Advance (NSW) Insurance Agencies Pty Limited & Anor v Matthews

[1988] HCATrans 218

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S54 of 1988

Between-

ADVANCE (NSW) INSURANCE AGENCIES

PTY LIMITED and HOME OWNERS

INSURANCE PTY LIMITED

Applicants

and

BRUCE JAMES MATTHEWS and

BERNADETTE ANN MATTHEWS

Respondents

Application for special leave to

appeal

MASON CJ
WILSON J

DEANE J

Advance

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 16 SEPTEMBER 1988, AT 2. 05 PM

Copyright in the High Court of Australia

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MR D.M.J. BENNETT, QC:  May it please the Court, I appear

for the applicants with my learned friends, MR A.J. MEAGHER

and MS M.C. WALKER (instructed by Phillips Fox)

MR C.M. SIMPSON: If the Court pleases, I appear for the

first-named respondent. (instructed by Butlers)

MR BENNETT:  I do not know if Your Honours wish the

second-named respondent to be called. She has been

served by substituted service but it is, obviously,

unlikely there would be any appearance.

MR SIMPSON: Yes, I do not think there is any need to call the

second-named respondent.

MR BENNETT:  Your Honours, I have taken the liberty of having

an outline of submissions placed on Your Honours'

desk and I have also handed up a document setting out

the relevant sections of the Act and an extract from

the Law Reform Commission report which led to the

legislation.

MASON CJ: Yes, Mr Bennett.

MR BENNETT: If Your Honour pleases. Your Honours, this case,

whichinvolves a comparatively small sum of money,	is a
case which we would submit is of great importance	to the
insurance industry and to insureds in Australia.	It
concerns the construction of some sections of the
INSURANCE CONTRACTS ACT.

Your Honours will see from the last page of the

statutory summary I have given Your Honours that

under section 33 the provisions of the relevant
division are exclusive of any other rights to terminate.

So, an insurer can only terminate if it can do so under a section of this division. And in relation to

fraudulent non-disclosure or misrepresentation the

relevant provision is section 28.

Now, the whole of the division has been drafted

without any regard to the problems arising with joint

insurance, composite insurance or several insurance.

So, one has to apply the words of the section to a

situation which is not expressly covered.	And the
words, as Your Honours see, are:

This section applies where the person who

became the insured under ..... failed to comply

with the duty of disclosure -

and -

If the failure was fraudulent ..... the insurer

may avoid the contract.

And, of course, what it does not say is what happens

if one of a number of insureds is fraudulent, may the

insurer avoid it or not. The question is related to

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the problem arising under section 21 which creates

a substantive obligation to be honest in answering

questions and to disclose and that, again, is in neutral

terms in so far as it applies to composite or joint

contracts.

The facts in this case involve no need for any

analysis. They are simply summarized for relevant

purposes in paragraph 3. One would not really need to

go beyond that. The insureds were husband and wife

under a standard domestic policy. The husband and wife

were guilty of non-disclosure in the sense that a prior

claim by the husband was not disclosed in a form

signed by both but only the husband was fraudulent.

There is a slight but not relevant over-simplification

in that, and really one would not need to go beyond that

to the facts.

The findings below are sunnnarized on page 2 of the

outline and Your Honours see there are three totally

different views taken. Mr Justice Young at first

instance took the view the policy was a policy of joint
insurance and on a true construction of section 28

fraud by one insured does not justify termination.

Incidentally, Mr Justice Samuels, dissenting, took the

view also that the policy was a policy of joint insurance

and he applied the old common law approach that if it is

joint then a misrepresentation by one avoids it; if it

is several or composite, it does not and, because it was

joint, he found for the insurer.

Mr Justice McHugh, with whom Mr Justice Hope

agreed, forming the majority, held that it was a policy

of composite insurance. And one must remember that this

is an absolutely standard situation: normal domestic

policy; husband and wife; no evidence as to whether
goods are owned by one or the other or both jointly or

both severally.and, indeed, the situation one would

expect in most simple domestic policies of this type.

And on the true construction of section 28, Their Honours held that fraud by one insured does not justify

termination whether it is joint, composite or several.

That result is reached by looking at section 28. And

if Your Honours go to page 71 Your Honours will see that

at line 3 on that page, in c~nstruing section 21

His Honour Mr Justice McHugh says:

Where "the insured" consists of persons jointly insured, a breach of their obligation could only

arise when knowledge of a relevant matter can

be imputed to all unless, of course, the words

"the insured" mean any of the joint insured.

That has the consequence that if two rogues insure on a

policy of joint insurance, each fraudulently failing to

disclose a prior claim but each being innocent of the

other's fraud in the sense that each does not know that

the other has told a lie, merely knows that he has, the

policy would be - there would be no breach if that

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interpretation were correct..	And His Honour goes on
at line 12, the new paragraph:

I think that it would be going beyond the

language of s 28, however, to hold that knowledge

of one of the joint insured was to be equated with

the knowledge of all.

We would respectfully submit that is the sentence

where the error occurs because that is not the test. knowledge of all, the question is whether, under section 28, the insured has failed to comply with the duty of disclosure and that failure is fraudulent
where one person has not disclosed and it is fraudulent

by that person. It is not quite imputing it to all; it

is simply saying, "On the true construction of section 28

and perhaps section 21, does that result follow?"

We submit in paragraph 5 that there is an ambiguity.

I would, of course, on the appeal put that more highly and submit that the view contended for by the insurers

is the correct one. But putting it at its lowest, it is

arguable, justices below have come to different views

on it, and we would submit that is a question of great

public importance; it is new legislation which has not

been previously construed and this question is one

which will arise frequently in joint or composite policies.

The second issue is a very short one. It only

arises if the answer to the first question is, as

Mr Justice Samuels suggested, that the old law as to the

distinction between "joint" and "composite" and "several"

to household policy?" and that is an issue which we would submit is also of importance but a very short

is be applied. If one applies that old law to the standard

issue.

The third issue is one which, we would submit,

again, is one which arises perhaps with more frequency

in practice than the other two and that concerns

section 28(3) and Your Honours see that provides that:

If the insurer is not entitled to avoid the contract -

because there is no fraud found, and that co~ld arise

either because there is no fraud or because "if I lose on the first part of the case, in a joint or composite

situation the fraud of one is irrelevant", the liability

of the insurer in respect of a claim is reduced to the

amount that would place him in a position in which he

would have been if the failure had not occurred. So,

we say but for the fraudulent representation

or fraudulent non-disclosure of one and innocent

non-disclosure of the other, we would not have insured,

therefore it would place us in the same situation and one

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must reduce the amount to zero. Mr Justice Young

said the word "reduce" does not include reduced to

zero. That is to abrogate or abolish and we can only

use the word "reduce" if one is reducing it to

something, therefore the section does not apply to

that situation at all.

Now, the Court of Appeal - although the matter

was argued - does not refer to that anywhere in its judgments although it was an issue which arose as a

result of their findings on the other issues.

If Your Honours go to the single page I have

provided from the Law Reform Commission report which

led to this Act and which, indeed, different parts of

this report were cited in the Court of Appeal at

page 54. I apologize for the fact that it has been

scribbled on and underlined, particularly for the

fact that the wrong bits have been underlined, so

I cannot be accused of influencing Your Honours by

doing that.

Your Honours, the relevant passage is in the middle

of the page about six lines above the first underlining

and if Your Honours see the word "misrepresentation"

in the left-hand margin, against that word the report

says:

The legislation does not require a court to

apply common law principles in assessing damages

in such cases. Rather, the court is required

to award such damages as it considers 'fair and

reasonable'. Either of these approaches might

be used to assess damages for innocent

misrepresentation and non-disclosure in relation

to insurance contracts. Of the two, the

common law approach is preferable. It is

directed towards the parties themselves and

does not require that discretions be conferred

on a court. Damages for a breach of duty

would simply depend on what the insured would

have done had it -

"insurer", that should be -

known the true facts. Where the insurer

would not have accepted the risk on any terms

at all, the amount of its loss is clearly

equivalent to the amount of the claim made

against it - ·

ie, the full amount.-

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 .... the

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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.

So, that is directly contrary to what His Honour

Mr Justice Young found and we would submit, in any

event, the word "reduce" is quite capable of being read

and should normally be read as an English word to

include the concept of reducing to zero.

Now, that is an issue which arises not merely in cases of joint, composite or multiple insurance but it

arises in every case of innocent misrepresentation

under this Act because in every case of innocent

misrepresentation where the insurer says, "But for

that representation I would not have insured" this

question will arise, and that must be a very significant

proportion - certainly, one would think, most cases

arising of misrepresentation or non-disclosure under

the Act which is not fraudulent.

So, we would submit, that is a question of great

importance to the industry and as I say, the

community generally and we would respectfully submit

that special leave should be granted. If Your Honours
grant special leave it will be necessary for certain
orders in relation to substituted service to be made.

I have prepared two alternative forms of order which I hand to Your Honours. The first utilizes Order 64 rule 2

to dispense with service altogether. The second utilizes

a different rule to order substituted service of

publication in The Australian. The evidence was that
one day some time ago Mrs Matthews simply left the house
and disappeared and was never seen again and there is

no explanation; no one knows why; no one knows what

h~ened. On that basis Justice Gaudron made

0r s for substituted service.. of this application

by publication in a newspaper in each State of Australia.

We would respectfully submit that is really

unnecessary at this stage and that if leave is to be

granted it will be sufficient to make order 1. If

Your Honours regard Order 64 rule 2 as not justifying a departure in advance from the rules as opposed to a

forgiving of a defect which has occurred, then I seek the
alternative order. If Your Honours were against me on

both I would accept, of course, the third form of order

which is that made by Justice Gaudron in relation to the

application requiring notification throughout Australia.

May it please the Court.

MASON CJ:  Mr Simpson, before we hear from you we will deal

with the matters outstanding from this morning.

AT 2.20 PM THE MATTER WAS ADJOURNED

UNTIL LATER THE SAME DAY

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UPON RESUMING AT 2.24 PM:

MASON CJ: Yes, Mr Simpson.

MR SIMPSON:  Your Honours, the decision of the Court of Appeal,

in the first respondent's submission, will only have a
limited effect - certainly a much more limited effect

than has been contended for by the applicants. If

Your Honours please, that really is because the result

that His Honour Mr Justice Samuels found so unpalatable

is one which really arose in the instant case in

consequence of a conjunction of two sets of circumstances.

The first of those, if Your Honours please, was the failure

of the insurer to draw its own policy in a way which would

give it the information that it really sought given,

particularly, the observations of His Honour

Mr Justice McHugh which appear at page 72 of His Honour's

judgment. If that was a common failure by insurers before

His Honour's judgment, it is certainly not going to be

one after.

Your Honours will recall that, appearing at about

line 22, His Honour said this:

If the construction which I have placed on

ss 21 and 28 poses a problem for insurers, a

remedy is available. It is to formulate their

questions in respect of joint insurance in the

manner suggested by Windeyer Jin DAVIES & ANOR

V THE NATIONAL FIRE & MARINE INSURANCE OFFICE OF

NEW ZEALAND at 105. If a question is answered

untruly, the insurer will have its remedy under
s 28(l)(b) ands 28(2) for misrepresentation.

So, if Your Honours please, the first peculiar factor that gave rise to the instant litigation was the way in which

the particular insurer in this case drew or, rather, failed

to draw its form of , proposal. and that is an error

which, in terms of the insurance industry at large, is

one that is unlikely to be repeated given the benefit of

the observations of His Honour Mr Justice McHugh.

The other peculiar factor about the case, if

Your Honours please, is that it proceeded in what is a

rather unusual way. Your Honours will recall that the

proceedings were at the suit of the insurer, it seeking

declaratory relief. So, it commenced and it had the

carriage of the proceedings. What then occurred was that

Mrs Matthews, having been made a party to the proceedings

and having appeared, she then disappeared in circumstances.

The result of that was that she, of course, never gave

evidence in the proceedings and, of course, the
circumstances of her disappearance was such that no

inference could be drawn against her in consequence of her not giving evidence. Now, if Your Honours please,

that is a rather unusual set of circumstances given that

in the normal run of the mill case, if one can put it that

way, the proceedings will be brought by the insured seeking

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to recover. If there are suggestions of fraud or the

like, they will be able to be ventilated in a way in

which they certainly were not able to be ventilated by

the insurer in these proceedings. So, if Your Honours

please, for those two reasons, in my submission, the

consequence of the determination of the Court of Appeal

is not likely to have the wide-ranging effect that the

applicant suggests that it will have.

So far as the other substantive issue is concerned,

that is, the question of reduction to nil or no, I would

simply say in relation to that that that was not a matter

which the Court of Appeal in the end result saw fit to

deal with. As such, it has only been dealt with by

His Honour Mr Justice Young at first instance. In my

submission, that would suggest to Your Honours that this

is not an appropriate vehicle for the Court to consider

in more detail, that particular matter. For those

reasons, in my respectful submission, Your Honours would

not grant special leave.

MASON CJ: Yes, Mr Bennett?

MR BENNETT: If Your Honours please. In relation to the

unusual situation concerning Mrs Matthews, that does not

affect the generality of the application of the case

because the problem arises in every case where one

insured is fraudulent and one innocent. In relation to the third matter about reducing to nil, we would submit the failure of the Court of Appeal to deal with it when

it was argued does not make it an inappropriate vehicle.
The Court still has one considered judgment on the

issue. The issue is one of importance and it was raised

and, in our respectful submission, the disadvantage of

having one rather than four, or three judgments in

relation to it is not such as to preclude leave. Thirdly, in relation to the fact that the insurer

could draw a form which might deal with some of the

problems, we wo~ld submit that is not a reason for

refusing leave. One can never draw a form which avoids

all of these problems, and the principal problem which

arises in this case will arise whenever one is fraudulent

and one is innocent. The secondary problem arises whenever
one is innocent and the insurer would not have insured.

So, we would submit that the points are of general

application.

MASON CJ:	Mr Bennett, are you willing to submit to a condition of the grant of special leave that you pay the costs of
the appeal in any event and that you do not disturb the
orders for costs in the courts below?
MR BENNETT:	Yes, Your Honour, I have those instructions with

this qualification: that I would seek to persuade

Your Honours that the second part of that condition ought

not to be imposed.

MASON CJ: Well, you are at liberty to attempt to persuade us

that we should not impose that condition.

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MR BENNETT: Well, Your Honour, it is my respectful submission

that where a case involves a small sum of money but

matters of general importance to an industry, it is the

normal practice and the proper practice to order that

the respondent not be disadvantaged by having the costs
of an appeal to this Court, that his costs be paid in any
event, and we happily submit to that condition. But if

we do succeed, it is my submission that there is no reason why the costs orders below should stand, the orders having

been shown to be wrong, and the smallness of the amount

is not a reason why that should be so. But if Your Honours

are against me on that I submit to both terms.

i1ASON CJ: Thank you, Mr Bennett. There will be a grant of special

leave in this matter on both conditions as to costs.

MR BENNETT: If Your Honours please. MR SIMPSON: If Your Honour pleases.

MASON CJ:  Mr Bennett, we have to deal with the order for

substituted service. Now, we will briefly consult

between ourselves as to what we are going to do.

In the circumstances, Mr Bennett, we think it would

be appropriate to make an order in terms of the second

of the two orders that you have proposed and there will

be an order for substituted service in those terms.

MR BENNETT: If Your Honour pleases.

AT 2.32 PM THE MATTER WAS ADJOURNED SINE DIE

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