervisory powers—liability of directors, employees and agents of insurers..................................................... 56 Examination of documents by ASIC not to imply compliance with relevant legislation................................................... 57 ASIC’s power to intervene in proceedings......................................... 57 Delegation [Repealed]........................................................................ 59 Annual report [Repealed].................................................................... 59

PART II – THE DUTY OF THE UTMOST GOOD FAITH 12 13 14 14A 15

This Part not to be read down............................................................ 61 The duty of the utmost good faith...................................................... 75 Parties not to rely on provisions except in the utmost good faith.................................................................... 138 Powers of ASIC—insurer’s failure to comply with the duty of the utmost good faith in relation to handling or settlement of claims......................................149 Certain other laws not to apply.........................................................151

PART III – INSURABLE INTERESTS DIVISION 1 – GENERAL INSURANCE 16

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Insurable interest not required.......................................................... 155

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Legal or equitable interest not required at time of loss....................158

DIVISION 2 – OTHER CONTRACTS OF INSURANCE 18 19

Insurable interest not required.......................................................... 160 Insurable interests [Repealed].......................................................... 162

DIVISION 3 – NAMING OF PERSONS BENEFITED 20

Persons benefited need not be named............................................ 162

PART IV – DISCLOSURES AND MISREPRESENTATIONS DIVISION 1 – INSURED’S DUTY OF DISCLOSURE 21 21A 21B 22

The insured’s duty of disclosure....................................................... 165 Eligible contracts of insurance—disclosure before contract originally entered into.............................................. 202 Eligible contracts of insurance—disclosure before contract renewed................................................................... 208 Insurer to inform of duty of disclosure.............................................. 213

DIVISION 2 – MISREPRESENTATIONS BY INSURED 23 24 25 26 27

Ambiguous questions........................................................................223 Warranties of existing facts to be representations........................... 226 Misrepresentation by life insured...................................................... 227 Certain statements not misrepresentations...................................... 228 Failure to answer questions..............................................................235

DIVISION 3 – REMEDIES FOR NON-DISCLOSURE AND MISREPRESENTATIONS BY INSURED 27A 28 29 30 31 31A 32 32A 33

Certain contracts of life insurance may be treated as if they comprised 2 or more separate contracts of life insurance..................................................239 General insurance.............................................................................241 Life insurance....................................................................................262 Misstatements of age........................................................................279 Court may disregard avoidance in certain circumstances................281 Non-disclosure by life insured...........................................................289 Non-disclosure or misrepresentation by life insured covered under group life contract.................................. 291 Non-disclosure or misrepresentation by holder of RSA................... 294 No other remedies............................................................................ 295

DIVISION 4 – KEY FACTS SHEETS 33A 33B 33C 33D

Application of this Division................................................................ 299 What is a Key Facts Sheet?..............................................................300 Insurer’s obligation to provide Key Facts Sheet...............................300 Provision of Key Facts Sheet does not constitute clearly informing......................................................... 301

PART V – THE CONTRACT DIVISION 1 – STANDARD COVER 2

Mann’s Annotated Insurance Contracts Act

34 35 36 37

Interpretation..................................................................................... 303 Notification of certain provisions....................................................... 304 Interpretation of regulations.............................................................. 310 Notification of unusual terms............................................................ 310

37A 37B 37C

Application of this Division................................................................ 313 Meaning of flood in prescribed contracts etc....................................315 Insurer must clearly inform insured whether prescribed contract provides insurance cover in respect of flood...................................................316 Circumstances in which prescribed contract is taken to provide insurance cover etc. in respect of flood............................................316 Division not to affect provision of insurance cover for certain events....................................................318

DIVISION 1A – DEFINITION OF FLOOD

37D 37E

DIVISION 2 – GENERAL PROVISIONS RELATING TO INSURANCE CONTRACTS 38 39 40 41 42 43 44 45 46 47 48 48AA 48A 49 50 51 52 53

Interim contracts of insurance...........................................................318 Instalment contracts of general insurance........................................320 Certain contracts of liability insurance.............................................. 321 Contracts of liability insurance—consent of insurer required for settlement etc. of claim................................................. 333 Maximum cover for premium............................................................ 339 Arbitration provisions.........................................................................340 Average provisions............................................................................341 “Other insurance” provisions.............................................................344 Pre-existing defect or imperfection................................................... 355 Pre-existing sickness or disability..................................................... 358 Contracts of general insurance—entitlements of third party beneficiaries.................................................................365 Life policy in connection with RSA for the benefit of third party beneficiary................................................................... 384 Life policy for the benefit of third party beneficiary.......................... 386 Where sum insured exceeds value of insured’s interest..................389 Sale of insured property................................................................... 392 Claims against insurer in respect of liability of insured or third party beneficiary................................................................... 395 “Contracting out” prohibited.............................................................. 403 Variation of contracts of insurance................................................... 406

DIVISION 3 – REMEDIES 54 55 55A

Insurer may not refuse to pay claims in certain circumstances....................................................................... 407 No other remedies............................................................................ 489 Representative actions by the ASIC................................................. 490

56 57

Fraudulent claims..............................................................................493 Interest on claims.............................................................................. 511

PART VI – CLAIMS

PART VII – EXPIRATION, RENEWAL AND CANCELLATION 58

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Table of provisions

Insurance Contracts Act 1984 59 59A 60 61 62 63 64A 64B

Cancellation procedure..................................................................... 536 Cancellation of contracts of life insurance........................................540 Cancellation of contracts of general insurance................................ 542 Insurers in liquidation........................................................................ 545 Cancellation of instalment contracts of general insurance...............546 Cancellations of contracts of insurance void.................................... 547 “Cooling-off” period: consumer credit insurance [Repealed]............ 549 Special provision regarding investment-linked contracts [Repealed]......................................................................... 549

64 65 66 67

Application to third party beneficiaries..............................................551 Subrogation to rights against family etc........................................... 552 Subrogation to rights against employees......................................... 555 Rights with respect to money recovered under subrogation etc....................................................................... 560 Contracts affecting rights of subrogation.......................................... 566

PART VIII – SUBROGATION

68

PART IX – INFORMATION, NOTICES AND REASONS 69 70 71 71A

74 75

Giving of information to insureds...................................................... 569 Notices to be given to life insureds in certain cases........................571 Agency.............................................................................................. 572 Notices to be provided by insurer concerning certain kinds of insurance [Repealed].......................................................... 575 Content and other requirements for notices etc. to be given in writing.........................................................................575 Method for giving written notices or documents...............................577 Insurance arranged in connection with supply of goods and services [Repealed]........................................................ 578 Policy documents to be supplied on request................................... 579 Reasons for cancellation etc. to be given........................................ 579

76 76A 77 78

Contribution between insurers.......................................................... 583 Liability of directors and employees etc. [Repealed]........................584 Giving notices [Repealed]................................................................. 585 Regulations....................................................................................... 586

72 72A 73

PART X – MISCELLANEOUS

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ICA ss 1-20

Table of Amending Legislation

Table of Amending Legislation Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Act 1984

80 of 1984

25 Jun 1984

1 Jan 1986 (Gaz S487 of 1985)

This legislation has been amended as follows:

Amending legislation

Number

Date of gazettal/ assent/ registration

Statute Law (Miscellaneous Provisions) Act (No 1) 1985

65 of 1985

5 Jun 1985

Sch 1: 3 Jul 1985

Australian Trade Commission (Transitional Provisions and Consequential Amendments) Act 1985

187 of 1985

16 Dec 1985

Sch 4: 6 Jan 1986 (Gaz S551 of 1985)

Statute Law (Miscellaneous Provisions) Act (No 2) 1985

193 of 1985

16 Dec 1985

Sch 1: 1 Jan 1986 (Gaz S487 of 1985)

Statute Law (Miscellaneous Provisions) Act (No 1) 1986

76 of 1986

24 Jun 1986

Sch 1: 1 Jan 1986 (Gaz S487 of 1985)

Statute Law (Miscellaneous Provisions) Act (No 2) 1986

168 of 1986

18 Dec 1986

Sch 1: 1 Jan 1986

Export Finance and Insurance Corporation (Transitional Provisions and Consequential Amendments) Act 1991

149 of 1991

21 Oct 1991

Sch 1: 1 Nov 1991

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Date of commencement

5

Insurance Contracts Act 1984

Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Act 1984

80 of 1984

25 Jun 1984

1 Jan 1986 (Gaz S487 of 1985)

This legislation has been amended as follows:

6

Amending legislation

Number

Date of gazettal/ assent/ registration

Insurance Laws Amendment Act (No 2) 1994

49 of 1994

7 Apr 1994

Sch items 2, 4, 5, 7 and 17: 7 Apr 1994; Sch items 3, 6 and 8–16: 1 Oct 1994 (Gaz GN38 of 1994)

Life Insurance (Consequential Amendments and Repeals) Act 1995

5 of 1995

23 Feb 1995

Sch items 42–52: 1 Jul 1995 (Gaz GN24 of 1995)

Crimes and Other Legislation Amendment Act 1997

20 of 1997

7 Apr 1997

Sch 2 item 6: 7 Apr 1997

Retirement Savings Accounts (Consequential Amendments) Act 1997

62 of 1997

28 May 1997

Sch 10: 2 Jun 1997 (Gaz S202 of 1997)

Financial Laws Amendment Act 1997

107 of 1997

30 Jun 1997

Sch 8: 30 Jun 1997

Date of commencement

Mann’s Annotated Insurance Contracts Act

Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Act 1984

80 of 1984

25 Jun 1984

1 Jan 1986 (Gaz S487 of 1985)

ICA ss 1-20

Table of Amending Legislation

This legislation has been amended as follows:

Amending legislation

Number

Date of gazettal/ assent/ registration

Insurance Laws Amendment Act 1998

35 of 1998

22 Apr 1998

Sch 1 items 77–81: 30 Apr 1998 (Gaz S188 of 1998)

Financial Sector Reform (Amendments and Transitional Provisions) Act 1998

54 of 1998

29 Jun 1998

Sch 12: 1 Jul 1998 (Gaz S316 of 1998)

Financial Sector Reform (Amendments and Transitional Provisions) Act (No 1) 1999 (am by Financial Sector Legislation Amendment Act (No 1) 2000)

44 of 1999

17 Jun 1999

Sch 7 item 117: 1 Jul 1999 (Gaz S283 of 1999)

Export Finance and Insurance Corporation Amendment Act 2000

11 of 2000

15 Mar 2000

Sch 2 items 2–4: 1 Jul 2000

Treasury Legislation Amendment (Application of Criminal Code) Act (No 3) 2001

117 of 2001

18 Sep 2001

Sch 3 items 5–14: 15 Dec 2001

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Date of commencement

7

Insurance Contracts Act 1984

Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Act 1984

80 of 1984

25 Jun 1984

1 Jan 1986 (Gaz S487 of 1985)

This legislation has been amended as follows:

8

Amending legislation

Number

Date of gazettal/ assent/ registration

Financial Services Reform (Consequential Provisions) Act 2001

123 of 2001

27 Sep 2001

Sch 1 items 246– 249: 11 Mar 2002 (Gaz GN42 of 2001)

Insurance and Aviation Liability Legislation Amendment Act 2002

96 of 2002

10 Nov 2002

Sch 1 item 6: 10 Nov 2002

Medical Indemnity (Prudential Supervision and Product Standards) (Consequential Amendments) Act 2003

36 of 2003

2 May 2003

Sch 1 items 12–17: 1 Jul 2003

Private Health Insurance (Transitional Provisions and Consequential Amendments) Act 2007

32 of 2007

30 Mar 2007

Sch 2 item 54: 1 Apr 2007

Private Health Insurance Legislation Amendment Act 2008

54 of 2008

25 Jun 2008

Sch 1 item 5: 25 Jun 2008

Statute Law Revision Act 2008

73 of 2008

3 Jul 2008

Sch 4 items 343– 347: 4 Jul 2008

Insurance Contracts Amendment Act 2012

41 of 2012

15 Apr 2012

Schs 1 and 2: 15 Apr 2012

Date of commencement

Mann’s Annotated Insurance Contracts Act

Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Act 1984

80 of 1984

25 Jun 1984

1 Jan 1986 (Gaz S487 of 1985)

ICA ss 1-20

Table of Amending Legislation

This legislation has been amended as follows:

Amending legislation

Number

Date of gazettal/ assent/ registration

Personal Liability for Corporate Fault Reform Act 2012

180 of 2012

10 Dec 2012

Sch 6 items 20–22: 11 Dec 2012

Insurance Contracts Amendment Act 2013

75 of 2013

28 Jun 2013

Schs 1 and 3, Sch 4 items 3–5, Sch 5 items 1, 2, 12, 13, 15 and 16 and Sch 6 items 23–28: 28 Jun 2013; Sch 2 items 1–8 and Sch 7 items 1 and 2: 28 Dec 2013; Sch 5 items 4–11 and Sch 6 items 1–22 and 30–40: 28 Jun 2014; Sch 4 items 1, 6, 9–12 and 14: 28 Dec 2015

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Date of commencement

9

Insurance Contracts Act 1984

Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Act 1984

80 of 1984

25 Jun 1984

1 Jan 1986 (Gaz S487 of 1985)

This legislation has been amended as follows:

Amending legislation

Number

Date of gazettal/ assent/ registration

Territories Legislation Amendment Act 2016

33 of 2016

23 Mar 2016

10

Date of commencement Sch 5 item 74: 1 Jul 2016

Mann’s Annotated Insurance Contracts Act

ICA ss 1-20

PART I – PRELIMINARY An Act 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, and for related purposes 1

Short title This Act may be cited as the Insurance Contracts Act 1984.

SECTION 1 COMMENTARY Pre-insurance contracts act ..................................................................... Reference to the Australian Law Reform Commission ........................... Reform and modernise: interpretation ..................................................... Fair balance: interpretation ...................................................................... Penalty units ............................................................................................

[1.10] [1.20] [1.30] [1.40] [1.50]

[1.10] Pre-insurance contracts act Prior to the commencement of the Insurance Contracts Act 1984 (ICA) contracts of insurance, now governed by the ICA, were governed by a mixture of federal and state statutes, imperial statutes and common law principles. The reference to the Australian Law Reform Commission (ALRC) on 9 September 1976 by the Attorney-General regarding the laws surrounding insurance contracts, provided the opportunity for a coherent scrutiny of the adequacy and appropriateness of these statutes and principles.

[1.20] Reference to the Australian Law Reform Commission The following matters were referred to the ALRC. 1. The adequacy of the law governing contracts of insurance (excluding marine insurance, workers’ compensation and compulsory third party insurance) having regard to the interests of insurer, insured and the public, and in particular whether: ©

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(a) terms and conditions presently found in contracts of insurance operate unfairly; (b) certain, and if so what, terms and conditions should be mandatory in contracts of insurance; (c) certain, and if so what, terms now found in contracts of insurance should be prohibited; (d) the practice of incorporating statements made in proposal forms into contracts of insurance provides an equitable basis of contract between the insurer and the insured; (e) it should be mandatory for an insurer to supply a person seeking insurance written information as to that person’s rights and obligations under the proposed contract; (f) arbitration clauses in contracts of insurance are operating unfairly to the parties or are otherwise undesirable; (g) the principles of the law of agency in precontractual negotiations should be modified to provide greater fairness to the insured; 2. What, if any, legislative or other measures are required to ensure a fair balance between the interests of insurer and insured; and 3. Any other relevant matter.

[1.30] Reform and modernise: interpretation The Australian Law Reform Commission Report No 20 (ALRC 20) was published in 1982, six years after the reference was made by the Attorney-General. The ALRC prepared a draft Bill which was published with ALRC 20 and as part of Appendix A to ALRC 20. The ICA largely follows the draft Bill. Clause 3 of the draft Bill does not appear in the ICA. It reads: Report to be an aid to interpretation 3. It is the intention of the Parliament that this Act and the regulations are to give effect to the recommendations made in the report of the Law Reform Commission entitled Insurance Contracts and laid before each House of the Parliament under the Law Reform Commission Act 1973 and accordingly, in the interpretation of this Act, regard may be had to that report, including the draft legislation set out in that report.

Priestley JA (NSW Sup Ct CA) speculated, in Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389; 6 ANZ Ins Cas 61-042 at 402 (NSWLR), 76,996 (ANZ Ins Cas), that cl 3 was not included in the ICA because of the insertion of s 15AB in the Acts Interpretation Act 1901 (Cth) prior to the enactment of the ICA. Section 15AB added further avenues for reference to extrinsic material in the interpretation of a provision to those permitted by s 15AA of the Act. 12

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When having reference to ALRC 20 and its supporting material, it is worth noting the description as to how the ICA should be construed given by Kirby P in the Ferrcom case (at 391 (NSWLR); 76,987-76,988 (ANZ Ins Cas)): [A remedial] statute should not be given a narrow or pedantic construction. It should be construed, so far as its language permits, to give effect to its remedial purpose. In order better to understand that purpose, to elucidate the mischief perceived in the pre-existing law and to clarify ambiguities in the Act, it is permissible to have regard to the report of the Australian Law Reform Commission which accompanied a draft Bill which, with certain modifications, became the Act.

It is also worth noting the importance of “context” in the interpretation of the ICA, as referred to by the High Court in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 71 ALJR 312; 9 ANZ Ins Cas 61-348; [1997] HCA 2 (at 408 (CLR); 76,853 (ANZ Ins Cas)): 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, 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.

(references omitted)

[1.40] Fair balance: interpretation In construing the ICA, it appears that regard should be had for the legislation in its entirety. The High Court in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 considered the long title of the ICA in addition to sections of the ICA not under immediate consideration. The long title acts as a touchstone to remind readers that the intention behind the ICA is to reform and modernise the law relating to contracts of insurance so that a “fair balance” is struck between the interests of insurers, insureds and other members of the public. Kirby P said in relation to s 54 ICA that it “does not cut a jagged swathe through the respective rights of the insurer and the insured”: Commercial Union Assurance Co of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389; 6 ANZ Ins Cas 61-042 at 398 (NSWLR), 76,993 (ANZ Ins Cas). The long title and its reference to the interests of “other members of the public” should serve as a reminder that amongst other things, the cost and availability of insurance are factors to be taken into account. ©

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[1.40]

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Insurance Contracts Act 1984

[1.40]

[1.50] Penalty units Contravention of various sections of the ICA can result in the imposition of penalty units. Penalty units accord with the monetary amount specified in s 4AA of the Crimes Act 1914 (Cth). 2

Commencement This Act shall come into operation on a day to be fixed by Proclamation.

SECTION 2 COMMENTARY [2.10] Background The ICA came into operation on 1 January 1986. 3

Repeals

(1) The Imperial Acts known as The Life Assurance Act, 1774, The Fires Prevention (Metropolis) Act, 1774 and The Marine Insurance Act, 1788, in their application to a contract of insurance or proposed contract of insurance to or in relation to which this Act applies, are repealed in so far as they are part of the law of the Commonwealth or of an external Territory to which this Act extends. (2) Section 8 of the Acts Interpretation Act 1901 extends to those Imperial Acts as so repealed as though they were Acts of the Parliament repealed by this Act.

SECTION 3 COMMENTARY [3.10] Background and synopsis The ALRC determined that all contracts of indemnity should be excluded from the statutory requirement of insurable interest. If a loss has been suffered, the lack of interest either at the date of the contract or at any time prior to the loss should not prevent recovery. Therefore, the Life Assurance Act 1774 (IMP) and the Marine Insurance Act 1788 (IMP) concerning the naming of parties interested in the contract were repealed insofar as they apply to contracts of insurance to which the ICA applies: ALRC 20, at [117], [147] and [149]. The Fires Prevention (Metropolis) Act 1774 (IMP), and in particular s 83, aims to restrict the incidence of arson by providing that where premises 14

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are insured and a loss occurs, the insurer must, upon a request by any person interested in the property, apply the money payable towards reinstatement of the premises. At the time of the publication of ALRC 20 this had remained the law in most Australian jurisdictions except New South Wales and the Australian Capital Territory. The ALRC determined that there were better ways of dealing with the problem and the Fires Prevention (Metropolis) Act 1774 was also repealed insofar as it applies to contracts of insurance to which the ICA applies: ALRC 20, at [128] and [129]. Section 8 of the Acts Interpretation Act 1901 (Cth) deals with the effect of the repeal of Acts. An Imperial Act is not an Act for the purposes of the Acts Interpretation Act 1901. Therefore s 3(2) ICA extends s 8 of the Acts Interpretation Act 1901 to cover the repeal of the specified Imperial Acts. 4

Previous contracts

(1) Subject to subsection (2), this Act does not apply to or in relation to a contract of insurance that was entered into before the date of commencement of this Act. (2) The application of sections 32, 54 and 56 extends to and in relation to a superannuation contract (other than an individual superannuation contract) that was entered into before the date of commencement of this Act in so far as a person who becomes, on or after that date, a member of the relevant superannuation or retirement scheme is concerned. [Subs (2) am Act 75 of 2013, s 3 and Sch 6 item 30] [S 4 am Act 75 of 2013]

SECTION 4 COMMENTARY [4.10] Background and synopsis The ICA applies prospectively. The only exception is found in s 4(2) ICA. A reference in the ICA to the “entering into a contract of insurance” has been defined in s 11(9) ICA as including: extension or variation in the case of a contract of life insurance; renewal, extension or variation in the case of any other contract of insurance; and the reinstatement of any previous contract of insurance. An example of the prospective application of the ICA is found in Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22. The respondent, Austcan, had renewed a contract of insurance shortly after ©

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[4.10]

s5

Insurance Contracts Act 1984

[4.10]

16 January 1986 with effect back to 23 November 1985 being the date upon which the earlier term of the insurance had expired. The High Court held (as did Cox J, at first instance, and the Full Court of the South Australian Supreme Court) that the ICA applied to the contract of insurance notwithstanding its retrospective effect back to a date prior to the commencement of the ICA. Subsection 4(2) of the ICA provides that the only exception to prospectivity is in relation to a superannuation contract (other than an individual superannuation contract): s 11(4). Prior to the amendment of s 4(2) (and the amendment of s 11(4) to reposition the word “and”) by the Insurance Contracts Amendment Act 2013, s 4(2) referred to a blanket superannuation contract: s 11(4)(c). This change in nomenclature from “blanket superannuation contract” to “superannuation contract (other than an individual superannuation contract)” commenced on 28 June 2014 (which is 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent). Sections 32, 54 and 56 (which relate to remedies for non-disclosure and misrepresentation (s 32), breach of contract (s 54) and fraudulent claims (s 56) will apply to that type of superannuation contract entered into before the date of the commencement of the ICA, but only insofar as those contracts affect a person who, after the date of commencement, became a member of the relevant scheme: Explanatory Memorandum, at [16]. 5

Crown to be bound

(1) This Act binds the Crown in right of the Commonwealth or of a Territory in which this Act applies or to which this Act extends but does not bind the Crown in right of a State. (2) Nothing in this Act renders the Crown in right of the Commonwealth or of a Territory liable to be prosecuted for an offence arising under this Act.

SECTION 5 COMMENTARY [5.10] Synopsis The Crown in right of the Commonwealth or of a Territory in which the legislation applies or to which it extends will be bound by its provisions. The Crown will not, however, be subject to prosecution for any offence under the ICA: Explanatory Memorandum, at [17]. See also s 9(1)(e) and 9(2).

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s7 ICA ss 1-20

[7.10]

Extension to external Territories

(1) This Act extends to Norfolk Island, the Territory of Christmas Island and the Territory of Cocos (Keeling) Islands, and to any other external Territory that is for the time being declared by Proclamation to be a Territory to which this Act extends. [Subs (1) am Act 33 of 2016, s 3 and Sch 5 item 74]

(2) A reference in this Act to the date of commencement of this Act is, in relation to an external Territory to which this Act extends, a reference to that date or to the date on which this Act commences so to extend, whichever is the later. [S 6 am Act 33 of 2016]

SECTION 6 COMMENTARY [6.10] Synopsis The ICA does not extend to external Territories unless it is declared to do so by proclamation. The ICA comes into operation in those Territories either on the date of that proclamation or on the date fixed by proclamation, whichever is later: Explanatory Memorandum, at [18]. 7

Effect of Act on other laws It is the intention of the Parliament that this Act is not, except in so far as this Act, either expressly or by necessary intendment, otherwise provides, to 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 or rule of the common law (including the law merchant) or of equity.

SECTION 7 COMMENTARY Effect of ICA: code ..................................................................................

[7.10]

Application: s 7 ........................................................................................

[7.20]

Implied repeal ..........................................................................................

[7.30]

[7.10] Effect of ICA: code According to the Notes to the Draft Insurance Contracts Bill 1982: The [ICA] is not a code of insurance contract law. It only relates to certain aspects of the law relating to insurance contracts.

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In Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418; 71 ALJR 156; 9 ANZ Ins Cas 61-347 at 432 (CLR), 76,825 (ANZ Ins Cas) the High Court said: “The function of s 7 is to confirm that the statute is not a code of insurance contract law and that, rather, it relates only to certain aspects of the law relating to insurance contracts”. Parts of the ICA provide a code for certain aspects of the law relating to insurance contracts. For instance the High Court (majority judgment) in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 at 615 (CLR), 75,836 (ANZ Ins Cas) noted in relation to Pt IV of the ICA: The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt 4. To that extent Pt 4 is a statutory code which replaces the common law.

There are important consequences flowing from this patchwork codification. The High Court noted that it is legitimate to resort to the antecedent common law in only extremely limited circumstances to interpret Pt IV of the ICA: see Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 (at 615 (CLR); 75,836 (ANZ Ins Cas)) applying Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd (1987) 163 CLR 236; 61 ALJR 415; [1987] HCA 30. In the event of an inconsistency between a federal and state enactment the state enactment is, to the extent of the inconsistency, invalid according to s 109 of the Constitution. Therefore, s 57 ICA which has been said to lay down a code for the payment of interest on insurance claims, will prevail over inconsistent state legislation: see NRMA Insurance Ltd v Tatt (1989) 94 FLR 339; 92 ALR 299; 5 ANZ Ins Cas 60-902 and commentary at [57.10.1].

[7.20] Application: s 7 Perry J (SA Sup Ct) considered the application of s 7 ICA to the question as to the liability of an insurer to pay interest under s 57 and elsewhere in Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40; 8 ANZ Ins Cas 61-209. He expressed an opinion that the liability of an insurer to pay interest created by s 57(1) of the ICA is a liability which can be regarded as running concurrently with a liability of some other provision of the law to pay interest, so long as the rate is no lower than the rate prescribed pursuant to s 57. He could not find anything either “expressly or by necessary intendment” in s 57 to indicate that it is to operate to oust provisions which would otherwise apply and which would operate to oblige an insurer to pay interest at a rate higher than that prescribed by the regulations. 18

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In this regard Perry J adopted the approach of Rogers J (NSW Sup Ct) in Tatt v NRMA Insurance Ltd (1988) 5 ANZ Ins Cas 60-834. He disagreed with Bollen J (SA Sup Ct) in Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967 who held that there was an inconsistency between s 57 and s 30C of the Supreme Court Act 1935 (SA) which permitted an award of interest on damages or money due, at that time, at a higher rate. Perry J did not refer to the judgment of the Court of Appeal in the Tatt case. Perry J expressed an opinion that the common law rule against double compensation was expressly preserved by s 7 of the ICA. He said (at 75,328): In my opinion the rule against double compensation, which is a “rule of the Common Law”, is expressly preserved in the case of the Insurance Contracts Act by s 7 of that Act, with the result that interest under s 57 should not normally be awarded if the assessment of damages proceeds on a basis which compensates the plaintiff for being out-of-pocket with respect to the moneys eventually awarded by the judgment.

However, Giles J (NSW Sup Ct) in Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1993) 32 NSWLR 735; 7 ANZ Ins Cas 61-202 applied the Court of Appeal judgment in NRMA Insurance Ltd v Tatt (1989) 94 FLR 339; 92 ALR 299; 5 ANZ Ins Cas 60-902 and rejected a submission that s 7 expressed the legislature’s intention that the ICA should not affect the operation of s 95 of the Supreme Court Act 1970 (NSW) governing interest after judgment. Giles J also rejected a submission that s 7 should not affect the operation of a technical rule as to merger of a cause of action in a judgment on the basis of the scope of s 57. It is submitted that the approach of Giles J is to be preferred because it took into account what became the accepted scope of s 57. The issue of a potential inconsistency was, in any event, resolved by the insertion of s 57(4) and 57(5) by virtue of the Insurance Laws Amendment Act 1998. See [57.10.1].

[7.30] Implied repeal Section 7 says that it is intended that the ICA is not to affect other laws except insofar as it expressly or by necessary intendment otherwise provides. Section 7 therefore does not operate to impliedly repeal an earlier Act: see Brownie J (NSW Sup Ct) in John Kaldor Fabricmaker Pty Ltd v Mitchell Cotts Freight (Aust) Pty Ltd (1989) 18 NSWLR 172; 98 FLR 99; 6 ANZ Ins Cas 60-960 at 76,359 (ANZ Ins Cas).

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s8

8

Insurance Contracts Act 1984

[8.10]

Application of Act

(1) Subject to section 9, the application of this Act extends to contracts of insurance and proposed contracts of insurance the proper law of which is or would be the law of a State or the law of a Territory in which this Act applies or to which this Act extends. (2) For the purposes of subsection (1), where the proper law of a contract or proposed contract would, but for an express provision to the contrary included or to be included in the contract or in some other contract, be the law of a State or of a Territory in which this Act applies or to which this Act extends, then, notwithstanding that provision, the proper law of the contract is the law of that State or Territory.

SECTION 8 COMMENTARY Background and synopsis .......................................................................

[8.10]

Proper law of a contract ..........................................................................

[8.20]

Express provision to the contrary ............................................................

[8.30]

[8.10] Background and synopsis The ALRC determined that it would be improper if the ICA could be avoided by selecting a foreign law or the law of a territory in which the ICA does not apply, that is, by way of a choice of law clause. Therefore the ICA applies to all contracts the proper law of which is the law of a state or territory to which the ICA extends. Where, but for an express term to the contrary, the contract would be governed by the law of a state or territory in which the ICA applies, then that is the law which will apply and any express term to the contrary should be disregarded: ALRC 20, at [15]. In the Notes to the Draft Insurance Contracts Bill 1982 (Cth) the ALRC stated: 2. This and the next clause determine the application of the Draft Bill. This clause provides that the contracts to which the Draft Bill applies include all contracts the proper law of which is the law of a state or territory. The normal rules of private international law will determine what the proper law of any particular contract of insurance will be. However, Australian courts will not be permitted to take into account, in determining what the proper law of a contract of insurance is, provisions included in the contract (or in a related contract) that specified that the proper law is some foreign law. This is to avoid circumventing the Act. 20

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[8.20] Proper law of a contract Nicholson J (Fed Ct WA District) in a case involving an interlocutory application to issue proceedings in Australia against a Swedish insurer, applied s 8 and the High Court decision in Akai in considering a clause in a policy: Quinlan v Safe International Forsakrings AB (2005) 14 ANZ Ins Cas 61-693; [2005] FCA 1362. The clause in the policy provided: This insurance is issued by SAFE … and it is effective world wide. Swedish legislation regarding insurance contracts shall always prevail and any dispute arising out of this insurance shall be settled according to Swedish law and by a public court of law in Sweden.

Nicholson J noted that there was a proper law issue which was different from the issue of the jurisdiction in which a dispute arising out of the policy can be litigated and which he termed the jurisdiction issue. As to the proper law issue he found that, putting the proper law clause to one side, the policy had its “closest and most real connection” to the Australian system of law. The policy provided benefits to Australian participants in an overseas program which involved travel from and back to Australia, and the applicants signed onto the policy whilst in Australia. Accordingly s 8 operated to override the proper law clause. Therefore the ICA applied to the policy. This, amongst other matters, determined the jurisdiction issue. Nicholson J found that the protective factor in the ICA favoured the ability to sue in an Australian Court – assuming that a Swedish court would not apply the ICA to the policy.

[8.30] Express provision to the contrary Section 8(2) of the ICA strikes down express provisions as to the proper law of a contract of an artificial nature inserted for the purpose of circumventing the ICA. If the proper law of a contract can be inferred from provisions that are not artificial and not inserted for the purpose of circumventing ICA then the ICA may have no application. In John Kaldor Fabricmaker Pty Ltd v Mitchell Cotts Freight (Aust) Pty Ltd (1989) 18 NSWLR 172; 98 FLR 99; 6 ANZ Ins Cas 60-960 an importer sued its customs agent for damages in negligence. The customs agent had entered into a contract of insurance with an association which was a protection and indemnity club. A dispute arose as to the proper law of the contract. The contract, incorporating the rules of the association, provided that every insurance subject to the rules should be construed in accordance with English law. The parties agreed that this clause should be disregarded for the purpose of ascertaining the proper law of the contract. The rules also contained an arbitration clause referable to London. The customs agent (dealing with goods imported into Australia and based in Australia) argued that the proper law of the contract was New South ©

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[8.30]

Wales law within the meaning of s 8(2) of the ICA. Further, the agent contended but for the provision in the rules and by virtue of s 8(1), the ICA applied. Thus by the operation of s 43 of the ICA the arbitration clause in the rules was void. The association argued that by virtue of s 8(2) the proper law of the contract was the law of England. Brownie J (NSW Sup Ct), although bound to disregard the first provision in the rules, considered the arbitration provision and held that it contained material from which it could be inferred that the actual intention of the parties was that the contract would be governed by English law. Although the arbitration provision was not an “express provision” within the meaning of s 8(2), it nevertheless could be inferred from its terms that the proper law was English law. Brownie J noted that according to the ALRC (ALRC 20, at [15] and notes to cl 9 of the Bill) the purpose of s 8(2) is to avoid provisions of an artificial nature, inserted for the purpose of circumventing the ICA. He found that this was factually far removed from the subject case. In Akai Pty Ltd v People’s Insurance Co Ltd an insurer under a contract of insurance which provided indemnity for certain credit risks, applied for a stay of proceedings in New South Wales pending final determination of proceedings brought in England. It did so on the basis of general provision 9 of the policy which stated: This policy shall be governed by the laws of England. Any dispute arising from this policy shall be referred to the Courts of England.

O’Keefe CJ Comm D (NSW Sup Ct) granted a stay of the proceedings in New South Wales. The Court of Appeal (Sheller and Meagher JJA, Kirby P dissenting) dismissed the appeal from his decision: Akai Pty Ltd v People’s Insurance Co Ltd (1995) 126 FLR 204; 8 ANZ Ins Cas 61-254. The High Court by a majority (Toohey, Gaudron and Gummow JJ; Dawson and McHugh JJ dissenting) allowed the appeal, setting aside the order for a stay of proceedings in New South Wales: Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418; 71 ALJR 156; 9 ANZ Ins Cas 61-347. The majority noted the remedial purpose of the ICA militated against a narrow reading of the phrase “but for an express provision to the contrary” in s 8(2). They concluded that the phrase is not to be read as identifying only what in texts and judgments often is called an express choice of law clause (an example of which was the first sentence of provision 9 of the policy). They said the phrase would also apply to provisions from which an express choice might be inferred. The majority said (at 436 (CLR); 76,827 (ANZ Ins Cas): The phrase, in s 8(2), “but for an express provision to the contrary” identifies that part of the logical universe (the normal common law rules of private international law as understood in Australia and which identify the proper law) 22

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which remains after allowance for the operation of the objective test to select the law of a State or a Territory. The words “express provision” in that phrase embrace those provisions of the contract from which, or by recourse to which, it would be determined that the parties to the contract had selected or chosen a proper law which was not the law of a State or a Territory. Notwithstanding those provisions, if, viewed objectively, the proper law of the contract under the normal rules of private international law as understood in Australia, would be the law of a State or Territory, then s 8 operates to attract the application of the Act to the relevant contract of insurance.

Applying this wide reading of the words “express provision” and also applying s 52 of the ICA (see [52.20]) the majority found that both sentences of provision 9 were rendered void. They were to be disregarded for the purpose of determining the proper law of the contract of insurance under s 8(1). The dissenting judges, Dawson and McHugh JJ, noted that there was no basis to conclude that it was the intention of the legislature to preclude exclusive jurisdiction clauses. Therefore, in their view the ICA has “no operation where the parties have agreed to have their disputes determined by the courts of another jurisdiction in circumstances where effect should be given to their intention by an Australian Court”. 9

Exceptions to application of Act

(1) Except as otherwise provided by this Act, this Act does not apply to or in relation to contracts and proposed contracts: (a) of reinsurance; or (b) of insurance entered into, or proposed to be entered into, by a private health insurer within the meaning of the Private Health Insurance Act 2007 in respect of its health insurance business within the meaning of Division 121 of that Act; or (ba) of insurance entered into, or proposed to be entered into, by a private health insurer within the meaning of the Private Health Insurance Act 2007 in respect of its health-related business within the meaning of section 131-15 of that Act that is conducted through a health benefits fund (as defined by section 131-10 of that Act); 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 within the meaning of the Export Finance and Insurance Corporation Act 1991 that are entered into on or after the commencement of this paragraph; 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

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(ii)

(f)

compensation for the death of a person, or for injury to a person, arising out of the use of a motor vehicle; or entered into or proposed to be entered into: (i) for the purposes of a law (including a law of a State or a 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.

[Subs (1) am Act 75 of 2013, s 3 and Sch 1 item 7; Act 54 of 2008, s 3 and Sch 1 item 5; Act 32 of 2007, s 3 and Sch 2 item 54; Act 11 of 2000, s 3 and Sch 2 items 2–4; Act 149 of 1991, s 50 and Sch 1; Act 187 of 1985, s 60 and Sch 4]

(1A) If a contract of insurance, or a proposed contract of insurance, includes: (a) provisions (the first group of provisions) that would, if they comprised a single contract or proposed contract, form a contract referred to in any of paragraphs (1)(a) to (f); and (b) provisions (the second group of provisions) that would, if they comprised a single contract or proposed contract, form a contract other than a contract referred to in any of paragraphs (1)(a) to (f); then subsection (1) applies as if the first group of provisions and the second group of provisions were each a separate contract or proposed contract. [Subs (1A) insrt Act 75 of 2013, s 3 and Sch 1 item 9]

(1B) Despite subsection (1A), if a contract of insurance, or a proposed contract of insurance, includes: (a) provisions (the first group of provisions) for the purposes of a law referred to in subparagraph (1)(f)(i); and (b) provisions (the second group of provisions) that provide insurance cover of the kind referred to in subparagraph (1)(f)(ii); then subsection (1) applies as if the first group of provisions and the second group of provisions were together a separate contract or proposed contract. [Subs (1B) insrt Act 75 of 2013, s 3 and Sch 1 item 9]

(1C) If: (a) a provision (a related provision) of a contract of insurance, or a proposed contract of insurance, relates to or affects the operation of a group or groups of provisions included in the contract or proposed contract; and (b) because of subsection (1A) or (1B), subsection (1) applies as if that group or those groups of provisions were a separate contract or proposed contract; then the related provision is, for the purposes of subsection (1), to be regarded as a provision included in that separate contract or proposed contract. [Subs (1C) insrt Act 75 of 2013, s 3 and Sch 1 item 9]

(2) This Act does not apply to or in relation to contracts and proposed contracts of insurance entered into, or proposed to be entered into, in the course

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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. [Subs (2) am Act 65 of 1985, s 3 and Sch 1]

(3) Sections 37, 41, 58, 59, 60, 63, 69 and 74 do not apply in relation to contracts, and proposed contracts, of insurance against the risk of the loss of an aircraft, or damage to the hull of an aircraft, as a result of war. [Subs (3) subst Act 107 of 1997, s 3 and Sch 8 item 1; insrt Act 76 of 1986, s 3 and Sch 1]

(4) Sections 53 and 63 do not apply in relation to a provision of a contract, or a proposed contract, of insurance to the extent that: (a) the provision authorises or permits the insurer to vary or cancel either or both of the following: (i) cover for risks related to war; (ii) cover for risks related to terrorism; and (b) the provision is prescribed or otherwise identified by the regulations. [Subs (4) insrt Act 96 of 2002, s 3 and Sch 1 item 6] [S 9 am Act 75 of 2013; Act 54 of 2008; Act 32 of 2007; Act 96 of 2002; Act 11 of 2000; Act 107 of 1997; Act 149 of 1991; Act 76 of 1986; Act 187 of 1985; Act 65 of 1985 Cross-reference: Insurance Contracts Regulations 1985: reg 33 prescribes a provision of a contract, or proposed contract, for extended coverage endorsement for s 9(4)(b).]

Pre ICAA 2013 Amendment (pre 28 June 2013) 9

Exceptions to application of Act

(1) Except as otherwise provided by this Act, this Act does not apply to or in relation to contracts and proposed contracts: (a) of reinsurance; or (b) of insurance entered into, or proposed to be entered into, by a private health insurer within the meaning of the Private Health Insurance Act 2007 in respect of its health insurance business within the meaning of Division 121 of that Act; or (ba) of insurance entered into, or proposed to be entered into, by a private health insurer within the meaning of the Private Health Insurance Act 2007 in respect of its health-related business within the meaning of Section 131-15 of that Act that is conducted through a health benefits fund (as defined by Section 131-10 of that Act); or (c) of insurance entered into, or proposed to be entered into, by a friendly society; or

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(ca) of insurance entered into, or proposed to be entered into, by the Export Finance and Insurance Corporation, other than short-term insurance contracts within the meaning of the Export Finance and Insurance Corporation Act 1991 that are entered into on or after the commencement of this paragraph; 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. [Subs (1) am Act 54 of 2008, s 3 and Sch 1 item 5; Act 32 of 2007, s 3 and Sch 2 item 54; Act 11 of 2000, s 3 and Sch 2 items 2–4; Act 149 of 1991, s 50 and Sch; Act 187 of 1985, s 60 and Sch 4]

(2) This Act does not apply to or in relation to contracts and proposed contracts of insurance 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. [Subs (2) am Act 65 of 1985, s 3 and Sch]

(3) Sections 37, 41, 58, 59, 60, 63, 69 and 74 do not apply in relation to contracts, and proposed contracts, of insurance against the risk of the loss of an aircraft, or damage to the hull of an aircraft, as a result of war. [Subs (3) subst Act 107 of 1997, s 3 and Sch 8 item 1; insrt Act 76 of 1986, s 3 and Sch 1]

(4) Sections 53 and 63 do not apply in relation to a provision of a contract, or a proposed contract, of insurance to the extent that: (a) the provision authorises or permits the insurer to vary or cancel either or both of the following: (i) cover for risks related to war; (ii) cover for risks related to terrorism; and (b) the provision is prescribed or otherwise identified by the regulations. [Subs (4) insrt Act 96 of 2002, s 3 and Sch 1 item 6] [S 9 am Act 54 of 2008; Act 32 of 2007; Act 96 of 2002; Act 11 of 2000; Act 107 of 1997; Act 149 of 1991; Act 76 of 1986; Act 187 of 1985; Act 65 of 1985 Cross-reference: Insurance Contracts Regulations 1985: reg 33 prescribes a provision of a contract, or proposed contract, for extended coverage endorsement for s 9(4)(b).]

SECTION 9 COMMENTARY Background and synopsis ....................................................................... Marine insurance: s 9(1)(d) ..................................................................... Workers’ compensation: s 9(1)(e) and 9(1)(f) ......................................... 26

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State insurance: s 9(2) ............................................................................ Third party aviation war and terrorism risk: s 9(4) ..................................

s9 [9.50] [9.60]

[9.20] Background and synopsis Exempt contracts

This section excludes certain classes of contracts from the operation of the ICA. Namely: (a) reinsurance, excluded on the basis that the prime focus of the ALRC reference was the relationship between a direct insurer and the insured (ALRC 20, at [10]); (b) health insurance, excluded on the basis that this area is monitored by the Department of Health through the National Health Act 1953 (ALRC 20, at [9]) [now the Private Health Insurance Act 2007]; (c) insurance by a friendly society or the Australian Trade Commission (the former body offers insurance to its members only and is governed by its rules); (d) marine insurance (excluded from the Terms of Reference of ALRC 20); (e) workers’ compensation and compulsory third-party insurance (excluded from the Terms of Reference of ALRC 20); (f) State insurance (s 51(xiv) of the Constitution grants power to the Parliament to make laws with respect to “insurance other than State insurance; also State insurance extending beyond the limits of the State concerned”). In effect, State insurance not extending beyond the limits of the State concerned is excluded (ALRC 20, at [7]); (g) loss of an aircraft, or damage to the hull of an aircraft, as a result of war. Small scale commercial operations are within the scope of the ICA however there is an exception for Australian aircraft operators requiring aviation hull and liability insurance policies covering all risks and war risks which are reinsured offshore: Explanatory Memorandum to the Financial Laws Amendment Bill 1996 (H of R) cl 279; and (h) third party aviation war risk. Bundled contracts (Post 28 June 2013)

Section 9 also addresses bundled contracts of insurance. A contract of insurance may contain one or more types of cover which are bundled together in the one contract. Accordingly, the ICA may apply to one or more of the types of cover contained in an insurance contract and may not apply to other types of cover in the same contract of insurance. The Review Panel commissioned by the Australian Government in September 2003 recommended that, in the case of contracts of insurance that bundle ©

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cover for compulsory workers’ compensation purposes together with cover for liability to employees at common law arising from employment related injury, the entire contract be exempt from the scope of the ICA (see Final Report (June 2004), at [1.14]–[1.26]). The Review Panel was of the view that this was the most effective solution to overcome uncertainty about the application of the ICA to insurance contracts that bundle such covers. This recommendation was accepted and resulted in the insertion of s 9(1)(f) and 9(1B) to the ICA. It was noted in the Explanatory Memorandum to ICAB 2013 that the new s 9(1B) applied a different rule for unbundling if one of the types of cover is a cover that is referred to in the newly inserted s 9(1)(f). This different treatment was necessary to ensure that directors’ liability cover would only be exempt from the scope of the ICA where it was bundled with compulsory workers’ compensation cover. The Review Panel recommended that for all bundled contracts other than those relating to workers’ compensation and employment-related personal injury, it was not desirable to rule the entire contract either in or out of the scope of the ICA. The exemption from the scope of the ICA in s 9(1) is to be applied to each type of cover in a bundled contract of insurance as if it were a separate contract: see s 9(1A), (1B) and (1C). The following unbundling example is given in the Explanatory Memorandum to ICAB 2013 (at [1.26]): Under the new subsections, contracts of insurance that contain more than one type of cover, one of which is exempted (Cover A) and one of which is not (Cover B), would contain some terms that relate solely to Cover A, some that relate solely to Cover B and some that relate to both Cover A and Cover B. To create “unbundled” contracts for the purpose of applying the exemption provisions, two notional contracts would be constructed. The first notional contract would comprise only those terms of the initial contract that are relevant to Cover A. The notional contract would also contain, because of subsection 9(1C), any terms of the initial contract that are relevant to both Cover A and Cover B. Similarly, the second notional contract would comprise those terms of the initial contract that are relevant to Cover B only and the terms that are relevant to both Cover A and Cover B. When the contents of the notional contracts are determined, the exemption provisions in subsection 9(1) are applied to each as if that contract were a separate contract of insurance or proposed contract of insurance. It may be that there are more than two types of cover bundled within a contract of insurance, in which case more than two notional contracts of insurance will need to be developed at the first stage. However, irrespective of whether there are two or more kinds of exempt covers, or two or more kinds of non-exempt covers, or both, the result of applying the unbundling process in subsections 9(1A) and 9(1C) is that only those contractual terms that relate to the exempt cover type(s) are exempt from the operation of the ICA. 28

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These amendments concerning bundled contracts apply to contracts of insurance entered into or renewed after 28 June 2013 (which is the day the Insurance Contracts Amendment Act 2013 received Royal Assent).

[9.30] Marine insurance: s 9(1)(d) The ICA does not apply to or in relation to contracts of insurance to which the Marine Insurance Act 1909 applies. Apart from the specific exclusion of pleasure craft from the Marine Insurance Act 1909 (s 9A ICA), the question arises as to whether a particular contract of insurance is subject to the Marine Insurance Act 1909. Section 7 of the Marine Insurance Act 1909 defines a contract of marine insurance as one which indemnifies the assured “against marine losses, that is to say, the losses incident to marine adventure”. The concept of “marine adventure” is described in s 9 of the Marine Insurance Act 1909. Olsson J (SA Sup Ct) noted that the statutory definition of a contract of marine insurance seeks to characterise the contract of insurance and not the individual risks spanned by it, extracted and considered individually: Norsworthy v SGIC [1999] SASC 496 at [44]. Olsson J found that the bulk of the policy of insurance in question was directed towards subject matter of the nature contemplated by s 9 of the Marine Insurance Act 1909 and was therefore subject to that Act. By way of contrast the NSW Court of Appeal (Meagher JA with whom Priestley and Stein JJA agreed) found that the Marine Insurance Act 1909 did not apply and therefore the ICA did apply to a liability risk involving a “wave sled ride” on a lake: Hansen Development Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1999] NSWCA 127. The question as to whether the Marine Insurance Act 1909 or the ICA applies is not necessarily an easy one. It remains an important question even though contracts of insurance in respect of pleasure craft are governed by the ICA because there are many commercial vessels which operate on inland waters. In a case not dissimilar to Hansen, Kennedy J (WA Sup Ct FC) (with whom Murray and Owen JJ agreed) found that the Marine Insurance Act 1909 did apply and therefore the ICA did not apply to a liability risk involving “parasailing” on the Swan River estuary which was regarded as the “sea”: Mercantile Mutual Insurance (Aust) Ltd v Gibbs (2001) 24 WAR 453; 163 FLR 455; [2001] WASCA 271. On appeal, the High Court by a majority (Gleeson CJ, Hayne and Callinan JJ; McHugh and Kirby JJ dissenting) affirmed the decision of the Full Court and held that the Marine Insurance Act 1909 and not the ICA governed the contract of insurance: Gibbs v Mercantile Mutual Insurance (Aust) Ltd (2003) 214 CLR 604; 77 ALJR 1396; 12 ANZ Ins Cas 61-570; [2003] HCA 39. The High Court members differed in terms of their reasoning. In summary, Gleeson CJ determined that the Marine Insurance ©

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Act 1909 applied because the locality in which the vessel operated, the Swan River estuary, was part of the sea. Hayne and Callinan JJ who delivered a joint judgment found that because the contract of insurance indemnified the insured for liability claims arising out of the negligent operation of the vessel, it indemnified “against marine losses, that is to say, losses incident to a marine adventure” under the Marine Insurance Act 1909. They did not have to draw a distinction based on locality between river and sea but said that if they had to then that part of the Swan River where the accident occurred was properly to be regarded as part of the sea because it was subject to tidal flow. In dissent, McHugh J and Kirby J found that the contract of insurance was subject to the ICA. McHugh J found that the Swan River estuary was not part of “the sea” and that the risk did not involve, or was not incidental to, or a consequence of, a voyage on the open sea for the purposes of the Marine Insurance Act 1909. Kirby J looked at the statutory setting of the Marine Insurance Act 1909 and the ICA and found that the insured adventure fell outside the ambit of the sea and did not extend to “perils of the seas”.

[9.40] Workers’ compensation: s 9(1)(e) and 9(1)(f) The ICA does not apply to or in relation to contracts of insurance entered into for the purposes of a law that relates to workers’ compensation (s 9(1)(e)(i)). The High Court in Moltoni Corporation Pty Ltd v QBE Insurance Ltd (2001) 205 CLR 149; 76 ALJR 337; 11 ANZ Ins Cas 61-512; [2001] HCA 73 held that a contract of insurance providing non-compulsory cover (as opposed to compulsory cover) for any common law liability for damages suffered by a worker was not considered captured by s 9(1)(e)(i). The cover for common law liability was therefore subject to the operation of the ICA. Section 9 of the ICA was amended in 2013 so as to insert s 9(1)(f) (having commenced on 28 June 2013). Section 9(1)(f) exempts from the operation of the ICA insurance contracts that bundle compulsory workers’ compensation cover together with cover under a rule of the common law for an employer’s liability for damages for employment-related personal injury. Section 9(1)(e) (Pre s 9(1)(f))

The Moltoni High Court decision was on appeal from the Full Court of the Supreme Court of Western Australia (comprising Ipp, Wallwork and Murray JJ). The Full Court held that a contract of insurance providing non-compulsory cover for any common law liability for damages suffered by a worker was not entered into for the purposes of a “law” that related to workers’ compensation within s 9(1)(e): QBE Insurance Ltd v Moltoni Corporation Pty Ltd (2000) 22 WAR 148; 155 FLR 379; 11 ANZ Ins Cas 61-468; [2000] WASCA 82. Wallwork J said (at 75,359 (ANZ Ins Cas)): 30

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In my opinion, it is significant that s 9(1)(e) refers to contracts entered into or proposed to be entered into for the purposes of a “law”. Those two words in their context naturally refer to a statutory law and not “the law”, which would include the common law.

Wallwork J contrasted the earlier decisions of Underwood J in Butler v Dunn Monumental Masons Pty Ltd (1996) 5 Tas R 487 and Rolfe J (NSW Sup Ct) in Workers’ Compensation Board of Queensland v Workcover Authority of New South Wales (1995) 36 NSWLR 732. These cases involved compulsory insurance for common law damages. As the relevant contracts of insurance were required by statute they were excluded from the ICA by virtue of s 9(1). In Moltoni the High Court in a joint judgment (Gleeson CJ, Gaudron, McHugh, Kirby and Hayne JJ) upheld the Full Court of the Supreme Court of Western Australia and found that insurance provisions providing common law compensation to workers were subject to the ICA because they were not entered into pursuant to the obligation imposed by the Workers’ Compensation and Rehabilitation Act 1981 (WA). The High Court did not accept that the operation of s 9(1)(e) depended on matters of form. It did not matter that there was a single policy document that recorded the arrangements for liability arising under the statutory scheme and the liability arising from common law. The High Court said (at 164–165 (CLR); 75,964 (ANZ Ins Cas)): We do not accept that the criterion for operation of s 9(1)(e) is the form in which particular arrangements between the parties are recorded. Thus, the fact that there is a single policy document which records the arrangements between the [insured] and the [insurer] does not determine whether s 9(1)(e)(i) is engaged. Account must be taken of the fact that there were, in this case, distinct insurances that were reflected in the two different insuring clauses that are set out earlier in these reasons. That both concerned an employer’s liability to provide compensation to workers, one form of liability arising under a statutory scheme and the other stemming from the common law, is not to the point. What is important is that one form of insurance was undertaken for the purposes of a relevant law; the other was not. The exception for which s 9(1)(e)(i) provides is identified by reference to a contract being entered into for the purposes of a law relating to a particular subject matter. The exception is not identified by reference to the way in which the risk which is insured can be described. In these circumstances, s 9(1)(e)(i) should be understood as excepting from the application of the Insurance Contracts Act only those aspects of the contract between the [insured] and the [insurer] that were made pursuant to the obligation imposed on the [insured] by the Workers’ Compensation Act to have insurance against liability under that Act. It is only the stipulations that relate to that cover which constitute a contract entered into for the purposes of the Workers’ Compensation Act. Section 9(1)(e)(i) does not operate to except from the application of the Act those provisions of the contract that were engaged in the circumstances of this case. ©

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Davies JA (Qld Ct of Appeal), with whom McPherson JA and Mullins J agreed, found that the trial judge was correct in applying s s 9(1)(e)(ii) to hold that the ICA had no application to the scheme contained in the Motor Accident Insurance Act 1994 (Qld): Palmer v Harker Transport Services P/L [2003] QCA 513. Moltoni had no application. The Motor Accidents Act provided an insurance contract under State law which covered the one liability of the respondent and was exempted from the ICA. Section 9(1)(f) and 9(1B) (Post 28 June 2013)

Section 9(1)(f) was inserted in the ICA in accordance with a recommendation of the Review Panel concerning the treatment of bundled workers’ compensation contracts of insurance that bundled insurance cover exempt from the ICA with non-exempt cover. The Review Panel recommended, in the case of contracts of insurance that bundle cover for compulsory workers’ compensation purposes together with cover for liability to employees at common law arising from employment related injury, that the entire contract be exempt from the scope of the ICA (see Final Report (June 2004), at [1.14]–[1.26]). The Review Panel was of the view that this was the most effective solution to overcome uncertainty about application of the ICA to contracts of insurance that bundle such covers. This recommendation was accepted and is reflected in s 9(1)(f) and (1B). These amendments commenced on 28 June 2013 and apply to contracts of insurance entered into or renewed after this date (being the day the Insurance Contracts Amendment Act 2013 received Royal Assent). Section 9(1)(f) was inserted in the ICA in accordance with a recommendation of the Review Panel concerning the treatment of bundled workers’ compensation contracts of insurance that bundled insurance cover exempt from the ICA with non-exempt cover. The Review Panel recommended, in the case of contracts of insurance that bundle cover for compulsory workers’ compensation purposes together with cover for liability to employees at common law arising from employment related injury, that the entire contract be exempt from the scope of the ICA (see Final Report (June 2004), at [1.14]–[1.26]). The Review Panel was of the view that this was the most effective solution to overcome uncertainty about application of the ICA to contracts of insurance that bundle such covers. This recommendation was accepted and is reflected in s 9(1)(f) and (1B). These amendments commenced on 28 June 2013 and apply to contracts of insurance entered into or renewed after this date (being the day the Insurance Contracts Amendment Act 2013 received Royal Assent).

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[9.50] State insurance: s 9(2) The ICA does not apply to or in relation to contracts of insurance entered into in the course of State insurance, which includes contracts of insurance entered into by a State and some other insurer jointly. State insurance is insurance entered into by State insurance offices established by State governments to write insurance. Section 9(2) has become less relevant with the corporatisation of State insurance offices and their agreement in some cases to be subject to the provisions of the ICA. This agreement is sometimes reflected in a policy endorsement in which the State insurance office agrees to adhere to the provisions of the ICA. Olsson J (SA Sup Ct) agreed with the author of Insurance Contracts Act (Layman Professional Statute Guides) that the effect of an endorsement to adhere to the provisions of the ICA is to incorporate the provisions of the ICA into the agreement between the parties as contractual rights as if the insurer was not a “State insurer”: Norsworthy v SGIC [1999] SASC 496. Section 9(2) nevertheless remains relevant with State insurance offices, such as the Territory Insurance Office, not subject to the ICA and the consequences that flow from that: Tropicus Orchids Flowers and Foliage Pty Ltd v Territory Insurance Offıce (1998) 148 FLR 441; 10 ANZ Ins Cas 61-412 and on appeal Territory Insurance Offıce v Tropicus Orchids Flowers [1999] NTSC 16.

[9.60] Third party aviation war and terrorism risk: s 9(4) Third party aviation war and terrorism risk is exempt from the cancellation void (s 63) provisions and the non-variation (s 53) provisions of the ICA. As a result of the events of 11 September 2001, aviation war risk insurance for damage on the ground was withdrawn from the global market. Since then war risk insurance has become available; however, major Australian airports and other Australian-based aviation service providers have been unable to purchase sufficient cover. This was due to ss 53 and 63 of the ICA, which prevented insurance contracts being varied or cancelled midway and caused the international insurance market to baulk at providing cover. The international insurance market was only prepared to continue offering war and terrorism risk insurance if it could be varied or cancelled on short notice, given that the risk factors may change rapidly. Section 9(4) provides for the exemption, by regulation, of war and terrorism risk insurance from the cancellation and variation provisions of the ICA (see reg 33).

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s 9A

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[9A.20]

9A Exclusion of pleasure craft from the Marine Insurance Act 1909 (1) The Marine Insurance Act 1909 does not apply to a contract of marine insurance made in respect of a pleasure craft unless the contract is made in connection with the pleasure craft’s capacity as cargo. (2) For the purposes of this section, a pleasure craft is a ship that is: (a) used or intended to be used: (i) wholly for recreational activities, sporting activities, or both; and (ii) otherwise than for reward; and (b) legally and beneficially owned by one or more individuals; and (c) not declared by the regulations to be exempt from this subsection. (3) For the purposes of paragraph (2)(a), any minor, infrequent and irregular use of a ship for activities other than: (a) recreational activities; or (b) sporting activities; is to be ignored. (4) In this section: contract of marine insurance has the same meaning as in the Marine Insurance Act 1909. [S 9A insrt Act 35 of 1998, s 3 and Sch 1 item 77]

SECTION 9A COMMENTARY [9A.20] Background and synopsis Marine pleasure craft owned legally and beneficially by one or more individuals are covered by the ICA. Prior to 1998 contracts of insurance for all shipping vessels were arguably subject to the Marine Insurance Act 1909. Section 9A(2) defines what is “marine pleasure craft” for the purposes of the ICA. Minor, irregular and infrequent use of a pleasure craft for purposes other than recreational or sporting activities will not preclude a relevant contract of insurance from falling under the provisions of the ICA. For example, where a ship used predominantly for recreational activities is made available for voluntary sea search and rescue operations. It should be noted that a contract of insurance that relates to the carriage of pleasure craft, as cargo on board another ship will be subject to the Marine Insurance Act 1909 in the same way as other types of cargo are subject to that Act: Explanatory Memorandum to the Insurance Laws Amendment Bill 1997 (H of R) cl 112-114 . 34

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Contracts of insurance

(1) A reference in this Act to a contract of insurance includes a reference to a contract that would ordinarily be regarded as a contract of insurance although some of its provisions are not by way of insurance. (2) A reference in this Act to a contract of insurance includes a reference to a contract that includes provisions of insurance in so far as those provisions are concerned, although the contract would not ordinarily be regarded as a contract of insurance. (3) Where a provision included in a contract that would not ordinarily be regarded as a contract of insurance affects the operation of a contract of insurance to which this Act applies, that provision shall, for the purposes of this Act, be regarded as a provision included in the contract of insurance.

SECTION 10 COMMENTARY Synopsis ..................................................................................................

[10.10]

Arbitration provision not affecting operation of the contract of insurance: s 10(3) .................................................................................................

[10.20]

Deed of release provision affecting operation of the contract of insurance ............................................................................................

[10.25]

Car rental agreement provision a contract of liability insurance .............

[10.30]

Application form and trust deed for superannuation scheme a contract of insurance ............................................................................................

[10.40]

Discretionary scheme for indemnity not a contract of insurance ............

[10.50]

[10.10] Synopsis Section 10 expands the definition of a contract of insurance and thereby widens the application of the ICA. The result is that a contract may be regarded as a contract of insurance or a provision regarded as a provision included in a contract of insurance that would not otherwise be regarded as such. Given the importance of this expanded definition it is worth noting the Notes to the Draft Insurance Contracts Bill 1982: 1. [Section 10(1)] provides that a contract of insurance does not cease to be so merely because it contains provisions that do not relate to insurance. 2. [Section 10(2)] extends the definition of “contract of insurance” to catch contracts which, while they might not ordinarily be regarded as contracts of insurance, do contain insurance provisions. An example is a contract to purchase property from an insurer under which the insurer also agrees to insure the property. The legislation operates on such contracts only insofar as they contain insurance provisions. ©

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3. [Section 10(3)] is necessary to ensure that the operation of the [ICA] is not circumvented by insurers requiring insureds to enter into other collateral contracts that would not ordinarily be regarded as contracts of insurance.

[10.20] Arbitration provision not affecting operation of the contract of insurance: s 10(3) Giles J (NSW Sup Ct) held that a provision in an agreement to submit a dispute to arbitration including a claim for interest under s 57 of the ICA is not to be regarded as a provision included in the contract of insurance within s 10(3): Hadchiti v NRMA Insurance Ltd (unreported, NSW Sup Ct, Giles J, 7 February 1992). He referred to this arbitration agreement as the exercise of the unfettered wills of the parties to attempt the resolution of a dispute which had arisen under the contract of insurance. According to Giles J, such an agreement could not properly be described as an agreement which affects the operation of the contract of insurance. He said (at 6–7): Rather, it is an agreement made separately by which the parties regulate the ascertainment of and enforcement of the operation of the contract of insurance … [I]t seems to me that there should not be attributed to the legislature the intention that s 10(3) prohibits the parties from agreeing upon the terms by which they will submit their dispute to arbitration, and that is supported by the saving in s 43(2) of an agreement to submit a dispute or difference to arbitration if the agreement was made after the dispute or difference arose.

[10.25] Deed of release provision affecting operation of the contract of insurance Ball J (NSW Sup Ct) was prepared to accept a proposition that a provision in a deed of release entered into between the insurer and the insured was a provision which affected the operation of the contract of insurance and therefore under s 10(3) was to be regarded as a provision included in the contract of insurance: Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Ltd [2015] NSWSC 1511. The provision in the deed of release concerned the repayment of the sum paid by the insurer to the insured by way of indemnity under the contract of insurance as a priority from any funds received by the insured from a recovery claim against a third party.

[10.30] Car rental agreement provision a contract of liability insurance Commissioner Greaves (WA Dist Ct) held that a provision in a car rental agreement providing collision indemnity for third party property damage 36

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constituted a contract of liability insurance within the meaning of ss 10(2) and 11(7): Hannell v Bayswater Car Rental Pty Ltd (1997) 10 ANZ Ins Cas 61-387. He decided that the car rental provision fell within the classic definition of insurance expounded by Channell J in Prudential Insurance Co v Commissioners of Inland Revenue [1904] 2 KB 658. Having reached this conclusion he thought that it was a small step to conclude that the provision provided insurance cover within the meaning of ss 10(2) and 11(7). On appeal the majority of the Full Court of the Supreme Court of Western Australia (Kennedy and Steytler JJ with Pidgeon J expressing a different view) were also of the opinion that the car rental agreement contained “provisions of insurance”: Bayswater Car Rental Pty Ltd v Hannell (1999) 29 MVR 35; 10 ANZ Ins Cas 61-437; [1999] WASCA 34. The court was unanimous in concluding that the opening words “Not being an insurer” in the agreement could not control the meaning of the relevant part of the agreement if it came within the definition of a contract of insurance under the ICA. In concluding that the car rental agreement contained “provisions of insurance” both Kennedy and Steytler JJ applied the definition of “contract of insurance” given by Channell J in Prudential Insurance Co v Commissioners of Inland Revenue [1904] 2 KB 658 at 663 and the working definition of “contract of insurance” in MacGillivray and Parkington on Insurance (9th ed), p 1. Notwithstanding this finding the appeal against the judgment of Commissioner Greaves was allowed on a different basis.

[10.40] Application form and trust deed for superannuation scheme a contract of insurance Gray J (SA Sup Ct) held that an application form (including the removable portion) and a trust deed for a superannuation scheme contained the provisions of a contract of insurance between the trustee and a member within the meaning of s 10 of the ICA: United Super Pty Ltd v Built Environs Pty Ltd (2000) 80 SASR 513; 12 ANZ Ins Cas 90-113; [2001] SASC 339. In this case, in return for contributions, the trustee had promised to pay a total and permanent disability benefit upon the occurrence of that event. Importantly, the application form and trust deed suggested that the member was contracting with the trustee for the benefit and did not disclose the existence of any particular insurer. Gray J referred to the classic definition of “insurance” expounded by Channell J in Prudential Insurance Co v Commissioners of Inland Revenue [1904] 2 KB 658 and the definition provided by MacGillivray (Legh-Jones, Longmore, Birds, Owen (Eds), MacGillivray on Insurance Law (9th Ed, Sweet and Maxwell, London, 1997, p 1)). ©

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Gray J noted that even though the overall contractual arrangements were not to be regarded as a contract of insurance, s 10(2) had application and the agreement should be treated as a contract of insurance for the purposes of the ICA. Further, because the trust deed was linked to a contract of insurance between the trustee and an insurer, s 10(3) would apply even if s 10(1) and (2) had no application. The provisions in the application form and trust deed affected the operation of the contract of insurance between the trustee and the insurer and, as such, were to be regarded as provisions included in the contract of insurance according to s 10(3).

[10.50] Discretionary scheme for indemnity not a contract of insurance A discretionary scheme for indemnity is not a contract of insurance. Le Miere J (WA Sup Ct) held that the NSW Solicitors Mutual Indemnity Fund (SMIF) which (historically) provided a discretionary indemnity to solicitors under a Master Policy and in accordance with the Legal Profession Act 2004 was not a contract of insurance between the NSW Law Society and a solicitor: Hancock Family Memorial Foundation Ltd v Fieldhouse (No 3) (2010) 16 ANZ Ins Cas 61-869; [2010] WASC 223. Le Miere J agreed with Cohen J in Lee v Phair (unreported, NSW Sup Ct, 31 October 1996) that there was no contract between the Law Society and the solicitor because the SMIF existed to provide an indemnity by a statutory directive rather than by way of a contract. If there was a contract, he found that it was not a contract of insurance because the indemnity was discretionary and there was no right to be paid. He referred to the reasoning of Sir Robert Megarry VC in Medical Defence Union Ltd v Department of Trade (1980) 1 Ch 82 who said, inter alia, that an obligation to pay on the happening of a specified event is essential to the existence of a contract of insurance. 11

Interpretation (1) In this Act, unless the contrary intention appears: ASIC means the Australian Securities and Investments Commission.

[Def insrt Act 54 of 1998, s 3 and Sch 12 item 1]

avoid, in relation to a contract of insurance, means avoid from its inception. binder means an authority given by an insurer to an insurance intermediary to enter into, as agent for the insurer, contracts of insurance on behalf of the insurer as insurer. broker’s placing slip means a document that: (a) is evidence of a contract of insurance; and

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(b) bears a notation by an insurer setting out the extent of the insurance cover that the insurer agrees to provide under the contract. business day means a day that is not a Saturday, a Sunday or a public holiday or bank holiday. commissioner [Repealed] [Def rep Act 54 of 1998, s 3 and Sch 12 item 2; insrt Act 49 of 1994, s 3 and Sch item 2]

consumer credit insurance means insurance provided by a class of contracts of insurance: (a) that is declared by the regulations to be a class of contracts to which Division 1 of Part V of this Act applies; and (b) that is identified by those regulations as consumer credit insurance. [Def insrt Act 49 of 1994, s 3 and Sch item 3]

continuous disability insurance policy means a contract that is a continuous disability policy within the meaning of the Life Insurance Act 1995. [Def insrt Act 5 of 1995, s 4 and Sch item 42]

contract of life insurance means a contract that constitutes a life policy within the meaning of the Life Insurance Act 1995. [Def insrt Act 5 of 1995, s 4 and Sch item 43]

duty of disclosure means the duty referred to in section 21. duty of the utmost good faith means the duty referred to in subsection 13(1). [Def am Act 75 of 2013, s 3 and Sch 1 item 1]

engage in conduct means: (a) do an act; or (b) omit to perform an act. [Def insrt Act 41 of 2012, s 3 and Sch 2 item 1]

friendly society means: (a) a body that is a friendly society for the purposes of the Life Insurance Act 1995; or (b) a body that is registered or incorporated as a friendly society under a law of a State or Territory; or (c) a body that is permitted, by a law of a State or Territory, to assume or use the expression friendly society; or (d) a body that, immediately before the date that is the transfer date for the purposes of the Financial Sector Reform (Amendments and Transitional Provisions) Act (No.1) 1999, was registered or incorporated as a friendly society under a law of a State or Territory. [Def subst Act 44 of 1999, s 4 and Sch 7 item 117]

group life contract means a contract of life insurance that is maintained for the purposes of:

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(a)

a superannuation or retirement scheme under which there can be more than one life insured; or (b) another kind of group life scheme (including a scheme that is not related to employment) under which there can be more than one life insured. [Def insrt Act 75 of 2013, s 3 and Sch 6 item 31]

guardian, in relation to a person who has not attained the age of 18 years, means a person who acts in the place of a parent of the person but does not include a person who so acts only for limited or particular purposes or periods. holder has the same meaning as in the Retirement Savings Accounts Act 1997. [Def insrt Act 62 of 1997, s 3 and Sch 10 item 1]

insurance broker means a person who carries on the business of arranging contracts of insurance, whether in Australia or elsewhere, as agent for intending insureds. [Def am Act 123 of 2001, s 3 and Sch 1 item 246]

insurance intermediary means 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. insured and insurer include a proposed insured and a proposed insurer, respectively. life insured includes a proposed life insured. [Def insrt Act 75 of 2013, s 3 and Sch 4 item 9]

policy document, in relation to a contract of insurance, means: (a) a document prepared by the insurer as evidence of the contract; or (b) a broker’s placing slip that constitutes evidence of the contract; and includes, in relation to an interim contract of insurance, a document of the kind usually known as a cover note prepared by the insurer or by an insurance intermediary with the authority of the insurer. proposal form includes: (a) a document containing questions to which a person is asked to give answers (whether in the document or not), where the answers are intended (whether by the person who answered them, by the insurer or by some other person) to be used in connection with a proposed contract of insurance; and

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(b) a form relating to the proposed membership of a person of a superannuation, retirement or other group life scheme. [Def am Act 75 of 2013, s 3 and Sch 6 item 32]

RSA has the same meaning as in the Retirement Savings Accounts Act 1997. [Def insrt Act 62 of 1999, s 3 and Sch 10 item 2]

RSA provider has the same meaning as in the Retirement Savings Accounts Act 1997. [Def insrt Act 62 of 1997, s 3 and Sch 10 item 3]

third party beneficiary, under a contract of insurance, means 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. [Def insrt Act 75 of 2013, s 3 and Sch 1 item 2]

this Act includes the regulations. [Def insrt Act 41 of 2012, s 3 and Sch 2 item 2]

writing means writing in the English language or in another language agreed between the insurer and the insured. [Subs (1) am Act 62 of 1997, s 3 and Sch 10 item 2; Act 5 of 1995, s 4 and Sch item 44; Act 49 of 1994, s 3 and Sch item 4]

(2) For the purposes of this Act, an interim contract of insurance is a contract of insurance that is intended by the insurer: (a) to provide temporary insurance cover; and (b) to be replaced or superseded by another contract of insurance; whether or not the contract is evidenced by a document of the kind usually known as a cover note. (3) [Repealed] [Subs (3) rep Act 5 of 1995, s 4 and Sch item 43; am Act 65 of 1985, s 3 and Sch 1]

(4) For the purposes of this Act: (a) a superannuation contract is a contract of life insurance that is being maintained for the purposes of a superannuation or retirement scheme, where the insured is a trustee for the purposes of the scheme; and (b) an individual superannuation contract is a superannuation contract as referred to in paragraph (a) under which there can be one life insured only. (c) [Repealed] [Subs (4) am Act 75 of 2013, s 3 and Sch 6 items 33–35; Act 65 of 1985, s 3 and Sch]

(5) [Repealed] [Subs (5) rep Act 5 of 1995, s 4 and Sch item 43]

(6) For the purposes of this Act, a contract of general insurance is a contract of insurance that is not a contract of life insurance. (7) For the purposes of this Act, a contract of liability insurance is a contract of general insurance that provides insurance cover in respect of the insured’s liability for loss or damage caused to a person who is not the insured.

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(8) For the purposes of this Act, an instalment contract of general insurance is a contract of general insurance the premium for which is, by virtue of a provision of the contract, payable by 7 or more instalments in a year. (9) Subject to subsection (10), a reference in this Act to the entering into of a contract of insurance includes a reference to: (a) in the case of a contract of life insurance—the making of an agreement by the parties to the contract to extend or vary the contract; (b) in the case of any other contract of insurance—the making of an agreement by the parties to the contract to renew, extend or vary the contract; or (c) the reinstatement of any previous contract of insurance. [Subs (9) subst Act 168 of 1986, s 3 and Sch 1]

(10) Notwithstanding subsection (9): (a) subject to paragraph (c), where, after the commencement of this Act and at or before the original entering into, or the renewal, extension or reinstatement, of a contract of insurance, the insurer has given information to the insured as required by section 22, 35, 37, 37C, 40, 44, 49 or 68, the requirement by that section to give information to the insured shall be deemed to be satisfied at or before any subsequent renewal, extension or reinstatement of the contract; (b) sections 22 and 40 do not require an insurer to give information to the insured at or before a variation of the relevant contract of insurance, unless subsection (10A) applies to the variation; and (c) sections 35, 37, 37C, 44, 49 and 68 require an insurer to give information to the insured at or before a variation of the relevant contract of insurance, but only to the extent that the information relates to the provision or provisions varied or proposed to be varied. [Subs (10) am Act 75 of 2013, s 3 and Sch 4 item 10; Act 41 of 2012, s 3 and Sch 1 items 1A and 1B; Act 123 of 2001, s 3 and Sch 1 items 247 and 248; Act 107 of 1997, s 3 and Sch 8 items 2 and 3; insrt Act 168 of 1986, s 3 and Sch 1]

(10A) This subsection applies to a variation of a contract of insurance if: (a) the variation: (i) is involved in a renewal, extension or reinstatement of the contract; or (ii) will provide a kind of insurance cover that was not provided by the contract immediately before the variation; or (iii) in the case of a contract of life insurance—will increase a sum insured under the contract in respect of one or more of the life insureds; and (b) the variation is not an automatic variation but is required to be expressly agreed between the insurer and the insured before the contract is varied. [Subs (10A) insrt Act 75 of 2013, s 3 and Sch 4 item 11]

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(11) Where a provision of this Act requires anything to be done before a particular contract is entered into, it is sufficient compliance with that provision if that thing is done at the time when the contract is entered into. [Subs (11) insrt Act 168 of 1986, s 3 and Sch 1] [S 11 am Act 75 of 2013; Act 41 of 2012; Act 123 of 2001; Act 44 of 1999; Act 54 of 1998; Act 107 of 1997; Act 62 of 1997; Act 5 of 1995; Act 49 of 1994; Act 168 of 1986; Act 65 of 1985 Cross-reference: Insurance Contracts Regulations 1985: reg 2A identifies a class of contracts as consumer credit insurance for para (b) of the definition of consumer credit insurance in s 11(1).]

SECTION 11 COMMENTARY Avoid ........................................................................................................ “Insurance broker” and “insurance intermediary” .................................... Contract of life insurance ........................................................................ Continuous disability insurance policy .................................................... Contract of liability insurance .................................................................. Instalment contract of general insurance ................................................ Entering into a contract ........................................................................... Retirement savings accounts .................................................................. Proposal form .......................................................................................... Information already given prior to renewal .............................................. Third party beneficiary .............................................................................

[11.05] [11.10] [11.30] [11.50] [11.70] [11.80] [11.90] [11.100] [11.110] [11.120] [11.130]

[11.05] Avoid “Avoid” means avoid from the inception of a contract of insurance. A contract of insurance which has been the subject of avoidance is sometimes referred to as void ab initio or void from its beginning. The insurer elects to avoid a contract of insurance and the effect of that election relates back to the beginning of the contract. What happens when claims have been paid prior to an insurer’s election to avoid a contract of insurance? A payment of a claim made by an insurer under a subsequently avoided contract of insurance may be recoverable by the insurer. In Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445 Debelle J (SA Sup Ct) made a declaration that the life insurer had validly avoided the contract of life insurance and ordered that the insured repay to the life insurer a benefit paid prior to the avoidance less the premiums paid. Is it possible to avoid a contract of insurance which has already come to an end, by way of payment out to the insured or by termination or otherwise? Bergin CJ in Eq in allowing an amendment to a defence, was satisfied that on the proper construction of s 29 of the ICA read with the definition of “avoid”, it was reasonably arguable that an insurer is not prohibited from avoiding a contract of insurance that has come to an end. Bergin CJ was satisfied that it was reasonably arguable that accrued rights ©

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[11.05]

and obligations under the terminated contract were amenable to avoidance under s 29: Hitchens v Zurich Australia Ltd (2011) 17 ANZ Ins Cas 61-915; [2011] NSWSC 1198.

[11.10] “Insurance broker” and “insurance intermediary” By definition “insurance intermediary” includes “insurance broker”. The ALRC thought that, in general, the principles of agency should apply to the giving and receiving of information. This would mean that a requirement that information be given to an insured should be satisfied if it is given to the insurer’s agent. The ALRC identified two problems. First, the insurer would be required to give the relevant information either to the insured or to the insured’s broker. In most cases the insurer would take the latter option. Given that the broker is under a duty to provide expert advice to the insured and should be aware of matters which the relevant notices are designed to draw to the insured’s attention, it would be absurd to require the insurer to draw these matters to the broker’s attention. Where a broker is acting on behalf of an insured (in cases where the broker is not acting under a binder) an insurer is relieved of the obligations to comply with information requirements: see s 71 of the ICA. Secondly, some intermediaries are not clearly agents of insureds or of insurers. Classification of some of these intermediaries as agents of insureds and therefore as brokers would, if any insurer was not to provide information to a broker, deprive an insured of needed information. Accordingly, the ALRC recommended that, for the purposes of the giving of information, intermediaries who are not brokers should be treated as agents of the relevant insurers. Further, that legislation should make it clear that the term “broker” in this context does not include intermediaries who sell insurance in connection with the supply of goods or services: ALRC 20, at [46].

[11.30] Contract of life insurance The Life Insurance (Consequential Amendments and Repeals) Act 1995 (Act No 5 of 1995) which commenced on 1 July 1995 resulted in the omission of s 11(3) which contained a definition of a contract of life insurance and the insertion of a definition of “contract of life insurance” by reference to the Life Insurance Act 1995 in s 11(1) of the ICA. In the Life Insurance Act 1995 a life policy is defined for the purposes of that Act. A definition of “life insured”, which was defined to include a proposed life insured, was inserted into s 11(1) by the Insurance Contracts 44

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Amendment Act 2013. The amendment commences on 28 December 2015, which is 30 months after the Insurance Contracts Amendment Act 2013 received Royal Assent.

[11.50] Continuous disability insurance policy The Life Insurance (Consequential Amendments and Repeals) Act 1995 (Act No 5 of 1995) resulted in the omission of s 11(5) and the insertion of a definition of a “continuous disability insurance” contract by reference to the Life Insurance Act 1995 in s 11(1) of the ICA. A “continuous disability policy” is defined in the dictionary which is a schedule to the Life Insurance Act 1995. Notably, as defined, it does not include a “contract of consumer credit insurance” within the meaning of the ICA. According to s 8 of the Life Insurance Act 1995 an expression defined in the dictionary has the meaning set out unless the contrary intention appears.

[11.70] Contract of liability insurance The phrase “contract of liability insurance” as defined in s 11(7) is wide enough to include contracts of insurance which are connected or related to the liability of an insured to a third party. Kirby P (NSW Sup Ct CA) in Antico v CE Heath Casualty & General Insurance Ltd (1996) 38 NSWLR 681; 125 FLR 270; 9 ANZ Ins Cas 61-304 found that a contract of insurance which indemnified the insured against legal expenses incurred in respect of liability to a third party is a contract of liability insurance in accordance with the definition. In making this finding Kirby P noted the passage in Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110 where Mann CJ (Vic Sup Ct) said (at 111): The words “in respect of” are difficult of definition, but they have the widest possible meaning of any expression intended to convey some connection or relation between two subject-matters to which the words refer.

Kirby P said that it would be too narrow a construction of the phrase “in respect of” to exclude a contract of insurance which covers legal liability expenses from the beneficial effect of s 40 ICA. Kirby P said (at 696 (NSWLR); 76,394 (ANZ Ins Cas)): The legislature must not be taken to have intended the statute to operate in that way. In adopting the words “in respect of” parliament was clearly intending that most, if not all, insurance policies would be subject to s 40 of the Act. Certainly policies which provide cover for legal expenses are policies “in respect of the insured’s liability”.

The phrase “contract of liability insurance” appears in ss 40, 41 and 51. Commissioner Greaves (WA Dist Ct) held that a provision in a car rental agreement providing collision indemnity for third party property damage ©

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constituted a “contract of liability insurance” within the meaning of ss 10(2) and 11(7): Hannell v Bayswater Car Rental Pty Ltd (1997) 10 ANZ Ins Cas 61-387. He decided that the car rental provision fell within the classic definition of insurance expounded by Channell J in Prudential Insurance Co v Commissioners of Inland Revenue [1904] 2 KB 658. Having reached this conclusion he thought that it was a small step to conclude that the provision provided insurance cover within the meaning of ss 10(2) and 11(7). On appeal the majority of the Full Court of the Supreme Court of Western Australia (Kennedy and Steytler JJ; with Pidgeon J expressing a different view) were also of the opinion that the car rental agreement contained “provisions of insurance” and was therefore a contract of liability insurance: Bayswater Car Rental Pty Ltd v Hannell (1999) 29 MVR 35; 10 ANZ Ins Cas 61-437; [1999] WASCA 34. However, the appeal against the judgment of Commissioner Greaves was allowed on a different basis.

[11.80] Instalment contract of general insurance The number of instalments required is set at seven to exclude contracts in which the premium is paid bi-monthly.

[11.90] Entering into a contract By way of background, the draft Insurance Contracts Bill proposed by the ALRC in ALRC 20 [Appendix A cl 12 which became s 11] did not include a definition of “entered into” or an equivalent of s 11(9). Sub section 11(9) was introduced by amendment in the Senate. The High Court noted the expressed rationale of s 11(9) in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50. French CJ, Gummow and Crennan JJ said (at [18]): Its rationale, as set out in the relevant explanatory memorandum, was as follows: The effect of the amendment will be to make it clear that any obligations which the Bill imposes on the insurer and insured “before the contract is entered into” will apply where they renew, extend, vary or reinstate an existing contract and thereby make a new contract.

See also, [21.10.4], [28.10.2] and [54.10.9].

[11.100] Retirement savings accounts The ICA provides for Retirement Savings Accounts (RSA) holders to recover a benefit from a life insurance company if they are named under a “group” life insurance contract (see s 48AA). The ICA also exempts 46

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contracts of life insurance which are RSAs from the cooling-off provision of the ICA (see s 64(1)). Accordingly, the ICA has definitions of “holder”, “RSA” and “RSA provider” which are the same as in the Retirement Savings Account Act 1997: Explanatory Memorandum to the Retirement Savings Accounts (Consequential Amendments) Bill 1997 (Sen), cll 186–189.

[11.110] Proposal form Placement of insurance by telephone and electronically has become commonplace. With a “paperless” insurance office a question can arise as to whether a proposal form is in existence and, if so, to what extent. James J (NSW Sup Ct) proceeded on the basis that a proposal form had come into existence when an insured was asked questions from a computer screen prompt by an employee of the insurer who recorded the answers and then provided a printout in confirmation: Celik v NRMA Insurance Ltd [2000] NSWSC 380. James J noted that according to s 25 of the Acts Interpretation Act 1901 the word “document” is given an extended meaning as including any material from which writings are capable of being reproduced. However, he also noted that having regard to the definition of “proposal form” in s 11 and even allowing for the fact that the definition is only an inclusive definition, it may be that it is the document containing the questions (that is the prompt) rather than the document containing the answers (that is the confirmation of details) which should be identified as being the proposal form. However for the purpose of addressing submissions in the case he was prepared to accept that the confirmation of details formed part of a “proposal form”. Various life insurance provisions of the ICA were amended by the Insurance Contracts Amendment Act 2013 to provide for the increased prevalence of group life contracts (see new definition of “group life contract”: s 11(1)) beyond those maintained for the purposes of a superannuation or retirement scheme. The definition of “proposal form” in s 11(1) was amended to replace the words “superannuation or retirement scheme” with “superannuation, retirement or other group life scheme”. The amendment commenced on 28 June 2014 which was 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent.

[11.120] Information already given prior to renewal The effect of s 11(10), is to make it unnecessary for an insurer to re-comply with the requirement to give information under the various sections specified, including s 22, in relation to renewals, extensions and reinstatements. Importantly, there is no time limit on when the original giving of information may have taken place. Section 11(10)(b) was amended by the Insurance Contracts Amendment Act 2013 to make it ©

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subject to the new s 11(10A) inserted by that Act. These amendments commenced on 28 December 2015. The amendment to s 11(10)(b) moved an exception to the information exemption before variation in relation to ss 22 and 40 from s 11(10)–11(10A). Section 11(10A) added further exceptions to s 11(10)(b). The NSW Court of Appeal noted that s 22(1) does not require that the informing of the insurer take place at any particular time before the contract of insurance is entered into. Once s 22(1) is satisfied, the effect of s 11(10) is to make it unnecessary to re-comply in relation to renewals, extensions and reinstatements, at least if they do not involve a variation of the contract: GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299. Contracts of life insurance may contain some common automatic variations, such as consumer price index increases, that are normally contained within the contract. As such, these variations would not (in a practical sense) be considered to require the provision of information by the insurer prior to variation. To ensure that certain automatic variations were not captured by s 11(9) and were not variations for the purpose of the ICA, as referred to above, s 11(10)(b) was amended and a new s 11(10A) inserted by the Insurance Contracts Amendment Act 2013. These amendments commenced on 28 December 2015 which was 30 months after the Insurance Contracts Amendment Act 2013 received Royal Assent.

[11.130] Third party beneficiary A definition of “third party beneficiary” was inserted in s 11(1) by the Insurance Contracts Amendment Act 2013. The definition is largely comprised by the description of a person entitled to claim under s 48 which was removed from s 48(1) and replaced by the defined term. Because the definition contains in large part of the terms previously found in s 48(1) the commentary on those terms is relevant to the definition. See [48.10.1] for “Not a party to a contract” and [48.10.2] for “Specified or referred to in the contract, whether by name or otherwise”. With the expansion of the rights of a third party beneficiary brought about by the Insurance Contracts Amendment Act 2013 the defined term is used in several sections of the ICA other than s 48. See also ss 13, 41, 48A, 48AA, 51, 55A and 64.

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[11AA.20]

Application of the Criminal Code

Chapter 2 of the Criminal Code applies to all offences against this Act. Note: Chapter 2 of the Criminal Code sets out the general principles of criminal responsibility. [S 11AA insrt Act 117 of 2001, s 3 and Sch 3 item 5]

SECTION 11A COMMENTARY [11AA.20] Synopsis Section 11AA applies Chapter 2 of the Criminal Code to all offences against the ICA.

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PART IA – ADMINISTRATION [Pt 1A insrt Act 49 of 1994, s 3 and Sch item 4]

11AAA Definition In this Part, unless the contrary intention appears: relevant legislation means: (a) this Act; or (b) Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003. [S 11AAA insrt Act 36 of 2003, s 3 and Sch 1 item 12]

11A ASIC responsible for general administration of Act Subject to any directions of the Treasurer, ASIC has the general administration of this Act. [S 11A subst Act 54 of 1998, s 3 and Sch 12 item 3; insrt Act 49 of 1994, s 3 and Sch item 4]

SECTION 11A COMMENTARY Background and synopsis ....................................................................... ASIC ........................................................................................................

[11A.20] [11A.30]

[11A.20] Background and synopsis The Report of the Government Working Party in December 1992, commissioned to determine a government response to the Trade Practices Commission Report on Consumer Credit Insurance, noted that the ICA was self-administering, with no power for government intervention. It concluded that the effectiveness of the ICA would be improved by more active administration and enforcement. This gave rise to the recommendation to make the Insurance and Superannuation Commissioner (ISC) (now ASIC) responsible for the general administration of the ICA. Accordingly, s 11A provides for ASIC to have responsibility for the general administration of the ICA, subject to any directions of the Treasurer: see Explanatory Memorandum to ILAB (No 2) 93.

[11A.30] ASIC See s 11(1).

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11B Powers of the ASIC For the purpose of undertaking the general administration of the relevant legislation, ASIC has power to do all things that are necessary or convenient to be done in connection with the administration of the relevant legislation and, without limiting the generality of that power, has power: (a) to promote the development of facilities for handling inquiries in relation to insurance matters; and (b) to monitor complaints in relation to insurance matters; and (c) to liaise generally with other persons or bodies having a responsibility to deal with inquiries, complaints and disputes concerning insurance matters; and (d) to review documents (including documents promoting particular kinds of insurance cover) issued by insurers and given to ASIC in compliance with section 11C; and (e) to review particulars, statistics and documents given to ASIC in compliance with section 11D; and (f) to monitor legal judgments, industry trends and the development of community expectations that are, or are likely to be, of relevance to the efficient operation of the relevant legislation; and (g) to promote the education of the insurance industry, the legal profession and consumers as to the objectives and requirements of the relevant legislation. [S 11B am Act 36 of 2003, s 3 and Sch 1 items 13 and 14; Act 54 of 1998, s 3 and Sch 12 items 8 and 9; insrt Act 49 of 1994, s 3 and Sch item 4]

SECTION 11B COMMENTARY Synopsis .................................................................................................. ASIC ........................................................................................................

[11B.20] [11B.30]

[11B.20] Synopsis Section 11B sets out the powers of ASIC as to the administration of the ICA.

[11B.30] ASIC See s 11(1).

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s 11C

Pt IA - Administration

11C Supervisory powers—ASIC may obtain insurance documents (1) ASIC may, for any purpose connected with the general administration of the relevant legislation, by notice in writing given to an insurer, require the insurer to give to ASIC, within 30 days of receipt of the notice, or such longer period as is specified in the notice, copies of: (a) documents specified in the notice relating to insurance cover provided, or proposed to be provided, by the insurer; or (b) documents relating to insurance cover of a kind specified in the notice provided, or proposed to be provided, by the insurer. [Subs (1) am Act 36 of 2003, s 3 and Sch 1 item 15; Act 54 of 1998, s 3 and Sch 12 items 8 and 10]

(2) An insurer must not fail, without reasonable excuse, to comply with the requirements of a notice under subsection (1). Penalty: 150 penalty units. Note: For the liability of a director, employee or agent of an insurer, see section 11DA. [Subs (2) am Act 180 of 2012, s 3 and Sch 6 item 20]

(2A) An offence against subsection (2) is a strict liability offence. Note: For strict liability, see section 6.1 of the Criminal Code. [Subs (2A) insrt Act 117 of 2001, s 3 and Sch 3 item 6]

(3) Subsection (1) does not require an insurer to give to ASIC any document dealing with the insurance cover provided to a particular person unless: (a) that person, or another person having an entitlement to claim under that insurance cover, has given a written authorisation to ASIC permitting ASIC to require the giving of that document; and (b) ASIC has given a copy of the authorisation to the insurer with the notice. Note: A defendant bears an evidential burden in relation to the matters in subsection (3), see subsection 13.3(3) of the Criminal Code. [Subs (3) am Act 117 of 2001, s 3 and Sch 3 item 7; Act 54 of 1998, s 3 and Sch 12 items 8 and 10]

(4) It is a reasonable excuse for an insurer to refuse or fail to comply with the requirements of a notice under subsection (1) if to do so would tend to incriminate the insurer. Note: A defendant bears an evidential burden in relation to the matters in subsection (4), see subsection 13.3(3) of the Criminal Code. [Subs (4) am Act 117 of 2001, s 3 and Sch 3 item 8] [S 11C am Act 180 of 2012; Act 36 of 2003; Act 117 of 2001; Act 54 of 1998; insrt Act 49 of 1994, s 3 and Sch item 4]

SECTION 11C COMMENTARY Synopsis ..................................................................................................

[11C.20]

ASIC ........................................................................................................

[11C.30]

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[11B.30]

s 11D

Insurance Contracts Act 1984

[11C.20]

[11C.20] Synopsis Section 11C provides that ASIC may require an insurer to provide documents relating to insurance cover for review. Upon receipt of a notice in writing an insurer is required to provide copies of the documents either specified in the notice or referred to in kind within 30 days of receipt of the notice or such longer period as may be specified: s 11C(1). If an insurer fails to comply with the requirements of a written notice to provide documents a penalty is incurred: s 11C(2). An offence against the subsection is a strict liability offence. An insurer is not required to give to ASIC any document dealing with the insurance cover provided to a particular person unless ASIC has written authorisation and has given a copy of the authorisation to the insurer with the notice: s 11C(3). The evidential burden is borne by the defendant. An insurer may reasonably refuse or fail to comply with the requirements of a notice if to do so would tend to incriminate the insurer: s 11C(4). The evidential burden is borne by the defendant.

[11C.30] ASIC See s 11(1). 11D Supervisory arrangements etc.

powers—ASIC

may

review

administrative

(1) ASIC may, for any purpose connected with the general administration of the relevant legislation, by notice in writing given to an insurer, require the insurer to give to ASIC, within 30 days of receipt of the notice or such longer period as is specified in the notice: (a) written particulars of the organisational structure and administrative arrangements of the insurer either generally or in a particular area of insurance; or (b) statistics relating to the nature and volume of the insurance business of the insurer either generally or in a particular area of insurance; or (c) copies of any training guides, work manuals or other materials of a similar nature used by an insurer in instructing its employees or any insurance intermediaries dealing with persons who have, or may be likely to seek, insurance cover from the insurer. [Subs (1) am Act 36 of 2003, s 3 and Sch 1 item 16; Act 54 of 1998, s 3 and Sch 12 items 8 and 11]

(2) An insurer must not, intentionally or recklessly, give ASIC, in purported compliance with a requirement under subsection (1), particulars or statistics that are false or misleading in a material particular. Penalty: 150 penalty units.

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Note: For the liability of a director, employee or agent of an insurer, see section 11DA. [Subs (2) am Act 180 of 2012, s 3 and Sch 6 item 20; Act 54 of 1998, s 3 and Sch 12 items 8 and 11]

(3) An insurer must not fail, without reasonable excuse, to comply with the requirements of a notice under subsection (1). Penalty: 150 penalty units. Note: For the liability of a director, employee or agent of an insurer, see section 11DA. [Subs (3) am Act 180 of 2012, s 3 and Sch 6 item 20]

(3A) An offence against subsection (3) is a strict liability offence. Note: For strict liability, see section 6.1 of the Criminal Code. [Subs (3A) insrt Act 117 of 2001, s 3 and Sch 3 item 9]

(4) Subsection (1) does not require an insurer to give ASIC a copy of any document or any information: (a) that reveals the identity of a particular insured or third party claimant; or (b) from which the identity of a particular insured or third party claimant can be deduced. Note: A defendant bears an evidential burden in relation to the matters in subsection (4), see subsection 13.3(3) of the Criminal Code. [Subs (4) am Act 117 of 2001, s 3 and Sch 3 item 10; Act 54 of 1998, s 3 and Sch 12 items 8 and 11]

(5) It is a reasonable excuse for an insurer to refuse or fail to comply with the requirements of a notice under subsection (1) if to do so would tend to incriminate the insurer. Note: A defendant bears an evidential burden in relation to the matters in subsection (5), see subsection 13.3(3) of the Criminal Code. [Subs (5) am Act 117 of 2001, s 3 and Sch 3 item 11]

(6) In this section: third party claimant means a person, other than the insured, who is, or might be, entitled to make a claim under a contract of insurance. [S 11D am Act 180 of 2012; Act 36 of 2003; Act 117 of 2001; Act 54 of 1998; insrt Act 49 of 1994, s 3 and Sch item 4]

SECTION 11D COMMENTARY Synopsis .................................................................................................. ASIC ........................................................................................................

[11D.20] [11D.30]

[11D.20] Synopsis Section 11D sets out the power of ASIC to review the following things: • Organisational structure and administrative arrangements of the insurer. • Statistics relating to the nature and volume of the insurance business. • Copies of any training guides, work manuals or other materials of a similar nature. ©

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[11D.20]

s 11DA

Insurance Contracts Act 1984

[11D.20]

• ASIC may require such things by the giving of a notice in writing to an insurer seeking provision within 30 days of receipt of the notice or such longer period as may be specified: s 11D(1). • If an insurer responds to a notice in writing by intentionally or recklessly giving particulars or statistics that are false or misleading in a material particular a penalty is incurred: s 11D(2). • If an insurer fails to comply with the requirements of a written notice under this section, a penalty is incurred: s 11D(3). An offence against the subsection is a strict liability offence. • An insurer may withhold from ASIC any document or information that reveals the identity of a particular insured or third-party claimant or from which the identity of a particular insured or third-party claimant can be deduced: s 11D(4). The evidential burden is borne by the defendant. • “Third-party claimant” is defined as a person other than the insured who is, or might be, entitled to make a claim. This would include a claimant under s 48 of the ICA: s 11D(6). An insurer may reasonably refuse or fail to comply with the requirements of the notice if to do so would tend to incriminate the insurer: s 11D(5). The evidential burden is borne by the defendant.

[11D.30] ASIC See s 11(1). 11DA Supervisory powers—liability of directors, employees and agents of insurers (1) A person commits an offence if: (a) the person is: (i) a director of a company that is an insurer; or (ii) an employee or agent of an insurer; and (b) the person permits or authorises the insurer to engage in conduct; and (c) the conduct constitutes an offence (the insurer offence) against subsection 11C(2) or 11D(2) or (3); and (d) the insurer commits the insurer offence. Penalty: 150 penalty units.

(2) There is no fault element for the physical element described in paragraph (1)(d) other than the fault elements (if any) for the physical elements of the insurer offence. (3) To avoid doubt: (a) an insurer does not commit the insurer offence, for the purposes of subsection (1), if the insurer has a defence to the insurer offence; and

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s 11F

(b) a person may be convicted of an offence against subsection (1) even if the insurer concerned has not been prosecuted for, or convicted of, the insurer offence. (4) In this section: conduct means: (a) an act; or (b) an omission to perform an act. engage in conduct means: (a) do an act; or (b) omit to perform an act. [S 11DA insrt Act 180 of 2012, s 3 and Sch 6 item 21]

11E Examination of documents by ASIC not to imply compliance with relevant legislation The fact that documents in use by an insurer previously have been given to ASIC under section 11C or 11D does not imply: (a) that ASIC has found that the documents comply with the requirements of the relevant legislation; or (b) that ASIC endorses any practice or procedure described in the documents. [S 11E am Act 36 of 2003, s 3 and Sch 1 item 17; Act 54 of 1998, s 3 and Sch 12 items 8 and 12; insrt Act 49 of 1994, s 3 and Sch item 4]

SECTION 11E COMMENTARY Synopsis .................................................................................................. ASIC ........................................................................................................

[11E.20] [11E.30]

[11E.20] Synopsis Section 11E provides that the examination of documents by ASIC does not imply compliance with the ICA by an insurer.

[11E.30] ASIC See s 11(1). 11F

ASIC’s power to intervene in proceedings

(1) ASIC may intervene in any proceeding relating to a matter arising under: (a) this Act; or (b) Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003. (2) If ASIC intervenes in a proceeding under subsection (1): (a) ASIC is taken to be a party to the proceeding; and ©

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[11E.30]

s 11F

Insurance Contracts Act 1984

[11F.20]

(b) ASIC has all the rights, duties and liabilities of such a party (subject to this Act or Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003, as the case requires). (3) Without limiting subsection (2), ASIC may appear and be represented in a proceeding in which it intervenes under subsection (1): (a) by a staff member of ASIC; or (b) by a natural person or body to whom ASIC has delegated its functions and powers under this Act; or (c) by a solicitor or by counsel. [S 11F reinsrt Act 75 of 2013, s 3 and Sch 3 item 1; rep Act 54 of 1998, s 3 and Sch 12 item 10; subst Act 107 of 1997, s 3 and Sch 8 item 4; insrt Act 49 of 1994, s 3 and Sch item 4]

SECTION 11F COMMENTARY [11F.20] Background and synopsis Section 11F provides ASIC with a power to intervene in any proceeding relating to a matter arising under the ICA or Pt 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 (Cth). It provides that ASIC is to be taken to be a party to the proceedings and allows ASIC to be represented in the proceedings by a staff member, a delegate, a solicitor or counsel. Part 3 of the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003 enables ASIC, and other parties, to make application to the court to enforce product standards for medical indemnity insurance. Section 11F was inserted in the ICA (having commenced on 28 June 2013) in accordance with a recommendation of the Review Panel commissioned by the Australian Government in September 2003 (see Final Report (June 2004), at [3.1]–[3.6]). Prior to the amendment, intervention by ASIC in a proceeding was at the discretion of the court. The Review Panel noted that ASIC has similar powers in, for example, s 1330 of the Corporations Act 2001 (Cth) and s 12GO of the Australian Securities and Investments Commission Act 2001 (Cth). A statutory power would give ASIC rights to adduce evidence in a proceeding and raise issues in addition to those raised by the parties. The Review Panel predicted, that with the constraints on its resources, ASIC is unlikely to abuse this power. Section 11F and the power of ASIC to intervene applies to any proceeding that is commenced after 28 June 2013 (which is the day the Insurance Contracts Amendment Act 2013 received Royal Assent).

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Pt IA - Administration

s 11H ICA ss 1-20

[11F.20]

Delegation [Repealed]

[S 11G rep Act 54 of 1998, s 3 and Sch 12 item 11; insrt Act 49 of 1994, s 3 and Sch item 4]

11H Annual report [Repealed] [S 11H rep Act 54 of 1998, s 3 and Sch 12 item 12; insrt Act 49 of 1994, s 3 and Sch item 4]

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PART II – THE DUTY OF THE UTMOST GOOD FAITH 12

This Part not to be read down The effect of this Part is not limited or restricted in any way by any other law, including the subsequent provisions of this Act, but this Part does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure.

SECTION 12 COMMENTARY Part II: not limited or restricted – s 12 (first limb) ................................... Utmost good faith and the duty of disclosure – s 12 (second limb) .......

[12.10] [12.10.1]

Section 12 and sections other than s 21 ................................................

[12.10.2]

Tort of bad faith (Tort of good faith) ........................................................

[12.20]

Utmost good faith: common law ..............................................................

[12.30]

Common law pre-contractual ..................................................................

[12.30.1]

Common law post-contractual .................................................................

[12.30.2]

[12.10] Part II: not limited or restricted – s 12 (first limb) Under the first limb of s 12, Pt II of the ICA is not limited or restricted in any way by any other law. This includes the subsequent provisions of the ICA. In other words, the duty of utmost good faith is paramount. It is not displaced or read down by any other duties imposed by the ICA. The Notes to Draft Insurance Contracts Bill 1982 contain a description of s 12 ICA (cl 13 of the Bill) as follows: The duty of the utmost good faith is paramount. The fact that further or other duties are imposed by the [ICA] on the parties to an insurance contract does not displace the duty of the utmost good faith.

The Explanatory Memorandum described the proposed law and the rationale for the first limb of s 12 (cl 12) as follows (at [29]–[30]): The effect of Part II is not affected or limited by any other provision in the Bill or any other law. Clause 12 ensures that the duty imposed on parties to a contract of insurance to show each other good faith is in fact the paramount duty. It is not displaced or read down by any other duties which the Act imposes.

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[12.10.1] Utmost good faith and the duty of disclosure – s 12 (second limb) Under the second limb of s 12, Pt II does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure. The interaction between the duty of utmost good faith and the duty of disclosure pursuant to the second limb of s 12 is an exception to the general principle of paramountcy. It is also considered below, [13.20.1]. The Notes to the Draft Insurance Contracts Bill 1982 refer to the interaction as follows: the duty of the insured to disclose all material facts of which he is aware (the duty of disclosure as imposed by [s 21 ICA]) is not to be rendered more onerous by the operation of [s 12 ICA]. The duty as expressed in [s 21 ICA] is, in fact, as much as the duty of the utmost good faith would require.

The Explanatory Memorandum described the proposed law and the rationale for the second limb of s 12 (referred to as cl 12 of the Bill) as follows (at [29]–[30]): Part II … does not impose, in relation to the duty of disclosure to the insurer, any duty other than the duty of disclosure. …the duty of the insured to disclose all material facts of which he is aware is not to be rendered more onerous by the operation of this clause (referring to s 12). In other words, the duty of disclosure expressed in clause 21 will, in fact, be as much the duty of the utmost good faith will require (ALRC para 183).

In practice, the duty of disclosure exception to the paramountcy of the duty of utmost good faith means that in circumstances of a failure to disclose, insurers tend to rely upon the duty of disclosure, or both duties rather than the duty of utmost good faith in isolation. Ormiston JA (Vic Sup Ct CA) described the operation of s 12 in CIC Insurance Ltd v Barwon Region Water Authority (1998) 100 LGERA 136; 147 FLR 353; 10 ANZ Ins Cas 61-425; [1998] VSCA 77. Ormiston JA said (at [40]): Section 12, being the first of the statutory provisions dealing with the duty of utmost good faith, expressly says that Part II “does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure”. On their face the words are curiously expressed but the reference to “duty of disclosure” is confined by the definition in s 11(1) of the Act to the duty referred to in s 21 of the Act, namely the first and principal section contained in Part IV relating to the duty of disclosure. The obligation to disclose imposed by that part of the Act is extensive but carefully worked out so as to have regard to the respective rights and obligations of insurer and insured. Section 12 is merely intended to ensure that ss 12, 13 and 14 do not place a higher duty on an insured than is otherwise required under Part IV. It does not, however, follow that failure to 62

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make proper disclosure may not be seen for certain purposes, at least, as a breach of the duty of utmost good faith, even if that might have the effect of providing an alternative remedy for a failure to make disclosure to those remedies which appear in Part IV. … it may be argued that these are but two sides of the same coin leading to remedies which are not mutually exclusive.

On the facts of the case it was not necessary for the Court of Appeal to look further at the interaction between the duty of utmost good faith and the duty of disclosure. It is open in an appropriate case to argue for the application of the duty of utmost good faith in circumstances where the duty of disclosure is involved and where the duty of disclosure is not rendered more onerous. The duty of utmost good faith may inform a need for disclosure as long as s 21 requires as much as the duty of utmost good requires. Schmidt J (NSW Sup Ct) described the need for disclosure by a corporate proponent in terms of the requirement of utmost good faith in Stealth Enterprises Pty Ltd t/a The Gentleman’s Club v Calliden Insurance Ltd (2016) 19 ANZ Ins Cas 62-095; [2015] NSWSC 1270 (3 September 2015). She said (at [138]): The need for disclosure by a corporate applicant for insurance, about the private activities of its officers, depends on the nature of the activities in question and the impact which they might have on the risk which an insurer is being asked to accept. That is because an insurance contract is a contract requiring the utmost good faith of both parties…

[12.10.2] Section 12 and sections other than s 21 Given that the effect of Pt II of the ICA is not “limited or restricted” in any way by subsequent provisions of the ICA, with the exception of the duty of disclosure, there is a question as to how the duty of utmost good faith interacts with provisions such as ss 54 and 56. This is also discussed below, [13.20.3] and [13.20.4]. In a matter involving the submission of fraudulently inflated stock sheets in support of part of a claim, it was submitted that the paramountcy of the duty of utmost good faith meant that s 54(1) did not limit or restrict the effect of s 13. Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 rejected the argument. He drew a distinction between the effect of ss 13 and 54(1) of the ICA. He said (at 77,136 (ANZ Ins Cas)): Section 12 is contained in Part II of the Act, as is s 13 (which imposes the duty of utmost good faith). Nevertheless, in my view, s 54(1) does not limit or restrict the effect of s 13. It merely provides the extent of the remedy for the duty imposed by s 13. The effect of s 54(1) is that a breach of duty of utmost good faith by the insured entitles the insurer to refuse to indemnify the insured only to the extent that the insurer’s “interests are prejudiced by that breach”. This view is consistent with the policy embodied in s 56 of the Act. It is ©

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[12.10.2]

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Insurance Contracts Act 1984

[12.10.2]

unlikely that the legislature intended that a breach of the duty of utmost good faith should be dealt with in a way fundamentally different to a fraudulent claim.

The proposition put forward by Ipp J and contained in the quoted passage above was accepted by Einstein J (NSW Sup Ct) as representing the proper construction of the ICA: Walton v Colonial Mutual Life Assurance Society Ltd (2004) 13 ANZ Ins Cas 61-620; [2004] NSWSC 616 (at 77,517 (ANZ Ins Cas)). It is likely that the question as to how the duty of utmost good faith interacts with provisions such as ss 54 and 56 will be the subject of further judicial consideration. The following matters remain to be canvassed or more fully canvassed (as the case may be): 1. Section 12 refers to the effect of Pt II of which s 13 is only one section. 2. It is difficult to reconcile s 14(1) with s 54(1). 3. In some respects the ALRC intended fraud to be treated in much the same way as a breach of the duty of utmost good faith (inability to avoid a contract ab initio: ALRC 20 at [243]). In other respects the two are treated quite differently (the entitlement to recover damages for a breach of the duty of utmost good faith: ALRC 20 at [328]). 4. A breach of the duty of utmost good faith is now a breach of the requirements of the ICA under s 13(2) (inserted by the Insurance Contracts Amendment Act 2013).

[12.20] Tort of bad faith (Tort of good faith) Bad faith and the ICA

The tort of bad faith which has arisen in the United States was specifically considered by the ALRC. The ALRC concluded that the introduction of a tort of bad faith would not add substantially to the remedies available to an insured. The tort derives from an implied covenant of fair dealing in a contract of insurance that neither party will do anything to injure the right of the other to receive the benefits of the contract. A breach of the duty is a tort for which, if appropriate, a court may award both general damages and punitive damages. The ALRC said (ALRC 20 at [328]): The question remains whether breach of [the duty of utmost good faith] should give rise to a tortious remedy. It appears that the main reason for American courts introducing a tort of bad faith was to enable an insured to recover punitive damages and damages for mental distress. Punitive or exemplary damages are awarded only rarely by Australian courts. An insured is already 64

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entitled to damages in the highly unlikely case of an insurer intentionally causing an insured nervous shock. The mere introduction of a tort of bad faith in Australia would not add substantially to the remedies available to an insured. To achieve the position reached by some American courts, it would also be necessary to extend the remedies available for a breach of tortious duty. It is doubtful whether such an extension would be desirable. Assessment of damages for a breach of the duty of good faith by the insurer should be based on ordinary contractual principles.

The ALRC favoured the introduction of a remedy in contractual damages for a breach of the duty of good faith over the introduction of a new tort. Accordingly, in matters subject to the ICA, the views of the ALRC, the lack of change in the social and commercial considerations underpinning the policy since the publication of ALRC 20 and the available remedy for contractual damages for a breach of utmost good faith and interest thereon, have meant a judicial unwillingness to recognise a new tort of bad faith/good faith. The terms “bad faith” and “good faith” have often been used interchangeably when the possible introduction of a new tort has been judicially considered. McMurdo J (Qld Sup Ct) saw no reason of principle or policy to warrant the recognition of a tort of bad faith concurrently with contractual remedies under the ICA. He noted that there were good reasons not to recognise such a tort: Lomsargis v National Mutual Life Association of Australasia Ltd [2005] 2 Qd R 295; (2005) 192 FLR 400; (2006) 14 ANZ Ins Cas 61-671; [2005] QSC 199. McMurdo J said (at 75,083 (ANZ Ins Cas)): The absence of any authority for the existence of this tort in any court in Australia, England, Canada or New Zealand, is not fatal to its recognition if, as a matter of principle and policy, there is a proper basis for it. But as to principle, the [insured] advanced no argument as to how the imposition of such a tortious liability would represent an extension of established principle to a particular context. As to policy, it is significant that the Australian Law Reform Commission, after its consultations and consideration, saw fit to recommend the introduction of a contractual obligation but to reject the importation of this tort of bad faith and there was no argument to the effect that any changing commercial or social conditions now present different policy considerations. Any proper basis for the imposition of this tortious liability must lie, if at all, in the nature and content of the relationship between the parties affected by it, and a perceived need in that context for a punitive remedy. Bad faith and the common law

English courts have resisted the introduction of a tort of bad faith. The English Court of Appeal rejected the introduction of a new tort in Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1988] NLJR 287; (1988) 5 ANZ Ins Cas 60–881; [1989] 2 All ER 952. The Court of Appeal said (at 997): ©

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Insurance Contracts Act 1984

[12.20]

In the case of a contract uberrimae fidei, the obligation to disclose a known material fact is an absolute one … A decision that the breach of such an obligation in every case and by itself constituted a tort if it caused damage could give rise to great potential hardship to insurers and even more, perhaps, to insured persons. An insured who had in complete innocence failed to disclose a material fact when making an insurance proposal might find himself subsequently faced with a claim by the insurer for a substantially increased premium by way of damages before any event had occurred which gave rise to a claim. In many cases warranties given by the insured in the proposal form as to the truth of the statements made by him might afford the insurers the same remedy, but by no means in all cases. In our judgment it would not be right for this court by way of judicial legislation to create a new tort, effectively of absolute liability, which could expose either party to an insurance contract to a claim for substantial damages in the absence of any blameworthy conduct.

The English Court of Appeal noted its earlier decision in Banque Financiere and applied the reasons for rejecting a tort of bad faith to the rejection of an implied term requiring the parties to act with utmost good faith in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (“The Good Luck”) [1990] 1 QB 818. In Australia, the lack of recognition of a tort of bad faith/good faith has been considered in a number of cases in which the contracts of insurance in question have not been subject to the ICA. Remedies for tortious conduct have most commonly been sought in cases involving workers’ compensation insurance which is excluded from the application of the ICA. The Court of Appeal of NSW comprehensively examined the reasoning underpinning the tort of bad faith, English and Australian cases in which it had been judicially considered and the statutory context of workers’ compensation legislation, and refused to recognise a tortious duty of good faith (or a contractual duty of good faith) in the circumstances of a workers’ compensation case in CGU Workers Compensation (NSW) Ltd v Garcia (2007) 69 NSWLR 680; 14 ANZ Ins Cas 61-746; [2007] NSWCA 193. The appeal to the Court of Appeal in Garcia was from a decision of Judge Goldring (NSW District Court) who had applied the reasoning of Badgery-Parker J (NSW Sup Ct) in Gibson v Parkes District Hospital (1991) 26 NSWLR 9. Gibson, and the reasoning in it, had been considered in several cases prior to Garcia. In Gibson Badgery-Parker J (NSW Sup Ct) considered an appeal from a decision of a Master of the Supreme Court granting the plaintiff leave to amend her statement of claim to include, inter alia, allegations that her workers’ compensation insurer had failed in its duty to deal fairly and in good faith in processing and paying her claim under the Workers’ Compensation Act (NSW). The contract of insurance was of a type not subject to the ICA. Badgery-Parker J reviewed the nature of the tortious duty alleged and relevant case law. He noted that although he was not 66

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referred to any case from a common law jurisdiction outside the United States where such a cause of action had been recognised, there were two Australian cases in which its possible existence had been adverted to, that is, Protean (Holdings) Ltd v American Home Assurance Co (1985) 4 ANZ Ins Cas 60-683 and Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1990) 159 LSJS 84. Badgery-Parker J said that it did not appear that the existence of a tortious duty should be seen to depend upon the implication of a term in the contract of workers’ compensation insurance requiring good faith and fair dealing, that being the theory underlying the American cases. He noted, according to the various authorities cited, that it was not open to him to hold that a contract of insurance, not the subject of the ICA, contained an implied term that the parties will deal fairly and in good faith. He allowed the amendment to the statement of claim on the basis that public interest did not dictate that the proposed cause of action be dismissed. In so deciding he left open the possibility that a tortious duty could exist in Australia where a contract of insurance is not governed by the ICA. McDonald J (Vic Sup Ct) declined to follow Gibson in Gimson v Victorian WorkCover Authority [1995] 1 VR 209. He considered that Gibson is authority which supports the proposition that a contractual relationship may give rise to a relationship of proximity which imposes on the parties a duty to act in good faith, a breach of which in some circumstances may give rise to an action in tort. However, he was not persuaded by the decision of Badgery-Parker J to reach that conclusion. The Full Court of the Supreme Court of WA commented on the confused state of decisions bearing upon whether a tortious duty of good faith was arguable against workers’ compensation insurers in Ilievska-Dieva v SGIO Insurance Ltd [2000] WASCA 161. Murray J noted that the claims in the case were arguably maintainable according to the reasoning in Gibson but not according to the reasoning in Gimson. The Full Court appears to have declined to strike out as untenable a claim that the workers compensation insurer owed a duty of good faith. McMurdo J (Qld Sup Ct) distinguished Gibson on its facts in Lomsargis v National Mutual Life Association of Australasia Ltd [2005] 2 Qd R 295; 192 FLR 400; (2006) 14 ANZ Ins Cas 61-671; [2005] QSC 199. He saw no reason of principle or policy to warrant the recognition of a tort of bad faith concurrently with contractual remedies under the ICA. He noted that there were good reasons not to recognise such a tort. The Court of Appeal of NSW in Garcia noted that Gibson was authority for the fact that a tortious duty of good faith was arguable and should not be struck out. It recognised that there were difficulties with Gibson. The Court of Appeal concluded that there is no tortious (or contractual) duty to act in good faith in the statutory context of workers’ compensation ©

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legislation. Mason P (with whom Hodgson and Santow JJA agreed) referred to the need to understand and respect the contract regulating the delivery of a system of workers’ compensation and work-related damages first, before venturing to the law of torts as a gap-filler. The reasoning in Garcia goes further than that and questions whether a new tort of good faith can exist in Australia. In Garcia, the worker argued that the insurer’s cessation of workers’ compensation payments resulted in psychiatric illness and other physical injuries. The worker claimed, and it was accepted by the trial judge, that there was a tortious duty upon the insurer to act in good faith towards the worker in relation to any claims made under the Workers Compensation Act 1987 (NSW). The trial judge found that the insurer was at least predisposed, if not totally prejudiced, against the worker and had used a medical report to arbitrarily cease payments. He held that such conduct was “contrary to all reasonable standards of commercial behaviour and malicious”. He awarded the worker damages, including punitive and exemplary damages. In allowing the appeal, the Court of Appeal found that a tort of good faith was legally and practically incompatible with the statutory framework of the workers’ compensation legislation in New South Wales because it already prescribed in detail the substantive and procedural rights of all parties. Mason P (with whom Hodgson and Santow JJ agreed) focused upon three particular issues of coherence as between the putative tort and the statutory scheme generally. He said (at 76,360–76,362 (ANZ Ins Cas)): First, the duty contended for (and found to have been breached in this case) intersects sharply across the statutory mechanisms and the adversary context in which the whole scheme is embedded. … Secondly, claims of consequential loss that would arise under a duty of good faith lie uneasily with the detailed limits of claims under the Workers Compensation Act 1987 (NSW)] and the [Workplace Injury Management & Workers’ Compensation Act 1998 (NSW)] focus upon management of workplace injuries. … Thirdly, the insurer’s statutory duties are closely monitored through a system of licensing and criminal penalties.

The Court of Appeal found that the weight of authorities did not support the existence of the duty. The court looked at why a new tort of good faith should not be easily found to exist. Mason P said (at 76,359 (ANZ Ins Cas)): Three problems at once present themselves, demonstrating powerful arguments why the new tort should not be granted easy passage if invoked to trump the “inadequacies” (from a plaintiff’s point of view) of contract. They concern: exemplary damages, damages for delay and damages for disappointment. 68

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Australian law has thus far not accepted exemplary damages for breach of contract (see Grey v Motor Accident Commission (1998) 196 CLR 1; [1998] HCA 70 at 6 (CLR), Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298; [2003] NSWCA 10 at 307, 333, 361 (NSWLR). This embargo and the policies it reflects, many of them clustering around the label of “efficient breach”, offer strong arguments against creation of a novel tort that would overstep this outcome in an area where a contract – and a statutory one at that – occupies centre stage. I do not feel justified in entering the field of exemplary damages by the back door. The second broad barrier relates to the approach taken by the common law to compensating for the impact of delay in meeting a contractual claim. The normal framework within which a plaintiff’s entitlement to timely indemnity under an insurance contract is addressed is by way of an award of interest, almost invariably resting upon provisions such as s 100 of the Civil Procedure Act 2005 (NSW). The common law regards a claim for indemnity under an insurance contract as an action for damages, not debt (see Jabbout v Custodian of Israeli Absentee Property [1954] 1 All ER 145; [1954] 1 WLR 139). A contractual or tortious duty of good faith that offers compensatory damages with reference to all losses stemming from an unjustified delay in meeting a just insurance claim cuts directly across this framework of reference. And when one moves to the particular field of claims under the WC Act and the WIM Act, the matter becomes more acute given that each Act closely confines interest awards (see WC Act s 151M (interest on damages), WIM Act ss 109–111 (interest on compensation awards)). Damages for unjustified delay in meeting an insurance claim may be recoverable, subject to the principles in Hadley v Baxendale (1854) 2 CLR 517; 9 Ex 341; 2 WR 302 (see generally Hungerfords v Walker (1989) 171 CLR 125; [1989] HCA 8; The New Zealand Insurance Co Ltd v Harris [1990] 1 NZLR 10; CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; [1997] HCA 2 at 411 (CLR); Sprung v Royal Insurance (UK) Ltd [1999] 1 Lloyd’s Rep R 111; Sempra Metals Ltd v Her Majesty’s Commissioners of Inland Revenue [2008] 1 AC 561; [2007] UKHL 34). The award in the present case was not based upon application of the rules in Hadley v Baxendale. The tortious duty simply sidestepped them. A third field of concern stems from the law’s very tentative recognition of damages for disappointment, distress and injured feelings caused by non-performance of a contract (see generally JW Carter Carter on Contract Vol 2, Ch 42, 42-100. In the present case the psychiatric injuries suffered by the worker stem from the combination of his work injury and the insurer’s unjustified delay in meeting what was eventually found to be a just claim. If, however, there is a common law duty sounding in damages for mental distress caused by an insurer’s prevarication, then one could envisage claims (unlike the present one) in which psychiatric injury was not parasitic upon physical injury generating a just claim for compensation under the WC Act. In the upshot, the novel tort would offer remedies withheld by the law of contract and also (unless severely qualified) generate non-statutory compensation entitlements unless severely qualified. My point is that compensatory and punitive awards of damages against insurers that play “hard ball” too hard must grapple with these problems. If ©

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certain compensatory and punitive awards are precluded under a contractual analysis and if they would contradict aspects of the statutory scheme, then tort law should generally respect those limits. I cannot envisage any circumstances in the present context where tort law could ignore them.

[12.30] Utmost good faith: common law In some respects, the duty of utmost good faith is different under the ICA as compared to the duty at common law. The preservation of aspects of the duty at common law under the ICA makes it necessary to understand the differences. At common law, a contract of insurance is based on the principle that the insurer and insured act with the utmost good faith towards each other. The principle is known as “uberrima fides”, with contracts of insurance classified as “uberrimae fidei”. At common law, the duty of utmost good faith has usually been considered in connection with the duty of disclosure. The remedy for breach of the duty at common law is avoidance of the contract of insurance. Clearly, the remedy of avoidance is more attractive to insurers facing a claim than insureds making a claim under a contract of insurance. The principle of utmost good faith was settled by the well-known judgment of Lord Mansfield in Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162. Lord Mansfield said (at 1909–1910 (Burr); 1164 (ER)): ... Insurance is a contract of 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 risque, 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 risque run is really different from the risque understood and intended to be run, at the time of the agreement... 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.

Young J (NSW Sup Ct) examined the development of the duty of utmost good faith at common law in GIO Insurance Ltd v Leighton Contractors Pty Ltd (1996) 8 ANZ Ins Cas 61-293.

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[12.30.1] Common law pre-contractual The judgment in Carter v Boehm (1766) 3 Burr 1905; 97 ER 1162 is also important for Lord Mansfield’s statement of the principles governing non-disclosure. There has been an overwhelming trend at common law for the duty of utmost good faith to be considered in the context of the inception of a contract of insurance.

[12.30.2] Common law post-contractual At common law, the duty of utmost good faith applies after the inception of a contract and during its currency. However, the duty has been applied in very few cases in this context and its width is arguably uncertain. England

The approach of Hirst J in Black King Shipping Corp v Massie (The “Litsion Pride”) [1985] 1 Lloyd’s Rep 437 arguably represents the post-contractual high water mark of the duty of utmost good faith at common law. The plaintiff ship-owner failed to give notice in 1982 that the Litsion Pride had been chartered to make a voyage to the Persian Gulf, then a war zone. In finding that the plaintiff had fraudulently failed to give the appropriate notice, Hirst J said (at 518 and 519): I am prepared to hold that the duty not to make fraudulent claims and not to make claims in breach of the duty of utmost good faith is an implied term of the policy… Consequently, I hold that the underwriters are entitled to maintain the defence of fraudulent claims and claims other than in utmost good faith against the mortgagees, since they arise out of the contract.

The English Court of Appeal in Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1988] NLJR 287; (1988) 5 ANZ Ins Cas 60–881; [1989] 2 All ER 952 generally approved the conclusion of Steyne J in the court below that the utmost good-faith principle comprises rules of law developed by judges and that it is incorrect to categorise the rules as implied terms of a contract of insurance. Steyne J had observed that once it was accepted that the principle of utmost good faith imposed meaningful reciprocal duties then it seemed anomalous that there should be no claim for damages for breach of those duties in a case where that was the only effective remedy. An argument for damages was developed before the Court of Appeal based on Black King Shipping Corp v Massie (The “Litsion Pride”) [1985] 1 Lloyd’s Rep 437The “Litsion Pride”. However, the Court of Appeal did not find the line of argument compelling. Slade J said (at 994): It may be that on the particular facts of some cases (though by no means necessarily all) the duty of post-contractual disclosure can be said to arise ©

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under the terms of the preceding contract. However, it by no means follows that the duty of pre-contractual disclosure arises under the contract rather than the general law.

The Court of Appeal found that a breach of the duty of utmost good faith, which was also a failure to disclose, did not give rise to a claim for damages. Subsequently, the House of Lords affirmed the decision of the Court of Appeal in Banque Financiere de la Cite SA v Westgate Insurance Co Ltd [1991] 2 AC 249; (1990) 6 ANZ Ins Cas 60-987. Although the House of Lords found it unnecessary to consider the question of remedies, Lord Templeton agreed with the Court of Appeal that a breach of the duty of utmost good faith does not sound in damages. The English Court of Appeal considered whether an insurer owed a post-contractual duty of utmost good faith to a non-party in Bank of Nova Scotia v Hellenic Mutual War Risks Association (Bermuda) Ltd (“The Good Luck”) [1990] 1 QB 818. The ship “Good Luck” was insured on the basis that the insurer was entitled to reject a claim if an event occurred while the ship was in an additional premium area which included the Persian Gulf. The insurer gave an undertaking to the bank that held the mortgage on the ship that it would inform it if the insurance ceased. The bank argued that the insurer breached its undertaking by not informing the bank that the ship was involved in voyages to the Persian Gulf where it was struck by a missile and became a constructive total loss. The Court of Appeal found that the insurer was not in breach of its undertaking and was not liable in negligence in that it owed the bank no duty of care. Importantly, the Court of Appeal held that if an obligation of good faith had been owed to the bank, its breach would not have been compensable by an award of damages. May LJ, who delivered the judgment, referred to the reasons given by Slade LJ in Banque Financiere for rejecting a liability in tort for breach of an insurer’s duty of good faith said (at p 888): Those reasons seem to us to be equally persuasive against regarding breach of the obligation of utmost good faith, in a contract of insurance, so far as concerns a breach of the obligation occurring after the contract has been made and in the course of the contract, as constituting a breach of an implied term of the contract and as therefore capable of supporting a claim to damages. We do not think it is necessary to question the decision of Hirst J in Black King Shipping Corp v Massie (The “Litsion Pride”) [1985] 1 Lloyd’s Rep 437 so far as concerns his decision that the obligation of utmost good faith could continue after the contract was made with reference to such a matter as the fixing of the rate of additional premiums. Assuming that the obligation can continue, we see no reason why the source in law of the obligation, or the remedy for its breach, should be different after the contract is made from what it is at the pre contract stage. We would, therefore, hold that, if the obligation of utmost good faith could be said to have arisen, either in the contract of insurance as a separate obligation owed to the bank as assignee, or in the 72

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contract contained in the letter of undertaking, the bank could not establish a claim to damages in respect of any breach of it. Australia

In NSW Medical Defence Union Ltd v Transport Industries Insurance Co Ltd (1985) 4 NSWLR 107, Rogers J (NSW Sup Ct) distinguished the Black King Shipping Corpv Massie (The “Litsion Pride”) [1985] 1 Lloyd’s Rep 437 and found that there had to be a “live obligation” on the part of a party to the contract of insurance to which the duty of utmost good faith could attach. In GIO Insurance Ltd v Leighton Contractors Pty Ltd (1995) 8 ANZ Insurance Cases 61-293 Young J (NSW Sup Ct) agreed with Rogers J that there must be a continuing obligation under a policy to which the implied duty of utmost good faith can attach. Young J said (at 76,309–76,310): … the uberrimae fidei principle, or as it might be Anglicised, the duty of utmost fidelity, is not one legal principle, it is a general norm from which many principles have sprung. It is not correct to regard the duty of utmost fidelity in and about acquainting the insurer of the risk with the implied terms that must be considered to exist after an actual contract of insurance has been made. This distinction perhaps has not always been borne in mind. Indeed, the various judgments in The Skandia Insurance case [Banque Keyser Ullmanns SA v Skandia (UK) Insurance Co Ltd [1990] 1 QB 665] and in the Bank of Nova Scotia case show that different judges have classified the principle in different ways. Some judges have said that the principle is a principle of law which is applied equally to pre-contractual and post-contractual disclosure. Others have said that there is a difference. They say the pre contractual disclosure duty of utmost fidelity is implied by law, but post contractual duties are a matter of implied terms in the contract. Even then there is a difference between those who say that the implied term gives rise to damages if breached and those who say that it does not. With respect, the clearest exposition of the law is that of Rogers, J in the NSW Medical Defence Union case. His Honour differentiates between a duty to disclose matters relevant to the risk which concludes as at the entry into the contract of insurance and an implied term that in connection with promises made under the policy, parties will comply with an obligation to use utmost fidelity.

In Nigel Watts Fashion Agencies Pty Ltd v GIO General Ltd (1995) 8 ANZ Insurance Cases 61-235, the NSW Court of Appeal and in particular, Kirby P and Handley JA (NSW Ct of App), considered the common law duty of utmost good faith in the context of a workers’ compensation insurer’s conduct of proceedings on behalf of both itself and an insured employer. The workers’ compensation insurer was subject to the common law duty of utmost good faith rather than the duty under s 9(1)(e). The worker, who was a principal of the insured employer, brought proceedings against the occupier of a building in which he had been injured when ©

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entering a lift. The occupier responded with a third party claim against the insured, in respect of its liability to the worker. The third party claim comprised both a contribution claim, based on the insured’s alleged negligence, and a contractual indemnity claim, under the terms of a lease between the insured and the occupier. The insurer instructed lawyers to defend the third party claim. Neither the insurer, nor the lawyers, told the insured before the trial that it may not be covered for the contractual indemnity claim under the lease. The trial judge dismissed the contribution claim and found for the occupier on the contractual indemnity claim. The insurer declined to cover the insured in respect of the contractual indemnity claim. In finding that the insurer was estopped from denying that the insured was covered for the contractual indemnity claim, Kirby P found, inter alia, that the insurer was not entitled to remain silent if the product of the silence was a relevant detriment to the insured. Handley JA found that an insurer has a duty to speak to and consult with its insured when faced with a conflict of interest in the conduct of the defence of proceedings against the insured. Both Kirby P and Handley JA reviewed the relevant continuing duty of utmost good faith at common law. Kirby P said that the duty of good faith obliged the insurer to be candid in its dealings with the insured. He said (at 75,646): The duty of good faith which the insurer owed to the insured obliged it to be candid in its dealings with the employer, as insured. Cf Gibson v Parkes District Hospital (1991) 26 NSWLR 9 (SC) at 17f. It required it, in the circumstances of this case, to make clear to the insured: The limit of the obligation; The differential liability of the insured; and The risk which the insured thereby ran in respect of which it might need to secure its own separate advice. Common law duty in light of the ICA

Cases under the ICA are not necessarily of assistance when considering the common law duty of utmost good faith. The differences between the common law duty and the duty under the ICA make it so. A defining aspect of the duty under the ICA is that it is an implied term of contracts of insurance subject to the Act. Similarly, the right of avoidance for a pre-contractual breach of the common law duty of utmost good faith has been a defining aspect. In Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203; (1999) 10 ANZ Ins Cas 61-429; [1998] QSC 209 Chesterman J (Qld Sup Ct) considered the common law post-contractual duty of utmost good faith in light of cases decided under ss 13 and 14. He did not find cases under the ICA helpful because they approached the point in dispute by reference to an implied term requiring utmost good faith.

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[12.30.2]

The duty of the utmost good faith

(1) A contract of insurance is a contract based on the utmost good faith and there is implied in such a contract a provision requiring each party to it to act towards the other party, in respect of any matter arising under or in relation to it, with the utmost good faith. [Subs (1) am Act 75 of 2013, s 3 and Sch 1 item 3]

(2) A failure by a party to a contract of insurance to comply with the provision implied in the contract by subsection (1) is a breach of the requirements of this Act. [Subs (2) insrt Act 75 of 2013, s 3 and Sch 1 item 4]

(3) A reference in this section to a party to a contract of insurance includes a reference to a third party beneficiary under the contract. [Subs (3) insrt Act 75 of 2013, s 3 and Sch 1 item 4]

(4) This section applies in relation to a third party beneficiary under a contract of insurance only after the contract is entered into. [Subs (4) insrt Act 75 of 2013, s 3 and Sch 1 item 4] [S 13 am Act 75 of 2013]

SECTION 13 COMMENTARY Utmost good faith: nature and scope Background and synopsis ....................................................................... Contractual duty ...................................................................................... Duration of the duty of utmost good faith ............................................... Third party beneficiary: Duty of good faith and fair dealing and the duty of utmost good faith ............................................................................ Meaning ................................................................................................... Nature of respective interests – not a fiduciary duty .............................. Not a statutory duty giving rise to a civil action for breach .................... Remedies ................................................................................................. Third party beneficiary .............................................................................

[13.10.1] [13.10.2] [13.10.3] [13.10.4] [13.10.5] [13.10.6] [13.10.7] [13.10.8] [13.10.9]

Section 13 and other ICA provisions Sections Sections Sections Sections Sections

13 13 13 13 13

and 21 ................................................................................. (and 11) and sections 48 (and 48A) ................................... and 54 ................................................................................. and 56 ................................................................................. and 57 .................................................................................

[13.20.1] [13.20.2] [13.20.3] [13.20.4] [13.20.5]

Pre-contractual application of s 13 Pre-contractual duty of insurer Notification by insurer of the consequences of a breach by insured ..... Insurer’s inclusion of insured in negotiations .......................................... Knowledge of insurer of pending underinsurance .................................. Silence by insurer when cover not in accordance with that required ..... ©

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Commercial advantage gained by insurer .............................................. Pre-contractual duty of insured Duty on insured to disclose financial position .........................................

[13.10.1] [13.30.5] [13.30.8]

Post-contractual application of s 13 Post-contractual duty of insurer Claims handling generally ....................................................................... [13.40.1] Timeliness and communication of decision by insurer ........................... [13.40.2] Assessment of claim by insurer and the formation of its opinion ........... [13.40.3] Consent to a course of conduct by insurer ............................................. [13.40.4] Assertion of a defence by insurer (whether successful or unsuccessful) ...................................................................................... [13.40.5] Cancellation of policy by insurer in relation to paid claim ...................... [13.40.6] Duty of “insurer” to warn on lapse of cover ............................................ [13.40.7] Reliance on ambiguous terms by insurer ............................................... [13.40.8] Denial of existence of insurance cover by insurer .................................. [13.40.9] Procedural conduct of proceedings by insurer ....................................... [13.40.10] Early realisation of policy by insurer applied to notice of intention to switch investment portfolios ................................................................ [13.40.11] Refusal by insurer to give an assurance absent a contractual obligation ............................................................................................ [13.40.12] Conduct by insurer prior to settlement of property claim ........................ [13.40.13] Treatment by insurer of one insured differently from another ................ [13.40.14] Post-contractual duty of insured False answer in claim form by insured ................................................... [13.45.1] Protected insured putting insurer at risk ................................................. [13.45.2] Failure to notify circumstances by insured .............................................. [13.45.3] Failure by insured to provide information and disclose its own view ..... [13.45.4] Insistence by insured on obtaining development consent ...................... [13.45.5]

Utmost good faith: nature and scope [13.10.1] Background and synopsis A contract based on the utmost good faith: s 13(1) first limb

The first limb of s 13(1), “a contract of insurance is a contract based on the utmost good faith” is substantially the same as the first limb of s 23 of the Marine Insurance Act 1909 (Cth), “a contract of marine insurance is a contract based upon the utmost good faith”. The Notes to Draft Insurance Bill 1982 (Appendix A to ALRC 20) which concern the proposed cl 14 (which became s 13(1)) invite a comparison between the proposed cl 14 and s 23 of the Marine Insurance Act 1909 (Cth) (cl 14 note 2). Implied in such a contract a provision requiring…utmost good faith: s 13(1) second limb

The second limb of s 13(1) provides that a contract of insurance contains an implied provision requiring each party to act towards the other with utmost good faith. Unlike the common law (at which the duty has been classified in different ways), the duty of utmost good faith is implied in every contract of insurance to which the ICA applies. The duty of utmost 76

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good faith is therefore a contractual duty under the ICA. Under the ICA, a breach of the duty of utmost good faith by an insurer is a breach of an implied term in a contract of insurance and can give rise to a claim for damages to be assessed according to ordinary contractual principles. At common law, the duty has been variously judicially described as a principle of law, a general norm from which many principles have sprung, an implied term post-contractually and implied by law. See [12.30.2]. On balance, at common law, the duty is extra-contractual and not an implied term. In any event, pursuant to s 13 a breach of the duty of utmost good faith by an insurer is unequivocally a breach of an implied term in a contract of insurance. Each party to it to act towards the other party: s 13(1) second limb

Each party to a contract of insurance is required to act towards the other party with the utmost good faith. This reflects the common law position where the duty is imposed on both insured and insurer. Section 13(1) was a renumbering of s 13. Section 13 was amended by the Insurance Contracts Amendment Act 2013 to renumber the section as s 13(1) and to add subsections. The amendment commenced on 28 June 2013 and applies to contracts of insurance entered into or renewed after this date (which is the day the Insurance Contracts Amendment Act 2013 received Royal Assent). Failure is a breach of the ICA (Post 28 June 2013): s 13(2)

A breach of the duty of utmost good faith is a breach of the requirements of the ICA s 13(2). Section 13(2) was inserted in the ICA by the Insurance Contracts Amendment Act 2013 (which commenced on 28 June 2013) in accordance with a recommendation of the Review Panel commissioned by the Australian Government in September 2003. The Review Panel recommended that a breach of the duty of utmost good faith should be a breach of the ICA, although any such breach would not be an offence and would attract no penalty (see Final Report (June 2004), at [1.2]–[1.8]). The rationale for the changes was the limitation under the pre-existing law that parties to a contract of insurance could enforce compliance with the implied duty of utmost good faith through private legal action. This presented too great an expense for some parties and did not provide long-term solutions to systemic breaches of utmost good faith committed over time: Explanatory Memorandum to ICAB 2013, (at [1.6]). To avoid any doubt about applicable remedies, s 14A was also inserted into the ICA to clarify the powers of ASIC under the Corporations Act 2001 in respect of an insurer’s breach of the duty of utmost good faith in claims handling or the settlement of a potential claim. By making a breach of the utmost good faith a breach of the ICA, s 13(2) forms part of the framework for the exercise by ASIC of powers pursuant ©

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to ss 14A and 55A, the latter of which concerns representative actions by ASIC on behalf of an insured against an insurer. A breach of the ICA for failure to comply with the duty of utmost good faith is not an offence against the ICA, nor does it attract any penalty under the ICA. This amendment applies to contracts of insurance entered into or renewed after 28 June 2013 (which is the day the Insurance Contracts Amendment Act 2013 received Royal Assent). The amendment also applies to a contract of general insurance renewed after 28 June 2013 and a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation. Third party beneficiary (Post 28 June 2013): s 13(3) and 13(4)

The duty of utmost good faith under the ICA extends post-contractually to third party beneficiaries of cover. A reference in s 13 to a “party to a contract of insurance” includes a reference to a third party beneficiary under the contract (s 13(3)). A third party beneficiary is defined in s 11(1) to mean 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. This definition was inserted in s 11(1) by the Insurance Contracts Amendment Act 2013. See [11.130], [48.10.1] and [48.10.2]. Importantly, s 13 applies in relation to a third party beneficiary under a contract of insurance only after the contract is entered into (s 13(4)). A post-contractual duty of utmost good faith is imposed on both insurer and third party beneficiary. Subsections 13(3) and 13(4) were inserted in the ICA following a recommendation of the Review Panel that third party beneficiaries should have access to the utmost good faith provisions under the ICA, but not pre-contractually (see Final Report (June 2004), at [10.1]–[10.6]). These amendments apply to a contract of insurance entered into after 28 June 2013 (which is the day the Insurance Contracts Amendment Act 2013 received Royal Assent). The amendments also apply to a contract of general insurance renewed after 28 June 2013 and a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation. Party to the contract of insurance vs third party beneficiary

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post-contractually. However, a third party beneficiary is only subject to the duty of utmost good faith post-contractually. The distinction between a party to a contract of insurance and a third party beneficiary may not be readily apparent. This is particularly so with directors who are covered under a directors and officers liability policy (see [48.10.1]).

[13.10.2] Contractual duty The duty of utmost good faith is a contractual duty under the ICA. The first limb of s 13(1) provides that a contract of insurance is based on the utmost good faith. The second limb of s 13(1) provides that a contract of insurance contains an implied provision requiring each party to act towards the other with utmost good faith. On balance, the duty of utmost good faith does not have a contractual status at common law. At common law, the balance of authority is that the duty is an extra-contractual principle of law (it has also been described as a general norm from which many principles have sprung) as opposed to an implied contractual term. See [12.30.2]. At common law the strict application of the duty of utmost good faith to a breach by an insured might conceivably result in an insurer being entitled to avoid a contract of insurance ab initio. This right of avoidance at common law favours insurers. A right of avoidance is an inappropriate remedy for an insured seeking to claim under a contract of insurance. Under the ICA, a breach of the duty of utmost good faith by an insurer is a breach of an implied term in a contract of insurance and can give rise to a claim for damages to be assessed according to ordinary contractual principles. Pre-contractual and post-contractual applications

The ALRC expressed a concern in ALRC 20 that the common law requirement of utmost good faith had usually been recognised in connection with the duty of disclosure. That is, it is usually recognised as operating pre-contractually. The ALRC was of the view that, in principle, the duty should apply equally to other aspects of the insurance relationship. There was no reported decision in Australia, at that time, applying the duty to the payment of claims. That is, applying the duty post-contractually. The ALRC said (ALRC 20 at [328]): Legislation should make it clear that the duty of good faith applies to all aspects of the relationship between insurer and insured, including the settlement of claims. An insured should be entitled to recover damages for loss suffered by him as a result of the insurer’s breach of the duty of good faith in relation to the settlement of a claim…Assessment of damages for a breach of the duty of good faith by the insurer should be based on ordinary contractual principles.

According to the Explanatory Memorandum at [35], s 13 makes it clear that the duty extends to the insurer in relation to the payment of the claim. ©

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It further states: [Section 13] will ensure that insurers and their advisers are careful in drafting their policies and that they act fairly in relying on their strict terms.

It is apparent that the ALRC wanted the duty of utmost good faith to apply to all aspects of the relationship between insurer and insured. The intention was to have the duty apply post-contractually to the settlement of claims as well as pre-contractually. But the duty of utmost good faith under the ICA differs from the common law duty in that it is a contractual duty. Also, the duty of disclosure has been separated from the duty of utmost good faith and codified in Pt IV of the ICA. The contractual nature of the duty of utmost good faith and the separate treatment of the duty of disclosure give rise to questions as to the pre-contractual application of the duty to an insurer and an insured that were not expressly addressed by the ALRC in ALRC 20. Can a contractual duty of utmost good faith arise before a contract of insurance has been entered into? Does the duty attach more generally to the relationship between the parties to a contract of insurance, which at the time of the relevant conduct may have been in contemplation, rather than more narrowly to the contractual relationship of the parties once the contract has been entered into? It follows from the contractual nature of the duty of utmost good faith under the ICA that the duty only becomes actionable once a contract of insurance has been entered into. Without a contract of insurance, there is no implied term to breach. In this sense the contractual duty of utmost good faith can only arise once a contract of insurance is entered into. But can the breach of the implied term as to utmost good faith involve conduct that occurred before the contract is entered into? Any proposition that the duty of utmost good faith cannot govern pre-contractual conduct because the duty owes its existence to an implied term in a contract of insurance which is yet to be effected finds little, if any, support. The ALRC intended to ensure that the duty of utmost good faith applied more widely to “all aspects of the relationship between insurer and insured” (ALRC 20 at [328]). Therefore, the better view is that the duty of utmost good faith under s 13 governs all aspects of the relationship between, and the conduct of the parties both pre-contractually and post-contractually. This wide application finds support in both the expressed intention of the ALRC and the explanation of the ambit of s 13 in the Explanatory Memorandum. There is no suggestion that the ALRC and the legislature intended to strengthen the post-contractual application of the duty of utmost good faith at the expense of the pre-contractual application of the duty. The wide application of the duty pre-contractually, as well as post-contractually, also finds support in the wording of s 13 which appears to reflect expressly or by implication the intention of the ALRC and the legislature: 80

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1. The first limb of s 13(1), “a contract of insurance is a contract based on the utmost good faith” is substantially the same as the first limb of s 23 of the Marine Insurance Act 1909 (Cth)(MIA), “a contract of marine insurance is a contract based upon the utmost good faith”. Section 23 of the MIA is in identical terms to Section 17 of the Marine Insurance Act 1906 (UK). The main focus of the duty of utmost good faith at common law Marine Insurance Act is pre-contractual. As such, arguably pre-contractual elements of the duty have been imported into s 13 and remain through the adoption of the first limb of s 23 of the Marine Insurance Act 1909 (Cth). The Notes to Draft Insurance Bill 1982 (Appendix A to ALRC 20) which concern the proposed cl 14 (which became s 13(1)) invite this comparison (cl 14 note 2). The Notes describe the making of a contractual duty, “rather than merely a statutory” duty so that the remedies for breach of contract will be available (cl 14 note 3). It is apparent that the intention was to add a contractual element to the existing duty in order to clarify the application of the duty to post-contractual conduct and to strengthen remedies. It appears that the intention was not to have “merely” a statutory duty, which was mainly pre-contractual, but rather enshrine that duty in the first limb of s 13(1) and add contractual elements to clarify the post-contractual duty and make available remedies for breach of contract; 2. The words “in respect of any matter arising under or in relation to [the contract of insurance]” in the second limb of s 13(1) are capable of being interpreted as making both pre-contractual and post-contractual conduct the subject of the duty of utmost good faith. For instance, a matter arising in a pre-contractual negotiation for a contract of insurance, would be a matter arising “in relation to” a contract of insurance. Beech AJA (WA Sup Ct CA) noted the width of the expression “in relation to” in Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pty Ltd (2009) 226 FLR 306; 253 ALR 364; 15 ANZ Ins Cas 61-793; [2009] WASCA 31 (at [150]). 3. Section 13(4) provides that s 13 applies to a third party beneficiary only after the contract is entered into. This subsection would be otiose if the duty of utmost good faith only operated post-contractually. The wider application of the duty of utmost good faith to pre-contractual conduct as well as post-contractual conduct, also finds judicial support in various cases, either expressly or by implication. Kirby J (High Court) noted that the duty was more important than an implied term and imposed obligations in respect of conduct wherever that conduct has legal consequences in CGU Insurance Ltd v AMP Financial ©

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Planning Pty Ltd (2007) 235 CLR 1; 81 ALJR 1551; 14 ANZ Ins Cas 61-739. In referring to conduct which has legal consequences, he did not draw a distinction between pre-contractual conduct and post-contractual conduct. He said (at [178]): The duty is more important than a term implied in the insurance contract, giving rise to remedies for a breach, although, by the express provision of s 13, it is certainly that. The duty imposes obligations of a stringent kind in respect of the conduct of insurer and insured with each other, wherever that conduct has legal consequences.

Vickery J (Vic Sup Ct) considered the duration of the duty of utmost good faith and supported the wider view in Imaging Applications Pty Ltd v Vero Insurance Ltd [2008] VSC 178 (29 May 2008). He said that it is clear that the duty of utmost good faith applies both pre-contractually and post-contractually. He noted that “any matter arising under or in relation to” the contract of insurance within the terms of s 13(1) would include the initial formation of the contract. He said (at [54]–[55]): It is clear that the duty of utmost good faith applies both pre-contractually and post-contractually… The implied term imported into the contract of insurance by s 13 of the Act applies to any matter arising under or in relation to the contract of insurance, and this includes the initial formation of the contract and its subsequent administration.

In the same vein, Sackar J (NSW Sup Ct) described the duty of utmost good faith as applying at the formation stage of a contract of insurance: Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd (2014) 18 ANZ Ins Cas 62-000; [2013] NSWSC 1975. Having set out s 13(1) he said (at [109]): The utmost good faith requirement therefore applies “in respect of any matter arising under or in relation to” the contract of insurance. The broad language of s 13 makes it clear that the duty of utmost good faith applies not only in the formation stage of the contract of insurance, but extends for the duration of the contract, including when a claim is made, and how a claim is handled.

[13.10.3] Duration of the duty of utmost good faith According to s 13, a contract of insurance is a contract based on the utmost good faith and the duty of utmost good faith is an implied provision in such contract. The implied term requiring the parties to act with utmost good faith applies and continues to apply, “in respect of any matter arising under or in relation to” the contract of insurance. The ALRC intended that the duty apply widely to “all aspects of the relationship” between the insurer and the insured. Arguably, the duty of utmost good faith under s 13 enures and endures to govern all aspects of the relationship between, and the conduct of, the parties both precontractually and post-contractually. 82

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Duty commences pre-contractually

The duty of utmost good faith applies both pre-contractually and post-contractually (see above [13.10.2]). The ALRC intended that duty apply to the relationship between insured and insurer. It follows that the duty applies from the commencement of that relationship. This initial pre-contractual application of the duty can be variously described and applied. Sackar J (NSW Sup Ct) described the duty of utmost good faith as applying at the “formation stage” of a contract of insurance: Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd (2014) 18 ANZ Ins Cas 62-000; [2013] NSWSC 1975. He said (at [109]): The broad language of s 13 makes it clear that the duty of utmost good faith applies not only in the formation stage of the contract of insurance, but extends for the duration of the contract, including when a claim is made, and how a claim is handled.

The second limb of s 12 states that Part II does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than duty of disclosure. However, this does not preclude, in certain circumstances, a pre-contractual duty of utmost good faith requiring an insured to make proper disclosure. Ormiston JA (Vic Sup Ct CA) described the operation of s 12 and the interaction of the duty of utmost good faith and the duty of disclosure in CIC Insurance Ltd v Barwon Region Water Authority (1998) 100 LGERA 136; 147 FLR 353; 10 ANZ Ins Cas 61-425; [1998] VSCA 77. Ormiston JA said (at [40]): Section 12, being the first of the statutory provisions dealing with the duty of utmost good faith, expressly says that Part II “does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure”. On their face the words are curiously expressed but the reference to “duty of disclosure” is confined by the definition in s 11(1) of the Act to the duty referred to in s 21 of the Act, namely the first and principal section contained in Part IV relating to the duty of disclosure. The obligation to disclose imposed by that part of the Act is extensive but carefully worked out so as to have regard to the respective rights and obligations of insurer and insured. Section 12 is merely intended to ensure that ss 12, 13 and 14 do not place a higher duty on an insured than is otherwise required under Part IV. It does not, however, follow that failure to make proper disclosure may not be seen for certain purposes, at least, as a breach of the duty of utmost good faith, even if that might have the effect of providing an alternative remedy for a failure to make disclosure to those remedies which appear in Part IV.… it may be argued that these are but two sides of the same coin leading to remedies which are not mutually exclusive.

The duty of utmost good faith may apply to the pre-contractual care or lack of care taken by an insurer in drafting insurance documents. The Explanatory Memorandum states (at [35]): ©

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[Section 13] will ensure that insurers and their advisers are careful in drafting their policies and that they act fairly in relying on their strict terms. Duty ceases when all obligations under the contract cease

Once all obligations under or in relation to a contract of insurance have ceased, it would appear to follow that the duty of utmost good faith would also effectively cease. The duty of utmost good faith is a contractual duty. If breached, it gives rise to contractual remedies. If a contract of insurance has been brought to an end and cannot be relied upon by any party, any subsequent conduct by a party that would otherwise be a breach of the implied term of that contract requiring utmost good faith, would not be actionable as such under the contract. But whether a contract of insurance has been brought to an end and all obligations under it have ceased, so as to thereafter preclude a remedy for a potential breach of the duty of utmost good faith, may be difficult to ascertain. Beech AJA (WA Sup Ct CA) considered a submission by an insured that its insurer was breach of its duty of utmost good faith in bringing a contribution claim against another insurer in Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (2009) 226 FLR 306; 253 ALR 364; 15 ANZ Ins Cas 61-793; [2009] WASCA 31. He said “there may be room for doubt as to whether the duty of utmost good faith would endure after an insurer has indemnified and paid an insured…” (at [156]). Nathan J (Vic Sup Ct) expressed an obiter opinion in CIC Insurance Ltd v Tancredi (1996) 9 ANZ Ins Cas 61-302 that because a contract of insurance was brought to an end by a release which contained a cancellation condition, the question of whether or not subsequent behaviour by the insured amounted to “bad faith” was irrelevant. However, a deed of release itself may contain a provision of the contract of insurance in which event the contract of insurance would endure because of the deed of release. Ball J (NSW Sup Ct) was prepared to accept a proposition that a provision in a deed of release entered into between the insurer and the insured was a provision which affected the operation of the contract of insurance and therefore under s 10(3) was to be regarded as a provision included in the contract of insurance: Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Ltd [2015] NSWSC 1511. Further, the duty of utmost good faith may endure as between an insurer and a third party beneficiary after the duty has ceased to apply between that insurer and an insured. The duty of utmost good faith under the ICA extends post-contractually to third party beneficiaries of cover by virtue of the amendments effected by the Insurance Contracts Amendment Act 2013. The identity of third party beneficiaries with continuing rights under 84

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a contract of insurance which has otherwise been brought to an end may be difficult to determine because of the nature of the cover to third party beneficiaries. The cessation of all obligations under or in relation to a contract of insurance may also be a matter that cannot be ascertained with any degree of certainty. The expression “under or in relation to” in s 13 is very wide. A contract of insurance may be brought to an end but rights “under or in relation to it” may subsist. The insurer may bring contribution or other proceedings. Given the width of the expression “in relation to”, Beech AJA (with whom Martin CJ and McLure JA agreed) in Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (at [150]) thought that there was merit in the insured’s submission that its insurer’s claim for contribution from another insurer was “in relation to” the contract of insurance with its insurer. Beech AJA said that it was true that the claim for contribution did not arise “under” the policy. However, the contribution claim only arose because the insurer indemnified a third party beneficiary under the policy made with the insured. Duty superseded by procedural rules of court

If the parties to a contract of insurance are in litigation with each other, then the implied duty of utmost good faith under s 13 does not extend to the procedural conduct of that litigation. Litigation is to be conducted under the procedural rules of the relevant court. Vickery J (Vic Sup Ct) found that the implied term of utmost good faith under s 13 did not extend to the conduct of litigation (relevantly to the question of delay) in Imaging Applications Pty Ltd v Vero Insurance Ltd [2008] VSC 178 (29 May 2008). He also found that the conduct of the insurer did not constitute a breach of the duty of utmost good faith even if the duty did continue to apply during the course of the litigation. Vickery J was persuaded by the reasoning of the House of Lords in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The “Star Sea”) [2001] UKHL 1; (2001) 1 Lloyd’s Rep 389. The House of Lords considered an argument that disclosure by the insured to the insurer was required as a matter of utmost good faith under s 17 of the Marine Insurance Act 1906 (UK) (MIA UK) even after litigation between the parties had commenced. Lord Hobhouse was strongly of the view that once the parties are in litigation, it is the procedural rules which govern disclosure and not s 17, though s 17 may influence the court in the exercise of its discretion. Vickery J said (at [55]): I accept that ss 12 and 13 of the [ICA] are in slightly different form to s 17 of the Marine Insurance Act 1906 (UK). However, the reasoning of the House of Lords in [The Star Sea] is persuasive. I am of the opinion that once the parties have commenced litigation that litigation is to be conducted under the procedural rules which govern their court of choice. The implied term imported into the contract of insurance by s 13 of the Act applies to any matter ©

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arising under or in relation to the contract of insurance, and this includes the initial formation of the contract and its subsequent administration. However, the statutory implied term does not extend to the conduct of litigation, which is an entirely different process. This is so, even though the litigation may concern a contract of insurance.

Vickery J accepted in Imaging Applications that s 13 is in “slightly different” form to s 17 (MIA UK). Whilst the first limbs of both sections are in very similar terms, the second limbs are very different. Section 17 of the MIA UK is in identical terms to s 23 of the Marine Insurance Act 1909 (Cth) (MIA) which states: 23. Insurance is uberrimae fidei A contract of marine insurance is a contract based upon the utmost good faith, and, if the utmost good faith be not observed by either party, the contract may be avoided by the other party.

The avoidance remedy in the second limb of s 17 (which is not in s 13), was one of the matters considered by Lord Hobhouse in The Star Sea. He noted that with litigation, the rights of the parties are governed by the rules of procedure and new remedies are available to them. There is no longer the need for the remedy of avoidance under s 17, as other more appropriate remedies are available. The reasoning of the House of Lords in The Star Sea also persuaded the WA Court of Appeal in an appeal from an interlocutory decision of a trial Judge in Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290; 13 ANZ Ins Cas 61-657; [2005] WASCA 106. Wiltrading concerned the MIA rather than the ICA and pre-dated Imaging Applications. Nevertheless Wiltrading arguably adds to the jurisprudence on the duration of the duty of utmost good faith under the ICA insofar as the WA Court of Appeal considered issues similar to those considered in Imaging Applications and, as noted, examined the reasoning of the House of Lords in The Star Sea which was subsequently found to be persuasive in Imaging Applications. The Court of Appeal considered an argument that the duty of utmost good faith under s 23 of the MIA (Cth) precluded the insurer from a late amendment of its defence. Steytler P (WA Ct of Appeal), with whom McLure JA agreed, noted that, in light of English authorities including The Star Sea , there is a powerful argument that, in the case of s 23 of the MIA (Cth), the duty of good faith is superseded or exhausted by the rules of litigation, once litigation has commenced. Duty continues to operate during litigation

The duty of utmost good faith continues to operate during litigation, albeit the litigation is to be conducted under the procedural rules of the relevant court. A question emerges from Wiltrading (s 23 of the MIA (Cth)) and Imaging Applications (s 13) as to whether the duty of utmost good faith comes to an end entirely upon the commencement of proceedings or is merely 86

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superseded to the extent that the conduct of the proceedings is governed procedurally by the relevant court rules. Both cases support the latter in so far as the duty of utmost good faith was expressed as being superseded by procedural matters, the process of litigation, the procedural rules or rules of litigation. The duty has a continuing application to matters of substantive law after the commencement of proceedings. Although, there may be arguments as to whether a matter is a procedural matter or a matter of substantive law. It was submitted by the insured in Wiltrading that the dicta in The Star Sea and the subsequent decision of the English Court of Appeal in Agapitos v Agnew [2003] QB 556, concerning the displacement of the duty of utmost good faith, applied only to procedural matters and not to matters of substantive law. The insured argued that the matter at hand, namely the late amendment to pleadings, was a substantive matter. Steytler P found that the interlocutory issue which faced the trial Judge was a procedural issue. It fell squarely within the province of the rules of litigation and outside s 23. Importantly, he left open the possibility that s 23 might influence the court in the exercise of its discretion. The possibility that s 23 might influence the Court in the exercise of its discretion is consistent with a continuation of the duty of utmost good faith beyond the commencement of proceedings. A not uncommon example of the continuation of the duty of utmost good faith during litigation is where an insurer under a policy providing third party liability cover either declines a claim or defers decision making because a third party has alleged disentitling conduct, such as fraud. If the insurer is joined to litigation between its insured and the third party, it must continue to act with utmost good faith. For instance, it would be a breach of the duty for the insurer to defend the insured’s litigated claim without a reasonable basis or to raise a defence for the purpose of frustrating the insured’s defence of the third party claim. The NSW Court of Appeal considered the continuing operation of the duty of utmost good faith upon parties to litigation arising under a D&O Liability Policy in Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd; Greaves v CGU Insurance Ltd (2003) 57 NSWLR 469; 12 ANZ Ins Cas 61-571; [2003] NSWCA 203. The Court considered the tension between the insurer’s defence to an insurance claim under the policy based on excluded dishonest or fraudulent conduct alleged by a third party and the insured’s defence to the third party claim. Hodgson JA was of the opinion that the obligation of “good faith” means that an insurer “can rely on any defence only if it has reasonable grounds to do so” (at [51]). He said that generally this would require legal advice given on the basis of full instructions as to facts and evidence known to the insurer. He noted that because of privilege, the insured and the Court will not generally be able to put that to the test, so to some extent this must ©

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depend on the integrity of the insurer. Tobias JA (with whom Beazley JA agreed) agreed with Hodgson JA on this matter. Tobias JA said that any defence by the insurer which invoked the fraudulent conduct exclusion “must be based on reasonable grounds” (at [78]). He said that the insurer cannot raise a defence to the insurance claim for the purpose of frustrating or delaying the insured’s defence of a third party claim. Lander and Jagot JJ (Fed Ct FC) citing Silbermann found that the obligation under s 13 on a party to a contract of insurance to act towards the other with utmost good faith “continues to operate upon the party in any litigation arising under the contract of insurance” in Ensham Resources Pty Ltd v Aioi Insurance Co Ltd (2012) 209 FCR 1; [2012] FCAFC 191 (at [68]). The continuation of the duty of utmost good faith during litigation finds further support at common law. Bollen J in Horbelt v State Government Insurance Commission (unreported, SA Sup Ct, Bollen J, 26 June 1992) found that an insured had breached his duty of utmost good faith (at common law because the claim just pre-dated the ICA) by fraudulently claiming items not in a fire and inflating values notwithstanding that this occurred after the insurance claim had been denied by the insurer. He was of the view that the duty of utmost good faith continues during litigation because the insurance claim, at least before trial, is not necessarily a static thing and is capable of amendment. Bollen J said (at 52): The claim, at least before a trial, is not necessarily a static thing. It is capable in the right circumstances of amendment. If rejected it is still there to be pursued by litigation or not as the insured chooses…The obligation of good faith on the part of the insured toward the insurer continues, if there be litigation, until judgment. Perhaps it continues longer. The demand for indemnity was marching on…As I say [the obligation of utmost good faith] continued at least until judgment or agreed settlement. I need not discuss the terminus of the obligation. It had not terminated here.

[13.10.4] Third party beneficiary: Duty of good faith and fair dealing and the duty of utmost good faith In addition to a third party beneficiary and an insurer being subject to and having the benefit of a post-contractual duty of utmost good faith under s 13(3) and 13(4) (in respect of contracts of insurance entered into or renewed after 28 June 2013), an insurer and a third party beneficiary are also subject to and have the benefit of a duty of “good faith and fair dealing”. The obligation of good faith and fair dealing is a bilateral one. The duty of good faith and fair dealing has been described as an implied obligation imposed on an insurer to have regard to more than its own interests when exercising its rights and powers. It can arise in a number of different situations. The duty of good faith and fair dealing has been relied 88

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upon by third party beneficiaries in circumstances where the duty of utmost good faith has not been available. Most commonly the duty has been applied in group life insurance, when a life insurer’s liability under the life policy depends on it being satisfied or on it forming an opinion that it is liable to a third party beneficiary claiming total and permanent disablement. It remains to be seen whether third party beneficiaries will continue to seek recourse by asserting a breach of the duty of good faith and fair dealing, either as a substitute for or in addition to the duty of utmost good faith, with the advent of the post-contractual duty of utmost good faith under s 13(3) and 13(4) and rights as third party beneficiaries under s 48A, which were respectively added and amended by the Insurance Contracts Amendment Act 2013. For those who have entered into and are therefore parties to group life contracts of insurance with life insurers, most commonly trustees, the position is unchanged. They are subject to and have the benefit the duty of utmost good faith under s 13(1). Stephen J (High Court) considered the duty of good faith and fair dealing in relation to the conduct of a third party liability claim in The Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; 2 ALR 321; 48 ALJR 136; [1974] HCA 3. He was of the view that the implied obligation of good faith and fair dealing was most clearly to be seen in the well established doctrines of the United States courts. As to the application of the duty he said (at [54]; 31 (CLR)): This duty of good faith and fair dealing must, I think, not only control the actions of an insurer who has taken over its insured’s defence but will apply equally to the insurer’s exercise of its power of granting or withholding consent to the making of admissions etc. even if it elects not to take over the defence.

McLelland J (NSW Sup Ct) considered the duty of good faith and fair dealing in relation to the decision making of a life insurer faced with a total and permanent disablement claim made by an employee and member of a superannuation plan whose right to enforce the liability of the life insurer under the life policy he described as a “derivative right” in Edwards v The Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113. The life policy was entered into before the commencement of the ICA. McLelland J referred to Distillers and noted that the life insurer, in the exercise of powers affecting the interests of both itself and the claimant, was under a duty of good faith and fair dealing which required it to have due regard to the interests of the claimant. He further noted that in insurance it is “well established that where under a contract of insurance an element of the insurer’s liability is expressed in terms of the satisfaction or the opinion of the insurer, the insurer is obliged to act reasonably in considering and determining that matter” (at 77,536). Bryson J (NSW Sup Ct) found that a member of a superannuation scheme, who claimed as a third party beneficiary under a Group Life ©

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Contract (he was not a party to) entered into by a trustee, did not fall within the provisions of s 13: Sayseng v Kellogg Superannuation Pty Ltd [2003] NSWSC 945. Accordingly, the relationship between the life insurer and the third party beneficiary was not subject to a duty of utmost good faith under the ICA. However, Bryson J found that the insurer had a duty of good faith and fair dealing to the third party beneficiary which required it to have due regard for the interests of the third party beneficiary and the trustee. This extension of the obligation of “good faith” was in accordance with the statements in Edwards, which had been applied in subsequent cases, and found to be supported by the observations of Mahoney JA in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. Mahoney JA observed (at 36 and 37 (NSWLR); 78,276 and 78,277 (ANZ Ins Cas)): In my opinion, a third person involved in a transaction of insurance may be bound by the principle of uberrimae fidae (utmost good faith) and, to the extent he is, may be under a duty to disclose facts affecting the insurance; however, the extent of the duty imposed on the third person will depend on the circumstances of his involvement… In my opinion, the principle is not limited to persons who are, under the general law, actual parties to the contract of insurance. It extends to others who are necessarily involved in the insurance. The principle extends, in my opinion, at least to two such classes of cases. I shall, for brevity, refer to them as “trust cases” and “benefit cases”.

Whilst Mahoney JA in Grey was referring to the duty of utmost good faith, his observations were applied by Bryson J to support the duty of good faith and fair dealing. On appeal, the NSW Court of Appeal (Santow JA with whom Spigelman CJ and Tobias JA agreed) noted that Bryson J had recognised and found that the third party beneficiary was not a party to the contract of insurance and therefore could not rely on the provisions of s 13: Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214. The third party beneficiary, described as an employee under a group life policy, could not imply a duty of utmost good faith under s 13. The Court of Appeal in Sayseng agreed that the insurer had a duty of good faith and fair dealing. Santow JA considered that McLelland J in Edwards intended to delineate the duty of good faith and fair dealing common to opinion cases. For those policies dependent on the insurer forming a favourable opinion as to whether the third party beneficiary qualified, there was a related but distinct duty to act reasonably in forming or declining to form that opinion. The third party beneficiary was entitled to the same obligation of good faith and fair dealing as was owed by the insurer to the trustee. The obligation was bilateral and enured for the benefit of the life insurer as well. Santow JA considered that the decision of the High Court in Trident General Insurance Co Ltd v McNiece Bros 90

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Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873; [1988] HCA 44, in which the High Court reasoned a common law extension of third party beneficiary rights, (see [48.30.5]) afforded a principled basis for attributing the duty of good faith and fair dealing to the third party beneficiary. In applying Trident in this way, he went further than Bryson J at first instance. Even if the Trident principles were inapplicable he found support from the observations of Mahoney JA in Grey. The case was neither a “trust cases” nor a “benefit cases” as described by Mahoney JA. Rather, Santow JA considered that Mahoney JA’s observations had a bearing because it was an analogous case. Santow JA said (at [39], [54], [70] and [72]): …I consider that those observations [of Mahoney JA in Grey] do bear upon the present case. This is so, though the present case is neither a “trust case” nor a “benefit case”... Rather it is an analogous case where the policy, though contractually and directly for the benefit of the Trustee, indirectly benefits employees by ensuring that the Trustee has the funds to meet a proper claim by any employee… …I consider that what [McLelland J in Edwards] intended was to delineate the duty of good faith and fair dealing common to cases where a favourable opinion was required to be formed by the insurer as a condition of the employee receiving a benefit as well as cases where that was not a condition. That duty, I emphasise, constituted a bilateral obligation between both insurer and claimant, for the benefit of both. Then, for those policies dependent on the insurer forming a favourable opinion as to whether the employee qualified, there was a related but distinct duty to act reasonably in forming or declining to form that opinion. There would be little point in a duty of good faith and fair dealing if it were essentially supplanted by the duty merely to act reasonably in those cases where rights or liabilities depended upon an opinion about something, here an opinion about total and permanent disablement… …I would conclude that [the third party beneficiary], though not entitled to the proceeds of the policy, was entitled to the same obligation of good faith and fair dealing as was owed by the insurer to the Trustee, taking account of their respective positions. That obligation, being a bilateral one, enures also for the benefit of the insurer as Mahoney JA observed in Grey (supra) at [36]... However, even if the Trident principles were inapplicable to the present case because of the differences between the facts of that case and this, I consider that the duty of good faith and fair dealing should nonetheless apply as between insurer and [third party beneficiary]. I do so given the latter’s total dependence on payment by the insurer to the Trustee in circumstances where that must have been appreciated by all parties to the tripartite arrangement and because, in particular, the policy is held by the Trustee for “the benefit” of the employees in the wider sense of benefit; cf Mahoney JA in the earlier quoted passage from Grey at [37]–[38].

However, Santow JA in noting a third party beneficiary’s “indirect path” through the insured trustee to the payment of a benefit, also referred to an obligation of utmost good faith that the life insurer had to both the trustee and the employee (in this case Mr Sayseng) as a third party beneficiary ©

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(emphasis added). He said (at [64]): … [the third party beneficiary] depended upon this “indirect path” not being obstructed by the insurer’s unfair dealing towards him. Equally, the insurer depended on [the third party beneficiary] performing his related obligation of utmost good faith, particularly in matters of disclosure. It therefore should be recognised that a failure by the insurer to give effect to the requirements of the policy, including an obligation of utmost good faith to both the Trustee and employees, would result in a failure to give effect to the expressed contractual intention of the Trustee, namely, to provide retirement benefits to employees. That would indeed result in a failure to give effect to the common intention of the parties, so causing injustice to the third party employee.

This reference to an obligation of utmost good faith by the insurer to “both” the trustee and third party beneficiaries gives rise to a number of questions. Santow JA held that the duty of utmost good faith under s 13 did not apply to third party beneficiaries. Does the finding as to s 13 mean that Santow JA was referring to the common law duty of utmost good faith? Is Sayseng authority for a common law duty of utmost good faith to a third party beneficiary subject to the payment of a benefit through an “indirect path”? It has been applied as such. Does a common law duty between an insurer and third party beneficiary co-exist with a duty under s 13 between that insurer and the insured party? That is a question that has yet to be specifically addressed in those terms. The distinction between utmost good faith (s 13 and common law) and good faith and fair dealing

The seminal judgment of the NSW Court of Appeal in Sayseng brought clarity to the duty of good faith and fair dealing. It is clear that the duty of good faith and fair dealing is narrower than the duty of utmost good faith. Therefore, the distinction between the two duties is potentially important. Just how important will vary according to the circumstances under consideration. The distinction between the duty of utmost good faith and the duty of good faith and fair dealing has therefore not always been recognised as such. Basten JA (NSW Sup Ct CA) recognised the distinction between the two duties in Birdsall v Motor Trades Association of Australia Superannuation Fund Pty Ltd [2015] NSWCA 104. A third party beneficiary making a total and permanent disablement claim under a group life policy effected by a trustee of a superannuation fund pleaded that both the trustee and the life insurer owed him “a duty of good faith and fair dealing”. Basten JA speculated that both the insurer and trustee had admitted that they owed him a duty of good faith and fair dealing, “perhaps because the duty understated what might have been relied upon against the insurer, namely the duty of utmost good faith” (at [4]). In an earlier and much cited judgment, Hunter J (NSW Sup Ct) considered the extension of the duty of utmost good faith under s 13 by a 92

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life insurer to a member of a superannuation fund who had made a claim based on total and permanent disablement under a life policy arranged by the trustee of the fund with the life insurer in Wyllie v National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324; [1997] NSWSC 146. Hunter J said (at 21): Where s 13 of the Insurance Contracts Act imports a duty into a contract of insurance upon parties to the contract to act with the utmost good faith towards each other “in respect of any matter arising under or in relation” to the contract, it is extremely difficult to see how such a duty of the insurer is not extended as an “incident of the relationship” in respect of a third party in the position of [this third party] under the conversion option of the policy: in this instance, in respect of the performance of the contract by the insurer. The practical consequences of this conclusion may be slight having regard to the further conclusion which I have reached as a matter of implication. The insurer was under an obligation to assess the plaintiff’s claim in good faith. The obligation of an insurer in circumstances not materially different from those of the insurer in these proceedings was considered by McLelland J, as he then was, in Edwards.

Hunter J in Wyllie concluded that the insurer had “failed to act reasonably, fairly or in good faith” in the assessment of the third party beneficiary’s claim. It appears from his application of Distillers and Edwards and the judgment generally that in reaching his conclusion on “good faith” Hunter J did not draw a bright line between good faith and fair dealing and utmost good faith. Bryson J noted in Sayseng, at first instance, that in Wyllie “there was a direct contractual relationship between the claimant as insured and the insurer” (at [89]). The conversion option provided for a single policy to be issued a member of the superannuation fund in certain circumstances. Therefore, the claimant in Wyllie may well have had a “direct contractual relationship” which may have made the claimant a party and therefore entitled to rely on s 13. This would distinguish Wyllie from other cases where there is no conversion option. Gzell J (NSW Sup Ct) went one step further in considering a claim by a member of a superannuation scheme in Dumitrov v SC Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372. He said by way of reference to Wyllie and the Court of Appeal in Sayseng that “it is beyond dispute that an insured, even if not a party to insurance, is owed a duty of utmost good faith by the insurer and may sue the insurer without the joinder of the other party to the insurance” (at [5]). Gzell J did not appear to draw a distinction between the duty of utmost good faith and the duty of good faith and fair dealing. His reference to a duty of utmost good faith to a non-party is likely to have been a reference to a common law duty as in Sayseng. ©

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Similarly, Ball J (NSW Sup Ct) cited the Court of Appeal in Sayseng for the proposition that a life insurer owes an obligation of utmost good faith in relation its dealings with a member of a superannuation fund who has made a claim and is not a party to a group life policy in Erzurumlu v Kellogg Superannuation Pty Ltd [2013] NSWSC 1115. He said (at [54]): An insurer, when considering a claim, must comply with its obligation of utmost good faith. That obligation requires the Insurer to act reasonably in considering the claim. The obligation to act reasonably includes an obligation to consider and to determine the correct question. It also includes an obligation to give the member an opportunity to answer any material on which the insurer intends to rely: Sayseng.

Ball J, again citing Sayseng, described the duty of utmost good faith owed by a life insurer to an “insured person” under a group life policy entered into by a trustee as a common law duty and that duty and the duty of good faith and fair dealing as interchangeable terms, when dealing with a claim, in Ziogos v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2015] NSWSC 1385. He said (at [65]): An insurer when faced with a claim by an insured owes the insured a duty of utmost good faith – sometimes described as a duty of good faith and fair dealing – in dealing with the claim. Following the decision of the Court of Appeal in [Sayseng], it is now also accepted that that duty is also owed at common law to an insured person who is covered by the policy. The right of an insured person to enforce the contract, and in particular the duty of utmost good faith, directly is also now to be found in the Insurance Contracts Act 1984 as a result of amendments that took effect from 28 June 2013: see ss 13, 48A.

Stevenson J (NSW Sup Ct) considered whether there had been a breach of the duty of good faith and fair dealing by life insurers in decision making in Shuetrim v FSS Trustee Corporation [2015] NSWSC 464. He described their duty of good faith and fair dealing as more accurately described as their duty of utmost good faith citing Basten JA in Birdsall. He said (at [29]): The first [stage of enquiry] is whether the [failures] bespeak a breach by the insurers of their duty to [the third party beneficiary] to act in good faith and fair dealing (perhaps more accurately described as their duty to act with utmost good faith; see s 13 of the Insurance Contracts Act 1984 (Cth) and Basten JA in Birdsall v Motor Trades Association of Australia Superannuation Fund Pty Ltd [2015] NSWCA 104 at [4]).

On appeal, the NSW Court of Appeal (Leeming JA, with whom Beazley P and Emmett AJA agreed) noted (at [47]) that there was “in truth, a measure of complexity in identifying the duty undoubtedly owed by the insurers to a member of the superannuation fund”: TAL Life Ltd v Shuetrim. Leeming JA further noted that the statutory implied duty of utmost good faith under s 13, prior to the addition of s 13(3) and 13(4), merely imposed obligations between the parties to a contract of insurance. 94

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An insurer does not have an obligation of utmost good faith pursuant to s 13 prior to amendment to a member of a superannuation fund. However, the trustee, as a party to the contract of insurance, has the benefit of the insurer’s obligation to act in utmost good faith which is held on trust for members. Leeming JA said (at [53]) “that in ‘special’ or ‘exceptional’ circumstances a beneficiary may bring proceedings in the beneficiary’s own name which ought otherwise to have been brought by the trustee”. The special or exceptional circumstances may be the failure by the trustee to sue to protect the trust estate or the interests of the beneficiary. The NSW Court of Appeal made it clear in Sayseng that third party beneficiaries did not have the benefit of s 13 (as it was prior to the Insurance Contracts Amendment Act 2013). However, third party beneficiaries have the benefit of the duty of good faith and fair dealing, Sayseng has also been applied as authority for the existence of a [common law] duty of utmost good faith between a third party beneficiary and an insurer in certain circumstances. Generally, the duties of utmost good faith and good faith and fair dealing have developed separately, vary in width and give rise to different remedies. Therefore, the commonality of description referred to in Ziogos may be restricted to “indirect path” claims and may not have universal application. In any event, it is likely that third party beneficiaries who have the benefit of a post-contractual duty of utmost good faith under s 13(3) and 13(4) will rely upon the duty under those sub-sections. And in cases where there is a trustee as the party to the contract of insurance and beneficiary as a claimant, which pre-date s 13(3) and 13(4), in addition to the common law duty and the duty of good faith and fair dealing, the insurer’s obligation to the trustee under s 13 may be held on trust for the beneficiary enabling the beneficiary to sue to enforce that obligation.

[13.10.5] Meaning The meaning of “utmost good faith” is not defined in the ICA. Its meaning is best determined according to judicial formulations and the application of the duty in the various cases in which it has been applied. These cases, some of which are discussed below, have resulted in quite different formulations. The most authoritative of the cases is the decision of the High Court in CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 81 ALJR 1551; 14 ANZ Ins Cas 61-739. The three judgments in this case contained a number of different formulations which are described below. Common law cases can also be referred to for the meaning of “utmost good faith”. However, most of the common law cases revolve around questions of disclosure. Therefore, care must be taken in applying ©

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common law formulations to the meaning of utmost good faith under the ICA, given the separation of the duty of utmost good faith from the duty of disclosure. Academic texts and papers are also important reference sources for the meaning of the term “utmost good faith”. The formulation by Sutton in Insurance Law in Australia (3rd ed, LBC Information Services, 1999) has been frequently referred to and judicially adopted. Sutton described “utmost good faith” as a term with many different meanings in the legal context, encompassing notions of fairness, reasonableness and community standards of decency and fair dealing. It is said to impose a market standard of fairness: Sutton K, Insurance Law in Australia (3rd ed, LBC Information Services, 1999), pp 157–158. The term “utmost good faith” is frequently referred to in the shortened form as “good faith”. The ALRC frequently referred to it as such. It is perhaps important to consider it in its longer form. In Sheldon v Sun Alliance Ltd (1989) 53 SASR 97 at 152 Bollen J (SA Sup Ct) said: I add merely that the obligation of the utmost good faith means what it says. It does not mean a measure of good faith. It means the utmost good faith.

Formulations of the meaning or meanings of the term “utmost good faith” have varied according to the facts to which the term has been applied. Its overall meaning or meanings become clearer when various formulations are compared with each other. There are common threads which provide guidance as to the essential and non-essential elements of the duty of utmost good faith. For instance, the element of “fairness” appears as probably the most common thread. The element of acting in conformity with community or commercial “standards of decency and fair dealing” is also a common thread. There is the non-essential element of honesty. Whilst dishonesty will amount to a breach of the duty of utmost good faith, it is not necessary to prove a want of honesty for there to be a breach of the duty. The High Court in CGU v AMP unanimously found that a want of honesty was not an essential element of the duty of utmost good faith. The primary judge in that case held that it was essential for the insured to prove some want of honesty on the part of the insurer in order to establish a breach of the duty of utmost good faith. In the court below, the majority of the Full Court of the Federal Court (Moore and Emmett JJ) found that the primary judge made an error of law (Gyles J dissented on another issue) and held that honesty was not an essential element to establish a failure to act with utmost good faith: AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2005) 146 FCR 447; 13 ANZ Ins Cas 61-658; [2005] FCAFC 185. The majority considered earlier judicial reasoning and applications of the duty and held that there can be a breach of the duty of utmost good faith in the absence of 96

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dishonesty. Emmett J said (at [87] and [89]): While a want of honesty will constitute a failure to act with the utmost good faith, want of honesty is not necessary in order to establish a failure to act with the utmost good faith in the context of a contract of insurance. The notion of acting in good faith entails acting with honesty and propriety. Lack of propriety does not necessarily entail lack of honesty. Further, the concept of utmost good faith involves something more than mere good faith. … The precise content of the concept of utmost good faith depends on the legal context in which it is used. In the context of insurance, the phrase encompasses notions of fairness, reasonableness and community standards of decency and fair dealing. While dishonest conduct will constitute a breach of the duty of utmost good faith, so will capricious or unreasonable conduct. While an essential element of honesty may be at the head of the concept of utmost good faith, dishonesty is not a prerequisite for a breach of the duty (see, for example Kelly v New Zealand Insurance Ltd (1996) 9 ANZ Ins Cas 61-317; 130 FLR 97 at 76,518–76,520 (ANZ Ins Cas), 111–112 (FLR)).

Very importantly, the High Court in three separate judgments in CGU v AMP agreed with the majority of the Full Court that dishonesty is not a prerequisite for a breach of the duty of utmost good faith. The formulations of the duty of utmost good faith in the three separate judgments of the High Court provide valuable guidance on the meaning of utmost good faith according to the facts under consideration (an insurer’s delay in making a decision on indemnity) and generally. Gleeson CJ and Crennan J referred to the requirement that may arise for an insurer to act consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. They said ([15]): We accept 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 (Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; 2 ALR 321; 48 ALJR 136; [1974] HCA 3 at 31 per Stephen J). 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.

Callinan and Heydon JJ, in agreeing with Gleeson CJ and Crennan J, used an analogy of the equitable doctrine of clean hands in describing aspects of the duty of utmost good faith. They were also of the opinion that acting with utmost good faith will usually require affirmative or positive action rather than passivity. They said ([257]): ©

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At the outset we should say that we agree with the Chief Justice and Crennan J that a lack of utmost good faith is not to be equated with dishonesty only. The analogy may not be taken too far, but the sort of conduct that might constitute an absence of utmost good faith may have elements in common with an absence of clean hands according to equitable doctrine which requires that a plaintiff seeking relief not himself be guilty of tainted relevant conduct. We have referred to the doctrine of clean hands because, as with another equitable doctrine, that he who seeks equity must do equity, it invokes notions of reciprocity which are of relevance here. That is not to say that conduct falling short of actual impropriety might not constitute an absence of utmost good faith of the kind which the Insurance Act [sic] demands. Something less than that might well do so. Utmost good faith will usually require something more than passivity: it will usually require affirmative or positive action on the part of a person owing a duty of it. It is not necessary, however for the purposes of this case, to attempt any comprehensive definition of the duty, or to canvass the ranges of conduct which might fall within, or outside s 13 of the InsuranceAct [sic].

Kirby J (in dissent on the appeal) also agreed with the broad view of the majority of the Full Court as to the applicable formulation of utmost good faith. He noted those parts of the judgments of Gleeson CJ and Crennan J and Callinan and Heydon JJ quoted above. In consideration of the judgments in earlier cases in which the meaning of utmost good faith had been considered and applied, and the majority judgments of the Full Court, he said (at [130], [131] and [139]): No one doubts that the absence of honesty on the part of an insurer (or insured) will, if proved, attract the provisions of s 13 of the Act. However, this does not mean that a want of honesty is a universal feature of a want of the utmost good faith in this context. … In my view, the criteria of dishonesty, caprice and unreasonableness more accurately express the ambit of what constitutes a breach of s 13 of the Act. … In particular, the broad view which the Full Court majority took concerning the operation of s 13 of the Act is one that this Court should endorse. It sets the correct, desirable and lawful standard for the efficient, reasonably prompt, candid and business-like processing of claims for insurance indemnity in this country. Pre CGU v AMP (High Court)

The High Court in CGU v AMP (and the Full Court below) considered previous judicial formulations of the duty of utmost good faith. Those formulations and others continue to assist in understanding the meaning of the term utmost good faith subject to the clarification by the High Court that honesty is not an essential element of the duty. Walsh J (WA Sup Ct) cited with approval the description given to the duty of the utmost good faith by Sutton in Insurance Law in Australia (2nd ed, Law Book Co, 1991) and was not persuaded in the circumstances that a 98

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breach of the duty of utmost good faith had been established, that is, that the insurer had failed to act with “fairness and honesty”: Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197 at 78,258. On appeal, the Full Court (comprising Kennedy, Owen & Steytler JJ) similarly referred to the description of utmost good faith given by Sutton in Insurance Law in Australia (2nd ed, Law Book Co, 1991) as basically encompassing “notions of fairness, reasonableness and community standards of decency and fair dealing” and the Full Court also referred to the decision of the New Zealand High Court in Vermeulen v SIMU Mutual Insurance Association (1987) 4 ANZ Ins Cas 60-812 in which the duty of utmost good faith was described as having the essential element of honesty: Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317. Owen J (with whom Kennedy and Steytler JJ agreed) said that the duty of utmost good faith is an overriding duty which must not be limited or restricted in any way. He found that there was “no dishonest, capricious or unreasonable conduct” by the insurer. However, whilst a close reading of the judgment of Owen J shows that he did appear to restrict the duty, the reference to Vermeulen caused his formulation to be read more restrictively by others. In particular his reference to the “essential element of honesty” being at the heart of the good faith principle. He said (at 76,520 (ANZ Ins Cas)): It is not necessary for a party to point to conduct of any particular degree of seriousness in order to establish a breach of the duty. In this case there is nothing that can be sheeted home to the [insurer] that could be said to offend “the essential element of honesty” that is at the heart of the good faith principle.

Ormiston JA (with whom Phillips and Kenny JJA agreed) (Vic Sup Ct CA) upheld Mandie J at first instance in applying “the essential element of honesty” requirement in CIC Insurance Ltd v Barwon Region Water Authority (1998) 100 LGERA 136; 147 FLR 353; 10 ANZ Ins Cas 61-425; [1998] VSCA 77. In applying what was considered to be the requirement imposed by the Western Australian Full Court in Kelly v New Zealand Insurance Co Ltd, the Victorian Court of Appeal noted that, being a decision of an intermediate court of appeal on the meaning of a Commonwealth statute, it was not appropriate for the Victorian Court of Appeal to reach a different interpretation even if the interpretation was thought to be wrong. However, Ormiston JA added that even if he was wrong on his view as to the requirement of dishonesty, the Judge at first instance had found that the insured had not failed to act fairly and reasonably or contrary to community standards of decency and fair dealing. The Full Court in AMP v CGU noted the description of the duty of utmost good faith by Ambrose J (Qld Sup Ct) in Gutteridge v Commonwealth of Australia (unreported, Ambrose J, Qld Sup Ct, 25 June 1993) as having a wider application in contrast with a requirement for an “essential element ©

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of honesty”. Ambrose J said (at 11): Acting with “utmost good faith” must involve more than merely acting honestly, otherwise no effect is given to the word “utmost”.

It is also worth generally noting Chesterman J (Qld Sup Ct) in Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203; (1999) 10 ANZ Ins Cas 61-429; [1998] QSC 209. He said (at 74,839 (ANZ Ins Cas)): I have difficulty comprehending what useful role the obligation can play in relation to powers or discretions conferred on one of the parties to a contract if the essence of the obligation is to act honestly. A dishonest exercise of a power is no exercise of the power at all. Dishonesty encompasses use of the power for a collateral or ulterior purpose or motive. The law of contract does not require a separate doctrine of good faith to provide a remedy in such a case. The law simply disregards the purported exercise which has no legal effect. Post High Court in CGU v AMP and other formulations

The formulations of the duty of utmost good faith and observations on its application in the three separate judgments of the High Court in CGU v AMP, have provided requisite clarity in a number of subsequent cases. The meaning of utmost good faith was expressed differently in all three judgments. In the absence of a comprehensive definition, the meaning of utmost good faith will continue to develop according to judicial formulations and the application of the duty in the various cases in which it is applied. Sackar J (NSW Sup Ct) noted that although CGU v AMP involved an allegation of a breach of the duty of utmost good faith against an insurer, he understood the formulations as describing the content of the duty generally, not just as owed by the insurer to the insured: Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd (2014) 18 ANZ Ins Cas 62-000; [2013] NSWSC 1975. Further, Sackar J noted that although some decided cases suggested a less stringent standard of conduct applying to an insured as opposed to an insurer, it was difficult to find a basis for that in s 13 or CGU v AMP. He said (at [118]): The language of s 13 does not discriminate between the stringency of the duty owed by the insurer to the insured (on the one hand) and the stringency of the duty owed by the insured to the insurer (on the other). Nonetheless, some of the decided cases indicate that a less stringent standard of conduct applies to an insured (only honesty is required) as opposed to an insurer (reasonable conduct is required)… It is difficult to find a basis for that distinction either in the language of s 13 or in High Court authority. Some cases indicate that honesty is not always sufficient, and that an insured is required, as a manifestation of the principle of utmost good faith, to take reasonable steps to reduce or minimise the liability of the insurer (see for example the observations of Derrington J in Newnham v Baker [1989] 1 Qd R 393 at 398–399).

Murrell CJ (ACT Sup Ct) referred to the observation of Callinan and Heydon JJ in CGU v AMP that utmost good faith usually requires 100

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something more than passivity and also referred to and applied the formulation of Kirby J (the criteria of dishonesty, caprice and unreasonableness) in that case, when considering the refusal of an insurer to provide an assurance it was under no contractual obligation to provide in Fogarty v CGU Insurance Ltd [2015] ACTSC 44 (27 February 2015). Murrell CJ said that the action of the insurer “fell well short of the type of act of dishonesty, caprice that would constitute a breach of the utmost good faith” (at [65]). Flanagan J (Qld Sup Ct) applied the formulation of Gleeson CJ and Crennan J as to what may be required of an insurer in CGU v AMP (commercial standards of decency and fairness, with due regard to the interests of the insured) in Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (2015) 18 ANZ Ins Cas 62-061; [2015] QSC 72. He described the formulation as “the most recent authoritative proposition as to what “utmost good faith” requires of an insurer” (at [243]). Ball J (NSW Sup Ct) proceeded on the basis of the insured’s formulation of conduct in “breach of the duty of utmost good faith as conduct that was capricious or unreasonable or involved unfair dealing” in Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Ltd [2015] NSWSC 1511 (at [63]).

[13.10.6] Nature of respective interests – not a fiduciary duty The duty of utmost good faith between the parties to a contract of insurance is not a fiduciary duty. A fiduciary duty requires a party to put the other party’s interests above its own and the duty of utmost good faith does not require this. The duty of utmost good faith does not require an insurer to put the interests of its insured above its own. The duty may require an insurer to have regard to the interests of the insured as well as its own interests. However, unlike a fiduciary duty, the duty of utmost good faith does not require an insurer to surrender or subjugate its own interests in favour of the interests of its insured. Mason P (NSW Sup Ct CA) in CGU Workers Compensation (NSW) Ltd v Garcia (2007) 69 NSWLR 680; 14 ANZ Ins Cas 61-746; [2007] NSWCA 193 remarked on the scope of the duty of utmost good faith and noted that the duty is narrower than a fiduciary duty. He said (at [60]): A duty to act in good faith is obviously wider than a duty not to act dishonestly or fraudulently. But it is obviously narrower than a duty of a fiduciary nature requiring the obligee to put the other party’s interest above its own. It is also narrower in scope than the obligation of utmost good faith of those about to enter into an insurance contract to make full disclosure of facts relevant to the insurance risk. ©

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McLelland J (NSW Sup Ct) considered the nature and content of a life insurer’s obligations under a life policy in Edwards v The Hunter Valley Co-op Dairy Co Ltd (1992) 7 ANZ Ins Cas 61-113 The life policy was entered into before the inception of ICA. He noted that the “obligations were contractual and not fiduciary. [The life insurer] was an insurer, not a trustee” (at 77,536). Flanagan J (Qld Sup Ct) noted that the duty of utmost good faith would not require the insurer to put the interests of the insured above its own in Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (2015) 18 ANZ Ins Cas 62-061; [2015] QSC 72. He referred to Mason P in Garcia in further noting that the duty of utmost good faith is not a fiduciary duty and gave examples to illustrate the point. He said (at [248]): The duty of utmost good faith does not equate to, nor is it synonymous or analogous to, a fiduciary duty… An insurer is legitimately entitled to:

• a reasonable period of time to make further inquiries of all the circumstances giving rise to a claim, including inquiries of the insured and those involved in its occurrence; • put an insured to proof if suspicious of the bona fides of the claim; and • decline indemnity if the circumstances giving rise to the claim fall outside the insurable interest or an exclusion clause is applicable to the circumstances. Parties’ regard to each other’s interests as well as own interests

The High Court referred to the requirement that insurer and insured have regard to each other’s interests in CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 81 ALJR 1551; 14 ANZ Ins Cas 61-739. Gleeson CJ and Crennan J referred to the requirement that may arise for an insurer to act consistently with commercial standards of decency and fairness, with due regard to the interests of the insured. They said (at [15]): … 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 (Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; 2 ALR 321; 48 ALJR 136; [1974] HCA 3 at 31 per Stephen J). 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. 102

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Kirby J, in his dissenting judgment, described the stringent obligations of an insurer and insured in respect of conduct with each other whenever that conduct has legal consequences. He said (at [176]–[178]): The principle is that the parties to insurance contracts in Australia, unlike most other contracts known to the law, owe each other, in equal reciprocity, an affirmative duty of the utmost good faith. This is so now by s 13 of the Act. In the context of that section, emphasis must be placed on the word “utmost” ... The exhibition of good faith alone is not sufficient. It must be good faith in its utmost quality. The resulting duty is one that pervades the dealings of the parties to an insurance contract with each other. In consequence of the Act, and of the reform that it introduced in s 13, the duty of good faith as between insurer and insured now takes on a true quality of mutuality. It governs the conduct of insurers whereas, previously, as a practical matter, the duty of good faith was confined to a duty cast upon insureds because the remedies for proof of the absence of good faith were usually of no real use to the insured… The duty is more important than a term implied in the insurance contract, giving rise to remedies for a breach, although, by the express provision of s 13, it is certainly that. The duty imposes obligations of a stringent kind in respect of the conduct of insurer and insured with each other, wherever that conduct has legal consequences.

Johnson J (WA Sup Ct) at first instance in Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2007) 209 FLR 247; [2007] WASC 62 interpreted the authorities on the duty of utmost good as requiring the insurer to act honestly and fairly, which involved considering the interests of the insured but not “subjugating its own interests” to those of the insured (at [300]). It did not require the insurer to place the insured’s interests above its own by not pursuing a claim for contribution against another insurer. On appeal, the WA Court of Appeal agreed that the insurer was not required to subjugate its interests: Speno Rail Maintenance Australia Pty Ltd v Metals & Minerals Insurance Pte Ltd (2009) 226 FLR 306; 253 ALR 364; 15 ANZ Ins Cas 61-793; [2009] WASCA 31. Beech AJA (with whom Martin CJ and McLure JA agreed) was “not persuaded that the duty of good faith would require [the insurer] to subjugate its interest to those of [the insured] by not pursuing the claim for contribution against [another insurer]” (at [163]). Sackar J (NSW Sup Ct) considered an insured’s reliance on the perception of the claims manager of the insurer that its duty of utmost good faith required open and transparent conduct by the insurer in the conduct and settlement of a property claim. He also considered the acceptance by that claims manager that the duty of utmost good faith required the insurer “to consider the interests of the insured insofar as it could not act solely considering its own interests” in Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd (2014) 18 ANZ Ins Cas 62-000; [2013] NSWSC 1975 (at [350]). The duty of utmost good faith did not oblige the claims manager of the insurer to foreshadow every move he ©

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was seeking to undertake in order to understand an estimate. He was not obliged “on the eve of the negotiation to portray his every thought and/or concern” (at [359]). In a similar vein, Sackar J citing Burger King Corporation v Hungry Jack’s Pty Ltd (2001) 69 NSWLR 558; [2001] NSWCA 187 and his earlier judgment in Camellia Properties expressed a view that if s 13 applied it did not require a party to surrender of interests in a negotiation in Allianz Australia Insurance Ltd v Vitale (2014) 18 ANZ Ins Cas 62-013; [2014] NSWSC 364. He said (at [125]): … I do not regard the obligation of utmost good faith as requiring a party to surrender any commercial advantage which they may seek to take advantage of during negotiations in favour the other party…

[13.10.7] Not a statutory duty giving rise to a civil action for breach The duty of utmost good faith under the ICA, in particular under s 13(1) and 13(2), does not satisfy the requisite elements for a civil action for a breach of statutory duty. Whilst the duty is a statutory duty, in the sense that it is a term implied by statute, more is required for there to be a statutory duty giving rise to a civil action for breach. Flanagan J (Qld Sup Ct) found that s 13(1) does not create a statutory duty affording an insured a private right of action for its breach in Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (2015) 18 ANZ Ins Cas 62-061; [2015] QSC 72. Flanagan J noted that more than the mere implication of a term into a contract of insurance by statute is required for a statutory duty. He rejected reliance on s 13(2) as providing support for a statutory duty because on a plain and natural reading of the ICA, a “breach of the requirements of the Act” under s 13(2), simply provides a trigger for ASIC to exercise its powers. In finding that s 13 does not create an inference as to a statutory duty he took into account a number of matters. A statutory duty is more readily inferred where there is no other adequate or alternative remedy. There are alternative remedies including suing in contract for a breach of the implied term. The generality of the provision tends against inferring a statutory duty. The historical legislative context of the ICA and decisions exploring the effect of the duty of utmost good faith provide an argument against s 13(1) creating a statutory duty. Two additional matters tell against a statutory duty. There are identified elements of a civil action for breach of a statutory duty. The plaintiff must fall within the “limited class” of the public for whose benefit the statutory provision was enacted. There is an obligation under the statute imposed on the defendant. However, the class of those benefitted by s 13(1) is wider than a “limited class” of the public. Secondly, the obligation imposed by s 13(1) is not solely imposed on insurers. It cannot be said 104

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that the provisions are designed to “protect” a class of persons, namely insureds, any more than the provisions are designed to “protect” insurers.

[13.10.8] Remedies Damages

A party to a contract of insurance in breach of the duty of utmost good faith under s 13 is in breach of an implied term of the contract and is potentially liable in damages for the loss suffered by another party as a result of that contractual breach. The ALRC considered that an insured should be entitled to recover damages for loss suffered by the insured as a result of the insurer’s breach of the duty of utmost good faith in relation to the settlement of a claim. In rejecting a tortious remedy for a breach, the ALRC said that assessment of damages for a breach of the duty should be based on ordinary contractual principles. The ALRC stated (ALRC 20, at [328]): Legislation should make it clear that the duty of good faith applies to all aspects of the relationship between insurer and insured, including the settlement of claims. An insured should be entitled to recover damages for loss suffered by him as a result of the insurer’s breach of the duty of good faith in relation to the settlement of a claim. The question remains whether breach of this duty should give rise to a tortious remedy. It appears that the main reason for American courts introducing a tort of bad faith was to enable an insured to recover punitive damages and damages for mental distress. Punitive or exemplary damages are awarded only rarely by Australian courts. An insured is already entitled to damages in the highly unlikely case of an insurer intentionally causing an insured nervous shock. The mere introduction of a tort of bad faith in Australia would not add substantially to the remedies available to an insured. To achieve the position reached by some American courts, it would also be necessary to extend the remedies available for a breach of tortious duty. It is doubtful whether such an extension would be desirable. Assessment of damages for a breach of the duty of good faith by the insurer should be based on ordinary contractual principles.

Notably, the ALRC directed its attention largely to the remedies available to an insured for a breach of the duty of utmost good faith by the insurer. It has been held that the damages should put the insured: “As nearly as can be done in the position in which [the insured] would have been had there been no breach”: Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967 at 76,434 (ANZ Ins Cas) per Bollen J (SA Sup Ct). Reference should also be made to the judgment of Brennan J in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; 66 ALJR 123; 104 ALR 1. His Honour stated (at 99): The measure of damages for breach of contract is governed by the contract itself. As the contract determines the measure of damages for losses caused by ©

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its breach, there is a difference between the measure of damages in contract and the measure of damages in tort, though the purpose of damages in both is the award of compensation. Liability to indemnify and breach of duty by insurer

A breach by an insurer of its duty of utmost good faith which entitles an insured to damages to be put in the position in which the insured would have been had there been no breach, does not automatically equate with the insurer being liable to indemnify the insured under the contract of insurance. Gleeson CJ and Crennan J in the seminal decision of the High Court on utmost good faith in CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 81 ALJR 1551; 14 ANZ Ins Cas 61-739 said (at [16]): However, the Act does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. If there is found to be a breach of the requirements of s 13 of the Act, there remains the question how that is to form part of some principled process of reasoning leading to a conclusion that the insurer is liable to indemnify the insured under the contract of insurance into which the parties have entered. … Between a premise that [the insurer’s] delay constituted a failure to act with the utmost good faith, and a conclusion that [the insurer] is liable to indemnify [the insured] …, there must be at least one other premise.

The need for a conclusion that an insurer is otherwise liable to indemnify an insured under a contract of insurance means that it is questionable whether a breach of the duty of utmost good faith would ever add anything to damages flowing ordinarily from a contractual breach. McMurdo J (Qld Sup Ct) remarked in Lomsargis v National Mutual Life Association of Australasia Ltd [2005] 2 Qd R 295; (2005) 192 FLR 400; (2006) 14 ANZ Ins Cas 61-671; [2005] QSC 199 that to recover damages for the breach of implied terms, one of which was the duty of utmost good faith under s 13, the insured had to establish an entitlement to be paid the benefits under the policy. But the insured was to recover the benefits together with s 57 in any event. It was not relevantly a claim in the alternative. McMurdo J said (at [13]): To recover damages for breach of these implied terms, the [insured] must establish his entitlement to be paid the benefits, but in that event, he will recover the benefits then accrued due together with a further sum for interest under s 57… It is submitted that [an insured] is entitled to plead his case in the alternative. But the claim for damages for breach of contract is dependent upon proof of the [insured’s] entitlement to payment of the agreed weekly benefits; it is not an alternative to a claim to that entitlement.

Flanagan J also noted that a breach of the duty of utmost good faith cannot be an alternative claim for indemnification in Matton Developments 106

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Pty Ltd v CGU Insurance Ltd (No 2) (2015) 18 ANZ Ins Cas 62-061; [2015] QSC 72 (15 April 2015). He referred to the views of Gleeson CJ and Crennan J in CGU v AMP and McMurdo J in Lomsargis (quoted above) and concluded that it followed 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. He said (at [287]): A breach of the duty of utmost good faith cannot be an alternative claim to indemnification. 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. However McMurdo J left open the question of whether exemplary damages may be awarded for a breach of the implied contractual duty of utmost good faith [Lomsargis at [46] and [58]]. Section 54 and breach of duty by insured

It appears to have been the intention of the ALRC that the remedies for breach of contract in s 54 would be available for a breach by an insured of the contractual duty of utmost good faith. The Notes to the Draft Insurance Contracts Bill 1982 (Appendix A to ALRC 20) which concern the proposed cl 14 (which became s 13) state that the remedies for breach of contract, for example s 54, will be available for a breach of the duty of utmost good faith. However, the application of s 54 to a breach of the duty of utmost good faith under s 13 is not without its difficulties. Section 54 assumes the existence of a contract of insurance and appears in Div 3 of the ICA concerning remedies. By its terms, s 54 does not apply to a precontractual breach of the duty of utmost good faith. Further, there is the question as to whether or not s 54 would limit or restrict the effect of Pt II contrary to s 12 of the ICA. See [13.20.3]. Cancellation

Section 60(1)(a) provides that if a person who is, or was at any time the insured, fails to comply with the duty of utmost good faith, the insurer may cancel a contract of general insurance. The person failing to comply with the duty must be a person who is or was, at any time, the insured under a contract of general insurance. Section 63(1) provides that an insurer must not cancel a contract of general insurance except as provided for by the ICA. Therefore, a breach of the duty of utmost good faith by a third party beneficiary does not give rise to a right of cancellation. ©

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[13.10.9] Third party beneficiary See s 11(1). See also [48.10.1] and [48.10.2]. The definition of “third party beneficiary” was inserted into s 11(1) by the Insurance Contracts Amendment Act 2013 and commenced on 28 June 2013.

Section 13 and other ICA provisions [13.20.1] Sections 13 and 21 In practical terms it is difficult to envisage an insurer relying upon a breach of the duty of disclosure by an insured solely as a breach of the duty of utmost good faith. 1. Section 33 ICA states that the provisions of Div 3 – Remedies for Nondisclosure and Misrepresentation (ss 28–33) are exclusive of any right that the insurer has, other than under the ICA, for a failure to disclose before the contract was entered into. 2. It was the intention of the ALRC that there should be no right to avoid a contract of insurance ab initio for a breach of the duty of utmost good faith. 3. The second limb of s 12 provides that Pt II of the ICA which concerns the duty of utmost good faith, does not have the effect of imposing on an insured, in relation to the disclosure of a matter to the insurer, a duty other than the duty of disclosure.

[13.20.2] Sections 13 (and 11) and sections 48 (and 48A) By its original terms s 13 required each party to a contract of insurance to act towards the other party with the utmost good faith. Accordingly, s 13 did not give or impose a duty of utmost good faith on a claimant who was not a party to a contract of insurance. However, the duty of utmost good faith under the ICA now extends post-contractually to third party beneficiaries of cover. A reference in s 13 to a “party to a contract of insurance” includes a reference to a third party beneficiary under the contract (s 13(3)). A third party beneficiary is defined in s 11(1) to mean 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. Importantly, s 13 now applies in relation to a third party beneficiary under a contract of insurance only after the contract is entered into (s 13(4)). A post-contractual duty of utmost good faith is imposed on both insurer and third party beneficiary. 108

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These amendments commenced on 28 June 2013 and apply to contracts of insurance entered into or renewed after this date (which is the day the Insurance Contracts Amendment Act 2013 received Royal Assent). Section 48 claimant not deemed a party under section 13

Prior to the post-contractual extension of the reference to “a party” within s 13 to include a reference to a third party beneficiary, there was a question as to whether a s 48 claimant was deemed to be a party to a contract of insurance with the rights under the ICA that this would bring. The answer to this question also applied, by extension, to a s 48 claimant. The High Court considered this question and concluded that s 48 does not deem a claimant under that section to be a party to the contract of insurance with the rights of a party: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50. French CJ, Gummow and Crennan JJ said (at [24]): 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.

It follows that a s 48 claimant is not a party to a contract of insurance and is not, solely by virtue of being a s 48 claimant (ignoring the post-contractual extension within s 13), deemed to be a party to the contract of insurance under s 13. Jagot J (Fed Ct) was persuaded that the reasoning in Sayseng (see [13.10.1]) and Metals & Minerals was inconsistent with any construction of ss 13 and 48 which overlooked the distinction between a party to the contract and an insured person: Smart v Westpac Banking Corporation (2011) 282 ALR 400; 16 ANZ Ins Cas 61-901; [2011] FCA 829. Her Honour said (at [14]): Section 13 implies into a contract of insurance a statutory duty of utmost good faith between the parties to the contract. Section 48 vests in an insured person who is not a party to the contract a right to recover the amount of the person’s loss notwithstanding that the person is not a party. On its terms, the section does not deem an insured person to be or to have the same rights as a party to a contract of insurance. Nor does it deem s 13 to apply as between an insurer and an insured person who is not a party to the contract.

Sackar J (NSW Sup Ct) agreed with an assertion by the insurer that s 13 had no application because those claiming a breach of the duty of utmost good faith, namely, a construction company, a director and the director’s wife, were not parties to any contract of insurance: Allianz Australia ©

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Insurance Ltd v Vitale (2014) 18 ANZ Ins Cas 62-013; [2014] NSWSC 364. He applied, inter alia, Smart v Westpac.

[13.20.3] Sections 13 and 54 It appears to have been the intention of the ALRC that the remedies for breach of contract in s 54 would be available for a breach of the contractual duty of utmost good faith. The Notes to the Draft Insurance Contracts Bill 1982 (Appendix A to ALRC 20) which concern the proposed cl 14 (which became s 13) state that the remedies for breach of contract, for example s 54, will be available for a breach of the duty of utmost good faith. However, the application of s 54 to a breach of the duty of utmost good faith under s 13 is not without its difficulties. Section 54 assumes the existence of a contract of insurance and appears in Div 3 of the ICA concerning remedies. By its terms s 54 does not apply to a pre-contractual breach of the duty of utmost good faith. Further, there is the question as to whether or not s 54 would limit or restrict the effect of Pt II contrary to s 12 of the ICA. Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 considered a submission from the insurer that a fraudulent inflation of stock lists forwarded to the insurer constituted a breach of the duty of utmost good faith, entitling the insurer to cancel the policy. It was further submitted that, as a consequence, the insurer had no liability to the insured under the policy. Ipp J considered the relationship between ss 54 and 13 and said (at 77,136 (ANZ Ins Cas)): Section 12 is contained in Pt 2 of the Act, as is s 13 (which imposes the duty of utmost good faith). Nevertheless, in my view, s 54(1) does not limit or restrict the effect of s 13. It merely provides the extent of the remedy for the duty imposed by s 13. The effect of s 54(1) is that a breach of duty of utmost good faith by the insured entitles the insurer to refuse to indemnify the insured only to the extent that the insurer’s “interests are prejudiced by that breach”… In the present case, there is no evidence of any prejudice suffered by the [insurer]. In the circumstances, I do not consider that the [insured’s] breach of the duty of utmost good faith assists the [insurer] in attempting to resist the [insured’s] claim for indemnity in respect of the losses (as defined by the policy) actually suffered by it.

The proposition put forward by Ipp J and contained in the quoted passage above was accepted by Einstein J (NSW Sup Ct) in Walton v Colonial Mutual Life Assurance Society Ltd (2004) 13 ANZ Ins Cas 61-620; [2004] NSWSC 616 as representing the proper construction of the ICA: (at 77,517 (ANZ Ins Cas)). 110

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Notwithstanding the above decision, ss 54 and 13 do not sit well together. Further, there may be cases where the question of prejudice may not be as easily disposed of as it was by Ipp J in the Entwellscase. Fullagar J (Vic Sup Ct) held that although it was strongly arguable that s 54 would apply to the breach of the implied term under s 13 nevertheless, s 54 has no application to cases which fall within s 56(1): Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104. His decision is at odds with the decision of Ipp J in Entwells on this point.

[13.20.4] Sections 13 and 56 The concepts of the duty of utmost good faith and fraud are different concepts but are intertwined. It is hard to imagine an incident of fraud that would not also constitute a breach of the duty of utmost good faith. But it does not follow that if there has been a breach of the duty of utmost good faith then there is also fraud. The ALRC considered the interrelationship of fraud and the duty of utmost good faith in respect of the entitlement to avoid a contract of insurance ab initio. The ALRC was concerned to ensure that both fraud and a breach of the duty of utmost good faith would affect only the claim in question: ALRC 20 at [243]. However, under s 56(2), if the fraud involves only a minimal or insignificant part of the claim a court may order payment of the balance if it is just and equitable to do so. Is a court entitled to make such an order if the fraud also amounts to a breach of the duty of utmost good faith? It has been said that because s 54(1) provides the extent of the remedy for the duty imposed by s 13 there is ultimately no inconsistency with s 56 of the ICA: Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 per Ipp J (WA Sup Ct). However, such a finding equates “the amount that fairly represents the extent to which the insurer’s interests were prejudiced” under s 54(1) to “the remainder of the claim” untainted by fraud under s 56(2). Further, s 54 has no application to cases that fall within s 56(1): Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104 per Fullagar J (Vic Sup Ct). The opinion of Fullagar J in Gugliotti was adopted by the Victoria Court of Appeal in Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48. Buchanan JA (with whom Charles and Callaway JJA agreed) noted that the regime established by s 54 is at odds with the amelioration of the effect of fraud provided by s 56(2). He said (at 288 (VR); 75,665 (ANZ Ins Cas)): ©

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If s 54(1) applies to a fraudulently exaggerated claim, an insurer will always be obliged to pay the true loss of the claimant, whereas s 56(2) requires the overstatement to be minimal or insignificant and non-payment of the remainder to be harsh and unfair before the amount of the loss must be paid.

However, Callaway JA left open the question of the relationship between s 56(1) and the duty of utmost good faith, particularly in light of the decision of the House of Lords in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [2001] 2 WLR 170; [2001] 1 All ER 743. Gillard J (Vic Sup Ct) described the relationship between utmost good faith and fraud in considering breaches of the duty of utmost good faith committed in the making of a claim that did not amount to fraud (because the breaches did not create a false belief in the insurer which improved claim prospects) in Insurance Manufacturers of Australia Pty Ltd v Heron (2005) 14 ANZ Ins Cas 61-669; [2005] VSC 482. He said (at [12]): Although the principle of utmost good faith is invariably linked with a fraudulent claim, nevertheless they are two different concepts. The failure to comply with the duty of utmost good faith does not mean that the claim is fraudulent. In all cases where a fraudulent claim is made, one can readily infer a breach of the obligation of utmost good faith. But it does not follow that a breach of the utmost good faith obligation means that the claim made is fraudulent. It must depend on all the circumstances.

[13.20.5] Sections 13 and 57 Section 57 of the ICA provides a code for recovery of interest on the amount of the payment unreasonably withheld by an insurer. However, Bollen J (SA Sup Ct) held that s 57 is not to be regarded as providing a code for recovery of compensation for withheld payment under an insurance policy: Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967. His Honour noted that s 57 does not state that interest only and no damages may be recovered. Bollen J did not consider that this arose by implication. It was claimed that the insurer was in breach of s 13 of the ICA in that it had delayed in the payment of the claim. The insured sought damages relating to the increase in liability to pay interest on borrowings. The insured also sought interest. Bollen J held that the amount of damages which can be awarded for a breach of the duty of utmost good faith based on non-payment is not to be limited by s 57. See also [13.40.1].

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Pre-contractual application of s 13 Pre-contractual duty of insurer

[13.30.1] Notification by insurer of the consequences of a breach by insured It has been held that an insurer’s obligation under s 13 includes, in certain circumstances, an obligation to bring to an insured’s notice the consequences of any breach by the insured of a condition of the contract of insurance. Cox J held that the appellant/insurer had such an obligation in Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957. His Honour took account of the width of both ss 13 and 14 of the ICA, and in particular s 14(3) referring to s 37 of the ICA, requiring notification in advance of any unusual provisions of a contract of insurance. He equated the obligation with the disclosure obligation under s 22 of the ICA. Cox J noted that there was no reason why the required notification should not be given at the same time as, or even combined with, the notice required by s 22. It is difficult to reconcile an obligation to bring to an insured’s notice the consequences of any breach by the insured of a condition of a contract of insurance with the provisions of the ICA. His Honour found that the provisions in question were not unusual provisions within the terms of s 37 of the ICA. Disclosure at the same time as s 22 disclosure would be an additional requirement. Further, the stated application of the duty of utmost good faith is much wider than the application specified in s 14(1) of the ICA. The decision in Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 has been questioned. Chesterman J (Qld Sup Ct) in Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203; (1999) 10 ANZ Ins Cas 61-429; [1998] QSC 209 thought that the decision was wrong. He said (at 74,840 (ANZ Ins Cas)): This decision appears to me, with respect, wrong. A duty, the essence of which is to act honestly, is elevated to an obligation in an insurer to coddle its insured and to allow idiosyncratic judicial solicitude to replace principle.

See also, [14.10.2].

[13.30.2] Insurer’s inclusion of insured in negotiations Commercial agreements may contain a term that one of the parties is to arrange a particular type of insurance cover for the benefit of both parties to the agreement. In these circumstances, it would be usual for the party arranging insurance cover to negotiate on behalf of the other party. ©

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However, difficulties can arise when the negotiations do not result in a document which purports to comprehend all the terms of the contract of insurance. Ormiston J (Vic Sup Ct) noted that as a contract of insurance is a bilateral contract, it is necessary that the insured should be a party, either directly or through an agent, to the negotiations; if for no other reason than that each party is required to act towards the other party with the utmost good faith in accordance with s 13 of the ICA: Cameron MacIntosh Pty Ltd v CE Heath Underwriting & Insurance (Aust) Pty Ltd (unreported, Vic Sup Ct, Ormiston J, 25 September 1991).

[13.30.3] Knowledge of insurer of pending underinsurance The insured alleged that the insurer had not acted with the utmost good faith in that it had renewed the contract of insurance and accepted increased premiums with full knowledge that a list of specified items had not been provided and with an appreciation that the insured’s house contained many items, such as paintings, antiques, curios and jewellery which were of considerable value. The contract of insurance covering contents contained a provision limiting insurance cover to valuable items which had been specified by the insured. The insured made a claim for the theft of valuable items which had not been specified to the insurer. It was found that the insured told an employee of the insurer that he did not wish to supply a list of valuable contents because he was concerned about the “taxman”. The insured procrastinated about the provision of a list notwithstanding that he was aware of the limitation in the contract of insurance. The insured probably believed, without justification, that the insurer would not rely upon the strict terms of the relevant provision in the contract of insurance and this to some extent led to the insured’s predicament. It was held that notwithstanding that the insurer had accepted increased premiums from the insured with the knowledge that he had not specified the contents of his house, in the circumstances the insurer had not breached its duty of utmost good faith in that it had not failed to act with fairness and honesty: Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197 per Walsh J (WA Sup Ct). On appeal, the Full Court of the Supreme Court of Western Australia comprising Kennedy, Owen and Steytler JJ (Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317) took into account that the insured was the only person who knew: • what valuable items were in the residence; • what value could be ascribed to each of them; • the identity of the owner of each item; • what other contents were in the residence; and 114

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• the overall value of all contents. In circumstances where the insurer had very limited knowledge on these matters the Full Court upheld the finding of Walsh J that the insurer had not breached its duty of utmost good faith. Owen J said (at 76,520 (ANZ Ins Cas)): For all of these reasons there was no dishonest capricious or unreasonable conduct by the [insurer]. It is not necessary for a party to point to conduct of any particular degree of seriousness in order to establish a breach of the duty. In this case there is nothing that can be sheeted home to the [insurer] that could be said to offend “the essential element of honesty” that is at the heart of the good faith principle.

[13.30.4] Silence by insurer when cover not in accordance with that required The Full Ct of the WA Sup Ct found, by a majority that the insurer had not breached its duty of utmost good faith in denying liability to indemnify the insured in respect of its contractual obligation to a third party when that contractual obligation was specifically brought to the insurer’s attention and it was made clear to the insurer that cover was specifically required: Speno Rail Maintenance Australia Pty Ltd v Hammersley Iron Pty Ltd (2000) 23 WAR 291; (2001) 11 ANZ Ins Cas 61-485; [2000] WASCA 408. Wheeler J, with whom Ipp J generally agreed, noted that there was no express representation to the effect that the policies, which didn’t meet the insured’s liability to the third party, would meet that liability. The representation, if any, could only have been made by silence. The insured had advised the insurer of its requirements and the insurer offered to issue the policies which were in fact issued. Her Honour found it difficult to see how in those circumstances the mere offer of policies in the terms issued could be regarded as a representation that the policies met all conditions required by the insured, rather than simply as a counter-offer to provide policies in those terms instead of those requested by the insured. She found that that given the provision of policy wordings, the absence of an express representation that the proposed terms would respond in the in the way requested and the experience of those negotiating in commercial and insurance matters there was no breach of the duty of utmost good faith. Wheeler J said (at [178]): The contention made on behalf of [the insured] must involve the proposition that it is not enough for the insurer, where requested to provide cover in particular terms (which terms may be in some cases detailed and complex) simply to provide as [the insurer] did the proposed policy wording; rather, it must specifically draw to the attention of the insured every way in which the policy proposed by the insurer may differ from that sought by the insured. I do not see why this should be so. Prima facie, provision of the proposed policy ©

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wording together with an indication that insurance will issue subject to those terms is an adequate – in most cases arguably the clearest – way of ensuring that the party to be insured understands the terms proposed by the insurer. In the absence of any express representation by [the insurer] that the proposed terms would respond in the way requested by [the insured], and in the context of an insurer negotiating with a party who would appear to have some experience in commercial and insurance matters, I do not see how there can be any breach of the duty of good faith in the course taken by [the insurer]…

Malcolm CJ, dissenting on this issue, noted that the insured and its insurance broker were capable of discovering the lack of cover by perusing the policies with care. However, given the complexity of cover, he considered that there was a “duty to speak” on the part of the insurer to inform the insured that the policies did not provide the cover specifically requested. Consequently, in his opinion, there was a breach of the duty of utmost good faith.

[13.30.5] Commercial advantage gained by insurer Sackar J (NSW Sup Ct) considered, in the event that s 13 applied, that an insurer’s pre-condition that the director of a construction company and his wife enter into a deed of indemnity before it provided home warranty insurance, which was required under the legislative regime before any building work, was not a breach of its duty of utmost good faith: Allianz Australia Insurance Ltd v Vitale (2014) 18 ANZ Ins Cas 62-013; [2014] NSWSC 364. Sackar J noted that the insurer had sought financial information about the construction company and those behind it. Following the provision of information indemnities were required. There was no doubt in his Honour’s mind that the request for indemnities was not driven by any capricious or whimsical requirement but rather a considered position of its unsurprising desire not to be exposed in the event that the construction company performed the building work unsatisfactorily or became insolvent. Insofar as the insurer insisted on indemnities as a means of minimizing its risks he was of the view that this could not amount to moral obloquy or a moral taint. Sackar J was of the view that requiring indemnities was not just a prudent course, given the construction company’s profile and limited experience, but one he considered “was both reasonable and necessary to protect the legitimate commercial interests of [the insurer]” (at [122]). His Honour agreed with an assertion by the insurer that s 13 had no application because those claiming a breach of the duty of utmost good faith were not parties to any contract of insurance. However, assuming that they could take advantage of s 13 he said (at[125]): 116

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…I do not regard the obligation of utmost good faith as requiring a party to surrender any commercial advantage which they may seek to take advantage of during negotiations in favour of the other party.

Pre-contractual duty of insured

[13.30.8] Duty on insured to disclose financial position In the absence of further evidence, it is most likely not a breach of the duty of utmost good faith for a proponent for a contract of insurance not to disclose her or his precarious financial position. Such a proposition assumes that a person in a precarious financial situation would be a moral hazard. This in turn assumes that such a person would be likely to succumb to temptation. Rogers CJ (Comm D) made obiter comments to this effect and posed this question to himself: “need a person who asserts that the temptation would be firmly resisted be required to make a disclosure of his financial position?” According to his Honour the answer should be “No”: Russell v NRMA Insurance Ltd (unreported, NSW Sup Ct, Rogers CJ Comm D, 8 November 1988).

Post-contractual application of s 13 Post-contractual duty of insurer

[13.40.1] Claims handling generally The duty of utmost good faith requires insurers to handle claims fairly. The question as to what is unfair and therefore may constitute a breach of the duty of utmost good faith in claims handling by general insurers is informed by the General Insurance Code of Practice,. Informed to the extent that a particular claim is subject to the Code and perhaps informed more generally in relation to all claims. For instance, the promises in s 3 of the 2012 Code of Practice by insurers subject to that Code that, inter alia: 1. [The insurer] will conduct claims handling in a fair, transparent and timely manner. 2. [The insurer] will only ask for and take into account relevant information when deciding on [the] claim. 3. .... 4. Where an error or mistake in dealing with [the] claim is identified, [the insurer] will immediately initiate action to correct it. 5. If [the insurer denies the] claim, [the insurer] will: (a) provide written reasons for [its] decision to deny [the] claim; ©

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These promises of fairness in claims handling are arguably aspects of an insurer’s duty of utmost good faith whether or not a particular claim is subject to the Code. Also arguably, no distinction is to be drawn in the application of these promises as aspects of the duty of utmost good faith between insurers subject to the Code and those not subject to the Code. For instance, these aspects of utmost good faith would equally apply to life insurers.

[13.40.2] Timeliness and communication of decision by insurer The duty of utmost good faith under s 13 requires an insurer to make a timely decision to accept or reject an insured’s claim for indemnity. Where there is a sound claim for indemnity, the duty of utmost good faith requires an insurer to make a prompt admission of liability to meet the claim and to make a prompt payment. Insurers are commonly delayed in their decision making by the need to gather further information. However, if there has been a lengthy delay in decision making by an insurer because of a lack of information, it may be necessary for that insurer to demonstrate that the information sought was necessary information in order to show that it did not breach its duty of utmost good faith. When an insurer’s lengthy delay in making a decision on an insurance claim concerns a third party claim against the insured, the conduct of the insured (of the third party claim and generally) may be relevant to the consideration of whether the insured should have relief for any breach of the duty of utmost good faith. Bollen J expressed an opinion that an insurer’s assessor could and should have quickly found that the insured had a sound claim for indemnity notwithstanding the insurer’s wait for a police report in Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967. See also above, [13.20.5]. The insurer initially delayed admitting liability pending a fire report and later a police report. Notwithstanding an admission as to liability, payment of the claim had not taken place at the time of the trial. It was noted that a failure to admit liability timeously may not be much help to an insured as an earlier admission with no payment does not obviate loss. Bollen J (SA Sup Ct) said (at 76,431 and 76,432): The [insurer] has not paid money which it should have paid. [The insured] says that prompt admission of liability to meet a sound claim for indemnity and prompt payment is required of an insurer by virtue of its obligation to act with the utmost good faith towards its insured. I agree. The [insurer] here, says [the insured], did not so behave. It is, therefore, in breach of its contract, of its obligation to act with the utmost good faith, of a term in its contract with the [insured]. It delayed for an unreasonably long time in admitting liability and in withholding, even until now, payment. 118

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… The correspondence and cross-examination of the [insured] establishes that the reasons for the delay is the waiting by the [insurer] for a fire report and later for a police report. The delay was mainly caused by the waiting for a police report. The assessors acting for the [insurer] were on the job the day after the fire. They had the means of gathering information. The [insured] did not know what to expect of the [insurer] as the weeks and months passed before receipt of the letter saying that indemnity would be met. … I think that it is no answer in the face of the long and continuing delay to say that it was reasonably waiting for a police report. I do not think the long wait was reasonable. I have no doubt that the [insurer] was waiting for that report and that was what prevented it from admitting liability and seeking details and setting about paying. I recognise too, as the [insured] agree, that a police officer or police officers in a country town were slow in preparing papers for the coroner. But the assessor could and should, in my opinion, quite quickly have found that the [insured] had a true and sound claim for indemnity.

The decision in Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967 has been questioned. Chesterman J (Qld Sup Ct) in Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203; (1999) 10 ANZ Ins Cas 61-429; [1998] QSC 209 expressed an obiter view that if an insurer is liable to pay damages because it paid late that liability arises because there is an implied term of the contract that it should pay by a certain date. He did not believe that the liability arises because it is bad faith to pay late. He thought it unwarranted to allow a different measure of damage depending on the nature of the term breached. Ambrose J (Qld Sup Ct) found that it was arguable that an insurer had breached its duty of utmost good faith by not communicating a decision on indemnity prior to the insured commencing proceedings in Gutteridge v Commonwealth of Australia (unreported, Ambrose J, Qld Sup Ct, 25 June 1993). In Gutteridge the insurer was pressed by its insured to make a decision on a claim for fire damage to their dwelling. The insured commenced proceedings to, inter alia, oblige the insurer to make a decision on the claim after which a decision to reject the claim was communicated to the insured. Ambrose J said that the rejection of the claim seemed to derive little, if any, more support from additional information communicated to the insured within the month prior to the commencement of proceedings, than it did from the information communicated to the insured within a month after the fire. Accordingly, he found that it was arguable that the insurer had breached its duty of utmost good faith by not communicating a decision prior to the commencement of proceedings. On this basis he awarded the insured costs in relation to their application to oblige the ©

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insurer to make a decision. The matters considered by Ambrose J in applying the duty of utmost good faith in respect of the communication of a decision on indemnity are worthy of note. He said (at 11): While the [insurer] might not fail to act “in good faith” if it acted honestly although in a blundering or careless fashion, the failure of the [insurer] to make and communicate within a reasonable time a decision of acceptance or rejection of the [insureds’] claim for indemnity by reason of negligence or unjustified and unwarrantable suspicion as to the bona fides of the [insureds’] claims, may constitute a failure on the part of the [insurer] to act towards the [insured] “with the utmost good faith” in dealing with their claim … Acting with “utmost good faith” must involve more than merely acting honestly, otherwise no effect is given to the word “utmost”. If of course the explanation of the failure … was a desire to achieve some purpose altogether ulterior to the honest rejection of the [insureds’] claim based upon information received in the course of the insurance investigation conducted into the loss of the [insureds’] house, then that would certainly involve a failure to act “with the utmost good faith” in dealing with that claim.

Also worthy of note is the citation by Ambrose J of Bollen J in Moss. He considered Moss to be authority for the following proposition (at 12): failure to make a timely decision to accept or reject an insured’s claim for indemnity under a policy can amount to a failure to act towards the insured with the utmost good faith as required by s 13 of the Act, even if the failure results not from an attempt to achieve an ulterior purpose, but results merely from a failure to proceed reasonably promptly when all relevant material is, or ought to be, at hand sufficient to enable a decision on the claim to be made and communicated to the insured.

The High Court in CGU v AMP considered the duty of utmost good faith and the way in which the insurer had handled the insurance claim over a lengthy period of time before making a decision on indemnity. The High Court resisted both attempting a comprehensive definition of the duty of utmost good faith and canvassing ranges of conduct which might fall within, or outside, s 13 of the ICA. Nevertheless the High Court has provided extremely valuable guidance on the conduct of insurance claims which involve third party liability and generally. The insurance claim in CGU v AMP concerned a number of third party claims against the insured. The High Court in three separate judgments variously considered the claims handling conduct of the insurer, the conduct of the insured faced with the third party claims and other matters according to the relevant timeline. The High Court by a majority allowed the appeal (from the Full Court of the Federal Court) and found for the insurer. All three judgments of the High Court (and the judgments of the courts below) provide valuable guidance on the application of an insurer’s duty of utmost good faith to its handling of an insurance claim by an insured wishing to settle third party claims contrasted with the position of the insured faced with the insurer’s lengthy delay in decision making. 120

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The insured was faced with third party claims by investors who had suffered losses having been advised by financial advisors who had a relationship with the insured. The insured notified the insurer under its professional indemnity policy. ASIC advised the insured that demands by investors should be handled in an efficient, fair and timely manner and that this obligation should override any concern about insurance cover. The insurer reserved its rights and told the insured to act as a “prudent uninsured”. A protocol was agreed between the insurer and the insured to resolve the third party claims. The insured proceeded to settle claims having notified its intention to do so. The insurer had not agreed that the insured was liable to the third parties and had not agreed that it was liable to indemnify the insured under the professional indemnity policy. The insured sought reimbursement and the insurer, after a significant delay, refused to indemnify. It had taken the insurer two years to reach a declinature based inter alia on a denial that the insured had a liability to the third parties. The insurer said that even if a liability existed there would be a defence under s 819(4) of the Corporations Law. The insured alleged that the insurer had breached its duty of utmost good faith in the way that it had dealt with the insurance claim before eventually arriving at a decision on indemnity. In the court below, the majority of the Full Court of the Federal Court (Moore and Emmett JJ; Gyles J dissenting) found that there may have been a breach of the duty of utmost good faith. They decided to remit the matter back to the primary judge for further consideration of, inter alia, whether it would be a want of utmost good faith to require the insured to establish by admissible evidence that it was legally liable to each of the third parties: AMP Financial Planning Pty Ltd v CGU Insurance Ltd (2005) 146 FCR 447; 13 ANZ Ins Cas 61-658; [2005] FCAFC 185. The majority considered Moss and Gutteridge and concluded that an insurer’s failure to make a timely decision on indemnity can amount to a breach of the duty of utmost good faith. Emmett J said (at [90]–[91]): A failure to make a prompt admission of liability to meet a sound claim for indemnity and to make payment promptly may be a failure to act with the utmost good faith on the part of an insurer. Of course, where the insurer is awaiting details that are necessary for the making of a decision whether to accept liability to indemnify or to determine the quantum of its liability, the position would be different (see Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 6 ANZ Ins Cas 60-967, at 76,431 (ANZ), at 154 (SASR)). A failure by an insurer to make and communicate within a reasonable time a decision of acceptance or rejection of a claim for indemnity, by reason of negligence or unjustified and unwarrantable suspicion as to the bona fides of the claim by the insured, may constitute a failure on the part of the insurer to act towards the insured with the utmost good faith in dealing with the claim. Putting it another way, acting with utmost good faith involves more than merely acting honestly. Otherwise, the word utmost would have no effect. Failure to make a timely decision to accept or reject a claim by an insured for ©

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indemnity under a policy can amount to a failure to act towards the insured with the utmost good faith, even if the failure results not from an attempt to achieve an ulterior purpose but results merely from a failure to proceed reasonably promptly when all relevant material is at hand, sufficient to enable a decision on the claim to be made and communicated to the insured (see, eg, Gutteridge v Commonwealth of Australia (unreported, Sup Ct, Qld, Ambrose J, 25 June 1993).

The majority of the High Court in CGU v AMP (Gleeson CJ and Crennan J; Callinan and Heydon JJ) found it unnecessary to make a finding on whether the insurer, through its conduct of the claim, breached its duty of utmost good faith. Callinan and Heydon JJ were of the view that were it not for the conduct of the insured, the conduct of the claim by the insurer may well have amounted to a breach of its duty of utmost good faith. They referred to notions of reciprocity and took into account the determination of the insured to settle the third party claims quickly for its own reasons, the insured’s wish to keep the insurer at a distance from the management of the claims, the fact that the insured did not invoke the senior counsel clause in the policy and the insured’s failure to consider a defence under s 819(4) of the Corporations Law. They said (at [259]): That the [insurer] may have wished to see some further documents, in order to explore in somewhat more detail some of the investors’ claims, that it thought that there might be a good defence under s 819(4) of the [Corporation] Law, that it wished to obtain its own senior counsel’s opinion, and that it changed its solicitors several times, cannot fully justify, or for that matter explain, the long delay that occurred before it denied liability. If that were all there were to the case, we might have been inclined to hold that the [insurer] did fail in its duty of utmost good faith. Temporising by an insurer can be just as damaging to an insured as outright rejection of a claim. To preserve their businesses, business people often need to act expeditiously. It is often in everyone’s interests if possible to keep out of court. If the [insured] had not been impelled by the other reasons to which we have referred, it still might have been in the interests of the [insured] and also ultimately those of the [insurer], to receive and deal with the claims quickly and out of court. In those circumstances, and in the absence of any other reasons or events, it might also have been open for a court to apply s 14 of the Insurance [Contracts] Act to hold that reliance on the strict definition of a claim, as an originating or like process would have infringed the … insurer’s duty of utmost good faith.

Callinan and Heydon JJ said that even if there had been an absence of utmost good faith by the insurer to which they made no conclusive finding that, having regard to the conduct of the insured referred to above, there was not such a degree of “reciprocal good faith” on the part of the insured as would entitle it to relief against the insurer. They said (at [261]): If it were otherwise the [insured] might perhaps have been able to make out a case that, as a practical matter, in the marketplace, both competitive and regulated as it was, in which it was operating, and having regard to the daily 122

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exigencies of business, an insurer acting opportunistically, and temporising, was not acting in good faith, in consequence of which settlements had to be, and were, not inappropriately made, even though in some instances strictly legally they need not have been made at all, or not for the amounts for which they were in fact made.

Gleeson CJ and Crennan J said that 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. This may well affect the conduct of an insurer in making a timely response to a claim for indemnity. However, they noted that the ICA does not empower a court to make a finding of liability against an insurer as a punitive sanction for not acting in good faith. They said (at [16]): If there is found to be a breach of the requirements of s 13 of the Act, there remains the question how that is to form part of some principled process of reasoning leading to a conclusion that the insurer is liable to indemnify the insured under the contract of insurance into which the parties have entered ... Between a premise that [the insurer’s] delay constituted a failure to act with the utmost good faith, and a conclusion that [the insurer] is liable to indemnify [the insured] in respect of the settlement amounts, there must be at least one other premise.

Gleeson CJ and Crennan J concluded that it was not delay on the part of the insurer that was said to be the form of want of good faith, but rather the possibility that it was unconscientious of the insurer to assert in the litigation that the insured must show, by admissible evidence, that it was liable to the third parties with whom it had settled. They noted a number of matters in agreeing with Gyles J, who was in dissent in the Full Court of the Federal Court, that the appeal to the Full Court should have been dismissed. The insured did not set out to establish that it was legally liable to the third parties at the hearing before the primary judge. Further, it was found by the primary judge that the insured did not settle the third party claims in reliance of any representation by the insurer that it would not be putting the insured to proof on its liability to the third parties. None of the third parties with whom the insured had settled had made a claim as defined in the policy. At the time the insured paid the claims, the insured was concerned that the insurer not take over the conduct of the claims. The settlement amounts were paid at a time when it was clear that the insurer was not committing itself to indemnify the insured. Kirby J in dissent agreed with the majority of the Full Court of the Federal Court and the remitter to the primary judge. He said (at [139]): The dilatory, prevaricating, confused, uncertain, inattentive and misleading way in which, over two years, [the insurer], with its four successive firms of solicitors, delayed and postponed its decision to deny indemnity amounts to a very sorry story. Potentially it is one of considerable disadvantage and prejudice to [the insured]. Whether it would ultimately entitle the Federal Court to provide relief to [the insured] requires further analysis of the evidence ©

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and argument, as the Full Court recognised. Nevertheless, in the circumstances, the order of remitter made by the Full Court was fully justified.

Kirby J wanted to send a strong signal to insurers concerning their obligations under the ICA. He said (at [179]–[180]): An insurer cannot agree with its insured in principle to a protocol for handling relevant claims against the insured, tell the insured to act as a “prudent uninsured” and then allow the processing of such claims (which necessarily had, as it knew, to be dealt with efficiently and fairly) to proceed to successive settlements over nearly two years without indicating one way or the other whether it admitted or denied indemnity. It cannot repeatedly receive large amounts of material from the insured and fail to give relevant and timely responses to that material. It cannot ignore numerous invitations to seek further information if it needed it or to ask for further materials. If cannot leave a frank disclosure of any concerns until nearly 18 months after notification of the claims and, even then, decline a candid identification of those concerns. One way or the other, the duty of the utmost good faith obliges an insurer to make up its mind and either to accept indemnity or to refuse it to the insured, long before that was done in this case. Then, at least, if indemnity is denied, both parties will know that they are left to their remedies at law. To condone and endorse, as lawful, the conduct of the insurer in this case, as the majority do, sends quite the wrong signal to Australian insurers concerning their obligations under the Act in their dealings with insureds. It is not a signal that I would endorse. It is not one that this Court should send.

Einstein J (NSW Sup Ct) found that there was no substance to an allegation that two excess insurers breached their duty of utmost good faith by, failing to investigate the claim promptly or otherwise sufficiently inform themselves to be in a position to make a decision on indemnity; failing to properly and fully consider material provided in a timely manner; and relying on a particular argument as to the attachment of their excess cover: Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (2006) ANZ Ins Cas 61-701; [2006] NSWSC 223. Having had certain design and construction responsibilities for the third runway at Sydney’s Kingsford Smith Airport, the insured was sued in relation to losses resulting from subsidence at the runway caused by the loss of sand. The insured claimed against its insurers in respect of its liability. The insured settled the third party claim with some insurers. The outstanding claims had been made under policies which covered the insured for breaches of professional duty. In this regard, the main question was whether the third party liability was based on a design defect, which fell within the professional indemnity cover, or a construction defect which did not. Insofar as the insured had settled with the third party whilst the relevant insurance claims remained unresolved and had raised issues of delay against the excess insurers, the case was similar to AMP v CGU. The judgment of Einstein J followed the Full Court judgment in AMP v CGU but preceded the High Court judgment in CGU v AMP. Einstein J 124

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thoroughly examined the relevant source and content of the duty of utmost good faith with reference to, inter alia, AMP v CGU. He considered the question of delay generally and more particularly delay in the context of a proposed settlement and when it is a breach of the duty of utmost good faith. In relation to delays caused by the investigation of claims by insurers, he noted (at [1109]): Where insurers deliberately string out an investigation, for example, by conducting investigations that are not part of a bona fide attempt to determine whether the contract of insurance responds or having reasonably concluded that the contract of insurance responds, but continuing the investigation in the hope of finding evidence to establish otherwise; seems likely to lead the insurer to be found to have breached its duty of utmost good faith…

However, the investigations by the excess insurers were necessary to determine the question of indemnity. Einstein J found that the excess insurers had every entitlement in the extraordinarily difficult environment in which they were placed, to await further details and tests and developments [including experts’ reports] before deciding whether or not to grant indemnity. They were entitled to form the view, on the information that they had, that they had arguable defences. There was a lack of certainty as to the cause of sand loss which continued into the final hearing. The question of indemnity was unclear. They were entitled to adopt the stance that their policies either did not respond or, likely did not respond. Lander and Jagot JJ (Fed Ct FC) did not agree that the duty of utmost good faith requires an insurer to advise an insured that the insurer is considering declining indemnity in Ensham Resources Pty Ltd v Aioi Insurance Co Ltd (2012) 209 FCR 1; [2012] FCAFC 191. They said (at [70]): We do not agree that an insurer has to advise an insured that indemnity may be declined before the insurer decides to refuse indemnity, but where the insurer considers that there is a probability that the insurer will decline indemnity. In other words, an insurer is not under an obligation to advise the insured that the insurer is considering declining indemnity.

Ball J (NSW Sup Ct) expressed an opinion that a life insurer determining whether an insured person was totally and permanently disabled was required by its duty of utmost good faith to give reasons for its decision in Ziogos v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2015] NSWSC 1385. He said (at [75]): In my opinion … [the life insurer] was also required by its duty of utmost good faith to give reasons for its decision. It is only by examining those reasons that it is possible to determine whether it acted with the utmost good faith in forming the opinion it was required to form. To put the point another way, where an insured person’s rights depend not on the objective fact (whether or not the insured suffered from TPD) but on the insurer’s opinion concerning that question, the requirement of utmost good faith requires the ©

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insurer to explain how it reached the decision it did so that the insured person can be satisfied that the decision itself was reached in the utmost good faith.

[13.40.3] Assessment of claim by insurer and the formation of its opinion An insurer is required to act reasonably, fairly or in good faith in the assessment of a claim. Fairness requires an insurer to disclose adverse material to the insured so that the insured has an opportunity to address the material before the insurer makes its decision. One reason for the requirement that the insurer must act with utmost good faith in assessing a claim, is that the insurer is acting as a judge in its own cause. Assessment of material and opportunity for insured to respond

Commonly issues have arisen in life insurance cases in which the life insurer is to make a determination, such as a determination as to whether the claimant is totally and permanently disabled, on the basis of medical and other evidence. Utmost good faith may require the life insurer not to act on a detailed and adverse medical report that it has obtained without giving the claimant the opportunity to answer either by providing a detailed report from a treating doctor in response or by addressing the adverse elements in the report. Hunter J (NSW Sup Ct) took several matters into account in determining that a life insurer had failed to act reasonably, fairly or in good faith in its assessment a claim by a member of a superannuation fund that he was totally and permanently disabled in Wyllie v National Mutual Life Association of Australasia Ltd (1997) 217 ALR 324; [1997] NSWSC 146. The matters included a failure to provide the member with an opportunity of addressing the matters upon which the insurer had formed the opinion that he was not totally and permanently disabled (which he described as “manifestly unfair”); declining the claim on inadequate claim material; and the insurer’s inequality of standards in its perceived obligation to act with due regard to the interest of the trustee as opposed to the member. Hunter J said (at 20): Having regard to the nature and seriousness of the plaintiff’s injury and to the unsatisfactory aspects of the claim material referred to later in these reasons, I think the insurer was obliged to inform the plaintiff of the particulars of the basis upon which that opinion had been reached and so to afford him the opportunity of presenting evidence of his actual capacity.

The “good faith” approach of Hunter J in Wyllie was adopted by Ipp J, with whom Malcolm CJ agreed (Full Court of the Supreme Court of Western Australia) in Beverley v Tyndall Life Insurance Co Ltd (1999) 21 WAR 327; 10 ANZ Ins Cas 61-453; [1999] WASCA 198. They held that the life insurer was obliged to act fairly, in good faith and reasonably in determining whether the insured was totally and permanently disabled. 126

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One reason for the requirement that the insurer must act with the utmost good faith is that in the assessment of a disability claim the insurer is acting as a judge in its own cause. Fairness required the insurer to disclose adverse medical reports to the insured and to give the insured the opportunity to answer new material before the insurer made its decision. Ipp J said (at [93]: …In my opinion, fairness required the [insured] to be given the opportunity of answering the new material before the [life insurer] made its decision. Were that not to be so, the [life insurer], in its capacity as a party in an adversarial position to the [insured], would be entitled to obtain evidence adverse to the [insured’s] contentions, not reveal that evidence to the [insured], assume its adjudicatory role, and determine the issue against the [insured] by reason of the evidence that had not been disclosed. In my view fairness would not tolerate such a transmogrification from adversary to adjudicator while concealing crucial material.

Anderson J agreed with the result of the appeal but doubted that “the rules of natural justice” had a role to play. The claimant under a group life policy asserting total and permanent disablement may be a third party beneficiary. If so, the requirement for a life insurer not to make an adverse decision based on its detailed and adverse medical reports without giving the claimant the opportunity to respond arises as a matter of good faith and fair dealing or under the common law duty of utmost good faith. These duties have an application even when s 13 has no application. Bryson J (NSW Sup Ct) was of the view that two expert medical reports were so important that it was not possible for the life insurer to reach a conclusion as to the effect on other submitted material, in the course of good faith and fair dealing and with due regard to the third party beneficiary (and trustee) without giving them the opportunity to respond: Sayseng v Kellogg Superannuation Pty Ltd [2003] NSWSC 945. The two reports relied upon to decline the claim which the claimant was not given an opportunity to respond to were entirely different from earlier reports which had supported the claim. On appeal, the NSW Court of Appeal agreed with Bryson J that the claimant should have been given an opportunity to respond to the two medical reports: Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214. Santow JA (with whom Spigelman CJ and Tobias JA agreed) rejected as untenable, given the nature of the reports withheld, an attempt by the life insurer to draw a distinction between the situation in Beverley, where the reports were apparently the only ones in question, and the case at hand where the reports were additional to reports already disclosed. Santow JA considered that the situation and breach of good faith and fair dealing was comparable to that in Wyllie. ©

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Brereton J (NSW Sup Ct) added a qualification to a general statement that the insurer was entitled to take into account information that had been submitted by the claimant without seeking more information, the onus being on the claimant to make out his claim in Halloran v Harwood Nominees Pty Ltd (2010) 16 ANZ Ins Cas 90-142; [2007] NSWSC 913. The qualification concerned obvious oversights. He said (at [38]): …there may be circumstances in which an insurer would not act fairly or reasonably by rejecting a claim when there had been some obvious oversight by the claimant in its preparation which could easily be remedied by a request for further information. It is to be borne in mind that the process is not an adversarial one, and the insurer does bear an obligation of utmost good faith.

Ball J (NSW Sup Ct) was of the opinion that in certain circumstances the duty of utmost good faith would require a life insurer to tell a claimant alleging total and permanent disablement that material submitted was insufficient to show that and to give the claimant an opportunity to put forward additional material in Ziogos v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2015] NSWSC 1385. However, it could not be suggested that the claimant had been denied a reasonable opportunity. Ball J said (at [78]): If the onus was on [the claimant] to bring forward adequate material, then an obligation on [the life insurer] arising from the duty of utmost good faith was to give her a reasonable opportunity to do so. Moreover, in some circumstances, the duty may go beyond that. If, for example, an unrepresented claimant failed to put forward sufficient material to enable [the life insurer] to address the substantive issues that it was required to address (that is, whether the claimant suffered from TPD) then, in my opinion, the duty of utmost good faith would require it to say so and to give the claimant an opportunity to put forward additional material. Conduct by insurer of own investigations

An insurer may require a claimant to be assessed or examined by an expert. This is a common practice and often a contractual requirement. As such, it is not necessarily a breach of the duty of utmost good faith for an insurer to require an assessment or examination of a claimant by an expert. Similarly, an insurer is required to assess a claim on the basis of material submitted by a claimant and, subject to the terms of a contract of insurance, is not necessarily required by the duty of utmost good faith to go beyond the assessment of the submitted material and conduct its own investigations. Stevenson J (NSW Sup Ct) was of the opinion that in the context of a claim based on a claimant’s alleged total and permanent disablement it was reasonable for a life insurer to require, as a condition of it considering the claim, that the claimant attend a vocational assessment in Shuetrim v FSS Trustee Corporation [2015] NSWSC 464. He did not consider that it was a breach by the life insurer of its obligation of good faith and fair dealing to require the claimant to submit to such an assessment. Further, 128

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he did not consider that the life insurer’s refusal to further consider the claim pending the claimant’s attendance at a vocational assessment was unreasonable or a breach of its duty of good faith or fair dealing. Subject to necessarily assessment conduct its

the terms of a contract of insurance, an insurer is not required by the duty of utmost good faith to go beyond the of the material submitted by a claimant and before it and own investigations.

Ball J (NSW Sup Ct) had regard to the terms of the policy and found that the life insurer was not required by the duty of utmost good faith to undertake its own investigations in Ziogos v FSS Trustee Corporation as Trustee of the First State Superannuation Scheme [2015] NSWSC 1385.

[13.40.4] Consent to a course of conduct by insurer It may be necessary for an insurer and an insured to agree to a course of conduct during the term of a contract of insurance. If an insurer unreasonably withholds its consent to a course of conduct proposed by the insured then this may amount to a breach of its duty of utmost good faith. In a case before the NSW Supreme Court, a thoroughbred colt was diagnosed as suffering from a vertebral malformation. The insured obtained a veterinary opinion that the colt should be destroyed for humane reasons. The insurer claimed that treatment could improve its position. The insured, relying on the opinion, destroyed the colt. It was held that the insurer was fettered in the exercise of its discretion by both s 13 and the common law requirement that consent not be unreasonably withheld. The question was decided by a referee on the basis of the common law requirement that consent not be unreasonably withheld. By implication, an unreasonable withholding of consent does not necessarily amount to a breach of the duty of utmost good faith: Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 per Giles J (NSW Sup Ct).

[13.40.5] Assertion of a defence by insurer (whether successful or unsuccessful) A denial of indemnity by an insurer and the assertion of a defence, whether or not ultimately successful, is not, in itself, a breach of the duty of utmost good faith. An insurer is entitled to decline to indemnify on reasonable grounds or put an insured to proof, where it is suspicious or has bona fide reservations concerning its obligation to indemnify. Kirby J noted that an insurer, acting in good faith, is perfectly entitled to deny indemnity in the seminal decision of the High Court on utmost good faith in CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) ©

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235 CLR 1; 81 ALJR 1551; 14 ANZ Ins Cas 61-739. He said (at [72]): An insurer, acting in good faith, is perfectly entitled to deny indemnity. It can put the insured to proof where it rejects a claim, where it is suspicious about it or where it has bona fide reservations concerning its obligations to indemnify the insured. Then, at least, insurer and insured know where they each stand. Each can take appropriate advice. Each can prosecute and defend its legal entitlements.

Hodgson JA (NSW Sup Ct CA) was of the opinion that the obligation of “good faith” means that an insurer “can rely on any defence only if it has reasonable grounds to do so” in Silbermann v CGU Insurance Ltd; Rich v CGU Insurance Ltd; Greaves v CGU Insurance Ltd (2003) 12 ANZ Ins Cas 61-571; [2003] NSWCA 203 (at [51]). He said that generally this would require legal advice given on the basis of full instructions as to facts and evidence known to the insurer. He noted that because of privilege, the insured and the Court will not generally be able to put that to the test, so to some extent this must depend on the integrity of the insurer. Tobias JA (with whom Beazley JA agreed) agreed with Hodgson JA on these matters concerning good faith. The good faith issue in the appeal concerned a defence to an insurance claim under a D&O Liability Policy based on excluded dishonest or fraudulent conduct alleged against the insured by a third party. Tobias JA said that any defence by the insurer which invoked the fraudulent conduct exclusion “must be based on reasonable grounds” (at [78]). He said that the insurer cannot raise a defence to the insurance claim for the purpose of frustrating or delaying the insured’s defence of a third party claim. Barr AJ (NSW Sup Ct) found that the assertion of facts by an insurer in alleging a breach of a policy condition which the insurer failed to prove did not constitute a breach of the duty of utmost good faith in Komorowski v Australian Associated Motor Insurers (1995) 9 ANZ Ins Cas 61-303. In other words it was not a breach of the duty of utmost good faith for an insurer to assert a defence which was unsuccessful. Flanagan J held that the insurer had not breached its duty of utmost good faith in refusing to indemnify in Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (2015) 18 ANZ Ins Cas 62-061; [2015] QSC 72. Flanagan J considered a submission that the insurer had breached its duty of utmost good faith by preferring the evidence of its own experts to that of an eye witness. To the extent that the evidence of the eye witness was not accepted, an insurer is not obliged to accept a statement by a particular eye witness or even an insured, who may be honestly mistaken. The insurer had given detailed consideration to the claim. The decision to decline the claim was one that evolved after careful consideration of the evidence. 130

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[13.40.6] Cancellation of policy by insurer in relation to paid claim An insured submitted that an insurer had breached its duty of utmost good faith under s 13 by cancelling a motor vehicle policy and personal effects policy on the basis that a motor vehicle claim was allegedly false when it had met the claim by authorising and paying for repairs to the motor vehicle. McLelland CJ in Eq (NSW Sup Ct) held that the insurer had not breached its duty of utmost good faith because it had authorised the repairer and become liable for payment for the repairs before the matters which led to the decision to cancel the policy had been investigated in Massoud v NRMA Insurance Ltd (1995) 62 NSWLR 653; 8 ANZ Ins Cas 61-257.

[13.40.7] Duty of “insurer” to warn on lapse of cover Contributions were paid to a trustee for a superannuation scheme so that members, being employees or subcontractors to the employer, could be covered for disability under a contract of insurance between the trustee and an insurer. Contributions were paid to the trustee annually but were payable to the insurer monthly, with the result that the disability cover lapsed for non-payment. A member’s claim for a disability benefit was subsequently refused by the insurer and trustee because of the absence of insurance cover from the insurer. Gray J (SA Sup Ct) found that the application form and the trust deed for the superannuation scheme contained the provisions of a contract of insurance between the trustee and the member (see [10.40]). He also found that the magistrate at first instance was correct in concluding that the ICA applied to the agreement between the member and the trustee. Gray J held that the magistrate was correct in finding that the trustee had breached its duty of utmost good faith by, inter alia, failing to warn that the disability cover was about to lapse or had lapsed and by leading the member to understand that the cover was in place: United Super Pty Ltd v Built Environs Pty Ltd (2000) 80 SASR 513; 12 ANZ Ins Cas 90-113; [2001] SASC 339. Gray J also found that the magistrate was correct in finding that s 14(1) operated to preclude the trustee from denying the member the benefit of the insurance contract. However, he did not elaborate on the application of s 14 within the terms of that section. The finding of a contract of insurance and therefore a duty of utmost good faith between a member of a superannuation fund and a trustee, who is the insured under a contract of insurance with a scheme insurer, should be contrasted with other judgments. A member of a superannuation scheme is ©

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more usually seen as a third party beneficiary to the contract of insurance between the trustee and the insurer. The trustee has a duty of good faith and fair dealing to the member but not a duty of utmost good faith (see [13.10.1]).

[13.40.8] Reliance on ambiguous terms by insurer The duty of utmost good faith extends to a case where an insurer comes to court seeking to construe an exclusion out of ambiguous words. The insurer had denied liability under a claim by the insured on the basis that a driver of one of its trucks was an unacceptable insurance risk. However, there was no clear term and condition of the policy of insurance allowing the insurer to decline a claim in the event that the claim had resulted from the truck being driven by the unacceptable driver. Palmer J (NSW Sup Ct) referred to the doctrine of contra proferentem, which prevents an insurer from construing an ambiguity in the terms of a policy of insurance in such a way as to deny liability. He said that insurers must remind themselves of the duty of utmost good faith under s 13 because in seeking to construe an exclusion out of ambiguous words or by recourse to implied terms, they may well face not only an adverse judgment almost out of hand, but also an indemnity costs order: Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd (2002) 12 ANZ Ins Cas 61-553; [2002] NSWSC 1006. The NSW Court of Appeal (Sheller JA with whom Santow and McColl JJA agreed) dismissed an appeal from the judgment of Palmer J. The Court of Appeal noted that the insurer had misinterpreted its own policy and therefore had rejected the driver without justification but did not refer to the duty of utmost good faith: QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd (2004) 13 ANZ Ins Cas 61-586; [2003] NSWCA 356.

[13.40.9] Denial of existence of insurance cover by insurer It was held that an insurer’s false denial of its participation in a layer of insurance was a breach of its duty of utmost good faith. Mullighan J (SA Sup Ct) exercised his discretion to order payment out of Funds in Court (paid into Court prior to the insurer going into liquidation) of costs incurred by an insured in establishing the existence of insurance cover which was wrongly denied by the insurer. The denial by the insurer of the existence of its participation in a second excess layer of insurance had been made falsely with the consequence that the insurer had not acted in good faith and was in breach of s 13. This matter contributed to his 132

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Honour’s conclusion that the discretion should be exercised in favour of the insured: Pilmer v HIH Casualty & General Insurance Ltd (No 3) [2005] SASC 302 (8 August 2005).

[13.40.10] Procedural conduct of proceedings by insurer The duty of utmost good faith does not extend to a legitimate exercise of the insurer’s rights under the applicable Court Rules in the conduct of litigation against it. Vickery J (Vic Sup Ct) found that the implied term of utmost good faith under s 13 did not extend to the procedural conduct of litigation in Imaging Applications Pty Ltd v Vero Insurance Ltd [2008] VSC 178 (29 May 2008). He said that even if a duty of utmost good faith did extend to the conduct of an insurer in the course of litigation, this did not explain the extent of the delay in the proceedings. The insured alleged that delay to the proceedings had been caused by the insurer’s failure to make obvious admissions. It was alleged that the duty of utmost good faith compelled the insurer to admit facts that were claimed by the insured to be obvious in the proceedings. Vickery J noted that if the duty of utmost good faith applied as contended, it would only apply to the insurer and not other defendants who were not party to the contract of insurance. He rejected the contention that the conduct of the defendants, including the insurer, in the course of the litigation, excused the delay caused by the inactivity of the insured during one of the periods under review. He was not satisfied that the conduct of the insurer, which was the subject of the complaint, “was anything more than a legitimate exercise of its rights under the Rules in the conduct of the litigation against it” (at [57]).

[13.40.11] Early realisation of policy by insurer applied to notice of intention to switch investment portfolios It was observed that s 13 did not prevent an insurer from making a decision to realise non-cash assets in anticipation of a switch from what was termed the Secure portfolio to the Cash portfolio under a Prosperity Bond policy of life insurance. The Vic Court of Appeal, Nettle and Neave JJA, with whom Robson AJA agreed, could see no lack of good faith or fair dealing in an insurer adopting an early resolution policy to realise non-cash assets, having received notice from a policyholder and in anticipation of completing a switch at the expiration of a three day notice period from a Secure portfolio to a Cash portfolio under a Prosperity Bond policy of life insurance; ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) ©

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v National Mutual Life (2014) ANZ Ins Cas 61-992; [2013] VSCA 241 (27 November 2013). They noted that whilst the common law duty of good faith and fair dealing (which differs from the duty of utmost good faith under s 13) was the subject of debate as to its scope in relation to commercial contracts, it seemed to be generally accepted that the duty did not operate to restrict decisions and actions reasonably taken, which are designed to promote the legitimate interest of a party. In their view, the early resolution policy promoted the legitimate interests of the insurer in complying with the terms of the policy of life insurance. It enabled the insurer to comply with its obligations of effecting completion at the price of units ruling on the day of notice of intention to switch, and at the same time it enabled the insurer to avoid dipping into its own resources to fund arbitrage profits which otherwise could have resulted from the withdrawal of the notice of intention to switch. In adding his own observations, Robson AJA was of the view that s 13 did not prevent the insurer from taking prudent steps to avoid significant losses when there were sensible steps that it could and did take, which still permitted advantages to the policyholder under its strategy, but not at the insurer’s expense. In his view, all the arguments essentially devolved to the issue as to whether the policyholder had a contractual right to make arbitrage profits at the insurer’s expense. He did not consider that the policyholder had such a right.

[13.40.12] Refusal by insurer to give an assurance absent a contractual obligation It was held that an insurer’s refusal to give an assurance, concerning the possibility that repairs by the insurer of the insured’s property may result in further damage, fell well short of a breach of the duty of utmost good faith. At the outset, the insurer had accepted liability for repair and was prepared to effect repairs itself. Murrell CJ (ACT Sup Ct) noted that while it would have been “helpful” to do so, the insurer was under no contractual obligation to give the assurance: Fogarty v CGU Insurance Ltd [2015] ACTSC 44 (27 February 2015). She applied the “dishonesty, caprice and unreasonableness” criteria which Kirby J found in CGU Insurance Ltd v AMP Financial Planning Pty Ltd (2007) 235 CLR 1; 81 ALJR 1551; 14 ANZ Ins Cas 61-739 at [131] to more accurately express the ambit of a breach of the duty of utmost good faith under s 13. Murrell CJ said (at [65]): While it may have been helpful to do so, the insurer was under no contractual obligation to make the assurance. The action of the insurer in declining to provide the assurance fell well short of the type of act of dishonesty, caprice or unreasonableness that would constitute a breach of the utmost good faith. 134

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[13.40.13] Conduct by insurer prior to settlement of property claim The duty of utmost good faith does not require completely open and transparent conduct by an insurer prior to the settlement of a property claim. It does not require an insurer to communicate every thought or concern. Sackar J (NSW Sup Ct) considered an allegation that the insurer had breached its duty of utmost good faith which the insured alleged required open and transparent conduct by the insurer in the conduct and settlement of a property claim, and should take into consideration the insured’s interests and not only its own interests: Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd (2014) 18 ANZ Ins Cas 62-000; [2013] NSWSC 1975. The insured alleged various breaches concerning the insurer’s treatment of an estimate of the cost of reinstatement of the fire damaged house and alleged reliance on documents which did not reasonably reflect the nature and cost of the work for the purpose of negotiating a smaller payout. Sackar J rejected the allegations of “bad faith” against the insurer. He did not think the insurer was obliged, on the eve of the negotiation to cash settle the claim, to portray every thought and/or concern. Further, even assuming that the insurer’s disingenuous complaint that an estimate had not been procured in a competitive environment was a “somewhat limp negotiating ploy”, his Honour did not think that amounted to an act of “bad faith”. He was not persuaded that there was a conspiracy in which experts considered that they should do the insurer’s bidding, as opposed to putting forward genuinely held views.

[13.40.14] Treatment by insurer of one insured differently from another Treatment by an insurer of one insured under a contract of insurance which differs from its treatment of another insured under the contract can be an indicator of utmost good faith. Whether it amounts to conduct in breach of the duty of utmost good faith depends on whether there are reasons for a different approach and what those reasons are. Rein J (NSW Sup Ct) considered allegations that an insurer had breached its duty of utmost good faith to an insured by refusing to indemnify for defence costs whereas it had indemnified numerous other insureds for defence costs and had taken points against the insured that it had not taken against other insureds: Lambert Leasing Inc v QBE Insurance Ltd (2015) 18 ANZ Ins Cas 62-067; [2015] NSWSC 750. The main reasons for the difference in treatment was that, unlike other insureds, the insured alleging the breach had been granted an indemnity for its defence costs by another insurer under a separate contract of insurance with the ©

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consequence that either it had no legal costs or they had been paid and, unlike other insureds, it had refused to supply information. There were other distinguishing reasons as to why the insurer had indemnified other insureds. In concluding that the differential conduct was not a breach of the duty of utmost good faith Rein J said (at [187]): I accept that where an insurer treats one insured differently to another this could be an indicator of a lack of utmost good faith but there are reasons why [the insurer] has taken a different approach to the question of indemnity of [the insured] than it has taken with the other insureds, which causes me to conclude that [the insurer’s] conduct in differentiating between insureds does not constitute a breach of utmost good faith.

Post-contractual duty of insured

[13.45.1] False answer in claim form by insured An insured falsely answered in the negative a question in a claim form asking whether the driver of a motor vehicle had consumed intoxicating liquor in the 12 hours before the accident. Fullagar J (Vic Sup Ct) held that the findings of the Magistrate as to the false answer necessitated a conclusion of law that there had been a breach of the implied condition of the insurance contract inserted by s 13 ICA: Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104.

[13.45.2] Protected insured putting insurer at risk The duty of utmost good faith readily extends to a case where an insured who is protected from suit by release acts, so as to potentially put the insurer at risk. A question arose as to whether a firm of solicitors was guilty of a breach of the duty of utmost good faith in circumstances where they had rescinded one settlement agreement and entered into another. The second settlement agreement provided for the assignment of a contract of insurance in relation to a professional indemnity policy year not included in the first settlement agreement. Both settlement agreements released the firm of solicitors from suit. However, with the additional assignment, the insurers were potentially exposed to a far greater liability. Einstein J (NSW Sup Ct) held that the solicitors had not breached their duty of utmost good faith. They had a genuine concern that the first settlement agreement might be set aside and that it was clearly appropriate for them to rely on legal advice and enter into the second settlement agreement: Murphy v Swinbank [1999] NSWSC 1098. 136

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[13.45.3] Failure to notify circumstances by insured The duty of utmost good faith may extend to a case where an insured decides not to notify the insurer of circumstances which may give rise to a claim under a claims made and notified policy. The insured may do this to avoid a higher premium on renewal or for some other reason, and then subsequently rely on s 54 in order to claim. Chesterman J (Qld Sup Ct CA) thought that in some cases the insurer may rely on the duty of utmost good faith in s 13 to resist paying where the insured seeks to resile from a decision not to give notice of an occurrence. However, he did no more than raise the general issue because the duty of utmost good faith was not argued: FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (1999) 153 FLR 448; 10 ANZ Ins Cas 61-445; [1999] QCA 243.

[13.45.4] Failure by insured to provide information and disclose its own view The duty of utmost good faith may extend to a case where an insured deliberately attempts to withhold vital information from an insurer or fails to disclose its own view as to the cause of a loss when the loss as caused may not be covered. Einstein J (NSW Sup Ct) found that there was such complexity accompanying the environment faced by the insured that what was put forward as a deliberate withholding of information was no more than fair and reasonable conduct. Because of the number of insurers to be kept in mind, the insured was entitled to tread carefully in trying to establish that particular policies responded. Further, there was no substance in the suggestion that the insured had breached its duty of utmost good faith by failing to disclose to the excess insurers its own view that the event which gave rise to its liability was due to its own construction defects (a cause of liability not covered), because the insured disclosed sufficient facts to put the insurers on notice of that possibility. In particular, an expert report was provided to the insurers which dealt with that possibility: Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd (2006) ANZ Ins Cas 61-701; [2006] NSWSC 223.

[13.45.5] Insistence by insured on obtaining development consent An insurer alleged that an insured had breached the duty of utmost good faith by obtaining a local government development consent in relation to the reinstatement of a fire damaged house when it was unnecessary to do ©

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so. In particular, the insurer alleged that the insured represented that a development application would be necessary to reinstate the house to its “as was” condition, when in fact a development application was only required as a result of proposed changes required by the insured. Sackar J (NSW Sup Ct) was satisfied that the development application was necessary and, in any event, the insured had simply accepted the advice of experts in lodging the development application. Accordingly, he rejected the allegation of breach of the duty of utmost good faith: Camellia Properties Pty Ltd v Wesfarmers General Insurance Ltd (2014) 18 ANZ Ins Cas 62-000; [2013] NSWSC 1975. Section 54 and breach by insured

It appears to have been the intention of the ALRC that the remedies for breach of contract in s 54 would be available for a breach by an insured of the contractual duty of utmost good faith. The Notes to the Draft Insurance Contracts Bill 1982 (Appendix A to ALRC 20) which concern the proposed cl 14 (which became s 13) state that the remedies for breach of contract, for example s 54, will be available for a breach of the duty of utmost good faith. However, the application of s 54 to a breach of the duty of utmost good faith under s 13 is not without its difficulties. Section 54 assumes the existence of a contract of insurance and appears in Div 3 of the ICA concerning remedies. By its terms, s 54 does not apply to a precontractual breach of the duty of utmost good faith. Further, there is the question as to whether or not s 54 would limit or restrict the effect of Pt II contrary to s 12 ICA. See [13.20.3]. Cancellation

Section 60(1)(a) provides that if a person who is, or was at any time the insured, fails to comply with the duty of utmost good faith, the insurer may cancel a contract of general insurance. The person failing to comply with the duty must be a person who is or was, at any time, the insured under a contract of general insurance. Section 63(1) provides that an insurer must not cancel a contract of general insurance except as provided for by the ICA. Therefore, a breach of the duty of utmost good faith by a third party beneficiary does not give rise to a right of cancellation. 14

Parties not to rely on provisions except in the utmost good faith

(1) If reliance by a party to a contract of insurance on a provision of the contract would be to fail to act with the utmost good faith, the party may not rely on the provision. (2) Subsection (1) does not limit the operation of section 13. (3) In deciding whether reliance by an insurer on a provision of the contract of insurance would be to fail to act with the utmost good faith, the court shall

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have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in section 37 or otherwise.

SECTION 14 COMMENTARY Reliance on provision with utmost good faith Background and synopsis ....................................................................... [14.10.1] Reliance on car modification condition in the absence of notification of consequences of breach by insurer ................................................... [14.10.2] Reliance on indemnity provision by insured ........................................... [14.10.3] Reliance on valuable contents specification provision by insurer .......... [14.10.4] Reliance by insurer against non-party to a contract of insurance .......... [14.10.5] Reliance by insurer on payment of social security to insured ................ [14.10.6] Reliance by insurer on major building exclusion in liability policy .......... [14.10.7] Reliance by insured on cover for undeclared property ........................... [14.10.8] Reliance by insurer on exclusion of contractual claims from liability cover ................................................................................................... [14.10.9] Reliance by insured on notification of circumstances term .................... [14.10.10] Reliance by insured on terms providing indemnity ................................. [14.10.11] Reliance by insurer on requirement for insured to satisfy insuring clause ................................................................................................. [14.10.12] Reliance by insurer on total and permanent disablement definition in group life policy ................................................................................... [14.10.13] Reliance by insurer on third party recovery priority provision in deed of release ................................................................................................ [14.10.14] Notification of the provision: s 14(3) ....................................................... [14.30] Sections 14 and 13 ................................................................................. [14.40]

Reliance on provision with utmost good faith [14.10.1] Background and synopsis Section 14 sets out only one application of the duty of utmost good faith. The ALRC considered that in the context of insurance the insertion of a provision for general judicial review in the ICA was probably unnecessary. The ALRC noted (ALRC 20, at [51]): The law relating to insurance already contains a flexible principle whose reaffirmation in an expanded form should be sufficient to deal with unexpected difficulties. Both parties to an insurance contract are subject to the requirement of the uberrima fides. This should be restated as a contractual duty between the parties. Neither party should be entitled to rely on a contractual provision when to do so would involve a breach of the duty of utmost good faith. That should provide sufficient inducement to insurers and their advisers to be careful in drafting their policies and to act fairly in relying on their strict terms. In the context of a reformed set of laws applying to insurance contracts, such a requirement would not have to be relied on frequently by the courts. It ©

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would give rise to less uncertainty than a general power of review. State and Territorial laws allowing for judicial review of contracts should be overridden in relation to insurance.

The prophecy of the ALRC, that in the context of a reformed set of laws the requirement would not have to be relied on frequently by the courts, has so far come to fruition insofar as s 14 is concerned. The application of the duty of utmost good faith in s 14 is narrow. It is reliance per se on a provision of a contract of insurance that must constitute the failure to act with the utmost good faith. Section 14 will probably continue to be infrequently relied upon by insureds given: • the advent of standard cover; • the necessity to notify unusual terms under s 37 ICA; • other provisions of the ICA which serve to protect consumers; and • the standardisation of personal lines contracts of insurance. Similarly, s 14 will probably continue to be infrequently relied upon by insurers. Section 14(1) is expressed as an application of the duty of utmost good faith to benefit both insurer and insured. The nature of insurance generally and the construction of contracts of insurance predicate that it will usually be an insurer’s reliance upon a provision of a contract of insurance that will be the subject of an insurance dispute. However, there are provisions of a contract of insurance that are relied upon by an insured where that reliance could potentially amount to breach of the duty of utmost good faith. For instance, the provisions that relate to the payment of a claim. The extent to which an insurer can rely upon s 14 to allege that an insured has failed to act with utmost good faith in relying on the payment provision of a contract of insurance is largely unresolved. It is possible that s 14(1) may receive more attention in the future, especially from insurers, because of the remedy it provides. If reliance by a party to a contract of insurance on a provision amounts to a failure to act with the utmost good faith, then that party may not rely on that provision. If in certain circumstances reliance by an insured on the payment provision of a contract of insurance amounts to a failure to act with utmost good faith, then arguably it will be open to a court to find that the insured may not rely on the payment provision.

[14.10.2] Reliance on car modification condition in the absence of notification of consequences of breach by insurer In Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 Cox J (SA Sup Ct) apparently 140

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widened the application of s 14 in holding that an insurer has an obligation, at least in some circumstances, to bring to the insured’s notice the consequences of any breach by the insured of a condition of the contract of insurance. The insureds had modified their car subsequent to renewing their insurance without informing the insurer of the modification. It was held that the insurer was not entitled to rely on the breach of the condition in the contract of insurance because it had failed in its duty to act with utmost good faith towards the insureds. Sections 13 and 14 were interpreted so as to require the insurer to give adequate warning to the insureds of the general nature and effect of the relevant condition, albeit that it was not unusual. It was held that this obligation had not been adequately discharged by the usual injunction printed on the proposal form or the bare supply of a copy of the policy or the terms of the renewal notice endorsement. His Honour took account of the width of both ss 13 and 14 of the ICA and in particular s 14(3) referring to s 37 of the ICA requiring notification in advance of any unusual provisions of a contract of insurance. He equated the obligation with the disclosure obligation under s 22 of the ICA. Cox J. noted that there was no reason why the required notification should not be given at the same time as, or even combined with, the notice required by s 22. It is difficult to reconcile an obligation to bring to an insured’s notice the consequences of any breach by the insured of a condition of a contract of insurance with the provisions of the ICA. His Honour found that the provisions in question were not unusual provisions within the terms of s 37 of the ICA. Disclosure at the same time as s 22 disclosure would be an additional requirement. Further, the stated application of the duty of utmost good faith is much wider than the application specified in s 14(1) of the ICA. The decision in Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 has been questioned. Chesterman J (Qld Sup Ct) in Re Zurich Australian Insurance Ltd [1999] 2 Qd R 203; (1999) 10 ANZ Ins Cas 61-429; [1998] QSC 209 thought that the decision was wrong. He said (at [81]): This decision appears to me, with respect, wrong. A duty, the essence of which is to act honestly, is elevated to an obligation in an insurer to coddle its insured and to allow idiosyncratic judicial solicitude to replace principle.

See also, [13.30.1].

[14.10.3] Reliance on indemnity provision by insured In Banks v NRMA Insurance Ltd (unreported, NSW Sup Ct, Brownie J, 1 September 1988) it was alleged that the insured would be in breach of their duty of utmost good faith in relying upon the indemnity provisions ©

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of the contract of insurance and in their insistence upon a measure of indemnity by reference to the cost of rebuilding to the same specifications. The insured building and land had been purchased by the insured for the sum of $13,500. The building was valued in January 1986 in the sum of $3,000 with attached buildings valued in the sum of $500. Two months later after repair work, the insured obtained cover on a replacement basis in the sum of $98,000. The building contained features unlikely to be replaced in the event that it was completely rebuilt. It contained three chimneys, unusually high ceilings and was lined with timber. The insured building was destroyed by fire. Notwithstanding that the replacement provisions would produce incongruous results, Brownie J did not think that s 14 could be used to enable an insurer to ignore the explicit provisions of the contract. In holding that the measure of indemnity was to be assessed by reference to the cost of rebuilding to the same specifications, he took into account that: • the insurer had provided the insured with a printed guide as to how to calculate the sum insured from which he inferred the premium was calculated; • the evidence had demonstrated that the guide was accurate in throwing up a sum insured which reflected the cost of rebuilding; and • there was competition between insurers marketing insurance contracts of the reinstatement and replacement type. In noting the incongruous result, Brownie J counselled insurers to reformulate standard forms of contract to avoid such a result.

[14.10.4] Reliance on valuable contents specification provision by insurer In Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197 it was held by Walsh J (WA Sup Ct) that notwithstanding that the insurer accepted increased premiums from the insured with the knowledge that he had not specified valuable contents of his house, the insurer was able to rely upon a provision of the contract of insurance limiting cover because it had not breached its duty of utmost good faith. His Honour held that it had not been established that the insurer had failed to act with fairness and honesty. Walsh J accepted that the insured had told an employee of the insurer that he was reluctant to supply a list of valuable contents because he was concerned about the “taxman”. He also found that at no time did the insured indicate that he would not provide such a list. He further found that the insured procrastinated in providing a list notwithstanding that he was aware of the limitation in the contract of insurance. Accordingly, his Honour was not satisfied that it had been established that the insurer had failed to act with the utmost good faith, notwithstanding that it renewed 142

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the contract of insurance and accepted increased premiums with full knowledge that the list had not been provided and with an appreciation that the house contained many items, such as paintings, antiques, curios and jewellery which were of considerable value. He rejected the assertion that in the circumstances of the claim it would be contrary to the insurer’s duty of the utmost good faith to refuse to pay the claim. The finding of Walsh J on utmost good faith was upheld on appeal by the Full Court of the Supreme Court of Western Australia (comprising Kennedy, Owen and Steytler JJ): Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317.

[14.10.5] Reliance by insurer against non-party to a contract of insurance It has been argued that an insurer seeking to invoke a provision of a contract of insurance which would allow it to rely, as against a non-party to the contract, on non-disclosure by a party to the contract would be guilty of a failure to act with the utmost good faith. Various persons, not parties to the contract of insurance, sought an entitlement to cover under s 48 of the ICA. Rogers CJ (Comm Div, NSW Sup Ct) held that if the insurer was entitled to rely upon a non-disclosure by a party to the contract of insurance as against a non-party because of s 48(3), then the reliance would not constitute a breach of the duty of utmost good faith: Carden v CE Heath Casualty & General Insurance Ltd (1992) 7 ANZ Ins Cas 61-147. The Court of Appeal did not consider this question in the appeal from the decision of Rogers CJ Comm D: CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. It appears therefore that s 14(1) cannot defeat an insurer’s entitlement arising by virtue of some other provision of the ICA, such as s 48.

[14.10.6] Reliance by insurer on payment of social security to insured A sickness and accident policy provided that social security payments had to be taken into account in assessing benefits under the policy. Because the insurer refused to pay benefits under the policy, the insured claimed social security moneys. Those social security moneys were repayable in the event that the insurer paid benefits under the policy. Brownie J (NSW Sup Ct) read the policy as subject to the social security legislation and held that the insurer was not entitled to take into account the social security moneys in determining the benefits payable under the policy. If he was incorrect in this, Brownie J was inclined to think that by force of s 14 the insurer would be failing to act with the utmost good faith in ©

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taking into account the social security payments: Ibrahim v Greater Pacific Life Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-330.

[14.10.7] Reliance by insurer on major building exclusion in liability policy A broad form liability policy excluded claims in respect of personal injury “in connection with the erection, demolition, alteration of and/or addition to buildings” by the insured except when not exceeding the sum of $100,000.00. Allen J (NSW Sup Ct) held that in relying upon the exclusion, the insurer would be failing to act with the utmost good faith under s 14 in circumstances where: (i) the insurer’s underwriter knew that the broker would not expect the policy to contain the exclusion and had negotiated the policy on the basis that there would be no exclusion of that type; (ii) the underwriter did not intend the policy to contain the exclusion; (iii) the terms of the policy including the exclusion were not communicated to the insured until after the accident suffered by the third party; (iv) in relying upon the exclusion the insurer would be taking advantage of its own administrative error in not deleting the exclusion in accordance with the intention of its own underwriter; and (v) the premium was grossly excessive for the policy containing the exclusion. Allen J noted that not all of these matters would be essential to a conclusion that reliance by the insurer on the exclusion would be a failure on its part to act with the utmost good faith: Baradom Contracting Pty Ltd v GIO General Ltd (unreported, NSW Sup Ct, Allen J, 13 June 1996).

[14.10.8] Reliance by insured on cover for undeclared property An Industrial Special Risks Insurance Policy (ISR Policy) covered the insured for “physical loss, destruction or damage” to “all real and personal property” belonging to the insured or for which the insured was responsible. The ISR Policy contained co-insurance (average) provisions. Following a flood, the insured claimed in respect of three structures which had not been declared to the insurer on any of the schedules of declared values. In proceedings commenced by the insured the insurer cross claimed in relation to an alleged unpaid premium on other property it said had not been declared under the ISR Policy. The insurer did not allege the failure to declare property as a failure to disclose. Rather, it appears that 144

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the insurer alleged an absence of disclosure as indirectly amounting to a breach of the duty of utmost good faith in reliance on the provision relating to the making of claims. The Victorian Court of Appeal (Ormiston JA, with whom Phillips and Kenny JJA agreed) noted that the making of a claim seeking indemnity cannot ordinarily be described as an act lacking good faith in the circumstances, “unless there was some agreement not to sue or some other act which would make the taking of that step one wanting in good faith”. At the time that the claim was made the failure to make required declarations was known and may have led to some remedy or defence which the insurer could rely upon. However, the making of the claim itself and the insured’s assertion that the property was covered by the ISR Policy, were matters which had to be resolved by reference to other events according to law. It was not a case of a fanciful or contrived claim being put forward. There were many legal issues of “nicety and difficulty” and the insured could not be said to have acted in breach of the duty of utmost good faith in merely making the claim and bringing it to court: CIC Insurance Ltd v Barwon Region Water Authority (1998) 100 LGERA 136; 147 FLR 353; 10 ANZ Ins Cas 61-425; [1998] VSCA 77.

[14.10.9] Reliance by insurer on exclusion of contractual claims from liability cover The insurer and its solicitors continued to represent the insured in proceedings notwithstanding that they had formed a view that the claims against the insured were based in contract and were not covered by the liability policy. Indemnity was eventually declined after summary judgment had been entered on the basis that the insured’s liability to the third party was in contract. Ollson J (SA Sup Ct) noted that an insurer has a clear duty, in the conduct of litigation against its insured where a conflict of interest arises, to make appropriate disclosure to, and consult with, the insured. He held that the insured had been “deliberately kept in the dark” and that the insurer and its advisers deliberately embarked on a strategy which was designed to deflect liability away from the interests of the insurer. Accordingly, he found that the conduct of the solicitor for the insurer in the matter, which, on any view, reflected at least his general instructions from the claims manager of the insurer, was a gross breach of good faith which plainly attracted the operation of s 14. By virtue of s 14, the insurer was not entitled to rely on any relevant contractual exclusion in the policy: ACN 007 838 584 Pty Ltd v Zurich Australian Insurance Ltd (1997) 69 SASR 374.

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[14.10.10] Reliance by insured on notification of circumstances term A professional indemnity “claims made and notified” policy provided for the notification of facts (circumstances). Notification of circumstances would have meant that any subsequent claim would be treated as having been notified on the date on which circumstances were notified. The insured deliberately elected not to notify circumstances. The insurer argued that the insured should be precluded from relying on the notification of circumstances term in accordance with s 14. The insurer relied upon various agreed facts, including the fact that the insured took legal advice after the suggestion that the insurer should not be notified because of the potential impact on future premiums. Rolfe J (NSW Sup Ct) was of the view that to imply an absence of the utmost good faith would mean that the beneficial effect of s 54 would be lost. He noted that there was no suggestion that the failure to give notice arose in consequence of any lack of good faith. He said that the failure to give notice was an omission but could not be categorised as one springing from a lack of good faith: Einfeld v HIH Casualty & General Insurance Ltd (1999) 152 FLR 211; 10 ANZ Ins Cas 61-450; [1999] NSWSC 867.

[14.10.11] Reliance by insured on terms providing indemnity In a professional indemnity policy, issued to the insured accountants, the insurer had modified and partially waived the duty of disclosure for acts of fraud and dishonesty. According to the modification, there was an increased excess in the event of fraud or dishonesty by partners such that the insurer was limited to indemnifying the insured only for an amount in excess of the assets in the firm of the fraudulent partner or partners. Debelle J (SA Sup Ct) rejected the insurer’s contention that the insured could not rely on the partial waiver because to do so would be to act contrary to the obligation to act with the duty of utmost good faith under s 14. His Honour held that the submission based on s 14 failed to have regard to the fact that the policy was intended to provide indemnity for, among other things, the very kind of conduct in which the fraudulent partner had engaged. Therefore, s 14 had no application: Sherry v FAI General Insurance Co Ltd (in liq) (2002) 12 ANZ Ins Cas 61-516; [2002] SASC 3.

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[14.10.12] Reliance by insurer on requirement for insured to satisfy insuring clause Under a trade credit insurance policy a party, entitled to be covered for sales in its own right, argued that it would be a breach of the duty of utmost good faith for the insurer to rely on its failure to prove sales. For the party to be covered it had to prove sales on terms that fell within the insuring clause of the policy. It failed to discharge its burden to prove sales and therefore failed to show that the policy was engaged. In Prepaid Services v Atradius (2012) 17 ANZ Ins Cas 61-937; [2012] NSWSC 608 McDougall J (NSW Sup Ct) found that it could not be a want of utmost good faith for the insurer to take the point that the party had failed to discharge its burden of proof to engage the policy. Because the policy was not engaged no question of utmost good faith under s 14 could arise. This finding was not appealed to the NSW Court of Appeal: Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252.

[14.10.13] Reliance by insurer on total and permanent disablement definition in group life policy A member of a superannuation scheme who made a total and permanent disablement claim under a group life policy effected by the trustee alleged that the life insurer had breached its duty of utmost good faith in relying on a total and permanent disablement definition which was said to be unusual or unduly harsh in Dumitrov v SC Johnson & Son Superannuation Pty Ltd. Gzell J (NSW Sup Ct) did not see a basis for concluding that the life insurer’s reliance on the definition would constitute a failure to act with the utmost good faith “in the absence of evidence that the definition of total and permanent disablement was unusual or unduly harsh, and in light of the decided cases in which similar clauses appear without challenge to their operation” (at [67]). There was no basis for the operation of s 14.

[14.10.14] Reliance by insurer on third party recovery priority provision in deed of release An insured submitted that reliance by its insurer on a provision in a deed of release that required the insured to account to its insurer for the recovery it made from a third party even though it was not fully indemnified for its loss was a breach of utmost good faith under s 14. The insured argued it was a breach of the duty to require entry into the deed as a condition of granting indemnity. It was also argued that it was a breach for the insurer not to first explicitly draw the insured’s attention to the fact ©

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that the deed modified its rights to recovery that it would otherwise have had under the policy. Ball J (NSW Sup Ct) was not prepared to accept that there had been a breach of the duty of utmost good faith in Small Business Consortium Lloyd’s Consortium No 9056 v Angas Securities Ltd [2015] NSWSC 1511. Ball J was prepared to accept that the provision in the deed of release was to be regarded as a provision included in the contract of insurance under s 10(3). However, looking at the position adopted by the insurer objectively, it did not appear to be “unreasonable, capricious or involve unfairness” (at [69]). Under the terms of an earlier letter the insurer had offered more than it was obliged to offer and sought a priority it was not entitled to under the policy. These terms were accepted without question by a “sophisticated commercial insured” who must have understood the effect of what it was doing. The deed of release did not depart from what the parties agreed. In those circumstances, Ball J was not prepared to accept that it would be a breach of the duty of utmost good faith for the insurer to seek to rely on the terms of the deed of release and, in particular, the provision giving priority to recovery moneys.

[14.30] Notification of the provision: s 14(3) Under s 14(3) the court shall have regard to any notification of the provision that was given to the insured, whether a notification of a kind mentioned in s 37 or otherwise. Section 37 refers to the notification of unusual terms in writing before a contract of insurance is entered into, whether by providing a copy of the unusual terms, a document containing the unusual terms or otherwise. Notification within the meaning of s 14(3) is not so limited. The rationale is that a court should be required to take account of an insurer’s efforts to bring a term of a contract to the insured’s attention in determining whether the insurer has acted in good faith in its subsequent reliance upon that term to the detriment of the insured: see Explanatory Memorandum at [37]. McClellan J (NSW Sup Ct) held that it was unlikely that any failure to draw attention to an exclusion clause in the manner contemplated by s 37, the effect of which is expressly qualified by s 71, could constitute a breach of the duty of utmost good faith under s 14: Porter v GIO Australia Ltd (2003) 12 ANZ Ins Cas 61-573; [2003] NSWSC 668. He rejected a submission by the insured that, even though he could not rely on s 37 for any failure to notify an unusual term, because he had an insurance broker acting on his behalf (s 71), the failure was nevertheless a breach of the insurer’s duty of utmost good faith under s 14. McClellan J said at 76,817–76,818 (ANZ Ins Cas): There is no question that the duty of utmost good faith is both fundamental and paramount in an insurance contract. The Act provides for it in Part II and reinforces its significance in sections 12 and 13. Section 14 mentions the 148

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obligation and no doubt the legislature had in mind the operation of exclusion clauses when enacting s 14(3). But it would be unlikely that any failure to draw attention to an exclusion clause in the manner contemplated by s 37, the effect of which is expressly qualified by s 71, could give rise to incapacity in the insurer as contemplated by s 14. The legislated scheme understandably imposes obligations on the insured’s agent to act to protect the insured, thereby relieving the insurer of burdens which the common law or statute may impose. I am satisfied that there is no aspect of the facts of the present case which mean that the natural consequences of ss 37 and 71 should not apply.

[14.40] Sections 14 and 13 Section 14(1) does not limit the operation of s 13. It appears that, in certain circumstances, the two sections may work in tandem: Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957. 14A Powers of ASIC—insurer’s failure to comply with the duty of the utmost good faith in relation to handling or settlement of claims (1) This section applies if an insurer under a contract of insurance has failed to comply with the duty of the utmost good faith in the handling or settlement of a claim or potential claim under the contract. (2) Despite any provision of Chapter 7 of the Corporations Act 2001 or any regulation made under that Chapter, ASIC may exercise its powers under Subdivision C of Division 4 of Part 7.6 of that Act or Subdivision A of Division 8 of that Part in relation to the insurer as if the insurer’s failure to comply with the duty of the utmost good faith were a failure by the insurer to comply with a financial services law. Note: Subdivision C of Division 4 of Part 7.6 of the Corporations Act 2001 deals with variation, suspension and cancellation of an Australian financial services licence, and Subdivision A of Division 8 of that Part deals with banning persons from providing financial services.

(3) In this section: financial services law has the meaning given by section 761A of the Corporations Act 2001. [S 14A insrt Act 75 of 2013, s 3 and Sch 1 item 5]

SECTION 14A COMMENTARY [14A.10] Background and synopsis Section 14A applies if an insurer has breached its duty of utmost good faith in the handling or settlement of a claim or potential claim under a contract of insurance (s 14A(1)). ASIC may exercise its powers under ©

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Subdivision C of Division 4 of Part 7.6 of the Corporations Act 2001 or Subdivision A of Division 8 of that Part in relation to the insurer as if the insurer’s failure to comply with the duty of utmost good faith were a failure by the insurer to comply with a financial services law (s 14A(2)). A financial services law is as defined in the Corporations Act 2001. The remedies available to ASIC include the issue of a banning order under s 920A of the Corporations Act 2001, the suspension or cancellation of the insurer’s financial services licence, the imposition of conditions on the licence or the acceptance of an enforceable undertaking not to act in a particular manner. Section 14A and the accompanying s 13(2) were inserted in the ICA (having commenced on 28 June 2013) in accordance with a recommendation of the Review Panel. The Review Panel recommended that a breach of the duty of utmost good faith should be a breach of the ICA, although any such breach would not be an offence and would attract no penalty. The Review Panel considered that s 13 had the potential to provide remedies for some of the issues relating to claims handling by insurers. The Review Panel noted that the possible implications of a breach of the duty of utmost good faith for the purposes of the licensing provisions of the Corporations Act 2001 required further consideration (see Final Report (June 2004), at [1.2]–[1.9]). The Review Panel however did express a view as to the type of conduct that would give rise to a risk of a banning order. To avoid any doubt about applicable remedies s 14A clarifies the powers of ASIC under the Corporations Act 2001 in respect of an insurer’s breach of the duty of utmost good faith in claims handling or the settlement of a potential claim. It is said that an example of the type of conduct leading to a permanent banning order is a pattern of persistent contraventions that indicates systemic failures or a general lack of understanding of, and regard for, compliance. Isolated breaches of the duty would not be expected to result in ASIC pursuing a banning order: Explanatory Memorandum to ICAB 2013, (at [1.14]). A breach of the ICA for failure to comply with the duty of utmost good faith is not an offence against the ICA, nor does it attract any penalty under the ICA. This amendment applies to contracts of insurance entered into or renewed after 28 June 2013 (which is the day the Insurance Contracts Amendment Act 2013 received Royal Assent). The amendment also applies to a contract of general insurance renewed after 28 June 2013 and a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

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Certain other laws not to apply

(1) A contract of insurance is not capable of being made the subject of relief under: (a) any other Act; or (b) a State Act; or (c) an Act or Ordinance of a Territory. (2) Relief to which subsection (1) applies means relief in the form of: (a) the judicial review of a contract on the ground that it is harsh, oppressive, unconscionable, unjust, unfair or inequitable; or (b) relief for insureds from the consequences in law of making a misrepresentation; but does not include relief in the form of compensatory damages. [S 15 subst Act 49 of 1994, s 3 and Sch item 5; Act 65 of 1985, s 3 and Sch 1]

SECTION 15 COMMENTARY Background and synopsis .......................................................................

[15.20]

Made the subject of relief under .............................................................

[15.25]

Under any Act ..........................................................................................

[15.30]

Application ...............................................................................................

[15.40]

[15.20] Background and synopsis Commonwealth, State or Territory legislation providing relief for harsh, oppressive, unconscionable, unjust, unfair or inequitable contracts does not apply to contracts of insurance subject to the ICA. Further, relief from the consequences of misrepresentation does not apply to contracts of insurance subject to the ICA. In light of the reaffirmation in an expanded form of the duty of utmost good faith in the ICA, a general power to review the terms of a contract of insurance is unnecessary: see Explanatory Memorandum, at [38]–[40]. The ALRC identified the undesirability of a general power of review with respect to some insurance contracts but not others, depending on the state or territorial law applicable to the contract in question. It was in conflict with the stated aim of creating a system of federal law to govern insurance contracts. It was therefore determined that it was preferable that the legislation should simply exclude the operation of relevant legislation (such as s 52A of the Trade Practices Act 1974 (Cth) (now s 18 of the Australian Consumer Law), the Contracts Review Act 1980 (NSW) and s 7 of the Misrepresentation Act 1972 (SA)) (ALRC 20 at [51] and Explanatory Memorandum, at [38]–[40]). ©

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Section 15 was repealed and substituted by Act No 49 of 1994, which commenced on 7 April 1994, to reflect the recommendations in the Government Working Party Report issued in December 1992 on consumer credit insurance. It was thought that the scope of the section and its relationship with the Trade Practices Act 1974 (now known as the Competition and Consumer Act 2010) should be clarified. Section 87(1E) of the Trade Practices Act 1974 (now known as the Competition and Consumer Act 2010) was also amended. It was considered that the amendments to s 15 would make it clear that other laws which might otherwise provide for judicial review of insurance contracts, and provisions which relieve consumers from certain consequences of making a misrepresentation, do not apply to insurance contracts. Bearing in mind the perceived problems encountered in interpreting s 15 in its previous forms, it is worth noting the comments on the amendments in the Explanatory Memorandum to ILAB (No 2) 93, as follows: 18. The phrase “in respect of harsh, oppressive, unconscionable, unjust, unfair or inequitable contracts” in s 15 could be interpreted as having a potentially wider application than was originally intended. The effect of the amendment is to require examination of the judicial review provision in the other law in order to determine whether the relief provided is directly in respect of harsh, oppressive, unconscionable, unjust, unfair or inequitable contracts. Section 15 will only come into operation when the statute providing the relief uses one or more of these words. For example, s 15 will have no effect whatsoever on whether an action is brought under s 52 or s 53 of the Trade Practices Act 1974 (now ss 18 and 29 of the Australian Consumer Law), as neither section uses one of the operative words of s 15(2)(a). Section 15 would, however, exclude the operation of s 51AB (which provides for relief in respect of unconscionable conduct) to the extent that the contract itself is the subject of the relief. In cases where it is pre-contractual conduct (rather than the contract itself) which is the subject of the action and the relief, s 15 will have no effect.

[15.25] Made the subject of relief under Drummond J (Fed Ct) was of the opinion that a contract of insurance is “made the subject of relief under” another Act within the meaning of the expression in s 15 when the action in which such relief is claimed is commenced, either by filing the originating application or by amending that application to claim such relief for the first time. He rejected a submission that the bar created by s 15(1) applies at the end of litigation when the form of the relief to be granted has to be considered: Australian Competition and Consumer Commission v IMB Group Pty Ltd (2002) 12 ANZ Ins Cas 61-545; [2002] ATPR (Digest) 46-221; [2002] FCA 402. 152

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[15.30] Under any Act Sutton, Insurance Law in Australia (3rd ed, LBC Information Services, 1999), pp 177–178 suggests that any common law (including equitable) principles of relief from unconscionable contracts or from the consequences of making a misrepresentation will continue to apply, since the section refers only to the exclusion of relief provided by legislation. The rules of the common law and equity are expressly preserved by s 7. Sutton submits that s 15 will be construed by the courts as excluding the rules of the common law by necessary intendment.

[15.40] Application Drummond J (Fed Ct) noted that the legislative intention of s 15 (both in its current and pre-1994 forms) was to make the ICA the sole source of power to grant relief in respect of harsh and unconscionable insurance contracts and to grant relief to insured persons who had made misrepresentations inducing insurers to enter into contracts of insurance that the insurers later sought to avoid because of the misrepresentation. For example, relief under s 7 of the Contracts Review Act 1980 (NSW) relating to “unjust contracts” cannot be claimed in respect of contracts of insurance by force of s 15 of the ICA. Further, no action can be brought under the Competition and Consumer Act 2010 (Cth) (formerly known as the Trade Practices Act 1974 (Cth)) for relief in respect of an unconscionable contract of insurance by virtue of s 15(1)(d) (pre-1994 form): Australian Competition and Consumer Commission v IMB Group Pty Ltd (2002) 12 ANZ Ins Cas 61-545; [2002] ATPR (Digest) 46-221; [2002] FCA 402. The Credit Act 1984 (Vic) provides for relief for unjust contracts. Such an Act cannot make a contract of insurance, to which s 15(1) ICA was held to apply, the subject of relief: Swann Insurance (Aust) Pty Ltd v Fraillon [1992] 1 VR 401; 6 ANZ Ins Cas 61-055; [1991] ASC 56–075. It should be noted that the subsequent amendments to s 15, by way of Act No 49 of 1994, would not have affected the result in this case because the insured sought a review of the contract of insurance in accordance with a legislative provision which contained the word “unjust”.

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[15.40]

ICA ss 1-20

PART III – INSURABLE INTERESTS Division 1 – General insurance 16

Insurable interest not required

(1) A contract of general insurance is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject-matter of the contract. (2) [Repealed] [Subs (2) rep Act 5 of 1995, s 4 and Sch item 44] [S 16 am Act 5 of 1995]

SECTION 16 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. The insured .............................................................................................. Application ...............................................................................................

[16.20] [16.25] [16.30] [16.40]

[16.20] Background and synopsis Prior to the ICA there was a requirement of the law of insurance that the insured have an insurable interest in the subject matter of the insurance. This requirement was said to discourage gaming and wagering and minimise the risk of destruction by the insured of the subject matter of the insurance. Certain statutes dealing with insurance required an insured to have an insurable interest either at the time the contract of insurance was arranged, or at the time a loss occurred. Further, legislation dealing generally with gaming and wagering indirectly imposed on an insured a requirement of an interest in the subject matter of the insurance at the time when the contract of insurance was arranged. The rationale being that contracts of insurance which are contracts of indemnity are predicated upon a loss. In the absence of an interest in the subject matter of the insurance there is no loss suffered if it is damaged or destroyed and the obligation to indemnify the insured does not arise. The three sources of the requirement for an insurable interest prior to the ICA were discussed by the ALRC: see ALRC 20 at [108]–[116]. The ALRC identified that the legislative requirements requiring an insurable interest were a result of a combination of imprecise drafting and ©

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s 16

Insurance Contracts Act 1984

[16.20]

historical accident (if the general gaming legislation had been passed earlier there would have been no need for the Life Assurance Act 1774 (IMP)). The ALRC noted that both the policy against wagering and the policy against unnecessary creation of a risk of destruction of the subject matter of the insurance, were both adequately protected by the indemnity principle since potential recovery is limited to actual loss. Accordingly, the ALRC was of the view that all contracts of indemnity should be excluded from the statutory requirement of insurable interest: “if a loss has been suffered, the lack of interest either at the date of the contract or at the time prior to the loss should not prevent recovery”: ALRC 20 at [117]. The ALRC determined that the Life Assurance Act 1774 (IMP) and the Marine Insurance Act 1788 (IMP) concerning the naming of the parties interested in the contract, should be repealed in their application to contracts of indemnity insurance. This repeal is made in s 3(1) of the ICA. However, the ALRC noted that there are some forms of insurance which are neither indemnity insurance nor life insurance. For instance, a personal accident policy which provides for the payment of a weekly sum in the event of the insured’s partial or total disablement. Another example is consumer credit insurance providing for weekly payments in the event of accidents, illness or unemployment. The danger of murder of the life insured is less apparent with these other forms of non-indemnity insurance. Accordingly, the ALRC determined that the retention of a strict requirement of insurable interest for these other forms of non-indemnity insurance would introduce unnecessary distinctions within the class of general insurance and would give rise to drafting difficulties. It was the ALRC’s view that adequate protection was already provided by gaming and wagering legislation and that therefore the strict requirement of insurable interest should be limited to life insurance: ALRC 20 at [149]. Section 16(2), which was repealed by the Life Insurance (Consequential Amendments and Repeals) Act 1995, reflected that determination by the ALRC. The Life Insurance Act 1995 and the Life Insurance (Consequential Amendments and Repeals) Act 1995 marked a change in that approach with an abandonment of the strict requirement of insurable interest in relation to life insurance. Prior to the ICA, if the insured did not hold an insurable interest then, generally, the contract of insurance was void. It is notable that s 16(1) addresses the question of an absence of interest in the subject matter of the contract of insurance at the time that it was entered into. It says that a contract of insurance is not void by reference to the time at which the contract of insurance was entered into. Section 17 deals with the question of interest at the time of any loss. Therefore, to cover the field, ss 16 and 17 must be read together. 156

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s 16 ICA ss 1-20

[16.30]

[16.25] Contract of general insurance See s 11(6).

[16.30] The insured The insured and other persons

Both ss 16 and 17 alter the law of insurable interest for the insured under a contract of general insurance. However, contracts of general insurance may, in certain circumstances, benefit persons who are not a party to the contract of insurance. This entitlement of a person other than an insured can arise under s 48 of the ICA or according to the authority of the High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873. Such a person is not one of “the insured” for the purposes of ss 16 and 17. Brownie J in a case before the NSW Supreme Court noted that a person covered by a contract of insurance, who is not one of “the insured” for the purposes of ss 16 and 17, would not otherwise be prevented from relying upon the contract of insurance. He further noted that once it was determined that a contract of insurance would be subject to the ICA by virtue of s 8, the Life Assurance Act 1774 (IMP) (now repealed), would have no application. This being the case, there was no rule of law in common law or statute which prevented the company in question, which it was assumed held a floating charge over stock, from relying upon the contract for the insurance of that stock: Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170; 7 ANZ Ins Cas 61-103. The insured and property owned by others

The insured may be required, either by agreement or under legislation, to effect a contract of insurance which covers property owned by others, either in addition to the insured’s property or on a stand-alone basis. If the insured chooses to do so by way of agreement, the insured would usually seek to rely upon the terms of the agreement and ss 16 and 17 to satisfy the insurer that it has an insurable interest in the subject-matter of the contract of insurance. For instance, the insured may seek to rely on the terms of the agreement to establish a pecuniary or economic loss within s 17 by reason of damage to insured property owned by another. If the requirement to insure property owned by another is a statutory requirement, then the relevant legislation may provide that the insured is to be taken to have an insurable interest in the subject-matter of the contract of insurance that the insured is required to enter into. An example of this is the legislative requirement for an owners’ corporation to effect insurance to cover both common property and fixtures within a lot, the latter of which is not owned by the owners’ corporation. ©

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s 17

Insurance Contracts Act 1984

[16.30]

Campbell J (NSW Sup Ct) noted that notwithstanding ss 16 and 17, the concept of insurable interest retains some application in Le v Williams [2005] NSW ConvR 56-109; [2004] NSWSC 645 (30 July 2004). He considered the requirement that an owners’ corporation insure fixtures owned by others and noted that a legislative provision which treated the insured as having an insurable interest in that property was to remove any scope for argument. He said (at [63]): Even though sections 16 and 17 Insurance Contracts Act 1984 (Cth) modify considerably the previous law about the extent to which a person taking out a policy of (relevantly) fire insurance must have an insurable interest in the property insured, the concept of insurable interest retains some application. One of the tasks of section 90 Strata Schemes Management Act 1996 is to remove any scope for argument that, to the extent to which an owners’ corporation took out insurance which covered owners’ fixtures which formed part of the building, the insurance was invalid on the ground of lack of insurable interest.

[16.40] Application Both ss 16 and 17 were considered by Hill J of the Federal Court in Howard v Australian Jet Charter Pty Ltd (1991) 6 ANZ Ins Cas 61-054 as part of an application to strike out proceedings. It was alleged by the insurer that the rights and interests of Australian Jet Charter Pty Ltd left it with no interest in the section of the contract of insurance which covered the relevant loss. In noting ss 16 and 17, Hill J was unable to resolve the question that arose without further evidence in the context of strike out proceedings. 17

Legal or equitable interest not required at time of loss Where the insured under a contract of general insurance has suffered a pecuniary or economic loss by reason that property the subject-matter of the contract has been damaged or destroyed, the insurer is not relieved of liability under the contract by reason only that, at the time of the loss, the insured did not have an interest at law or in equity in the property.

SECTION 17 COMMENTARY Background and synopsis .......................................................................

[17.10]

Contract of general insurance .................................................................

[17.15]

Pecuniary or economic loss ....................................................................

[17.20]

The insured ..............................................................................................

[17.30]

Sections 17 and 48 .................................................................................

[17.40]

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s 17

[17.10] Background and synopsis The ALRC recommended the abandonment of the strict proprietary test requiring an interest at law or in equity in the subject matter of the contract of insurance in favour of a test based on the more flexible concept of economic loss. It was anticipated that this would allow a greater degree of flexibility to insurers and insured without promoting gaming and wagering in the form of insurance or adding to the risk of the destruction of insured property. The ALRC stated (ALRC 20, at [120]): Legislation should provide that, where an insured is economically disadvantaged by damage to or destruction of the insured property, the insurer should not be relieved of liability by reason only that the insured did not have a legal or equitable interest in the property.

“Economically disadvantaged” is expressed in s 17 as the insured having suffered a “pecuniary or economic loss”. Guidance as to the application of s 17 is provided in the Notes to the Draft Insurance Contracts Bill 1982 by way of the following example: A is employed in his father’s business which is left to him under his father’s will. The father refuses to insure the property of the business, so A insures it in his own name. The property is destroyed by fire before the father dies. Under the existing law, A would be prevented from recovering anything under the contract because he had no legal or equitable interest in the property. [Section 17] allows him to recover the amount of his economic loss (up to the limit of the insurer’s liability under the contract) as a result of the destruction of the property.

The prospective inheritance in the example demonstrates the width of the term “has suffered a pecuniary or economic loss”.

[17.15] Contract of general insurance See s 11(6).

[17.20] Pecuniary or economic loss The width of the term “pecuniary or economic loss” has yet to be fully determined. For instance, would a guarantor/insured suffer a pecuniary or economic loss by reason of the destruction of property which is the security under a finance agreement? Is it sufficient that the insured suffer a pecuniary or economic loss by reason of the destruction of a minor part of insured property? (For instance a steering wheel cover in a motor vehicle which has been destroyed by fire.) In Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1988) 12 NSWLR 250; 93 FLR 164; 5 ANZ Ins Cas 60-850 at 255 (NSWLR) 75,315 (ANZ Ins Cas) his Honour Samuels JA (NSW Sup Ct CA) stated: ©

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ICA ss 1-20

[17.20]

s 18

Insurance Contracts Act 1984

[17.20]

In the light of s 17, it is now strongly arguable that a test of the kind adopted by the Insurance Law of New York, s 158, which defines insurance interest as including “any lawful and substantial economic interest in the safety or preservation of property from loss, destruction or pecuniary damage” is applicable in New South Wales.

It should be noted, however, that although the ALRC referred to the test adopted by the Insurance Law of New York in the test expressed in s 17, the pecuniary or economic loss does not have to be “substantial”.

[17.30] The insured Section 17 applies in tandem with s 16 and is similarly expressed to apply to the insured under a contract of general insurance. Therefore, it has no application to a person seeking the benefit of a contract of insurance who is not a party to it. See, [16.30] and [16.40].

[17.40] Sections 17 and 48 There is a question as to whether the benefit of s 48 in providing a person who is not a party to a contract of general insurance with a right of recovery if that person is appropriately specified or referred to in the contract, applies to a person who has to rely upon the benefit of s 17 to overcome the absence of an insurable interest. Whilst it was unnecessary for him to decide the question, Teague J (Vic Sup Ct) noted that ss 17 and 48 form part of a remedial statute and therefore, in the absence of specific provisions excluding joint operation, he would not give those sections limited operation. It seemed to him that the occasions where the two issues would arise together would be rare and that therefore the possibility that unfairness to the insurer would result must be extremely remote: Pacific Dunlop Ltd v Maxitherm Boilers Pty Ltd (1996) 9 ANZ Ins Cas 61-357.

Division 2 – Other contracts of insurance [Div 2 subst Act 5 of 1995, s 4 and Sch item 45]

18

Insurable interest not required (1) This section applies to: (a) a contract of life insurance; or (b) a contract that provides for the payment of money on the death of a person by sickness or accident.

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s 18

(2) A contract to which this section applies is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject-matter of the contract. [S 18 subst Act 5 of 1995, s 4 and Sch item 45]

SECTION 18 COMMENTARY Background and synopsis ....................................................................... Contract of life insurance ........................................................................

[18.20] [18.30]

[18.20] Background and synopsis The ALRC pointed out that retention of an insurable interest avoids an increase in the risk of hoped-for gain from a life policy forming the motive for murder: ALRC 20, at [145] and [146]. A majority of the ALRC members recommended retention of the requirement of an insurable interest in the life insured at the time when the contract is made. This recommendation extended to life cover provided by a general insurer in the form of personal accident insurance. Accordingly, under s 18 prior to the Life Insurance Act 1995 which commenced on 1 July 1995 an insured was required, at the time of entering into the contract, to have an insurable interest in each of the lives insured in a contract of life insurance or a contract that provided for the payment of money on the death of a person by sickness or accident. If the insured did not have such an interest the contract was void. Since 1 July 1995, this strict requirement of an insurable interest no longer applies by virtue of s 18 as inserted in the ICA by the Life Insurance (Consequential Amendments and Repeals) Act 1995 (Act No 5 of 1995). Section 18 now provides that a contract of life insurance or a contract that provides for the payment of money on the death of a person by sickness or accident is not void by reason only that the insured did not have, at the time when the contract was entered into, an interest in the subject matter of the contract. The abandonment of the strict legislative requirement for an insurable interest though means a greater emphasis on insurable interest as an underwriting requirement.

[18.30] Contract of life insurance See s 11(1). See also [11.30].

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[18.30]

s 19

19

Insurance Contracts Act 1984

[19.20]

Insurable interests [Repealed]

[S 19 rep Act 5 of 1995, s 4 and Sch item 45]

SECTION 19 COMMENTARY [19.20] Background and synopsis Prior to 1 July 1995, s 19 provided that a person had an insurable interest in: (a) her or his own life; (b) the life of her or his spouse; (c) the life of her or his child under the age of 18 years; and (d) the life of a person under the age of 18 years of whom he or she is a guardian. Section 19 also provided that wherever a pecuniary or economic loss was likely on the death of a person, an insurable interest existed. Examples of such interest were set out in the repealed s 19(4). Since 1 July 1995, with the amendment to s 18 and the omission of s 19, there has been no strict requirement for an insurable interest in relation to a contract of life insurance or a contract providing for the payment of money on the death of a person by sickness or accident. However, the categories of insurable interest in the life of another will remain important for underwriting purposes.

Division 3 – Naming of persons benefited 20

Persons benefited need not be named An insurer under a contract of insurance 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.

SECTION 20 COMMENTARY Persons benefited need not be named – synopsis ................................

[20.10]

Policy document ......................................................................................

[20.20]

Application ...............................................................................................

[20.30]

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s 20 ICA ss 1-20

[20.30]

[20.10] Persons benefited need not be named – synopsis Section 20 removes the necessity that the interested persons’ names must be inserted in the policy. Every person who properly falls within a policy’s description of the persons entitled to indemnity is entitled to make a claim for loss covered by the policy. The fact that a person is not named in a policy, whether as a beneficiary or as a principal, is irrelevant: ALRC 20 at [117], [147] and [149].

[20.20] Policy document See s 11(1).

[20.30] Application An insurer is not relieved of liability by reason only of a lack of specification. An inquiry into the lack of specification may lead to a rectification of a contract of insurance. Any person noted as having the benefit of cover under a contract of insurance may bring a claim in accordance with s 48 of the ICA. Brownie J (NSW Sup Ct) noted in Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170; 7 ANZ Ins Cas 61-103 that the necessity to disclose the interest of a financier to the insurer did not mean that there was any need for the insurer to “record” that disclosure in the Certificate of Insurance. This was particularly having regard to the enactment of ss 3 and 20 of the ICA. The financier was entitled to the benefit of s 48. Teague J (Vic Sup Ct) noted in Pacific Dunlop Ltd v Maxitherm Boilers Pty Ltd (1996) 9 ANZ Ins Cas 61-357 that a distinction had been drawn in several cases concerning composite cover between a situation where a non-party insured is expressly named and where there is no naming but a class is nominated for cover. He said that the distinction was not of any moment in view of s 20. McMillan J (Vic Sup Ct) found in You v Thomas [2014] VSC 255 (2 June 2014) that s 93(1)(a) of the Building Act 1993 (Vic) requires, inter alia, that an adjoining owner be insured under a contract of insurance and that because of s 20 of the ICA, the adjoining owner need not be named in the contract of insurance in order to be covered by it. The adjoining owners were named in a certificate of currency and there was a question as to whether the certificate formed part of the contract of insurance. HH said that leaving aside this question, because of the effect of s 20, it followed ©

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s 20

Insurance Contracts Act 1984

[20.30]

that a finding that the adjoining owners were not named in the policy could not form the basis of a conclusion that the policy did not comply with s 93 of the Building Act.

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ICA ss 21-33D

PART IV – DISCLOSURES AND MISREPRESENTATIONS Division 1 – Insured’s duty of disclosure [Div 1 heading subst Act 41 of 2012, s 3 and Sch 2 item 3]

21

The insured’s duty of disclosure

(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 (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind. [Subs (1) am Act 75 of 2013, s 3 and Sch 4 item 1]

(2) The duty of disclosure does not require the disclosure of a matter: (a) that diminishes the risk; (b) that is of common knowledge; (c) that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or (d) as to which compliance with the duty of disclosure is waived by the insurer. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 5]

(3) Where a person: (a) failed to answer; or (b) gave an obviously incomplete or irrelevant answer to; a question included 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. [S 21 am Act 75 of 2013; Act 107 of 1997]

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s 21

Insurance Contracts Act 1984

Pre ICAA 2013 Amendment (pre 28 December 2015) 21

The insured’s duty of disclosure

(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. (2) The duty of disclosure does not require the disclosure of a matter: (a) that diminishes the risk; (b) that is of common knowledge; (c) that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or (d) as to which compliance with the duty of disclosure is waived by the insurer. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 5]

(3) Where a person: (a) failed to answer; or (b) gave an obviously incomplete or irrelevant answer to; a question included 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. [S 21 am Act 107 of 1997]

SECTION 21 COMMENTARY Code ........................................................................................................ Background and synopsis ....................................................................... An insured/the insured ............................................................................ An insured/a person noted: s 21(1) ........................................................ Before the relevant contract of insurance is entered into: s 21(1) ......... Matter – Known to the insured: s 21(1) .................................................. The insured knows…relevant to…insurer: s 21(1)(a) ............................. Relevant to the decision of the insurer whether to accept the risk: s 21(1)(a) ............................................................................................ A reasonable person in the circumstances: s 21(1)(b) ........................... Could be expected to know to be a matter so relevant: s 21(1)(b) ........

[21.10] [21.10.1] [21.10.2] [21.10.3] [21.10.4] [21.10.5] [21.10.6] [21.10.7] [21.10.8] [21.10.9]

The disclosure of certain matters is not required Common knowledge: s 21(2)(b) .............................................................. The insurer knows or ought to know: s 21(2)(c) ..................................... As to which compliance … is waived: s 21(2)(d) .................................... Background and generally: s 21(3) ......................................................... 166

[21.20.1] [21.20.2] [21.20.3] [21.30.1]

Mann’s Annotated Insurance Contracts Act

[21.10.1]

Pt IV – Div 1 – Insured’s duty of disclosure

Failed to answer – Obviously incomplete: s 21(3)(a) and (b) ................ A question included in a “proposal form”: s 21(3) ................................... Onus of proof ...........................................................................................

s 21 [21.30.2] [21.30.3] [21.40]

Part 4 of the ICA is a statutory code which replaces the common law. The High Court (majority judgment of Mason CJ, Dawson, Toohey and Gaudron JJ) in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 at 615 (CLR), 75,836 (ANZ Ins Cas) stated: The evident intention of the legislature is to replace the antecedent common law regulating non-disclosure, misrepresentations and incorrect statements by insured persons before entry into a contract with the provisions of Pt 4. To that extent Pt 4 is a statutory code which replaces the common law. Accordingly, the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the statute are extremely limited: see Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Aust Pty Ltd (1987) 163 CLR 236 at 243–244. However, in the light of our view as to the meaning of the relevant provisions of the statute, we do not find it necessary to resort to the common law or to explore the bases on which it may be permissible to engage in that exercise.

[21.10.1] Background and synopsis The ALRC recommended that the duty of disclosure be retained in a modified form. It recommended a modified test of materiality. The ALRC envisaged that regard would be had to the insured’s position in life, mental condition and ability, education, literacy, knowledge, experience and cultural background. However, this recommendation was not accepted by Parliament. Section 22(1)(b) of the original Bill which specified “a person in the circumstances of the insured” became “a reasonable person in the circumstances”. Section 21 deals with the duty of disclosure in two parts. Section 21(1) deals with the matters to be disclosed by an insured. Section 21(2) deals with those matters that an insured is not required to disclose. According to s 21(3), an insurer is deemed to have waived compliance with the duty of disclosure where a person either fails to answer or gives an obviously incomplete or irrelevant answer to a question in a proposal form. The effect of ss 21(3) and 27 is to require insurers to follow up missing or obviously incomplete or irrelevant answers to questions in proposal forms: ALRC 20 at [161]–[165]. Non-exclusive factors: s 21(1)(b) (Post 28 December 2015)

Section 21(1)(b) was amended in 2013 (commenced on 28 December 2015) to include two non-exclusive factors which a court may have regard ©

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[21.10] Code

s 21

Insurance Contracts Act 1984

[21.10.1]

to in determining whether a reasonable person in the circumstances could be expected to know a matter was relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. The Review Panel commissioned by the Australian Government in 2003 to review the ICA was of the view that non-exclusive factors could be used to interpret s 21 in difficult cases (see Final Report (June 2004), at [4.15]–[4.21]). Two of the three non-exclusive factors recommended by the Review Panel were adopted. The amendment to include non-exclusive factors applies to a contract of insurance originally entered into after 28 December 2015 (which is 30 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The amendment also applies to a contract of general insurance renewed after 28 December 2015 and a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[21.10.2] An insured/the insured The ICA does not specifically address the problems which arise when the contract of insurance is proposed by more than one insured. With more than one proponent for insurance, the question arises as to whether s 21 imposes a duty to disclose on each person who becomes insured or imposes a joint duty to disclose. The High Court in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 resolved this question and found that s 21 imposes a duty on each person and that therefore “an insured” and “the insured” in s 21 is to be read as a reference to each co-insured. The various judgments in Advance are very important and have been the subject of a great deal of commentary. It is worthwhile noting some of the facts and the history of the proceedings. Mr and Mrs Matthews submitted a proposal form seeking household insurance. In response to the question “have you ever had any … claim rejected?” Mr and Mrs Matthews answered no. They also answered a further question asking whether there were any other facts which should be disclosed in the negative. Mr Matthews failed to disclose an earlier claim for loss arising from a fire suffered by a business in which he had been a partner. He had made a claim on another insurer which had been rejected. Advance rejected a theft claim by Mr and Mrs Matthews on the basis of the non-disclosure and misrepresentations. At first instance Young J found that the non-disclosure was of a matter that “a reasonable person in the circumstances could be expected to know to be a matter so relevant” within s 21(1)(b). 168

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[21.10.2]

Pt IV – Div 1 – Insured’s duty of disclosure

s 21

On appeal to the NSW Court of Appeal the majority (McHugh and Hope JJA) held that as Mr and Mrs Matthews had insured their joint and several interests under a composite policy each was “an insured” for the purposes of s 21. In dismissing the appeal, the majority held that the knowledge of all insureds is required before there is a duty to disclose and in the case of joint insurance, “the insured” must mean both of the joint insured. In a well-reasoned dissenting judgment, Samuels JA held that “the insured” in s 21(1) means, in every case, “each insured”: Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1988) 12 NSWLR 250; 93 FLR 164; 5 ANZ Ins Cas 60-850. The majority of the High Court was in agreement with Samuels JA of the Court of Appeal. In a joint judgment Mason CJ, Dawson, Toohey and Gaudron JJ stated in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 at 616 (CLR), 75,837 (ANZ Ins Cas): As Samuels JA noted in the Court of Appeal, the insurer has an interest in the individual history and claims record of each person who seeks insurance with the insurer. It would not harmonise with this context or with the existence of the duty of utmost good faith imposed by ss 13 and 14 to read s 21 as creating only a joint duty to disclose, that is, a duty to disclose limited to the joint acts and omissions of the co-insured.

Accordingly, the High Court read the questions in the proposal form as directed to each of the insured. The majority was of the view that there was a duty to disclose the rejection of the earlier claim to which Mr Matthews was a party and there was a relevant non-disclosure. In a dissenting judgment (although agreeing with the outcome of the appeal) Deane J held that a reference to an insured in s 21 must be read as a collective reference to the people who constitute the insured under a contract of insurance. Therefore the duty of disclosure on Mr and Mrs Matthews was a joint one. The phrase “known to the insured” means, in the case of a joint policy of insurance, within the collective knowledge of the joint insured or known to at least one of them. In summary, pursuant to s 21 each insured has a duty to disclose those matters required for disclosure. If one of a number of co-insured fails to disclose a relevant matter then this will be a breach of the duty of disclosure under s 21. ©

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Young J held that the question in the proposal form referred only to the rejection of a claim made jointly by Mr Matthews and Mrs Matthews. He found therefore that the answer to the questions in the proposal form had not been false and that there had been no misrepresentation: see Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813.

s 21

Insurance Contracts Act 1984

[21.10.2]

[21.10.3] An insured/a person noted: s 21(1) Section 21 imposes a duty of disclosure on parties to a contract of insurance. Persons specified or referred to in a contract of insurance as having the benefit of insurance cover have the right to recover the amount of any loss under s 48 ICA and are not subject to the disclosure requirements of s 21. Therefore, insofar as the directors of a company specified in a directors and officers liability insurance policy were non-parties, it was conceded that the duty of disclosure under s 21 had no application to them. It was noted that the ICA uses the term “insured” only in relation to contracting parties and not those who may benefit under a contract of insurance: Carden v CE Heath Casualty & General Insurance Ltd (1992) 7 ANZ Ins Cas 61-147 per Rogers CJ (NSW Sup Ct). On appeal to the New South Wales Court of Appeal, Clarke JA (with whom Meagher JA agreed) noted that where s 21 speaks of the duty of an insured to disclose the matter set out in s 21(1), it is referring to the party who proposes to enter into a contract of insurance in the context of those provisions in the ICA which spell out the consequences of the failure by a person who has entered into the contract to comply with that duty: CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. Clarke JA stated (at 46 (NSWLR); 78,283 (ANZ Ins Cas)): Accordingly where s 21 speaks of the duty of an insured to disclose the matters set out in s 21(1) it is talking about the party who proposes to enter into a contract of insurance in the context of those provisions in the Act which spell out the consequences of the failure by a person who has entered into the contract to comply with that duty. A similar approach is taken in those sections which deal with misrepresentation. The remedies offered to an insurer where the insured fails to comply with the duty of disclosure, or makes a misrepresentation before entering into the contract, are contained in s 28. Broadly, if the failure was fraudulent or the misrepresentation was made fraudulently the insurer may avoid the contract, that is, avoid it from its inception (s 28(2); s 11(1)). If the failure or misrepresentation was not fraudulent there is no right to avoid the contract but the liability of the insurer may be reduced under s 28(3). Further, s 31 empowers the court in the circumstances set out there to disregard the avoidance but only in “proceedings by the insured”, and s 33 provides that Div 3 of Pt IV (ss 28–33) is, in effect, a code. What is clear from these provisions is that the obligation to disclose, and not to make misrepresentations, is cast upon a person intending to enter into a contract of insurance and the consequences of non-compliance are visited only upon persons who actually enter into such a contract. What is of greater importance is the fact that there is no obligation to disclose, or not misrepresent, before a contract is entered into, imposed upon a person entitled 170

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Mahoney JA similarly noted the concession by the parties that s 21 does not impose a duty of disclosure on a non-party. Although the decision did not turn on the point, he expressed an opinion that in some circumstances non-parties are under a duty of disclosure. He said (at 36 (NSWLR); 78,276 (ANZ Ins Cas)): In my opinion, third persons who are to take benefit under a contract of insurance but are not parties to the contract under the general law may, in some circumstances, be under a duty of disclosure in respect of the contract of insurance breach of which may entitle the insurer to avoid the contract. In my opinion, a third person involved in a transaction of insurance may be bound by the principle of uberrimae fidae (utmost good faith) and, to the extent he is, may be under a duty to disclose facts affecting the insurance; however, the extent of the duty imposed on the third person will depend on the circumstances of his involvement.

This opinion of Mahoney JA in Grey appears to be slanted towards the common law where there is a connection between the duty of utmost good faith and pre-contractual disclosure. To the extent that it concerns the ICA, it is against the weight of authority. It should also be noted that under s 13(4), the duty of utmost good faith applies to a third party beneficiary only after a contract of insurance is entered into. The Full Ct of the Fed Ct (Jacobson, Gilmour and Gordon JJ) agreed with the general observations of Clarke JA in Grey and concluded that s 21 concerns the party who proposes to enter into the contract and not a s 48 claimant: ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65. Their Honours considered the use of the word “insured” rather than “party to the contract of insurance” in s 21 and the distinction to be drawn with a third party beneficiary who is a person to whom the benefit of insurance cover extends. The Full Court said (at [1634]–[1636]): Whilst obiter, we, nonetheless, respectfully agree with the general observations of Clarke JA in Grey at 45–46 that the ICA in using the words “insurer” and “insured” is speaking to the parties to the contract and that there is a clear dichotomy between a party and a person who is not a party but who is entitled to benefit under the policy. That said, it needs to be borne in mind that “insured” and “insurer” includes, by definition a “proposed insured” and a “proposed insurer”. Thus, “insured” under s 21, which provides for the pre-contractual duty of disclosure, has the extended meaning of “proposed insured”. The “insured” in s 48 is the insured who is the party to the contract. This dichotomy is particularly evident when s 48 of the ICA is considered, where the distinction is drawn between, on the one hand, a “person who is not a party to a contract” who is, relevantly, named as a person to whom the insurance cover provided by the contract extends and, on the other hand, the “insured”. ©

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to recover the amount of a loss pursuant to s 48(1). Nothing in s 28 provides that anything he or she does, or fails to do, before the contract is concluded in any way disentitles him or her from successfully maintaining a claim.

s 21

Insurance Contracts Act 1984

[21.10.3]

We do not think that the use of the word “insured” in s 21 of the ICA rather than “party to the contract of insurance” affects this conclusion. This is so because when the duty of disclosure under s 21 arises and endures there are no parties to a contract of insurance. No such contract has been entered into. In s 21 “the insured” having the duty of disclosure “before the relevant contract of insurance is entered into” means, as defined, the “proposed insured” who is proposing to enter into a contract of insurance with the insurer, meaning, as defined, the “proposed insurer”.

It didn’t matter that the third party beneficiary was defined in the contract of insurance as one of the “insured”. The Full Court was concerned with the meaning of “the insured” under s 21 and a third party beneficiary didn’t fit the description. The Full Court said (at [1638]): We are concerned with the meaning of “insured” on the proper construction of the ICA, not the Insurance Contract.

[21.10.4] Before the relevant contract of insurance is entered into: s 21(1) The insured has a duty to disclose relevant matters before a contract of insurance is entered into. The date upon which a contract of insurance is entered into may be sometime after the date upon which a proposal for insurance is completed. Notwithstanding the completion of a proposal, the duty to disclose exists up to the time that the contract of insurance is entered into. This is regardless of the fact that the contract of insurance may specify the period of insurance as commencing on an earlier date. In a case before the Victorian Supreme Court, an insured submitted a proposal form which specified the period of insurance as 6 April 1989 to 6 April 1990. The proposal form was signed by a director of the insured on 2 June 1989. After the proposal was signed, but before the contract of insurance was entered into on 29 June 1989, the insured, through the director, became aware of a matter relevant for disclosure. It was held that there had been a failure to comply with the duty of disclosure: Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028 per Tadgell J (Vic Sup Ct). Section 11(9) specifies that the entering into of a contract of insurance other than life insurance includes a reference to renewal, extension or variation of the contract. In the case of life insurance, it includes a reference to the extension or variation of the contract. In the case of both, it includes a reference to the reinstatement of any previous contract of insurance. Therefore, the exercise of a Take Up Option, whereby the insured was offered the opportunity to obtain additional life cover, was held to be the entry into a contract of life insurance in accordance with s 11(9): Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445; per Debelle J (SA Sup Ct). 172

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In Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22 the High Court in a joint judgment (Mason CJ, Deane, Dawson, Toohey and McHugh JJ) noted that the ALRC did not express any intention to depart from the common law position where the duty to disclose arose not only on entry into the original contract but also on each renewal: ALRC 20 at [153]. The High Court held that the Full Court of the Supreme Court of South Australia was wrong in disregarding the clear terms of s 11(9). See also, [28.10.2] and [54.10.9]. It is the actual disclosure before the contract of insurance is entered into which is relevant. Nathan J (Vic Sup Ct) held that there had not been a failure to disclose in circumstances where the insured had been prepared to act disreputably and in a way which would have compromised the risk of the insurer, but resiled from that conduct and made disclosure to the insurer through a broker prior to the issue of the policy: GIO Insurance Ltd v Nader (unreported, Vic Sup Ct, Nathan J, 7 April 1994). The duty of disclosure is not qualified in terms of the insured not being required to disclose matters that the insured did not have a “reasonable opportunity” to disclose before the contract of insurance was entered into. Doyle CJ (SA Sup Ct) said that if the duty of disclosure under s 21 was to be qualified in this manner he would have expected the qualification to appear in s 21(2): Summerton v SGIC Life Ltd (1999) 10 ANZ Ins Cas 90-102; [1999] SASC 121.

[21.10.5] Matter – Known to the insured: s 21(1) Matter that is known to the insured

For there to be a duty of disclosure a matter must be known to the insured. Knowledge of a particular matter can be thought of as the primary aspect of knowledge in s 21(1) and a gateway to s 21. The primary aspect of knowledge, in the sense that if an insurer proves that a particular matter is known to the insured, it must also prove that either that the insured knows to be a matter relevant to the insurer in accordance with s 21(1)(a) (being another aspect of knowledge), or a reasonable person in the circumstances could be expected to know of the relevance to the insurer (s 21(1)(b)). A gateway in the sense that a determination of other matters in s 21 would be unnecessary if a matter allegedly not disclosed was not known to the insured. The application of s 21(1)(a) or 21(1)(b) both proceed on the basis that that there is a matter that is known to the insured. In other words, if a matter that was allegedly not disclosed to an insurer was not known by the insured, then there can be no breach of the duty of ©

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[21.10.5]

s 21

Insurance Contracts Act 1984

[21.10.5]

disclosure under s 21. It doesn’t matter that a reasonable person in the circumstances could be expected to know that the matter was relevant to the insurer under s 21(1)(b). The dependence of the matters in s 21(1)(a) or 21(1)(b) on the existence of a matter known by the insured, has been judicially described in different ways. Rolfe J stated in Thompson v Government Insurance Offıce of New South Wales (unreported, NSW Sup Ct, Rolfe J, 15 June 1994) at 63–64: The duty of disclosure extends to every matter specified in subs (a) and (b) provided it is a matter known to the insured. To fall within subs (a) the matter must be that which the insured knows to be a matter to the decision of the insurer. … However a different test is propounded in subs (b). One moves from actual knowledge, save that the matter must still be known to the insured, to a deemed knowledge of the insured, as a reasonable person in the circumstances.

Tadgell J (Vic Sup Ct) stated by way of explanation in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028 at 76,877: …one is concerned only with the existence of matters that were known to the insured before the contract of insurance was entered into, and not with matters of which he ought to have known. Those matters alone are to be disclosed that, being known to the insured at the relevant time, fall within para (a) or para (b) of s 21(1).

The Full Ct of the Fed Ct (Jacobson, Gilmour and Gordon JJ) stated in ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65 (at [1685]–[1686]): …the inquiry is not whether a reasonable person could be expected to know the “matter” even if the insured did not in fact know the matter. Rather, it is that when a matter is known to the insured, could a reasonable person, in the circumstances, be expected to know that the matter is relevant to the risk decision of the insurer? Thus, breach of s 21 is to be judged against the insured’s knowledge of the matter and either their knowledge of its relevance to the decision of the insurer or against the knowledge of that relevance being imputed, employing the objective test of what in the circumstances a reasonable person could be expected to know. The latter deals with a situation where the insured’s appreciation of the relevance of a known matter is not reasonable. In other words, applying this construction, s 21 is not breached by a failure to disclose a matter which is not actually known by the insured. “Known” as opposed to suspicion or belief

Hodgson CJ in Eq (NSW Sup Ct) examined questions of knowledge and belief in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529; 10 ANZ Ins Cas 61-408. His formulation was 174

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In my opinion, “known” in s 21(1) means more than suspected or believed. What is required is that the matter should be the subject of a true belief, held with sufficient assurance to justify the term “known”. However, it must be remembered that a belief may sometimes itself be a matter relevant to the decision of an insurer. An insured may know that it has a particular belief, and know that its having that belief is relevant to the decision of an insurer, in which case that belief itself is a matter which must be disclosed. It is possible that the belief of the insured in Khoury v GIO (NSW) (1984) 165 CLR 622; 54 ALR 639 that his sons were systematically stealing from the business was a matter known to be relevant to the decision of the insurer, in which case that case could be decided under the Insurance Contracts Act in the same way as it was at general law.

The NSW Court of Appeal in Permanent Trustee noted that the belief held by the insurance brokers on behalf of the insured was akin to “Nelsonian knowledge” because they deliberately withheld disclosure that would have given them firsthand knowledge. This belief in the likely attitude of the insurer was held with sufficient assurance for both of them to conduct themselves in the business transaction as if it were true. In these circumstances belief became “knowledge” for the purposes of s 21. Handley JA, with whom Meagher and Powell JJA agreed, said (at 690 (NSWLR); 75,676 (ANZ Ins Cas)): When a person, on the basis of some information, holds a belief on which that person is prepared to act in the world of practical affairs, he or she knows that fact for most legal purposes, and certainly for the purposes of s 21.

The words of Hodgson CJ in Eq in Permanent Trustee were adopted and applied by the Qld Court of Appeal (Shepherdson J with whom McMurdo P and Thomas JA agreed) in Australian Casualty & Life Ltd v Hall (1999) 151 FLR 360. The High Court majority (McHugh, Kirby and Callinan JJ) in their joint judgment in Permanent Trustee emphatically stated that “knows” means considerably more than “believes” or “suspects”: Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; 77 ALJR 1070; 12 ANZ Ins Cas 61-565; [2003] HCA 25. They stated (at 76,649 (ANZ Ins Cas)): The word “knows” is a strong word. It means considerably more than “believes” or “suspects” or even “strongly suspects”. And the matter, to answer the description that par[a] (a) of the subsection states, must be a matter that is not only “relevant to the decision of the insurer whether to accept the risk, and if so, on what terms”, but also one that the insured knows to be such a matter. ©

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approved both on appeal by the NSW Court of Appeal (Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679; 160 FLR 435; 11 ANZ Ins Cas 61-491; [2001] NSWCA 20) and again in GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299. He said (at 582–583 (ALR); 74,525 (ANZ Ins Cas)):

s 21

Insurance Contracts Act 1984

[21.10.5]

Gummow and Hayne JJ in dissent in Permanent Trustee thought it unnecessary to attempt some general definition of what is meant by the word “know” when it is used in the ICA. They said (at 76,658): Attempting to define the boundary between “belief” and “knowledge”, except by reference to the facts of a particular case, is fraught with difficulty. The substitution of one set of value laden words for the word “know” (like “informed belief … suffıcient … to induce any reasonable man” (Coastal Estates Pty Ltd v Melevende [1965] VR 433 at 451) to adopt a course of action, or holding “a belief on which that person is prepared to act in the world of practical affairs” [referring to the NSW Court of Appeal judgment in the case] ) may do little more than restate the problem which the section presents. Known by inference

“Known to the insured” does not mean knowledge of a matter which is not relevant from which the insured should reasonably infer another matter which is relevant. The Queensland Court of Appeal rejected this construction of knowledge of a relevant matter by inference in CIC Insurance Ltd v Midaz Pty Ltd (1998) 10 ANZ Ins Cas 61-394; [1998] QCA 21. The Court found that the insured knew that its tenant had stored liquids relating to a nail polish business. It was argued that the insured should have appreciated that the stored liquids were inflammable and that this should have been disclosed. In rejecting an argument that the storage of inflammable liquids was known to the insured, Pincus JA (with whom Moynihan and Byrne JJ agreed) said (at 74,186 (ANZ Ins Cas)): Acceptance of that argument must depend on adoption of a construction of s 21(1) which is rather generous to insurers: that the section means that if an insured knows matter A which is not in itself relevant to insurance, but the insured should reasonably infer from matter A a further matter B which is so relevant, then the duty to disclose matters A and B arises. This construction is in practical terms little different from reading the introductory part of s 21(1) as if it included the expression “… every matter that is known to or should be inferred by the insured”. I have found no authority which supports such a reading, nor does it appear to be one which must be adopted to give s 21(1) a sensible operation. Actually known

Whilst “known to the insured” is sometimes denoted as “actually known” it would be wrong to import the word “actually” into s 21. In Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; (2000) 11 ANZ Ins Cas 61-458; [1999] NSWCA 422 Davies AJA (NSW Supt Ct CA) (with whom Meagher JA and Foster AJA agreed) said (at [37]): the terms “known” and “knows” are used in their common law sense. Their primary denotation refers to that which is actually known; but it would be wrong to import the word “actually” into a provision such as s 21. The section 176

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s 21

The statement in Beard that it would be wrong to import the word “actually” into s 21 can be contrasted with the later decision of the NSW Ct of Appeal in GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506, in which it was said by Heydon JA (with whom Priestley and Hodgson JJA agreed) that whatever distinction there might be for some purposes between “knowledge” and “actual knowledge” in the case at hand, there was nothing that flowed from it. Heydon JA said (at [15]), “‘Even if, which was not decided, the trial judge’ ‘erred in speaking of “actual knowledge”, it was a harmless error’”. Opinion known

An opinion that is held may be a matter that is “known”. In Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252 the NSW Court of Appeal (Meagher JA, with whom Macfarlan and Emmett JJA agreed) noted that the fact that an opinion is held is something that may be “known”. An insurer may be influenced in its decision to accept a risk, or the terms upon which it will do so, by the fact that an opinion is held. Constructive knowledge and knowledge of an agent

The ALRC did not fully address the question of constructive knowledge in describing the common law duty of disclosure. The ALRC referred to s 24 of the Marine Insurance Act 1909 in the following terms: The assured must disclose to the insurer, before the contract is concluded, every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known to him. If the assured fails to make such disclosure, the insurer may avoid the contract.

The ALRC noted that the section is generally regarded as accurately summarising the common law as it applies to the insured’s duty of disclosure with the exception that it is doubtful whether, in fields other than marine insurance, constructive knowledge is to be attributed to the insured: ALRC 20 at [151]. According to Young J in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 the insured must have actual knowledge. Constructive knowledge is not sufficient under s 21. Young J stated (at 74,998): Although the language of s 21 is awkward, in my view it means that if a reasonable person in the circumstances could be expected to know that a matter is relevant it must be disclosed and whether that be the case or not, if the insured actually knows the relevant thing, that is enough. However, the insured must have actual knowledge of the thing, the mere fact that he ought ©

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does not use it. The terms “known” and “knows” are used in their ordinary sense. Whether a matter is known is a question of fact for the judge or jury.

s 21

Insurance Contracts Act 1984

[21.10.5]

in the ordinary course of business to have known is insufficient. In this respect I agree with Tarr on Australian Insurance Law (Law Book Co, 1987), p 85.

However, it is sufficient for the matter required to be disclosed to be a matter known either to the proponent personally or to a relevant agent of the proponent. For example, if all insurance matters are delegated by the proponent to an employee and that employee knows facts calling for disclosure of which the proponent is unaware, then the proponent is not relieved from disclosing, through the employee, highly relevant matters concerning the risk and known to the employee. Nor is the knowledge confined to that of the agent charged with effecting insurance. Rogers CJ Comm Div (NSW Sup Ct) held that knowledge of the managing agent of premises owned by the insured was knowledge which ought to be imputed to the owners: Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673; 5 ANZ Ins Cas 60-913. His Honour stated (at 684 (NSWLR); 75,861 (ANZ Ins Cas)): In my view, the pre-1984 law imputed to a proponent the knowledge of appropriate agents (compare Tarr, Australian Insurance Law (2nd ed, Law Book Co, 1991), p 76, fn 32). The managing agent of a block of shops and offices is, in my opinion, such an agent. His knowledge of matters relating to the property which impact on the insurance risk ought to be imputed to the owners. In other words, by delegating the management of the property to an agent, the owners cannot avoid having knowledge of matters which might result in a proposal being refused or a higher premium being imposed. That law was enacted in s 21(1).

The knowledge of a person to whom the insured has confided the task of effecting insurance is knowledge of the insured for the purpose of determining what has to be disclosed under s 21. Hence the knowledge of an insurance broker is knowledge of the insured: Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; 5 ANZ Ins Cas 60-933 per Rogers CJ Comm D. Further, a solicitor life insured who signed a proposal on behalf of his insured wife was obliged on her behalf to make disclosure of numerous serious defalcations: Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (unreported, NSW Sup Ct, Cole J, 15 June 1994). This was upheld on appeal by the NSW Court of Appeal comprising Priestley, Clarke and Powell JJA: Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543. The NSW Court of Appeal in Permanent Trustee found that the relevant knowledge of an insurance broker could properly be imputed to the insured for the purpose of deciding whether there had been any non-disclosure in breach of s 21(1)(a). The insured was bound by the knowledge of its broker who negotiated an extension of insurance cover on its behalf. In so finding the NSW Court of Appeal adhered to its previous decisions in Macquarie Bank and Beard. Further, it was held that the conclusion was supported by s 24, which refers to “a statement made 178

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However, the High Court in Permanent Trustee were split on the issue as to whether an insured can “know” a matter for disclosure by its agent: Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; 77 ALJR 1070; 12 ANZ Ins Cas 61-565; [2003] HCA 25. McHugh, Kirby and Callinan JJ in their joint majority judgment expressed an obiter view that the relevant knowledge, either actual or constructive, is the knowledge of the insured, and not of any insurance intermediary, a term which embraced the insurance broker who had acted for the insured. They said (at [30]): It is also noteworthy, particularly if it should become necessary to deal with the other grounds of appeal, that the knowledge of which the sub-section speaks, either actual or constructive, is the knowledge of the insured, and not of any insurance intermediary, a term defined by the Act and clearly embracing an agent of the kind that [the insurance broker] was. This is at least to suggest that the reference to the insured is intended to be a reference to the insured personally and not to its agent or broker. However, it is not essential to our reasons to determine this point.

Gummow and Hayne JJ in their joint minority judgment saw no reason to disturb the finding of the trial judge and the Court of Appeal that the insured had delegated the performance of its duty of disclosure in relation to the matter for disclosure to its insurance broker. It followed that the knowledge of the insurance broker was to be imputed to the insured. Gummow and Hayne JJ adopted the reasoning of Powell JA in Macquarie Bank that s 21 operates widely in relation to persons (including corporations) who can act and who can “know” only through agents. This wide operation of the ICA found some support in the reference in s 24 to statements “attributable to” the insured. The conclusion by the minority judges that the knowledge of the insurance broker was the knowledge of the insured was rooted in the words of the ICA and, in particular, a proper understanding of what is meant by “the insured knows”. They noted, as Powell JA had noted, that a corporate insured can know something only through an agent. In the context of a section governing the duty of disclosure, the knowledge of an agent to effect the insurance is the knowledge of the insured. Gyles J (Fed Ct) proposed that, pending further clarification by the High Court, the wider view that an insured can know a matter for disclosure by an agent should be taken following Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd per Powell JA: Tosich v Tasman Investment Management Ltd (2008) 250 ALR 274; [2008] FCA 377. The obligation to disclose something “known” can attach only to something which, at the time for disclosure, a person actually has in her ©

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by or attributable to the insured”. Statements attributable to an insured must be those made by an agent: Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd [2001] 50 NSWLR 679; 160 FLR 435; 11 ANZ Ins Cas 61-491; [2001] NSWCA 20.

s 21

Insurance Contracts Act 1984

[21.10.5]

or his consciousness. Therefore, if an agent, such as an insurance broker, forgets to tell the insured about the rejection of a driver under a policy of insurance covering a truck, then the agent does not “know” that the agent had forgotten to tell the insurer: Hammer Waste Pty Ltd v QBE Mercantile Mutual Ltd (2002) 12 ANZ Ins Cas 61–553; [2002] NSWSC 1006. Palmer J (NSW Sup Ct) referred to the passage from the judgment of Davies AJA in Beard quoted above and said (at [56]): As the passage from [Commercial Union Assurance Co of Australia Ltd v Beard (2000) 11 ANZ Ins Cas 61-458] indicates, in s 21(1) ICA the word “know” is used in its ordinary sense; it implies actual, not constructive, knowledge both on the part of the insured and on the part of any agent or employee of the insured whose “knowledge” is to be imputed to the insured. 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 off hand because I actually know that it is to be found in the plastic card in my wallet.

The NSW Court of Appeal (Sheller JA with whom Santow and McColl JJA agreed) dismissed an appeal from the judgment of Palmer J. The Court of Appeal referred to the majority and minority judgments of the High Court in Permanent Trustee on the question of knowledge of an agent but resolved the appeal without the need to decide on that issue and the findings of Palmer J on the issue of imputation of an agent’s knowledge: QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd (2004) 13 ANZ Ins Cas 61-586; [2003] NSWCA 356. Dowsett J (Fed Ct) noted that it seems to be generally accepted that the position under the ICA with respect to imputed knowledge reflects the common law position: A & D Douglas Pty Ltd v Lawyers Private Mortgages Pty Ltd (2006) 14 ANZ Ins Cas 61-709; [2006] FCA 520. He noted this by reference to Sutton K, Insurance Law in Australia (3rd ed) at paras 3.183 and 3.184, and Tarr AA, Australian Insurance Law (Law Book Co., 1987) at 104–105. He referred to the common law case of Australia & New Zealand Bank Ltd v Colonial & Eagle Wharves Ltd (1960) 2 Lloyd’s Rep 241 (in which McNair J assumed that at common law, rules derived from the Marine Insurance Act 1906 (Imp) applied to non-marine insurance) and authors on the common law but made no reference to the High Court in Permanent Trustee.

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As well as a matter being known to the insured, the insured must either know that the matter is relevant to the insurer (s 21(1)(a)) or a reasonable person in the circumstances could be expected to know of the relevance to the insurer (s 21(1)(b)). Whether or not the insured knows that the matter for disclosure is relevant to the insurer is a matter for factual determination. Various matters have proved to be of assistance in this factual determination. A director of an insured is to be taken to have known that a matter was relevant to the decision of an insurer whether to accept the risk if that matter was the subject of a question in a proposal signed by that director. Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028 per Tadgell J (Vic Sup Ct). Further in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 Young J (NSW Sup Ct) did not accept that a matter for disclosure never entered the insured’s head when effecting insurance. The insured swore that the matter never entered his head even though there was a question on the proposal relating to that matter. This was not accepted in view of the general discrediting of the insured. In Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661; 6 ANZ Ins Cas 60-954 a director of an insured company who had been convicted of a criminal offence had given a seriously misleading answer in a proposal to another insurer about actual or threatened prosecutions for criminal action over the previous five years. In addition to this he admitted in his evidence that as long ago as three years earlier he had known that his criminal history would have an effect on an insurer. These matters enabled a finding by Brooking J (Vic Sup Ct) that he knew that the criminal convictions were relevant to the decision of the insurer within s 21(1)(a).

[21.10.7] Relevant to the decision of the insurer whether to accept the risk: s 21(1)(a) Under the ICA, an insured has a duty to disclose all material facts. An insured is under no duty to disclose a fact unless he or she knows it would influence the judgment of that particular insurer in entering into the contract. Materiality is thus based on relevance to the decision of the “particular” insurer: Notes to the Draft Insurance Contracts Bill 1982. By specifying the test of materiality the existing law was clarified. Section 21 was said to ameliorate the existing law, particularly insofar as “the prudent insurer” test had to be applied, because the test took no account of ©

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[21.10.6] The insured knows…relevant to…insurer: s 21(1)(a)

s 21

Insurance Contracts Act 1984

[21.10.7]

the insured’s circumstances or the circumstances in which the contract of insurance was negotiated: Explanatory Memorandum, at [62]. The best known formulation of the test of materiality, known as the prudent insurer test, is that of Samuels J in Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 at 239: It seems to me that the test of materiality is this: a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether he will accept the insurance, and if so, at what premium and on what conditions. The word “reasonably” is necessary to maintain control over the evidence of possibly absurdly stringent insurance practice… It achieves the purpose of the “reasonable assured” test, but fixes the area of judgment where it properly belongs – that is, with the insurer.

Although it is clear that the test of materiality under the ICA is one of relevance to the particular insurer, there is a question as to whether elements of the “prudent insurer” test remain as a gloss on the new specification of the test of materiality. Samuels JA (NSW Sup Ct CA) in Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 15 NSWLR 641; 94 FLR 362; 5 ANZ Ins Cas 60-903 considered an argument by an insurance broker that even if it had effected proper insurance for the occupiers of a building they would have been bound to disclose acts of industrial sabotage and disruption and threats made by a dismissed employee of the group of companies. Samuels JA agreed with Yeldham J at first instance who had rejected the argument. Samuels JA, in disposing of the submission, raised further objections to the submission and made the following obiter comment (at 649 (NSWLR); 75,758 (ANZ Ins Cas)): the test of materiality is not what an individual insurer would in fact have done, but whether the information would reasonably have affected the mind of a prudent insurer: Mayne Nickless Ltd v Pegler [1974] 1 NSWLR 228 at 239 and Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd (1976) 2 Lloyd’s Rep 22.

Subsequently, Rogers CJ Comm D (NSW Sup Ct) in Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; 5 ANZ Ins Cas 60-933 referred to the obiter comment of Samuels JA and noted that it had been questioned by commentators. In answer to a submission that it was wrong Rogers CJ Comm D said (at 296 (FLR), 76,035 (ANZ Ins Cas)): Properly understood, what his Honour was saying was that in determining what facts known to the insured, or to the hypothetical reasonable person in the circumstance of the insured, were “relevant” within the meaning of s 21, the old test of materiality was to be applied. In other words, the Mayne Nickless formulation remains operative and what is relevant to the decision of the insurer remains to be determined having regard to a prudent insurer acting reasonably.

Parker J (WA Sup Ct) referred to the debate whether “the insurer” meant “the actual insurer” or a prudent insurer (acting reasonably) in General 182

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Accident Insurance Co Australia Ltd v Kelaw Pty Ltd (1997) 9 ANZ Ins Cas 61-369. Parker J was of the opinion that for the purposes of s 21(1) the critical word “relevant” suggested a position akin to the test adopted for materiality at common law by Samuels J in Mayne Nickless Ltd v Pegler. However, another member of the Full Court in that case, Franklyn J, expressed a reservation as to the opinion of Parker J on the meaning of the word “insurer” (without coming to any conclusion thereon). Also, the third member of the Full Court, Murray J, who agreed with the reasons for decision of Parker J, subsequently clarified that it was the question of disclosure from the point of view of the insurer to which the application for insurance is in fact made: McCabe v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-119; [2003] WASCA 162. It is clear that a requirement to have regard to a prudent insurer acting reasonably cannot be imported into the test of materiality in s 21. Keall DCJ (WA Dist Ct) in a judgment that was handed down before the judgment of Rogers CJ in the Ayoub case noted (at 76,135 (ANZ Ins Cas)): “It is the particular insurer concerned … not a hypothetical reasonable and prudent insurer”: Delphin v Lumley General Insurance Ltd (1989) 6 SR (WA) 161; 5 ANZ Ins Cas 60-941. Brooking J (Vic Sup Ct) was prepared to assume that the hypothetical prudent insurer has been banished. He treated s 21(1) as confining attention to the particular insurer concerned: Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661; 6 ANZ Ins Cas 60-954. Brownie J (NSW Sup Ct) in Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014 determined the materiality to the defendants (three insurance companies) of matters concerning the insured’s audit procedures in relation to contracts of fidelity insurance. He determined the question of materiality according to the first defendant’s approach to the matter for disclosure. The evidence of the first defendant’s officers as to the first defendant’s attitude was outweighed by the evidence of what the first defendant had actually done. He found that the other two defendant insurers were likely to simply follow the first defendant’s lead. It is apparent from his judgment that he confined his attention to the particular insurers concerned. Higgins J (ACT Sup Ct) in QBE Insurance Ltd v Giampaolo [1993] ACTSC 106 noted the replacement of the previous test of materiality involving the hypothetical prudent insurer, with that of the materiality to the individual insurer. He said that Rogers CJ Comm D in Ayoub had drawn attention with apparent approval to the dictum of Samuels JA in Toikan International Insurance Broking Pty Ltd v Plasteel Windows Australia Pty Ltd (1989) 15 NSWLR 641; 94 FLR 362; 5 ANZ Ins Cas 60-903. Higgins J said (at [49]): ©

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[21.10.7]

s 21

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[21.10.7]

The effect of that formulation is that, whilst the test is to be applied from the view point of the insured, or a reasonable person in the position of the insured it is not that person’s view of what an individual insurer would in fact have done that is relevant, but rather whether the insured knew (or ought to have known) that the matter in question would have affected the mind of the hypothetical prudent insurer.

Rolfe J (NSW Sup Ct) in Thompson v Government Insurance Offıce of New South Wales (unreported, NSW Sup Ct, Rolfe J, 15 June 1994) said that the concept of the hypothetical prudent insurer has been banished to the extent that it has no place in s 21(1)(a). The particular insurer may limit the common law duty of disclosure by questions asked and not asked. Rolfe J said (at 64): This will allow the insurer to ask an idiosyncratic question, the answer to which could not have been regarded as required by a prudent insurer. The question could fall within the description of an “absurdly stringent insurance practice”. If the insurer makes it known to the proponent for insurance that that is a matter relevant to the insurer’s decision, the proponent is not relieved from the obligation to make the disclosure by reference to a consideration of what a prudent insurer may reasonably require. To this extent it can be said, I think, that the concept of the hypothetical prudent insurer has been banished.

However, Rolfe J noted the different test in s 21(1)(b) and expressed an opinion that the hypothetical prudent insurer remained as part of the wider test in s 21(1)(b). (See [21.10.9]). Higgins J (ACT Sup Ct) in Von Braun v Australian Associated Motor Insurers Ltd (1998) 135 ACTR 1; 10 ANZ Ins Cas 61-419 referred to his discussion as to the test in QBE Insurance Ltd v Giampaolo [1993] ACTSC 106. He noted that Rolfe J in Thompson v GIO seems to suggest that s 21(1) would impose a duty of disclosure in respect of matters inquired by an insurer, even if only by an “idiosyncratic” question. He considered that if that was a fair summary of the view of Rolfe J it would require a qualification that the matter for disclosure must, at least, be a matter that is, in truth, apparently relevant to the hypothetical insurer’s decision. He noted that an insured who failed to provide a truthful answer to a seemingly irrelevant question would take the risk that the duty of disclosure did in fact apply to it. Hansen J (Vic Sup Ct) in Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228; 8 ANZ Ins Cas 61-287 accepted that the insurer referred to in s 21(1) was the actual insurer and not a hypothetical insurer. He added that even if the insurer in s 21(1) was a hypothetical insurer it would have made no difference to the result in the case. Hodgson CJ in Eq (NSW Sup Ct) in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529; 10 ANZ Ins Cas 61-408 noted that the parties had accepted, in his view correctly, that the “insurer” in s 21 means the particular insurer. He noted that the particular 184

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The particular insurer may have idiosyncrasies, and may be different in various ways from the hypothetical reasonable insurer; but the possibility of an untoward effect from these considerations is to some extent avoided by the requirement that either the insured know that the matter is relevant, or that a reasonable person in the circumstances could be expected to know that it is relevant. It may also be that the effect of idiosyncrasies of a particular insurer are further minimised by reason of the words “relevant” and “whether to accept the risk and if so, on what terms”.

On appeal from the decision of Hodgson CJ in Eq the NSW Court of Appeal (Meagher, Handley and Powell JJA) added further weight to the banishment of the continued operation of the previous test of materiality from s 21(1)(a): Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679; 160 FLR 435; 11 ANZ Ins Cas 61-491; [2001] NSWCA 20. Handley JA said (at 75,674 (ANZ Ins Cas)): In my judgment s 21(1)(a) leaves no room for the continued operation of the previous test of materiality. The changes are too many and too substantial to allow this, and they must have been deliberate. The section appears in a code and it is not possible to construe it as codifying the previous law.

In a subsequent decision, Murray J (with whom Wallwork and Anderson JJ agreed) of the WA Court of Appeal referred to the finding that the insurer in s 21(1)(a) is the “particular insurer” in Permanent Trustee as being in line with the earlier decision of the WA Full Bench in Kelaw of which Murray J was a member: McCabe v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-119; [2003] WASCA 162. The approach of Handley JA as to the previous prudent insurer test in Permanent Trustee was also the approach adopted by the High Court. On appeal from the NSW Court of Appeal, the High Court both expressly and impliedly considered the position of the “particular insurer”. Gummow and Hayne JJ expressly noted in their joint judgment that under the ICA attention is shifted from the prudent insurer to the particular insurer and it is that insurer’s decision which is the fulcrum about which the section turns: Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; 77 ALJR 1070; 12 ANZ Ins Cas 61-565; [2003] HCA 25. The banishment of the “prudent insurer” test accords with the general approach of the High Court in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910: see, [21.10]. It was noted that the circumstances in which it is legitimate to resort to the antecedent common law for the purpose of interpreting the ICA are extremely limited. ©

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insurer may have idiosyncrasies but said that the possibility of an untoward effect was to some extent avoided by other requirements within s 21. He said (at 584 (ALR); 74,526 (ANZ Ins Cas)):

s 21

Insurance Contracts Act 1984

[21.10.7]

The focus on the reasonable insured as opposed to the “prudent insurer” was again noted by the High Court in CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; 82 ALJR 1135; 15 ANZ Ins Cas 61-768; [2008] HCA 30. The High Court (comprising Gummow, Kirby, Heydon, Crennan and Kiefel JJ) in their joint judgment described the test for disclosure and said (at 76,682 (ANZ Ins Cas)): The statutory test for disclosure now to be found in s 21 of the Insurance Contracts Act focuses on the “reasonable insured”, not the “prudent insurer”, and operates, first, by reference to the actual knowledge of the insured (s 21(1)(a)), and secondly, by reference to what “a reasonable person in the circumstances could be expected to know” (s 21(1)(b)). Accept the risk

The High Court majority in Permanent Trustee jointly found that the words “accept the risk” were key words. They contrasted this phrase with other phrases such as “to enter into a contract of insurance”, which is used in the introductory words to s 21, or “to renew a contract of insurance”. The majority found that the focus of attention is upon the “risk”, ie the particular insurance hazard. It is not, as such, upon the much broader question of the commercial willingness of the insurer to accept the risk, still less emotional or individual reactions to that question. They found that assessment of the risk, ie insurance hazard, is susceptible to objective ascertainment. Other considerations including commercial and emotional responses are less readily ascertained retrospectively. They did not consider any difficulty in keeping the concepts separate as the language of the ICA requires. The majority were concerned that if any relevant commercial knowledge acquired was a matter for disclosure then that would allow the ICA to be used as a charter for avoidance of claims. The High Court minority jointly noted that speaking of the insurer “accepting the risk”, rather than “making the contract of insurance”, embraces all of the many kinds of dealings by which an insurer agrees to insure the insured. They found that the ICA does not require or permit a distinction between matters which bear upon the risk and those which concern the making of the contract, even if such a distinction can be drawn. The fact that a matter for disclosure is the subject of questions on a proposal form may assist in the determination as to whether a matter is relevant to the decision of a particular insurer whether to accept the risk and, if so, on what terms. In circumstances where a land broker had been asked specific questions in a proposal form, a letter and telephone call threatening legal action against the land broker was a matter relevant to the decision of the insurer whether to accept the risk under a contract of professional indemnity 186

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Where a director of the insured had signed a proposal form containing a question as to hazardous goods within a building, the existence of drums of highly flammable chemical ethanol was a matter relevant to the decision of the insurer whether to accept the risk: Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028 per Tadgell J (Vic Sup Ct). Where a manager of a brothel had answered a specific question in a proposal form as to the brothel’s registration in the ACT, it was to be inferred that the insured owner and operator company also knew when it was reminded of its disclosure obligations on renewal the following year, that the brothel’s registration was relevant to the insurer’s decision to renew its insurance: Stealth Enterprises Pty Ltd t/a The Gentleman’s Club v Calliden Insurance Ltd [2015] NSWSC 1270 (3 September 2015) per Schmidt J (NSW Sup Ct).

[21.10.8] A reasonable person in the circumstances: s 21(1)(b) The formulation “a reasonable person in the circumstances” in s 21(1)(b) does not accord with the recommendation of the ALRC. The ALRC recommended that the duty of disclosure should extend to facts which a reasonable person in the insured’s circumstances would have known to be relevant to the insured’s assessment of the risk. The ALRC envisaged that regard would be had to the insured’s position in life, mental condition and ability, education, literacy, knowledge, experience and cultural background: ALRC 20 at [183]. Section (1)(b) of the original Bill specified “a person in the circumstances of the insured”. This became “a reasonable person in the circumstances”. Any reference to ALRC 20 should take into account the changed formulation. Some insight into the changed formulation was provided in the Explanatory Memorandum, at [62]: [Section 21] clarifies the existing law by specifying the test of materiality. It also ameliorates the existing law, particularly insofar as the “prudent insurer” test has been applied, for this test takes no account of the insured’s circumstances or the circumstances in which the contract of insurance is negotiated. [Section 21] mitigates the application of the duty by providing that the insured’s duty is only to disclose those facts which he knew or a reasonable person in the circumstances would have known to be relevant to the insurer’s assessment of the risk. As an examination of what a reasonable man would know cannot take place in a vacuum, a court would not be precluded from considering an insured’s position and circumstances in applying the test. ©

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insurance: Dwyer v Long; CE Heath Casualty & General Insurance (Third Party) (1992) 58 SASR 102; 7 ANZ Ins Cas 61-120 per Prior J (SA Sup Ct).

s 21

Insurance Contracts Act 1984

[21.10.8]

There is a question that has arisen with the changed formulation as to whether a reasonable person in the circumstances merely refers to “extrinsic factors” such as the circumstances in which a policy of insurance is entered into, or whether “intrinsic factors” such as an insured’s personal circumstances (that is, understanding of English or business acumen, etc) are also to be taken into account. The changed formulation, the amendments to s 21(1)(b) by way of the Insurance Contracts Amendment Act 2013 and the preponderance of legal authority, all support the proposition that only extrinsic factors are to be taken into account. Brooking J (Vic Sup Ct) in Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661; 6 ANZ Ins Cas 60-954 preferred the view of Tarr (Australian Insurance Law (1st ed, Law Book Co, 1987), p 86) that “intrinsic factors” are not to be taken into account. It was submitted to Brooking J that “circumstances” require regard to be had to what Tarr described as “individual idiosyncrasies such as imperfect understanding of English, cultural background or unfamiliarity with business or insurance practice”. Brooking J noted Tarr’s view that these “intrinsic” factors are not to be taken into account. However, “extrinsic” factors, such as “the informality attendant upon negotiations where interim cover is arranged over the telephone, or the type of policy in issue, or the exposure to advertising and promotional material” are to be taken into account. It seemed to his Honour that the alternative submission would, in an appropriate case, require the court to postulate, for example, the reasonable simpleton. Jones J (Qld Sup Ct) applied the test applied by Brooking J in Twenty-First Maylux Pty Ltd and took into account extrinsic factors rather than individual idiosyncrasies: Dew v Suncorp Life and Superannuation Ltd [2001] QSC 252. Jones J said (at [21]): I was referred to Twenty-first Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd in which Brooking J considered that “the circumstances” to be taken into account were not individual idiosyncrasies of the claimant but rather the extrinsic factors such as the level of informality attendant upon negotiations, whether cover was arranged over the telephone, or the type of policy in issue, or exposure to advertising and promotional referring. This case essentially confirms the test as being an objective one having regard to the particular circumstances in which an insured person finds himself or herself. Or, as put by the authors of [Australian Insurance Law, 2nd Ed, Tarr, Liew and Holligan, p 92–2], “an objective test modified by subjective criteria”.

The Queensland Court of Appeal (McMurdo P, McPherson JA and Cullinane J) upheld the decision of Jones J without deciding the correct test to be applied: Dew v Suncorp Life and Superannuation Ltd [2001] QCA 459. 188

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Under s 21(1)(b) it is necessary, in judging what a reasonable person could be expected to know, to take into account the circumstances affecting the actual insured, but the ultimate question turns on what could be expected of a reasonable person’s state of mind, not on the insured’s state of mind.

Murray J (with whom Wallwork and Anderson JJ agreed) of the WA Court of Appeal applied the test in Twenty-First Maylux Pty Ltd in McCabe v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-119; [2003] WASCA 162. Murray J said (at 86,328 (ANZ Ins Cas)): Turning to s 21(1)(b), the question it raises is an objective one. The test is what a reasonable person, an ordinary person, should know, in the circumstances as they were presented to the insured, ie: the external or extrinsic circumstance surrounding the application for insurance and the matter which it is contended ought to have been disclosed as being material to or relevant to the insurer’s decision whether to accept the risk and, if so, on what terms.

It appears that a division in the views of commentators has led to differing judicial views. Keall DCJ (WA Dist Ct) in Delphin v Lumley General Insurance Ltd (1989) 6 SR (WA) 161; 5 ANZ Ins Cas 60-941, which was decided before Twenty-First Maylux Pty Ltd, concluded that the relevant tests required both “extrinsic” and “intrinsic” factors to be taken into account. He based his judgment on the views of Kelly and Ball, Insurance Legislation Manual, para C21-03 that the Explanatory Memorandum relating to the relevant Bill and the Second Reading Speech supported the conclusion that a reasonable person in the circumstances means “a reasonable person in the insured’s circumstances (including his educational background)” rather than “a hypothetical reasonable person in the extrinsic circumstances of the insured”. He also based his decision on the application of the term by Rogers CJ Comm D (NSW Sup Ct) in Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673; 5 ANZ Ins Cas 60-913 wherein it was said that “the requirements of s 21(1)(b) are satisfied in that a reasonable person, in Mr Lindsay’s circumstances, would be expected to know that the nature of the use of the premises was relevant”. Based on this Keall DCJ accepted that the relevant test is a “hybrid objective/ subjective test”. In applying the MANN7 he took into account whether a reasonable person with the state of knowledge and having the educational background of the insured could be expected to know that her intermittent heroin use and her involvement with cannabis was a relevant matter to the insurer. In some cases there may not be a clear dividing line between “extrinsic” and “intrinsic” factors. For instance, Cole J in Plasteel Windows Australia ©

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Heydon JA (NSW Sup Ct CA) in GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299 favoured consideration of extrinsic factors. He said (at 75,866 (ANZ Ins Cas)):

s 21

Insurance Contracts Act 1984

[21.10.8]

Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926 referred to a broker signing proposal forms on behalf of clients and applied s 21(1)(b) to a reasonable person engaged in the insurance industry. This is a description of both the nature of the dealings between the parties (extrinsic) and the sophistication of the insured in insurance matters (intrinsic). The views of Tarr are consistent with the change in the formulation. His view is supported by Twenty-First Maylux Pty Ltd and Dew v Suncorp. The test whereby “extrinsic” factors only are to be taken into account not only accords with the changed formulation but also has attracted the greatest amount of judicial support. It received the apparent approval of the High Court in CGU Insurance Ltd v Porthouse (2008) 235 CLR 103; 82 ALJR 1135; 15 ANZ Ins Cas 61-768; [2008] HCA 30. The High Court (comprising Gummow, Kirby, Heydon, Crennan and Kiefel JJ) in their joint judgment, with reference to Twenty-First Maylux, Dew and Wallace, described the test for disclosure and in particular the interpretation of s 21(1)(b). They said (at 76,682 (ANZ Ins Cas)): The statutory test for disclosure now to be found in s 21 of the Insurance Contracts Act focuses on the “reasonable insured”, not the “prudent insurer”, and operates, first, by reference to the actual knowledge of the insured (s 21(1)(a)), and secondly, by reference to what “a reasonable person in the circumstances could be expected to know” (s 21(1)(b)). That latter statutory phrase has been interpreted as meaning that one should take into account only factors which are “extrinsic” to the insured, such as the circumstances in which the policy was entered into, rather than “intrinsic” factors such as the individual idiosyncrasies of the insured. Whilst it is possible to take into account the circumstances of the insured, the ultimate question under s 21(1)(b) turns on consideration of a reasonable person’s state of mind, not the insured’s state of mind. A test of disclosure, which operates by reference to both the insured’s actual knowledge and the knowledge of a reasonable person in the same circumstances, is calculated to balance the insured’s duty to disclose and the insurer’s right to information. The insurer is protected against claims where the insured’s disclosure is inadequate because the insured is unreasonable, idiosyncratic or obtuse and the insured is protected from exclusion from cover, provided he or she does not fall below the standard of a reasonable person in the same position.

The view that “extrinsic” factors only are to be taken into account is also supported by the amendments to s 21(1)(b) by way of the Insurance Contracts Amendment Act 2013 to add two non-exclusive factors which are extrinsic in nature. That amendment which commenced on 28 December 2015, included two non-exclusive factors which a court may have regard to in determining whether a reasonable person in the circumstances could be expected to know a matter was relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. The Review Panel commissioned by the Australian Government in 190

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2003 to review the ICA was of the view that non-exclusive factors could be used to interpret s 21 in difficult cases (see Final Report (June 2004), at [4.15]–[4.21]). Two of the three non-exclusive factors recommended by the Review Panel were adopted. The factors added to s 21(1)(b) are: (i) the nature and extent of the insurance cover to be provided under the relevant contract of insurance; and (ii) the class of persons who would ordinarily be expected to apply for insurance cover of that kind.

[21.10.9] Could be expected to know to be a matter so relevant: s 21(1)(b) The insured must know that either a matter is relevant to the insurer or know of a matter that a reasonable person in the circumstances could be expected to know is of relevance to the insurer. There are two lines to the inquiry. First, whether the insured knew and, secondly, whether a reasonable person in the circumstances could be expected to know. Both questions are questions of fact. In Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028, Tadgell J (Vic Sup Ct) considered a submission on behalf of the insurer that it was a matter of fair inference that a reasonable person in the circumstances could be expected to know that the sharing of insured premises was relevant to the insurer. His Honour said (at 76,879 (ANZ Ins Cas)): The question is one of fact and degree, and I should think it as likely as not that such a reasonable person could not be so expected.

As with the first line of inquiry, the existence of questions in a proposal form relevant to the matter for disclosure has proved to be an important factor in the weighing-up process in several cases. For instance, there was no doubt in the mind of Rogers CJ Comm D (NSW Sup Ct) in Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; 5 ANZ Ins Cas 60-933 that a reasonable person in the circumstances of the insured would have regarded as relevant the fact that an application for cover had been rejected by another insurer on the basis that the condition of premises made the person an inappropriate risk. This matter was specifically addressed by a question in the proposal form. Rolfe J (NSW Sup Ct) in Thompson v Government Insurance Offıce of New South Wales (unreported, NSW Sup Ct, Rolfe J, 15 June 1994) said that the concept of the hypothetical prudent insurer has been banished to the extent that it has no place in s 21(1)(a) (see above, [21.10.7]). However he said that it is present in s 21(1)(b) which deals with a deemed knowledge of the insured, as a reasonable person in the circumstances. He said that in his opinion this wider test is accommodated by the test suggested by Rogers CJ Comm D in the Ayoub case (see [21.10.7]). Rolfe J said (at 64): ©

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[21.10.9]

s 21

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[21.10.9]

In this way the Court has an accepted method for measuring the obligation which falls upon the insured to disclose matters within his knowledge, and an accepted method of curbing an “absurdly stringent insurance practice”. When one has regard to sub-section (b) one must also consider, in my opinion, the terms of the questions asked and the fact that questions are not asked. This gives full effect to that which a “reasonable person” could be “expected to know” to be relevant to the insurer’s decision.

It remains to be seen whether the test of a prudent insurer acting reasonably is to be accepted in the future as a method for measuring the obligation which falls upon the insured to disclose matters within the insured’s knowledge and as a method of curbing an “absurdly stringent insurance practice”.

The disclosure of certain matters is not required [21.20.1] Common knowledge: s 21(2)(b) An insured is not required to disclose matters which are of common knowledge. Section 21(2)(b) is a continuation of an exception to the requirement for disclosure at common law. If argued by an insured it may be necessary to inquire whether an insurer would have made assumptions from common knowledge. An example of the nature of the inquiry is to be found in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926. Cole J (NSW Sup Ct) where it was determined on the evidence that the practice complained of (that members of NIBA were charging clients undisclosed fees) had almost ceased by 1984 and that accordingly an insurer would not assume from common knowledge that members of NIBA were engaging in that practice at a later time.

[21.20.2] The insurer knows or ought to know: s 21(2)(c) When an insured has entered into other contracts of insurance with an insurer a question can arise as to whether the insurer has knowledge of the other insurance dealings or matters disclosed earlier. An insured may have dealt with various insurance officers. It does not necessarily follow that the knowledge of one officer is the knowledge of another. Nor does it necessarily follow that an officer underwriting an insurance risk has knowledge of all matters that may be disclosed if that officer were to search through the insurer’s records. Beach J (Vic Sup Ct) considered whether an insurer was possessed of the knowledge of an officer of the insurer in Evans v Sirius Insurance Co Ltd (1986) 4 ANZ Ins Cas 60-755. His Honour said (at 74,555): It would seem to me that, before an insurer can be said to have knowledge of a particular matter, it must be established that the knowledge was possessed by 192

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Beach J found that a responsible officer of the insurer had knowledge of the matter for disclosure and had a duty to inform other officers of the company responsible for the issue of the contract of insurance. A distinction has to be drawn between information within an insurer’s records which is a source of knowledge and actual knowledge. It is only actual knowledge which the “insurer knows” within the meaning of s 21(2)(c). This is an important distinction in the information age. The Court of Appeal of NSW considered whether an extract from the Sydney Morning Herald held on one of the insurer’s files meant that an insurer knew that a well-known Sydney identity Mr Abraham Saffron, had an interest in the building which its insured occupied in Commercial Union Assurance Co of Australia Ltd v Beard (1999) 47 NSWLR 735; (2000) 11 ANZ Ins Cas 61-458; [1999] NSWCA 422. In concluding that the insurer did not know of Mr Saffron’s interest in the building Davis AJA (with whom Meagher JA agreed) said (at 75,263 (ANZ Ins Cas)): When speaking of that which the insurer knows, s 21(2)(c) is speaking of actual knowledge. The relevant matter must be known to an appropriate officer or agent of the insurer or contained in current official records. Ordinarily the appropriate officers will be those who are handling the particular insurance on behalf of the insurer: see Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 13 ACLC 3245; [1995] 2 AC 500. An extract from a newspaper does not amount to knowledge, it is merely a source from which knowledge can be gained. Access to a means of knowledge is not sufficient: Bates v Hewitt LR 2 QB 595.

There was disagreement within the Court of Appeal as to whether information set out in the current formal records of an insurer could constitute knowledge. Davies AJA (with whom Meagher JA agreed) thought it may, in appropriate circumstances, because records are an appropriate means of storing knowledge. However, the extract from the Sydney Morning Herald was not a record of the insurer and was not contained in a file relevant to the subject insurance. Foster AJA expressed a contrary view. He was of the view that the state of legal authority did not permit a finding that stored information became “known” to an insurer until it was transferred into the mind of an officer relevantly engaged in the transaction in question. Lee J (Qld Sup Ct) said that to speak of “imputed” knowledge in the context of s 21(2) is meaningless. A life insurer does not “know” confidential medical information known to a medical practitioner even if that medical practitioner is its agent: Herbohn v NZI Life Ltd (1998) 149 FLR 21; 10 ANZ Ins Cas 61-410. ©

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a responsible officer of the company who either appreciated the significance of the knowledge, or should have appreciated its significance. That is, he must know that the company has before it a proposal for insuring the particular risk and must know, or should know, that the information in his possession is material to the risk or the terms upon which the risk should be insured.

s 21

Insurance Contracts Act 1984

[21.20.2]

Applegarth J (Qld Sup Ct) confirmed the importance of the distinction between knowledge of an insurer within the meaning of s 21(2)(c) and “the mere possession of information” given the “march of the computer”: Kotku Bread Pty Ltd v Vero Insurance Ltd (2012) 17 ANZ Ins Cas 61-930; [2012] QSC 109. He noted that although the march of the computer may mean that certain information within an insurer is held in electronic, rather than hard copy form, the ability to search databases does not alter the relevant principles. His Honour referred to the principles “helpfully” stated in Derrington and Ashton, The Law of Liability Insurance, (2nd ed, LexisNexis 2005 at 4-99 to 4-107) as follows: If the information is supplied to an officer authorised to receive it for one purpose, it cannot be said that the insurer has received it for another purpose for which a different officer is authorised to receive it. The relevant matter must be known to an appropriate officer or agent ordinarily handling the matter, or it must be contained in its official records. This is particularly so in the case of a large organisation where the knowledge may be held only by someone not involved in or aware of the proposed cover.

Applegarth J held that the employees of the insurer transitioning policies covering the insured’s premises in 2010 did not know, and could not reasonably be expected to have known, that a different broker had provided information in respect of the same premises in 2006 in respect of a transaction that did not proceed. In the circumstance, there was no requirement for the insurer to search through its records. His Honour said at 72,838 (ANZ Ins Cas); [174] (QSC): The march of the computer does not require insurers to undertake costly searches throughout their records, at a cost which is likely to be passed on to policyholders, to locate information that was acquired years earlier in respect of a proposed transaction that came to nothing in respect of an entity which was not thought to be a client.

McDougall J (NSW Sup Ct) found that an insurer under a trade credit insurance policy had become aware, well before it went on risk, that a payment history was far less satisfactory than that shown in answer to a question in a proposal form. Also, the insurer had information as to contractual payment terms that precluded an interpretation by the insurer of an answer to another question in the proposal form. McDougall J applied s 21(2)(c) to the answers. He found that the payment history information had been made available to the insurer and analysed by it. It did not matter that the information had not come to the attention of the decision-making officers of the insurer: Prepaid Services v Atradius (2012) 17 ANZ Ins Cas 61–937; [2012] NSWSC 608. Ginnane J (Vic Sup Ct) considered that a reference to another life insurer’s medical examination in a medical report obtained by a life insurer in respect of an application for increased cover was insufficient to prove that the life insurer knew or ought to have known within s 21(2)(c) 194

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[21.20.3] As to which compliance … is waived: s 21(2)(d) Section 21(2)(d) provides that the duty of disclosure does not require the disclosure of a matter as to which compliance with the duty of disclosure is waived by the insurer. It was derived from s 24(3)(c) of the Marine Insurance Act 1909 (Cth) (MIA) which provides: 24(3) In the absence of inquiry the following circumstances need not be disclosed, namely: (c) Any circumstance as to which information is waived by the insurer;

The ALRC noted (ALRC 20 at [160]) that the waiver exception under MIA s 24(3)(c) is applicable at common law to non-marine insurance as well as marine insurance and that of the four listed disclosure exceptions in MIA s 24 it gave rise to the most practical difficulty. Given that waiver exception in s 21(2)(d) is derived from the exception in the which is applicable at common law to non-marine insurance, it follows that the common law can provide guidance to the application of the waiver exception. The extent of that guidance is uncertain. One area where the common law provides guidance concerns the need for an “on notice” insurer to seek further information. Section 21(2)(d) “reflects” the common law in so far as an insurer may be taken to have waived compliance with the duty of disclosure if it fails to ask sufficient questions on a matter for disclosure after having been given sufficient information to put the insurer on notice of the need to ask questions. In General Accident Insurance Asia Ltd v Sakr (2001) 11 ANZ Ins Cas 61-508; [2001] NSWCA 402, an insurer failed to ask questions upon two consecutive renewals about the unoccupancy of insured premises and for how long it had been unoccupied. Upon the second of the renewals, the insurer had reason to believe that the property had been unoccupied for a further year in addition to a time of unoccupation prior to the first of the renewals. It did not enquire as to whether there had been any change as to occupancy. Insurance cover had been reduced because the insured premises were not tenanted. The NSW Court of Appeal, Giles JA (with whom Hodgson JA and Sperling J agreed), held that if there was not knowledge in the ordinary sense of the word, then any deficiency in the insurer’s knowledge of the period and currency of unoccupancy was, in his opinion, due to its waiver of (further) compliance with the duty of disclosure within s 21(2)(d). Giles JA was of the view that the ICA in this respect reflected the common law position. He said (at [32]): ©

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that life insurance had been refused by the other insurer: Montclare v MetLife Insurance Ltd (2015) 18 ANZ Ins Cas 62-070; [2015] VSC 306 (25 June 2015) (at [351]–[353])

s 21

Insurance Contracts Act 1984

[21.20.3]

If there was not knowledge in the ordinary sense of the word (Commercial Union Assurance Company of Australia Ltd v Beard [1999] NSWCA 422; (1999) 47 NSWLR 735), any deficiency in the appellant’s knowledge of the period and currency of unoccupancy was in my opinion due to its waiver of (further) compliance with the duty of disclosure within s 21(2)(d) of the Act. The Act in this respect, in my view, reflects the common law position discussed in, for example, Liga Knitting Mills v Lombard Insurance Co Ltd (1984) 3 ANZ Ins Cas 60-551 at 78,258–9 and the cases there cited; see also MacGillivray on Insurance Law 9th ed, para 17–78; Sutton, Insurance Law in Australia, 3rd ed, para 3.31; Law Reform Commission, Insurance Contracts, LRC 20, para 161.

At common law, before a question of waiver arises, there must be a “fair presentation” of the risk to the insurer. If there has been a fair presentation of the risk and an insurer receives information which prompts it to make further inquiries, then, if it does not make inquiries, it may be taken to have waived disclosure of the fact which would have been revealed White J (NSW Sup Ct) considered whether there had been a waiver under s 21(2)(d) in relation to various failures by a life insured to disclose matters concerning his medical history and the applicability of the common law on waiver, including the concept of “fair presentation”, in Hitchens v Zurich Australia Ltd (2015) 18 ANZ Ins Cas 62-076; [2015] NSWSC 825 (30 June 2015). He noted that s 21(2)(d) is derived from s 24(3)(c) of the MIA which also reflected the common law as to non-marine insurance. White J noted the elusive nature of waiver at common law. Importantly, he found that he was bound by the view that “waiver” in s 21(2)(d) takes its meaning from how the concept has been applied in insurance law. In his detailed review of the relevant common law, White J noted that the English Court of Appeal in WISE Underwriting Agency Ltd v Grupo Nacional Provincial SA [2004] EWCA Civ 962; [2004] 2 All ER (Comm) 613; [2004] 2 Lloyd’s Law Rep 483 decided that in insurance law, before a question of waiver arises, there must be a fair presentation of the risk. White J considered whether there had been a waiver under s 21(2)(d) in relation to various failures by the life insured to disclose matters concerning his medical history. He noted that the underwriting expert called by the life insured was of the view that the life insured had been “inconsistent with his disclosures, particularly the depth of his disclosures” with the resulting effect that when entering into the life policies things appeared to be much better than they really were. White J said (at [141]): Accordingly, if an insurer will only be taken to have waived compliance with the duty of disclosure pursuant to s 21(2)(d) of the Insurance Contracts Act if there has been a fair presentation of the risk, there would be no waiver under that provision.

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An insurer may be taken to have waived compliance with the duty of disclosure by virtue of a question posed in a proposal from. A question in a proposal form asked about traffic convictions and made no mention of Traffic Infringement Notices which were held not to be “convictions”. The question in the proposal would lead the insured to conclude that information as to Traffic Infringement Notices was not required and it followed that even if the insured was, or should as a reasonable person, have been aware that the information was relevant, the insurer had waived compliance with the duty of disclosure under s 21(2)(d): QBE Insurance Ltd v Giampaolo [1993] ACTSC 106. In a case before the WA Supreme Court, an insurer was held not to have waived compliance with the duty of disclosure under s 21(2)(d) in circumstances where the disclosure relied upon had been made more than 16 months prior to a proposal for new insurance in the course of seeking a quotation which, apparently, was never given: Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288 per Steytler J (WA Sup Ct). In Phillips v ING Life Ltd (2009) 15 ANZ Ins Cas 90-139; [2009] FCA 283 a life insurer did not waive compliance with the duty of disclosure by providing for two alternative ways for an insurance applicant to provide information about her or his medical history – by completing an application form and by attending a medical appointment for the completion of a report. This was because, inter alia, at the interview the insured completed and signed a health evaluation form which contained the duty of disclosure. Also, given that it was life insurance, and the nature and breadth of the questions in the application form and the health evaluation form, it was evident from both processes that the insurer was seeking information relating to any matter which might affect the life expectancy of the applicant. That included the matter not disclosed by the applicant, namely that he suffered from Barrett’s oesophagus: per Siopis J (Fed Ct). An insurer may be taken to have waived compliance with the duty of disclosure in respect of information by not requiring a proposal form to be filled out and submitted. The Full Court of the Fed Court (Jacobson, Gilmour and Gordon JJ) considered whether the insurer had waived compliance with the duty of disclosure by failing to require a subsidiary of the policyholder to fill in a proposal form (assuming the subsidiary had a duty of disclosure – having found that it didn’t) in ABN AMRO Bank NV ©

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insured. A reference to “this charges” in a letter from the insured did not put the insurer on notice that there may be more than one criminal charge because the reference was plainly a reference to the one offence, that being the flow of the letter, which was in terms inconsistent with there being any other involvement with the Police: Devine v Sun Alliance Aust Ltd (unreported, NSW Sup Ct, Giles J, 18 June 1992).

s 21

Insurance Contracts Act 1984

[21.20.3]

v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65. The insurer had only required financial statements from the subsidiary. Jagot J, the primary judge, had concluded that if an insurer does not insist on a completed proposal form from the insured, then the insured has failed to answer any question in a proposal form and thus s 21(3) is engaged: Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 (5 November 2012). The Full Ct agreed with the primary judge that compliance with the duty of disclosure had been waived when the insurer made it clear that it did not require a proposal form to be filled out by the subsidiary. However, the Full Ct’s reasoning differed in that it applied the general waiver under s 21(2)(d) rather than a waiver under s 21(3).

[21.30.1] Background and generally: s 21(3) Background

The ALRC in ALRC 20 reviewed the principles and authorities that led to ss 21(3) and 27: ALRC 20 at [161]–[165]. There were two matters that the ALRC sought to address in the draft clauses of the Insurance Contracts Bill 1984 (which were the same as ss 21(3) and 27). The ALRC stated in ALRC 20 at [184]; Stipulations in a proposal form to the effect that a failure to answer a particular question will be deemed to be an answer in the negative should be rendered ineffective. They lead to uncertainty and confusion, particularly in relation to questions which are not obviously susceptible of a negative answer. Moreover, an insurer should be deemed to have waived the duty of disclosure to the relevant extent where it has failed to pursue unanswered or obviously incompletely answered questions contained in a proposal form. If an insurer requires more information, it should make further inquiry. Not a code for waiver

Section 21(3) is not a codification of circumstances which may constitute waiver. The Full Court of the Fed Court (Jacobson, Gilmour and Gordon JJ) considered whether the insurer had waived compliance with the duty of disclosure by failing to require a subsidiary of the policyholder to fill in a proposal form (assuming the subsidiary had a duty of disclosure – having found that it didn’t) in ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65. The insurer had only required financial statements from the subsidiary. Jagot J, the primary judge, had concluded that if an insurer does not insist on a completed proposal form from the insured, then the insured has failed to answer any question in a proposal form and thus s 21(3) is engaged: Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 (5 November 2012). The Full 198

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Ct agreed with the primary judge that compliance with the duty of disclosure had been waived when the insurer made it clear that it did not require a proposal form to be filled out by the subsidiary. However, the Full Ct’s reasoning differed in that it applied the general waiver under s 21(2)(d) rather than a waiver under s 21(3). The questions in the proposal form were directed to the policyholder and not the subsidiary. The Full Ct was of the opinion that before s 21(3) is enlivened there must have been a question in a proposal form that the subsidiary had failed to answer or in respect of which the subsidiary had given an obviously incomplete or irrelevant answer. The Full Court said (at [1708]–[1710]): It cannot be said that [the subsidiary] failed to answer a question or gave an obviously incomplete or irrelevant answer to a question. However, that is not the conclusion of the matter. Section 21(2)(d) provides that the duty of disclosure does not require disclosure of a matter as to which compliance with the duty is waived by the insurer. Section 21(3) provides alternative examples of what will be deemed to be waiver of compliance. The provision is not a codification of circumstances which may constitute a waiver.

[21.30.2] Failed to answer – Obviously incomplete: s 21(3)(a) and (b) Stevenson J (NSW Sup Ct) did not accept that the fact that a proposal form for a directors and officers liability policy was not signed by the person nominated in the proposal to sign had the consequence that an insured either “failed to answer” a relevant question or “gave an obviously incomplete or irrelevant answer” for the purposes of Section 21(3): Poole v Chubb Insurance Company of Australia Ltd (2014) 18 ANZ Ins Cas 62-029; [2014] NSWSC 1832 (19 December 2014). The proposal form provided that it “must be signed” by the applicant’s “Chairman of the Board, Managing Director or Chief Executive Director”. It was signed by the Chief Financial Officer who described his position as such. Stevenson J found that the provision in the proposal that it “must be signed” by the nominated person was a provision for the insurer’s benefit. The insurer was able to, and evidently did, waive its benefit. In these circumstances, Stevenson J did not accept that this had the consequence that an insured either “failed to answer” a relevant question or “gave an obviously incomplete or irrelevant answer” for the purposes of Section 21(3). The Qld Court of Appeal (Fitzgerald P, Davies JA and Thomas J) in Orb Holdings Pty Ltd v Lombard Insurance Co (Aust) Ltd [1995] 2 Qd R 51; (1994) 8 ANZ Ins Cas 61-221 found that there was no waiver of the insured’s duty of disclosure in misrepresenting that a building was of a “brick/iron” construction. Fitzgerald P noted that the rationale behind ss 21(3) and 27 is that “obviously incomplete” information puts an insurer ©

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[21.30.2]

s 21

Insurance Contracts Act 1984

[21.30.2]

on inquiry and, if it omits to inquire, it has waived its right to rely upon the insured’s failure to disclose or misrepresentation. The insured had stated in a proposal form that a building was of “brick/iron” construction with a note “See Survey Report” although the building was constructed substantially of wood. Fitzgerald P found that given that a quite sensible reading of the “See Survey Report” notation meant that the report would provide confirmation and perhaps details of the information contained in the proposal, it would not necessarily follow that the notation meant that the information given was incomplete so that it could not be said that it was “obviously incomplete”. Davies JA and Thomas J considered a contention by the insured that the proposal was obviously incomplete and that a schedule referred to in the proposal could not cure that incompleteness because, even if the reference “brick/iron” meant walls of brick and roof of iron, that reference said nothing of the material which comprised the floor. However, their Honours noted that the insurer was not relying on a failure to disclose the composition of the floor and would have accepted the risk without knowing what that composition was. Consequently, any waiver of a duty to disclose the composition of the floor was irrelevant. The fact that only one claim was disclosed for a business which had been established for over 20 years was not so extraordinary a circumstance so as to put the insurer on notice that the answer to a question in respect of previous losses was “obviously incomplete”: Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288 per Steytler J (WA Sup Ct). Whether an answer is “obviously incomplete” for the purpose of s 21(3) must be looked at, in the view of Jones J (Qld Sup Ct), in light of other information coming to the knowledge of the insurer: Dew v Suncorp Life and Superannuation Ltd [2001] QSC 252.

[21.30.3] A question included in a “proposal form”: s 21(3) Section 21(3) concerns a failure to answer or an obviously incomplete or irrelevant answer by a person to a question included in a proposal form about a matter. For s 21(3) to apply, there must be a proposal form containing a question or questions. “Proposal form” is defined in s 11 to include, a document containing questions to which a person is asked to give answers (whether in the document or not) where the answers are intended (whether by the person who answered them, by the insurer or by some other person) to be used in connection with a proposed contract of insurance. It also includes a form relating to membership of a group life scheme. 200

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The Full Ct of the Fed Ct (Jacobson, Gilmour and Gordon JJ) considered circumstances in which an insurer required a proposal from the policyholder as the proposed insured but did not require a subsidiary of the proposed insured to fill out a proposal form: ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65. In finding that s 21(3) did not apply the Full Ct stated (at [1704] and [1708]): We are of the opinion that before s 21(3) is enlivened there must have been a question in a proposal form which the proposed insured has failed to answer or in respect of which the proposed insured has given an obviously incomplete or irrelevant answer. The requirement for a proposal form under s 21(3) is a positive one. The statutory enquiry is not relevant where no proposal form exists. The questions in the proposal form were directed to the [proposed insured], not [the subsidiary]. It cannot be said that [the subsidiary] failed to answer a question or gave an obviously incomplete or irrelevant answer to a question.

When insurance is placed by telephone or electronically on line, arguably a proposal form comes into existence when a proposed insured is asked questions by or from a computer screen. James J (NSW Sup Ct) proceeded on the basis that a proposal form had come into existence when an insured was asked questions from a computer screen prompt by an employee of the insurer who recorded the answers and then provided a printout in confirmation: Celik v NRMA Insurance Ltd [2000] NSWSC 380. James J noted that according to s 25 of the Acts Interpretation Act 1901 (Cth), the word “document” is given an extended meaning as including any material from which writings are capable of being reproduced. However, he also noted that having regard to the definition of “proposal form” in s 11, and even allowing for the fact that the definition is only an inclusive definition, it may be that it is the document containing the questions (that is the prompt), rather than the document containing the answers (that is the confirmation of details), which should be identified as being the proposal form. However, for the purpose of addressing submissions in the case, he was prepared to accept that the confirmation of details formed part of a “proposal form”. James J found that the insurer’s request for a RTA listing of driving offences and traffic infringements, which the insured failed to provide, did not bring s 21(3) into operation on the basis that the requirement for the RTA listing was not “a question”, nor was it contained in “a proposal form”. See also [11.110].

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s 21A

Insurance Contracts Act 1984

[21.30.3]

[21.40] Onus of proof The onus of proof in respect of an insured’s failure to comply with s 21 lies on the insurer alleging such a failure. The onus of proof was referred to by Wallwork J (WA Sup Ct) in his summary of the judgment of Keall DCJ in the court below in Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Ins Cas 60-986. Compliance by the insurer with s 22 is a prerequisite to reliance by the insurer on s 21: Delphin v Lumley General Insurance Ltd (1989) 6 SR (WA) 161; 5 ANZ Ins Cas 60-941 per Keall DCJ (WA Dist Ct) and Breville Appliances Pty Ltd v Ducrou (1992) 7 ANZ Ins Cas 61-125 per Cole J (NSW Sup Ct). 21A Eligible contracts of insurance—disclosure before contract originally entered into Scope (1) This section applies in relation to the original entering into of an eligible contract of insurance. Note: This section does not apply in relation to the renewal, extension, reinstatement or variation of an eligible contract of insurance. Section 21B applies in relation to the renewal of an eligible contract of insurance.

Position of the insurer (2) Before the contract is originally entered into, the insurer may request the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. (3) If the insurer does not make a request in accordance with subsection (2), the insurer is taken to have waived compliance with the duty of disclosure in relation to the contract. (4) If the insurer: (a) makes a request in accordance with subsection (2); and (b) requests the insured to disclose to the insurer any other matter that would be covered by the duty of disclosure in relation to the contract; then the insurer is taken to have waived compliance with the duty of disclosure in relation to that other matter. Position of the insured (5) If: (a) the insurer makes a request in accordance with subsection (2); and (b) in answer to each specific question included in the request, the insured discloses each matter that: (i) is known to the insured; and

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(ii)

a reasonable person in the circumstances could be expected to have disclosed in answer to that question; then the insured is taken to have complied with the duty of disclosure in relation to the contract.

(6) In this section: eligible contract of insurance means a contract of insurance that is specified in the regulations for the purposes of this section. [S 21A subst Act 75 of 2013, s 3 and Sch 4 item 6; am Act 75 of 2013; insrt Act 35 of 1998, s 3 and Sch 1 item 78 Cross-reference: Insurance Contracts Regulations 1985: reg 2B prescribes eligible contracts of insurance for s 21A(6).]

Pre ICAA 2013 Amendment (pre 28 December 2015) 21A Eligible contracts of insurance—disclosure of specified matters (1) This section applies to an eligible contract of insurance unless it is entered into by way of renewal. Note: Section 21B applies in relation to the renewal of an eligible contract of insurance. [Subs (1) am Act 75 of 2013, s 3 and Sch 4 item 3]

Position of the insurer (2) The insurer is taken to have waived compliance with the duty of disclosure in relation to the contract unless the insurer complies with either subsection (3) or (4). (3) Before the contract is entered into, the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. (4) Before the contract is entered into, both: (a) the insurer requests the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and (b) the insurer expressly requests the insured to disclose each exceptional circumstance that: (i) is known to the insured; and (ii) the insured knows, or a reasonable person in the circumstances could be expected to know, is a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; and (iii) is not a matter that the insurer could reasonably be expected to make the subject of a question under paragraph (a); and

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Definition

s 21A

Insurance Contracts Act 1984

[21.40]

(iv) is not a matter covered by subsection 21(2). (5) If: (a) the insurer complies with subsection (3) or (4); and (b) the insurer asks the insured to disclose to the insurer any other matters that would be covered by the duty of disclosure in relation to the contract; the insurer is taken to have waived compliance with the duty of disclosure in relation to those matters. Position of the insured (6) If: (a) the insurer complies with subsection (3); and (b) in answer to each question referred to in subsection (3), the insured discloses each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question; the insured is taken to have complied with the duty of disclosure in relation to the contract. (7) If: (a) the insurer complies with subsection (4); and (b) in answer to each question referred to in paragraph (4)(a), the insured discloses each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question; and (c) the insured complies with the request referred to in paragraph (4)(b); the insured is taken to have complied with the duty of disclosure in relation to the contract. Onus of proof—exceptional circumstance (8) In any proceedings relating to this section, the onus of proving that a matter is an exceptional circumstance covered by subparagraph (4)(b)(iii) lies on the insurer. Definition (9) In this section: eligible contract of insurance means a contract of insurance that is specified in the regulations. [S 21A am Act 75 of 2013; insrt Act 35 of 1998, s 3 and Sch 1 item 78 Cross-reference: Insurance Contracts Regulations 1985: reg 2B prescribes eligible contracts of insurance for s 21A(9).]

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SECTION 21A COMMENTARY

Section 21 of the ICA requires, in relation to all classes of insurance, insureds to disclose any matter which they know, or which a reasonable person in the circumstances could be expected to know, is relevant to an insurer’s decision to provide insurance cover. Where an insured fails to disclose information in accordance with the duty of disclosure, an insurer may be entitled to avoid the contract. It is therefore thought to be vital that an insured is given every reasonable opportunity to comply with this duty. Generally, insurers obtain information by asking insureds to complete proposal forms. It was considered that many proposal forms, however, contain vague or open-ended questions which require the insured to anticipate or interpret the real meaning or extent of the questions and the type of information the insurer is seeking. Additional protection was considered necessary because consumers, particularly in the case of domestic and personal lines insurance, frequently lack the knowledge and awareness to fully understand those issues which may be of significance to an insurer. On the other hand, the insurer has the experience and knowledge to identify the information it reasonably requires in order for it to be able to make an assessment of a risk. Section 21A was designed to redress this imbalance and improve the capacity of an insured to comply with the duty of disclosure by requiring an insurer to ask specific questions in respect to a proposed contract of insurance, in default of which the insurer is deemed to have waived the duty of disclosure: Explanatory Memorandum to the Insurance Contracts Amendment Bill 1997 at [117]. Section 21A sets out requirements which an insurer must follow if a duty of disclosure is to apply to an insured in relation to “eligible” contracts of insurance. It also prescribes how an insured may comply with the duty of disclosure in respect of such contracts. “Eligible” contracts are prescribed by regulations and include domestic and personal lines insurance. For the purposes of the following discussion on s 21A and where relevant, the form of s 21A prior to the amendments effected by the Insurance Contracts Amendment Act 2013 will be referred to as the “old s 21A”. The form that s 21A took following the amendments that commenced on 28 December 2015 which were effected by the Insurance Contracts Amendment Act 2013 will be referred to as the “new s 21A”. Section 21A – Pre Insurance Contracts Amendment Act 2013

Section 21A was amended by the Insurance Contracts Amendment Act 2013. With the exception of the insertion of a new note to s 21A (which commenced on 28 June 2013), the main amendment to s 21A commenced on 28 December 2015 (which was 30 months after the Insurance ©

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[21A.20] Background and synopsis

s 21A

Insurance Contracts Act 1984

[21A.20]

Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The effect of this amendment was to repeal the old s 21A and substitute it with a new s 21A. The old s 21A will continue to apply to an eligible contract of insurance originally entered into prior to 28 December 2015. The old and new s 21A did not and will not (respectively) apply upon renewal of a contract of insurance. Prior to the Insurance Contracts Amendment Act 2013, disclosure on renewal of eligible contracts of insurance did not receive special treatment. As with all other contracts of insurance, s 21 applied. The old s 21A(2) provides that an insurer is deemed to have waived the duty of disclosure unless the insurer complies with either s 21A(3) or 21A(4). The old s 21A(3) covers the circumstance where an insurer asks insureds specific questions relevant to the risk. An insurer could, under the old s 21A(3), seek additional information from an insured, such as a clarification or follow up of an earlier specific question, by way of further specific questions. The old s 21A(4), in conjunction with the old s 21A(2), essentially allows insurers to ask insureds to disclose exceptional circumstances, provided that specific questions are also asked. An “exceptional circumstance” is defined in the old s 21A(4)(b), and is intended to identify any matter which would be relevant to a contract of insurance but which, because the matter is special or individual to the insured, an insurer could not reasonably be expected to make the subject of a specific question. The old s 21A(5) provides that if an insurer complies with either of the old s 21A(3) or 21A(4), but requests the insured to disclose any other matters that would be covered by the duty in relation to the contract, then the insurer is taken to have waived the duty of disclosure, but only in relation to those matters specified in that request. The effect of this provision is that it prevents the insurer, in the event of a dispute, from relying on the insured’s answers (or non-disclosure) to any vague or open ended questions that may be asked. This provides a disincentive for insurers to ask such questions. If the insurer meets either of the requirements of the old s 21A(3) and 21A(4), the insured owes a duty of disclosure in relation to the relevant contract. The old s 21A(6) and 21A(7) set out the conditions which the insured must meet in order for the insured to have complied with the duty of disclosure. These subsections require the insured, in answering the specific questions, to disclose each matter known to the insured and that a reasonable person in the circumstances would be expected to have disclosed in answer to the question. 206

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A similar test applies to the insured in disclosing exceptional circumstances. Under the old s 21A(4)(b), the insured must disclose matters known to the insured, where the insured knows, or a reasonable person would know, that the matter is relevant to the decision of the insurer to accept the risk and, if so on what terms. Matters falling within the old s 21(2) are not required to be disclosed. If the insured is not taken to have complied with the duty of disclosure under the old s 21A, the insured is required to comply with the duty of disclosure as set out in s 21. For example, if an insured fails to answer a specific question, or gives an incomplete answer to a question in a proposal form, the insured would not be taken to have fulfilled the duty of disclosure under the old s 21A. The insured’s duty of disclosure would then be governed by s 21. In these circumstances, if the insurer then accepts an obviously incomplete answer, the insurer will be deemed to have waived the duty of disclosure in relation to that question in accordance with s 21(3). The old s 21A(6) puts the onus on the insurer to prove that a matter is an exceptional circumstance that the insurer could not reasonably be expected to make the subject of a specific question. Pursuant to s 28, irrespective of whether or not the duty of disclosure is taken to have been waived by the insured under the old s 21A, untrue statements which are fraudulently made by the insured in answering the insurer’s questions can be relied upon by the insurer in any action against the insured. Consequently, the insurer could avoid the contract in these circumstances: Explanatory Memorandum to the Insurance Laws Amendment Bill 1997 (H of R) cl 115–125. Section 21A – Post Insurance Contracts Amendment Act

With the exception of a note referring to s 21B, the amendment to substitute a new s 21A applies to an eligible contract of insurance originally entered into after 28 December 2015 (which was 30 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). In summary, the new s 21A removes the ability of insurers to ask “catch all” questions and applies enhanced rules for the duty of disclosure in relation to eligible contracts of insurance. It was considered that insurers should be in a position to decide what matters are material to their decision to provide eligible contracts of insurance and formulate specific questions accordingly. In the event that an insurer is unable to foresee a matter that is relevant to their decision whether to accept the risk of a particular contract, then it is difficult to justify expecting an unsophisticated insured to realise its relevance (see Explanatory Memorandum to ICAB 2013, at [1.56]). The new s 21A(1) provides that s 21A applies in relation to the original entering into of an eligible contract of insurance. There is a note to ©

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[21A.20]

s 21B

Insurance Contracts Act 1984

[21A.20]

s 21A(1), which refers to s 21B (which was inserted into the ICA by the Insurance Contracts Amendment Act 2013) applying in relation to the renewal of an eligible contract of insurance. The new s 21A(2) provides that the insurer may ask one or more specific questions that are relevant to the decision whether to accept the risk and, if so, on what terms. If the insurer does not ask one or more questions, under s 21A(3) the insurer is taken to have waived compliance with the duty of disclosure. If an insurer makes a request in relation to any other matter outside the specific questions that would be covered by the duty of disclosure, under s 21A(4) the insured is taken to have waived compliance with the duty of disclosure in relation to that other matter. If an insurer asks one or more specific questions in accordance with the new s 21A(2) and the insured, in response to those questions, discloses each matter that is known to the insured and a reasonable person in the circumstances should be expected to have disclosed in answer to that question, then under s 21A(5) the insured is taken to have complied with the duty of disclosure in relation to the contract. The new s 21A(6) mirrors the old s 21A(9) in defining an eligible contract of insurance as that specified in the regulations for the purposes of the section. Regulations for the purposes of the old s 21A(9) continue to have effect as if they had been made for the purposes of the new s 21A(6). 21B Eligible contracts of insurance—disclosure before contract renewed Scope (1) This section applies in relation to the renewal of an eligible contract of insurance after the commencement of this section (regardless of when the contract was originally entered into). (2) However, this section does not apply in relation to the renewal of an eligible contract of insurance during the transition period unless, before the contract is renewed, the insurer has clearly informed the insured in writing of the general nature and effect of this section. Note: Before the contract is renewed, the insurer must also clearly inform the insured in writing of the general nature and effect of the duty of disclosure (see section 22).

Position of the insurer (3) Before the contract is renewed, the insurer may do either or both of the following things: (a) request the insured to answer one or more specific questions that are relevant to the decision of the insurer whether to accept the risk and, if so, on what terms;

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(b) give the insured a copy of any matter previously disclosed by the insured in relation to the contract and request the insured: (i) to disclose to the insurer any change to that matter; or (ii) to inform the insurer that there is no change to that matter.

(4) If the insurer does not: (a) make a request in accordance with paragraph (3)(a); or (b) give the insured a copy of any matter previously disclosed by the insured and make a request in accordance with paragraph (3)(b); then the insurer is taken to have waived compliance with the duty of disclosure in relation to the renewed contract. Note: This subsection is affected by subsection (12).

(5) If the insurer: (a) makes a request in accordance with paragraph (3)(a); and (b) also requests (other than in accordance with paragraph (3)(b)) the insured to disclose to the insurer any other matter that would be covered by the duty of disclosure in relation to the renewed contract; then the insurer is taken to have waived compliance with the duty of disclosure in relation to that other matter. Note: This subsection is affected by subsection (12).

(6) If the insurer: (a) gives the insured a copy of any matter previously disclosed by the insured and makes a request in accordance with paragraph (3)(b); and (b) also requests (other than in accordance with paragraph (3)(a)) the insured to disclose to the insurer any other matter that would be covered by the duty of disclosure in relation to the renewed contract; then the insurer is taken to have waived compliance with the duty of disclosure in relation to that other matter. Note: This subsection is affected by subsection (12).

Position of the insured (7) If: (a) the insurer makes a request in accordance with paragraph (3)(a), but does not give the insured a copy of any matter previously disclosed by the insured or make a request in accordance with paragraph (3)(b); and (b) before the contract is renewed, the insured discloses, in answer to each specific question included in the request, each matter that: (i) is known to the insured; and (ii) a reasonable person in the circumstances could be expected to have disclosed in answer to that question; then the insured is taken to have complied with the duty of disclosure in relation to the renewed contract. Note: This subsection is affected by subsection (12).

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Note: Change, to a matter previously disclosed by an insured in relation to an eligible contract of insurance, is defined in subsection (13).

s 21B

Insurance Contracts Act 1984

[21A.20]

(8) If: (a) the insurer gives the insured a copy of any matter previously disclosed by the insured and makes a request in accordance with paragraph (3)(b), but does not make a request in accordance with paragraph (3)(a); and (b) before the contract is renewed, the insured: (i) discloses any change to the matter; or (ii) if there is no change to the matter—informs the insurer that there is no change to the matter; then the insured is taken to have complied with the duty of disclosure in relation to the renewed contract. Note: This subsection is affected by subsection (12).

(9) If: (a) the insurer: (i) makes a request in accordance with paragraph (3)(a); and (ii) gives the insured a copy of any matter previously disclosed by the insured and makes a request in accordance with paragraph (3)(b); and (b) before the contract is renewed, the insured: (i) discloses each matter referred to in paragraph (7)(b); and (ii) does either of the things referred to in paragraph (8)(b); then the insured is taken to have complied with the duty of disclosure in relation to the renewed contract. Note: This subsection is affected by subsection (12).

(10) If: (a) the insurer gives the insured a copy of any matter previously disclosed by the insured and makes a request in accordance with paragraph (3)(b); and (b) before the contract is renewed, the insured does not disclose any change to the matter; then the insured is taken to have informed the insurer that there is no change to the matter. (11) If: (a) the insurer gives the insured a copy of any matter previously disclosed by the insured and makes a request in accordance with paragraph (3)(b); and (b) before the contract is renewed, the insured informs the insurer under subsection (8) or (9), or is taken to have informed the insurer under subsection (10), that there is no change to the matter; then neither subsection 21(3) nor section 27 applies in relation to any failure by the insured to disclose any change to the matter. Effect of failure to comply with duty of disclosure in relation to original contract of insurance or previous renewal (12) If the insured failed to comply with the duty of disclosure in relation to the contract as originally entered into or any renewal of that contract, then, despite any other provision of this section: 210

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(a)

the insurer is not taken to have waived compliance with the duty of disclosure in relation to the earlier failure; and (b) the insured is not taken to have complied with the duty of disclosure in relation to the earlier failure.

(13) In this section: change, to a matter previously disclosed by an insured in relation to an eligible contract of insurance, means a change to the matter that: (a) is known to the insured; and (b) a reasonable person in the circumstances could be expected to disclose in relation to that matter. eligible contract of insurance has the same meaning as in section 21A. renewed contract means an eligible contract of insurance that is entered into by way of renewal. transition period means the period of 30 months beginning on the day this section commences. [S 21B insrt Act 75 of 2013, s 3 and Sch 4 item 4]

SECTION 21B COMMENTARY [21B.20] Eligible contracts of insurance – disclosure before contract renewed: background and synopsis The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that s 21A be amended (this was effected by a new s 21B) so that on renewal of an eligible contract of insurance, if an insurer wished to rely on the insured’s disclosure obligations, a fresh round of questions had to be sent to the insured. The Review Panel noted that in practice the questions on renewal may simply be a request for an update to the answers provided at inception (see Final Report (June 2004), at [4.22]). Section 21B applies to disclosure before the renewal of an eligible contract of insurance. “Eligible contract of insurance” has the same meaning as in s 21A. A “renewed contract” is defined as an eligible contract of insurance that is entered into by way of renewal. Section 21B was inserted into the ICA by the Insurance Contracts Amendment Act 2013. That Act received Royal Assent on 28 June 2013. Subsection 21B(1) provides that s 21B applies to the renewal of an eligible contract of insurance after the commencement of the section which was the date the Act received Royal Assent. There was a 30 month ©

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Definitions

s 21B

Insurance Contracts Act 1984

[21B.20]

“transition period” for s 21B. “Transition period” was defined as the 30 month period beginning on the day the section commenced, which was 28 June 2013. During this 30 month transition period in order to rely on s 21B an insurer was required, before the contract was renewed, to have clearly informed the insured in writing of the general nature and effect of s 21B. This mirrored the requirement in the new s 22 to inform insureds of the general nature and effect of s 21B. The new s 22 commenced on 28 December 2015 (which was 30 months after the Insurance Contracts Amendment Act 2013 received Royal Assent). Subsections 21B(3)–(6) deal with the position of the insurer and detail the requirements for an insurer wishing to rely on the insured’s duty of disclosure in relation to the renewal of an eligible contract of insurance. An insurer may, prior to renewal, ask the insured either specific questions or for disclosure by way of an update of any changes to matters previously disclosed by the insured, a copy of which is to be provided to the insured. If the insurer does neither of these things, s 21B(3) provides that the insurer is taken to have waived compliance with the duty of disclosure in relation to the renewed contract. This is subject to the new s 21B(11) which deals with previous misrepresentations and nondisclosures. Subsections 21B(5) and 21B(6) concern “catch all” questions. Asking “catch all” questions covering other matters in addition to specific questions or an update of previous disclosures will result in a waiver of compliance with the duty of disclosure with respect to the other matters. Subsections 21B(7)–(11) deal with the position of the insured. Subsection 21B(7) deals with the circumstances in which an insured is taken to have complied with the duty of disclosure by answering specific questions. Subsection 21B(8) deals with compliance with the duty of disclosure by providing an update of previous disclosures. Subsection 21B(9) deals with an insured who is asked both specific questions and for an update. If an insurer seeks a disclosure update but the insured does not disclose a change before renewal, then s 21B(10) operates so that the insured is taken to have advised that there is no change. Subsection 21B(11) provides that ss 21(3) and 27 have no application if the insurer has acted in accordance with s 21B(3)(b) and the insured has informed the insurer under s 21B(8) and 21B(9) or if the insured is taken to have advised that there is no change under s 21B(10). Subsection 21B(12) provides that compliance by an insured with the duty of disclosure on renewal does not mean that a failure to comply with the duty of disclosure on original inception or a previous renewal is negated. The intention of s 21B(12) is to permit insurers to continue to rely on the accuracy of matters disclosed on inception or on previous renewal. Otherwise insurers would have to seek an update on every matter for disclosure at each renewal and this would be time consuming and onerous for both parties. 212

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Example 1.2 For example, suppose when originally applying for a home buildings policy, an insured breaches the duty of disclosure in relation to providing information on the main construction materials used in the home. At a subsequent renewal, the insurer seeks updates to various matters but does not ask the insured to update the information previously provided on main construction materials, because they are unlikely to change between inception and renewal. In such a case, even though the insured may be taken to comply with the duty of disclosure in respect of the renewed contract by providing all updates as requested, the effect of subsection 21B(12) is that compliance with the duty under the renewed contract does not operate to negate the earlier failure.

The rule in s 21B(12) is not to be taken to imply a continuing obligation to update matters that have changed at renewal. This further clarification of the rule in s 21B(12)is provided in the Explanatory Memorandum to ICAB 2013 (at [1.75]): For clarity, the rule in subsection 21B(12) should not be taken to imply that an insured who has complied with the duty of disclosure previously is under a continuing obligation to update matters that have changed at renewal, unless specifically requested to do so. If an insurer wishes to ensure that information is updated at renewal, they will need to either ask the insured a specific question regarding the matter, or ask the insured to update the information previously provided. 22

Insurer to inform of duty of disclosure

(1) The insurer must, before a contract of insurance is entered into, clearly inform the insured in writing: (a) of the general nature and effect of the duty of disclosure; and (b) if section 21A or 21B applies to the contract—of the general nature and effect of that section; and (c) if the contract is a contract of life insurance—of the effect of section 31A; and (d) that the duty of disclosure applies until the proposed contract is entered into. (2) If the proposed contract is a contract of life insurance, the insurer must also, before the contract is entered into, clearly inform, in writing, any person (other than the insured) who, under the contract, would become a life insured of the matters referred to in subsection (1). (3) If: (a) an insurer complies with subsection (1) in relation to a proposed contract of insurance; and (b) the insurer accepts an offer by the insured to enter into the proposed contract, or makes a counter-offer to enter into another contract of insurance with the insured; and

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An example of the operation of s 21B(12) is provided in the Explanatory Memorandum to ICAB 2013 (at [1.73]), by way of clarification:

s 22

Insurance Contracts Act 1984

[21B.20]

(c)

the insurer’s acceptance or counter-offer is made more than 2 months after the insured’s most recent disclosure for the purpose of complying with the duty of disclosure in relation to the proposed contract; then the insurer must give to the insured, with the acceptance or counter-offer, a reminder notice stating that the duty of disclosure applies until the proposed or other contract is entered into. (4) If the regulations prescribe a form of writing to be used: (a) for informing a person of the matters referred to in subsection (1); or (b) for the reminder notice referred to in subsection (3); the writing to be used may be in accordance with the prescribed form. (5) An insurer who has not complied with subsection (1) and (if applicable) subsection (2) may not exercise a right in respect of a failure to comply with the duty of disclosure, unless the failure was fraudulent. (6) If: (a) an insurer is required to comply with subsection (3) in relation to a contract of insurance; and (b) the insurer does not do so; then the insurer may not exercise a right in respect of a failure to comply with the duty of disclosure in relation to a new matter relating to the contract, unless the failure was fraudulent. (7) For the purposes of subsection (6), a new matter relating to a contract of insurance is a matter of which the insured first becomes aware after the insured’s most recent disclosure for the purpose of complying with the duty of disclosure in relation to the contract. [S 22 subst Act 75 of 2013, s 3 and Sch 4 item 12; am Act 75 of 2013; Act 35 of 1998 Cross-reference: Insurance Contracts Regulations 1985: • reg 3(2) and Sch 1 prescribe the form of writing that may be used to inform an insured of the matters mentioned in s 22(1); • reg 3(3) and Sch 1A prescribe the form of writing that may be used to inform another person who may become a life insured of the matters mentioned in s 22(1); • reg 3A and Sch 1B prescribe the form of writing that may be used to remind an insured of the matters mentioned in s 22(1); and • reg 3B and Sch 2 prescribe the words that may be used to inform an insured orally of the matters mentioned in s 22(1).]

Pre ICAA 2013 Amendment (pre 28 December 2015) 22

Insurer to inform of duty of disclosure

(1) The insurer shall, before a contract of insurance is entered into, clearly inform the insured in writing of the general nature and effect of the duty of disclosure and, if section 21A applies to the contract, also clearly inform the insured in writing of the general nature and effect of section 21A.

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Note: If the insurer wishes to rely on section 21B during the transition period (within the meaning of section 21B) in relation to the renewal of an eligible contract of insurance, the insurer must also comply with subsection 21B(2) before the contract is renewed.

(2) If the regulations prescribe a form of writing to be used for informing an insured of the matters referred to in subsection (1), the writing to be used may be in accordance with the form so prescribed. (3) An insurer who has not complied with subsection (1) may not exercise a right in respect of a failure to comply with the duty of disclosure unless that failure was fraudulent. [S 22 am Act 75 of 2013; Act 35 of 1998 Cross-reference: Insurance Contracts Regulations 1985: reg 3(1) and Sch 1 Pts 1–3 prescribe the form of writing that may be used to inform an insured of the matters mentioned in s 22(1); and reg 3(2) and Sch 2 prescribe the words that may be used to inform an insured orally of the matters mentioned in s 22(1).]

SECTION 22 COMMENTARY Insurer to inform of duty of disclosure: background and synopsis ......... Entered into ............................................................................................. Writing ...................................................................................................... Contract of life insurance ........................................................................ Clearly inform .......................................................................................... Effect of duty of disclosure ...................................................................... Onus of proof ........................................................................................... The form .................................................................................................. Not read down according to misleading conduct or unconscionability .... Renewal ...................................................................................................

[22.10] [22.20] [22.30] [22.35] [22.40] [22.50] [22.60] [22.70] [22.80] [22.90]

[22.10] Insurer to inform of duty of disclosure: background and synopsis The insurer is required to inform the insured in writing of the general nature and effect of the duty of disclosure: see s 21. If s 21A applies, then the insurer must inform the insured in writing of the general nature and effect of that section (“eligible” contracts of insurance). The insurer must do this before the contract is entered into. The Regulations may prescribe a form of writing to be used when the insurer is informing an insured of the duty of disclosure. Different forms are prescribed for contracts of general insurance that are eligible contracts; for those that are not eligible contracts and for contracts of life insurance: reg 3; ALRC 20 at [43] and Explanatory Memorandum to the Insurance Laws Amendment Bill 1997 (H of R) cl 126. If the insurer fails to comply with the section, the insurer may not exercise any rights unless the breach was fraudulent. In other words, the insurer is still protected if the non-disclosure was fraudulent: Explanatory Memorandum, at [63]–[65]. ©

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[Subs (1) am Act 75 of 2013, s 3 and Sch 4 item 5; Act 35 of 1998, s 3 and Sch 1 item 79]

s 22

Insurance Contracts Act 1984

[22.10]

For the purposes of the following discussion on s 22 and where relevant, the form of s 22 prior to the amendment effected by the Insurance Contracts Amendment Act 2013 will be referred to as the “old s 22”. The form that s 22 took following the amendments that commenced on 28 December 2015 which were effected by the Insurance Contracts Amendment Act 2013 will be referred to as the “new s 22”. Where no such distinction is made within the commentary, the commentary is taken to be relevant to both the old and new s 22. Post 28 December 2015

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA noted that many insureds do not realise that the duty of disclosure obligations still apply between the date of the application for the policy and the date that the policy comes into effect. The time between disclosure on application and policy commencement can be many months. During this period further matters for disclosure may arise. The Review Panel recommended that if an application for insurance is not promptly accepted by the insurer, the insurer must provide, at the time when the policy is issued, a reminder that the duty of disclosure obligations continue until the time the policy is entered into (see Final Report (June 2004), at [4.28]–[4.29]). Section 22 was amended by the Insurance Contracts Amendment Act 2013. With the exception of the insertion of a new note to s 22(1) (which commenced on 28 June 2013), the main amendments to s 22 commenced on 28 December 2015 (which was 30 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The effect of this amendment was to repeal the old s 22 and substitute it with the new s 22. However, the amendment to substitute the new s 22 applies to a contract of insurance either originally entered into or renewed, extended, varied or reinstated after 28 December 2015. There is a new s 11(10A) which clarifies the nature of a variation to a contract to which s 11(10)(b) applies and therefore the new s 22 applies. As was the case under the old s 22(1), the new s 22(1) requires an insurer to inform the insured of the general nature and effect of the duty of disclosure and s 21A, if it applies. Added to that is the requirement to inform the insured of the general nature and effect of s 21B if it applies and the effect of the new s 31A (which concerns non-disclosure by a life insured) if the contract is a contract of life insurance. The new s 22(1) also requires the insurer to inform the insured that the duty of disclosure applies until the proposed contract is entered into. If the proposed contract is a contract of life insurance, the life insurer must also inform any person who would become the life insured. If an insurer complies with s 22(1) and either accepts an offer or makes a counter-offer more than two months after its most recent compliance 216

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As before, if the insurer fails to comply with s 22(1) or, if applicable, s 22(2), the insurer may not exercise any non-disclosure rights unless the breach was fraudulent. If there is a failure to comply with the new s 22(3), then under s 22(6) the insurer may not exercise a non-disclosure right in relation to a “new matter”, unless the failure was fraudulent. Importantly s 22(7) prescribes that a “new matter” for the purposes of s 22(6), is a matter of which the insured first becomes aware after the insured’s most recent disclosure for the purpose of complying with the duty of disclosure in relation to the contract.

[22.20] Entered into The requirement under s 22 is for the insurer to inform the insured in writing before a contract of insurance is entered into. Accordingly, a duty of disclosure notice in an interim contract of insurance, where there was a “continuity of acting” which led to a subsequent contract of insurance, constituted a compliance with s 22: Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228; 8 ANZ Ins Cas 61-287 per Hansen J (Vic Sup Ct). See also s 11(9) and (10).

[22.30] Writing See s 11(1).

[22.35] Contract of life insurance See s 11(1). See also [11.30].

[22.40] Clearly inform The words “clearly inform” in s 22(1) require an insurer to prove that the duty of disclosure has been made known to the insured in writing with some precision and in accordance with a proper standard of information giving. Clarity is required not only in the contents of documents provided but also the manner in which the contents of the documents have been made known. The statutory language of s 22(1) requires a fact-specific ©

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disclosure then under the new s 22(3) the insurer must give to the insured, with the acceptance or counter-offer, a reminder notice that the duty of disclosure applies until the proposed or other contract is entered into. The Regulations may prescribe a notice under s 22(1) or a reminder notice under s 22(3).

s 22

Insurance Contracts Act 1984

[22.40]

analysis of the language of the notice given, the context in which it is to be found in the insurer’s documentation and the circumstances in which the documentation was provided to the prospective insured. In Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Ins Cas 60-986 the Full Court of the Supreme Court of Western Australia (comprising Malcolm CJ, Rowland and Wallwork JJ) upheld the decision of Keall DCJ (WA Dist Ct) at first instance (Delphin v Lumley General Insurance Ltd (1989) 6 SR (WA) 161; 5 ANZ Ins Cas 60-941) and in doing so approved the adoption of the Shorter Oxford English Dictionary definition of “inform” as meaning to “tell or make known”. Because of the need to inform in writing the requirement is to “make known”. In Delphin the Full Court noted that the insurer’s system of dispatching renewal notices containing information about the duty of disclosure did not establish that a particular notice was in fact posted and received by the insured. The court was not prepared to infer that the insured had received the information and, therefore, the insurer failed to discharge the onus of proving compliance with s 22. Because compliance with s 22 is a prerequisite to reliance on s 21, the court found for the insured. The meaning of the words “clearly inform” was considered by the NSW Court of Appeal (comprising Meagher, Stein and Giles JJA) in Suncorp General Insurance Ltd v Cheihk (1999) 10 ANZ Ins Cas 61-442; [1999] NSWCA 238. Stein JA said (at 75,020 (ANZ Ins Cas)): The requirement under s 22(1) of the Act is for the insurer to “clearly inform” the insured in writing of the nature and effect of the duty of disclosure. The onus of so proving is on the insurer, Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Ins Cas 60-986 at 76,565. I also accept that “inform” means to “make known” see at 76,571. The general nature and effect of the duty of disclosure must be “clearly” made known to the insured in writing. The adverb “clearly” is a plain English word and its ordinary meaning would convey the need for some precision in the making known of the relevant duty.

In Cheihk the Court of Appeal considered whether the insured, who had been sent three documents by the insurer for the renewal of the policy, had been clearly informed of the duty of disclosure which appeared on the back of one of the documents being the Certificate of Insurance. Importantly, the insured was not told in the other two documents or on the face of the Certificate of Insurance that there was information on the back of the Certificate of Insurance about something the insured should do before renewal, upon which the efficacy of renewal might turn. In deciding that the insured had not been “clearly informed”, the Court of Appeal noted that clarity was required not only in the contents of the documents but also the manner in which the contents of the documents was made known. Stein JA noted that the Certificate of Insurance did not say on its face “please read the important warning on the back”. He said that the manner 218

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of forwarding the documents did not assist the insurer. The instructions for renewal seemed to be directed, almost exclusively, to payment of the premium with no reference to the duty of disclosure whatsoever.

The issue is whether what the [insurer] did, that is, sending the three documents to the [insured], amounted to clearly informing the [insured] of the contents of the note on the back of the Certificate of Insurance. The contents of the note had to be made known to the [insured], and had to be made known to him clearly. Clarity was required not only in the contents of the note by which information was conveyed but also by the manner in which the note conveying the information was made known. A note in the document without attention appropriately drawn to it would not suffice, even if the contents of the note were adequate to state the general nature and effect of the duty of disclosure.

Giles JA looked at the process a recipient would go through in considering the three documents. The Certificate of Insurance, as the end result of the renewal process, was not the place to look for information about something to be done before or at the time of renewal. He said (at 75,024 (ANZ Ins Cas)): It will always be a question of fact and degree, but the purpose of s 22 is to ensure that the insured is informed of the significant and important matters of his duty of disclosure and the consequences of failure to comply with the duty of disclosure, so that his insurance cover will not be imperilled by ignorance of those matters. The insured is to be informed clearly. Both the purpose of s 22 and its terms call for insistence on a proper standard of information giving.

The statutory language of s 22(1) does not involve a term of art. Accordingly, the NSW Court of Appeal held that the use by a Tribunal of the words “properly advised” as opposed to the words of s 22, “clearly inform”, did not demonstrate a misapprehension as to the statutory test in s 22(1) in O’Farrell v Allianz Australia Insurance Ltd (2015) 18 ANZ Ins Cas 62-059; [2015] NSWCA 48. Basten JA (with whom Macfarlan JA and Gleeson JA agreed) was of the view that the primary judge was correct in finding that, in practical terms, the language used by the Tribunal did not depart from the meaning of s 22(1). He referred to the explanation by Giles JA in Cheihk as to what was required. He said (at [36]–[37]): As further explained by Giles JA in Suncorp v Cheihk, the statutory language does not involve a term of art, but rather requires a fact-specific analysis of the language of the notice given, the context in which it is to be found in the insurer’s documentation and the circumstances in which the documentation was provided to the prospective insured. In referring to “a proper standard of information giving”, Giles JA was seeking to explain how the statutory language operated, adopting a purposive approach to construction. The primary judge in the present case was correct in ©

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Giles JA held that clarity was required in the manner in which the duty of disclosure was made known. He said (at 75,024 (ANZ Ins Cas)):

s 22

Insurance Contracts Act 1984

[22.40]

concluding that the formulation “properly advised” did not demonstrate a misapprehension as to the statutory test.

In O’Farrell the insurer failed to satisfy its burden of proof with respect to compliance with s 22(1) notwithstanding that the insured had signed a proposal which contained a declaration as to the reading of information concerning the duty of disclosure and also as to understanding one of the consequences of not complying with the duty. This provided the insurer with some evidence of the insured having had his attention drawn to the duty of disclosure and having read it, but nothing more. Whether the insurer had been “clearly informed” was a factual issue and the Tribunal had not accepted the insurer’s evidence in that regard. In considering whether an insurer has “clearly informed” the insured, the entire course of dealing between the parties and the history of information provision can be taken into account. This is particularly important in circumstances where a policy of insurance has been renewed several times. The duty of disclosure notices to be taken into account may be contained in a proposal for insurance, original policy wording or accompanying documents, further amended policy wordings or renewal documentation. Importantly, s 22(1) does not say how long before the contract is entered into that clear information must be given. The NSW Court of Appeal considered a course of dealing between the parties to determine whether the insured had been “clearly informed” of the duty of disclosure in GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299. Heydon JA (with whom Priestley and Hodgson JJA agreed subject to Hodgson JA’s further comments) said (at 75,875 (ANZ Ins Cas)): Section 22(1) requires only that the insurer clearly inform the insured of the duty of disclosure “before a contract of insurance is entered into”. Section 22(1) does not say how long before the contract is entered that clear information must be given. Here there was a course of dealing from 1987 on between two parties, the [insured] and the [insurer] … That course of dealing dealt with only one subject – the insurance of the [insured’s] premises. The course of dealing may have been effectuated not through one contract renewed seven times, but through a series of contracts, some of them variations, some of them renewals. But it was in substance a single course of dealing. Each “contract” and each document relating to the course of dealing or the same number.

Hodgson JA added further comments of his own. He said (at 75,879 (ANZ Ins Cas)): On the question of compliance with s 22, I agree with Heydon JA that s 22(1) does not require that the informing of the insurer take place at any particular time before the contract of insurance is entered into. However, this does not mean that if this has happened at any time in the past, s 22(1) must be satisfied; otherwise, s 11(10) would be otiose in its application to s 22. In my opinion, what is required by s 22(1), unaffected by s 11(10), is that the information provided before entry into the contract should be such as to 220

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In determining whether an insurer has “clearly informed” the insured, not only may the contents of the duty of disclosure notice and the manner in which the contents of the notice was made known be taken into account, but perhaps also the context of the notice and the proposal for insurance as a whole. Cooper J (Fed Ct) considered an inadequate duty of disclosure notice provided to an accountant in the context of disclosure of circumstances in a proposal for insurance in DellaVedova v HIH Casualty & General Insurance Ltd (1997) 9 ANZ Ins Cas 61-383. Whilst the inadequate notice was not argued, Cooper J expressed an obiter view that the context of the notice and the proposal as a whole would direct a reasonable accountant in the position of the insured to believe that the relevant circumstances for disclosure were those contended for by the insurer. In the context of a moral hazard defence to a motor vehicle claim where a regular driver of the motor vehicle had sustained criminal charges in relation to matters of dishonesty, Balmford J (Vic Sup Ct) upheld a magistrate’s decision applying Cheihk that the insurer had not “clearly informed” the insured and therefore had not complied with s 22(1): RACV Insurance Pty Ltd v Alam (2001) 35 MVR 399; [2001] VSC 503. A duty of disclosure notice in a life insurance application form had significant differences when compared to the form prescribed in Sch 1 of the Insurance Contracts Regulations 1985. Ginnane J (Vic Sup Ct) found that the notice provided did not comply with s 22 because it did not clearly state the consequences of a failure to comply with the duty of disclosure: Montclare v MetLife Insurance Ltd (2015) 18 ANZ Ins Cas 62-070; [2015] VSC 306 (25 June 2015).

[22.50] Effect of duty of disclosure An insurer has not told the insured about the “effect” of the duty of disclosure unless it has told the insured what the consequences will, or may be, of a failure to make proper disclosure. If the notice is explicit and along the lines of the prescribed form, the insurer will fulfil the statutory obligation: Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 per Cox J (SA Sup Ct). However, it may not be necessary to explain the statutory obligations contained in the ICA and, in particular, the duty of disclosure contained in s 21 if the person arranging insurance for the insured has placed a large ©

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clearly inform the insured, as at the time of entry, of the general nature and effect of the duty of disclosure. In considering whether this is the case, the whole history of information-providing can be considered. The effect of s 11(10) is to make it unnecessary to re-comply with s 22 in relation to renewals, extensions and reinstatements, at least if they do not involve a variation of the contract.

s 22

Insurance Contracts Act 1984

[22.50]

amount of business through the particular broker with the particular insurer and well knows the obligations of a person seeking insurance. In these circumstances (which were known to the insured), where the relationship between the person arranging insurance and the broker was such that it would have been quite pointless for the broker to advise that person of his obligations under s 21, it follows that Ellis has no application: Kelaw Pty Ltd v General Accident Insurance Co of Australia Ltd (1995) 8 ANZ Ins Cas 61-285 per Scott J (WA Sup Ct).

[22.60] Onus of proof Wallwork J (WA Sup Ct) referred to the judgment of Keall DCJ in the court below in Lumley General Insurance Ltd v Delphin (1990) 6 ANZ Ins Cas 60-986 at 76,569 as follows: His Honour found that the onus of proof in respect of the [insurer’s] compliance with s 22, and the [insured’s] failure to comply with s 21, lay on the [insurer] and that compliance by the insurer with s 22 of the Act was a prerequisite to reliance by the insurer on s 21.

[22.70] The form The effect of s 22(2) is that an insurer may use, but is not obliged to use, the prescribed form of writing: see reg 3. However, if an insurer departs from the prescribed form it will do so at its own risk: Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 per Cox J (SA Sup Ct).

[22.80] Not read down according to misleading conduct or unconscionability The old s 22(3) (which is the new s 22(5)) is not to be read down by reference to a relatively ill-defined concept of misleading conduct or unconscionability. Notwithstanding that no written notice had been given to the insured in compliance with s 22(1), the insured made a statement in his proposal that he had received and read the duty of disclosure notice. The argument that the insured had been an active participant in misleading the insurer that he had been duly informed and that the insurer might exercise a right in relation to innocent non-disclosure was rejected on a number of grounds. It was noted, inter alia, that there is no basis for reading the section down in the ICA: Shepherd v National Mutual Life Association of A/asia Ltd (1994) 8 ANZ Ins Cas 61-233 per Hedigan J (Vic Sup Ct).

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s 23

Pt IV – Div 2 – Misrepresentations by insured

The ALRC did not contemplate the question of the provision of a duty of disclosure notice upon renewal. Section 11(10) ICA was introduced on 18 December 1986 retrospectively with effect from 1 January 1986. Section 11(10)(a) explicitly provides that, where the information required by s 22 is provided before entry into a contract of insurance or a renewal, the requirement to give information shall be deemed to be satisfied at, or before, any subsequent renewal. The High Court (comprising Mason CJ, Deane, Dawson, Toohey and McHugh JJ) noted in Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22 that the judgment of the court below (SA Sup Ct FC) was based on a belief that the insurer was required to provide a duty of disclosure notice upon each renewal. It appeared that s 11(10)(a) had not been taken into account.

Division 2 – Misrepresentations by insured [Div 2 heading subst Act 41 of 2012, s 3 and Sch 2 item 4]

23

Ambiguous questions Where: (a) a statement is made in answer to a question asked in relation to a proposed contract of insurance or the provision of insurance cover in respect of a person who is seeking to become a member of a superannuation, retirement or other group life scheme; and

[Para (a) am Act 75 of 2013, s 3 and Sch 6 item 36]

(b) a reasonable person in the circumstances would have understood the question to have the meaning that the person answering the question apparently understood it to have; that meaning shall, in relation to the person who made the statement, be deemed to be the meaning of the question. [S 23 am Act 75 of 2013]

SECTION 23 COMMENTARY Ambiguous questions: background and synopsis ...................................

[23.10]

Would have understood ..........................................................................

[23.20]

The person ..............................................................................................

[23.30]

Approach to s 23 .....................................................................................

[23.40]

Construction of questions ........................................................................

[23.50]

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[22.90] Renewal

s 23

Insurance Contracts Act 1984

[23.10]

[23.10] Ambiguous questions: background and synopsis Section 23 applies to a question asked in relation to a proposed contract of insurance or the provision of insurance cover of a person seeking to become a member of a superannuation or retirement scheme. Where a person answering such a question apparently understood the question had a certain meaning, and it was not unreasonable for a person in the circumstances to have that understanding, the question is to be taken to have that meaning. In other words, in determining whether there has been any misrepresentation, any ambiguity will be resolved in favour of the insured. The recommendations of the ALRC were not entirely accepted by Parliament. Section 23(b) ICA differs from s 24(b) of the Bill. The words “it would have been reasonable for a person in the circumstances of the person answering the question to have understood” in the Bill were replaced with “a reasonable person in the circumstances would have understood”. The final wording reflects the wording of s 21(1)(b). A similar change was made in respect of s 21, undoubtedly with the same consequences. Therefore, it is doubtful that in determining reasonableness, the particular circumstances of the person concerned, such as level of education, are to be taken into account: ALRC 20 at [184]. See also, [21.10.8]. See also s 26(1) ICA which provides that a statement made on the basis of a belief, being a belief that a reasonable person in the circumstances would have held, is not taken to be a misrepresentation. To broaden the scope of the operation of s 23, paragraph (1)(a) was amended by the Insurance Contracts Amendment Act 2013 (having commenced on 28 June 2014) to change the phrase “superannuation or retirement scheme” to “superannuation, retirement or other group life scheme”. A definition of “group life contract” was inserted in s 11(1) at the same time. The inclusion applies to any other group life scheme originally entered into after 28 June 2014 (being 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The amendment also applies to include any other group life scheme that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[23.20] Would have understood Consideration of ALRC 20 indicates that the use of the word “would” was deliberate. It is not possible to substitute the word “might” for the word 224

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“would” appearing in s 23(b): Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014 per Brownie J (NSW Sup Ct).

The “person” referred to in s 23 is “the insured”. It may be difficult to identify the “person” when a group of companies is involved. Brownie J (NSW Sup Ct) considered ALRC 20 (at [183]–[185]) and was persuaded that the “person” referred to is “the insured” rather than one or other of the former officers of the corporate insured who had completed the proposal. It was not necessary for his Honour to discriminate between the company involved in the dispute and the group of companies for the purpose of resolving the effect of s 23: Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014.

[23.40] Approach to s 23 In Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014 at 76,785, Brownie J (NSW Sup Ct) said on the application of s 23: One way of approaching s 23 would be to look at the completed proposal form from the point of view of the insurer at the time, and ask whether it would be reasonable for a person answering the questions to have understood them to have the meaning that that person apparently understood them to have. Another way would be to examine the same question now from the point of view of an observer at the trial, that is, someone who also knows of matters such as, in this case, the thought processes of (former employees of the insured) who collectively completed the form. [O]n balance the former approach seems preferable: this approach looks to the position of the insurer at the time of making the decision whether to accept the proposed risk and, if so, upon what terms. The assumption is that the insurer devised the form of the questions so that if the answers suggest that the person giving the answers attributed a particular meaning to the questions, then in the circumstances set out in s 23, the insurer is bound by that meaning. But it does not mean that the insurer ought to know other facts, such as the thought processes involved in answering the question, perhaps first known to an insurer on a trial, years later.

[23.50] Construction of questions Also on the application of s 23, in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 at 74,994, Young J said: In the light of s 23 of the Act, it seems to me that the court goes through a fourfold process with respect to the construction of questions in a proposal for insurance as follows: First, the court looks at the true construction of the ©

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[23.30] The person

s 24

Insurance Contracts Act 1984

[23.50]

words. Secondly, the court asks whether the words are ambiguous, thirdly, it asks what the insured apparently understood by the words and fourthly, it asks whether a reasonable person in the circumstances would have understood the question in the same way as the insured.

Hargrave J (Vic Sup Ct) considered Young J’s fourfold process in relation to a question whether a property was “to be demolished” in Bergman v CGU Insurance Ltd [2016] VSC 81 (9 March 2016). However, unlike Young J who had considered the question in Advance to be ambiguous, Hargrave J reasoned that the demolition question should be given its natural meaning and was not ambiguous. 24

Warranties of existing facts to be representations

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 COMMENTARY Background and synopsis ....................................................................... Application ...............................................................................................

[24.10] [24.20]

[24.10] Background and synopsis A statement made by the insured with respect to the existence of a state of affairs will not be treated as a warranty. It will be treated as a representation made by the insured to the insurer before the contract is entered into. This section has two purposes: 1. it prevents insurers from avoiding the provisions of the ICA relating to remedies for misrepresentation by incorporating representations as terms of the contract. Prior to the ICA, a proposal form would have commonly contained what was referred to as a “basis of contract clause” whereby the proponent would warrant the truth of the answers in the proposal form. A breach would have contractual consequences. Such clauses had already attracted some legislative intervention prior to the ICA: ALRC 20 at [171]; and 2. it ensures that the substantive rights and obligations of insurer and insured are the same, irrespective of the form in which those obligations are phrased. In other words, the insured’s obligation is to tell the truth to the best of the insured’s knowledge: ALRC 20 at [195]. Section 24 converts only warranties of existing facts into representations. Continuing warranties are dealt with separately in the context of remedies for breach of contract: see s 54. 226

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Perram J (Fed Ct) held that it was “arguable” that an endorsement to a policy of insurance relieving a professional indemnity insurer of its obligation to indemnify a valuer for losses arising out of any valuation exceeding $1 million, unless it was reviewed by a second valuer prior to such valuation being issued, was a warranty to which s 24 directly applied: Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) (2011) 205 FCR 295; 284 ALR 72; [2011] FCA 1124. It was argued that the endorsement was to be seen, in substance, as a warranty that at the time of the entry into the policy all valuations exceeding $1 million had been checked by two valuers. As a statement with respect to the existence of a state of affairs under s 24 of the ICA, it did not have the effect as a warranty but had the effect as a statement made before the policy was entered into. Therefore, arguably, any warranty could not operate as the professional indemnity insurer contended. This was either because it was a warranty to which s 24 directly applied or alternatively, it was to be seen as an attempt to contract out of Pt IV of the ICA, a course both prohibited and rendered invalid by s 33. Perram J held that it was “arguable” that the endorsement did not apply. 25

Misrepresentation by life insured Where, during the negotiations for a contract of life insurance but before it was entered into, a misrepresentation was made to the insurer by a person who, under the contract, became the life insured or one of the life insureds, this Act has effect as though the misrepresentation had been so made by the insured.

SECTION 25 COMMENTARY Background and synopsis ....................................................................... Contract of life insurance ........................................................................ Negotiations ............................................................................................. Application ...............................................................................................

[25.10] [25.20] [25.30] [25.40]

[25.10] Background and synopsis In life insurance, representations as to health etc are often made by the life to be insured (life insured). Previously, insurers protected themselves against misrepresentations by providing that the insured warranted the truth of the representations made by the life insured. The effectiveness of this protection was greatly reduced by s 26(1) which requires that such warranties be interpreted according to the belief of a person making a statement in connection with a proposed contract of insurance. ©

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[24.20] Application

s 26

Insurance Contracts Act 1984

[25.10]

Consequently, any misrepresentation by the life insured is to be treated as if it had been made by the insured: ALRC 20 at [185]. By the operation of s 25, where, before a contract of life insurance is entered into, a misrepresentation is made to the insurer by a person whose life is insured, the misrepresentation is regarded as having been made by the insured: ALRC 20 at [185].

[25.20] Contract of life insurance See s 11(1). See also [11.30].

[25.30] Negotiations Lee J (Qld Sup Ct) considered that the word “negotiations” in s 25 was wide enough to include both oral negotiations and written negotiations. It included written negotiations in the form of statements made in the proposal for insurance, statements made in the proposal statement of the life insured and statements made in any other relevant form, eg in a confidential medical report it adopted by the life insured: Herbohn v NZI Life Ltd (1998) 149 FLR 21; 10 ANZ Ins Cas 61-410.

[25.40] Application A solicitor life insured misrepresented that statements in writing in support of a proposal were accurate and complete when he knew they were not because he had failed to disclose serious misappropriations. The effect of s 25 was to attach the misrepresentation of the life insured to the insured: Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (unreported, NSW Sup Ct, Cole J, 15 June 1994). This was upheld on appeal by the NSW Court of Appeal comprising Priestley, Clarke and Powell JJA: Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543. 26

Certain statements not misrepresentations

(1) Where a statement that was made by a person in connection with a proposed contract of insurance was in fact untrue but was made on the basis of a belief that the person held, being a belief that a reasonable person in the circumstances would have held, the statement shall not be taken to be a misrepresentation. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 item 6]

(2) A statement that was made by a person in connection with a proposed contract of insurance shall not be taken to be a misrepresentation unless the person who made the statement knew, or a reasonable person in the

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s 26

Pt IV – Div 2 – Misrepresentations by insured

(3) This section extends to the provision of insurance cover in respect of: (a) a person who is seeking to become a member of a superannuation, retirement or other group life scheme; or (b) a person who is a holder, or is applying to become a holder, of an RSA. [Subs (3) am Act 75 of 2013, s 3 and Sch 6 item 37; Act 62 of 1997, s 3 and Sch 10 item 4] [S 26 am Act 75 of 2013; Act 107 of 1997; Act 62 of 1997]

SECTION 26 COMMENTARY Certain statements not misrepresentations: background and synopsis .... A person .................................................................................................. Statement ................................................................................................ A belief that the person held, being a belief that a reasonable person in the circumstances would have held: s 26(1) ...................................... A reasonable person in the circumstances could be expected to have known: s 26(2) .................................................................................... Could be expected to have known that the “statement” would have been relevant to the insurer: s 26(2) ........................................................... Sections 26 and 21 ................................................................................. Onus of proof ...........................................................................................

[26.10] [26.20] [26.25] [26.30] [26.35] [26.40] [26.50] [26.60]

[26.10] Certain statements not misrepresentations: background and synopsis At common law a misrepresentation was subject to the question of materiality in precisely the same way as a non-disclosure. Materiality was judged by the prudent insurer test in each case. The ALRC commented that the test is calculated to protect the insured against the unforeseeable idiosyncrasies of the insurer. However, the justification for the test disappears where those idiosyncrasies are apparent from the questions asked by the insurer. It was thought that the prudent insurer test discriminated against an innovative insurer. The ALRC recommended that the law be modified in favour of the insurer by adopting a similar recommendation to the one proposed for non-disclosure: ALRC 20 at [184]. As with s 21, the recommendation by the ALRC was not accepted by Parliament in its entirety. Section 27(1) of the original Bill which specified “it was reasonable for a person in his circumstances to hold” became “a reasonable person in the circumstances would have held” in s 26(1). Similarly, s 27(2) of the Bill which specified “a person in the circumstances of that person” became “a reasonable person in the ©

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circumstances could be expected to have known, that the statement would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms.

s 26

Insurance Contracts Act 1984

[26.10]

circumstances” in s 26(2) ICA. Any reference to ALRC 20 should take into account the changed formulation. See the earlier discussion in relation to the meaning of “a reasonable person in the circumstances” in s 21 discussed at, [21.10.8]. Section 26(1) is concerned with whether a person making a statement in connection with a proposed contract of insurance knew that the statement was a misrepresentation. Section 26(2) is concerned with whether the person making a statement in connection with a proposed contract of insurance knew that the misrepresentation was relevant to the insurer. Section 26 applies to people wishing to become a member of a superannuation or retirement scheme or a person who is a Retirement Savings Accounts (RSA) holder or applying to become an RSA holder (see s 11 ICA): Explanatory Memorandum to the Retirement Savings Accounts (Consequential Amendments) Bill 1997 (Sen) cl 190. An example of the proposed operation of s 26 is to be found in the Notes to the Draft Insurance Contracts Bill 1982 (cl 27) as follows: A, who is 60, takes out motor vehicle insurance. In answer to questions in a proposal form he accidentally misstates his age as 59 and says that his car is in a roadworthy condition. Unknown to A, the insurer does not insure people of the age of 60 or over and the brakes of his car need repair (although they have always worked properly in the past and A has his car serviced regularly). A is involved in an accident. [Section 26(1)] would prevent the insurer from avoiding the claim because of the misstatement as to the roadworthiness of the car. [Section 26(2)] would prevent the insurer from avoiding the claim because of the misstatement of age.

To broaden the scope of the operation of s 26, paragraph (3)(a) was amended by the Insurance Contracts Amendment Act 2013 (having commenced on 28 June 2014) to change the phrase “superannuation or retirement scheme” to “superannuation, retirement or other group life scheme”. A definition of “group life contract” was inserted in s 11(1) at the same time. The inclusion applies to any other group life scheme originally entered into after 28 June 2014 (which is 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The amendment also applies to include any other group life scheme that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[26.20] A person The word “person” in s 26 should have the same construction as attributed by the High Court to the expression “an insured” in s 21 in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910. 230

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[26.30]

Pt IV – Div 2 – Misrepresentations by insured

s 26

In Advance (NSW) Insurance Agencies Pty Ltd v Matthews … Mason CJ, Dawson, Toohey and Gaudron JJ held that the expression “an insured” in s 21 meant each of the persons who became an insured, and therefore that the failure of one of those persons to make the requisite disclosure triggered the rights which s 28 gives to the insurer, notwithstanding that the failure of one of the co-insured persons was not known to the others. It does not seem to me possible to treat the word “person” in s 28(1) as meaning one thing for the purposes of the law about the duty of disclosure, and another thing for the purposes of the law about misrepresentations; and it follows that the word “person” should receive the same construction where it appears in s 26(1) and (2), that is, any person who becomes “the insured”, or one of the insured persons.

[26.25] Statement The scope of the word “statement” in s 26 covers misrepresentations by conduct, omission or silence. A narrow construction of “statement” in s 26 to exclude misrepresentations by conduct, omission or silence would leave such misrepresentations within s 28 but outside s 26. This would be contrary to the remedial nature of s 26: Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679; 160 FLR 435; 11 ANZ Ins Cas 61-491; [2001] NSWCA 20 (per NSW Sup Ct CA Meagher, Handley and Powell JJA). On appeal, the High Court majority (McHugh, Kirby and Callinan JJ) cautioned that there could be no obligation “to correct” a state of mind of one party by another in respect of a matter not relevant to the risk: Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; 77 ALJR 1070; 12 ANZ Ins Cas 61-565; [2003] HCA 25.

[26.30] A belief that the person held, being a belief that a reasonable person in the circumstances would have held: s 26(1) The court must place itself in the shoes of the person making the statement and ask “did the person making the statement believe the statement and would a reasonable person in the circumstances, that is in the same circumstances, have held that belief?”. The court must resist the temptation of hindsight and must not ask “is there something better the person making the statement could have done?”: Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062 at 77,151 per Beach J (Vic Sup Ct). ©

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Brownie J (NSW Sup Ct) considered the meaning of “person” in s 26 in Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014. He said (at 76,786):

s 26

Insurance Contracts Act 1984

[26.30]

The court must consider the knowledge and understanding of the person concerned. This meant that a person’s belief in the truth of answers to questions about a medical condition in a member application form for insurance under an employment based superannuation trust was that of an ordinary worker without the knowledge and understanding of a doctor: NRG Victory Australia Ltd v Hudson (2003) 13 ANZ Ins Cas 90-121; [2003] WASCA 291. Parker J (WA Sup Ct FC with whom Steytler and Miller JJ agreed) said at 86,519: It must be remembered that the [person] did not have the knowledge and understanding of a doctor of the scope of the concept of a disease, but only the appreciation of an ordinary worker.

[26.35] A reasonable person in the circumstances could be expected to have known: s 26(2) The wording of a proposal for insurance is something to be taken into account in determining whether an insurer can prove that a reasonable person in the circumstances making a statement in connection with a proposed contract of insurance could be expected to have known the statement would have been relevant to the decision of the insurer. Handley JA (NSW Sup Ct CA) (with whom Sheller JA and Studdert AJA agreed) noted that the fact that a tick in answer to a question in a proposal for insurance for life insurance was in an agent’s handwriting was not a decisive matter under s 26(2): Australian Mutual Provident Society v Lose (1997) 9 ANZ Ins Cas 61-381. Handley JA took into account the fact that the life insured signed the proposal which became the basis of the contract together with the declaration in the proposal that the answers were true and correct “regardless of whether or not they are in [the life insured’s] own handwriting”. The proposal also specified that those signing had “read all the questions and answers”.

[26.40] Could be expected to have known that the “statement” would have been relevant to the insurer: s 26(2) Section 26(2) makes no assumption about the truth or falsity of any statement. Samuels JA (NSW Sup Ct CA) considered the question of whether the statement had to be false in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; 95 ALR 305; 6 ANZ Ins Cas 60-964. He said (at 407–408 (NSWLR); 76,402 (ANZ Ins Cas)): [s 26(2)] makes no assumption about the truth or falsity of any statement, but provides that no statement in a proposal is capable of amounting to a misrepresentation unless it satisfies the prescribed test of relevance. By reason 232

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s 26

of the basis clause in the proposal and the policy the statements made in answer to questions in the proposal would, at common law, have constituted warranties and proof of their breach would have rested upon the insurer … Despite the effect of s 24 (and bearing in mind what was said in Advance (NSW) Insurance Agencies Pty Ltd v Matthews at 615 (CLR), 75,836 (ANZ Ins Cas)) it still seems sensible to retain the same principle, which, in any case, applies also to proof of misrepresentation, whether a warranty or not.

In Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182, Davies JA (Qld Sup Ct CA) (with whom McPherson JA and Cullinane J agreed on this matter) agreed with Samuels JA in Plasteel Windows and found that s 26(2) makes no assumption about the truth or falsity of any statement. Davies JA stated (at 86,300): It is correct, in my opinion, as Samuels JA said in Plasteel Windows, that subsection (2) makes no assumption about the truth or falsity of any statement. So the relevant part of that subsection may be read as “a reasonable person in the circumstances could be expected to have known that the statement (whether true or false) would have been relevant to the decision of the insurer whether to accept the risk and, if so, on what terms”. … The truth or falsity of such a statement does not affect its relevance to the decision whether to accept the risk or to the decision upon the terms on which the risk should be accepted. A statement may be relevant to either such decision whether it is true or false. The falsity of such a statement may affect only whether, if the truth had been known, the risk would have been rejected or would have been accepted only on different terms. That is a matter with which s 29 deals and which it will be necessary to consider later.

[26.50] Sections 26 and 21 The application of ss 26(2) and 21(1) respectively to the same facts can yield different results. Davies JA (Qld Sup Ct CA) (with whom McPherson and Cullinane agreed on this matter) explained how on the same facts ss 26(2) and 21(1) can yield different results in Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182. The life insured’s breathlessness and the fact that she saw a medical practitioner for it were not matters that a reasonable person in the circumstances could be expected to know were relevant to the decision of the life insurer under s 21. On the other hand, the statements (whether true or false) in answers to questions which required but omitted details of the visit to the medical practitioner were statements which taken together, a reasonable person in the circumstances of the life insured could be expected to have known would have been relevant to the decision of the life insurer under s 26. Davies JA said (at 86,300–86,301 (ANZ Ins Cas)): ©

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[26.50]

s 26

Insurance Contracts Act 1984

[26.50]

Section 21 applies where the insured has failed to disclose to the insurer a matter known to her which, relevantly, a reasonable person in the circumstances of the insured could be expected to know was relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. It does not matter for this purpose whether the non-disclosure occurred in the course of answering a question in the proposal or whether, for some other reason or in some other circumstances, it was a matter which a reasonable person in the circumstances of the insured could be expected to have known was relevant to those decisions. The section is framed as a positive duty of the insured. By contrast s 26(1) is framed in terms of excluding, from the category of what would otherwise be misrepresentations, statements made in specified circumstances; and s 26(2) is framed in terms of excluding from that category statements unless made in certain circumstances. The inference in each case is that, unless so excluded, statements which would otherwise be misrepresentations will be misrepresentations for the purpose of the Act. On this construction of these sections, the only possible point of overlap between s 21 and s 26 would occur in the case where, whether or not the insurer has inquired about a matter, the insured has made a statement about that matter which was false because it was misleadingly incomplete. In such a case there may be a failure to disclose a matter which the insured had a duty to disclose under s 21 and the statement may also be a misrepresentation not excluded from being one by s 26. However, 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, as the present case may illustrate.

[26.60] Onus of proof The onus of proving the application of s 26(1) lies upon the proponent and of proving the application of s 26(2) upon the insurer. Samuels JA considered the question of the onus of proof in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; 95 ALR 305; 6 ANZ Ins Cas 60-964. He said (at 407–408 (NSWLR); 76,402 (ANZ Ins Cas)): In my opinion the onus of proving the application of s 26(1) lies upon the proponent, and of s 26(2) upon the insurer. The two subsections cover different ground. Subsection (1) sets out the basis upon which an untrue statement shall not amount to a misrepresentation – that is, shall be excepted from its ordinary fate. For that reason …and because it depends upon establishing the proponent’s belief, the proof rests with the proponent. On the other hand s 26(2) makes no assumption about the truth or falsity of any statement, but provides that no statement in a proposal is capable of amounting to a misrepresentation unless it satisfies the prescribed test of relevance. By reason of the basis clause in the proposal and the policy the statements made in answer to questions in the proposal would, at common law, have constituted warranties and proof of their breach would have rested upon the insurer … 234

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s 27

Rares J (Fed Ct, Syd Reg) in Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (No 4) (2010) 268 ALR 108; 16 ANZ Ins Cas 61-842; [2010] FCA 482 referred to Plasteel Windows and the onus on the insured of establishing its belief if it seeks to rely on s 26(1). The Full Court of the Federal Court (comprising Besanko, Perram and Katzmann JJ), in a joint judgment, dismissed the appeal by the insured. The Full Court said that in raising s 26(1) in respect of an untrue statement, the insured needed to show that the sole director of the insured made the statement on the basis of a belief and that belief was one that, in the circumstances, a reasonable person would have held. They noted that by raising s 26(1) the insured had put directly in issue the question of whether it held the belief that what it said in its disclosures was true. Since the person who completed the disclosures was the sole director of the insured, it followed that the insured had made the question of his belief in the truth of the disclosures an issue which inevitably had to be resolved by the trial judge: Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (2011) 16 ANZ Ins Cas 61-885; [2011] FCAFC 53. 27

Failure to answer questions A person shall not be taken to have made a misrepresentation by reason only that the person failed to answer a question included in a proposal form or gave an obviously incomplete or irrelevant answer to such a question. [S 27 am Act 107 of 1997, s 3 and Sch 8 item 7]

SECTION 27 COMMENTARY Background and synopsis ....................................................................... Proposal form .......................................................................................... By reason only ......................................................................................... Obviously incomplete ..............................................................................

[27.10] [27.20] [27.25] [27.30]

[27.10] Background and synopsis A person is not taken to have made a misrepresentation solely because that person failed to answer a question or gave an obviously incomplete or irrelevant answer to a question in a proposal form. The ALRC noted that some insurance contracts stipulated that a failure to answer a question in a proposal form would be deemed to be an answer in the negative. Section 27 overrides such a stipulation. The ALRC ©

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Despite the effect of s 24 (and bearing in mind what was said in Advance (NSW) Insurance Agencies Pty Ltd v Matthews at 75,836) it still seems sensible to retain the same principle, which, in any case, applies also to proof of misrepresentation, whether a warranty or not.

s 27

Insurance Contracts Act 1984

[27.10]

recommended that an insurer should be deemed to have waived the duty of disclosure to the relevant extent where it has failed to pursue unanswered or obviously incomplete answered questions contained in a proposal form. If the insured has not answered a question and the insurer wants that information, the insurer bears the onus of making further inquiries: ALRC 20 at [184].

[27.20] Proposal form See s 11(1).

[27.25] By reason only The NSW Court of Appeal (Meagher JA, with whom Macfarlan and Emmett JJA agreed) found that the critical words in s 27 are the words “by reason only”. The provision is directed to misrepresentations that arise solely because of a failure to answer or an obviously incomplete or irrelevant answer. He held that s 27 had no application to the subject misrepresentations being two answers in a proposal for a trade credit policy. Those misrepresentations were said to arise from parts of the two answers which were alleged to be “obviously incomplete” because officers of the insurer were aware of facts that showed that those answers gave less than a full and accurate account of the subject matter to which they were directed. Therefore they did not arise solely because those answers were obviously incomplete or irrelevant: Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252. Meagher JA said (at [69]): Section 27 describes a circumstance in which a person is to be taken not to have made a “misrepresentation”. In this context a misrepresentation is the making of a statement which is untrue: see s 26(1). The critical words in s 27 are the words “by reason only”. They make clear that the provision is directed to misrepresentations which arise solely because there has been either a failure to answer or an obviously incomplete or irrelevant answer given. Such misrepresentations would include those made by a negative answer which is inferred only from the fact of the incomplete or partial answer as well as those which result from a contractual term having that effect. Understood in this way s 27 can have no application to the misrepresentations relied upon by the [insured]. Those misrepresentations are said to arise from parts of the answers given to the first and second questions. Neither is said to arise solely from the fact that those answers were obviously incomplete or irrelevant.

White J (NSW Sup Ct) found that s 27 did not affect the consequences of a misrepresentation by a life insured that he had suffered only the “odd lymphedema” and that the lymphedema which he suffered was “mild”. Section 27 had no application because there was a misrepresentation, whether the answer was complete or not complete: Hitchens v Zurich 236

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[27.30]

Pt IV – Div 2 – Misrepresentations by insured

s 27

The section provides that a person is not to be taken to have made a misrepresentation by reason only that he or she failed to answer a question or gave an obviously incomplete or irrelevant answer. The section was introduced to counter the form of some proposals that provided that a question that was not answered was to be deemed to be answered, “No”. Where an answer is given, but the answer is not true, there will be a misrepresentation, whether the answer was complete or not complete.

[27.30] Obviously incomplete The Qld Court of Appeal (Fitzgerald P, Davies JA and Thomas J) in Orb Holdings Pty Ltd v Lombard Insurance Co (Aust) Ltd [1995] 2 Qd R 51; (1994) 8 ANZ Ins Cas 61-221 found that there was no waiver of the insured’s duty of disclosure in misrepresenting that a building was of “brick/iron”. Fitzgerald P noted that the rationale behind ss 27 and 21(3) is that “obviously incomplete” information puts an insurer on inquiry and, if it omits to inquire, it has waived its right to rely upon an insured’s misrepresentation or failure to disclose. The insured had stated in a proposal form that a building was of “brick/iron” construction with a note “See Survey Report” whereas the building was constructed substantially of wood. Fitzgerald P found that given that a quite sensible reading of the “See Survey Report” notation meant that the report would provide confirmation and perhaps details of the information contained in the proposal it would not necessarily follow that the notation meant that the information given was incomplete so that it could not be said that it was “obviously incomplete”. Davies JA and Thomas J considered a contention that the proposal was obviously incomplete and a schedule referred to in the proposal could not cure that incompleteness because, even if the reference “brick/iron” meant walls of brick and roof of iron, that reference said nothing of the material which comprised the floor. However the insurer was not relying on a failure to disclose the composition of the floor and would have accepted the risk without knowing what that composition was. Consequently any waiver of a duty to disclose the composition of the floor was irrelevant. Rares J (Fed Ct, Syd Reg) in Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (No 4) (2010) 268 ALR 108; 16 ANZ Ins Cas 61-842; [2010] FCA 482 considered whether answers provided by an insured in two proposals for motor vehicle insurance disclosing one PCA conviction and licence cancellation of an additional driver, who had also had an earlier PCA conviction and licence cancellation, were “obviously incomplete”. Proposal documentation had been referenced to both three-year and five-year driving and licence history, a five-year period ©

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Australia Ltd (2015) 18 ANZ Ins Cas 62-076; [2015] NSWSC 825 (30 June 2015). White J said, giving emphasis to the words “by reason only” in Section 27, (at [123]):

s 27

Insurance Contracts Act 1984

[27.30]

catching the undisclosed earlier conviction and licence cancellation. Rares J found that the answer to a question in one proposal which contained a handwritten “3 yrs” next to the question was not “obviously incomplete” in the context provided by a letter and a telephone conversation. A reasonable reading of the material was that the only PCA offence and licence cancellation that the additional driver had were the most recent ones. Rares J also found that the answers in the other proposal were not “obviously incomplete”. The proposal required answers with respect to a five-year period and a driver’s declaration had referred to a three-year period (only disclosing the more recent offence and cancellation). Rares J rejected an argument that by failing to inquire, the insurer had waived any right to rely on an incomplete answer. For all the insurer knew, full and complete answers had been given to the questions in the proposal. The Full Court of the Federal Court (comprising Besanko, Perram and Katzmann JJ), in a joint judgment, dismissed the appeal by the insured. The Full Court did not think that relevant answers were obviously incomplete. There would have been no reason for a reader of the answers to draw any conclusion other than the conclusion that all convictions of nominated drivers in connection with intoxicating liquor were disclosed: Sagacious Legal Pty Ltd v Wesfarmers General Insurance Ltd (2011) 16 ANZ Ins Cas 61-885; [2011] FCAFC 53. In Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252, the NSW Court of Appeal (Meagher JA, with whom Macfarlan and Emmett JJA agreed) found that s 27 had no application to two answers in a proposal form for a trade credit policy. The misrepresentations were said to arise from parts of the two answers which were alleged to be “obviously incomplete” because officers of the insurer were aware of facts that showed that those answers gave less than a full and accurate account of the subject matter to which they were directed. The insured’s argument that s 27 applied was rejected because the misrepresentations did not arise solely from the fact that the answers were obviously incomplete or irrelevant. Meagher JA also rejected the insured’s argument because the argument depended upon the relevant answers being “obviously incomplete” other than as a result of their construction in accordance with principles governing s 27 referred to above (see [27.25]). He noted that the operation of those principles in determining whether a misrepresentation has been made may have been modified by ss 23 and 26. He noted however that the operation of those principles have not been modified for the purposes of applying s 27.

Division 3 – Remedies for non-disclosure and misrepresentations by insured [Div 3 heading subst Act 41 of 2012, s 3 and Sch 2 item 5]

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[27.30]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 27A

(1) If: (a) a contract of life insurance includes 2 or more groups of provisions (for example, provisions that are grouped into 2 or more separate parts); and (b) each group of provisions could form a single contract of life insurance; then this Division applies as if each group of provisions were a separate contract of life insurance. (2) If: (a) a contract of life insurance includes 2 or more groups of provisions (for example, provisions that are grouped into 2 or more separate parts); and (b) because of subsection (1), this Division applies as if each group of provisions were a separate contract of life insurance; and (c) the contract also includes provisions (related provisions) that relate to or affect the operation of one or more of the groups of provisions referred to in paragraph (a); then the related provisions are, for the purposes of this Division, to be regarded as provisions included in each relevant separate contract of life insurance referred to in paragraph (b). (3) If a contract of life insurance provides insurance cover in relation to 2 or more life insureds, this Division applies as if the insurance cover provided in relation to each life insured were provided by a separate contract of life insurance. (4) If a contract of life insurance provides: (a) insurance cover in relation to a life insured that is underwritten on particular terms; and (b) insurance cover in relation to that life insured that: (i) is not underwritten; or (ii) is underwritten on different terms; then this Division applies as if the insurance cover referred to in paragraph (a) and the insurance cover referred to in paragraph (b) were each provided by a separate contract of life insurance. Note: The effect of this section in relation to a contract of life insurance to which subsection (1), (3) or (4) applies is that different remedies may be available to the insurer in respect of each separate contract of life insurance that is taken to exist by virtue of the relevant subsection. [S 27A insrt Act 75 of 2013, s 3 and Sch 5 item 1]

SECTION 27A COMMENTARY Background and synopsis (Pre and Post 28 June 2013) .......................

[27A.10]

Contract of life insurance ........................................................................

[27A.20]

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27A Certain contracts of life insurance may be treated as if they comprised 2 or more separate contracts of life insurance

s 27A

Insurance Contracts Act 1984

[27A.10]

[27A.10] Background and synopsis (Pre and Post 28 June 2013) The Review Panel commissioned by the Australian Government in 2003 to review the ICA considered the remedies for misrepresentation and non-disclosure under s 29 which concerns contracts of life insurance. The Review Panel noted that at the time of the publication of ALRC 20 in 1982 the major part of life insurance business was endowment and whole of life policies. At the time of the review in 2004 term life including rider benefits and disability insurance represented over 90% of new long term life insurance business. Given the wider range of risks underwritten by life insurers (such as trauma and income protection) and the fact that they are often bundled together the Review Panel recommended a different approach to remedies for misrepresentation and non-disclosure according to the type of insurable event and further recommended that life insurance contracts should be “unbundled” to facilitate separate treatment (see Final Report (June 2004), at [7.12]–[7.18] and [7.30]–[7.36]). Unbundling of contracts of life insurance is explained in the Explanatory Memorandum to ICAB 2013 (at [1.1.04]–[1.1.06]). Contracts of life insurance often bundle in the one contract different types of protection against more than one type of insurable event resulting from death, sickness or accident. An application for each type of insurable event will be unbundled for separate consideration by an insurer in relation to each type of risk for underwriting purposes. An example is provided in the Explanatory Memorandum to ICAB 2013 as follows (at [1.1.05]): For example, an applicant may present with a family medical history of a condition that is well recognised as a risk factor in the development of a debilitating disease, but a disease that is unlikely to result in premature death. In those circumstances, the insurer is likely to accept a death cover component without a loading or exclusion, but the income protection cover would be offered with a modification to the policy terms or with a premium loading, in response to the additional risk caused by the family history of the condition.

Before the amendments to the ICA including the inclusion of s 27A (pre 28 June 2013) the remedies for avoidance or variation of the contract had to be applied to the contract as a whole. This was notwithstanding that any misrepresentation or non-disclosure that affected one aspect of the insurance cover may not have been relevant to another, which disadvantaged the insured. Now s 27A (post 28 June 2013) provides that if a contract of life insurance contains two or more groups of provisions, the remedies in Div 3 of Pt IV of the ICA for misrepresentation and non-disclosure apply to each group of provisions, as if the groups of provisions were a separate contract of life insurance. Therefore, if a contract contains cover for both death and total and permanent disability (TPD), then with unbundling remedies would apply to each as required. 240

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[27A.20]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 28

Similarly, if a contract of insurance provides insurance cover in relation to two or more life insureds, then under s 27A(3) the insurance cover in relation to each life insured is taken to be provided by separate contracts of life insurance. Finally, under s 27A(4) where a contract of life insurance provides insurance cover in relation to a life insured that is underwritten on particular terms and insurance cover in relation to that life insured that is either not underwritten or is underwritten on different terms, the remedies for misrepresentation or non-disclosure apply as if the insurance cover were each provided by a separate contract of life insurance. The intention of this provision is to allow separate remedies in relation to top-up cover which is provided on a more underwritten basis to those members of a group life scheme who satisfy the additional underwriting criteria. The remedies would apply to the top-up cover but not the cover that is automatically provided under the scheme. Section 27A was inserted into the ICA by the Insurance Contracts Amendment Act 2013. It commenced when the Act received Royal Assent on 28 June 2013. Section 27A applies to a contract of life insurance whether originally entered into before or after that commencement. However the application of s 27A does not affect any proceedings, or any appeal, in progress at the commencement of s 27A.

[27A.20] Contract of life insurance See s 11(1). See also [11.30]. 28

General insurance

(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. (2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.

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If there are related provisions that relate to or affect the operation of one or more of the groups of provisions, then under s 27A(2) those related provisions are to be taken to be included in each separate contract of life insurance.

s 28

Insurance Contracts Act 1984

[28.10]

(3) If the insurer is not entitled to avoid the contract or, being entitled to avoid the contract (whether under subsection (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. [Subs (3) am Act 107 of 1997, s 3 and Sch 8 item 8] [S 28 am Act 107 of 1997]

SECTION 28 COMMENTARY Background and synopsis ....................................................................... The person who became the insured: s 28(1) ........................................ Entered into: s 28(1) ................................................................................ Misrepresentation … before the contract: s 28(1)(b) .............................. Where “the insurer” would have entered into the contract ..................... On the same terms and conditions: s 28(1) ........................................... Fraudulent non-disclosure: s 28(2) ......................................................... Fraudulent misrepresentation: s 28(2) .................................................... Avoid: s 28(2) .......................................................................................... Liability reduced: s 28(3) ......................................................................... The liability of the insurer in respect of a claim: s 28(3) ........................ Onus of proof ........................................................................................... Refund of premium ..................................................................................

[28.10] [28.10.1] [28.10.2] [28.10.3] [28.10.4] [28.10.5] [28.20.1] [28.20.2] [28.20.3] [28.30.1] [28.30.2] [28.30.3] [28.40]

[28.10] Background and synopsis Section 28 sets out the remedies of an insurer under a contract of general insurance in the event of non-disclosure or misrepresentation. Section 33 makes these remedies the only ones available to an insurer. An insurer may avoid a contract for fraudulent non-disclosure or misrepresentation but in certain circumstances courts may disregard the avoidance by the operation of s 31. Under s 28 an insurer is not entitled to avoid a contract of general insurance for innocent misrepresentation or innocent non-disclosure but may reduce its liability to the amount that would place it in the position it would have been in the absence of the non-disclosure or misrepresentation. If the non-disclosure or misrepresentation was fraudulent, the insurer may avoid the contract. Section 28 will not apply if the insurer would have entered into the contract of insurance for the same premium and on the same terms and conditions, even with the nondisclosure or misrepresentation. The ALRC considered the assessment of damages for innocent misrepresentation and non-disclosure in relation to insurance contracts. It noted that at common law a different approach is taken to the assessment of damages for misrepresentation. The ALRC considered the common law approach to be preferable. The ALRC stated (ALRC 20 at [192]): 242

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s 28

Where the insurer would have accepted the risk, but at a different premium, its loss is the difference between the actual and notional premiums. Where it would have accepted the risk on different terms (whether at the same premium or not), the loss is the difference between its liabilities under the actual and notional contracts. If it would have excluded the risk which gave rise to the claim, the amount of its loss is equivalent to the amount of the claim made against it. In that case, the insured would recover nothing.

In making recommendations for the remedies for non-disclosure and misrepresentation under a contract of general insurance the ALRC stated (ALRC 20 at [194]): The nature and extent of the insurer’s redress should depend on the nature and extent of the loss which it has suffered as a result of the insured’s conduct. It should no longer be entitled to avoid a contract, and a heavy claim under that contract, merely because it has suffered a small, even insubstantial, loss as a result of a non-disclosure or misrepresentation … It is quite plainly contrary to the true principle of uberrima fides to impose on the insured a burden which far exceeds the harm which he has done. The insurer should not be entitled to any redress which exceeds the loss which it has in fact suffered … It should be entitled to damages for the breach of duty. This entitlement should be limited to a right to deduct from a claim an amount that fairly represents the loss it has suffered as a consequence of the insured’s breach of duty. Given the difficulties associated with proportionality and with the causal connection test, the only appropriate method for assessing this amount is in accordance with the principle applicable to the assessment of damages for fraudulent misrepresentation at common law.

The ALRC noted that there were two main grounds for retaining an insurer’s entitlement to avoid a contract of insurance ab initio in the event of a fraudulent non-disclosure or misrepresentation (ALRC 20, at [196]): First, fraud on the part of the insured is so flagrant a breach of the duty of utmost good faith that avoidance of the contract is the only appropriate remedy. Secondly, if the penalty for fraudulent misrepresentation, like that for innocent misrepresentation, were to be limited to the loss actually caused by the insured’s conduct, there would be little disincentive to an insured against attempting to obtain lower premiums or more advantageous terms by misrepresenting facts clearly relevant to the insurer.

It is worth noting the frequently quoted description of s 28 appearing in the Notes to the Draft Insurance Contracts Bill 1982: An insurer is not entitled to avoid a contract for innocent misrepresentation or non-disclosure, but may reduce a claim by the amount of the loss it has suffered as a result of the misrepresentation or non-disclosure. The amount by which the claim is reduced is the amount which would place the insurer in the position it would have been in if the failure to comply with the duty of disclosure had not occurred or the misrepresentation had not been made. For example, if the insurer would have charged a higher premium had the misrepresentation not been made, it would be entitled to reduce the claim by the amount of the additional premium. If the insurer would not have entered into the contract at all, it would be entitled to pay nothing in respect of the ©

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[28.10]

s 28

Insurance Contracts Act 1984

[28.10]

claim except the premium paid by the insured. If the insurer would have inserted a different term in the contract, then the insurer would only be liable for the amount for which it would have been liable if that term had been a term of the contract. The principle is the one generally applied in assessing damages for misrepresentation.

[28.10.1] The person who became the insured: s 28(1) The ICA does not specifically address the problems which arise when more than one person becomes the insured under a contract of general insurance. A question arises as to how persons who become co-insured are to be treated under s 28. This question also arises in respect of s 21. It was addressed by the High Court in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910. The High Court found that if “an insured” in s 21(1) is to be read as a reference to each co-insured, then it is natural to read the references in s 28(1) to “the person who became the insured” and “the insured” in the same way. As a consequence, the insurer was entitled to avoid the contract of insurance where one co-insured had been guilty of a fraudulent failure to disclose. (The High Court decision in Advance (NSW) Insurance Agencies Pty Ltd v Matthews is dealt with more fully at [21.10.2].) Young J (NSW Sup Ct) held, at first instance, that as only one co-insured had been guilty of a fraudulent breach of the duty of disclosure there was no fraud by the insured person within the meaning of s 28(2): Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813. The NSW Court of Appeal, by a majority, dismissed the insurer’s appeal. The majority held that in the case of joint insurance of an interest, “the insured” must mean both of the joint insured. In the case of a composite policy which insured the several interests of different people, the insurer may avoid the contract insofar as it affects the separate interests of the insured person who has fraudulently failed to disclose a relevant matter: Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1988) 12 NSWLR 250; 93 FLR 164; 5 ANZ Ins Cas 60-850 per McHugh and Hope JJA. In a dissenting judgment, Samuels JA held that the “insured” in s 28(1) meant “the insured or any of them”, as it does under s 21. His Honour held that if this was not the case, a co-insured who was guilty of fraud could recover the whole of the sum insured. He noted that it was also open to the insured to seek recovery under s 31 notwithstanding the avoidance. The majority of the High Court did not draw a distinction between joint and composite contracts of insurance, as the Court of Appeal had done, but ruled as a general principle that s 28 applied where one co-insured had failed to disclose a material fact, notwithstanding that the other did not 244

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[28.10.2]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 28

It is convenient to begin the discussion of this question by saying that, if we are to read “an insured” in s 21(1) as a reference to each co-insured, it is natural to read the references in s 28(1) to “the person who became the insured” and “the insured” in the same way … if s 21 imposes a duty on each person who becomes insured to disclose a material matter to the insurer, as in our opinion it does, then it is logical to read s 28(1) as referring to such a failure, that is, the failure of one co-insured to disclose, even though the other co-insured is not guilty of such a failure. And it follows also that the reference in s 28(2) to a failure that “was fraudulent” is a reference to a fraudulent failure to disclose on the part of a co-insured.

Deane J, in a dissenting judgment, held that references to “an insured” and “the insured” must, in the case of a joint contract of insurance, be read as collective references to the co-insured. Accordingly, the co-insured have a joint obligation to disclose matters to the insurer. He treated the words “known to the insured” as meaning, in the case of a joint contract of insurance, within the collective knowledge of the joint insured, that is to say, as known to at least one of them. He held that on his construction of s 21(1) it followed that the requirements of s 28(1) were satisfied, the jointly co-insured persons having failed to comply with the duty of disclosure imposed by s 21(1). Gobbo J (Vic Sup Ct) applied the majority judgment of the High Court in the Advance case in Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd [1991] 2 VR 146; (1990) 6 ANZ Ins Cas 60-984. In summary, where a contract of insurance insures more than one person and one co-insured has failed to disclose a material fact, it is not necessary to decide whether the contract of insurance is joint or composite. The insurer is entitled to a remedy under s 28 regardless of the fact that an innocent co-insured was unaware of the non-disclosure.

[28.10.2] Entered into: s 28(1) Section 28 is concerned with non-disclosure and misrepresentation before entry into the contract of insurance. The duty of disclosure arises not only on entry into the original contract of insurance but also on each renewal, extension or variation of the contract. Section 11(9) and (10) are to be applied to s 28. The High Court noted that ALRC 20 stated that the common law duty to disclose arose not only on entry into the original contract but also on each renewal. The High Court further stated that ALRC 20 did not express any intention to depart from the common law in this respect: Alexander Stenhouse Ltd v Austcan Investments Pty Ltd ©

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know of the non-disclosure: Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910. Their Honours stated (at 616–617 (CLR); 75,837 (ANZ Ins Cas)):

s 28

Insurance Contracts Act 1984

[28.10.2]

(1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22 per Mason CJ, Deane, Dawson, Toohey and McHugh JJ; see also [21.10.4] and [54.10.9].

[28.10.3] Misrepresentation … before the contract: s 28(1)(b) There must be a nexus between the misrepresentation and the contract of insurance in question. The misrepresentation for which an insurer claims a remedy under s 28 must have induced the insurer to issue the policy on terms and conditions that would not have been offered had the misrepresentation not been made: Hendry Rae & Court v FAI General Insurance Co Ltd (1991) 5 WAR 376; 7 ANZ Ins Cas 61-101 per Anderson J (WA Sup Ct). The word “before” raises a further question as to the nexus between the misrepresentation and the contract of insurance in question. Whilst s 28 applies to misrepresentations which have made a difference to the insurer’s decision-making, the misrepresentation relevant to the insurer’s decision-making may have been made temporally “before” the making of the contract of insurance, but not “in connection with” it. Continuing misrepresentations

Does a misrepresentation continue to apply and operate in relation to subsequent renewals? A misrepresentation may continue to have effect through subsequent renewals. Whether or not it is a continuing misrepresentation depends on the facts. A misrepresentation may have ceased to operate as such because it has been expressly or impliedly corrected or has been spent. A misrepresentation may be more likely to be spent if it is a statement of intention as opposed to a misrepresentation as to an existing fact. Lindgren J (Fed Ct) considered the question of an unconnected earlier misrepresentation in FAI General Insurance Co Ltd v McSweeney (1998) 10 ANZ Ins Cas 61-443. He noted that under general law a misrepresentation made in relation to an earlier contract of insurance may vitiate a later one by way of renewal if the misrepresentation is of a “continuing” nature. Taking up from the expression of the general law position by Professor Sutton (Insurance Law in Australia (2nd ed, Lawbook Co, 1991) at [3.164]) the misrepresentation must be “applicable”, “continuing” or “operative”. Given that Pt IV is a statutory code, Lindgren J applied the natural meaning of the word “before” and found it difficult to read into the word any other limitation. Lindgren J said (at 75,054): The “natural meaning” of the word “before” in s 28(1)(b) is “temporally before”, no matter by how long or short a period. It is difficult to read into the word some limiting notion, such as one of reasonableness. Similarly, it is 246

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s 28

To understand whether the alleged misrepresentations were continuing, Lindgren J in McSweeney found it necessary to consider what was said in the earlier proposal and the place of what was then said in the context of the overall communications between the insured and the insurer about a third party claim the subject matter of the alleged misrepresentation. He held that the insured had made it clear that he was not intending to make, as continuing representations, the representations relied upon. Hargrave J (Vic Sup Ct) in Bergman v CGU Insurance Ltd [2016] VSC 81 (9 March 2016) accepted a statement by Longmore LJ of the English Court of Appeal in Limit No 2 Ltd v AXA Versicherung AG [2009] Lloyd’s Rep I.R. 396 (at [141]) that “a representation of intention cannot last forever and, on the facts of a particular case, there will come a time when it is spent and cannot be relied upon as constituting a continuing representation at the time of a subsequent renewal.” Hargrave J noted that this and other statements by Longmore LJ were made in the context of a right to avoid a contract of insurance for innocent misrepresentation. Given the differences in Australia under Pt IV of the Insurance Contracts Act 1984, Hargrave J was of the view that Australian courts may be more willing than English courts to find that a misrepresentation as to an existing fact continues on an insurance renewal. He said (at [142]): Moreover, I note that Longmore LJ’s statements were made in a context which does not operate in Australia, where the right of an insurer to avoid a contract of insurance for misrepresentation is limited by s 28 of the Act to fraudulent misrepresentation and, in the absence of fraud, the lesser remedies under s 28(1) and (3) of the Act constitute the insurer’s exclusive rights: see s 33 of the Act. Accordingly, Australian courts may be more willing to find that a misrepresentation as to an existing fact continues on an insurance renewal. Each case must, of course, depend on its own facts.

Hargrave J also referred to the conclusion by I Enright and R Merkin based on Limit No 2 Ltd v AXA Versicherung AG (Sutton on Insurance Law, Thomson Reuters, 4th ed, at [7.960]) that a misrepresentation based on a statement of intention may not have a continuing effect. McMillan J in Kalabakas v Chubb Insurance Company of Australia Ltd (2016) 19 ANZ Ins Cas 62-088; [2015] VSC 705 (at [37]) used the terminology of a misrepresentation being “deemed to be repeated when renewing a policy unless otherwise corrected” citing Countrywide Finance Ltd v State Insurance Ltd [1993] 3 NZLR 745. She also cited Lindgren J in McSweeney saying that this was “the case for any misrepresentation that was made before entry into the initial policy that ©

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difficult to read into the word some limiting notion of a non-temporal kind, such as one of purpose.These considerations suggest that I should proceed on the basis that the supposed 7 May 1990 representations [in the proposal for renewal of a former policy] are potentially within s 28 of the Insurance Contracts Act if they were still “applicable”, “continuing” or “operative” as at 28 April 1991 [the renewal of another policy].

s 28

Insurance Contracts Act 1984

[28.10.3]

remains ‘applicable’, ‘continuing’ or ‘operative’ as at the date of the entry into the renewed policy such that the said misrepresentation will constitute a relevant misrepresentation in respect of the renewed policy as well”.

[28.10.4] Where “the insurer” would have entered into the contract Section 28(1) raises for consideration whether “the insurer” would have entered into a contract of general insurance for the same premium and having the same terms and conditions. It is relatively common for an underwriting agent to agree to bind cover on behalf of an insurer for the payment of the premium and according to the terms and conditions of the contract of insurance. Where this has occurred and the insurer alleges a misrepresentation or non-disclosure, the insurer has to prove under s 28 what it would have done had there not been a misrepresentation or non-disclosure. Will it suffice for the underwriting agent to prove those matters on behalf of an insurer? White J (NSW Sup Ct) considered the question of proof by an insurer through an underwriting agent and whether the reference to the insurer in Pt IV of the ICA includes the insurer’s agent in New Cap Reinsurance Corporation Ltd (in liq) v Daya [2010] NSWSC 1226. However, he noted that they were not questions to be decided on an interlocutory application. White J noted that the application of the ICA, where the insured or an insurer acts through an agent, is not always clear. In a number of cases it has been held that matters known to the insured for disclosure include matters known to the insured’s agent. Notwithstanding this, the High Court majority (McHugh, Kirby and Callinan JJ) in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; 77 ALJR 1070; 12 ANZ Ins Cas 61-565; [2003] HCA 25 expressed an obiter view that the relevant knowledge, either actual or constructive, is the knowledge of the insured, and not of any insurance intermediary – see [21.10.5]. In considering agents of an insurer (as opposed to an insured) White J said (at [18]): It might be thought that most insurers are corporations and thus only able to act through agents, or, in the case of members of Lloyd’s syndicates, would employ an underwriting agent.

White J thought it clear that, were it not for the observations of the majority in Permanent Trustee it would be clear that Pt IV of the ICA accommodates the case of an insurer who enters into contracts of insurance through an agent acting under a binder in a like manner to the way obligations are imposed by Pt IV on an insured who used an agent. He said (at [21]): However, the observations of McHugh, Kirby and Callinan JJ in Permanent Trustee …, although not necessary for their decision, show that there is a real 248

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[28.10.5]

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s 28

question as to whether the reference to “the insured” in Part IV of the Act includes a reference to the insured’s agent. If so, the same question arises whether the reference to “the insurer” includes the insurer’s agent.

Section 28(1) raises for consideration whether the insurer would have entered into a contract of general insurance for the same premium and having the “same terms and conditions”. This raises as a question whether the operation of an existing term producing a different result falls within the ambit of s 28(1). Anderson J (WA Sup Ct) in Hendry Rae & Court v FAI General Insurance Co Ltd (1991) 5 WAR 376; 7 ANZ Ins Cas 61-101 held that an existing term producing a different result does not fall within s 28(1). In this case the insured notified the insurer in 1987 of a potential claim for damages. In 1991 the insured submitted a proposal for renewal of the policy and answered questions concerning prior circumstances which may result in a claim in the negative. Subsequently a claim was made against the insured and the insurer accepted liability to indemnify the insured under the 1987 policy. The insured claimed an indemnity under the 1991 policy and the insurer refused to indemnify the insured under that policy on the basis of the misrepresentation as to prior circumstances. The insurer contended that, had the misrepresentation not been made, it would have excluded from the 1991 policy all liability for any claim arising from those circumstances. Anderson J found that the operation of an existing term producing a different result did not fall within s 28(1). On appeal the Full Court (Malcolm CJ and Franklyn J; Pidgeon J dissenting) rejected submissions on behalf of the insured that s 28(1) was not concerned with questions of construction of documents: FAI General Insurance Co Ltd v Hendry Rae & Court (1993) 10 WAR 322; 115 FLR 50; 7 ANZ Ins Cas 61-200. Malcolm CJ said (at 336 (WAR); 78,298 (ANZ Ins Cas)): In my view, the distinction between the terms and conditions of the policy and the result of the application of the terms of the policy to a particular state of facts is an artificial distinction.

He concluded that had the misrepresentation not been made, it would have been a term of the policy that liability for the claim under the 1991 policy was excluded. Therefore, it could not be said that the insurer would have entered into the contract on the same terms and conditions if the insured had not made the misrepresentation before the contract was entered into. Franklyn J agreed with Malcolm CJ on this question and said (at 350 (WAR); 78,309 (ANZ Ins Cas)): The contract, absent the misrepresentation made in the written proposal, the particulars and statements in which were agreed to be the basis of and ©

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[28.10.5] On the same terms and conditions: s 28(1)

s 28

Insurance Contracts Act 1984

[28.10.5]

incorporated in the contract, was a different contract to that which resulted from the misrepresentation and, in my view, is consequently one on different terms and conditions within the meaning of s 28(1)(b). Absent the misrepresentation s 28(1)(b) would not have operated to preclude the operation of s 28(3).

Any insurer who wants to avoid liability on the basis that it would not have entered into the contract had it known of the true facts, should give detailed evidence as to office practice and underwriting guidelines: Delphin v Lumley General Insurance Ltd (1989) 6 SR (WA) 161; 5 ANZ Ins Cas 60-941 per Keall DCJ (WA Dist Ct).

[28.20.1] Fraudulent non-disclosure: s 28(2) The ICA does not address the question as to what constitutes a fraudulent nondisclosure. The ALRC did not address the question and much of the discussion in ALRC 20 centred around the necessity to provide a disincentive to an insured against attempting to obtain lower premiums or more advantageous terms, whilst protecting the insured from consequences which would be seriously disproportionate to the harm caused to an insurer. Young J (NSW Sup Ct) in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 rejected the sworn evidence of Mr Matthews that the matter for disclosure had never entered his head when he was effecting insurance and found that he knowingly did not disclose the matter concerned. On appeal, Samuels JA described the finding of fraud as one of a deliberate failure to disclose: (1988) 12 NSWLR 250; 93 FLR 164; 5 ANZ Ins Cas 60-850 at 256 (NSWLR), 75,316 (Cas). Whether a failure to comply with the duty of disclosure is fraudulent only when the insured “knows” the matter to be relevant to the decision of the insurer is a question that remains open. In other words, is a fraudulent non-disclosure within s 28(2) limited to a breach of the duty of disclosure within s 21(1)(a)? In Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926, it was argued that for there to be fraud the insured must have knowledge of both the material necessary to be disclosed and its relevance to the decision of the insurer. Cole J (NSW Sup Ct) expressed the view that there is no warrant for reading down s 28(2) to restrict fraudulent failures of disclosure in the manner contended. He noted that there is nothing in s 28(1) or 28(2) to suggest that construction. He also noted that fraud may occur if there is a misrepresentation (including through non-disclosure) made recklessly, without care as to whether it be true or false. He stated (at 75,971): The fact that a reasonable person in the circumstances could be expected to know that the matter not disclosed was relevant (s 21(1)(b)), may be evidence 250

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Pt IV – Div 3 – Remedies for non-disclosure etc.

s 28

Brooking J (Vic Sup Ct) in Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661; 6 ANZ Ins Cas 60-954 doubted that the meaning of “fraudulent” in s 28(2) was limited to cases that fall within s 21(1)(a). He said that the view that cases which fall within s 21(1)(a) are cases of fraud, while cases which do not fall within that paragraph but do fall within s 21(1)(b) are cases of failure to comply with the duty of disclosure which is not fraudulent, did not appear to be the draftsperson’s intention and he doubted the distinction. However, in finding that the insured’s conduct fell within s 21(1)(a) it was not necessary for him to apply the distinction to the case at hand. Hansen J (Vic Sup Ct) in Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228; 8 ANZ Ins Cas 61-287, like Brooking J in Twenty-First Maylux, doubted that cases within s 21(1)(b) are cases of failure to comply with the duty of disclosure which are not fraudulent. In his view paras (a) and (b) of s 21(1) deal with non-disclosure by reference to two different cases, without intending to preclude fraud in one of them. Similarly, in finding a deliberate withholding of information of the type mentioned in s 21(1), it was enough to determine the case under s 21(1)(a); although he thought it also covered para (b). Debelle J (SA Sup Ct) in Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445, a case which concerned a claim under a contract of life insurance, thought that there was no reason why fraudulent non-disclosure would not also include recklessness in cases where the insured knows a matter which is relevant to the insurer’s decision whether to accept the risk under s 21(1)(a). It was unnecessary for him to explore the issue as to whether recklessness could amount to fraudulent non-disclosure when the question of materiality is to be determined by the knowledge of a reasonable person under s 21(1)(b). White J (NSW Sup Ct) in New Cap Reinsurance Corporation Ltd (in liq) v Daya [2010] NSWSC 1226 did not strike out a pleading of fraudulent non-disclosure on the basis that it is “at least arguable that a non-disclosure is fraudulent if the non-disclosure is deliberate or reckless”: (at [448]). Accordingly, it is possible that a reckless failure to comply with the duty of disclosure may constitute a fraudulent non-disclosure. However, the question as to whether this is the case with non-disclosure, to which s 21(1)(b) applies, remains unresolved. ©

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sufficient to sustain a finding that the failure of disclosure was made recklessly, without care whether it be true or false. Indeed, in some circumstances, such a finding may be sufficient to sustain a finding that the misrepresentation by non-disclosure was made without belief in its truth.

s 28

Insurance Contracts Act 1984

[28.20.1]

[28.20.2] Fraudulent misrepresentation: s 28(2) The ICA does not address the question as to what constitutes a fraudulent misrepresentation. However, it appears that fraud in relation to misrepresentation has been more clearly judicially defined than fraud in relation to non-disclosure. Deliberately or recklessly (conscious indifference)

In the absence of a definition in the ICA, judges have tended to refer to the well settled formulation as to what constitutes a fraudulent misrepresentation. A statement is made fraudulently if it is made with knowledge of its falsity or without belief in its truth or recklessly, not caring whether it is true or false. In other words, it is made deliberately or recklessly. Reckless disregard has also been described as conscious indifference. The well settled formulation, which dates back to the House of Lords decision in Derry v Peek (1889) 14 App Cas 337, has been adopted in cases concerning both ss 28(2) and 29(2) the latter of which concerns contracts of life insurance (see [29.20.2]). The formulation by Lord Herschell in Derry v Peek is frequently cited. Lord Herschell stated (at 374): [F]raud is proved when it is shewn that a false representation is being made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief.

Young J (NSW Sup Ct) in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 said (at 74,995): Although there is no definition of fraudulent conduct in the Act, one applies the usual view of the word, that is it means acting deliberately or recklessly.

Similarly Cole J (NSW Sup Ct) in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926 noted (at 75,971): [F]raud may occur if there is a misrepresentation (including through nondisclosure) made recklessly, without care whether it be true or false.

Knowledge that an insurer’s economic interest will be imperilled is not a necessary element of fraudulent misrepresentation. Higgins J (ACT Sup Ct) in Von Braun v Australian Associated Motor Insurers Ltd (1998) 135 ACTR 1; 10 ANZ Ins Cas 61-419 (at 74,703) said that the question as to 252

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[W]ill be answered in favour of the insurer if such misrepresentation was made by an insured who knew that it was false or had no actual belief in its truth, or recklessly, without caring if it be true or false, with the intention that the misrepresentation should be acted on in whatever fashion the insurer might choose. Knowledge that the insurer’s economic interests will thereby be imperilled is not, in my view, necessary.

Parker J (with whom Steytler and Miller JJ agreed) (WA Sup Ct FC) were of the view that Professor Sutton fairly summarised the notion of fraud for the purposes of ss 28(2) and 29(2) of the ICA in his book Insurance Law in Australia (3rd ed, para 3.138) in NRG Victory Australia Ltd v Hudson (2003) 13 ANZ Ins Cas 90-121; [2003] WASCA 291. Sutton’s formulation was based, inter alia, on the formulation by Higgins J in Von Braun. Parker J quoted Sutton (at [32]): A fraudulent misrepresentation is one made with an absence of an actual and honest belief in its truth: it is a deliberate decision by the insured to mislead or conceal something from the insurer, or recklessness amounting to indifference about whether this occurs.

The NSW Court of Appeal (Meagher JA, with whom Macfarlan and Emmett JJA agreed) described reckless disregard in terms of “conscious indifference” in Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252. Meagher JA determined that it was not open to the primary judge to make a finding of fraud under s 28(2) based upon “conscious indifference” because it was not put to the person who answered questions in a proposal form that he did not care that his answers to the questions were true or not. In discussing the governing principles and arriving at the description “conscious indifference” Meagher JA stated (at [39] and [40]): For fraudulent misrepresentation to be made out it must be established that the representor had no honest belief in the truth of the representation in the sense in which the representor intended it to be understood: John McGrath Motors (Canberra) Pty Ltd v Applebee [1964] HCA 1; 110 CLR 656 at 659–660 (Kitto, Taylor and Owen JJ); Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563; 69 ALJR 629; 130 ALR 1; [1995] HCA 68 at 578–579 (Brennan, Deane, Gaudron and McHugh JJ). In Forrest v Australian Securities and Investments Commission [2012] HCA 39; 86 ALJR 1183 at [22] (French CJ, Gummow, Hayne and Kiefel JJ) it was emphasised that a false statement “made through carelessness and without reasonable grounds for believing it to be true, may be evidence of fraud but does not necessarily amount to fraud”. As Lord Herschell observed at 374, the formulation in Derry v Peek [see above] covers the whole ground because someone who knowingly represents what is false obviously has no honest belief, and someone who is indifferent to whether a representation is true or false can have no honest belief as to its truth. Being reckless or indifferent as to the truth of something describes a state of mind or consciousness: Angus v Clifford [1891] 2 Ch 449 at 471 (Bowen LJ); Le Lievre v Gould [1893] 1 QB 491at 500–501 (Bowen LJ); ©

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whether a misrepresentation was made fraudulently:

s 28

Insurance Contracts Act 1984

[28.20.2]

Banditt v The Queen [2005] HCA 80; 224 CLR 262 at [2] (Gummow, Hayne and Heydon JJ); Fidock v Legal Profession Complaints Committee [2013] WASCA 108 at [93]–[97] (Martin CJ, Newnes and Murphy JJA). The fact of that indifference is the basis for the conclusion as to the absence of any real belief, which is a finding as to the relevant person’s state of mind: Banditt v The Queen at [2].

In considering the evidence of the person who answered the questions in the proposal form, the explanation for the misrepresentations and matters that were not put to the witness Meagher JA said (at 46): The relevant further explanation would have been that those failures could not be explained by mere, or even gross, carelessness but rather reflected the fact that he did not care, before and at the time that he signed the proposal, whether the answers in it were correct or not.

Stevenson J (NSW Sup Ct) in Poole v Chubb Insurance Company of Australia Ltd (2014) 18 ANZ Ins Cas 62-029; [2014] NSWSC 1832 (19 December 2014) cited Meagher JA’s description of conscious indifference in the context of a proposal form in Prepaid Services. He said (at [152]): An explanation as to what is meant by “conscious indifference” was given by Meagher JA in [Prepaid Services] at [46]: it means more than “mere, or even gross, carelessness” and requires the insurer, in the context of a representation in a proposal form, to establish that the insured “did not care before and at the time that he signed the proposal, whether the answers in it were correct or not” (emphasis added) Carelessness not recklessness

Carelessness, even gross carelessness, does not satisfy the degree of recklessness required to constitute a fraudulent misrepresentation. Debelle J (SA Sup Ct) in Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445 considered a claim under a contract of life insurance and noted that whilst the ICA does not define fraudulent misrepresentation, what constitutes it is well settled. In referring to the case law he noted that in terms of a contract of insurance a fraudulent misrepresentation is a representation which is false and which is made either knowingly, or without belief in its truth, or recklessly, not caring whether it be true or false and with the intention that it be acted upon by the insurer. He contrasted recklessness with carelessness. He said (at 86,140 (ANZ Ins Cas)): It is not enough that the [insured] may have acted carelessly. [The insurer] must show that the [insured] lacked an honest belief in the truth of his answers. If he was consciously indifferent to the truth of his answers, he was reckless: Lamb v Johnston (1914) 15 SR NSW 65 at 74–75.

Carelessness was also contrasted with recklessness by the Qld Court of Appeal (Shepherdson J with whom McMurdo P and Thomas JA agreed) with the conclusion that it does not amount to fraud: Australian Casualty & Life Ltd v Hall (1999) 151 FLR 360. 254

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The NSW Court of Appeal (Macfarlan JA with whom Hodgson and Young JJA agreed) also contrasted carelessness with recklessness in upholding a finding that incorrect answers to questions as to driving history and claims given by the insured involved a lack of care and did not satisfy the degree of recklessness (a “high hurdle”) required for fraud under s 28(2): Dawes Underwriting Australia Pty Ltd v Roth (2009) 15 ANZ Ins Cas 61-813; [2009] NSWCA 152. He said (at 77,589): A fair view of what his Honour [the primary judge] said on the topic of fraud indicates that he correctly appreciated that for [the insured] to be found guilty of fraud there would have had to be a finding to the effect that [the insured] had “no honest belief in the truth of the representation” (Krakowski v Eurolynz Properties Ltd (1995) 183 CLR 563; 69 ALJR 629; 130 ALR 1; [1995] HCA 68 at 578 (CLR)). His Honour took the view that this was not [the insured’s] state of mind. Rather he found [the insured] to have been careless.

Even gross carelessness does not satisfy the degree of recklessness or conscious indifference required for a finding of fraud. The NSW Court of Appeal (Meagher JA, with whom Macfarlan and Emmett JJA agreed) distinguished “conscious indifference” from “mere, or even gross, carelessness” (at [46]) in the context of answering questions in a proposal form in Prepaid Services. Stevenson J (NSW Sup Ct) in Poole v Chubb Insurance Company of Australia Ltd (2014) 18 ANZ Ins Cas 62-029; [2014] NSWSC 1832 (19 December 2014) cited Meagher JA’s description of conscious indifference and its comparison with mere or gross carelessness in the context of a proposal form in Prepaid Services. He said (at [152]): An explanation as to what is meant by “conscious indifference” was given by Meagher JA in [Prepaid Services] at [46]: it means more than “mere, or even gross, carelessness” and requires the insurer, in the context of a representation in a proposal form, to establish that the insured “did not care before and at the time that he signed the proposal, whether the answers in it were correct or not” (emphasis added) Misrepresentation becoming fraudulent with supervening events

A continuing representation may, with supervening events, become a fraudulent misrepresentation. A misrepresentation may become fraudulent where an insured through its insurance broker fails to reveal the occurrence of supervening events, which, to the insured’s knowledge, have falsified a statement before it was acted on by the insurer. In other words, the representation is a continuing one and has become false to the knowledge of the insured prior to it being acted upon by the insurer. The supervening event may be an insurance broker’s discovery that statements to an insurer had conveyed more than intended. If the broker knew that her or his statements were false and chose to remain silent, and thereby allowed the statements to be acted upon by the insurer, then this constitutes fraud: Permanent Trustee ©

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[28.20.2]

s 28

Insurance Contracts Act 1984

[28.20.2]

Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679; 160 FLR 435; 11 ANZ Ins Cas 61-491; [2001] NSWCA 20 (per NSW CA Meagher, Handley and Powell JJA). On appeal, the High Court overruled the NSW Court of Appeal on its finding of fraudulent misrepresentation on the basis, inter alia, that the findings by the trial judge did not allow the finding of fraud by the Court of Appeal. The High Court majority (McHugh, Kirby and Callinan JJ) noted the principle when the maker of a representation which is believed to be, or is actually true when made, but which the maker later discovers to be false, but refrains from correcting, well knowing that the representee is acting upon the representation, and intends the representee to do so, is guilty of fraud. However, they found that the principle had no application in the case: Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; 77 ALJR 1070; 12 ANZ Ins Cas 61-565; [2003] HCA 25.

[28.20.3] Avoid: s 28(2) According to s 11(1) “avoid” means avoid from the inception of a contract of insurance. See also [11.05], [29.20.3] and [29.30.3].

[28.30.1] Liability reduced: s 28(3) There has been a great deal of judicial consideration of the construction of s 28(3) and, in particular, whether an insurer can escape liability if it can demonstrate that if the misrepresentation or non-disclosure had not been made it would have declined to enter into the contract of insurance. It is now clear that an insurer can escape liability under s 28(3). In this sense the wording “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” has been referred to as “reduced to nil”. Although this shorthand formulation usefully describes the process that takes place, it is perhaps in one sense a misnomer. If an insured has made an innocent misrepresentation or innocent non-disclosure then there may be an entitlement to a refund of premium. If a refund is considered as part of the liability between the parties, then it could be said that a claim is reduced to the amount of the refund rather than to “nil”. This accords with the description given by the ALRC to the proposed s 28(3) in the Notes to the Draft Insurance Contracts Bill 1982: see [28.10]. Although the doubts raised in respect of the above interpretation have been largely dispelled, it is worthwhile considering the development of the interpretation of s 28(3). 256

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Young J (NSW Sup Ct) in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1987) 4 ANZ Ins Cas 60-813 was of the view that an insurer cannot reduce its liability to nil even if it can show that it would not have taken the risk. He formed that view without apparent regard to ALRC 20. He referred to much earlier cases involving the power to reduce a scale of charges for telegrams. He concluded that there would be a reduction to nil only in a very extraordinary case. Giles J (NSW Sup Ct) in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1989) 5 ANZ Ins Cas 60-907 departed from the view adopted by Young J in the Advance case and commented that in s 28(3) there is a specific direction as to what the liability is to be reduced to. Accordingly, it would not be a misuse of language to talk of a reduction to nil. Rogers CJ Comm D (NSW Sup Ct) in Lindsay v CIC Insurance Ltd (1989) 16 NSWLR 673; 5 ANZ Ins Cas 60-913 agreed with Giles J in the Ferrcom case. He noted that if the insurer would not have accepted the policy then the restoration to the position that it would have been in is arrived at by reducing the payment required to be made under the policy to nil. He also noted the possibility of a refund of premium in appropriate cases. Deane J (HC) in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 gave an alternative construction to s 28(3). The appeal to the High Court was resolved on a question of fraudulent conduct falling within s 28(2) and accordingly his comments were obiter. He stated (at 622 (CLR); 75,840 (ANZ Ins Cas)): Section 28(3) does not offer an indirect means of avoiding a policy. Its starting point is the existence of the policy and the insurer’s entrenched liability under it. Its operation, in a case to which it applies, is to reduce the amount of that liability. That being so, any reduction in the amount of the insurer’s liability would, in the postulated circumstances, have fallen to be calculated on the basis of the position which would have existed if the insurer had issued a policy after full disclosure of the claims history. That is to say, the insurer’s liability under the policy would be reduced by any additional amount or amounts of premium it would have charged if there had been full disclosure. If the evidence established that, in such circumstances, the additional amount of premium which would have been charged would have exceeded the amount of the claim, the amount of the insurer’s liability would be reduced to nil. In that regard, I respectfully dissent from the view of the learned trial Judge that s 28(3) can never operate so as to reduce the amount of the insurer’s liability to a nil amount in the circumstances of a particular case.

Keall DCJ (WA Dist Ct) in Delphin v Lumley General Insurance Ltd (1989) 6 SR (WA) 161; 5 ANZ Ins Cas 60-941 followed the approach taken by Deane J in Advance. ©

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[28.30.1]

s 28

Insurance Contracts Act 1984

[28.30.1]

Rogers CJ Comm D (NSW Sup Ct) in Ayoub v Lombard Insurance Co (Aust) Pty Ltd (1989) 97 FLR 284; 5 ANZ Ins Cas 60-933 reaffirmed his interpretation of s 28(3) in Lindsay. He found the approach taken by Deane J in Advance to be very difficult. He expressed the view that the offset against any claim is not additional premium but rather the amount of the loss suffered by the underwriter. In his view the additional premium concept was artificial in that an underwriter may decline cover altogether as opposed to extend cover at a premium equal to the amount of the loss. Brooking J (Vic Sup Ct) in Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [1990] VR 919; (1989) 92 ALR 661; 6 ANZ Ins Cas 60-954 preferred the construction adopted by Rogers CJ Comm D in Lindsay and Ayoub to that of Deane J in Advance. He noted that the approach adopted by Deane J required acceptance of the artificial assumption that an insurer would have issued a policy at an inflated premium had disclosure or knowledge of the misrepresentation been made. Gobbo J (Vic Sup Ct) in Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd [1991] 2 VR 146; (1990) 6 ANZ Ins Cas 60-984 agreed with Rogers CJ Comm D in the Lindsay case and Ayoub case and with Brooking J in the Twenty-First Maylux Pty Ltd case. In considering the various judgments, he preferred the reasoning in the judgments that recognised that s 28(3) can assist an insurer who can prove that it would not have entered into the contract at all. Brownie J (NSW Sup Ct) in Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014 adopted the construction of s 28(3) adopted by Giles J in the Ferrcom case; Rogers CJ Comm D in the Lindsay case and Ayoub case and Brooking J in the Twenty-First Maylux Pty Ltd case. He preferred that construction to the “additional premium” approach adopted by Deane J in the Advance case. Prior J (SA Sup Ct) in Dwyer v Long; CE Heath Casualty & General Insurance (Third Party) (1992) 58 SASR 102; 7 ANZ Ins Cas 61-120 referred to the Ayoub case and held that liability could be reduced to nil under s 28(3) if the insurer would not have entered into the contract of insurance. Accordingly, the doubts originally expressed by Young J in the Advance case have been resolved and liability can be reduced to nil. The High Court has not considered a reduction of liability under s 28(3). However, the High Court (comprising Mason CJ, Deane, Dawson, Toohey and McHugh JJ) in Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22, in remitting the matter to the Full Court of the SA Supreme Court, stated (at 77,918 (ANZ Ins Cas)): 258

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Accordingly, the construction whereby liability is reduced to nil appears to have been placed beyond doubt. There is much authority against the obiter “additional premium” approach taken by Deane J in the Advance case. It is unlikely that the “additional premium” approach will revive given the approach taken by the High Court (including Deane J) in respect of a similar construction question involving s 28(3) in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156. Further, Malcolm CJ (WA Sup Ct FC) adopted the approach of the High Court in the Ferrcom case in relation to a reduction of liability to nil in FAI General Insurance Co Ltd v Hendry Rae & Court (1993) 10 WAR 322; 115 FLR 50; 7 ANZ Ins Cas 61-200. It is also unlikely that the “additional premium” reasoning will revive given that in several matters in which a “reduce to nil” approach has been adopted it has expressly not been followed: see Gobbo J (Vic Sup Ct) in Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd [1991] 2 VR 146; (1990) 6 ANZ Ins Cas 60-984; Higgins J (ACT Sup Ct) in QBE Insurance Ltd v Giampaolo [1993] ACTSC 106; and Davies JA and Thomas J (with whom Fitzgerald P agreed) Qld Sup Ct CA in Orb Holdings Pty Ltd v Lombard Insurance Co (Aust) Ltd [1995] 2 Qd R 51; (1994) 8 ANZ Ins Cas 61-221. For other cases in which it has been held that liability can be “reduced to nil”, see: Miles CJ (ACT Sup Ct) in Duthie v Rolf H Wick & Assoc (Aust) Pty Ltd (1994) 120 ACTR 1; 120 FLR 49; 8 ANZ Ins Cas 61-223; Hansen J (Vic Sup Ct) in Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228; 8 ANZ Ins Cas 61-287; and Steytler J (WA Sup Ct) in Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288. The principle of “reduced to nil” is also supported by the fact that it was not disputed before the Full Court of the Supreme Court of Western Australia in the last of these cases: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1997) 9 ANZ Ins Cas 61-343. Ipp J (WA Sup Ct) noted (at 76,753) cases in support of the proposition. Further, on appeal to the High Court Kirby J noted (at 636 (CLR); 74,243 (ANZ Ins Cas)) that “the preponderance of judicial authority supports the possibility that an insurer’s liability may, in certain circumstances be reduced to nil”: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; 72 ALJR 937; 10 ANZ Ins Cas 61-396; [1998] HCA 38.

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If it should transpire that Sun Alliance is at liberty to call evidence with a view to establishing that, by reason of s 28(3), its liability is reduced to nil, it would not be right for us to order at this stage that judgment be entered for Austcan against Sun Alliance.

s 28

Insurance Contracts Act 1984

[28.30.1]

[28.30.2] The liability of the insurer in respect of a claim: s 28(3) The reduction of liability under s 28(3) looks to the position of the insurer rather than the position of the insured. Therefore, the fact that the insured may have had to pay a higher premium with another insurer is not an element in the calculation: Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014 per Brownie J (NSW Sup Ct). Further, it appears that in an inquiry into the position of the insurer, the inquiry may be wider than the subject claim and may include previous claims. In the Fruehauf Finance Corp Pty Ltd case Brownie J concluded (at 76,791): [B]ut for my other findings … the first defendant would be entitled to reduce the amount of the claim by refunding the whole of the premiums paid on all of the liability, marine, personal accident and fidelity policies for the Clyde Group, less the amount of any claims previously paid or now payable in respect of any of those policies.

In making the inquiry into the position of the insurer with a view to reducing liability under s 28(3), the court will have to consider the terms that would have applied had proper disclosure been made “as to both insurance and reinsurance” compared to those which applied to, and in relation to, the contract of insurance entered into by the insurer: Prime Forme Cutting Pty Ltd v Baltica General Insurance Co Ltd (1990) 6 ANZ Ins Cas 61-028 per Tadgell J (Vic Sup Ct).

[28.30.3] Onus of proof The burden of proof rests with the insurer in satisfying the court that if the matters for disclosure had been disclosed, or if the misrepresentations had not been made, that it would not have entered into the contract of insurance for the same premium and on the same terms and conditions as it did. If the insurer is unable to satisfy its burden of proof then s 28 will have no application according to s 28(1). An example where the insurer was unable to satisfy the burden of proof is to be found in Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062. In that case Beach J (Vic Sup Ct) thought it significant that the insurer did not see fit to adduce evidence from any person in its organisation who had authority to approve or disapprove the insurer’s application, nor were any underwriting guidelines touching upon the matter tendered in evidence. In referring to the burden of proof, Beach J referred to the decision of Gobbo J in Zurich Australian Insurance Ltd v Contour Mobel Pty Ltd 260

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[28.40]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 28

An insurer was not precluded from avoiding policies by the terms of s 19 of the Insurance (Agents & Brokers) Act 1984, which required an insurance broker to have a professional indemnity policy before he or she could be registered and thus carry on business as a broker: Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; 95 ALR 305; 6 ANZ Ins Cas 60-964 per Samuels JA (NSW Sup Ct CA). An insurer seeking to reduce its liability to nil under s 28(3) will need to adduce underwriting evidence to the effect that it would not have entered into the contract of insurance were it not for the misrepresentation or non-disclosure. Likewise an insurer seeking to reduce its liability must adduce evidence as to any additional amounts that would have been borne by the insured had there not been a misrepresentation or non-disclosure. For instance, evidence as to additional premium or any excess that may have been imposed. In Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014 Brownie J (NSW Sup Ct) referred to the necessity for an insurer who invokes s 28(3) to put before the court evidence from which the court can calculate the amount of the reduction contended for.

[28.40] Refund of premium At common law an insurer avoiding a contract of insurance for innocent misrepresentation or innocent non-disclosure is obliged to refund the premium. There are common law authorities that suggest that this obligation does not arise in respect of a fraudulent misrepresentation or a fraudulent non-disclosure. The ICA is silent on the question of refund of premium. The ALRC, in the notes to [LR 20.29], said: If the insurer would not have entered into the contract at all, it would be entitled to pay nothing in respect of the claim except the premium paid by the insured.

This statement suggests that an insured is entitled to a refund of premium when an insurer reduces its claim to nil under s 28(3) as a consequence of an innocent misrepresentation or an innocent non-disclosure. This ©

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[1991] 2 VR 146; (1990) 6 ANZ Ins Cas 60-984. In an appeal from the decision of a magistrate, Gobbo J noted the evidence before the magistrate given on behalf of the insurer that had the insured’s criminal convictions been disclosed, the risk would not have been underwritten by the insurer. According to the evidence the insurer could avoid liability under s 28(3).

s 29

Insurance Contracts Act 1984

[28.40]

entitlement to a refund equates with the entitlement at common law arising from avoidance for an innocent misrepresentation or an innocent non-disclosure. This approach to a refund of premium tends to suggest: 1. reduction of liability to nil under s 28(3) involving a refund of premium will mean that the insurer has no continuing liability under the contract of insurance; and 2. if the reduction of liability to nil under s 28(3) proceeds from the fact that an insurer, although entitled to, has not avoided a contract of insurance for fraudulent misrepresentation or fraudulent non-disclosure then the insured will not be entitled to a refund of premium. When various contracts of insurance are negotiated in one package by a group of companies and there is to be a refund of premium for a claim by one company in the group under only one of the contracts of insurance, there is a question as to whether, if divisible, only the premium in respect of the particular company and only the premium paid in respect to the particular contract of insurance is refundable. Brownie J (NSW Sup Ct) considered this question in Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1990) 6 ANZ Ins Cas 61-014, a matter involving three insurers. Brownie J concluded that, but for his other findings, one of the insurers would be entitled to reduce the amount of the claim by refunding the whole of the premiums paid on all of the contracts of insurance for the group of companies less the amount of any claims previously paid, or payable, for any of those contracts of insurance. He took this view because the four contracts of insurance concerned were negotiated as one package which had been difficult to place and on the basis that if the insurer had refused to grant the subject insurance the broker would have looked elsewhere with the entire package (there being no suggestion that the broker would have been able to place the package of insurances elsewhere). 29

Life insurance

Scope (1) This section applies where the person who became the insured under a contract of life 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:

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(c)

the insurer would have entered into the contract 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; or (d) the failure or misrepresentation was in respect of the date of birth of one or more of the life insureds. may be available to the insurer in respect of each separate contract of life insurance that is taken to exist by virtue of the relevant subsection. [Subs (1) am Act 75 of 2013, s 3 and Sch 5 items 2 and 4]

Insurer may avoid contract (2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract. [Subs (2) am Act 75 of 2013, s 3 and Sch 5 item 5]

(3) If the failure was not fraudulent or the misrepresentation was not made fraudulently, the insurer may, within 3 years after the contract was entered into, avoid the contract. [Subs (3) subst Act 75 of 2013, s 3 and Sch 5 item 6]

Insurer may vary contract (4) If the insurer has not avoided the contract, whether under subsection (2) or (3) or otherwise, the insurer may, by notice in writing given to the insured, vary the contract by substituting for the sum insured (including any bonuses) a sum that is not less than the sum ascertained in accordance with the formula SP Q where: S is the number of dollars that is equal to the sum insured (including any bonuses). P is the number of dollars that is equal to the premium that has, or to the sum of the premiums that have, become payable under the contract; and Q is the number of dollars that is equal to the premium, or to the sum of the premiums, that the insurer would have been likely to have charged if the duty of disclosure had been complied with or the misrepresentation had not been made. Note: This subsection applies differently in relation to a contract with a surrender value, or a contract that provides insurance cover in respect of the death of a life insured (see subsection (10)). [Subs (4) am Act 75 of 2013, s 3 and Sch 5 items 7–9; Act 107 of 1997, s 3 and Sch 8 item 9]

(5) In the application of subsection (4) in relation to a contract that provides for periodic payments, the sum insured means each such payment (including any bonuses). (6) If the insurer has not avoided the contract or has not varied the contract under subsection (4), the insurer may, by notice in writing given to the insured,

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Note: If subsection 27A(1), (3) or (4) applies to the contract of life insurance, different remedies

s 29

Insurance Contracts Act 1984

[28.40]

vary the contract in such a way as to place the insurer in the position (subject to subsection (7)) in which the insurer would have been if the duty of disclosure had been complied with or the misrepresentation had not been made. Note: This subsection does not apply in relation to a contract with a surrender value, or a contract that provides insurance cover in respect of the death of a life insured (see subsection (10)). [Subs (6) subst Act 75 of 2013, s 3 and Sch 5 item 10]

(7) The position of the insurer under a contract (the relevant contract) that is varied under subsection (6) must not be inconsistent with the position in which other reasonable and prudent insurers would have been if: (a) they had entered into similar contracts of life insurance to the relevant contract; and (b) there had been no failure to comply with the duty of disclosure, and no misrepresentation, by the insureds under the similar contracts before they were entered into. [Subs (7) insrt Act 75 of 2013, s 3 and Sch 5 item 10]

(8) For the purposes of subsection (7), a contract of life insurance (the similar contract) is similar to another contract of life insurance (the relevant contract) if: (a) the similar contract provides insurance cover that is the same as, or similar to, the kind of insurance cover provided by the relevant contract; and (b) the similar contract was entered into at, or close to, the time the relevant contract was entered into. [Subs (8) insrt Act 75 of 2013, s 3 and Sch 5 item 10]

Date of effect of variation of contract (9) A variation of a contract under subsection (4) or (6) has effect from the time when the contract was entered into. [Subs (9) insrt Act 75 of 2013, s 3 and Sch 5 item 10]

Exception for contracts with a surrender value or that provide cover on death (10) If the contract is a contract with a surrender value, or a contract that provides insurance cover in respect of the death of a life insured: (a) the insurer may vary the contract under subsection (4) before the expiration of 3 years after the contract was entered into, but not after that period; and (b) subsections (6), (7) and (8) do not apply in relation to the contract. [Subs (10) insrt Act 75 of 2013, s 3 and Sch 5 item 10] [S 29 am Act 75 of 2013; Act 107 of 1997]

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s 29

Pre ICAA 2013 Amendment (pre 28 June 2014) Life insurance

(1) This section applies where the person who became the insured under a contract of life 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: (c) the insurer would have entered into the contract 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; or (d) the failure or misrepresentation was in respect of the date of birth of one or more of the life insureds. Note: If subsection 27A(1), (3) or (4) applies to the contract of life insurance, different remedies may be available to the insurer in respect of each separate contract of life insurance that is taken to exist by virtue of the relevant subsection. [Subs (1) am Act 75 of 2013, s 3 and Sch 5 item 2]

(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract. (3) If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract. (4) If the insurer has not avoided the contract, whether under subsection (2) or (3) or otherwise, the insurer may, by notice in writing given to the insured before the expiration of 3 years after the contract was entered into, vary the contract by substituting for the sum insured (including any bonuses) a sum that is not less than the sum ascertained in accordance with the formula

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29

s 29

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[29.05]

SP Q where: S is the number of dollars that is equal to the sum insured (including any bonuses). P is the number of dollars that is equal to the premium that has, or to the sum of the premiums that have, become payable under the contract; and Q is the number of dollars that is equal to the premium, or to the sum of the premiums, that the insurer would have been likely to have charged if the duty of disclosure had been complied with or the misrepresentation had not been made. [Subs (4) am Act 107 of 1997, s 3 and Sch 8 item 9]

(5) In the application of subsection (4) in relation to a contract that provides for periodic payments, the sum insured means each such payment (including any bonuses). (6) A variation of a contract under subsection (4) has effect from the time when the contract was entered into. [S 29 am Act 75 of 2013; Act 107 of 1997]

SECTION 29 COMMENTARY Background and synopsis ....................................................................... Contract of life insurance ........................................................................ Duty of disclosure .................................................................................... The person who became the insured: s 29(1) ........................................ Entered into: s 29(1) ................................................................................ Misrepresentation: s 29(1)(b) .................................................................. The contract: s 29(1)(c) ........................................................................... Fraudulent non-disclosure: s 29(2) ......................................................... Fraudulent misrepresentation: s 29(2) .................................................... Avoid: s 29(2) .......................................................................................... Not prepared to enter into a contract of life insurance on any terms – Pre 28 June 2014 ...................................................................................... Not prepared to enter – timing and nature of decision – Pre 28 June 2014 .................................................................................................... Avoid: s 29(3) .......................................................................................... Onus of proof: s 29(3) – Pre 28 June 2014 ............................................ By notice in writing given to the insured: s 29(4) ................................... A court may disregard avoidance ............................................................

[29.05] [29.10.1] [29.10.2] [29.10.3] [29.10.4] [29.10.5] [29.10.6] [29.20.1] [29.20.2] [29.20.3] [29.30.1] [29.30.2] [29.30.3] [29.30.4] [29.40] [29.60]

[29.05] Background and synopsis The ALRC recommended the retention of s 84 of the Life Insurance Act 1945 (Cth) (as it then was) in a modified form. Section 84 rendered a life 266

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When considering the question of the appropriate method of assessing damages for an innocent misrepresentation or non-disclosure within the contestable period, the ALRC chose proportionality over common law damages and the causal connection test. The ALRC noted that where a misrepresentation or breach of the duty of disclosure is discovered within three years of the contract being entered into, the insurer should be entitled to reduce the amount payable under the contract in accordance with the principle of proportionality. Where the insurer would not have entered into the contract at all, the ALRC considered the appropriate remedy to be avoidance: ALRC 20 at [198]. For the purposes of the following discussion on s 29 and where relevant, the form of s 29 prior to the amendment effected by the Insurance Contracts Amendment Act 2013 will be referred to as the “old s 29”. The form that s 29 took following the amendments effected by the Insurance Contracts Amendment Act 2013 will be referred to as the “new s 29”. Where no such distinction is made within the commentary, the commentary is taken to be relevant to both the old and new s 29.The new s 29 commenced on 28 June 2014. Section 29 – Pre 28 June 2014

The remedies for non-disclosure and misrepresentation under the old s 29 for all contracts of life insurance prior to the commencement of the amendments to s 29 effected by the Insurance Contracts Amendment Act 2013 (and for “traditional” contracts of life insurance after the commencement of the amendments but subject to some changes (see below)) are as follows: 1. Where there is a relevant non-disclosure or a relevant misrepresentation that is fraudulent and it does not relate to age, the insurer may avoid the contract: s 29(2). 2. Where there is a relevant non-disclosure or a relevant misrepresentation that is innocent but it does not relate to age and it is discovered outside three years, there is no remedy available. 3. Where there is a relevant non-disclosure or a relevant misrepresentation that is innocent but it does not relate to age but is discovered inside three years, the insurer may vary the contract on the basis of the principle of proportionality: s 29(4). If the insurer would not have insured the risk on any terms it may, within three years, avoid the contract: s 29(3). ©

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insurance contract incontestable for written innocent misrepresentation unless the statement was made within three years before the death of the life insured or the date on which the contract was sought to be avoided. The ALRC was of the view that the limitation to misstatements made in written form was anomalous and accordingly recommended an extension to oral misstatements and to non-disclosure.

s 29

Insurance Contracts Act 1984

[29.05]

4. Where the misstatement is in respect of the age (date of birth) of the life insured, the principle of proportionality applies: s 30. Section 29 – Post 28 June 2014

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA considered the remedies for misrepresentation and non-disclosure with respect to contracts of life insurance under s 29. The Review Panel noted that at the time of the publication of ALRC 20 in 1982 the major part of life insurance business was endowment and whole of life policies. At the time of their review in 2004 term life products such as disability insurance represented most of new long term life insurance business. The Review Panel recommended a different approach to remedies for misrepresentation and non-disclosure according to the type of insurable event. For contracts of life insurance, or parts thereof, that cover mortality or contain a surrender value it was recommended that the three year period in which an insurer can avoid a contract should remain. However, for contracts of life insurance, or parts thereof, that do not cover mortality or do not contain a surrender value, it was recommended that remedies equivalent to those applicable under s 28 to general insurance be adopted with modification. (see Final Report (June 2004), at [7.12]–[7.39]) The amendments to the old s 29 were largely in accordance with the recommendations of the Review Panel. They were enacted by the Insurance Contracts Amendment Act 2013 and are explained in the Explanatory Memorandum to ICAB 2013 (at [1.113]–[1.119]). The old s 29 as it stood prior to amendment was considered suitable for “traditional” kinds of contracts of life insurance. “Traditional” is a term used in the Explanatory Memorandum to describe a contract of life insurance with a surrender value or providing death cover. The old s 29 was not considered suited to short-term contracts of life insurance, such as income protection or total and permanent disability covers. These short-term or non-traditional types of life insurance policy were considered better dealt with using remedies akin to those available for general insurance policies. “Traditional” contracts of life insurance

The treatment of traditional contracts of life insurance was largely not affected by the amendments to s 29. The old s 29(1), 29(2) and 29(3) continue to apply to all contracts of life insurance. Subsection 29(3) has been amended and allows avoidance within three years for conduct which is not fraudulent. This simpler formulation of the new s 29(3) means that an insurer no longer has to prove that it would not have been prepared to enter into “a” contract of life insurance if the duty of disclosure had been complied with or the misrepresentation had not been made (see [29.30.1] and [29.30.2]). Under the new s 29(10), if the contract of life insurance has a surrender value or provides cover on death (effectively a definition 268

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for a “traditional” contract) the insurer may not vary the contract under s 29(4) more than three years after entry into the contract. The old s 29(4) has been amended to delete the requirement for the notice in writing to be given to the insured before the expiration of three years after the contract was entered into. Under the new s 29(10)(b), s 29(6), 29(7) and 29(8) have no application to a contract of life insurance that has a surrender value or provides cover on death. In other words, those subsections only apply to “non-traditional” contracts of life insurance. “Non-traditional” contracts of life insurance

The old s 29(4) was amended to delete the requirement that the notice in writing be given to the insured “before the expiration of three years after the contract was entered into”. It follows from the newly inserted s 29(10) that if the contract of life insurance does not have a surrender value and does not provide cover on death the insurer may vary the contract under s 29(4) at any time and is not restricted to a three year rule. It also follows from s 29(10) that the inserted s 29(6), 29(7) and 29(8) apply to a contract of life insurance other than a contract that has a surrender value or provides cover on death. In other words those subsections only apply to “non-traditional” contracts of life insurance. An insurer may vary a non-traditional contract under the new s 29(6), that has not been avoided or varied under s 29(4), to place it in a position that it would have been in had the duty of disclosure been complied with or the misrepresentation not made. Any variation has effect from the time the contract was entered into under s 29(9). Under the newly inserted s 29(7) the position of the insurer of the varied “relevant contract” must not be inconsistent with the position in which other reasonable and prudent insurers would have been if they had entered into “similar” contracts and if the conduct had not occurred. Under s 29(8) a “similar contract” is similar to the “relevant contract” if it provides insurance cover that is the same as, or similar to, the kind of insurance cover and was entered into at, or close to, the time the relevant contract was entered into. The source and nature of the “reasonable and prudent insurer” evidence required for a s 29(6) variation is referred to in the Explanatory Memorandum to ICAB 2013 (at [1.118]): When an insurer is endeavouring to establish whether the variation is or is not inconsistent with how other reasonable prudent insurers would have varied a similar contract, an insurer would generally be required to seek a view from one or more third parties as to what other reasonable or prudent insurers would have acted (sic.). These third parties may include but would not be limited to underwriters. • Underwriters normally have a good understanding of the development of life insurance products in the market place, this understanding would enable them to make judgements and decisions based on what a reasonable and prudent insurer would have been likely to have done at the time the relevant contract was entered into. ©

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[29.05]

s 29

Insurance Contracts Act 1984

[29.05]

Commencement – Post 28 June 2014

The amendments to s 29 apply to a contract of life insurance originally entered into after 28 June 2014 (which is 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The amendments also apply to the renewal of a contract of insurance (expressed in the Explanatory Memorandum to ICAB 2013 as a contract of “general” insurance) after that date. The amendments also apply to a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[29.10.1] Contract of life insurance See s 11(1). See also [11.30].

[29.10.2] Duty of disclosure The “duty of disclosure” means the duty referred to in s 21 (s 11(1)).

[29.10.3] The person who became the insured: s 29(1) Section 29 applies where the person who became the insured under a contract of life insurance made a misrepresentation. According to s 25 any misrepresentation by the life insured is to be treated as if it had been made by the insured. There is no provision covering non-disclosure by the life insured. However, the general law of agency applies. In submitting a proposal for life insurance the life insured may be acting as the agent of the insured. The different treatment of the imputation of misrepresentations and non-disclosures by a life insured to the insured under a life policy can be seen in Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (unreported, NSW Sup Ct, Cole J, 15 June 1994). In this case a solicitor life insured misrepresented that statements in writing in support of a proposal were accurate and complete when he knew that they were not because he had failed to disclose that he had misappropriated a very large sum of money. Further, the life insured failed to disclose his serious misappropriations. The misrepresentations of the life insured attached to the two insured pursuant to s 25. The life insured’s wife, who was one of the insured, was aware of the proposal to obtain insurance and that the policy was to be in her name as the insured. It was clear that she had left it to her husband to do what was necessary to obtain the policy. Therefore, the life insured was regarded as his wife’s agent for the purpose of obtaining insurance and his knowledge was to be regarded as his wife’s knowledge subject to disclosure by her or by the life insured 270

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as her agent. This was upheld on appeal by the NSW Court of Appeal comprising Priestley, Clarke and Powell JJA: Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 40 NSWLR 543.

Section 29 is concerned with non-disclosure and misrepresentation before entry into the contract of insurance. The duty of disclosure arises not only on entry into the original contract of life insurance but also on each extension or variation of the contract. Subsections 11(9) and 11(10) are to be applied to s 29. Debelle J (SA Sup Ct) held that the exercise of a “Take Up Option”, whereby the insured obtained additional life cover, was an agreement to extend or vary the contract of life insurance as expressed in s 11(9). The insured therefore had a duty to make full disclosure and a duty not to misrepresent the facts when exercising the option: Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445. Doyle CJ (SA Sup Ct) held that the provision of a free look period in life insurance did not alter the usual rule that an acceptance of an offer to enter into a contract of life insurance is effective when communicated, subject to the rule relating to contracts made by post: Summerton v SGIC Life Ltd (1999) 10 ANZ Ins Cas 90-102; [1999] SASC 121.

[29.10.5] Misrepresentation: s 29(1)(b) There must be a nexus between the misrepresentation and the contract of life insurance in question. This issue has been considered when applying s 28(1)(b), which contains the same wording: see [28.10.3].

[29.10.6] The contract: s 29(1)(c) Section 29 does not apply where the insurer would have entered into the contract 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. It should be noted that the subsection refers to the contract rather than a contract of insurance. This means that the requirement that the insurer would not have entered into the contract would be satisfied if the insurer would have entered into a contract of insurance albeit on different terms and conditions. Rolfe J (NSW Sup Ct) held that “the contract” was the contract of life insurance that was entered into. The insurer would not have entered into “the contract” but rather an income protection policy with a lower benefit ©

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[29.10.4] Entered into: s 29(1)

s 29

Insurance Contracts Act 1984

[29.10.6]

had it been aware of the true income of the person covered by the policy: Hoare v Mercantile Mutual Life Assurance Co Ltd (2000) 12 ANZ Ins Cas 90-110; [2000] NSWSC 1026. James J held that the life insurer would not have entered into the contract into which it did enter in Boekenstein v Tyndall Life Insurance Co Ltd [1997] NSWSC 38. The life insured misrepresented his business income and failed to disclose his true business income with the result that the contract of life insurance provided for the payment of a higher benefit in the event of the life insured’s total disability. James J held that the life insurer would not have entered into the contract into which it did enter, that is to pay the higher benefit in the event of the life insured’s total disability, if the life insured had not failed to comply with the duty of disclosure or had not made a misrepresentation. Accordingly s 29(1)(c) did not prevent s 29 from applying. In Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445, Debelle J (SA Sup Ct) held that the life insurer would not have entered into the contract into which it did enter. The life insured failed to disclose that he had undertaken a medical test and also made a misrepresentation in this regard. Debelle J held that the life insurer would not have entered into the contract if it had known about the medical test. In considering the wording of s 29(1)(c) Debelle J said (at 86,142 (ANZ Ins Cas)): In other words, unless the insurer relies on the answers made by the insured, it is not entitled to avoid the policy even in the case of fraudulent nondisclosure or fraudulent misrepresentation. So, in this case, in order that the remedies of s 29 may be available to it, [the insurer] must show that the fraudulent non-disclosure or fraudulent misrepresentations were relevant and induced it to accept the risk. I respectfully agree with Professor Sutton that it is implicit in the wording of s 29(1)(c) that the insurer is denied a remedy only where he would have entered into precisely the same contract as that which was made: Sutton, Insurance Law in Australia (2nd ed), para 3.115.

Further Debelle J rejected a submission that s 29(1)(c) required a life insurer which would not have entered into a contract of life insurance pending further medical examination to prove, on the balance of probabilities, what the outcome of the future medical examination would have been. In giving his reasons for rejecting the submission he said (at 86,146): [I]t attempts to convert the obligation imposed on an insurer by s 29(1)(c) to prove reliance into a further obligation to prove what condition would have been diagnosed in consequence of the further medical condition and to prove that the diagnosis would have caused it not to accept the risk and enter into the contract. That is to require an insurer to discharge an evidentiary burden which is extremely difficult, if not in some circumstances impossible, to prove. That is not what is intended by s 29(1)(c), a conclusion which is reinforced when s 29(1)(c) is compared with s 29(3). 272

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I would have had no doubt about that [meaning] were it not for s 28(1), the equivalent provision with respect to general insurance, which provides that it 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 made the misrepresentation before the contract was entered into”. The addition in s 28 of the words which I have emphasized and their omission from s 29(1)(c) gives cause to doubt my opinion. However I think that they were added to s 28 to emphasize the limited nature of the exception to what is, by contrast to s 29, a right in an insurer to avoid a contract for non-disclosure or misrepresentation only in the case of fraud.

Nicholas J (NSW Sup Ct) approved and applied the formulation of the requirement of s 29(1)(c) expressed in Chisholm that the insurer would be denied a remedy only where it “would have entered into precisely the same contract as that which was made” in Kenan Berk v Westpac Securities Administration Ltd (unreported, NSW Sup Ct, Nicholas J, 4 February 2010).

[29.20.1] Fraudulent non-disclosure: s 29(2) The same question as to what constitutes a fraudulent non-disclosure arises under both ss 29(2) and 28(2) and has been considered in cases concerning both contracts of general insurance and contracts of life insurance (see [28.20.1] above).

[29.20.2] Fraudulent misrepresentation: s 29(2) The same question as to what constitutes a fraudulent misrepresentation arises under both ss 29(2) and 28(2) and has been considered in cases concerning both contracts of general insurance and contracts of life insurance (see [28.20.2] above). It is well settled as to what constitutes a fraudulent misrepresentation. A statement is made fraudulently if it is made with knowledge of its falsity or without belief in its truth or recklessly, not caring whether it is true or false. This formulation, which dates back to Derry v Peek (1889) 14 App Cas 337 at 374 has been adopted in cases concerning s 29(2): see James J in Boekenstein v Tyndall Life Insurance Co Ltd [1997] NSWSC 38 at 24; Debelle J (SA Sup Ct) in Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445 at 86,140 (ANZ Ins Cas) and ©

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Davies JA (Qld Sup Ct CA) referred to Chisholm and also expressed the opinion that “the contract” in s 29(1)(c) means the same contract, ie the contract in fact entered into notwithstanding some doubt introduced by way of comparison with the wording of s 28(1): Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182. He said (at 86,302 (ANZ Ins Cas)):

s 29

Insurance Contracts Act 1984

[29.20.2]

Parker J (WA Sup Ct Full Ct Steytler and Miller JJ agreeing) in NRG Victory Australia Ltd v Hudson (2003) 13 ANZ Ins Cas 90-121; [2003] WASCA 291.

[29.20.3] Avoid: s 29(2) According to s 11(1) “avoid” means avoid from the inception of a contract of insurance. See also [11.05] and [29.30.3].

[29.30.1] Not prepared to enter into a contract of life insurance on any terms – Pre 28 June 2014 Section 29(3) was repealed and substituted by the Insurance Contracts Amendment Act 2013, which commenced on 28 June 2014. The phrase “would not have been prepared to enter into a contract of life insurance” is not used in the new s 29(3) which generally commenced in relation to contracts of life insurance entered into after 28 June 2014 (see [29.05] above). The new simpler formulation of the new s 29(3) means that an insurer no longer has to prove that it would not have been prepared to enter into “a” contract of life insurance if the duty of disclosure had been complied with or the misrepresentation had not been made. The old s 29(3) remains relevant to a contract of insurance not entered into or renewed after 28 June 2014 and to the extent that it is not varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover. The old s 29(3) permitted avoidance only if the insurer would not have been prepared to enter into “a” contract of life insurance “on any terms” if the duty of disclosure had been complied with or the misrepresentation had not been made. Unlike s 29(1)(c), which was concerned with whether the insurer would have entered into “the” contract of insurance, s 29(3) was concerned with whether the insurer would have been prepared to enter into “a” contract “on any terms”. Davies JA (Qld Sup Ct CA) noted, when considering the availability of the avoidance remedy with respect to a misrepresentation made by the insured to the life insurer, that this part of s 29(3) was expressed in negative terms: Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182. He said (at 86,302 and 86,303 (ANZ Ins Cas)): It is put in negative terms; so what must be established, for the section to operate, is that the insurer would not have been prepared to enter into a contract with the insured on any terms if the misrepresentation had not been made. What that means is this: for a right of avoidance under s 29(3) to arise it must be shown that, on the insured’s offer on the assumption that it had stated the 274

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In Davis v Westpac Life Insurance Services Ltd (2007) 226 FLR 285; (2008) 15 ANZ Ins Cas 90-132; [2007] NSWCA 175, the NSW Court of Appeal (McColl JA, with whom Santow and Hodgson JJA agreed) applied s 29(3) and found that the life insurer would not have been prepared to enter into “a” contract of life insurance “on any terms” had there been proper disclosure.

[29.30.2] Not prepared to enter – timing and nature of decision – Pre 28 June 2014 The phrase “would not have been prepared to enter into a contract of life insurance” is not used in the new s 29(3) which generally commenced in relation to contracts of life insurance after 28 June 2014 (see [29.05] above). The new simpler formulation of s 29(3) means that an insurer no longer has to prove that it would not have been prepared to enter into “a” contract of life insurance if the duty of disclosure had been complied with or the misrepresentation had not been made. The old s 29(3) remains relevant to a contract of insurance not entered into or renewed after 28 June 2014 and to the extent that it is not varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover. The old s 29(3) was silent on the question of when the insurer would not have been prepared to enter into a contract of life insurance. This is an important question because commonly life insurers defer decision making pending the receipt of further information. If the life insurer would have conducted further investigations as a consequence of proper disclosure, in the absence of a misrepresentation or non-disclosure, then to avoid under s 29(3) the life insurer must show that following that investigation it would have declined to enter into a contract of life insurance. Two points emerge. First, because the section was silent on timing, the life insurer can establish that it would not have been prepared to enter into a contract of life insurance had proper disclosure been made, either at the time that proper disclosure ought to have made (when the contract of insurance to be avoided was entered into) or, at some future time after the receipt of further information following investigations that would have resulted from proper disclosure. Secondly, it is not enough for the life insurer merely to show that it would have deferred its decision pending further investigations. UThe life insurer must show that it would not have been prepared to enter into a contract of life insurance on any terms. Davies JA (Qld Sup Ct CA) found that where an insured had misrepresented their medical history and, absent that misrepresentation, ©

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true facts, the insurer would not have been prepared to enter into a contract on any terms; in other words, the insurer would have declined the risk.

s 29

Insurance Contracts Act 1984

[29.30.2]

the life insurer may have deferred its decision whether to enter into a contract of life insurance pending further investigation, then the life insurer would still need to show, at some point, that the offer would probably be declined: Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182. He said (at 86,303 (ANZ Ins Cas)): What [s 29(3)] does not require, expressly or implicitly, is that any such hypothetical contract, the preparedness to have entered into which must be excluded, be one entered into on the date on which the actual contract was entered into. The only reference in the subsection to that date is the requirement that, the condition of subsection (3) having been established, the avoidance take place within three years after that date.

The NSW Court of Appeal (McColl JA, with whom Santow and Hodgson JJA agreed) approved of, and applied, the interpretation of s 29(3) by Davies JA in Schaffer to the effect that a life insurer is entitled to show that it would not have entered into a contract of life insurance with the insured on any terms by taking into account information it would had obtained through enquiries made following compliance with the duty of disclosure: Davis v Westpac Life Insurance Services Ltd (2007) 226 FLR 285; (2008) 15 ANZ Ins Cas 90-132; [2007] NSWCA 175. In approving this interpretation of s 29(3), the Court of Appeal clarified doubts that had been introduced by a passage in the judgment of McPherson JA in Schaffer and conclusions drawn by Murray J in McCabe v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-119; [2003] WASCA 162. The Court of Appeal found that their interpretation of s 29(3) was supported by the description given by the ALRC of the appropriate method for assessing damages for an innocent misrepresentation or non-disclosure (ALRC 20 at [198]). The ALRC did not identify any temporal limit in s 29(3), merely viewing it as an alternative to the exercise which found its way into s 29(4). McColl JA said (at 87,317 and 87,318 (ANZ Ins Cas)): It is plain that s 29(4) does not look to the time the policy was entered into. Section 29(6) provides, in effect, a relation back so that a variation of a contract under subs (4) has effect from the time when the contract was entered into. The only temporal limit on s 29(4) is the same three year period referred to in s 29(3). As was pointed out in the course of argument, unless an insurer can take into account information acquired after the date the contract of insurance was entered into for the purposes of determining whether it had satisfied the s 29(3) test, it could never determine the “Q” amount it would have been likely to have charged if the duty of disclosure had been complied with or the misrepresentation had not been made. … In my opinion s 29(4) makes it plain that for the purposes of s 29(3) an insurer is entitled to demonstrate that it would not have been prepared to enter into a 276

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contract of life insurance with the insured on any terms if the duty of disclosure had been complied with by taking into account information it would have obtained as a result of enquiries made consequent upon compliance with the duty of disclosure. As Davies JA said in Schaffer, the only relevant time period is three years after entry into the policy. If, during that time, the insurer becomes aware of facts which reveal that the insured had not complied with the s 21 duty of disclosure (and/or made a misrepresentation), but needs to obtain further information before determining what its attitude to acceptance of the risk would have been, it is entitled to bring the results of those consequent inquiries to bear in that exercise. If after making those enquiries it determines it would not have been prepared to enter into any policy, it can avoid the policy.

[29.30.3] Avoid: s 29(3) According to s 11(1) “avoid” means avoid from the inception of a contract of insurance. See also [11.05] and [29.20.3]. It is reasonably arguable that a contract of life insurance which has already come to an end, by way of payment out to the insured or by termination or otherwise, can be subsequently avoided. Bergin CJ in Eq, in allowing an amendment to a defence, was satisfied that on the proper construction of s 29 of the ICA read with the definition of “avoid”, it was reasonably arguable that an insurer is not prohibited from avoiding a contract of insurance that has come to an end. Her Honour was satisfied that it was reasonably arguable that accrued rights and obligations under the terminated contract were amenable to avoidance under s 29: Hitchens v Zurich Australia Ltd (2011) 17 ANZ Ins Cas 61-915; [2011] NSWSC 1198.

[29.30.4] Onus of proof: s 29(3) – Pre 28 June 2014 The phrase “would not have been prepared to enter into a contract of life insurance” is not used in the new s 29(3) which generally commenced in relation to contracts of life insurance after 28 June 2014 (see [29.05] above). The new simpler formulation of s 29(3) means that an insurer no longer has to prove that it would not have been prepared to enter into “a” contract of life insurance if the duty of disclosure had been complied with or the misrepresentation had not been made. The old s 29(3) remains relevant to a contract of insurance not entered into or renewed after 28 June 2014 and to the extent it is not varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover. The onus of proof rested with the insurer in satisfying the court that it would not have been prepared to enter into a contract of life insurance ©

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[29.30.4]

s 29

Insurance Contracts Act 1984

[29.30.4]

with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made under the old s 29(3). Davies JA (Qld Sup Ct CA) said that there are several reasons why this onus of proof is on the insurer: Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd (2003) 12 ANZ Ins Cas 90-116; [2003] QCA 182. He said (at 86,304 (ANZ Ins Cas)): In the first place, s 29(3) confers a conditional right upon the insurer, the condition being expressed as a condition precedent. The [insurer] in its defence alleged that that condition had been fulfilled. Secondly, proof of the fulfilment of the condition involved proof of matters peculiarly within the knowledge of the [insurer]. And thirdly, though there is no authority directly in point, this Court in Midaz Pty Ltd v Peters McCarthy Insurance Brokers Pty Ltd [1999] 1 Qd R 279 at 284 and Holmes J in McNeill v O’Kane (2003) 12 ANZ Ins Cas 61-554; [2002] QSC 144 … accepted that the onus was upon the insurer to prove what it would have done, for the purpose of s 29(3), if a misrepresentation had not been made. In my opinion that question is sufficiently analogous to that under s 29(3) to make those views persuasive on that question and I would follow them.

[29.40] By notice in writing given to the insured: s 29(4) Section 29(4) provides that if the insurer has not avoided the contract then it may vary the contract, by notice in writing given to the insured. But what if the insured has died? The section is to be read as permitting written notice to a deceased insured’s personal representative. Siopis J (Fed Ct) found that the widow of the insured was his personal representative and that a letter giving notice to her complied with s 29(4): Phillips v ING Life Ltd (2009) 15 ANZ Ins Cas 90-139; [2009] FCA 283. He said (at 87,449 (ANZ Ins Cas)): In my view, the section is to be read as permitting a written notice to be given by an insurer in the case of the death of the insured, to the insured’s personal representative. This is because s 29(4) of the Act refers to the notice as a notice to vary the contract. It follows that the relevant party to the contract in the circumstances is the insured’s personal representative.

[29.60] A court may disregard avoidance As with the avoidance of a contract of general insurance, a court may disregard the avoidance of a contract of life insurance which has been avoided on the ground of fraudulent failure to comply with the duty of disclosure or fraudulent misrepresentation in certain circumstances under s 31.

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30

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 30

Misstatements of age

SP Q where: S is the number of dollars that is equal to the sum insured (including any bonuses). P is the number of dollars that is equal to the premium that has, or to the sum of the premiums that have, become payable under the contract; and Q is the number of dollars that is equal to the premium, or to the sum of the premiums, that would have become payable under the contract if it or they had been ascertained on the basis of the correct date of birth or dates of birth. (2) If the date of birth of one or more of the life insureds under a contract of life insurance was not correctly stated to the insurer at the time when the contract was entered into: (a) where the sum insured (including any bonuses) exceeds the amount in dollars ascertained in accordance with the standard formula—the insurer may at any time vary the contract by substituting for the sum insured (including any bonuses) an amount that is not less than the amount in dollars so ascertained; and (b) where the sum insured (including any bonuses) is less than the amount so ascertained, the insurer shall either: (i) reduce, as from the date on which the contract was entered into, the premium payable to the amount that would have been payable if the contract had been based on the correct date of birth or correct dates of birth and repay the amount of overpayments of premium (less any amount that has been paid as the cash value of bonuses in excess of the cash value that would have been paid if the contract had been based on the correct date of birth or correct dates of birth) together with interest on that amount at the prescribed rate computed from the date on which the contract was entered into; or (ii) vary the contract by substituting for the sum insured (including any bonuses) the amount in dollars so ascertained. (3) In the application of subsection (2) in relation to a contract that provides for periodic payments, the sum insured means each such payment (including any bonuses).

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(1) In this section, the standard formula, in relation to a contract of life insurance means the formula

s 30

Insurance Contracts Act 1984

[30.10]

(3A) If: (a) the expiration date of a contract of life insurance is calculated by reference to the date of birth of a person who is a life insured under the contract; and (b) the person’s date of birth was not correctly stated to the insurer at the time when the contract was entered into; then the insurer may (instead of doing any of the things referred to in subsection (2)) vary the contract by changing its expiration date to the date that would have been the expiration date if the contract had been based on the correct date of birth. [Subs (3A) insrt Act 75 of 2013, s 3 and Sch 5 item 12]

(4) A variation of a contract under subsection (2) or (3A) has effect from the time when the contract was entered into. [Subs (4) am Act 75 of 2013, s 3 and Sch 5 item 13] [S 30 am Act 75 of 2013 Cross-reference: Insurance Contracts Regulations 1985: reg 4 prescribes a rate of 11% p.a. interest for s 30(2)(b)(i).]

SECTION 30 COMMENTARY Background and synopsis ....................................................................... Contract of life insurance ........................................................................ Contract was entered into .......................................................................

[30.10] [30.20] [30.30]

[30.10] Background and synopsis The ALRC recommended that the remedies available under s 83 of the Life Insurance Act 1945 (as it then was) for misstatements of age should be retained in a modified form. In the event of a misstatement as to age, s 83 had the effect of overriding the insurer’s remedy of avoidance and substituting a principle by which the sum insured was reduced by reference to a principle of proportionality. It was noted that the rule in s 83 was well accepted and well understood in the industry. However, under s 83 where the true age of the life insured happened to be less than the age used as the basis for calculating the premiums, the insurer had the option of repaying to the insured the amount of overpayment of premiums less certain appropriate deductions. The ALRC noted that this option may operate unfairly against an insured because it does not take into account the interest the insurer has earned on unpaid premiums and recommended that it should no longer be available: ALRC 20 at [197]. According to s 30 ICA, if the date of birth of the life insured is incorrectly stated then the sum insured (including any bonuses) is to be varied to the amount calculated according to “the standard formula”: s 30(2). The “standard formula” is set out in s 30(1). 280

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In accordance with the recommendation of the ALRC, s 30 retains the principle of proportionality in relation to misstatements as to age (both overstated and understated). Where the age of the life insured has been overstated, the insurer will still have the option of either increasing the sum insured or repaying the amount of overpaid premiums (together with interest at a prescribed rate) from the date the contract of life insurance was entered into: Explanatory Memorandum, at [92]–[95]. Section 30 was amended to include a new s 30(3A) by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2013. This was to ensure appropriate outcomes for an insurer if the expiration date of a contract of life insurance has been calculated on the basis of an incorrectly stated date of birth. Section 30(3A) provides that an insurer may, if that has occurred (instead of acting in accordance with s 30(2)), vary the contract to change the expiration date based on the correct date of birth of the life insured. The amendment applies to a contract of life insurance originally entered into after 28 June 2013 (which is when the Insurance Contracts Amendment Act 2013 received Royal Assent). The amendment also applies to a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[30.20] Contract of life insurance See s 11(1). See also [11.30].

[30.30] Contract was entered into See s 11(9). 31

Court may disregard avoidance in certain circumstances

(1) In any proceedings by the insured in respect of a contract of insurance that has been avoided on the ground of fraudulent failure to comply with the duty of disclosure or fraudulent misrepresentation, the court may, if it would be harsh and unfair not to do so, but subject to this section, disregard the avoidance and, if it does so, shall 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. (2) The power conferred by subsection (1) may be exercised only where the court is of the opinion that, in respect of the loss that is the subject of the proceedings before the court, the insurer has not been prejudiced by the failure or misrepresentation or, if the insurer has been so prejudiced, the prejudice is minimal or insignificant.

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[30.30]

s 31

Insurance Contracts Act 1984

[31.10]

(3) In exercising the power conferred by subsection (1), the court: (a) shall have regard to the need to deter fraudulent conduct in relation to insurance; and (b) shall 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. (4) The power conferred by subsection (1) applies only in relation to the loss that is the subject of the proceedings before the court, and any disregard by the court of the avoidance does not otherwise operate to reinstate the contract.

SECTION 31 COMMENTARY Background and synopsis ....................................................................... Proceedings by the insured .................................................................... The court ................................................................................................. Harsh and unfair ...................................................................................... Insured to recover the whole “or such part” ............................................ Loss that is the subject of the proceedings ............................................ Prejudice .................................................................................................. Any other relevant matter ........................................................................ Need to deter fraudulent conduct: s 31(3)(a) .......................................... Before entering into a contract of insurance ........................................... Onus of proof ...........................................................................................

[31.10] [31.10.1] [31.10.2] [31.10.3] [31.10.4] [31.20.1] [31.20.2] [31.30.1] [31.30.2] [31.40] [31.50]

[31.10] Background and synopsis The ALRC heard arguments from members of the insurance industry that an insurer should always be entitled to avoid a contract ab initio in the event of a fraudulent misrepresentation or a fraudulent non-disclosure. The ALRC noted the arguments and, in particular, that fraud constituted a serious breach of the duty of utmost good faith. However, the ALRC was concerned that where the breach had not caused substantial harm, an attempt to impose a much heavier loss on the insured would not necessarily demonstrate utmost good faith on the part of the insurer. It was noted that statutory restrictions at the time of the report on the rights of avoidance applied to both innocent and fraudulent misrepresentation. The ALRC was concerned to provide a disincentive to an insured against attempting to obtain lower premiums or more advantageous terms by misrepresenting facts clearly relevant to the insurer. It recommended that the courts should have power to disregard avoidance and adjust the rights of third parties in cases where the loss of the insured’s claim would be seriously disproportionate to the harm caused. The ALRC recommended that in adjusting the rights of the parties the court should be required to 282

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[31.10.1]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 31

Under s 31 the court has power to: (a) disregard the avoidance of a contract of insurance as a result of fraudulent non-disclosure or fraudulent misrepresentation when it would be harsh and unfair not to do so; and (b) 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). These powers can only be exercised where the court finds that the insurer has not been prejudiced by the fraudulent non-disclosure or fraudulent misrepresentation or where any prejudice is minimal or insignificant: s 31(2). In exercising its power, the court may have regard to any relevant matter and shall: (a) have regard to the need to deter fraudulent conduct in relation to insurance; and (b) weigh the fraud against the magnitude of the loss resulting from avoidance (s 31(3)): Explanatory Memorandum, at [97]–[98]. The power to disregard the avoidance only applies to the loss that is before the court: s 31(4). It is difficult to reconcile a court disregarding avoidance and allowing recovery, whether as to the whole of a claim or part of it, with the need to deter fraudulent conduct in relation to insurance.

[31.10.1] Proceedings by the insured Section 31(1) predicates relief upon proceedings by the insured. It does not include within the scope of its relief a third party joined to proceedings in order to answer a cross-claim which is not in respect of a contract of insurance. Samuels JA (NSW Sup Ct CA) in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; 95 ALR 305; 6 ANZ Ins Cas 60-964 said (at 410 (NSWLR); 76,404 (ANZ Ins Cas)): “In any proceedings by the insured”, in s 31(1), must contemplate a claim prosecuted by the insured “in respect of a contract of insurance” and so forth, and does not include within the scope of the relief provided a party joined to the same proceedings in order to answer a cross-claim which is not in respect of a contract of insurance, etc. That seems to me to be the position here. Notwithstanding that the appellants are vitally affected by the enforceability of the policy they are not entitled to stand in the insured’s shoes for the purposes of s 31. ©

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have regard to all relevant facts, including the need to deter fraudulent conduct by the insuring public: ALRC 20 at [196].

s 31

Insurance Contracts Act 1984

[31.10.1]

Because s 31 concerns proceedings by the insured it has no application to proceedings brought by a lender to the insured: Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (unreported, NSW Sup Ct, Cole J, 15 June 1994).

[31.10.2] The court Section 31(1) provides that “the court” may disregard avoidance and allow recovery. Other subsections of s 31 also refer to “the court”. Accordingly, only a court has jurisdiction to exercise the power under s 31. This means that a tribunal such as the Superannuation Complaints Tribunal is not invested with jurisdiction pursuant to s 31. Dowsett J (Fed Ct) noted that the Superannuation Complaints Tribunal is not a court with jurisdiction under s 31 in Tuua v Savings Australia Pty Ltd as Trustee for Superannuation Trust of Australia [2006] FCA 1816 (15 November 2006). The Superannuation Complaints Tribunal had correctly declined to exercise jurisdiction under s 31. Dowsett J declined to exercise the jurisdiction under s 31 on appeal.

[31.10.3] Harsh and unfair Cole J (NSW Sup Ct) considered the concepts of harshness and unfairness in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926. The Court of Appeal did not subsequently refer to this particular aspect of s 31(1). Cole J was of the view that the fact that under s 19 of the Insurance (Agents & Brokers) Act 1984 a broker is required to have a professional indemnity policy before registration can be obtained cannot result in a circumstance which reflects in “harshness” or “unfairness”. He noted that if it was intended to be a relevant factor for consideration in the exercise of the power conferred by s 31, then it could readily have been prescribed. Cole J also considered the question of conduct on the part of the insurer acting under a power of subrogation resulting in a third party, or the insured, being responsible for legal fees. He said (at 75,972–75,973): Such a circumstance would be material to the exercise of discretion under s 31 only if it resulted in harshness or unfairness. In my view, conduct of litigation aimed at protecting the interests of the insured, and consequently the insurer, would rarely result in such harshness or unfairness as to disentitle the insured to have the avoidance of the policy of insurance disregarded. Certainly, in the present case, there are no circumstances sufficient to satisfy me that the conduct of the legal proceedings resulted in such harshness or unfairness as to justify the exercise of the power conferred by s 31.

It should be noted that it must be “harsh and unfair”, that is, both harsh and unfair not to disregard the avoidance. 284

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Beach J (Vic Sup Ct) was prepared to exercise his power under s 31 in the event that the insured had been guilty of non-disclosure as to an earlier cancellation in Evans v Sirius Insurance Co Ltd (1986) 4 ANZ Ins Cas 60-755. His Honour noted that it would be harsh and unfair not to disregard any avoidance because the insured was not an astute businessman and someone other than the insured had filled out the relevant section of the proposal in the belief that the cancellation of the earlier policy was immaterial to the risk. In Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228; 8 ANZ Ins Cas 61-287, Hansen J (Vic Sup Ct) was not prepared to exercise the power conferred by s 31(1). In this case the insured, who had a history of various claims and several losses, including between 30 and 40 burglaries, disclosed only one loss in a proposal form. His Honour stated that no amount of premium would have induced the insurer to enter into a contract of insurance with the insured if full disclosure had been made. Accordingly he was satisfied that in the circumstances it would not be “harsh and unfair not to” disregard the avoidance.

[31.10.4] Insured to recover the whole “or such part” Cole J in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926 found support for his view that s 31 is confined to a consideration of the position of the insured and the insurer in that s 31(1) speaks of permitting “the insured to recover the whole, or such part as the court thinks just and equitable in the circumstances”. He noted that it must be just and equitable in the circumstances appertaining between the insurer and the insured.

[31.20.1] Loss that is the subject of the proceedings Cole J in the Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926 expressed the view that it is only the insured who can seek relief pursuant to s 31(1) in that the reference to “the loss that is the subject of the proceedings before the court” in s 31(2) is the insured’s loss, not the loss of a third party.

[31.20.2] Prejudice The onus is on the insured to prove the absence of prejudice. The question as to what amounts to prejudice, or the absence of it, and whether prejudice is minimal or insignificant has been considered in a number of cases. ©

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[31.20.2]

s 31

Insurance Contracts Act 1984

[31.20.2]

Cole J considered the question of prejudice in Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926. He found on the facts that the court was prohibited by s 31(2) from exercising the power under s 31(1). He held that the insurer had been prejudiced in that it had written insurance that it would not have written. Further, that the insurer had been prejudiced by the receipt of false information and the absence of information. He referred to the judgment of Priestley JA in Hajjar v NRMA Insurance Ltd (1985) 3 ANZ Ins Cas 60-647 and put forward the proposition that wrong information can only be prejudicial. On appeal (Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; 95 ALR 305; 6 ANZ Ins Cas 60-964), Samuels JA disagreed that an insurer could be prejudiced merely by receipt of false information and the absence of information. He said (at 76,405 (ANZ Ins Cas)): That cannot be a correct conclusion because the whole scheme of s 31, and the exercise of the discretion it confers, are hinged upon the assumption that there had been a failure to disclose or a misrepresentation. But the prejudice contemplated by s 31(2), or its absence, must be sought outside the predicates established in s 31(1). Hajjar dealt with s 18(1) of the Insurance Act 1902, a provision which differs markedly from s 31(2).

This means that cases decided on s 18(1) of the Insurance Act 1902 (NSW) will be of little assistance in the interpretation of prejudice within s 31(2). Beach J (Vic Sup Ct) was prepared to exercise the power conferred by s 31(1) in Evans v Sirius Insurance Co Ltd (1986) 4 ANZ Ins Cas 60-755. He noted that the insured was not an astute businessman and that his broker had provided the answer to the relevant question in the proposal. His broker did so in the belief that the matter for disclosure, namely the cancellation of an earlier policy, was immaterial to the risk. An employee of the insurer had knowledge of the earlier cancellation. Accordingly, his Honour was of the opinion that any prejudice to the insurer in respect of the loss by reason of the insured’s non-disclosure had been insignificant. In Burns v MMI-CMI Insurance Ltd (1994) 8 ANZ Ins Cas 61-228; 8 ANZ Ins Cas 61-287, Hansen J (Vic Sup Ct) was not prepared to exercise his power under s 31. In this case the insured, who had a history of various claims and several losses, including between 30 and 40 burglaries, disclosed only one loss in a proposal form. Hansen J stated that in a case in which the insurer would not have granted cover at all if disclosure had been made, and a claim for $770,000 was at stake, it was hard to see how the insurer was not prejudiced to a substantial and significant degree. James J (NSW Sup Ct) was not prepared to exercise his power under s 31 where the life insured under a life policy had fraudulently misrepresented his business income and fraudulently failed to disclose his true business 286

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income in Boekenstein v Tyndall Life Insurance Co Ltd [1997] NSWSC 38. It was found that the life insurer would not have entered into the contract into which it did enter, that is to pay the monthly benefit it agreed to pay in the event of the life insured’s total disability, if he had disclosed his true business income and had not made a misrepresentation in relation to his business income. James J considered that the prejudice, was not merely minimal or insignificant. The life insurer had committed itself to pay in the event of the life insured’s total disability, over a period which could last up to 30 years, a much larger amount of money than it would have agreed to pay if there had been no failure or misrepresentation and indeed a larger amount of money than the life insured’s actual net income, with the consequence that the life insured would have no financial incentive to cease being totally disabled within the meaning of that term in the policy. Higgins J (ACT Sup Ct) was prepared to exercise his power under s 31 where the insured had misrepresented the purchase price of a motor vehicle on an insurance proposal and where the prejudice, being the difference between the previous insurer’s agreed value of $60,000 compared with the insurer’s agreed value of $65,000, was considered minimal: Von Braun v Australian Associated Motor Insurers Ltd (1998) 135 ACTR 1; 10 ANZ Ins Cas 61-419. In determining a “just and equitable” result Higgins J allowed the claim as if the agreed value had been $56,000, being the figure most favourable to the insurer. Debelle J (SA Sup Ct) was not prepared to exercise his power under s 31 where the life insured under a life policy had been guilty of a fraudulent misrepresentation and fraudulent non-disclosure in relation to a medical test undertaken by him in Tyndall Life Insurance Co Ltd v Chisholm (1999) 205 LSJS 54; (2000) 11 ANZ Ins Cas 90-104; [1999] SASC 445. There was a very direct relationship between the undisclosed or misrepresented facts and the event that gave rise to the claim. It was held the insurer was prejudiced by the non-disclosure and misrepresentation because it was denied the opportunity to investigate the cause of symptoms experienced by the insured. It paid a claim in the sum of $500,000 upon the insured being diagnosed with cancer. This was a substantial payment which the insurer sought to recover. The prejudice was not minimal or insignificant and was considered to be substantial. McClellan J (NSW Sup Ct) was not prepared to give relief pursuant to s 31 because the insurer had been prejudiced by a fraudulent nondisclosure which he described as “fundamental”. The insurer would never had accepted the risk if it had known of the true position: Porter v GIO Australia Ltd (2003) 12 ANZ Ins Cas 61-573; [2003] NSWSC 668. Daubney J (Qld Sup Ct) in Syddall v National Mutual Lfe Association of Australasia Ltd (2012) 17 ANZ Ins Cas 90-149 was not prepared to to give relief pursuant to s 31 where the insured under an income protection ©

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[31.20.2]

s 31

Insurance Contracts Act 1984

[31.20.2]

insurance policy had been guilty of fraudulent misrepresentations and non-disclosures as to his occupation, income and medical history. Daubney J noted that s 31 conferred a discretion that he was only to exercise if he was of the opinion that the insurer was not prejudiced by the failure to disclose or misrepresentation, or if such prejudice is minimal or insignificant. He found that it was clear that the insurance would not have been entered into if the insured had told the truth. In those circumstances, it could not be said that any prejudice caused by the failure or misrepresentation would be minimal or non-existent.

[31.30.1] Any other relevant matter The words “any other relevant matter” in s 31(3) refer to matters relevant as between the insurer and the insured. They do not put the court’s discretion at large: Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1989) 5 ANZ Ins Cas 60-926 per Cole J.

[31.30.2] Need to deter fraudulent conduct: s 31(3)(a) One of the matters to be taken into account in exercising the power conferred under s 31 is the need to deter fraudulent conduct in relation to insurance. James J (NSW Sup Ct) took into account the need to deter fraudulent conduct in relation to insurance in Boekenstein v Tyndall Life Insurance Co Ltd [1997] NSWSC 38. That case involved a finding that a life insured, under an “income reserve plan” life policy, had fraudulently misrepresented his business income and had failed to disclose his true business income with the result that the life insurer had agreed to a higher monthly benefit in the event of total disability than it would have otherwise agreed. James J noted that the larger monthly benefit was a larger amount of money than the life insured’s actual net income, with the consequence that the life insured would have no financial incentive to cease being totally disabled within the meaning of that term in the policy. In deciding that he was not prepared to exercise his power under s 31, he also took into account the injunction in s 31(3)(a) that the court is to have regard to the need to deter fraudulent conduct in relation to insurance. Higgins J (ACT Sup Ct) took into account the need to deter fraudulent conduct in calculating that part of the amount that would have been payable if the contract had not been avoided in Von Braun v Australian Associated Motor Insurers Ltd (1998) 135 ACTR 1; 10 ANZ Ins Cas 61-419. The insured had misrepresented the purchase price of a motor vehicle on an insurance proposal. He told the insurer that he had paid $70,000 for the motor vehicle when in fact it was more probable than not that the cash price had been $56,000. In giving due weight to competing 288

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[31.50]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 31A

[31.40] Before entering into a contract of insurance Part 4 of the ICA, being ss 21–33, constitutes a code with respect to non-disclosure, misrepresentations and incorrect statements by insured persons before entering into a contract of insurance. Section 31(1) refers to the situation described in s 28. Accordingly, s 31 can have no application to a failure to notify a change in the risk after the contract of insurance has been entered into: Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 per Cox J (SA Sup Ct).

[31.50] Onus of proof In referring to s 31(2) Samuels JA in the Plasteel Windows Australia Pty Ltd v CE Heath Underwriting Agencies Pty Ltd (1990) 19 NSWLR 400; 95 ALR 305; 6 ANZ Ins Cas 60-964 at 411 (NSWLR); 76,404 (ANZ Ins Cas) said: Section 31(2) conditions the exercise of the power upon the court’s affirmative opinion that the insured has not been prejudiced by the failure or misrepresentation. That is to say, it is no one’s task to establish prejudice, but the insured’s task (because I cannot doubt that that is where this onus lies) to prove its absence. 31A Non-disclosure by life insured (1) This section applies in relation to a contract of life insurance under which a person (other than the insured) would become a life insured. (2) If, during the negotiations for the contract but before it was entered into, the person (the life insured) failed to disclose to the insurer a matter that was known to the life insured, being a matter that: (a) the life insured knew 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 have been 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

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factors Higgins J allowed the claim as if the agreed value had been $56,000. He chose that figure, as the most favourable to the insurer, and the least favourable to the insured to reflect the need to deter the giving of deliberately false information to insurers, even though, had the insured told the truth, the agreed value figure would in all probability have been no less than $60,000.

s 31A

Insurance Contracts Act 1984

[31A.10]

(ii)

the class of persons who would ordinarily be expected to apply for insurance cover of that kind; this Act has effect as if the failure to disclose the matter had been a failure by the insured to comply with the duty of disclosure in relation to the matter. (3) Subsection (2) does not apply in relation to a failure by the life insured to disclose a matter: (a) that diminishes the risk; or (b) that is of common knowledge; or (c) that the insurer knows or in the ordinary course of the insurer’s business as an insurer ought to know; or (d) as to which compliance with the duty of disclosure is waived by the insurer. [S 31A insrt Act 75 of 2013, s 3 and Sch 4 item 14]

SECTION 31A COMMENTARY Background and synopsis (Post 28 December 2015) ............................ Contract of life insurance ........................................................................ Life insured ..............................................................................................

[31A.10] [31A.20] [31A.30]

[31A.10] Background and synopsis (Post 28 December 2015) The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended the expansion of s 25. Section 25 concerns the attribution of a misrepresentation by the life insured to the insured under a contract of life insurance. The Review Panel recommended s 25 be expanded to include the attribution of a non-disclosure by the life insured (see Final Report (June 2004), at [4.31]–[4.33]). In life insurance, representations as to health etc are often made by the life to be insured (life insured). Previously, insurers protected themselves against misrepresentations by providing that the insured warranted the truth of the representations made by the life insured. The effectiveness of this protection was greatly reduced by s 26(1) which requires that such warranties be interpreted according to the belief of a person making a statement in connection with a proposed contract of insurance. Consequently, any misrepresentation by the life insured is to be treated as if it had been made by the insured under s 25. Non-disclosure can be similar in result to misrepresentation, in terms of the potential detrimental impact on an insurer’s decision to enter into the contract. Accordingly, s 31A was inserted into the ICA pursuant to the Insurance Contracts Amendment Act 2013, and commenced on 28 December 2015. It is similar in its effect to s 25, except that it covers 290

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[31A.30]

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s 32

Section 31A applies to a contract of life insurance originally entered into after 28 December 2015 (which is 30 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The amendment also applies to a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[31A.20] Contract of life insurance See s 11(1). See also [11.30].

[31A.30] Life insured See s 11(1). The definition of “life insured” was inserted by the Insurance Contracts Amendment Act 2013 and commenced on 28 December 2015. 32 Non-disclosure or misrepresentation by life insured covered under group life contract (1) This Division extends to the case where there was a failure to comply with the duty of disclosure, or a misrepresentation was made to the insurer, in respect of a proposed life insured under a group life contract, as if: (a) the insurance cover provided by the group life contract in respect of the life insured were provided by an individual contract of life insurance between the insurer and the insured; and (b) the group life contract had been entered into at the time when the proposed life insured became a life insured under the group life contract. (2) For the purposes of this Division, if the failure to comply with the duty of disclosure, or the misrepresentation, occurred after the proposed life insured became a member of the relevant superannuation, retirement or other group life scheme but before the insurance cover was provided by the group life contract in respect of the life insured, then the failure or misrepresentation is taken to have occurred before the proposed life insured became a life insured under the group life contract. [S 32 subst Act 75 of 2013, s 3 and Sch 6 item 38]

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non-disclosures by life insured rather than misrepresentations made by them. The life insured’s duty of disclosure under s 31A is similar to that applying to insureds under s 21, except any non-disclosure is imputed to the insured. The exceptions in s 21(2) are repeated in s 31A(3).

s 32

Insurance Contracts Act 1984

[32.10]

Pre ICAA 2013 Amendment (pre 28 June 2014) 32

Non-disclosure or misrepresentation by member of scheme

This Division extends to the case where there was a failure to comply with the duty of disclosure, or a misrepresentation was made, to the insurer under a blanket superannuation contract in respect of a proposed member of the relevant superannuation or retirement scheme as though: (a) the insurance cover provided by that contract in respect of that member were provided by an individual superannuation contract between the insurer as insurer and the trustee for the purposes of the scheme as the insured; and (b) that contract had been entered into at the time when the proposed member became a member of the scheme.

SECTION 32 COMMENTARY Background and synopsis ....................................................................... Group life contract ................................................................................... Life insured .............................................................................................. Previous contracts ...................................................................................

[32.10] [32.20] [32.30] [32.40]

[32.10] Background and synopsis The provisions of Div 3 of Pt IV extend to a failure to comply with the duty of disclosure or a misrepresentation made to the insurer under a blanket superannuation contract in respect of a proposed member of that scheme. The section provides that it is as if the contract were an individual contract in respect of that proposed member entered into at the time the member became a member of the scheme. Section 32 extends to blanket insurance contracts entered into before the date of commencement of the ICA but only insofar as those contracts relate to people who become members of the relevant scheme after that date: see s 4(2). The rationale of s 32 is that a blanket contract of insurance normally predates any misrepresentation or non-disclosure made by a particular member. As an insurer has remedies only for a misrepresentation or non-disclosure made before the contract was entered into, and not for those made after that time, the insurer would be deprived of any remedy in the case of a blanket superannuation contract. Under s 32 an insurer is entitled to remedies for misrepresentation or nondisclosure by a member as if a single contract between the insurer and trustee (the insured) had been entered into when the member joined the scheme: ALRC 20 at [199]; Explanatory Memorandum, at [100]–[102]. 292

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s 32

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that s 32 should apply to non-superannuation group life schemes and should be amended to make it clear that remedies remain available for non-disclosures and misrepresentations when they occur between the time an insured becomes a member of the scheme and when the insured applies for cover (see Final Report (June 2004), at [10.29]–[10.32]). Section 32 was repealed and substituted with a new s 32 by the Insurance Contracts Amendment Act 2013, The new s 32 commenced on 28 June 2014. The new s 32 employs the broader term “group life contract” which is defined in s 11(1) to mean a contract of life insurance maintained for the purpose of a superannuation or retirement scheme, or another scheme (including one not related to employment). It also addresses circumstances in which individuals join a scheme but there is some delay before insurance cover commences. Delays are reasonably common because of medical examinations and health questions. Previously under s 32(b) the contact of insurance was taken to be entered into when the member joined the scheme. The new s 32 addresses this difficulty by providing that, where there is a delay from the time of joining the scheme until the time that cover is actually effected, the relevant contract of life insurance is taken to have commenced at the time the life insurance cover under the scheme took effect in relation to the relevant member. The new s 32 applies to a contract of life insurance originally entered into after 28 June 2014 (which is 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). The new section also applies to a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[32.20] Group life contract See s 11(1). The definition of “group life contract” was inserted into s 11(1) by the Insurance Contracts Amendment Act 2013 and commenced on 28 June 2014.

[32.30] Life insured See s 11(1). The definition of “life insured” was inserted by the Insurance Contracts Amendment Act 2013 commencing on 28 December 2015.

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[32.30]

s 32A

Insurance Contracts Act 1984

[32.30]

[32.40] Previous contracts Section 32 applies to a superannuation contract (other than an individual superannuation contract) entered into before the date of commencement of the ICA insofar as a person who subsequently becomes a member of the relevant superannuation or retirement scheme is concerned: see s 4(2). The amendment of s 4(2) by the Insurance Contracts Amendment Act 2013 replaced the term “blanket superannuation contract” with “superannuation contract (other than an individual superannuation contract)”. 32A Non-disclosure or misrepresentation by holder of RSA This Division extends to the case where there was a failure to comply with the duty of disclosure, or a misrepresentation was made to the insurer, in relation to a holder, or a person applying to become a holder, of an RSA as though: (a) the insurance cover provided in relation to that RSA in respect of that person were provided by a contract between the insurer as insurer and the RSA provider as the insured; and (b) that contract has been entered into at the time when the holder became the holder, or the person applying to become the holder, became the holder. [S 32A am Act 75 of 2013, s 3 and Sch 6 item 39; insrt Act 62 of 1997, s 3 and Sch 10 item 5]

SECTION 32A COMMENTARY Background and synopsis ....................................................................... Retirement savings accounts ..................................................................

[32A.20] [32A.30]

[32A.20] Background and synopsis Section 32A extends the provisions of Div 3 (Remedies for Nondisclosure and Misrepresentation) to a Retirement Savings Account (RSA) holder. The section applies to a RSA holder who has insurance cover under a “group” insurance policy and provides for the RSA holder to be treated as if the insurance cover was in fact individual insurance cover: Explanatory Memorandum to the Retirement Savings Accounts (Consequential Amendments) Bill 1997 (Sen), cl 191. Section 32A was amended by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2014, to correct a typographical error by relocating a comma to the correct location in the section. The relocation of the comma applies to an RSA entered into before or after 28 June 2014 (which is 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013). 294

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[33.20]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 33

[32A.30] Retirement savings accounts

33

No other remedies

The provisions of this Division are exclusive of any right that the insurer has otherwise than under this Act in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement.

SECTION 33 COMMENTARY Synopsis .................................................................................................. Application ............................................................................................... Otherwise than under this Act .................................................................

[33.10] [33.20] [33.30]

[33.10] Synopsis The effect of s 33 is that the insurer cannot by contract have a greater range of remedies in relation to non-disclosure or misrepresentation than those conferred by Div 3 of Pt IV. The section does not, however, affect the insurer’s right to cancel the contract under Pt VII.

[33.20] Application The provisions of Div 3 of Pt IV of the ICA which concern remedies for non-disclosure and misrepresentation, namely ss 28 to 32A, are exclusive of any right that the insurer has otherwise than under the Act. This exclusivity is in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement. Section 33 will catch any provision of a contract of insurance which has the effect of providing remedies to an insurer greater than those in Div 3 of Pt IV. Therefore s 33 may preclude an insurer from relying on a provision which, for instance, seeks to provide a remedy to an insurer for a non-disclosure or misrepresentation by a person who did not become the insured under a contract of insurance. That would make it a greater remedy than that provided for in ss 28 and 29 which concern non-disclosure and misrepresentation by a person who became the insured. Conti J (Fed Ct NSW Registry) considered a submission that s 33 precluded an insurer from relying upon a prior claims and circumstances exclusion (cl 4.1) in a professional indemnity policy: Permanent ©

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See s 11(1).

s 33

Insurance Contracts Act 1984

[33.20]

Custodians Ltd v ARMA Pty Ltd (2006) 14 ANZ Ins Cas 61-707; [2006] FCA 640. The submission was made by a third party claimant making a direct access application under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and seeking to join an underwriter and its agents to proceedings against the insured. The third party claimant submitted that if the exclusion was to be applied, it would effectively provide an additional right to the insurer than it would otherwise have in respect of a misrepresentation or incorrect statement before the contract was entered into. It was submitted that the exclusion was on all fours with a retroactive clause in a contract of insurance considered by Hodgson CJ in Eq (NSW Sup Ct) in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529; 10 ANZ Ins Cas 61-408. Hodgson CJ in Eq in interpreting the retroactive clause, which omitted claims and circumstances, had added that “[i]f the retroactive clause had the effect of excluding liability for something which was in substance a nondisclosure, then I think s 33 would in any event, prevent the retroactive clause excluding liability”. Conti J granted leave for the joinder and allowed the third party claimant to pursue its framed causes of action. In doing so he found that the s 33 submission was “reasonably arguable”. In Macquarie Underwriting Pty Ltd v Permanent Custodians Ltd (2007) 240 ALR 519; [2007] FCAFC 60, the Full Ct, of the Federal Court (Allsop and Buchanan JJ, with whom Graham J agreed on this point) agreed with Conti J that it was arguable that s 33 was engaged and noted the similarities with the debate on s 54 and claims-made policies. Allsop and Buchanan JJ said (at 524 (ALR)): The effect of s 33 is to limit remedies for non-disclosure and misrepresentation to those provided by the Insurance Contracts Act itself. Of particular relevance is s 28, which, while permitting avoidance of an insurance contract in the event of a fraudulent non-disclosure or misrepresentation, otherwise limits the protection of an insurer’s interests to reduction of the claim “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”: s 28(3). It is now clear on the authorities that this reduction can, if the evidence permits the conclusion, be to zero. [The third party claimant] contends that in substance, the attempt at the definition of coverage cannot withstand the effect of s 33. In our view, this contention is arguable. In another context, s 54 of the Insurance Contracts Act, the fitting into the scheme of that Act of claims-made policies caused significant difficulty for a number of years: see East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092; FAI General Insurance Co v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164; Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 146 ALR 385; [1997] HCA 35; and FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38. These difficulties arose from a desire of insurers to identify the notification of a claim within a policy period as an 296

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[33.20]

Pt IV – Div 3 – Remedies for non-disclosure etc.

s 33

McClellan J (NSW Sup Ct), in an earlier decision, held that s 33 was not relevant to the operation of an exclusion clause which excluded liability for claims arising out of prior circumstances of which the insured was aware before the period of insurance: Porter v GIO Australia Ltd (2003) 12 ANZ Ins Cas 61-573; [2003] NSWSC 668. McClellan J noted that the exclusion operated to exclude the nominated matters from the risk insured. He said (at 76,812 (ANZ Ins Cas)): Accordingly, s 33, which only relates to remedies in relation to matters within the policy, is not relevant to the present circumstances.

The brief reasoning of McClellan J in Porter is difficult to reconcile with the reasoning of the Full Bench of the Federal Court in Macquarie Underwriting. Perram J (Fed Ct) held that it was “arguable” that s 33 prevented a professional indemnity insurer from relying on an endorsement to a policy of insurance relieving it of its obligation to indemnify a valuer for losses arising out of any valuation exceeding $1 million unless it was reviewed by a second valuer prior to such valuation being issued: Genworth Financial Mortgage Insurance Pty Ltd v KCRAM Pty Ltd (in liq) (No 2) (2011) 205 FCR 295; 284 ALR 72; [2011] FCA 1124. It was argued that the endorsement was to be seen, in substance, as a warranty that at the time of the entry into the policy all valuations exceeding $1 million had been checked by two valuers. As a statement with respect to the existence of a state of affairs under s 24 of the ICA, it did not have the effect as a warranty but had the effect as a statement made before the policy was entered into. Therefore, arguably, any warranty could not operate as the professional indemnity insurer contended. This was either because it was a warranty to which s 24 directly applied or alternatively it was seen as an attempt to contract out of Pt IV of the ICA, a course both prohibited and rendered invalid by s 33. Perram J noted that the Full Bench of the Federal Court in Macquarie Underwriting held that because of s 33 it was “arguable” that an exclusion in respect of circumstances of which the insured was aware prior to entry into the policy did not stand in the way of a claim under s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). He was inclined, in terms of arguability, to reach the same conclusion. It was arguable that the endorsement did not apply.

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essential attribute of insurance cover, and not as a contractual condition of the policy regulating required conduct of the insured. The debate about cl 4.1 of the second policy and s 33 is not entirely dissimilar. In cl 4.1 the insurers are attempting to exclude from cover matters which would otherwise be disclosable. The aim may be readily seen to be definitional, but it is arguable that s 33 is engaged. That is not a final conclusion.

s 33

Insurance Contracts Act 1984

[33.20]

[33.30] Otherwise than under this Act Rights given to the insurer at common law and preserved by s 7 are retained and are available to the insurer “under this Act”. It is submitted by Sutton, Insurance Law in Australia (3rd ed, LBC Information Services, 1999), p 179 that s 33 will be construed by the courts as excluding the rules of the common law by “necessary intendment”. If so the ICA will provide the only relief available for a failure to disclose or for misrepresentation.

298

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[33A.10]

Pt IV – Div 4 – Key Facts Sheets

s 33A

Division 4 – Key Facts Sheets 33A Application of this Division This Division applies in relation to: (a) a contract of insurance (in this Division called a prescribed contract) that is included in a class of contracts of insurance declared by the regulations to be a class of contracts in relation to which this Division applies; and (b) a proposed or possible contract of insurance (in this Division called a potential prescribed contract) that would, if entered into, be a prescribed contract. [S 33A insrt Act 41 of 2012, s 3 and Sch 2 item 6 Cross-reference: Insurance Contracts Regulations 1985: reg 4A lists the classes of contracts to which Pt IV, Div 4 applies.]

SECTION 33A COMMENTARY [33A.10] Background and synopsis Queensland, New South Wales and Victoria all experienced severe flooding in 2010-11. These floods highlighted a level of confusion by those covered under home building and home contents policies of insurance as to what was covered and what was not covered. On 5 April 2011, the Commonwealth Government released a consultation paper Reforming flood insurance: Clearing the waters in order to engage the community in suggesting improvements to the regulatory framework and other aspects of Australia’s insurance market. One of the proposals contained in the paper was the “Key Facts Sheet” (KFS). Insurers are currently required to give consumers a “Product Disclosure Statement” (PDS) if they offer, or issue, insurance policies to consumers. Product Disclosure Statements can be lengthy, making it difficult for consumers to access key information about the policy. It is said that the KFS will make information about what is covered by home buildings and home contents policies more accessible to consumers. It will outline key information in relation to the policies in an easy to read and consumer friendly layout. This is in addition to a PDS: Revised Explanatory Memorandum to the Insurance Contracts Amendment Bill 2012 (Senate). Section 33A deals with the application of the new Div 4 to a prescribed contract declared by the regulations to be a class of contracts of insurance to which the Division applies. The Division also applies to a “potential prescribed contract” that would, if entered into, be a prescribed contract.

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[Div 4 insrt Act 41 of 2012, s 3 and Sch 2 item 6]

s 33B

Insurance Contracts Act 1984

[33B.10]

33B What is a Key Facts Sheet? For the purposes of this Division, a Key Facts Sheet for a prescribed contract, or a potential prescribed contract, is a document: (a) that contains the information relating to the prescribed contract, or the potential prescribed contract, that is required by the regulations; and (b) that complies with any other requirements prescribed by the regulations. [S 33B insrt Act 41 of 2012, s 3 and Sch 2 item 6 Cross-reference: Insurance Contracts Regulations 1985: reg 4B prescribes the information required to be contained in a Key Facts Sheet and also requirements that a Key Facts Sheet must comply with for the purposes of s 33B.]

SECTION 33B COMMENTARY [33B.10] Synopsis Section 33B provides that a Key Facts Sheet is a document that contains the information required by, and any other requirements prescribed by, the regulations. 33C Insurer’s obligation to provide Key Facts Sheet (1) An insurer must provide a Key Facts Sheet for a prescribed contract, or a potential prescribed contract, in the circumstances, and in the manner, prescribed by the regulations. (2) Regulations made for the purposes of subsection (1) may prescribe circumstances in which a Key Facts Sheet may or must be provided by electronic means. The regulations have effect despite subsection 77(1). (3) The regulations may prescribe exceptions to the requirement in subsection (1). Note: A defendant bears an evidential burden in relation to a matter prescribed for the purposes of subsection (3) (see subsection 13.3(3) of the Criminal Code).

(4) The following provisions do not apply in relation to the requirement in subsection (1): (a) subsection 11(11); (b) section 69. Offence (5) An insurer commits an offence if: (a) the insurer is subject to a requirement under subsection (1); and (b) the insurer engages in conduct; and (c) the conduct contravenes the requirement.

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[33D.10]

Pt IV – Div 4 – Key Facts Sheets

s 33D

Penalty: 150 penalty units.

SECTION 33C COMMENTARY [33C.10] Synopsis Section 33C deals with the an insurer’s obligation to provide a Key Facts Sheet. An insurer must provide a KFS in the circumstances, and in the manner, prescribed by the regulations. The regulations may prescribe circumstances in which a KFS may, or must, be provided by electronic means. The regulations have effect despite s 77(1) which provides for the giving of notices. The regulations may prescribe exceptions to the application of the Division. The KFS is required to be provided at the time a request is made by a consumer in relation to a particular prescribed or potential prescribed contract. An insurer is not able to defer the provision of a KFS until a contract of insurance is entered into. Therefore, s 11(11) does not apply in relation to the provision of a KFS. Similarly s 69, which allows insurers to provide information within 14 days in certain circumstances, does not apply to the provision of a KFS. An insurer commits an offence if it engages in conduct in contravention of the requirement to provide a KFS and contravention may attract a penalty. 33D Provision of Key Facts Sheet does not constitute clearly informing For the purposes of this Act, the provision by an insurer of a Key Facts Sheet to a person does not constitute clearly informing the person of the matters contained in the Key Facts Sheet. [S 33D insrt Act 41 of 2012, s 3 and Sch 2 item 6]

SECTION 33D COMMENTARY [33D.10] Synopsis Under s 33D, the provision of a KFS does not constitute clearly informing the person provided with the KFS of the matters contained in it.

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[S 33C insrt Act 41 of 2012, s 3 and Sch 2 item 6 Cross-reference: Insurance Contracts Regulations 1985: reg 4C details the obligations of insurers to provide Key Facts Sheets for the purposes of s 33C.]

PART V – THE CONTRACT Division 1 – Standard cover Interpretation In this Division: minimum amount, in relation to a claim, means the amount declared by the regulations to be the minimum amount in relation to a class of claims in which that claim is included. prescribed contract means a contract of insurance that is included in a class of contracts of insurance declared by the regulations to be a class of contracts in relation to which this Division applies. prescribed event, in relation to a prescribed contract, means an event that is declared by the regulations to be a prescribed event in relation to that contract. [Cross-reference: Insurance Contracts Regulations 1985: • regs 5, 9, 13, 17, 21 and 25 declare classes of contracts that provide motor vehicle, home buildings, home contents, sickness and accident, consumer credit and travel insurance in relation to which Div 1 of Pt V applies for s 34; • regs 6, 10, 14, 18, 22 and 26 declare events to be prescribed events in relation to a contract for s 34; • regs 8, 12, 16, 20, 24 and 28 declare the minimum amount in respect of a claim made under a contract for s 34; and • reg 29 places limits on minimum amounts for s 34.]

SECTION 34 COMMENTARY Synopsis .................................................................................................. Prescribed contracts ................................................................................

[34.10] [34.20]

[34.10] Synopsis Section 34 defines the terms used in Div 1 of Pt V. In light of those definitions, standard cover operates in the following manner: (a) regulations declare that contracts included in specified classes of contracts are “prescribed contracts”; (b) for such contracts, regulations declare that certain events are “prescribed events”; and (c) for such events, regulations declare a “minimum amount” which must be paid by the insurer subject to s 36: Explanatory Memorandum, at [106]. ©

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34

s 35

Insurance Contracts Act 1984

[34.10]

[34.20] Prescribed contracts The Insurance Contracts Regulations 1985 (Statutory Rules 1985 No 162) declared the following classes of contracts of insurance as “prescribed contracts”: • Division 1 – Motor Vehicle Insurance; • Division 2 – Home Buildings Insurance; • Division 3 – Home Contents Insurance; • Division 4 – Sickness and Accident Insurance; • Division 5 – Consumer Credit Insurance; and • Division 6 – Travel Insurance. 35

Notification of certain provisions

(1) Where: (a) a claim is made under a prescribed contract; and (b) the event the happening of which gave rise to the claim is a prescribed event in relation to the contract; the insurer may not refuse to pay an amount equal to the minimum amount in relation to the claim by reason only that the effect of the contract, but for this subsection, would be that the event the happening of which gave rise to the claim was an event in respect of which: (c) the amount of the insurance cover provided by the contract was less than the minimum amount; or (d) insurance cover was not provided by the contract. (2) Subsection (1) does not have effect where the insurer proves that, before the contract was entered into, the insurer clearly informed the insured in writing (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise) or the insured knew, or a reasonable person in the circumstances could be expected to have known: (a) where the effect of the contract, but for subsection (1), would be that the liability of the insurer in respect of a claim arising upon the happening of the event would be less than the minimum amount—what the extent of the insurer’s liability under the contract in respect of such a claim would be; or (b) where the effect of the contract, but for subsection (1), would be that the insurer would be under no liability in respect of such a claim—that the contract would not provide insurance cover in respect of the happening of that event. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 10; Act 193 of 1985, s 3 and Sch 1; Act 65 of 1985, s 3 and Sch 1]

(3) Regulations made for the purposes of this section take effect at the expiration of 60 days after the day on which they are notified in the Gazette.

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[35.20]

Pt V – Div 1 – Standard cover

s 35

(4) Where regulations made for the purposes of this section are amended after the day on which a particular contract of insurance is entered into, the amendments shall be disregarded in relation to the application of subsection (1) to that contract. [S 35 am Act 107 of 1997; Act 193 of 1985; Act 65 of 1985]

SECTION 35 COMMENTARY [35.20] [35.30] [35.40] [35.50]

[35.20] Background and synopsis The main aim of standard cover is to ensure that exclusions and limitations which an insured might not expect are brought to the insured’s notice before the contract of insurance is entered into. Section 35(1) makes the insurer liable: (a) when a claim is made under a prescribed contract (see [34.10]); (b) to the extent set out in the Insurance Contracts Regulations 1985; and (c) in respect of the happening of the events specified in the Insurance Contracts Regulations 1985. In the Explanatory Memorandum, at [108] the proposed law was described as follows: Where an insured makes a claim under a prescribed contract (ie a contract to which the standard cover provisions apply) and that claim is in respect of loss arising from an event prescribed in the [Insurance Contracts Regulations], the insurer must pay [the insured] the minimum amount specified in the regulations. This is so even where the amount of the insurance cover provided by the contract is less than the minimum amount, or insurance cover is not provided by the contract at all [s 35(1)] unless the insurer proves that: • before the contract was entered into [the insurer] clearly informed the insured in writing that less cover (or no cover) was provided; or • the insured knew, or a reasonable person in the circumstances could be expected to have known that less cover, or no cover as the case may be, was provided [s 35(2)].

According to the ALRC, the rationale of s 35 is that an insurer should be free to market policies which offer less than the standard cover, provided the insured’s attention is drawn to the limitations or a reasonable person in the circumstances could be expected to have been aware of such limitations. For the latter, the ALRC intended that the insured’s age, ©

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Background and synopsis ....................................................................... Document containing the provisions ....................................................... Entry into the relevant contract of insurance .......................................... Clearly informed … (whether providing the insured with a document containing the provisions … or otherwise) .........................................

s 35

Insurance Contracts Act 1984

[35.20]

mental condition, education and so on was to be taken into account: ALRC 20 at [43], [45], [69] and [70]. Clause 36(2) of the original Bill (which became s 35(2)) referred to “a person in the circumstances of the insured”. This became “a reasonable person in the circumstances”. This accords with the wording of s 21(1)(b): see discussion at, [21.10.8]. Section 35(3) and (4) deals with technical matters: 1. Regulations normally come into effect on the day which they are notified in the Commonwealth Gazette: s 48(1)(b) of the Acts Interpretation Act 1901 (Cth). A further period of 28 days is prescribed before the regulations actually take effect. 2. The making and amending of regulations is not to have effect on contracts of insurance that were in effect immediately before the regulations were made or amended.

[35.30] Document containing the provisions Insurers were initially uncertain as to whether they had to provide a special notice specifying the extent of any derogation from standard cover, in addition to the policy document itself. Before the commencement of the ICA the matter was clarified by two amendments to s 35. First, words in brackets “(whether by providing the insured with a policy document in relation to the contract or otherwise)” were inserted after the words “in writing” (Act No 65 of 1985). It then became clear that the requirement to inform could be satisfied by providing a copy of the policy document itself, subject to the document clearly informing the insured of the extent of the cover provided. The second amendment omitted the words “policy document in relation to the contract”, which had been added by the first amendment, and substituted the words “documents containing the provisions, or the relevant provisions, of the proposed contract” (Act No 193 of 1985). It then became clearer that the information to be provided could be conveyed by various means, including a document containing the provisions of the proposed contract.

[35.40] Entry into the relevant contract of insurance It is necessary to consider the requirements of s 35 at the time of entry into the relevant contract of insurance. Where the insured claimed that they were entitled to the benefit of s 35(1) it was established on the evidence that notwithstanding earlier contracts of insurance, the insured knew of a flood exclusion prior to the relevant contract of insurance and therefore the insurer could rely upon s 35(2): State Government Insurance Commission v Sharp (1994) 8 ANZ Ins Cas 61-243 (Nyland J, SA Sup Ct). 306

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[35.50]

Pt V – Div 1 – Standard cover

s 35

Where the insured relied upon s 35(1) and claimed to be unaware of a flood exclusion, the Full Court SA Sup Ct (comprising Mohr, Olsson and Debelle JJ) determined that the building was used “principally and primarily as a place of residence” according to the definition in reg 2 at the relevant time, namely at the time of entry into the contract of insurance: Gray v Mercantile Mutual Insurance (Aust) Ltd (1994) 63 SASR 154; 119 FLR 140; (1995) 8 ANZ Ins Cas 61-241.

Einstein J (NSW Sup Ct) found, on an obiter basis, that the insureds were “clearly informed” according to s 35(2) through the receipt of a policy document containing a flood exclusion, even though that exclusion did not address what was termed the Wayne Tank principle; namely, that if a loss has two or more proximate or effective causes and at least one cause is excluded from cover, the insurer is not liable: Hams v CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-525; [2002] NSWSC 273. Einstein J referred to the decision of the NSW Court of Appeal in Suncorp General Insurance Ltd v Cheihk (1999) 10 ANZ Ins Cas 61-442; [1999] NSWCA 238. The Court of Appeal considered the meaning of “clearly informed” in s 22(1) and accepted that “inform” means “to make known”. Einstein J accepted that without the words in parentheses in s 35(2) the reasoning and analysis of the Court of Appeal in Cheihk on the meaning and application of the words “clearly inform” in that case would apply to s 35(2) with a similar result. Einstein J expressed a view that the words in brackets in s 35(2) are likely in most circumstances to result in the provision of a document containing the relevant provisions (usually an insurance policy) in, and of itself, satisfying the requirement to clearly inform. However, he noted that there may be special circumstances in which the complexity of or confusions within the document could be such that the mere provision of the document would not establish that the insurer had effectively informed the insured. His Honour accepted that providing a document was one of a number of mechanisms that could be used to inform. He said that, in each case, the context of the document and all of the circumstances of its provision would need to be considered in order to determine if the insurer had effectively informed the insured. Einstein J said that the ICA uses the words “the effect of the contract” in s 35(2) as requiring the provisions of the insurance contract to be spelled out in a document containing the provisions or relevant provisions of the proposed contract or otherwise in writing. That is all that is required. He did not accept that as a general rule it would be incumbent upon an ©

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[35.50] Clearly informed … (whether providing the insured with a document containing the provisions … or otherwise)

s 35

Insurance Contracts Act 1984

[35.50]

insurer to provide along with the document containing the provisions either a text on insurance law or an annotated policy identifying and explaining either general principles of insurance law or the principles dealing with the proper approach to the construction of policy provisions. He said (at 76,200 (ANZ Ins Cas)): The fact is that the principles which underpin the law of insurance are often complex in the extreme and it could not be the case, as it seems to me, that a condition precedent to an insurer establishing that it had clearly informed the insured in writing of the relevant limitation, required the insurer to annotate the Policy by reference to principles of insurance law.

In giving emphasis to this point he said (at 76,203 (ANZ Ins Cas)): The words “the provisions or the relevant provisions of the proposed contract” are not concerned with the interstices of the fine and complex approaches taken by courts to questions of law or of mixed fact and law related to insurance law.

Angel J (NT Sup Ct) questioned whether “informed” in s 35 means “to make known” and considered that it means simply no more than “told”: Marsh v CGU Insurance Ltd (t/as Commercial Union Insurance) (2003) 175 FLR 403; 12 ANZ Ins Cas 61-569; [2003] NTSC 71. He said (at 76,689 (ANZ Ins Cas)): With respect, I question whether “informed” in s 35 means “to make known”. “To make known” conveys the idea that the recipient knows or learns something. In s 35 actual knowledge of the insured is one alternative to the insurer having “clearly informed the insured in writing”. It seems to me, with respect, that “informed” in the context of s 35 means simply no more than “told”. Thus, it seems to me, an insurer who sends a policy document which in plain English informs an insured that there is no flood cover would comply with s 35(2) of the Act notwithstanding that unbeknown to the insurer the insured did not understand English.

The Northern Territory Court of Appeal (Mildren J with whom Bailey J agreed on this point) agreed with Einstein J in Hams that the provisions of s 35(2) could be met if the insurer provided to the proposed insured a document such as the proposed policy which contained the relevant wording: Marsh v CGU Insurance Ltd (t/as Commercial Union Insurance) (2004) 13 ANZ Ins Cas 61-594; [2004] NTCA 1. The words in parenthesis in s 35(2) clearly contemplate this as a possibility. Mildren J found that the insured had been “clearly informed” of a flood exclusion under s 35(2) and could satisfy s 35(2) by providing the insured with a copy of the policy which shows the exclusion in clear and unambiguous terms. He said (at 77,055 (ANZ Ins Cas)): Whether the policy wording in fact “clearly informed” the insured that there was no cover for flood is a question of fact to be determined by an examination of the document in question. I do not consider that it is necessary for the relevant exclusion to be prominently displayed in bold capitals over the front cover in order for the insurer to succeed on this question. There are now a large number of "prescribed events" such as flood which are required to be 308

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s 35

excluded by clearly informing the proposed insured that they are not covered risks and it would be impractical to require them all to be so displayed. Furthermore, the language of s 35(2) suggests that the proposed insured can be clearly informed merely by providing the insured with a copy of the policy which shows the exclusion in clear and unambiguous terms.

Even though s 35 is plainly beneficial legislation, a fair reading of s 35(2) does not warrant the conclusion that the result need go no further than provide for the relevant exclusion in the policy wording in clear and unambiguous language and in a manner which a person of average intelligence and education is likely to have little difficulty in finding and understanding if that person reads the policy in question.

Kourakis J (SA Sup Ct) found that an unlicensed driver exclusion clause, applied literally and unaffected by its context, would not when read by a reasonable person in the position of the insured, have “clearly informed” them that they would not be covered for the damage to their motor vehicle occasioned by their unlicensed 14-year-old son who took it without their consent or knowledge: Lockwood & Lockwood v Insurance Australia Ltd (t/as SGIC Insurance) (2010) 107 SASR 299; 16 ANZ Ins Cas 61-843; [2010] SASC 140. He looked beyond the mere provision of a policy booklet to satisfy s 35(2). He found that the exclusion would be read by a reasonable person in the position of the insured as more naturally referring to accidental damage occurring when the insured vehicle was driven by a person the insured had permitted to drive. There was no reference to the unlicensed driver exclusion in that part of the policy which addressed the limitations on theft cover. The unlicensed driver exclusion appeared in the section of the policy that dealt with claims under the heading “Things that may put your claim or insurance cover at risk”. It did not appear in either the general exclusion part or the cancellation part of the policy. Kourakis J found that a reasonable person would have been surprised to learn that the policy did not cover the circumstances in which the insured’s vehicle was damaged. In finding that the insured were not clearly informed that they would not be covered in the event that transpired, he said (at 78,124–78,125 (ANZ Ins Cas)): The terms of the policy, far from being calculated to alert an insured to the unlicensed exclusion clause, hid it in a “multiplicity [and] generality of words” (Maye v Colonial Mutual Life Assurance Society Ltd (1924) 35 CLR 14 at 27).

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Mildren J rejected a submission that the insured was not clearly informed because the policy was a lengthy document, did not readily disclose that flood was exempted and required a careful reading of the policy. He found that the answer to the question “is flood covered” was easily ascertainable by any person of average intelligence and education. He found similarly that the answer to the question, “what risks are excluded” would easily have revealed that flood was not covered. He said (at 77,055 (ANZ Ins Cas)):

s 36

36

Insurance Contracts Act 1984

[36.10]

Interpretation of regulations

If a question arises whether an event is a prescribed event, the relevant provisions of the regulations shall be construed as though they were provisions of a contract put forward by the insurer.

SECTION 36 COMMENTARY Background ............................................................................................. Prescribed event .....................................................................................

[36.10] [36.20]

[36.10] Background The contra proferentem rule requires the terms of an insurance contract to be strictly construed against the party who offered the terms of the contract, usually the insurer. The ALRC was concerned that the contra proferentem rule may not necessarily apply to legislation, namely, standard cover. Accordingly, the ALRC recommended that the rule should apply to all contracts of insurance and standard cover: ALRC 20 at [71].

[36.20] Prescribed event See s 34. 37

Notification of unusual terms An insurer may not rely on a provision included in a contract of insurance (not being a prescribed contract) of a kind that is not usually included in contracts of insurance that 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 (whether by providing the insured with a document containing the provisions, or the relevant provisions, of the proposed contract or otherwise). [S 37 am Act 168 of 1986, s 3 and Sch 1; Act 65 of 1985, s 3 and Sch 1]

SECTION 37 COMMENTARY Synopsis ..................................................................................................

[37.20]

Prescribed contract ..................................................................................

[37.30]

Not usually included ................................................................................

[37.40]

Before the contract was entered into ......................................................

[37.50]

Sections 37 and 14(3) .............................................................................

[37.60]

Application and interpretation ..................................................................

[37.70]

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[37.40]

Pt V – Div 1 – Standard cover

s 37

[37.20] Synopsis In the case of a contract other than a prescribed contract, an insurer will not be able to rely on any of its provisions which are of a kind not usually included in contracts of insurance providing similar cover unless, before the contract was entered into, the insurer clearly informed the insured in writing of the effect of the particular provisions.

[37.30] Prescribed contract

[37.40] Not usually included A provision may be considered to be “not usually included” in a contract of insurance within s 37 if the meaning attributed to it by the insurer renders it unusual. Williams J (SA Sup Ct) considered that s 37 (in addition to and independently of matters of utmost good faith and misleading and deceptive conduct) would apply so as to treat the meaning attributed by the insurer to the definition of “delivered” in a trade credit policy, if correct, as an unusual term requiring prior notice in writing under s 37 by the insurer “of the effect of the provision”: Messagemate Australia Pty Ltd v National Credit Insurance (Brokers) Pty Ltd (2002) 85 SASR 303; 12 ANZ Ins Cas 61-546; [2002] SASC 327. McClellan J (NSW Sup Ct) considered an argument that an exclusion in a directors and officers liability policy excluding claims “arising from any litigation or Inquiry that was either in progress or pending prior to the Period of Insurance” was unusual in that it operated irrespective of whether the insured knew the inquiry had commenced before the inception of the policy. In considering whether the provision was unusual, McClellan J noted that there is a distinction to be drawn between matters which an insured is required to disclose and the actual risk which is being insured. He also noted that each policy has its own commercial advantages and disadvantages. The policy in question provided cover which was not provided under the previous policy, but the price for that cover was that it came subject to the exclusion. It was unnecessary for McClellan J to make an express finding on the application of s 37 because of the application of s 71 of the ICA: Porter v GIO Australia Ltd (2003) 12 ANZ Ins Cas 61-573; [2003] NSWSC 668. See [14.30]. In Dumitrov v SC Johnson & Son Superannuation Pty Ltd [2006] NSWSC 1372, the mere fact that a provision in an insurance policy issued to a trustee for the benefit of members created a harsher definition of total and permanent disablement did not mean that the definition was necessarily ©

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See s 34.

s 37

Insurance Contracts Act 1984

[37.40]

unusual in terms of s 37. Gzell J (NSW Sup Ct) perused authorities in which similar definitions in insurance policies were considered without them being classified as unusual under s 37 and concluded that in the absence of further evidence, the member had failed to establish that the definition was unusual for the purposes of s 37.

[37.50] Before the contract was entered into The entering into a contract of insurance includes a reference to those matters referred to in s 11(9). Further, according to s 11(10)(a) where information as required by s 37 has been given to the insured before the original entering into, renewal, extension or reinstatement of a contract of insurance, the requirement to give information shall be deemed to be satisfied at, or before, any subsequent renewal, extension or reinstatement of the contract.

[37.60] Sections 37 and 14(3) Section 14(1) specifies that a party may not rely on a provision of a contract of insurance when that reliance would mean a failure to act with the utmost good faith. Section 14(3) specifies that in deciding whether reliance by an insurer on a provision of a contract of insurance would be to fail to act with the utmost good faith, the court shall have regard to any s 37 or other notification. The fact that provisions in a policy of insurance are not unusual within the terms of s 37, and therefore s 37 has no application, does not mean that the provisions may not be relevant to the insurer’s duty under ss 14 and 37: Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 per Cox J (SA Sup Ct). This accords, in part, with the wording of s 14(3) which allows the court to have regard to “any” notification of a provision that was given to the insured, whether a notification of the kind mentioned in s 37 “or otherwise”.

[37.70] Application and interpretation The NSW Court of Appeal (Sheller JA with whom Santow and McColl JJA agreed) referred to s 37 and reliance on usual terms which have not been notified. The Court stated that it follows that it should not readily countenance the implication in a contract of insurance of a provision of which the insured has no notice and which alters or limits to the

312

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[37A.10]

Pt V – Div 1A – Definition of flood

s 37A

advantage of the insurer the meaning of the language of the contract: QBE Mercantile Mutual Ltd v Hammer Waste Pty Ltd (2004) 13 ANZ Ins Cas 61-586; [2003] NSWCA 356.

Division 1A – Definition of flood [Div 1A insrt Act 41 of 2012, s 3 and Sch 1 item 1]

(1) This Division applies in relation to a contract of insurance (in this Division called a prescribed contract) if: (a) the contract is included in a class of contracts of insurance declared by the regulations to be a class of contracts in relation to which this Division applies; and (b) the contract was entered into after the day on which those regulations were made. (2) However, this Division does not apply in relation to a prescribed contract at any time before the transition time for the prescribed contract. (3) Also, this Division does not affect the operation of a prescribed contract in relation to an event that occurred before the transition time for the prescribed contract. (4) In this section: transition time, for a prescribed contract, means the time when regulations made for the purposes of paragraph (1)(a), declaring a class of contracts of insurance including the contract to be a class of contracts in relation to which this Division applies, commence. [S 37A insrt Act 41 of 2012, s 3 and Sch 1 item 1 Cross-reference: Insurance Contracts Regulations 1985: reg 29C declares classes of contracts in relation to which Div 1A of Pt V applies for s 37A.]

SECTION 37A COMMENTARY [37A.10] Background and synopsis Queensland, New South Wales and Victoria all experienced severe flooding in 2010-11. These floods highlighted a level of confusion by those covered under home building and home contents policies of insurance as to what was covered, the extent to which policies provided flood cover and what cover for flood means. There was confusion in relation to the definition of flood in policies. On 5 April 2011, the Commonwealth Government released a consultation paper Reforming flood insurance: Clearing the waters in order to engage the community in suggesting improvements to the regulatory framework and other aspects of Australia’s insurance market. One of the proposals contained in the ©

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37A Application of this Division

s 37A

Insurance Contracts Act 1984

[37A.10]

paper was the standard definition of a flood. The standard definition reserves the term flood to describe what has become known as riverine or inland flooding (as opposed to stormwater runoff or actions of the sea such as storm surge), whether as an included or excluded event. The purpose of introducing the standard definition is to both avoid different assessments of the one event (because of different flood definitions) and to improve consumers’ ability to evaluate different insurance offerings: Revised Explanatory Memorandum to the Insurance Contracts Amendment Bill 2012 (Senate). Section 37A deals with the application of Div 1A of the ICA. It applies to the types of contracts prescribed in the regulations, namely “prescribed contracts”, if those contracts are within specific classes of contracts of insurance, declared by the regulations to be classes of contracts in relation to which Div 1A of the ICA applies and were entered into after the regulations were made (see reg 29C of the Insurance Contracts Regulations 1985). The classes of contracts of insurance which are declared to be classes of contracts of insurance for the purposes of s 37A (as prescribed under reg 29C(1)) are as follows: (a) home building insurance contracts described in reg 9; (b) home contents insurance contracts described in reg 13; (c) insurance contracts that combine home building insurance and home contents insurance; (d) contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of destruction of or damage to a strata title residence; (e) contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of the loss of the equipment, stock, inventory or premises of a small business; (f) contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of damage to the equipment, stock, inventory or premises of a small business. However, note that under reg 29C(2), a contract is taken not to be in a class of contract mentioned in subreg (1) if: (a) the contract was arranged by an insurance broker, not being an insurance broker acting under a binder; and (b) the contract was arranged in the course of the provision of financial advice by the broker or licensee. Section 37A also provides for a “transition time” which is the time of the commencement of the regulations declaring the class of contracts to which the Division applies. The relevant regulations have subsequently been set to commence two years after they were made, namely 19 June 2014. Under Pt 4 of the Insurance Contracts Regulations 1985, the Division will not apply to a prescribed contract or event before the 314

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[37B.10]

Pt V – Div 1A – Definition of flood

s 37B

transition time unless an insurer decides to rely on Div 8 of Pt II of the Regulations (Flood Insurance), in relation to a contract that provides insurance cover, in which case the regulations apply in relation to: (a) the insurer; and (b) the contract. 37B Meaning of flood in prescribed contracts etc.

(2) In a prescribed contract (or a notice or other document or information given by the insurer in relation to a prescribed contract): (a) the word flood has the meaning given by the regulations; and (b) other parts of speech or grammatical forms of that word have corresponding meanings. (3) Subsection (2) has effect in relation to a prescribed contract (or a notice or other document or information given by the insurer in relation to a prescribed contract) even if the meaning of the word flood (or other parts of speech or grammatical forms of that word) provided by the contract (or the notice or other document or information) is different from the meaning of flood given by the regulations. [S 37B insrt Act 41 of 2012, s 3 and Sch 1 item 1 Cross-reference: Insurance Contracts Regulations 1985: reg 29D prescribes the meaning of flood for s 37B(2)(a).]

SECTION 37B COMMENTARY [37B.10] Synopsis Section 37B deals with the meaning of “flood” in prescribed contracts. The meaning of flood in prescribed contracts is now provided in the Insurance Contracts Regulations 1985. (See reg 29D within Div 8 of Pt 5 of the Regulations). The definition in the regulations is the same as that proposed in the Government’s Consultation paper, Reforming flood insurance: Clearing the waters. Regulation 29D reads as follows: Flood means the covering of normally dry land by water that has escaped or been released from the normal confines of any of the following: (a) (b) (c) (d)

a lake (whether or not it has been altered or modified); a river (whether or not it has been altered or modified); a creek (whether or not it has been altered or modified); another natural watercourse (whether or not it has been altered or modified); (e) a reservoir;

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(1) The regulations must define the meaning of flood for the purposes of this Division.

s 37C

Insurance Contracts Act 1984

[37B.10]

(f) a canal; (g) a dam.

Under s 37B(3) of the Act, the meaning of “flood” set out in subreg (1) will apply to the prescribed contract even if the meaning of the word “flood” provided by the prescribed contract (or by a notice or other document or information given by the insurer in relation to the prescribed contract) is different from the meaning set out in subreg (1). 37C Insurer must clearly inform insured whether prescribed contract provides insurance cover in respect of flood Before entering into a prescribed contract, the insurer must clearly inform the insured in writing whether the contract provides insurance cover in respect of loss or damage caused by, or resulting from, flood as defined by the regulations. [S 37C insrt Act 41 of 2012, s 3 and Sch 1 item 1]

SECTION 37C COMMENTARY [37C.10] Synopsis Section 37C provides that an insurer must inform the insured whether the prescribed contract provides cover for flood before it is entered into. 37D Circumstances in which prescribed contract is taken to provide insurance cover etc. in respect of flood (1) This section applies in relation to a prescribed contract that includes provisions (flood provisions) that provide insurance cover in respect of loss or damage caused by, or resulting from, one or more flood events (whether or not the contract expressly provides insurance cover for flood as defined by the regulations). (2) The flood provisions of the prescribed contract are taken to provide insurance cover in respect of loss or damage caused by, or resulting from, flood as defined by the regulations. (3) The insurer under the prescribed contract may not refuse to pay a claim in respect of loss or damage caused by, or resulting from, the happening of a flood event by reason only that, but for subsection (2), insurance cover in respect of loss or damage caused by, or resulting from, that event was not provided by the contract. (4) If the prescribed contract includes provisions (also flood provisions) that provide different maximum amounts of insurance cover in respect of different flood events, those provisions are taken to provide a maximum amount of insurance cover in respect of loss or damage caused by, or resulting from, flood,

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[37D.10]

Pt V – Div 1A – Definition of flood

s 37D

as defined by the regulations, equal to the highest maximum amount (the maximum flood cover amount) of insurance cover provided by those provisions in respect of any flood event. (5) The insurer under the prescribed contract may not refuse to pay an amount equal to the maximum flood cover amount in relation to a claim in respect of loss or damage caused by, or resulting from, the happening of a flood event by reason only that, but for subsection (4), the maximum amount of insurance cover provided by the contract in respect of loss or damage caused by, or resulting from, that event was less than the maximum flood cover amount.

(6) This section has effect in relation to a prescribed contract whether or not the insurer clearly informed the insured of the purported effect of the flood provisions in the contract. (7) In this section: flood event means an event that is, or would be, a flood as defined by the regulations. [S 37D insrt Act 41 of 2012, s 3 and Sch 1 item 1]

SECTION 37D COMMENTARY [37D.10] Synopsis Section 37D deals with the circumstances in which a prescribed contract is taken to provide insurance cover for flood. Prescribed contracts that include flood provisions that provide cover for flood are taken to provide insurance cover for flood as defined by the regulations under reg 29D. A “flood event” is as defined by reg 29D (see also [37B.10]). An insurer may not refuse to pay a claim where the prescribed contract provides cover for a narrower definition of flood than the standard definition. If a prescribed contract provides different maximum amounts for insurance for different flood events, the flood provisions are taken to provide the highest maximum amount of cover offered in respect of any flood event. When a prescribed contract provides different maximum amounts for different flood events, an insurer cannot refuse to pay an amount equal to the maximum amount for an event on the basis that any loss or damage caused or resulting from that event was less than the maximum amount of flood cover. The section has effect whether or not the insurer has clearly informed the insured of the effect of the flood provisions.

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(5A) To avoid doubt, this section does not affect the operation of any provisions of a prescribed contract that are not flood provisions.

s 37E

Insurance Contracts Act 1984

[37E.10]

37E Division not to affect provision of insurance cover for certain events If: (a) a prescribed contract is expressed to provide insurance cover in respect of loss or damage caused by, or resulting from, a particular event; and (b) the effect of another provision of this Division is that the contract would not provide that insurance cover; then that provision is taken not to have that effect. [S 37E insrt Act 41 of 2012, s 3 and Sch 1 item 1]

SECTION 37E COMMENTARY [37E.10] Synopsis Section 37E provides that if a prescribed contract is expressed to provide insurance cover for loss and damage caused by an event, then another provision of the Division is not to be taken to have the opposite effect.

Division 2 – General provisions relating to insurance contracts 38

Interim contracts of insurance

(1) Where, under a provision included in an interim contract of insurance, the liability of the insurer is dependent upon the submission to, or the acceptance by, the insurer of a proposal for a contract of insurance intended to replace the interim contract of insurance, the provision is void. (2) Where: (a) an insurer has entered into an interim contract of insurance; and (b) before the insurance cover provided by the contract has expired, the insured has submitted a proposal to the insurer for a contract of insurance intended to replace the interim contract of insurance; the insurer remains liable in accordance with the interim contract of insurance until the earliest of the following times: (c) the time when insurance cover commences under another contract of insurance (whether or not it is an interim contract of insurance) between the insured and the insurer or some other insurer, being insurance cover that is intended to replace the insurance cover provided by the interim contract of insurance; (d) the time when the interim contract of insurance is cancelled; (e) if the insured withdraws the proposal—the time of withdrawal.

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Pt V – Div 2 – Insurance contracts – general provisions

s 38

(3) Sections 35, 37, 37C, 40 and 44 and subsection 68(1) do not apply in relation to interim contracts of insurance. [Subs (3) am Act 41 of 2012, s 3 and Sch 1 item 2] [S 38 am Act 41 of 2012]

SECTION 38 COMMENTARY Background and synopsis ....................................................................... Interim contract of insurance ...................................................................

[38.10] [38.20]

Prior to the ICA many contracts of insurance contained provisions which made the liability of an insurer under an interim contract of insurance (commonly referred to as a cover note) subject to completion of a satisfactory proposal form for the formal contract of insurance. The ALRC was critical of the fact that the insurer’s liability under a cover note was dependent upon the completion of a satisfactory proposal. This imported a degree of uncertainty into the arrangement. The ALRC noted that there were occasions when it was very difficult or impossible to lodge a proposal, for example, if the insured died during the currency of the cover note without having completed a proposal form: ALRC 20 at [205]. Accordingly, s 38(1) makes a provision in a cover note limiting the liability of an insurer in respect of a proposal void. Further, under s 38(2) where an insurer enters into a cover note and a proposal for a replacement contract of insurance is submitted on time, the insurer will remain liable under the cover note until: (a) the insured enters into another contract of insurance intended as replacement cover; (b) the cover note is cancelled; or (c) the insured withdraws the proposal. According to s 38(3), ss 35, 37, 40, 44 and 68(1) which involve notification by the insurer to the insured, do not apply to cover notes. The effect of s 38 is that if an insurer issues a cover note, the insurer will be liable on that cover note even though it is not prepared to enter into a final contract because of the insured’s answers to questions in a proposal. The insured must still comply with the duty of disclosure: see s 21.

[38.20] Interim contract of insurance See s 11(2).

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[38.10] Background and synopsis

s 39

39

Insurance Contracts Act 1984

[39.10]

Instalment contracts of general insurance

Where a provision included in an instalment contract of general insurance has the effect of limiting the liability of the insurer by reference to non-payment of an instalment of the premium, the insurer may not refuse to pay a claim, in whole or in part, by reason only of the operation of that provision unless: (a) at least one instalment of the premium has remained unpaid for a period of at least 14 days; and (b) before the contract was entered into, the insurer clearly informed the insured, in writing, of the effect of the provision.

SECTION 39 COMMENTARY Background and synopsis .......................................................................

[39.10]

Instalment contract of general insurance ................................................

[39.20]

Before the contract was entered into ......................................................

[39.30]

[39.10] Background and synopsis The ALRC was concerned about the possibility of a cancellation of an instalment contract of general insurance without prior notification to an insured who overlooked a payment. Generally the ALRC recommended that, unless notified, a contractual right of cancellation by the insurer for non-payment of an instalment should not be capable of being exercised until one month has elapsed from the date when the instalment became due. This recommendation was extended to an exclusion of liability for non-payment of an instalment short of cancellation. The ALRC recommended that an insurer should not be entitled to rely on contractual provisions permitting cancellation of an instalment contract without proper notice, or permitting it to refuse or to reduce the claim, unless the insured was notified of the existence of those provisions before the contract was entered into: ALRC 20 at [254]. Accordingly, s 39 specifies that where a provision in such a contract limits liability because of the insured’s failure to pay a premium instalment, the insurer may not rely on that provision to refuse to pay a claim unless: (a) one instalment has remained unpaid for at least 14 days; and (b) the insurer has given the insured written notice of the effect of the provision before the contract was entered into. The insurer may cancel the instalment contract of general insurance under ss 59 and 62 if an instalment of the premium has not been paid. 320

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[39.30]

Pt V – Div 2 – Insurance contracts – general provisions

s 40

[39.20] Instalment contract of general insurance See s 11(8).

[39.30] Before the contract was entered into See s 11(9). Certain contracts of liability insurance

(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. (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. Penalty: 300 penalty units. [Subs (2) am Act 49 of 1994, s 3 and Sch item 6]

(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. [S 40 am Act 49 of 1994]

SECTION 40 COMMENTARY Background and synopsis ....................................................................... Contract of liability insurance .................................................................. This section applies … the effect … the insurer’s liability … excluded or limited … notice of a claim: s 40(1) ................................................... In respect of a loss suffered by some other person: s 40(1) ................. The operation of s 40(2) ..........................................................................

[40.15] [40.20] [40.23] [40.24] [40.25]

Gave notice in writing to the insurer: s 40(3) Gave notice in writing to the insurer ....................................................... Primacy and application – s 40(3) and deeming clauses ....................... Gave notice ............................................................................................. Notice in writing to the insurer in respect of a particular policy .............. ©

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40

s 40

Insurance Contracts Act 1984

Sections 40 and 54 ................................................................................. Section 40(3) – not implied into policies of insurance ............................

[40.15] [40.30] [40.35]

[40.15] Background and synopsis Traditionally, liability insurance was occurrence based in that it covered events which “occurred” during the term of the contract of insurance giving rise to a claim by a third party. A claim could arise many years after the occurrence of an event. This caused problems with the investigation of the event. The reserving for claims within a given policy year together with inflation, meant that there was a possibility of claims being out of proportion to the premium collected for the particular risk. These problems led to the development of “claims made” policies. Accordingly, some forms of liability insurance, such as professional indemnity insurance, cover “claims made” by third parties against the insured within the period of cover. Claims made policies which require the notification of claims within the period of cover are referred to as “claims made and notified” policies. As an occurrence may not materialise into a claim for quite some time, claims made policies often contain a clause covering claims made after the period of cover, providing they arise out of an occurrence notified to the insurer within the period of cover. The ALRC recommended that insurers should be required to include in their policies a clause covering claims made outside the period of cover providing they arose out of occurrences notified within the period of cover. Similarly, the ALRC noted that extensions are available to cover claims made within the period of cover for occurrences before the commencement of that period, unless the claims are covered under an earlier contract of insurance. The ALRC recommended that an insurer should be required to provide cover for a claim made after the expiration of the contract of insurance provided it had been notified of facts that might give rise to a claim as soon as reasonably practicable and before the contract of insurance expired. In addition, the ALRC recommended that an insurer should be required to draw to the attention of a proponent the availability of retroactive cover for claims arising from occurrences not notified within the period of, and therefore not covered by, any prior insurance: ALRC 20 at [265]. It is worth noting the Summary of Recommendations to ALRC 20 which identified the objectives to be achieved by s 40. The ALRC stated at [48]: Liability Insurance. Some forms of liability insurance (eg professional indemnity insurance) apply to claims made against the insured within the period of cover rather than to events which occurred within that period. In some cases, the contract also covers claims made after the period of insurance provided they arise out of an occurrence notified to the insurer within the period of cover. Legislation should make additional cover of this type 322

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mandatory. In addition, the insurer should be required clearly to advise the insured of this additional benefit. Extensions to cover of this type are also available for claims made within the period of cover in respect of occurrences before the commencement of that period, unless covered by a preceding insurance. An insurer should be required to draw the attention of a proposed insured to the availability of retroactive cover of this type (para. 265, cl. 41).

Provided the insured gave the insurer written notice as soon as reasonably practicable of the facts that might give rise to a 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 cover: s 40(3). The insurer shall, before the contract is entered into, give the insured: (a) written notice of the effect of s 40(3); and (b) written notice that the contract does not provide cover for events occurring before the contract was entered into, if that is the case: s 40(2). Failure to so inform the insured attracts a penalty: Explanatory Memorandum, at [128].

[40.20] Contract of liability insurance See s 11(7). See also [11.70].

[40.23] This section applies … the effect … the insurer’s liability … excluded or limited … notice of a claim: s 40(1) Section 40 applies to a contract of liability insurance where its effect is that the insurer’s liability is excluded or limited by reason that a notice of a claim against the insured for a loss suffered by some other person is not given to the insurer before the expiration of the period of insurance cover. This means that s 40 will apply to a “claims made and notified” policy of insurance because it has the stipulated effect if a notice of a claim is not given before the expiration of insurance cover. Section 40 also applies to an orthodox “claims made” policy which does not require notice of a claim as a condition precedent to liability. The High Court (Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ) found that s 40 applied to an orthodox “claims made” policy which did not require notice of the claim as a condition precedent to liability in Newcastle City Council v GIO General Ltd (1997) 191 CLR 85; 72 ALJR 97; 9 ANZ Ins Cas 61-380. The High Court allowed an appeal from the NSW Court of Appeal (Kirby P, Sheller and Powell JJA) who had found ©

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Section 40 applies to contracts of liability insurance which exclude or limit an insurer’s liability because notice of a claim is not given before the period of cover expires: s 40(1).

s 40

Insurance Contracts Act 1984

[40.23]

that s 40 did not apply to an orthodox “claims made” policy which did not require notice of a claim as a condition precedent to liability: GIO General Ltd t/a GIO Aust v Newcastle City Council (1996) 38 NSWLR 558; 9 ANZ Ins Cas 61-301. In this case, the claim against the insured, which concerned the collapse of a building in the Newcastle earthquake in 1989, was not made until after the expiration of insurance cover with the insurer. The insured notified circumstances prior to the expiration of the insurance cover. The policy was an orthodox “claims made” policy in that it covered only claims made during the period of insurance cover. The policy did not require notification of claims as a condition precedent to liability. There was no term in the policy providing cover for a claim made after the expiration of the period of insurance cover if circumstances which may give rise to a claim had been notified beforehand. In finding that s 40 applied to the “claims made” policy the insured received the benefit of s 40(3) and additional mandatory cover because of its notification of circumstances, notwithstanding the absence of a relevant term in the policy. The Judges of the High Court reached the same conclusion in three separate judgments. The majority comprising Toohey, Gaudron and Gummow JJ said that s 40(1) should not be construed narrowly or with undue technicality. The insurer submitted that because no claim had been made upon the insured within the currency of the “claims made” policy there was no liability of the insurer which otherwise existed and was excluded or limited by reason of any matter within the terms of s 40(1). The majority found that liability was excluded or limited by looking at the stipulated outcome or “effect”. Liability was excluded or limited because the insured could not and did not give notice of a claim to the insurer prior to the expiration of insurance cover. The majority said (at 103; 77,167): The opening words of s 40(1) identify a contract or policy of liability insurance the provisions of which operate in a given case to produce a stipulated outcome or “effect”. This is that, a certain event not having occurred (notice of a claim not having been given to the insurer during the currency of the policy), the insurer is entitled to refuse the claim (so that its liability is “excluded or limited”), whereas if the event had occurred the insurer would have been liable to the insured.

Brennan CJ looked at s 40(3) and its importance in terms of the fair operation of the relationship between insurers and insureds according to the preamble to the ICA. He held that s 40(1) should not be read as governing the operation of s 40(3). In holding this he read down the general introductory words of s 40(1) “this section applies in relation to …” and found that they should not be read literally so as to govern s 40(3). 324

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Chesterman J (Qld Sup Ct) was compelled by the reasoning by the High Court in Newcastle City Council and especially the judgment of Toohey, Gaudron and Gummow JJ in refusing to construe the terms of s 40(1) narrowly or with undue technicality: CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388. Chesterman J rejected a submission that the word “claim” appearing in s 40(1) should be understood to be concerned only with “mere demands by third parties on the insured during the course of the policy”. The insurer submitted that because it had defined the word “claims” in the policy to mean a claim initiated by a legal proceeding, s 40(1) did not apply to the policy. Chesterman J said that what had emerged from decisions of the High Court concerning the Act is that one should not approach its construction with any preconception that it was intended to have a particular effect or that it was to apply only to a particular type of policy. Giving the words in question their ordinary meaning he found that there was no warrant for reading the word “claim” in s 40(1) as excluding a claim of the sort defined by the insurer’s policy.

[40.24] In respect of a loss suffered by some other person: s 40(1) There must be a “loss suffered by some other person” in accordance with s 40(1) for s 40(3) to apply. McClellan J (NSW Sup Ct) held that the insured director’s claim under a directors and officers liability policy, which was based on the cost of defending criminal charges and proceedings, was not in respect of a loss suffered by some other person: Porter v GIO Australia Ltd (2003) 12 ANZ Ins Cas 61-573; [2003] NSWSC 668. Rather, there was an assertion of a wrongful act which led to relevant loss only in the sense of the insured’s own loss, i.e. his costs of defending the proceedings. Accordingly, the requirements of s 40(1) had not been satisfied and therefore s 40(3) and the question of any notification of circumstances could be disregarded. ©

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McHugh J adopted a purposive approach in construing s 40. He noted that a literal reading of s 40(1) was difficult to reconcile with both the words of s 40(3) and the mischief to which s 40 was designed to overcome. He found that Parliament by inadvertence had used language in s 40(1) which read literally did not apply to some policies which it must have been intended to apply to. His response was to add to the wording of s 40(1) the words “because no claim was made against the insured before that period expired”. Read in this way s 40(3) applied and prevented the insurer from relying on the fact that the claims were made after the policy had expired.

s 40

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[40.24]

[40.25] The operation of s 40(2) It appears that the operation of s 40(2) is not to be limited by a strict reading of s 40(1) which is a definitional provision: Newcastle City Council v GIO General Ltd (1997) 191 CLR 85; 72 ALJR 97; 9 ANZ Ins Cas 61-380. The High Court comprising Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ considered a submission by the insurer that it would be wrong to a give a purposive approach to s 40 because s 40(2) is a penal provision. In considering this submission the High Court made obiter comments about the operation of s 40(2) and its relationship with s 40(1). Toohey, Gaudron and Gummow JJ in their judgment noted that s 40(2) casts an obligation upon the insurer, in aid of remedial measures passed for the protection of those dealing with insurers. In this context, the rule of strict construction of penal provisions is one of last resort. In other words, the strict construction rule cannot prevent the words of the section from being given their fair meaning which, given the remedial nature of the section, requires a purposive approach to interpretation. McHugh J agreed with this approach. However, Brennan CJ was of the view that the introductory words of s 40(1) should not be read literally so as to govern s 40(3) though defining the policies to which s 40(2) relates.

Gave notice in writing to the insurer: s 40(3) [40.26.1] Gave notice in writing to the insurer The New South Wales Court of Appeal (Kirby P, Priestley and Powell JJA) considered the application of s 40(3) and the meaning of the phrase “gave notice in writing to the insurer” in Antico v CE Heath Casualty & General Insurance Ltd (1996) 38 NSWLR 681; 125 FLR 270; 9 ANZ Ins Cas 61-304. The appeal, which was from a judgment of Giles CJ Comm D (NSW Sup Ct), concerned, inter alia, whether a letter of 29 June 1990 and attachments sent by a broker to the Sydney office of the insurer, in connection with a proposal for Directors’ and Officers’ Liability Insurance, constituted the giving of notice of facts (circumstances) that might give rise to a claim under a Legal Expenses Policy issued by the Melbourne office of the insurer. Giles CJ, Comm D and the members of the Court of Appeal expressed differing views on the notification questions. Notwithstanding these differing views, some important points emerge.

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[40.26.2] Primacy and application – s 40(3) and deeming clauses

Kirby P compared a deeming provision in the contract of insurance which operated where the insured “notifies” the insurer with s 40(3), which applies where the insured “gave notice”. He did not think that there was a relevant difference between the two expressions but said (at 696 (NSWLR); 76,394 (ANZ Ins Cas)): Nonetheless, the Act clearly takes primacy over the contract. Therefore, if there is a difference between the expressions the relevant requirement will be for the [insured] to have “given notice” to the [insurer].

Ashley J (Vic Sup Ct) warned against equating the language of s 40(3) with the similar language of deeming clauses: TBI Pty Ltd v AON Financial Planning Ltd [2004] VSC 40; 13 ANZ Insurance Cases 61-601 (19 February 2004). He said (at [282]): The language of [s 40(3)] must be considered discretely, and not simply be equated with the sometimes similar language of insurance policies – as was involved, for example, in Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1996) 130 FLR 85; 9 ANZ Ins Cas 61-315 and John Connell Holdings Pty Ltd v Mercantile Mutual Holdings Ltd (1999) 10 ANZ Ins Cas 61-454.

[40.26.3] Gave notice Notification for the purpose of s 40(3) requires more than the incidental conveying of information. There is a difference between knowledge and notification. Giles CJ Comm D at first instance in Antico v CE Heath Casualty & General Insurance Ltd (1995) 8 ANZ Ins Cas 61-268 held that on the facts of the case, that there was no relevant notification for the purpose of s 40(3) or the deeming provision in the contract (being Condition 5). He said (at 76,004): Having regard to the part played by such notification in setting parameters to the rights and liabilities of the parties, the choice to be exercised by notification, and the requirement that [the insured] “notify us in writing”, in my view more was required than the incidental conveying of information by the inclusion of the letter of 29 June 1990 in the documents provided to [the insurer] in connection with proposals for other insurance.

Giles CJ Comm D did not express a view as to whether the question of notification required an objective or subjective assessment. On either basis ©

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Kirby P in the Antico case expressed an obiter view that when a “claims made and notified” policy contains a deeming provision which provides for the notification of facts that might give rise to a claim that is expressed differently from s 40(3), then the ICA will take primacy over the contract of insurance.

s 40

Insurance Contracts Act 1984

[40.26.3]

he found that notification had not taken place. He said (at 76,004): If it be relevant, I consider it clear that [the insured] (including by his agent [the broker]) did not subjectively intend the provision of the letter of 29 June 1990 amongst the documents to be notification of circumstances and [the insurer] did not subjectively so regard it: nor in my view on an objective assessment did [the insured], by providing the letter for a quite different purpose and as one of many documents, notify [the insurer] of the facts therein as the significant contractual step of giving notice of the facts as facts that might give rise to a claim being made against him for the purposes of condition 5 or s 40(3).

On appeal, Priestley JA (with whom Powell JA agreed) agreed with and adopted the reasoning of Giles CJ Comm D on the notification point. They found that the letter and enclosures did not achieve relevant notification. Kirby P expressed a contrary view. In finding that the letter and enclosures did constitute notification in accordance with s 40(3), he defined the word “notify” widely in terms of “making known” or “informing”. He did not consider that any intention to notify was a requirement of s 40(3). Kirby P said (at 698 (NSWLR); 76,395 (ANZ Ins Cas)): Intention, whether determined on a subjective or objective basis, is not a requirement of s 40(3) of the Act. The words of the section do not indicate the existence of any such condition. The section reads: “where the insured gave notice …” It does not say, as it might have if the legislature had so intended, “where the insured, specifically and intentionally, gave notice”.

Therefore the question as to whether an “intention” to notify is a requirement of s 40(3) remains unsettled. Giles CJ Comm D considered the intention of the insured but did not make a finding as to the relevance of intention. Priestley and Powell JJA followed his reasoning. Kirby P was of the opinion that intention was not a requirement of s 40(3).

[40.26.4] Notice in writing to the insurer in respect of a particular policy In the Antico case Kirby P construed s 40(3) as requiring that information be supplied to the insurer in its capacity as the insurer in respect of a particular policy. He said (699 (NSWLR); 76,396 (ANZ Ins Cas)): (T)he statute requires that the insured give notice in writing to the insurer. Indeed, it is implicit in the concept of notification that the notifier make known the facts to the recipient. This element of s 40(3) of the Act necessitates more than merely the supply of the relevant facts. It requires that the information be supplied to the insurer in its capacity as the insurer in respect of a particular policy.

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[40.30] Sections 40 and 54

The New South Wales Court of Appeal (Gleeson CJ, Mahoney and Clarke JJA) considered the relationship between ss 40 and 54 in East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092. The insured had notified a claim made during the period of cover outside that period. The insured argued that under the first limb of s 54(1) the insurer could not refuse to pay the claim by reason only of the insured’s omission to notify the claim within the period of cover. The insurer contended that s 54 should be given a narrower meaning so as to avoid a very curious result in cases of the kind to which s 40 applies. The Court of Appeal declined to give s 54 a narrower meaning. Gleeson CJ said (at 405 (NSWLR); 77,361 (ANZ Ins Cas)): the fact that it might be possible to envisage circumstances in which the inter-relationship of s 40 and s 54 produces a curious result does not constitute a sufficient reason for applying s 54 in a manner that denies the words of that section their ordinary meaning.

Mahoney JA said (at 409 (NSWLR); 77,364 (ANZ Ins Cas)): The two sections deal with conceptually different problems. Section 40 applies to a policy where the omission to give notice of a claim within the period of insurance would exclude or limit liability: the remedy provided is that the omission shall not have that effect if the insured gave notice of the facts which might give rise to a claim within the time specified in s 40(3).

And further (at 409 (NSWLR); 77,365 (ANZ Ins Cas)): It could be envisaged that, in respect of a particular policy, both s 40 would operate (to prevent avoidance of the policy) and s 54 would operate to provide for a reduction of the amount payable by the insurer. There is, I think, no inconsistency in this.

The New South Wales Court of Appeal (Gleeson CJ, Kirby P and Clarke JA) again considered the relationship between ss 40 and 54(1) in FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164. The professional indemnity policy contained a deeming provision in terms similar to s 40 which gave the insured an option to provide notification. The insured had not given notification of an occurrence which subsequently gave rise to a claim within the terms of the deeming provision. The Court of Appeal by a majority (Kirby P dissenting) held that the non-notification pursuant to the deeming provision did not constitute an omission under s 54. ©

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The relationship between ss 40 and 54 has been considered by the courts both in terms of the notification of claims and the notification of facts that might give rise to a claim.

s 40

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[40.30]

In arriving at his decision Clarke JA described s 40(3) as follows (at 106–107 (NSWLR); 77,902 (ANZ Ins Cas)): Section 40(3) is a facultative provision which enables an insured successfully to claim indemnity under a policy of the type specified even though that insured has not received any claim from a third party during the currency of the policy provided that notice of facts which may give rise to a claim have been given. Upon the insured becoming aware of those facts he or she has an option to give notice of those facts or to await the notification of a claim. An insured, who renews a professional liability policy from year to year, may consider it is not in his or her interest to give notice of the possibility of a claim because of a perception that there is only a remote possibility that a claim will eventuate and the risk that notification will lead to increased premiums for the following year’s policy … It is true that s 40(3) enables an insured who has given notice of relevant facts successfully to claim indemnity but it does not follow that if the insured does not give notice of those facts the effect of the policy is that a claim would be defeated by his or her act (omission).

The High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 rejected a portion of the reasoning in Perry. Perry was overruled by the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38. Rolfe J (NSW Sup Ct) did not consider that there is an inconsistency between ss 40 and 54: Einfeld v HIH Casualty & General Insurance Ltd (1999) 152 FLR 211; 10 ANZ Ins Cas 61-450; [1999] NSWSC 867. In his opinion, to the extent that s 40 provides a statutory extension to a policy of insurance, there is no reason why the ameliorating provisions of s 54 cannot apply to it. The plurality in the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38 (McHugh, Gummow and Hayne JJ) considered the argument raised in East End that s 54 should be read down because, if that were not done, there would be some inconsistency between ss 40 and 54. In rejecting the notion of inconsistency, the majority judges said (at 656–657 (CLR); 75,760 (ANZ Ins Cas)): Sections 40 and 54 deal with different problems. Section 40 is concerned with certain contracts of liability insurance and, among other things, with the insured giving notice of a potential claim during the period of insurance cover when the claim is not made until after the expiration of that period. Section 54, by contrast, deals with the much more general subject of an insurer refusing to pay claims. It is concerned with acts as well as omissions, and with acts or omissions not only of the insured but also of “some other person”. That is reason enough to conclude that any tension or overlap between the two sections should not be resolved by reading s 54 down. In any event, as 330

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Mahoney JA pointed out in East End the suggested reading of s 54 would not remove any tension that may exists between the two provisions.

Section 40(3) confers rights on an insured and obligations on an insurer, but to obtain the subsection’s protection an insured must comply with its terms, by giving notice. [The insured’s] submissions would require a modification to the subsection and provide relief in circumstances other than those specified by the legislation. If it were Parliament’s intention that s 54 should modify the operation of s 40(3) one would expect to find some indication of the intention in the provision. There is nothing in s 40(3) which makes the requirement that notice be given during the currency of the policy “subject to s 54”.

Bergin J (NSW Sup Ct) adopted the reasoning of Chesterman J in Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511. The NSW Court of Appeal adopted similar reasoning which accorded with the reasons given by Bergin J in dismissing an appeal: Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; 12 ANZ Ins Cas 61-566; [2003] NSWCA 34. Sheller J (with whom Spigelman CJ and Meagher JA agreed) said (at [36]): Section 54 does not permit the reformulation of the claim. It operates to prevent an insurer relying on certain acts or omissions to refuse to pay that particular claim. The actual claim made by the insured is one of the premises from which consideration of the application of s 54 must proceed. The section does not operate to relieve the insured of restrictions or limitations, such as the temporal limits within which the claim must be made upon the insured in a claims made policy, that are inherent in that claim.

[40.35] Section 40(3) – not implied into policies of insurance A question has arisen as to whether s 40(3) is to be implied as a term of policies of insurance with the effect that if an insured fails to notify facts (circumstances) that may give rise to a claim, then the “effect” of the policy of insurance would be that the insurer may refuse to pay a claim under s 54. In FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38, the High Court by a majority held that the “effect” of the “claims made and notified” policy in that case was that the insurer could refuse to pay a claim because of the existence of a deeming clause in the policy allowing for the notification of facts (circumstances) that had not in ©

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Chesterman J (Qld Sup Ct) in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388 disagreed with the obiter view expressed by Rolfe J in Einfeld. Chesterman J pointed out that the judgment of Rolfe J in Einfeld pre-dated the High Court in Australian Hospital Care. He said (at 75,889 (ANZ Ins Cas)):

s 40

Insurance Contracts Act 1984

[40.35]

fact been notified. It was therefore not necessary for the High Court to consider the operation of s 40(3) given the existence of the deeming clause. Chesterman J (Qld Sup Ct) considered a failure to notify facts (circumstances) under a “claims made and notified” policy which did not allow for, or otherwise require, the notification of facts (circumstances) in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388. In this case the insured raised the novel argument that not giving the notice required by s 40(3) was an omission, the effect of which was that the insurer could refuse to pay the claim and therefore s 54 would apply. The insured sought to extend the operation of the decision of the High Court in Australian Hospital Care. Chesterman J held that s 40(3) does not imply into policies of insurance a term to the same effect as the subsection. He said (at 75,889 (ANZ Ins Cas)): Section 40(3) does not imply into policies of insurance a term to the same effect as the subsection. Some statutes do imply terms into contracts: the Sale of Goods Act perhaps provides the best example. When it happens the legislation makes it clear that the implication is to occur. Where a statute implies a term into a contract the resulting rights and obligations created by the implied term are contractual, not statutory. In Newcastle City Council Brennan CJ referred to “the statutory alteration in an insured’s rights … worked by subsection (3)” and the imposition by the subsection of “a liability where no contractual liability exists”, and a “statutory modification of contractual relations” (p 91, 93). To speak of the statutory alteration of the insured’s contractual rights, or the imposition of a statutory liability “where no contractual liability exists” is inconsistent with s 40(3) implying a term into contracts of insurance.

Bergin J (NSW Sup Ct) followed the reasoning of Chesterman J and similarly declined to imply a term to the same effect as s 40(3) into a policy of insurance that did not contain any clause allowing for, or otherwise requiring, the notification of facts (circumstances) which might give rise to a claim: Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511. Bergin J said (at 76,227 (ANZ Ins Cas)): What the [insured] seeks to do is to utilise the combinations of ss 40 and 54 of the Act to imply a deemed claims clause and then utilise the Act again to claim that notwithstanding the implication the [insured] omitted to comply with the requirement of the implied term and thus, but for that omission, the later claim would have been deemed to have been made during the Policy period. In my view the [insured’s] submissions in this case would, as in the [insured’s] submissions before Chesterman J, require modification to the subsection and provide relief other than that specified in the legislation.

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statutory extension of the policy. The contention that s 40 alone or in combination with s 54 gave rise to an implied term in the policy of a “deemed claims” provision was not pressed on appeal: Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; 12 ANZ Ins Cas 61-566; [2003] NSWCA 34.

(1) This section applies in relation to a contract of liability insurance if it would constitute a breach of the contract if, without the consent of the insurer, the insured or any third party beneficiary were: (a) to settle or compromise a claim against the insured or third party beneficiary; or (b) to make an admission or payment in respect of such a claim. (2) If the insured or any third party beneficiary (the claimant) under the contract has made a claim under the contract, the claimant may at any time, by notice in writing given to the insurer, require the insurer to inform the claimant in writing: (a) whether the insurer admits that the contract applies to the claim; and (b) if the insurer so admits—whether the insurer proposes to conduct, on behalf of the claimant, the negotiations and any legal proceedings in respect of the claim made against the claimant. (3) If the insurer does not, within a reasonable time after being given a notice under subsection (2), inform the claimant: (a) that the insurer admits that the contract of liability insurance applies to the claim; and (b) that the insurer proposes to conduct, on behalf of the claimant, the negotiations and any legal proceedings in respect of the claim made against the claimant; then: (c) the insurer may not refuse payment of the claim; and (d) the amount payable in respect of the claim is not reduced; by reason only that the claimant breached the contract as mentioned in subsection (1). [S 41 subst Act 75 of 2013, s 3 and Sch 6 item 1; am Act 107 of 1997; Act 65 of 1985]

Pre ICAA 2013 Amendment (pre 28 June 2014) 41

Liability insurance: insured may require insurer to elect

(1) This section applies where it would constitute a breach of a contract of liability insurance if, without the consent of the insurer, the insured were to: (a) settle or compromise a claim made against the insured; or

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41 Contracts of liability insurance—consent of insurer required for settlement etc. of claim

s 41

Insurance Contracts Act 1984

[41.20]

(b) make an admission or payment in respect of such a claim. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 item 11]

(2) An insured who has made a claim under a contract of liability insurance may at any time, by notice in writing given to the insurer, require the insurer to inform the insured in writing: (a) whether the insurer admits that the contract applies to the claim; and (b) if the insurer so admits, whether the insurer proposes to conduct, on behalf of the insured, the negotiations and any legal proceedings in respect of the claim made against the insured. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 items 12 and 13; Act 65 of 1985, s 3 and Sch]

(3) Where the insurer does not, within a reasonable time after the notice was given, inform the insured that the insurer admits that the contract of liability insurance applies to the claim and that the insurer proposes to conduct, on behalf of the insured, the negotiations and any legal proceedings in respect of the claim made against the insured, the insurer may not refuse payment of the claim, and the amount payable in respect of the claim is not reduced, by reason only that the insured breached the contract as mentioned in subsection (1). [Subs (3) am Act 65 of 1985, s 3 and Sch 1] [S 41 am Act 107 of 1997; Act 65 of 1985]

SECTION 41 COMMENTARY Background and synopsis ....................................................................... Contract of liability insurance .................................................................. Third party beneficiary ............................................................................. The claim: s 41(2) ................................................................................... The insurer proposes to conduct…negotiations and any legal proceedings: s 41(2)(b) ...................................................................... The contract of liability insurance applies to the claim: s 41(3)(a) ......... By reason only…as mentioned in subsection (1): s 41(3) ...................... Wrongful repudiation and s 41 ................................................................

[41.20] [41.30] [41.35] [41.40] [41.50] [41.60] [41.70] [41.80]

[41.20] Background and synopsis Many contracts of insurance contain admission clauses making an admission to a third party or a settlement or compromise of a third party claim, without the insurer’s consent, a breach of the contract. These clauses may place the insured in an unenviable position. The ALRC noted the problem encountered by the insured in Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; 2 ALR 321; 48 ALJR 136; [1974] HCA 3. In this case the insured, being a thalidomide manufacturer, was faced with negligence claims. The insurer declined to indicate whether it would cover the claims and take over proceedings (as 334

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it was entitled to do under the policy). This meant that the insured could not settle or compromise the claims without jeopardizing its insurance cover.

Section 41 applies to contracts of liability insurance where an insured’s settlement or compromise of a claim or admission or payment in respect of a claim would, without the insurer’s consent, be a breach of the contract: s 41(1). Therefore, in relation to a mutual release between an insured and a third party, s 41 would apply only to that part of the release concerning the third party’s claim on the insured. An insured who has made a claim against the insurer may give it written notice requiring it to inform the insured in writing: whether it admits that the contract of insurance applies to the claim; and if so, whether it proposes to take over conduct of the negotiations and any legal proceedings on behalf of the insured: s 41(2). When an insurer fails to notify its decision within a reasonable time, it may not refuse payment of the claim merely because the insured has been in breach of the contract of insurance by settling, compromising or making an admission or payment in respect of the claim without the insurer’s consent: s 41(3). The insured is, however, required to act according to the duty of utmost good faith (s 13) in taking that action: Explanatory Memorandum, at [130]. Section 41 was amended by the Insurance Contracts Amendment Act 2013 (having commenced on 28 June 2014) so as to extend the same rights that insureds have under that section to third party beneficiaries. A definition of “third party beneficiary” was inserted in s 11(1) by that Act. The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that third party beneficiaries have access to various provisions of the ICA but did not make a specific recommendation in relation to s 41 (see Final Report (June 2004), at [10.1]–[10.6]). The amendment to s 41 to extend rights to third party beneficiaries applies to a contract of liability insurance entered ©

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The ALRC recommended that the insured should be entitled to require the insurer to elect within a reasonable time between acceptance and rejection of liability. Where the insurer does not elect within that time or rejects liability, the insured should be entitled to ignore the admissions and compromise clause. The ALRC noted that the insured would be required to have proper regard to the interests of the insurer in settling or compromising the claim in accordance with the principle of uberrima fides: ALRC 20 at [234] and [244].

s 41

Insurance Contracts Act 1984

[41.20]

into or renewed after 28 June 2014 (which is 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent on 28 June 2013).

[41.30] Contract of liability insurance See s 11(7). See also, [11.70].

[41.35] Third party beneficiary See s 11(1). See also [48.10.1] and [48.10.2]. The definition of “third party beneficiary” was inserted into s 11(1) by the Insurance Contracts Amendment Act 2013 and commenced on 28 June 2013.

[41.40] The claim: s 41(2) Section 41(2) provides that the claimant (insured or third party beneficiary), having made an insurance claim, may by written notice, require the insurer to inform the claimant in writing, whether the insurer admits that the contract applies to “the claim” and, if so, whether the insurer proposes to conduct negotiations and any legal proceedings in respect of “the claim”. “The claim” by the third party may be comprised by several causes of action, some of which are covered by the contract of insurance and some of which are not. If so, does “the claim” in s 41(2) refer to the claim as a whole or to its separate parts? Hansen J (Vic Sup Ct) was of the view that “the claim” in s 41(2) refers to the separate parts of the claim in Lofthouse v ACN 081 121 495 Pty Ltd [2003] VSC 253 (3 July 2003). He said (at [34]: When s 41(2) refers to “the claim” it refers to the separate parts of the claim meaning the several causes of action, if there be more than one. It is axiomatic that “the claim” may include a claim based on a cause of action constituted by facts and events that are outside the cover of an insurance policy. It will be necessary to attend to the distinction between “the claim” in the sense of the overall claim, and in the sense of the two or more causes of action that comprise it.

[41.50] The insurer proposes to conduct…negotiations and any legal proceedings: s 41(2)(b) Section 41(2) provides that a claimant (insured or third party beneficiary) having made an insurance claim under a contract of liability insurance may, by written notice, require the insurer to inform the claimant of the matters in s 41(2)(a) and (b). The matter in s 41(2)(b) is that the insurer 336

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“proposes to conduct, on behalf of the claimant, the negotiations and any legal proceedings in respect of the claim made against the claimant”. Section 41(3) provides that if an insurer does not, within a reasonable time after being given a notice under s 41(2), inform the claimant (insured or third party beneficiary) of the matters in s 41(3)(a) and (b), then the insurer may not refuse the claim or reduce its liability by reason only of a contractual breach as mentioned in s 41(1).

Hansen J found that a conditioned offer did not satisfy the requirements of s 41(2)(b) in Lofthouse v ACN 081 121 495 Pty Ltd [2003] VSC 253 (3 July 2003). He said (at [44]): Section 41(2)(b) required [the insurer] to state whether it proposed to conduct, on behalf of the [the insured], the negotiations and legal proceedings in respect of [the third party] claim. [The insurer] either proposed to do so, or it did not. Instead of saying that, in terms responsive to s 41, [the insurer] put forward an offer to act that would be effective only if [the insured] accepted a string of conditions. Consequently, the response is not properly to be characterised as a proposal which answered the requirement in s 41(2)(b), but as a set of terms on which [the insurer] would be prepared to act.

[41.60] The contract of liability insurance applies to the claim: s 41(3)(a) Section 41(3) provides that if an insurer does not, within a reasonable time after being given a notice under s 41(2), inform the claimant (insured or third party beneficiary) of the matters in s 41(3)(a) and (b), then the insurer may not refuse the claim or reduce its liability by reason only of a contractual breach as mentioned in s 41(1). The matter in s 41(3)(a) is that the insurer “admits that the contract of liability insurance applies to the claim”. An insurer may not have to use the precise language of s 41(3)(a) in responding to a s 41(2) notice from the claimant. Hansen J (Vic Sup Ct) considered the use of different language in Lofthouse v ACN 081 121 495 Pty Ltd [2003] VSC 253 (3 July 2003). Rather than saying in its letter in response that the insurer admitted that the contract applied to the claim, the insurer said that “indemnity is granted … in respect to the claim”. Hansen J found it unnecessary to consider the difference between an admission that the contract of insurance applies to the claim, and the stated grant of indemnity in respect of the claim. In his view, it was sufficient, for the purpose of his determination, “that the latter statement constitutes an admission that the contract applies to the claim” (at [37]). ©

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An offer by an insurer to conduct negotiations and legal proceedings subject to the acceptance of conditions is not a proposal in accordance with the requirements of s 41(2)(b).

s 41

Insurance Contracts Act 1984

[41.60]

[41.70] By reason only…as mentioned in subsection (1): s 41(3) Section 41 concerns the conduct described in s 41(1), if it would constitute a breach of the contract “as mentioned in” s 41(1), and no more than that. When a claimant (insured or third party beneficiary) has given notice to an insurer in accordance with s 41(2) and the insurer has not responded in accordance with s 41(3), then the insurer may not rely upon the claimant’s conduct within s 41(1) as a breach of the contract. There is no waiver by the insurer beyond this. Hansen J (Vic Sup Ct) looked at the purpose of s 41 and the words “by reason only” in s 41(3) in concluding that s 41 does not provide that an admission by an insurer that a contract of insurance applies to a claim constitutes a waiver by the insurer of any and every condition in the contract that the insurer might otherwise have been able to rely on to exclude liability: Lofthouse v ACN 081 121 495 Pty Ltd [2003] VSC 253 (3 July 2003). He noted that it is not necessary that s 41 provide such a waiver to achieve its purpose. The purpose is to overcome the effect of the point upheld in Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1974) 130 CLR 1; 2 ALR 321; 48 ALJR 136; [1974] HCA 3. The court in Distillers held that the making of an admission, offer, promise or payment to a party in an action by an insured, without the consent of the insurer, would constitute a breach of a condition concerning admission or settlement without consent, notwithstanding that the insurer had elected not to take over and conduct the defence or settlement of the action. Hansen J said (at [38]): Consistent with this purpose, the words “by reason only” in s 41(3) make it clear that the section is dealing only with a contractual condition…, that the insured would be in breach of the contract of insurance if, without the consent of the insurer, it settled or compromised a claim against the insured, or made an admission or payment in respect of the claim.

[41.80] Wrongful repudiation and s 41 Sackville J (Fed Ct NSW District) said that it seemed s 41, based on the purpose of that section, was simply not intended to address the case where an insurer has wrongfully repudiated its obligations to indemnify the insured in Drayton v Martin (1996) 67 FCR 1; 137 ALR 145; 9 ANZ Ins Cas 61-322. He noted that the ALRC was addressing what it described as “the special problem” raised in Distillers v Ajax where an insurer had not admitted any liability to indemnify the insured and was not in breach of the contract of insurance, as opposed to a case where the insurer had wrongfully repudiated its obligations. He said that the ALRC assumed that there was no need to address the situation where an insurer 338

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improperly denied liability, since in that case the insured could settle or compromise the claim without penalty: ALRC 20 at [244]. 42

Maximum cover for premium The maximum liability of the insurer under a contract of general insurance is the highest amount of insurance cover that the insurer would, at the time when the contract was entered into, have been prepared to provide under a contract that was, apart from the maximum liability under that contract, in the same terms and in respect of the same subject-matter and risk as those of the first-mentioned contract.

[42.10] [42.20]

[42.10] Background and synopsis The ALRC was concerned with the setting of minimum premiums. It noted that while there are sound reasons for setting minimum premiums, there is no justification for limiting cover to a figure lower than the maximum obtainable by the payment of the minimum premium. The ALRC recommended that, upon the payment of a premium, the insured should obtain the maximum cover available for that premium: ALRC 20 at [275]. According to s 42, if an insurer would have been prepared to give the insured greater cover at the time it entered into a contract of general insurance on the same terms and for the same subject matter and risk, the insurer would be obliged to give that greater cover. An example as to the operation of s 42 is provided in the Notes to the Draft Insurance Contracts Bill 1982 as follows: A owns goods worth $10,000. He does not think he can afford to insure them for $10,000 so instead takes out insurance for $5,000 for a premium of $80. In fact, the insurer charges a minimum premium of $80 for cover of $7,000 or less. A’s goods are destroyed by fire. A could recover $7,000 from the insurer.

[42.20] Contract of general insurance See s 11(6).

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SECTION 42 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance .................................................................

s 43

43

Insurance Contracts Act 1984

[43.10]

Arbitration provisions

(1) Where a provision included in a contract of insurance has the effect of: (a) requiring, authorizing or otherwise providing for differences or disputes in connection with the contract to be referred to arbitration; or (b) limiting the rights otherwise conferred by the contract on the insured by reference to an agreement to submit a difference or dispute to arbitration; the provision is void. (2) Subsection (1) does not affect an agreement to submit a dispute or difference to arbitration if the agreement was made after the dispute or difference arose.

SECTION 43 COMMENTARY Background and synopsis ....................................................................... Agreement after the dispute arose ..........................................................

[43.10] [43.20]

[43.10] Background and synopsis The ALRC was of the view that in the context of insurance, compulsory arbitration could lead to increased cost, delay in payment and even to the avoidance of just claims. The ALRC said “even where the insurer is bound to meet the costs of the arbitration, it would be preferable to allow the insured to take his dispute straight to court”. The ALRC recommended that arbitration clauses should be rendered ineffective: ALRC 20 at [332]. Section 43 is extremely wide in its terms. It makes arbitration provisions, which have the effect of “requiring, authorising or otherwise providing for” arbitration or limiting rights by reference to an arbitration agreement, ineffective. It is perhaps arguable that the ALRC intended to strike out compulsory arbitration provisions only and not those providing the insured with an option, although optional arbitration provisions potentially authorise or otherwise provide for arbitration. Optional arbitration provisions can, however, constitute a valid agreement to arbitrate: PMT Partners Pty Ltd (in liq) v Australian National Parks and Wildlife Service (1995) 184 CLR 301; 69 ALJR 829; 131 ALR 377; [1995] HCA 36 (High Court). In certain States other legislation rendered arbitration clauses in insurance contracts ineffective prior to the inception of the ICA. 340

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An agreement to submit a dispute to arbitration will be valid if made after that dispute has arisen.

[43.20] Agreement after the dispute arose The saving in s 43(2) of an agreement to submit a dispute or difference to arbitration if the agreement was made after the dispute or difference arose, supports the view that the legislature did not intend s 10(3) to prohibit parties from agreeing upon the terms by which they will submit the dispute or difference to arbitration: Hadchiti v NRMA Insurance Ltd (unreported, NSW Sup Ct, Giles J, 7 February 1992).

44

Average provisions

(1) An insurer may not rely on an average provision included 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. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 item 14]

(2) Where the sum insured in respect of property that is the subject-matter of a contract of general insurance that provides insurance cover in respect of loss of or damage to a building used primarily and principally as a residence for the insured, for persons with whom the insured has a family or personal relationship, or for both the insured and such persons, or loss of or damage to the contents of such a building, or both, is not less than 80% of the value of the property, the liability of the insurer in respect of loss of or damage to the property is not reduced by reason only of the operation of an average provision included in the contract. (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 AS P 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

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See also, [10.20].

s 44

Insurance Contracts Act 1984

[44.10]

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. (4) In this section: value, in relation to property, means: (a) if the relevant contract provides for indemnifying the insured in respect of loss of or damage to the property—the indemnity value of the property; or (b) if the relevant contract provides for reinstatement or replacement of the property—the reinstatement or replacement value of the property; at the time when the relevant contract was entered into. [Subs (4) subst Act 107 of 1997, s 3 and Sch 8 item 15] [S 44 am Act 107 of 1997]

SECTION 44 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. Reliance on an average provision ...........................................................

[44.10] [44.20] [44.30]

[44.10] Background and synopsis An average clause is a provision in a contract of insurance whereby in the event of underinsurance, the insured must bear a rateable proportion of a partial loss. Although there were calls for the abolition of average clauses (ALRC DP 17, at [71]) the ALRC concluded that the right of insurers to include such clauses in contracts of insurance should be preserved with some limitations. The ALRC recommended a margin of error. It recommended that an average clause should apply only where, and to the extent that, the sum insured is less than 70% of the true value (the true value to be assessed as at the date of inception of the contract). The ALRC expressed the view that this recommendation, together with a mandatory warning concerning underinsurance and the application of average clauses, should be sufficient to alleviate the perceived problems. The aim was to encourage an insured to obtain full insurance cover, thereby reducing the extent to which insureds who take out full cover subsidise those who do not: ALRC 20 at [270] and [271]. The ALRC recommended a margin of error of not less than 70%. Section 44 provides for a margin of error of not less than 80%. Section 44 modifies the operation of average clauses so that: 1. An insurer will not be able to rely on an average clause unless it has clearly informed the insured in writing of its nature and effect 342

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before the contract of general insurance was entered into, including whether the average provision is based on indemnity or replacement value of the property that is the subject matter of the contract: s 44(1). 2. Where the sum insured represents 80% or more of the value of a residential building (the residence of the insured and/or persons with whom the insured has a family or personal relationship) and/or the contents of that building, an average clause is ineffective: s 44(2). 3. Where the sum insured in such a contract is less than 80% of the value, an average clause will operate by allowing the insurer to reduce the claim. The amount of that reduction is calculated by a formula based on the difference between 80 per cent of the value of the property at the time the contract was entered into and the sum insured. It is not based on the difference between the full amount of the value and the sum insured: s 44(3). The value of the property is assessed at the time the contract is entered into (s 44(4)): Explanatory Memorandum, at [139]–[142]: Explanatory Memorandum to the Financial Laws Amendment Bill 1996 (H of R), cl 292). An example of the application of the formula is given in the Notes to the Draft Insurance Contracts Bill 1992. With appropriate changes to the margin of error from 70%–80% the example is as follows: B insures the contents of his house, valued at $15,000, for $10,000. A stereo worth $1,000 is stolen. If the contract contained an average clause, the minimum that the insurer could pay by virtue of that clause would be: $10,000 x $1,000.00 8/10 x $15,000 = $833.33 (s 44(3))

[44.20] Contract of general insurance See s 11(3).

[44.30] Reliance on an average provision Where a contract of insurance contained an average provision it was held that s 44(1), which predicates reliance upon notification, had no application because a broker had acted on behalf of the insured within the terms of s 71(1): Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288 per Steytler J (WA Sup Ct).

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[44.30]

s 45

45

Insurance Contracts Act 1984

[45.10]

“Other insurance” provisions

(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 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. Contract of general insurance first mentioned [entered into by the insured?] ............................................................................................. By reason that: s 45(1) ............................................................................ The insured has “entered into” some other contract of insurance (second mentioned contract of insurance): s 45(1) ......................................... Contract required to be effected by or under a law: s 45(1) .................. Provision is void ...................................................................................... Specified in the first mentioned contract: s 45(2) ................................... Not liable for more than rateable proportion ........................................... Sections 45 and 48 .................................................................................

[45.10] [45.11] [45.12] [45.13] [45.14] [45.16] [45.18] [45.20] [45.40] [45.50]

[45.10] Background and synopsis Prior to the ICA, some contracts of insurance contained provisions referred to as “other insurance” clauses, which excluded or limited the insurer’s liability in the event that another insurer was liable for the same loss. The ALRC could find no justification for “other insurance” clauses. It noted that they could defeat an insured’s reasonable expectation. Therefore, the ALRC recommended that forms of “other insurance” provisions should be rendered ineffective if more than one insurance is in effect for the same risk. The insured should be entitled to recover the whole of the loss from one insurer which would then be entitled to obtain contribution from the others: ALRC 20, at [289]. The ALRC stated (at [289]): The Commission is concerned with the effect of “other insurance” clauses on the interests of the insured. Insureds are detrimentally affected by uncertainty over the effects of individual provisions and combinations of different provisions. More important is the fact that some “other insurance” clauses have the effect of limiting the insurer’s liability to its insured. In such a case, 344

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the insured’s protection may be compromised or lost. While they affect the interests of insureds in this manner, “other insurance” clauses have little independent value for insurers. To the extent that they are intended as a protection against fraud, they are ineffective. At most, such a clause might operate as a disincentive to claiming the same loss twice under different policies. The same effect could be achieved by a clear warning to the insured that he is entitled to claim, under the policy concerned and under any other insurance, no more than his actual loss. To the extent that “other insurance” clauses are designed to ensure that an insurer becomes aware of the existence of other insurance so that it may claim contribution in the event of a loss, the same aim could be achieved by asking appropriate questions in the proposal and claim forms. There is no substantial justification for any of the various types of “other insurance” clause. As they may cause the insured’s reasonable expectations to be defeated, all forms of “other insurance” provisions should be rendered ineffective. If more than one insurance is in effect in respect of the same risk, the insured should be entitled to recover the whole of his loss from any one of the insurers, which should then be entitled to obtain contribution from the others.

However, the ALRC emphasised that the recommendations would have no effect on layered policies in the field of co-insurance where each policy covered a discrete range of the total risk and no overlap occurred. The ALRC also recommended two exceptions. First, that true excess liability policies were not to be affected. Secondly, insurers should be able to restrict the scope of cover to exclude liability under compulsory insurances: ALRC 20, at [290]. Under s 45, a provision in a contract of general insurance (other than a contract providing insurance cover for loss not covered by another specified contract) limiting or excluding the insurer’s liability due to other insurance, will be void. However, insurers are able to limit or exclude liability that is also covered by a contract which the insured is obliged by law to enter. Section 76 covers the question of contribution between insurers.

[45.11] Contract of general insurance See s 11(6).

[45.12] Contract of general insurance first mentioned [entered into by the insured?] Section 45 refers to two contracts of insurance. A contract of general insurance that contains an “other insurance” provision to which s 45 potentially applies. This is the first mentioned contract of insurance which is sometimes referred to as the “first” contract of insurance. The second mentioned “other” contract of insurance entered into by the insured is sometimes referred to as the “second” contract of insurance. ©

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[45.12]

s 45

Insurance Contracts Act 1984

[45.12]

There is a question as to whether the insured has to have “entered into” the first contract of insurance containing the “other insurance” provision for s 45 to apply. That is, “entered into” the first contract as a contracting party as opposed to a third party beneficiary of cover (a person with rights to claim pursuant to s 48). In other words, does the reference to “the insured” in s 45 mean both the party who contracted with the insurer on whom the claim is made and a party to the second contract of insurance? Arguably, both the first and second contracts of insurance in s 45(1) must be “entered into” by the insured for s 45 to apply. That is, the insured must be a contracting party to both contracts of insurance and not a person who has rights to claim pursuant to s 48 under either of the contracts. It is clear that the second contract of insurance must have been “entered into” by the insured as a contracting party for s 45 to apply. The High Court unanimously found that the words “entered into” in the second part of s 45(1) are not capable of encompassing a party who has the benefit of cover but has “not entered” into the contract of insurance: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pty Ltd (“Metals & Minerals”) (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50. If the insured is a third party beneficiary of cover (a person who has rights to claim pursuant to s 48) under the second contract of insurance, then s 45 will not operate to void the “other insurance” provision. Whilst the High Court in Metals & Minerals was concerned with a question as to the meaning of the words “entered into” in the second part of s 45(1) and the second contract of insurance, in their “majority” joint judgment French CJ, Gummow and Crennan JJ appear to have gone further and, both in the words used and rejection of a submission by the insurer seeking to apply s 45, arguably decided or at least expressed an obiter view that the insured also has to be a “party” to the first contract of insurance (and not a third party beneficiary of cover) for s 45 to apply. French CJ, Gummow and Crennan JJ said (at [26]): Zurich submitted that s 45(1) should be construed as if the text read: “Where a provision … has the effect of limiting or excluding the liability of the insurer under the contract by reason that the insured [including a person entitled under s 48] has entered into [an arrangement giving it cover under] some other contract of insurance … the provision is void” That submission should not be accepted. The text of the provisions of the Act with which s 45 must be read points inexorably to the conclusion that s 45 is only concerned with “other insurance” provisions affecting double insurance where the insured is a party to the relevant contracts of insurance. It does not allow room for a construction which would include a non-party insured among the ranks of those who have “entered into” the relevant contract. The inclusion of persons not parties to the relevant contract would be inconsistent with the 346

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Rein J (NSW Sup Ct) considered that he was bound to apply the decision of the High Court in Metals & Minerals in holding that s 45 requires “the insured” mentioned in the section to be a party who contracted with the insurer on whom the claim is made (the first contract of insurance) as well as a party to the second contract of insurance: Lambert Leasing Inc v QBE Insurance Ltd (2015) 18 ANZ Ins Cas 62-067; [2015] NSWSC 750. At the time of writing the NSW Court of Appeal has heard an appeal against the decision in Lambert Leasing and a judgment is pending. Rein J regarded the statement of the High Court majority in Metals & Minerals in italics above as critical to a determination that the High Court was not drawing a distinction between the insured, being a party to the first contract, and the insured, being a party to the second contract. The use of the plural word “contracts” was important to this determination. Also important was the rejection of the submission that both sets of bracketed words were to be read into s 45. Rejection of the first set of bracketed words “[including a person entitled under s 48]” being a rejection of a submission that the insured under the first contract of insurance in s 45 could be other than a “party” to that contract. It was submitted, and Rein J accepted, that the High Court majority’s decision on the two sets of bracketed words was part of the ratio decidendi of Metals & Minerals, He said (at [63]): I regard the statement [in Metals & Minerals in italics above] … as critical to determining whether the Court was drawing a distinction between the insured being a party to the first contract and the insured being a party to the second contract. Not only is the use of the plural word “contracts” important, but also important is the submission that was being rejected in the first sentence. That submission was not only that the words “[an arrangement giving it cover under]” should be read as included but also that the words “[including a person entitled under s 48]” after the word “insured” should be read as included. It was open to the High Court to accept the first set of bracketed words but reject the second set of bracketed words. The Court did not, in the [majority] judgment, draw any distinction between the two sets of words and no issue was taken in the [minority] judgment. I accept [Senior Counsel’s] submissions that the High Court’s decision on whether the two sets of bracketed words were to be read in to s 45 was part of the ratio decidendi of ©

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ordinary or any plausibly extended meaning of “entered into” in relation to contracts. In so saying, it must be acknowledged that the purpose of s 45 as appears from the ALRC Report and the relevant Explanatory Memorandum is not so confined as to indicate such a construction. There is no distinction made in the Report or the Explanatory Memorandum between “other insurance” provisions purporting to affect double insurance which includes non-party insurance, and double insurance where the insured is a party to the relevant contract. The most that can be said is that the Report seems to have proceeded upon the assumption that the problem of “other insurance” clauses arose in cases in which the insured was a party to both contracts.

s 45

Insurance Contracts Act 1984

[45.12]

the case since the issue was said to be “central to the determination of the appeal” … see Rupert Cross, “Precedent in English Law” (3rd ed, Oxford University Press, 1968) p 77.

However, in an earlier judgment, McMeekin J (Qld Sup Ct), “with some considerable hesitation”, rejected a submission that the insured has to be a “party” to the first contract of general insurance for s 45 to operate: Nicholas v Wesfarmers Curragh Pty Ltd (2010) 16 ANZ Ins Cas 61-871; [2010] QSC 447 (at [60]). Rein J in Lambert Leasing, declined to follow some of the reasoning in Nicholas and considered additional matters. McMeekin J in Nicholas found that the relevant passages in the majority reasons of the High Court in Metals & Minerals, which could be read as referring to both the first contract and the second contract in s 45, were obiter. Rein J in Lambert Leasing said (at [61]) that even if the passages were obiter, “the High Court has made clear in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89 at [134] that a trial judge and intermediate Court of Appeal are bound by obiter dicta expressed by a majority of the Court”. McMeekin J in Nicholas reasoned that for the insured in s 45 to be construed to be a contracting party to the first contract of insurance it would be necessary to read words into s 45. He found that the omission by the legislature to import the words “entered into by the insured” qualifying “general insurance” supported a rejection of the submission that the insured has to be a party to the first contract of insurance. Rein J in Lambert Leasing did not think it a matter of reading words into s 45. Rather, it turned on the construction of the existing word “insured” in s 45. Rein J said (at [66]): [Metals & Minerals] requires “insured” in s 45 to mean an insured who has entered into two relevant contracts of insurance, that is both the first and the second contract of insurance. That interpretation excludes an insured who is a named insured but not a party to either the first insurance contract or the second insurance contract, or is a party to only one of them.

[45.13] By reason that: s 45(1) Section 45 invalidates terms of contracts of insurance which have the effect of excluding liability “by reason that” the insured has entered into another insurance contract. There is a distinction between a provision in a contract of insurance which has the effect of excluding liability “by reason that” the insured has entered into another insurance contract and a provision in a contract of insurance which, when applied, means that cover is simply not extended. In other words, s 45 does not operate to strike down a provision which excludes liability for persons who are not covered by the contract of insurance because they have other cover. 348

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[45.14] The insured has “entered into” some other contract of insurance (second mentioned contract of insurance): s 45(1) The “other insurance” provisions to which s 45 is directed are concerned with contracts of insurance “entered into” by the insured. The words “entered into” limit the application of s 45 to “other insurance” provisions affecting contracts of insurance which the insured has entered into. A third party beneficiary of cover does not “enter into” some other contract of insurance. Therefore, s 45(1) will not apply if the other insurance, to which the provision in a contract of insurance is directed, covers the insured as a third party beneficiary of cover. The High Court unanimously found that the words “entered into” are not capable of encompassing a party who has the benefit of cover but has “not entered” into the contract of insurance: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50. In their joint judgment French CJ, Gummow and Crennan JJ referred to a party who was not a party to a contract of insurance but rather was claiming under it by virtue of the statutory right of recovery in s 48 of the ICA (or under the common law extension of rights in the High Court decision of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873; [1988] HCA 44) as a “non-party insured”. The words “entered into” in s 45 are not capable of encompassing a non-party insured. The High Court rejected a submission that the text of s 45(1) should be construed to include arrangements giving cover to a person entitled under s 48 of the ICA. French CJ, Gummow and Crennan JJ said (at [26]): The text of the provisions of the Act with which s 45 must be read points inexorably to the conclusion that s 45 is only concerned with “other insurance” provisions affecting double insurance where the insured is a party to the relevant contracts of insurance. It does not allow room for a construction which would include a non-party insured among the ranks of those who have “entered into” the relevant contract. The inclusion of persons not parties to the ©

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The Queensland Court of Appeal (Chesterman JA; with whom Muir JA and Atkinson J agreed) found that an insurer’s policy did not operate to exclude liability to persons “by reason that” they took out policies with another insurer. The policy did not exclude liability for that reason but rather because it never extended to such persons, and a reference to their having effected other insurance was only a means of identifying a risk to which the policy did not attach: Australasian Medical Insurance Ltd v CGU Insurance Ltd (2010) 271 ALR 142; 16 ANZ Ins Cas 61-857; [2010] QCA 189.

s 45

Insurance Contracts Act 1984

[45.14]

relevant contract would be inconsistent with the ordinary or any plausibly extended meaning of “entered into” in relation to contracts. In so saying, it must be acknowledged that the purpose of s 45 as appears from the ALRC Report and the relevant Explanatory Memorandum is not so confined as to indicate such a construction. There is no distinction made in the Report or the Explanatory Memorandum between “other insurance” provisions purporting to affect double insurance which includes non-party insurance, and double insurance where the insured is a party to the relevant contract. The most that can be said is that the Report seems to have proceeded upon the assumption that the problem of “other insurance” clauses arose in cases in which the insured was a party to both contracts. However, notwithstanding the generality of the mischief to which s 45 was directed, the words “entered into” are not capable of encompassing a non-party insured.

The High Court considered the meaning of the words “entered into” in s 45(1). French CJ, Gummow and Crennan JJ concluded that there was nothing in the other provisions or history of the ICA to provide a basis for reading “entered into” other than in accordance with its natural meaning. They construed s 45(1) using the ordinary, relevant meaning of those words, the usage of which they said is reflected in other sections of the ICA. They said (at [23]): The ordinary, relevant meaning of “enter into” is “take upon oneself (a commitment, duty, relationship, etc); bind oneself by, subscribe to, (an agreement)” (Shorter Oxford English Dictionary, 6th ed (2007) at 840–841). That usage is reflected in the definition in s 11(9) of the Act which refers, albeit non-exhaustively, to “the making of an agreement by the parties to the contract”. It is also reflected in the other sections of the Act referred to below [referring to ss 48, 56(1) and 76].

The meaning of “entered into” in s 45(1) has remained a difficult issue particularly where an insured has been added to some other contract of insurance by another. This commonly occurs in the performance of obligations to insure others in insurance clauses in contracts between principals and contractors. It also occurs when a company insures other companies within the same group. While each case will depend on its own facts, it appears that a subsidiary added to a contract of insurance by its parent company is more likely to have “entered into” the contract than a principal added to a contract of insurance by a contractor pursuant to a contractual obligation. Resolution of this issue depends on the circumstances of the entry into the contract of insurance and the construction of the contract itself. An insured subsidiary may have “entered into” some other contract of insurance, for the purpose of s 45(1), through the head company in the group acting as its agent. McMeekin J (Qld Sup Ct) held that a head company had acted as an agent of its subsidiary in accepting a significant portion of the premium to obtain appropriate insurance for its subsidiary which had “entered into” 350

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the contract of insurance within the meaning of s 45(1): Nicholas v Wesfarmers Curragh Pty Ltd (2010) 16 ANZ Ins Cas 61-871; [2010] QSC 447. He did not find the decision straightforward. He found a principal and agent relationship had been established based on the subsidiary’s consent to the head company effecting insurance on its behalf. That consent was evidenced by the payment by the subsidiary of a significant sum for the insurance cover. There was no evidence of any other reason for the head company to effect the insurance on behalf of its subsidiary, such as a contractual obligation. He noted that it is trite law that there is no legal distinction between acting through an agent and acting on one’s own behalf vis-à-vis third parties. In his view, the actions of the head company in entering into the policy were undertaken as agent for the subsidiary. The insurance policy put the insurer on risk for the subsidiary’s potential claims, and hence the subsidiary had, for present purposes, “entered into” the policy. Even apart from the reasoning based on the characterisation of the relationship as one of principal and agent, McMeekin J was of the view that the meaning of “entered into” should be extended to the actions of the head company on behalf of its subsidiary. If it was not extended, then the mischief that s 45(1) was designed to prevent would be encouraged in respect of a significant class of insurance policies. The approach of the head company in this case being not uncommon between principals and subsidiaries in company groups. Further, rather than the subsidiary becoming an insured by some form of extended definition of insured person, it was a “Named Insured” in the particular contract of insurance. An insured may have “effected” insurance but this does not necessarily mean that it has “entered into” some other contract of insurance for the purpose of s 45(1). In Vero Insurance Ltd v QBE Insurance (Aust) Ltd (2011) 16 ANZ Ins Cas 61-912; [2011] NSWSC 593, Einstein J (NSW Sup Ct) held that a referee’s finding that insurance was “effected by” the insured, but it did not “enter into” a contract of insurance within the meaning of s 45(1), demonstrated no error of principle. The insured was added to the policy as a “Named Insured” albeit it was plain that the wide range of entities falling within the scope of the definition of “Named Insured” did not become parties to the contract of insurance through the agency of the party arranging cover. The insured had taken steps to ensure that cover was effected through a broker and had met the cost of the cover, but this had no bearing on the construction of the policy. As a matter of construction, the insured was merely one of a broad class of entities entitled to indemnity under a policy arranged by another. It followed that whilst the insured had effected the insurance cover, it had not “entered into” the contract of insurance for the purposes of s 45(1). ©

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[45.14]

s 45

Insurance Contracts Act 1984

[45.14]

[45.16] Contract required to be effected by or under a law: s 45(1) Wilson J (Qld Sup Ct) expressed an obiter view that for a workers’ compensation contract to be “required to be effected by or under a law” it was enough that the insured was, as an employer, obliged to effect a policy and that WorkCover (Qld) had agreed to provide indemnity under that policy. It was not necessary that there be a requirement that the contract be effected in respect of the particular claim under consideration: WorkCover Queensland v Royal and Sun Alliance Insurance Australia Ltd (2001) 11 ANZ Ins Cas 61-489; [2001] QSC 066.

[45.18] Provision is void Section 45(1) renders void the provision, or part of a provision, in a contract of insurance which has the effect stipulated in s 45(1). The word “provision” in s 45(1) means a clause or proviso rather than the ensuing result. The important element of the definition of a “provision” is that it provides “for some particular matter”. There is no requirement to construe s 45(1) so that its operation depends on accidents of drafting. There might be two statements in an “other insurance” clause, each specifying circumstances of operation. One statement might relate to “other insurance” to which the insured is a party and the other statement to other insurance to which the insured is a non-party or third party beneficiary of cover. Section 45(1) would only render void that part of the other insurance clause which relates to the insured as a party: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50. The High Court considered whether an “other insurance” clause in a contract of insurance that applied to two different circumstances, only one of which attracted the application of s 45(1), was a “provision” and therefore void as a whole in Metals & Minerals. The members of the High Court were unanimous in concluding that such an “other insurance” clause was not void as a whole. Rather, only that part of the clause that attracted the operation of s 45(1) was void. The members of the High Court, in two separate judgments, adopted two different approaches in reaching the same conclusion. The majority approach depending on the wording of the “other insurance” clause(s) and the minority approach depending on the operation of the clause(s). French CJ, Gummow and Crennan JJ approached the question by considering the meaning of “provision” in s 45(1). This approach required them to consider the wording of the “other insurance” clause in question and the “provisions” within that clause. They noted that the clause 352

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The word “provision” has been described rightly as “a word of diverse meanings which slide easily into each other”. As Lord Simonds, who made that comment, observed [Berkeley v Berkeley [1946] AC 555 at 580]: It may mean a clause or proviso, a defined part of a written instrument. Or it may mean the result ensuing from, that which is provided by, a written instrument or part of it. It is clear enough that “provision” in s 45(1) is used in the former sense. The relevant definition in the Oxford English Dictionary is: Each of the clauses or divisions of a legal or formal statement, or such a statement itself, providing for some particular matter; also, a clause in such a statement which makes an express stipulation or condition; a proviso. The important element of that definition is that a provision provides “for some particular matter”. The fact that there may be more than one provision for a particular matter in one numbered clause of a contract is an accident of drafting. The inclusion in one clause of two statements of rights or liabilities in the form “if X, then Z” and “if Y, then Z” has the same effect as the inclusion of those statements in two separate numbered clauses. Each statement is a provision of the contract. There is no requirement to construe s 45(1) so that its operation depends upon accidents of paragraphing or numbering in contracts of insurance. The Underlying Insurance clause contains two statements each specifying a circumstance in which the Hamersley Policy will be reduced to an Excess Insurance policy. Each is properly regarded as a “provision” of that insurance contract. The question whether a clause of an insurance contract may contain a “provision”, within the meaning of s 45(1), with different elements so intertwined that neither can be regarded as a distinct “provision”, does not arise in this case. In the result, s 45(1) operates only to render void that part of the Underlying Insurance clause in the Hamersley Policy which relates to double insurance to which the insured is a party.

Hayne and Heydon JJ adopted an operational approach to the question which did not depend on any “discrete collocation of words”. This approach took into consideration the operation of the contract which s 45(1) rendered void. No other operation of the contract was avoided. They said (at [41]–[42]): What s 45(1) makes void is a provision included in a contract of general insurance where it has the effect described in the sub-section. The Act’s reference to a provision having a particular effect is not to be read as reference to a discrete collocation of words. Section 45(1) directs attention to a particular operation which the contract would have according to its terms. It renders that operation of the contract void. It follows that no question of severance arises. However, the insurance contract may be drafted, the contract cannot be given an operation of the kind that is identified in s 45(1). That operation of the contract, which is to say, the provision made by the contract to that effect, is void. But no other operation of the contract is avoided. ©

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contained two statements, each expressing an “other insurance” circumstance which were each properly regarded as a “provision”. The question of one “intertwined” provision did not arise. They said (at [31]):

s 45

Insurance Contracts Act 1984

[45.18]

[45.20] Specified in the first mentioned contract: s 45(2) An “other insurance” clause is not void if the “other insurance” has been specified. The word “specified” is not defined in the ICA and has been the subject of a spectrum of opinion in academic literature. The NSW Court of Appeal (Mason P with whom Handley JA and Foster AJA agreed on this issue) reviewed the academic literature when considering a “principal arranged” other insurance clause: HIH Casualty & General Insurance Ltd v Pluim Constructions Pty Ltd (2000) 11 ANZ Ins Cas 61-477; [2000] NSWCA 281). As the question of whether the “other insurance” has been specified very much depends on precise wording, it is worthwhile noting the relevant other insurance clause in full. The Court stated (at [30]): In the event of the named Insured entering into an agreement with any other party (who for the purpose of this clause is called “the Principal”) pursuant to which the Principal has agreed to provide a policy of insurance which is intended to indemnify the named Insured for any liability arising out of the performance of the works then the Company(ies) will (subject to the terms and conditions of this Policy) only indemnify the names Insured for such liability not covered by the policy of insurance provided by the Principal.

Mason P found it unnecessary to seek the definitive meaning of s 45(1). He noted that the policy of s 45(1) suggested to him that the exception in s 45(2) should be construed narrowly, as some of the academic writers have suggested. In finding that he could not read the “other insurance” clause as specifying a contract of insurance, such as the principal arranged contract of insurance in question, he commented on its lack of relevant specificity. He said (at [45]): Here there was no identification of any particular policy with any particular insurer. The type of insurance which the proprietor was obliged to take out was described in the building contract in terms of the broadest generality and with no reference to conditions or exclusions. [The policy] is not in form or substance a type of layered insurance or excess insurance. The fact that a “policy of insurance” would be “principal–arranged” only emphasises its futurity, contingency and lack of relevant specificity. In the context of [the “other insurance” clause], a “policy of insurance” means any policy of insurance. This is the antithesis of “a …specified contract” within s 45(2).

[45.40] Not liable for more than rateable proportion A provision in a contract of general insurance, which provided that if there is another insurance covering the same loss or damage the insurer “shall not be liable for more than its rateable proportion thereof”, was void by virtue of s 45: State Rail Authority of New South Wales v Blacktown City Council (unreported, NSW Sup Ct, Greenwood M, 16 December 1996). 354

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Commonly, commercial contracts entered into between principals and contractors contain insurance clauses requiring one of the parties (usually the contractor) to obtain insurance cover on behalf of the other. This can result in double insurance where the party requiring the other to obtain insurance cover on its behalf also holds its own insurance cover. An insured is entitled to recover from any one or more of the insurers under s 76 until indemnified fully in respect of a loss. However, if there is an “other insurance” clause in the contracts of insurance of the party requiring the other to obtain insurance cover, the clause’s operation and whether or not it is void according to s 45 will depend on whether the entitlement under the other contract of insurance is as a party or as a claimant under s 48. The High Court considered the meaning of “entered into” in s 45 by comparing usage in other sections of the ICA: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50. The High Court concluded that s 48 does not deem a claimant under that section to be a party to the contract of insurance with the rights of a party. Therefore a s 48 claimant or non-party was not a person who had “entered into” a contract of insurance within the meaning of s 45(1). French CJ, Gummow and Crennan JJ said (at [24]): 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). 46

Pre-existing defect or imperfection

(1) This section applies where a claim under a contract of insurance (other than a contract of insurance that is included in a class of contracts declared by the regulations to be a class of contracts in relation to which this section does not apply) is made in respect of a loss that occurred as a result, in whole or in part, of a defect or imperfection in a thing. (2) Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the defect or imperfection, the insurer may not

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[45.50] Sections 45 and 48

s 46

Insurance Contracts Act 1984

[46.10]

rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to the condition, at a time before the contract was entered into, of the thing. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 16] [S 46 am Act 107 of 1997 Cross-reference: Insurance Contracts Regulations 1985: reg 30 prescribes classes of contracts of insurance in relation to which s 46 does not apply.]

SECTION 46 COMMENTARY Background and synopsis .......................................................................

[46.10]

By reference to a defect or imperfection in a thing ... before the contract was entered into .................................................................................

[46.20]

[46.10] Background and synopsis The ALRC made a general recommendation in relation to misrepresentations that a representation on the existence of a fact should be read as a representation that that fact exists to the best of the insured’s knowledge and reasonable belief. The ALRC was concerned that an insurer might require a guarantee of accuracy that the insured would be unable to give. Exclusions applying to any pre-existing illness even if the insured was not, and could not reasonably have been, aware of it were considered objectionable. The ALRC recommended that where an exclusion is based on a state or condition of the subject matter of the insurance, the insurer should not be able to rely on that exclusion if the insured proves that, at the time the contract was entered into, the insured did not know, and a reasonable person in these circumstances would not have known, of the existence of the relevant state or condition. Section 46 is in line with the law relating to misrepresentations in s 26: ALRC 20, at [184]. Section 46 relates to clauses in contracts (other than contracts included in certain prescribed classes of contract) which exclude or limit liability for defects or imperfections in a thing before the contract was entered into. An insurer is not able to rely on such a clause to the extent that the insured was not aware, and a reasonable person in the circumstances could not be expected to have been aware, of that defect or imperfection. The rationale behind the power to exclude certain classes of contract by regulation is described in the Explanatory Memorandum (at [151]) as follows: The power to exclude certain classes of contract by regulation will ensure that an insurer may, in the case of certain prescribed classes of commercial insurance, avoid liability for existing defects. It may be quite reasonable in certain cases for an insurer to be able to do this under the contract, eg, latent 356

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defects in components used by a building contractor. In such cases, the insured may have remedies against the supplier of the goods and be in a position to pursue those claims.

According to reg 30 of the Insurance Contracts Regulations 1985 (SR 1985 No 162) the classes of contracts of insurance to which s 46 do not apply are as follows: (a) … construction risks insurance contracts;

(c) contracts of insurance under which the insurer agrees to indemnify the insured, in relation to a business undertaking, against loss resulting from a breakdown of, or malfunctioning, machinery (including electronic equipment) or plant of the insured, being – (i) loss in respect of the repair or replacement of that machinery or plant; or (ii) any further loss resulting from that breakdown or malfunction, or both, but not against any other loss; (d) … products liability insurance contracts; (e) … “broad form” accidental loss and damage insurance contracts.

[46.20] By reference to a defect or imperfection in a thing ... before the contract was entered into Section 46 relates to clauses in contracts which exclude or limit liability for defects or imperfections in a thing before the contract was entered into. Section 46(2) is based upon the insured’s lack of awareness of a defect or imperfection in a thing at the time when the contract of insurance was entered into. Under s 46(2), the insurer may not rely on a provision included in the contract of insurance that has the effect of limiting or excluding the insurer’s liability under the contract by reference to the condition of the thing at a time before the contract was entered into. Section 46 has no application to an exclusion which takes effect by reference to the condition of the thing after the contract was entered into. In Asteron Life Ltd v Zeiderman (2004) 59 NSWLR 585; 13 ANZ Ins Cas 90-120; [2004] NSWCA 47, the NSW Court of Appeal unanimously agreed that neither Section 46 or Section 47 applied to an exclusion when the time of entry into the contract of insurance is irrelevant to the exclusion. Spigelman CJ (with whom Meagher JA and Bergin J agreed on this point) said (at [16]): An insurer is entitled to exclude cover for particular events, irrespective of when they occur, and an exclusionary provision of that character does not fall within the statutory preclusion in either s 46 or s 47 of the Act because it could not be said that a limitation or exclusion was made “by reference to” a ©

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(b) … industrial special risks insurance contracts or commercial risks insurance contracts;

s 47

Insurance Contracts Act 1984

[46.20]

condition of a thing or a sickness or disability at the time the contract was entered into. When the time of entry into the contract is irrelevant to the exclusion, the sections do not apply.

Section 46(2) requires an examination of the relevant policy terms and not the particular facts of a case. To the extent that ss 46 and 47 contain the same wording, caselaw on one of the sections applies equally to the other. Therefore Einstein J (NSW Sup Ct) applied the decision in Zeiderman, which concerned s 47, to his determination that s 46 did not operate to override an exclusion which concerned loss or damage caused by, or resulting from, an inherent defect because the loss and damage trigger, by its nature, occurred after the contract of insurance was entered into: Nelson v Hollard Insurance Co Pty Ltd (2010) 77 NSWLR 313; 16 ANZ Ins Cas 61-841; [2010] NSWSC 199. Nelson concerned a yacht which was assumed to have defects or imperfections before it was purchased and before the contract of insurance was entered into. The excluded loss or damage caused by or resulting from, inter alia, inherent defects occurred after the contract of insurance was entered into. In applying s 46, it was necessary to look at the exclusion and its trigger rather that the underlying defects or imperfections. Einstein J said (at [34] and [38]): Section 46(2) requires an examination of the relevant policy terms and not the particular facts of the case: this is accepted by all members of the Court of Appeal in [Zeiderman]. … the exclusion does not operate by reference to a condition of being at a time before the contract was entered into. That is because the trigger for the exclusion is not the relevant inherent defect, faulty workmanship or the like. It is in fact a separate event being the subsequent event of the loss or damage caused by or resulting from the inherent defect. In relation to the instant facts the trigger is not the pre-existing condition of the yacht, nor the inherent defect nor the faulty workmanship. It is in fact the subsequent event of loss or damage that is the focus of the exclusion.

Adamson J (NSW Sup Ct) followed Nelson (and therefore also Zeiderman) in finding that Section 46 did not apply to an exclusion in a commercial motor vehicle policy since the time of entry into the contract was irrelevant to the operation of the exclusion: Zhang v Popovic [2016] NSWSC 407 (12 April 2016). 47

Pre-existing sickness or disability

(1) This section applies where a claim under a contract of insurance is made in respect of a loss that occurred as a result, in whole or in part, of a sickness or disability to which a person was subject or had at any time been subject. (2) Where, at the time when the contract was entered into, the insured was not aware of, and a reasonable person in the circumstances could not be

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expected to have been aware of, the sickness or disability, the insurer may not rely on a provision included in the contract that has the effect of limiting or excluding the insurer’s liability under the contract by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 17] [S 47 am Act 107 of 1997]

Synopsis .................................................................................................. Loss: s 47(1) ............................................................................................ Sickness or disability: s 47(1) and 47(2) ................................................. By reference to a sickness or disability … at a time before the contract was entered into: s 47(2) ....................................................................

[47.07] [47.10] [47.15] [47.20]

[47.07] Synopsis As with s 46, s 47 is in line with the law relating to misrepresentations in s 26: ALRC 20, at [184]. Section 47 relates to clauses in contracts which exclude or limit liability for sickness or disability of the insured existing before the contract was entered into. An insurer is not able to rely on such a clause where the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, the sickness or disability: Explanatory Memorandum, at [152]–[153].

[47.10] Loss: s 47(1) Section 47 applies where a claim under a contract of insurance is made in respect of a “loss” that occurred as a result of a sickness or disability. A question arises as to what constitutes a “loss” and whether the absence of a “loss” would preclude the application of s 47. Meagher JA (NSW Sup Ct CA) found it difficult to affix a meaning to the word “loss” and it was not necessary for him to do so: Asteron Life Ltd v Zeiderman (2004) 59 NSWLR 585; 13 ANZ Ins Cas 90-120; [2004] NSWCA 47. In this case the insured was diagnosed with cancer during the waiting period under a life policy. The life insurer applied a waiting period exclusion in declining the claim. At first instance the trial judge found that s 47 negatived the waiting period exclusion because the insured had cancer before the life policy was entered into. The Court of Appeal by a majority (Meagher JA with whom Bergin J agreed; Spigelman CJ dissenting) found that s 47 had no application. Whilst it was unnecessary to determine the meaning of the word loss Meagher JA said (at [50]): ©

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SECTION 47 COMMENTARY

s 47

Insurance Contracts Act 1984

[47.10]

On the one hand, one would be wary of giving it the narrow meaning of “financial loss”; on the other hand, it is hardly the sickness itself, or its diagnosis.

Spigelman CJ in dissent found that s 47 negatived the waiting period exclusion and addressed the use of the word “loss”. He was of the opinion that use of the word “loss” did not require the identification of a monetary or other disadvantage, over and above the circumstances which cause the policy to respond, prior to the operation of an exclusionary clause precluded by ss 46(2) and 47(2). He said (at [29]–[32]): In the context of the whole of the legislative scheme, particularly the purpose of ss 46 and 47 to prevent avoidance of the Act’s regulation of misrepresentation and non-disclosure, the reference to “loss” in each of ss 46(1) and 47(1) should not be construed to confine the preclusive operation of ss 46(2) and 47(2). Subsection (1) of each of the two sections identifies the need for a claim to be made, as a precursor to the reliance by the insurer on an exclusion clause, which reliance is precluded by subsection (2) of each section. The use of the word “loss” is, in my opinion, merely designed to indicate the circumstances, in accordance with the particular insurance contract under consideration, which can give rise to claims. It is not, in my opinion, employed in the sense suggested in the [insurer’s] submissions, to require the identification of a monetary or other disadvantage, over and above the circumstances which cause the policy to respond, prior to the operation of an exclusionary clause precluded by ss 46(2) and 47(2). In my opinion, s 47 is intended to operate upon provisions of contracts of insurance of a particular character, the scope and effect of which is observable from the terms of the contract of insurance. The section does not turn on the occurrence of additional events for which the contract of insurance does not provide. Section 47 is concerned with the circumstances in which a policy responds and with circumstances equivalent in their effect to those which, but for the change of the law effected by Part IV, would entitle an insurer to avoid a policy for reasons of non-disclosure. This concern is best served by ensuring that the provisions of ss 46 and 47 apply in the same range of situations as equivalent non-disclosure provisions would apply. This, in my opinion, extends to the whole of the circumstances in which … there exists an additional “loss”, other than that provided for in, or presumed to flow from, an event identified in the policy as one which causes the policy to respond.

Nicholson J (SA Sup Ct) in Galaxy Homes Pty Ltd v National Mutual Life Association of Australasia Ltd (No 2) (2012) 116 SASR 1; [2012] SASC 235 was of the view that the legislature did not intend a strict or literal reading of the word “loss” in s 47 . He noted that the intention behind s 47 was to prevent an insurer from getting around the full extent of the remedies for misrepresentation and non-disclosure by characterising conduct as either warranties by an insured or as falling within exclusions from cover. Nicholson J agreed with the analysis of Spigelman J in Asteron Life on this point noting that whilst Spigelman J had dissented in 360

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the result the other members of the court in Asteron Life, Meagher JA and Bergin J, neither approved nor disapproved of this aspect of his reasoning. On appeal the Full Court of the SA Sup Ct (comprising Anderson, Peek and Stanley JJ) did not consider the meaning of the word “loss”: Galaxy Homes Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2013] SASCFC 66.

The words “sickness or disability” appear in both sub-sections of s 47. The Full Court of the SA Sup Ct (comprising Anderson, Peek and Stanley JJ) found that the “sickness or disability” in s 47(2) must be the same “sickness or disability” in s 47(1): Galaxy Homes Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2013] SASCFC 66. In this case the life insured was aware that he had been subject to malignant melanoma 17 years earlier at the time the contract was entered into but was not aware he was suffering from the condition at the time the contract was entered into. The insured contended that there are separate enquiries under s 47(1) and 47(2) and that the inquiry under s 47(2) is directed at the insured’s state of mind at the time of entry into the contract and not some earlier time. It contended that the awareness must mean an awareness that the life insured was suffering from the condition, as opposed to awareness of some historical state of affairs of no apparent continuing relevance. The Full Court in Galaxy Homes accepted that s 47(1) prescribes the circumstances whereby the provision applies. They noted that the operative part of s 47 is subsection (2). In rejecting the insured’s submissions on the operation of s 47(2), the Full Court found that the sickness or disability upon which the provision operates is the sickness or disability to which the life insured was subject or had at any time been subject where a claim is made in respect of a loss that has occurred as a result of that sickness or disability. The Full Court stated (at [88]): The operative part of s 47 is sub-section (2). It directs attention to the time when the insurance contract was made. It provides that where, at that time, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, “the sickness or disability” the insurer may not rely on a provision included in the contract that has effect of limiting or excluding its liability under the contract by reference to “a sickness or disability” to which the insured was subject at a time before the contract was entered into. Consideration of the operation of s 47(2) begs the question: what is “the sickness or disability” upon which the provision operates? In our view, the answer is the “sickness or disability” to which [the insured] person was subject or had any time been subject where a claim is made in respect of a loss that has occurred as a result of that sickness or disability. The “sickness or disability” in s 47(2) must be the same “sickness or disability” in s 47(1). The flaw in the [insured’s] argument is that it involves reading into s 47(2) the ©

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[47.15] Sickness or disability: s 47(1) and 47(2)

s 47

Insurance Contracts Act 1984

[47.15]

words “existing at that time” after the words “sickness or disability”. It is not necessary to do so for the provision to operate. This construction is reinforced by reference to the words we have emphasised above, with which sub-section (2) concludes, namely: “by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into”.

The Full Court applied the findings of the trial judge that the life insured knew, at the time he entered into the contract, that he had suffered from a malignant melanoma 17 years earlier. Accordingly, the Full Court held that s 47 did not operate to preclude the relevant exclusion from applying.

[47.20] By reference to a sickness or disability … at a time before the contract was entered into: s 47(2) Section 47(2) is based upon the insured’s lack of awareness of a sickness or disability at the time when the contract of insurance was entered into. Under s 47(2) the insurer may not rely on a provision included in the contract of insurance that has the effect of limiting or excluding the insurer’s liability under the contract by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into. It must be by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into. Section 47 has no application to an exclusion which takes effect by reference to a sickness or disability after the contract was entered into. Further, there is no temporal limit on the time before the contract was entered into. It is not confined to the time immediately preceding entry into the contract. Before and not after

In Asteron Life Ltd v Zeiderman (2004) 59 NSWLR 585; 13 ANZ Ins Cas 90-120; [2004] NSWCA 47 the NSW Court of Appeal unanimously agreed that neither s 47 or s 46 applied to an exclusion when the time of entry into the contract of insurance is irrelevant to the exclusion. Spigelman CJ (with whom Meagher JA and Bergin J agreed on this point) said (at [16]): An insurer is entitled to exclude cover for particular events, irrespective of when they occur, and an exclusionary provision of that character does not fall within the statutory preclusion in either s 46 or s 47 of the Act because it could not be said that a limitation or exclusion was made “by reference to” a condition of a thing or a sickness or disability at the time the contract was entered into. When the time of entry into the contract is irrelevant to the exclusion, the sections do not apply.

However, the Court of Appeal divided on the application of s 47 to the exclusion in question in Zeiderman. The Court of Appeal by a majority (Meagher JA with whom Bergin J agreed; Spigelman CJ dissenting) found that s 47 had no application to an exclusion which took effect by reference 362

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The core purpose of s 47(2) is to mitigate the effects of certain contractual provisions where liability is sought to be avoided “by reference to” a sickness or disability to which the insured was subject at a time before the contract was entered into. The contract of insurance in this case has the effect of limiting the relevant liability not by reference to (or because of or on the basis of) pre-contractual pathology but by reference to post contractual diagnosis irrespective of pre contractual pathology, that is, irrespective of whether the insured was subject to the particular sickness or disability at a time before the parties entered into the contract.

Spigelman CJ in dissent found that s 47 negatived the waiting period exclusion. He agreed that an insurer is entitled to exclude cover for particular events, irrespective of when they occur, and an exclusion, of that character does not fall within s 47 (and s 46 because of the same relevant wording) because it could not be said that a limitation or exclusion was made “by reference to” a sickness or disability or a condition of a thing) at the time the contract was entered into. When the time of entry into the contract is irrelevant to the exclusion, s 47 (and s 46) does not apply. However, he found that the insured’s cancer was of a type inevitably present over the whole of the three-month waiting period prior to diagnosis and therefore was present prior to a contract of insurance being entered into. Spigelman CJ therefore held that “as a matter of substance, the three-month waiting period exclusion operates by reference to – in the sense of is based on – a sickness or disability that existed at the time of the contract”: (at [30]). Bergin J (NSW Sup Ct) similarly considered that s 47(2) did not apply because the insured “first suffered” cancer after the policy was entered into and within a 90 day waiting period commencing on the benefit start date: Farkas v Northcity Financial Services Pty Ltd [2004] NSWSC 206 (22 June 2004). It was submitted that the policy fell foul of s 47(2) because it purported to exclude cover for cancer that was present prior to the Start Date of the policy. Her Honour found it unnecessary to decide the issue because of findings she had made which determined the claim by ©

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to sickness or disability after the contract of insurance was entered into, rather than before the contract of insurance was entered into as required by s 47(2). The insured was diagnosed with cancer during the three-month waiting period under a life policy. The life insurer applied the waiting period exclusion in declining the claim. At first instance, the trial judge found that s 47 negatived the waiting period exclusion because the insured had cancer before the life policy was entered into. The Court of Appeal found that the waiting period exclusion was referenced to post contractual diagnosis irrespective of pre-contractual pathology, that is, irrespective of whether the insured had a sickness or disability before the contract was entered into. Meagher JA noted that pre-contract pathology had no logical connection with, and couldn’t be the cause of the operation of the waiting period exclusion. Bergin J agreed with Meagher JA. She said (at [53]):

s 47

Insurance Contracts Act 1984

[47.20]

the insured but nevertheless expressed a view because the issue was relevant to alternative claims. In expressing a view that the postcontractual nature of the waiting period requirement did not satisfy the pre-contractual sickness or disability requirements of s 47 and with reference to Zeiderman she said (at [93]): It seems to me that the Policy does not limit the insurer’s liability “by reference to” a sickness or disability to which the insured was subject at a time before entering into the Policy. The Policy has the effect of limiting the insurer’s liability not by reference to pre-contract sickness or disability but to post contractual occurrence or suffering and, in the case of cancer, diagnosis, irrespective of whether the insured was subject to the cancer prior to the contract… No temporal limit

The Full Court of the SA Sup Ct (comprising Anderson, Peek and Stanley JJ) held that s 47 did not operate to preclude a relevant exclusion from applying where the life insured was aware that he had been subject to malignant melanoma 17 years earlier at the time the contract was entered into but was not aware he was suffering from the condition at the time the contract was entered into: Galaxy Homes Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2013] SASCFC 66. The Full Court said that there is no temporal limit on the time before the contract was entered into. In this case it was 17 years. It is not confined to the time immediately preceding entry into the contract. The Full Court stated (at [88]): The operative part of s 47 is sub-section (2). It directs attention to the time when the insurance contract was made. It provides that where, at that time, the insured was not aware of, and a reasonable person in the circumstances could not be expected to have been aware of, “the sickness or disability” the insurer may not rely on a provision included in the contract that has effect of limiting or excluding its liability under the contract by reference to a “sickness or disability” to which the insured was subject at a time before the contract was entered into. Consideration of the operation of s 47(2) begs the question: what is “the sickness or disability” upon which the provision operates? In our view, the answer is the “sickness or disability to which [the insured] person was subject or had any time been subject” where a claim is made in respect of a loss that has occurred as a result of that sickness or disability. The “sickness or disability” in s 47(2) must be the same “sickness or disability” in s 47(1). The flaw in the [insured’s] argument is that it involves reading into s 47(2) the words “existing at that time” after the words “sickness or disability”. It is not necessary to do so for the provision to operate. This construction is reinforced by reference to the words we have emphasised above, with which subsection (2) concludes, namely: “by reference to a sickness or disability to which the insured was subject at a time before the contract was entered into”. In this phrase, the words “at a time before the contract was entered into” must be understood to refer to an unlimited temporal period prior to the contract being made. It is not confined to the time immediately preceding entry into the contract. Accordingly, the operation of s 47 precludes an insurer from relying 364

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on a provision in the contract limiting or excluding the insurer’s liability in respect of a claim for a sickness or disability to which the insured was subject at any time before the contract was entered into, where the insured did not know or could not reasonably have known of the condition. This construction is consonant with the underlying purpose of s 47. 48 Contracts of general insurance—entitlements of third party beneficiaries

[Subs (1) subst Act 75 of 2013, s 3 and Sch 6 item 4; Act 107 of 1997, s 3 and Sch 8 items 18 and 19]

(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. [Subs (2) am Act 75 of 2013, s 3 and Sch 6 items 5 and 6; Act 73 of 2008, s 3 and Sch 4 item 343; Act 107 of 1997, s 3 and Sch 8 items 18 and 19]

(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). [Subs (3) am Act 75 of 2013, s 3 and Sch 6 item 7; Act 107 of 1997, s 3 and Sch 8 item 20]

(4) [Repealed] [Subs (4) rep Act 5 of 1995, s 3 and Sch item 46]

(5) [Repealed] [Subs (5) rep Act 5 of 1995, s 3 and Sch item 46] [S 48 am Act 75 of 2013, s 3 and Sch 6 item 3; Act 73 of 2008; Act 107 of 1997; Act 5 of 1995]

Pre ICAA 2013 Amendment (pre 28 June 2014) 48

Entitlement of named persons to claim

(1) Where a person who is not a party to a contract of general insurance is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover the amount of the person’s loss from the insurer in accordance with the contract notwithstanding that the person is not a party to the contract. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 items 18 and 19]

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(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.

s 48

Insurance Contracts Act 1984

[48.10]

(2) Subject to the contract, a person who has such a right: (a) has, in relation to the person’s claim, the same obligations to the insurer as the person would have if the person were the insured; and (b) may discharge the insured’s obligations in relation to the loss. [Subs (2) am Act 73 of 2008, s 3 and Sch 4 item 343; Act 107 of 1997, s 3 and Sch 8 items 18 and 19]

(3) The insurer has the same defences to an action under this section as the insurer would have in an action by the insured. [Subs (3) am Act 107 of 1997, s 3 and Sch 8 item 20]

(4) [Repealed] [Subs (4) rep Act 5 of 1995, s 3 and Sch item 46]

(5) [Repealed] [Subs (5) rep Act 5 of 1995, s 3 and Sch item 46] [S 48 am Act 73 of 2008; Act 107 of 1997; Act 5 of 1995]

SECTION 48 COMMENTARY Background and synopsis ....................................................................... Third Party Beneficiary – not a party to a contract ................................. Third party beneficiary – specified or referred to in the contract, whether by name or otherwise ......................................................................... In accordance with the contract .............................................................. The third party beneficiary’s (person’s) claim – s 48(2)(a) ..................... The same obligations to the insurer – s 48(2)(a) ................................... Insurer has the same defences – Pre and Post 28 June 2014 ............. Non-disclosure and s 48(3) ..................................................................... Breach of a policy term and s 48(3) ....................................................... Fraud as a defence and s 48(3) ............................................................. Section 48(3) and the common law ........................................................ Sections 48 and 17 ................................................................................. Sections 48 and 45 .................................................................................

[48.10] [48.10.1] [48.10.2] [48.10.3] [48.20.1] [48.20.2] [48.30.1] [48.30.2] [48.30.3] [48.30.4] [48.30.5] [48.40] [48.50]

[48.10] Background and synopsis Prior to the ICA, the indemnity principle, which requires an insured making a claim to show a strict proprietary interest in the subject matter of the insurance or some agency or trust relationship to the person who suffered the loss and the doctrine of privity, meant that insurance policies purporting to protect the interests of third parties were ineffective. Demonstrating the necessary relationship could be very difficult, for example, where the policy was taken out before the relationship itself could be regarded as commencing: Jovanovic v Broers (1979) 25 ACTR 39; 45 FLR 453. 366

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s 48

According to s 48, every person who is specified or referred to in a contract of general insurance, whether by name or otherwise, as being entitled to insurance cover can recover loss in accordance with the policy. This is so notwithstanding that the person is not a party to the contract: s 48(1). In relation to the claim, that person will be under the same obligations and may discharge the insured’s obligations in relation to the loss: s 48(2). The insurer has the same defences to an action as it would have in an action by the insured: s 48(3): Explanatory Memorandum, at [157]. Subsections 48(4) and (5) were omitted by the Life Insurance (Consequential Amendments and Repeals) Act 1995 (Act No 5 of 1995) which commenced on 1 July 1995. The subject matter of the subsections is now covered in s 48A, which was inserted at the same time. The Review Panel commissioned by the Australian Government in 2003 to review the ICA recommended that a third party beneficiary claiming under s 48 should be in no better position than the insured. At the time a divergence of judicial interpretation as to the meaning of s 48(3) had arisen and was noted by the Review Panel. There were competing views as to whether s 48 claimants were tainted by the conduct of the insured and a distinction had arisen between pre-contractual and post contractual conduct in interpreting s 48 (see Final Report (June 2004), [10.7]–[10.16]). The Review Panel recommended that s 48(3) make it clear that an insurer should be able to raise the conduct of the insured (whether pre or post contract) in defence of a claim brought by a third party beneficiary. Section 48 was amended by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2014. Amendments were made to s 48(1) and 48(2) to accord with a definition of “third party beneficiary” introduced into s 11(1) by the same Act. Section 48(3) was amended in accordance with a recommendation of the Review Panel to make it clear that an insurer, faced with a claim by a third party beneficiary, should be entitled to raise defences based on the conduct of the insured, regardless of the nature of the conduct or when the conduct occurred. The amendment, which added clarifying words to s 48(3), means that s 48 claims made pursuant to contracts of general insurance entered into or renewed after 28 June 2014 (which is 12 months after the amending Act received Royal Assent) should not depend on the nature and timing of the conduct of the insured. It is therefore necessary, in light of the amendment to s 48(3), to exercise caution when considering interpretations and ©

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The ALRC recommended that every person who properly falls within a policy description of the persons entitled to indemnity should be entitled to make a claim for loss covered by the policy. The fact that the person is neither a beneficiary under a trust nor a principal under a contract of agency should be irrelevant: ALRC 20 at [121]–[124].

s 48

Insurance Contracts Act 1984

[48.10]

applications of s 48(3) that depend on the nature and timing of the conduct of the insured, including those cases referred to in [48.30.2], [48.30.3] and [48.30.4].

[48.10.1] Third Party Beneficiary – not a party to a contract Section 48(1), by its terms and after amendment, in conjunction with the application of the definition of “third party beneficiary” provides “a person who is not a party to a contract of general insurance” with a right of recovery if that person is appropriately specified or referred to in the contract. That part of s 48(1) that described a person entitled to claim under s 48 (including the words “a person who is not a party to a contract of general insurance”) were removed from s 48 and replaced by a definition of “third party beneficiary” by the Insurance Contracts Amendment Act 2013. The words removed are now to be found in the definition of “third party beneficiary” in s 11(1). A third party beneficiary is not a party to the contract of insurance. Therefore, in considering the application of s 48, it is necessary to determine whether or not the person in question is a party to the contract. This involves construction of the contract of insurance. The question is what the parties should be taken to have agreed upon, viewing the matter objectively. Therefore the answer to the question, whether the person is a party to the contract of insurance (and, if not perhaps a third party beneficiary), may be clear from policy terms without the need to look further. Commonly the question will be resolved according to the policy definition of “the insured” and by reference to the section headed “the insured” in any policy schedule. In Protean (Holdings) Ltd v American Home Assurance Co (1985) 4 ANZ Ins Cas 60-683, Marks J (Vic Sup Ct) was of the opinion that the definition of “insured” in the context of the whole policy clearly incorporated financiers as parties to the contract of insurance (at 74,056 (ANZ Ins Cas)). Brownie J (NSW Sup Ct) referred to Protean (Holdings) in Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170; 7 ANZ Ins Cas 61-103. He said that the question “was not what the parties subjectively intended, but what they should be taken to have agreed upon, viewing the matter objectively…” (at 77,440 (ANZ Ins Cas)). The policy contained a definition of “the insured” which referred to the person or persons “so named in the certificates”. The person seeking cover was not named in the relevant certificate as “the insured” and this was determinative of the issue in Barroora. 368

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s 48

In ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65 the Full Ct of the Fed Ct (Jacobson, Gilmour and Gordon JJ) found that a subsidiary of a policyholder included in a policy by way of an endorsement as an “Insured Entity” was a third party beneficiary. Only the policyholder had completed a proposal form and the contract of insurance was between the insurer and the policyholder. The evidence did not support a conclusion that the policyholder had acted in the negotiation for, and entry into, the contract of insurance as agent of the subsidiary. By definition, the subsidiary was an “Insured Entity” and therefore one of the “Insured” under the policy. That did not make it a party to the contract of insurance. The Full Ct said (at [1629]): A party to a contract of insurance, depending on the particular kind of policy, need not necessarily be an insured person under it. Likewise an insured person need not be a party, as is the case here in relation to [the subsidiary].

Directors’ and Officers’ Insurance Policies are discussed separately below under the heading “Directors’ and Officers’ Liability Insurance”. Commonly a director is described as an “Insured Person” in a D&O Liability Policy, but may be a party to the contract of insurance or a third party beneficiary. Section 48 does not deem “a person” to be a party

“A person” who has a right of recovery under a contract of general insurance pursuant to s 48 is “not a party” to the contract of insurance. A party to the contract of insurance would have rights under the contract without the need to have recourse to s 48. Section 48 does not deem “a person” with a right of recovery pursuant to s 48 to be a party to the contract of insurance. In considering the meaning of “entered into” in s 45 and other sections of the ICA, the High Court concluded that s 48 does not deem a claimant under that section to be a party to a contract of insurance with the rights of a party: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 7016; ANZ Ins Cas 61-829; [2009] HCA 50. Therefore a s 48 claimant or non-party was not a person who had “entered into” a contract of insurance within the meaning of s 45(1). French CJ, Gummow and Crennan JJ said (at [24]): 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 ©

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However, the policy wording itself may not provide sufficient clarity on the question of whether the parties, viewed objectively, should be taken to have agreed that a particular person is a party to the contract of insurance (rather than a third party beneficiary). The policy wording may not contain a definition of “the insured”. If it does, and a person is defined as an “insured”, it doesn’t necessarily follow that the person is a party to the contract of insurance. Viewed objectively the person may be determined to be a third party beneficiary.

s 48

Insurance Contracts Act 1984

[48.10.1]

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).

McLure P (WA Sup Ct CA) noted the observations of the High Court in Metals & Minerals that s 48 does not deem a person to whom the insurance cover extends to be a party to the insurance contract in determining the question as to who was entitled to bring an insurance claim under strata insurance: CHU Underwriting Agencies Pty Ltd v Wise (2012) 17 ANZ Ins Cas 61-938; [2012] WASCA 123. Directors’ and Officers’ Liability Insurance

A question frequently arises as to whether directors covered by a Directors’ and Officers’ Insurance Policy are parties to the contract or third party beneficiaries of cover entitled to claim under s 48. Rogers CJ Comm D (NSW Sup Ct) found as a matter of construction that directors were not contracting parties to the Directors’ and Officers’ Liability Insurance Policy under consideration in Carden v CE Heath Casualty & General Insurance Ltd (1992) 7 ANZ Ins Cas 61-147. He said (at 77,767 (ANZ Ins Cas)): The arguments of the insurer highlight the fact that the policy wording was devised by the broker not the underwriter. Nonetheless, it seems to me that, at the end of the day, the contracting party to the D & O policy is confined to the company and does not extend to the amorphous shifting population which, by definition, may from time to time constitute the class of directors and officers.

On appeal, the NSW Court of Appeal (Mahoney, Clarke and Meagher JJA) found that the directors were contracting parties to the Directors’ and Officers’ Liability Insurance Policy: CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. The Court of Appeal gave effect to the expressed intention of the parties in finding that the directors were contracting parties. Mahoney JA found support for this conclusion both in the nature of the insurance arrangements and in the particular terms of the Directors’ and Officers’ Liability Insurance Policy. He said (at 33–34 (NSWLR); 78,273–78,274 (ANZ Ins Cas)): Rogers CJ Comm D, in concluding that the directors were not party to the D/O policy, appears to have been influenced mainly by the width of the class of persons who, on that basis, would be parties to the contract of insurance. 370

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[48.10.2]

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s 48

… the intention of the policy in this regard was that the Insured Persons should be the Directors and Officers at the time when the policy was effected. These are the persons who, I infer, paid such premium on the D/O policy as was payable.

Bergin J (NSW Sup Ct) in Green v CGU Insurance Ltd (2005) 215 ALR 612; 13 ANZ Ins Cas 61-650; [2005] NSWSC 254 found that directors, at the time the Directors’ and Officers’ Liability Insurance Policy was effected, were contracting parties to the policy. In arriving at that determination, she considered the matters referred to by Mahoney JA in Grey as supporting the finding that the directors were parties to the contract of insurance including the intention of the policy and other matters. As to the other matters, she said (at 77,947 (ANZ Ins Cas)): Other matters of significance considered by Mahoney JA to support the finding that the directors were parties to the contract of insurance included: (1) the extent of the directors’ knowledge that insurance was being effected for their benefit; (2) the extent of the directors’ involvement in carrying out the arrangements under the package proposal; (3) the commercial context of the insurance package; and (4) the obligations under the Policy.

It is worth noting that Bergin J found in Green that the terms of the Policy supported a finding that it was intended that each director was an “insured” and contracting party at the time the Policy was effected notwithstanding that, unlike the policy in Grey, the Policy did not contain a definition of insured.

[48.10.2] Third party beneficiary – specified or referred to in the contract, whether by name or otherwise Section 48(1), by its terms and after amendment, in conjunction with the application of the definition of “third party beneficiary”, provides a person who is not a party to a contract of general insurance with a right of recovery if that person is “specified or referred to in the contract, whether by name or otherwise”. That part of s 48(1) that described a person entitled to claim under s 48 (including the words “specified or referred to in the contract, whether by name or otherwise”) was removed from s 48 and replaced by the defined term “third party beneficiary” by the Insurance Contracts Amendment Act 2013. The words removed are now to be found in the definition of “third party beneficiary” in s 11(1). ©

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The judge was, of course, correct in pointing to the difficulty of determining the content of the term Insured Person. But there are, I think, two substantial answers to it: on the proper construction of the policy, the difficulty is less than the judge thought; and the difficulty, whatever its extent, does not warrant the construction that it is the (or a) Compass company which is the party to the contract of insurance rather than the (or an) Insured Person.

s 48

Insurance Contracts Act 1984

[48.10.2]

Accordingly, the application of s 48 is predicated upon a person being specified or referred to in the contract of insurance. Provided a copy of an insurance policy is available to a potential s 48 claimant, then the wording of the policy and, if required, any contract referred to therein, ought to reveal whether the person is specified or referred to. It is clear from the wording of s 48 that a third party claimant who is claiming against an insured, and who is not specified or referred to in the insurance policy, cannot make a claim against the insurer under s 48. Harrison J (NSW Sup Ct) noted that a third party claimant was not a person specified or referred to in the insurance policy to whom cover extended and accordingly refused leave to join the insurer to the proceedings: Nicol v Whiteoak (2011) 16 ANZ Ins Cas 61-893; [2011] NSWSC 168. In ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65, the Full Ct of the Fed Ct (Jacobson, Gilmour and Gordon JJ) considered a preface to an endorsement that provided that subsidiaries “shall be included in this policy”. It noted that there would be no need for the endorsement if the subsidiaries were parties to the contract of insurance. The Full Ct found that the expression “shall be included in this policy” met the statutory description in s 48(1) of “a person who is not a party to the contract specified by name as a person to whom the insurance cover provided by the contract extends” (at [1637]).

[48.10.3] In accordance with the contract Giles J (NSW Sup Ct) dealt with an argument in Commonwealth Bank of Australia v Baltica General Insurance Co Ltd (1992) 28 NSWLR 579; 7 ANZ Ins Cas 61-133 that the specified party had no right of recovery because the contract of insurance had been avoided ab initio. He did not think that this was correct. He said (at 591 (NSWLR); 77,684 (ANZ Ins Cas)): The words “in accordance with the contract” in s 48(1) are descriptive of the basis for an extent of the right of recovery rather than a statement of a precondition for the right, and s 48(3) envisages determination of the third party’s recovery by regard (inter alia) to whether or not there is a defence of fraudulent non-disclosure.

The NSW Court of Appeal (Priestley JA with whom Meagher and Powell JJA agreed) expressed an obiter view that in the circumstances of s 48(1) a s 48 claimant has a right to recover in accordance with the indemnity provided to the contracting party and does not have a greater right: MacDonald v CE Heath Underwriting and Insurance (Aust) Ltd (1997) 9 ANZ Ins Cas 61-362. Priestley JA said (at 77,010 (ANZ Ins Cas)): 372

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[48.20.2]

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Put slightly differently 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 General Motors Acceptance Corporation Australia v RACQ Insurance Ltd (2003) 12 ANZ Ins Cas 61-574; [2003] QSC 080, Muir J (Qld Sup Ct) found that neither the insured or any s 48 claimant had a right to recover “in accordance with the contract” under the terms of the relevant contract of insurance. He said that s 48(1) does not operate to extend the scope of cover provided by the policy and that the s 48 claimant must take the policy as it is found.

[48.20.1] The third party beneficiary’s (person’s) claim – s 48(2)(a) Section 48 does not make the rights under it contingent on the making of a claim by a third party beneficiary (referred to as a “person” prior to amendment in 2014) on the insurer. The Victorian Court of Appeal (Neave and Dodds-Streeton JJA and Kyrou AJA) noted that because of s 48(2) the making of a claim is not a pre-condition to recovery in the absence of a contractual requirement: QBE Insurance (Aust) Ltd v Lumley General Insurance Ltd (2009) 24 VR 326; 15 ANZ Ins Cas 61-807; [2009] VSCA 124. The Court of Appeal, referring to s 48(2)(a) which was amended, but not relevantly on this point, by the Insurance Contracts Amendment Act 2013, said (at 77,488 (ANZ Ins Cas)): It is true that s 48(2)(a) of the IC Act refers to “the person’s claim”. However, the word “claim” is not defined in the IC Act and does not appear in s 48(1), which confers the right of recovery. Furthermore, s 48(2) expressly provides that it is subject to the contract and therefore cannot impose a requirement for the making of a claim as a pre-condition for recovery when the contract of insurance does not contain any such pre-condition.

[48.20.2] The same obligations to the insurer – s 48(2)(a) Section 48(2)(a) provides, subject to the contract of insurance, that a third party beneficiary (referred to as a “person” prior to amendment in 2014), ©

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In a separate case, Simpson J (NSW Sup Ct) noted that the recovery of a s 48 claimant was “in accordance with the contract” and that s 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 s 48 claimant: GIO Australia Ltd v P Ward Civil Engineering Pty Ltd (2000) 11 ANZ Ins Cas 61-467; [2000] NSWSC 371.

s 48

Insurance Contracts Act 1984

[48.20.2]

has the same obligations to the insurer as the third party beneficiary would have if the third party beneficiary were the insured. Section 48(2)(b) provides that the third party beneficiary may discharge the insured’s obligations in relation to the loss. Are there limits to an insured’s obligations to an insurer imposed on a third party beneficiary under s 48(2)? If so, what are those limits? The obligations must be “in relation to the third party beneficiary’s claim”. This would appear to limit the obligations to post-contractual obligations in relation to the claim that the third party beneficiary has made. The obligations must be obligations that the third party beneficiary would have if the third party beneficiary were the insured. Section 48(2) is expressed to be subject to the contract of insurance. Subject to these limitations, s 48(2) does not, on its face, confine the source of any relevant obligation. The source could be contract, equity or statute. Beech-Jones J (NSW Sup Ct) considered the operation of s 48(2) in determining an interlocutory application to amend pleadings in Estate of Watson v Conolly [2012] NSWSC 741 (22 June 2012). There didn’t seem to him to be any reason why s 48(2) would not, on its face, impose an obligation on a third party beneficiary to repay to an insurer any amount obtained by way of recovery from a third party pursuant to the principles of subrogation. Beech-Jones J said (at [26]): [Section 48(2)] does not confine the source of the relevant obligation. It could be contract, equity or statute.

It should be noted, for the sake of completeness, that Watson pre-dates the ICAA 2013 amendments whereby s 67, which concerns rights with respect to money recovered under subrogation, was repealed, replaced and extended to third party beneficiaries by virtue of s 64. Section 48(2) does not impose a pre-contractual duty of disclosure under s 21 on a third party beneficiary. The Full Ct of the Fed Ct (Jacobson, Gilmour and Gordon JJ) in ABN AMRO Bank NV v Bathurst Regional Council (2014) 24 FCR 1; 309 ALR 445; 18 ANZ Ins Cas 62-020; [2014] FCAFC 65 noted that s 48(2) confines the third party beneficiary’s obligations to those which are “in relation to the person’s (third party beneficiary’s) claim”. The Full Ct did not regard this as referable to the pre-contractual obligations of the insured under s 21.

[48.30.1] Insurer has the same defences – Pre and Post 28 June 2014 Prior to the amendment of s 48(3) by the Insurance Contracts Amendment Act 2013, consideration of the meaning of s 48(3) had resulted in divergent judicial opinion. There were two competing interpretations 374

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[48.30.1]

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The interpretation of s 48(3) had depended, to an extent, on the nature of the conduct alleged against the insured. The latter and wider interpretation found favour in cases concerning alleged non-disclosure by the insured: Commonwealth Bank of Australia v Baltica General Insurance Co Ltd (1992) 28 NSWLR 579; 7 ANZ Ins Cas 61-133 per Giles J (NSW Sup Ct); CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. The narrower interpretation had found favour in cases which concerned alleged arson by the insured. The non-disclosure cases had involved, in part, different considerations from the arson cases. Cases concerning an alleged breach of a policy term by the insured would have also involved different considerations. To this extent, a trichotomy appeared to be developing in relation to the treatment of s 48(3) depending on the nature of the conduct alleged. The treatment appeared to differ depending on whether the conduct was pre-contractual, that is a non-disclosure (see [48.30.2]), a post-contractual breach of a policy term (see [48.30.3]) or post contractual fraud (see [48.30.4]). The amendment of s 48(3) by the Insurance Contracts Amendment Act 2013 is intended to make it clear that an insurer, faced with a claim by a “third party beneficiary” (a definition of that term was introduced into s 11(1) by the same Act) should be entitled to raise defences based on the conduct of the insured, regardless of the nature of the conduct or when the conduct occurred. The amendment, which adds clarifying words to s 48(3), means that s 48 claims made pursuant to contracts of general insurance entered into or renewed after 28 June 2014 (which is 12 months after the amending Act received Royal Assent) should not depend on the nature and timing of the conduct of the insured. It is therefore necessary to exercise caution when considering the interpretation and application of s 48(3) that depended on the nature and timing of the conduct of the insured in the cases referred to in [48.30.2], [48.30.3] and [48.30.4] in light of the amendment to s 48(3).

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which had both found judicial support. On the one hand, s 48(3) had been read narrowly to mean that a claimant under s 48 must face the same defences as those against the insured but it would be necessary for an insurer to prove facts in support of those defences against the s 48 claimant. In other words the s 48 claimant would not be tainted with the conduct of the insured. On the other hand, s 48(3) had also been given a wider interpretation. The phrase “same defences” in s 48(3) had been interpreted as the insurer’s defences against the insured taking into account facts had they been proved against the insured. In other words, the s 48(3) claimant would be tainted with the conduct of the insured.

s 48

Insurance Contracts Act 1984

[48.30.1]

[48.30.2] Non-disclosure and s 48(3) Giles J in Commonwealth Bank of Australia v Baltica General Insurance Co Ltd (1992) 28 NSWLR 579; 7 ANZ Ins Cas 61-133 was concerned with a claim by the insurer that it was entitled to rely upon its avoidance of the policy by reason of fraudulent non-disclosure on the part of the insured or, alternatively, its reduction of liability to nil by reason of the non-disclosure of the insured as against the bank as a s 48 claimant. He held that the insurer was entitled, as against the bank, to rely upon the non-disclosure defence in answer to the bank’s claim pursuant to s 48. Giles J noted the following matters in relation to a third party: 1. Prior to s 48 a third party had no rights of recovery at all. 2. A specific provision protective of third-party rights of recovery could have been made, as in other legislation, but was not. 3. The High Court in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910 held that an insurer is entitled to avoid a contract of insurance for fraudulent non-disclosure notwithstanding the existence of an innocent co-insured. Giles J said (at 590–591 (NSWLR); 77,683 (ANZ Ins Cas)): To sum up, having regard to the mischief addressed by s 48, such indications as there are in the language of the Act, recognition of the interests of the parties to the contract of insurance in relation to the existence and terms of the contract, and profound consequences of a contrary view for the exposure of insurers, in my view the insurer can rely on non-disclosure by the insured as a defence to a third party’s claim under s 48(1). While it may be otherwise if it is necessary to treat the third party as an insured in order to give effect to the terms of the contract, where the existence of the contract or the terms of the contract are in question, s 48(3) means what it says – the insurer has the same defences as he would have in an action by the insured.

Rogers CJ Comm D (NSW Sup Ct) in Carden v CE Heath Casualty & General Insurance Ltd (1992) 7 ANZ Ins Cas 61-147 declined to follow Giles J in the Commonwealth Bank of Australia case and concluded that non-disclosure by a contracting party will not work to restrict the rights of a third-party beneficiary who was not a party to the non-disclosure. He considered the position of directors under a Directors and Officers Liability Policy and concluded that they were not contracting parties. Accordingly, he considered their rights under s 48. Rogers CJ Comm D contrasted s 48 with other provisions of the ICA and also considered what he took to be the purpose of the legislation. While accepting that the language used by the legislature did not make the position clear, he was reluctant to accept that a third party may rely on a policy which, as against the actual insured party, may be reduced to nil. He was persuaded 376

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[48.30.2]

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Central to the approach of the Act is the proposition that policies of insurance, issued in returned for the payment of premium, should remain enforceable unless fraud has intervened. If the insured has done something, or omitted to do something, which results in damage to the insurer, then to the extent of that damage, but no further, the benefit of the policy should be truncated and restricted. The legislative purpose so identified will not be served, in my opinion, by restricting the benefit of the policy which the legislature clearly intended should be enforceable by a third party, where the third party beneficiary is innocent of any act of commission or omission. Denying the insurer that defence is the way and the only way, it seems to me, in which the legislative purpose can be fully implemented.

On appeal, the NSW Court of Appeal (Mahoney, Clarke and Meagher JJA) found that the directors were contracting parties to the Directors and Officers Liability Insurance Policy: CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. Although this finding largely disposed of the appeal, the Court of Appeal expressed obiter views on the treatment of the directors as s 48 claimants. The Court of Appeal was of the opinion that an insurer can rely upon a non–disclosure by an insured as against a s 48 claimant. Clarke JA (with whom Meagher JA agreed) looked at the purpose, construction and application of s 48. In reference to s 48(3) he said (at 47 (NSWLR); 78,284 (ANZ Ins Cas)): Despite its economy of language the subsection says, in plain words, that the insurer is to have the same defences to a claim by the named person as it would have in an action by the insured. One of the defences available in an action by the insured would be a defence of fraudulent non-disclosure (by the insured) but upon the interpretation of Rogers J that defence could never be available in an action by the person named. This would be an astonishing result, particularly as the proof of fraudulent non-disclosure by the insured which induced the entry into the contract would entitle the insurer to avoid the contract. In the circumstances, the insurer would not, on that approach, have the same defences against a person suing pursuant to the right accorded by s 48(1) as it would have against the insured.

Mahoney JA looked at the basis upon which it may be argued that, as a result of s 48, the insurer had a right to avoid the contract of insurance for non-disclosure. He said (at 40 (NSWLR); 78,279 (ANZ Ins Cas)): There are three bases on which it may be argued that, as the result of s 48, Heath has the right to avoid the contract for such non-disclosure: (a) because the rights given to the directors by s 48 carry with them the relevant duty of disclosure; (b) because the obligation to disclose is imposed by s 48(2)(a); and (c) because of the operation of s 48(3).

In relation to s 48(3) Mahoney JA said (at 41 (NSWLR); 78,279–78,280 (ANZ Ins Cas)): ©

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that the purpose of the legislation was better served by concluding that it is only some act or omission of a third party that should ground a defence to a claim by the third party. He said (at 77,770 (ANZ Ins Cas)):

s 48

Insurance Contracts Act 1984

[48.30.2]

In my opinion s 48(3) enables Heath to rely on a defence of avoidance for breach of the principle of good faith. The subsection, in referring to “the same defences … as he would have in an action by the insured” does not, of course, refer merely to the defences which, having regard to the defaults of the insured party, would be available to Heath against the insured party. The subsection does not require the position as between Heath and the third person directors to be determined by reference alone to the facts which would be pleaded and relied upon in a proceeding by the insured against Heath. Those defences may, of course, be available. But the operation of s 48(3) is, I think, not limited to authorising Heath to raise those defences. The purpose of the subsection is to enable Heath to rely, against the third person directors, on defences of the kind which would be available against the insured. It is, of course, necessary for the insurer to establish the facts necessary to bring those defences into operation.

[48.30.3] Breach of a policy term and s 48(3) The Court of Appeal in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199 made obiter comments concerning an insurer’s reliance upon a breach of a policy term and whether a s 48 claimant could be held to such a breach. Clarke JA (with whom Meagher JA agreed) referred to s 54 and expressed a view that a reference to “other person” in s 54(1) is a reference to a s 48 claimant. He said (at 47 (NSWLR); 78,284 (ANZ Ins Cas)): [Section 54] is concerned with the right of an insurer to refuse to pay a claim “by reason of some act (which includes omission s 54(6)) of the insured or some other person” (emphasis added). Two things should immediately be said about this provision. First, the insurer’s right to refuse to pay the claim would ordinarily arise out of the terms of the policy of insurance. Secondly, the other person referred to must, I think, be a person who is entitled to a benefit under the policy and who is given the right by s 48(1) to recover the amount of his or her loss.

Clarke JA broadly described s 54 and noted that the section is not entirely clear insofar as it does not expressly deal with the effect of the conduct of the insured on a claim brought by a s 48 claimant. He said (at 47–48 (NSWLR); 78,284 (ANZ Ins Cas)): Perhaps that is explicable because the terms of the contract should themselves spell out the consequences of particular conduct by the insured and the other person. If, for instance, the contract provided that no claim would be allowed if the insured did not give prompt notice then, subject to s 54, the failure by the insured to give such notice would, prima facie, defeat all claims, whether by the insured or by another person. In short, one could expect that the consequences of the particular conduct by either the insured or a person entitled to claim directly under the policy pursuant to s 48 upon the entitlements of one or the other would be spelt out in the policy itself. In this context s 48(3) would seem to add little if anything to those rights of an insurer which are circumscribed by s 54 although the two sections do not, in my view, sit together in perfect harmony. There are other aspects of s 54 which 378

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[48.30.4]

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create difficulties. Subsections (3) and (4) speak only of the insured. However, these matters were not the subject of argument and can conveniently be left for another day.

An example of where the terms of the contract denied cover to a s 48 claimant is the case of GIO Australia Ltd v P Ward Civil Engineering Pty Ltd (2000) 11 ANZ Ins Cas 61-467; [2000] NSWSC 371. Simpson J (NSW Sup Ct) found that the insurer was entitled to the benefit of a defence arising from the exclusion of cover when a motor vehicle was being driven by an unlicensed driver.

[48.30.4] Fraud as a defence and s 48(3) Tadgell J (Vic Sup Ct) in VL Credits Pty Ltd v Switzerland General Insurance Co Ltd [1990] VR 938; (1989) 5 ANZ Ins Cas 60-936 rejected the argument put by the insurer that if it could prove arson by the insured, then that would provide it with a defence against the s 48 claimant. Tadgell J was of the view that the construction of s 48(3) was essentially a matter of impression. He said (at 76,059 (ANZ Ins Cas)): It must be said that subsection (3) is in a sense elliptical and economic in its use of words. I should regard the result contended for by the defendant as surprising if it represented the true construction of the provision. Section 48(3) does not say that the matters of fact upon which the insurer may rely by way of defence against a person bringing a claim under s 48 should be treated as the same as those which could give rise to a defence to a claim by the insured if he were making a claim. The argument on behalf of the defendant really amounts to that. Subsection (3) means, in my opinion, that if facts are proved against a person making a claim under s 48 which, had they been proved against the insured in the event that he made a claim and would have afforded a defence to the insured’s claim, they afford a like defence against the person making a claim under s 48.

Clarke JA (with whom Meagher JA agreed) was of the opinion that some of the views expressed by Tadgell J were problematic insofar as they might apply to a question of disclosure: CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. Clarke JA noted that s 21 does not impose on a s 48 claimant an obligation to disclose. However, this problem does not arise when applying the views of Tadgell J to the question of fraud by the insured being raised by the insurer as a defence against an innocent s 48 claimant. ©

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Accordingly, subject to the resolution of further questions such as the relationship between ss 48 and 54, it appears that an insurer’s ability to rely upon a breach of a policy term by the insured as against a s 48 claimant will depend, inter alia, on the terms of the contract of insurance and whether the s 48 claimant is to be fixed with the consequences of the alleged conduct according to those terms.

s 48

Insurance Contracts Act 1984

[48.30.4]

Brownie J (NSW Sup Ct) in Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170; 7 ANZ Ins Cas 61-103 also considered that an insurer would not be entitled to raise arson by an insured as a defence against a third-party claimant. Although he concluded that the third-party claimant was entitled to the benefit of s 48, he decided the questions before him by applying the judgments of the High Court and the NSW Court of Appeal in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873; [1988] HCA 44 (High Court); (1987) 8 NSWLR 270; 4 ANZ Ins Cas 60-771 (NSW CA). Clarke JA considered s 56 and thought it clear that an insurer may refuse (subject to s 56(2)) to pay a claim that is fraudulently made but remains otherwise bound by the terms of the contract of insurance: CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199. Being otherwise bound by the terms of the contract would mean that a fraudulent claim by the insured would not affect another claim for the same loss made by a s 48 claimant. Clarke JA said (at 48 (NSWLR); 78,285 (ANZ Ins Cas)): What, I think, is clear from s 56(1) is that the insurer may refuse (subject to s 56(2)) to pay a claim that is fraudulently made but remains otherwise bound by the terms of the contract. Where, therefore an insured makes a fraudulent claim that would not, as it presently seems to me, affect another claim for the same loss made by a person entitled to recover its loss pursuant to s 48(1). Where, for instance, an insured destroys its own premises by firing them it would not be entitled to maintain a claim under a policy in respect of the damage to those premises whereas nothing in s 56 would appear to affect the right of an innocent mortgagee named in the policy from claiming in respect of the loss it suffered as a consequence of the fire. This is consistent with Brownie J’s opinion in Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 170; (1992) 7 ANZ Ins Cas 61-103 that the insurer’s liability to each at common law is several and that an innocent mortgagee could, in the example I have given, recover under the common law.

Therefore, it appears, that if an insured and a s 48 claimant are covered under a contract of insurance severally (as opposed to jointly), then the insurer will not be able to rely upon the fraud of the insured against the innocent s 48 claimant. This is most commonly seen where the contract of insurance covers both mortgagee and mortgagor. It is likely that an insurer’s liability to each will be several and an innocent mortgagee will be able to recover under a contract of insurance either pursuant to s 48 or the common law.

[48.30.5] Section 48(3) and the common law Another point that arises from the judgment of Brownie J (NSW Sup Ct) in Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 26 NSWLR 380

Mann’s Annotated Insurance Contracts Act

[48.30.5]

Pt V – Div 2 – Insurance contracts – general provisions

s 48

170; 7 ANZ Ins Cas 61-103 is that the common law potentially assists third-party claims in matters to which s 48 is applicable. Section 48(3) can be contrasted with the statement of McHugh JA (NSW Sup Ct CA) in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270; 4 ANZ Ins Cas 60-771 (at 288 (NSWLR); 74,688 (ANZ Ins Cas)):

Brownie J in the Barroora case read the statement narrowly as a reference to a failure to give timely notice of the claim in accordance with policy conditions which would be excused under the provisions of s 18 of the Insurance Act 1902 (NSW). If the meaning was more extensive than this then Brownie J, for various reasons, was of the view that it was not a valid general proposition. However, it should be noted that Seaman J (WA Sup Ct) in Visic v State Government Insurance Commission (1990) 3 WAR 122; 6 ANZ Ins Cas 61-021 did not accept that the common law reflected the position which had been reached under the ICA. He commented that the decision of the High Court in Trident v McNiece had declared an extension of the common law to be followed by properly discerning its ratio decidendi. He said (at 126 (WAR); 76,829 (ANZ Ins Cas)): I need say no more than that case is broadly concerned with the right of a named insured who is not a party to the contract of insurance and who has not paid a premium therefore, to recover under it, and may involve questions of reliance on the policy terms.

He did not regard the High Court decision as authority for the proposition that if a person is an intended beneficiary under an insurance policy, that person is entitled to sue on it. Accordingly, the common law position may be narrower than s 48. Clarke JA, in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199, adopted a view on ss 48 and 56 consistent with the opinion of Brownie J in the Barroora case that the insurer’s liability to a mortgagee and mortgagor at common law is several and an innocent mortgagee could recover under the common law. He appears to have treated s 48 and the Trident v McNiece common law extension as being co-extensive. Clarke JA cited from the High Court judgment of Mason CJ and Wilson J in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873; [1988] HCA 44 and emphasised the following passage from that judgment (at 122 (CLR)): ©

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To be able to sue at common law the beneficiary must be a person who is specified or referred to in the contract, whether by name or otherwise. The insurer is entitled to the same defences as he would have in an action brought by the promisee-party. Moreover, so that the insurer will not be liable at the suit of the promisee-party, the latter will need to be a defendant in the action.

s 48

Insurance Contracts Act 1984

[48.30.5]

[T]o subordinate the third party’s entitlement in this way would accord with legal principle and with the protection of the interests of the parties to the contract. There is to our minds no compelling reason why the interests of the third party should be preferred.

This subordination of interests may take place if there has been a fraudulent non-disclosure by the insured or if the insured has breached a policy term the consequences of which are expressed to flow to defeat a s 48 claimant, subject to the application of s 54. However, the rights of an innocent mortgagee will not necessarily be subordinate to the rights of a fraudulent mortgagor. The relationship between, on the one hand, s 48 and, on the other hand, the common law extension provided by the High Court in Trident v McNiece, in dealing with claims by an innocent third-party claimant where there has been fraud by an insured, has yet to be determined. The NSW Court of Appeal in Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214 extended Trident v McNiece to attribute a duty of good faith and fair dealing to a life insurer in its dealings with a member of a superannuation fund who had the benefit of a policy effected by the fund’s trustee which provided total and permanent disablement cover for the benefit of members. Unlike the insurance in Trident v McNiece which involved direct payment, the group insurance policy covered the trustee with respect to payments made under the fund. Notwithstanding this, there was no relevant difference in principle in applying Trident v McNiece. Santow JA (with whom Spigelman CJ and Tobias JA agreed) said (at 86,627 (ANZ Ins Cas)): Here, indeed, while “the benefit to be provided for [the member]” does not involve a direct payment by the insurer to [the member] under the policy, any payment by the Trustee from the Fund to that employee is directly underpinned by, and dependent on it receiving payment under the policy … It is entirely in accord with the rationale for abandoning strict application of the privity doctrine in an insurance context to extend its application to a retirement or disability plan which is so underpinned … Indeed, insofar as the employee makes a contribution to the costs of insurance, the case is even stronger.

[48.40] Sections 48 and 17 There is a question as to whether the benefit of s 48 in providing a person who is not a party to a contract of general insurance with a right of recovery if that person is appropriately specified or referred to in the contract, applies to a person who has to rely upon the benefit of s 17 to overcome the absence of an insurable interest. Whilst it was unnecessary for him to decide the question, Teague J (Vic Sup Ct) noted that ss 17 and 48 form part of a remedial statute and that therefore in the absence of specific provisions excluding joint operation, he would not give them a limited operation. It seemed to him that the occasions where the two 382

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s 48

issues would arise together would be rare and that therefore the possibility that unfairness to the insurer would result must be extremely remote: Pacific Dunlop Ltd v Maxitherm Boilers Pty Ltd (1996) 9 ANZ Ins Cas 61-357.

Commonly commercial contracts entered into between principals and contractors contain insurance clauses requiring one of the parties (usually the contractor) to obtain insurance cover on behalf of the other. This can result in double insurance where the party requiring the other to obtain insurance cover on its behalf also holds its own insurance cover. The cover obtained because of the contractual promise may be as a third party beneficiary of cover under s 48. An insured is entitled to recover from any one or more of the insurers under s 76 until indemnified fully in respect of a loss. However, if there is an “other insurance” clause in one of two contracts of insurance the clause’s operation and whether or not it is void according to s 45 will depend on whether the entitlement under the other contract of insurance is as a party or as a claimant under s 48. The High Court considered the meaning of “entered into” in s 45 by comparing usage in other sections of the ICA: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; (2010) 16 ANZ Ins Cas 61-829; [2009] HCA 50. The High Court concluded that s 48 does not deem a claimant under that section to be a party to the contract of insurance with the rights of a party. Therefore a s 48 claimant or non-party was not a person who had “entered into” a contract of insurance within the meaning of s 45(1). French CJ, Gummow and Crennan JJ said (at 77,936 (ANZ Ins Cas)): 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).

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[48.50] Sections 48 and 45

s 48AA

Insurance Contracts Act 1984

[48.50]

48AA Life policy in connection with RSA for the benefit of third party beneficiary (1) This section applies in relation to a contract of life insurance if: (a) the contract is entered into in connection with an RSA; and (b) the owner of the policy is an RSA provider. [Subs (1) subst Act 75 of 2013, s 3 and Sch 6 item 9]

(1A) A third party beneficiary under the contract has a right to recover a benefit from the insurer in accordance with the contract even though the third party beneficiary is not a party to the contract. [Subs (1A) insrt Act 75 of 2013, s 3 and Sch 6 item 9]

(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 payment of a benefit. [Subs (2) am Act 75 of 2013, s 3 and Sch 6 items 10 and 11]

(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). [Subs (3) am Act 75 of 2013, s 3 and Sch 6 items 12 and 13] [S 48AA am Act 75 of 2013, s 3 and Sch 6 item 8; insrt Act 62 of 1997, s 3 and Sch 10 item 6]

Pre ICAA 2013 Amendment (pre 28 June 2014) 48AA Life policy in connection with an RSA for the benefit of another person (1) Where a person who is not a party to a contract of life insurance entered into in connection with an RSA, where the owner of the policy is an RSA provider, is specified or referred to in the contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends, that person has a right to recover a benefit from the insurer in accordance with the contract notwithstanding that he or she is not a party to the contract. (2) Subject to the contract, a person who has such a right: (a) has, in relation to his or her claim, the same obligations to the insurer as he or she would have if he or she were the insured; and (b) may discharge the insured’s obligations in relation to the payment of a benefit.

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(3) The insurer has the same defences to an action under this section as he or she would have in an action by the insured. [S 48AA insrt Act 62 of 1997, s 3 and Sch 10 item 6]

SECTION 48AA COMMENTARY Background and synopsis ....................................................................... Contract of life insurance ........................................................................ RSA ......................................................................................................... Third party beneficiary .............................................................................

[48AA.10] [48AA.20] [48AA.30] [48AA.40]

Section 48AA operates where a Retirement Savings Account (RSA) provider takes out a contract of life insurance for the benefit of RSA holders (referred to as group insurance). Thus, a RSA holder who is specified in the contract, has the right to recover a benefit from the insurer in accordance with the contract, even though they are not a party to that contract. The RSA holder has the same obligations to the insured as if the RSA holder was the insured and may discharge the insured’s obligations in relation to the payment of a benefit: s 48AA(2). The insurer has the defences to an action as it would have in an action by the insured: s 48AA(3): Explanatory Memorandum to the Retirement Savings Accounts (Consequential Amendments) Bill 1997 (Sen), cl 192–193. Section 48AA is worded similarly to s 48, except that it deals with a third party beneficiary under a contract of life insurance taken out by an RSA provider whereas s 48 deals with a third party beneficiary under a contract of general insurance. The Review Panel commisisoned by the Australian Government in September 2003 to review the ICA considered and recommended that a third party beneficiary claiming under s 48 (and by extension s 48AA) should be in no better position than the insured (see [48.10]). Section 48AA was amended by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2014. Amendments were made to s 48AA(1) and 48AA(2) to accord with a definition of “third party beneficiary” introduced into s 11(1) by the same Act. Section 48AA(3) was amended in accordance with the recommendation of the Review Panel (based on s 48(3)) to make it clear that a life insurer, faced with a claim by a third party beneficiary should be entitled to raise defences based on the conduct of the insured, regardless of the nature of the conduct or when the conduct occurred. The amendment, which added ©

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[48AA.10] Background and synopsis

s 48A

Insurance Contracts Act 1984

[48AA.10]

clarifying words to s 48AA(3), means that s 48AA claims made pursuant to contracts of life insurance entered into after 28 June 2014 (which is 12 months after the amending Act received Royal Assent) should not depend on the nature and timing of the conduct of the insured. The amendment also applies to a contract of life insurance that is varied by agreement (not automatically) after 28 June 2014 to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation.

[48AA.20] Contract of life insurance See s 11(1). See also [11.30].

[48AA.30] RSA See s 11(1).

[48AA.40] Third party beneficiary See s 11(1). See also [48.10.1] and [48.10.2]. The definition of “third party beneficiary” was inserted into s 11(1) by the Insurance Contracts Amendment Act 2013 and commenced on 28 June 2013. 48A Life policy for the benefit of third party beneficiary (1) The following paragraphs have effect in relation to a contract of life insurance to the extent that the contract is expressed to be for the benefit of a third party beneficiary (who may be the life insured): (a) the third party beneficiary has a right to recover from the insurer any money that becomes payable under the contract even though the third party beneficiary is not a party to the contract; (b) if the third party beneficiary is not the life insured, any money paid to the third party beneficiary under the contract does not form part of the estate of the life insured. [Subs (1) subst Act 75 of 2013, s 3 and Sch 6 item 16]

(1A) Paragraph (1)(a) has effect in relation to a contract of life insurance that is maintained for the purposes of a superannuation or retirement scheme, subject to: (a) the terms of the contract and the scheme; and (b) any other law; relating to the payment of money under the contract or the scheme. [Subs (1A) insrt Act 75 of 2013, s 3 and Sch 6 item 16]

(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

386

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s 48A

(b) may discharge the insured’s obligations in relation to the payment of any money to the third party beneficiary under the contract. [Subs (2) subst Act 75 of 2013, s 3 and Sch 6 item 16]

(3) Nothing in this section restricts the capacity of a person to exercise any right or power under a contract of life insurance to which the person is a party. In particular, nothing in this section restricts the capacity of a person: (a) to surrender a contract of life insurance to which the person is a party; or (b) to borrow money on the security of a contract of life insurance; or (c) to obtain a variation of a contract of life insurance, including a variation having the result that the contract ceases to be a contract to which this section applies. ICA ss 34-55A

[S 48A am Act 75 of 2013, s 3 and Sch 6 item 15; insrt Act 5 of 1995, s 4 and Sch item 47]

Pre ICAA 2013 Amendment (pre 28 June 2014) 48A Life policy for the benefit of another person (1) This section applies to a contract of life insurance effected on the life of a person but expressed to be for the benefit of another person specified in the contract (the third party). (2) The following provisions have effect in relation to a contract to which this section applies: (a) any money that becomes payable under the contract is payable to the third party, even though he or she is not a party to the contract; (b) money paid under the contract does not form part of the estate of the person whose life is insured. (3) Nothing in this section restricts the capacity of a person to exercise any right or power under a contract of life insurance to which the person is a party. In particular, nothing in this section restricts the capacity of a person: (a) to surrender a contract of life insurance to which the person is a party; or (b) to borrow money on the security of a contract of life insurance; or (c) to obtain a variation of a contract of life insurance, including a variation having the result that the contract ceases to be a contract to which this section applies. [S 48A insrt Act 5 of 1995, s 4 and Sch item 47]

SECTION 48A COMMENTARY Background and synopsis .......................................................................

[48A.20]

Third party beneficiary .............................................................................

[48A.30]

Contract of life insurance ........................................................................

[48A.40]

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s 48A

Insurance Contracts Act 1984

[48A.20]

[48A.20] Background and synopsis Section 48A relates to policies effected by persons on their own life for the benefit of a third party, and protects the moneys payable under the policy to the third party: Supplementary Explanatory Memorandum to the Life Insurance (Consequential Amendments and Repeals) Bill 1994 (H of R) cl 13. Prior to amendment in 2013, because s 48A related to policies effected by persons on their own life, it had no application where policies were effected by another, such as a superannuation fund trustee for the benefit of members: Hannover Life Re of Australasia Ltd v Sayseng (2005) 13 ANZ Ins Cas 90-123; [2005] NSWCA 214. The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that s 48A be amended to make it clear that a third party beneficiary can bring an action against a life insurer without the intervention of the policy owner. The Review Panel also recommended that s 48A be amended so that the life insured can be nominated as a third party beneficiary and to provide that a third party beneficiary can give a valid discharge to the insurer (see Final Report (June 2004), at [10.17]–[10.22]). Section 48A was amended by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2014. According to the Explanatory Memorandum to ICAB 2013 (at [1.149]), refinements were made to s 48A(1) and 48A(2) to: • allow for circumstances in which a person whose life is insured under a contract of life insurance may be a third party beneficiary; • ensure that a third party beneficiary who has a claim over money payable under the contract of life insurance may bring an action against the insurer in respect of the claim without the intervention of the policyholder; and • ensure that the third party beneficiary is capable of giving a valid discharge to the insurer in relation to the insurer’s obligations in respect of the claim. A new s 48A(1A) has been inserted to provide that for contracts of life insurance maintained for the purposes of a superannuation or retirement scheme, the payment of money is subject to the terms of the contract and scheme and any other relevant laws. The amendments to s 48A apply to a contract of life insurance originally entered into after 28 June 2014 (which is 12 months after the Insurance Contracts Amendment Act 2013 received Royal Assent). The amendments also apply to a contract of life insurance that is varied by agreement (not automatically) after that date to increase a sum insured or provide an additional kind of insurance cover to the extent of the variation. 388

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s 49

[48A.30] Third party beneficiary See s 11(1). See also [48.10.1] and [48.10.2]. The definition of “third party beneficiary” was inserted into s 11(1) by the Insurance Contracts Amendment Act 2013 and commenced on 28 June 2013.

[48A.40] Contract of life insurance See s 11(1). See also [11.30]. Where sum insured exceeds value of insured’s interest

(1) This section applies where: (a) a loss occurs in respect of property that is the subject-matter of a contract of general insurance; and (b) the insured and some other person each have an interest in the property; but does not apply where: (c) the contract of insurance does not provide insurance cover in respect of an interest in the property that is not the insured’s interest; and (d) 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. (2) A reference in this section to the amount of the insurer’s notional liability is a reference to the amount for which the insurer would have been liable to the insured in respect of the particular claim if the insured had been the only person who had an interest in the property. [Subs (2) am Act 168 of 1986, s 3 and Sch 1]

(3) Where: (a) the amount of the insurer’s notional liability exceeds the amount of the insurer’s liability to the insured in respect of the loss; and (b) within 3 months after the day on which the loss occurred, a person who is not the insured but has an interest in the property gives to the insurer a notice in writing informing the insurer of the person’s interest; the insurer is liable, at the expiration of that period, to pay to that person an amount equal to the amount by which the amount of the insurer’s notional liability exceeds the amount of the insured’s loss. [Subs (3) am Act 107 of 1997, s 3 and Sch 8 items 21 and 22]

(4) Where 2 or more persons have served notices under this section, the amount ascertained under subsection (3) shall be divided between them in proportion to the values of their interests in the property. (5) Nothing in subsection (3) renders the insurer liable to pay to a person an amount exceeding the amount of the loss suffered by that person.

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49

s 49

Insurance Contracts Act 1984

[49.20]

(6) Where: (a) the amount of the insurer’s notional liability exceeds the amount of the liability to the insured in respect of the loss; (b) the insurer has paid to the insured the amount of the notional liability; and (c) the insurer did not know, and could not reasonably be expected to have known, that a person other than the insured had an interest in the property; subsection (3) does not apply, but a person who is not the insured may recover from the insured an amount that bears to the amount of the notional liability the same proportion as the value of that person’s interests in the property bears to the total value of all persons’ interests in the property. [Subs (6) insrt Act 168 of 1986, s 3 and Sch 1] [S 49 am Act 107 of 1997; Act 168 of 1986]

SECTION 49 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. Protection of interests and a contractual requirement for insurance ......

[49.20] [49.30] [49.40]

[49.20] Background and synopsis Prior to the ICA, where both an insured and a third party had an interest in the insured property, the extent of recovery by the insured may have been limited according to the indemnity principle. Further, due to the doctrine of privity of contract, insurers were not obliged to satisfy the claims of third parties who were not parties to the contract of insurance, notwithstanding that they may have had a legitimate interest in the insured property. The resultant problems perceived by the ALRC were best exemplified by the decision of the High Court in British Traders’ Insurance Co Ltd v Monson (1964) 111 CLR 86; 38 ALJR 20. A tenant of insured property had insured it for its full value. The owners of the property had cancelled their own insurance policy, effected with the same insurer, on the faith of the tenant’s policy. The High Court found that, by insuring the premises, the tenant had no intention to benefit the lessor. The ALRC noted that as a result, the insurer, which had presumably accepted premiums based on the full value of the property, was able to avoid liability for its destruction notwithstanding its promise to the contrary. The ALRC noted that an insurer is readily able to limit its liability by indicating in the contract of insurance the nature of the interest which it is insuring. It recommended that in the absence of clear limitations specifically bought to the attention of the insured, the insurer should be required to fully indemnify. Further, it should be required to pay any 390

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amount in excess of the insured’s own loss to any person who has an interest in the property and makes a claim on the insurer within a specified period. The ALRC noted that the insurer should be entitled to exercise against other interested parties any rights which it had, or would have had, against the insured. As an example it mentioned the right to refuse to pay a fraudulent claim: ALRC 20, at [125]–[LR.20.127].

The insurer’s notional liability is defined as the amount for which the insurer would have been liable to the insured for the claim if the insured had been the only person who had an interest in the property: s 49(2). According to the Explanatory Memorandum, (at [162]) the insurer will be required to pay the insured an amount to cover the insured’s loss in the first instance. This does not appear as an express requirement in s 49 and is a matter that will no doubt be subject to further clarification. Where the notional liability exceeds the amount of the liability to the insured for the loss, the insurer is required to satisfy proportionally the claims of third parties who notify the insurer of their interests within three months of the date the loss occurred: s 49(3) and (4). A person cannot recover more than her or his loss: s 49(5). In the case where an insurer’s notional liability exceeds the amount of the liability to the insured and the insured has been paid and the insurer did not know, and could not reasonably be expected to have known that another person had an interest in the property, then s 49(3) does not apply. But such a person may recover from the insured any amount that bears to the amount of the notional liability the same proportion as the value of that person’s interests in the property bears to the total value of all persons’ interests in the property: Explanatory Memorandum, at [162]–[163]. The Notes to the Draft Insurance Contracts Bill 1982 contained the following example as to the operation of s 49: (1) A house is owned by A and leased to B. The value of B’s interest is $10,000. The house is insured by B for $50,000 – its full insurable value. The house is destroyed by fire. B’s claim is limited (by the indemnity principle) to $10,000. A, however, may claim $50,000 – $10,000 = $40,000. (2) If the fire was a result of A’s arson, then A would be entitled to nothing from the insurer [see s 56]. ©

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Section 49 applies where a loss has occurred in respect of a property that is the subject matter of a contract of general insurance and both the insured and a third party have an interest in that property. Section 49 applies in the absence of any clear provision notified in writing to the insured, excluding liability for any interest other than the insured’s: s 49(1).

s 50

Insurance Contracts Act 1984

[49.20]

[49.30] Contract of general insurance See s 11(6).

[49.40] Protection of interests and a contractual requirement for insurance A builder of a boat failed to have the purchasers named under an insurance policy which insured the works according to a contractual requirement. The purchasers could not rely upon the breach of the contractual requirement as a basis for repudiation of the contract because s 49 was available to protect their interests: Werenfridus v Bincrest Pty Ltd (unreported, Qld Sup Ct, Cullinane J, 1 July 1993). 50

Sale of insured property

(1) Where: (a) a person (in this section called the purchaser) agrees to purchase, or to take an assignment of, property and in consequence the purchaser has, or will have, a right to occupy or use a building; (b) the building is the subject-matter of a contract of general insurance to which the vendor or assignor under the agreement is a party; and (c) the risk in respect of loss of or damage to the building has passed to the purchaser; the purchaser shall be deemed to be an insured under the contract of insurance, so far as the contract provides insurance cover in respect of loss of or damage to the building and such of the contents of the building as are being sold or assigned to the purchaser at the same time, during the period commencing on the day on which the risk so passed and ending at whichever of the following times is the earliest: (d) the time when the sale or assignment is completed; (e) the time when the purchaser enters into possession of the building; (f) the time when insurance cover under a contract of insurance effected by the purchaser in respect of the building commences; (g) the time when the sale or assignment is terminated. (2) A reference in this section to a building includes a reference to a part of a building and also includes a reference to a structure.

SECTION 50 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance .................................................................

[50.10] [50.20]

Risk has passed to the purchaser New South Wales .................................................................................... 392

[50.30.1]

Mann’s Annotated Insurance Contracts Act

[50.10]

Pt V – Div 2 – Insurance contracts – general provisions

Generally ................................................................................................. Rights of subrogation ..............................................................................

s 50 [50.30.2] [50.40]

[50.10] Background and synopsis

Prior to the ICA legislation, various States attempted to deal with this problem in different ways. One way was to impose on the vendor a duty to account to the purchaser for moneys paid by an insurer for a claim for damage to, or destruction of, the property subject to the contract of sale. However, the legislation in Victoria, for example, was not without problems: Ziel Nominees Pty Ltd v VACC Insurance Co Ltd (1975) 180 CLR 173; 50 ALJR 106; 7 ALR 667 (High Court). Further, for a discussion on the various provisions of the Property Law Act 1974 (Qld) see Kern Corporation Ltd v Walter Reid Trading Pty Ltd (1987) 163 CLR 164; 61 ALJR 319; 4 ANZ Ins Cas 60-790 (High Court). The ALRC recommended that a purchaser should receive the benefit of the vendor’s insurance for any loss occurring before completion or prior to entry into occupation. The ALRC noted that the insurer would be forced to insure purchasers without being able to assess the “moral risk”. There may be a demonstration of a lack of reasonable care with respect to the maintenance of property or alternatively there may be a serious possibility of arson. The ALRC expressed the view that these concerns would be minimised if a purchaser were to be given the benefit of the vendor’s insurance from the contract of sale until completion or entry into possession. The ALRC recommended that after the purchaser effected insurance cover there would be no entitlement to the benefit of the vendor’s insurance: ALRC 20, at [130]–[132]. Section 50 means a purchaser or person taking an assignment of a building, to whom the risk for loss or damage has passed, will be deemed to be the insured under any contract of general insurance taken out by the vendor or assignor in relation to that building and any contents being sold, from the date the risk passed until (whichever is the earliest): (a) completion of the contract; (b) the purchaser enters into possession; (c) the purchaser effects insurance and cover commences; (d) the sale or assignment is terminated (Explanatory Memorandum, at [166]). ©

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If improvements on land subject to an enforceable contract of sale are damaged or destroyed prior to settlement, the purchaser, in the absence of an agreement to the contrary, usually remains bound to pay the full purchase price. Accordingly, a purchaser should obtain her or his own insurance upon entering into a contract of sale. At common law, the purchaser obtains no right to benefit from the vendor’s insurance.

s 50

Insurance Contracts Act 1984

[50.10]

[50.20] Contract of general insurance See s 11(6).

Risk has passed to the purchaser [50.30.1] New South Wales Bryson J (NSW Sup Ct) noted in State Bank of New South Wales Ltd v Stephenson (1996) 124 FLR 434; 9 ANZ Ins Cas 61-306 that the enactment in New South Wales of Div 7 of the Conveyancing Act 1919 (NSW) had the effect of taking away from purchasers their position as deemed insured under a contract of insurance made by the vendor under s 50(1). He said (at 76,431 (ANZ Ins Cas)): [T]his is a result of s 66 of the Conveyancing Act postponing the passing of risk and para (1)(c) of s 50 of the Insurance Contracts Act creating deemed insurance where “the risk in respect of loss of or damage to the building has passed to the purchaser.” The result of these fast-succeeding law reforms is that once again only the vendor has the benefit of its insurance.

On appeal, Sheller JA confirmed that effectively s 66K(1) of the Conveyancing Act 1919 denies purchasers the benefit under s 50: Stephenson v State Bank of New South Wales (1996) 39 NSWLR 101; 9 ANZ Ins Cas 61-314.

[50.30.2] Generally In a matter involving fire damage to a building in between the exchange of a contract of sale and settlement, it was argued by the purchaser that the vendor/insured had agreed to transfer the policy of insurance to the purchaser. It was submitted by the purchaser that, due to the operation of s 50, the purchaser was temporarily (from the date of the contract of sale until settlement) a party to the policy. This submission was rejected by Carr J (Fed Ct WA District) because under the terms of the contract of sale risk did not pass to the purchaser until settlement and it was common ground that the purchaser was not entitled to possession prior to settlement. Therefore the risk in respect of loss or damage to the relevant building had not passed to the purchaser as required by s 50(1)(c): Cusmano v Pinner (1998) 157 ALR 61.

[50.40] Rights of subrogation In a matter where the purchasers had not sued the insurer of the vendor as a deemed party to the contract of insurance, Young J (NSW Sup Ct) speculated that the only effect on the result of the case that s 50 may bring 394

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s 51

about was to prevent the insurer asserting its rights of subrogation to compel the vendor to take action against the purchaser for the full purchase price. However, as the purchase price had abated under s 66M of the Conveyancing Act 1919 (NSW) it did not seem to him that this would have much effect: Lukies v Ripley (1994) 6 BPR 13,471; [1994] NSW ConvR 55-707.

(1) 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 inquiry, 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. [Subs (1) subst Act 75 of 2013, s 3 and Sch 6 item 19]

(2) A payment, (a) (b)

payment under subsection (1) is a discharge, to the extent of the in respect of: the insurer’s liability under the contract; and the liability of the insured or third party beneficiary, or the legal personal representative of the insured or third party beneficiary, to the other person.

[Subs (2) am Act 75 of 2013, s 3 and Sch 6 item 20; Act 107 of 1997, s 3 and Sch 8 item 23]

(3) This section does not affect any right that the other person has in respect of the liability of the insured or third party beneficiary, being a right under some other law of the Commonwealth or under a law of a State or Territory. [Subs (3) am Act 75 of 2013, s 3 and Sch 6 item 21] [S 51 am Act 75 of 2013, s 3 and Sch 6 item 18; Act 107 of 1997]

Pre ICAA 2013 Amendment (pre 28 June 2014) 51

Right of third party to recover against insurer

(1) Where: (a) the insured under a contract of liability insurance is liable in damages to a person (in this section called the third party); (b) the insured has died or cannot, after reasonable enquiry, be found; and (c) the contract provides insurance cover in respect of the liability; the third party may recover from the insurer an amount equal to the insurer’s liability under the contract in respect of the insured’s liability in damages. ©

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51 Claims against insurer in respect of liability of insured or third party beneficiary

s 51

Insurance Contracts Act 1984

[51.10]

(2) A payment under subsection (1) is a discharge, to the extent of the payment, in respect of: (a) the insurer’s liability under the contract; and (b) the liability of the insured or of the insured’s legal personal representative to the third party. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 23]

(3) This section does not affect any right that the third party has in respect of the insured’s liability, being a right under some other law of the Commonwealth or under a law of a State or Territory. [S 51 am Act 107 of 1997]

SECTION 51 COMMENTARY Background and synopsis ....................................................................... The insured – Pre 28 June 2014 ............................................................ Third party beneficiary ............................................................................. Contract of liability insurance .................................................................. Liable in damages: s 51(1)(a) ................................................................. Damages: s 51(1) .................................................................................... Or cannot … be found: s 51(1)(b) – Post 28 June 2014: s 51(1)(c) ...... The contract provides insurance cover: s 51(1)(c) – Post 28 June 2014: s 51(1)(b) ............................................................................................

[51.10] [51.15] [51.17] [51.20] [51.30] [51.40] [51.50] [51.60]

[51.10] Background and synopsis The ALRC noted that the fact that an insurer under a third-party liability policy usually takes over the conduct of a claim might suggest that a third party should be entitled to bring a claim directly against an insurer in all cases. However, bearing in mind the problems being addressed and the need for insurers to have the co-operation of the insured in defending third-party claims, the ALRC concluded that justice would be best achieved if a third party had a right to proceed directly against an insurer where the insured was dead or could not be found despite reasonable inquiry. This “direct recourse” or “direct access” principle is found in compulsory third-party insurance in most jurisdictions. In New South Wales an application of the “direct access” principle is to be found in s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). Importantly the ALRC noted (at [LR.20.340]): The insurer should be entitled to rely on all the insured’s defences, together with any it would have had if an action had been brought against it by the insured in respect of the third party claim.

The ALRC also noted that the recommendations would not affect a third party’s right to bring an action against the insured: ALRC 20, at [340]. In the Explanatory Memorandum the rationale of s 51 was as follows (at 396

Mann’s Annotated Insurance Contracts Act

[51.10]

Pt V – Div 2 – Insurance contracts – general provisions

s 51

[170]):

Section 51 specifies that third parties (as defined) have the right to proceed directly against the insurer in all types of liability insurance, in the event that the insured has died or cannot be found after reasonable inquiry. The insurer is liable to the extent that it would have been liable to the insured: s 51(1). Payment by the insurer to the third party discharges its liability under the contract as well as the insured’s liability to the third party to the extent of the payment: s 51(2). Any other rights which the third party may have are unaffected by s 51: s 51(3). The Review Panel commissioned by the Australian Government in September 2003 to review the ICA made various recommendations for the revision of s 51 to ensure its interaction with related provisions in other legislation (see Final Report (June 2004), at [10.23]–[10.28]). However, the only recommendation that resulted in an amendment to s 51 was the recommendation to address the situation where a third party beneficiary is liable and has died or cannot after reasonable enquiry be found. Section 51 was amended by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2014. Amendments were made to s 51(1), 51(2) and 51(3) to expand direct access under the section to cover not only the liability of an insured but also the liability of a third party beneficiary who has died or cannot after reasonable enquiry be found. The amendment applies to a contract of liability insurance entered into or renewed after 28 June 2014 (which is 12 months after the amending Act received Royal Assent). Importantly, a direct access claim cannot be made in relation to the liability of a third party beneficiary who has cover under a contract of liability insurance and who has died or cannot after reasonable enquiry be found if the contract was not entered into or renewed after 28 June 2014 (see [51.15]). ©

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Rationale – As the law stands, the third party may be faced with a number of difficulties in pursuing his claim against an insured. For example, he may, in the case of a deceased insured, need to bring initial proceedings to appoint a guardian ad litem. The third party’s rights may well be defeated where an insurer insists that the third party pursue his claim against an absent insured on the basis that it should not be required to conduct a defence of an action in the absence of the insured. While the insurer is clearly in an unfortunate position in the absence of the insured, the third party should be able to claim directly from the insurer which has accepted premiums to cover the loss concerned. Any prejudice the insurer suffers is outweighed by the loss the innocent third party would otherwise suffer. (ALRC para 340).

s 51

Insurance Contracts Act 1984

[51.10]

[51.15] The insured – Pre 28 June 2014 Before the amendment to s 51 by the Insurance Contracts Amendment Act 2013 to include the liability of a third party beneficiary, the section was restricted to the liability of an insured. This is because the noun “insured” in s 51 refers to a party to a contract of insurance and does not include another person to whom the insurance cover provided by the contract extends. In other words, before the expansion of s 51 to cover the liability of a third party beneficiary, a claimant proceeding against a third party beneficiary with an entitlement to cover under s 48 had no right to recover against the insurer under s 51. Prior to the amendment to s 51 by the Insurance Contracts Amendment Act 2013 it was therefore important to determine whether the third party claim was against an insured or a third party beneficiary. If the claim was against a third party beneficiary and the contract of liability insurance was not entered into or renewed after 28 June 2014, then s 51 had no application. Blow J (Tas Sup Ct) considered the effect of a consent judgment for dismissal of concurrent proceedings brought by the relatives of a passenger killed when a light aircraft crashed. Relying on s 51, the relatives had commenced proceedings directly against the insurer even though the pilot allegedly at fault was not the insured and was, at best, a s 48 claimant under the policy. Because of this, the dismissal of the proceedings did not provide relief in other proceedings: Ripper v Gatenby (2002) 10 Tas R 435; 12 ANZ Ins Cas 61-532; [2002] TASSC 45. Blow J said (at [22]): The meaning of s 51 is not affected by the non-exhaustive definition of the noun “insured” in s 11 (“insured and insurer include a proposed insured and a proposed insurer, respectively”). The noun “insured” does not ordinarily refer to a person who is covered by someone else’s insurance policy. There is nothing in the Insurance Contracts Act, nor in the report of the Australian Law Reform Commission that gave rise to it, to suggest that a wider meaning of the work was intended in s 51. I therefore conclude that the noun “insured” in s 51 refers only to a party to a contract of insurance, and does not include another person to whom the insurance cover provided by the contract extends.

Hulme J (NSW Sup Ct) in Aspioti v Leigh [2003] NSWSC 1224 also expressed the view that the “insured” within s 51 did not encompass s 48 claimants. Hulme J said (at [35]): In light of the distinction made in s 48 between the “insured” and a third party entitled to cover under a policy, and against the background of the existing legislation in s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) and similar legislation in the Australian Capital Territory, it is not possible to regard the references to “insured” in s 51 as intended to encompass third parties to whom cover is expressed to extend. 398

Mann’s Annotated Insurance Contracts Act

[51.30]

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s 51

In a separate matter, Bergin J (NSW Sup Ct) held that directors covered under a directors and officers liability policy were “insured” within the meaning of that expression in s 51, and it was therefore unnecessary to consider submissions based on a contention that they were third party beneficiaries of cover: Green v CGU Insurance Ltd (2005) 215 ALR 612; 13 ANZ Ins Cas 61-650; [2005] NSWSC 254.

[51.17] Third party beneficiary See s 11(1). See also [48.10.1] and [48.10.2]. The definition of “third party beneficiary” was inserted into s 11(1) by the Insurance Contracts Amendment Act 2013 and commenced on 28 June 2013.

[51.20] Contract of liability insurance See s 11(7). See also [11.70].

[51.30] Liable in damages: s 51(1)(a) Perhaps surprisingly, given the nature of s 51, a question has arisen as to whether the words “liable in damages” in s 51(1)(a) require, as a matter of construction, a third party to determine, either by way of judgment or settlement, liability against the insured before instituting proceedings against the insurer. Although the issue is not completely settled, there is persuasive authority to the effect that s s 51(1)(a) does not require a third party to determine either by way of judgment or settlement, liability against the insured before instituting proceedings against the insurer. Gillard J (Vic Sup Ct), in an application for joinder, proceeded on an assumption that the cause of action did not accrue to the third party against the insurer until liability was established against the insured (at the same time not accepting the correctness of the assumption): Tatterson v Wirtanen (unreported, Vic Sup Ct, Gillard J, 30 September 1998). However, Gillard J allowed the joinder of the insurer to the proceedings because of the ability of the third party to claim declaratory relief, even when there is no cause of action. Beach J (Vic Sup Ct) in Vollstedt v Calibre Enterprises Pty Ltd (1999) 10 ANZ Ins Cas 61-440 noted that it is implicit in s 51 that any proceedings instituted by the third party against the insurer will be instituted before ©

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In Morris v Betcke (2005) 13 ANZ Ins Cas 61-665; [2005] NSWCA 308, the NSW Court of Appeal (Hoeben J with whom Beazley and Giles JJA agreed) considered earlier cases and the contract of insurance, leaving open as a triable issue the question of whether the pilot of a crashed light aircraft was an “insured” within s 51.

s 51

Insurance Contracts Act 1984

[51.30]

any liability of the insured has been determined. If an insured cannot be found, how can proceedings be served and then determined? However, apart from the words “liable in damages” in s 51(1)(a), a contract of insurance may contain terms in relation to the relevant question of liability. For instance, the indemnity which is alleged to constitute a contract of insurance may be expressed to operate only on judgment. The Full Court of the Supreme Court of Western Australia (comprising Kennedy, Pidgeon and Steytler JJ) considered a car rental agreement which contained an indemnity which operated on a court judgment against the renter: Bayswater Car Rental Pty Ltd v Hannell (1999) 29 MVR 35; 10 ANZ Ins Cas 61-437; [1999] WASCA 34. In the absence of a court judgment, Pidgeon J, with whom Steytler J agreed, held that s 51 was not intended and could not alter the terms of the contract between the parties, providing they were not contracting out of the section. The parties had not contracted out of s 51. The third party had no rights against the car rental company. If the relevant clause of the car rental agreement was a contract of insurance, and if there had been a court judgment, then s 51 would operate to allow the third party to proceed against the car rental company. The WA Court of Appeal found, in an appeal against summary judgment, that it was arguable that s 51 does not require a third party to determine either by way of judgment or settlement, liability against the insured before instituting proceedings in Webb v Estate of Darryl Arthur Herbert C/The Public Trustee (2006) 31 WAR 492; [2006] WASCA 43 (20 March 2006). In finding that it was arguable Wheeler JA, with whom Pullin and Buss JJA agreed, said (at [13]): In the present case, the issue under the Act appears to be whether the words “is liable” have the effect of meaning “is determined by a Court to be liable”, or perhaps “has an enforceable liability”, as opposed to meaning “has been responsible for an act or omission which gives rise to liability”. It seems to me that it is difficult to say that it is not arguable that the section proceeds from a view that a liability for negligent behaviour arises at the time of the accident, when the negligence and damage coincide (see for example, Post Offıce v Norwich Union Fire Insurance Society Ltd [1967] 2 QB 363 at 373 per Lord Denning MR). A view of that kind is supported by the relevant extrinsic materials, and by what judicial consideration there has been of s 51 and of arguably similar provisions.

In noting the expressed rationale in the Explanatory Memorandum (see [51.10]), it seemed to Wheeler JA that the Parliament contemplated that the action which the third party might be able to pursue in the absence of the insured would be an action in which the liability of the insured to the third party would be a live issue. Otherwise, it is difficult to see any other reason for the references to the unfortunate position of the insurer in defending an action in the absence of the insured. She noted the reasoning of Beach J in Vollstedt which appeared to stem from a “purposive” 400

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s 51

Le Miere J (WA Sup Ct) found, on an obiter basis, that s 51(1)(a) does not require a third party to determine either by way of judgment or settlement, liability against the insured before instituting proceedings against the insurer: The Hancock Memorial Foundation Ltd v Fieldhouse (No 5) [2013] WASC 121. He noted that the section is a remedial provision and should be given a purposive construction. Le Miere J also noted the point made by counsel in Vollstedt which Beach J had found arguable as supporting the construction. The point being that it is implicit that any proceeding by a third party against the insurer will be brought before the insured’s liability to the third party is determined. This must follow from the fact that the third party has the right to recover from the insurer not only where the insured has died but where after reasonable enquiry the insured cannot be found. If the insured cannot be found, how can the insured be served with proceedings and liability to the third party be determined? Le Miere J’s finding that s 51(1)(a) does not require a third party to determine either by way of judgment or settlement, liability against the insured before instituting proceedings against the insurer was not challenged on appeal to the WA Court of Appeal: The Hancock Family Memorial Foundation Ltd v Lowe [2015] WASCA 38 (5 March 2015). The Full Court of the Supreme Court of Tasmania explained the similarities and differences in wording between s 51 and s 601AG of the Corporations Act 2001 (Cth) and noted that in Webb the WA Court of Appeal accepted that the purposive approach to s 601AG supported the argument that under s 51 an established liability against the insured at the time of the relevant event was not a precondition of liability in Allianz Australia Insurance Ltd v Mercer (2014) 18 ANZ Ins Cas 62-016; [2014] TASFC 3 (9 May 2014). Porter J, with whom Tennent J and Wood J agreed, said (at [142]–[143]): In relation to Wheeler JA’s observations that similar concepts are involved in s 601AG and s 51 of the Insurance Contracts Act, the difference in the tenses used in those provisions may well be explained on the basis that s 51 also ©

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construction of s 51(1). Wheeler JA also considered the purposive construction of s 601AG of the Corporations Act 2001 (Cth), which concerns claims against insurers of deregistered companies, taken in two earlier cases. Section 601AG deals with similar concepts to but is differently worded to s 51(1). The similarity would support a purposive construction to s 51(1). As to Bayswater, Wheeler JA noted that there may be some basis for a submission, at an appropriate time, that a portion of the reasons in the decision should be reconsidered, if not distinguished. In accepting that summary judgment should not be entered, she also accepted that the effect of s 51(1) in the circumstances was a question of some complexity, in relation to which there was limited authority and in relation to which such authority as there was did not appear to be all one way.

s 51

Insurance Contracts Act 1984

[51.30]

covers the situation where an insured person is alive but cannot, after reasonable inquiry, be found. Otherwise the two provisions deal with the liability of persons of whom it is appropriate to speak in the past tense; a deregistered company in the case of s 601AG, and a person who has died in the case of s 51 of the ICA. In Webb, the Court accepted that the purposive approach taken to s 601AG supported the argument that the effect of s 51 was to enable the plaintiff to pursue the cause of action directly against the insurer, and that an established liability against the insured at the time of the relevant event was not a precondition of liability.

[51.40] Damages: s 51(1) Beach J (Vic Sup Ct) considered a submission that the word “damages” can only mean liability in damages for a wrong which is either a tort or a breach of contract and that the third parties could not succeed under s 51 because at most they had a claim for contribution: Vollstedt v Calibre Enterprises Pty Ltd (1999) 10 ANZ Ins Cas 61-440. In refusing a summary judgment application, Beach J held it “arguable” that the word “damages” where used in s 51(1) was to be given a wider interpretation.

[51.50] Or cannot … be found: s 51(1)(b) – Post 28 June 2014: s 51(1)(c) Olsson J (SA Sup Ct) held that the words “cannot … be found” in s 51(1)(b) extended to the deregistration of a corporate insured in Norsworthy v SGIC [1999] SASC 496. Olsson J took into account that the relevant text of s 51 had been written against the background that policies of insurance are frequently issued to both natural persons and corporate bodies. He also took into account the remedial nature of the legislation. Given the obvious intention of s 51 to empower a party having a valid claim against an insured to recover directly from the insurer when the insured no longer exists, he considered it appropriate, on normal canons of statutory construction, to give s 51 a liberal construction. He said (at [61]): The concepts of death and inability to find are clearly disjunctive. I see no compelling reason to restrict the phrase “cannot … be found” to human beings and to exclude corporations. To do so would be to substantially emasculate the obvious concept of what is intended to be a remedial statute in a very arbitrary, illogical and unjust manner. There is simply no reason to suppose that the legislature had such an end result in mind. Just as a person can disappear and not be found, so also can a corporation vanish by reason of deregistration; and thus not be found. In my view s 51(1)(b) is capable of extending to a factual scenario such as the deregistration of a corporation, so that it has ceased to exist. 402

Mann’s Annotated Insurance Contracts Act

[51.60]

Pt V – Div 2 – Insurance contracts – general provisions

s 52

This liberal construction of s 51(1)(b) may not have great practical application because recovery from the insurer of a deregistered company is covered by s 601AG of the Corporations Act 2001.

[51.60] The contract provides insurance cover: s 51(1)(c) – Post 28 June 2014: s 51(1)(b)

Garling J (NSW Sup Ct) noted that the phrase “the liability” used in s 51(1)(c) is referrable to the words used in s 51(1)(a), namely, that the insured “… is liable in damages to [a] third party”: Rail Corporation NSW v Vero Insurance Ltd [2012] NSWSC 632. The application of broad exclusions in Xerri v Kingmill Pty Ltd (1998) 28 MVR 569 meant that a deceased insured’s contract of liability insurance did not provide insurance cover in respect of the deceased’s liability towards the third party. Mason P (NSW Sup Ct CA), with whom Handley and Sheller JJA agreed, was critical of the insurance cover provided under a car rental agreement. Nevertheless, he declined to ignore the broad exclusions on the basis that the stringency of an exclusion was not a reason to ignore it and the third party was in no way subrogated to the rights (if any) of the deceased against the rental company stemming from any representation as to cover wider than that which was actually implicit in the car rental agreement. 52

“Contracting out” prohibited

(1) Where a provision of a contract of insurance (including a provision that is not set out in the contract but is incorporated in the contract by another provision of the contract) purports to exclude, restrict or modify, or would, but for this subsection, have the effect of excluding, restricting or modifying, to the prejudice of a person other than the insurer, the operation of this Act, the provision is void. (2) Subsection (1) does not apply to or in relation to a provision the inclusion of which in the contract is expressly authorized by this Act.

SECTION 52 COMMENTARY Synopsis ..................................................................................................

[52.10]

A provision of a contract of insurance: s 52(1) .......................................

[52.20]

... the operation of this Act: s 52(1) .........................................................

[52.30]

Applications .............................................................................................

[52.40]

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For the third party to recover from the insurer under s 51 the contract of liability insurance must provide insurance cover in respect of “the liability”.

s 52

Insurance Contracts Act 1984

[52.10]

[52.10] Synopsis The operation of the ICA cannot be excluded, restricted or modified to the prejudice of a person other than the insurer by a provision of a contract of insurance. This includes a provision that is not set out in the contract but is incorporated in the contract by another provision. Any provision purporting to have this effect is void: s 52(1). The section does not affect provisions which are expressly authorised by the ICA to be included, for example, ss 62 and 52(2).

[52.20] A provision of a contract of insurance: s 52(1) A provision in an arbitration agreement made after a dispute has arisen is not to be regarded as a provision in a contract of insurance under s 10(3) and therefore does not exclude, restrict or modify the ICA within the terms of s 52: Hadchiti v NRMA Insurance Ltd (unreported, NSW Sup Ct, Giles J, 7 February 1992). A provision in a contract of insurance specifying the forum for disputes was found by a majority of the High Court in Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418; 71 ALJR 156; 9 ANZ Ins Cas 61-347 (Toohey, Gaudron and Gummow JJ; Dawson and McHugh JJ dissenting) to be rendered void through the operation of s 52(1).

[52.30] ... the operation of this Act: s 52(1) The phrase “the operation of this Act” was held by the High Court (Toohey, Gaudron and Gummow JJ; Dawson and McHugh JJ dissenting) to include the operation, to the advantage of the insured, of s 54: Akai Pty Ltd v People’s Insurance Co Ltd (1996) 188 CLR 418; 71 ALJR 156; 9 ANZ Ins Cas 61-347. In Akai an insurer under a contract of insurance which provided indemnity for certain credit risks applied for a stay of proceedings in New South Wales pending final determination of proceedings brought in England. It did so on the basis of general provision 9 of the policy which stated: This policy shall be governed by the laws of England. Any dispute arising from this policy shall be referred to the Courts of England.

At first instance, O’Keefe C J Comm D (NSW Sup Ct) granted a stay of the proceedings in New South Wales. The Court of Appeal (Sheller and Meagher JJA, Kirby P dissenting) dismissed the appeal from his decision: Akai Pty Ltd v People’s Insurance Co Ltd (1995) 126 FLR 204; 8 ANZ Ins Cas 61-254. The High Court, by a majority, allowed the appeal setting aside the order for a stay of proceedings in New South Wales. The 404

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[52.40]

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s 52

The majority found that it was unnecessary to decide the case solely upon the basis of s 8 and found prejudice within the meaning of s 52. The insured relied upon s 54 to respond to the denial of liability by the insurer. The majority dealt with the matter on the basis that an English court would not apply s 54. The phrase “the operation of this Act” included the operation, to the advantage of the insured of s 54. The majority found that the insured would be prejudiced, within the meaning of s 52, by the grant of a stay in order that the insurer might enforce the obligation to refer disputes arising from the policy to the courts of England, pursuant to the second sentence of provision 9 of the policy. The stay would serve to exclude the operation of s 54 from the litigation. As a consequence, the majority found that the second sentence of provision 9 was rendered void.

[52.40] Applications An exclusion clause in a professional indemnity insurance policy, excluding claims arising from circumstances of which the insured was aware prior to the commencement of insurance, is not void under s 52. In Pech v Tilgals (1994) 28 ATR 197; 94 ATC 4206 it was argued that an exclusion clause excluded claims which, having regard to s 28, would not be excluded. Accordingly, it was submitted that the operation of the clause was void under s 52 in that it would have the effect of excluding, restricting or modifying the operation of the ICA by excluding claims that would not be excluded under the principles of non-disclosure. However, Dunford J (NSW Sup Ct) noted that the exclusion clause was not concerned with non-disclosure; the claims specified were excluded from cover whether or not circumstances were disclosed and accordingly s 28 was not excluded or modified by the exclusion clause. Liability of excess underwriters after underlying insurers have paid or admitted liability The WA Court of Appeal held that a provision in an excess liability policy conditioning liability on payment or admission of liability by the underlying insurers was not void under s 52 in The Hancock Family Memorial Foundation Ltd v Lowe [2015] WASCA 38 (5 March 2015). A claim had been brought by a third party claimant against a lawyer who had died. The third party claimant who claimed directly against excess insurers under s 51 argued that a pre-condition to liability in excess policies conditioning liability on payment or admission of liability by the underlying insurers was void under s 52. McLure P, with whom Newnes JA and Beech J agreed, noted that the condition did not in terms purport to exclude, restrict or modify s 51(1). The only question was whether it ©

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majority found that both sentences of provision 9 were void because they were express provisions to the contrary within the meaning of that phrase in s 8(2) (see, [8.20]).

s 53

Insurance Contracts Act 1984

[52.40]

had the relevant effect on the operation of the ICA. It was argued that it could not have the relevant effect when the non-application of s 51(1) was attributable to a failure to establish an element thereof, in this case the requirement in s 51(1)(c) that “the contract provides insurance cover in respect of the liability”. McLure P was of the opinion that the fact that the excess policies did not provide insurance cover in respect of the liability for the purpose of s 51(1)(c) cannot be determinative of the question whether there has been a contracting out for the purposes of s 52. She said the correct approach was first to “determine whether the relevant provision infringes s 52 and if so, only have regard to those terms of the [excess policies] that are not void under s 52 for the purpose of s 51(1)(c)” (at [93]). McLure P noted that the excess insurers’ liability to indemnify under the excess policies was derivative and conditional on that of an underlying insurer to whom s 51(1) did not apply. The relevant effect was a consequence of the scope of s 51(1) not the condition. Accordingly, s 52 did not apply. McLure P was of the view that it could not have been the intention of the legislature in enacting s 51 to fundamentally alter the nature of the contractual relationship between an insured and his excess insurers in the event the insured dies. 53

Variation of contracts of insurance

Where a provision included in a contract of insurance (other than a contract of insurance that is included in a class of contracts declared by the regulations to be a class of contracts in relation to which this section does not apply) authorizes or permits the insurer to vary, to the prejudice of a person other than the insurer, the contract, the provision is void. [Cross-reference: Insurance Contracts Regulations 1985: reg 31 prescribes classes of contracts of insurance in relation to which s 53 does not apply.]

SECTION 53 COMMENTARY [53.10] Synopsis Section 53 renders ineffective a provision in a contract of insurance permitting the insurer to unilaterally vary the contract. As with s 52, its purpose is to prevent insurers from avoiding the provisions of the ICA. Section 53 does not apply to classes of contracts of insurance excluded from its operation as declared by the regulations. Regulation 31 of the Insurance Contracts Regulations 1985 (Statutory Rules 1985 No 162; 2000 No 118) excludes from the operation of s 53 the following classes of contracts: (a) each of the classes of contracts referred to in reg 30 (see [46.10]); 406

Mann’s Annotated Insurance Contracts Act

[53.10]

Pt V – Div 3 – Remedies

s 54

Sickness and accident policies which are guaranteed “renewable” at the option of the insured or where the insurer guarantees not to cancel the policy in response to a change in the risk where such a policy has been effected for a predetermined period of years in excess of one year.

(f) export payments insurance contracts within the meaning of subsection 14(2) of the Export Finance and Insurance Corporation Act 1991. Accordingly, in the prescribed classes of contract the insurer is able to unilaterally vary the contract. For instance, an alteration in the insured risk may result in a variation of the terms of the contract of insurance.

Division 3 – Remedies 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. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 item 24]

(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:

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(b) contracts of insurance under which the insurer agrees to indemnify the insured against loss in respect of failure by a debtor to pay a debt due to the insured, but not against any other loss; (c) contracts of life insurance; (d) superannuation contracts, including individual superannuation contracts and blanket superannuation contracts; and (e) sickness and accident insurance contracts to which para 17(c) applies. Paragraph 17(c) applies to:

s 54

Insurance Contracts Act 1984

[53.10]

(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. [Subs (5) am Act 65 of 1985, s 3 and Sch 1]

(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. [S 54 am Act 107 of 1997; Act 65 of 1985]

SECTION 54 COMMENTARY Background and synopsis ....................................................................... Restrictions or limitations – inherent and acknowledged – not s54 ....... The dichotomy between s 54(1) and 54(2) ............................................. Effect of a contract of insurance: s 54(1) first limb ................................. Claim: s 54(1) first limb and following ..................................................... By reason of – sufficiency of causal connection: s 54(1) first limb ........ Act (Omission) – meaning: s 54(1) first limb and following .................... Act (omission) of the insured (insurer’s rights): s 54(1) first limb ........... Some other person: s 54(1) first limb .....................................................

[54.10.1] [54.10.2] [54.10.3] [54.10.4] [54.10.5] [54.10.6] [54.10.7] [54.10.8] [54.10.9]

After the contract was entered into: s 54(1) first limb ............................. [54.10.10] Reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced: s 54(1) second limb ............ [54.10.11] Prejudice: s 54(1) second limb – the Ferrcom case ............................... [54.10.12] Prejudice generally: s 54(1) .................................................................... [54.10.13] “Claims made and notified” policies and s 54(1) – notification of claims .............................................................................................. [54.10.14] “Claims made and notified” policies and s 54(1) – notification of facts (circumstances) that might give rise to a claim .................................. [54.10.15] Capable of causing or contributing to a loss: s 54(2) .............................

[54.20]

Insured: s 54(3) and 54(4) ......................................................................

[54.22]

No part of the loss was caused by the act: s 54(3) ................................

[54.25]

Omission: s 54(6) ....................................................................................

[54.30]

Section 54(6)(b) .......................................................................................

[54.40]

Sections 54 and 13 .................................................................................

[54.50]

Sections 54 and 40 .................................................................................

[54.60]

Sections 54 and 48 .................................................................................

[54.70]

Sections 54 and 56 .................................................................................

[54.80]

Proof ........................................................................................................

[54.90]

Previous contracts ...................................................................................

[54.100]

408

Mann’s Annotated Insurance Contracts Act

[54.10.1]

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s 54

[54.10.1] Background and synopsis In considering the circumstances in which an insurer could refuse to pay a claim, whether in whole or in part, the ALRC recommended the adoption of a combination of a proportionality test and a causal connection test.

Proportionality involves the abolition of the right to terminate and the substitution of a right to damages. Damages might be assessed in accordance with a test based on proportionality. The ALRC recommended a proportionality test framed in terms of prejudice to the insurer, with damages being the measure of prejudice suffered as a consequence of the insured’s conduct. The ALRC also adopted a causal connection test. This involves a determination of damages by reference to whether the insured’s conduct, either actually or in principle, could have caused or contributed to a loss. The two tests (that is, proportionality and causal connection) combine in s 54. Section 54 (and in particular s 54(1)) has been the subject of much judicial consideration. Given this, it is worth noting the commentary of the ALRC on the combination of the two tests. The ALRC said (at [LR.20.228]): Where the conduct of the insured might, in principle, have caused or contributed to a loss, a causal connection approach should be adopted. As between termination and damages in these cases, there may not be a great deal to choose. But damages provide a more flexible remedy in those rare cases where the insured’s conduct caused or contributed to only a part of the loss. Given the insured’s superior knowledge concerning the circumstances of most losses, he should bear the burden of proof. Where the insured’s conduct could not, in principle, have caused or contributed to the loss, the insurer should also be limited to a right to damages. Those damages should be assessed by reference to ordinary contractual principles. That would, presumably, involve an application of the principle of proportionality. The Commission recognises that, in some cases, that principle might be difficult to apply. But it believes those difficulties are justified by the need to strike a fair balance between insurer and insured in the relatively few cases to which the principle would apply. The actual test should be stated in terms of prejudice to the insurer. Damages should be measured by reference to the prejudice the insurer has suffered as a consequence of the insured’s conduct. As in the case of misrepresentation and non-disclosure, the right to damages should be exercisable only by way of reduction of a claim.

The ALRC also considered the possible means of evasion of the proposed provision. It noted that the relevant provisions of the draft legislation attached to ALRC 20 were designed to ensure that implementation of the recommendations would be unaffected by matters of form. The ALRC ©

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The principle of proportionality requires that the insured should suffer penalties only in proportion to the harm caused by the insured’s conduct.

s 54

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[54.10.1]

said (at [LR.20.229]): The Commission has already pointed out that its present recommendations should extend not only to strict warranties and other terms imposing obligations on the insured, but also to exclusions from cover of certain risks. Were they not to extend to temporal exclusions, legislation based on the present recommendations might be avoided simply by rephrasing an obligation (‘the insured warrants that the car will be kept in a roadworthy condition’) as a temporal exclusion (‘the insurer will not be liable while the car is in an unroadworthy condition’). That legislation might also be avoided if obligations and exclusions were omitted and the cover itself stated in such a way as to achieve the same end (‘cover is granted in respect of the roadworthy car’). Once again, the form in which the insurer seeks to protect itself from an increase in risk should not be allowed to affect the extent of that protection. The relevant provisions of the draft legislation attached to the report are designed to ensure that implementation of the present recommendations would be unaffected by the form in which policies were drafted.

The ALRC considered that in certain cases a breach of a contract of insurance would be excusable. It recommended that an insured should not be disentitled from recovery where compliance with the contract of insurance was not reasonably possible in all the circumstances. Further, it recommended that the insured should not be disentitled from recovery where the relevant conduct was reasonably necessary for the protection of persons or property. The ALRC recommended that an insurer should be entitled to rely on a breach of conditions subsequent when it has suffered prejudice as a result of the breach. The insurer should be entitled to reduce the insured’s claim by an amount which fairly represents the prejudice which it has suffered. “Prejudice”, in this context, was intended to connote the detriment that an insurer suffers in being hindered in the proper investigation of a loss or in dealing with a claim by a third party. In considering impossibility of performance (notice provisions and generally), the ALRC recommended (as with excusable breach) that the insured should not be disentitled from recovery where compliance with the term was not reasonably possible in all the circumstances. Section 54 affects contracts of insurance which permit an insurer to refuse to pay a claim, either in whole or in part, because the insured or a third party has done some act (or omitted to do some act) after the contract was entered into. If the act or omission could not reasonably be regarded as being capable of causing or contributing to a loss for which insurance cover is provided, the insurer may not refuse to pay the claim. The insurer may, however, reduce its liability by the amount that fairly represents the extent to which the insurer’s interests were prejudiced as a result of that act or omission: s 54(1). By contrast, the insurer may refuse to pay the claim where the act or omission could reasonably be regarded as being capable of causing or 410

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A reference in s 54 to an “act” includes a reference to an omission and 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: s 54(6). The operation of s 54 is best illustrated by example. The following examples are found in the Notes to the Draft Insurance Contracts Bill 1982: (1) A motor vehicle policy contains a term by which the insured warrants that the vehicle will be maintained in a roadworthy condition. As a result of a brake failure, the vehicle, while being driven by the insured, collides with another vehicle. The driver of the other vehicle was 50 per cent to blame for the accident. The insured’s conduct in allowing the vehicle to become unroadworthy could reasonably be supposed to cause or contribute to a loss, hence subcl (2) applies. The insured is able to prove that he was, at most, 50 per cent to blame for the accident. Hence the insurer is entitled to deduct only 50 per cent of the claim (subcl (3)). (2) If the vehicle was damaged while parked, the insured could recover the full amount of his loss (subcl (1)). (3) A’s motor vehicle policy contains a term which excludes the insurer’s liability if the driver of the vehicle is unlicenced. While driving the car, A is involved in an accident. He was unlicenced at the time, having forgotten to renew his licence, which expired two weeks previously. A’s conduct could not reasonably be supposed to be of a type which could contribute to an accident, so subcl (1) only applies. Since the insurer could not have been prejudiced by A’s driving the car without a licence, it is liable for the full amount of the claim.

[54.10.2] Restrictions or limitations – inherent and acknowledged – not s 54 There is what is arguably an initial question concerning the engagement of s 54. Section 54 may not be engaged if an insurance claim or a potential insurance claim is not payable because of a restriction or limitation on the scope of cover that is provided under a contract of insurance. The question as to whether or not s 54 is engaged if there is a scope of cover declinature, has received a great deal of judicial ©

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contributing to a loss for which cover is provided: s 54(2). However, if the insured proves that no part of the loss that gave rise to the claim was caused by the act or omission, then the insurer may not refuse to pay the claim by reason only of that act or omission: s 54(3). If the insured proves that some part of the loss that gave rise to the claim was not caused by the act or omission, the insurer may not refuse to pay that part of the claim: s 54(4). Where the act was necessary to protect the safety of a person or to preserve property or it was not reasonably possible not to do the act, the insurer may not refuse the claim by reason only of the act: s 54(5).

s 54

Insurance Contracts Act 1984

[54.10.2]

consideration. The High Court has explained that it is necessary to consider the insurance claim that has in fact been made. Section 54 does not operate to relieve the insured of restrictions or limitations that are inherent in the claim in fact made and which must be acknowledged in the making of the actual claim. However, the description of inherent restrictions or limitations which must be acknowledged in the making of the claim, on the one hand, does not necessarily equate with a restriction or limitation on the scope of cover that is provided under a contract of insurance, on the other. The former description captures some but not all scope of cover declinatures. It is therefore of great importance to understand the extent to which the two are not coextensive. A good starting point is an example where the two are co-extensive. By way of example, a contract of insurance may cover the insured for third party liability and may be written on what is known as an “occurrence” basis. That is, the contract will cover the insured for third party liability arising out of an occurrence during the period of insurance. Third party liability arising out of an occurrence that did not occur within the period of insurance will fall outside the scope of cover according to the temporal limitation. In practice, the parties to the contract would most likely recognise that the occurrence and third party liability is outside the scope of cover and therefore not properly the subject of an insurance claim. However, in the event that an insurance claim is made, the contract of insurance simply won’t respond and s 54 will not be engaged. In the ordinary parlance of the insurance world, the claim would be declined because it is outside the scope of cover provided by the contract of insurance. Using the description of the High Court, there is a restriction or limitation which is inherent in the claim and which must be acknowledged in the making of the claim. The claim would acknowledge that indemnity is sought in respect of an occurrence that has not occurred within the period of cover. But there are other examples where the two are not co-extensive. In other words, where a scope of cover declinature would attract relief under s 54. This comes about primarily because the application of s 54 does not depend on matters of form and therefore does not depend on drafting techniques. Unaffected by form

Section 54 is remedial in nature and has a broad application to policy terms, regardless of the language used or where the policy terms appear in a contract of insurance. “Scope of cover” terms, properly so called, are those that define the risk covered under a policy. Depending on the drafting technique employed, these terms are likely to appear in the insuring clause of a policy wording, and will be subject to defined terms and the particulars contained in an accompanying schedule. However, the 412

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The NSW Court of Appeal (Gleeson CJ, Mahoney and Clarke JJA) in East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092 found that s 54 applied to the requirement of notification of a third party claim by an insured to an insurer under a “claims made and notified” policy, even though it formed part of the definition of the risk insured. Their Honours rejected the insurer’s “construction” argument that s 54 had no application because it deals with matters such as warranties, conditions and perhaps exclusions but not matters concerning the ambit of insurance cover. In rejecting the construction argument, Gleeson CJ (with whom Clarke JA agreed) expressed a view that s 54 is concerned with the effect of the contract as a matter of substance. He said (at 7 ANZ Ins Cas p 77,360): In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s 54 depends upon matters of form. As a matter of ordinary language, it is perfectly appropriate to say in the present case that the effect of the contract of insurance is such that, but for s 54, the [insurer] may refuse to pay the [insured’s] claim. The circumstance that this comes about because of the language of that part of the contract of insurance which defines the risk rather than by reason of a breach of a condition of the policy does not seem to me to be material.

This view of Gleeson CJ in East End was approved by the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 and in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38. The requirement for notification by an insured to an insurer has been seen as a procedural matter and not a matter of substance. Spigelman CJ referred to the reasoning of Gleeson CJ in East End in Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 147 FLR 422; 158 ALR 592; 10 ANZ Ins Cas 61-423. He said (at 10 ANZ Ins Cas p 74,740): The reference to a requirement of notification in the definition of the relevant risk to which an insurance policy responds, is not a matter of substance. Rather the reference to notification by the insurer should be understood as the equivalent of a condition of the policy creating an obligation on the insured to notify the insurer on receipt of a claim. The insurer cannot escape liability by defining the relevant risk in terms of such procedural conditions. ©

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application of s 54 does not depend on where a term appears and does not depend on the language used. This means that if, for example, a claim is refused because there is a breach of a procedural requirement, such as the requirement to notify an insurer of a third party claim, that refusal will be subject to s 54. It won’t matter that the procedural requirement is to be found in an insuring clause and employs the language of risk definition.

s 54

Insurance Contracts Act 1984

[54.10.2]

Accordingly, an insured’s failure to notify a third party claim under a “claims made and notified” policy will engage s 54 notwithstanding that the obligation is framed according to the defined risk or scope of cover. It is to be regarded as a procedural matter and not a matter of substance which could equally appear elsewhere in a policy as a condition. Therefore, it doesn’t necessarily follow that s 54 is not engaged when an insurance claim is refused because of a restriction or limitation that the parties have chosen to frame as a scope of cover requirement. But what insurance claims that can be or have been refused because of restrictions or limitations on cover do not engage s 54? Acknowledged inherent restrictions or limitations in the claim

Finding a formulation that can be applied universally to generally describe all claims or potential claims that are not payable because of a restriction or limitation on the scope of cover under a contract of insurance and where, as a consequence s 54 is not engaged, has proved difficult. Such a formulation can arguably be derived from the High Court judgments in Australian Hospital Care and Maxwell v Highway Hauliers Pty Ltd (2014) 88 ALJR 841; 18 ANZ Ins Cas 62-035; [2014] HCA 33. The plurality (McHugh, Gummow and Hayne JJ) in Australian Hospital Care said (at [41]): Section 54 does not permit, let alone require, the reformulation of the claim which the insured has made… In other words, the actual claim made by the insured is one of the premises from which consideration of the application of s 54 must proceed. The section does not operate to relieve the insured of restrictions or limitations that are inherent in that claim.

The plurality in Australian Hospital Care noted that the restrictions that are inherent within a claim vary according to the type of insurance in issue. They noted that under a claims made and notified policy, if no third party claim (which they termed a “demand”) was made by a third party during the period of insurance, any subsequent claim “would necessarily acknowledge that indemnity was sought in relation to a demand not of a type covered by the policy” (at [42]). The High Court in Maxwell v Highway Hauliers said that the insurers had misapplied the statement of the plurality in Australian Hospital Care (at [41]) in equating the reference to restrictions or limitations that are inherent in a claim with any restriction or limitation on the scope of the cover that is provided under the contract of insurance. It reiterated and summarised the above statements of the plurality (Australian Hospital Care at [41]–[42]) and said (at [23]): The Insurers sought support for their argument from a statement of the plurality in [Australian Hospital Care] that [s 54] “does not operate to relieve the insured of restrictions or limitations that are inherent in [the] claim”. They misapply that statement in equating its reference to restrictions or limitations that are inherent in a claim with any restriction or limitation on the scope of 414

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the cover that is provided under the contract. A restriction or limitation that is inherent in the claim which an insured has in fact made, in the sense in which the plurality in [Australian Hospital Care] used that terminology, is a restriction or limitation which must necessarily be acknowledged in the making of a claim, having regard to the type of insurance contract under which that claim is made.

A composite formulation is therefore possible as follows:

The formulation could be framed as a threshold question. Are there any restrictions or limitations that are inherent in the actual insurance claim and which must necessarily be acknowledged in the making of that claim, having regard to the relevant type of insurance contract? If so, s 54 will not operate to provide relief. Examples of restrictions or limitations – inherent and acknowledged in claim

But what are the restrictions and limitations that are inherent in a claim and must be acknowledged in the making of a claim? The answer to this question has great significance because these are the restrictions or limitations that must be met before an insurance claim can be made under a contract of insurance. In the event that they are not met and, as a consequence, the insurer refuses to pay any insurance claim that is made, s 54 will not be engaged to provide relief. The examples that have been given provide guidance. The plurality in Australian Hospital Care gave examples by noting the difference between “occurrence-based” contracts of insurance and “claims made and notified” policies. Their Honours said (at [42]): Under an “occurrence” based contract, no claim can be made under the contract unless the event insured against takes place during the period of cover. Under a “claims made and notified” policy, if no demand is made by a third party upon the insured during the period of insurance, any claim that may subsequently be made by the insured on the insurer (that is, the claim to which s 54 refers) would necessarily acknowledge that indemnity is sought in relation to a demand not of a type covered by the policy (because not within the temporal limits that identify those demands in relation to which indemnity must be given).

The NSW Court of Appeal (Meagher JA with whom Macfarlan and Emmett JJA agreed) helpfully elaborated on the characteristics of the event of the kind insured referred to by the plurality in Australian Hospital Care as “restrictions or limitations” inherent in a claim in Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252. Meagher JA said (at [133]–[135]): ©

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Section 54 does not operate to relieve the insured of restrictions or limitations that are inherent in the insurance claim in fact made and which must necessarily be acknowledged in the making of the claim, having regard to the type of insurance contract under which that claim is made.

s 54

Insurance Contracts Act 1984

[54.10.2]

The respects in which the insured’s claim does not have the characteristics of the event of the kind insured are referred to by the plurality in Australian Hospital Care as “restrictions or limitations” inherent in that claim. Section 54 does not “relieve” the insured of those restrictions or limitations: [41]. The plurality (at [41], [42]) describe that event as “the event insured against” and as “an event of the type contemplated by the contract” and note that it will vary according to “the type of insurance in issue”. That event may be an accident which results in personal injury or property damage; or the happening of that injury or damage; or the making of a demand against the insured by a third party; or the happening of an occurrence or circumstance which may give rise to such a demand; or the insured’s becoming aware of such an occurrence or circumstance. These descriptions of themselves are not sufficiently specific to define the event covered by a particular type of policy. The accident will have to be of a particular kind, or arise out of or in the course of a specified activity. The injury or damage will usually have to happen in the course of or in connection with a particular activity. The third party demand is usually described as arising out of or in connection with a particular business or professional activity. The same may be said of an occurrence or circumstance which may give rise to a claim. The way in which the provisions of the policy describe or define that event or risk will vary between different types of policy, and sometimes between policies which provide the same type of cover. It is here that matters of form are not to dictate the outcome when considering the effect of the contract: East End at 403–404. It nevertheless remains necessary, in addressing that effect, to have regard to the nature of the risk and subject matter insured as well as the commercial or other context in which the insurance is written, to the extent that evidence of that kind is admissible on that question of construction.

In Prepaid Services, a trade credit policy provided cover for losses in respect of a third party’s failure to meet payment obligations arising in relation to each of the insured, under a contract identified in Declarations. Meagher JA found that the claim for indemnity was for losses resulting from payment failures under a contract which did not answer that description. There was no basis for disregarding the agreement of the parties as to the description of the relevant contract on the basis that to do otherwise would be to prefer form over substance. The insurer’s refusal to pay was because the claim was in respect of a payment default which was not covered by the policy. Section 54 had no application. The High Court in Maxwell v Highway Hauliers explained the acknowledgement of inherent restrictions or limitations in the making of a claim using the examples provided in and by Australian Hospital Care. It said (at [24]–[25]): …the making of a claim under a “claims made and notified” contract necessarily acknowledges that the indemnity sought can only be in relation to a demand made on the insured by a third party during the period of cover. The section does not operate to permit indemnity to be sought in relation to a demand which the third party omitted to make on the insured during the period of cover but made after that period expired. Similarly, the making of a claim 416

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under a “discovery” contract, of the type in issue in [Australian Hospital Care] itself, necessarily acknowledges that the indemnity sought can only be in relation to an occurrence of which the insured became aware during the period of cover.

The High Court in Maxwell v Highway Hauliers found that there was a requisite effect of the contract of insurance that the insurers may refuse to pay the claims by reason of an act and an omission by the insured sufficient to engage Section 54(1). The claims had been made for accidents (events under the occurrence based contract) during the period of cover. It didn’t matter that the effect was produced by an exclusion framed as a limitation on the covered risk. It said (at [27]): The Insured having made claims seeking indemnity under the Policy in relation to the accidents which occurred during the Period of Insurance, it is sufficient to engage Section 54(1) that the effect of the Policy is that the Insurers may refuse to pay those claims by reason only of acts which occurred after the contract was entered into. Precisely how the Policy produced that effect was not to the point.

McLure P (WA Court of Appeal) in dismissing a further ground of appeal found that an exclusion under a home insurance policy which excluded legal liability for “Injury to any person who normally lives with you…” is not a restriction or limitation which must necessarily be acknowledged in the making of the claims in Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25. This finding by her Honour is significant given both the prevalence of this type of exclusion and the fact that it appears, albeit differently worded, in standard cover (see Regs 11(k)(i) and 15(m)(i) of theInsurance Contracts Regulations 1985). McLure P read the High Court in Maxwell v Highway Hauliers as requiring relevantly acknowledgement of available cover, bodily injury during the period of insurance and an accident within the covered geographical area. She said (at [60]): On my reading of Maxwell (HC), what must be acknowledged in the claims is that the third party respondents were insured under the Policy for legal liability, that bodily injury the subject of the claims occurred during the period of insurance and was caused by an accident within the geographic area covered by the Policy.

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The making of a claim under an “occurrence based” contract, the type of insurance contract in the present case, necessarily acknowledges that the indemnity sought can only be in relation to an event which occurred during the period of cover. That restriction or limitation is inherent in a claim which is made under such a policy.

s 54

Insurance Contracts Act 1984

[54.10.2]

[54.10.3] The dichotomy between s 54(1) and 54(2) The causal connection test requires a determination as to whether an act or omission could reasonably be regarded as being capable of causing or contributing to a loss for which cover is provided. If it can, then the act or omission is treated according to s 54(2), (3) and (4). If it cannot, then s 54(1) applies. The determination as to whether an act or omission could reasonably be regarded as being capable of causing or contributing to a loss, for which cover is provided, may be difficult in some cases. The High Court, in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156 stated (at 339–340 (CLR); 77,830 (ANZ Ins Cas)): Subsection (1) relates to acts or omissions occurring after the contract of insurance is entered into that could not reasonably be regarded as being capable of causing or contributing to the loss; subss (2) to (4) relate to acts or omissions that could reasonably be regarded as being capable of causing or contributing to the loss. The dichotomy between the two classes of acts or omissions is not entirely clear. It seems that the effect of an act that has not caused a loss or part of a loss depends on whether the act “could reasonably be regarded as being capable of causing or contributing to [the] loss”.

The dichotomy and whether an act or omission is capable of causing or contributing to a loss are more fully examined at [54.20] under the heading “Capable of causing or contributing to a loss: s 54(2)”. See [54.20].

[54.10.4] Effect of a contract of insurance: s 54(1) first limb For s 54 to be enlivened, the “effect of a contract of insurance” must be that the insurer may refuse to pay a claim. The “effect” is that the insurer may refuse payment “by reason of” a relevant act or omission. This “effect” must come from the contract of insurance. The question as to whether a contract of insurance has the requisite effect does not depend upon matters of form. It does not matter whether the effect arises from, for example, an insuring clause or an exclusion. Effect not dependent on form

In East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092 the NSW Court of Appeal (Gleeson CJ, Mahoney and Clarke JJA) held that it does not matter where in a contract of insurance the “effect” arises from when considering a submission that s 54(1) is not concerned with acts or 418

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In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s 54 depends upon matters of form. As a matter of ordinary language, it is perfectly appropriate to say in the present case that the effect of the contract of insurance is such that, but for s 54, the respondent may refuse to pay the appellant’s claim. The circumstance that this comes about because of the language of that part of the contract of insurance which defines the risk rather than by reason of a breach of a condition of the policy does not seem to me to be material. The case falls within the general words of the section and I see no justification for reading them down.

Mahoney JA said (at 407 (NSWLR); 77,363 (ANZ Ins Cas)): Section 54(1) looks, in its terms, not to the provisions of the contract of insurance but to “the effect” of it. This, in my opinion, means the effect which the contract of insurance would, apart from the section, have in the relevant factual context. … For the subsection to apply, the entitlement to refuse to pay the claim must be “by reason of some act of the insured or of some other person”. In the present case, the immediate reason why the insurer could refuse to pay the claim was not, in terms, by reason of an act (for which may be substituted “omission”) of “the insured or some other person” but by reason merely of the fact that, the making of the claim upon the insurer not having been “notified” to the insurer, the claim was not within the cover. But it was not within the cover by reason of an (omission) of the insured. Therefore the entitlement to refuse arose by reason of that omission.

In Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 the High Court referred to, and approved, the above passage by Gleeson CJ in East End and looked at effect rather than matters of form. In the majority judgment Dawson, Toohey, Gaudron and Gummow JJ said (at 673 (CLR); 77,084 (ANZ Ins Cas)): The phrase “by reason of” does not express a limitation to the sole or unique cause of the entitlement of the insurer to refuse payment. Rather, s 54(1) refers not to precise concepts of form but to the effect of the contract and asks whether that effect is that the insurer may refuse payment “by reason of” the relevant act or omission. No requisite effect

For s 54 to apply, the “effect of a contract of insurance” must be that the insurer may refuse payment “by reason of” a relevant act or omission. If the contract of insurance does not have this requisite effect then s 54 is not ©

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omissions which form part of the definition of the risk insured. The respondent submitted that the phrase “the effect of a contract of insurance” covers warranties, conditions and perhaps exclusions, but not matters directly affecting the ambit of insurance cover. In rejecting the submission, the Court of Appeal refused to read s 54(1) narrowly, and in particular the word “effect”. Gleeson CJ said (at 403–404 (NSWLR); 77,360 (ANZ Ins Cas)):

s 54

Insurance Contracts Act 1984

[54.10.4]

enlivened. For instance, an act or omission by an insured, may be in breach of an exclusion or condition of a contract of insurance, but the contract may not provide a right to the insurer to refuse payment of a claim by reason of that act or omission. The insurer may have other rights, such as the rights of avoidance or cancellation, but not the right to refuse the claim. In Lipari v Union des Assurances de Paris IARD (1998) 44 NSWLR 652; 10 ANZ Ins Cas 61-415, the NSW Court of Appeal came to the conclusion that there was no requisite “effect” when considering a general condition in a policy which contained no promise or obligation upon the part of the insured. Stein JA (with whom Sheller and Meagher JJA agreed) noted that the consequence of a breach of the condition was that the insurer could elect to avoid the policy. In the absence of the exercise of an election by the insurer (and in the absence of an entitlement to refuse to pay the claim), s 54 did not arise for consideration. A contract of insurance providing third party cover on a claims made and notified basis may provide the requisite “effect” to bring the refusal of payment of a claim within s 54 if the policy contains a “deeming clause” allowing for the notification of facts (circumstances) that might give rise to a claim (usually similarly worded to s 40(3)) and the insured omits to notify circumstances. In FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38, the High Court held by a majority (McHugh, Gummow, Kirby and Hayne JJ; Gleeson CJ dissenting) that a failure to give notice of facts (circumstances) that might give rise to a claim in accordance with a contractual requirement to do so was an omission within the meaning of s 54 because the effect of the contract was that the insurer could refuse to pay the claim. The plurality of the High Court (McHugh, Gummow and Hayne JJ) said (at 660 (CLR); 75,762 (ANZ Ins Cas)): [T]the claim which the insured made on [the insurer] was for indemnity against liability for an occurrence of which the insured first became aware during the period of cover. The effect of the contract of insurance is that [the insurer] could refuse to pay that claim by reason only of the fact that the insured did not give notice of the occurrence to it. Section 54, therefore, requires the conclusion that [the insurer] may not refuse to pay the insured’s claim. The effect of the contract of insurance, but for s 54, would be that the insurer may refuse to pay the insured’s claim by reason only of the omission of the insured to notify the occurrence which, at the time, was one which might subsequently give rise to a claim by the third party against it. That being so, the section is engaged.

Byrne J (Vic Sup Ct) in Aussie Tax Pty Ltd v Markel Capital Ltd (2009) 15 ANZ Ins Cas 61-809; [2008] VSC 592 considered the terms of a 420

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contract of insurance concerning notification of circumstances and concluded that the “effect” of the contract was that the insurer may refuse to pay a claim because circumstances had not been notified under those terms. He preferred this analysis to a proposition that s 54 creates a statutory entitlement to indemnity in an insured.

Chesterman J (Qld Sup Ct) in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388 and Bergin J (NSW Sup Ct) and the NSW Court of Appeal (comprising Spigelman CJ, Meagher and Sheller JJA) in Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511 and Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; 12 ANZ Ins Cas 61-566; [2003] NSWCA 34, respectively) found that there was no relevant effect of the contract of insurance in circumstances where there had been a late notification of facts (circumstances) that might give rise to a claim. The “claims made and notified” policies in these cases did not contain a deeming clause allowing for the notification of facts (circumstances) or any other provision requiring the notification of facts (circumstances). Further, it was held in both cases that s 40(3) does not imply into policies of insurance a term to the same effect as the subsection so as to create the requisite “effect”. In other words, if the contract of insurance itself does not give the requisite “effect”, then the requirement within s 54(1) is not satisfied and s 54 is not enlivened. Therefore, the question as to whether a non-notification or late notification of facts (circumstances) constitutes an omission within s 54 depends on the terms of the contract of insurance. This has caused insurers to review the terms of their “claims made and notified” policies. Most Australian professional indemnity policies do not contain deeming clauses and contain a narrow definition as to what constitutes a claim in order to avoid the requisite “effect”. On the other hand, most directors and officers liability policies do contain a deeming clause. Many insurers underwriting professional indemnity covers in Australia discontinued the practice of including deeming clauses in policies and removed deeming clauses from policies by way of endorsements to policy wordings following the decision of the High Court in Australian Hospital Care to avoid the application of s 54 in the event of a failure to notify circumstances. Without a “deeming clause”, or any other provision allowing for the notification of circumstances, in a contract of insurance, ©

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However, if a contract of insurance does not contain a “deeming clause”, or any other provision allowing for the notification of circumstances, then it does not provide the requisite effect, with the consequence that the requirement within s 54(1) will not be satisfied and s 54 will not be enlivened in the event of an omission to notify circumstances.

s 54

Insurance Contracts Act 1984

[54.10.4]

an insured can notify circumstances under s 40 before the expiry of the contract but will not have the benefit of s 54 in the event of late notification. Effect determined as a matter of construction

An insurer may refuse to pay a claim because the subject matter of the claim is outside the scope of cover under the contract of insurance. Section 54 is not engaged. Using the language of s 54, the effect of the contract of insurance is that the insurer may refuse to pay a claim because it is in respect of something which is not covered by the contract of insurance. The NSW Court of Appeal (Meagher JA with whom Macfarlan and Emmett JJA agreed) in Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252 in considering and applying East End noted that the “effect” of the contract of insurance must be determined as a matter of construction, unconstrained by distinctions between provisions which define the scope of cover and conditions or exclusions which affect the entitlement of an insured to claim. Meagher JA also noted that it is necessary to consider the “effect” of the contract in the way in which it responds to the claim actually made by the insured. He said that it is at this point that difficulties may arise in applying s 54(1) in circumstances where it is said by the insured that the act or omission is the reason why the insured’s claim is not with respect to a risk or event covered by the policy. He considered the facts of prior cases which provided examples of such circumstances. Meagher J concluded that s 54 did not prevent the insurer from refusing to pay the claim under the trade credit policy because, in the language of s 54(1), the “effect” of the policy was that the insurer may refuse to pay the insured’s claim because it was in respect of a payment default which was not covered by the policy.

[54.10.5] Claim: s 54(1) first limb and following What constitutes a “claim” under s 54?

What is a “claim” for the purposes of s 54(1)? A “claim” is a demand for indemnity the substance of which has been brought home to the insurer. The NSW Court of Appeal noted an absence of authority on what is a “claim” for the purposes of s 54(1) in Gorczynski v W & FT Osmo Pty Ltd (2010) 77 NSWLR 62; 241 FLR 242; 16 ANZ Ins Cas 61-852; [2010] NSWCA 163. A third party claimant had served on the insurer an application for direct access under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). The insured had not, at any time, notified the insurer of the third party claim. The Court held that there was a 422

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The Court of Appeal noted that the policy behind s 54 is to limit the insurer’s remedies so that they reflect the actual loss the insurer has suffered as a consequence of the relevant act or omission. Therefore, it is difficult to see why that policy does not apply to a claim made by a third party as much as a claim by the insured where otherwise the contract of insurance is engaged. The Court of Appeal expressed the view that the draftsperson of s 54 must have contemplated that, on occasions, a third party would be entitled to make a claim under an insurance contract, whether under s 54 or the common law. The Court of Appeal also considered the essential nature of a s 6 application and concluded that a claim to enforce a charge is no different in substance to a claim upon the insurer for payment in respect of the insured’s liability. The Court of Appeal in Gorczynski referred to Kelly & Ball, Principles of Insurance Law, (2nd ed, 2001) at [14.0080] and the reference to a claim against an insured. The authors refer to Walton v National Employers’ Mutual General Insurance Association Ltd [1973] 2 NSWLR 73 at 82 where Bowen JA referred to the primary sense of the word “claim” as being “a demand for something as due, an assertion of a right to something”. The Court of Appeal noted that a claim is obviously made when a writ or statement of claim is served, although service is not necessary provided its issue is brought home to the insurer. In holding that a “claim” for the purposes of s 54(1) was made against the insurer upon service of the s 6 application, Tobias JA (with whom Giles and McColl JJA agreed) said (at [69]–[71]): In my opinion, a claim for the purposes of s 54(1) was made against [the insurer] when the present application was filed and served seeking the leave of the court under the proviso to s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 to commence proceedings against [the insurer]. The claim was for payment of the insurance moneys payable under the policies and over which the [third party] was entitled to a charge pursuant to s 6(1) of that Act. Even if the filing and service of that application was not sufficient, then in my view if leave were granted, a statement of claim would be filed and served upon [the insurer] which would, on this aspect of the matter, be sufficient to engage s 54(1). But as Kelly and Ball state, all that is necessary is that the insurer … have had brought to its attention that a claim is asserted against it and that “claim” seeks payment under the relevant contract of insurance. Thus in the words of Sheller JA in Trident Properties Ltd v Capita Financial Group Ltd [1995] NSWCA 543; (1996) 12 BCL 402, the essence of the ©

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“claim” under s 54(1) notwithstanding that the insured had not, at any time, notified the insurer of the third party claim. There was a “claim” for the purposes of s 54(1) because a “demand” had been made upon the insurer that it indemnify its insured in respect of a third party claim against the insured. The substance of the claim had been “brought home to the insurer” (at [71]).

s 54

Insurance Contracts Act 1984

[54.10.5]

making of a claim is that the substance of the claim is in fact “brought home to” the person against whom the claim is asserted. Actual insurance claim as a starting point and initial premise

In applying s 54 it is necessary to give close attention to the “claim” the insured has in fact made on the insurer as well as the reason for the insurer’s refusal to pay that claim. Section 54 directs attention to the effect of the contract of insurance on the claim which the insured has in fact made on the insurer. Put differently, the actual claim made by the insured, on the insurer, is one of the premises from which consideration of the application of s 54 must proceed. Section 54 does not permit the reformulation of the claim which the insured has in fact made. The importance of examining the actual insurance claim made by the insured as an initial premise from which consideration of the application of s 54 must proceed, is apparent when considering an insurance claim where the insurer’s refusal is due to an inherent restriction or limitation. It may be that the insurance claim is not in respect of an insured event. That is, an event that the insured must rely on to engage the insurer’s obligations under the contract of insurance. For instance, cover under a claims made policy is triggered by a third party claim against the insured during the period of cover. In the absence of a third party claim during the period of cover, the insurer may refuse an insurance claim because its obligations are not engaged in the absence of an insured event. Section 54 would have no application. The application, or alternatively, the lack of applicability, of s 54 to insurance claims which are not in respect of an insured event or risk, has been the subject of varied judicial reasoning. The High Court has provided clarification. The plurality in the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38 (McHugh, Gummow and Hayne JJ) examined the reasoning in Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 147 FLR 422; 158 ALR 592; 10 ANZ Ins Cas 61-423 and Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (1998) 153 ALR 529; 10 ANZ Ins Cas 61-408. In Greentree, Spigelman CJ had reasoned that the absence of a third party claim against the insured within the period of cover under a claims made policy did not create any “effect” that an “insurer may refuse to pay a claim” by the insured. The third party claim was an event wholly external to the policy. In Permanent Trustee, Hodgson CJ in Eq said that where there is no third party claim during the period of cover the gravamen of the insurer’s refusal to meet a later claim by the insured is not that someone omitted to do something, but rather that something did not happen. The plurality in Australian Hospital Care rejected the reasoning in Greentree and Permanent Trustee but found that that the actual decision 424

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in both cases was right. In rejecting the reasoning in Greentree, the plurality noted that the difficulty with referring to events as “wholly external to the policy” is that no question about the effect of a contract of insurance can ever be asked in isolation from external facts and circumstances. The plurality noted that the formulation in Permanent Trustee was also open to criticism. The distinction between an omission and a non-event is more readily applied to cases where, for example, flood damage occurs after the period of cover. The absence of a flood during the period of cover is more naturally described as a non-event as opposed to an omission. But the distinction cannot readily be applied when the circumstance or event said to be an omission is described by reference to a person, for example, a third party making a claim after the period of cover. How can a person’s failure to take some step be categorized as a non-event rather than an omission? The plurality in Australian Hospital Care noted that there was thought to be a difficulty in reading s 54 literally in rejecting its application to a claim where there has been no event during the period of cover. They considered that the difficulty was more apparent than real and that close attention should be given to the elements of s 54 including the “claim” made by the insured and the reasons for the insurer’s refusal to pay that claim. They said (at [39]–[41]): Close attention must be given to the elements with which s 54 deals: the effect of the contract of insurance between the parties; the “claim” which the insured has made; and the reason for the insurer’s refusal to pay that claim. Section 54 directs attention to the effect of the contract of insurance on the claim on the insurer which the insured has in fact made. It is not concerned with some other claim which the insured might have made at some other time or in respect of some other event or circumstance. It requires the precise identification of the event or circumstance in respect of which the insured claims payment or indemnity from the insurer. For example, in Greentree the insured claimed indemnity against liability for a claim which the third party had first made on it outside the period of cover…The insured’s claim necessarily incorporated a temporal dimension. The contract of insurance applied only if the third party’s demand on the insured was made within the period of cover. The insured’s claim on the insurer therefore had to identify when the demand was made. That being so, the claim could not properly be described without that temporal element. Even if the fact that the third party made no demand on the insured within the period of cover were said to be an “omission” it is, nevertheless, of the first importance to recognise that the claim to which s 54 refers is the claim by the insured on the insurer that was actually made. It is not a claim for indemnity against some other demand (such, for example, as a demand assumed to have been made during the period of cover). Section 54 does not permit, let alone require, the reformulation of the claim which the insured has made. It operates to prevent an insurer relying on certain acts or omissions to refuse to the pay that particular claim. In other words, the actual claim made by the insured is one of the premises from which consideration of the application of s 54 must ©

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[54.10.5]

s 54

Insurance Contracts Act 1984

[54.10.5]

proceed. The section does not operate to relieve the insured of restrictions or limitations that are inherent in that claim.

In Maxwell v Highway Hauliers Pty Ltd (2014) 88 ALJR 841; 18 ANZ Ins Cas 62-035; [2014] HCA 33, the High Court rejected a proposition that the “claim” to which s 54 refers is limited to a claim for an insured risk. The proposition was inconsistent with the construction of s 54(1) by the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35. The High Court in Maxwell v Highway Hauliers noted that Antico established that “claim” to which s 54 takes as its starting point nothing more than the existence of a claim and of a contract the effect of which is that the insurer may refuse to pay that claim by reason of some act which the insured (or someone else) has done or omitted to do after the contract was entered into. It does not postulate a liability of the insurer to pay the claim that has been made. The High Court also noted that the Antico construction was reinforced by the reasoning in Australian Hospital Care. Acknowledged inherent restrictions or limitations in the claim

It can be seen that there are restrictions and limitations which, if applicable, will mean any insurance claim will not be met by an insurer and s 54 will not be engaged to provide relief in relation to the insurer’s refusal to pay the claim. Put simply, any insurance claim that is made will not be a “claim” within s 54 because s 54 is not engaged. But it is not just any restriction or limitation. The plurality in Australian Hospital Care stated (at [41]) that s 54 does not operate to relieve an insured of restrictions or limitations that are inherent in the claim that is in fact made. The High Court in Maxwell v Highway Hauliers reiterated and summarised the statements of the plurality in Australian Hospital Care and said that a restriction or limitation that is inherent in the claim is one which must necessarily be acknowledged in the making of a claim, having regard to the type of insurance contract under which that claim is made. It is not possible to equate restrictions and limitations in claims which do not engage s 54 with the scope of cover under a contract of insurance. The two are not coextensive. The High Court in Maxwell v Highway Hauliers said that the insurers had misapplied the statement of the plurality in Australian Hospital Care (at [41]) in equating the reference to restrictions or limitations that are inherent in a claim with any restriction or limitation on the scope of the cover that is provided under the contract of insurance. But what are the restrictions and limitations that are inherent in a claim and must be acknowledged in the making of a claim? The answer to this question has great significance because these are the restrictions or limitations that must be met before an insurance claim can be made. In the 426

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event that they are not met and, as a consequence, the insurer refuses to pay any insurance claim that is made, s 54 will not be engaged to provide relief.

Under an “occurrence” based contract, no claim can be made under the contract unless the event insured against takes place during the period of cover. Under a “claims made and notified” policy, if no demand is made by a third party upon the insured during the period of insurance, any claim that may subsequently be made by the insured on the insurer (that is, the claim to which s 54 refers) would necessarily acknowledge that indemnity is sought in relation to a demand not of a type covered by the policy (because not within the temporal limits that identify those demands in relation to which indemnity must be given).

In the circumstances considered in Greentree, the claim made by the insured was for indemnity against liability for a demand that was not a demand of the kind dealt with by the policy because it was not a demand by a third party made within the period of insurance cover. The reason for refusal was not some act or omission of the insured or some other person. It was that the policy did not extend to the demand referred to in the claim for indemnity. The High Court in Maxwell v Highway Hauliers considered an argument from the insurers which sought support from the statement of the plurality in Australian Hospital Care that s 54 does not operate to relieve the insured of restrictions or limitations that are inherent in the claim. In finding that the insurers were misapplying the statement it said (at [23]): They misapply that statement in equating its reference to restrictions or limitations that are inherent in a claim with any restriction or limitation on the scope of the cover that is provided under the contract. A restriction or limitation that is inherent in the claim which an insured has in fact made, in the sense in which the plurality in [Australian Hospital Care] used that terminology, is a restriction or limitation which must necessarily be acknowledged in the making of a claim, having regard to the type of insurance contract under which that claim is made.

The High Court in Maxwell v Highway Hauliers explained the acknowledgement of inherent restrictions or limitations in the making of a claim using the examples provided in and by Australian Hospital Care. It said (at [24]–[25]): …the making of a claim under a “claims made and notified” contract necessarily acknowledges that the indemnity sought can only be in relation to a demand made on the insured by a third party during the period of cover. The section does not operate to permit indemnity to be sought in relation to a ©

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The plurality in Australian Hospital Care noted that the restrictions that are inherent within the claim vary according to the type of insurance in issue. Their Honours noted the difference between “occurrence-based” contracts of insurance and “claims made and notified” policies. They said (at [42]):

s 54

Insurance Contracts Act 1984

[54.10.5]

demand which the third party omitted to make on the insured during the period of cover but made after that period expired. Similarly, the making of a claim under a “discovery” contract, of the type in issue in [Australian Hospital Care] itself, necessarily acknowledges that the indemnity sought can only be in relation to an occurrence of which the insured became aware during the period of cover. The making of a claim under an “occurrence based” contract, the type of insurance contract in the present case, necessarily acknowledges that the indemnity sought can only be in relation to an event which occurred during the period of cover. That restriction or limitation is inherent in a claim which is made under such a policy.

[54.10.6] By reason of – sufficiency of causal connection: s 54(1) first limb The words “by reason of” in s 54(1) require an examination of the sufficiency of the casual connection between the insurer’s refusal to pay a claim and some act or omission of the insured or a third party. The High Court noted the question of the sufficiency of the causal connection in the analysis of s 54(1) in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35. In the majority judgment, the High Court (comprising Dawson, Toohey, Gaudron and Gummow JJ) said (at 670 (CLR); 77,082 (ANZ Ins Cas)): The issue … is whether the Insurer may refuse to pay the [insured’s] claim “by reason of” some act or omission of the [insured] which occurred after the entry into the relevant contract of insurance.

In Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 147 FLR 422; 158 ALR 592; 10 ANZ Ins Cas 61-423 the NSW Court of Appeal (comprising Spigelman CJ, Mason P and Handley JA) held that a failure by a third party to make a claim on the insured within the period of insurance cover under a “claims made and notified policy” was not an “omission … of some other person” within s 54(1). Mason P noted the issue of sufficiency of causal connection was emphasised by the High Court in Antico. He said (at 74,745 (ANZ Ins Cas)): What is involved in this analysis is the same process that occurs when the law decides whether one event caused or contributed to another. Although the judicial task is described as a question of fact, there is necessarily some element of judgment, some normative process, in which it is perceived sensible and fair to make the causative link.

The plurality in the High Court (McHugh, Gummow and Hayne JJ) in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38 rejected some of the reasoning in Greentree but thought that the decision 428

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Similarly, the NSW Court of Appeal (Meagher JA with whom Macfarlan and Emmett JJA agreed) found that the insurer’s refusal to pay the claim was not by reason of an act (the insured submitted that the act was contracting with a third party on different terms) but rather because the claim was in respect of a payment default which was not covered by the trade credit policy because the relevant contract had not been identified in Declarations: Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252.

[54.10.7] Act (Omission) – meaning: s 54(1) first limb and following An “act” in s 54(1) and the following subsections includes an “omission” by virtue of s 54(6). For s 54 to provide relief, under the first limb of s 54(1), there must be, inter alia, an effect of the contract of insurance that the insurer may refuse to pay a claim by reason of some act or omission of the insured or of some other person. The identification of a relevant act or omission is therefore critical to the application of s 54. In most cases, identification of an act or omission will be straight forward. However, in some cases it may be difficult to determine whether there has been a relevant act or omission or there may be more than one act or omission. The question as to what constitutes an “omission” has been a particularly vexed one and has occupied much judicial time. There is no conclusive test as to what constitutes an omission. The question has been frequently considered in cases involving a failure to notify facts (circumstances) under claims made and notified policies. In the course of the history below there have been many ultimately unsuccessful attempts to distinguish an “omission” that would fall under s 54 from things that would not; mere inaction; non-events; non-events in the sense of conduct wholly external to the policy; and a state of affairs; to mention the main ones. Whilst an attempt to distinguish a particular “omission” from a “state of affairs” was unsuccessful, an alleged “act” has been distinguished from a state of affairs or description of a relationship. ©

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was right. The plurality said that it was apparent that while the effect of the contract of insurance was that the insurer might refuse to pay the claim, it was not by reason of any act or omission of the insured or some other person. The claim made by the insured was for indemnity against liability for a demand that was not a demand of the kind dealt with by the policy because it was not a demand by a third party made within the period of cover. The policy simply did not extend to the demand referred to in the claim for indemnity.

s 54

Insurance Contracts Act 1984

[54.10.7]

The seminal decision of the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38 provided and continues to provide clarity on aspects of s 54. The plurality in Australian Hospital Care (McHugh, Gummow and Hayne JJ) noted that there was a perceived difficulty in reading s 54 literally. They noted that this perceived difficulty stemmed from an intuitive rejection of a construction of the section, which would require an insurer to pay a claim where there had been no event during the period of cover which the insured could have relied on as engaging the insurer’s obligations under the contract. This difficulty was described as more apparent than real. Instead of considering the question as to what constituted an omission, the majority judges said that close attention had to be given to the elements with which s 54 deals, “the effect of the contract of insurance between the parties; the ‘claim’ which the insured has made; and the reason for the insurer’s refusal to pay that claim” (at [39]). Australian Hospital Care therefore perhaps heralded an abandonment of the judicial search for one conclusive test as to what constitutes an omission. Instead, cases involving a failure to notify facts (circumstances) under “claims made and notified” policies will turn on whether the effect of the contract of insurance is that the insurer may refuse to pay a claim. This will depend on whether the contract of insurance provides for the refusal of the claim either directly or indirectly by way of a deeming clause or other provision (see [54.10.15]). Further, there is a distinction between the “claim” referred to in s 54(1) and the third party claim on the insured, which, to distinguish it from the former, can be referred to as a “demand” by the third party. In the absence of a deeming clause, if the third party’s demand on the insured was not made within the period of insurance cover, then one of the premises from which consideration of the application of s 54 would otherwise proceed would be absent. Section 54 would not be engaged because it does not operate to relieve the insured of restrictions or limitations that are inherent in the claim (see [54.10.5]). The case law preceding Australian Hospital Care is complex and diverse. It is worthwhile recording that history so that the cases can now be understood in light of the majority decision of the High Court in Australian Hospital Care. Because of the importance of the majority decision in Australian Hospital Care, it is helpful to consider the cases on the meaning of “omission” both before and after the decision using an Australian Hospital Care timeline. The history (before Australian Hospital Care)

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The history starts with the decision by the NSW Court of Appeal in FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164. Perry was regarded as overruled by the High Court in Australian Hospital Care. In Perry the NSW Court of Appeal by a majority held that a failure by an insured to notify facts (circumstances) that might give rise to a claim in accordance with an optional provision of a policy in terms similar to s 40, will not constitute an omission within s 54. It is important to note that whilst there had been a failure to notify circumstances within one policy year, a claim was made on the insured in the following policy year. The insurer’s declinature of the claim in the subsequent policy year, because of a failure to disclose the circumstances at inception, led to the consideration of the failure to notify circumstances in the earlier policy year. In his reasoning in Perry, Gleeson CJ emphasised the element of choice. Clarke JA based his conclusion on the fact that the insured lost no pre-existing right by reason of his failure to notify the relevant circumstances. They formed the majority with Kirby J dissenting. Whatever the reasoning, it is clear that a failure to notify facts (circumstances) under s 40(3), or under a deeming provision in a policy which replicates s 40(3), was held by the majority to be “inaction” and was not considered to be an “omission” within s 54. Accordingly, s 54 was held not to apply. (See [54.10.14].) The inaction/omission dichotomy was applied to other failures by an insured. An election by an insured not to expand the scope of cover by providing the insurer with a list of valuable contents was held to be inaction and not an omission within s 54 by the Full Court of the Supreme Court of Western Australia in Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317 per Kennedy, Owen and Steytler JJ. The Full Court upheld the judgment of Walsh J (WA Sup Ct) at first instance (Kelly v New Zealand Insurance Co Ltd (1993) 7 ANZ Ins Cas 61-197) who applied the majority decision of the Court of Appeal in Perry. In this case the insurer refused to pay a claim by the insured for the full value of stolen valuable contents because of a provision (item 5) in the contract of insurance requiring the specification of valuable contents. The insured contended that his failure to specify valuable contents constituted an “act” (omission) to which s 54 applied and that the insurer was thereby precluded from relying on such omission, except to the extent that liability for the claim was reduced by the amount that fairly represented the extent to which the insurer’s interests were prejudiced as a result of that act. In this regard, the insured relied on the East End decision (see [54.10.4]). Walsh J emphasised that the insurer did not seek to deny liability under the contract of insurance because of the failure of ©

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The omission/inaction dichotomy

s 54

Insurance Contracts Act 1984

[54.10.7]

the insured to do something, but because the insured did not elect to extend the scope of the cover under the relevant provision in the contract of insurance. He found that the issue was not one of cover being lost, but rather one where the cover would have been extended beyond the express policy limits. Walsh J concluded that the insured had not brought himself within the provisions of s 54 because the failure to extend cover did not constitute an omission of the kind with which s 54 is concerned. On appeal, the insured once again relied upon East End. In upholding the judgment of Walsh J, the Full Court applied the judgment of Gleeson CJ in Perry and his reasoning for distinguishing inaction from omission when considering a choice not to notify the insurer and thereby extend the scope of the cover. Owen J (with whom Kennedy and Steytler JJ agreed) said (at 67,518 (ANZ Ins Cas)): There are obvious differences between the failure to advise an insurer of a notifiable event and a failure to expand the scope of cover by listing particular items of nominated values so that they will become the subject of specific cover. In my opinion, this is a case where the distinction between an omission, properly so called, entitling the insurer to refuse to pay a claim and the exercise by the insured of a right to elect not to expand the scope of cover is critical. Clearly, “inaction and omission are not synonyms”. Close examination of item 5 reveals that the insured is provided with limited cover unless that party chooses to provide the insurer with a list. The insured has a choice as to whether to extend cover. The insured is not obliged to provide the list. If the insured chooses not to provide that list, for whatever reason, then it remains insured, but only to the limited extent stated in the policy clause. The question under s 54 is whether the insurer can refuse to indemnify the insured by reason of some act or omission of the insured. In this particular case the omission is the failure to provide the insurer with a list. I respectfully agree with the way in which it was put by the trial Judge. Liability was denied not because the [insured] failed to do something but because he deliberately elected not to extend the scope of cover beyond that specifically provided for in item 5. The findings of fact that the [insured] knew of the existence of the limitation, that he knew that he was being asked to provide a list and that he did not do so, are critical for the determination of this point.

The application of the omission/inaction dichotomy to a failure to obtain the insurer’s consent before incurring legal costs was considered by the NSW Court of Appeal in Antico v CE Heath Casualty & General Insurance Ltd (1996) 38 NSWLR 681; 125 FLR 270; 9 ANZ Ins Cas 61-304 and subsequently by the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35. This case is important because it marked the rejection of the omission/inaction dichotomy by the High Court. Given its importance, it is worthwhile considering the case and the various judgments in some detail. The appeal in Antico was from a judgment of Giles CJ, Comm D (NSW Sup Ct) and concerned, inter alia, whether a letter and attachments sent by 432

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a broker to the Sydney office of the insurer, in connection with the proposal for directors’ and officers’ liability insurance, constituted the giving of notice of facts (circumstances) that might give rise to a claim under a legal expenses policy issued by the Melbourne office of the insurer. The legal expenses policy contained a notification provision (condition 5) which provided for the notification of facts that might give rise to a claim to enable any subsequent claim to be deemed to be within the period of insurance cover. By another provision (condition 1) the insurer was not liable to indemnify the insured for legal expenses in the defence of claims unless the insured obtained the specific consent of the insurer. This required the insured to request consent and the insurer to give its consent. Proceedings were commenced against the insured and by the time the insured requested the insurer to consent to legal expenses being incurred, significant expenses had already been incurred. It was alleged that the insured had failed to seek consent, had failed to supply relevant information and was not entitled to rely upon the deeming provision because he had not notified facts (circumstances). Therefore, on one level, the case involved the notification of facts and on another level involved other failures. At first instance, Giles CJ Comm D (NSW Sup Ct) (Antico v CE Heath Casualty & General Insurance Ltd (1995) 8 ANZ Ins Cas 61-268) considered the application of the omission/inaction dichotomy and said (at 76,011): What is the difference between an omission and inaction? It is not enough simply to refer to the insured having a choice – in one sense the insured had a choice whether or not to give notice of the claim in East End Real Estate Pty Ltd v CE Heath Casualty and General Insurance Ltd, even if choosing not to give notice of the claim put it in breach of a condition of the policy. The choice must be in relation to obtaining a right to claim under the policy, not just in relation to making a claim in the invocation of an existing right.

Giles CJ Comm D followed the reasoning of both Gleeson CJ and Clarke JA in Perry. He determined that the insured also had a choice whether to do what was necessary to obtain the insurer’s consent in order to obtain a right to claim under the legal expenses policy, prior to incurring legal expenses. Failure to obtain consent would be inaction rather than an omission within the meaning of s 54. On appeal to the Court of Appeal, Kirby P sought to distinguish the reasoning of Gleeson CJ from the reasoning of Clarke JA in Perry. He said that Gleeson CJ emphasised the element of choice. The insured had a choice of whether or not to notify the relevant circumstances, and thus increase the coverage of the insurance policy. Kirby P said that Clarke JA based his conclusion on the fact that the insured lost no pre-existing right by reason of his failure to notify the relevant circumstances. He said that Clarke JA considered that s 54 would apply only when the insured lost a ©

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right to claim under the contract by virtue of some act or omission, either by the insured, or by some other person. Kirby P agreed with the “element of choice” reasoning of Gleeson CJ in Perry but sought to limit it to a failure to notify an insurer of circumstances giving rising to potential future claims. He said that the reasoning of Gleeson CJ in Perry was explicable in terms of legal policy. The insurance policy in Perry was underwritten on a “claims made and notified” basis. Because the very purpose of a claims made and notified policy is that the insurer will not be liable for claims which are not “made and notified” within the period of cover, the notification provisions of such policies take on special significance and have been strictly interpreted. Read according to the limitation, Kirby P said that the judgment of Gleeson CJ would not prevent the application of s 54 to the failure of the insured to obtain the consent of the insurer to undertake or defend proceedings. He characterised this requirement as a condition precedent to the insurer’s liability. He said that the use of s 54 did not strike at the intended operation of “claims made and notified” policies because the insurer was taken to be aware that a potential claim was pending. Kirby P disagreed with the reasoning of Clarke JA in Perry. He pointed out that Clarke JA held that a failure to act would only constitute an omission for the purposes of s 54 only when that failure led to the loss of a pre-existing right, specifically, the right to claim. He said that if s 54 was available only when the insured had established a right to indemnity from the insurer, it would be unavailable to cure any condition precedent to liability, no matter how technical or insignificant. This, he said, would permit form to triumph over substance. The other judges of the Court of Appeal in Antico found it unnecessary to decide upon this point. The omission/non-event dichotomy

In subsequent cases, the focus shifted from distinguishing an “omission” from mere inaction to distinguishing an “omission” from a non-event. Subsequently, findings of non-event as opposed to omission were restricted to cases in which the policy of insurance had not been activated by either the making of a third party claim or the existence of facts (circumstances) to be notified within the period of insurance cover. Antico – failure to exercise a right, choice or liberty

The High Court in Antico considered the meaning of “omission” in the context of the impact of the decision of the NSW Court of Appeal on the allegations by the insured that its insurance broker had failed to exercise due care. In terms consistent with the majority, Brennan CJ was of the view that s 54(1) focuses upon the actual conduct of the insured, that is, on some act 434

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which the insured does or omits to do. The legal classification of the act or omission is immaterial. He said (at 660–661 (CLR); 77,076–77,077 (ANZ Ins Cas)):

Importantly, in considering the meaning of omission, the High Court thought there was no reason why an omission may not be a failure to exercise a right, choice or liberty which the insured enjoys under the contract of insurance. The majority (comprising Dawson, Toohey, Gaudron and Gummow JJ) said (at 669–670 (CLR); 77,082 (ANZ Ins Cas)): Section 54 does not postulate a liability of the insurer to pay a claim which has been made. Rather, it takes as its starting point the existence of a claim and a contract the effect of which is that the insurer may refuse to pay the claim. The section directs attention to the reason founding the refusal, namely a particular act or omission on the part “of the insured or of some other person”… Section 54(1) uses the phrase “by reason of some act of the insured or of some other person”. It does not specify the act or omission of the insured as being a failure to discharge an obligation owed by the insured to the insurer. The legislation is expressed in broad terms and, on its face, there is no reason why the omission of the insured may not be a failure to exercise a right, choice or liberty which the insured enjoys under the contract of insurance. In any event, the act or omission may be that of a third party, “some other person”, who is unlikely to be a party to the contract of insurance in question. Submissions by the respondent which were contrary to the above construction of s 54(1) and which apparently were based upon the reasoning of the New South Wales Court of Appeal in Perry should be rejected.

Accordingly, the High Court only rejected part of the reasoning in Perry. It remained to be seen whether this rejection would have led the High Court to a different finding in Perry and would lead the High Court to a different finding in cases involving different facts. The consideration of this led to what can possibly be termed the “omission/non-event dichotomy”. Hodgson CJ in Eq (NSW Sup Ct) considered the question of a failure by an insured to notify facts (circumstances) that might give rise to a claim under a claims made policy in Permanent Trustee Australia Ltd v FAI ©

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Sub-section (1) of 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 non-compliance 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.

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General Insurance Co Ltd (1998) 153 ALR 529; 10 ANZ Ins Cas 61-408. In this matter, no claim had been made within the period of insurance cover. Hodgson CJ in Eq noted that the distinction between something a person may choose to do (in which case, there is a mere non-event if the person does not do it) and something that a person has an obligation to do (in which case, there is an omission if the person does not do it) was rejected by the High Court in Antico. He thought a similar distinction could be supported in another way. He illustrated this with the example appearing below. It seemed to him that with a lack of a claim under a claims made policy the gravamen of the refusal of the insurer to indemnify is not that someone omitted to do something (an “omission” under s 54) but rather that something did not happen (a non-occurrence of an event or “non-event”). Hodgson CJ in Eq said (at 565–566 (ALR); 74,510 (ANZ Ins Cas)): To take another (and plainly absurd) example. Suppose a person has fire insurance for 1995, and not 1996. An arsonist burns down the person’s house in 1996. The insured claims under the 1995 policy, arguing that the insurer cannot refuse the claim by reason of the omission of the arsonist to burn the house in 1995. Clearly, in that case, the reason for the refusal is that there was no fire whatsoever in 1995, whether caused by an arsonist or by accident or in any way whatsoever; so it would be bizarre to characterise the reason for refusal of cover in terms of an omission by the arsonist. … If the reason for refusal is fairly characterised as being that someone omitted to do something, then this is an omission to which s 54 can apply; but if it is fairly characterised rather as being that something did not happen, then this is not an omission to which s 54 can apply, even if it is the case that this something would have happened if one or more persons had acted in certain ways. On this approach, it is not necessary to maintain as being decisive the discredited distinctions between provisions defining the scope of the cover and conditions affecting the insured’s entitlement to claim, and between cases where the relevant person has a choice whether or not to do something and those where the person is under an obligation to do it. Yet, although these distinctions do not determine the question, both of them may be relevant to the proper characterisation of the reason for refusal. If the reason for refusal is that the circumstances insured against did not happen, then this would tend to favour the view that the gravamen of this reason is non-occurrence of an event rather than someone’s omission to do something. However, it is not conclusive. In East End, despite the wording of the policy, the Court considered that in substance the circumstance insured against was the making of a claim against the insured, and that notification of that claim was rather something the insured had to do. One might think it would have been unreasonable to regard it otherwise: if the making of a claim against the insured and the notification of that claim to the insurer were regarded as together being the circumstance insured against which had to occur within the policy period, this would mean that a claim received by the insured late on the 436

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last day of one policy period, and notified as soon as possible on the first day of the next policy period, would fall within neither of the policies. Furthermore, if the insured has an obligation to do something, and cover is refused for the reason that this thing was not done, one would tend to regard the gravamen of the reason for refusal as being that the insured omitted to do it, rather than that some event did not occur. Looked at in that way, it seems to me that Perry is not inconsistent with Antico. In Perry, the policy was a claims-made policy; and the relevant term was that if, during the insurance, the insured became aware of circumstances which may give rise to a claim and gave written notice thereof, then any subsequent claim arising out of those circumstances was deemed to have been made during the period of the insurance. On my suggested approach, it is reasonable to say that the gravamen of the refusal in Perry was the non-occurrence of a claim during the insurance, or of anything else deemed to be a claim; and not that the insured omitted to notify circumstances.

In applying this, he found that a refusal by the insurer to pay the insured’s claim on the ground that no claim was actually made within the period of insurance, and that no claim was deemed to have been made, focused on the non-occurrence of an event, rather than an omission of the insured or anyone else to do something, so that s 54 did not apply. However, having found that circumstances were notified, his decision did not turn on this point. This reasoning in Permanent Trustee was subsequently rejected by the plurality of the High Court in Australian Hospital Care although the decision in Permanent Trustee was considered to be right. In Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 147 FLR 422; 158 ALR 592; 10 ANZ Ins Cas 61-423 the NSW Court of Appeal (comprising Spigelman CJ, Mason P and Handley JA) held that a failure by a third party to make a claim on the insured within the period of insurance cover under a “claims made and notified” policy was not an “omission … of some other person” within s 54(1). Whilst Spigelman CJ, Mason P and Handley JA all concluded that the lack of a third party claim was not an “omission”, and whilst Spigelman CJ and Handley JA both agreed with the reasons for judgment of Mason P in draft form, they differed on matters of construction and focus. Spigelman CJ preferred the formulation of “non-event” in the sense of conduct external to the policy itself. He said (at 74,741 (ANZ Ins Cas)): Handley JA has suggested a particular construction of the word “omission”, which I do not entirely adopt. Rather, I prefer the formulation of “non event”, in the sense of conduct wholly external to the policy itself. In the context of liability insurance, the failure of a third party to make a claim should be regarded as an event wholly external to the policy, in the same way as the conduct of an arsonist is an external event for a fire policy. (To use the analogy of Hodgson CJ in Eq in Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd …). ©

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Rather than focus on the definition of the word “omission”, I would focus on the words “the effect of the contract of insurance”. The drafting of the clause defining the risk may mean (as East End decided and Antico affirmed), that such a clause can be characterised as having an “effect” that “the insurer may refuse to pay a claim”. That does not mean that every such clause, or every part of such clause, may be so characterised. The absence of a claim on the insured does not create any “effect” that an “insurer may refuse to pay a claim” by the insured. Until the first kind of claim is made, no issue of a claim of the second kind arises at all. This is not a matter of drafting or of mere form. The “claim” is an event wholly external to the policy and precedes any consideration of its “effect”.

Mason P noted that the way in which a policy of insurance is structured and expressed will potentially determine what conduct of the insured could be said to constitute the “act” (omission) for the purpose of s 54(1). By way of illustration, an act or omission leading to injury in a motor vehicle accident by an insured under a professional indemnity policy would be a non-event so far as the professional indemnity policy was concerned. Mason P referred to Hodgson CJ in Eq in Permanent Trustee v FAI and noted that the gravamen of the insurer’s refusal to pay on the claim in such a matter would not be the fact that the insured did or omitted to do something, but rather that something relevant to the policy did not happen. Mason P noted that the issue of sufficiency of causal connection was emphasised by the High Court in Antico. He said (at 74,745 (ANZ Ins Cas)): What is involved in this analysis is the same process that occurs when the law decides whether one event caused or contributed to another. Although the judicial task is described as a question of a fact, there is necessarily some element of judgment, some normative process, in which it is perceived sensible and fair to make the causative link.

Mason P noted that in Antico the High Court emphasised the requirement in s 54(1) of establishing sufficient causal connection between the insurer’s refusal to pay a claim and some act or omission of the insured or a third party. He said that, after Antico, a distinction remains between terms of the policy which should rightly be seen as conditions to be satisfied by the insured and terms which might expand the scope of the policy itself. He said (at 74,750 (ANZ Ins Cas)): The distinction is difficult to express definitively. Ultimately, it is a question of applying the words of s 54 and the policy it expresses to the substance of the words of a particular insurance policy. Section 54 was not available to cure the omission in Perry, because of the effect of doing so would have altered the scope of the contract of insurance in such a way that it would have been impossible for the Court to find a sufficient causal connection between the terms of the policy and the insurer’s refusal to pay a particular claim. In Perry and Antico the Court was at pains to identify the insured’s rights existing under the contract at the time of the claim. Only when they were understood 438

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was it possible to determine whether the insurer’s refusal of the claim could fairly be said to flow “by reason of” some act (or omission) of the insured or of some other person. Some acts or omissions are simply “non-events”, in the sense of having no connection with the substantive rights conferred under the policy and negotiated between the parties.

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” … 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. The other person need not be an agent of the insured. It may for example be the post office which fails to deliver a letter promptly or at all, or a facsimile transmission service which breaks down with the same result. The word does not cover failures to act by others having no relevant relationship or connection with the insured, whose interests are adverse to the insured.

Some of the reasoning in Greentree was subsequently rejected by the plurality in the High Court in Australian Hospital Care although the decision in Greentree was considered to be right. The omission/non-event dichotomy further confined

Subsequently, and prior to the majority decision of the High Court in Australian Hospital Care, a failure to notify facts (circumstances) was said to be an omission and the decision of the NSW Court of Appeal in Perry was not followed. The Full Court of the Federal Court (comprising Lee, North and Mansfield JJ) in HIH Casualty & General Insurance Australia Pty Ltd v DellaVedova (1999) 10 ANZ Ins Cas 61-431 expressed an obiter view that in applying Antico a failure to notify circumstances constituted an omission within s 54. Because of the similarity of facts, it is apparent that in applying Antico, the Federal Court was overruling the NSW Court of Appeal in Perry. The Qld Court of Appeal (comprising Pincus JA, Derrington and Chesterman JJ) considered the omission/non-event dichotomy in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd [1999] QCA 243. The insured, which owned a hospital, had failed to notify its insurer of an enquiry by the solicitor of a patient made during the period of insurance of a “claims made and notified” policy. The insured knew that the patient’s solicitor appeared satisfied that there was no indication of malpractice. The patient subsequently made a claim against the insured after the policy had expired. ©

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Handley JA agreed with the reasons for judgment of Mason P and added that in his opinion the meaning of omission as it is used in s 54 means the non-performance or neglect of action or duty and refers to the failure of the insured or someone else to perform an act for the benefit of the insured under the policy. He said (at 74,751 (ANZ Ins Cas)):

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On appeal, the Qld Court of Appeal held by a majority that the insured was aware of circumstances and that its failure to notify circumstances constituted an omission within the terms of s 54. Unfortunately, little guidance was given by the majority judges as to those cases in which a failure to notify would constitute an omission and those where it would not. Derrington J noted that the Full Federal Court considered an identical policy provision in DellaVedova and found that in applying Antico the Full Federal Court implied clearly, on an obiter basis, that Perry was protanto overruled. Derrington J distinguished Greentree. In Greentree the happening of the event was quite outside the subject matter of the policy. This contrasted with a failure to notify circumstances where the substance of the contract included cover where the insured was aware of the possibility of a claim, and it had the right to invoke that cover. The insured’s omission to exercise its rights did not put the cover “outside the contract”. Derrington J held that Perry had been effectively overruled by Antico. Derrington J did recognise in his preliminary observations that not every failure would necessarily constitute an omission. He said (at 75,087 (ANZ Ins Cas)): There may be some limitations upon the extent of the remedy provided by the section inherent in the concept of an omission. It is an essential connotation of the term that the act omitted is capable of being performed. For example, an insured cannot omit to notify the insurer of a claim made if the claim has not been made. There may be similar inherent limitations which go further, but none of this is directly relevant to the present case except to provide an understanding that the expressions used in the formulation of the remedy are not without limitations.

Chesterman J also distinguished Greentree. He held that on an application of the reasoning of the High Court in Antico, the distinction between East End and Perry, had been removed with the consequence that the former case had been approved. He noted in this regard the express approval of the High Court in Antico of the reasoning of Mahoney JA in East End. He said (at 75,098–75,099 (ANZ Ins Cas)): The reasoning of Mahoney JA in East End seems to apply exactly to the present circumstance. The immediate reason why the [insurer] could refuse to pay was that the policy did not cover the claim. But this was because the [insured] had not, during the duration of the policy, notified the [insurer] of the occurrence. The claim was not within the cover by reason of an omission of the insured; therefore the [insurer’s] entitlement to refuse indemnity arose by reason of that omission. If this be the correct approach I cannot see how s 54 does not apply unless one makes assumptions about the sorts of omissions to which the section applies. Antico makes this approach impermissible.

Rolfe J (NSW Sup Ct) also found that Perry should not be followed in Einfeld v HIH Casualty & General Insurance Ltd (1999) 152 FLR 211; 10 440

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In arriving at his decision, Rolfe J considered the omission/non-event dichotomy as it arose in Greentree. He noted that in Greentree the absence of a claim in the policy year meant that there was nothing to activate the policy. However, he sought to distinguish the non-notification of circumstances. Rolfe J said (at 75,166 (ANZ Ins Cas)): In my opinion, if relevant circumstances came to the notice of the [insured] that would mean that something happened and, relevantly for present purposes, the omission would be the failure to notify the insurer in accordance with the policy.

Rolfe J held that consistency demanded that a failure to notify circumstances be treated in the same manner as a failure to notify a claim. He said (at 75,167 (ANZ Ins Cas)): In the case of a claim made or of becoming aware of circumstances which may give rise to a claim, notice must be given. If, in the first case, the failure to give notice is an “omission”, as has been authoritatively determined, it seems to me that it is very strongly arguable that it also is in the second case. Indeed, in my respectful opinion, consistency would demand that approach. In each case there is a failure to give notice in circumstances where an event potentially triggering the policy has occurred and, if notice is given of that event, the policy will respond. I do not see why the nature of the event, provided it happens within the policy year, affects the consequence of the failure to give notice of it, where the omission is the failure to give notice.

Therefore, prior to the High Court decision in Australian Hospital Care, the omission/non-event dichotomy had been confined with the result that a failure was considered a non-event given facts the same as, or similar, to those in Permanent Trustee and Greentree. The weight of authority was to the effect that Perry was overruled and that a failure to notify circumstances constituted an omission within the terms of s 54. The question remained as to whether the High Court would approve the “omission/non-event dichotomy” but restrict a non-event finding to a case in which the policy had not been activated by the making of a third party claim or the existence of facts (circumstances) to be notified within the period of insurance cover. ©

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ANZ Ins Cas 61-450; [1999] NSWSC 867. Rolfe J held that the facts of this case were indistinguishable from those in Perry. In considering the reasoning of the High Court in Antico, and the cases that followed, he concluded that FAI v Perry had been overruled and that he was bound to follow the decisions in DellaVedova and Australian Hospital Care. He took into account the fact that the High Court had disapproved vital reasoning in FAI General Insurance Co Ltd v Perry and had expressly approved the reasoning in East End. Whilst accepting that the NSW Court of Appeal had held, albeit obiter, in Greentree that the decision in Antico did not affect Perry, the two other intermediate appellate courts in DellaVedova and Australian Hospital Care had assumed or held that Perry had been overruled by Antico.

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Australian Hospital Care – meaning of omission

The High Court held by a majority in Australian Hospital Care (McHugh, Gummow, Kirby and Hayne JJ; Gleeson CJ dissenting) that a failure to give notice of facts (circumstances) which might give rise to a claim in accordance with a contractual requirement to do so, was an omission within the meaning of s 54 because the effect of the contract was that the insurer could refuse to pay the claim. The plurality (McHugh, Gummow and Hayne JJ) rejected the reasoning in Greentree and Permanent Trustee but found that the actual decision in each case was right. The plurality looked at the suggestion in Greentree that a distinction could be drawn between omissions and non-events. In Greentree it was said that the distinction was between “conduct wholly external to the policy” and events which have some effect under the policy. The majority judges in Australian Hospital Care said that there was difficulty with referring to events as “wholly external to the policy” in that no question about the effect of a contract of insurance can ever be asked in isolation from external facts and circumstances. The plurality also criticised the formulation of Hodgson CJ in Eq in Permanent Trustee, who said that in the absence of a claim by a third party during the period of insurance cover, the gravamen of the refusal is not that someone omitted to do something but rather something did not happen. It was thought that the distinction could not readily be applied in certain cases. The plurality said that the perceived difficulty in reading s 54 literally, which had led to the distinction, was more apparent than real. Very importantly, their Honours said that close attention must be given to the elements with which s 54 deals: the effect of the contract of insurance between the parties, the “claim” which the insured has made and the reason for the insurer’s refusal to pay that claim. The plurality said (at [40]): Section 54 directs attention to the effect of the contract of insurance on the claim on the insurer which the insured has in fact made. It is not concerned with some other claim which the insured might have made at some other time or in respect of some other event or circumstance. It requires the precise identification of the event or circumstance in respect of which the insured claims payment or indemnity from the insurer.

The plurality, in using the Greentree example where the insured claimed indemnity against liability for a claim that the third party had first made on it outside the period of cover, distinguished the insured’s “claim” within the meaning of that term in s 54(1) from the third party claim on the insured, which they referred to as a “demand”. The plurality said (at [41]): 442

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The plurality noted that the restrictions that are inherent within the claim vary according to the type of insurance in issue. Their Honours noted the differences between “occurrence-based” contracts of insurance and “claims made and notified” policies. In the circumstances considered in Greentree, the claim made by the insured was for indemnity against liability for a demand that was not a demand of the kind dealt with by the policy because it was not a demand by a third party made within the period of cover. The reason for refusal was not some act or omission of the insured or some other person. It was that the policy did not extend to the demand referred to in the claim for indemnity. The plurality said (at [45]): By contrast, if a third party had made a demand on the insured during the period of cover but, for whatever reason, the insured had not notified the insurer of the making of that demand until after the period of cover ended, it is apparent that the effect of the contract, but for s 54, would be that the insurer may refuse to pay the insured’s claim only by reason of the failure to notify the fact of the demand.

Applying this to the facts at hand, the plurality noted that the claim the insured made on the insurer was for indemnity against liability for an occurrence of which the insured first became aware during the period of cover. The effect of the contract of insurance was that the insurer could refuse to pay that claim by reason only of the fact that the insured did not give notice of the occurrence to it. Section 54, therefore, required the conclusion that the insurer may not refuse to pay the insured’s claim. The effect of the contract of insurance, but for s 54, would be that the insurer may refuse to pay the insured’s claim by reason only of the omission of the insured to notify the occurrence which, at the time, was one which might subsequently give rise to a claim by the third party against it. In summary, there will be some cases where the policy does not extend to the demand referred to in the claim for indemnity. Section 54 will not operate to relieve the insured of restrictions or limitations that are inherent in any claim. Alternatively, there may be cases where the demand by the third party allows for a “claim” within the meaning of that term in s 54(1), but there is no relevant effect of the contract of insurance such that the insurer might refuse to pay the claim. An example of a case in which there is no relevant effect of the contract of insurance is a matter where there has been a non-notification of facts (circumstances) which may give rise ©

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Section 54 does not permit, let alone require, the reformulation of the claim which the insured has made. It operates to prevent an insurer relying on certain acts or omissions to refuse to pay that particular claim. In other words, the actual claim made by the insured is one of the premises from which consideration of the application of s 54 must proceed. The section does not operate to relieve the insured of restrictions or limitations that are inherent in that claim.

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to a claim and where there is no provision in the contract of insurance allowing for the notification of circumstances providing the requisite effect. Post Australian Hospital Care – no contractual provision giving requisite effect

The majority decision in Australian Hospital Care demonstrated that if a claims made and notified policy of insurance contained a clause that provided for the notification of facts (circumstances) that might give rise to a claim (a deeming clause) then there could be a relevant “effect of the contract of insurance” and an “omission” in the event of a failure to notify. But what if a claims made and notified policy does not contain a deeming clause? There would be no requisite “effect of the contract of insurance” and no “omission” in the event of a failure to notify. Chesterman J (Qld Sup Ct) in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388 and Bergin J (NSW Sup Ct) and the NSW Court of Appeal (comprising Spigelman CJ, Meagher and Sheller JJA) in Gosford City Council (Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511 and Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; 12 ANZ Ins Cas 61-566; [2003] NSWCA 34, respectively) found that there was no relevant effect of the contract of insurance, and therefore no “omission”, in circumstances where there had been a late notification of facts (circumstances) that might give rise to a claim. The claims made and notified policies in these cases did not contain a deeming clause allowing for the notification of facts (circumstances) or any other provision requiring the notification of facts (circumstances). Further, it was held in both cases that s 40(3) does not imply into policies of insurance a term to the same effect as the subsection so as to create the requisite “effect” and therefore an “omission” in the event that there is a failure to notify facts that might give rise to a claim. In other words, if the contract of insurance itself does not give the requisite “effect”, then the requirement within s 54(1) is not satisfied and s 54 is not enlivened. Therefore, the question as to whether a non-notification or late notification of facts (circumstances) constitutes an omission within s 54 depends on the terms of the contract of insurance. This has caused insurers to review the terms of their claims made and notified policies and remove deeming clauses to avoid a requisite “effect” and therefore the possibility of an “omission” under s 54. Omission compared with “a state of affairs” or something beyond power or control and Maxwell v Highway Hauliers

The Qld Court of Appeal (Chesterman JA with whom Holmes and White JJA agreed) in Johnson v Triple C Furniture & Electrical Pty Ltd (2010) 243 FLR 336; 16 ANZ Ins Cas 61-866; [2010] QCA 282 found that there 444

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In Johnson v Triple C a pilot had failed to comply with Civil Aviation Regulations in not satisfactorily completing an aeroplane flight review, which required an instructor’s assessment of the pilot’s performance within the preceding two years (in breach of an exclusion based on use of the aircraft in breach of regulations). The Court of Appeal held that this was not an omission within s 54 because, obtaining the satisfaction of the instructor was something he might achieve, but was not something he had the power to do and therefore that he could omit. Chesterman JA said (at 78,528 and 78,529 (ANZ Ins Cas)): There is an immediate problem in characterising the prohibition on [the pilot’s] flying as an omission. The word carries with it an implication or connotation that the thing omitted, the thing not done, was something which was within the power of the omitter to have done. An omission may be deliberate or inadvertent, but whatever its cause one cannot, I think, be said to omit to do something which is beyond one’s capacity to do. A candidate for an examination who fails is not ordinarily described as having omitted to pass. An athlete beaten in a contest does not omit to win. … [The pilot] did not omit to comply with reg 5.81(1). The circumstance that he had not satisfactorily completed a flight review was not an omission as the word is ordinarily understood and as it is, in my opinion, used in s 54. He may have omitted to undergo the review but what was required was that he complete the review to someone else’s satisfaction. Obtaining that satisfaction was something [the pilot] might achieve, or fail to achieve, but it was not something he could omit.

The Court of Appeal in Johnson v Triple C noted that an omission cannot operate to reformulate a claim. Chesterman JA said (at 78,530 (ANZ Ins Cas)): As I understand the exegesis in [Australian Hospital Care], for the purposes of applying s 54 one looks to see whether some act or omission entitles an insurer to refuse the claim actually made on it. If the claim was for indemnity in respect of a loss which the policy did not cover s 54 will not apply. The act or omission, assuming one is identified, cannot operate to reformulate the claim or, in this case, convert the claim from one in respect of the loss caused by a pilot who had not completed the flight review into a loss caused by a pilot who had completed a flight review. ©

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can be a failure of a person to do something in breach of an exclusion in a contract of insurance that is not an omission under s 54 when the thing not done is not something within that person’s power or capacity to do. The High Court in Maxwell v Highway Hauliers Pty Ltd (2014) 18 ANZ Ins Cas 62-035; [2014] HCA 33 found that the Qld Court of Appeal had erred to the extent that it had accepted an argument that s 54(1) was not engaged in circumstances where the insurer, relying on a temporal exclusion, refused to pay the insured’s claim by reason of the operation of an aircraft in breach of air safety regulations. To that extent, its decision should not be followed.

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The Qld Court of Appeal in Johnson v Triple C said that from the description essayed in Antico, and endorsed in Australian Hospital Care, for the purposes of s 54 an act or omission is the performance, or non-performance, of some activity which the contract of insurance requires, allows or contemplates and which may affect its operation. In Johnson v Triple C they found that it was not a case in which the omission gave rise to a right in the insurer to refuse the claim by reason of something in the policy. Rather, it was an omission which was relied on to give rise to a claim which the insured could not otherwise make. Because the pilot had not satisfactorily completed the flight review, the claim for indemnity under the policy was excluded. The omission could not change that, and was not of the kind with which s 54 was concerned. The interpretation of the term “omission” and the application of the principles governing s 54(1) in Johnson v Triple C was called into question. The WA Court of Appeal (McLure P, Pullin and Murphy JJA) in Maxwell v Highway Hauliers Pty Ltd (2013) 45 WAR 297; 275 FLR 64; 17 ANZ Ins Cas 61-967 which was a factually similar case rejected contentions based on what were said to be an application of the legal principle in Johnson v Triple C in finding that there had been an omission which engaged s 54(1). The insured, the operator of a fleet of trucks, had operated its vehicles which were involved in accidents on a particular run with drivers who did not satisfy the requirements of the policy of insurance, in that they were non-declared drivers who had not obtained a minimum PAQS test score. At first instance, Corboy J (WA Sup Ct) rejected a submission based on Johnson v Triple C that the failure could be characterised as a “state of affairs” in so far as the drivers were required not only to perform the test but also to pass it (rather than an act or omission): Highway Hauliers Pty Ltd v Maxwell (2012) 17 ANZ Ins Cas 61-925; [2012] WASC 53. Corboy J characterised the relevant act by reference to the use of the vehicles, rather than the attributes of the drivers concerned. This focused on the substantive effect of the contract of insurance, the claims made by the insured and the reasons why the insurer was entitled to reject the claim. He found that he was not bound by Johnson v Triple C to reach the same conclusion because the relevant act or omission for the purpose of s 54(1) will depend on the particular circumstances of the case. The facts of the case, whilst similar in some respects, differed from those in Johnson v Triple C. On appeal, the members of the WA Court of Appeal, in separate judgments, found that there had been an act or omission within s 54(1). McLure P applied the approach of the plurality of the High Court in Antico and found there was an omission, being the failure of the insured’s 446

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When the omission is fully formulated consistently with Antico, it is an omission for the purpose of s 54(1). The fact that the insured or another person is not wholly in control of satisfying a requirement for another’s consent or in successfully completing a test is of no significance. The failure is in not meeting the requirement before engaging in the relevant conduct in question. There is nothing in the judgment in Johnson v Triple C to indicate that there was any dispute about the relevant act or omission. Chesterman JA in that case did not put the failure in its full factual context. To the extent that his conclusion depends upon an interpretation of the term “omission” in s 54(1) I would, applying the test in Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, depart from that interpretation.

McLure P also rejected a submission by the insurers based on their understanding of the reasoning of Chesterman JA in Johnson v Triple C in reference to the relevant act or omission being in relation to an “activity which the contract of insurance requires, allows or contemplates”. She could find no reason for concluding that this was an essential element of s 54(1). Even if applicable it required the identification of the content of the relevant “activity”. It should be confined to the particular activity to which the failure relates: in Antico the activity was incurring legal costs; in this case, driving nominated vehicles on the east-west run; and in Johnson v Triple C, flying the aircraft. The relevant omission in each case relates to that activity. In rejecting a widening of the content of that activity she said (at [85]): There is no warrant for widening the content of “activity” to include the relevant omission with the consequences that the compound activity (incurring legal costs without consent; driving the nominated vehicles on an east-west run without having satisfactorily completed the PAQS test; or flying an aircraft in breach of the civil aviation regulations) is not what the contract “requires, allows or contemplates”. This latter approach to narrowing the scope and application of s 54(1) is not consistent with either Antico or [Australian Hospital Care (see above)] and in my respectful opinion is wrong. If that is how the test is applied in Johnson v Triple C, I would decline to follow it.

Pullin JA was of the view that the act of the insured was the act of giving permission to a driver to operate the vehicles when the driver did not have the requisite PAQS driver profile score. Alternatively, there was an omission by a third person, namely, the omission of the insured’s drivers to satisfactorily complete the PAQS test before driving the insured’s nominated vehicles on an east-west run. The act or, alternatively, the omission were relied upon to refuse the claim. He said that the insurer’s ©

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drivers to satisfactorily complete the PAQS test before driving the insured’s nominated vehicles on an east-west run. Because s 54(1) applies to the act of the insured or another person, it didn’t matter whether it was a failure of the insured’s drivers to satisfactorily complete the PAQS test before driving the vehicles or the failure of the insured to use drivers who had satisfactorily completed the test. McLure P rejected the contentions based on Johnson v Triple C. She said (at [83]–[84]):

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attempt to characterise the reason for the refusal to pay as based on a contention that the claim was outside the scope of the policy was of no avail. Murphy JA similarly found that the effect of the policy was that the insurer could refuse to pay the claim by reason of the act of the insured in operating the vehicles using drivers who did not hold the specified PAQS qualification. This could also be characterised as an omission to use drivers who had that qualification. Section 54(1) therefore applied. He did not see the observations of Chesterman J in Johnson v Triple C as as laying down some independent “legal principle” for the application or construction of s 54(1). He did not consider the decision in Johnson v Triple C required him to reach a different conclusion from the one he had reached on the application of s 54(1). The NSW Court of Appeal (Meagher JA with whom Macfarlan and Emmett JJA agreed) in Prepaid Services Pty Ltd v Atradius Credit Insurance NV (2013) 302 ALR 732; 17 ANZ Ins Cas 61-981; [2013] NSWCA 252 found that s 54(1) had no application because the insurer could refuse to pay a claim under a trade credit policy because the payment default was simply not covered by the policy. Meagher JA considered the decision in Johnson v Triple C and the decision of the WA Court of Appeal in Maxwell v Highway Hauliers. Meagher JA noted that each of the decisions addresses, as a step in the process of applying s 54, the need to identify any “restrictions or limitations” inherent in the actual claim to an indemnity, by reference to the characteristics of the event or circumstance to which the policy responded. Meagher JA noted that Chesterman JA in Johnson v Triple C in describing the insured event in that case, took into account the operation of an exclusion which had the effect of suspending cover during the existence of a state of affairs resulting from the failure of the pilot to obtain or maintain a qualification. In his opinion, in so doing Chesterman JA proceeded other than in accordance with the principles stated by the High Court in Australian Hospital Care. Meagher JA said (at [140]): In my respectful opinion, in doing so his Honour proceeded other than in accordance with the principles and approach stated in Australian Hospital Care and applied in Maxwell v Highway Hauliers. Taking the operation of such an exclusion into account when identifying the risk insured would mean that s 54 would not address unsatisfactory aspects of the common law which it was intended to reform. Reference to Report No 20 and the Explanatory Memorandum shows that s 54 was intended to prevent reliance upon temporal exclusions, such as those considered in these two cases, 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: Law Reform Commission Report No 20, esp paras 217,229 and Appendix A, cl 54, notes 3 and 4; and Explanatory Memorandum, paras 177 to 182. 448

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The High Court in Maxwell v Highway Hauliers Pty Ltd (2014) 88 ALJR 841; 18 ANZ Ins Cas 62-035; [2014] HCA 33 dismissed the appeal from the insurers and found that the conclusion of the Court of Appeal was correct.

The High Court rejected the proposition that the “claim” to which s 54 refers is limited to a claim for an insured risk. The proposition was inconsistent with the construction of s 54(1) by the High Court in Antico. The High Court noted that Antico established that s 54 takes as its starting point nothing more than the existence of a claim and of a contract the effect of which is that the insurer may refuse to pay that claim by reason of some act which the insured (or someone else) has done or omitted to do after the contract was entered into. It does not postulate a liability of the insurer to pay the claim that has been made. The High Court also noted that the Antico construction was reinforced by the reasoning in Australian Hospital Care. The High Court found that the insurers had misapplied a statement of the plurality in Australian Hospital Care that s 54 does not operate to relieve the insured of restrictions or limitations that are inherent in the claim. The insurers had equated its reference to restrictions or limitations that are inherent in a claim with any restriction or limitation on the scope of cover that is provided under the contract. The High Court found that there was both an act and an omission. It said (at [26]–[27]): Here the fact that each vehicle was being operated at the time of the accident by an untested driver is properly characterised as having been by reason of an “act” that occurred after the contract of insurance was entered into. There was an omission of the Insured to ensure that each vehicle was operated by a driver who had undertaken a PAQS test or an equivalent program approved by the Insurers. That omission occurred during the Period of Insurance. The Insured having made claims seeking indemnity under the Policy in relation to the accidents which occurred during the Period of Insurance, it is sufficient to engage s 54(1) that the effect of the Policy is that the Insurers may refuse to pay those claims by reason only of acts which occurred after the contract was entered into. Precisely how the Policy produced that effect was not to the point.

The High Court also found that the Qld Court of Appeal in Johnson v Triple C had erred to the extent that it had accepted an argument that ©

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The insurers argued that the substantive effect of the policy was that the claims for indemnity which the insured made were for damage to vehicles whose drivers had a characteristic that removed the accidents from the scope of cover. The argument reduced to the proposition that the “claim” to which s 54(1) refers to is limited to a claim for an insured risk. The insurers relied upon the reasoning of the plurality in Australian Hospital Care as interpreted and applied in Johnson v Triple C.

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s 54(1) was not engaged in circumstances where the insurer, relying on a temporal exclusion, refused to pay the insured’s claim by reason of the operation of an aircraft in breach of air safety regulations. To that extent, its decision should not be followed. Retrospective endorsement to cover not an “act”

An insured’s agreement to a retrospective endorsement to cover is not an “act” within s 54. Robertson J (Fed Ct) considered an arguably novel submission that the act of the insured in agreeing to an endorsement to cover fell within s 54 such that the insurers may not rely on the endorsement to refuse to pay the claim. He accepted the insurer’s submission that the words “some act of the insured or of some other person” do not capture bilateral or multilateral agreements with the insurer, in this case the retrospective endorsement to cover which was agreed during the term of the policy: Sienkiewicz (As Trustee for the Sienkiewicz Superannuation Fund) v Salisbury Group Pty Ltd (in Liquidation) (No 2) [2015] FCA 147 (6 March 2015).The Full Court of the Fed Ct (Allsop CJ, Gleeson and Beach JJ) allowed an appeal on the basis of policy interpretation and construction; the s 54 submission does not appear from the Full Court judgment to have been raised on appeal: Todd v Alterra at Lloyd’s Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15. Failures by deemed member of fund to make and by trustee to obtain an “insured member” application “omissions”

In Harrison v Retail Employees Superannuation Pty Ltd (2016) 19 ANZ Ins Cas 62-091; [2015] NSWSC 1665 (10 November 2015) Lindsay J (NSW Sup Ct) considered a TPD claim made by an employee, who was a “deemed member” of a fund (for 12 months) and the beneficiary of TPD cover between a trustee as the insured and a life insurer. The life insurer contended that the employee’s disablement (TPD event) occurred outside the 12-month period of deemed cover and, in the absence of an application to it to become a full insured member (for cover beyond the 12 month period), the TPD claim was not payable because cover had ceased. Lindsay J found that the disablement occurred during the period of deemed cover. Alternatively, in his opinion, if (contrary to his finding) the employee became TPD after the period of deemed cover (in circumstances in which, for want of an “application”, cover had ceased) s 54 would operate to preclude the life insurer from refusing to pay the claim by reason only of the want of an “application”. Lindsay J cited Antico and noted that an act or omission which engages s 54 may be a failure to exercise a right, choice or liberty, which an insured enjoys under the contract of insurance. He found that to the extent that the employee’s claim might be said to have been based on a TPD event that occurred outside “the period of cover”, any restriction or limitation on the entitlement to claim a TPD benefit was not inherent in the claim 450

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(Australian Hospital Care and Maxwell) but arose by reason of an omission on the part of the employee to make, and an omission on the part of the trustee to obtain from the employee, an application to become a full “insured member”, which omissions occurred after the policy had been entered into and while it remained operative. Clearing Australian Customs in yacht to leave Australian waters to compete in race an “act” or “acts”

In Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyd’s (2016) 19 ANZ Ins Cas 62-090; [2016] FCA 1 (5 January 2016), Foster J (Fed Ct) considered a total loss claim under a boat insurance policy which arose when the insured yacht ran aground off Cape Talbot WA (in Australian waters) after returning from Indonesia. Cover under the policy was geographically limited to Australian waters and was automatically suspended whenever the boat cleared Australian Customs for the purpose of leaving Australian waters and recommenced when it cleared Australian Customs on return. The insurer declined to pay the claim because cover had been suspended upon the boat clearing Australian Customs to leave Australian waters to compete in the Fremantle to Bali sailboat race but cover had not recommenced when the boat ran aground because it had not cleared Australian Customs upon its return. Foster J found that the suspension provision was in the nature of an exclusion and did not operate as one of the contractually prescribed elements of the geographic limits on the scope of cover itself. In his view, the circumstance that the boat was sailing within Australian waters but had not yet cleared Australian Customs on the return journey from Indonesia to Australia when it ran aground, taken in isolation, was not an act or omission within s 54. This was because it was not the re-entry, presence, operation and sailing of the boat in Australian waters, looked at in isolation, that provided a basis to deny indemnity. Rather, it was the vessel’s departure from Fremantle in the first place, for the purpose of leaving Australian waters, having cleared Australian Customs, which led to the automatic suspension of cover under the policy. Foster J held that by causing the boat to clear Australian Customs for the purpose of leaving Australian waters in order to compete in the Fremantle to Bali sailboat race, the insured committed an act or acts within the meaning of that term in s 54(1) which led the insurer to refuse to pay his claim. Exclusion from cover of liability for injury to person normally living with insured not an “act” (“state of affairs” or “relationship”)

The WA Court of Appeal (McLure P, Buss JA and Mitchell J) in Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25 found that normally ©

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Clearing Australian Customs in yacht to leave Australian waters to compete in the Fremantle to Bali sailboat race is an act or acts within s 54.

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living with an insured in accordance with an exclusion to liability cover that excluded injury to any person who normally lives with the insured, was not an act under s 54 but rather a state of affairs, a description of a relationship or the character of the relationship between the injured person and the insured. In Inglis the claimant, at the time 10 years old, was injured as a result of being run over by a ride-on lawnmower. She normally lived with the insured. The insured became the subject of third party proceedings brought by defendants to proceedings commenced by the claimant. The insured claimed under a home insurance policy and the insurer declined to indemnify due the operation of exclusion in the policy which excluded legal liability for “Injury to any person who normally lives with you…” McLure P, with whom Buss JA and Mitchell J agreed, noted that the issue in the case was whether there was an act within the natural and ordinary meaning of that word. In drawing a distinction between an act and a state of affairs McLure P said (at [36]–[37]): In its immediate context in s 54(1) and in s 54 generally, ’act’ means something done or being done by a person. It is unnecessary to determine whether an act is confined to physical conduct, although that is what is relied on in this case. In its natural and ordinary meaning, an act is different from a state of affairs or the result of an act. These distinctions are well known in the criminal law. See He Kaw Teh v The Queen [1985] HCA 43; (1985) 157 CLR 523, 564.

It was noted that it is not a requirement of the exclusion that the claimant be living with the insured at the time of the accident. A claimant may be away from the place where the claimant “normally lives” when injured. Where a claimant normally lives may change during the period of insurance. However, the applicability of the exclusion is to be determined as at the date the legal liability is incurred. McLure P noted (at [41]) “The question at that date is ‘does the claimant normally live with you?’. That question can be answered in the affirmative regardless of where the claimant was actually living on that day”. The ultimate fact as to whether the claimant normally lived with the insured at the relevant time depended on the drawing of an inference from the conduct of relevant persons over an extended period and not any act on the day in question. It is properly characterized as a state of affairs or a description of a relationship and not an “act” within s 54. McLure P said (at [42]): Whether a “person normally lives with” an insured requires that the claimant and the insured (or each insured if more than one) cohabit the same premises over an extended period. The conduct of the claimant and each insured over that extended period will be relevant in determining the ultimate question; it will not be the conduct of any single person, be it the claimant or the insured. Where the ultimate fact (did the claimant normally live with the insured at the relevant time) depends on the drawing of an inference from the conduct of all 452

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relevant persons over an extended period and does not depend on there being any act on the relevant day, the ultimate fact is not an “act of the insured or of some other person”; it is properly characterised as a state of affairs or description of a relationship.

[54.10.8] Act (omission) of the insured (insurer’s rights): s 54(1) first limb Insurer’s entitlements under a contract of insurance must not be looked at in isolation when considering the cause of the entitlement of an insurer to refuse payment within the terms of s 54(1). The High Court decided in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 that rather than deny s 54(1) any operation because of the absence of action by an insurer, it is necessary to look at the effect of the contract and to ask whether that effect is that the insurer may refuse payment “by reason of” the relevant act or omission. The case concerned the defence of proceedings and the expenditure of legal costs without the consent of the insurer under a provision (condition 1) of a legal expenses policy. The High Court noted that the effect of condition 1 was to protect the position of the insurer against payment of legal expenses where the insured lacked reasonable grounds for the defence of the proceedings or in the absence of reasonable grounds for a successful outcome. The High Court illustrated the operation of condition 1 by way of example of a Queen’s Counsel giving an opinion that there is no reasonable ground for a successful outcome in a matter. The furnishing of this unfavourable opinion would be an “act … of some other person” within s 54(1) which under the contract of insurance, may be a basis for an insurer’s refusal to pay a claim. However, s 54(1) would operate to deny the insurer the right to refuse the claim by reason only of the act of the Queen’s Counsel. Rather, liability would depend on the extent of any prejudice. In the court below, the NSW Court of Appeal had held that s 54 had no application to the absence of action by the insurer in not granting consent to defend proceedings and incur legal costs, since that action was never requested: Antico v CE Heath Casualty & General Insurance Ltd (1996) 38 NSWLR 681; 125 FLR 270; 9 ANZ Ins Cas 61-304. Kirby P (with whom Priestley and Powell JJA agreed on this point) noted that to obtain ©

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In agreeing with McLure P, Mitchell J noted that the identification of the claimant as a person who normally lived with the insured was to describe the character of her relationship with the insured, rather than her conduct. The status of the claimant as a person who normally lived with the insured did not depend on anything she did. That status was not an “act” of the claimant.

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the insurer’s consent required two steps, namely, the act of the insured in seeking consent, and the act of the insurer in granting consent. He said that since s 54 only deals with the conduct of the insured, it cannot assist where the insurer does not grant consent. The High Court held that it was inappropriate to analyse condition 1 so as to deny s 54(1) any operation because there was an absence of action by the insurer. The High Court (Dawson, Toohey, Gaudron, and Gummow JJ) said (at 672–673 (CLR); 77,083–77,084 (ANZ Ins Cas)): Nor is it appropriate to analyse condition 1, as did the Court of Appeal, so as to deny to s 54(1) any operation in this case because there was inaction or an absence of action by the insurer. Within the meaning of s 54(1), there was an omission by the [insured], who failed to obtain the consent of the insurer before incurring the relevant legal expenses. … the question then is whether “by reason of” such omissions, the effect of the policy, but for s 54(1), would be that the insurer may refuse to pay the claim. The phrase “by reason of” does not express a limitation to the sole or unique cause of the entitlement of the insurer to refuse payment. Rather, s 54(1) refers not to precise concepts of form but to the effect of the contract and asks whether that effect is that the insurer may refuse payment “by reason of” the relevant act or omission.

Accordingly, s 54 is potentially available in cases where an insurer is required to give its consent under a contract of insurance.

[54.10.9] Some other person: s 54(1) first limb The reference to “some other person” in the first limb of s 54(1) allows the insured to rely on an act or omission by another in invoking s 54(1). A question arises as to whether there is a limit to the category of persons who can potentially be “some other person”. Some judges have expressed a view that “some other person” may encompass either a s 48 claimant or a claimant pursuant to the common law extension provided by the High Court in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873; [1988] HCA 44. However, the High Court has expressed a view that the category is wider. In CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199 Clarke JA expressed an obiter opinion that the reference to “other person” in s 54(1) is a reference to a s 48 claimant. He said (at 47 (NSWLR); 78,284 (ANZ Ins Cas)): [Section 54] is concerned with the right of an insurer to refuse to pay a claim “by reason of some act (which includes omission s 54(6)) of the insured or some other person” (emphasis added). Two things should immediately be said about this provision. First, the insurer’s right to refuse to pay the claim would ordinarily arise out of the terms of the policy of insurance. Secondly, the “other person” referred to must, I think, be a person who is entitled to a benefit under the policy and who is given the right by s 48(1) to recover the amount of his or her loss. 454

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“Some other person” in s 54(1) cannot refer to anyone in the world, and must refer to a person interested in the contract of insurance either as a party thereto or as a beneficiary thereunder by reason of s 48(1).

However, the view that “some other person” must refer to a person interested in the contract of insurance needs to be contrasted with statements by the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35. In the majority judgment, the High Court (comprising Dawson, Toohey, Gaudron and Gummow JJ) said (at 669–670 (CLR); 77,082 (ANZ Ins Cas)): Section 54(1) uses the phrase “by reason of some act of the insured or of some other person”. It does not specify the act or omission of the insured as being a failure to discharge an obligation owed by the insured to the insurer. The legislation is expressed in broad terms and, on its face, there is no reason why the omission of the insured may not be a failure to exercise a right, choice or liberty which the insured enjoys under the contract of insurance. In any event, the act or omission may be that of a third party, “some other person”, who is unlikely to be a party to the contract of insurance in question.

In Antico the High Court was considering the effect of a provision (condition 1) in a legal expenses policy protecting the position of the insurer against payment of legal expenses incurred by the insured in defending claims or proceedings where the insured lacked reasonable grounds for that defence, or in the absence of reasonable grounds, for a successful outcome. Condition 1 provided for an opinion of a Queen’s Counsel in the event that the insurer refused its consent to the expenditure and payment of legal costs in defence of proceedings. In giving an example as to the operation of s 54(1), the High Court expressed the view that “some other person” would encompass a Queen’s Counsel giving an opinion. In the majority judgment the High Court said (at 673–674 (CLR); 77,084 (ANZ Ins Cas)): The operation of condition 1 may be illustrated by taking the case where … the Queen’s Counsel gives an opinion which does not conclude that the insured has reasonable grounds for defending the claim or proceedings made or instituted against the insured or that there were reasonable grounds for the ©

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This obiter opinion was applied in Seery v John R Carr and Associates Pty Ltd (unreported, NSW Sup Ct, Giles CJ Comm D, 3 November 1995). Giles CJ Comm D rejected a submission from the third-party claimants that they fell within the meaning of “some other person” in s 54(1). The third-party claimants were neither parties to, nor expressed to have, the benefit of cover under the contract of insurance. In the absence of relief under s 54(1), the insurer was entitled to decline to provide indemnity to the insured. Accordingly Giles CJ, Comm D refused to give the third-party claimants leave to proceed against the insurer under s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). Giles CJ Comm D said (at 8):

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successful outcome of the matter. The furnishing of the unfavourable opinion will be an “act … of some other person” within s 54(1). Under the contract of insured this may found a refusal by the insurer to pay a claim by the insured. However, s 54(1) would operate to deny to the insurer the right to refuse to pay the claim by reason only of that act of the Queen’s Counsel. Rather, the liability of the insurer in respect of the claim would be reduced by the amount which fairly represented the extent to which the interests of the insurer were prejudiced as a result of that act.

Handley JA (NSW Sup Ct CA) also gave examples of wider categories of persons who could fall within the description of “some other person” in Greentree v FAI General Insurance Co Ltd (1998) 44 NSWLR 706; 147 FLR 422; 158 ALR 592; 10 ANZ Ins Cas 61-423. However, he thought that there would have to be a relevant relationship or connection with the insured. In expressing an opinion on what he described as the secondary meaning of the word “omission”, namely “the non-performance or neglect of action or duty”, Handley JA said (at 74,751 (ANZ Ins Cas)): 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. The other person need not be an agent of the insured. It may for example be the post office which fails to deliver a letter promptly or at all, or a facsimile transmission service which breaks down with the same result. The word does cover failures to act by others having no relevant relationship or connection with the insured, whose interests are adverse to the insured.

An example of “some other person” under s 54(1) is a trustee under a superannuation plan. In Hannover Life Re of Australasia Ltd v Farm Plan Pty Ltd (2001) 11 ANZ Ins Cas 90-109; [2001] FCA 796, the trustee as the policy owner under the policy, omitted to pay the relevant premium, which arguably meant that the insurance had ceased prior to the death of the life insured: per Lee J (Fed Ct).

[54.10.10] After the contract was entered into: s 54(1) first limb Section 54(1) applies to an act (including an omission) that occurred after the contract was entered into. Renewal

Entry into a contract of insurance refers to the entry not only into the original contract of insurance but also into each renewal. The High Court (Mason CJ, Deane, Dawson, Toohey and McHugh JJ) noted that the ALRC did not express any intention to depart from the common law position in this regard: Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22. 456

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Date entered into

When determining this matter one is not necessarily concerned with the date upon which the policy of insurance was issued but rather with the date upon which the parties entered into the contract of insurance. In a given case the policy of insurance may not issue for a substantial period of time after the parties have entered into the contract of insurance. Where a proposal is accepted by the insurer the contract is complete and the insurer is then just as bound to issue the policy as the insured is to accept it. It is upon acceptance of the insured’s proposal by the insurer that the contract comes into existence. Endorsement

The date that the contract was entered into may be the date of an endorsement to the contract even if that endorsement is agreed to by the parties during the term of cover and has retrospective effect. Accordingly, putting all other issues to one side, s 54 will not apply unless an “act” occurred after the endorsed contract was entered into. Robertson J (Fed Ct) considered an arguably novel submission that the act of the insured in agreeing to an endorsement to cover fell within s 54 such that the insurers may not rely on the endorsement to refuse to pay the claim. He accepted the insurer’s submission that the words “some act of the insured or of some other person” do not capture bilateral or multilateral agreements with the insurer, in this case the retrospective endorsement to cover which was agreed during the term of the policy. He was also not persuaded that a retrospective amendment to a contract of insurance involved an act of the insured that occurred after the contract was entered into. The unamended contract of insurance did not have the requisite effect that the insurer may refuse to pay the claim (by reason of the act). There was no act of the insured after the contract as amended by endorsement was entered into: Sienkiewicz (As Trustee for the Sienkiewicz Superannuation Fund) v Salisbury Group Pty Ltd (in Liquidation) (No 2) [2015] FCA 147 (6 March 2015). The Full Court of the Fed Ct (Allsop CJ, Gleeson and Beach JJ) allowed an appeal on the basis of policy interpretation and construction; the s 54 submission does not appear from the Full Court judgment to have been raised on appeal: Todd v Alterra at Lloyd’s Ltd (on behalf of the underwriting members of Syndicate 1400) [2016] FCAFC 15.

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The date upon which parties entered into a contract of insurance may not necessarily correspond with the date of issue of the policy of insurance. Beach J (Vic Sup Ct) addressed the question of determining the date upon which a contract of insurance is entered into in Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062. He said (at 77,150):

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[54.10.11] Reduced by the amount that fairly represents the extent to which the insurer’s interests were prejudiced: s 54(1) second limb Quantification of the “amount that fairly represents the extent to which the insurer’s interests were prejudiced” (prejudice) within the second limb of s 54(1), requires identification of the amount of damage which the insurer suffered as a result of the relevant act or omission. That damage is the actual financial damage, expressed in monetary terms, that either has been or will be suffered by the insurer. If the insurer would have gone off risk entirely, had the relevant act or omission not occurred, the amount of the prejudice is the whole of the amount claimed. If the insurer would not have gone off risk, the prejudice is to be measured by reference to what would have happened (as distinct from what could or might have happened) if the act or omission had not occurred. The High Court explained the application of the second limb of s 54(1) and the determination of prejudice, whether or not the insurer has lost an opportunity to go off risk, in two cases. In Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156, the High Court explained the application of the second limb of s 54(1) where there is a loss of opportunity to go off risk. It also gave its unequivocal imprimatur to an insurer’s ability to reduce to nil under the second limb of s 54(1). The High Court in joint reasons (Brennan, Deane, Dawson, Gaudron and McHugh JJ) held that in the circumstances of that case the insurer had lost its opportunity to “go off risk” and that this lost opportunity was equal to the prima facie liability imposed by s 54(1) which was thereby “reduced to nil”. The same question as to whether an insurer can reduce its liability to nil also arises under s 28(3) (see [28.30.1]). Given its importance to an understanding of the second limb of s 54(1) and otherwise, Ferrcom is more fully discussed at [54.10.12]. In Moltoni Corporation Pty Ltd v QBE Insurance Ltd (2001) 205 CLR 149; 76 ALJR 337; 11 ANZ Ins Cas 61-512; [2001] HCA 73, the High Court extended its reasoning in Ferrcom and explained the application of the second limb of s 54(1) where the insurer would not have gone off risk. The High Court in Moltoni noted that the expression in s 54(1) “the insurer’s liability in respect of the claim is reduced by the amount that fairly represents the extent” of prejudice to the insurer ,assumes that the consequences of the act or omission can be expressed in a monetary sum. It said (at [15]): 458

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The High Court also noted that the reference to “the extent to which the insurer’s interests were prejudiced” invites attention to, and requires identification of, the amount of damage suffered by the insurer as a result of the relevant act or omission. The act or omission may not always constitute a breach of the contract of insurance. For instance, it may have been by “some other person”. Therefore, the amount of damage suffered by the insurer will not always be identifiable as an amount for compensatory damages for breach of contract. Nevertheless, the High Court said that like compensatory damages “the amount of which s 54(1) speaks, as fairly representing the extent to which the insurer’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” (at [16]). The High Court noted the joint reasons in Ferrcom where it was said that s 54(1) prejudice will consist in the existence of a liability which would not have been borne without the act or omission or the non-receipt of additional premium to which the insurer is entitled because of the act or omission. It was also said in Ferrcom that the liability imposed by s 54(1) is not itself the prejudice because, if it were, s 54(1) would be self-destructive. The High Court said that this means that although prejudice may be found to consist in the existence of a liability which would not have been borne without the 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.” (at [17]). If, as in Ferrcom, it can be shown that the insurer would have gone off risk, then the prejudice is the whole of the amount claimed. In respect of not going off risk, which was the case at hand) the High Court said (at [18]): …if the insurer would not have gone off risk…the relevant prejudice suffered is to be measured by reference to what would have happened (as distinct from what could or might have happened) if the act or omission had not occurred.

The High noted that the language of lost opportunity was equally accurate to cases that do not involve the loss of opportunity to “go off risk” but warned that its use may distract attention from the need to identify what would have happened had the act or omission not occurred. Their Honours emphasised that it was what “would” have happened rather than what “might” have happened. They said (at [20]): Yet it is only if, first, the right would have been exercised, but was not, and secondly the insurer has suffered resulting prejudice that can be represented in monetary terms that the provision of s 54(1) allowing reduction in the insurer’s liability is engaged. If the right would not have been exercised, the ©

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It is only by expressing the consequences in monetary terms that the liability can be reduced.

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insurer has not suffered prejudice, let alone prejudice that can be measured in monetary terms. And in the setting of a trial, this last proposition amounts to saying that if the insurer does not prove, on the balance of probabilities, that it would have exercised the right in question, it fails to demonstrate that its liability for the claim should be reduced.

Additional premium that would have been received by the insurer may be the prejudice under the second limb of s 54(1) in some cases, but it may not be the material prejudice. Cox J (SA Sup Ct) in Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957 considered the relevance to s 54(1) of the obiter comments of Deane J of the High Court in Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606; 63 ALJR 365; 5 ANZ Ins Cas 60-910. Deane J postulated an alternative construction to s 28(3) based on a reduction of liability according to the “additional premium” that would have been charged if there had been full disclosure: see [28.30.1]. There is much authority against this “additional premium” approach to s 28(3). Cox J found in Ellis that it was possible to distinguish the position under s 28(3) from the position under s 54. He did not read the comments of Deane J as applying to s 54. He said (at 70 (SASR); 76,329 (ANZ Ins Cas)): [Section 54] is confined to a policy breach or other act occurring after the contract was entered into, whereas s 28 deals, as I have sought to show, only with acts of non-disclosure or misrepresentation occurring before or at the time the contract (including any renewal) is made. Section 54 is not concerned with the state of mind or blameworthiness of the insured but simply with the consequences of the relevant act. I would therefore not read [Deane J’s] remarks as applying to s 54.

Deane J was one of the five Judges who gave joint reasons in Ferrcom. The High Court said (at 77,831 (ANZ Ins Cas): The prejudice [to which s 54(1) refers] will consist in the existence of a liability which, in whole or in part, would not have been borne by the insurer if the act had not been done or the omission had not been made or in the non-receipt of an additional premium to which the insurer would have been entitled by reason of the doing of the act or the making of the omission.

Ferrcom involved a failure by the insured to notify the insurer of the registration of a mobile crane. The High Court said that the prejudice to the interests of the insurer resulting from this failure did not consist merely in the increased risk attendant on the driving of the crane on public roads, nor in the increased premium that the insurer would have demanded had it continued to insure against the risk of overturning. These disadvantages were but part of the prejudice. The material prejudice was the loss of opportunity to cancel the policy.

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[54.10.12] Prejudice: s 54(1) second limb – the Ferrcom case

Ferrcom contracted with the insurer to insure a mobile crane which was then unregistered as a motor vehicle. The policy contained a condition precedent to the insurer’s liability requiring notification “as soon as possible … of any change materially varying any of the facts and circumstances existing at the commencement of [the] policy”. The crane was subsequently registered as a motor vehicle in New South Wales. Ferrcom’s insurance agent failed to pass this information on to the insurer. Approximately four months after the registration the crane overturned and was extensively damaged during a lifting operation. The insurer denied liability. The Ferrcom case – Giles J

Giles J (NSW Sup Ct) at first instance found for Ferrcom against the insurer: (1989) 5 ANZ Ins Cas 60-907. Ferrcom conceded that it had breached the condition precedent to liability and that but for the operation of s 54(1), the insurer would be relieved of its liability under the policy. Giles J found that if Ferrcom had notified the insurer of the registration it would not have allowed the crane to remain covered under the policy. Instead, it would have offered alternative cover excluding damage to the crane resulting from overturning arising out of its operation as a crane. He concluded that the insurer would probably have given notice of cancellation. Giles J also found it necessary to determine what Ferrcom would have done if told by its insurer that it would no longer cover the crane. Ferrcom had changed its broker some time after the incident. Giles J concluded that Ferrcom would have insisted on appropriate cover and that the prejudice to the insurer as a result of Ferrcom’s failure to notify the registration of the crane was that it remained “on risk” without having received additional premium or without having imposed an increased excess. The Ferrcom case – Court of Appeal

On appeal, the majority of the NSW Court of Appeal (Kirby P and Handley JA with Priestley JA dissenting) found for the insurer against Ferrcom: Commercial Union Assurance Co of Australia Ltd v Ferrcom ©

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The judgment of the High Court (comprising Brennan, Deane, Dawson, Gaudron and McHugh JJ) in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156 is crucial to an understanding of the mechanics of s 54(1), the concept of prejudice and the application of the second limb of s 54(1) to a breach by an insured of a condition precedent to liability. Given its importance it is worthwhile considering Ferrcom in detail.

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Pty Ltd (1991) 22 NSWLR 389; (1991) 6 ANZ Ins Cas 61-042. The majority adopted a hypothesis that the original insurance agent would have continued to act for Ferrcom in obtaining insurance and that the insurer would not have granted cover except on the basis of an exclusion for damage resulting from overturning arising out of the operation of the crane. In making this finding, Kirby P and Handley JA adopted a subjective test to determine the extent to which “the insurer’s interests” were prejudiced within the terms of the second limb of s 54(1). They found that “the insurer” is “the particular insurer”. This subjective test requires evidence from the particular insurer as to what its actions would have been had notification been made. If an insurer would have taken itself off risk or required a relevant exclusion, as in this case, then provided the incident that occurs falls within the terms of the exclusion, the insurer is allowed to reduce its liability for the claim by the amount of its prejudice to nil. The Ferrcom case – High Court – the lost opportunity test – prejudice

The High Court also found that the second limb of s 54(1) requires a subjective test involving the “actual insurer”. As to the operation of s 54(1), the High Court said (at 77,830 (ANZ Ins Cas)): The effect of s 54(1) is to impose on [the insurer] a prima facie liability to pay Ferrcom’s claim, but it does not purport to annihilate the effect of the relevant “act” in determining “the extent to which the insurer’s interests were prejudiced”. As liability imposed by s 54(1) is a liability which, but for the relevant “act”, would have arisen under the contract of insurance, the “insurer” in s 54(1) must be taken to be the actual insurer and “the insurer’s interests” must be taken to be the interests which it would have had but for the relevant “act”, leaving out of account the liability imposed by s 54(1).

The High Court referred to ALRC 20 and in particular to the requirement that damages should be assessed by reference to ordinary contractual principles: see [54.10.1]. The High Court noted that “ordinary contractual principles” as to damages are difficult to apply when the relevant act or omission is a failure to satisfy a condition precedent to the insurer’s liability. In order to give the second limb of s 54(1) some operation, the High Court found that it is necessary to treat a condition precedent as a term imposing on the insured an obligation to comply with it and to treat a failure to satisfy the condition precedent as a breach of a term obliging compliance. This enables “the extent to which the insurer’s interests [have been] prejudiced as a result of [the] act” to be assessed. The High Court said (at 77,831 (ANZ Ins Cas)): If a condition precedent is taken to impose on the insured an obligation to comply with it, ordinary contractual principles require that the position which the insurer would have been in if the insured had performed the obligation is to be compared with the position that the insurer is in as a result of the insured having failed to perform the obligation. 462

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In determining the position that the insurer would have been in, the High Court found it necessary to adopt a hypothesis as to what the particular insurer would have done if it had been notified that the crane was to be, or had been, registered.

The prejudice will consist in the existence of a liability which, in whole or in part, would not have been borne by the insurer if the act had not been done or the omission had not been made or in the non-receipt of an additional premium to which the insurer would have been entitled by reason of the doing of the act or the making of the omission. The prejudice to the interests of [the insurer] resulting from Ferrcom’s failure to notify [the insurer] of the registration of the mobile crane does not consist merely in the increased risk attendant on the driving of the mobile crane on public roads nor in the non-receipt of the additional premium which [the insurer] would have demanded if it had continued to insure Ferrcom against damage to the mobile crane caused by overturning. Those disadvantages were but part of the prejudice. The loss of the opportunity to cancel the policy was the material prejudice suffered by [the insurer].

And (at 77,832 (ANZ Ins Cas)): The value to [the insurer] of its lost opportunity to go off risk was the value of a right to go off risk which [the insurer] would have exercised. It follows that the amount which “fairly represents” the prejudice suffered by [the insurer] in losing the opportunity to go off risk is the equivalent of the liability prima facie imposed on [the insurer] by s 54(1). The prima facie liability imposed by s 54(1) is thus “reduced” to nil.

In agreeing with the conclusion reached by the Court of Appeal, the High Court noted two propositions. First, s 54(1) is not self-destructive in that the liability imposed on an insurer is not itself the prejudice to be taken into account. Section 54(1) imposed on the insurer a prima facie liability to pay under the policy by sterilising the operation of the change-of-risk clause. The opportunity the insurer lost was the opportunity to go off risk offered by the right of cancellation. In determining the value of that lost opportunity, the fact that the continuance of the risk left the insurer exposed to the imposition of a liability by s 54(1) is material. Secondly, the value of the lost opportunity depends on the hypothesis that the insurer would have exercised the right to cancel the policy for the crane and would not have issued another policy without the exclusion. The High Court noted that the hypothesis is not a historical fact and that it is necessary for the court to form an estimate as to the likelihood of the insurer having acted in that way. ©

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The High Court found the suggestion in ALRC 20 that ordinary contractual principles would presumably involve an application of the principle of proportionality “truly daunting”. The High Court noted that an act or omission falling within s 54(1) may result in prejudice to the insurer though it does not cause loss to the insured. In addressing the question of prejudice the High Court said (at 77,831 (ANZ Ins Cas)):

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[54.10.12]

Accordingly, the High Court has postulated what may be termed “the lost opportunity” test in relation to an insured’s failure to satisfy a condition precedent to the insurer’s liability.

[54.10.13] Prejudice generally: s 54(1) Notification of intention to modify a motor vehicle

Cox J (SA Sup Ct) considered the application of s 54(1) to a condition precedent to liability in Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957. The insured had failed to notify the insurer of their intention to modify a motor vehicle so that the insurer could decide whether or not to consent to it and, if so, on what terms. If notified, the insurer would have continued the insurance but would have imposed a condition excluding its liability while the car was being driven by a person under the age of 25. The insureds’ daughter, who was 23 years of age, was driving the motor vehicle when the accident which gave rise to the claim occurred. Cox J noted (at 69 (SASR); 76,328 (ANZ Ins Cas)): As it was a direct result of the [insureds’] failure to notify that the [insurer] was denied the opportunity of writing into the contract the restriction to drivers over 25 – or, I suppose one must add, of avoiding the contract altogether in the event of the [insureds] not accepting the condition and still modifying the car – the extent to which the [insurer’s] interests were thereby prejudiced is fairly represented, as it seems to me, by the full amount of the [insureds’] claim.

Although the Ellis case turned on other matters, it is interesting to note a pre-Ferrcom application of s 54(1) to a different condition precedent to liability. Notification of a third party claim under a claims made and notified policy

The question as to what constitutes prejudice was considered by Rolfe J (NSW Sup Ct) in East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092. The insurer had refused to indemnify the insured for late notification of a claim. This point had been taken successfully before Staff AJ and unsuccessfully before the NSW Court of Appeal, leading to the remission of the proceedings to the Supreme Court for a determination of various matters including the question as to whether the insurer had been prejudiced. The insurer submitted that its interests had been prejudiced to the extent that it was required to pay the costs of the proceedings before Staff AJ and the Court of Appeal. The amount of those costs had not been quantified. Rolfe J considered the ways in which a failure to notify a claim could result in prejudice in terms sounding in financial loss. He considered that the prejudice contended for was not prejudice in the manner contemplated 464

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by s 54(1). He said (at 77,801 (ANZ Ins Cas)):

Consent to defence of third party proceedings and legal cost expenditure

Another example of what could potentially constitute prejudice was considered by the High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35. Under a provision (condition 1) of a legal expenses policy the insured was required to seek the consent of the insurer to the defence of proceedings and the expenditure of legal costs before the insurer was obliged to meet the legal costs. The insured sought to claim legal costs expended prior to the notification of, and therefore without the consent of, the insurer. In looking at the nature of the prejudice, the High Court noted that the interests of the insurer would be prejudiced to the extent to which the insured paid out funds on the defence where, in truth, there had not been reasonable grounds for doing so. That issue was remitted to the NSW Supreme Court for determination. In the majority judgment the High Court (comprising Dawson, Toohey, Gaudron and Gummow JJ) said (at 674–675 (CLR); 77,085 (ANZ Ins Cas)): The measure of the prejudice to the Insurer addressed in s 54 will turn upon the probability that a Queen’s Counsel reasonably would have considered that the [insured] had reasonable grounds for defending the claim against him and whether the amount of costs incurred would have been less had the [insured] complied with condition 1 and the other relevant provisions of the policy.

On remission to the NSW Supreme Court, Hunter J determined that the insurer would have suffered no prejudice: Antico v CE Heath Casualty & General Insurance Ltd (unreported, NSW Sup Ct, Hunter J, 17 December 1998). In quantifying prejudice, Hunter J compared the approach adopted by the insured to legal services and legal fees to that which would have been adopted by the insurer. The Full Court of the WA Sup Ct (comprising Malcolm CJ, Murray and Wheeler JJ) applied the measure of prejudice specified by the High Court majority in Antico to an omission to obtain an insurer’s consent in relation ©

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As a result of the failure to give notice the consequences of investigations, which might otherwise have been put in train and which might have provided relevant information to an insurer, may be lost, or the insurer may, in some other way, be precluded from effectively resisting either the claim made or its obligations under the policy. However, conceptually, that seems to me different from the insurer taking the point, as a matter of law, that the failure to give notice precludes its being liable under the policy. On analysis I think it is more correct to say that insofar as the interests of the defendant “were prejudiced” they were not prejudiced in the manner contemplated by s 54(1), but by virtue of the decision to take the point and to litigate it and by virtue of failure in that litigation. In these circumstances, had it been necessary, I would have concluded that the prejudice was not a prejudice falling within s 54, such as to entitle the defendant to reduce its liability.

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to legal costs and expenses. The Full Court decided, in the absence of evidence, and any suggestion that consent could have been properly withheld or that the action would not have been defended, that there was no prejudice under s 54(1): Manufacturers Mutual Insurance Ltd v Murray River North Pty Ltd (2005) 14 ANZ Ins Cas 61-674; [2004] WASCA 276. Notification of a material alteration of the risk

The Qld Court of Appeal, by a majority (Thomas JA and Mackenzie J, Pincus JA dissenting), applied the reasoning of the High Court in Ferrcom in a case where the insurer had lost its opportunity to “go off risk” because of the insured’s failure to notify a material alteration of the risk and this lost opportunity was equal to the prima facie liability imposed by s 54(1), which was thereby “reduced to nil”: Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [2002] 1 Qd R 17; (2002) 11 ANZ Ins Cas 61-484; [2000] QCA 524. Late notification of a claim

There may be prejudice if an insurer does not have an opportunity to have a disability claimant medically examined because of the late notification of a claim. However, the Full Court of the Supreme Court of South Australia considered that there was no prejudice to the insurer as a consequence of the late formal notification to the insurer of a permanent total disability claim in Zollo v National Australia Bank (No 2) [1997] SASC 6060. Doyle CJ (with whom Prior and Nyland JJ agreed) noted there was no lack of medical evidence about the condition of the insured and that it did not seem to him that it had been shown that medical examinations at an earlier time would have assisted the insurer’s case. In addition, he had regard to the fact that at the time of an earlier oral notification of the claim to the bank, as agent for the insurer, the existence of insurance was being denied and therefore it was doubtful that the insurer would have arranged medical examinations. A liability insurer may suffer prejudice if it is unable to properly defend a liability claim against its insured because of late notification of that claim. The NSW Court of Appeal looked at this type of prejudice in FAI General Insurance Ltd v Jarvis (1999) 46 NSWLR 1; 150 FLR 96; 10 ANZ Ins Cas 61-426; [1999] NSWCA 23. The insurer only became aware of a liability claim in the month before the hearing. The proceedings involved a third party “slip and fall” claim against an insured who provided cleaning services. The insurer lacked information from the principals of the insured and knowledge of the whereabouts of any records of the insured. The insurer had no opportunity to determine whether the insured had contracted to provide cleaning services to the store in which the slip had taken place and, if it had not, no opportunity to mount a positive case in this regard. Further, it appeared that nobody had any information as to the present whereabouts of various witnesses. This made it probable that 466

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the only witness available to give evidence at the trial was the third party herself. Powell JA, with whom Beazley JA agreed (Stein JA dissenting on this point), concluded that the insurer in the circumstances had been prejudiced.

The Full Court of the Supreme Court of Western Australia (comprising Ipp, Wallwork and Murray JJ) considered whether the late notified claim had resulted in “loss of opportunity” prejudice: QBE Insurance Ltd v Moltoni Corporation Pty Ltd (2000) 22 WAR 148; 155 FLR 379; 11 ANZ Ins Cas 61-468; [2000] WASCA 82. The trial judge had found that the insurer had not demonstrated that it had suffered prejudice that had caused or would cause damage. On appeal, Ipp J was of the opinion that the opportunity to investigate and the opportunity to refer the worker to an appropriate medical practitioner had value, and therefore, the loss of opportunity was for relevant purposes an actual loss. The value of the opportunity lost by the insurer depended on further factual findings and therefore, in allowing the appeal, he remitted the matter for retrial. Wallwork J also allowed the appeal but did not deal with the question of lost opportunity prejudice. On appeal the High Court found that the trial judge was right to conclude that that the insurer had not demonstrated that it had suffered prejudice that had caused or would cause it damage: Moltoni Corporation Pty Ltd v QBE Insurance Ltd (2001) 205 CLR 149; 76 ALJR 337; 11 ANZ Ins Cas 61-512; [2001] HCA 73. The High Court said (at [18]): …the relevant prejudice suffered is to be measured by reference to what would have happened (as distinct from what could or might have happened) if the act or omission had not occurred.

The High Court found that the insurer had lost an opportunity to reduce its liability by exercising its rights under the policy at an earlier date to investigate the claim, to have the employee examined by a doctor of its choosing and to have him undergo different treatment. However, the amount that fairly represented the extent to which the insurer’s interests were prejudiced was not established by pointing to what “might” have been done. The insurer had not proved, to the requisite standard of proof, what “would” have been done. Therefore, the insurer did not establish that its liability to the insured should be reduced by any amount. Acting as a prudent uninsured

An insurer providing trade credit insurance covering payment obligations may suffer prejudice if the insured fails to act as a prudent uninsured, as ©

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An insurer may not establish the amount that fairly represents its prejudice by proving what it would have done had it not lost the opportunity to investigate a workers’ compensation claim, to refer the worker to a medical practitioner, of its choosing, for advice to lessen the severity of injuries and to have the worker undergo different treatment because it was not notified of the claim for about 17 months.

s 54

Insurance Contracts Act 1984

[54.10.13]

required under a term of the policy by releasing a charge over assets which would have provided security for the payment obligations. The NSW Ct of Appeal found it unnecessary to determine the issue because the insured was not in breach of a term of the policy requiring it to use the same diligence and prudence as it would reasonably be expected to exercise were it not insured and to use all reasonable endeavours to preserve its rights against both its buyers and any third parties by releasing a charge over a buyer’s assets: Compagnie Francaise D’Assurance Pour le Commerce Exterieur t/as Coface Australia v Sims Group Australia Holdings Ltd (2014) 18 ANZ Ins Cas 61-995; [2013] NSWCA 418 (11 December 2013). Ward JA, with whom Barrett JA and Sackville AJA agreed, concluded that had it been necessary to determine the issue, the evidence before the trial judge enabled a conclusion that had the charge not been released, it would have secured assets sufficient to meet final payments. The insurer’s prejudice was the loss of its ability to maintain the security for the full amount outstanding under the relevant contracts, quantified by reference to the amount it would have been able to realise by enforcing the charge.

[54.10.14] “Claims made and notified” policies and s 54(1) – notification of claims Section 54(1) applies to an insured’s failure to notify a claim within the period of insurance cover under a “claims made and notified” policy of insurance. According to the terms of s 54(1) the insurer may not refuse to pay the claim by reason only of the late notification, but it is open to the insurer to contend that it has been prejudiced by the late notification. This is settled law with the approval by the High Court in Antico and Australian Hospital Care of the reasoning and decision of the NSW Court of Appeal (Gleeson CJ, Mahoney and Clarke JJA) in East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092. In East End, the NSW Court of Appeal considered the application of s 54(1) to a claim which was made by a third party against the insured within the period of insurance cover, but notified after that period. The insured argued that, pursuant to the first limb of s 54(1), the insurer could not refuse to pay the claim by reason only of the insured’s omission to notify the claim within the period of cover. The insurer sought to answer this argument in two ways: one way depending upon general considerations as to the construction of s 54(1) (the construction argument); and the other depending upon the relationship between ss 54 and 40 (the relationship argument). As to the construction argument, the insurer submitted that s 54 has nothing to say concerning acts (or omissions) which form part of the definition of the risk insured. The insurer argued that s 54 deals with 468

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matters such as warranties, conditions and perhaps exclusions but not matters concerning the ambit of insurance cover. Reliance was placed upon a statement by Handley JA (NSW Sup Ct CA) in Ferrcom Pty Ltd v Commercial Union Assurance Co of Aust Ltd (1991) 22 NSWLR 389; (1991) 6 ANZ Ins Cas 61-042 to the effect that s 54 did not widen the cover in a policy of insurance.

In my view, by choosing words of generality and avoiding reference to the particular type of contractual provision that might produce the result that the insurer may refuse to pay a claim, the legislature has evinced an intention to avoid the result that the operation of s 54 depends upon matters of form. As a matter of ordinary language, it is perfectly appropriate to say in the present case that the effect of the contract of insurance is such that, but for s 54, the [insurer] may refuse to pay the [insured’s] claim. The circumstance that this comes about because of the language of that part of the contract of insurance which defines the risk rather than by reason of a breach of a condition of the policy does not seem to me to be material. The case falls within the general words of the section and I see no justification for reading them down. The Act, in its long title, is described as an Act 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. It would hardly be consistent with the purposes thus described to construe the language of s 54 in such a way as to make its operation depend upon the choice that is made between various available drafting techniques.

Similarly, Mahoney JA found that the “effect” of the subject policy would be that the insurer might refuse to pay the claim because of lack of notification and therefore the matter came within the ambit of s 54(1), when literally construed. In noting the remedial nature of the ICA and the “mischief” that s 54(1) was designed to remedy, his Honour found that there was no relevant distinction between acts or omissions going to cover and those going to conditions or exclusions. Mahoney JA said (at 407 (NSWLR); 77,363 (ANZ Ins Cas)): For [s 54(1)] to apply, the entitlement to refuse to pay the claim must be “by reason of some act of the insured or of some other person”. In the present case, the immediate reason why the insurer could refuse to pay the claim was not, in terms, by reason of an act (for which may be substituted “omission”) of “the insured or of some other person” but by reason merely of the fact that, the making of the claim upon the insured not having been “notified” to the insurer, the claim was not within the cover. But it was not within the cover by reason of an (omission) of the insured. Therefore the entitlement to refuse arose by reason of that omission.

The relationship argument was also rejected by the Court of Appeal. The relationship argument was developed by reference to s 40. Section 40(3) ©

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Gleeson CJ (with whom Clarke JA agreed) rejected the construction argument and said (at 403–404 (NSWLR); 77,360 (ANZ Ins Cas)):

s 54

Insurance Contracts Act 1984

[54.10.14]

provides, inter alia, that an insurer is not relieved of liability by reason only that the claim against the insured was made after the expiration of the period of cover. The insurer argued that s 40(3) confers a carefully defined measure of protection, whereas s 54, read literally and applied to the same circumstances, would confer a wider benefit, thereby making a nonsense of s 40(3). Gleeson CJ found that the fact that the interrelationship between the sections may in certain circumstances produce a curious result did not constitute a reason for denying the words of s 54 their ordinary meaning. Mahoney JA also rejected the relationship argument. His Honour said that the varieties of policies with which ss 40 and 54 respectively deal are not precisely congruent. There was no inconsistency because the two sections deal with conceptually different problems. Accordingly, both the construction and relationship arguments were rejected by the Court of Appeal. In the result, the insured was not bound to fail in its claim merely by reason of the fact that it had notified the claim to the insurer after the expiration of the period of insurance cover. The High Court refused an application for special leave to appeal from the decision of the Court of Appeal in East End. Notwithstanding earlier reservations about the East End decision, and a fear that it would lead Australian insurers to withdraw from offering “claims made and notified” policies of insurance (see Cole J (NSW Sup Ct) in Breville Appliances Pty Ltd v Ducrou (1992) 7 ANZ Ins Cas 61-125), it has withstood the test of time. Sackville J (Fed Ct NSW District) in Drayton v Martin (1996) 67 FCR 1; 137 ALR 145; 9 ANZ Ins Cas 61-322 expressed an obiter view that East End was correctly decided. Further, the East End decision has been referred to without disapproval as a precursor to the Court of Appeal decision in FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164 in several cases (see Junemill Ltd (in liq) v FAI General Insurance Co Ltd (1996) 130 FLR 85; 9 ANZ Ins Cas 61-315 per Dowsett J (Qld Sup Ct) and Kelly v New Zealand Insurance Co Ltd (1996) 130 FLR 97; 9 ANZ Ins Cas 61-317 per FC WA Sup Ct). The High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 approved the East End decision. The High Court noted that East End decided that, where a policy of professional indemnity insurance indemnified the insured against claims first made within the period of insurance and notified to the insurer during the period of cover, s 54 operated so that the insurer might not refuse to pay the claim merely by reason of the circumstance that the claim was notified to the insurer after the expiration of the period of insurance cover. The High Court approved the passages of Gleeson CJ and Mahoney JA quoted above. 470

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The High Court also cited and approved Gleeson CJ and Mahoney JA in East End in its seminal s 54 decision in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38.

[54.10.15] “Claims made and notified” policies and s 54(1) – notification of facts (circumstances) that might give rise to a claim Section 54(1) applies to an insured’s late notification or failure to notify facts (circumstances) that might give rise to a claim under a “claims made and notified” policy of insurance, providing the effect of that contract of insurance is that the insurer may refuse to pay the claim that subsequently arises. According to the terms of s 54(1), the insurer may not refuse to pay the claim by reason only of the late notification or non-notification of facts (circumstances), but it is open to the insurer to contend that it has been prejudiced by the late notification or non-notification. The High Court held by a majority (McHugh, Gummow, Kirby and Hayne JJ, Gleeson CJ dissenting) that a failure to give notice of facts (circumstances) that might give rise to a claim in accordance with the contractual requirement to do so (a “deeming” provision or clause), was an omission within the meaning of s 54(1) because the effect of the contract was that the insurer could refuse to pay the claim: FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38. The High Court overruled the decision of the NSW Court of Appeal (Gleeson CJ and Clarke JA, Kirby J dissenting) in FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164. Immediately prior to the High Court’s decision in Australian Hospital Care, the weight of authority was to the effect that FAI v Perry was overruled and that a failure to notify circumstances constituted an omission within the terms of s 54. The High Court in Australian Hospital Care not only confirmed this, but also shifted away from the question as to what constitutes an omission by contrasting an omission from, say, a non-event. Rather, it moved towards giving close attention to the elements with which s 54 deals: the effect of the contract of insurance between the parties, the “claim” the insured has made and the reason for the insurer’s refusal to pay that claim. The element of s 54(1) most applicable to a late notification or non-notification of facts (circumstances), is the element that focuses upon the effect of the contract of insurance between the parties. If the effect of ©

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It should be noted, however, that East End concerned only the first limb of s 54(1). It would be open to an insurer to contend for a reduction of liability according to the notion of prejudice under the second limb of s 54(1).

s 54

Insurance Contracts Act 1984

[54.10.15]

the contract of insurance is that the insurer may refuse to pay a claim, then s 54 is enlivened. However, if there is no relevant “effect” of the contract of insurance, then s 54 is not enlivened. The plurality in Australian Hospital Care (McHugh, Gummow and Hayner JJ) noted the differences between the “occurrence-based” contracts of insurance and “claims made and notified” policies. Further, the plurality distinguished the insured’s “claim” within the meaning of that term in s 54(1) to the third party claim on the insured, which they referred to as a “demand”. There will be some cases where the policy does not extend to the demand referred to in the claim for indemnity. To that extent, s 54 will not operate to relieve the insured of restrictions or limitations that are inherent in the claim. Alternatively, there may be cases where the demand by the third party allows for a “claim” within the meaning of that term in s 54(1), but there is no relevant effect of the contract of insurance such that the insurer might refuse to pay the claim. In Australian Hospital Care there was a relevant effect of the contract of insurance because the policy in question contained a deeming clause allowing for the notification of facts (circumstances) whereby any subsequent claim would be deemed to have been made within the period of insurance in which the circumstances were notified. The existence of the deeming clause meant that the effect of the contract of insurance, but for s 54, would be that the insurer may refuse to pay the insured’s claim by reason only of the omission of the insured to notify the facts (circumstances) that might subsequently give rise to a claim. Chesterman J (Qld Sup Ct) in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388 and Bergin J (NSW Sup Ct) and the NSW Court of Appeal (comprising Spigelman CJ, Meagher and Sheller JJA) in Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511 and Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; 12 ANZ Ins Cas 61-566; [2003] NSWCA 34, respectively) found that there was no relevant effect of the contract of insurance in circumstances where there had been a late notification of facts (circumstances) that might give rise to a claim. The “claims made and notified” policies in these cases did not contain a deeming clause allowing for the notification of facts (circumstances) or any other provision requiring the notification of facts (circumstances). Further, it was held in both cases that s 40(3) does not imply into policies of insurance a term to the same effect as the subsection so as to create the requisite “effect”. In other words, if the contract of insurance itself does not give the requisite “effect”, then the requirement within s 54(1) is not satisfied and s 54 is not enlivened. Therefore, the question as to whether a non-notification or late notification of facts (circumstances) constitutes an 472

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omission within s 54 depends on the terms of the contract of insurance. This has caused insurers to review the terms of their “claims made and notified” policies.

[54.20] Capable of causing or contributing to a loss: s 54(2) Section 54(2) contains the causal connection test and is the fulcrum around which other subsections of s 54 turn. The causal connection test requires a determination as to whether an act or omission could reasonably be regarded as being capable of causing or contributing to a loss for which cover is provided. If it can, then the act or omission is treated according to s 54(2), (3) and (4). If it cannot, then s 54(1) applies. The determination as to whether an act or omission could reasonably be regarded as being capable of causing or contributing to a loss for which cover is provided may be difficult in some cases. The High Court, in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156 said (at 339–340 (CLR); 77,830 (ANZ Ins Cas)): Subsection (1) relates to acts or omissions occurring after the contract of insurance is entered into that could not reasonably be regarded as being capable of causing or contributing to the loss; ss (2) to (4) relate to acts or omissions that could reasonably be regarded as being capable of causing or contributing to the loss. The dichotomy between the two classes of acts or omissions is not entirely clear. It seems that the effect of an act that has not caused a loss or part of a loss depends on whether the act “could reasonably be regarded as being capable of causing or contributing to [the] loss”.

The identification of the relevant act or omission to which the causal connection test in s 54(2) is to be applied is an important step. Identification may be difficult in cases where there is more than one potential act or omission. The relevant act or omission is one that accords with the terms of s 54(1). That is the effect of the contract is that the insurer may refuse to pay the claim by reason of the act or omission. The relevant act or omission is therefore the act or omission upon which an insurer has based its refusal to pay a claim in accordance with the contract of insurance. Identification of the relevant act or omission is informed by ©

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Byrne J (Vic Sup Ct) considered the terms of a contract of insurance concerning notification of circumstances and concluded that the “effect” of the contract was that the insurer may refuse to pay a claim because circumstances had not been notified under those terms. He preferred this analysis to a proposition that s 54 creates a statutory entitlement to indemnity in an insured: Aussie Tax Pty Ltd v Markel Capital Ltd (2009) 15 ANZ Ins Cas 61-809; [2008] VSC 592.

s 54

Insurance Contracts Act 1984

[54.20]

the reason for the refusal to pay a claim and the terms of the contract of insurance upon which that refusal is based. The High Court majority (Dawson, Toohey, Gaudron and Gummow JJ) in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 stated (at 669–670 (CLR); 77,082 (ANZ Ins Cas)): [Section 54]… takes as its starting point the existence of a claim and a contract the effect of which is that the insurer may refuse to pay the claim. The section directs attention to the reason founding the refusal, namely a particular act or omission on the part “of the insured or of some other person”…

The question as to whether or not a “particular” act or omission is capable of causing or contributing to a loss for which cover is provided, is best answered by way of examples. Some examples were given by the ALRC: see [54.10.1]. Notification to the insurer and material change

A failure by the insured to notify the insurer of a requisite matter is likely to be an “act” that could not reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided. It is difficult to perceive a situation in which a failure by an insured to notify an insurer would be capable of causing or contributing to a loss. If the failure to notify is not capable of causing or contributing to a loss, then s 54(1) applies. In Ferrcom, the insured Ferrcom registered a mobile crane for road use and failed to notify the insurer that it had done so. This was a failure to notify a material change of the circumstances existing at policy commencement to the insurer (described in the policy as the Company) as required by clause 1(a) of the policy, which stated: The extent of the liability of the Company is conditional upon — (a) The notification as soon as possible by the Insured to the Company of any change materially varying any of the facts or circumstances existing at the commencement of this Policy.

The act or omission in Ferrcom was the failure to notify a material change to the insurer. It was common ground that this act or omission by the insured, in failing to notify the registration for road use of a mobile crane, could not “reasonably be regarded as being capable of causing or contributing to [the] loss” and was therefore an “act” falling within s 54(1). If the act or omission is a the material change to the risk itself rather than the notification of the material change then it is more likely that the act or omission could reasonably be regarded as being capable of causing or contributing to a loss. In Austcan Investments Pty Ltd v Sun Alliance Insurance Ltd (1992) 7 ANZ Ins Cas 61-116 the insured changed the use of its premises to 474

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include a manufacturing process which necessitated keeping larger quantities of flammable liquid on site than had been the case which increased the risk of fire. The change was not agreed by the insurer. This change was an alteration of manufacture which increased the risk of destruction or damage in breach of a policy condition, which stated: The policy shall be avoided with respect of any item thereof in regard to which there be any alteration after the commencement of this insurance … (b) in the trade or manufacture carried on, ... in such a way as to increase the risk of destruction or damage;

The SA Sup Ct FC, King CJ, with whom Prior and Mulligan JJ agreed, held that the act of changing the manufacture could reasonably be regarded as being capable of causing or contributing to the fire within s 54(2). The change which contributed to a fire, could be regarded as contributing to the resultant loss. As a side note the decision by the Full Court in Austcan was overturned by the High Court on the basis that the omission to disclose the change in use happened before and not after the entry into the relevant contract of insurance: Alexander Stenhouse Ltd v Austcan Investments Pty Ltd (1993) 67 ALJR 421; 112 ALR 353; 7 ANZ Ins Cas 61-166; [1993] HCA 22. As stated above, identification of the relevant act or omission may be difficult in cases where there is more than one potential act or omission. The relevant act or omission is the act or omission upon which an insurer has based its refusal to pay a claim in accordance with the contract of insurance. Identification of the relevant act or omission is informed by the reason for the refusal to pay a claim and the terms of the contract of insurance upon which that refusal is based. In Gibbs Holdings Pty Ltd v Mercantile Mutual Insurance (Aust) Ltd [2002] 1 Qd R 17; (2002) 11 ANZ Ins Cas 61-484; [2000] QCA 524 the insured failed to notify the insurer that there had been a material alteration of a risk arising from a plastics manufacturer going into occupation of part of the insured premises. The material change and subsequent failure to notify were in breach of a general condition and exclusion (clause 2), which stated: If there is any change or alteration after the commencement of [this Policy] which will or might increase the risk of any claim being made, and in particular relating to: 2.1 the nature of the Business carried on; 2.2 the nature of the occupation of or other circumstances affecting the buildings insured; ©

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unless such alteration be admitted by memorandum hereon or attached hereto signed by or on behalf of the Company.

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Insurance Contracts Act 1984

[54.20]

then no benefits will be payable… unless you have advised us in writing as to any such changes and we have agreed to them. The Qld Court of Appeal (Thomas JA and Mackenzie J, Pincus JA dissenting) considered whether the “act of the insured” was the insured granting possession to a tenant which manufactured plastics, or its failure to notify the insurer of the occupancy of the tenant, or a composite of both. Thomas JA and Mackenzie J held that the “act” was the failure to notify the insurer of the change which was not reasonably to be regarded as being capable of causing or contributing to a loss and therefore fell within s 54(1). In finding that the “act” was the failure to notify, they applied the reasoning of the High Court in Ferrcom. The relevant act could not be confined to the acceptance of the plastics manufacturer as a tenant or to the insured permitting the use of its premises by a plastics manufacturer. Both of these acts would potentially have fallen within s 54(2). Thomas JA said (at [30]): The answer I think is that the “act” referred to in s 54(1) is the act by reason of which the insurer is entitled to refuse to pay the claim. That act was not the bare granting of tenancy by the insured or the occupancy of that tenant, but the failure of the insured to notify the insurer of that fact. In such a situation the insured cannot insist that some other fact be treated as the relevant act of the insured. These conclusions are supported firstly by the reference in s 54(1) to the insurer’s refusal to pay “by reason of” some act of the insured. Secondly, the statement of Dawson, Toohey, Gaudron and Gummow JJ in Antico v Heath Fielding Australia Pty Ltd [cited with relevant quote above] expresses the same view …

Mackenzie J said (at [74]): In the present case cl 2 provides that the payment of benefits is contingent upon advice in writing being given as to any relevant change or alteration. The relevant omission is the failure to notify of the change. The matter therefore falls within the principle in Ferrcom rather than that in . The learned trial judge was therefore correct in concluding that the outcome was analogous to that in Ferrcom.

Pincus JA, in dissent, found that the disentitling under the policy, to refuse to pay, was a “composite”. It consisted of letting the plastics manufacturer in and failing to advise the insurer of and secure the insurer’s agreement. Pincus JA found that “Act” in s 54 includes “acts”. In deciding causation within s 54(2) he was of the view that it is wrong to consider only that part of the composite which is of such a kind that it could not possibly cause any loss to the insured and to ignore that part which could do so. Accordingly, Pincus JA found that Ferrcom did not govern the case and that the composite was capable of causing or contributing to a loss.

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Unoccupancy of insured premises

Olsson J noted that it was difficult to perceive why a breach of an unoccupancy clause in a contract of insurance for premises at the particular location of the subject premises could not reasonably be regarded as capable of causing or contributing to a loss caused by vandals. Driving under the influence of alcohol

In Bunting v Australian Associated Motor Insurers Ltd [1994] TASSC 9 the act was driving the insured motor vehicle under the influence of alcohol in breach of a policy exclusion, which stated: You will not be entitled to claim under this policy if, at the time of the accident or event which results in the loss, damage or liability your car was:— 4.1.1 being driven by a person who was under the influence of intoxicating liquor or of a drug or whose blood alcohol level was in excess of the legal limit prescribed in the State or Territory where the accident or event took place …

There was a motor vehicle accident because the person driving the insured’s motor vehicle had failed to apply the brakes. He was driving under the influence of alcohol. Underwood J was satisfied by evidence from pathologists that the probabilities were that a person whose concentration of alcohol in the blood is between .1 and .15 of a gram per 100 millilitres has impaired driving skills. Accordingly, driving a motor vehicle with that blood alcohol concentration was an act that could reasonably be regarded as being capable of causing or contributing to a loss within s 54(2). Failure to set an alarm

In McNeill v O’Kane (2003) 12 ANZ Ins Cas 61-554; [2002] QSC 144, the act (omission) was a failure to set an alarm in accordance with a reasonable care and maintenance requirement under a policy of insurance, which stated: You must take all reasonable care:.... (g) to ensure burglar alarms and intrusion prevention systems shall be made operative whenever the premises at the ©

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In Mercantile Mutual Insurance (Aust) Ltd v Schigulski (1993) 172 LSJS 173, Olsson J found that the insurer had not established that insured premises had been unoccupied in breach of an unoccupancy clause in a policy, which stated: 2. UNOCCUPANCY The cover provided by this Policy for Buildings and Contents shall be restricted to lightning or thunderbolt or earthquake for any period exceeding sixty (60) consecutive days during which the Buildings have been left uninhabited, unless You have notified Us in writing beforehand and obtained Our written consent for cover to continue.

s 54

Insurance Contracts Act 1984

[54.20]

Situation are not occupied or are unattended... Fire protection systems shall … be operative at all times. Holmes J (Qld Sup Ct) held that the failure to set an alarm in accordance with the requirement could reasonably be regarded as being capable of causing or contributing to the loss in respect of which the insurance cover was provided. He said (at [56]): The question to be asked for the purpose of [s 54(2)] is not whether the failure to set the alarm did cause or contribute to the loss by arson, but whether it could be reasonably regarded as being capable of doing so. The inescapable conclusion in this case is that the failure to set the alarm was capable of having contributed to the loss. Failure by pilot to complete an aeroplane flight review

In Johnson v Triple C Furniture & Electrical Pty Ltd (2010) 243 FLR 336; 16 ANZ Ins Cas 61-866; [2010] QCA 282 the omission (assuming it to be an omission within s 54) was a pilot’s failure to successfully complete an aeroplane flight review within 2 years prior to a crash in breach of Civil Aviation Regulations 1988 and in breach of a temporal exclusion, which stated: …. this policy does NOT apply whilst the aircraft, with the knowledge of the insured or the insured’s agent ... is; … operated in breach of; … an Appropriate Authority’s, (defined herein) “communications”, ... issued from time to time;…

The Qld Court of Appeal, Chesterman JA (with whom Holmes and White JJA agreed) found that a successfully completed aeroplane flight review could have addressed a pilot’s demonstrated shortcomings as a pilot and improved his skills. The failure to undergo such a review could reasonably be regarded as causing or contributing to a crash which caused loss. Chesterman JA said (at [97]): It is not to the point that [the pilot] might have satisfactorily completed a flight review by concealing his deficiencies in flying technique from the instructor, or by applying himself to the examination more conscientiously than it appears he did in everyday flying. The test is whether the omission, not undergoing the review, could reasonably be regarded as being capable of contributing to the loss. The failure to undergo the review could be so regarded because: (i) The loss was caused by pilot error. (ii) [The pilot] had many faults as a pilot. (iii) The purpose of a flight review is to check for pilot faults; and (a) correct them; or (b) prevent the unskilful pilot from flying. (iv) An astute instructor will detect faults even where the candidate tries to conceal them. 478

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The causal connection test in s 54(2) may yield a different result when applied to the failure of truck drivers to undertake psychological testing as compared to the failure by a pilot to complete a flight review. In Maxwell v Highway Hauliers Pty Ltd (2014) 88 ALJR 841; 18 ANZ Ins Cas 62-035; [2014] HCA 33, the High Court considered an “act” whereby two vehicles (prime movers linked with two trailers as B Doubles which were involved in accidents) were being operated by drivers who had not undertaken a PAQS test or an equivalent program (psychological testing of drivers’ attitudes towards safety) and an “omission” to ensure that each vehicle was operated by a driver who had undertaken a PAQS test or an equivalent program. The act and omission were in breach of a temporal exclusion. The High Court noted that the Insurers conceded at trial that the fact that each vehicle was being operated by an untested driver could not reasonably be regarded as being capable of causing or contributing to any loss incurred by the Insured as a result of each accident. Operation of a crane contrary to Australian Standards, manufacturer’s guidelines and not as designed

In Matton Developments Pty Ltd v CGU Insurance Ltd (No 2) (2015) 18 ANZ Ins Cas 62-061; [2015] QSC 72 (15 April 2015), the act was operating an insured crane on a 7 degree slope with a load of 39.2 tonnes in breach of various exclusions. The crane was being used in a manner other than that for which it was designed. It was not being used in compliance with relevant Australian Standards. It was being operated contrary to manufacturer’s guidelines. The boom of the crane collapsed whilst the crane was being used as such rendering it a total loss. Flanagan J (Qld Sup Ct) held that the act could reasonably be regarded as being capable of causing or contributing to the collapse of the boom. Clearing Australian Customs in yacht to leave Australian waters to compete in race

In Pantaenius Australia Pty Ltd v Watkins Syndicate 0457 at Lloyd’s (2016) 19 ANZ Ins Cas 62-090; [2016] FCA 1 (5 January 2016), Foster J (Fed Ct) considered a total loss claim under a boat insurance policy which arose when the insured yacht ran aground off Cape Talbot WA (in Australian waters) after returning from Indonesia. By its terms, cover under the policy was limited to Australian waters and was automatically suspended whenever the boat cleared Australian Customs for the purpose of leaving Australian waters and recommenced when it cleared Australian Customs on return. The insurer declined to pay the claim because cover had been suspended upon the boat clearing Australian Customs to leave Australian waters to compete in the Fremantle to Bali sailboat race but cover had not recommenced when the boat ran aground because it had not cleared Australian Customs upon its return. ©

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Failure of truck drivers to undertake psychological testing

s 54

Insurance Contracts Act 1984

[54.20]

Foster J agreed with the substance of submissions that the correct approach under s 54(2) is to adopt a form of “with or without” test of causation rather than a “but for” test. He concluded that the relevant act or acts which engaged s 54(1) at least included clearing Australian Customs for the purpose of leaving Australian waters in order to compete in the Fremantle to Bali sailboat race. He found that it was necessary to consider whether the act or acts “increased the risk” that the boat would run aground in Australian waters off Cape Talbot. There was no evidence before him that would support the proposition that the mere fact that the boat left Fremantle for the purpose of competing in the Fremantle to Bali sailboat race and cleared Australian Customs added to the risk that it would run aground off Cape Talbot. He said (at [99] “the proposition that the risk would be increased by those circumstances seems somewhat fanciful”. Foster J tested the proposition by way of a hypothetical journey in the boat sailing from Fremantle to Darwin without clearing Australian Customs, because there would be no obligation to do so. If the boat ran aground off Cape Talbot, the loss suffered would have been covered under the policy. The loss would have occurred within Australian waters at a time when there was no suspension of cover in effect. The position may have been different had the vessel sunk in Indonesian waters or while sailing on the high seas. For these reasons, Foster J considered that the insurer failed to make out any entitlement to refuse to pay the claim under s 54(2) of the Act and also failed to demonstrate the requisite prejudice contemplated by s 54(1). Risk of loss for liability to person normally living with insured

In Allianz Australia Insurance Ltd v Inglis [2016] WASCA 25, a liability claim under a home insurance policy was refused because the 10 year old injured claimant normally lived with the insured which was an excluded risk under 14 of the policy which read, in part: We will not cover your legal liability for: a. Injury to any person who normally lives with you…;

The WA Court of Appeal (McLure P, Buss JA and Mitchell J) found that the claimant normally living with the insured did not constitute an “act” within s 54. It followed from this finding that the appeal was allowed. However, McLure P considered and dismissed a further ground of appeal. She found that if the claimant normally living with the insured was an act, then the risk of financial loss for liability in respect of an accident injuring that person was not an act which could reasonably be regarded as being capable of causing or contributing to a loss in respect of the insurance cover provided. To satisfy s 54(2), the act must be reasonably regarded as legally capable of satisfying the requirement that the act could potentially cause or contribute to an accident and any consequential harm and loss. It must satisfy the causation requirements for liability. This construction of s 54(2) is supported by the succeeding subsections of s 54. McLure P said 480

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For the purposes of s 54(2), the act in question must be one that is reasonably regarded as legally capable of satisfying the causation elements or requirements of legal liability for a loss. In particular, the act must be reasonably regarded as legally capable of satisfying the requirement that the act could potentially cause or contribute to an accident and any consequential harm and loss. The fact that a claimant normally lives with the insured may, for the reasons given by [the insurer], increase the risk of a financial loss in respect of which cover is provided, but it is incapable of satisfying the causation requirements for legal liability. If there was an “act”, the increase in risk of financial loss may arguably constitute prejudice for the purposes of s 54(1) but it does not bring the act within s 54(2). This construction of s 54(2) is consistent with and positively supported by ss 54(3), 54(4) and 54(5) which, together with s 54(2), comprise a connected subset of the legislative scheme. The third party respondents’ fall-back reliance on s 54(5)(b) reveals the high artificiality of seeking to apply s 54(5) to an act that is legally incapable of satisfying the causation elements of legal liability.

See [54.10.3].

[54.22] Insured: s 54(3) and 54(4) Section 54(3) and (4) are expressed to apply “where the insured proves” the relevant facts. The expression “the insured” in s 54(3) and (4) can be interpreted as referring to an insured person which would include a third party beneficiary of cover and third party claimant seeking direct access. The NSW Court of Appeal in Gorczynski v W & FT Osmo Pty Ltd (2010) 77 NSWLR 62; 241 FLR 242; 16 ANZ Ins Cas 61-852; [2010] NSWCA 163 noted that the wording of s 54(3) and (4) in being expressed to apply “where the insured proves” the relevant facts creates a difficulty in s 54 as a whole applying to a claim made pursuant to s 48 or s 51. That difficulty was recognised by Giles J in Commonwealth Bank of Australia v Baltica General Insurance Co Ltd (1992) 28 NSWLR 579; 7 ANZ Ins Cas 61-133 at 589G–590A (NSWLR) where he noted that s 54(3) indicates that a third party is in a worse position than the insured since the insurer may refuse to pay the claim by reason of the act of the third party unless the “insured” proves that no part of the loss was caused by the relevant act. The insured may be dead, impossible to find or even uncooperative. The difficulties caused by the expression “the insured” in s 54(3) and (4), when seeking to apply s 54 to a s 48 claim and, a fortiori, a s 51 claim (see s 51(1)(b)), were also noted by Clarke JA (with whom Meagher JA agreed) in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199 at 48B. The Court of Appeal in Gorczynski noted that the expression “the insured” is sometimes used loosely in the ICA to mean any insured person under ©

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(at [54]–[55]):

s 54

Insurance Contracts Act 1984

[54.22]

the contract of insurance, being a person who is expressly entitled to a benefit under such a contract. Thus the first sentence of [233] of ALRC 20 speaks in terms of “an insured person” rather than “the insured”. The latter is by definition a party to the contract of insurance whereas the former may be a third party who is entitled to make a claim under the contract but is not a party thereto. Tobias JA (with whom Giles and McColl JJA agreed), said (at 78,361 (ANZ Ins Cas)): It would be consistent with the object of s 54(1) to interpret the expression “the insured” in subs (3) and subs (4) as referring to an insured person, thus including a third party claimant. There is no rational reason why the rights conferred by subs (3) and subs (4) should only be available to insureds (in the strict sense) but not to third party claimants. Moreover, if subs (3) and subs (4) are read literally so that they are limited in the manner for which [the insurer] contends, they produce very odd results.

[54.25] No part of the loss was caused by the act: s 54(3) The dichotomy between s 54(1) and 54(2), which depends on whether an act can reasonably be regarded as being capable of causing or contributing to a loss for which cover is provided, is a difficult one. Cox J (SA Sup Ct) considered the dichotomy and the operation of s 54(3) in Australian Associated Motor Insurers Ltd v Ellis (1990) 54 SASR 61; 10 MVR 143; 6 ANZ Ins Cas 60-957. He noted that the fitting of mag wheels to the insured’s car without informing the insurer played no part in the subsequent loss when the car was involved in an accident. Cox J further noted that prejudice, directly causative of the loss, is referred to in s 54(3). However, the question of prejudice in s 54(1) is not directed, or at least restricted to, the loss that gives rise to the claim that was caused by the act or omission of the insured. The failure by the insured to notify the insurer of the intention to modify the car (that modification being the “act” in question) so that the insurer could decide whether or not to consent to it and if so, on what terms, was within the province of s 54(1).

[54.30] Omission: s 54(6) A reference in s 54 to an act includes a reference to an omission. For the meaning of “omission” see [54.10.7].

[54.40] Section 54(6)(b) The High Court (Brennan, Deane, Dawson, Gaudron and McHugh JJ) in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156 noted the extension to the meaning of “act” in s 54(6)(b) and said (at 339 (CLR); 482

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[54.50]

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s 54

77,830 (ANZ Ins Cas)): Curiously, para (b) which is in form a further extension of the term “act” includes only acts and omissions of a limited class.

The High Court noted that a similar provision appears in s 60(3). However, having raised a question as to the drafting of s 54(6), the High Court did not pursue the question any further. The High Court concluded that if there is a problem with the drafting of s 54(6) it will have to wait for another day.

[54.50] Sections 54 and 13 It appears to have been the intention of the ALRC that the remedies for breach of contract in s 54 would be available for a breach of the contractual duty of utmost good faith. The Notes to the Draft Insurance Contracts Bill 1982, which concern the proposed cl 14 (which became s 13), state that the remedies for breach of contract, for example s 54, will be available for a breach of the duty of utmost good faith. However, the application of s 54 to a breach of the duty of utmost good faith under s 13 is not without its difficulties. Section 54 assumes the existence of a contract of insurance and appears in Div 3 of Pt V of the ICA under “Remedies”. By its terms s 54 does not apply to a precontractual breach of the duty of utmost good faith. Further, there is the question as to whether or not s 54 would limit or restrict the effect of Pt II contrary to s 12 of the ICA. Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 considered a submission from the insurer that a fraudulent inflation of stock lists forwarded to the insurer constituted a breach of the duty of utmost good faith, entitling the insurer to cancel the policy. It was further submitted that, as a consequence, the insurer had no liability to the insured under the policy. Ipp J considered the relationship between ss 54 and 13 and said (at 77,136 (ANZ Ins Cas)): Section 12 is contained in Pt 2 of the Act, as is s 13 (which imposes the duty of utmost good faith). Nevertheless, in my view, s 54(1) does not limit or restrict the effect of s 13. It merely provides the extent of the remedy for the duty imposed by s 13. The effect of s 54(1) is that a breach of duty of utmost good faith by the insured entitles the insurer to refuse to indemnify the insured only to the extent that the insurer’s “interests are prejudiced by that breach” … ©

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McLure P (WA Court of Appeal) in Maxwell v Highway Hauliers Pty Ltd (2013) 45 WAR 297; 275 FLR 64; 17 ANZ Ins Cas 61-967 expressed an obiter view that she would construe s 54(6) as an inclusive definition which is not limited to or by the matters in s 54(6)(b).

s 54

Insurance Contracts Act 1984

[54.50]

In the present case, there is no evidence of any prejudice suffered by the [insurer]. In the circumstances, I do not consider that the [insured’s] breach of the duty of utmost good faith assists the [insurer] in attempting to resist the [insured’s] claim for indemnity in respect of the losses (as defined by the policy) actually suffered by it.

Notwithstanding the above decision ss 54 and 13 do not sit well together. Further, there may be cases where the question of prejudice may not be as easily disposed of as it was by Ipp J in Entwells. In Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104, Fullagar J (Vic Sup Ct) held that although it was strongly arguable that s 54 would apply to the breach of the implied term under s 13, s 54 has no application to cases which fall within s 56(1). His decision is in conflict with the decision of Ipp J in Entwells case on this point.

[54.60] Sections 54 and 40 The relationship between ss 54 and 40 has been considered by the courts both in terms of the notification of claims and the notification of facts that might give rise to a claim. The NSW Court of Appeal (Gleeson CJ, Mahoney and Clarke JJA) considered the relationship between ss 54 and 40 in East End Real Estate Pty Ltd v CE Heath Casualty & General Insurance Ltd (1991) 25 NSWLR 400; 7 ANZ Ins Cas 61-092. In this case the insured had notified a claim made during the period of cover outside that period. The insured argued that pursuant to the first limb of s 54(1) the insurer could not refuse to pay the claim by reason only of the insured’s omission to notify the claim within the period of cover. The insurer contended that s 54 should be given a narrower meaning so as to avoid a very curious result in cases of the kind to which s 40 applies. The Court of Appeal declined to give s 54 a narrower meaning. Gleeson CJ said (at 405 (NSWLR); 77,361 (ANZ Ins Cas)): [T]he fact that it might be possible to envisage circumstances in which the inter-relationship of s 40 and s 54 produces a curious result does not constitute a sufficient reason for applying s 54 in a manner that denies the words of that section their ordinary meaning.

Mahoney JA said (at 409 (NSWLR); 77,364–77,635 (ANZ Ins Cas)): The two sections deal with conceptually different problems. Section 40 applies to a policy where the omission to give notice of a claim within the period of insurance would exclude or limit liability: the remedy provided is that the omission shall not have that effect if the insured gave notice of the facts which might give rise to a claim within the time specified in s 40(3). ... 484

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[54.60]

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s 54

It could be envisaged that, in respect of a particular policy, both s 40 would operate (to prevent avoidance of the policy) and s 54 would operate to provide for a reduction of the amount payable by the insurer. There is, I think, no inconsistency in this.

The Court of Appeal by a majority (Kirby P dissenting) held that the non-notification pursuant to the deeming provision did not constitute an omission under s 54. In arriving at his decision Clarke JA described s 40(3) as follows (at 77,902 (ANZ Ins Cas)): Section 40(3) is a facultative provision which enables an insured successfully to claim indemnity under a policy of the type specified even though that insured has not received any claim from a third party during the currency of the policy provided that notice of facts which may give rise to a claim have been given. Upon the insured becoming aware of those facts he or she has an option to give notice of those facts or to await the notification of a claim. An insured, who renews a professional liability policy from year to year, may consider it is not in his or her interest to give notice of the possibility of a claim because of a perception that there is only a remote possibility that a claim will eventuate and the risk that notification will lead to increased premiums for the following year’s policy … It is true that s 40(3) enables an insured who has given notice of relevant facts successfully to claim indemnity but it does not follow that if the insured does not give notice of those facts the effect of the policy is that a claim would be defeated by his or her act (omission).

The High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 rejected a portion of the reasoning in Perry. Perry was overruled by the High Court in FAI General Insurance Co Ltd v Australian Hospital Care Pty Ltd (2001) 204 CLR 641; 75 ALJR 1236; 11 ANZ Ins Cas 61-497; [2001] HCA 38. The High Court held by a majority (McHugh, Gummow, Kirby and Hayne JJ, Gleeson CJ dissenting) that a failure to give notice of facts (circumstances) that might give rise to a claim in accordance with the contractual requirement to do so (a deeming provision), was an omission within the meaning of s 54(1) because the effect of the contract was that the insurer could refuse to pay the claim. ©

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The NSW Court of Appeal (Gleeson CJ, Kirby P and Clarke JA) again considered the relationship between ss 54 and 40(1) in FAI General Insurance Co Ltd v Perry (1993) 30 NSWLR 89; 7 ANZ Ins Cas 61-164. The professional indemnity policy contained a deeming provision in terms similar to s 40 which provided the insured with an option to provide notification. The insured had not given notification of an occurrence which subsequently gave rise to a claim within the terms of the deeming provision.

s 54

Insurance Contracts Act 1984

[54.60]

Rolfe J (NSW Sup Ct) did not consider that there is an inconsistency between ss 40 and 54: Einfeld v HIH Casualty & General Insurance Ltd (1999) 152 FLR 211; 10 ANZ Ins Cas 61-450; [1999] NSWSC 867. In his opinion, to the extent that s 40 provides a statutory extension to a policy of insurance, there is no reason why the ameliorating provisions of s 54 cannot apply to it. The plurality in Australian Hospital Care (McHugh, Gummow and Hayne JJ) considered the argument raised in East End that s 54 should be read down because, if that were not done, there would be some inconsistency between ss 40 and 54. In rejecting the notion of inconsistency, the plurality said (at [34]): Sections 40 and 54 deal with different problems. Section 40 is concerned with certain contracts of liability insurance and, among other things, with the insured giving notice of a potential claim during the period of insurance cover when the claim is not made until after the expiration of that period. Section 54, by contrast, deals with the much more general subject of an insurer refusing to pay claims. It is concerned with acts as well as omissions, and with acts or omissions not only of the insured but also of “some other person”. That is reason enough to conclude that any tension or overlap between the two sections should not be resolved by reading s 54 down. In any event, as Mahoney JA pointed out in East End the suggested reading of s 54 would not remove any tension that may exists between the two provisions.

Chesterman J (Qld Sup Ct) in CA & MEC McInally Nominees Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2009] 2 Qd R1; (2001) 166 FLR 271; 11 ANZ Ins Cas 61-507; [2001] QSC 388 disagreed with the obiter view expressed by Rolfe J in Einfeld. Chesterman J pointed out that the judgment of Rolfe J in Einfeld pre-dated the High Court in Australian Hospital Care. He said (at 75,889 (ANZ Ins Cas)): Section 40(3) confers rights on an insured and obligations on an insurer, but to obtain the subsection’s protection an insured must comply with its terms, by giving notice. [The insured’s] submissions would require a modification to the subsection and provide relief in circumstances other than those specified by the legislation. If it were Parliament’s intention that s 54 should modify the operation of s 40(3) one would expect to find some indication of the intention in the provision. There is nothing in s 40(3) which makes the requirement that notice be given during the currency of the policy “subject to s 54”.

Bergin J (NSW Sup Ct) adopted the reasoning of Chesterman J in Gosford City Council v GIO General Ltd (2002) 12 ANZ Ins Cas 61-527; [2002] NSWSC 511. The NSW Court of Appeal adopted similar reasoning which accorded with the reasons given by Bergin J in dismissing an appeal: Gosford City Council v GIO General Ltd (2003) 56 NSWLR 542; 12 ANZ Ins Cas 61-566; [2003] NSWCA 34. Sheller J (with whom Spigelman CJ and Meagher JA agreed) said (at [36]): Section 54 does not permit the reformulation of the claim. It operates to prevent an insurer relying on certain acts or omissions to refuse to pay that particular claim. The actual claim made by the insured is one of the premises from which consideration of the application of s 54 must proceed. The section 486

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s 54

does not operate to relieve the insured of restrictions or limitations, such as the temporal limits within which the claim must be made upon the insured in a claims made policy, that are inherent in that claim.

The Court of Appeal in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199 made obiter comments concerning an insurer’s reliance on breach of a policy term and whether a s 48 claimant could be held to such a breach. Clarke JA (with whom Meagher JA agreed) referred to s 54 and expressed a view that a reference to “other person” in s 54(1) is a reference to a s 48 claimant. However, he broadly described s 54 and noted that the section is not entirely clear insofar as it does not expressly deal with the effect of the conduct of the insured on a claim brought by a s 48 claimant. Clarke JA said (at 47–48 (NSWLR); 78,284 (ANZ Ins Cas)): Perhaps that is explicable because the terms of the contract should themselves spell out the consequences of particular conduct by the insured and the other person. If, for instance, the contract provided that no claim would be allowed if the insured did not give prompt notice then, subject to s 54, the failure by the insured to give such notice would, prima facie, defeat all claims, whether by the insured or by another person. In short, one could expect that the consequences of the particular conduct by either the insured or a person entitled to claim directly under the policy pursuant to s 48 upon the entitlements of one or the other would be spelt out in the policy itself. In this context s 48(3) would seem to add little if anything to those rights of an insurer which are circumscribed by s 54 although the two sections do not, in my view, sit together in perfect harmony. There are other aspects of s 54 which create difficulties. Subsections (3) and (4) speak only of the insured. However, these matters were not the subject of argument and can conveniently be left for another day.

Accordingly, subject to the resolution of further questions such as the relationship between ss 48 and 54, it appears that an insurer’s ability to rely upon a breach of a policy term by the insured as against a s 48 claimant will depend, inter alia, on the terms of the contract of insurance and whether the s 48 claimant is to be fixed with the consequences of the alleged conduct according to those terms. See also, [48.30.3].

[54.80] Sections 54 and 56 A fraudulent claim will undoubtedly also constitute a breach of the duty of utmost good faith. If s 54 provides the extent of the remedy for the duty of utmost good faith imposed by s 13 then the question of the relationship between ss 54 and 56 necessarily arises. Under s 56(2) a court may, if the fraud involves only a minimal or insignificant part of the claim, order payment of the balance if it is just and equitable to do so. Is ©

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[54.70] Sections 54 and 48

s 54

Insurance Contracts Act 1984

[54.80]

a court entitled to make such an order if the fraud also amounts to a breach of the duty of utmost good faith? It has been said that because s 54(1) provides the extent of the remedy for the duty imposed by s 13 there is ultimately no inconsistency with s 56. Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 said (at 77,136 (ANZ Ins Cas)): The effect of s 54(1) is that a breach of duty of utmost good faith by the insured entitles the insurer to refuse to indemnify the insured only to the extent that the insurer’s “interests are prejudiced by that breach”. This view is consistent with the policy embodied in s 56 of the Act. It is unlikely that the legislature intended that a breach of the duty of utmost good faith should be dealt with in a way fundamentally different to a fraudulent claim.

The obiter opinion of Ipp J in Entwells can be viewed alongside the decision of Fullagar J (Vic Sup Ct) in Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104. In that case the insured was found to have made a fraudulent claim in that he had inserted a false answer to a question in a claim form concerning the results of a blood alcohol test. It was submitted by the insured that he was entitled to relief under s 54. Fullagar J said (at 77,451 (ANZ Ins Cas)): If the [insurer] could rely only upon a breach by the insured of the term implied by s 13, then it is at least strongly arguable that s 54 would apply to the case, but this case falls well squarely within s 56(1) and, in my opinion, s 54 has no application to cases which fall within s 56(1).

The Victorian Court of Appeal in Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48 was of the opinion that Fullagar J was correct when in Gugliotti he held that “s 54 has no application to cases which fall within s 56(1)”. Buchanan JA (with whom Charles and Callaway JJA agreed) said (at 287–288 (VR); 75,665 (ANZ Ins Cas)): Section 54 modifies the effect of contracts of insurance, whereas the entitlement of an insurer to refuse to pay a fraudulent claim is derived from a statutory prescription. Further, the regime established by s 54 is at odds with the amelioration of the effect of fraud provided by s 56(2). If s 54(1) applies to a fraudulently exaggerated claim, an insurer will always be obliged to pay the true loss of the claimant, whereas s 56(2) requires the overstatement to be minimal or insignificant and non-payment of the remainder to be harsh and unfair before the amount of the loss must be paid.

The above decisions support a view that s 54 has no application to cases which fall within s 56(1).

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[55.10]

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[54.90] Proof

For instance, the prejudice to an insurer under the second limb of s 54(1) is determined according to a subjective test requiring evidence from the actual insurer. Prejudice is therefore a matter for the insurer to prove. Where the act or omission concerns a failure to satisfy a condition precedent to the insurer’s liability then the value of the insurer’s lost opportunity depends on an hypothesis based on the court’s estimate of the likelihood of the insurer having acted in the way contended. This again is a matter for the actual insurer: Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156 per Brennan, Deane, Dawson, Gaudron and McHugh JJ. Section 54(3) and (4) are expressed as requiring the insured to prove the causal nexus between the act (including omission) and the loss.

[54.100] Previous contracts Subsection 54 applies to blanket superannuation entered into before the date of commencement of the ICA insofar as a person who subsequently becomes a member of the scheme is concerned: see s 4(2). 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.

SECTION 55 COMMENTARY Synopsis ..................................................................................................

[55.10]

Legislative intention .................................................................................

[55.20]

[55.10] Synopsis So far as an insurer’s rights to avoid a contract of insurance or to refuse to pay a claim by reason of an act or omission of an insured are concerned, those rights are governed exclusively by Div 3 of Pt V. Section 55 does not, however, affect the insurer’s right to cancel a contract of insurance under Pt VII.

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The burden of proof under s 54 falls upon either an insurer or an insured depending on the matter requiring proof.

s 55A

Insurance Contracts Act 1984

[55.10]

[55.20] Legislative intention The High Court in Antico v Heath Fielding Australia Pty Ltd (1997) 188 CLR 652; 71 ALJR 1210; 146 ALR 385; 9 ANZ Ins Cas 61-371; [1997] HCA 35 referred to the legislative intention evinced by s 55. In the majority judgment the High Court (comprising Dawson, Toohey, Gaudron and Gummow JJ) said (at 668 (CLR): 77,081 (ANZ Ins Cas)): Section 55 evinces a legislative intention to establish a regime which will overcome the perceived inequities to the insured in the operation of the common law remedies available to the insurer. Those remedies depended upon form rather than substance. Thus, if an obligation of the insured were expressed as a condition, the insurer might rescind for breach, whereas if the same obligation were expressed as an exclusion from the cover, the insurer might refuse to allow a claim. Again, there might be little or no causal connection between the claim itself and the conduct relied upon by the insurer in refusing the claim. 55A Representative actions by the ASIC (1) If: (a) an insured has entered into a contract of insurance with an insurer; and (b) ASIC is satisfied that the insured or any third party beneficiary under the contract has suffered damage, or is likely to suffer damage, because the terms of the contract, or the conduct of the insurer, breaches the requirements of this Act; ASIC may, by application, if ASIC is of the opinion that it is in the public interest to do so: (c) bring an action against the insurer on behalf of the insured or third party beneficiary under or in respect of that contract; or (d) take over and continue, on behalf of the insured or third party beneficiary, an action brought against the insurer by the insured or third party beneficiary under or in respect of that contract. [Subs (1) am Act 75 of 2013, s 3 and Sch 6 items 23–25; Act 54 of 1998, s 3 and Sch 12 items 8 and 13]

(2) If: (a) a number of insureds have entered into contracts of insurance with an insurer; and

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(b) ASIC is satisfied that those insureds or any third party beneficiaries under the contract have suffered damage, or are likely to suffer damage, because the terms of the contracts, or the conduct of the insurer, breaches the requirements of this Act; ASIC may, by application, if ASIC is of the opinion that it is in the public interest to do so, bring a single action against the insurer on behalf of all of those insureds or third party beneficiaries under or in respect of the contracts so entered into.

(3) ASIC may only bring or take over an action under subsection (1), or bring an action under subsection (2), if ASIC has obtained the written consent of the insured or third party beneficiary, or of each of the insureds or third party beneficiaries, on whose behalf the action is being brought or is being continued. [Subs (3) am Act 75 of 2013, s 3 and Sch 6 item 28; Act 54 of 1998, s 3 and Sch 12 items 8 and 13] [S 55A am Act 75 of 2013; Act 54 of 1998; insrt Act 49 of 1994, s 3 and Sch item 7]

SECTION 55A COMMENTARY Synopsis .................................................................................................. ASIC ........................................................................................................ Third party beneficiary .............................................................................

[55A.20] [55A.30] [55A.40]

[55A.20] Synopsis Section 55A sets out the representative actions that, upon application, may be undertaken by the ASIC where ASIC is of the opinion that it is in the public interest to do so. ASIC may bring a representative action on behalf of an insured in certain circumstances: s 55A(1). ASIC may bring a representative action on behalf of a number of insured: s 55A(2). ASIC must obtain written consent of the insured, or each of the insured, before bringing a representative action: s 55A(3). Section 55A was amended by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2013. Several refinements were made to s 55A to extend ASIC’s powers to cover bringing or continuing actions against insurers on behalf of third party beneficiaries as well as insureds. The amendments apply to contracts of insurance entered into both before and after commencement on Royal Assent on 28 June 2013.

[55A.30] ASIC See s 11(1). ©

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[Subs (2) am Act 75 of 2013, s 3 and Sch 6 items 26 and 27; Act 54 of 1998, s 3 and Sch 12 items 8 and 13]

s 55A

Insurance Contracts Act 1984

[55A.30]

[55A.40] Third party beneficiary See s 11(1). See also, [48.10.1] and [48.10.2].

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PART VI – CLAIMS 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.

(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.

SECTION 56 COMMENTARY Background and synopsis ....................................................................... Claim: s 56(1) .......................................................................................... Previous contracts ................................................................................... Claim under a contract of insurance: s 56(1) ......................................... Claim is made fraudulently: s 56(1) ........................................................ Minimal or insignificant part: s 56(2) ....................................................... Need to deter fraudulent conduct and any other relevant matter: s 56(3) ................................................................................................. Sections 56 and 48 ................................................................................. Sections 56 and 54 ................................................................................. Matters of proof .......................................................................................

[56.10] [56.10.1] [56.10.2] [56.10.3] [56.10.4] [56.20] [56.30] [56.40] [56.50] [56.60]

[56.10] Background and synopsis The ALRC was concerned about the rule that existed prior to the ICA that fraud in respect of one claim taints other claims under the same policy. The strict application of the doctrine of utmost good faith might have resulted in an entitlement to avoid a contract of insurance ab initio with an entitlement to deny prior claims untainted by fraud. Accordingly, the ALRC recommended that in the event of a fraudulent claim an insurer should be able to decline the claim but should not be able to avoid the contract ab initio: ALRC 20, at [243]. ©

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(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.

s 56

Insurance Contracts Act 1984

[56.10]

The ALRC doubted whether many insurers would reject a substantial claim merely because an insured had acted fraudulently in relation to a minor part of it. The ALRC gave an example as follows (ALRC 20, at [243]): A claim for $3,000 lost baggage would usually be met even if a fraudulent claim that a camera worth $200 was included in that baggage was rejected.

Accordingly, the ALRC recommended that 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. The ALRC was concerned that in exercising this discretion the court should have regard to all relevant factors, including the need to deter fraud. Accordingly, s 56 provides that where a fraudulent claim is made, the insurer will be unable to avoid the contract but may refuse to pay the whole of the claim: s 56(1). The application of s 56 is modified, however, by the court which has the power to order an insurer to pay an amount that it assesses as just and equitable in the circumstances. The court may exercise this power 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: s 56(2). In exercising this power the court will have regard to the need to deter fraudulent conduct and other relevant matters (s 56(3)): Explanatory Memorandum to the Insurance Contracts Bill 1984, at [186].

[56.10.1] Claim: s 56(1) Section 56(1) is concerned with fraud and the making of the “claim”. Form of claim

A relevant policy of insurance may contain a definition of “claim”. The claim may have to be in writing and may have to be in a particular form. This may determine what constitutes a “claim” under s 56(1). However, if the policy does not require a claim to be in writing, or to be in any particular form then the submission of documents in support of the claim will constitute a claim within the terms of s 56(1). In Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 the insured contended that the delivery of falsified stock sheets after the delivery of a signed claim form did not involve the making of a claim. Ipp J (WA Sup Ct) held that the submission of the stock lists was part of the process of making the claim. False statements in connection with a claim

A “claim” is made fraudulently if the claimant knowingly makes a false statement in connection with the claim to induce a false belief in the 494

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A “claim” within the meaning of that term in s 56(1) may be fraudulent if a claimant asserts that a motor vehicle was stolen but misstates the identity of the thief. In Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48 the Victorian Court of Appeal considered a claim in which the insured had misstated that a motor vehicle was taken by others when in fact it had been driven at the relevant time by her son. It was submitted that the claim insofar as it involved the assertion that the motor vehicle was stolen was not false as the insured’s son “stole” the car. In rejecting a submission that the claim was not rendered false because the identity of the thief was misstated, Buchanan JA (with whom Charles and Callaway JJA agreed) noted that s 56(1) is concerned with fraud in the making of the claim, ie fraud in the formulation and presentation of the claim. He said (at 285 (VR); 75,663–75,664 (ANZ Ins Cas)): The submission assumes that the word “claim” in s 56(1) does not refer to the form of the demand upon the insurer but is synonymous with the identification by the insured of the relevant class of indemnity provided by the policy which the insured invokes, in this case the indemnity against loss or damage caused by theft of the insured property. I doubt that the assumption is correct. While it may be true of subs (2), which speaks of nonpayment of the remainder of a claim, subs (1) is concerned with fraud and the making of the claim, that is, fraud in the formulation and presentation of the claim. In my opinion if a false statement is knowingly made in connection with the claim for the purpose of inducing the insurer to meet the claim, the claim is one made fraudulently within the meaning of s 56(1). It is not necessary to analyse the false statement to determine whether or not the falsity attaches to the basis upon which the insurer is claimed to be liable.

Einstein J (NSW Sup Ct) rejected the life insurer’s assertion that a claim under an income protection policy was made fraudulently in that the claimant stated in his claim forms that he was not working in Walton v Colonial Mutual Life Assurance Society Ltd (2004) 13 ANZ Ins Cas 61-620; [2004] NSWSC 616. He noted the relevant principles from various cases including To. He said (at [144]): …the for fraud is satisfied if the insured has a dishonest intent to induce a false belief in the insurer for the purpose of obtaining payment or some other benefit under the policy. As such, where the insured makes a false statement with knowledge in a claim to induce the insurer to meet the claim, the claim is made fraudulently. The fraudulent statement need not be material to the insured’s claim nor is the insured absolved of any responsibility by asserting ©

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insurer for the purpose of obtaining payment or some other benefit under the policy. The false statement must be in connection with the claim. A false statement not in connection with a claim will not engage s 56(1). Further, it will be necessary for an insurer to prove that the claimant knowingly made a false statement to induce the insurer to indemnify or pay a benefit for s 56(1) to be engaged.

s 56

Insurance Contracts Act 1984

[56.10.1]

that he considered his claim to be valid… it is not necessary to show prejudice as having been suffered by the insurer for s 56 to be relied upon…

In Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262, the NSW Court of Appeal observed that the insurer had not properly pleaded the alleged false statements by the insured in connection with a motor vehicle theft claim as to the insured’s whereabouts and the route taken when driving the vehicle. Beazley P commented (at [65]) that the pleading did “not assert that the false statements were made with the intent to induce [the insurer] to pay the claim”. Meagher JA observed that two consequences flowed from this. He said (at [73]–[74]): …One consequence of this, as the learned President’s reasons show, was that, when considering the [insurer’s] reliance on that defence, the primary judge neither addressed nor made a finding as to the [insured’s] alleged fraudulent purpose in making the false statements. A second consequence of this deficiency in the pleading was to create apparent uncertainty as to whether the [insurer] had made a positive case that the claim was fraudulent because the vehicle was known by the [insured] not to have been stolen. “Claim” in s 56(1) not a claim made in proceedings

A “Claim” under s 56(1) is other than one that arises in proceedings between the claimant and insurer. Section 56 does not apply to a claim that arises in proceedings such as a claim for damages made in the proceedings or false statements made in evidence by way of affidavit. Hammerschlag J (NSW Sup Ct) was of the view that a claim contemplated by s 56(1) was one made extra-curially by an insured on an insurer. A cause of action for damages in proceedings following the refusal of an insurance claim was not a claim under a contract of insurance for the purposes of s 56(1): Brescia Furniture Pty Ltd v QBE Insurance (Aust) Ltd (2007) 14 ANZ Ins Cas 61-740; [2007] NSWSC 598. He said ([355]–[359]): The claim for stock loss is a claim for damages made in proceedings in this Court which was manifestly always going to be the subject of close scrutiny. In my view, a claim contemplated by s 56(1) is a claim made extra-curially by an insured on an insurer with dishonest intent to induce a false belief in the insurer for the purpose of obtaining payment or some other benefit under the policy. Section 56(2) talks of “proceedings in relation to such a claim” which, in my view, indicates a distinction between a claim and proceedings in relation to it. The prosecution of the cause of action in these proceedings for damages after refusal by the [insurer] of indemnity is not, in my view, a claim under an insurance contract for the purposes of s 56(1) of the Act. It follows, in my view, that even if I had found that the stock loss claim was inflated to the knowledge of [the insured] the [insurer] would not have had the benefit of s 56(1). 496

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The Victorian Court of Appeal (comprising Nettle JA, Dodds-Streeton JA and Coghlan AJA) concluded that s 56 does not have any application to fraudulent representations made in evidence: Allianz Australia Insurance Ltd v Douralis (2008) 217 FLR 452; 15 ANZ Ins Cas 61-763; [2008] VSCA 72. In that case there were false statements in an affidavit directed to claims pursuant to the Trade Practices Act 1974 (now known as the Competition and Consumer Act 2010), a claim for damages for stress and inconvenience and a claim that the insurer was estopped from denying cover. Dodds-Streeton JA said (at 76,620 (ANZ Ins Cas)): Those claims, to which the false statements in the affidavit were directed, were not, in my view, claims made under the policy in terms of s 56(1). Rather, they were made to support claims which assumed that the policy did not cover Mr and Mrs Douralis who were not, in consequence, entitled to claim under it.

As to the question of fraudulent misrepresentation, I respectfully take leave to doubt that s 56 of the Insurance Contracts Act 1984 (Cth) has anything to do with representations made in evidence in the course of proceedings following the rejection of a claim. Notwithstanding what was said in [To], I see no reason in principle why a plaintiff’s claim against an insurer should any more be denied on the basis that the plaintiff has given deliberately false evidence than a plaintiff’s case against any other sort of defendant is denied on the basis that the plaintiff has given deliberately false evidence. By the time a plaintiff gets to evidence in the course of a proceeding to enforce an insurance policy, the circumstances are really no different to those which obtain when a plaintiff gets to evidence in the course of a proceeding to enforce any other form of contract. Logic implies, therefore, that the results of telling lies in each proceeding should be more or less the same. Regrettably, witnesses can and sometimes do tell lies in evidence, and it is to be discouraged. Hence, they are liable to be punished for perjury. But they are not usually punished by being deprived of the fruits of their claim when and if they manage to prove it regardless of the identity of the defendant.

The Victorian Court of Appeal in Douralis did not refer to the earlier decision of Hammerschlag J in Brescia but reached the same conclusion, that s 56(1) is not concerned with false evidence in proceedings to enforce an insurance claim, using different reasoning.

[56.10.2] Previous contracts Section 56 applies to blanket superannuation entered into before the date of commencement of the ICA insofar as a person who subsequently becomes a member of the scheme is concerned: see s 4(2). ©

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Nettle JA (with whose conclusion on this matter Couglan AJA agreed), taking into consideration what was said in Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48, expressed it differently. He said (at 76,605 (ANZ Ins Cas)):

s 56

Insurance Contracts Act 1984

[56.10.2]

[56.10.3] Claim under a contract of insurance: s 56(1) Section 56(1) specifies that it is a claim under a contract of insurance or a claim under the ICA by a person who is not the insured (that is, s 48) which must be fraudulent for the insurer to have the right to refuse payment of the claim. Notably, s 56(1) focuses fraud upon the claim itself rather than upon the person making the claim. Commonly with a corporate insured a question arises as to whether the conduct of directors is to be regarded as the conduct of the insured? Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 held that in assisting some outside person to set fire to the insured property, one or the other of the two directors concerned was acting with the intention of enabling the insured to claim under the policy and that, in the circumstances, the acts of either of the two directors were to be identified with the insured. Ipp J referred to the “active and directing” will of a company and said (at 77,134 (ANZ Ins Cas)): The “active and directing” will of a company may be constituted by the minds of several persons, each acting separately and independently of the others. In such event, the acts and mind of one of such persons, when so acting, may be the acts and mind of the company itself.

In Preseed Pty Ltd v Colonial Mutual General Insurance Co Ltd (unreported, NSW Sup Ct, Brownie J, 5 March 1992) the analysis of the law by Ipp J in Entwells was adopted. Brownie J found that the managing directors of the insured acted in concert and they were in actual control of every aspect of the insured’s business. He further found that their arson was carried out with a view to enabling the insured to claim under its contract of insurance and was therefore the arson of the insured company.

[56.10.4] Claim is made fraudulently: s 56(1) Section 56 does not provide any guidance as to what constitutes a fraudulent claim It is necessary to have regard to the common law. Buchanan JA (Vic Sup Ct CA) noted the preservation of the common law as to what constitutes a fraudulent claim and the extent to which s 56 alters the common law in Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48. He rejected a submission that the purpose of s 56 is to prevent a fraudulent claimant being punished by limiting the effect of fraud to reduction of the liability of the insurer by the extent to which it had been prejudiced by the insured’s fraud. He held that no such intention could be detected in s 56 and said (at 284 (VR); 75,663 (ANZ Ins Cas)): In my opinion 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 498

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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 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.

It is therefore necessary to have regard to the common law in determining what constitutes a fraudulent claim. A fraudulent claim may be made in a variety of ways. The question as to what constitutes a fraudulent claim varies according to the nature of the fraud. It is worthwhile considering some examples. Arson/fraud involves the intentional destruction by fire of the subject matter of the contract of insurance followed by an insurance claim. In the absence of direct evidence it is necessary for insurers to prove a fraudulent claim within the terms of s 56(1) through circumstantial evidence. Classically an insurer would build a circumstantial case by presenting evidence that the insured had a requisite motive, had the opportunity or provided the person who lit the fire with the opportunity to light the fire, and the fire was deliberately lit. Evidence concerning the credibility of the insured can be very important. There are many cases in which the constituent elements of a circumstantial arson/fraud case have been analysed. For an exhaustive analysis see Brownie J (NSW Sup Ct) in Preseed Pty Ltd v Colonial Mutual General Insurance Co Ltd (unreported, NSW Sup Ct, Brownie J, 5 March 1992). Also see Mutual Community General Insurance Pty Ltd v Khatchmanian (2013) 17 ANZ Ins Cas 61-974; [2013] VSCA 144 in which the Victorian Court of Appeal analysed the constituent elements of arson against the facts of that case and considered the weighing of “possibilities” against the need to decide the case by applying the civil standard on the balance of “probabilities”. Fraudulent exaggeration

An exaggerated claim is not necessarily a fraudulent claim. On the question as to when an exaggerated claim is to be considered fraudulent: see Engel v South British Insurance Co Ltd (1983) 2 ANZ Ins Cas 77-938. Davidson CJ (NZ High Ct) in that case accepted the following principles which are set out in Ivamy, General Principles of Insurance Law (4th ed, Butterworths, 1979), p 436 and cited at 77,948 of the judgment: An exaggerated claim is to be considered fraudulent in the following cases: 1. Where the assured clearly intended to defraud the insurers; 2. Where the overestimate of his loss is so excessive as to lead to the inference that the assured cannot have made the claim honestly, but must have intended to defraud the insurers; ©

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Arson/fraud

s 56

Insurance Contracts Act 1984

[56.10.4]

3. Where the overestimate, though not deliberately put forward with the directly fraudulent intent of inducing the insurers to pay the full amount claimed, is designedly made for the purpose of fixing a basis upon which to negotiate with the insurers.

Ipp J (WA Sup Ct) cited the Ivamy formulation in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059. In that case he held that stock lists were inflated with the deliberate intention of inducing the insurer to pay more than the insured had in fact lost by fire. Ipp J held that the essence of a fraudulent claim is that it is made dishonestly. He was of the view that the inflation of the stock lists was dishonest and fraudulent. Similarly, in Moxia Pty Ltd v AMP General Insurance Ltd (unreported, Vic Sup Ct, Beach J, 21 September 1992) Beach J said (at 36): In my opinion the [insureds’] claims in respect of their losses as a consequence of the fire were so exaggerated as to amount to a fraud. The figures put forward on their behalf were so greatly exaggerated that they cannot be described as honest estimates but were clearly intended to deceive [the insurer] and to induce it to pay a larger sum than was properly payable. Even had the amounts only been exaggerated not for the purpose of inducing [the insurer] to pay the full amount of the claim but for the purpose of fixing a basis upon which to negotiate a settlement, that still would have been fraudulent.

Beach J held that a substantial claim on behalf of the insured for the hours allegedly spent in cleaning and repairing equipment after the fire was grossly exaggerated and wilfully so. False statements

A “claim” is made fraudulently if the claimant knowingly makes a false statement in connection with the claim to induce a false belief in the insurer for the purpose of obtaining payment or some other benefit under the policy. A claim may be fraudulent due to the insured’s deliberate insertion of a false answer in a claim form. Fullagar J (Vic Sup Ct) in Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104 held that the deliberate insertion of a false answer as to the results of a blood alcohol in a claim form was fraudulent within the meaning of s 56(1). He noted that the only logical reason for the false answers was an intention by the insured to mislead the insurer. Mandie J (Vic Sup Ct) in Australian Associated Motor Insurers Ltd v To (1999) 151 FLR 384; 10 ANZ Ins Cas 61-444; [1999] VSC 287 in referring to Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104 and s 56(1) said (at 75,078 (ANZ Ins Cas)): If a person knowingly makes false statements believing that they have an invalid claim in order to mislead the insurer into believing that they have a 500

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valid claim, it seems to me not to matter whether in fact the claim is valid or invalid. The claim is made dishonestly and hence fraudulently within the meaning of the Act.

Usually a claimant submits a fraudulent claim because, in the absence of fraud, the claim will either not be paid by the insurer or the amount sought will not be paid. The insured commits the fraud to create a false belief in the insurer for the purpose of obtaining an indemnity under the contract of insurance that would not otherwise be provided. It is an unusual situation in which the claimant commits a fraud under the mistaken belief that if the true position is revealed to the insurer the claim will not be paid. In Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48 the insured’s motor vehicle was involved in an accident and sustained damage when driven without her consent by her 15-year-old unlicensed son. She falsely told the insurer that the motor vehicle had been stolen and damaged when her son was set upon by a gang of youths. The policy did in fact cover damage when the vehicle was being driven by an unlicensed person without the consent of the insured. However, the insured had lied about the events in the mistaken belief that cover was not available in such circumstances. Buchanan JA (with whom Charles and Callaway JJA agreed) rejected a submission that an insured who was entitled to indemnity could not make a fraudulent claim. He said (at 285–286 (VR); 75,664 (ANZ Ins Cas)): It was submitted on behalf of the [insured] that a fraudulent claim required knowledge on the part of the claimant that he or she was not entitled to the claimed benefit. Belief was not sufficient. Thus an insured who was entitled to indemnity could not make a fraudulent claim … In my view the mental element required to establish fraud is an intention to deceive, that is, an intention to create a false belief in the person deceived for the purpose of obtaining money or some other benefits. It is not necessary to go further and stipulate knowledge or belief as to a lack of entitlement to the money or other benefit claimed. In fact most fraudulent claimants … know they are not entitled to that which they claim, but the claimant who lies because of a mistaken belief as to entitlement is equally dishonest. To the same end it was submitted on behalf of the [insured] that it is not possible for a claimant to defraud another of a benefit to which the claimant is entitled … In my view the word “fraudulently” in s 56 of the Act encompasses a lie which could not prejudice the insurer even if it were believed as well as a lie which does not prejudice the insurer because the insurer is not deceived. The claimant’s dishonesty is commensurate in both cases.

Buchanan JA also rejected a submission that s 56 only applied to fraudulent misstatements that were material, ie misstatements that influence a prudent insurer’s decision to accept, reject or compromise a ©

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False statements – creating false belief even if mistaken belief

s 56

Insurance Contracts Act 1984

[56.10.4]

claim. He noted that s 56 does not distinguish between material and immaterial fraud. In considering the submission he said (at 287 (VR); 75,665 (ANZ Ins Cas)): The submission adapted the requirement of materiality which applies to innocent non-disclosure and misrepresentation prior to the formation of a contract of insurance. The submission derives support from some decisions in the United States, although in other decisions United States judges have insisted upon the principle that an insurer may avoid a policy upon the making of a fraudulent claim as one which “provides insureds with an incentive to tell the truth” and refused to “dilute that incentive to allow an insured to gamble that a lie will turn out to be unimportant”. Section 56 does not in terms distinguish between material and immaterial fraud, and in my view there is no reason to think that the section was intended to alter the common law in this respect.

Gillard J (Vic Sup Ct) considered a dishonest failure to disclose information in relation to an insurance claim in Insurance Manufacturers of Australia Pty Ltd v Heron (2005) 14 ANZ Ins Cas 61-669; [2005] VSC 482. In this case the insured had dishonestly withheld information which, if known by the insurer, would not have affected its decision on the claim. The conduct amounted to a breach of the duty of utmost good faith. The principles of law stated by Buchanan JA in Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48 concerning the necessary mental element, namely, an intention “to create a false belief in the person deceived for the purpose of obtaining money or some other benefit” were applied. The claim was not fraudulent because the dishonest failure to disclose information did not create a false belief in the insurer which improved the insured’s claim prospects. Further, the insured did not withhold the information with an intention of obtaining payment under the policy. Jointly or severally co-insured

Section 56 does not provide any guidance as to claims by innocent co-insured in circumstances where one or more other co-insured have made a fraudulent claim within the meaning of s 56(1). Where there is a separation of the interests insured as between those severally or compositely co-insured the fraud of one co-insured will not defeat the claim of the innocent co-insured. However, the interests of joint co-insured are treated as one. Therefore, the fraud of one co-insured will defeat the claim of innocent parties jointly co-insured. The NSW Court of Appeal (Sheller JA with whom Mason P and Beazley JA agreed) held that the claim of an innocent jointly co-insured wife in a husband and wife partnership was made fraudulently within the meaning of s 56(1) because of the fraud of her husband/partner: MMI General Insurance Ltd v Baktoo (2000) 48 NSWLR 605; 155 FLR 230; 11 ANZ Ins Cas 61-466; [2000] NSWCA 70. 502

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[56.20] Minimal or insignificant part: s 56(2) The question as to whether the fraudulent part of a claim is minimal or insignificant appears to assume that the fraudulent part of a claim is readily quantifiable. This may not necessarily be the case. The example given by the ALRC (see [56.10]) involved a fraudulent claim in the sum of $200 as part of a lost baggage claim in the sum of $3,000. In the Explanatory Memorandum to the Insurance Contracts Bill 1984 the following example was given (at [187]): [I]t may be unfair for an insured to have the whole of a legitimate claim for the loss of contents worth $100,000 disallowed because he fraudulently claimed for the loss of a non-existent watch worth $50.

For instance, Fullagar J (Vic Sup Ct) considered whether false answers in a claim form constituted a minimal or insignificant part of the claim in Gugliotti v Commercial Union Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104. Fullagar J held that the false answers as to the results of a blood alcohol were given in order to minimise the risk that the insurer would investigate the actual alcohol consumption of the driver and refuse to meet the claim. He held that this fraud tainted the whole claim and that therefore it was not a case where “only a minimal or insignificant part of the claim” was made fraudulently. In other words, in order to quantify the fraud he looked at the intended consequences of the fraud and the degree to which it tainted the claim. The quantification of fraud may be difficult. The Qld Court of Appeal (Williams JA, Mackenzie and Chesterman JJ) in Ricciardi v Suncorp Metway Insurance Ltd [2001] QCA 190 considered the difficulty of quantifying fraud in a case where the insured had represented to a valuer, who was instructed for the purpose of quantifying the insurance claim, that a house damaged by fire had been in superior condition to another house owned by the insured. In fact, the house damaged by fire had been in worse condition. The insured thereby dishonestly obtained an inflated valuation and in doing so claimed $30,000 when his loss was no more than $20,000 and may have been nothing. The Qld Court of Appeal held that this could not be regarded as minimal or insignificant. The question of divisibility was looked at by Chesterman J. He noted that s 56(2) seems only to apply where there is a distinct component of a claim which, although fraudulent, is minimal. He referred to the belief of Professor Sutton in Insurance Law in Australia (3rd ed, Law Book Co.) at [15.86] that the subsection “will apply only if a claim can be divided into a number of separate parts of which one or more … has been made fraudulently, the remainder being honestly put forward”. Chesterman J ©

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Given the varieties of fraud and difficulties of proof these examples have proved less than helpful.

s 56

Insurance Contracts Act 1984

[56.20]

noted that in this case there was one claim for the loss of one property. That claim was tainted by fraud which affected “the claim”, which was indivisible. Although it was not a necessary point in relation to the outcome of the appeal he noted that it did not seem possible to regard the situation as involving two claims: the fraudulent claim for $30,000 and a notional, honest claim for part of that sum. In a similar vein the Victorian Court of Appeal (Buchanan JA with whom Charles and Callaway JJA agreed) considered whether fraud that could not affect the insurer’s liability was “minimal or insignificant” within the meaning of s 56(2) in Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48. The insured had made a false statement as to the circumstances in which a motor vehicle was damaged, thinking incorrectly that if she told the truth the insurer would not meet the claim. The Victorian Court of Appeal noted that the fraud related to the entire sum or benefit claimed and therefore the division contemplated by s 56(2) could not be achieved. The quantification of fraud does not have to be a precise science. Beach J (Vic Sup Ct) in Moxia Pty Ltd v AMP General Insurance Ltd (unreported, Vic Sup Ct, Beach J, 21 September 1992), noted that there were so many aspects of the insured’s claim for damages which were false it was difficult to know where to stop in identifying them. Having quantified some of the fraudulent claims, he expressed the opinion that the fraudulent claims were of such a magnitude as to entitle the insurer to refuse payment of all the insured’s claims. Ipp J (WA Sup Ct) exercised his discretion under s 56(2) without precisely quantifying the fraud in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059. He found a stock claim to be inflated, in total, by at least $27,412 and probably by some thousands of dollars more. He accepted that the insured’s claim ranged between $222,589 and $528,000. He held that even at the lower end of the scale, he regarded the fraudulent part of the claim as being relatively small and considered that the non-payment of the entire remainder of the claim would be harsh and unfair. His description of the fraudulent part of the claim as being “relatively small” is hard to reconcile with the wording of s 56(2), namely, “minimal or insignificant part of the claim”. In Tsorotes v RACV Insurance Pty Ltd (unreported, Vic Sup Ct FC, 30 November 1993), the Full Court of the Supreme Court of Victoria (comprising Fullagar, Marks and Ormiston JJ) upheld one of the findings at first instance that a substantial quantity of contents allegedly stolen were not in a house as alleged by the insured. Various amounts were looked at as being the value of contents actually stolen compared with the amount claimed by the insured. The Court held the discrepancy was large 504

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and inconsistent with a mere inflation of the claim. The fraud did not relate to “such a small part of the claim” as to enable the power under s 56(2) to be exercised.

[56.30] Need to deter fraudulent conduct and any other relevant matter: s 56(3) In exercising the power conferred by s 56(2) the court must have regard to the need to deter fraudulent conduct. This is indeed a difficult exercise.

[56.40] Sections 56 and 48 Clarke JA (with whom Meagher JA agreed) in CE Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25; 7 ANZ Ins Cas 61-199 considered s 56, on an obiter basis, in the context of a claim by a s 48 claimant. He thought it clear that an insurer may refuse (subject to s 56(2)) to pay a claim that is fraudulently made but remains otherwise bound by the terms of the contract of insurance. Being otherwise bound by the terms of the contract would mean that a fraudulent claim by the insured would not affect another claim for the same loss made by a s 48 claimant. Clarke JA said (at 48 (NSWLR); 78,285 (ANZ Ins Cas)): What, I think, is clear from s 56(1) is that the insurer may refuse (subject to s 56(2)) to pay a claim that is fraudulently made but remains otherwise bound by the terms of the contract. Where, therefore, an insured makes a fraudulent claim that would not, as it presently seems to me, affect another claim for the same loss made by a person entitled to recover its loss pursuant to s 48(1). Where, for instance, an insured destroys its own premises by firing them it would not be entitled to maintain a claim under a policy in respect of the damage to those premises whereas nothing in s 56 would appear to affect the right of an innocent mortgagee named in the policy from claiming in respect of the loss it suffered as a consequence of the fire. This is consistent with Brownie J’s opinion in Barroora Pty Ltd v Provincial Insurance (Aust) Ltd (1992) 7 ANZ Ins Cas 61-103 that the insurer’s liability to each at common law is several and that an innocent mortgagee could, in the example I have given, recover under the common law.

In an earlier case Tadgell J (Vic Sup Ct) in VL Credits Pty Ltd v Switzerland General Insurance Co Ltd [1990] VR 938; (1989) 5 ANZ Ins ©

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The court shall also have regard to any other relevant matters. Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 exercised the discretion under s 56(2) and took into account the need to deter fraudulent conduct in relation to insurance. However, he did not specify the way in which he took this factor into account. In addition he took into account the fact that the insurer had not been significantly prejudiced by the fraud. However, he did not quantify the prejudice.

s 56

Insurance Contracts Act 1984

[56.40]

Cas 60-936 rejected the argument put by the insurer that if it could prove arson by the insured then that would provide it with a defence against the s 48 claimant. Brownie J (NSW Sup Ct) in the Barroora Pty Ltd case, referred to by Clarke JA above, also considered that an insurer would not be entitled to raise arson by an insured as a defence against a third-party claimant. Although he concluded that the third-party claimant was entitled to the benefit of s 48 he decided the questions before him by applying the judgments of the High Court and the NSW Court of Appeal in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107; 62 ALJR 508; 5 ANZ Ins Cas 60-873; [1988] HCA 44. Therefore, it appears, that if an insured and a s 48 claimant are covered under a contract of insurance severally (as opposed to jointly) then the insurer will not be able to rely upon the fraud of the insured against the innocent s 48 claimant. This is most commonly seen where the contract of insurance covers both mortgagee and mortgagor. It is likely that an insurer’s liability to each will be several and an innocent mortgagee will be able to recover under a contract of insurance either pursuant to s 48 or the common law. The insurer will have a defence under s 65 only against the insured. See also [48.30.4].

[56.50] Sections 56 and 54 A fraudulent claim will undoubtedly also constitute a breach of the duty of utmost good faith. If s 54 provides the extent of the remedy for the duty of utmost good faith imposed by s 13 then the question of the relationship between ss 54 and 56 necessarily arises. Under s 56(2) a court may, if the fraud involves only a minimal or insignificant part of the claim, order payment of the balance if it is just and equitable to do so. Is a court entitled to make such an order if the fraud also amounts to a breach of the duty of utmost good faith? It has been said that because s 54(1) provides the extent of the remedy for the duty imposed by s 13 there is ultimately no inconsistency with s 56. Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 said (at 77,136 (ANZ Ins Cas)): The effect of s 54(1) is that a breach of duty of utmost good faith by the insured entitles the insurer to refuse to indemnify the insured only to the extent that the insurer’s “interests are prejudiced by that breach”. This view is consistent with the policy embodied in s 56 of the Act. It is unlikely that the legislature intended that a breach of the duty of utmost good faith should be dealt with in a way fundamentally different to a fraudulent claim.

The obiter opinion of Ipp J in Entwells can be viewed alongside the decision of Fullagar J (Vic Sup Ct) in Gugliotti v Commercial Union 506

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Assurance Co of Australia (1992) 15 MVR 463; 7 ANZ Ins Cas 61-104. In that case the insured was found to have made a fraudulent claim in that he had inserted a false answer to a question in the claim form concerning the results of a blood alcohol . It was submitted by the insured that he was entitled to relief under s 54. Fullagar J said (at 77,451 (ANZ Ins Cas)): If the [insurer] could rely only upon a breach by the insured of the term implied by s 13, then it is at least strongly arguable that s 54 would apply to the case, but this case falls well squarely within s 56(1) and, in my opinion, s 54 has no application to cases which fall within s 56(1).

Section 54 modifies the effect of contracts of insurance, whereas the entitlement of an insurer to refuse to pay a fraudulent claim is derived from a statutory prescription. Further, the regime established by s 54 is at odds with the amelioration of the effect of fraud provided by s 56(2). If s 54(1) applies to a fraudulently exaggerated claim, an insurer will always be obliged to pay the true loss of the claimant, whereas s 56(2) requires the overstatement to be minimal or insignificant and non-payment of the remainder to be harsh and unfair before the amount of the loss must be paid.

The above decisions support a view that s 54 has no application to cases which fall within s 56(1).

[56.60] Matters of proof An insurer alleging fraud under s 56 bears the onus of proof. An insurer alleging fraud is required to prove fraud according to the ordinary civil standard of proof which is proof on the balance of probabilities. However, the strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what is sought to be proved. When an insurer seeks to prove fraud the classic formulation of Dixon J (HC) in Briginshaw v Briginshaw (1938) 60 CLR 336 is likely to be referred to. Dixon J said (at 361–362): Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matters “reasonable satisfaction” should not be produced by inexact proofs, indefinite imony, or indirect inferences. ©

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The Victorian Court of Appeal in Tiep Thi To v Australian Associated Motor Insurers Ltd (2001) 3 VR 279; 161 FLR 61; 11 ANZ Ins Cas 61-490; [2001] VSCA 48 was of the opinion that Fullagar J was correct when in Gugliotti he held that “s 54 has no application to cases which fall within s 56(1)”. Buchanan JA (with whom Charles and Callaway JJA agreed) said (at 287–288 (VR); 75,665 (ANZ Ins Cas)):

s 56

Insurance Contracts Act 1984

[56.60]

Therefore, the formulation by Dixon J as to the degree of proof required in a fraud case puts the standard somewhere on a sliding scale based upon the balance of probabilities, where the degree of certainty of proof required in criminal cases is not demanded. The rationale behind the degree of proof was described in the majority judgment of the High Court (Mason CJ, Brennan, Deane and Gaudron JJ) in Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd (1992) 67 ALJR 170; 110 ALR 449 (at 450 (ALR)): [T]he strength of the evidence necessary to establish a fact or facts on the balance of probabilities may vary according to the nature of what it is sought to prove. Thus, authoritative statements have often been made to the effect that clear or cogent or strict proof is necessary “where so serious a matter as fraud is to be found”. Statements to that effect should not, however, be understood as directed to the standard of proof. Rather, they should be understood as merely reflecting a conventional perception that members of our society 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.

Their Honours referred to the earlier decision of the High Court in Rejfek v McElroy (1965) 112 CLR 517; 39 ALJR 177. In that case the High Court (Barwick CJ, Kitto, Taylor, Menzies and Windeyer JJ) made it clear that the standard of proof was the ordinary civil standard. Their Honours said (at 521–522 (CLR)): No matter how grave the fact which is to be found in a civil case, the mind has only to be reasonably satisfied and has not with respect to any matter in issue in such a proceeding to attain that degree of certainty which is indispensable to the support of a conviction upon a criminal charge.

Although an insurer alleging fraud bears the onus of proof in respect of the fraud, depending on the insured event the insured may also bear an onus to show that an event within the terms of a contract of insurance has occurred. For instance, there is an onus on an insured alleging theft of insured property to establish on the balance of probabilities that the insured property was in fact stolen. The requirements of Briginshaw have no bearing on this onus. Fraud compared with putting the insured to proof

An insurer may put an insured to proof that an event has occurred such as would entitle the insured to cover under a contract of insurance. As an alternative to or additional to putting an insured to proof the insurer may seek to prove that the insured is not entitled to cover because the claim has been made fraudulently. Putting the insured to proof that an event has occurred within policy terms requires very different proof to an allegation of fraud in relation to that event. For instance, if the event is theft of insured property, the onus is on the insured to prove, on the balance of probabilities, that the property was stolen. If the probability that the property was stolen is equal to the probability that it was not then the 508

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insured will not discharge that onus of proof. By way of comparison, the onus is on an insurer to prove, according to the Briginshaw requirements, that the insured property was not stolen and that the claim has been made fraudulently. Putting an insured to proof on theft is not the same as alleging fraud and does not shift the onus of proof to the insurer according to the Briginshaw requirements.

I entirely fail to see how Briginshaw has any bearing upon the failure of the [insured] to discharge the onus which clearly rested upon him. Moreover, I do not think that the finding that the learned judge made is necessarily equivalent to a finding of fraud. It was perfectly open to the learned judge to say, as he did, that he was not satisfied that the appellant had proved that the car was stolen, on the footing that the probability that it was exactly equal to the probability that it was not.

The NSW Court of Appeal again considered the insured’s onus of proof when alleging the theft of a motor vehicle in Vidal v NRMA Insurance Ltd [2005] NSWCA 390. It was noted that an insurer may put the insured to proof of theft without having a positive case or may have a positive case which was described as a “negative pregnant”. Handley JA (with whom Mason P and Brownie AJA agreed) noted that an insurer is fully entitled to run a positive case, without undertaking anything more than an evidentiary burden of displacing the insured’s prima facie case. He referred to the consideration of this question by the House of Lords in the marine insurance case of Rhesa Shipping Co SA v Edmunds [1985] 1 WLR 948. In that case Lord Brandon said (at 951): [I]t is important that two matters should be borne constantly in mind. The first matter is that the burden of proving, on a balance of probabilities, that the ship was lost by perils of the sea, is and remains throughout on the shipowners. Although it is open to underwriters to suggest and seek to prove some other cause of loss, against which the ship was not insured, there is no obligation on them to do so. Moreover, if they chose to do so, there is no obligation on them to prove, even on a balance of probabilities, the truth of their alternative case. The second matter is that it is always open to a court, even after the kind of prolonged inquiry with a mass of expert evidence which took place in this case, to conclude, at the end of the day, that the proximate cause of the ship’s loss, even on the balance of probabilities, remains in doubt, with the consequence that the shipowners have failed to discharge the burden of proof which lay on them. ©

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The NSW Court of Appeal considered the insured’s onus of proof when alleging the theft of a motor vehicle in Simon v NRMA Insurance Ltd (unreported, NSW Sup Ct CA, Samuels AP, Clarke and Handley JJA, 22 October 1992). At first instance, the trial judge found that the insured had failed to discharge his onus of proof in showing that the motor vehicle was stolen. On appeal it was submitted that this finding amounted to a finding of fraud, and thus the Briginshaw requirements of proof should have applied. This argument was rejected by the Court of Appeal. Samuels AP (with whom Clarke and Handley JJA agreed) said (at 7):

s 56

Insurance Contracts Act 1984

[56.60]

Handley JA held that this statement applies, with appropriate modifications, to insurance claims for theft, fire and the like. The NSW Court of Appeal (comprising Beazley P, Meagher JA and McDougall J) considered the insured’s onus of proof when alleging the theft of a motor vehicle and the insurer’s onus and requirements in alleging false statements of matters connected to the theft in Sgro v Australian Associated Motor Insurers Ltd [2015] NSWCA 262. The insurer alleged false statements by the insured in connection with a motor vehicle theft claim as to the insured’s whereabouts and that of the allegedly stolen vehicle. The insurer also put the insured to proof on the theft of the vehicle. On the whole of the evidence, the probabilities were equal, and the insured was unable to satisfy the court on the balance of probabilities of the necessary facts to establish that the vehicle was stolen. The primary judge’s conclusion as to proof of theft was upheld by the Court of Appeal. Beazley P said (at [44]): In a case where, on the whole of the evidence, the probabilities are equal, a plaintiff will fail, having not satisfied the court on the balance of probabilities of the necessary facts to establish the cause of action. If in a case such as the present, the court had found that the probability that the vehicle was stolen was equal to the probability that it was not stolen, the [insured] would not have succeeded on his claim: see Compania Naviera Vascongada v British & Foreign Marine Insurance Co Ltd (The Gloria) (1936) 54 LIL Rep 35 at 50–51; Palamisto General Enterprises v Ocean Marine Insurance Co Ltd (1972) 2 QB 625; Hammoud Brothers Pty Ltd v Insurance Australia Ltd [2004] NSWCA 366; 13 ANZ Insurance Cases 161-639; Anderson v AON Risk Services Australia Ltd [2004] QSC 49; 13 ANZ Insurance Cases 61-614.

The false statements had not been clearly pleaded and properly particularized. A finding by the primary judge that the insured, “for whatever reason” was not honest or candid in the answers that he gave about his whereabouts did not satisfy the requirement of clarity given the nature of the allegation. The insurer had to plead and prove that any false statement was knowingly made by the insured for the purpose of inducing the insurer to pay the claim. Beazley P said (at [57]): A finding of fraud, including fraud for the purposes of s 56, involves a finding that a person has been untruthful and deliberately so, with the intent of obtaining a financial gain. It is a finding of seriously wrong conduct. Although it was not suggested that criminal consequences are likely to flow from the finding in this case, the [insured] submitted that there may be serious implications for his future insurance needs. But even without that concern, it cannot be gainsaid that, if a finding of fraud is to be made, it should be made clearly and the reasons for the finding articulated. A statement that “for whatever reason” the respondent’s entitlement to have the claim refused under s 56 does not satisfy this fundamental requirement.

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Pt VI - Claims

s 57

Interest on claims

(1) Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section. (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. (3) The rate at which interest is payable in respect of a day included in the period 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 regulations. (4) This section applies to the exclusion of any other law that would otherwise apply. [Subs (4) insrt Act 35 of 1998, s 3 and Sch 1 item 80]

(5) In subsection (4): law means: (a) a statutory law of the Commonwealth, a State or a Territory; or (b) a rule of common law or equity. [Subs (5) insrt Act 35 of 1998, s 3 and Sch 1 item 80] [S 57 am Act 35 of 1998; Act 107 of 1997 Cross-reference: Insurance Contracts Regulations 1985: reg 32 prescribes formula for the rate of interest on withheld payment for s 57(3).]

SECTION 57 COMMENTARY Background and synopsis .......................................................................

[57.10]

Code for the payment of interest ............................................................

[57.10.1]

Person .....................................................................................................

[57.10.2]

Liable to pay interest: s 57(1) – not damages: Hungerfords v Walker ....

[57.10.3]

Unreasonable for the insurer to have withheld payment ........................

[57.20]

Reasonable period for the insurer to have withheld payment ................

[57.30]

Ending on the day on which the payment is made: s 57(2)(a) ..............

[57.40]

Contribution between insurers – not s 57 ...............................................

[57.50]

©

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[Subs (3) am Act 107 of 1997, s 3 and Sch 8 item 25]

s 57

Insurance Contracts Act 1984

[57.10]

[57.10] Background and synopsis The ALRC noted that the rate of interest recoverable under State legislation was, at the time of the publication of ALRC 20, often well below commercial rates and varied from one State or Territory to another. The ALRC noted that “Commonwealth legislation on the matter would ensure uniformity of treatment of insureds”: ALRC 20, at [323]. The ALRC recommended that an obligation should be imposed on an insurer (both in relation to general insurance and life insurance) to pay interest from the date on which a claim should reasonably have been paid. The ALRC also recommended that the rate of interest should be prescribed by regulation and should reflect current commercial rates: ALRC 20, at [323] and [324]. Section 57 requires insurers to pay interest on unpaid claims. Interest is paid from the day on which it would be unreasonable to withhold payment on a claim to the day on which payment is actually made or posted, whichever is earlier: s 57(2). The rate at which interest is payable in respect of a day is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by, the regulations. Section 57(3) provides scope for the rate of interest on payments unnecessarily delayed to be linked to market rates, where regular changes to the rate set under reg 32 of the Insurance Contracts Regulations 1985 would be inappropriate: Explanatory Memorandum to the Financial Laws Amendment Bill 1996 (H of R), cl 303. Subsections 57(4) and (5) make it clear that the rate of interest fixed pursuant to s 57 applies to the exclusion of other rates (under State legislation or by Court rules) which may be applied in respect of delayed payment. The rate of interest is therefore standardised throughout the Commonwealth: Explanatory Memorandum to the Insurance Laws Amendment Bill 1997 (H of R), cl 127. Unlike State legislation the right to interest does not depend on legal proceedings. The rate of interest is prescribed under reg 32 of the Insurance Contracts Regulations 1985 (SR 1985 No 162). The original rate of 11% per annum was amended to 13% per annum by way of Insurance Contracts Regulations (Amendments) 1990 (SR 1990 No 444) with effect from 21 December 1990 (the date it was gazetted). This change was not retrospective. Regulation 32 was again amended by way of substitution (SR 1997 No 226) with effect from 27 August 1997 (the date it was gazetted). Again this change was not retrospective. Interest from 27 August 1997 is calculated according to a formula based on the 10-year Treasury Bond yield plus 3%. 512

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[57.10.1] Code for the payment of interest Section 57 provides a code for the payment of interest on insurance claims. This means that where there is an inconsistency between s 57 and State legislation providing for the payment of interest, s 57 will prevail.

There is a possibility of remaining doubt in the application of s 57 because of the sometimes difficult distinction between interest and damages in the nature of interest. It is therefore worthwhile reviewing the mixed reception that the question of inconsistency between s 57 and State legislation has had in various States. New South Wales: s 94 of the Supreme Court Act 1970 (NSW) (now s 100 of the Civil Procedure Act 2005 (NSW))

Rogers J (NSW Sup Ct) in Tatt v NRMA Insurance Ltd (1988) 5 ANZ Ins Cas 60-834 held that there was no inconsistency between s 57 of the ICA and s 94 of the Supreme Court Act 1970 (NSW). Section 94, at that time, prescribed a higher rate of interest. Rogers J held that the rate according to reg 32 and s 57 was, for the purpose of the uniformity of interest rates contemplated by the ALRC, a minimum rate only and that there was no obligation on a court to adhere to that rate as a maximum. On appeal, the NSW Court of Appeal (Hope, Samuels and McHugh JJA) disagreed with the conclusion of Rogers J and held that there was an inconsistency between s 94 and s 57: NRMA Insurance Ltd v Tatt (1989) 94 FLR 339; 92 ALR 299; 5 ANZ Ins Cas 60-902. McHugh JA said (at 75,751 (ANZ Ins Cas)): The evident purpose of s 57 is to lay down a code for the payment of interest on insurance claims. The section fixes the rate of interest payable and specifies the period for which interest is payable by reference to specific criteria. It is hardly conceivable that the federal Parliament intended that insurers could be made liable by State legislation to pay interest on a claim in respect of a period other than that which results from the application of the criteria specified in s 57(2). It is equally inconceivable that federal Parliament intended that State legislation could fix a different rate of interest from that prescribed under s 57(3) for a period calculated in accordance with s 57(2). I think that s 57 states completely, exhaustively and conclusively the law on the subject of interest payable for periods during which a person has been kept out ©

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Prior to the insertion of s 57(4) and 57(5) by virtue of the Insurance Laws Amendment Act 1998, there was doubt in some States as to what rate should apply where one interest rate was fixed under State legislation or by Court rules and the other by regulations pursuant to s 57. Section 57(4) says that s 57 applies to the exclusion of any other law that would otherwise apply. Whilst this clarification assists in the codification of s 57 to the exclusion of other laws as to interest on unpaid moneys, it remains to be seen whether the new subsections are wide enough to exclude damages in the nature of interest.

s 57

Insurance Contracts Act 1984

[57.10.1]

of insurance moneys to which he is entitled. If it does, then a State law purporting to authorise the fixing of a different rate of interest is invalid.

The comments of McHugh JA were made obiter. McHugh JA noted that s 94(2)(b) of the Supreme Court Act 1970 provided that s 94 did not “apply in relation to any debt upon which interest is payable as of right whether by virtue of an agreement or otherwise”. Accordingly, s 94 had no application because interest is payable under the ICA as of right. Clearly there was no question of an inconsistency in New South Wales and courts in New South Wales continued to apply s 57 to the exclusion of State legislation. See also the NSW Court of Appeal (Gleeson CJ, Kirby P and Sheller JA) in Zurich Australian Insurance Ltd v Fruehauf Finance Corp Pty Ltd (1993) 7 ANZ Ins Cas 61-177. South Australia: s 30C of the Supreme Court Act 1935 (SA)

Bollen J (SA Sup Ct) in Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967 held that there was an inconsistency between s 57 of the ICA and s 30C of the Supreme Court Act 1935 (SA) which permits an award of interest on damages or money due, at that time, at a higher rate. He disagreed with the finding of Rogers J in the Tatt case but did not refer to the decision of the Court of Appeal in that case. Perry J (SA Sup Ct) in Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40; 8 ANZ Ins Cas 61-209 expressed an opinion that the liability of an insured to pay interest under s 57 is a liability which can be regarded as running concurrently with the liability under some other provision of the law to pay interest, so long as the rate is no lower than the rate prescribed pursuant to s 57. He preferred the approach of Rogers J in the Tatt case to that of Bollen J in the Moss case. However, he did not refer to the judgment of the Court of Appeal in the Tatt case. Perry J sought to rely upon s 7 ICA. He did not find anything either “expressly or by necessary intendment” in s 57 to indicate that it is to operate to oust provisions which would otherwise apply and which would operate to oblige an insurer to pay interest at a rate higher than that prescribed pursuant to s 57. However, his Honour did not consider the obiter comments of McHugh JA (NSW Sup Ct CA) in the Tatt case that the evident purpose of s 57 is to lay down a code for the payment of interest on insurance claims. These cases were prior to the insertion of s 57(4) and (5) by virtue of the Insurance Laws Amendment Act 1998. Section 57(4) says that s 57 applies to the exclusion of any other law that would otherwise apply. This clarification assists in the codification of s 57 to the exclusion of other laws as to interest on unpaid moneys. 514

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The Full Court of the Supreme Court of SA (comprising Doyle CJ, Gray and Layton JJ) held that s 57(4) excluded an award of interest pursuant to ss 30C and 114 of the Supreme Court Act 1935 (SA) in QBE Insurance Ltd v Nguyen (2008) 100 SASR 560; [2008] SASC 138. Victoria: s 58 of the Supreme Court Act 1986 (Vic)

Beach J in Manchester Unity Total Care Building Society v MGICA Ltd (1991) 6 ANZ Ins Cas 61-062 expressed an opinion that there was no inconsistency between s 57 of the ICA and s 58 of the Supreme Court Act 1986 (Vic). He agreed with the views expressed by Rogers J in the Tatt case rather than the view of Bollen J in the Moss case. He said (at 77,155 (ANZ Ins Cas)): Section 57 of the Insurance Contracts Act applies to a situation where there has been no litigation between the insured and the insurer but the insurer has been dilatory in paying the claim.

And (at 77,156 (ANZ Ins Cas)):

However, as with Bollen J in the Moss case, Beach J did not appear to have been directed to the judgment of the NSW Court of Appeal in the Tatt case. It is notable that in an earlier decision Ormiston J (Vic Sup Ct) applied s 57 and specifically referred to the Court of Appeal decision in the Tatt case: VL Credits Pty Ltd v Switzerland General Insurance Co Ltd (No 2) [1991] 2 VR 311. Tasmania: s 35(1)(b) of the Supreme Court Civil Procedure Act 1932 (Tas)

The Full Court of the Tas Supreme Court (Green CJ, Cox and Wright JJ) held that there was no inconsistency between s 35(1)(b) of the Supreme Court Civil Procedure Act 1932 (Tas) and s 57 in Walker v FAI Insurance Ltd (1991) 6 ANZ Ins Cas 61-081. Wright J (with whom Green CJ and Cox J agreed) noted that s 35(1)(b) provided for an award of “damages in the nature of interest”, not merely “interest on damages”. There was no inconsistency because of the distinction between “damages”, albeit in the nature of interest, and “interest” on damages. Were it not for this distinction he would have reached the same conclusion as Bollen J in the Moss case.

[57.10.2] Person Section 57 requires insurers to pay a “person” interest on an amount under a contract of insurance. The use of the expression “a person” widens the category of those entitled to payment. Examples of categories of persons potentially entitled to interest under s 57, other than “the insured” are to ©

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Section 57 does not purport to override the operation of existing State legislation which empowers courts to award interest in consequence of litigation.

s 57

Insurance Contracts Act 1984

[57.10.2]

be found in ss 48, 48A, 49 and 51 of the ICA. “A person” within s 57 also includes an assignee of the right to indemnity under a contract of insurance. The Full Court of the Supreme Court of SA considered that a third party claimant who had been assigned the insured’s right to indemnity by his Official Trustee in Bankruptcy was “a person” entitled to interest under s 57: QBE Insurance Ltd v Nguyen (2008) 100 SASR 560; [2008] SASC 138. Gray J (with whom Doyle CJ and Layton J agreed on this issue) said (at 76,729 (ANZ Ins Cas)): In my view, a person in the position of the [third party claimant] comes within the literal meaning of s 57(1) in that he is “a person” who is entitled to payment “under a contract of insurance”. … If my interpretation of the section is correct, the [third party claimant’s] right to the payment of interest under s 57 arises by reason of the assignment of the right to indemnity and the fact that [the insured] is liable for damages. The right is not based on an assignment of the right to interest under s 57. It occurs by reason of an assignment of rights independently of the Act, which bring the [third party claimant] within the description of a person who is entitled to claim interest under the section.

[57.10.3] Liable to pay interest: s 57(1) – not damages: Hungerfords v Walker In Hungerfords v Walker (1989) 171 CLR 125, Mason CJ and Wilson J (Brennan and Deane JJ agreeing generally) of the High Court allowed damages by way of compound interest notwithstanding s 30C of the Supreme Court Act 1935 (SA) which provides for interest on an award of damages. Brennan and Deane JJ held that there was a critical distinction between an order for interest on damages and an actual award of damages representing compensation for the loss of use of money assessed by reference to interest which would have been earned on that money. They found that there was no acceptable reason why the ordinary principles governing common law damages should not, in an appropriate case, apply to damages as compensation for a wrongfully and foreseeably caused loss of the use of money. As to s 30C of the Supreme Court Act 1935 Mason CJ and Wilson J said (at 147–148): We see no reason for construing s 30C in such a way that it forecloses the authority of the courts to award damages in accordance with the principle established by Hadley v Baxendale [(1854) 9 Ex 34; 156 ER 145] and the measure of damages governing claims in tort. The section is not intended to erect a comprehensive and exclusive code governing the award of interest. It is a provision intended to provide a plaintiff with some protection against the late payment of damages. The section does not attempt to regulate the measure of compensation to be awarded for a specific head of loss. 516

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s 57

There is a question as to whether s 57 as a code for the payment of interest on unpaid insurance moneys would exclude, in an appropriate case, a Hungerfords damages claim by way of compound interest.

Bollen J in the Moss case noted that the Hungerfords decision provides for compensation measured by rates of interest including compound interest on the wrongful withholding of payment or wrongful deprivation of money. He allowed the insured a component of damages to compensate for “extra interest” incurred by reason of delayed payment. He allowed damages measured by reference to the obligation of the insured to pay interest on loans from the date that it was reasonable for the insurer to pay the claim. However, he resisted awarding damages and interest under s 57. He said this would travel beyond compensation. Accordingly, he allowed interest under s 57 and allowed the balance between that sum and the “extra interest” as damages. The Full Court of the Supreme Court of Tasmania in the Walker case noted that an insured could recover any proved loss arising from loss of use of moneys due under the contract of insurance either under s 35(1) of the Supreme Court Civil Procedure Act 1932 (Tas) or at common law based on the principles enunciated in the Hungerfords case. Mason CJ and Wilson J in the Hungerfords case noted that s 30C of the Supreme Court Act 1932 (SA) is not intended to erect a comprehensive and exclusive code governing the award of interest. McHugh JA in Tatt v NRMA Insurance Ltd (1988) 5 ANZ Ins Cas 60-834 described s 57 as stating “completely, exhaustively and conclusively” the law on the payment of interest for periods during which an insured has been kept out of moneys. Although in Moss and Walker it was held that s 57 does not preclude a Hungerfords claim for damages by way of compound interest, Mason CJ and Wilson J have possibly suggested that such a claim might be precluded and any such suggestion has been strengthened by the insertion of s 57(4) and 57(5). ©

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Bollen J (SA Sup Ct) in Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967 did not regard s 57 as providing a code for recovery of compensation for withheld payment under an insurance policy. He noted that s 57 does not say that interest only and no damages may be recovered. He did not consider that it implied that idea. The Full Court of the Tas Supreme Court in Walker v FAI Insurance Ltd (1991) 6 ANZ Ins Cas 61-081 agreed with Bollen J in the Moss case. Giles J (NSW Sup Ct) in Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 and Cole J (NSW Sup Ct) in Bankstown Football Club Ltd v CIC Insurance Ltd (unreported, NSW Sup Ct, Cole J, 17 December 1993) also agreed with Bollen J, in the Moss case that s 57 is not a code which excludes claims for damages otherwise properly payable.

s 57

Insurance Contracts Act 1984

[57.10.3]

However, notwithstanding the strengthening of the exclusivity or codification of s 57 through the insertion of s 57(4) and 57(5), the distinction between interest on unpaid moneys and damages for the loss of use of money remains. Whilst the Full Court of the Federal Court (Drummond, Sundberg and Marshall JJ) said that the insured could not recover both s 57 interest and the damages claim because this would result in double recovery, the Court noted that the insured had claimed damages on one basis, a basis inconsistent with any reliance on s 57: Elders Ltd v Swinbank (2000) 96 FCR 303; [2000] FCA 56. The Federal Court thought that there was no reason to read s 57(5) as limiting an insured to s 57 interest for losses in excess of the opportunity or borrowing costs of being deprived of access to moneys payable by an insurer as measured by appropriate market interest rates. However, damages would have to be claimed on a basis different from the opportunity or borrowing costs measured by appropriate commercial interest rates. Whether or not s 57 has exclusive domain depends on the nature of the additional claim. The Federal Court noted that Mason CJ and Wilson J in the Hungerfords case read the expression “rule of law” which now appears in s 57(5) as referring to common law principles governing the award of interest as damages for late payment and so regarded the provision as confirming the continued availability to the insured of the right to damages. The Federal Court said (at 314 (FCR)): There is therefore a substantial argument that the expression in s 57(5) – “a rule of common law or equity” – is used to refer to the common law and equitable rules of the kind discussed in Hungerfords v Walker at 146 and 148 that provide for the award of interest as damage and that, in consequence, the only interest recoverable to compensate insured persons wrongly kept out of moneys payable to them under contracts of insurance is that provided for by s 57. But losses in excess of the opportunity or borrowing costs of being deprived of access to moneys payable by an insurer as measured by appropriate market interest rates may be suffered by a particular claimant. Hungerfords v Walker affirms that those losses are recoverable under the rule in Hadley v Baxendale; if they are claimed on a basis different from the opportunity or borrowing costs measured by appropriate commercial interest rates, there is no reason to read s 57(5) as limiting a claimant to recovery of interest under s 57(1) as the only compensation for those losses. Section 57(5) should be confined to preventing the award, by way of compensation for being kept out of moneys payable under a contract of insurance, of interest under any State legislation or interest as damages under any rule of the common law or equity.

The resolution of the question as to the extent to which s 57 excludes a Hungerfords damages claim will therefore depend on the basis of the damages claim. Crennan J (Fed Ct) in Hannover Life Assurance Re of Australasia Ltd v Membrey (2005) 210 ALR 462; 13 ANZ Ins Cas 90-122; [2004] FCA 1095 referred to Moss and Walker and said that there was nothing in s 57 518

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that would preclude the awarding of compound interest on appropriate facts, in an appropriate case following the approach in Hungerfords case. In looking at the question of interest by reference to the powers of the Superannuation Complaints Tribunal under the Superannuation (Resolution of Complaints) Act 1993 with respect to an unfair and unreasonable decision Crennan J said (at 86,612 (ANZ Ins Cas)): Determining interest that is to be compounded is merely obliging the Insurer to give back the value of the use of the money which it had during the relevant period, when, but for the unfair and unreasonable decision, the [claimant] would have had the value of the use of the money.

[57.20] Unreasonable for the insurer to have withheld payment According to s 57(2) interest is payable from the date from which it was unreasonable for the insurer to have withheld payment under the contract of insurance. Conduct of an insured

The conduct of an insured may be such that it is reasonable for an insurer to withhold payment up to the date upon which a court determines that the insured should be indemnified. Such was the case in Swanson v Guild Insurance Co Ltd (unreported, Qld Sup Ct, Derrington J, 17 August 1990). In that case Derrington J referred to the court’s discretion as to the awarding of interest. The reference to a discretion suggests that he may not have had s 57 in mind. He did not in fact specifically refer to s 57. The date of the fire under consideration was 17 April 1988 and therefore the insurance claim appears to have been subject to the ICA. Derrington J referred to the decision in Roumeli Food Stores (NSW) Pty Ltd v New India Assurance Co Ltd [1972] 1 NSWLR 227. In that case Macfarlan J said (at 252): In my further opinion once I decide this is a case that justified investigation interest should not be awarded, even though it might be possible to say, though it was not so submitted, that the time taken proving liability could be isolated from that involved proving the indemnity. In my opinion I should refuse the application for an award of interest. ©

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It is perhaps trite to say that the availability of Hungerfords damages will depend on the evidence. In a separate case, Gzell J (NSW Sup Ct) noted that the question as to whether there would have been a profit on moneys withheld and the amount of that profit must be determined on the evidence. There is no automatic allowance of interest on moneys withheld. Therefore in the absence of evidence he was not prepared to grant damages in the nature of interest by an award of compound interest: Dumitrov v SC Johnson & Son Superannuation Pty Ltd (No 2) (2007) 14 ANZ Ins Cas 61-722; [2007] NSWSC 42.

s 57

Insurance Contracts Act 1984

[57.20]

Similarly, Derrington J refused to award interest. He said (at 35–36): if by his improper conduct an insured person so attracts suspicion to the honesty of his claim that an insurer is justified in having the matter determined by the court, then he really cannot be said in justice to be entitled to have his indemnity according to his rights until the court has decided the matter in his favour. It is not a matter of punishment but rather the practical determination of the question whether there has been a good reason why the [insurer] has failed to meet its obligation or of the conclusion that as between it and the [insured] no award of interest is necessary in order to do justice between them; and if from that practical viewpoint that date is postponed until the time of trial, then there is no good basis for awarding interest. That is the position in the present case.

Rolfe J (NSW Sup Ct) in Harrison v Zurich Australian Insurance Ltd [1996] NSWSC 309 did not consider a submission that an insurer should not wait for the investigation of others to be correct in absolute terms. He said by way of example that an insurer may, in the particular circumstances of a case, be justified in awaiting the giving of evidence at a coronial enquiry or trial before it agrees to indemnify. In this case, the insured had been charged with conspiracy to commit arson of the insured hotel, the subject of the claim. There had been an exchange of correspondence between the insured and insurer to the effect that the insurance claim should await the outcome of the criminal proceedings. Rolfe J held that in the circumstances interest should run from a reasonable time after the insured’s acquittal. In Jiwira Pty Ltd v MMI General Insurance Ltd (unreported, NSW Sup Ct, Cohen J, 7 February 1997), Cohen J (NSW Sup Ct) held that an insurer was justified in delaying payment of a claim until shortly after a finding at a coronial enquiry that the fire which resulted in damage the subject of the insurance claim was deliberately lit by unknown persons. Bona fide dispute

There is a question as to whether an insurer is not acting unreasonably in withholding payment whilst there is a bona fide dispute in existence. An insurer may not be acting unreasonably in taking longer to investigate a claim if there is a reasonably held suspicion that the insured has been involved in fraud or arson. On the other hand the existence of a bona fide dispute does not mean that an insurer is not acting unreasonably in withholding payment until that dispute is resolved by a court. Once the court has rejected the insurer’s defence to a claim, that defence becomes irrelevant as does the fact that the insurer had a bona fide belief in its efficacy. Perry J (SA Sup Ct) accepted that a reasonably held suspicion of fraud or arson involving the insured may give rise to a longer investigation: Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40; 8 ANZ Ins Cas 61-209. He said (at 75,318 (ANZ Ins 520

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Cas)): What is reasonable should be determined objectively. I accept the [insurer’s] contention that it is a question of fact and depends on the circumstances of each case. I accept also that a reasonably held suspicion of fraud or arson involving the insured, may take longer to investigate than other cases.

In my view, s 57 is directed to a determination of the point of time at which empirically, it can be stated that it was unreasonable to decline to make payment. That decision is not to be determined simply by a determination of whether or not there was a bona fide dispute regarding the entitlement to payment. It is rather to be determined by a finding as to whether or not there was liability. If there was liability found and the insurer to pay, then the presumption must be that the insurer would be deemed to know of that obligation as ultimately determined, even though it may bona fide have held a different view at all times prior to determination, at least at the first instance level, in relation to the question of liability. A reasonable period is to be given to the insurer to investigate and determine its position but if it adopts an incorrect position in relation to its obligation to pay under the policy, that, in my view, does not mean that simply because that incorrect position is adopted on a bona fide basis, it becomes reasonable for the insurer to decline to pay the sums otherwise due. That seems to me to be the correct interpretation of s 57(2), particularly in circumstances of s 57(1) of the Act, where an insurer is liable to pay to a person an amount under a contract of insurance.

Therefore, if the view of Cole J is to be followed (and it has been frequently followed), the period for the payment of interest under s 57(2) commences at the expiration of a reasonable period given to the insurer to investigate and determine its position. On appeal to the NSW Court of Appeal, Priestley JA saw no error in the approach of Cole J and Kirby P was prepared to agree with Priestly JA: CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Ins Cas 61-232. Kirby P noted that his assessment as to when it was unreasonable for the insurer to have withheld payment was consistent with the hypothesis of the editors of CCH Australian & New Zealand Insurance Reporter, at 23-400 as follows; [A]n examination of [the] cases suggests that the most that can be said is that interest is generally awarded either from when the insurer emphatically denied liability or disputed quantum, or from when, in the normal course of events, the claim would have been paid if liability or quantum had not been disputed.

Subsequently, Priestley JA adopted the views of Kirby P to the extent necessary to support the declarations and orders made by them: CIC Insurance Ltd v Bankstown Football Club Ltd (No 2) (unreported, NSW Sup Ct CA, Kirby P, Priestley and Powell JJA, 7 April 1995). ©

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Cole J (NSW Sup Ct) considered a submission that an insurer is not acting unreasonably if it declines to make payment until a bona fide dispute is resolved by a court in Bankstown Football Club Ltd v CIC Insurance Ltd (unreported, NSW Sup Ct, Cole J, 17 December 1993). His Honour rejected the submission and said (at 3–4):

s 57

Insurance Contracts Act 1984

[57.20]

There was no challenge on appeal to the High Court to the construction placed upon s 57 by Cole J that a reasonable period is to be given to the insurer to investigate and determine its position: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 71 ALJR 312; 9 ANZ Ins Cas 61-348; [1997] HCA 2. However, the High Court noted that the existence of a bona fide dispute as to the entitlement of the insured is not necessarily an answer to the complaint that the insurer has been acting unreasonably in withholding payment. The approach of Cole J in Bankstown Football Club was considered apposite in relation to treatment of the s 57 issue by Einstein J in Hams v CGU Insurance Ltd (2002) 12 ANZ Ins Cas 61-542; [2002] NSWSC 843. Is the approach of Cole J in Bankstown Football Club in conflict with that of Perry J in Settlement Wine? It is possible to argue that it is not. Bona fide disputes encompassed in defences are irrelevant to the question of interest once the defences are rejected. However reasonable belief in fraud or arson by an insured may prolong an investigation. A coronial enquiry may, in determining the cause of a fire, prolong an investigation into fraud or arson. However, to the extent that the two approaches are in conflict, the approach of Cole J in Bankstown Football Club has been preferred. Bongiorno J (Vic Sup Ct) in HIH Casualty & General Insurance Ltd v Insurance Australia Ltd (No 2) (2006) 14 ANZ Ins Cas 61-685; [2006] VSC 128 considered that the approach of Cole J in Bankstown Football Club was to be preferred to that of Perry J in Settlement Wine. He said (at 75,253 (ANZ Ins Cas)): 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.

Nicholas J (NSW Sup Ct) in Sayseng v Kellogg Superannuation Pty Ltd (2007) 213 FLR 174; 14 ANZ Ins Cas 61-738; [2007] NSWSC 857 referred to cases since and considered that that it should be accepted that the approach of Cole J in Bankstown Football Club was correct. He said (at 76,164 (ANZ Ins Cas)): In my opinion it should now be accepted that the correct approach to be taken by the court on this question is that taken by Cole J in Bankstown Football Club. In my assessment, the cases to which I have referred establish that the question of reasonableness is to be judged by reference to the true position in respect of the claim with allowance to be made for the insurer to have a reasonable period of time within which to investigate the claim and to consider 522

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its position. The discretionary determination is to be made having regard to the particular circumstances of the case, including the probable issues which require investigation. Under the Act the court is not required to evaluate and pronounce upon the opinion or decision-making process of the insurer. It is not relevant that the insurer acted bona fide in denying the claim, or when the judgment of the court established the insurer’s liability to pay it. In short, the award will be calculated on the basis of what the court finds is a reasonable time for completion of the insurer’s investigation of the claim. Put another way, in my opinion, the insurer is not automatically liable to pay interest from the day on which it became liable to pay to a person an amount under a contract of insurance. Under s 57(2) liability to pay interest is to be calculated with regard to the day on which it was unreasonable for the insurer to withhold payment of the amount after it had become liable to pay it in response to a claim.

Hansen J (Vic Sup Ct) in McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance Plc (No 2) (2009) 15 ANZ Ins Cas 61-794; [2009] VSC 49 agreed with the observations of both Cole J in Bankstown Football Club and Bongiorno J in HIH. Hansen J said (at 77,370 (ANZ Ins Cas)): In my view, the existence of a bona fide dispute as to liability is not relevant to s 57. As counsel agreed, however, in ascertaining the start date, an insurer is entitled to a reasonable time to conclude its examination of the issues relating to the claim and of the amount which it should pay on the claim.

In Nino v MLC Ltd [2009] NSWSC 400, White J (NSW Sup Ct) adopted the statements of both Cole J in Bankstown Football Club and Bongiorno J in HIH and proceeded to determine a reasonable period to have conducted an investigation of the claim before interest started to run. White J noted (for the benefit of those applying the case in the future) that whilst the statement “reported” to have been made by Cole J in Bankstown Football Club had been approved and applied in other cases, the unreported judgment of that case was not (at the time) to be found in the Law Courts Library or on any online system. Schmidt J (NSW Sup Ct) adopted the approach of Cole J in Bankstown Football Club and applied the observations of Nicholas J in Sayseng in Garage Fashions Pty Ltd v Insurance Australia Ltd trading as NRMA Insurance [2011] NSWSC 968. Tennent J (Tas Sup Ct) adopted the approach of Nicholas J in Sayseng in Summers v National Mutual Life Association of Australasia (No 2) [2012] TASSC 9. Gzell J (NSW Sup Ct) in adopting the views expressed by Cole J in Bankstown Football Club noted that those views had been adopted and ©

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Macready AJ (NSW Sup Ct) applied the views of Cole J in Bankstown Football Club in Triffıtt v Australiansuper Pty Ltd (2007) 214 FLR 407; [2007] NSWSC 1167.

s 57

Insurance Contracts Act 1984

[57.20]

applied in a number of cases: De Smeth v NSW Fire Brigades Superannuation Pty Ltd [2013] NSWSC 19. Gzell J also reviewed the reception of those views by the NSW Court of Appeal and the High Court on appeal from Cole J and noted that the construction adopted by Cole J stands. Nettle and Neave JJA (Vic Sup Ct CA) adopted the statement of Bongiorno J in HIH and held that the insurer’s bona fides in withholding payment were not relevant in applying s 57 in Mutual Community General Insurance Pty Ltd v Khatchmanian (2013) 17 ANZ Ins Cas 61-974; [2013] VSCA 144. Election between reinstatement and indemnity value

The High Court in Bankstown Football Club held that the insured was not entitled to interest under s 57 during the time it had to make an election between “indemnity value” rather than the cost of reinstatement, replacement or repair. The High Court said (at 410–411 (CLR); 76,855 (ANZ Ins Cas)): [I]n the present case, the obligation of [the insurer] to honour the claim by paying the moneys, for the assessment of which the Policy provided, involved the making of an election by [the insured] or the passage of the period within which such an election might be made. The election, as indicated earlier in these reasons, involved the choice by [the insured] of the “indemnity value” rather than the cost of reinstatement, replacement, or repair. When the policy expired on 30 October 1992, no such election had been made and the time for doing so would have passed. Further, the period for commencement and performance of work of restoration and repair by [the insured] “with reasonable dispatch” also had passed. The result was that certainly by the time of expiry of the Policy [the insured] was liable to make payment in a sum no greater than the indemnity value of the damaged property at the time of the happening of the damage. In all the circumstances, interest under s 57 should be payable for a period commencing on 30 October 1992.

In the same vein, but prior to the High Court judgment in CIC Insurance Ltd v Bankstown Football Club Ltd, Rolfe J (NSW Sup Ct) held that if the insured elects to proceed on a reinstatement basis no s 57 interest is payable, and if the insured elects to accept indemnity value, interest will run shortly after the making of the election. He looked at the requirement for unreasonableness and said that in his opinion something more is required than just that the insured has been kept out of moneys to which the insurer has had the benefit: Harrison v Zurich Australian Insurance Ltd [1996] NSWSC 309. Investigating claims and requests for information and documents

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In McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance Plc (No 2) (2009) 15 ANZ Ins Cas 61-794; [2009] VSC 49, Hansen J (Vic Sup Ct) considered a claim for s 57 interest over the period of an insurer’s withholding of payment of a complex and uncertain insurance claim concerning the disappearance of the insured’s mining plant and equipment in Central Africa. The claim had evolved over several years with the provision of documentation, the addition of items to the claim and numerous amendments to pleadings. However Hansen J agreed that, over this period of time, the essential nature of the insured’s claim did not change, and the original list of missing items submitted to the insurer ultimately accounted for 92% of the judgment sum several years later. Therefore, looking at the substance of the claim overall, the insured succeeded on the claim it originally made. The insured at the beginning of the period in question had sought, in effect, a response on liability and the insurer had responded with requests for documentation. Whilst all of the documentation was not provided immediately Hansen J noted that none of the documentation established the insurer’s defence of the claim. He found that lack of clarity did not mean the avoidance of the running of interest for several years. In finding that the insurer was entitled to a period of four months rather than several years he said (at 77,371 (ANZ Ins Cas)): [T]he fact that the exact circumstances surrounding the loss of the equipment remained unclear, even after the trial, does not mean that an insurer who chooses to request further information and defer a decision on policy liability until such time as the picture is clear (when the practical reality is that the picture may never become as clear as the insurer might wish) can avoid the running of interest on a payment which the Court has ultimately held should have been made by the insurer at an earlier time.

It may be reasonable for a life insurer to withhold payment until the original policy of life insurance has been produced to the insurer. In Public Trustee v Lumley Life Ltd [2012] QSC 061, Fryberg J (Qld Sup Ct) held that a life insurer was entitled to refuse to make a payment until the original life policy providing death benefits had been produced in order to ensure that the policy had not been assigned and that it was in the possession of the claimant and not in the possession of an equitable chargee. He said that the insistence on the production of the original policy was both a matter of strict legal right and ordinary commercial reason.

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reasonable for an insurer to defer payment of a claim because of a lack of clarity or when requested information does not serve to assist an insurer in its defence of a claim.

s 57

Insurance Contracts Act 1984

[57.20]

[57.30] Reasonable period for the insurer to have withheld payment The question as to when it becomes unreasonable for an insurer to withhold payment will obviously vary from case to case. What is reasonable should be determined objectively. Perry J (SA Sup Ct) in Settlement Wine Co Pty Ltd v National & General Insurance Co Ltd (1994) 62 SASR 40; 8 ANZ Ins Cas 61-209 said (at 75,318 (ANZ Ins Cas)): What is reasonable should be determined objectively. I accept the [insurer’s] contention that it is a question of fact and depends on the circumstances of each case. I accept also that a reasonably held suspicion of fraud or arson involving the insured, may take longer to investigate than other cases.

Some direction as to the reasonableness of the period of withheld payment may be provided by decided cases. Bollen J (SA Sup Ct) in Moss v Sun Alliance Australia Ltd (1990) 55 SASR 145; 99 FLR 77; 6 ANZ Ins Cas 60-967 held that it was no answer to the delay for the insurer to say that it was waiting for a police report. He held that the investigations establishing soundness of the claim could have been concluded within two months of the fire which destroyed the insured property. Kitchen J (SA Sup Ct) in Melin v Mutual Community General Insurance Pty Ltd (1991) 6 ANZ Ins Cas 61-057 allowed the insurer three months from the time it received everything it needed to determine a claim for damage caused by fire to a house. In Zurich Australian Insurance Ltd v Fruehauf Finance Corp Pty Ltd (1993) 7 ANZ Ins Cas 61-177 the NSW Court of Appeal (Gleeson CJ, Kirby P and Sheller JA) upheld Brownie J at first instance who, in a fidelity guarantee insurance claim concerning employee dishonesty, awarded interest commencing approximately 10 months from the notice of the insured’s claim. Notice of the insured’s claim was given in February 1988. Brownie J based his award of interest upon the finding that 31 December 1988 was a reasonable time by which the insurers should have been able to thoroughly investigate the claim. Ormiston J (Vic Sup Ct) in VL Credits Pty Ltd v Switzerland General Insurance Co Ltd (No 2) [1991] 2 VR 311 held that a mortgagee covered under the policy was entitled to interest from a date three months from a fire. He rejected an argument that interest should run from the date that particulars of the loss were provided on the basis that the mortgagee was, as such, in some difficulty as to its direct knowledge of the details. He found that if the insurer had made a proper admission of liability the question of quantum could have been resolved quickly. 526

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Rolfe J in Harrison v Zurich Australian Insurance Ltd (unreported, NSW Sup Ct, Rolfe J, 30 July 1996) was of the opinion that an insurer may, in the particular circumstances of a case, be justified in awaiting the giving of evidence at a coronial enquiry or a trial before making a decision on the payment of a claim.

The NSW Court of Appeal (Cole J with whom Priestley AP and Simos AJA agreed) in GRE Insurance Ltd v Allinghams Removals Pty Ltd (t/a Allinghams Removals and Mac Hodges Removals) (1996) 9 ANZ Ins Cas 61-354 upheld Hulme J at first instance in his finding that it was unreasonable for the insurer to have withheld payment from the date of declinature upon various bases including the name of the insured. This was notwithstanding a successful application for rectification of the name by the insured some six years after the declinature. This was because rectification operates from the date of the contract of insurance which is to be read as though it were in its rectified form. In a separate matter, Mansfield J (Fed Ct) held that it was reasonable for an insurer to have withheld payment for just over 11 months for damage to stock caused by water inundation. The water inundation was followed by an excluded flood event and, given the complexity of the claim, it was not unreasonable to have taken that period of time to make a substantial settlement offer and to negotiate the quantum of the claim: Elilade Pty Ltd v Nonpareil Pty Ltd (2002) 124 FCR 1; 12 ANZ Ins Cas 61-535; [2002] FCA 909. In Sayseng v Kellogg Superannuation Pty Ltd (2007) 213 FLR 174; 14 ANZ Ins Cas 61-738; [2007] NSWSC 857, Nicholas J (NSW Sup Ct) held that having regard to the matter overall, it was not unreasonable for a life insurer covering members of a superannuation fund to wait for a member’s statement which was received some 10 months after it was requested. However, by the time the employer’s statement had been received, the insurer had had ample time within which to thoroughly investigate and assess the claim. Macready AJ (NSW Sup Ct) held that a reasonable time to assess a total and permanent disablement claim against the trustee of a superannuation fund and its insurer expired on the date the claimant was advised of the rejection of his claim which was six months after the claim was made. The fact that medical evidence and information submitted six years later may have provided a different perspective or further confirmation of the claim was not relevant to the question of determining what was a ©

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Cohen J in Jiwira Pty Ltd v MMI General Insurance Ltd (unreported, NSW Sup Ct, Cohen J, 7 February 1997) held that it was reasonable for the insurer to have withheld payment until shortly after a coronial enquiry in which it was found that a fire which destroyed insured property was deliberately lit by unknown persons.

s 57

Insurance Contracts Act 1984

[57.30]

reasonable time to assess the claim: Triffıtt v Australiansuper Pty Ltd (2007) 214 FLR 407; [2007] NSWSC 1167. Schmidt J (NSW Sup Ct) held, in relation to fire damage to retail fashion business premises, contents and stock, that interest should not run on the stock claim until after the insurer received both the relevant business records and a report on the stock loss. This was two years after the fire. The investigation into other aspects of the claim was regarded to have been concluded six months after the fire and interest ran from that earlier time: Garage Fashions Pty Ltd v Insurance Australia Ltd trading as NRMA Insurance [2011] NSWSC 968. Gzell J (NSW Sup Ct) held, in relation to a total and permanent incapacity claim by an injured claimant against the trustee of a superannuation fund and group life insurer, that it was reasonable to wait over two years for a further medical opinion that injuries had finally stabilised and that no further improvement was expected before admitting liability. The trustee and life insurer acted with dispatch after receipt of the opinion in admitting the claim and therefore interest ran from the date the claim was admitted: De Smeth v NSW Fire Brigades Superannuation Pty Ltd [2013] NSWSC 19. In a separate matter, Nettle and Neave JJA (Vic Sup Ct CA) took into account the insurer’s delays in aspects of its arson fraud investigation into a house fire and found that a reasonable time to investigate the claim was three months from the date of the fire. They found that the trial judge was in error in finding that the insurer was entitled to withhold payment for six months and held that interest should run from three months after the date of the fire: Mutual Community General Insurance Pty Ltd v Khatchmanian (2013) 17 ANZ Ins Cas 61-974; [2013] VSCA 144.

[57.40] Ending on the day on which the payment is made: s 57(2)(a) According to s 57(2) the period for which interest is payable ends on the day payment is made or the day the payment is sent by post to the person to whom it is payable, whichever is the earlier. This means that if there is a judgment, interest will continue to accrue under s 57 rather than the post-judgment interest provisions of the governing State legislation. Giles J (NSW Sup Ct) in Fruehauf Finance Corp Pty Ltd v Zurich Australian Insurance Ltd (1993) 32 NSWLR 735; 7 ANZ Ins Cas 61-202 held that the insured was entitled to s 57 interest rather than interest according to s 95 of the Supreme Court Act 1970 (NSW). He reached his conclusion ultimately from the terms of s 57. His Honour noted that the words “payment” and “paid” are used in a number of places in s 57 and that the word “payment” is in the ordinary sense not the same as the word “judgment”. He said (at 743 (NSWLR); 78,330 (ANZ Ins Cas)): 528

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s 57

If as a matter of construction s 57 provides for interest until payment, meaning money or moneys worth going to the insured and not just judgment, then according to NRMA Insurance Ltd v Tatt [(1989) 94 FLR 339] it is an exhaustive statement of the entitlement to interest for that period and governs the accrual of interest from the date of judgment as well as until the date of judgment.

Hansen J (Vic Sup Ct) found that, read in context, the word “payment” in s 57(2)(a) was a reference to the payment of judgment amounts rather than the payment of s 57 interest amounts: McConnell Dowell Middle East LLC v Royal & Sun Alliance Insurance (No 3) (2009) 226 FLR 84; [2009] VSC 94. This meant that after the payment of judgment amounts s 57 had no further operation and it followed that s 57 did not exclude the operation of s 110(1) of the Supreme Court Act 1986 (Vic) in respect of interest on unpaid s 57 interest.

The right that one insurer has to seek contribution from another does not arise under any section of the ICA. Rather, any contribution is payable to bring about equality between the parties who would, but for the payment by one, have been liable. Because the right to contribution does not arise under any section of the ICA it is not enforceable by virtue of s 57. Therefore, in matters concerning contribution between insurers any interest will be payable other than under s 57 (eg, in NSW under s 100 of the Civil Procedure Act 2005): Sun Alliance & Royal Insurance Aust Ltd v Switzerland Insurance Aust Ltd (1996) 9 ANZ Ins Cas 61-353 per Rolfe J (NSW Sup Ct).

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[57.50] Contribution between insurers – not s 57

PART VII – EXPIRATION, RENEWAL AND CANCELLATION 58

Insurer to notify of expiration of contracts of general insurance

(2) Not later than 14 days before the day on which renewable insurance cover provided under a contract of general insurance (in this section called the original contract) expires, the insurer shall give to the insured or a person acting as agent for the insured a notice in writing informing the person to whom the notice is given 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. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 26; Act 168 of 1986, s 3 and Sch 1]

(3) Where: (a) an insurer has failed to comply with subsection (2); and (b) before the original contract expired, the insured had not obtained from some other insurer insurance cover to replace that provided by the original contract; then, by force of this section, there exists between the parties to the original contract a contract of insurance that provides insurance cover as provided by the original contract, except that the cover provided is in respect of the period that: (c) commences immediately after the insurance cover provided by the original contract expires; and (d) expires, unless the contract is sooner cancelled, at: (i) the expiration of a period equal to the period during which insurance cover was provided by the original contract; or (ii) the time when the insured obtains from the original insurer or some other insurer insurance cover to replace that provided by the original contract; whichever is the earlier. [Subs (3) am Act 107 of 1997, s 3 and Sch 8 item 27]

(4) Where a contract of insurance is in force by virtue of subsection (3): (a) except in a case to which paragraph (b) applies, no premium is payable in respect of the contract; but

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(1) In this section, renewable insurance cover means insurance cover that: (a) is provided for a particular period of time; and (b) is of a kind that it is usual to renew or for the renewal of which it is usual to negotiate.

s 58

Insurance Contracts Act 1984

[58.15]

(b) if a claim is made under the contract, there is payable by the insured to the insurer, as a premium in respect of the contract, an amount worked out in accordance with subsection (5) or (6), as the case requires. [Subs (4) am Act 107 of 1997, s 3 and Sch 8 item 28]

(5) If the claim is for total loss of the property insured, the premium is an amount equal to the amount (the hypothetical premium) that, if the original contract had been renewed for the same period and on the same terms and conditions (including the same subject-matter and risk), would have been payable by the insured in respect of the renewal. [Subs (5) insrt Act 107 of 1997, s 3 and Sch 8 item 29]

(6) If the claim is not for total loss of the property insured, the premium is an amount worked out in accordance with the formula: Period until claim

×

Hypothetical premium

Period of original contract where: period until claim means the number of days in the period that began on the day on which the contract came into force and ended on the day on which the claim was made. hypothetical premium has the meaning given in subsection (5). period of original contract means the number of days in the period of the original contract. [Subs (6) insrt Act 107 of 1997, s 3 and Sch 8 item 29] [S 58 am Act 107 of 1997; Act 168 of 1986]

SECTION 58 COMMENTARY Background and synopsis ....................................................................... Renewable insurance cover .................................................................... Statutory policy ........................................................................................ Contract of general insurance .................................................................

[58.15] [58.20] [58.30] [58.40]

[58.15] Background and synopsis The ALRC concluded that both insurers and insured would benefit by the operation of a provision automatically extending insurance cover if an insurer fails to notify the expiration of cover. The ALRC identified the mischief which ought to be remedied as follows (ALRC 20 at [264]): The practice of general insurers is to send a renewal notice shortly before the expiry of a policy calling for it to be renewed by payment of the stated premium. In some cases, however, in order to save the insurer the embarrassment of telling an unwanted insured that it is not inviting renewal, 532

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the relevant renewal notice may simply be withheld. Conduct of that type is objectionable for two reasons. First, in the absence of a renewal notice, the insured may well overlook the expiry of the policy and suffer an uninsured loss. Secondly, if the reason for not renewing is relevant to the nature of the risk insured, a substitute insurer will be deprived of information which, had the insurer openly declined to renew, would have been accessible to it.

Section 58 applies to insurance cover which is taken out for fixed intervals and regularly renewed: s 58(1). The insurer is under an obligation to notify the insured in writing of the date on which, and the time at which, the cover will expire. The notice has to be given at least 14 days before the cover expires and must inform the insured whether the insurer is prepared to negotiate to renew the contract or extend the cover: s 58(2).

(a) a period equal to the period covered by the original contract expires; or (b) the insured obtains cover from the original insurer or some other insurer, whichever is the earlier: s 58(3). Where, by virtue of s 58(3), a contract of insurance is deemed to be in force, no premium will be payable in respect of the contract unless the insured should make a claim under it. If the insured makes a claim, the insured must pay the insurer as a premium in respect of the contract, an amount worked out in accordance with subs (5) or (6), depending on whether the claim is for total loss of the property insured or not. In respect of a total loss on an automatically renewed policy the insured will receive the premium for the full term of the policy as if the contract had been renewed in the normal way. If the claim is not for total loss of the property insured, then a formula is applied: Explanatory Memorandum to the Financial Laws Amendment Bill 1996 (H of R), cll 306–307. The insurer has the right to cancel the extended contract at any time: s 60(4)(a).

[58.20] Renewable insurance cover Renewable insurance cover is defined in s 58(1) as insurance cover that first, is provided for a particular period of time and secondly, is of a kind that it is usual to renew or for the renewal of which it is usual to negotiate. It would be rare to have an insurance cover that was not ©

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Where the insured does not obtain cover from another insurer to replace the original cover before it expires, then failure to serve a notice results in the original cover being automatically extended: s 58(3). The term of that cover will commence immediately after the cover provided by the original contract expires and, unless the contract is cancelled sooner, will end when:

s 58

Insurance Contracts Act 1984

[58.20]

provided for a particular period of time. The question as to whether it is usual to renew or usual to negotiate a renewal of a particular insurance cover can be more difficult. McDougall J (NSW Sup Ct) concluded that insurance covers entered into through negotiations with lead underwriters who took the negotiated terms by way of a slip to the market, were not renewable insurance covers: Towry Law PLC v Chubb Insurance Co of Europe SA [2009] NSWSC 434.

[58.30] Statutory policy A statutory policy in force by operation of s 58 is not itself “renewable insurance cover” to which s 58 again applies. The NSW Court of Appeal (comprising Beazley P; Meagher and Ward JJA) rejected an argument that a statutory policy was also renewable insurance cover to which s 58 applied in Allianz Australia Insurance Ltd v Haddad (2015) 18 ANZ Ins Cas 62-072; [2015] NSWCA 186. A statutory policy had been in force because of the insurer’s failure to comply with s 58(2) but it had expired before the happening of the event for which the insured sought cover. The insured argued for an extension of cover beyond the expiration of the statutory policy. In rejecting the argument the Court of Appeal noted why the statutory policy was not a “renewable insurance cover”. The Court said (at [52]): The policy in force by virtue of s 58 was not the result of any consensual arrangement. It was imposed by reason of the insurer’s non-compliance with subs 58(2). It was not insurance cover that “it is usual to renew or for the renewal of which it is usual to negotiate” within subs (1)(b). Nor was it cover “provided for a particular period of time” within subs (1)(a). The effect of subs (3) is that the cover is not for a definite period. It may be cancelled by the insurer at any time by 14 days’ notice and ceases if the cover provided by the original contract is replaced.

If an insurer has given notice in writing to the insured of proposed cancellation, in apparent compliance with the procedure laid down in s 59, thereafter the policy is not one which is set to expire within the meaning of s 58. It follows, in the view of the High Court, that no statutory policy will come into existence: CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384; 71 ALJR 312; 9 ANZ Ins Cas 61-348; [1997] HCA 2. There have been a number of judgments in the Bankstown Football Club proceedings. It is worthwhile considering the earlier judgments which led to the High Court judgment on the operation of s 58 and the question of a statutory policy. The facts surrounding this case involved an insurance claim that arose as a result of fire damage to the insured’s club premises arising from three 534

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separate fires, one before and two after the date for expiration of the contract of insurance. After the first fire the insurer cancelled the policy and did not give the insured notice concerning renewal of the contract of insurance in terms provided for in s 58. Cole J (NSW Sup Ct) at first instance in Bankstown Football Club Ltd v CIC Insurance Ltd (unreported, NSW Sup Ct, Cole J, 17 December 1993) found that a claim was not fraudulent and that therefore a purported cancellation on that basis was ineffective. He found that a letter from the insurer to the insured did not constitute a notice as required by s 58(2) informing the insured of whether the insurer was prepared to negotiate to renew or extend the cover. The letter was in the following terms:

Further, Cole J rejected arguments of waiver and estoppel based on a subsequent request by the insured’s solicitors for the return of premium. He found that because the cancellation was ineffective and because a notice had not been given according to s 58(2) a statutory policy came into existence at the subsequent renewal. That statutory policy operated for a further 12 months upon the same terms as the earlier policy and covered subsequent fires involving the insured property. The NSW Court of Appeal (comprising Kirby P, Priestley and Powell JJA) by a majority found that there was no policy in existence as at the renewal date which could have been renewed through the operation of s 58 and therefore a statutory policy could not result: CIC Insurance Ltd v Bankstown Football Club Ltd (1995) 8 ANZ Ins Cas 61-232. On appeal the High Court (comprising Brennan CJ, Dawson, Toohey, Gaudron and Gummow JJ) had regard to ALRC 20 to ascertain the mischief which s 58 sought to remedy. The High Court noted that neither of the objections referred to by the ALRC in ALRC 20 at [264] (see [58.20]), namely the insured overlooking the expiry of the policy and a substitute insurer being deprived of information, exists where before the commencement of the 14-day period specified in s 58(2) the insurer has, in reliance upon one or more of the grounds specified in s 60(1), given notice of a proposed cancellation in accordance with the procedure laid down in s 59. The High Court said (at 409–410 (CLR); 76,854 (ANZ Ins Cas)): In our view, the insurance cover of which s 58(2) speaks will not be said to expire within 14 days and the obligation of the insurer to give notice informing the insured thereof will not arise if, before the commencement of that 14 day period, the insurer has given written notice of proposed ©

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We are also instructed to advise that in addition to the refusal of the claim, the following policies: (a) IS395070 (Industrial Special Risks)… Which would otherwise have expired at 4.00 pm on 30 October 1992 are hereby cancelled in accordance with their following respective conditions: (a) Conditions 5(b)(v) and 5(c) IS395070.

s 59

Insurance Contracts Act 1984

[58.30]

cancellation. If the insured accepts that notice as effective to cancel the subsisting contract, then there is no question of subsequently extending or renewing a cover which the insured accepts has already come to an end, or will do so upon expiry of any balance of the term of the notice. If the insured disputes the effectiveness of that notice, then ss 58 and 59, taken together, do not oblige the insurer to give a second notice to gainsay the effect stated in the first notice. That is to say, if the insurer has given notice in writing to the insured of proposed cancellation, in apparent compliance with the procedure laid down in s 59, thereafter the policy is not one which is said to expire within the meaning of s 58. That was this case. It follows, in our view, that no statutory policy came into existence.

[58.40] Contract of general insurance See s 11(6). 59

Cancellation procedure

(1) An insurer who wishes to exercise a right to cancel a contract of insurance shall give notice in writing of the proposed cancellation to the insured. (2) The notice has effect to cancel the contract at whichever is the earlier of the following times: (a) the time when another contract of insurance between the insured and the insurer or some other insurer, being a contract that is intended by the insured to replace the first-mentioned contract, is entered into; (b) whichever is the latest of the following times: (i) 4 pm on the applicable business day; (ii) if a time is specified for the purpose in the contract—that time; (iii) if a time is specified in the notice—that time. [Subs (2) insrt Act 107 of 1997, s 3 and Sch 8 item 30]

(2A) In subparagraph (2)(b)(i): applicable business day means: (a) in respect of a contract that is not a contract of life insurance: (i) if the contract is in force because of section 58—the fourteenth business day; or (ii) otherwise—the third business day; or (b) in respect of a contract of life insurance—the twentieth business day; after the day on which the notice was given to the insured. [Subs (2A) insrt Act 107 of 1997, s 3 and Sch 8 item 31]

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(3) This section does not apply to a contract of life insurance if the life policy that is constituted by the contract may be forfeited in accordance with subsection 210(5) of the Life Insurance Act 1995. [Subs (3) subst Act 5 of 1995, s 3 and Sch item 48] [S 59 am Act 107 of 1997; Act 5 of 1995]

SECTION 59 COMMENTARY Background and synopsis ....................................................................... Notice in writing of the proposed cancellation ........................................

[59.10] [59.20]

Cancellation versus automatic cessation ................................................

[59.30]

The ALRC recommended that clauses providing for automatic cancellation or for cancellation without notice should be rendered ineffective. Further, that notice of cancellation should be required in all cases. If not directly effected, notice should be given by mail and deemed to have been given at the time when it would have been delivered in the ordinary course of post unless the insured proves that, through no fault of her or his own, the insured did not receive it. The ALRC recommended that notice of cancellation should not be effective until either substitute insurance is effected or until three business days have elapsed from the time notice was given: ALRC 20, at [247]. Further, the ALRC determined that notification to the insured of cancellation of a life policy is as desirable in principle as it is in the case of general insurance. The ALRC recommended that the rules relating to notification of cancellation of general insurance should apply equally to life insurance, save that the time period for notice should accord with s 100 of the Life Insurance Act 1945 (Cth) which has now been repealed. Section 100 required, inter alia, 28 days’ notice to be given by an insurer of forfeiture by reason of non-payment of premium of an ordinary policy on which not less than three years’ premiums had been paid: ALRC 20, at [263]. The matters that were covered in s 100 of the Life Insurance Act 1945 are now covered in s 210 of the Life Insurance Act 1995, which commenced on 1 July 1995. Section 59 sets out the procedures to be followed by an insurer if cancellation is to be effective. The insurer must give written notice of its intention to do so: s 59(1). That notice will not cancel the contract immediately but will take effect at the earlier of the following times: (a) the time when the insured enters into another contract of insurance intended to replace the contract; or (b) whichever is the latest of the following times: ©

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[59.10] Background and synopsis

s 59

Insurance Contracts Act 1984

[59.10]

(i) 4 pm on the applicable business day (as defined): Explanatory Memorandum to the Financial Laws Amendment Bill 1996 (H of R), cll 308–309. (ii) the time, if any, specified in the contract, or (iii) the time, if any, specified in the notice (s 59(2)): Explanatory Memorandum, at [199]. See s 11(1).

[59.20] Notice in writing of the proposed cancellation A threat or a warning as to what may occur in the future if and when rights of cancellation may crystallise is not a notice of proposed cancellation under s 59(1). In MLC Ltd v J & W Management Services Pty Ltd (2001) 11 ANZ Ins Cases 61-511; [2001] VSC 241 the threat or warning concerned what may have occurred if a premium was not paid by the due date. This was not a notice of proposed cancellation because at the time the notice was given the premium was not due and unpaid and therefore there had not been a breach of the contract of insurance giving rise to a right of cancellation. A letter written after the premium was due and had not been paid did constitute a notice of proposed cancellation under s 59(1): (per McDonald J, Vic Sup Ct).

[59.30] Cancellation versus automatic cessation Cancellation of a contract of insurance is governed by s 59 of the ICA whereas automatic cessation is not. It is not uncommon for contracts of insurance to contain automatic cessation provisions which provide that upon the happening of a particular event (commonly the non-payment of premium), cover shall cease or be deemed to have ceased. An automatic cessation provision is to be distinguished from a cancellation provision which gives rights in respect of cancellation to an insurer. In Waterman v Gerling Australia Insurance Co Pty Ltd (2005) 65 NSWLR 300; 13 ANZ Ins Cas 61-664; [2005] NSWSC 1066, the relevant policy of insurance contained an automatic cessation provision (termed a “deferred premiums endorsement”) which limited liability to pay by providing that cover ceases upon non-payment of an instalment. Brereton J (NSW Sup Ct) held that the provision in the contract produced an automatic agreed result on the happening of a particular event and did not confer a right to cancel on the insurer and because ss 59, 60 and 63 only contemplate cancellation by an insurer, then those sections had no application. He said (at [65]–[67]): As has already been pointed out, the plain words of the Act distinguish between provisions for cancellation of the policy, and provisions limiting liability to pay. In this case, the relevant provision is of the latter character. 538

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Finn J (Fed Ct) found that there had been a cessation of cover, before the notification of claims, because of a failure to pay an instalment of premium for a professional indemnity policy in Rawley Pty Ltd ACN 009 027 454 v Bell (No 2) (Corrigendum dated 20 June 2007) [2007] FCA 583 (26 April 2007). He noted that a distinction between what he called “cessation of cover”, on the one hand, and cancellation of the policy, on the other, is recognised explicitly in the ICA in the manner in which it regulates instalment contracts of insurance. He specifically referred to ss 39 and 62 and generally to Waterman. The policy acknowledged the insurer’s right to cancellation under s 60 in one clause. In a separate sub-clause (cl 2.5), the policy provided that if full payment of the gross premium was not made, “there is no cover”. Finn J found that once the contingency on which the sub-clause is premised occurred then the cover ceased. He said (at [393]–[394]): It is a question of construction of the policy, admittedly under the shadow of the Insurance Contracts Act, as to whether in the circumstances [the insured] had the cover provided by [the insurer] at the time of the notification of the claims… Apart from recognising the difference between cessation of cover and cancellation, the Act does not apply to or regulate directly provisions such as cl 2.5. On its face that sub-clause is a self-executing one. Once the contingency on which it is premised occurs, the cover ceases. The cover may later be revived by the making of payment in full, assuming an election to cancel for non-payment had not by then be made. Unless and until that occurred, there would be no cover notwithstanding that the Policy itself may remain on foot. Far from throwing any doubt on this construction the policy itself supports it. I have not considered it necessary to give detailed consideration to the principles applied in the construction of contracts of insurance. These have ©

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Section 59 does not affect provisions which limit liability to pay by reference to non-payment of premium. Such provisions are not affected by the Act save in the case of instalment contracts as defined, which this is not. To construe s 59 as extending to such provisions would be to construe a provision which covers only one state of affairs, to cover another set of circumstances, when the distinction between the two situations, albeit in the context of “instalment contracts”, is recognised in the Act, by ss 39 and 62. Moreover, insofar as the Act regulates cancellation of policies, its plain words are concerned with cancellation by the insurer; what occurred here was not a cancellation of a contract of insurance by the insurer, consensually or pursuant to any right of the insurer to do so, but an automatic cessation of cover under the policy upon occurrence of a specified event. That is not a “cancellation by the insurer” within s 59. Accordingly, this is an instance in which, if Parliament intended to prevent automatic cessation of cover without notice upon non-payment of premium other than in the case of an instalment contract as defined within the compass of what is called “automatic cancellation” in the Law Reform Commission Report and the Explanatory Memorandum, then the words it has employed for that purpose are simply insufficient to achieve it …

s 59A

Insurance Contracts Act 1984

[59.30]

been recently essayed by Brereton J in Waterman’s case. For my part, I respectfully agree with his Honour’s conclusion in that case. It deals with the very issue raised here though with a clause not quite as unmistakably explicit as here. I would merely wish to emphasise that while I well understand that an automatic cessation of cover might have the same undesirable policy effects as the Australian Law Reform Commission identified in relation to automatic cancellation: see ALRC 20 Insurance Contracts, 1982 [246]–[247], I agree with Brereton J that there is nothing in the Insurance Contracts Act, that Report and the now accepted principles of interpretation of contracts: see e.g. Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2005) 223 ALR 560 at [71] ff; affd [2006] FAFC 144; (2006) 156 FCR 1; that would permit the torturing of the clear and coherent terms and text of a contract so as to effectuate that policy in some way. That is a matter for the legislature to address. 59A Cancellation of contracts of life insurance (1) An insurer under a contract of life insurance (the first contract) may cancel the contract if the insured has made a fraudulent claim: (a) under the first contract; or (b) under another contract of insurance with the insurer that provides insurance cover during any part of the period during which the first contract provides insurance cover. (2) If an insurer has cancelled a contract of life insurance under subsection (1) because of a fraudulent claim by the insured under that contract, then, in any proceedings in relation to the claim, the court may, if it would be harsh and unfair not to do so: (a) disregard the cancellation of the contract; and (b) order the insurer to pay, in relation to the claim, such amount (if any) as the court considers just and equitable in the circumstances; and (c) order the insurer to reinstate the contract. (3) If an insurer has cancelled a contract of life insurance (the cancelled contract) under subsection (1) because of a fraudulent claim by the insured under another contract of insurance with the insurer, then, in any proceedings in relation to the claim, the court may, if it would be harsh and unfair not to do so: (a) order the insurer to pay, in relation to the claim, such amount (if any) as the court considers just and equitable in the circumstances; and (b) order the insurer to reinstate the cancelled contract. (4) If an insurer has cancelled a contract of life insurance under subsection (1), then, in any proceedings in relation to the cancellation, the court may, if it would be harsh and unfair not to do so, order the insurer to reinstate the contract. This subsection does not limit, and is not limited by, subsection (2) or (3). (5) In exercising the power conferred by subsection (2), (3) or (4), the court: (a) must have regard to the need to deter fraudulent conduct in relation to insurance; and

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(b) may also have regard to any other relevant matter. [S 59A insrt Act 75 of 2013, s 3 and Sch 5 item 15]

SECTION 59A COMMENTARY Background and synopsis ....................................................................... Contract of life insurance ........................................................................

[59A.10] [59A.20]

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA noted that there was no provision in the ICA that allowed a life insurer to cancel a contract of life insurance for any reason. There was no life insurance equivalent to s 60 which concerns contracts of general insurance. The Review Panel understood that life insurers could rely upon the common law and specific cancellation clauses in their policies to provide a similar outcome to that provided by s 60. Accordingly, the Review Panel questioned the need to clarify that which was perceived to be already available (see Final Report (June 2004), at [7.48]–[7.56]). Notwithstanding the views of the Review Panel, a decision was made to introduce a statutory framework for life insurance cancellation in respect of fraudulent claims similar to that applying to general insurance. The introduction of a new provision was in response to court decisions regarding rights of cancellation of contracts of life insurance at common law. Section 59A was inserted into the ICA by the Insurance Contracts Amendment Act 2013, having commenced on 28 June 2013. Under s 59A(1) a life insurer may cancel a contract of life insurance, termed the “first contract”, if the insured has made a fraudulent claim under the first contract or another contract with the insurer that provides cover for any part of the period in which the first contract provides cover. According to the Explanatory Memorandum to ICAB 2013 (at [1.126]) this ability to cancel contracts is provided “on the basis that if a fraudulent claim occurred, the relationship between the insurer and the insured could have soured to the point that the insurer no longer wants to cover the insured under any terms”. However s 59A(2), 59A(3) and 59A(4) provide that: • a court may disregard the cancellation of a contract of life insurance because of a fraudulent claim under that contract if it would be harsh or unfair not to do so and order the insurer to pay an amount it considers to be just and equitable and order the insurer to reinstate the contract (s 59A(2)); ©

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[59A.10] Background and synopsis

s 60

Insurance Contracts Act 1984

[59A.10]

• similarly, a court may disregard the cancellation of a contract of life insurance (termed the “cancelled contract”) because of a fraudulent claim under another contract of insurance with the insurer and order a payment and reinstatement of the cancelled contract (s 59A(3)); • similarly, a court may, if it would be harsh or unfair not to do so, order reinstatement of a cancelled contract of life insurance (s 59A(4)); Under s 59A(5) a court must, in exercising its power, have regard to the need to deter fraudulent conduct in relation to insurance. The provisions concerning a court’s power to disregard cancellation of a contract of life insurance are similar to the provisions in s 31 which concern a court’s power to disregard avoidance. Section 59A applies to a contract of life insurance originally entered into after 28 June 2013 (which is when the Insurance Contracts Amendment Act 2013 received Royal Assent).

[59A.20] Contract of life insurance See s 11(1). See also [11.30]. 60

Cancellation of contracts of general insurance

(1) Where, in relation to a contract of general insurance: (a) a person who is or was at any time the insured failed to comply with the duty of the utmost good faith; (b) the person who was the insured at the time when the contract was entered into failed to comply with the duty of disclosure; (c) the person who was the insured at the time when the contract was entered into made a misrepresentation to the insurer during the negotiations for the contract but before it was entered into; (d) a person who is or was at any time the insured failed to comply with a provision of the contract, including a provision with respect to payment of the premium; or (e) the insured has made a fraudulent claim under the contract or under some other contract of insurance (whether with the insurer concerned or with some other insurer) that provides insurance cover during any part of the period during which the first-mentioned contract provides insurance cover; the insurer may cancel the contract. (2) Where: (a) a contract of general insurance includes a provision that requires the insured to notify the insurer of a specified act or omission of the insured; or

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(b) the effect of the contract is to authorize the insurer to refuse to pay a claim, either in whole or in part, by reason of an act or omission of the insured or of some other person; and, after the contract was entered into, such an act or omission has occurred, the insurer may cancel the contract. (3) A reference in subsection (2) to an act or omission of the insured includes a reference to an act or omission of the insured 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. (4) Where a contract of insurance is: (a) a contract that is in force by virtue of section 58; or (b) an interim contract of general insurance; the insurer may at any time cancel the contract.

[60.10] [60.20] [60.30] [60.40]

[60.10] Background and synopsis The ALRC recommended a specification of the grounds upon which an insurer might rely to cancel a contract of insurance rather than a specification of the circumstances in which cancellation should be forbidden. Apart from allowing a right to cancel for a breach of the duty of utmost good faith, the making of a fraudulent claim, and the making of a claim which an insurer is entitled to refuse to meet, the ALRC recommended that the right to cancel a contract of insurance should also extend to cases where the insurer requires notification of specified changes in the risk. For example, an insurer may require the insured to notify it of a change in occupation. The ALRC also recommended that an insurer should have the right to cancel, without restriction, an interim contract of insurance which comes into existence as a result of an insurer’s failure to notify the expiration of cover: ALRC 20, at [251]. Section 60 sets out the circumstances in which an insurer has the right to cancel a contract of general insurance. Namely: (a) breach of duty of utmost good faith; (b) breach of duty of disclosure; (c) a misrepresentation; (d) each of a provision of the contract; or (e) a fraudulent claim under the contract or under some other contract in effect at the same time. ©

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SECTION 60 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. Duty of utmost good faith ........................................................................ Cancellation generally .............................................................................

s 60

Insurance Contracts Act 1984

[60.10]

The insurer can also cancel the contract if the contract provides that it may refuse to pay a claim by reason of an act or omission of the insured or some third party and that act or omission actually occurs after the contract has been entered into: s 60(2). This covers those contracts which require an insured to notify the insurer of a change in circumstances during the period of cover. Section 60(2) preserves the operation of such clauses. The insurer may also cancel a contract in force because it has failed to send a renewal notice in accordance with s 58 or an interim contract of insurance, that is, cover note (s 60(4)): Explanatory Memorandum, at [203].

[60.20] Contract of general insurance See s 11(6).

[60.30] Duty of utmost good faith See ss 13 and 14.

[60.40] Cancellation generally If an insured calls into question an insurer’s cancellation of a contract of insurance then it will be necessary for the insurer to establish the basis for the cancellation. If a cancellation has been based on an alleged breach of the duty of utmost good faith there is a question as to whether it is necessary for the insurer to show that it has suffered prejudice within the terms of s 54(1) in order to ultimately justify the cancellation. Ipp J (WA Sup Ct) in Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68; 5 ACSR 424; 6 ANZ Ins Cas 61-059 considered a submission by the insurer that because of the insured’s failure to comply with its duty of utmost good faith the insurer was entitled to cancel the policy. The insurer further submitted that accordingly it had no liability to the insured under the policy. Ipp J decided that s 54(1) provided the extent of the remedy for the duty imposed by s 13. In the absence of any prejudice suffered by the insurer he did not consider that the insured’s breach of the duty of utmost good faith assisted the insurer in attempting to resist the insured’s claim for indemnity. It is not apparent from the judgment whether he gave consideration to the question as to the effect of the absence of prejudice on the insurer’s entitlement to cancel the policy. If the insurer is unable to sustain the basis for the cancellation of a contract of insurance then the purported act of cancelling the contract of insurance is void and of no effect. 544

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[61.10]

Pt VII - Expiration, renewal & cancellation

s 61

By cancelling a contract of insurance an insurer may be held to have evinced an intention to repudiate and not be bound by the contract. Acceptance of an insurer’s repudiation is a matter to be taken into account in determining the relief available to an insured. Upon an insurer abandoning its defence to a claim and cancellation of a contract of insurance and agreeing to be bound by the contract of insurance, the insured ceased to be entitled to rescind the contract and recover damages at common law for the loss of the bargain: Johnson v Australian Casualty Co Ltd (1992) 7 ANZ Ins Cas 61-109 per McDonald J (Vic Sup Ct). In the opinion of Hayne J (Vic Sup Ct) an insurer is to be taken to know of the statutory rights conferred on it by s 60 or at the least cannot be heard to say that it is not so aware. In a dispute as to contribution between two insurers one knew of certain facts and was taken to have elected not to cancel under s 60: Esanda Finance Corporation Ltd v Colonial General Insurance Co Ltd (1993) 217 ALR 180. Insurers in liquidation

(1) Where an insurer under a contract of general insurance is a company that is in liquidation, the insurer may at any time cancel the contract. (2) Subsection (1) does not affect the operation of a law (including a law of a State or Territory) that relates to the disclaimer of unprofitable contracts to which a company that is in liquidation is a party.

SECTION 61 COMMENTARY Background and synopsis .......................................................................

[61.10]

Contract of general insurance .................................................................

[61.20]

[61.10] Background and synopsis The ALRC recommended that an insurer should be entitled to cancel contracts when it is in liquidation: ALRC 20, at [251]. According to s 61 an insurer in liquidation may cancel a contract at any time. This applies only to contracts of general insurance. Section 61 does not, however, affect the operation of laws relating to disclaimers of unprofitable contracts to which the insurer is a party such as s 568 of the Corporations Act 2001 (Cth). The combined operation of s 59 (cancellation procedure) and s 61 means that an insured is advised of the cancellation of a contract of insurance and will then be able to obtain new cover.

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s 62

Insurance Contracts Act 1984

[61.10]

[61.20] Contract of general insurance See s 11(6). 62

Cancellation of instalment contracts of general insurance

(1) An instalment contract of general insurance may include provisions inconsistent with section 59 with respect to the cancellation of the contract for non-payment of an instalment of the premium. [Subs (1) am Act 75 of 2013, s 3 and Sch 2 item 1]

(2) An insurer may not rely on such a provision unless: (a) at least one instalment of the premium has remained unpaid, at the time when the contract is sought to be cancelled, for a period of at least one month; and (b) before the contract was entered into, the insurer clearly informed the insured in writing of the effect of the provision. [S 62 am Act 75 of 2013]

SECTION 62 COMMENTARY Background and synopsis ....................................................................... Instalment contract of general insurance ................................................

[62.10] [62.20]

[62.10] Background and synopsis The ALRC recommended in relation to instalment insurance that unless notified to an insured in the appropriate manner, a contractual right of cancellation by an insurer for non-payment of an instalment should not be capable of being exercised until one month has elapsed from the date when an instalment became due. The recommendation extended to an exclusion of liability for non-payment of an instalment short of cancellation: ALRC 20, at [254]. In the Notes to the Draft Insurance Contracts Bill 1982 the ALRC provided the following example as to the proposed s 62: An instalment contract of insurance (providing for, say, monthly instalments of the premium) includes a clause allowing the insurer to cancel the contract without notice as soon as one premium is overdue. When a premium is overdue, the insurer has two options: 1. It can give notice as provided by [s 59] – the notice becomes effective to cancel the contract, at the most, three days after it is served; 2. It can wait for one month and then cancel the contract without notice. This would only be available if the insurer had clearly informed the insured, before the contract was entered into, that the contract could be cancelled without notice for breach. 546

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Pt VII - Expiration, renewal & cancellation

s 63

According to s 62, instalment contracts of general insurance may include terms inconsistent with s 59 (cancellation procedure) or s 77 (giving notices) with respect to cancellation for non-payment of an instalment. An insurer is not, however, able to rely on those terms to cancel the contract unless: (a) at least one instalment has been outstanding for at least one month at the time the insurer seeks to cancel; (b) the insured was informed in writing before entering into the contract of the effect of the terms.

Section 62 was amended by the Insurance Contracts Amendment Act 2013 so as to delete the reference to s 77 in that section. This amendment was a consequence of the repeal of s 77 of the ICA by the Insurance Contracts Amendment Act 2013. The amendment to s 62 commenced on 28 December 2013 and applies to notices or other documents or information given to a person after this date (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

[62.20] Instalment contract of general insurance See s 11(8). 63

Cancellations of contracts of insurance void

(1) Except as provided by this Act, an insurer must not cancel a contract of general insurance. (2) Except as provided by this Act or section 210 of the Life Insurance Act 1995, an insurer must not cancel a contract of life insurance. Note: Section 210 of the Life Insurance Act 1995 deals with cancellation of a contract of life insurance because of non-payment of a premium.

(3) Any purported cancellation of a contract of insurance in contravention of subsection (1) or (2) is of no effect. [S 63 subst Act 75 of 2013, s 3 and Sch 5 item 16]

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Section 62 is complemented by s 39 which also concerns instalment contracts of general insurance and in particular provisions limiting an insurer’s liability because of an insured’s failure to pay a premium: Explanatory Memorandum, at [209]–[210].

s 63

Insurance Contracts Act 1984

[63.10]

Pre ICAA 2013 Amendment (pre 28 June 2013) 63

Cancellations void

Except as provided by this Act, an insurer may not cancel a contract of general insurance and any purported cancellation in contravention of this section is of no effect.

SECTION 63 COMMENTARY Background and synopsis .......................................................................

[63.10]

Contract of life insurance ........................................................................

[63.20]

Contract of general insurance .................................................................

[63.25]

Justifying cancellation .............................................................................

[63.30]

[63.10] Background and synopsis Section 63 provides that an insurer is not able to cancel a contract of general insurance except in accordance with the provisions of the ICA. Accordingly, the provisions of the ICA relating to cancellation of a contract of general insurance are exclusive of any contractual right. Section 63 was amended by the Insurance Contracts Amendment Act 2013 (having commenced on 28 June 2013) as a consequence of the insertion of s 59A into the ICA which concerns the cancellation of contracts of life insurance. Previously, the section had only concerned contracts of general insurance. Section 63 was amended to provide for a mirror contravention in relation to a purported cancellation of a contract of life insurance other than under the ICA or s 210 of the Life Insurance Act 1995 (Cth). The amendment to s 63 applies to a contract of life insurance originally entered into after 28 June 2013 (which is when the Insurance Contracts Amendment Act 2013 received Royal Assent).

[63.20] Contract of life insurance See s 11(1). See also [11.30].

[63.25] Contract of general insurance See s 11(6).

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s 64B

[63.30] Justifying cancellation

In that case the High Court noted that the litigation had apparently been conducted on the basis that the insurer would have been entitled to cancel the policy in respect of a mobile crane if it had been advised that the crane had been registered and that the insured’s entitlement would have been unaffected by s 63. In accordance with that conventional basis, the court construed the policy as though an effective right to cancel was conferred by the relevant provision. However, the High Court did presume that it was accepted by the parties that perhaps ss 59 and 60(2)(b) would have permitted the insurer to exercise its right to cancel. This case illustrates the need for an insurer to base its cancellation upon specific provisions of the ICA. 64A “Cooling-off” period: consumer credit insurance [Repealed] [S 64A rep Act 123 of 2001, s 3 and Sch 1 item 249; insrt Act 49 of 1994, s 3 and Sch item 9]

64B Special provision regarding investment-linked contracts [Repealed] [S 64B rep Act 123 of 2001, s 3 and Sch 1 item 249; insrt Act 5 of 1995, s 4 and Sch item 52]

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Section 63 requires an insurer to found its cancellation within the provisions of the ICA. However, unless an insured seeks to contest the basis of cancellation then legal proceedings based on a prospective entitlement to cancel, for instance under s 54(1), may proceed on what the court in Ferrcom Pty Ltd v Commercial Union Assurance Co of Australia Ltd (1993) 176 CLR 332; 67 ALJR 264; 7 ANZ Ins Cas 61-156 described as the “conventional basis”.

PART VIII – SUBROGATION 64

Application to third party beneficiaries In this Part, a reference to an insured includes a reference to a third party beneficiary. [S 64 reinsrt Act 75 of 2013, s 3 and Sch 7 item 1; rep Act 123 of 2001, s 3 and Sch 1 item 249; am Act 107 of 1997; Act 62 of 1997; Act 5 of 1995; Act 49 of 1994]

SECTION 64 COMMENTARY Background and synopsis .......................................................................

[64.10]

Third party beneficiary .............................................................................

[64.20]

Section 64, prior to its repeal in 2001 by the Financial Services Reform (Consequential Provisions) Act 2001 (Cth), appeared in Pt VII (Expiration, renewal and cancellation) of the ICA. Prior to its repeal in 2001, s 64 concerned an insured’s right under a contract of life insurance (other than a blanket superannuation contract or Retirement Savings Account) to cancel the contract before the expiration of 14 days after receipt of the policy document (the cooling-off period). The subject matter is now dealt with in s 1442B of the Corporations Act 2001 (Cth). The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that third party beneficiaries should have access to the provisions of the ICA to the extent that they would have the same rights and obligations as an insured for the purposes of subrogation (see Final Report (June 2004), at [10.2]–[10.6]). Section 64, which gives effect to the recommendation of the Review Panel, was inserted into the ICA by the Insurance Contracts Amendment Act 2013, having commenced on 28 December 2013. It provides that in this Part of the ICA (which includes ss 64–68), a reference to an insured includes a reference to a third party beneficiary. “Third party beneficiary” is defined in s 11(1). Section 64 applies to a contract of general insurance originally entered into or renewed after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent). ©

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[64.10] Background and synopsis

s 65

Insurance Contracts Act 1984

[64.10]

[64.20] Third party beneficiary See s 11(1). See also [48.10.1] and [48.10.2]. The definition of “third party beneficiary” was inserted into s 11(1) by the Insurance Contracts Amendment Act 2013 and commenced on 28 June 2013. 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. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 35]

(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. [Subs (3) am Act 107 of 1997, s 3 and Sch 8 item 36]

(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 the third party’s contract of insurance in respect of the loss. [Subs (4) am Act 73 of 2008, s 3 and Sch 4 item 344; Act 107 of 1997, s 3 and Sch 8 item 37]

(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 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. [Subs (5) am Act 107 of 1997, s 3 and Sch 8 item 38; Act 49 of 1994, s 3 and Sch item 10]

(6) An assignment made in compliance with such a condition or in pursuance of such an invitation or suggestion is void.

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[65.15]

Pt VIII - Subrogation

s 65

(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. [S 65 am Act 73 of 2008; Act 107 of 1997; Act 49 of 1994]

SECTION 65 COMMENTARY Background and synopsis .......................................................................

[65.15]

Contract of general insurance .................................................................

[65.20]

The insured – Pre 28 December 2013 ...................................................

[65.30]

Serious or wilful misconduct: s 65(2) ......................................................

[65.40]

[65.15] Background and synopsis

The ALRC concluded that subrogation could readily be justified on the indemnity principle in that it prevents an insured from obtaining a double indemnity. However, the ALRC was of the view that it is not appropriate that subrogation be available in circumstances where double indemnity is, as a practical matter, not in issue and where the liability to be relied upon is intra-familial and one which the insured would not have relied upon. Accordingly, the ALRC recommended that an insurer should not be entitled to be subrogated to rights which the insured has against an uninsured person against whom the insured, because of family or other personal relationships, could not reasonably be expected to bring legal action. The ALRC recommended that in the case of motor vehicle insurance, the disentitlement should extend to the insured’s rights against any uninsured person using the motor vehicle by consent at the time of the loss. However, the ALRC expressed the view that the insured should remain free to exercise any rights or assign those rights to the insurer after a loss has occurred. The recommended prohibition was directed at insurers requiring or inviting an insured to do so as a condition of payment of a claim: ALRC 20, at [305]. Accordingly, s 65 restricts an insurer’s right to be subrogated to the rights of the insured where the insured might reasonably be expected not to exercise those rights because of a family or other personal relationship between the insured or a third party or, in the case of motor vehicle insurance, because the insured consented to the third person driving the motor vehicle: s 65(1). ©

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Where an insurer pays a claim, it is normally entitled to exercise any right the insured might have against a third person, for the loss which gave rise to the claim. The process whereby the insurer stands in the shoes of the insured to pursue those rights against a third party is termed subrogation.

s 65

Insurance Contracts Act 1984

[65.15]

Section 65 will not apply where the conduct of the third party occurred in the course of employment with the insured or was serious or wilful misconduct: s 65(2). In cases where the insured has not exercised rights and might reasonably be expected not to exercise rights against a third party in accordance with s 65(1), the insurer is not entitled to be subrogated to the insured’s rights where the third party is not insured in respect of the loss: s 65(3). Where the third party is insured, the insurer may not recover any amount greater than the third party may recover under her or his contract of insurance: s 65(4). An insurer may not impose a condition requiring the insured to assign the insured’s rights against a third party. Breach of this provision attracts a penalty and any assignment is void (s 65(5) and 65(6)): Explanatory Memorandum, at [220]. The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that third party beneficiaries should have access to the provisions of the ICA to the extent that they would have the same rights and obligations as an insured for the purposes of subrogation (see Final Report (June 2004), at [10.2]–[10.6]). Section 64, which gives effect to the recommendation of the Review Panel, was inserted into the ICA by the Insurance Contracts Amendment Act 2013, having commenced on 28 December 2013. It provides that in this Part of the ICA which includes s 65, a reference to an insured includes a reference to a third party beneficiary. “Third party beneficiary” is defined in s 11(1). The amendment to s 65 by virtue of s 64, to include a reference to a third party beneficiary to a reference to an insured, applies to a contract of general insurance originally entered into or renewed after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

[65.20] Contract of general insurance See s 11(6).

[65.30] The insured – Pre 28 December 2013 Section 65, by virtue of the inclusion of s 64 in the ICA by the Insurance Contracts Amendment Act 2013, now includes a reference to a third party beneficiary to each reference to an insured. Prior to amendment, s 65 by its terms, restricted an insurer’s entitlement to be subrogated to the rights of “the insured”. It did not purport to affect an insurer’s entitlement to be subrogated to the rights of a person who was not a party to a contract of 554

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s 66

Pt VIII - Subrogation

insurance who had claimed under s 48. This restriction will continue to apply to a contract of general insurance that was not originally entered into or renewed after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

[65.40] Serious or wilful misconduct: s 65(2)

Higgins J (ACT Sup Ct) considered the question in an appeal from a decision of a registrar not to set aside a judgment to enable a third party to argue a defence under s 65 in Lennock Motors Pty Ltd v Pastrello (1990) 101 FLR 405; (1991) 6 ANZ Ins Cas 61-033. In allowing the appeal Higgins J considered whether the vague and evasive answers given by the third party in the course of the hearing amounted to serious or wilful misconduct, so as to preclude the third party from relying on s 65(1)(c)(ii). The fact that the third party was apparently “evasive” about the circumstances of the accident was relevant to the question as to whether he had been guilty of “serious or wilful misconduct”. However, it was possible to fully investigate the circumstances of the accident and, there being no suggestion of misconduct, it was held that it must be seriously arguable that s 65(2)(b) did not apply, whatever the “evasiveness” of the third party as the registrar perceived it. The term “serious or wilful misconduct” also appears in s 66 and is further considered at [66.40] and [66.50]. 66

Subrogation to rights against employees Where: (a) the rights of an insured under a contract of general insurance in respect of a loss are exercisable against a person who is the insured’s employee; and (b) the conduct of the employee that gave rise to the loss occurred in the course of or arose out of the employment and was not serious or wilful misconduct; the insurer does not have the right to be subrogated to the rights of the insured against the employee. [S 66 am Act 54 of 1998, s 3 and Sch 12 item 7; Act 107 of 1997, s 3 and Sch 8 item 39]

SECTION 66 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. Insured’s employee ................................................................................. Gave rise to the loss ............................................................................... ©

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The question as to what constitutes serious or wilful misconduct has been the subject of judicial consideration.

s 66

Insurance Contracts Act 1984

Serious misconduct ................................................................................. Wilful misconduct ..................................................................................... Notice of proof .........................................................................................

[66.10] [66.40] [66.50] [66.60]

[66.10] Background and synopsis The ALRC noted that employers’ liability insurance was a field in which the exercise of rights of subrogation against employees had given rise to concern. In Lister v Romford Ice & Cold Storage Co Ltd [1957] AC 555; [1957] 1 All ER 125; [1957] 2 WLR 158 the House of Lords upheld the right of an insurer to bring an action by way of subrogation against a negligent employee of its insured. There had been criticisms that such a decision is inconsistent with sound practice in the field of industrial relations. Doubt had been expressed concerning the scope of the Lister decision in Australia. See Commercial and General Insurance Co Ltd v GIO (NSW) (1973) 129 CLR 374; 47 ALJR 612: ALRC 20, at [306]. Section 66 restricts an insurer’s right of subrogation where the rights to which it is subrogated are rights against an employee of the insured. There is an exception for serious or wilful misconduct. The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that third party beneficiaries should have access to the provisions of the ICA to the extent that they would have the same rights and obligations as an insured for the purposes of subrogation (see Final Report (June 2004), at [10.2]–[10.6]). Section 64, which gives effect to the recommendation of the Review Panel, was inserted into the ICA by the Insurance Contracts Amendment Act 2013, having commenced on 28 December 2013. It provides that in this Part of the ICA (which includes s 66), a reference to an insured includes a reference to a third party beneficiary. “Third party beneficiary” is defined in s 11(1). The amendment to s 66 by virtue of s 64, to include a reference to a third party beneficiary to a reference to an insured, applies to a contract of general insurance originally entered into or renewed after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

[66.20] Contract of general insurance See s 11(6).

[66.25] Insured’s employee Ashley J (Vic Sup Ct) in Deutz Australia Pty Ltd v Skilled Engineering Ltd (2001) 162 FLR 173; [2001] VSC 194 held that “employee” where 556

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[66.40]

Pt VIII - Subrogation

s 66

used in s 66 means a person employed under a contract of service. In this case, the worker was, at the time of the incident, described as a “servant pro hac vice” of another, that is a worker in the service of a temporary employer for the time being. Regardless of the description, it was clear that at the material time, there was no contract of service with the insured. Accordingly, Ashley J concluded that the worker was not entitled to the protection of s 66, acknowledging at the same time the remedial intent of the section.

The Full Court of the Qld Supreme Court (Thomas, Derrington and Ambrose JJ) considered the causal nexus between the conduct of an employee and the loss that occurred in Boral Resources (Qld) Pty Ltd v Pyke [1992] 2 Qd R 25. An employee of an insured had worked a 17-hour day without eating and then drove the insured’s truck and trailer after consuming alcohol. The employee fell asleep at the wheel and the insured’s trailer, which was insured, was damaged in the resulting accident. The insured did not know that its employee had been drinking. Employees were liable to instant dismissal if they drove a company vehicle under the influence of alcohol. The employee’s breathalyser reading was 0.11. It was submitted on behalf of the employee that for there to be a causal nexus it would be necessary to show that the alcohol consumption was the “real cause”, “substantial cause” of the loss or the “causa causans”. Thomas J (with whom Ambrose J agreed) rejected this submission and said (at 35): I would not consider it necessary to go beyond the simple whether the conduct “contributes in a substantial way to the injury” expressed by Mason J (with whom Brennan J agreed) in Girlock (Sales) Pty Ltd v Hurrell (1982) 149 CLR 155, 168, although that was framed in a somewhat different context. There is no reason why the wide expression “gave rise to” should be subject to metaphysical s of causation, or to any different than which is appropriate to the words “attributable to” in Girlock’s case. Both are broad phrases of connection. Of course, as I read the legislation, no such questions arise in the proper application of s 66(b).

[66.40] Serious misconduct The Full Court of the Qld Supreme Court (Thomas and Ambrose JJ; Derrington J dissenting) found that any employee’s drink-driving conduct was serious misconduct in Boral Resources (Qld) Pty Ltd v Pyke [1992] 2 Qd R 25. Thomas J said (at 34): The conduct is not to be judged from the standpoint of pressure groups such as insurers or employees. The exercise is, as the preamble to the Act recites, “to ©

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[66.30] Gave rise to the loss

s 66

Insurance Contracts Act 1984

[66.40]

enable a fair balance to be struck between the interests of insurers, insureds and other members of the public and to ensure that the practices of insurers operate fairly”. I do not think that double standards can be tolerated such that this drink driving conduct is not to be regarded as serious misconduct in the context of the employer’s insurer exercising a remedy against him. From a wider community viewpoint, such conduct is seriously regarded, especially if damage is caused.

Thomas J considered that sympathy for the employee’s problems did not obscure the essential conduct. He found that the conduct was serious notwithstanding all the circumstances of mitigation that had been raised. He said (at 35): This includes the knowledge and work instructions of the employer. These were relevant circumstances in placing the misconduct of the employee into its proper perspective, although they fell short of establishing any defence in favour of the employee such as absence of duty, contributory negligence or volenti on the part of the employer. With all considerations in view, both charitable and uncharitable, this was still serious misconduct.

Ambrose J agreed with the views of Thomas J that by generally accepted community standards it is “serious” to drive a motor vehicle with a blood alcohol concentration of that which the employee was found to have at the relevant time, namely, 0.11. He found it unnecessary to express any view as to whether that consideration by itself was sufficient to categorise the conduct as “serious misconduct” within the meaning of s 66(b). He took into account that it is necessary to keep in mind that it is misconduct as an employee and not in any general sense which is relevant under s 66(b). He said (at 51): Where under the terms of employment specified conduct on the part of an employee is expressly prohibited and warrants instant dismissal it will normally be difficult, I should think, to describe that misconduct as being other than serious: the fact that that misconduct also constitutes a criminal offence attracting penalties of imprisonment and/or the imposition of a fine makes it impossible in my view to describe it as other than serious.

Although s 66 was not referred to, Millhouse J (SA Sup Ct) in a separate matter, held that an employee who had been drinking for approximately six hours, who had consumed maybe 20 schooners of beer (he was not sure of the quantity) and who admitted that at the time of an accident he had been driving a motor vehicle in a reckless or dangerous manner with a blood alcohol concentration of 0.208, was guilty of serious and wilful misconduct: Ingham v Vita Pacific Ltd (1994) 20 MVR 342; (1995) 8 ANZ Ins Cas 61-272.

[66.50] Wilful misconduct Although the Full Court of the Qld Supreme Court (Thomas and Ambrose JJ; Derrington J dissenting) decided in Boral Resources (Qld) Pty Ltd v 558

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[66.60]

Pt VIII - Subrogation

s 66

Pyke [1992] 2 Qd R 25 that the insurer should be allowed to be subrogated to the rights of its insured against the employee on the basis of, inter alia, the employee’s serious misconduct, the judges also gave some consideration to the question of wilful misconduct. Although he found it unnecessary to consider whether the conduct was also wilful misconduct Thomas J said (at 35): In this respect, the consumption of the liquor must be regarded as wilful, and so must the embarking upon the journey with the risks that that entailed. Giving full effect to the evidence of Dr Lynch and to [the trial judge’s] findings of primary fact, I should be constrained to find the misconduct wilful, notwithstanding the finding that [the employee] went to sleep “without prior warning”.

Similarly, Ambrose J found it largely unnecessary to consider the question of wilful misconduct. However, he said (at 51):

Although s 66 was not referred to, Millhouse J (SA Sup Ct) in a separate matter, held that an employee who had been drinking for approximately six hours, who had consumed maybe 20 schooners of beer (he was not sure of the quantity) and who admitted that at the time of an accident he had been driving a motor vehicle in a reckless or dangerous manner with a blood alcohol concentration of 0.208, was guilty of serious and wilful misconduct: Ingham v Vita Pacific Ltd (1994) 20 MVR 342; (1995) 8 ANZ Ins Cas 61-272.

[66.60] Notice of proof Thomas J considered the sequence of matters for an insurer to prove under s 66(a) and (b) for an insurer to be subrogated to rights against an employee in Boral Resources (Qld) Pty Ltd v Pyke (1992) 2 Qd R 25. He said that an insurer purporting to exercise a right of subrogation must prove under s 66(a) that the insured employer has rights exercisable against its employee for the relevant loss. To do this, evidence will be adduced to prove negligence or breach of contract or whatever facts are necessary to establish liability for the loss. He said (at 31–32): That is the primary task of the insurer in an action of the present kind. If the right is based on negligence of the employee it is not “exercisable” unless the [insured] proves a duty, breach of it, that the breach caused damage to the employer, and that the damage represents a “loss” that is covered by insurance. Unless this is established, consideration of the further factors mentioned in s 66(b) does not arise … Once it is found (as it was in the present case) that the employee would be liable to his employer for negligence ©

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“Wilful” misconduct involves merely the doing of acts in fact amounting to misconduct intentionally, with knowledge that those acts will amount to misconduct. In this regard I adopt what was said in Lewis v Great Western Railway Co (1877) 3 QBD 195 at 210-211 per Brett LJ and Transport Commission (Tasmania) v Neale Edwards Pty Ltd (1954) 92 CLR 214 at 223 per Webb J and 227–228 per Kitto J.

s 67

Insurance Contracts Act 1984

[66.60]

or breach of contract causing the loss, the correct exercise was to examine the conduct of the employee that gave rise to the damage, and ask whether that conduct arose out of the employment and whether it was serious or wilful misconduct. 67

Rights with respect to money recovered under subrogation etc.

Scope (1) This section applies if: (a) an insurer is liable under a contract of general insurance in respect of a loss; and (b) the insurer has a right of subrogation in respect of the loss; and (c) an amount is recovered (whether by the insurer or the insured) from another person in respect of the loss. Amount recovered by insurer (2) If the amount is recovered by the insurer in exercising the insurer’s right of subrogation in respect of the loss: (a) the insurer is entitled under this paragraph to so much of the amount as does not exceed the sum of: (i) the amount paid by the insurer to the insured in respect of the loss; and (ii) the amount paid by the insurer for administrative and legal costs incurred in connection with the recovery; and (b) if the amount recovered exceeds the amount to which the insurer is entitled under paragraph (a)—the insured is entitled under this paragraph to so much of the excess as does not exceed the insured’s overall loss; and (c) if the amount recovered exceeds the sum of: (i) the amount to which the insurer is entitled under paragraph (a); and (ii) the amount (if any) to which the insured is entitled under paragraph (b); the insurer is entitled to the excess. Amount recovered by insured (3) If the amount is recovered by the insured: (a) the insured is entitled under this paragraph to so much of the amount as does not exceed the sum of: (i) the insured’s overall loss; and (ii) the amount paid by the insured for administrative and legal costs incurred in connection with the recovery; and (b) if the amount recovered exceeds the amount to which the insured is entitled under paragraph (a)—the insurer is entitled to so much of the excess as does not exceed the amount paid by the insurer to the insured in respect of the loss; and

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[66.60]

(c)

Pt VIII - Subrogation

s 67

if the amount recovered exceeds the sum of: (i) the amount to which the insured is entitled under paragraph (a); and (ii) the amount (if any) to which the insurer is entitled under paragraph (b); the insured is entitled to the excess.

Amount recovered by insurer and insured jointly (4) Subsections (5), (6) and (7) apply if the amount is recovered by the insurer and the insured jointly.

(6) If the amount recovered is equal to the sum of the paragraph (2)(a) amount and the paragraph (3)(a) amount: (a) the insurer is entitled to the paragraph (2)(a) amount; and (b) the insured is entitled to the paragraph (3)(a) amount. (7) If the amount recovered exceeds the sum of the paragraph (2)(a) amount and the paragraph (3)(a) amount, then: (a) the insurer is entitled to the paragraph (2)(a) amount; and (b) the insured is entitled to the paragraph (3)(a) amount; and (c) in addition to those amounts, the insurer and the insured are each entitled to a portion of the remainder of the amount recovered, calculated on a pro rata basis in proportion to the amounts referred to in subparagraphs (2)(a)(ii) and (3)(a)(ii). Amount awarded by way of interest (8) If an amount (the interest amount) by way of interest is awarded in respect of the amount recovered (the principal amount), the following apply: (a) if the principal amount was recovered by the insurer, the insurer is entitled to the interest amount; (b) if the principal amount was recovered by the insured, the insured is entitled to the interest amount; (c) if the principal amount was recovered by the insurer and the insured jointly, the interest amount is to be divided fairly between the insurer and the insured, having regard to: (i) the amounts to which the insurer and the insured are each entitled under subsection (5), (6) or (7), as the case requires; and (ii) the periods of time during which the insurer and the insured have lost the use of their money. Rights of insurer and insured are subject to contract and any agreement (9) The rights of the insurer and the insured under this section in respect of a loss are subject to:

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(5) If the amount recovered is less than the sum of the paragraph (2)(a) amount and the paragraph (3)(a) amount, the insurer and the insured are each entitled to a portion of the amount recovered, calculated on a pro rata basis in proportion to the paragraph (2)(a) amount and the paragraph (3)(a) amount.

s 67

Insurance Contracts Act 1984

[66.60]

(a) the relevant contract of insurance; and (b) any agreement made between the insurer and the insured after the loss occurred. Definitions (10) In this section: insured’s overall loss, in relation to a loss incurred by an insured to which this section applies, means the amount of the loss reduced by any amount paid to the insured by the insurer in respect of the loss. paragraph (2)(a) amount means the sum of the amounts referred to in subparagraphs (2)(a)(i) and (ii). paragraph (3)(a) amount means the sum of the amounts referred to in subparagraphs (3)(a)(i) and (ii). [S 67 subst Act 75 of 2013, s 3 and Sch 7 item 2]

Pre ICAA 2013 Amendment (pre 28 December 2013) 67

Rights with respect to moneys recovered under subrogation

(1) Where an insurer, in exercising a right of subrogation in respect of a loss, recovers an amount, the insured may recover that amount from the insurer. (2) Unless the contract expressly provides otherwise, the insured may not recover under subsection (1): (a) an amount greater than the amount (if any) by which the amount recovered by the insurer exceeds the amount paid to the insured by the insurer in relation to the loss; or (b) an amount that, together with the amount paid to the insured under the contract, is greater than the amount of the insured’s loss. (3) The rights of an insured and insurer under the preceding provisions of this section are subject to any agreement made between them after the loss occurred. (4) A reference in this section to an amount recovered by an insurer shall be construed as a reference to the amount so recovered less the administrative and legal costs incurred in connection with the recovery of the amount.

SECTION 67 COMMENTARY Background and synopsis .......................................................................

[67.10]

Contract of general insurance .................................................................

[67.20]

Application ...............................................................................................

[67.30]

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[67.10]

Pt VIII - Subrogation

s 67

[67.10] Background and synopsis Rights with respect to moneys recovered under subrogation – Pre 28 December 2013

Section 67 was repealed and replaced by a new s 67 by the Insurance Contracts Amendment Act 2013, with both the repeal and replacement having commenced on 28 December 2013. The replacement s 67 applies to a contract of general insurance originally entered into or renewed after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent). The repealed s 67 will continue to apply to a contract of insurance not entered into or renewed after this date.

As a general principle the ALRC noted that the exercise of rights of subrogation ought not be allowed to deprive the insured of a full indemnity. However, in some cases, an insurer may not be prepared to exercise its rights of subrogation unless it is entitled to retain a proportion of any amount recovered from the third party. Accordingly, the ALRC considered that its recommendation should not affect an agreement made after a loss has occurred where the insurer and insured agree to share any amount recovered from a third party: ALRC 20, at [301] and [302]. The ALRC provided an example as to the operation of the proposed cl 68 of the Bill (which became s 67) in the Notes to the Draft Insurance Contracts Bill 1982 as follows: A takes out travel insurance. While in Hong Kong he buys a watch for $500. The watch is negligently destroyed by a staff member of the hotel at which he is staying. He claims on his insurance and is paid $200, which is the insurer’s maximum liability in respect of watches, jewellery and other valuable items under the contract. The insurer then seeks to recover the loss from the hotel. The hotel agrees to pay the full value of the watch in Hong Kong currency. Owing to a change in the exchange rate that amount is equivalent to $A550. The insured is entitled to recover the balance of his loss from the insurer (that is, $500 – $200 = $300). The insurer is entitled to keep the remaining $200 plus the excess of $50.

The above example, although apparently mathematically incorrect so far as it concerns the “remaining $200”, illustrates the original intention behind s 67. It should be noted however that cl 68 of the Bill differed in some respects from the now repealed s 67. ©

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The ALRC in ALRC 20 reported on its consideration of the question that may arise when an insured’s right against a third party proves to be greater in value than the loss which was suffered. It recommended that provided the insured has recovered a full indemnity for her or his loss, the insurer should be entitled to retain any amount which it recovers in excess of the amount it has paid over to the insured.

s 67

Insurance Contracts Act 1984

[67.10]

Accordingly, the repealed s 67 provided for the apportionment of moneys recovered under subrogation between the insured and insurer. Where an insurer recovers an amount, the insured may recover that amount from the insurer: s 67(1). Unless the contract expressly provides otherwise, the insured may not recover from the insurer an amount that, when added to the amount recovered under the contract, exceeds the amount of the insured’s loss. Nor may the insured recover from the insurer a sum greater than the difference between the sum recovered by the insurer by exercising its rights of subrogation and the sum it has paid to the insured under the contract: s 67(2). This arrangement could be varied by agreement between the insurer and the insured after the loss has occurred: s 67(3). In calculating the amount it has recovered by subrogation, the insurer was entitled to deduct administrative and legal costs incurred in connection with the recovery: s 67(4). Rights with respect to moneys recovered under subrogation – Post 28 December 2013

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA considered the approach recommended by the ALRC as to rights with respect to moneys recovered under subrogation in its review of the Marine Insurance Act 1909 (Cth) (MIA). The ALRC reported on its review of the MIA in ALRC 91 which was tabled in 2001. The ALRC made a submission to the Review Panel based on its approach in ALRC 91. The Review Panel considered that the approach recommended by the ALRC would provide suitable solutions to the criticisms raised about the operation of s 67. The Review Panel recommended that s 67 be brought into harmony with the outcome of the review of the MIA on the same subject (see Final Report (June 2004), at [11.14]–[11.30]). Section 67 was repealed and replaced by a new s 67 by the Insurance Contracts Amendment Act 2013. The new s 67 contains rules for the division of proceeds from a recovery action largely in accordance with the approach recommended by the ALRC in ALRC 91. Section 67 is based on a number of principles concerning the priority of payment of recovered moneys. First, in relation to administrative and legal costs in the recovery, the party taking the recovery action should be entitled to reimbursement from any moneys recovered. If both parties contribute to those costs they should both be reimbursed (s 67(4)) and, if there is an insufficient recovery for a full recovery of those costs, the reimbursement is shared pro rata (s 67(5)). Secondly, there are three possibilities for distribution of remaining sums depending on who has funded the recovery action: 564

Mann’s Annotated Insurance Contracts Act

[67.10]

Pt VIII - Subrogation

s 67

• if the insurer funds the recovery action, it is entitled to an amount equal to the amount that it has paid to the insured under the contract of insurance. The insured is then entitled to any further amount necessary for it to ultimately recover from the insurer under the contract of insurance or the third party in the recovery action, or both in combination, the full amount of its loss (s 67(2)); • if the insured funds the recovery action, the order in the preceding paragraph is reversed. The insured is entitled to retain an amount so that the total that it receives from the recovery action and under the policy is equal to its total loss. The insurer is entitled at this point to an amount equal to the amount that it has paid to the insured under the policy (s 67(3)); or • if the recovery action is funded jointly by both the insurer and the insured, and there are insufficient funds to reimburse them in full, they are both entitled to the same amounts as referred to above as their first entitlement paid pro rata (s 67(5)).

Fourthly, any separate or identifiable component in respect of interest should be divided fairly between the parties, having regard to the amounts that each has recovered and the periods of time for which each party lost the use of their funds (s 67(8)). The rights of the insurer and insured (or third party beneficiary) under s 67 may be modified by the terms of the relevant contract of insurance and any agreement between them after the loss occurred (s 67(9)). The Review Panel also recommended that third party beneficiaries should have access to the provisions of the ICA to the extent that they would have the same rights and obligations as an insured for the purposes of subrogation (see Final Report (June 2004), at [10.2]–[10.6]). Section 64, which gives effect to the recommendation of the Review Panel, was inserted into the ICA by the Insurance Contracts Amendment Act 2013, having commenced on 28 December 2013. It provides that in this Part of the ICA (which includes s 67), a reference to an insured includes a reference to a third party beneficiary. “Third party beneficiary” is defined in s 11(1). The new s 67 by virtue of s 64, is to be read to include a reference to a third party beneficiary to a reference to an insured. Both the new s 67 and the inserted s 64 apply to a contract of general insurance originally entered into or renewed after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent). ©

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Thirdly, any excess or windfall recovery is then to be distributed to both parties in the same proportions as they contributed to the administrative and legal costs of the recovery action (s 67(7)).

s 68

Insurance Contracts Act 1984

[67.10]

[67.20] Contract of general insurance See s 11(6).

[67.30] Application Osborn JA (Vic Sup Ct) noted in Matthews v AusNet Electricity Services Pty Ltd [2014] VSC 663 (23 December 2014) that there were doubts as to how s 67, as worded before it was amended in 2013, fell to be applied in respect of a proposed settlement and distribution scheme in the context of a group proceeding before him for approval. There was a threshold question whether an insurer recovered a loss “in exercising a right of subrogation” under the pre-amendment s 67(1) in the context of a group proceeding. He found it unnecessary to examine this issue in detail. In agreeing that the proposed approach was reasonable and appropriate, he noted a number of matters. Amongst these matters Osborn JA noted that: • uncertainty attached to the interpretation of s 67 as it was prior to amendment and at the relevant date; • some of the uncertainty was sufficient to provoke criticism by the Review Panel in the Final Report (June 2004); • the application of s 67 to a particular case would on its face require the examination of the relevant insurance contract in each instance and an enquiry as to whether subsequent agreement had been reached between the parties to it; and • the proposal before him “may be thought to reflect the policy of the [amended – post 23 December 2013] form of s 67 of the Insurance Contracts Act 1984” (at [398]). 68

Contracts affecting rights of subrogation

(1) 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. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 item 40]

(2) The duty of disclosure does not require the insured to disclose the existence of a contract that so limits the insured’s rights. [S 68 am Act 107 of 1997]

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[68.10]

Pt VIII - Subrogation

s 68

SECTION 68 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. Duty of disclosure ....................................................................................

[68.10] [68.20] [68.30]

[68.10] Background and synopsis

The ALRC recommended that if an insurer wished to protect itself against the additional burden resulting from the loss of subrogation to “potential” rights, it should be required to insert a special term to that effect in its policies. Further, the ALRC recommended that insurers should be required to specifically notify this term to insured and should not be allowed to avoid this obligation by relying on the duty of disclosure: ALRC 20, at [308]. According to s 68 an insured is not to be regarded as being in breach of a contract of insurance simply because the insured enters into a contract containing an exclusion clause unless the insurer has clearly informed the insured of the effect of a relevant provision excluding or limiting the insurer’s liability before the contract was entered into: s 68(1). The insured is not in breach of her or his duty to disclose should the insured choose not to reveal the existence of such a contract to the insurer: s 68(2). An example as to the operation of the proposed cl 69 (which became s 68) was given by the ALRC in the Notes to the Draft Insurance Contracts Bill 1982 as follows: A arranges insurance over his household goods while they are being transported from Brisbane to Sydney. The contract of insurance contains a term by which A agrees not to enter into any contract which would have the effect of limiting the insurer’s rights of subrogation. The insurer did not specifically draw this term to the attention of A. The contract of carriage contains an exemption clause which excludes the carrier’s liability for any loss or damage, however caused. The goods are severely damaged when the truck carrying them is involved in an accident, which was caused by the negligence of the driver. The insurer would not be entitled to avoid the claim on the ground that A was in breach of his contract of insurance in entering into the contract of carriage. ©

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ICA ss 56-78

An insured may enter into contracts with third parties for the supply of goods or services which contain provisions limiting liability in the event, for example, of the third parties’ negligence. Such exclusion clauses affect an insurer’s right of subrogation. Prior to the ICA some insurers had inserted specific provisions dealing with this question in their contracts of insurance. However, in the absence of such a provision, the liability of the insurer depended on what terms a court would be willing to imply into a contract of insurance.

s 68

Insurance Contracts Act 1984

[68.10]

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA recommended that third party beneficiaries should have access to the provisions of the ICA to the extent that they would have the same rights and obligations as an insured for the purposes of subrogation (see Final Report (June 2004), at [10.2]–[10.6]). Section 64, which gives effect to the recommendation of the Review Panel, was inserted into the ICA by the Insurance Contracts Amendment Act 2013, having commenced on 28 December 2013. It provides that in this Part of the ICA (which includes s 68), a reference to an insured includes a reference to a third party beneficiary. “Third party beneficiary” is defined in s 11(1). The amendment to s 68 by virtue of s 64, to include a reference to a third party beneficiary to a reference to an insured, applies to a contract of general insurance originally entered into or renewed after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

[68.20] Contract of general insurance See s 11(6).

[68.30] Duty of disclosure See s 21.

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PART IX – INFORMATION, NOTICES AND REASONS 69

Giving of information to insureds

[Subs (1) am Act 65 of 1985, s 3 and Sch 1]

(1A) If: (a) an insured may, because of subsection (1), be informed orally of the matters referred to in subsection 22(1); and (b) the regulations prescribe a form of words to be used in giving the information orally; the information may be given using the prescribed form of words. [Subs (1A) insrt Act 35 of 1998, s 3 and Sch 1 item 81]

(2) Where, by reason of a provision of this Act: (a) information in relation to a contract of insurance is to be or may be given in writing to a person before the contract is entered into; and (b) it was not reasonably practicable for the information to be so given orally or in writing; the provision shall be deemed to have been complied with, and the information shall be deemed to have been given, if the information is given in writing within 14 days after the day on which the contract was entered into. [Subs (2) am Act 65 of 1985, s 3 and Sch 1]

(3) Where information as mentioned in subsection (1) or (2) is given in writing after the contract was entered into, but at a time later than 14 days after the day on which the contract was entered into: (a) the rights of a person other than the insurer in respect of a loss that occurred during the period commencing at the expiration of 14 days after the day on which the contract was entered into and ending at the time when the information was so given are the same as though the information had not been given; and

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(1) Where: (a) by reason of a provision of this Act, information in relation to a contract of insurance is to be or may be given in writing to a person before the contract is entered into; and (b) it is not reasonably practicable for the information to be so given in writing but it is reasonably practicable for it to be so given orally; the provision shall be deemed to have been complied with if: (c) the information is so given orally; and (d) the information is also given in writing within 14 days after the day on which the contract was entered into.

s 69

Insurance Contracts Act 1984

[69.20]

(b) the rights of a person other than the insurer in respect of a loss that occurred at any other time are the same as though the information had been given in writing before the contract was entered into. [Subs (3) am Act 65 of 1985, s 3 and Sch 1]

(4) Where: (a) by reason of this Act, information in relation to a contract of insurance is to be or may be given in writing by the insurer to a person before, or at the time when, the contract is entered into; (b) it is reasonably practicable for the information to be so given; and (c) the information is not so given, but is given in writing at a later time; the rights of a person other than the insurer in respect of a loss that occurred after the contract was entered into but before the information was given are the same as though the information had not been given. [Subs (4) insrt Act 168 of 1986, s 3 and Sch 1] [S 69 am Act 35 of 1998; Act 168 of 1986; Act 65 of 1985]

SECTION 69 COMMENTARY [69.20] Background and synopsis The ALRC recommended, as a general principle, that relevant information should be given to an insured in writing before a contract of insurance is entered into. Where that is not reasonably practicable, the ALRC recommended, as a general principle, that relevant information should be given to an insured orally before a contract of insurance is entered into. Further, where notice is not given before the contract is entered into it should be given in writing as soon as reasonably practicable thereafter. The ALRC recommended that any claim which arises after the time when notice in writing was reasonably practicable but before the written notice is actually given should be treated as if that notice had not been given: ALRC 20, at [45]. According to s 69 if it is not reasonably practicable for an insurer to give information in writing, before the contract is entered into, but it is reasonably practicable for the information to be given orally, the insurer is deemed to have complied with the ICA if it is given orally and written notice is given within 14 days after the day on which the contract was entered into: s 69(1). An oral disclosure notice may be more appropriate and is prescribed in the regulations. Thus insurers may give policy holders information in writing after a contract is entered into provided that the oral disclosure notice is given prior to concluding the contract (s 69(1A)): Explanatory Memorandum to the Insurance Laws Amendment Bill 1997 (H of R), cl 128. 570

Mann’s Annotated Insurance Contracts Act

[70.10]

Pt IX - Information, notices & reasons

s 70

Where a provision in the ICA stipulates that information must be given to the insured in writing but it is not reasonably practicable to give it either in writing or orally, then the provision is deemed to have been complied with and the information given, if the information is given in writing within 14 days after the day on which the contract was entered into: s 69(2). Once notice in writing has been given more than 14 days after the day on which the contract was entered into, the rights of a person other than the insurer in respect of a loss that occurred after the 14-day period and before the time at which the information was given are the same as though the information had not been given. The rights in respect of a loss that occurred at any other time are the same as though the information had been given in writing before the contract was entered into: s 69(3).

70

Notices to be given to life insureds in certain cases Where, by this Act, provision is made with respect to the giving of a notice or other document or information to an insured, then, in the case of an individual superannuation contract, a reference in the provision to the insured shall be read as a reference to the life insured. [S 70 am Act 75 of 2013, s 3 and Sch 2 item 2]

SECTION 70 COMMENTARY Background and synopsis ....................................................................... Individual superannuation contract .........................................................

[70.10] [70.20]

[70.10] Background and synopsis The ALRC noted that when insurance is arranged in connection with superannuation it is the trustee who is the insured, not the members of the scheme for whom cover is granted. Accordingly, notification to the insured would not bring the information to the attention of the members. In investigating solutions the ALRC was concerned about the possibility of substantial inconvenience in the case of group insurance. Accordingly, the ALRC recommended that notifications should continue to be given to the trustee in the case of group or “blanket” policies. In other cases, it was recommended that the insurer should be required to notify the member before the contract is entered into: ALRC 20, at [47]. ©

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Where information is to be given under the ICA before, or at the time when, a contract is entered into and it is reasonably practicable for the information to be given and that information is not given, the rights of a person other than the insurer in respect of loss after the contract was entered into but before the information was given are the same as though the information was not given: s 69(4).

s 71

Insurance Contracts Act 1984

[70.10]

According to s 70, notices, statements, information and so on as required by the ICA to be given to the insured are, in the case of an individual superannuation contract, to be given to the life insured, that is, the member of the relevant superannuation scheme for whom the insurance is taken out. The Review Panel commissioned by the Australian Government in September 2003 to review the ICA expressed support for the notion of updating the ICA to allow for communication by electronic means. The Review Panel recommended that the ICA be brought within the scope of the Electronic Transactions Act 2000 (Cth) (ETA), with consequential changes to the ICA to ensure consistency and to include any necessary safeguards (see Final Report (June 2004), at [2.13]–[2.18]). Following the recommendation of the Review Panel, the Electronic Transactions Regulations 2000 (Cth) were amended to remove the exemption so that communications under the ICA are subject to the ETA. Amendments were made to various provisions of the ICA by the Insurance Contracts Amendment Act 2013 in recognition of this change. Section 70 was amended by the Insurance Contracts Amendment Act 2013 to remove the reference to a “statement”, having commenced on 28 December 2013. The concept of a “statement” is covered by the term “notice or other document”. The amendment to s 70 applies to a notice or other document or information given to a person under the ICA after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

[70.20] Individual superannuation contract See s 11(4). 71

Agency

(1) A provision of this Act (other than subsection 58(2)) for or with respect to the giving of a notice or other document or information to an insured before a contract of insurance is entered into does not apply where the contract was arranged by an insurance broker, not being an insurance broker acting under a binder, as agent of the insured. [Subs (1) am Act 75 of 2013, s 3 and Sch 2 item 3; Act 168 of 1986, s 3 and Sch 1]

(2) Where: (a) a person who is not an insurance intermediary acted as agent of an insured in arranging a contract of insurance; and

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[71.20]

Pt IX - Information, notices & reasons

s 71

(b) the insurer gave that person a notice or other document or information as mentioned in this Act; the insurer shall be deemed to have given the notice, other document or information to the insured. [Subs (2) am Act 75 of 2013, s 3 and Sch 2 items 4 and 5]

(3) An insurance intermediary, other than an insurance broker who is not acting under a binder, shall, in relation to the giving of a notice or other document or information that, by this Act, is required or permitted to be given, be deemed to be the agent of the insurer and not of the insured. [Subs (3) am Act 75 of 2013, s 3 and Sch 2 item 6] [S 71 am Act 75 of 2013; Act 168 of 1986]

SECTION 71 COMMENTARY [71.20] [71.30] [71.40] [71.50] [71.60]

[71.20] Background and synopsis The ALRC considered that the principles of agency should apply to the giving and receiving of information. This would mean that a requirement for information to be given to an insured would be satisfied if it is given to an agent. The ALRC noted that a broker is under a duty to provide expert advice to the insured. Accordingly, where a broker is acting on behalf of an insured, an insurer should be relieved of its obligation to comply with information requirements. However, some agents are not necessarily agents of the insured. For instance, insurance intermediaries may be neither agents of the insured nor of insurers, for example, dealers and salespeople who sell insurance in connection with the supply of goods and services. These intermediaries are not experts on insurance and are not necessarily in a position to draw notices to the insured’s attention. Accordingly, the ALRC recommended that for the purpose of the giving of information intermediaries who are not brokers should be treated as agents of the relevant insurers. Further, legislation should make it clear that the term “broker” in this context does not include intermediaries who sell insurance in connection with the supply of goods or services: ALRC 20, at [46]. Section 71 sets out the principles of agency which apply to the giving of a notice, a statement or any other document or any information before a contract of insurance is entered into as required by the ICA (with the exception of notification of expiration under s 58(2)). These are: ©

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Background and synopsis ....................................................................... Insurance broker ...................................................................................... Binder ...................................................................................................... Insurance intermediary ............................................................................ Application ...............................................................................................

s 71

Insurance Contracts Act 1984

[71.20]

1. Where the contract of insurance is arranged for the insured by an insurance broker, as agent of the insured and the insurance broker is not acting under a binder, any provision requiring that the insured be given information will not apply: s 71(1). 2. Where the contract of insurance is arranged for the insured by a person who is not an insurance intermediary and who acts as the insured’s agent then the information given to that person will be deemed to have been given to the insured: s 71(2). 3. An insurance intermediary, other than a broker who is not acting under a binder is deemed, in relation to the giving of notice, to be the agent of insurer and not the insured: s 71(3). The ALRC provided examples to the operation of cl 72 (which became s 71) in the Notes to the Draft Insurance Contracts Bill 1982 as follows: (1) A buys a new car on credit. At the time of arranging the credit contract the finance company also arranges consumer credit insurance on A’s behalf. The finance company is paid a commission. A is not warned of his duty of disclosure. He innocently fails to tell the insurer or the finance company that he has not been well recently and has been to see a doctor several times, although the doctor has not been able to determine what is wrong. Two weeks later A is diagnosed as having glandular fever and is off work for 10 weeks. The insurance company seeks to avoid liability because of A’s breach of his duty of disclosure. The finance company is not an insurance broker (see the definition of “insurance broker” in [s 11(1)]). Hence, for the purposes of giving the information, it is treated as an agent of the insurer (see [s 71(3)] and the definition of “insurance intermediary” in [s 11(1)]). Therefore, A should have been warned of his duty of disclosure either the by the insurer or the finance company. Since he was not, the insurer cannot rely on A’s breach of duty to avoid the claim [s 22(3)]. (2) If the insurance was arranged by B, a friend of A, on A’s behalf, and B was warned of the duty of disclosure, the insurer would be entitled to reduce the claim in accordance with [s 28(3)].

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA expressed support for the notion of updating the ICA to allow for communication by electronic means. The Review Panel recommended that the ICA be brought within the scope of the Electronic Transactions Act 2000 (Cth) (ETA), with consequential changes to the ICA to ensure consistency and to include any necessary safeguards (see Final Report (June 2004), at [2.13]–[2.18]). Following the recommendation of the Review Panel, the Electronic Transactions Regulations 2000 (Cth) were amended to remove the exemption so that communications under the ICA are subject to the ETA. Amendments were made to various provisions of the ICA by the Insurance Contracts Amendment Act 2013 in recognition of this change. Section 71 was amended by the Insurance Contracts Amendment Act 2013 to remove the references to “statement”, wherever occurring, having 574

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[71.60]

Pt IX - Information, notices & reasons

s 72

commenced on 28 December 2013. The concept of a “statement” is covered by the term “notice or other document”. The amendments to s 71 applies to a notice or other document or information given to a person under the ICA after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

[71.30] Insurance broker See s 11(1).

[71.40] Binder See s 11(1).

[71.50] Insurance intermediary

[71.60] Application A broker had acted on behalf of the insured within the terms of s 71(1) and therefore s 44(1), which requires the notification of an average provision in a contract of insurance to the insured before it can be relied upon, had no application: Rocco Pezzano Pty Ltd v Unity Insurance Brokers Pty Ltd (1995) 8 ANZ Ins Cas 61-288 per Steytler J (WA Sup Ct). 71A Notices to be provided by insurer concerning certain kinds of insurance [Repealed] [S 71A rep Act 123 of 2001, s 3 and Sch 1 item 249; insrt Act 49 of 1994, s 3 and Sch item 11]

72 Content and other requirements for notices etc. to be given in writing A reference in this Act to the giving of a notice or other document or information to a person, in writing, is a reference to giving the person a notice or other document or information in writing that complies with the requirements (if any) prescribed as to: (a) the content and legibility of the notice, other document or information; and (b) the material that may accompany the notice, other document or information. [S 72 subst Act 75 of 2013, s 3 and Sch 2 item 7; am Act 107 of 1997, s 3 and Sch 8 item 41]

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See s 11(1).

s 72

Insurance Contracts Act 1984

[72.10]

Pre ICAA 2013 Amendment (pre 28 December 2013) 72

Legibility of writing

A reference in this Act to the giving of a notice, a statement or information to a person, in writing, is a reference to giving the person a notice, statement or information in writing that complies with the requirements, if any, prescribed as to the legibility of the notice, statement or information, as the case requires. [S 72 am Act 107 of 1997, s 3 and Sch 8 item 41]

SECTION 72 COMMENTARY Background ............................................................................................. Writing ......................................................................................................

[72.10] [72.20]

[72.10] Background The ALRC recommended that a standard of legibility should be prescribed by regulation. An appropriate standard might be based upon the ability of a person who has the minimum visual acuity required for obtaining a motor vehicle licence or, alternatively, by way of the prescription of either a suitable print size or both print size and the colour of paper. The ALRC recommended that a suitable standard should be determined in consultation with the insurance industry and consumer representatives. According to s 72 a reference in the ICA to the giving of a notice, a statement or information to a person, in writing, is a reference to the giving of the notice, statement or information as the case requires in compliance with any prescription as to legibility. There are currently no standards of legibility, for example, print size and type size, prescribed by the Regulations. The Review Panel commissioned by the Australian Government in September 2003 to review the ICA expressed support for the notion of updating the ICA to allow for communication by electronic means. The Review Panel recommended that the ICA be brought within the scope of the Electronic Transactions Act 2000 (Cth) (ETA), with consequential changes to the ICA to ensure consistency and to include any necessary safeguards (see Final Report (June 2004), at [2.13]–[2.18]). Following the recommendation of the Review Panel, the Electronic Transactions Regulations 2000 (Cth) were amended to remove the exemption so that communications under the ICA are subject to the ETA. 576

Mann’s Annotated Insurance Contracts Act

[72A.10]

Pt IX - Information, notices & reasons

s 72A

Amendments were made to various provisions of the ICA by the Insurance Contracts Amendment Act 2013 in recognition of this change. Section 72 was repealed and replaced with an expanded s 72 by the Insurance Contracts Amendment Act 2013, with both the repeal and replacement having commenced on 28 December 2013. The purpose of this expansion is so that the regulation-making power in s 72 may deal not only with the content and legibility of the notice or other document itself, but also with material that may accompany the notice or other document or information. The power is intended to permit the making of regulations to ensure that the content of the statutory notices under the ICA is able to be digested by the recipient without interruption or distraction by other material provided with the notice. The replacement s 72 applies to a notice or other document or information given to a person under the ICA after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent).

See s 11(1). 72A Method for giving written notices or documents A notice or other document that is required or permitted by this Act to be given to a person in writing may be given: (a) to a body corporate in any way in which documents may be served on the body corporate; or (b) to a natural person: (i) personally; or (ii) by post to that person at the person’s last-known address. Note: A notice or other document may also be given to a person by electronic communication in accordance with the Electronic Transactions Act 1999 and any regulations made under that Act. [S 72A insrt Act 75 of 2013, s 3 and Sch 2 item 7]

SECTION 72A COMMENTARY [72A.10] Background Section 72A replaced the repealed s 77. The new s 72A largely replicates the content of the repealed s 77. However the rule regarding the deemed giving of a notice of cancellation at the time it would have been delivered

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[72.20] Writing

s 73

Insurance Contracts Act 1984

[72A.10]

in the ordinary course of post previously in s 77(2) was removed. Section 29 of the Acts Interpretation Act 1901 (Cth) deals with that subject. Section 72A sets out the manner in which notices or other documents required or permitted to be given under the ICA may be given to a body corporate or a natural person (formerly s 77(1)). The Review Panel commissioned by the Australian Government in September 2003 to review the ICA expressed support for the notion of updating the ICA to allow for communication by electronic means by bringing the ICA within the scope of the Electronic Transactions Act 2000 (Cth) (ETA). The Electronic Transactions Regulations 2000 (Cth) were amended to remove an exemption so that communications under the ICA are subject to the ETA. The new s 72A was inserted into the ICA by the Insurance Contracts Amendment Act 2013, having commenced on 28 December 2013. Section 72A is not intended to affect the operation of s 71(1), which covers situations where insurance is arranged by brokers acting for insureds. A notice of cancellation is subject to ss 59 and 59A. Section 72A applies to a notice or other document or information given to a person under the ICA after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent). 73 Insurance arranged in connection with supply of goods and services [Repealed] [S 73 rep Act 123 of 2001, s 3 and Sch 1 item 249; am Act 49 of 1994; Act 168 of 1986; Act 76 of 1986; Act 65 of 1985]

SECTION 73 COMMENTARY [73.20] Background Section 73 concerned the requirement of a supplier arranging insurance in connection with the supply of goods or services to disclose to the insured the nature of any benefit received by the supplier. The section was repealed and the subject matter is dealt with in s 1440 of the Corporations Act 2001.

578

Mann’s Annotated Insurance Contracts Act

[74.15]

74

Pt IX - Information, notices & reasons

s 75

Policy documents to be supplied on request

(1) Where the insured under a contract of insurance so requests in writing given to the insurer, the insurer shall give to the insured a statement in writing that sets out all the provisions of the contract. Penalty: 300 penalty units. [Subs (1) am Act 49 of 1994, s 3 and Sch item 14]

(2) An insurer need not comply with the requirements of subsection (1) if the insurer has already given to the insured such a statement, whether as required by this Act or otherwise. Note: A defendant bears an evidential burden in relation to the matters in subsection (2), see subsection 13.3(3) of the Criminal Code. [Subs (2) am Act 117 of 2001, s 3 and Sch 3 item 12; Act 107 of 1997, s 3 and Sch 8 item 42] [S 74 am Act 117 of 2001; Act 107 of 1997; Act 49 of 1994]

[74.15] Background and synopsis The ALRC explored ways in which insurers were to be required to provide policy documents to insured: ALRC 20, at [33]. According to s 74 an insurer is required to give a copy of the provisions of a contract of insurance to an insured who makes a written request unless the insurer has already given the insured a copy. Failure to comply incurs a penalty. The evidential burden is borne by the defendant. 75

Reasons for cancellation etc. to be given

(1) Where an insurer: (a) does not accept an offer to enter into a contract of insurance; (b) cancels a contract of insurance; (c) indicates to the insured that the insurer does not propose to renew the insurance cover provided under a contract of insurance; or (d) by reason of some special risk relating to the insured or to the subject-matter of the contract, offers insurance cover to the insured on terms that are less advantageous to the insured than the terms that the insurer would otherwise offer; the insurer shall, if the insured so requests in writing given to the insurer, give to the insured a statement in writing setting out the insurer’s reasons for not accepting the offer, for cancelling the contract, for not renewing the insurance cover or for offering insurance cover on less advantageous terms, as the case may be.

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SECTION 74 COMMENTARY

s 75

Insurance Contracts Act 1984

[74.15]

Penalty: 300 penalty units. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 items 43 and 44; Act 49 of 1994, s 3 and Sch item 15]

(2) In relation to a contract of general insurance, if the state of health of the insured was the reason, or one of the reasons, that the insurer did not accept the offer, cancelled the contract, did not renew the insurance cover or offered insurance cover on less advantageous terms, as the case may be, the insurer may require the insured to inform the insurer in writing of the name of a legally qualified medical practitioner to whom the statement may be given on behalf of the insured and, where the statement is given to the medical practitioner so nominated, the insurer shall be taken to have complied with subsection (1) in relation to the request. (3) In relation to a contract of life insurance where the insured is not the life insured, subsection (1) does not apply if the state of health of the life insured was the only reason that the insurer did not accept the offer, cancelled the contract, did not renew the insurance cover or offered insurance cover on less advantageous terms, as the case may be. Note: A defendant bears an evidential burden in relation to the matters in subsection (3), see subsection 13.3(3) of the Criminal Code. [Subs (3) am Act 117 of 2001, s 3 and Sch 3 item 13]

(4) In relation to a contract of life insurance where the insured is not the life insured, a statement given under subsection (1) shall not include any reference to the state of health of the life insured. (5) Where an insurer: (a) does not accept an offer to enter into a contract of life insurance; (b) cancels such a contract; (c) indicates to the insured that the insurer does not propose to renew the insurance cover provided under such a contract; or (d) by reason of some special risk relating to the life insured, offers life insurance cover to the insured on terms that are less advantageous to the insured than the terms that the insurer would otherwise offer; the insurer shall, if the life insured so requests in writing given to the insurer, give to the life insured a statement in writing setting out the insurer’s reasons for not accepting the offer, for cancelling the contract, for not renewing the insurance cover or for offering life insurance cover on less advantageous terms, as the case may be, being reasons that relate to the state of health of the life insured. Penalty: 300 penalty units. [Subs (5) am Act 73 of 2008, s 3 and Sch 4 items 345–347; Act 49 of 1994, s 3 and Sch item 16]

(6) The insurer may require the life insured to inform the insurer in writing of the name of a legally qualified medical practitioner to whom the statement may be given on behalf of the life insured and, where the statement is given to the medical practitioner so nominated, the insurer shall be taken to have complied with subsection (5) in relation to the request. (7) It is a defence to a prosecution for an offence arising under this section if the insurer proves that compliance with this section would have unreasonably put at risk the interests of the insurer or of some other person.

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[75.15]

Pt IX - Information, notices & reasons

s 75

Note: A defendant bears a legal burden in relation to a matter mentioned in subsection (7), see section 13.4 of the Criminal Code. [Subs (7) am Act 117 of 2001, s 3 and Sch 3 item 14]

(8) [Repealed] [Subs (8) rep Act 20 of 1997, s 3 and Sch 2 item 6] [S 75 am Act 73 of 2008; Act 117 of 2001; Act 107 of 1997; Act 20 of 1997; Act 49 of 1994]

SECTION 75 COMMENTARY Background and synopsis .......................................................................

[75.15]

Contract of general insurance .................................................................

[75.20]

Contract of life insurance ........................................................................

[75.30]

The ALRC recognised that as a general rule insurers must be free to differentiate between risks. The decisions of insurers, however, can cause prejudice. Many proposal forms ask whether the insured has ever been refused cover and whether any insurer has ever cancelled or refused to renew a contract of insurance with the insured. These matters are treated as relevant to the proposed contract. The new insurer may seek the reasons behind the previous insurer’s action to which the insured would not be privy. The ALRC noted that developments in the area of public law supported the view that an insurer should be required to disclose reasons for refusing cover. Accordingly, it recommended that an insurer should be required, upon request by the insured, to give precise details of any reasons for refusing cover or for offering cover on special terms. An exception should be made where disclosure of the reasons might unreasonably put at risk the interests or safety of the insurer or some other person. Further, with life insurance it is only appropriate to require disclosure of medical information to an insured who is the life insured or the parent or guardian of a minor who is the life insured. It might not be appropriate for medical information to be disclosed to a life insured rather than her or his medical practitioner. The ALRC recommended that a life office should be entitled to refuse to make direct disclosure of information to a life insured and should be able to require the nomination of a medical practitioner to whom the disclosure should be made: ALRC 20, at [214]. According to s 75, on receiving a written request from the insured, an insurer is obliged to provide written reasons as to why it refused cover, cancelled the contract, failed to renew a contract or offered insurance on less advantageous terms than it would otherwise offer. Failure to comply incurs a penalty: s 75(1). ©

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[75.15] Background and synopsis

s 75

Insurance Contracts Act 1984

[75.15]

In relation to a contract of general insurance where the insured’s state of health was the reason for the insurer acting in the ways set out in s 75(1), the insurer is obliged to give reasons either to the insured or a medical practitioner: s 75(2). In relation to a contract of life insurance where the only reason for the insurer acting in the ways set out in s 75(1) is the life insured’s health and the insured is not the life insured, the insurer is not obliged to give any reasons to the insured: s 75(3). The evidential burden is borne by the defendant. In relation to a contract of life insurance where the insured is not the life insured, the insurer must not include any reference to the state of health of the life insured: s 75(4). In relation to a contract of life insurance, the life insured may request in writing that the insurer give written reasons for refusing cover, cancelling a contract, failing to renew a contract or offering insurance on less advantageous terms than the insurer would otherwise offer. Failure to comply incurs a penalty: s 75(5). The insurer has the option of giving those reasons either to the life insured or to a medical practitioner nominated by the life insured: s 75(6). An insurer does not have to comply with a request for reasons made under s 75 if it would substantially put at risk its interests or the interests of some other person. This is a defence to prosecution: s 75(7): Explanatory Memorandum, at [251]. The evidential burden is borne by the defendant.

[75.20] Contract of general insurance See s 11(6).

[75.30] Contract of life insurance See s 11(1). See also [11.30].

582

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PART X – MISCELLANEOUS 76

Contribution between insurers

(1) When 2 or more insurers are liable under separate contracts of general insurance to the same insured in respect of the same loss, the insured is, subject to subsection (2), entitled immediately to recover from any one or more of those insurers such amount as will, or such amounts as will in the aggregate, indemnify the insured fully in respect of the loss. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 item 45]

(3) Nothing in this section prejudices the rights of an insurer or insurers from whom the insured recovers an amount or amounts in accordance with this section to contribution from any other insurer liable in respect of the same loss. [S 76 am Act 107 of 1997]

SECTION 76 COMMENTARY Background and synopsis ....................................................................... Contract of general insurance ................................................................. Liable … to the same “insured” ...............................................................

[76.20] [76.30] [76.40]

[76.20] Background and synopsis The ALRC considered the question of contribution between insurers. It recommended that, in the absence of an agreement to the contrary between affected insurers, losses should be apportioned on the basis of equal independent liabilities: ALRC 20, at [296]. Accordingly, cl 77 of the Draft Insurance Contracts Bill provided for an apportionment of liability between insurers in respect of a loss. However, the focus of the draft provision changed substantially prior to becoming legislation. It focused on the insured recovering from any one or more of the insurers rather than the apportionment between insurers. Accordingly, s 76 applies where two or more insurers are liable under separate contracts of general insurance to the same insured in respect of the same loss. In such a case, the insured is entitled to recover the loss ©

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(2) Nothing in subsection (1) entitles an insured: (a) to recover from an insurer an amount that exceeds the sum insured under the contract between the insured and that insurer; or (b) to recover an amount that exceeds, or amounts that in the aggregate exceed, the amount of the loss.

s 76A

Insurance Contracts Act 1984

[76.20]

from any one or more of the insurers as is necessary to satisfy the loss but without prejudice to the rights of an insurer to contribution from another liable insurer. Section 76, when read in conjunction with s 45, ensures that an insured will receive prompt payment of a claim and will not be required to wait until insurers have decided issues of contribution amongst themselves: Explanatory Memorandum, at [257]–[258].

[76.30] Contract of general insurance See s 11(6).

[76.40] Liable … to the same “insured” The “insured” in s 76 can be a party to the contract of insurance or a claimant under s 48 of the ICA. The High Court contrasted s 45 with s 76 and concluded that the condition of entitlement of an “insured” under s 76 is the liability of the insurer, which may arise either from the contract of insurance or pursuant to s 48: Zurich Australian Insurance Ltd v Metals & Minerals Insurance Pte Ltd (2009) 240 CLR 391; 84 ALJR 70; 16 ANZ Ins Cas 61-829; [2009] HCA 50. French CJ, Gummow and Crennan JJ said (at [25]): Section 76 … confers an entitlement upon an insured to proceed against two or more insurers who “are liable under separate contracts of general insurance to the same insured in respect of the same loss”. The condition of entitlement is the liability of the insurer, which may arise as a matter of contract or pursuant to s 48. 76A Liability of directors and employees etc. [Repealed] [S 76A rep Act 180 of 2012, s 3 and Sch 6 item 22; insrt Act 49 of 1994, s 3 and Sch item 17]

SECTION 76A COMMENTARY [76A.20] Synopsis Prior to the repeal of s 76A in 2012, a director of a company, or an employee or agent, could be in contravention of the ICA and therefore guilty of an offence against the ICA, punishable by penalty subject to s 76A(2): s 76A(1). Section 76A(2) prescribed the penalty provisions applying to a director of a company or an individual who was an employee or agent of a company, who was guilty of an offence where the company was in contravention of the ICA. 584

Mann’s Annotated Insurance Contracts Act

[77.10]

Pt X - Miscellaneous

s 77

Section 76A(3) prescribed the penalty provisions applying where a company or corporation acted as the agent of an individual and in contravention of the ICA. 77

Giving notices [Repealed]

[S 77 rep Act 75 of 2013, s 3 and Sch 2 item 8; am Act 107 of 1997]

Pre ICAA 2013 Amendment (pre 28 December 2013) Giving notices

(1) A notice or other document that is by this Act required or permitted to be given may be given: (a) to a body corporate—in any way in which documents may be served on the body corporate; and (b) to a natural person: (i) personally; or (ii) by post to that person at the person’s last-known address. [Subs (1) am Act 107 of 1997, s 3 and Sch 8 item 46]

(2) If a notice of cancellation of a contract of insurance is given to an insured by post, the notice shall be deemed to have been given at the time at which it would have been delivered in the ordinary course of post unless the insured proves that, through no fault of the insured, the insured did not receive it. [Subs (2) am Act 107 of 1997, s 3 and Sch 8 item 47] [S 77 am Act 107 of 1997]

SECTION 77 COMMENTARY [77.10] Background and synopsis Section 77 was repealed and replaced by a new s 72A. The content of the repealed s 77 is largely replicated in the new s 72A. However, the rule regarding the deemed giving of a notice of cancellation at the time it would have been delivered in the ordinary course of post, previously in s 77(2), was removed. Section 29 of the Acts Interpretation Act 1901 (Cth) deals with that subject. Section 72A sets out the manner in which notices or other documents required or permitted to be given under the ICA may be given to a body corporate or a natural person (formerly s 77(1)). ©

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77

s 78

Insurance Contracts Act 1984

[77.10]

The Review Panel commissioned by the Australian Government in September 2003 to review the ICA expressed support for the notion of updating the ICA to allow for communication by electronic means by bringing the ICA within the scope of the Electronic Transactions Act 2000 (Cth) (ETA). The Electronic Transactions Regulations 2000 (Cth) were amended to remove an exemption so that communications under the ICA are subject to the ICA. Section 77 was repealed and the new s 72A was inserted into the ICA by the Insurance Contracts Amendment Act 2013, with both the repeal and insertion having commenced on 28 Decemeber 2013. Section 72A applies to a notice or other document or information given to a person under the ICA after 28 December 2013 (which is six months after the Insurance Contracts Amendment Act 2013 received Royal Assent). 78

Regulations The Governor-General may make regulations, not inconsistent with this Act, prescribing matters: (a) required or permitted by this Act to be prescribed; (b) necessary or convenient to be prescribed for carrying out or giving effect to this Act; or (c) amending the time limits provided for in sections 39, 58 and 69.

SECTION 78 COMMENTARY [78.10] Synopsis This is a standard clause empowering the Governor-General to make regulations for the purposes of the ICA.

586

Mann’s Annotated Insurance Contracts Act

INSURANCE CONTRACTS REGULATIONS 1985 PART 1 – PRELIMINARY 1 2 2A

Name of regulations..........................................................................593 Interpretation..................................................................................... 593 Definition of consumer credit insurance............................................596

PART 4 – DISCLOSURES AND MISREPRESENTATIONS DIVISION 1 – INSURED’S DUTY OF DISCLOSURE 2B 3 3A 3B

Eligible Duty of Duty of Duty of

contracts of insurance (Act, s21A(6)).................................. 597 disclosure—written notice.................................................... 597 disclosure—reminder notice.................................................598 disclosure—oral notice......................................................... 599

DIVISION 3 – REMEDIES FOR NON-DISCLOSURE AND MISREPRESENTATIONS BY INSURED 4

Prescribed rate of interest — subparagraph 30(2)(b)(i) of the Act........................................................................................... 599

4A 4B 4C

Application of Division.......................................................................599 What is a Key Facts Sheet?..............................................................599 Insurer’s obligation to provide Key Facts Sheet...............................600 ICR

DIVISION 4 – KEY FACTS SHEETS

PART 5 – THE CONTRACT—STANDARD COVER DIVISION 1 – MOTOR VEHICLE INSURANCE 5 6 7 8

Prescribed contracts......................................................................... 603 Prescribed events............................................................................. 603 Exclusions......................................................................................... 604 Minimum amounts.............................................................................606

DIVISION 2 – HOME BUILDINGS INSURANCE 9 10 11 12

Prescribed contracts......................................................................... 606 Prescribed events............................................................................. 606 Exclusions......................................................................................... 607 Minimum amounts.............................................................................609

DIVISION 3 – HOME CONTENTS INSURANCE 13 14

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Prescribed contracts......................................................................... 609 Prescribed events............................................................................. 609

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587

Insurance Contracts Regulations 1985 15 16

Exclusions......................................................................................... 610 Minimum amounts.............................................................................612

DIVISION 4 – SICKNESS AND ACCIDENT INSURANCE 17 18 19 20

Prescribed contracts......................................................................... 612 Prescribed events............................................................................. 613 Exclusions......................................................................................... 614 Minimum amounts.............................................................................615

DIVISION 5 – CONSUMER CREDIT INSURANCE 21 22 23 24

Prescribed contracts......................................................................... 616 Prescribed events............................................................................. 616 Exclusions......................................................................................... 617 Minimum amounts.............................................................................617

25 26 27 28

Prescribed contracts......................................................................... 618 Prescribed events............................................................................. 619 Exclusions......................................................................................... 619 Minimum amounts.............................................................................621

DIVISION 6 – TRAVEL INSURANCE

DIVISION 7 – LIMITS ON MINIMUM AMOUNTS 29

Limits on minimum amounts............................................................. 621

29A 29B 29C 29D

Definition for Division 8..................................................................... 621 Small businesses.............................................................................. 622 Prescribed contracts......................................................................... 622 Meaning of “flood” in prescribed contracts etc................................. 623

30

Classes of contracts of insurance in relation to which section 46 of the Act does not apply................................................ 625 Classes of contracts of insurance in relation to which section 53 of the Act does not apply................................................ 626 Rate of interest on withheld payment—section 57 of Act................ 627 Insurance for risks related to war and terrorism...............................628 Notices under S 71A (3) of the Act [Repealed]................................ 629 Notices under S 71A (5) of the Act [Repealed]................................ 629 Financial sector supervisory agencies (Act s. 11F) [Repealed]....... 629 Law enforcement agencies (Act, s. 11F) [Repealed]....................... 629 Overseas financial sector supervisory agencies (Act, s. 11F) [Repealed].................................................................... 629

DIVISION 8 – FLOOD INSURANCE

PART 10 – MISCELLANEOUS 31 32 33 34 35 36 37 38

PART 11 – TRANSITIONAL ARRANGEMENTS 40 41 42

Purpose of Part................................................................................. 631 Amendments made by Insurance Contracts Amendment Regulation 2012 (No. 1)............................................... 631 Amendments made by the Insurance Contracts Amendment Regulation 2014 (No. 1) [Expired]................................631

SCHEDULE 1 – WRITING TO INFORM OF DUTY OF DISCLOSURE – 588

Mann’s Annotated Insurance Contracts Act

Table of provisions Part 1

– Contracts of general insurance, other than eligible contracts............ 632

Part 2

– Contracts of life insurance.................................................................. 632

Part 3

– Eligible contracts of insurance............................................................ 633

Part 4

– Renewal of eligible contracts of insurance......................................... 633

SCHEDULE 1A – WRITING TO INFORM PERSONS TO BE INSURED BY OTHERS SCHEDULE 1B – WRITING TO REMIND OF DUTY OF DISCLOSURE – Part 1

– Contracts of general insurance...........................................................636

Part 2

– Contracts of life insurance.................................................................. 636

Part 3

– Eligible contracts of insurance............................................................ 636

SCHEDULE 2 – WORDS TO INFORM OF DUTY OF DISCLOSURE FOR ELIGIBLE CONTRACTS OF INSURANCE SCHEDULE 3 – KEY FACTS SHEETS – Home buildings insurance contract.................................................. 638 Home contents insurance contract................................................... 640

ICR

Form 1 Form 2

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Insurance Contracts Regulations 1985

Table of Amending Legislation Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Regulations 1985

162 of 1985

5 Jul 1985

1 Jan 1986 (Gaz 1985, No. S487)

This legislation has been amended as follows:

Amending legislation

Number

Date of gazettal/ assent/ registration

Insurance Contracts Regulations (Amendment) 1990

444 of 1990

21 Dec 1990

21 Dec 1990

Insurance Contracts Regulations (Amendment) 1994

327 of 1994

23 Sep 1994

R. 5: 22 Nov 1994 and remainder: 1 Oct 1994 (r. 1.1 and Gaz 1994, No. GN38)

Insurance Contracts Regulations (Amendment) 1996

304 of 1996

18 Dec 1996

18 Dec 1996

Insurance Contracts Regulations (Amendment) 1997

226 of 1997

27 Aug 1997

27 Aug 1997

Insurance Contracts Regulations (Amendment) 1997

238 of 1997

10 Sep 1997

10 Sep 1997

Insurance Contracts Regulations (Amendment) 1998

78 of 1998

5 May 1998

5 May 1998

Insurance Contracts Regulations (Amendment) 1998

195 of 1998

30 Jun 1998

1 Jul 1998

590

Date of commencement

Mann’s Annotated Insurance Contracts Act

Table of Amending Legislation

Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Regulations 1985

162 of 1985

5 Jul 1985

1 Jan 1986 (Gaz 1985, No. S487)

Amending legislation

Number

Date of gazettal/ assent/ registration

Insurance Contracts Amendment Regulations 1999 (No 1) 1999

191 of 1999

1 Sep 1999

1 Sep 1999

Insurance Contracts Amendment Regulations 2000 (No 1) 2000

118 of 2000

15 Jun 2000

Rr. 1–3 and Sch 1: 15 Jun 2000 and Sch 2: 1 Jul 2000 (r. 2(b))

Insurance Contracts Amendment Regulations 2002 (No 1) 2002

18 of 2002

21 Feb 2002

11 Mar 2002 (r. 2 and Gaz 2001, No. GN42)

Insurance Contracts Amendment Regulations 2002 (No 2) 2002

147 of 2002

27 Jun 2002

27 Jun 2002

Insurance Contracts Amendment Regulations 2002 (No 3) 2002

273 of 2002

15 Nov 2002

15 Nov 2002

Insurance Contracts Amendment Regulation 2012 (No 1)

116 of 2012

18 Jun 2012

Sch 1: 19 Jun 2012

Insurance Contracts Amendment Regulation 2012 (No 2)

250 of 2012

9 Nov 2014

Sch 1: 9 Nov 2014

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This legislation has been amended as follows:

Insurance Contracts Regulations 1985

Principal legislation

Number

Date of gazettal/ assent/ registration

Date of commencement

Insurance Contracts Regulations 1985

162 of 1985

5 Jul 1985

1 Jan 1986 (Gaz 1985, No. S487)

This legislation has been amended as follows:

Amending legislation

Number

Date of gazettal/ assent/ registration

Insurance Contracts Amendment Regulation 2015 (No 1)

50 of 2015

20 Apr 2015

592

Date of commencement Sch 1 items 1–4: 21 Apr 2015; Sch 2: 28 Dec 2015

Mann’s Annotated Insurance Contracts Act

Pt 1 – Preliminary

reg 2

PART 1 – PRELIMINARY [Former Pt I heading subst SLI 250 of 2012, reg 3 and Sch 1 item 1]

1

Name of regulations These regulations are the Insurance Contracts Regulations 1985.

[Reg 1 subst SR 191 of 1999, reg 3 and Sch 1 item 1]

2

Interpretation (1) In these Regulations, unless the contrary intention appears: accidental damage, in relation to a thing, means damage that occurs to the thing fortuitously in relation to the insured. accidental injury means an injury that occurs fortuitously to the insured person but does not include an injury that is caused by or results from a sickness or disease. contents, in relation to a residential building, means: (a) furniture, furnishings and carpets (whether fixed or unfixed); (b) household goods; (c) clothing and other personal effects; (d) any of the following: (i) a picture; (ii) a work of art; (iii) a fur; (iv) a piece of jewellery; (v) a gold or silver article; (vi) a document of any kind; (vii) a collection of any kind; the value of all of which at the time when the relevant contract of insurance is entered into does not exceed $500; and (e) swimming pools that are not fixtures, that are owned by the insured or by a member of the insured’s family ordinarily residing with the insured, but does not include an article or thing to which the expression residential building extends. eligible contract of insurance has the meaning given in regulation 2B.

[Def insrt SR 191 of 1999, reg 3 and Sch 1 item 2]

expropriation, in relation to property, means the lawful seizure, confiscation, nationalization or requisition of the property. home building means: (a) a building used principally and primarily as a place of residence; and

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the Act means the Insurance Contracts Act 1984.

reg 2

Insurance Contracts Regulations 1985

(b) out-buildings, fixtures and structural improvements used for domestic purposes, being purposes related to the use of the principal residence; on the site and, without limiting the generality of the expression, includes: (c) fixed wall coverings, fixed ceiling coverings and fixed floor coverings (other than carpets); (d) services (whether underground or not) that are the property of the insured or that the insured is liable to repair or replace or pay the cost of repairing and replacing; and (e) fences and gates wholly or partly on the site; but does not include: (f) a hotel; (g) a motel; (h) a boarding house; (j) a building that is in the course of construction; (k) a temporary building or structure or a demountable or moveable structure; (m) a caravan (whether fixed to the site or not); or (n) a building that is let or rented by the insured, as lessor, as a business and is not the principal residence of the insured. home buildings insurance contract means a contract referred to in regulation 9. [Def insrt SLI 250 of 2012, reg 3 and Sch 1 item 2]

home contents insurance contract means a contract referred to in regulation 13. [Def insrt SLI 250 of 2012, reg 3 and Sch 1 item 2]

insured person, in relation to a contract of insurance, means a person specified in the contract as a person in respect of whose death, sickness, disease, injury or unemployment insurance cover is provided under the contract. member of the insured person’s travelling party means a member of the family of the insured person, or a person specified in the contract of insurance, travelling or intending to travel with the insured person on the specified journey. motor vehicle means a vehicle that is designed: (a) to travel by road; (b) to use volatile spirit, steam, gas, oil, electricity or any other power (not being human power or animal power) as its principal means of propulsion; and (c) to carry passengers; and includes a motor cycle but does not include an omnibus or a tram or a motor vehicle the carrying capacity of which exceeds 2 tonnes. personal belongings means baggage and other personal effects (including tickets, credit cards, travellers cheques, travel documents and

594

Mann’s Annotated Insurance Contracts Act

Pt 1 – Preliminary

reg 2

passports) that accompany the insured person on the specified journey (whether acquired before or during the journey) or have been collected from the insured person by a carrier in order to be taken on the specified journey, but does not include: (a) currency notes, bank notes or coins; or (b) goods so taken that are intended for trade.

specified journey means a journey in relation to which insurance cover is provided by the relevant contract of insurance. warlike activities means invasion, act of foreign enemy, hostilities (whether war is declared or not), civil war, rebellion, revolution, insurrection, military or usurped power, looting, sacking or pillage following any of these. (2) Where a residential building is a part of a building that has been subdivided under a law of a State or Territory that relates to the subdivision of buildings into strata (however described), a reference in these Regulations to the contents of the residential building includes a reference to such of the fixtures and structural improvements in the part of the building as are not insured under a contract of insurance that provides insurance cover in respect of the destruction of, or damage occurring to, the building, being a contract under which the body corporate established by or under that law is the insured. (3) A reference in these Regulations to a period during which a person is disabled is a reference to a period specified in a certificate given by a duly qualified medical practitioner that certifies that the person is disabled during that period. [Reg 2 am SLI 250 of 2012; SR 191 of 1999]

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residential building means: (a) a building used principally and primarily as a place of residence; and (b) out-buildings used for domestic purposes, being purposes related to the use of the principal residence; on the site but does not include: (c) a hotel; (d) a motel; (e) a boarding house; (f) a building that is in the course of construction; (g) a temporary building or structure or a demountable or moveable structure; (h) a caravan (whether fixed to the site or not); or (j) a building that is let or rented by the insured, as lessor, as a business and is not the principal residence of the insured. site, in relation to a building, means the site specified in the relevant contract of insurance as the site on which the building is situated.

reg 2A

Insurance Contracts Regulations 1985

[202.20]

REGULATION 2 COMMENTARY [202.20] A building used principally and primarily as a place of residence A building of about 180 square metres in total, in which the insured resided, contained a room of about 50 square metres in which the business of a general store was conducted. The Full Court of SA Sup Ct (Comprising Mohr, Olsson and Debelle JJ) in Gray v Mercantile Mutual Insurance (Aust) Ltd (1994) 63 SASR 154; 119 FLR 140; (1995) 8 ANZ Ins Cas 61-241 determined that the building was used “principally and primarily as a place of residence” according to the definition in reg 2. Olsson J looked at the physical reality of the situation, the undisputed factual history, the intention of the insured and various subjective elements. He said that the incidental modest business did not gainsay the proposition that globally the building was the family home and that was its main function. Debelle J gave substantial weight to the intent of the use of the building as a residence and applied a “broad and commonsense approach”. 2A Definition of consumer credit insurance For the purposes of paragraph (b) of the definition of consumer credit insurance in subsection 11(1) of the Act, the class of contracts referred to in regulation 21 is identified as consumer credit insurance. Note: For the purposes of paragraph (a) of the definition of consumer credit insurance (a class of contracts declared to be a class of contracts to which Division 1 of Part V of the Act applies), see regulation 21. [Reg 2A insrt SR 327 of 1994, reg 3]

596

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[202.20]

Pt 4 – Disclosures & misrepresentations

reg 2B

PART 4 – DISCLOSURES AND MISREPRESENTATIONS [Pt 4 heading insrt SLI 250 of 2012, reg 3 and Sch 1 item 3]

Division 1 – Insured’s duty of disclosure [Div 1 heading insrt SLI 250 of 2012, reg 3 and Sch 1 item 3]

2B Eligible contracts of insurance (Act, s21A(6)) (1) A contract of insurance is an eligible contract of insurance if it: (a) is for new business; and (b) is wholly in a class of contracts that is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies. Note: The following regulations declare certain classes of insurance contracts for Division 1 of

(2) A contract of insurance is an eligible contract of insurance if: (a) it is not mentioned in subregulation (1); and (b) it is for new business; and (c) the insurer, before the contract is entered into, gives to the insured: (i) a written notice in accordance with the form set out in Part 3 of Schedule 1; or (ii) an oral notice in accordance with the words set out in Schedule 2; or (iii) a notice otherwise complying with subsection 22(1) of the Act clearly informing the insured of the general nature and effect of the duty of disclosure and the general nature and effect of section 21A of the Act. (3) However, a contract of insurance mentioned in subregulation (2) is not an eligible contract of insurance if: (a) the insurer gave the insured a notice mentioned in paragraph (2)(c) before 28 December 2015; and (b) the contract is subsequently renewed before 28 December 2016; and (c) before that renewal, the insurer gives the insured a notice under section 22 of the Act; and (d) in that notice, the insurer clearly indicates that contract of insurance is no longer an eligible contract of insurance. [Subreg (3) insrt SLI 50 of 2015, reg 4 and Sch 1 item 1] [Reg 2B am SLI 50 of 2015, reg 4 and Sch 2 item 1; subst SR 118 of 2000, reg 3 and Sch 1 item 1; insrt SR 191 of 1999, reg 3 and Sch 1 item 3]

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Part V of the Act: • regulation 5 (motor vehicle insurance) • regulation 9 (home buildings insurance) • regulation 13 (home contents insurance) • regulation 17 (sickness and accident insurance) • regulation 21 (consumer credit insurance) • regulation 25 (travel insurance)

reg 3

3

Insurance Contracts Regulations 1985

[203.10]

Duty of disclosure—written notice (1) This regulation is made for paragraph 22(4)(a) of the Act.

(2) The form of writing that may be used to inform an insured of the matters mentioned in subsection 22(1) of the Act is: (a) for a contract of general insurance other than an eligible contract or insurance—the form set out in Part 1 of Schedule 1; and (b) for a contract of life insurance—the form set out in Part 2 of Schedule 1; and (c) for the original entering into of an eligible contract of insurance—the form set out in Part 3 of Schedule 1; and (d) for the renewal of an eligible contract of insurance—the form set out in Part 4 of Schedule 1. (3) The form of writing that may be used to inform another person who may become a life insured of the matters mentioned in subsection 22(1) of the Act is set out in Schedule 1A (see subsection 22(2) of the Act). [Reg 3 subst SLI 50 of 2015, reg 4 and Sch 2 item 2; am SLI 50 of 2015; SR 118 of 2000; subst SR 191 of 1999, reg 3 and Sch 1 item 4; am SR 327 of 1994, reg 4]

REGULATION 3 COMMENTARY [203.10] Duty of disclosure form Schedule 1 of the Insurance Contracts Regulations 1985 contains prescribed written forms for various duties of disclosure notices. The prescribed forms are not mandatory but in deviating from a prescribed form an insurer would need to ensure that its notice “clearly informs” an insured of the matters in s 22(1). A duty of disclosure notice in a life insurance application form had significant differences when compared to the form prescribed in Sch 1 of the Insurance Contracts Regulations 1985. Ginnane J (Vic Sup Ct) found that the notice provided did not comply with s 22 because it did not clearly state the consequences of a failure to comply with the duty of disclosure: Montclare v MetLife Insurance Ltd (2015) 18 ANZ Ins Cas 62-070; [2015] VSC 306 (25 June 2015). 3A Duty of disclosure—reminder notice (1) This regulation is made for paragraph 22(4)(b) of the Act. (2) The form of writing that may be used to remind an insured of the matters mentioned in subsection 22(1) of the Act is: (a) for a contract of general insurance that is not an eligible contract of insurance—the form set out in Part 1 of Schedule 1B; and

598

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[203.10]

Pt 4 – Disclosures & misrepresentations

reg 4B

(b) for a contract of life insurance—the form set out in Part 2 of Schedule 1B; and (c) for an eligible contract of insurance—the form set out in Part 3 of Schedule 1B. [Reg 3A insrt SLI 50 of 2015, reg 4 and Sch 2 item 2]

3B Duty of disclosure—oral notice (1) This regulation is made for subregulation 69(1A) of the Act. (2) The words that may be used to inform an insured orally of the matters mentioned in subsection 22(1) of the Act for the original entering into of an eligible contract of insurance are set out in Schedule 2. [Reg 3B insrt SLI 50 of 2015, reg 4 and Sch 2 item 2]

Division 3 – Remedies for non-disclosure and misrepresentations by insured [Div 3 heading insrt SLI 250 of 2012, reg 3 and Sch 1 item 4]

4

Prescribed rate of interest — subparagraph 30(2)(b)(i) of the Act For the purposes of subparagraph 30(2)(b)(i) of the Act, the rate of 11 per cent per annum is prescribed.

Division 4– Key Facts Sheets [Div 4 insrt SLI 250 of 2012, reg 3 and Sch 1 item 5]

4A Application of Division

(2) Each of the following class of contracts of insurance is declared to be a class of contracts in relation to which Division 4 of Part IV of the Act applies: (a) a home buildings insurance contract; (b) a home contents insurance contract. (3) In this Division, a reference to a contract includes a reference to a proposed or possible contract. [Reg 4A insrt SLI 250 of 2012, reg 3 and Sch 1 item 5]

4B What is a Key Facts Sheet? (1) This regulation: (a) is made for section 33B of the Act; and (b) prescribes: (i) the information required to be contained in a Key Facts Sheet for a contract; and (ii) requirements that a Key Facts Sheet must comply with. (2) A Key Facts Sheet must: (a) contain the information, and be completed in the way, specified in the following form: (i) for a home buildings insurance contract—Form 1 in Schedule 3;

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(1) This regulation is made for section 33A of the Act.

reg 4B

Insurance Contracts Regulations 1985

[203.10]

(ii)

for a home contents insurance contract—Form 2 in Schedule 3; and (b) be A4 in size; and (c) be set out in Arial font, in the following sizes: (i) the heading at the top of the first page that starts with the words “KEY FACTS” must be in size 18 font; (ii) the word “STEP” must be in size 16 font; (iii) the number after the word “STEP” must be in size 48 font; (iv) the footnote after step 2 must be in size 8 font; (v) the rest of the document must be in size 10 font; and (d) be set out in the following colours, with sufficient contrast in the colours to allow the text to be easily read: (i) the headings, subheadings, and policy name, must be in blue type on a white background; (ii) the top box in step 2 must be in white type on a blue background; (iii) the remaining boxes in step 2 must alternate between black type on a white background, and black type on a light blue background; (iv) the box in step 3 must be in white type on a blue background; (v) the rest of the document must be in black type on a white background. [Reg 4B insrt SLI 250 of 2012, reg 3 and Sch 1 item 5]

4C Insurer’s obligation to provide Key Facts Sheet (1) This regulation: (a) is made for section 33C of the Act; and (b) prescribes: (i) the circumstances, and manner, in which an insurer must provide a Key Facts Sheet for a contract; and (ii) the circumstances in which an insurer may or must provide a Key Facts Sheet for a contract by electronic means; and (iii) exceptions to the requirement in subsection 33C(1) of the Act. (2) An insurer must provide a person (a consumer) with a Key Facts Sheet for a contract: (a) if the consumer requests information about the contract—as soon as reasonably practicable, but not later than 14 days, after the consumer first requests information about the contract; and (b) if the consumer enters into the contract with the insurer (other than by an agreement to extend or vary the contract or a reinstatement of the contract)—as soon as reasonably practicable, but not later than 14 days, after the consumer enters into the contract. (3) The insurer may provide the Key Facts Sheet by electronic means at the consumer’s request.

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[203.10]

Pt 4 – Disclosures & misrepresentations

reg 4C

(4) If an insurer has a website that is accessible by members of the public, the insurer must keep the most current copy of each Key Facts Sheet for a contract on the website, in a format that may be downloaded by members of the public. (5) An insurer is not required to provide a consumer with a Key Facts Sheet for a contract: (a) if: (i) the insurer has already provided the consumer with the Key Facts Sheet; and (ii) the Key Facts Sheet has not changed since then, other than a change to the date of the Key Facts Sheet; or (b) if: (i) the insurer believes, on reasonable grounds, that someone else has already provided the consumer with the Key Facts Sheet; and (ii) the Key Facts Sheet has not changed since then, other than a change to the date of the Key Facts Sheet; or (c) if the consumer: (i) requests information about the contract from an insurance broker; or (ii) enters into the contract through an insurance broker who is not acting as an agent of the insurer in relation to the contract; or (d) if the consumer does not provide the insurer with the consumer’s address (postal or electronic) to which the Key Facts Sheet is to be sent; or (e) if the consumer informs the insurer that the consumer does not want the Key Facts Sheet.

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[Reg 4C insrt SLI 250 of 2012, reg 3 and Sch 1 item 5]

601

[203.10]

Pt 5 – The contract — standard cover

reg 6

PART 5 – THE CONTRACT — STANDARD COVER [Former Pt II heading subst SLI 250 of 2012, reg 3 and Sch 1 item 6]

Division 1 – Motor vehicle insurance 5

Prescribed contracts The following class of contracts of insurance is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies, namely, contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of one or more of the following: (a) loss of, or damage to, a motor vehicle; (b) liability for loss of, or damage to, property caused by or resulting from impact of a motor vehicle with some other thing; where the insured or one of the insureds is a natural person. Prescribed events The following, except insofar as they are excluded by regulation 7, are declared to be prescribed events in relation to a contract referred to in regulation 5: (a) the occurrence within Australia of the destruction or, theft of, or accidental damage to, the motor vehicle specified in the contract; (b) the occurrence within Australia of accidental damage to, or the theft of: (i) a tool or appliance that is standard equipment for the motor vehicle specified in the contract; or (ii) an accessory that forms part of that motor vehicle; at a time when the tool, appliance or accessory is attached to or within the motor vehicle; (c) the insured or a person: (i) who, with the express or implied consent of the insured, was driving, using or in charge of the motor vehicle at the relevant time; or (ii) who, at the relevant time, was an authorized passenger in the motor vehicle or, if the motor vehicle is a motor cycle, who, at the relevant time, was an authorized passenger on the motor vehicle; incurring a liability (otherwise than under a contract) to pay compensation or damages in respect of loss of, or damage occurring to, property (not being the motor vehicle or a tool, appliance or accessory as mentioned in paragraph (b)) in Australia, being loss or damage that occurs as a result of the use of: (iii) the motor vehicle; or (iv) a trailer or caravan attached to the motor vehicle; (d) a person who, at the relevant time, was an employer, principal or partner of the insured, incurring a liability (otherwise than under a contract) as employer, principal or partner, respectively, to pay

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6

reg 6

Insurance Contracts Regulations 1985

[203.10]

compensation or damages in respect of loss of, or damage occurring to, property (not being the motor vehicle or a tool, appliance or accessory as mentioned in paragraph (b)) in Australia, being loss or damage that occurs as a result of the use of: (i) the motor vehicle; or (ii) a trailer or caravan attached to the motor vehicle. 7

604

Exclusions The following are excluded: (a) depreciation; (b) wear and tear, rust or corrosion; (c) structural failure or mechanical or electrical breakdown or failure; (d) the tyres of the motor vehicle being damaged by application of brakes or by road punctures, cuts or bursting; (e) destruction or damage, or the incurring of a liability as mentioned in paragraph 6(c) or (d), at a time when: (i) the motor vehicle is being used in, or tested in preparation for, racing, pacemaking, a reliability trial or a speed or hill-climbing test by the insured or by some other person with the express or implied consent of the insured; (ii) the motor vehicle, trailer or caravan is being used: (A) in an experiment, test, trial or demonstration; or (B) in the case of a motor vehicle, to tow some other vehicle; in connection with the motor trade by the insured or by some other person with the express or implied consent of the insured; (iii) the motor vehicle, trailer or caravan: (A) is let on hire by the insured as lessor; or (B) is being used in the course of the business of carrying passengers or goods for hire or reward by the insured or by some other person with the express or implied consent of the insured; (iv) the motor vehicle, trailer or caravan is in the possession of a person as part of the person’s stock in trade; (v) the motor vehicle, trailer or caravan is being used for an unlawful purpose by the insured or is being so used by some other person with the express or implied consent of the insured; (vi) the insured is driving the motor vehicle and is not authorized under the law in force in the State or Territory in which the motor vehicle is being driven, being a law with respect to the licensing of drivers of motor vehicles, to drive the motor vehicle; (vii) a person other than the insured: (A) is driving the motor vehicle with the express or implied consent of the insured; and

Mann’s Annotated Insurance Contracts Act

(f)

(g)

(h)

(j)

(k)

©

Pt 5 – The contract — standard cover

reg 7

(B) is not authorized under the law in force in the State or Territory in which the motor vehicle is being driven, being a law with respect to the licensing of drivers of motor vehicles, to drive the motor vehicle; and the insured knew or should reasonably have known, at the time when the consent was given or impliedly given, that that person was not so authorized; (viii) the insured is driving the motor vehicle and is under the influence of intoxicating liquor or of a drug; or (ix) a person other than the insured: (A) is driving the motor vehicle with the express or implied consent of the insured; and (B) is under the influence of intoxicating liquor or of a drug; and the insured knew or should reasonably have known, at the time when the consent was given or impliedly given, that that person was or was to be at the relevant time under that influence; destruction or damage, or the incurring of a liability as mentioned in paragraph 6(c) or (d), as a result of: (i) the expropriation of the motor vehicle, trailer or caravan; (ii) war or warlike activities; (iii) the use, existence or escape of nuclear weapons material, or ionizing radiation from, or contamination by radioactivity from, any nuclear fuel or nuclear waste from the combustion of nuclear fuel; or (iv) the unroadworthy or unsafe condition of the motor vehicle, caravan or trailer concerned, being a condition that was known to the insured, or should reasonably have been known to the insured, at the time of the occurrence of the loss or damage or the incurring of the liability; destruction or damage intentionally caused by, or a liability as mentioned in paragraph 6(c) or (d) intentionally incurred by, the insured or a person acting with the express or implied consent of the insured; destruction or damage occurring as a result of the insured failing to take steps that are, in the circumstances, reasonable for the security of the motor vehicle after accidental damage has occurred to it; the incurring of a liability as mentioned in paragraph 6(c) or (d) (whether to the insured or to some other person) in respect of damage to property that belongs to, or is in the custody of, the person so liable; the incurring of a liability as mentioned in paragraph 6(c) or (d) by a person other than the insured at a time when that person is driving the motor vehicle and:

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[203.10]

reg 7

Insurance Contracts Regulations 1985

[203.10]

(i)

is not authorized under the law in force in the State or Territory in which the motor vehicle is being driven, being a law with respect to the licensing of drivers of motor vehicles, to drive the motor vehicle; or (ii) is under the influence of intoxicating liquor or of a drug; (m) the incurring of a liability to pay compensation or damages in respect of loss or damage, where: (i) the loss or damage occurred as a result of the use of a trailer or caravan attached to the motor vehicle; and (ii) there were, at the time the loss or damage occurred, two or more trailers or caravans, or one or more trailers and one or more caravans, attached to the motor vehicle. 8

Minimum amounts

(1) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 5, being a claim arising out of an event referred to in paragraph 6(a) or (b), is declared to be the amount sufficient to indemnify the person who made the claim. (2) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 5, being a claim that arises out of an event referred to in paragraph 6(c) or (d), is declared to be the amount, not exceeding $5,000,000, sufficient to indemnify the person who made the claim in respect of his or her liability. (3) Where there is more than one such claim arising out of the same event, being an event referred to in paragraph 6(c) or (d), then, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made after the first of those claims has been made is declared to be the amount sufficient to indemnify the person who made the claim or the amount ascertained by subtracting from $5,000,000 the amount or the sum of the amounts, as the case may be, that the insurer has paid, or is liable to pay, in respect of the claim or claims arising out of that event that have already been made, whichever is the lesser.

Division 2 – Home buildings insurance 9

Prescribed contracts The following class of contracts of insurance is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies, namely, contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of destruction of or damage to a home building, where the insured or one of the insureds is a natural person.

606

Mann’s Annotated Insurance Contracts Act

[203.10]

Pt 5 – The contract — standard cover

reg 11

Prescribed events The following, except in so far as they are excluded by regulation 11, are declared to be prescribed events in relation to a contract referred to in regulation 9: (a) the destruction of, or damage occurring to, the home building on the site, being destruction or damage that is caused by or results from: (i) fire or explosion; (ii) lightning or thunderbolt; (iii) earthquake; (iv) theft, burglary or housebreaking or an attempt to commit theft, burglary or housebreaking; (v) a deliberate or intentional act; (vi) bursting, leaking, discharging or overflowing of fixed apparatus, fixed tanks or fixed pipes used to hold or carry liquid of any kind; (vii) riot or civil commotion; (viii) an action of a person acting maliciously; (ix) impact by or arising out of the use of a vehicle (including an aircraft or a water-borne craft); (x) impact by: (A) space debris or debris from an aircraft, rocket or satellite; (B) an animal (other than an animal kept on the site or a domestic animal); (C) a falling tree or part of a tree; or (D) a television or radio aerial that has broken or collapsed; or (xi) storm, tempest, flood (within the meaning given by regulation 29D), the action of the sea, high water, tsunami, erosion or land slide or subsidence; [Para (a) am SLI 116 of 2012, reg 3 and Sch 1 item 1]

(b) accidental damage that is breakage of any fixed glass, fixed shower base, fixed basin, fixed sink, fixed bath, fixed lavatory pan or fixed cistern; (c) loss by theft, burglary or housebreaking; (d) the insured or a member of the insured’s family ordinarily residing with the insured incurring a liability as owner or occupier of the home building to pay compensation or damages to some other person. [Reg 10 am SLI 116 of 2012]

11

Exclusions The following are excluded: (a) depreciation; (b) wear and tear, rust or corrosion; (c) the action of insects or vermin; (d) destruction or damage, or the incurring of a liability as mentioned in paragraph 10(d), as a result of:

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10

reg 11

(e)

(f)

(g)

(h) (j)

(k)

608

Insurance Contracts Regulations 1985

[203.10]

(i) the expropriation of the home building; (ii) war or warlike activities; (iii) the use, existence or escape of nuclear weapons material, or ionizing radiation from, or contamination by radioactivity from, any nuclear fuel or nuclear waste from the combustion of nuclear fuel; (iv) the use of the home building for the purposes of a business, trade or profession; or (v) tree lopping or felling by the insured or a person acting with the express or implied consent of the insured; or destruction or damage intentionally caused, or a liability as mentioned in paragraph 10(d) intentionally incurred, by: (i) the insured; or (ii) a member of the insured’s family ordinarily residing with the insured; or a person acting with the express or implied consent of any of them; where the home building is unoccupied and has been unoccupied for a continuous period of more than 60 days—destruction or damage occurring otherwise than as mentioned in subparagraph 10(a)(ii) or (iii) or (vii) to (xi) (inclusive), or the incurring of liability as mentioned in paragraph 10(d); destruction of, or damage occurring to: (i) a free-standing or retaining wall (whether or not part of the home building), or to a gate or fence, as a result of a storm or tempest; (ii) an electrical machine or apparatus as a result of the electric current therein; or (iii) any property as a result of it undergoing a process necessarily involving the application of heat; theft by a person ordinarily residing with the insured at the time of the theft; in the case of destruction or damage that is caused by or results from bursting, leaking, discharging or overflowing of fixed apparatus, fixed tanks or fixed pipes used to hold or carry liquid of any kind or impact by a television or radio aerial that has broken or collapsed—damage to the apparatus, tanks or pipes or the television or radio aerial, respectively; the incurring of a liability as mentioned in paragraph 10(d): (i) to the insured or a member of the insured’s family ordinarily residing with the insured; or (ii) as a result of: (A) the insured; or (B) a member of the insured’s family ordinarily residing with the insured; or a person acting with the express or implied consent of any of them, using a vehicle (including an aircraft or water-borne craft) on the site.

Mann’s Annotated Insurance Contracts Act

[203.10]

12

Pt 5 – The contract — standard cover

reg 14

Minimum amounts

(1) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 9, being a claim arising out of an event referred to in paragraph 10(a), (b) or (c), is declared to be the amount sufficient to indemnify the person who made the claim reduced, in respect of destruction or damage occurring as a result of and within 48 hours after an earthquake, by $200. (2) The amount declared by subregulation (1) to be the minimum amount in respect of a claim shall be taken to include the reasonable cost of: (a) identifying and locating the cause of destruction or damage concerned if it is necessary to do so to effect a repair; (b) demolition and removal of debris; and (c) emergency accommodation. (3) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 9, being a claim that arises out of an event referred to in paragraph 10(d), is declared to be the amount, not exceeding $2,000,000, sufficient to indemnify the person who made the claim in respect of his or her liability.

Division 3 – Home contents insurance 13

Prescribed contracts The following class of contracts of insurance is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies, namely, contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of loss of or damage to the contents of a residential building where the insured or one of the insureds is a natural person, but does not include a contract that provides insurance cover only or primarily in respect of specified personal effects. 14

Prescribed events The following, except in so far as they are excluded by regulation 15, are declared to be prescribed events in relation to a contract referred to in regulation 13: (a) destruction of, or damage occurring to, the contents of the residential building which is specified in the contract, at a time when they are in the residential building or on the site of the residential building, being destruction or damage that is caused by or results from:

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(4) Where there is more than one such claim arising out of the same event, being an event referred to in paragraph 10(d), then, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made after the first of those claims has been made is declared to be the amount sufficient to indemnify the person who made the claim or the amount ascertained by subtracting from $2,000,000 the amount or the sum of the amounts, as the case may be, that the insurer has paid, or is liable to pay, in respect of the claim or claims arising out of that event that have already been made, whichever is the lesser.

reg 14

Insurance Contracts Regulations 1985

[203.10]

(i) fire or explosion; (ii) lightning or thunderbolt; (iii) earthquake; (iv) theft, burglary or housebreaking or an attempt to commit theft, burglary or housebreaking; (v) a deliberate or intentional act; (vi) bursting, leaking, discharging or overflowing of fixed apparatus, fixed tanks or fixed pipes used to hold or carry liquid of any kind; (vii) riot or civil commotion; (viii) an action of a person acting maliciously; (ix) impact by or arising out of the use of a vehicle (including an aircraft or water-borne craft); (x) impact by: (A) space debris or debris from an aircraft, a rocket or a satellite; (B) an animal (other than an animal kept on the site or a domestic animal); (C) a falling tree or part of a tree; or (D) a television or radio aerial that has broken or collapsed; or (xi) storm, tempest, flood (within the meaning given by regulation 29D), the action of the sea, high water, tsunami, erosion or land slide or subsidence; [Para (a) am SLI 116 of 2012, reg 3 and Sch 1 item 2]

(b) accidental damage that is breakage of glass forming part of an item of furniture (including fixed or unfixed glass table tops), at a time when it is in the residential building or on the site of the residential building; (c) loss by theft, burglary or housebreaking of contents while in the residential building on the site; (d) where: (i) the insured is a tenant or lessee of the residential building; or (ii) the residential building is a unit (however described) created by the subdivision of strata (however described) in a building and the insured is the owner of the unit; the insured or a member of the insured’s family ordinarily residing with the insured incurring a liability as occupier of the home building to pay compensation or damages to some other person. [Reg 14 am SLI 116 of 2012]

610

Mann’s Annotated Insurance Contracts Act

[203.10]

reg 15

Exclusions The following are excluded: (a) depreciation; (b) wear and tear, rust or corrosion; (c) the action of insects or vermin; (d) destruction or damage, or the incurring of a liability as mentioned in paragraph 14(d), as a result of: (i) the expropriation of the contents; (ii) war or warlike activities; (iii) the use, existence or escape of nuclear weapons material, or ionizing radiation from, or contamination by radioactivity from, any nuclear fuel or nuclear waste from the combustion of nuclear fuel; (iv) the use of the residential building for the purposes of a business, trade or profession; or (v) tree lopping or felling by the insured or a person acting with the express or implied consent of the insured; (e) destruction or damage intentionally caused, or a liability as mentioned in paragraph 14(d) intentionally incurred, by: (i) the insured; or (ii) a member of the insured’s family ordinarily residing with the insured; or a person acting with the express or implied consent of any of them; (f) where the residential building is unoccupied and has been unoccupied for a continuous period of more than 60 days—destruction or damage occurring otherwise than as mentioned in subparagraph 14(a)(ii) or (iii) or (vii) to (ix) (inclusive), or the incurring of liability as mentioned in paragraph 14(d); (g) destruction of, or damage occurring to: (i) an electrical machine or apparatus as a result of the electric current in it; or (ii) any property as a result of it undergoing a process necessarily involving the application of heat; (h) accidental breakage of: (i) a television picture tube or screen; (ii) the picture tube or screen of an electronic visual display unit; (iii) a ceramic or glass cooking top of a stove; (iv) glass in a picture frame, a radio set or a clock; (j) theft by a person ordinarily residing with the insured at the time of the theft; (k) in the case of destruction or damage that is caused by or results from bursting, leaking, discharging or overflowing of fixed apparatus, fixed tanks or fixed pipes used to hold or carry liquid of any kind or impact

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2016 THOMSON REUTERS

611

ICR

15

Pt 5 – The contract — standard cover

reg 15

Insurance Contracts Regulations 1985

[203.10]

by a television or radio aerial that has broken or collapsed—damage to the apparatus, tanks or pipes or the television or radio aerial, respectively; (m) the incurring of a liability as mentioned in paragraph 14(d): (i) to the insured or a member of the insured’s family ordinarily residing with the insured; or (ii) as a result of: (A) the insured; or (B) a member of the insured’s family ordinarily residing with the insured; or a person acting with the express or implied consent of any of them, using a vehicle (including an aircraft or water-borne craft) on the site. 16

Minimum amounts

(1) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 13, being a claim arising out of an event referred to in paragraph 14(a), (b) or (c), is declared to be the amount sufficient to indemnify the person who made the claim, reduced, in the case of destruction or damage occurring as a result of an earthquake, by $200. (2) For the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 13, being a claim that arises out of an event referred to in paragraph 14(d), is declared to be the amount, not exceeding $2,000,000, sufficient to indemnify the person who made the claim in respect of his or her liability. (3) Where there is more than one such claim arising out of the same event, being an event referred to in paragraph 14(d), then, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made after the first of those claims has been made is declared to be the amount sufficient to indemnify the person who made the claim or the amount ascertained by subtracting from $2,000,000 the amount or the sum of the amounts, as the case may be, that the insurer has paid, or is liable to pay, in respect of the claim or claims arising out of that event that have already been made, whichever is the lesser.

Division 4 – Sickness and accident insurance 17

Prescribed contracts

The following class of contracts of insurance is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies, namely, contracts that provide insurance cover (whether the cover is limited or restricted in any way) in respect of the insured person contracting a sickness or disease or a specified sickness or disease or sustaining an injury or a specified injury, where the insured or one of the insureds is a natural person, other than: (a) a life policy within the meaning of the Life Insurance Act 1995; [Para (a) am SR 304 of 1996, reg 2]

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Mann’s Annotated Insurance Contracts Act

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Pt 5 – The contract — standard cover

reg 17

(b) a continuous disability insurance contract incorporated within a life policy within the meaning of the Life Insurance Act 1995; [Para (b) am SR 304 of 1996, reg 2]

(c)

sickness and accident policies which are guaranteed “renewable” at the option of the insured or where the insurer guarantees not to cancel the policy in response to a change in the risk where such a policy has been effected for a predetermined period of years in excess of one year; or (d) a contract that is included in a class of contracts that is declared by some other regulation to be a class of contracts in relation to which that Division applies. [Reg 17 am SR 304 of 1996]

REGULATION 17 COMMENTARY Life policy ................................................................................................. Guaranteed “renewable” or non-cancellable ...........................................

[217.10] [217.20]

[217.10] Life policy A policy of insurance which insures the payment of a monthly sum of money on disability with a provision that this payment might terminate on death is not a policy within the definition of a “Life policy” in the Life Insurance Act 1945: Ibrahim v Greater Pacific Life Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-330 per Brownie J NSW Sup Ct.

Brownie J (NSW Sup Ct) held that a sickness and accident policy was not subject to standard cover because each of the criteria in reg 17(c) was met: Ibrahim v Greater Pacific Life Insurance Co Ltd (1996) 9 ANZ Ins Cas 61-330. The policy was guaranteed “renewable” even though it did not contain the word “guarantee”. Brownie J said (at 76,669): The contract does not use the word “guarantee”, or any form of that word. It provides that the insured might, by paying the premium each year, keep the policy on foot until he was almost 55; it did not contain any mechanism by which the insurer could prevent the insured from keeping the policy on foot for this period, by reason of a change in the risk; and the policy was (subject to the insured continuing to pay the premiums) one effected for a predetermined period in excess of a year. In short, each of the criteria in Regulation 17(c) was met.

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ICR

[217.20] Guaranteed “renewable” or non-cancellable

reg 18

18

Insurance Contracts Regulations 1985

[217.20]

Prescribed events

The following, except in so far as they are excluded by regulation 19, are declared to be prescribed events in relation to a contract referred to in regulation 17: (a) where the contract provides insurance cover (whether the cover is limited or restricted in any way) in respect of the insured person contracting a specified sickness or disease: (i) the death of the insured person; or (ii) the total disablement of the insured person from carrying out all the normal duties of his or her usual occupation; being death or disablement that results from the insured person contracting that sickness or disease; (b) where the contract (not being a contract referred to in paragraph (a)) provides insurance cover (whether the cover is limited or restricted in any way) in respect of the insured person contracting a sickness or disease—the total disablement of the insured person from carrying out all the normal duties of his or her usual occupation, being disablement that results from the person contracting a sickness or disease; (c) the death of the insured person, or the total disablement of the insured person from carrying out all the normal duties of his or her usual occupation, as a result of the insured person sustaining an accidental injury, being death or disablement that occurs within 12 months after the insured person sustains the injury; (d) the partial disablement of the insured person from carrying out the normal duties of his or her usual occupation as a result of the insured person sustaining an accidental injury, being disablement that occurs within 12 months after the insured person sustains the injury. 19

614

Exclusions The following are excluded: (a) death or disablement that results from: (i) a deliberately self-inflicted injury; (ii) war or warlike activities; (iii) the use, existence or escape of nuclear weapons material, or ionizing radiation from, or contamination by radioactivity from, any nuclear fuel or nuclear waste from the combustion of nuclear fuel; (iv) the insured person: (A) being under the influence of intoxicating liquor or of a drug, other than a drug taken or administered by or in accordance with the advice of a duly qualified medical practitioner; (B) being addicted to intoxicating liquor or to a drug; (C) taking part in a riot or civil commotion;

Mann’s Annotated Insurance Contracts Act

[217.20]

Pt 5 – The contract — standard cover

reg 20

(D) acting maliciously; or (E) engaging in professional sporting activities; (b) death or disablement occurring at a time when the insured person is flying, or engaging in aerial activities, otherwise than as a passenger in an aircraft that is authorised to fly under a law that relates to the safety of aircraft. 20

Minimum amounts

(1) Where the insured has expressly agreed that no amount is to be payable under the contract of insurance in particular circumstances, then, for the purposes of this regulation, the contract shall be read as though it specified an amount to be payable in those circumstances. (2) Where a contract of insurance provides that an amount is payable by reference to a period other than a day, then, for the purposes of this regulation, the contract shall be read as though it specified as the daily amount an amount ascertained by dividing the amount payable for that period by the number of days in that period. (3) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 17, being a claim that arises as mentioned in Column 1 of the following Table, is declared to be the amount ascertained in accordance with Column 2 of the Table in relation to that claim, reduced by an amount equal to the amount so payable in respect of the first 14 days of the period during which the insured person is disabled. Table

©

Column 2

Description of claim

Minimum amount

1

A claim that arises out of the death of the insured person

The amount specified in the contract as the amount payable under the contract in respect of the death of the insured person or, where no amount is so specified, $25,000

2

A claim that arises out of the total disablement of the insured person

Where:

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Column 1

a daily amount is specified in the contract in respect of the total disablement of the insured person—that amount multiplied by the number of days during which the insured person is so disabled; or

615

reg 20

Insurance Contracts Regulations 1985

Column 1

Column 2

Description of claim

Minimum amount (b)

3

A claim that arises out of the partial disablement of the insured person

[217.20]

where no amount is so specified—an amount equal to the amount of income lost by the insured person by reason of the disablement

Where: (a)

a daily amount is specified in the contract in respect of the partial disablement of the insured person—that amount multiplied by the number of days during which the insured person is so disabled; or

(b)

where no amount is so specified—an amount equal to the amount of income lost by the insured person by reason of the disablement

Division 5 – Consumer credit insurance 21

Prescribed contracts

The following class of contracts of insurance is declared to be a class of contracts to which Division 1 of Part V of the Act applies, namely, contracts that provide insurance cover (whether the cover is limited or restricted in any way) in respect of: (a) the death of the insured; or (b) the insured: (i) contracting a sickness or disease; (ii) sustaining an injury; or (iii) becoming unemployed; where: (c) the insured or one of the insureds is a natural person; and (d) the amount of the liability of the insurer under the contract is to be ascertained by reference to a liability of the insured under a specified agreement to which the insured is a party. [Reg 21 am SR 327 of 1994, reg 5]

616

Mann’s Annotated Insurance Contracts Act

[217.20]

Pt 5 – The contract — standard cover

reg 23

Prescribed events The following, except in so far as they are excluded by regulation 23, are declared to be prescribed events in relation to a contract referred to in regulation 21: (a) the total disablement of the insured person from carrying out all the normal duties of his or her usual occupation as a result of the insured person contracting a sickness or disease, being disablement that occurs within 12 months after the insured person contracted the sickness or disease; (b) the death of the insured person, or the total disablement of the insured person from carrying out all the normal duties of his or her usual occupation, as a result of the insured person sustaining an accidental injury, being death or disablement that occurs within 12 months after the insured person sustains the injury; (c) the insured person becoming unemployed. 23

©

Exclusions The following are excluded: (a) death, disablement or unemployment resulting from: (i) a deliberately self-inflicted injury; (ii) war or warlike activities; (iii) expropriation of any property; (iv) the use, existence or escape of nuclear weapons material, or ionizing radiation from, or contamination by radioactivity from, any nuclear fuel or nuclear waste from the combustion of nuclear fuel; or (v) the insured person: (A) being under the influence of intoxicating liquor or of a drug, other than a drug taken or administered by or in accordance with the advice of a duly qualified medical practitioner; (B) being addicted to intoxicating liquor or to a drug; (C) taking part in a riot or civil commotion; (D) acting maliciously; or (E) engaging in professional sporting activities; (b) death or disablement occurring at a time when the insured person is flying, or engaging in aerial activities, otherwise than as a passenger in an aircraft that is authorised to fly under a law that relates to the safety of aircraft; (c) the insured person becoming voluntarily unemployed; (d) where the insured person is employed for a specified period or by reference to specified work—the insured person becoming unemployed at the expiration of the period or on the completion of the work.

2016 THOMSON REUTERS

617

ICR

22

reg 24

24

Insurance Contracts Regulations 1985

[217.20]

Minimum amounts

(1) A reference in this regulation to the amount falling due under an agreement in respect of a day is a reference to the amount ascertained by dividing the amount of the payment that next falls due after that day under the agreement (excluding any arrears) by the number of days in the period commencing on the day on which the immediately previous payment under the agreement fell due and ending on the day on which that next payment falls due. (2) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 21, being a claim that arises as mentioned in Column 1 of the following Table, is declared to be the amount ascertained in accordance with Column 2 of the Table in relation to that claim, reduced by an amount equal to the amount so payable in respect of the first 14 days of the period during which the insured person is disabled. Table Column 1

Column 2

Description of claim

Minimum amount

1

A claim that arises out of the death of the insured person

The amount due at the date of death (excluding any arrears) under the agreement specified in the contract

2

A claim that arises out of the total disablement of the insured person

The sum of the amounts falling due under the agreement specified in the contract in respect of each day during the period during which the insured person is so disabled

3

A claim that arises out of the insured person becoming unemployed

The sum of the amounts falling due under the agreement specified in the contract in respect of each day during the period during which the insured person is unemployed

Division 6 – Travel insurance 25

Prescribed contracts

The following class of contracts of insurance is declared to be a class of contracts in relation to which Division 1 of Part V of the Act applies, namely, contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of one or more of the following: (a) financial loss in respect of: (i) fares for any form of transport to be used; or

618

Mann’s Annotated Insurance Contracts Act

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Pt 5 – The contract — standard cover

reg 27

(ii) accommodation to be used; in the course of the specified journey in the event that the insured person does not commence or complete the specified journey; (b) loss of or damage to personal belongings that occurs while the insured person is on the specified journey; (c) a sickness or disease contracted or an injury sustained by the insured person while on the specified journey; where the insured or one of the insureds is a natural person. Prescribed events The following, except in so far as they are excluded by regulation 27, are declared to be prescribed events in relation to a contract referred to in regulation 25: (a) financial loss on account of: (i) fares for any form of transport to be used; or (ii) accommodation to be used; in the course of the specified journey in the event that the insured person or a member of the insured person’s travelling party, through unforeseen circumstances beyond the control of the insured person or member, respectively, cannot reasonably be expected to commence or complete the journey; (b) loss of or damage occurring to personal belongings of the insured person during the course of the specified journey; (c) the death of the insured person or a member of the insured’s travelling party while on the specified journey; (d) the insured person or a member of the insured’s travelling party contracting a sickness or disease or sustaining an injury while on the specified journey. 27

©

Exclusions The following are excluded: (a) financial loss, loss of or damage to personal belongings or death, sickness or injury, occurring as a result of: (i) war or warlike activities; (ii) expropriation of any thing; (iii) the use, existence or escape of nuclear weapons material, or ionizing radiation from, or contamination by radioactivity from, any nuclear fuel or nuclear waste from the combustion of nuclear fuel; or (iv) the insured person or a member of the insured person’s travelling party: (A) being under the influence of intoxicating liquor or of a drug, other than a drug taken or administered by or in accordance with the advice of a duly qualified medical practitioner; (B) being addicted to intoxicating liquor or to a drug;

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ICR

26

reg 27

(b)

(c)

(d)

(e)

(f)

(g)

620

Insurance Contracts Regulations 1985

[217.20]

(C) taking part in a riot or civil commotion; (D) acting maliciously; or (E) engaging in professional sporting activities; financial loss, loss of or damage to personal belongings or death, sickness or injury, intentionally caused by: (i) the insured person; or (ii) a member of the insured person’s travelling party; or by a person acting with the express or implied consent of any of them; financial loss as a result of: (i) the insured person failing to commence or complete the journey: (A) for financial, business or contractual reasons, being reasons related to the insured person or to a member of the insured person’s travelling party; or (B) because of a sickness, disease or disability to which a person was subject at any time during the period of six months before the contract was entered into and continues to be subject to after that time; (ii) the insured person or a member of the insured person’s travelling party being disinclined to travel; or (iii) contravention of, or failure to comply with, a law (including the law of a foreign country) by the insured person or a member of the insured person’s travelling party; loss of or damage occurring to personal belongings as a result of: (i) depreciation; (ii) wear and tear, mildew, rust or corrosion; (iii) the action of insects or vermin; (iv) mechanical or electrical breakdown or failure of the personal belongings; (v) the personal belongings being cleaned, dyed, altered or repaired; or (vi) in the case of personal belongings that are fragile or brittle — the negligence of the insured; death occurring or injury sustained as a result of a sickness or disability to which the person concerned was subject at any time during the period of 6 months before the contract was entered into and continues to be subject to after that time; death occurring or injury sustained at a time when the person concerned is flying, or engaging in aerial activities, otherwise than as a passenger in an aircraft that is authorised to fly under a law that relates to the safety of aircraft; the insured person or a member of the insured’s travelling party sustaining a deliberately self-inflicted injury.

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[217.20]

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reg 29A

Minimum amounts

(1) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 25, being a claim that arises out of an event referred to in paragraph 26(a) or (b), is declared to be the amount sufficient to indemnify the person who made the claim in respect of his or her loss or damage. (2) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 25, being a claim that arises out of an event referred to in paragraph 26(c), is declared to be the amount sufficient to indemnify the person who made the claim in respect of the reasonable cost of: (a) the funeral or cremation; or (b) transporting the remains of the deceased person to the deceased’s former place of residence. (3) Subject to these Regulations, for the purposes of section 34 of the Act, the minimum amount in respect of a claim made under a contract referred to in regulation 25, being a claim that arises out of an event referred to in paragraph 26(d), is declared to be the amount sufficient to indemnify the person who made the claim in respect of the reasonable cost of: (a) medical, surgical, hospital, ambulance and nursing home charges; and (b) other medical treatment; incurred during the specified journey as a result of the sickness, disease or injury.

Division 7 – Limits on minimum amounts Limits on minimum amounts

Where the insured knew, or a reasonable person in the circumstances would have known, that a particular amount is the maximum amount that would be payable by the insurer under the contract of insurance whatever the circumstances, then, in relation to a claim under that contract, the minimum amount for the purposes of section 34 of the Act shall be the first-mentioned amount or the amount declared by the relevant provision of these Regulations to be the minimum amount in respect of the claim, whichever is the less.

Division 8 – Flood Insurance [Div 8 insrt SLI 116 of 2012, reg 3 and Sch 1 item 3]

29A Definition for Division 8 In this Division: strata title residence means a residence to which the following apply: (a) the portion of land on which the residence is located exists as the result of the subdivision of the title to a larger portion of land into separate titles for use for residential purposes; (b) property that is common between the residence and one or more other portions of land is managed by a single body corporate (however described);

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621

ICR

29

reg 29A

Insurance Contracts Regulations 1985 Example:

(c)

[217.20]

An “owners corporation”.

the title to the portion of land on which the residence is located is regulated under the law of the State or Territory in which the land is located as a “strata title”, a “community title” or another description that refers to the title being created as described in paragraphs (a) and (b).

[Reg 29A insrt SLI 116 of 2012, reg 3 and Sch 1 item 3]

29B Small businesses (1) This regulation explains whether a business is a small business for this Division. (2) If the business has operated in the last completed financial year, and its turnover in the last completed financial year is known, the business is a small business if: (a) its turnover in the last completed financial year was less than $1 000 000; and (b) the total number of hours worked each week by the employees of the business is no more than 190 hours (whether or not the employees are employed on a full-time, part-time or casual basis). Note: 190 hours is the equivalent of 5 employees each working a 38 hour week.

(3) If: (a) the business did not operate in the last completed financial year; or (b) the turnover of the business in the last completed financial year is unknown; the business is a small business only if the number of hours worked each week by the employees of the business is no more than 190 hours (whether or not the employees are employed on a full-time, part-time or casual basis). Note: 190 hours is the equivalent of 5 employees each working a 38 hour week. [Reg 29B insrt SLI 116 of 2012, reg 3 and Sch 1 item 3]

29C Prescribed contracts (1) For section 37A of the Act, the following classes of contracts of insurance are declared to be classes of contracts in relation to which Division 1A of Part V of the Act applies: (a) home building insurance contracts described in regulation 9; (b) home contents insurance contracts described in regulation 13; (c) insurance contracts that combine home building insurance and home contents insurance; (d) contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of destruction of or damage to a strata title residence; (e) contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of the loss of the equipment, stock, inventory or premises of a small business; (f) contracts that provide insurance cover (whether or not the cover is limited or restricted in any way) in respect of damage to the equipment, stock, inventory or premises of a small business.

622

Mann’s Annotated Insurance Contracts Act

[217.20]

Pt 5 – The contract — standard cover

reg 29D

Note: Division 1A of Part V of the Act refers to these contracts as prescribed contracts.

(2) However, subregulation (1) does not apply to a contract that is arranged by an insurance broker who is acting as an agent of the insured. [Subreg (2) subst SLI 250 of 2012, reg 3 and Sch 1 item 7] [Reg 29C am SLI 250 of 2012; insrt SLI 116 of 2012, reg 3 and Sch 1 item 3]

29D Meaning of “flood” in prescribed contracts etc (1) For paragraph 37B(2)(a) of the Act, the word “flood” means the covering of normally dry land by water that has escaped or been released from the normal confines of any of the following: (a) a lake (whether or not it has been altered or modified); (b) a river (whether or not it has been altered or modified); (c) a creek (whether or not it has been altered or modified); (d) another natural watercourse (whether or not it has been altered or modified); (e) a reservoir; (f) a canal; (g) a dam. Note: Under subsection 37B(3) of the Act, the meaning of “flood” set out in subregulation (1) will apply in the prescribed contract even if the meaning of the word provided by the prescribed contract (or by a notice or other document or information given by the insurer in relation to the

(2) For the purposes of entering into a contract that provides insurance cover (whether or not the cover is limited or restricted in any way) in respect of loss caused to a business, if an insurer proposes to: (a) use the word “flood” in the contract; and (b) give the word a meaning other than the meaning set out in subregulation (1); the insurer must take reasonable steps to ensure that the contract is not a prescribed contract in respect of loss caused to a business that would, at that time, be a small business. Note: The insurer is likely to rely on information provided by the insured to assess whether the business is a small business. The provision of false or misleading information is a serious matter.

(3) Subregulation (2) does not apply to: (a) the making of an agreement to renew, extend or vary the contract; or (b) the reinstatement of any previous contract of insurance. Note: See subsection 11(9) of the Act. [Reg 29D insrt SLI 116 of 2012, reg 3 and Sch 1 item 3]

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prescribed contract) is different from the meaning set out in subregulation (1).

[230.10]

Pt 10 – Miscellaneous

reg 30

PART 10 – MISCELLANEOUS [Former Pt III heading subst SLI 250 of 2012, reg 3 and Sch 1 item 8]

30 Classes of contracts of insurance in relation to which section 46 of the Act does not apply For the purposes of section 46 of the Act, each of the following classes of contracts is declared to be a class of contracts in relation to which that section does not apply: (a) contracts of insurance commonly known as construction risks insurance contracts; (b) contracts of insurance commonly known as industrial special risks insurance contracts or commercial risks insurance contracts; (c) contracts of insurance under which the insurer agrees to indemnify the insured, in relation to a business undertaking, against loss resulting from a breakdown of, or malfunction in, machinery (including electronic equipment) or plant of the insured, being: (a) loss in respect of the repair or replacement of that machinery or plant; or (b) any further loss resulting from that breakdown or malfunction; or both, but not against any other loss; (d) contracts of insurance commonly known as products liability insurance contracts; (e) contracts of insurance commonly known as “broad form” accidental loss and damage insurance contracts.

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REGULATION 30 COMMENTARY [230.10] “Broad form” accidental loss and damage insurance contracts Under reg 30(e), contracts of insurance commonly known as “broad form” accidental loss and damage insurance contracts, are a class of contracts to which s 46 does not apply. There is no generally accepted definition as to what constitutes a “broad form” accidental loss and damage insurance contract. However, insurance contracts which combine product liability cover and public liability cover (and sometimes but far less frequently professional liability cover) are commonly referred to as broadform liability policies. Arguably “broad form” contracts in reg 30(e) can be equated with broadform liability policies to the extent that the latter contain product liability cover. Under reg 30(d) products liability contracts are a class of contracts to which s 46 does not apply. It was thought reasonable for insurers to be able to exclude liability for existing defects under certain classes of commercial insurance (Explanatory ©

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Memorandum at [151]) and products liability was one such class of insurance as is evident from reg 30(d). In Zhang v Popovic [2016] NSWSC 407 (12 April 2016) Adamson J was not persuaded that a Fleet Motor policy was a “broad form” policy within the meaning of reg 30. Accordingly, s 46 was not excluded under reg 30. Reference was made to Sutton, Insurance Law in Australia, 3rd ed, LawBook Co. at [9.24], which contains following description under the heading “Industrial Special Risks Policies” and “Broadform Policies”: It is becoming an increasingly common practice for firms and corporations in a substantial way of business to have special forms of policies which have been specially negotiated on their behalf by insurance brokers and which are tailored to meet their particular requirements. These policies provide cover for a variety of risks such as loss or damage to buildings and property; burglary and loss of money insurance; personal injury (widely defined) to officers and other employees of the assured; public liability; products liability; consequential loss through business interruption following on property damage; fidelity guarantee; loss of or damage to electronic equipment; and machinery/boiler insurance. The certificate of insurance lists the parties, the period of insurance, the maximum liability and any excess (or “deductibles”) payable by the assured in each section, a brief description of the property insured and the amount of the premium, while the schedule attached to the certificate provides full details of the cover. There are general conditions and general exclusions covering the whole of the various types of insurance (with the frequent inclusion of a waiver of subrogation rights against directors or employees of the assured), and these are supplemented by special clauses applicable only to a particular type of risk.

Adamson J did not find submissions on what amounts to a “broadform” policy or a “broad form” policy (there being a contention by the insurer that there is a distinction between the use of one word in the texts and two words in reg 30) particularly helpful. As to a proposition that one can recognise a “broad form” policy from common experience, Adamson J noted that this appeared to be undermined by the fact that it was an issue in the case. She observed that although the Fleet Motor policy “purports to cover a number of risks it would not appear to meet the description in the 3rd edition of Sutton, Insurance Law in Australia, set out above since the risks, although various, relate largely, if not exclusively, to motor vehicles” (at [245]). 31 Classes of contracts of insurance in relation to which section 53 of the Act does not apply (1) For section 53 of the Act, each of the following classes of contracts is declared to be a class of contracts in relation to which that section does not apply: (a) each of the classes of contracts referred to in regulation 30;

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reg 32

(b) contracts of insurance under which the insurer agrees to indemnify the insured against loss in respect of failure by a debtor to pay a debt due to the insured, but not against any other loss; (c) contracts of life insurance; (d) superannuation contracts, including individual superannuation contracts and blanket superannuation contracts; (e) sickness and accident insurance contracts to which paragraph 17(c) applies; (f) export payments insurance contracts within the meaning of subsection 14(2) of the Export Finance and Insurance Corporation Act 1991; (g) aviation liability indemnity contracts. (2) For this regulation, aviation liability indemnity contracts are contracts under which the Commonwealth provides indemnities to airlines, airports or other aviation service providers for claims against them by third parties, for property damage or bodily injury or both (other than injury to aircraft passengers and employees of the insured travelling as passengers in the course of their duties) arising as a consequence of: (a) war, invasion, acts of foreign enemies, hostilities (whether war has been declared or not), civil war, rebellion, revolution, insurrection, martial law, military law, military or usurped power or attempts at usurpation of power; or (b) strikes, riots, civil commotions or labour disturbances; or (c) an act of one or more persons (whether or not as agent of a sovereign power) for political or terrorist purposes (whether the resulting loss or damage is accidental or intentional); or (d) a malicious act or act of sabotage; or (e) hi-jacking or an unlawful seizure or wrongful exercise of control of the aircraft or crew in flight (including an attempt at such seizure or control) made by any person acting without the consent of the insured; or (f) confiscation, nationalisation, seizure, restraint, detention, appropriation, requisition or use by or under the order of a government (civil, military or de facto) or public or local authority. [Subreg (2) insrt SR 147 of 2002, reg 3 and Sch 1 item 4] [Reg 31 am SR 147 of 2002; SR 118 of 2000, reg 3 and Sch 2 items 1 and 2]

32

Rate of interest on withheld payment—section 57 of Act

(1) For subsection 57(3) of the Act, the rate applicable to a day in respect of which interest is payable by an insurer, is the rate worked out under the following formula: Y + 3% where: Y is the rate of:

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[Former reg 31 renum and am SR 147 of 2002, reg 3 and Sch 1 items 1–3]

reg 32

Insurance Contracts Regulations 1985

[232.20]

(a)

10-year Treasury Bond yield at the end of the half-financial year ending in the period that, in relation to the withheld amount, is mentioned in subsection 57(2) of the Act, or: (b) if more than one half-financial year has ended during that period—the mean of the rates of the 10-year Treasury Bond yield at the end of each of those half-financial years; or (c) if no half-financial year has ended during that period—the 10-year Treasury Bond yield at the end of the half-financial year immediately preceding the commencement of that period. (2) In subregulation (1), 10-year Treasury Bond yield means the rate known as the 10-year Treasury Bond yield, published by the Reserve Bank of Australia. (3) In subregulation (1), mean, in relation to rates, means, if the mean of the rates is not a whole number, or does not end in .75, .50 or .25, the mean rate rounded to the nearest lower quarter of 1%. [Reg 32 subst SR 226 of 1997, reg 2; am SR 444 of 1990, reg 2]

REGULATION 32 COMMENTARY [232.20] Synopsis The original rate of 11 per cent per annum was amended to 13 per cent per annum with effect from 21 December 1990. The amendment was not retrospective. Interest is, as from 27 August 1997, payable by an insurer according to a formula, Y (which is defined) + 3%. 33

Insurance for risks related to war and terrorism

For paragraph 9(4)(b) of the Act, a provision of a contract, or proposed contract, for extended coverage endorsement (aviation liabilities) is prescribed if it provides one or more of the following: (a) the insurers may give notice in writing to review the premium or geographical limits, and the notice becomes effective after a period of 6 days 23 hours and 59 minutes after the day on which notice is given; (b) following a hostile detonation of any weapon of war employing atomic or nuclear fission or fusion or other like reaction or radioactive force or matter, regardless of the place or time of the detonation and whether or not the insured aircraft may be involved—the insurers may give notice, in writing, of the cancellation of one or more parts of the cover provided by the endorsement, and the notice becomes effective after a period of 47 hours and 59 minutes after the day on which notice is given;

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(c)

Pt 10 – Miscellaneous

reg 38

the cover provided by the endorsement may be cancelled by either the insurer or the insured giving notice in writing, and the notice becomes effective after a period of 6 days 23 hours and 59 minutes after the day on which notice is given.

Note: Section 9 of the Act allows an insurer to vary or cancel a provision of a contract or proposed contract of insurance only to the extent that the provision covers risks related to war or terrorism. [Reg 33 reinsrt SR 273 of 2002, reg 3 and Sch 1 item 1; rep SR 18 of 2002, reg 3 and Sch 1 item 1; insrt SR 327 of 1994, reg 6]

34

Notices under S 71A (3) of the Act [Repealed]

[Reg 34 rep SR 18 of 2002, reg 3 and Sch 1 item 1; am SR 191 of 1999, reg 3 and Sch 1 items 5 and 6; insrt SR 327 of 1994, reg 6]

35

Notices under S 71A (5) of the Act [Repealed]

[Reg 35 rep SR 18 of 2002, reg 3 and Sch 1 item 1; insrt SR 327 of 1994, reg 6]

36

Financial sector supervisory agencies (Act s. 11F) [Repealed]

[Reg 36 rep SR 195 of 1998, reg 3; am SR 78 of 1998, reg 3; insrt SR 238 of 1997, reg 2]

37

Law enforcement agencies (Act, s. 11F) [Repealed]

[Reg 37 rep SR 195 of 1998, reg 4; insrt SR 238 of 1997, reg 2]

38 Overseas financial sector supervisory agencies (Act, s. 11F) [Repealed]

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[Reg 38 rep SR 195 of 1998, reg 5; insrt SR 238 of 1997, reg 2]

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Pt 11 – Transitional arrangements

reg 42

PART 11 – TRANSITIONAL ARRANGEMENTS [Former Pt 4 heading subst SLI 250 of 2012, reg 3 and Sch 1 item 9] [Pt 4 insrt SLI 116 of 2012, reg 3 and Sch 1 item 4]

40

Purpose of Part This Part makes transitional arrangements in relation to amendments of these Regulations. [Reg 40 am SLI 250 of 2012, reg 3 and Sch 1 item 10; insrt SLI 116 of 2012, reg 3 and Sch 1 item 4]

41 Amendments made Regulation 2012 (No. 1)

by

Insurance

Contracts Amendment

(1) The amendments of these Regulations made by Schedule 1 to the Insurance Contracts Amendment Regulation 2012 (No. 1) do not apply for the period of 2 years commencing when this regulation commences. Note: Schedule 1 to the Insurance Contracts Amendment Regulation 2012 (No. 1) inserted Division 8 of Part 5, which, among other things: (a) identifies certain contracts that provide insurance cover in respect of loss caused to a business; and (b) deals with the use of the word “flood” in those contracts; and (c) explains whether a business is a small business. [Subreg (1) am SLI 250 of 2012, reg 3 and Sch 1 item 11]

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(2) However, if, during that period, an insurer decides to rely on these Regulations, as amended by Schedule 1 to the Insurance Contracts Amendment Regulation 2012 (No. 1), in relation to a contract that provides insurance cover, these Regulations, as amended by that Schedule, apply in relation to: (a) the insurer; and (b) the contract. [Reg 41 am SLI 250 of 2012; insrt SLI 116 of 2012, reg 3 and Sch 1 item 4]

42 Amendments made by the Insurance Contracts Amendment Regulation 2014 (No. 1) [Expired] [Reg 42 exp SLI 50 of 2015, reg 42(3), with effect from 28 Dec 2015]

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Schedule 1 – Writing to inform of duty of disclosure Note: See subregulation 3(2). [Sch 1 note subst SLI 50 of 2015, reg 4 and Sch 2 item 3]

Part 1 – Contracts of general insurance, other than eligible contracts Your duty of disclosure Before you enter into an insurance contract, you have a duty to tell us anything that you know, or could reasonably be expected to know, may affect our decision to insure you and on what terms. You have this duty until we agree to insure you. You have the same duty before you renew, extend, vary or reinstate an insurance contract. You do not need to tell us anything that: • reduces the risk we insure you for; or • is common knowledge; or • we know or should know as an insurer; or • we waive your duty to tell us about. If you do not tell us something If you do not tell us anything you are required to, we may cancel your contract or reduce the amount we will pay you if you make a claim, or both. If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed.

Part 2 – Contracts of life insurance Your duty of disclosure Before you enter into a life insurance contract, you have a duty to tell us anything that you know, or could reasonably be expected to know, may affect our decision to insure you and on what terms. You have this duty until we agree to insure you. You have the same duty before you extend, vary or reinstate the contract. You do not need to tell us anything that: • reduces the risk we insure you for; or • is common knowledge; or • we know or should know as an insurer; or • we waive your duty to tell us about. If the insurance is for the life of another person and that person does not tell us everything he or she should have, this may be treated as a failure by you to tell us something that you must tell us.

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Schedules

If you do not tell us something In exercising the following rights, we may consider whether different types of cover can constitute separate contracts of life insurance. If they do, we may apply the following rights separately to each type of cover. If you do not tell us anything you are required to, and we would not have insured you if you had told us, we may avoid the contract within 3 years of entering into it. If we choose not to avoid the contract, we may, at any time, reduce the amount you have been insured for. This would be worked out using a formula that takes into account the premium that would have been payable if you had told us everything you should have. However, if the contract has a surrender value, or provides cover on death, we may only exercise this right within 3 years of entering into the contract. If we choose not to avoid the contract or reduce the amount you have been insured for, we may, at any time vary the contract in a way that places us in the same position we would have been in if you had told us everything you should have. However, this right does not apply if the contract has a surrender value or provides cover on death. If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed. [Pt 2 subst SLI 50 of 2015, reg 4 and Sch 2 item 4]

Part 3 – Eligible contracts of insurance Your duty of disclosure

If we ask you questions that are relevant to our decision to insure you and on what terms, you must tell us anything that you know and that a reasonable person in the circumstances would include in answering the questions. You have this duty until we agree to insure you. If you do not tell us something If you do not tell us anything you are required to tell us, we may cancel your contract or reduce the amount we will pay you if you make a claim, or both. If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed.

Part 4 – Renewal of eligible contracts of insurance Your duty of disclosure Before you renew this contract of insurance, you have a duty of disclosure under the Insurance Contracts Act 1984. If we ask you questions that are relevant to our decision to insure you and on what terms, you must tell us anything that you know and that a reasonable person in the circumstances would include in answering the questions.

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Before you enter into an insurance contract, you have a duty of disclosure under the Insurance Contracts Act 1984.

Insurance Contracts Regulations 1985

Schedule 1

Also, we may give you a copy of anything you have previously told us and ask you to tell us if it has changed. If we do this, you must tell us about any change or tell us that there is no change. If you do not tell us about a change to something you have previously told us, you will be taken to have told us that there is no change. You have this duty until we agree to renew the contract. If you do not tell us something If you do not tell us anything you are required to tell us, we may cancel your contract or reduce the amount we will pay you if you make a claim, or both. If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed. [Sch 1 am SLI 50 of 2015; subst SLI 50 of 2015, reg 4 and Sch 1 item 4; am SR 191 of 1999; Former Sch renum SR 327 of 1994, reg 7]

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Schedule 1A

Schedules

Schedule 1A – Writing to inform persons to be insured by others Note: See subregulation 3(3).

If the person entering the contract does not tell us something In exercising the following rights, we may consider whether different types of cover can constitute separate contracts of life insurance. If they do, we may apply the following rights separately to each type of cover. If the person entering into the contract does not tell us anything he or she is required to, and we would not have provided the insurance if he or she had told us, we may avoid the contract within 3 years of entering into it. If we choose not to avoid the contract, we may, at any time, reduce the amount of insurance provided. This would be worked out using a formula that takes into account the premium that would have been payable if he or she had told us everything he or she should have. However, if the contract has a surrender value, or provides cover on death, we may only exercise this right within 3 years of entering into the contract. If we choose not to avoid the contract or reduce the amount of insurance provided, we may, at any time vary the contract in a way that places us in the same position we would have been in if he or she had told us everything he or she should have. However, this right does not apply if the contract has a surrender value or provides cover on death. If the failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed. [Sch 1A insrt SLI 50 of 2015, reg 4 and Sch 2 item 5]

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Insured’s duty of disclosure A person who enters into a life insurance contract in respect of your life has a duty, before entering into the contract, to tell us anything that he or she knows, or could reasonably be expected to know, may affect our decision to provide the insurance and on what terms. The person entering into the contract has this duty until we agree to provide the insurance. The person entering into the contract has the same duty before he or she extends, varies or reinstates the contract. The person entering into the contract does not need to tell us anything that: • reduces the risk we insure you for; or • is common knowledge; or • we know or should know as an insurer; or • we waive your duty to tell us about. If you do not tell us something that you know, or could reasonably be expected to know, may affect our decision to provide the insurance and on what terms, this may be treated as a failure by the person entering into the contract to tell us something that he or she must tell us.

Insurance Contracts Regulations 1985

Schedule 1B – Writing to remind of duty of disclosure Note: See regulation 3A.

Part 1 – Contracts of general insurance Reminder—your duty of disclosure You have previously been given a notice informing you of your duty of disclosure in relation to a general insurance contract. This is a duty to tell us about anything that you know, or could reasonably be expected to know, may affect our decision to insure you and on what terms. You have this duty until we agree to insure you.

Part 2 – Contracts of life insurance Reminder—your duty of disclosure You have previously been given a notice informing you of your duty of disclosure in relation to a life insurance contract. This is a duty to tell us about anything that you know, or could reasonably be expected to know, may affect our decision to insure you and on what terms. If the contract is for insurance of the life of another person, and that person does not tell us about anything that he or she knows, or could reasonably be expected to know, may affect our decision to provide the insurance and on what terms, this may be treated as a failure by you to tell us something that you must tell us. You have this duty until we agree to provide the insurance.

Part 3 – Eligible contracts of insurance Reminder—your duty of disclosure You have previously been given a notice informing you of your duty of disclosure in relation to an eligible contract of insurance. This is a duty to tell us, in response to our questions, anything that you know, and that a reasonable person in the circumstances would include in answering the questions. You have this duty until we agree to insure you. [Sch 1B insrt SLI 50 of 2015, reg 4 and Sch 2 item 5]

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Schedules

Schedule 2 – Words to inform of duty of disclosure for eligible contracts of insurance Note: See regulation 3B. [Sch 2 note subst SLI 50 of 2015, reg 4 and Sch 2 item 6]

Before you enter into an eligible contract of insurance with us, you have a duty of disclosure under the Insurance Contracts Act 1984. We may ask you questions that are relevant to our decision to insure you and on what terms. If we do, you must tell us anything that you know and that a reasonable person in the circumstances would include in their answer. You have this duty until we agree to insure you. If you do not tell us anything you are required to, we may cancel your contract or reduce the amount we will pay you if you make a claim, or both. If your failure to tell us is fraudulent, we may refuse to pay a claim and treat the contract as if it never existed.

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[Sch 2 am SLI 50 of 2015; subst SLI 50 of 2015, reg 4 and Sch 1 item 4; insrt SR 191 of 1999, reg 3 and Sch 1 item 11]

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Schedule 3 – Key Facts Sheets (regulation 4B)

Form 1 – Home buildings insurance contract

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Form 1

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Schedule 3

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Form 2

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Form 2 – Home contents insurance contract

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Form 2

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Schedule 3

[Sch 3 reinsrt SLI 250 of 2012, reg 3 and Sch 1 item 12; rep SR 18 of 2002, reg 3 and Sch 1 item 2; former Sch 2 renum and am SR 191 of 1999, reg 3 and Sch 1 items 12 and 13; am SR 195 of 1998, reg 6; insrt SR 327 of 1994, reg 8]

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CODES OF PRACTICE General Insurance Code of Practice General Insurance Code of Practice 2014 ................................ [GICP.50]

Insurance Brokers Code of Practice Insurance Brokers Code of Practice ........................................ [IBCP.50]

GENERAL INSURANCE CODE OF PRACTICE 2014 [GCIP.50] [The General Insurance Code of Practice is reproduced with permission of the Insurance Council of Australia. See http:// www.insurancecouncil.com.au]

FOREWORD This version of the General Insurance Code of Practice took effect on 1 July 2014. The Board of the Insurance Council of Australia is pleased to support this significant revision of the General Insurance Code of Practice.

The changes made to the Code in 2014 enhance and clarify the rights of consumers. The Code is written in plain English. It sets out clearer processes for making claims and complaints, and stronger and more detailed obligations for insurers to provide assistance to those experiencing financial difficulty. The Code is supported by a transparent and independent governance framework to ensure Code compliance is effectively monitored and enforced. The body tasked with these duties is the Code Governance Committee, constituted through an association incorporated under NSW law, and comprising an independent chair, a consumer representative and an insurance industry representative. ©

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Codes

The Code was first introduced in 1994 and has undergone multiple improvements to ensure it remains relevant and continues to meet its objectives. The current Code follows a wide-ranging 12-month independent review of the Code’s efficacy and its position within the general insurance industry. Both the review process and the development of the revised Code involved extensive consultation with a broad range of consumer, government and industry stakeholders to ensure the Code works for all parties.

Codes of Practice

[GCIP.50]

The ICA is responsible for making sure the content of the Code meets its objectives to commit insurers to high standards of service and to promote better and more informed relationships between insurers and their customers. The Code is a living document, and the ICA will continue to make improvements as and when required. The ICA Board believes that the General Insurance Code of Practice sets the benchmark for industry self-regulation in Australia. The Code will continue to be a significant change agent for general insurers in continuously improving customer service. Mr Mark Milliner President Insurance Council of Australia 1 July 2014

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Codes of Practice

1 Introduction 1.1 We have entered into this voluntary Code with the Insurance Council of Australia (ICA). This Code commits us to uphold minimum standards when providing services covered by this Code. 1.2 We acknowledge that our customers and our relationships with them are the foundations of our business. 1.3 The terms of this Code require us to be open, fair and honest in our dealings with you. 1.4 This Code aims to work with the many laws covering our conduct and in no way limits your rights under such laws against us. This Code also deals with issues not dealt with in legislation. 1.5 The Code terms provide that you may: (a) ask us to address an issue; (b) access our Complaints process set out in section 10 of this Code; and/or (c) report your concerns to the CGC.1 By agreeing to this Code, we enter into a contract with the ICA to abide by this Code. This Code does not create legal or other rights between us and any person or entity other than the ICA. 1.6 If we fail to meet our obligations under this Code, the CGC may impose sanctions on us. 1.7 Important terms which have a special meaning are identified in bold and can be found in the Definitions section on page 17 at the end of this Code.

2.1 The objectives of this Code are: (a) to commit us to high standards of service; (b) to promote better, more informed relations between us and you; (c) to maintain and promote trust and confidence in the general insurance industry; (d) to provide fair and effective mechanisms for the resolution of Complaints and disputes between us and you; and (e) to promote continuous improvement of the general insurance industry through education and training. 2.2 The objectives of this Code will be pursued having regard to the law, and acknowledging that a contract of insurance is a contract based on the utmost good faith.

3 Application 3.1 This Code takes effect on 1 July 2014, and we must adopt this Code within 12 months. 3.2 This Code applies to all: 1. The Code Governance Committee.

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2 Objectives

Codes of Practice

3.3 3.4 3.5

3.6 3.7

3.8 3.9 3.10

[GCIP.50]

(a) new policies and renewed policies of insurance entered into with us; and (b) new claims2 and Complaints received by us, after we have adopted this Code.3 If this Code applies, previous codes do not. This Code applies to all industry participants who have adopted it. Members of the ICA, any other general insurers, and such other entities as are approved by the ICA, may adopt this Code. This Code covers all general insurance products except Workers Compensation, Marine Insurance, Medical Indemnity Insurance, and Motor Vehicle Injury Insurance. It does not cover reinsurance. This Code does not apply to life and health insurance products issued by life insurers or registered health insurers. This Code applies differently to Retail Insurance and Wholesale Insurance. The following sections apply to Retail Insurance only: (a) Buying insurance – section 4 (b) Standards for our Service Suppliers – section 6 (c) Claims – section 7 (d) Catastrophes – section 9 (e) Complaints and disputes – section 10 All other sections apply to both Retail Insurance and Wholesale Insurance. Under a Co-Insurance arrangement, if one or more of the insurers has not adopted this Code, then that policy is not covered by this Code. Where there is any conflict or inconsistency between this Code and any Commonwealth, State or Territory law, that law prevails. Where this Code imposes an obligation on us in addition to obligations applying under a law, we will also comply with this Code except where doing so would lead to a breach of a law.

4 Buying insurance 4.1 This section applies to Retail Insurance only. 4.2 In this section, “you” means an Insured only. 4.3 This section applies to the initial enquiry and buying of insurance and renewal of cover. 4.4 Our sales process and the services of our Employees and our Authorised Representatives will be conducted in an efficient, honest, fair and transparent manner, in accordance with this section. 2. New claims received by us after we have adopted this Code will be covered by sections 6, 7, 8, 9 and 10 of this Code. 3. The 2012 code will continue to apply to all policies of organisations who have not yet adopted this Code, prior to 1 July 2015. Conduct that occurred before we adopted this Code will be measured against the 2012 code standards, but will be covered by our Complaints process set out in section 10 of this Code, and the monitoring, enforcement and sanctions provisions set out in section 13 of this Code. 646

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4.5 We will take reasonable steps to ensure that our communications with you are in plain language. 4.6 We will only ask for and rely on information and documents relevant to our decision in assessing an application for insurance. 4.7 Where we identify, or you tell us about, an error or mistake in your application or in the information or documents we have relied on in assessing your application, we will immediately initiate action to correct it. 4.8 If we cannot provide you with insurance, we will: (a) give you our reasons; (b) supply you with the information we relied on in assessing your application if you request it, in accordance with section 14 of this Code; (c) refer you to the ICA or the National Insurance Brokers Association of Australia (NIBA) for information about alternative insurance options, or another insurer; and (d) provide details of our Complaints process, if you tell us you are unhappy with our decision. Cancellation Rights 4.9 This section applies to Retail Insurance only. 4.10 You may be entitled to cancel your insurance policy and obtain a refund, in accordance with the terms of your policy. If you cancel your policy, any money we owe you will be sent to you within 15 business days.4 4.11 Where you have an Instalment Policy and we have not received an instalment payment, we will send you a notice in writing regarding your non-payment at least 14 calendar days before any cancellation by us for non-payment. If after sending the above notice we do not receive the instalment payment, we will send you a second notice in writing, either: (a) prior to cancellation, informing you that your Instalment Policy is being cancelled for non-payment; or (b) within 14 days after cancellation by us, confirming our cancellation of your Instalment Policy.

5.1 When our Employees or Authorised Representatives are acting on our behalf, we will: (a) provide them with, or require them to receive, appropriate education and training to provide their services competently and to deal with you professionally, including training on this Code; (b) only allow our Employees and our Authorised Representatives to provide services that match their expertise; 4. In cases where you buy insurance through an insurance broker, different arrangements will apply. Ask your broker what arrangements apply to you.

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5 Standards for our employees and authorised representatives

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(c) measure the effectiveness of training by monitoring the performance of our Employees’ and our Authorised Representatives’ services; (d) provide or require appropriate education and training to correct any identified performance shortcomings in our Employees’ or Authorised Representatives’ services; and (e) keep our Employees’ education and training records for a minimum of five years and make them available to the CGC on request, and require our Authorised Representatives to do the same. 5.2 Our Authorised Representatives will notify us of any Complaint they receive against them while they are acting on our behalf, and we will handle such Complaints under our Complaints process. 5.3 When providing a service to you, our Authorised Representatives will inform you of the service they have been authorised to provide on our behalf, and our identity. 5.4 The CGC may include any recommendations on education and training in its quarterly reports to the ICA Board. Authorised Financial Services Licensees Acting on our Behalf 5.5 We may contract with other persons who are not our Authorised Representatives but who are licensed by ASIC to sell insurance products. These may include insurance brokers, banks, or credit unions. If they do not comply with this Code when selling our products on our behalf, you can: (a) ask us to address the matter; and (b) report your concerns to the CGC.

6 Standards for our service suppliers 6.1 This section applies to Retail Insurance only. 6.2 Our Service Suppliers will provide services on our behalf in an honest, efficient, fair and transparent manner, in accordance with this section. 6.3 We will only appoint Service Suppliers who: (a) reasonably satisfy us at the time of appointment that they are, and their employees are, qualified by education, training or experience to provide the required service competently and to deal with you professionally (including but not limited to whether they hold membership with any relevant professional body); and (b) hold a current licence, if required by law. 6.4 Our contracts with our Service Suppliers entered into after we have adopted this Code must reflect the standards of this Code as they relate to the services of the Service Supplier. 6.5 A Service Supplier must obtain our approval before subcontracting their services. 6.6 When providing a service to you, our Service Suppliers will inform you of the service they have been authorised to provide on our behalf, and our identity. 648

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6.7 Our Service Suppliers must notify us about any Complaint about a matter under this Code when acting on our behalf. We will handle Complaints relating to our Service Suppliers when they are acting on our behalf under our Complaints process.

7 Claims 7.1 This section applies to Retail Insurance only. 7.2 We will conduct claims handling in an honest, fair, transparent and timely manner, in accordance with this section. 7.3 We will only ask for and rely on information relevant to our decision when deciding on your claim. 7.4 Where we identify, or you tell us about, an error or mistake in dealing with your claim, we will immediately initiate action to correct it. 7.5 If any of the time frames in this section are not practical due, for example, to the complex nature of your claim, we will agree a reasonable alternative timetable with you. If we cannot reach an agreement on an alternative timetable, we will provide details of our Complaints process. 7.6 Our Complaints process set out in section 10 of this Code is available to you, if you wish to make a Complaint about any aspect of our claims handling.

Making a Claim 7.8 You are entitled to ask us if your insurance policy covers a particular loss before a claim is lodged. In answering, we will not discourage you from lodging a claim, and will inform you that the question of coverage will be fully assessed if a claim is lodged. 7.9 If you make a claim and we do not require further information, assessment or investigation, we will decide to accept or deny your claim and notify you of our decision within ten business days of receiving your claim. 7.10 If you make a claim and we require further information or assessment, within ten business days of receiving your claim we will: (a) notify you of any information we require to make a decision on your claim; ©

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Urgent Financial Need of Benefits 7.7 Where you reasonably demonstrate to us that you are in urgent financial need of the benefits you are entitled to under your insurance policy as a result of the event causing the claim, we will: (a) fast-track the assessment and decision process of your claim; and/or (b) make an advance payment to assist in alleviating your immediate hardship within five business days of you demonstrating your urgent financial need; and (c) provide details of our Complaints process, if you are not happy with our decision.

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(b) if necessary, appoint a loss assessor or loss adjuster; and (c) provide an initial estimate of the timetable and process for making a decision on your claim. Assessment and Investigation 7.11 We will assess your claim on the basis of all relevant facts, the terms of your insurance policy, and the law. 7.12 If we appoint a loss assessor, loss adjuster or investigator,5 we will notify you within five business days of their appointment. 7.13 We will keep you informed about the progress of your claim at least every 20 business days. 7.14 We will respond to routine requests made by you about your claim within ten business days. 7.15 If we engage an External Expert to provide a report which is necessary to assess your claim, we will ask them to provide their report to us within 12 weeks of the date of their engagement. If the External Expert cannot meet or fails to meet this time frame, we will inform you of this, and keep you informed of our progress in obtaining the report. Decision 7.16 Once we have all relevant information and have completed all enquiries, we will decide whether to accept or deny your claim and notify you of our decision within ten business days. 7.17 Our decision will be made within four months of receiving your claim, unless Exceptional Circumstances apply. If we do not make a decision within four months, we will provide details of our Complaints process. 7.18 Where Exceptional Circumstances apply, our decision will be made within 12 months of receiving your claim. If we do not make a decision within 12 months, we will provide details of our Complaints process. 7.19 If we deny your claim, we will: (a) give you reasons for our decision in writing; (b) inform you of your right to ask for the information about you that we relied on in assessing your claim, and supply the information within ten business days if you request it, in accordance with section 14 of this Code; (c) inform you of your right to ask for copies of any Service Suppliers’ or External Experts’ reports that we relied on in assessing your claim, and supply the reports within ten business days if you request them, in accordance with section 14 of this Code; and (d) provide details of our Complaints process. Repair Workmanship and Materials 7.20 Where we have selected and directly authorised a repairer, we will: 5. An appointed loss assessor, loss adjuster or investigator may be an Employee or a Loss Assessor/Loss Adjuster/Investigator. 650

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(a) accept responsibility for the quality of the workmanship and materials; and (b) handle any Complaint about the quality or timeliness of the work or conduct of the repairer under our Complaints process. Compliance with Timetables 7.21 We must comply with the timetables in this section, unless: (a) our conduct complied with an alternative timetable agreed with you; or (b) our conduct and the timetable were reasonable in all the circumstances; or (c) the cause of the non-compliance was a delay in the supply of a report from an External Expert, and we had engaged the External Expert in accordance with this section, and used our best endeavours to obtain the report in time. 7.22 The standards of this section do not apply if you have commenced any proceedings in any court, tribunal or under any other dispute handling process (other than FOS) in respect of your claim.

8 Financial hardship

Where You Owe Us Money 8.3 If you owe us money, and you experience Financial Hardship, you may ask us to assess whether you are entitled to assistance. 8.4 If you inform us that you are experiencing Financial Hardship, we will supply you with an application form for Financial Hardship assistance, and contact details for the national financial counselling hotline 1800 007 007. 8.5 In assessing your request for Financial Hardship assistance, reasonable evidence of your Financial Hardship may assist us, such as: (a) for Centrelink clients, your Centrelink statements; or (b) evidence of serious illness that prevents you from earning income, unemployment or disability, including disability caused by mental illness. ©

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8.1 For the purposes of this section only, the definition of “you” means: (a) an individual Insured or Third Party Beneficiary who owes us money under an insurance policy we have issued; and (b) an individual we are seeking recovery from, for damage or loss caused by them to an Insured or Third Party Beneficiary we cover under an insurance policy. 8.2 This section does not apply to the payment of premiums under an insurance policy we have issued.

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We will only request information from you that is reasonably necessary to assess your application for Financial Hardship assistance. We will notify you about our assessment of whether you are entitled to assistance for your Financial Hardship as soon as reasonably practicable. If we determine that you are not entitled to Financial Hardship assistance, we will provide you with the reasons for our decision, and information about our Complaints process. If you make a request for Financial Hardship assistance in relation to an amount we seek from you, we will contact any relevant Collection Agent and put on hold any recovery action in relation to that amount until we have assessed your request and notified you of our decision. If we determine that you are entitled to Financial Hardship assistance: (a) we will work with you to consider an arrangement that could include: (i) extending the due date for payment; (ii) paying in instalments; (iii) paying a reduced lump sum amount; (iv) postponing one or more instalment payments for an agreed period; or (v) a combination of the above options, and we will confirm any agreed arrangement in writing; (b) if you are an Insured or Third Party Beneficiary, at your request we will notify any financial institution with an interest in your insurance policy; (c) you may ask us for a release, discharge or waiver of a debt or obligation; however, you are not automatically entitled to a release, discharge or waiver; (d) if we agree to release, discharge or waive a debt or obligation, we will confirm this in writing, and if you are an Insured or Third Party Beneficiary, at your request we will notify any financial institution with an interest in your insurance policy; (e) if we are unable to reach an agreement, we will provide details of our Complaints process. If we determine you are not entitled to Financial Hardship assistance in relation to an amount we seek from you, and your circumstances change, you can make a further request for Financial Hardship assistance in relation to that amount. While assessing your further request, it will be at our discretion whether we again put any recovery action on hold.

Collection of Monies Owed 8.10 If we authorise an agent to send you any communication about money you owe us, that communication will identify us as the insurer on whose behalf the agent is acting, and it will specify the nature of our claim against you. 652

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8.11 We will require our agents to notify us, or to tell you to notify us, if you inform them that you are experiencing Financial Hardship, and require them to provide you with details of our Financial Hardship process. 8.12 We and our agents will comply with the ACCC & ASIC Debt Collection Guideline when taking any recovery action. 8.13 If you inform us that you intend to declare bankruptcy, we will work with you or your representative to provide a written confirmation of the debt you owe us for the purposes of bankruptcy. If we cannot reach an agreement, we will provide details of our Complaints process.

9 Catastrophes 9.1 This section applies to Retail Insurance only. 9.2 We will respond to Catastrophes in an efficient, professional and practical way, and in a compassionate manner. 9.3 If you have a property claim resulting from a Catastrophe and we have finalised your claim within one month after the Catastrophe event causing your loss, you can request a review of your claim if you think the assessment of your loss was not complete or accurate, even though you may have signed a release. We will give you 12 months from the date of finalisation of your claim to ask for a review of your claim. We will inform you about: (a) this entitlement when we finalise your claim; and (b) our Complaints process. 9.4 We will co-operate and work with the ICA on industry coordination and communications under the ICA Industry Catastrophe Coordination Arrangements. 9.5 The CGC may include any recommendations on the ICA Industry Catastrophe Coordination Arrangements in its quarterly report to the ICA Board.

10 Complaints and disputes

10.3 10.4 10.5 10.6

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Internal Complaints Process You are entitled to make a Complaint to us about any aspect of your relationship with us. We will conduct Complaints handling in a fair, transparent and timely manner, in accordance with this section. We will make available information about your right to make a Complaint and about our processes for dealing with Complaints on our website and in our relevant written communications. We will only ask for and rely on information relevant to our decision in dealing with Complaints. We will supply you with the information we relied on in assessing your Complaint within ten business days, if you request it, in accordance with section 14 of this Code.

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10.1 This section applies to Retail Insurance only. 10.2 The CGC may include any recommendations on our Complaints process in its quarterly reports to the ICA Board.

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10.7 Where we identify, or you tell us about, an error or mistake in handling your Complaint, we will immediately initiate action to correct it. 10.8 We will notify you of the name and relevant contact details of the Employee assigned to liaise with you in relation to your Complaint at each stage of the Complaints process. 10.9 Our Complaints process described below does not apply to your Complaint if we resolve it to your satisfaction by the end of the fifth business day after your Complaint was received by us, and you have not requested a response in writing. This exemption to the Complaints process does not apply to Complaints about a Declined Claim, the value of a claim, or about Financial Hardship. 10.10 Stage One and Stage Two of our Complaints process described below will not exceed 45 calendar days in total, unless we are unable to provide you with a final decision within 45 calendar days. If we are unable to provide you with a final decision within 45 calendar days, we will inform you before the end of that period of the reasons for the delay and your right to take your Complaint to FOS, together with contact details for FOS. Stage One 10.11 We will respond to your Complaint within 15 business days of the date of receipt of your Complaint, provided we have all necessary information and have completed any investigation required. 10.12 If we cannot respond within 15 business days because we do not have all necessary information or we have not completed our investigation: (a) we will let you know as soon as reasonably practicable within the 15-business-day time frame, and agree a reasonable alternative timetable with you. If we cannot reach an agreement on an alternative timetable, we will advise you of your right to take your Complaint to Stage Two of the Complaints process; and (b) we will keep you informed about the progress of our response at least every ten business days, unless you agree otherwise. 10.13 We will respond to your Complaint in writing and tell you: (a) our decision in relation to your Complaint; (b) the reasons for our decision; (c) your right to take your Complaint to Stage Two if our decision at Stage One does not resolve your Complaint to your satisfaction; and (d) if you are still not satisfied with our decision after Stage Two, your right to take your Complaint to FOS, together with contact details for FOS and the time frame within which you must take your Complaint to FOS. Stage Two 10.14 If our Stage One decision does not resolve your Complaint to your satisfaction, you may advise us that you wish to take your Complaint to Stage Two. 654

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10.20 10.21 10.22

10.23 10.24

External Dispute Resolution We subscribe to the independent external dispute resolution scheme administered by FOS. FOS is available to customers and third parties who fall within the FOS Terms of Reference. If our decision at Stage Two does not resolve your Complaint to your satisfaction, or if we do not resolve your Complaint within 45 calendar days of the date we first received your Complaint, you may refer your Complaint to FOS. External dispute resolution determinations made by FOS are binding upon us in accordance with the FOS Terms of Reference. If FOS advises you that the FOS Terms of Reference do not extend to you or your dispute, you can seek independent legal advice or access any other external dispute resolution options that may be available to you.

11 Information and education 11.1 The ICA is responsible for the promotion of this Code to consumers and to industry participants that have not yet adopted this Code. 11.2 The ICA will work with the CGC, the relevant regulator and stakeholders to encourage all general insurers and other industry participants that carry on business in Australia to adopt this Code. ©

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10.15 If you advise us that you wish to take your Complaint to Stage Two, your Complaint will be reviewed by an Employee or Employees with the appropriate experience, knowledge and authority, who is/are, to the extent it is practical, different from the person or persons whose decision or conduct is the subject of the Complaint, or who was/were involved in the Stage One decision. 10.16 We will keep you informed about the progress of our review at least every ten business days. 10.17 We will respond within 15 business days of the date you advise us that you wish to take your Complaint to Stage Two, provided we have all necessary information and have completed any investigation required. 10.18 If we cannot respond within 15 business days because we do not have all necessary information or we have not completed our investigation, we will let you know as soon as reasonably practicable within the 15-business-day time frame, and agree a reasonable alternative timetable with you. If we cannot reach an agreement on an alternative timetable, we will advise you of your right to take your Complaint to FOS. 10.19 Our response to the review of your Complaint will be in writing and will include: (a) our final decision in relation to your Complaint and the reasons for that decision; and (b) your right to take your Complaint to FOS if you are not satisfied with our decision, together with contact details for FOS, and the time frame within which you must take your Complaint to FOS.

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11.3 The ICA may develop guidance documents from time to time, to assist us in meeting our obligations under this Code. 11.4 The CGC may include any recommendations on Code promotion in its quarterly reports to the ICA Board. 11.5 We will work with the ICA to promote and champion this Code. 11.6 We will provide information about this Code on our websites and in our product information where we consider it appropriate to do so. 11.7 We will work with the ICA to provide general information to assist you in accessing insurance products. 11.8 We will work with the ICA to initiate programmes to promote insurance, financial literacy and the insurance industry, and we will support ICA initiatives aimed at education on general insurance. 11.9 The CGC may include any recommendations on education relevant to the operation of this Code in its quarterly reports to the ICA Board.

12 Code governance 12.1 The CGC is the independent body responsible for monitoring and enforcing compliance with this Code. 12.2 The CGC is made up of: (a) a consumer representative; (b) an industry representative; and (c) an independent chair. 12.3 The CGC is responsible for monitoring and enforcing our compliance with this Code, in accordance with section 13 of this Code. 12.4 The CGC’s constitution, functions and powers are set out in the CGC Charter. 12.5 The CGC is responsible for providing quarterly reports to the ICA Board, with recommendations on any Code improvements, Code-related issues and matters of importance. 12.6 The CGC may outsource to an appropriate service provider any of the responsibilities of the CGC set out in sections 13.7 to 13.9 of this Code. 12.7 The ICA is responsible for commissioning formal independent reviews of this Code from time to time. The CGC may recommend to the ICA Board that this Code be reviewed, if the CGC believes the application of this Code is not meeting the objectives outlined in section 2 of this Code. 12.8 In addition to formal independent reviews of this Code, the ICA will consult with the CGC, FOS, consumer and industry representatives, relevant regulators and other stakeholders to develop this Code on an ongoing basis.

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Our Responsibility

13.7 13.8 13.9

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CGC Responsibility The CGC is responsible for monitoring and enforcing compliance with this Code. The CGC will prepare annual public reports containing aggregate industry data and consolidated analysis on Code compliance. The CGC will: (a) receive allegations about breaches of this Code; (b) investigate alleged breaches at its discretion in accordance with this Code; (c) provide an opportunity for us to respond to alleged breaches; (d) determine whether a breach has occurred; (e) agree with us any corrective measure(s) to be implemented by us and the relevant time frame(s); and (f) monitor the implementation of any corrective measures by us and determine if they have been implemented within the agreed time frame. The CGC may provide any recommendations on Code improvements as a response to its monitoring and enforcement, in its quarterly reports to the ICA Board.

Sanctions 13.11 If the CGC considers we have failed to correct a Code breach, it will: (a) notify our Chief Executive Officer in writing; and (b) provide an opportunity for us to respond within 15 business days. 13.12 The CGC will consider any response by us before making a final determination and imposing any sanctions. ©

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13.2 We will: (a) have appropriate systems and processes in place to enable the CGC to monitor compliance with this Code; (b) prepare an annual return to the CGC on our compliance with this Code; and (c) have a governance process in place to report on our compliance with this Code to our Board of Directors or executive management. 13.3 If we identify a Significant Breach of this Code, we will report it to the CGC within ten business days. 13.4 We will be in breach of this Code if our Employees, our Authorised Representatives, or our Service Suppliers fail to comply with this Code when acting on our behalf. 13.5 We will cooperate with the CGC in its: (a) review of our compliance with this Code; and (b) investigations of any alleged Code breach. 13.6 We will apply corrective measures within set time frames, as agreed with the CGC, in response to a Code breach.

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13.13 The CGC will notify our Chief Executive Officer in writing of its decision regarding any failure to correct a Code breach and any sanctions to be imposed. 13.14 When determining any sanctions to be imposed, the CGC will consider: (a) the principles and objectives of this Code; (b) the appropriateness of the sanction; and (c) whether the breach is a Significant Breach. 13.15 13.15The CGC may impose one or more of the following sanctions: (a) a requirement that particular rectification steps be taken by us within a specified time frame; (b) a requirement that a compliance audit be undertaken; (c) corrective advertising; and/or (d) publication of our non-compliance. 13.16 The CGC’s decisions are binding on us. FOS Responsibility 13.17 FOS may report possible Code breaches to the CGC.

14 Access to information 14.1 We will abide by the principles of the Privacy Act 1988 when we collect, store, use and disclose personal information about you. 14.2 Subject to 14.4, you will have access to information about you that we have relied on in assessing your application for insurance cover, your claim or your Complaint, if you request. 14.3 Subject to 14.4, you will also have access to reports from Service Suppliers or External Experts that we have relied on in assessing your claim, if you request. 14.4 In special circumstances, we may decline to provide access to or disclose information to you, such as: (a) where information is protected from disclosure by law, including the Privacy Act 1988; (b) where, in the case of a claim, the claim is being or has been investigated; or (c) where the release of the information may be prejudicial to us in relation to a dispute about your insurance cover or your claim (except in the case of External Experts’ reports), or in relation to your Complaint. 14.5 If we decline to provide access to or disclose information to you: (a) we will not do so unreasonably; (b) we will give you reasons for doing so; and (c) we will provide details of our Complaints process.

15 Definitions ACCC means the Australian Competition and Consumer Commission. APRA means the Australian Prudential Regulation Authority. ASIC means the Australian Securities and Investments Commission. 658

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authorised by us to provide financial services on our behalf under our Australian Financial Services licence, in accordance with the Corporations Act 2001. business days are Monday to Friday, excluding public holidays. Catastrophe means an event declared by the ICA to be a catastrophe, including, but not limited to, fire, flood, earthquake, cyclone, severe storm and hail, resulting in a large number of claims and involving multiple insurers. CGC means the Code Governance Committee as explained in Section 12. Claims Management Service means a person or company who is not our Employee but is contracted by us to manage your claim on our behalf. Co-Insurance means where two or more insurers agree to insure a proportion of the same risk under the same policy. Code means the General Insurance Code of Practice 2014. Collection Agent means a person or company who is not our Employee but is contracted by us to recover money owing to us. Complaint means an expression of dissatisfaction made to us, related to our products or services, or our Complaints handling process itself, where a response or resolution is explicitly or implicitly expected. Declined Claim means you have made a claim on an insurance policy, and: (a) we have declined or not accepted the claim; or (b) we have not determined the claim within 10 business days of receiving all the information necessary to do so. Employee means a person employed by us or by a related entity that provides services to which this Code applies. Exceptional Circumstances means: (a) the claim arises from an extraordinary Catastrophe as declared by the ICA Board; (b) the claim is fraudulent or we reasonably suspect fraud; (c) there is a failure by you to respond to our reasonable inquiries or requests for documents or information concerning your claim; (d) there are difficulties in communicating with you in relation to the claim due to circumstances beyond our control; or (e) you request a delay in the claims process. External Expert means a person or company who is not our Employee or a Service Supplier, but is contracted by us solely to provide an expert opinion as to the likely cause of your loss or damage. Financial Hardship means where you have difficulty meeting your financial obligations to us. FOS means the Financial Ombudsman Service. ICA means the Insurance Council of Australia. in writing means a communication conveyed by mail or electronically via email, facsimile or text message. Instalment Policy means a Retail Insurance policy for which the premium is payable by seven or more instalments in a year, as defined in the Insurance Contracts Act 1984. Insured means a person, company or entity seeking to hold or holding a general insurance product covered by this Code, but excludes a Third Party Beneficiary. ©

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Authorised Representative means a person, company or other entity

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Investigator means a person or company who is not our Employee but is contracted by us to verify the circumstances relating to your claim. Loss Assessor or Loss Adjuster means a person or company who is not our Employee but is contracted by us to examine the circumstances of your claim, assess the damage or loss, determine whether your claim is covered under your policy, assist in obtaining repair/replacement quotes and help settle the claim. Marine Insurance means insurance to which the Marine Insurance Act 1909 applies. This Code applies to pleasure craft covered by the Insurance Contracts Act 1984. Medical Indemnity Insurance means medical indemnity cover for health care professionals under a contract of insurance covered by the Medical Indemnity (Prudential Supervision and Product Standards) Act 2003. Motor Vehicle Injury Insurance means insurance that covers personal injury or death arising out of the use of a motor vehicle, including cover for the injury or death of a driver of a motor vehicle which is caused by the fault of that person when driving. NIBA means the National Insurance Brokers Association of Australia. Retail Insurance means a general insurance product that is provided to, or to be provided to, an individual or for use in connection with a Small Business, and is one of the following types: (a) a motor vehicle insurance product (Regulation 7.1.11); (b) a home building insurance product (Regulation 7.1.12); (c) a home contents insurance product (Regulation 7.1.13); (d) a sickness and accident insurance product (Regulation 7.1.14); (e) a consumer credit insurance product (Regulation 7.1.15); (f) a travel insurance product (Regulation 7.1.16); or (g) a personal and domestic property insurance product (Regulation 7.1.17), as defined in the Corporations Act 2001 and the relevant Regulations. Service Supplier means an Investigator, Loss Assessor or Loss Adjuster, Collection Agent, Claims Management Service (including a broker who manages claims on behalf of an insurer) or its approved sub-contractors acting on our behalf. Significant Breach means a breach that is determined to be significant by reference to: (a) the number and frequency of similar previous breaches; (b) the impact of the breach or likely breach on our ability to provide our services; (c) the extent to which the breach or likely breach indicates that our arrangements to ensure compliance with Code obligations is inadequate; (d) the actual or potential financial loss caused by the breach; and (e) the duration of the breach. Small Business means a business that employs: (a) less than 100 people, if the business is or includes the manufacture of goods; or 660

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(b) otherwise, less than 20 people. Third Party Beneficiary means a person, company or entity who is not an

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Insured but is seeking to be or is specified or referred to in a general insurance product covered by this Code, whether by name or otherwise, as a person to whom the benefit of the insurance cover provided by the product extends. we, us or our means the organisation that has adopted this Code. Wholesale Insurance means a general insurance product covered by this Code which is not Retail Insurance. Workers Compensation means insurance that covers an employer’s liability to pay compensation for an employment-related personal injury. you or your means an Insured or Third Party Beneficiary, or as otherwise stated in relation to a particular section of this Code.

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INSURANCE BROKERS CODE OF PRACTICE [IBCP.50] Insurance Brokers Code of Practice [The Insurance Brokers Code of Practice is reproduced with permission of the National Insurance Brokers Association of Australia. See www.niba.com.au] The insurance broking profession is about helping you to navigate the unavoidable complexities of insurance products and markets so you can appropriately manage the risks affecting you. David Wyner, President, 2013–2014, National Insurance Brokers Association of Australia

Important background information

Why do you need to use an insurance broker? An insurance broker can: • help you to assess and manage your risks, and provide advice on insurance solutions appropriate for your needs; • help you to arrange, acquire and maintain insurance; and • act as your advocate in settlement of any claim that may be made by you under your insurance. In the majority of cases, an insurance broker acts on your behalf as your agent. In some situations the insurance broker may act for insurers. Insurance brokers can offer you a variety of services, such as: • assistance with selecting and arranging appropriate, tailored insurance policies and packages; • detailed technical expertise including knowledge of insurance markets, prices, terms and conditions, benefits and pitfalls of the wide range of insurance policies available on the market; • assistance in interpreting, arranging and completing insurance documentation; • experience in predicting, managing and reducing risks; • experience with claims and settlements; and • assistance with services related to insurance such as premium funding and risk management reviews. The Code is designed to set high standards relating to the role of an insurance broker when acting for customers, as well as when an insurance broker may act for an insurer or play a role in relation to services associated with its insurance services. 662

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Who owns the code? The Code is an initiative of the National Insurance Brokers Association of Australia ACN 006 093 849 (NIBA) which has been recognised and respected for more than 30 years as the voice of the insurance broking industry in Australia.

National Insurance Brokers Association of Australia Level 11, 20 Berry Street North Sydney, NSW, 2060 Australia (02) 9459 4300 http://www.niba.com.au

About NIBA Since its incorporation in 1982, NIBA has been a driving force for change in the Australian insurance broking industry, setting higher standards of professionalism and education for insurance brokers, establishing professional qualifications (Qualified Practising Insurance Broker – QPIB) and providing ongoing training and support for insurance brokers through NIBA College. NIBA represents nearly 400 member firms and over 3000 individual Qualified Practising Insurance Brokers throughout Australia.

How to navigate the code (A “Code Member” is referred to in these Standards as “we”, “our” and “us” and a “Client” as “you” and “your”) Step 1 Understand what the code applies to The Code applies to general and life insurance and other insurance related services (as defined in the “Covered Services” section page 8 [of the Code]) provided by us as Code Members (see “Code Members” definition on page 11 [of the Code]) to you as our Client (see “Client” definition page 11 [of the Code]). ©

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Insurance brokers manage more than 90% of the commercial insurance transacted in Australia, and are a major stakeholder in insurance distribution, effectively managing over $16 billion in premiums annually and regularly accessing overseas insurance markets for large and special risks.

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The Code is drafted to cover a broad range of services that go beyond those covered by the Financial Ombudsman Service (FOS) Terms of Reference. Contact the Code Administrator with questions. Visit http://www.fos.org.au or tel: 1300 7808 08. Step 2 Understand the standards and requirements that code members must meet The Code sets the high standards and other requirements we agree with NIBA to meet (see “Service Standards” section on pages 10-13 [of the Code]). Nothing prevents us from adopting higher standards where we wish to do so. The aim is to promote informed and effective relationships between us and you, insurers and others involved in the insurance industry. The Code standards address many issues not specifically dealt with in legislation. The Code does not affect or limit your rights under any relevant legislation or other law against us. Step 3 Understand what happens if the code is breached If there is a breach of the Code you can make a complaint and seek to have it resolved in accordance with the Code terms (see “Complaints and Disputes Resolution Process” on pages 14-16 [of the Code]). The Code does not create legal or other rights between us and any person other than NIBA, with which we contract in relation to the Code. The Code Compliance Committee can impose binding orders and/or sanctions on us for a breach (See “Binding Orders and Sanctions” on page 16 [of the Code]). To maintain high standards of compliance (and help protect consumers) the Code Compliance Committee will undertake annual reviews of Code compliance. The Code Administrator also has the power to undertake Code reviews of our compliance and the Code Compliance Committee can impose binding orders and/or sanctions on us for any identified breach. The Code Compliance Committee also monitors Code compliance and oversees administration of the Code. How up to date is the Code? The Code is a living Code and can be updated by NIBA at any time to take into immediate account where necessary of any significant market developments and industry experiences. NIBA will arrange for the Code to be reviewed every three years. 664

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In making any changes NIBA will consult with relevant stakeholders, including consumer representatives, Code Members, FOS, the Code Compliance Committee and relevant government agencies. Are any Code reports available to you? Reports can be prepared and publicised by NIBA covering matters it believes are of importance having regard to the Code Objectives and Code Principles. Words with special meanings Some words have the special meanings set out in the “Words with Special Meanings” section on pages 17-18 [of the Code]. Additional guidance to help you understand the Code Guidance has been developed to assist the understanding of the Code but does not form part of the Code itself. See the Code of Practice section of the NIBA website at http://www.niba.com.au Code Procedures Code Procedures also apply which cover in detail how a Complaint may be made and resolved and details of the structure and powers of the Code Administrator and Code Compliance Committee. See the Code of Practice section of the NIBA website at http://www.niba.com.au

What does the code seek to do? (code objectives) (A “Code Member” is referred to in these Standards as “we”, “our” and “us” and a “Client” as “you” and “your”)

The above is a high level summary. Full details are enclosed throughout this document. WHAT YOU NEED TO KNOW We are committed by the Code to high standards, which apply to a very broad range of customers and services. They are designed to: • result in a higher standard of service for customers; and • promote better and more professional, informed and effective relationships between insurance brokers and their customers, insurers and others involved in the insurance industry. ©

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THE CODE COMMITS US AND OUR REPRESENTATIVES TO: high standards of customer service; a free and transparent complaints and compliance review process; and abide by any binding sanctions imposed on us under the Code for any breach.

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The Code addresses many issues not specifically dealt with in legislation. Where the Code imposes an obligation that is greater than the law we will comply with it (unless it would cause us to breach the law). The Code aims to work together with the many laws covering our conduct and in no way limits your rights under such laws against us. The Code does not create legal or other rights between us and any person other than NIBA, with which we contract in relation to the Code. You can complain to the Code Administrator and have the complaint resolved in accordance with the procedures set out in the Code (see “Complaints and Dispute Resolution Process” on pages 14-16 [of the Code]). This is usually done if our Internal Dispute Resolution (IDR) process fails to resolve the complaint. FOS will not usually consider a complaint that has not gone through this process. The Code Administrator can also conduct reviews of Code compliance by us even where there has been no complaint. There is also an independent Code Compliance Committee that makes determinations on alleged Code breaches unresolved by the Code conciliation process, monitors compliance and oversees administration of the Code. All of the above helps minimise non-compliance and maintain high compliance standards. By agreeing to the Code we enter into a contract with NIBA to abide by the Code. The Code does not create legal or other rights between us and any person other than NIBA. The Code Compliance Committee can impose binding orders or sanctions on us for a breach of the Code.

Scope of the code

Who does the code apply to and from when? (code members) WHO ARE CODE MEMBERS (also referred to as “we”, “our” and “us” in the Code)? NIBA Principal Member or Corporate Associate as defined in the NIBA Constitution Anyone that has entered into a formal agreement with NIBA to be bound by the Code Such other type of NIBA member approved by the NIBA Board

WHEN DOES THE CODE APPLY FROM? 666

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The later of: • the time they become a Principal Member or Corporate Associate; and • 1 January 2014 or such earlier time they agree with NIBA to opt into this Code. The time they enter into an agreement with NIBA to be bound by the Code. For a list of Code Members see http://www.niba.com.au

What services are covered by the code? (covered services) Covered services The Code applies to Covered Services provided by us (or our Representatives on our behalf) after the time we become bound by the Code (see “Who does the Code apply to and from when?” above). Covered Services are made up of Insurance Services and Associated Services. INSURANCE SERVICES means all: • general insurance services; and • life insurance services in relation to life policies (as defined in section 9 of the Life Insurance Act 1995 (Cth)). Insurance Services do not include reinsurance services. ASSOCIATED SERVICES means services provided in association with the above two types of Insurance Services.

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These services include but are not limited to: • claims administration services; • loss control and risk management advice; • mutual fund or captive administration; • risk inspection; and • premium funding arrangement or referral. Associated Services do not include reinsurance services

Who can access the benefits of the code? (client - referred to as “you” and “your” in the code) A person is covered by the Code as a Client in relation to the Covered Services we provide to them. However, a Client will not include any: • insurer or its agents; ©

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• insurance broker; • other type of insurance intermediary; or • other insurance service provider such as a premium funder and loss adjuster, except to the extent we have provided Covered Services to them in relation to or arising from their proposed or actual purchase of insurance or Associated Services. For example, if an insurer uses our services to acquire insurance on their behalf, they are a Client in relation to that insurance and any premium funding referral we may make related to the insurance. If we act as their agent in selling insurance for them to others or act for an insured in arranging insurance with them as insurer, they won’t be a Client in relation to these services.

What rights are provided by the code? Rights between us and NIBA We have agreed with NIBA to comply with: • the standards and provisions of the Code; and • any orders made or sanctions imposed by the Code Compliance Committee as a result of our breach of the Code. Rights between us and you You have a right to make a complaint under the Code if you believe there has been a breach of the relevant standards or provisions and seek to have it resolved in accordance with the terms of the Code The Code does not create any legal or other right as between us and you or any person other than NIBA. This means that by agreeing to comply with the Code we do not make any representation to you, or agree with you that, we will meet the Code standards in providing our service (unless specifically stated otherwise in writing to you). Our agreement to do so is only with NIBA.

How is the code applied? (code principles) The provisions of the Code will be applied having regard to the: • requirement of Code Members to meet the standards established at general law and statute, in particular but in no way limited to the following (as amended from time to time): – Corporations Act 2001 (in particular Chapter 7); – Insurance Contracts Act 1984; – Australian Securities and Investments Commission Act 2001; – Competition and Consumer Act 2010; and – Privacy Act 1988 668

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•

• • • •

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To the extent the Code may be found to be inconsistent with any Commonwealth, State or Territory law, that law always prevails. fact that insurance policies and arrangements between Code Members, Clients and insurers and their agents are substantially governed by the above legislation; need for Code Members to provide fair, honest and diligent services to enhance and maintain public confidence in insurance brokers and insurance intermediaries; need for Clients of Code Members to be made aware of the provisions of the Code; and need to promote competition and cost efficiency in the insurance industry and to ensure flexibility and innovation in the development and enhancement of products and services for Clients of Code Members.

Service standards

What standards apply to our Covered Services? 1 We will comply with all relevant law 2 We will transparently manage any conflicts of interest that may arise

When providing Covered Services this standard is met where we: • identify any conflicts of interest; • assess and evaluate these conflicts of interest; • decide upon and implement an appropriate response to those conflicts, which can, depending on the circumstances, include: – disclosing the relevant conflicts of interest to you; – allocating another representative to provide the relevant Covered Services; and – declining to provide our Covered Services. • have monitoring procedures in place to ensure that: – our conflicts management arrangements are implemented and maintained; and – any non-compliance is identified, recorded and appropriately acted upon. • keep appropriate records of our management of conflicts of interest; • answer any questions you have about conflicts of interest and our procedures for handling them; and • comply with any additional requirements imposed by relevant law regarding the management of conflicts of interest. ©

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Conflicts of interest are circumstances where some or all of your interests are inconsistent, or diverge from, some or all of our interests.

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3 We will clearly tell you if we do not act for you When providing Insurance Services we will clearly tell you if we are: • acting as agent of the insurer (including under binder) before or at the time we provide any Insurance Service; and • using another insurance broker to assist in the arrangement of insurance for you (commonly called a wholesale broker) and will explain their role and answer your questions. 4 We will clearly tell you about the scope of our covered services Before or at the time we provide Insurance Services we will clearly tell you: • if we are providing you with advice based on our consideration of whether certain insurance products are appropriate for your personal needs, objectives or financial situation or not (Personal Advisory Service); and • if there are any material limits on the scope of any Personal Advisory Service being provided and what we believe are the relevant implications of this. 5 We will discharge our duties diligently, competently, fairly and with honesty and integrity When providing Covered Services on your behalf we will exercise reasonable care and skill, including communicating with you in a clear and prompt manner. When you are buying insurance and we act on your behalf, we will do the following (unless we agree with you or tell you otherwise): • when we provide you with a Personal Advisory Service in relation to the insurance we will: – act in your best interests by: • identifying your objectives, financial situation and needs as disclosed to us by you through your instructions; • identifying the subject matter of the advice that has been sought by you (whether explicitly or implicitly); • identifying your objectives, financial situation and needs that would reasonably be considered as relevant to advice sought on that subject matter (Relevant Circumstances); and • making reasonable inquiries to obtain complete and accurate information where it is reasonably apparent that information relating to your Relevant Circumstances is incomplete or inaccurate, Something is “reasonably apparent” if it would be apparent to a person with a reasonable level of expertise in the subject matter of the advice that has been sought, were that person exercising care and objectively assessing the information given. 670

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• warn you if it is reasonably apparent that information relating to your objectives, financial situation and needs on which the advice is based is incomplete or inaccurate, and tell you that because of this, you should, before acting on the advice, consider the appropriateness of the advice having regard to your objectives, financial situation and needs; • provide advice that is appropriate for your needs. This can include, where appropriate in the circumstances, a reasonable explanation of the terms of the insurance that the advice is being provided on; • where the insurance is to be provided by a foreign general insurer that is not authorised under or subject to the provisions of the Insurance Act 1973 (which establishes a system of financial supervision of general insurers that carry on general insurance business in Australia), we will: – inform you of the general risks we believe are involved in transacting insurance with such an insurer; and – answer your questions; • assist you to determine the level of insurance cover you may require; • assist you to determine your policy requirements and arrange, acquire and maintain your insurance policies for you; • only request an authority to obtain information from your insurers relevant to the services we are to provide for you; • promptly provide to insurers any insurance proposal and application forms or other information required by them; • only advise you that insurance is available on specified terms (insurance conditions, coverage or premiums) where the declared insurer has provided such terms; • take all reasonable steps to promptly make available to you copies of any relevant insurance documentation we receive, including but not limited to policy wordings, schedules, certificates and endorsements; • promptly advise you if policy coverage is accepted, declined, cancelled or lapsed or has had additional special terms applied to you; • receive all general insurance notices from the insurer on your behalf and pass the notices or relevant information in the notices to you promptly (including but not limited to renewal information where relevant); • in relation to Group Purchasing Arrangements (as defined below): – where the person can separately elect and pay to access the benefit we will tell the contracting insured of the importance of: • taking reasonable steps to make copies of the relevant policy terms available to the relevant persons at or before the time they make the election and pay; and • complying with relevant law as it applies to them in relation to such arrangements. A “Group Purchasing Arrangement” is where the policy provides the benefit of being able to claim under the policy to persons who are not ©

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contracting insureds (e.g persons covered by reason of section 48 of the Insurance Contracts Act 1984 (Cth)). When you have an insurance claim and we act on your behalf we will (unless we agree with you or tell you otherwise): • assist you in making and progressing a claim (including but not limited to providing you with claim forms and claims advice), and will act in your best interests in doing so; • on receiving an insurer’s response to a claim, inform you as soon as reasonably practical of that response; and • assist you and negotiate with insurers on your behalf in the event of a claim being disputed or rejected. When we act for an insurer and not on your behalf we will: • tell you if we are acting for an insurer and not for you before or at the time we provide our services for certain transactions. This is important because in these circumstances we will not be acting on your behalf; • comply with any obligation that the insurer has under any law or code of practice the insurer subscribes to, where relevant to our conduct and subject to our agreement with the insurer; • take all reasonable steps to promptly make available to you or your agent copies of any relevant insurance documentation evidencing the insurance in force, including but not limited to policy wordings, schedules, certificates and endorsements; and • reasonably assist with any requested acquisition, arrangement or management of your insurance policies, including but not limited to any endorsement, reinstatement, replacement, renewal or cancellation of such policies. 6 We will clearly tell you how our covered services are paid for before we provide them and answer any questions you have Before or at the time you enter into an insurance policy we will clearly tell you: • if we will receive remuneration (e.g a fee payable by you) in addition to or instead of commission/brokerage from the relevant insurer as a result of you accepting an insurance policy arranged by us (including renewals and variations). The commission/brokerage is generally a percentage of the insurer’s premium. It is included in the premium set out in our invoices and we receive it when you pay the premium or at such other time agreed with the insurer. • if we intend to retain any of the commission/brokerage paid by the insurer or any fee paid by you if the insurance policy is cancelled before the period of insurance ends. 7 We will handle any money received in accordance with relevant law and any agreement with you 672

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We will answer any question you may have about the operation of any designated trust account we have established in accordance with the Corporations Act 2001. We use this account to hold certain insurance premiums paid to us by you and certain moneys owing to you that are paid to us by insurers.

9 We will respond to catastrophes and disasters in a timely, professional, practical and compassionate manner in conjunction with any industry-wide response 10 We will ensure that we have an internal complaints and disputes handling process that meets the Code Complaints and Dispute process standards (see pages 14-16 [of the Code]) 11 We will support NIBA in promoting the Code and make information on the Code (including how to make a complaint) and our Covered Services readily available to you 12 We will not engage in activity or inactivity that is reasonably likely to bring the insurance broking profession into disrepute

Complaints and dispute resolution process

General standards (A “Code Member” is referred to in these Standards as “we”, “our” and “us” and a “Client” as “you” and “your”) ©

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8 We will ensure that we and our representatives are competent and adequately trained to provide the relevant services and will maintain this competence We will: • ensure our Representatives receive adequate training to competently provide services on our behalf, including but not limited to: – an understanding of this Code or other relevant code applying to them and their obligations under them (where applicable to their activities); and – meeting any training standards identified by NIBA as applicable to the Covered Services; • ensure records of their training are kept for at least five years and make the records available for examination by the Code Administrator or Code Compliance Committee on request; • measure the effectiveness of their training by appropriately monitoring their performance; • require additional or remedial training to address any identified deficiencies or improvements required in their training and ongoing development; and • maintain and keep current a training and development plan for our Representatives that is appropriate for the services provided by them or to be provided by them in the future.

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Our internal complaints and disputes handling process for Covered Services (IDR Process) is a two-step process as set out to the right and must: • meet any relevant standard required by law; • be free of charge; • be conducted in a fair, transparent and timely manner; • require us to: – immediately (or if this is not possible as soon as practicable) acknowledge the receipt of Complaints or Disputes and address them promptly in accordance with their degree of urgency; – only ask for and take account of relevant information in considering a Complaint or Dispute; – immediately initiate action to correct any identified error or mistake in dealing with a Complaint or Dispute; – allow you to seek access to information we have relied on in assessing a Complaint or Dispute and provide you with access to the information, except in special circumstances, such as where this would breach any laws (e.g. privacy) or would prejudice us in relation to the Complaint or Dispute; and – provide reasons why we will not give you access to such information mentioned above (in writing if you request it); and • handle Complaints and Disputes caused by our Representatives for Covered Services provided by them on our behalf.

Usual process for resolving a complaint from start to finish Step 1 Making a complaint to us “Complaint” means an expression of dissatisfaction made to us by you related to our Covered Services, or the complaints handling process itself, where a response or resolution is explicitly or implicitly expected. We will advise you on how we propose to resolve it by the earlier of: • 21 days or such later time agreed with you in order to obtain information or undertake the relevant assessment or investigation. If a later time is agreed, we will keep you informed of progress on a regular basis as is reasonable in the circumstances; and • such time limits required by law or the relevant ASIC-approved external dispute resolution scheme to which we belong. If the Complaint is resolved and both parties are happy, the issue ends here. If not, the Complaint will proceed to step 2 as a Dispute. Step 2 Dispute “Dispute” means an unresolved Complaint. 674

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If a Complaint is unresolved (for example, you tell us you are dissatisfied with our decision on a Complaint, or you or we ask to treat the Complaint as a Dispute) we will follow the procedure below. We will refer the matter to our internal disputes resolution manager, who will consider and seek to resolve the dispute by the earlier of: • 21 days or such later time agreed with you in order to obtain information or undertake the relevant assessment or investigation. If a later time is agreed, the manager will keep you informed of progress on a regular basis as is reasonable in the circumstances; and • such time limits required by law or the relevant ASIC-approved external dispute resolution scheme to which we belong. Our dispute resolution manager will: • advise you of any decision they have reached in writing, including clear reasons for the decision; and • if they have been unable to resolve a dispute with you through the above process, provide you with information on how you can seek to access the the Financial Ombudsman Service, or such other ASICapproved independent external dispute resolution scheme we belong to (which is free of charge), as described in step 3, and meet such other requirements of that scheme. We will make information on our Complaints and Disputes resolution process available to you. Step 3 Referral of dispute to Financial Ombudsman Service (FOS) Dispute within fos terms of reference If FOS decides your dispute falls within its Terms of Reference (TOR) it will handle it in accordance with the TOR. Visit http://www.fos.org.au for more details. If FOS decides your dispute falls outside its TOR it will arrange, as Code Administrator, to determine if it falls with the terms of the Code. If so, it will follow the process below. See Code Procedures for more detail, located at http://www.niba.com.au Reporting breach and resolution by Code Compliance Manager • Reporting a breach – For an alleged breach to be reviewed the required complaint form must be completed and provided to the Code Compliance Manager by a Client. If appropriate, they will assist the Client in completing the form. • Review of Code compliance ©

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Dispute within code terms

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– The Code Compliance Manager may conduct compliance reviews of any Code Member whether a complaint has been received or not. • Conciliation process – The Code Compliance Manager will, where appropriate, endeavour to resolve alleged breaches of the Code by a Code Member by conciliation. They do not have the power to make any decisions which bind a Code Member or the complainant. Binding determination by Code Compliance Committee • The Code Compliance Committee has the power to determine if there is a breach of the Code and make such orders and impose such permitted sanctions as are appropriate on the Code Member. • These bind the Code Member but not the complainant. Financial Ombudsman Service GPO Box 3 Melbourne VIC 3001 http://www.fos.org.au 1300 780 808 [email protected]

Binding orders and sanctions The following binding orders and sanctions can be made or imposed on Code Members for a Code breach: • order rectification of the problem procedures; • order a Code Member to comply with the provisions of the Code or a specified provision of the Code; • order a Code Member to comply with the provisions of the Code Procedures or a specified provision of the Code Procedures; • order a Code Member to undertake through an independent and appropriately qualified person an audit of its compliance procedures; • order a Code Member to publish corrective advertising; • order a Code Member to undertake, or require their employees or agents to undertake, professional education of a specific type; • impose a timetable for compliance with the above orders by a Code Member; • publish details of any non-compliance by a Code Member, including their name and the name of the Company they represent; and • recommend to NIBA that the Code Member be removed or suspended as a member of the Code and NIBA. No monetary penalties can be imposed on a Code Member. 676

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Words with special meaning “Associated Services” on page 8 [of the Code]. ASIC means the Australian Securities and Investments Commission. CATASTROPHES OR DISASTERS means any natural events such as fires, floods, earthquakes, cyclones, severe storms and hail, affecting a significant group of persons. CLIENT has the meaning given to it in the section “Who can access the benefits of the Code? (Client)” page 9 [of the Code]. CODE means this version of the Code. CODE ADMINISTRATOR means the Financial Ombudsman Service Limited (FOS) or such other entity appointed by NIBA from time to time for this role. CODE COMPLIANCE COMMITTEE means the independent committee of that name operating under the Code Procedures that can amongst other things, make binding determinations for a breach of the Code. CODE COMPLIANCE MANAGER means the Code Compliance Manager appointed by the Code Administrator in accordance with the Code Procedures. CODE MEMBER has the meaning given to it in the section “Who does the Code apply to and from when? (Code Members)” page 8 [of the Code]. CODE OBJECTIVES has the meaning given to it in the section “What does the Code seek to do? (Code Objectives)” page 7 [of the Code]. CODE PRINCIPLES has the meaning given to it in the section “How is the Code applied? (Code Principles)” page 9 [of the Code]. CODE PROCEDURES means the code procedures determined by the NIBA Board to apply in relation to the administration of the Code. See the Code of Practice section of the NIBA website at http://www.niba.com.au COMPLAINT means an expression of dissatisfaction made to us by you related to our Covered Services, or the complaints handling process itself, where a response or resolution is explicitly or implicitly expected. COVERED SERVICES has the meaning given to it in the section “What Services are covered by the Code? (Code Services)” page 8 [of the Code]. DISPUTE means an unresolved Complaint. FOS means the Financial Ombudsman Service Limited, which administers the Code for NIBA http://www.fos.org.au FOS TERMS OF REFERENCE means the relevant terms of reference issued by FOS available at http://www.fos.org.au INSURANCE SERVICES has the meaning given to it in the section “Insurance Services” page 8 [of the Code]. NIBA means The National Insurance Brokers Association of Australia (NIBA) (ACN 006 093 849) http://www.niba.com.au which is the peak body for the insurance broking industry in Australia. ©

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ASSOCIATED SERVICES has the meaning given to it in the section

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PERSONAL ADVISORY SERVICE is when we provide you with advice

based on our consideration of whether certain insurance products are appropriate for your personal needs, objectives or financial situation or not. REPRESENTATIVE(S) means anyone who acts on behalf of a Code Member in providing the Covered Services, including but not limited to their employees. YOU/YOUR has the same meaning as “Client”. WE/OUR/US has the same meaning as “Code Member”.

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INDEX Abbreviations used in this Index References in this index are to provisions of various Acts and Regulations. References in square brackets are to paragraph numbers. The full list of abbreviations used for Acts and Regulations in this index is as follows: GICP provision number General Insurance Code of Practice 2014 eg GICP 1.1 IBCP Insurance Brokers’ Code of Practice ICA section number Insurance Contracts Act 1984 (Cth), eg ICA 24 ICA Schedule number. Insurance Contracts Act 1984 (Cth), eg ICA Sch 2

A Agency information, provision of, [11.10], [71.20] insurance intermediary as agent of insurer, ICA 71(3), [71.20], [71.50] where broker not under binder, ICA 71(1), [71.20], [71.60] where person acted as agent, ICA 71(2), [71.20] principles of, [11.10], ICA 71, [71.20] Agent duty of disclosure, knowledge, [21.10.5] liability of ICA, under, [76A.20] where company as agent contravenes ICA, [76A.20] where employer company contravenes ICA, [76A.20] penalty provisions, [76A.20] Ambiguous question application of ICA s 23, [23.10], [23.40], [23.50] companies, application to, [23.30] construction of questions, [23.50] interpretation of, [23.10] proposed insurance contract, asked in relation to, ICA 23, [23.10]–[23.50] “the person” in ICA s 23 as the insured, [23.30]

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“would have understood”, [23.20] Ambiguous terms insurer’s reliance on, [13.40.8] Arbitration provision contract for general insurance, in, [8.30], [10.20], ICA 43, [43.10]–[43.20] agreement to submit to arbitration after dispute arises, ICA 10(3), [10.20], ICA 43(2), [43.10], [43.20] optional, [43.10] Arson fraudulent claim where, [56.10.4] Australian Law Reform Commission history of ICA draft Bill cl 3, [1.30] matters referred to, [1.20]–[1.30], [3.10] repeal of specified Imperial Acts, ICA 3, [3.10] Australian Securities and Investments Commission (ASIC) administration of ICA, ICA 11A, [11A.20], ICA 11B, [11B.20] definition of ASIC, ICA 11(1), [11A.30], [11B.30], [11C.30], [11D.30], [11E.30], [55A.30] powers of examination of insurer’s documents, ICA 11E, [11E.20] imposition of penalties, ICA 11C, [11C.20], ICA 11D, [11D.20], ICA 14A

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Index

ICR reg number. Insurance Contracts Regulations 1984 (Cth), eg ICR 2

INDEX Australian Securities and Investments Commission (ASIC) — continued information requests to insurer, ICA 11C, [11C.20] intervention in proceedings, ICA 11F, [11F.20] liability of directors, employees and agents of insurers, ICA 11DA review of administrative arrangements, ICA 11D, [11D.20] supervisory, ICA 11C representative actions by, ICA 55A, [55A.20] Availability of insurance, [1.40] Average provisions general insurance contracts, in, ICA 44, [44.10] insurer reliance on, ICA 44(1), [44.10], [44.30] sum insured 80% or less of value of residential building, ICA 44(3), [44.10] formula to calculate reduced claim, ICA 44(3), [44.10] or more of value of residential building, ICA 44(2), [44.10] value meaning, ICA 44(4), [44.10] when assessed, ICA 44(4), [44.10] where ineffective, ICA 44(2), [44.10] Aviation war and terrorism risk third party, ICA 9(4), [9.60], ICR 33 Avoidance avoid, definition, ICA 11(1), [11.05], [28.20.3], [29.20.3], [29.30.3] claims paid prior to, where, [11.05] contract that has come to an end, of, ICA 29(3), [29.30.3] court may disregard in certain circumstances, ICA 31, [31.10] amount insured may recover, ICA 31(1), [31.10], [31.10.4] any other relevant matter, [31.30.1] before entering into a contract, ICA 28, [31.40] loss that is the subject of the proceedings, ICA 31(4), [31.10], [31.20.1] third parties ineligible, [31.20.1] matters for court consideration, ICA 31(3), [31.10] 680

deterrence of fraudulent conduct, [31.30.2] harshness and unfairness, [31.10.3] prejudice to insurer, [31.20.2], [31.50] onus of proof on insured, [31.50] proceedings by the insured, [31.10.1] when, ICA 31(2) general insurance contract fraudulent misrepresentation or non-disclosure, for, ICA 28, [28.20.1]–[28.20.2] refund of premium, [28.40] that has come to an end, [11.05] life insurance contract, court may disregard, [29.30.1], [31.10]

B Bad faith American tort of, [12.20] Binder definition, ICA 11(1) Blanket scheme — see Superannuation Breach duty of utmost good faith, of — see Duty of utmost good faith insurance contract, of — see Insurance contract Broker — see Insurance broker Brokers’ Code — see Insurance Brokers’ Code of Practice

C Cancellation general insurance contract, of, ICA 60, [60.10], [60.40], [63.25] cover notes, ICA 60(4)(b), [60.10] instalment, ICA 39, [39.10] for non-payment of premium, ICA 62, [62.10] insured’s acts leading to insurer’s right to cancel, ICA 60(1), (2), [60.10] act or omission after contract entered into, ICA 60(2), (3) breach of duty of disclosure, ICA 60(1)(b) breach of duty of utmost good faith, ICA 60(1)(a), [60.30], Mann’s Annotated Insurance Contracts Act

Cancellation — continued [60.40] failure to comply with provisions, ICA 60(1)(d) fraudulent claims, ICA 60(1)(e) insurer fails to send renewal notice, ICA 58(3), ICA 60(4)(b), [60.10] insurer in liquidation, ICA 61, [61.10] justifying cancellation, [63.20], [63.30] misrepresentation, ICA 60(1)(c) void, ICA 63, [63.10], [63.30] reasons for cancellation, ICA 75, [71.15], [75.20] insurance contract, of automatic cessation of, [59.30] delivered by post, timing of, [77.10] insurer’s notice in writing to insured, ICA 59(1), [59.10], [59.20] paid claim, in relation to, [13.40.6] procedure, ICA 59, [59.10] timing of cancellation, ICA 59(2), [59.10] applicable business day, ICA 59(2A) life insurance contract, ICA 59(3), ICA 63, [63.20] reasons for cancellation, ICA 75, [75.15], [75.30] Causal connection test contribution to loss by insured’s conduct, [54.10.1], [54.10.3] crane operation contrary to Australian Standards, [54.20] driving under the influence of alcohol, [54.20] failure of pilot to complete and aeroplane flight review, [54.20] failure of truck driver to undertake psychological MANN7 program, [54.20] failure to set an alarm, [54.20] home insurance policy excluding liability to third party claimant, [54.20] leaving Australian waters when policy confined to Australian waters, [54.20] notification to insurer and material ©

2016 THOMSON REUTERS

change, [54.20] unoccupancy of insured premises, [54.20] Cessation of insurance contract automatic, [59.30] Choice of law clause ICA, avoidance of, [8.10] Claim arson, where, [56.10.4], [56.40] blanket superannuation, ICA 4(2) day payment — see Interest exaggerated, [56.10.4] false answer by insured, [13.45.1], [56.10.4] form not specified, [56.10.1] fraudulent, ICA 56 arson, [56.10.4] cancellation of contract due to, ICA 60(1)(e) claim form, fraud in, [56.10.4] meaning, ICA 56(1), [56.10.1] co-insured, [56.10.4] corporate insured, [56.10.3] court may order insurer to pay, ICA 56(2), [56.10] deterrence of, ICA 56(3), [56.10], [56.30] duty of utmost good faith, breach of, [13.20.4], [13.40.1], ICA 56(2), [56.50] exaggeration, [13.20.4], [56.10.4] focus on claim rather than person making it, [56.10.3] insured may refuse to pay whole of claim, ICA 56(1), [56.10] minimal or insignificant part of claim, fraud as, [13.20.4] mistaken belief, [56.10.4] non-party claimant, by, [56.10.3] onus of proof rests with insurer, [56.60] powers of court, [56.10] quantification of, [56.20] third party claimant, by, [56.10.3], [56.40] what constitutes, ICA 56(1), [56.10.4] interest on — see Interest misrepresentation, what is, [28.20.2] named persons, by, entitlement, ICA 48, [48.10]–[48.50] absence of insurable interest, where, 681

Index

INDEX

INDEX Claim — continued ICA 17, [17.40], [48.40] breach of policy term by, [48.30.3], ICA 54(1) common law and, [48.30.5] duty of utmost good faith, not subject to, [14.10.5] fraud as a defence, [48.30.4] in accordance with the contract, ICA 48(1), [48.10.3] innocent, [48.30.4] insured, treated as, ICA 48(2), [48.10] insurer’s defences, as if against insured, [14.10.3], ICA 48(3), [48.10], [48.30.1] non-disclosure and, [48.30.2] not party to contract, ICA 48(1), [48.10], [48.10.1] determining whether, [45.14], [48.10.1] directors and officers liability insurance, [48.10.1] third parties, ICA 51, [51.15], [54.22] other insurance clauses, ICA 45, [45.14], [45.50], [48.50] rights not contingent on making a claim, [48.20.1] specified or referred to in contract, ICA 48(1), [48.10.2] non-disclosure, what is, [28.20.1] prior circumstances, from, exclusion of, [52.40] reasonable period for insurer to have RSA holders, by, [48AA.30] life policy connected to for benefit of another, ICA 48AA, [48AA.10], [48AA.20] insurer’s defences, as if against insured, ICA 48AA(3), [48AA.10], [48AA.20], [48AA.30] RSA holder, treated as insured, ICA 48AA(2), [48AA.20] non-parties to RSA contracts, ICA 48AA who can make, ICA 20, [20.10], [20.30], [48.10.2], [48.30.1], [48.30.5] withheld payment, ICA 57(2), [57.30] Co-insureds, [21.10.2], [26.20], [28.10.1] 682

Codes of practice brokers’ code — see Insurance Brokers’ Code of Practice general insurance — see General Insurance Code of Practice 2014 Consumer credit insurance, [11A.20] “cooling-off” period [repealed], ICA 64A definition, ICA 11(1), ICR 2A, ICR 21 example, [71.20] minimum claim amounts, ICR 24 non-indemnity insurance, as, [16.20] notifications, repealed, ICA 71A, [71A.20] prescribed contracts, ICR 21, [34.20] prescribed events, ICR 22 exclusions, ICR 23 Contra proferentem, [13.40.8], ICA 36, [36.10] Contract general insurance, of — see General insurance contract insurance, of — see Insurance contract liability insurance, of — see Liability insurance contract life insurance, of — see Life insurance contract unjust — see Unjust contract Contracting out prohibition of, ICA 52, [52.10]–[52.30] Cost of insurance, [1.40] Cover note interim insurance contract, ICA 11(2), [38.20] liability of insurer, ICA 38, [38.10] Criminal Code application of, ICA 11AA, [11AA.20]

D Damages — see also Remedies breach of contract, [12.30.2], [13.10.1] definition, [51.40] delay, for, [12.20] disappointment, for, [12.20] duty of utmost good faith, breach of — see Duty of utmost good faith exemplary, [12.20] interest — see also Interest as opposed to, [57.10.1], [57.10.3] by way of compound interest, Mann’s Annotated Insurance Contracts Act

Damages — continued [57.10.3] double compensation, [7.20] on award of, [7.20] misrepresentation or non-disclosure — see Remedies Deed of release provision Contract of insurance, effect, [10.25] Defect pre-existence, limitation of liability by insurer, ICA 46, [46.10] before contract was entered into, ICA 46(2), [46.20] classes of contract not applicable to, ICR 30, [46.10], [230.10] insured not aware, where, ICA 46(2), [46.10] policy terms, not facts of case, as focus of ICA s 46, ICA 46(2), [46.20] Director directors and officers liability insurance, [48.10.1] liability of, where company as agent contravenes ICA, [76A.20] Disability continuous disability insurance policy, ICA 11(1), [11.50] requiring monthly sum of money on disability, [217.10] pre-existing, limitation of liability by insurer, ICA 47, [47.10], [47.15] before contract was entered into, ICA 47(2), [47.20] insured not aware, where, ICA 47(2), [47.07], [47.20] loss, meaning, ICA 47(1), [47.10] total and permanent, determining, [13.40.2] Duty of disclosure agent’s knowledge of, [21.10.5] ambiguous questions — see Ambiguous question application to co-insureds, [21.10.2], [26.20], [28.10.1] non-parties, [21.10.3] “the insured”, ICA 21(1), [21.10.2], [28.10.1] cancellation of contract for, ICA 60(1)(b) ©

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common knowledge, exception for matters of, ICA 21(2)(b), [21.20.1] common law, replacement by ICA Pt IV, [21.10] constructive knowledge, [21.10.5] definition, ICA 11(1), ICA 21 duty of utmost good faith, and, [12.10], [12.30], [13.10.4] eligible contracts of insurance, ICA 21A(1), ICA 21A(9), ICR 2B insured compliance under s 21A or 21, [21A.20] conditions for compliance of, ICA 21A(5), [21A.20] disclosure before contract renewed, ICA 21B, [21B.20] fraudulent statements of, [21A.20] insurer disclosure before contract renewed, ICA 21B, [21B.20] exceptional circumstances request of insured, ICA 21A(4)(b), [21A.20] specific questions of insured, ICA 21A(2), ICA 21A(4)(a), [21A.20] waiver, ICA 21A(3), ICA 21A(5), [21A.20] synopsis, [21A.20] entry into insurance contract, before, ICA 21(1), [21.10.4], ICA 28(1), [28.10.2] exceptional circumstances, ICA 21A, [21A.20] exceptions to requirement, ICA 21(2), [21.20.1]–[21.20.3] common knowledge, ICA 21(2)(b), [21.20.1] matters that diminish risk, ICA 21(2)(a) matters the insurer knows or should know, ICA 21(2)(c), [21.20.2] actual knowledge v possessed information, [21.20.2] where insurer waives compliance, ICA 21(2)(d), [21.20.3] extent of, [12.10.2] failure to comply 683

Index

INDEX

INDEX Duty of disclosure — continued cancellation of contract for, ICA 60(1)(b) consequences of breach, [13.30.1], ICA 14, [14.10.2] entry into insurance contract, before, ICA 22(1), [22.20] onus of proof, [22.60] prescribed form, ICA 22(2), ICR 3, [22.70], [203.10] insured’s, ICA 21, [21.10.1], [21.10.2] insurer must inform of duty of disclosure and application of ICA s 21, ICA 22(1), [22.10] before entry into contract, ICA 22(1), [22.20] “clearly inform”, ICA 22(1), [22.40] effect of duty of disclosure, ICA 22(1), [22.50] in writing, ICA 22(1), ICA 22(2), [22.30], ICR 3(1), [203.10] onus of proof, [22.60] oral, ICR 3(2), [203.10], ICR 3B post 28 December 2015, [22.10] prescribed form of writing, ICA 22(2), ICR 3, [22.70], [203.10] reminder notice, ICR 3A renewal of contract, [11.120], [22.90] where non-disclosure fraudulent, [22.10] knowledge agent of insured, of, [21.10.5] belief, [21.10.5] constructive, [21.10.5] known to the insured, ICA 21(1), [21.10.5] ICA s 26(2), compared, [26.50] to be relevant to insurer, ICA 21(1)(a), [21.10.6], ICA 21(1)(b), [21.10.9] officer of insurer, whether insurer possessed of knowledge of, [21.20.2] reasonable person test, ICA 21(1)(b), [21.10.8] could be expected to know, ICA 21(1)(b) 684

extrinsic/intrinsic factors, [21.10.8] materiality of facts, ICA 21(1)(a), [21.10.7], [21.10.8] acceptance of risk, [21.10.7] non-exclusive factors relevant to risk, [21.10.1] matters to be disclosed by insured, ICA 21(1), [21.10.1]–[21.10.8] misleading conduct or unconscionability, not to be read down according to, [22.80] non-exclusive factors relevant to risk, [21.10.1] onus of proof duty of insurer to inform insured of, [22.60] failure to comply, [21.40] parties to contract, of, [21.10.3] persons noted, application to, [21.10.3] prudent insurer test, [21.10.7], [21.10.8], [21.10.9], [26.10], [56.10.4] reasonable opportunity, [21.10.4] reasonable person test, ICA 21(1)(b), [21.10.8] extrinsic/intrinsic factors, [21.10.8] reasons for refusing cover, ICA 75, [75.15], [75.20] obligation to supply written reasons, ICA 75(1), [75.15] life insured may request, ICA 75(5), [75.15] where health related, to insured or medical practitioner, ICA 75(2), ICA 75(6), [75.15] where insured is not life insured, ICA 75(3)–(4), [75.15] where risk to insurer, [75.15] relevance of matter for disclosure criminal convictions of director of insured, [21.10.6] factual determination of, [21.10.6] insured could be expected to know, ICA 21(1)(b), [21.10.6], [21.10.9] reasonable person, test of, ICA 21(1)(b), [21.10.8] renewal of contract, on, [21.10.4] waived compliance, ICA 21(2)(d), [21.20.3] renewal of eligible contract of Mann’s Annotated Insurance Contracts Act

Duty of disclosure — continued insurance, ICA 21B, [21B.20] representations, warranties of existing facts to be, ICA 24, [24.10], [24.20] risk, insurer’s, ICA 21(1)(a), [21.10.7] statutory code, ICA Pt IV as, [21.10], [28.10.3] synopsis, [21.10.1], [21A.20] “the insured”, meaning of, ICA 21(1), [21.10.2], ICA 28(1), [28.10.1] “the insurer”, meaning of, ICA 21(1)(a), [21.10.7] waiver by insurer, ICA 21(3), [21.10.1], [21.20.3], ICA 21A(2), ICA 21A(5), [21A.20] ICA s 27 compared, ICA 27, [27.30] where information obviously incomplete, ICA 21(3)(b), [21.30.1], [27.25] where insured failed to answer questions, ICA 21(3)(a), ICA 27, [27.10] Duty of utmost good faith ambiguous terms, [13.40.8] application, [12.10.2], [13.10.4], ICA 14, [14.10.1], [37.50] breach of, [13.10.1], [13.10.8] application of s 21, [13.20.1] application of s 48, [13.20.2] application of s 54, [13.10.8], [54.50] application of s 56, [13.20.4] application of s 57, [13.20.5] avoidance ab initio, [13.10.2], [13.20.1] breach of duty of disclosure as, [13.20.1] cancellation of policy, ICA 60(1)(a), [13.10.8], [60.30], [60.40] damages, [12.10.2], [12.20], [13.10.2] fraud, [13.20.3], [13.20.4] fraudulent claims, [13.20.4], [56.50] insurer, by, [13.10.8] non-payment, [13.20.5], [13.40.1] post-contractual, [13.40.1]–[13.40.11] pre-contractual, [13.30.1]–[13.30.8] cancellation of policy due to, ©

2016 THOMSON REUTERS

ICA 60(1)(a), [60.30], [60.40] cessation, [13.10.3] claims handling, [13.40.1] common law, [12.30], [13.10.2] post-contractual, [12.30.2] pre-contractual, [12.30.1], [13.20.1], [13.20.3] contractual duty post-contractual, [13.10.2] pre-contractual, [13.10.2] course of conduct, agreement as to, [13.40.4] damages, and, [12.20], [13.10.2] definition, ICA 11(1), [12.10.1], [13.10.5] duration, [13.10.3] commences pre-contractually, [13.10.3] continues during litigation, [13.10.3] duty superseded by procedural rules of court, [13.10.3] duty of disclosure, and, [12.10], [12.10.1], [13.10.4], [13.20.1] duty of fair dealing and, [13.10.4] duty of good faith, compared, [13.10.1], [13.10.4] fairness, and, [13.10.3] fraud, and, [12.10.2], [13.20.4] General Insurance Code of Practice, [13.40.1] handling or settlement of claims, ICA 14A, [14A.10] honesty, and, [13.10.3], [13.40.1] insured absence of disclosure, [14.10.8] failure to notify circumstances, [13.45.3] failure to provide information and disclose its own view, [13.45.4] false answer in claim form by, [13.45.1] financial position, disclosure of, [13.30.8] insistence on obtaining development consent, [13.45.5] protected from suit, [13.45.2] reliance on indemnity terms, [14.10.11] reliance on notification of circumstances term, [14.10.10] reliance on payment provision, [14.10.3] insurer 685

Index

INDEX

INDEX Duty of utmost good faith — continued ambiguous terms, reliance on, [13.40.8] assessment of claim and formation of opinion, [13.40.3] cancellation of paid claim, [13.40.6] cancellation of policy, ICA 60(1)(a), [60.30], [60.40] claims handling by, [13.40.1], ICA 14A, [14A.10] commercial advantage gained by insurer, [13.30.5] communication, [13.40.2] conduct prior to settlement of property claim, [13.40.13] consent to course of conduct by insurer, [13.40.4] defence, assertion, [13.40.5] duty to non-party, [12.10.2] early realisation of policy, [13.40.11] false denial of existence of insurance cover, [13.40.9] insured included in negotiations, [13.30.2] insured to satisfy insuring clause, reliance, [14.10.12] lapse of cover, warning, [13.40.7] negotiations, in, [13.30.2] notification to insured of consequences of a breach, [13.30.1], ICA 14, [14.10.2] procedural conduct of proceedings, [13.40.10] protection from suit, [13.45.2] refusal to give assurance absent a contractual obligation, [13.40.12] reliance on exclusion, [14.10.7], [14.10.9] silence when cover not in accordance with that required, [13.30.4] third party recovery priority provision in deed of release, reliance, [14.10.14] total and permanent disablement definition, reliance, [14.10.13] treating one insured differently from another, [13.40.14] underinsurance, knowledge of, [13.30.3], [14.10.4] unsuccessful defence, asserting, 686

[13.40.5] interest on withheld payments, and, [13.20.5] marine insurance legislation, comparison, [13.10.1] meaning, [13.10.5] nature of, [13.10.1]–[13.10.6] fiduciary duty, distinguished, [13.10.6] respective interests, [13.10.6] non-parties, whether bound by, [13.10.1], [13.20.2] notification of provision by insurer, [14.30] other provisions, interaction with, [12.10.2], [13.20.1], [13.20.2], [13.20.3]–[13.20.5] paramount under ICA, [12.10] Part II not to be read down, ICA 12, [12.10] subsequent provisions, not limited or restricted by, [12.20] reliance on provision with utmost good faith, ICA 14, [14.10.1]–[14.30] background and synopsis, [14.10.1] interaction with ICA s 13, ICA 14(2) non-party, against, [14.10.5] notification of consequences of breach, [14.10.2] replacement provision, [14.10.3] valuable contents specification, [14.10.4] remedies for breach of — see Remedies scope of, [13.10.1]–[13.10.5] statutory duty giving rise to civil action for breach, [13.10.7] third parties, whether bound by, [13.10.4], [13.20.2] tort of bad faith, and, [12.20] Australian position, [12.20] common law, [12.20] uberrima fides, [12.20], [12.30], [13.20.2], [14.10.1], [21.10.3], [41.20] “utmost good faith”, meaning, [13.10.5] case law, [13.10.5] Mann’s Annotated Insurance Contracts Act

E Economic or pecuniary loss width of term, ICA 17, [17.10]–[17.20] Employee liability of ICA, under, [76A.20] where employer company contravenes ICA, [76A.20] penalty provisions, [76A.20] subrogation to rights against — see Subrogation Expiration general insurance contract, of, ICA 58 automatic extension of cover, ICA 58(3), [58.15] no premium payable unless claim made, ICA 58(3) where claim made, calculation of premium made, ICA 58(5), ICA 58(6) notice in writing to insured, ICA 58(2) compliance leads to no statutory failure to serve leads to automatic extension of cover, ICA 58(3) policy, [58.30] timing of, ICA 58(2) renewable insurance cover, ICA 58(1), [58.20] guaranteed, [217.20]

F Fair balance intention of ICA, as, [1.40] Family subrogation to rights against — see Subrogation Flood insurance application of ICA Pt V Div 1A, ICA 37A, [37A.10] classes of contracts relating to, [37A.10], ICR 29C flood, definition in home building and contents policies, [37A.10] flood event, meaning, ICR 29D, ICA 37D, [37D.10] flood provisions covered in contract, where, ICA 37D, [37D.10] insurer must clearly inform whether flood covered in contract, ©

2016 THOMSON REUTERS

ICA 37C, [37C.10] maximum flood cover amount, ICA 37D(4) prescribed contracts, ICR 29C flood, meaning in, ICA 37B, [37B.10], ICR 29D small businesses, ICR 29B strata title residence, definition, ICR 29A Fraud arson, [56.10.4] claim form, in, [56.10.4] minimal or insignificant part of, as, [13.20.4], [56.20] co-insured, where, [48.30.2], [56.10.4], [56.40] defence, as, [48.30.4] deterrence of, [31.10], [31.30.2], ICA 56(3), [56.30] duty of utmost good faith, breach of, [12.10.2], [13.20.3], [13.20.4], [56.50] exaggeration, [13.20.4], [56.10.4] misrepresentation, [28.20.2] mistaken belief, [56.10.4] non-disclosure, [28.20.1] non-party claimants, defence against, [48.30.4], [56.40] onus of proof rests with insurer, [56.60] quantification of, [56.20] remedies — see Remedies third party claimants, [56.40] Fraudulent claims arson, [56.10.4] cancellation of contract due to, ICA 60(1)(e) claim form, fraud in, [56.10.4] meaning, ICA 56(1), [56.10.1] co-insured, [56.10.4] corporate insured, [56.10.3] court may order insurer to pay, ICA 56(2), [56.10] deterrence of, ICA 56(3), [56.10], [56.30] duty of utmost good faith, breach of, [13.20.4], [13.40.1], ICA 56(2), [56.50] exaggeration, [13.20.4], [56.10.4] focus on claim rather than person making it, [56.10.3] insurer may refuse to pay whole of 687

Index

INDEX

INDEX Fraudulent claims — continued claim, ICA 56(1), [56.10] minimal or insignificant part of claim, fraud as, [13.20.4] mistaken belief, [56.10.4] non-party claimant, by, [56.10.3] onus of proof rests with insurer, [56.60] powers of court, [56.10] previous contracts, [56.10.2] quantification of, [56.20] third party claimant, by, [56.10.3], [56.40] what constitutes, ICA 56(1), [56.10.4] Fraudulent misrepresentation remedies — see Remedies supervening event, [28.20.2] what is, [28.20.2] Fraudulent non-disclosure remedies — see Remedies what is, [28.20.1]

G Gaming and wagering, [16.20], [17.10] General Insurance Code of Practice 2014, [GICP.50] access to information, GICP 14–GICP 14.5 application, GICP 3–GICP 3.10 co-insurance arrangements, GICP 3.8 exceptions, GICP 3.5–3.6 retail insurance only, GICP 3.7 binding agreement, GICP 1.5 buying insurance, GICP 4–GICP 4.8 cancellation rights, GICP 4.9–GICP 4.10 catastrophes, GICP 9–GICP 9.5 claims, GICP 7–GICP 7.6 assessment and investigation, GICP 7.11–GICP 7.15 compliance with timetables, GICP 7.21–GICP 7.22 decision, GICP 7.16–GICP 7.19 making a claim, GICP 7.8–GICP 7.10 repairs, workmanship and materials, GICP 7.20 urgent financial need of benefits, GICP 7.7 688

complaints and disputes, GICP 1.5, GICP 10 external disputes resolution, GICP 10.20–GICP 10.24 internal complaints process, GICP 10.3–GICP 10.10 stage one, GICP 10.11–GICP 10.13 stage two, GICP 10.14–10.19 definitions, GICP 15 financial hardship, GICP 8–GICP 8.2 collection of monies owed, GICP 8.10–GICP 8.13 where you owe us money, GICP 8.3–GICP 8.9 governance of code, GICP 12–GICP 12.8 inconsistency with laws, GICP 3.9 information and education, GICP 11–GICP 11.9 instalment policy, GICP 4.11 legal rights, relationship, GICP 1.4 minimum standards, GICP 1.1 monitoring, enforcement and sanctions, GICP 13 CGC responsibility, GICP 13.7–GICP 13.10 FOS responsibility, GICP 13.17 our responsibility, GICP 13.2–GICP 13.6 sanctions, GICP 13.11–GICP 13.16 objectives, GICP 2 obligations, imposed, GICP 3.10 open, fair and honest dealings, GICP 1.3 sanctions for non-compliance, GICP 1.6 standards for our employees and authorised representatives, GICP 5–GICP 5.4 authorised financial services licensees acting on our behalf, GICP 5.5 standards for our service suppliers, GICP 6–GICP 6.7 voluntary code, entry, GICP 1.1–1.7 General insurance contract average provisions — see Average provisions cancellation — see Cancellation contract of general insurance definition, ICA 11(6), [42.20], [44.20], [45.11], [49.30], [50.20], [58.40], [60.20], [61.20], [65.20], [66.20], Mann’s Annotated Insurance Contracts Act

INDEX

[68.20] expiration, notification by insurer of, ICA 58, [58.20]–[58.30] instalment, ICA 39, [39.10], [39.20], [39.30] cancellation of, [39.10], ICA 62, [62.10] definition, ICA 11(8), [11.80], ICA 62, [62.20] non-payment of, [39.10] number of instalments, ICA 11(8), [11.80] insurable interests legal or equitable interest, at time of loss, ICA 17, [17.10]–[17.30] requirement for, ICA 16, [16.20] maximum cover for premium, ICA 42, [42.10] Good faith — see Duty of utmost good faith

H History matters referred to ALRC, [1.20] pre-ICA, [1.10] Home buildings insurance home building, definition, ICR 2(1) Key Fact Sheets, [33A.10], ICR 4A, ICR 4B insurers obligation to provide, ICR 4C minimum claim amounts, ICR 12 place of residence, [202.20] prescribed contracts, ICR 9, [34.20] prescribed events, ICR 10 exclusions, ICR 11 Home contents insurance contents, definition, ICR 2(1) strata buildings, ICR 2(2) Key Fact Sheets, [33A.10], ICR 4A, ICR 4B insurers obligation to provide, ICR 4C minimum claim amounts, ICR 16 prescribed contracts, ICR 13, [34.20] prescribed events, ICR 14 exclusions, ICR 15 specification of valuable contents, [14.10.4] ©

2016 THOMSON REUTERS

I Imperfection policy terms, not facts of case, as focus of ICA s 46, ICA 46(2), [46.20] pre-existence, limitation of liability by insurer, ICA 46, [46.10] before contract was entered into, ICA 46(2), [46.20] classes of contract not applicable to, ICR 30, [46.10], [230.10] insured not aware, where, ICA 46(2), [46.10] Information — see also Duty of disclosure clearly informed, ICA 22(1), [22.40] insured, to be supplied to insurance broker, by, [11.10] insurance intermediary, by, [11.10] Insurable interest absence of, ICA 17, [17.40], ICA 48, [48.40] categories, [19.20] general insurance legal or equitable interest, for, ICA 16, [16.20], [16.40], ICA 17, [17.10]–[17.40] life insurance contract, [16.20], ICA 18(1), [18.20] sum insured exceeds, ICA 49, [49.20] Insurance and Superannuation Commissioner — see also Australian Securities and Investments Commission administration of ICA, former, [11A.20] documents compliance with Act not implied by ASIC examination of, ICA 11E, [11E.20] Insurance broker — see also Insurance intermediary agency application to giving and receiving of information, [11.10], [71.60] broker’s placing slip, definition, ICA 11(1) Code — see Insurance Brokers’ Code of Practice definition, [11.10], [71.30] duty of disclosure knowledge, ICA 21(1)(a), [21.10.5] knowledge of, equated to knowledge of 689

Index

General insurance contract — continued

INDEX Insurance broker — continued insured, s 21(1), [21.10.5] Insurance Brokers’ Code of Practice access to benefits of code, IBCP.50 application, IBCP.50 binding orders and sanctions, IBCP.50 complaints and dispute resolution process, IBCP.50 dispute with code terms, IBCP.50 dispute within fos terms of reference, IBCP.50 principles of code, IBCP.50 rights provided by code, IBCP.50 service standards, IBCP.50 services covered, IBCP.50 words with special meaning, IBCP.50 Insurance contract — see also Contract admission clauses, [41.20] agreement to submit to arbitration after dispute arises, ICA 10(3), [10.20], ICA 43(2), [43.10], [43.20] optional, [43.10] arbitration provisions, [8.30], [10.20], ICA 43, [43.10]–[43.20] average provisions — see Average provisions avoidance — see Avoidance breach damages, [12.20], [13.10.1] insured, by, notification by insurer of consequences of, [13.30.1], ICA 14, [14.10.2] cancellation — see Cancellation cessation of, automatic, [59.30] choice of law clause, [8.10] Criminal Code, application, ICA 11AA, [11AA.20] damages, [12.20] deed of release provision, [10.25] definition, [10.10], [10.30] discretionary indemnity scheme, not a, [10.50] duty of utmost good faith — see Duty of utmost good faith entering into definition, ICA 11(9), [11.90], [21.10.4], [28.10.2], [29.10.4], [30.30], [54.10.9], ICR 29D fair dealing, implied, [12.20], [13.10.4] good faith, implied, [12.20] harsh and unconscionable, relief, 690

ICA 15(2)(a), [15.40] non-application of Acts other than, ICA 15, [15.20]–[15.40] insured must be party to negotiations, [13.30.2] interim, ICA 11(2), [38.20] minimum amounts, limits, ICR 29 misrepresentation — see Misrepresentation naming of persons benefited, ICA 20, [20.10], [20.30] non-parties, [20.30] specification, lack of, [20.30] non-disclosure — see Non-disclosure non-party, reliance against by insurer, [14.10.5] notifications by insurer under — see Insurer “other insurance” provisions, ICA 45, [45.10] “by reason that”, meaning, ICA 45(1), [45.13] entered into, meaning, ICA 45(1), [45.14] companies, group, [45.14] effected insurance cover, meaning compared, [45.14] insured as party to contract containing, ICA 45(1), [45.12] not s 48 non-party claimant, [45.50] not third party beneficiary, [45.14] provision, meaning, [45.18] provision limiting or excluding insurer’s liability due to other insurance, ICA 45(1), [45.10] rateable proportion, [45.40] where other provision specified, ICA 45(2), [45.20] required to be effected by or under law, ICA 45(1), [45.16] other laws, non-application of, ICA 15, [15.20]–[15.40] payment date, implied term, [13.40.2] payment provisions, [14.10.1], [14.10.3] pre-existence, limitation of liability by insurer defect or imperfection, of, ICA 46, [46.10] before contract was entered into, ICA 46(2), [46.20] Mann’s Annotated Insurance Contracts Act

Insurance contract — continued classes of contract not applicable to, ICR 30, [46.10], [230.10] insured not aware, where, ICA 46(2), [46.10] policy terms, not facts of case, as focus of ICA s 46, ICA 46(2), [46.20] sickness or disability, of, ICA 47, [47.10], [47.15] before contract was entered into, ICA 47(2), [47.20] insured not aware, where, ICA 47(2), [47.07], [47.20] loss, meaning, ICA 47(1), [47.10] premium — see Premium prescribed contracts classes of, ICR 5, ICR 9, ICR 13, ICR 17, ICR 21, ICR 25, [34.20] definition, ICA 34, [34.10], ICA 37A(1) insurer liability under, ICA 35(1), [35.20] minimum amount, limits, ICR 29 prescribed events, ICA 34, [34.10], [35.50], [36.20], ICA 37E, [37E.10], ICR 6, ICR 10, ICR 14, ICR 18, ICR 22, ICR 26 contra proferentem rule, ICA 36, [36.10] flood — see Flood insurance proper law of, ICA 8, [8.20] express provision to the contrary, ICA 8(2), [8.30] relief, non-application of laws other than ICA regarding, ICA 15, [15.20]–[15.40] renewal — see Renewal standard cover, ICA 34, [34.10] aim of, [35.20] derogation from, notification by insurer of, [35.20]–[35.40] consideration at time of entry into relevant insurance contract, ICA 35(2), [35.40] document containing provisions, ICA 35(2), [35.30] insurer to clearly inform in writing, ICA 35(2), [35.50] ©

2016 THOMSON REUTERS

minimum amount, liability of insurer to pay, ICA 34, [34.10], ICR 29 operation of, [34.10] unusual terms, interaction with duty of utmost good faith, ICA 14(3), [37.60] not usually included, ICA 37, [37.40] notification by insurer of, [13.30.1], ICA 14(3), [14.10.1], ICA 37, [37.20], [37.50], [37.70] variation of, ICA 53, [53.10] superannuation scheme application form and trust deed as, [10.40] supply of goods and services, connection, ICA 73, [73.20] third party beneficiary, definition, ICA 11, [11.130], ICA 13, [13.10.4], [13.10.9], ICA 41, [41.35], ICA 48A, ICA 48AA, [48AA.10], [48AA.40], ICA 51, [51.17], ICA 55A, [55A.40], ICA 64, [64.20] variation, ICA 11(10A) Insurance Contracts Act 1984 (ICA) administration, ICA 11A, [11A.20] powers of ASIC, ICA 11B–11E, [11B.20]–[11E.20] application, ICA 4, [4.10], ICA 8, [8.10], ICA 15, [15.20], ICA 52, [52.10]–[52.40], ICA 55, [55.10], [55.20] exclusions, [8.20], [8.30], ICA 9, [9.20] bundled contracts, [9.20] marine insurance, ICA 9(1)(d), [9.30] State insurance, ICA 9(2), [9.50] superannuation, blanket or group, ICA 4(2), [4.10] workers’ compensation, ICA 9(1)(e), [9.40] jurisdictions external Territories, ICA 6, [6.10] States and Territories, ICA 5(1), [5.10], ICA 8, [8.30] code, as Part IV, insured’s duty of disclosure, [7.10] s 57, payment of interest on claims, 691

Index

INDEX

INDEX Insurance Contracts Act 1984 (ICA) — continued [7.10]–[7.20] commencement, ICA 2, [2.10] external Territories, in, ICA 6(2), [6.10] construction, [1.20]–[1.30] consideration in entirety, [1.40] context, [1.30] contracting out, prohibition of, ICA 52, [52.10]–[52.40] Crown binding of, ICA 5(1), [5.10], ICA 9(2), [9.20] not subject to prosecution for offence under ICA, ICA 5(2), [5.10] effect of, [7.10] external Territories, extension to, ICA 6, [6.10] history, [1.10]–[1.20] intention fair balance, [1.40] reform and modernisation, [1.30], [1.40] interpretation, [1.30] fair balance, [1.40] jurisdiction, exclusive clauses, [8.30] long title, [1.40] other laws, effect on, ICA 7, [7.10]–[7.30] application, [7.20], ICA 15, [15.20] exclusive jurisdiction clauses, [8.30] implied repeal, [7.30] State legislation, and, [7.10] penalty units, [1.50] previous contracts, application to, ICA 4, [4.10] proper law of contract, ICA 8, [8.20] express provision to the contrary, ICA 8(2), [8.30] prospective application, ICA 4(1), [4.10] case law example, [4.10] exception, blanket or group superannuation, ICA 4(2), [4.10] regulations, power to make, ICA 78, [78.10] remedies — see Remedies repeals by, ICA 3, [3.10] implied, ICA 7, [7.30] short title, ICA 1 692

third party beneficiary, [11.130], [13.10.4], [13.10.9] Insurance Contracts Regulations 1985 construction, [36.10] contra proferentum rule, ICA 36, [36.10] interpretation, [36.10], ICR 2 name of, ICR 1 prescribed contracts, ICA 34, [34.10]–[34.20], ICR 5, ICR 9, ICR 13, ICR 17, ICR 21, ICR 25 prescribed events, ICA 34, [34.10]–[34.20], ICR 6, ICR 10, ICR 14, ICR 18, ICR 22, ICR 26 transitional arrangements, ICR 40, ICR 41 Insurance intermediary — see also Insurance broker agency, provision of information, ICA 71(3), [71.20], [71.50], [71.60] agent of insurer, as, [11.10] definition, ICA 11(1), [11.10], [71.50] Insured claim by — see Claim course of conduct, agreement with insurer as to, [13.40.4] deceased, [51.60] definition, ICA 11(1) not a non-party under ICA s 48, [11.130], [16.30], [17.30], [17.40], ICA 48 duty of disclosure — see Duty of disclosure duty of utmost good faith — see Duty of utmost good faith false answer in claim form by, [13.45.1] financial position, duty of disclose, [13.30.8] indemnity of, [11.70] interest of, sum insured exceeds value of, ICA 49, [49.20] meaning in ICA s 51, [51.15] misrepresentation by — see Misrepresentation negotiations, inclusion, [13.30.2] non-parties — see Non-parties (s 48 claimants) protected from suit, [13.45.2] Mann’s Annotated Insurance Contracts Act

Insured — continued reliance on payment provision by, [14.10.3] third parties — see Third party and, having interest in insured property, ICA 49, [49.20] undeclared property of, [14.10.8] Insured property insured and third party having interest in, ICA 49, [49.20] proportional satisfaction of claims, [49.20] where sum insured exceeds value of insureds interest, ICA 49, [49.20] sale of, ICA 50, [50.10] building, meaning, ICA 50(2) purchaser deemed to be insured under vendor contract, whether, ICA 50(1), [50.10], [50.30.1] definition, ICA 50(1)(a) risk passing to, [50.30.1], [50.30.2] subrogation rights of insurer, [50.40] to effect own insurance, [50.10] Insurer administrative arrangements, review by ASIC of, ICA 11D, [11D.20] agent — see Agent ambiguous questions — see Ambiguous question cancellation insurance contract, of — see Cancellation paid claim, of, [13.40.6] code of practice — see General Insurance Code of Practice 2014 commercial advantage gained by insurer, [13.30.5] communication, obligation of, [13.40.2] contribution between, [57.50], ICA 76, [76.20]–[75.40] insured may be party or non-party, [76.40] course of conduct, agreement with insured as to, [13.40.4] cover note, liability under, ICA 38(2), [38.10] definition, ICA 11(1) documents, provision to ASIC, ©

2016 THOMSON REUTERS

ICA 11C, [11C.20] duty of disclosure of — see Duty of disclosure duty of utmost good faith of — see Duty of utmost good faith employee of — see Employee interest, liability to pay, [7.20] knowledge of pending underinsurance, [13.30.3] liability of, to make payment interest, [7.20] minimum amount, [35.20], ICR 28 notional, [49.20] reduced, [28.30.1], [28.30.2], ICA 54(1), [54.10.11] third party, to, [11.70] liquidation, in, ICA 61, [61.10] minimum amount, liability to pay, [35.20], ICR 29 negotiations by, duty in, [13.30.2] notification to insured by, [14.30], ICA 69, [69.20] agents, [11.10], [71.20] insurance intermediary as agent of insurer, ICA 71(3), [71.20], [71.50], [71.60] where broker not under binder, ICA 71(1), [71.20], [71.40], [71.60] where person acted as agent, ICA 71(2), [71.20] conflict of interest, of, [14.10.9] consequences of a breach, of, [13.30.1], ICA 14, [14.10.2] giving of notices, [77.10] cancellation, ICA 59, [59.10] legibility of writing, ICA 72, [72.10] life insureds, ICA 70, [70.10] oral, followed by written, ICA 69(1)(b), [69.20] must be given prior to concluding contract, ICA 69(1A), [69.20] provision of, [14.30] unusual terms, [13.30.1], ICA 14, [14.10.1], [14.10.7], [14.30] interaction with duty of utmost good faith, [37.60] not usually included, ICA 37, [37.40] notification by insurer of, [13.30.1], ICA 14, [14.10.1], 693

Index

INDEX

INDEX Insurer — continued ICA 37, [37.20], [37.50], [37.70] written, timing of, ICA 69(3), [69.20] insured’s rights retained, ICA 69(4), [69.20] notional liability of, [49.20] pre-existence, limitation of liability by insurer defect or imperfection, of, ICA 46, [46.10] before contract was entered into, ICA 46(2), [46.20] classes of contract not applicable to, ICR 30, [46.10], [230.10] insured not aware, where, ICA 46(2), [46.10] policy terms, not facts of case, as focus of ICA s 46, ICA 46(2), [46.20] sickness or disability, of, ICA 47, [47.10], [47.15] before contract was entered into, ICA 47(2), [47.20] insured not aware, where, ICA 47(2), [47.07], [47.20] loss, meaning, ICA 47(1), [47.10] refusal to pay claims, ICA 54, [54.10.1]–[54.100] act capable of causing loss, ICA 54(2), [54.10.1], [54.20] act or omission by insured or third party, where, ICA 54(2), [54.10.1], [54.10.8] failure to notify facts, ICA 40(3), [54.10.7], [54.10.14] meaning of “act”, ICA 54(6), [54.10.1], [54.10.7], [54.40] meaning of “omission”, ICA 54(1), [54.10.7], [54.10.9], ICA 54(6), [54.30] omission/inaction dichotomy, [54.10.7], [54.10.14] omission/non-event dichotomy, [54.10.7] restriction or limitation in scope of cover, [54.10.2] where act was necessary due to safety, ICA 54(5), [54.10.1] 694

where insured proves act or omission did not cause loss, ICA 54(3), [54.10.3] where insured proves part of loss due to something else, ICA 54(4), [54.10.3] where no part of loss caused by act, [54.25] additional premium, [54.10.11] blanket superannuation, application of ICA s 54 to, [54.100] breach of utmost good faith, application to, [54.50] burden of proof, [54.90] by reason of, ICA 54(1), [40.30], [54.10.6], [54.10.8] causal connection test, [54.10.1], [54.10.3], [54.10.6], [54.10.7], [54.20] claim, what is, for purposes of ICA s 54, [54.10.5], [54.10.7] third parties “demands” and, [54.10.5], [54.10.7] claims made and notified policies notification of claims, [54.10.15] notification of facts giving rise to claim, [54.10.15] date contract was entered into, ICA 54(1), [54.10.10] effect of a contract of insurance, ICA 54(1), [54.10.4] fraud, [48.30.4], [54.80] insured, who is, ICA 54(3), ICA 54(4), [54.22] insurer may reduce liability to nil, ICA 28(3), [28.30.1], ICA 54(1), [54.10.11] insurer’s rights, ICA 54(1), [54.10.8] operation of ICA s 54, [54.10.2] prejudice, ICA 54(1), [54.10.11], [54.10.12], [54.10.13] proportionality test, [54.10.1] “some other person”, meaning, [54.10.9] non-parties, [48.30.3], [54.70] silence when cover not in accordance with that required, [13.30.4] third party, right of recovery, ICA 51(1), [51.10] direct recourse principle, [51.10], [51.50] underinsurance, knowledge of, Mann’s Annotated Insurance Contracts Act

INDEX

[13.30.5], [14.10.4] unsuccessful defence, asserting, [13.40.5] valuable contents specification, reliance on, [14.10.4] writing, legibility of, ICA 72, [72.10], [72.20] wrongful repudiation of obligation to indemnify insured by, [41.80] Interest claims, on, ICA 57, [57.10.1] code for payment of on unpaid claims, [13.20.5], [57.10.1] date from which payable, ICA 57(2), [57.20] factors determining, [57.20] day payment ends on, ICA 57(2), [57.40] is made, ICA 57(2), [57.20] insurer, liability to pay, [7.20], ICA 57(1) period for which interest is payable, ICA 57(2) rate of, ICA 57(3), ICR 32, [232.20] State legislation, inconsistency with, [57.10], [57.10.1] reasonable period for insurer to have withheld payment, [57.30] contribution between insurers, where, [57.50] damages as opposed to, [57.10.1], [57.10.3] by way of compound interest, [57.10.3] double compensation, [7.20] on award of, [7.20] double compensation, [7.20] insurable — see Insurable interest persons entitled to, ICA 48, ICA 48A, ICA 49, ICA 51, [57.10.2] third party claimant, [57.10.2] prescribed rate, ICR 4 right to not dependent on proceedings, [57.10] Interim insurance contract — see Cover note Investment-linked contracts special provision, repealed, ICA 64B ©

2016 THOMSON REUTERS

K Key Facts Sheets insurer’s obligation to provide, ICA 33C, [33C.10] contravention and penalty, ICA 33C(5), [33C.10] provision does not constitute clear informing, ICA 33D, [33D.10] what are, ICA 33B, [33A.10], [33B.10]

L Liability insurance contract, ICA 40, [40.20], ICA 41, [41.30], ICA 51 application of ICA s 40, ICA 40, [40.23] car rental agreement provision, [10.30], [11.70] claims, notification of, ICA 40(1), [40.15] exclusion of, ICA 40(1), [40.15] claims made and notified policies, [40.15], [40.35], [54.10.14] “contract of liability insurance” definition, ICA 11(7), [11.70], [41.30], [51.20] directors and officers, as non-parties, [48.10.1] election between acceptance and rejection of liability by insurer, ICA 41, [41.20]–[41.80] consent of insurer required for settlement, ICA 41, insured’s duty of utmost good faith, ICA 13, [13.10.1], [14.40], [41.20] insurer fails to notify decision in reasonable time, where, ICA 41(3), [41.20] insurer proposes to conduct negotiations and legal proceedings, [41.50] mutual release, where, [41.20] time frame for decision, [41.60] wrongful repudiation, [41.80] exclusion of contractual claims, [14.10.9] facts giving rise to claim, notification, ICA 40(3), [40.30] insurer liability, ICA 40(1), ICA 40(3), 695

Index

Insurer — continued

INDEX Liability insurance contract, ICA 40 — continued [40.23], [40.24] interaction between ICA s 40(1), [40.23] s 40(3) not implied into insurance policies, [40.35] must clearly inform, ICA 40(2), [40.15], [40.25] penal provision, ICA 40(2), [40.25] major exclusion, [14.10.7] notice in writing to insurer, ICA 40(3), [40.26.1]–[40.26.4] deeming clauses, [40.26.2] ICA takes primacy, [40.26.2] in capacity as insurer, [40.26.4] intention to notify, [40.26.3] remedies, and, [40.30], ICA 54, [54.10.14] what is, [10.30], [11.70] Life insurance contract avoidance — see Avoidance cancellation, ICA 59A, ICA 59(3), [59A.10] void, ICA 63, [63.20] definition, ICA 11(1), [48A.40], [59A.20] extension or variation of, ICA 11(9), [21.10.4] insurable interest, ICA 18, [18.20] life insured, definition, [32.30] misrepresentation by life insured, ICA 25, [25.10]–[25.40] attached to insured, [25.10], [25.40] remedies — see Remedies misstatements of age, ICA 30, [30.10] murder, gain from, [18.20] non-disclosure by life insured, ICA 31A, [31A.10]–[31A.30] notices to be given to life-insured, ICA 70, [70.10] reasons for refusing cover, ICA 75(5), [75.15] reinstatement of previous contract, ICA 11(9), [21.10.4] take up option, [21.10.4] third party beneficiary, ICA 48A, [48A.20], [48A.30] Life policy claims by RSA non-party life policy connected to for benefit of another, ICA 48AA, 696

[48AA.20] insurer’s defences, as if against insured, ICA 48AA(3), [48AA.20] RSA holder, treated as insured, ICA 48AA(2), [48AA.10], [48AA.20], [48AA.40] non-parties to RSA contracts, ICA 48AA requiring monthly sum of money on disability, [217.10] third party, for benefit of, ICA 48A, [48A.20] Liquidation insurer in, ICA 61, [61.10] Loss legal or equitable interest at time of, ICA 17, [17.10] lost opportunity, [54.10.11] pecuniary or economic, [17.10], [17.20] Insurance Law of New York test, [17.20]

M Marine insurance non-application of ICA, ICA 9(1)(d), [9.30] pleasure craft, ICA 9A, [9A.20] Misconduct — see Serious or wilful misconduct Misleading conduct duty of disclosure not to be read down according to, [22.80] Misrepresentation age, of, ICA 30, [30.10] standard formula, ICA 30(1) insurer’s variations using, ICA 30(2), ICA 30(4), [30.10] ambiguous question application of ICA s 23, [23.10], [23.40], [23.50] proposed insurance contract, asked in relation to, ICA 23, [23.10]–[23.50] companies, application to, [23.30] construction of questions, [23.50] interpretation of, [23.10] resolved in favour of insured, ICA 23, [23.10] “the person” in ICA s 23 as the insured, [23.30] Mann’s Annotated Insurance Contracts Act

INDEX

“would have understood”, [23.20] belief, [21.10.5], ICA 26(1), [26.30], [26.35] cancellation of contract due to, ICA 60(1)(c) co-insureds, where, [21.10.2], [26.20], [28.10.1] person, meaning, ICA 26, [26.20], [28.10.1] remedies — see Remedies damages — see Remedies entry into contract, before, ICA 28(1), [28.10.2]–[28.10.3] failure to answer questions, ICA 27, [27.10] insurer’s onus of making further inquiries’, [21.10.1], [27.10] fraudulent remedies — see Remedies supervening event, [28.20.2] what is, [28.20.2] innocent, [28.10], [28.30.1], [28.40] life insured, by, ICA 25, [25.10], ICA 29(1), [29.10.3] misrepresentation of life insured attached to insured, ICA 25, [25.10] negotiations, form of, [25.30] materiality of, ICA 26, [26.10] prudent insurer test of, [26.10] misrepresentation of ongoing nature, [28.10.3] obviously incomplete information, ICA 27, [27.10], [27.25], [27.30] ICA s 21 compared, ICA 21(3)(b), [21.30.1], [27.30] remedies for — see Remedies representations, warranties of existing facts to be, ICA 24, [24.10], [24.20] statements application of s 26(2) and s 21, compared, [26.50] known misrepresentations, [25.10], ICA 26(1), [26.10] known relevance to insurer, ICA 26(2), [26.10] no truth/falsity assumption, [26.40] onus of proof on insurer, [26.60] ©

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meaning, [26.25] not misrepresentations, [23.10], ICA 26(1), [26.10] person making, meaning, [21.10.2], [26.20] reasonable person in the circumstances, meaning, ICA 26, [26.30], [26.35], [26.40] untrue, but believed to be true, ICA 26(1), [26.30] onus of truth on proponent, [26.60] superannuation contract, by member of scheme, [32.10] Motor vehicle insurance, [34.20] case law relating to, [13.40.6], [14.10.2], [22.40], [26.10], [27.30], [31.20.2], [31.30.2], [35.50], [48.30.3], [54.10.1], [54.10.3], [54.10.7], [54.10.12], [54.10.13], [56.10.1], [56.10.4], [56.20], [56.60], [65.15], [66.40], [66.50] minimum claim amounts, ICR 8 motor vehicle, definition, ICR 2(1) prescribed contracts, ICR 5 prescribed events, ICR 6 exclusions, ICR 7 use of motor vehicle by family member, subrogation, ICA 65(1)(c)(ii), [65.15]

N Non-disclosure circumstances which may give rise to claim, of, [13.40.10] claim by non-party where, [48.30.2] co-insured, where, [14.10.8], [28.10.1] damages — see Remedies entry into contract, before, [28.10.2] financial situation, of, [13.30.8] fraudulent remedies — see Remedies what is, [28.20.1] in breach of ICA s 21(1)(a), [21.10.5] innocent, [12.20], [28.10], [28.30.1], [28.40] life insured, by, ICA 31A, [31A.10]–[31A.30] nexus with contract, requirement for, ICA 28(1)(b), [28.10.3] 697

Index

Misrepresentation — continued

INDEX Non-disclosure — continued principles of, [12.10.1] remedies for — see Remedies same terms and conditions, whether insured would have entered contract on, ICA 28(1), [28.30.3] onus of proof, [28.30.3] superannuation contract, by member of scheme, [32.10]–[32.20] Non-parties (s 48 claimants) claims by, entitlement, ICA 48, [48.10]–[48.50] absence of insurable interest, where, ICA 17, [17.40], [48.40] breach of policy term, [48.30.3], ICA 54(1) common law and, [48.30.5] duty of utmost good faith, not subject to, [14.10.5] fraud as a defence, [48.30.4] in accordance with the contract, ICA 48(1), [48.10.3] innocent, [48.30.4] insured, treated as, ICA 48(2), [48.10] insurer’s defences, as if against insured, [14.10.3], ICA 48(3), [48.10], [48.30.1] non-disclosure and, [48.30.2] not party to contract, ICA 48(1), [48.10.1] determining whether, [45.14], [48.10.1] directors and officers liability insurance, [48.10.1] third parties, ICA 51, [51.15], [54.22] other insurance clauses, ICA 45, [45.14], [45.50], [48.50] rights not contingent on making a claim, [48.20.1] specified or referred to in contract, [48.10.2] duty of disclosure, whether bound by, [21.10.3] duty of utmost good faith, whether bound by, [13.10.1], [13.20.2] insurer liability to under ICA s 20, ICA 20, [20.30] “not the insured for ICA” ss 16, 17, [16.30], [17.30], [17.40] reliance against by insurer, [14.10.5] 698

Notification ASIC by — see Australian Securities and Investments Commission cancellation of policy, insurer to notify insured, ICA 59, [59.10], ICA 60, [60.10] claims outside period of cover, of, [40.15], [40.30], [54.10.14], [54.60] decision to accept claim, insurer to notify insured of, ICA 41(2), [41.20] expiry date, insurer to notify insured of, ICA 58, [58.15], [58.30] facts that may give rise to a claim, of, [40.30], [54.10.12], [54.60] failure of insured to give optional notice, [40.30], [54.60] giving of notices, ICA 69, [69.20] insurance broker, by — see Insurance broker insurance intermediary, by — see Insurance intermediary method for giving written notice or documents, ICA 72A, [72A.10]

O Onus of proof breach of duty of disclosure, [21.40] failure by insurer to inform insured of duty of disclosure, ICA 22, [22.60] failure to comply with duty of disclosure, [21.40] fraudulent claim, [56.60] misrepresentation, [26.40], [28.30.3] prejudice to insurer by act or omission by insured, [54.90] refusal by insurer to pay claim, [54.90] subrogation, ICA 66(a), [66.60]

P Pecuniary loss width of term, [17.20] Policy document definition, ICA 11(1), [20.20] supply on request, ICA 74, [74.15] insurer need not comply if previously supplied, ICA 74(2), [74.15] insurer to comply, ICA 74(1), Mann’s Annotated Insurance Contracts Act

INDEX

[74.15] Policy types claims made and notified, [13.40.10], [14.10.10], [40.15], [40.23], [40.26.2], [40.35], [54.10.5], [54.10.7], [54.10.14], [54.10.15] composite, [20.30], [21.10.2], [28.10.1], [56.10.4] Premium grossly excessive, [14.10.7] liability for non-payment of, ICA 39, [39.10], ICA 62, [62.10] maximum cover for under contract of general insurance, ICA 42, [42.10] minimum, setting of, [42.10] refund of, where avoidance of contract by insurer, [28.30.1], [28.40] Professional indemnity insurance discretionary, [10.50] modification to policy, [14.10.11] Proof onus of — see Onus of proof standard of, [56.60] Proportionality test refusal by insurer to pay claim, [54.10.1] Proposal form ambiguous questions in — see Ambiguous question definition, ICA 11(1), [11.110], [21.30.3], [27.20] failure to disclose, whether misrepresentation, [21.10.2] obviously incomplete, ICA 21(3)(b), [21.30.1], ICA 27, [27.10], [27.30] “by reason only”, meaning, [27.25] open-ended questions, [21A.20] question included in “proposal form”, [21.30.3] specific questions, [21.20.3], ICA 21A(3) information requested outside of, [21.30.2], ICA 21A(5)(b) virtual existence of, [11.110] Prudent insurer test, [21.10.7], [21.10.8], [21.10.9], [26.10], [56.10.4] Purchaser of property deemed to be insured under vendor contract, whether, ICA 50(1), ©

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[50.10], [50.30.1] definition, ICA 50(1)(a) risk passing to, [50.30.1], [50.30.2] NSW, [50.30.1] subrogation rights of insurer, [50.40] to effect own insurance, [50.10]

Q Question — see also Proposal form ambiguous — see Ambiguous question construction of, ICA 23, [23.50] failure to answer, whether misrepresentation, [21.10.2]

R Refund premium, of, [28.30.1], [28.40] Register insurance brokers, of — see Insurance broker Remedies duty of utmost good faith, breach of, [13.10.8], [13.20.3], [13.20.4], [13.10.1] insurer, by, [13.10.8] exclusivity of remedy rights under ICA Pt IV Div 3, ICA 33, [33.10]–[33.30] fraud, [13.20.3], [13.20.4] insurer may not refuse to pay claims, where, ICA 54, [54.10.1]–[54.100] act capable of causing loss, ICA 54(2), [54.10.2], [54.20] act or omission by insured or third party, where, ICA 54(2), [54.10.2], [54.10.8] failure to notify facts, ICA 40(3), [54.10.7], [54.10.14] meaning of “act”, ICA 54(6), [54.10.2], [54.10.7], [54.40] meaning of “omission”, ICA 54(1), [54.10.7], [54.10.9], ICA 54(6), [54.30] omission/inaction dichotomy, [54.10.7], [54.10.14] omission/non-event dichotomy, [54.10.7] restriction or limitation in scope 699

Index

Policy document — continued

INDEX Remedies — continued of cover, [54.10.2] where act was necessary due to safety, ICA 54(5), [54.10.2] where insured proves act or omission did not cause loss, ICA 54(3), [54.10.3] where insured proves part of loss due to something else, ICA 54(4), [54.10.3] where no part of loss caused by act, [54.25] additional premium, [54.10.11] blanket superannuation, application of ICA s 54 to, [54.100] breach of utmost good faith, application to, [54.50] burden of proof, [54.90] by reason of, ICA 54(1), [40.30], [54.10.6], [54.10.8] causal connection test, [54.10.2], [54.10.3], [54.10.6], [54.10.7], [54.20] claim, what is, for purposes of ICA s 54, [54.10.5], [54.10.7] third party “demands” and, [54.10.5], [54.10.7] claims made and notified policies notification of claims, [54.10.15] notification of facts giving rise to claim, [54.10.15] date contract was entered into, ICA 54(1), [54.10.10] effect of a contract of insurance, ICA 54(1), [54.10.4] fraud, [48.30.4], [54.80] insured, who is, ICA 54(3), ICA 54(4), [54.22] insurer may reduce liability to nil, ICA 28(3), [28.30.1], ICA 54(1), [54.10.11] insurer’s rights, ICA 54(1), [54.10.8] operation of ICA s 54, [54.10.2] prejudice, ICA 54(1), [54.10.11], [54.10.12], [54.10.13] proportionality test, [54.10.1] “some other person”, meaning, [54.10.9] non-parties, [48.30.3], [54.70] non-disclosure and misrepresentation, for 700

blanket superannuation contracts, ICA 32, [32.10] contracts entered into pre-ICA, ICA 4(2), [4.10], [32.10], [32.20], [32.40] treated as individual contract, ICA 32(1)(a), [32.10] common law damages, [28.10] court may disregard in certain circumstances, ICA 31, [31.10] amount insured may recover, ICA 31(1), [31.10], [31.10.4] before entering into a contract, ICA 28, [31.40] deterrence of fraudulent conduct, [31.30.2] harshness and unfairness, [31.10.3] loss that is the subject of the proceedings, ICA 31(4), [31.10], [31.20.1] matters for court consideration, ICA 31(3), [31.10] onus of proof on insured, [31.50] prejudice to insurer, [31.20.2], [31.50] proceedings by the insured, [31.10.1] when, ICA 31(2) exclusivity of remedy rights under ICA Pt IV Div 3, ICA 33, [33.10]–[33.30] general insurance, in, ICA 28, [28.10]–[28.40] “additional premium” approach, [28.30.1], [54.10.11] agent, where insurer acted through, [28.10.4] carelessness, [28.20.2] co-insureds, where, [21.10.2], [28.10.1] court may disregard avoidance, [28.10], ICA 31, [31.40] failure to comply with duty of disclosure, ICA 28(1)(a) fraud results in avoidance, ICA 28(2), [28.20.2], [28.20.3] fraudulent misrepresentation, what is, [28.20.2], [29.20.2] fraudulent non-disclosure, what is, [28.20.1], [29.20.1] Mann’s Annotated Insurance Contracts Act

Remedies — continued innocent, insurer may reduce liability where, ICA 28(3), [28.30.1], [28.30.2], [28.40], [54.10.11] “insurer”, meaning, [28.10.4] misrepresentation made before contract entered into, where, ICA 28(1)(b), [28.10.3], [29.10.5] misrepresentation of ongoing nature, [28.10.3] onus of proof rests with insurer, [28.30.3] person who became the insured, ICA 28(1), [28.10.1] recklessness, [28.20.1], [28.20.2] reduction of liability to nil, [28.30.3], [28.40] refund of premium, [28.40] renewal, extension or variation of contract, ICA 11(10), [28.10.2] same terms and conditions, whether insurer would have entered contract on, ICA 28(1)(b), [28.10.4], [28.10.5], [28.30.3] timing: upon contracted being entered into, ICA 11(9), [21.10.4], ICA 28(1), [28.10.2] where insurer unentitled to avoid, ICA 28(3) life insurance, ICA 29, [29.10]–[29.60] agent, where insurer acted through, [29.10.3] avoidance of contract that has come to an end, ICA 29(3), [29.30.3] contract, meaning, ICA 29(1)(c), [29.10.6] court may disregard avoidance, [29.60], ICA 31, [31.40] deceased’s personal representative, [29.40] fraud results in avoidance, ICA 29(2) fraudulent misrepresentation, what is, [28.20.2], [29.20.2] fraudulent non-disclosure, what ©

2016 THOMSON REUTERS

is, [28.20.1], [29.20.1] innocent, discovered inside three years, ICA 29(3) innocent, discovered outside three years, [29.05] insurer not prepared to enter contract, [29.30.1], [29.30.2], [29.30.4] misrepresentation of life insured attached to insured, ICA 25, [25.10], [25.20], [29.10.3] misstatement regarding age of life insured, ICA 30 non-disclosure by life insured, ICA 27A, [27A.10], [27A.20], [29.10.3], ICA 31A, [31A.10]–[31A.30] onus of proof rests with insurer, [29.30.4] person who became the insured, ICA 29(1), [29.10.3] previous contracts, [32.40] temporal limits on insurer, ICA 29(3), ICA 29(4), ICA 29(6), [29.30.2] third party beneficiary, ICA 48A, [48A.20], [48A.30], [48A.40] timing: upon contract being entered into, ICA 29(1), [29.10.4], [30.30] 2 or more separate contracts of life insurance, treatment, ICA 27A, [27A.10], [27A.20] variation notice in writing given to insured, ICA 29(4), [29.40] RSA holders, ICA 32A, [32A.20] treated as individual cover, [32A.20] third party beneficiary to life insurance policy, ICA 48A, [48A.20], [48A.30], [48A.40] Renewal insurance contract, of duty of disclosure notice upon, [22.90] fraud results in avoidance, ICA 29(2) information given prior to, ICA 11(10), [11.120] Representation warranties of existing facts to be, ICA 24, [24.10], [24.20] 701

Index

INDEX

INDEX Representative actions ASIC, by, ICA 55A, [55A.20] Residential building definition, ICR 2(1) “principally and primarily as a place of residence”, [202.20] strata contents, ICR 2(2) Retirement savings accounts claims for life policy connected to for benefit of another, ICA 48AA, [48AA.20] insurer’s defences, as if against insured, ICA 48AA(3), [48AA.10], [48AA.20] RSA holder, treated as insured, ICA 48AA(2), [48AA.20], [48AA.40] non-parties to RSA contracts, ICA 48AA cooling-off provisions, exemption from, [11.100] definitions RSA, ICA 11(1), [32A.30], [48AA.30] RSA provider, ICA 11(1) group life insurance, [11.100], [32A.20], [48AA.20] remedies — see Remedies Risk purchaser of property, passing to, ICA 50, [50.30.1], [50.30.2] NSW, [50.30.1]

S Sale insured property, of, ICA 50, [50.10] building, meaning, ICA 50(2) purchaser deemed to be insured under vendor contract, whether, ICA 50(1), [50.10], [50.30.1] definition, ICA 50(1)(a) risk passing to, [50.30.1], [50.30.2] subrogation rights of insurer, [50.40] to effect own insurance, [50.10] Serious or wilful misconduct employee, by, subrogation, ICA 66(b), [66.40], [66.50] third party, by, subrogation, ICA 65(2), 702

[65.40] Short title, ICA 1 Sickness pre-existing, limitation of liability by insurer, ICA 47, [47.10], [47.15] before contract was entered into, ICA 47(2), [47.20] insured not aware, where, ICA 47(2), [47.07], [47.20] loss, meaning, ICA 47(1), [47.10] Sickness and accident insurance case law relating to, [14.10.6] guaranteed renewable policy, [217.20] minimum claim amounts, ICR 20 prescribed contracts, ICR 17, [34.20] prescribed events, ICR 18 exceptions, ICR 19 renewable, guarantee as to, [217.20] social security payments, reliance by insurer on, [14.10.6] variation of contract exclusion, ICA 53, [53.10], ICR 31 Social security payment to insured of, reliance by insurer on, [14.10.6] Standard cover — see Insurance contract Standard of proof fraudulent claim, [56.60] State insurance, ICA 9(2), [9.50] Subrogation contracts affecting rights of, ICA 68, [68.10] employee of insured, to rights against, ICA 66, [66.10] employee, meaning, ICA 66, [66.25] serious or wilful misconduct, ICA 66(b), [66.10], [66.40], [66.50] family, to rights against, ICA 65(1), [65.15] insurer’s rights, [50.40] loss that occurred, nexus with, [66.30] proof, notice of, [66.60] moneys recovered, rights with respect to, ICA 67, [67.10], [67.20] apportionment of moneys recovered, [67.10] insured may recover amount from insurer, ICA 67(1), ICA 67(3) insurer and insured jointly, ICA 67(4)–(7) Mann’s Annotated Insurance Contracts Act

INDEX

interest amount, ICA 67(8) limitations on amount recovered, ICA 67(2) subject to contract, ICA 67(9), ICA 68, [68.10], [68.20], [68.30] non-parties, [65.30] rights of third party beneficiaries, ICA 64, [64.10], [64.20] serious or wilful misconduct employee, by, ICA 66(b), [66.40], [66.50] third party, by, ICA 65(2), [65.40] third party, to rights against, ICA 65(2)–(6), [65.15]–[65.40] where insured, ICA 65(4) where not insured, ICA 65(3) what is, [65.15] Superannuation blanket scheme exception to ICA prospectivity, as, ICA 4(2), [4.10], [32.10], [32.20] remedies — see Remedies case law relating to, [10.40], [13.10.4], [13.40.2], [21.10.8], [48.30.5], [57.20] contract, definition, ICA 11(4)(a) individual contract, definition, ICA 11(4)(b), [70.20] misrepresentation by applicant member, ICA 26(3)(a), [26.10] misrepresentation or non-disclosure by member of, ICA 32, [32.10]–[32.20] scheme application form, [10.40] trust deed, [10.40]

T Third party beneficiary, [41.35] definition, ICA 13, ICA 41, [41.35], ICA 48A, ICA 48AA, [48AA.10], [48AA.40], ICA 51, [51.17], ICA 55A, [55A.40], ICA 64, [64.20] claim by — see Claim duty of utmost good faith, and, [13.10.1], [13.20.2] insured and, having interest in insured property, ICA 49, [49.20] ©

2016 THOMSON REUTERS

protection of interests, [49.40] where sum insured exceeds value of insured’s interest, ICA 49, [49.20] life policy for benefit of, [48A.20] right to recover against insurer, ICA 51, [51.10] corporate deregistration, application to, [51.50] damages, meaning, ICA 51(1)(a), [51.40] deceased insured, ICA 51(1)(c) determination of liability against insurer, by, ICA 51(1)(a), [51.30] direct recourse principle, [51.10], [51.50] liability, [51.60] subrogation, rights, ICA 64, [64.10], [64.20] Third party aviation war and terrorism risk, ICA 9(4), [9.60], ICR 33 cancellation and variation provisions, exemption, [9.60] Third party beneficiary definition, ICA 13, ICA 41, [41.35], ICA 48A, ICA 48AA, [48AA.10], [48AA.40], ICA 51, ICA 55A, ICA 64 Tort bad faith, of, American, [12.20] ICA, and, [12.20] Travel insurance example, [67.10] minimum claim amounts, ICR 28 prescribed contracts, ICR 25, [34.20] prescribed events, ICR 26 exclusions, ICR 27

U Uberrima fides, [12.10], [12.30], [13.20.2], [14.10.1], [21.10.3], [41.20] Unconscionable conduct duty of disclosure not to be read down according to, [22.80] relief from, application of common law principles, [15.30] Unjust contract relief under other Acts, application of, [15.40] Unusual terms interaction with duty of utmost good faith, [37.60] 703

Index

Subrogation — continued

INDEX Unusual terms — continued not usually included, ICA 37, [37.40] notification by insurer of, [13.30.1], ICA 14, [14.10.1], ICA 37, [37.20], [37.50], [37.70] Utmost good faith — see Duty of utmost good faith

V Variation insurance contracts, of, ICA 11(10A), ICA 53, [53.10], ICR 31 Void — see Avoidance

W Warranty existing facts, of, to be representation, ICA 24, [24.10], [24.20] Words and phrases 10-year Treasury Bond yield, ICR 32(2) accidental damage, ICR 2(1) accidental injury, ICR 2(1) applicable business day, ICA 59(2A) ASIC, ICA 11(1), [11A.30], [11B.30], [11C.30], [11D.30], [11E.30] average clauses, [44.10] aviation liability indemnity contracts, ICR 31 avoid, ICA 11(1), [11.05], [28.20.3], [29.20.3] binder, ICA 11(1), [71.40] broker’s placing slip, ICA 11(1) business day, ICA 11(1) causal connection test, [54.10.1] claim, [56.10.1] consumer credit insurance, ICA 11(1), ICR 2A, ICR 21 contents, ICR 2(1) continuous disability insurance policy, ICA 11(1), [11.50] contract of general insurance, ICA 11(6), [16.25], [42.20], [44.20], [45.11], [49.30], [50.20], [58.40], [60.20], [61.20], [65.20], [66.20], [68.20] contract of insurance, ICA 10, [10.10] contract of liability insurance, ICA 11(7), [11.70], [41.30] contract of life insurance, ICA 11(1), 704

[11.30], [18.30], [25.20], [29.10.1], [30.20] contract of marine insurance, ICA 9A(4) direct recourse principle, [51.10] duty of disclosure, ICA 11(1), ICA 21, [29.10.2] duty of the utmost good faith, ICA 11(1), ICA 13 eligible contract of insurance, ICA 21A(9), ICR 2(1), ICR 2B(2) engage in conduct, ICA 11(1) entering into a contract of insurance, [4.10], ICA 11(9), [21.10.4], [28.10.2], [29.10.4], [30.30], [54.10.9], ICR 29D expropriation, ICR 2(1) flood, ICA 37B, [37B.10], ICR 29D flood event, ICA 37D(7) fraudulent claim, [56.10.1], [56.10.4] fraudulent misrepresentation, [28.20.2] fraudulent non-disclosure, [28.20.1] friendly society, ICA 11(1) guardian, ICA 11(1) harsh and unfair, [31.10.3] holder, ICA 11(1) home building, ICR 2(1) hypothetical premium, ICA 58(5) individual superannuation contract, ICA 11(4)(b), [70.20] instalment contract of general insurance, ICA 11(8), ICA 62, [62.20] insurance broker, ICA 11(1), [11.10] insurance intermediary, ICA 11(1), [11.10], [71.50] insured, ICA 11(1), ICA 51, [51.15] insured person, ICR 2(1) insurer, ICA 11(1) interim contract of insurance, ICA 11(2), [38.20] law, ICA 57(5) life policy, [11.30], [217.10] made the subject of relief under, [15.25] maximum flood cover amount, ICA 37D(4) mean, ICR 32(3) minimum amount, ICA 34, [34.10] motor vehicle, ICR 2(1) notional liability of insurer, ICA 49(2), [49.20] Mann’s Annotated Insurance Contracts Act

INDEX Words and phrases — continued

Index

omission, [54.10.7] original contract, ICA 58(2) pecuniary or economic loss, [17.20] period of original contract, ICA 58(6) period until claim, ICA 58(6) personal belongings, ICR 2(1) pleasure craft, ICA 9A(2), [9A.20] policy document, ICA 11(1), [20.20] potential prescribed contract, ICA 33A(b) prejudice, [54.10.11], [54.10.12], [54.10.13] prescribed contract, ICA 34, [34.10], ICA 37A(1), [37.30] prescribed event, ICA 34, [34.10] proportionality test, [54.10.1] proposal form, ICA 11(1), [27.20] prudent insurer test, [21.10.7], [26.10] purchaser, ICA 50(1)(a) relevant legislation, ICA 11AAA renewable insurance cover, ICA 58(1), [217.20] residential building, ICR 2(1) road motor vehicle, ICA 65(7) RSA, ICA 11(1), [32A.30] RSA provider, ICA 11(1) serious or wilful misconduct, [65.40] site, ICR 2(1) small business, ICR 29B

specified journey, ICR 2(1) standard formula, ICA 30 statement, [26.25] strata title residence, ICR 29A subrogation, [65.15] sum insured, ICA 29(5), ICA 30(3) superannuation contract, ICA 11(4)(a) the Act, ICR 2(1) third party, ICA 65(1)(b) this Act, ICA 11(1) transition time, ICA 37A(4), [37A.10] uberrima fides, [12.10] utmost good faith, [13.10.3] value, ICA 44(4) void ab initio, [11.05] warlike activities, ICR 2(1) writing, ICA 11(1), [22.30] Workers compensation common law compensation, [9.40] excluded from ICA, ICA 9(1)(e), ICA 9(1)(f), [9.40] duty of good faith in, [12.30.2] Writing legibility of, ICA 72, [72.10], [72.20] notification to insured by insurer in, ICA 69, [69.20] duty of disclosure, as to, ICA 22(1), ICA 22(2), [22.10] prescribed form, ICR 3, [203.10] reminder notice, ICR 3A

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