Austcan Investments Pty Ltd (Respondent 1) v Sun Alliance Insurance Ltd (Respondent 2) and Alexander Stenhouse Limited (Appellant) (No.2) No. SCGRG88/632 Judgment No. 4299 Number of Pages 6 Practice

[1993] SASC 4299

COURT IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA KING CJ(1), PRIOR(2) AND MULLIGHAN(3) JJ

CWDS
Practice - agreement during trial that damages be remitted to a Master - whether question of reduction of insurer's liability pursuant to s.28(3) Insurance Contracts Act (Cth) within the agreement - whether insurer entitled to introduce further evidence on s.28(3) issues on assessment of loss by Master.

HRNG ADELAIDE, 6-7, 28 April 1992, 23 November 1993 #DATE 7:12:1993
Counsel for appellant:         Mr C Gee QC and Mr J Gleeson
Solicitors for appellant:        Piper Alderman
Counsel for respondent 1:        Mr T R Anderson QC
   and Ms L J King
Solicitors for respondent 1:     Stratford and Co
Counsel for respondent 2:        Mr R D Lawson QC and
   Mr A V L Possingham
Solicitors for respondent 2:     Lawson Downs

ORDER
Appeals of first respondent and appellant allowed. $NJUDGE1 KING CJ This appeal has been remitted to the Full Court by the High Court of Australia. In order to understand the point remaining to be decided by this Court, it is necessary to refer briefly to the course of the proceedings. 2. The action was brought by the first respondent against the second respondent claiming indemnity under a policy of insurance for damage to its factory by fire. The second respondent denied that there was a contract of insurance with the first respondent and pleaded, in the alternative, that if such a contract existed, the first respondent was in breach of the contract by reason of failure to disclose an alteration in the use of the premises consisting in the manufacture of waterbeds involving woodwork and spray painting. The first respondent sued the appellant, in the alternative, for damages for failing, as its broker, to effect a policy of insurance and for failing to advise it of its obligation to disclose the alteration of use. 3. The learned trial judge found that there was no contract between the first and second respondents. He also found that if such a contract had come into existence the appellant would have been negligent in failing to advise the first respondent as to its obligation to disclose. He ordered that "the assessment of the plaintiff's damages against the second defendant be heard before a Master of the Court". 4. The Full Court on appeal held that there was a contract of insurance. It held that the first respondent was in breach of the disclosure condition and that that breach precluded recovery against the second respondent. It upheld the trial judge's finding that the appellant was negligent in failing to advise as to the obligation to disclose. It therefore dismissed the appeal. 5. The finding that there was a contract of insurance between the first and second respondent was not affected by the decision of the High Court. That Court decided, however, that the effect of the non-disclosure was not necessarily to preclude recovery. It held that s.28(3) of the InsuranceContracts Act 1984 (Cth) governed the situation. That subsection is as follows: "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 him in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made" 6. The question which has been remitted to this Court then arose. The High Court said:
    "It is at this point that a debate arose as to the form
    of order to be made. Mr Sackar QC for Sun Alliance seeks that
    this Court should, by its order, remit the matter to the trial
    judge or, possibly, a master to determine the extent of Sun
Alliance's liability under s.28(3). Mr Sackar suggests that
    evidence could be led to show that, had Sun Alliance known of
    the risk, it would have required certain fire precautions the
    effect of which would have been to eliminate the risk of fire
    or, alternatively, to have reduced the damage. On the other
    hand, Mr Anderson QC for Austcan and Mr Haydon QC for Stenhouse
resist a remitter in these terms. They assert that the s.28(3)
    question is foreclosed. That view of the matter derives some
    support from the form of order as expressed in the reasons for
    judgment of the trial judge and from another part of his
    reasons. After pronouncing judgment for Austcan against
    Stenhouse, his Honour said: 'In accordance with the arrangement
    between the parties before the trial began, the damages will be
    assessed, in default of agreement, by a Master.'
     His Honour's order indicates that he did not contemplate that
    there was any outstanding issue which remained for him to
    determine. On the findings that he made, all that remained was
    damages and that was to go to a master. Some confirmation of
    that view of the position emerges from his Honour's discussion
of s.28(3) in his reasons for judgment. He expressed himself as
    not being satisfied that: 'in the circumstances of this case
    Sun Alliance would have refused absolutely to insure the Mile
    End property had it been informed at the proper time of the
    nature and extent of the manufacturing operations'.
     He expressed this conclusion in the course of reviewing
    evidence which had been directed to this issue and went on to
    say that Sun Alliance would have charged a higher premium and
    probably would have investigated the tenant's fire precautions
    with care but more likely than not would have continued to
    insure. His Honour also thought that the evidence suggested
    that the broker would have in any event been able to find
    another insurer. When the matter came before the Full Court,
the application of s.28(3) was the subject of some discussion.
    However, it is not entirely clear to us from the few pages of
    the transcript of argument in that Court which we have seen
whether the Full Court took the view that the s.28(3) issue had
    been completely resolved by findings made by the trial judge on
    the evidence before him. In these circumstances, as we are
    unable to resolve the question on the materials before us, we
    consider that the appropriate course is to remit the matter to
    the Full Court so that it can determine what course should be
taken with respect to the s.28(3) issue, in particular, whether
    the parties should be at liberty to call further evidence on
that issue and whether further findings are to be made." 7. The argument before us turned on how the issues arising under s.28(3) should be resolved. It was common ground that the parties had agreed at trial, and the judge had accepted, that the trial should be confined to issues of liability and that any question of damages should be referred to a Master. Mr Lawson QC, who appeared for the second respondent, on this occasion, contended that, in reliance on that agreement, his client had not presented evidence on the s.28(3) issues and that it should be permitted to do so on an assessment of damages by a Master. Mr Gee QC for the appellant and Mr Anderson QC for the first respondent contended that the s.28(3) issues were issues as to liability rather than damages and that the second respondent ought to have presented, and did present, such evidence as it saw fit, on those issues at trial and ought not to be permitted to re-open the matter in order to call further evidence. 8. The provisions of s.28(3) of the Insurance Contracts Act can be said to give rise to four issues in the present case, namely whether, if proper disclosure had been made,
     (1) the second respondent would have refused to insure,
    thereby reducing its liability to nil;
     (2) the second respondent would have imposed conditions which
    would have prevented the fire, thereby reducing the liability to
    nil;
     (3) the second respondent would have imposed conditions which
    would have minimized the extent of the damage, thereby reducing
    the liability to some, and what, amount;
     (4) the second defendant would have imposed a higher premium
    thereby reducing its liability by the additional amount of
    premium which it would have collected, and if so what that
    amount would be. 9. The learned trial judge held that he was not satisfied that the second respondent would have refused the insurance and Mr Lawson QC did not challenge that decision. He contended, however, that the other issues were not before the trial judge but were left to be dealt with on the assessment of damages. 10. The trial judge, as the High Court noted, does not appear to have taken that view of the proceedings. To understand why, it is necessary to look more closely at the course of the proceedings. 11. At the trial the second respondent called as a witness its Corporate Property Manager, a Mr T J Hughes. He gave evidence on a number of points. His evidence included a passage in his examination in chief directed to the second respondent's attitude to insuring premises on which woodworking, including waterbed manufacturing, occurred. He indicated that if the risk were to be accepted, it might be subject to conditions such as the installation of a sprinkling system. Further to that indication, the following passage occurred.
    "A We would consider it but we would still need to make
    sure that everything possible could be done to improve the risk,
    to minimise dust accumulations, make sure the machinery had dust
    extractors, that there were adequate fire protection,
    sprinklers, fire hydrants, extinguishers, in other words, to
    bring it as best we could to make it suitable to consider it for
    commercial reasons.
     Q What about the premium, assuming that all this was done.
     A The premium would still be substantially higher than a less
    hazardous risk, it would be a consideration - if there were
    sprinklers it would be a reduced rate but it would still be
higher than a less hazardous type of risk." He was cross-examined as to the range of premiums which might apply in such circumstances and stated various premium rates. 12. The second respondent also called Mr A J Plate, a retired insurance inspector. He gave evidence of insurers' attitudes to proposals to insure premises on which woodworking or upholstery activities were occurring, and to the need for "safety requirements" if the risk was to be accepted. 13. The second respondent's primary contention on this point, at least on the pleadings, was that the non-disclosure was fraudulent and that it had lawfully avoided the contract. If it wished to rely, in the alternative, on s.28(3), it was incumbent upon it to place such evidence as it relied upon before the trial judge. It did so in the shape of the evidence of Messrs Hughes and Plate. Mr Lawson QC contended that their evidence was directed solely to the materiality of the non-disclosure, but I think that it was also clearly directed to s.28(3). The thrust of their evidence was that the risk would have been declined if disclosure had been made. Alternatively conditions would have been imposed and a higher premium charged. 14. The learned trial judge clearly considered that the s.28(3) issues were before him. His reasons for judgment contain the following passage:
    "By virtue of sub-s.(3) of s.28, however, the liability of
    Sun Alliance in respect of the plaintiff's claim, on this
    hypothesis, would simply have been reduced to the amount that
    would place Sun Alliance in the position in which it would have
    been had the failure to disclose not occurred. Despite Hughes's
    conservative evidence on the subject, I am not satisfied that in
    the circumstances of this case Sun Alliance would have refused
    absolutely to insure the Mile End property had it been informed
    at the proper time of the nature and extent of the manufacturing
    operations. Certainly woodworking and upholstery were
    unattractive risks - what Hughes called 'accommodation
    business', which Sun Alliance only accepted when it felt it had
    to - but Alexander Stenhouse was a national broker and placed
    substantial business with Sun Alliance. It is plain that Sun
    Alliance would have charged a higher premium, and probably it
    would have investigated the tenant's fire precautions with care,
    but I think it more likely than not that it would have continued
to insure the property." 15. When the case came on appeal to the Full Court, the second respondent was represented by Mr McCarthy QC who had been leading counsel at the trial. He made no submission that the s.28(3) issues were not before the trial judge. His contention was that it was necessary to have further findings as to those issues and that the matter should go back to the trial judge to make those findings. The following colloquy occurred:
     "KING CJ: The effect, as I understand it, of a finding
    that the plaintiff's failure to disclose material facts
    involving an increase in risk, would be some adjustment of the
    premium, do you agree with that?
     MR McCARTHY: His Honour's finding indicate that indeed would
    be what he would have done, because he mentioned, in his
    findings, that insurance could have been obtained, but at a much
    higher premium. What he didn't go into, of course, was the
    evidence that was before him, from both Hughes, who was the main
    underwriter of the insurance company, and Plate, the expert
    witness, that conditions in relation to housekeeping and fire
    precaution, etc, for this huge increase in risk would have been
    imposed and the evidence dealt with that at some length - let me
    finish my submission first, if I may, and then perhaps we can
    discuss it. What I proposed, however was in the event of the
    court not acceding to that request, then I really ought to have
    a notice of alternative intention before this court and ask this
    court to make those findings from the evidence and I've put
    three copies of the proposed notice of contention, but it would
    be my submission that they are matters that really ought properly
    be dealt with by the trial judge and not by this court.
     KING CJ: Why, we're in a position to deal with it? One is very
    reluctant to send a case back for further trial on an issue like
    this. The evidence is all there and the judge's findings are
    there as to credibility and so on.
     MR McCARTHY: I suppose, in some respects, that's correct. My
    learned friend, in his address, mentioned the figure of
    increased premium, the figure I think he said was $2000, maybe
    1800 to $2000, but that's based on evidence from Hughes that the
    premium might have been as high as 0.45 or 0.40, depending on
    inspection, depending on risks, etc. Then there was evidence
    from the man Plate as to what arrangements would have to be put
    into place, maybe sprinklers, maybe extra fire extinguishers,
    extra fire precautions in the way of lock up cupboards etc, all
    conditions which would be placed on a high risk such as this.
    There's yet a further problem, because if his Honour's principle
    judgment, in relation to whether or not there was insurance, is
    overturned, it would depend on what findings this court made in
    relation to when the insurance was effected and whether or not
    there was an insurance before November '85 or whether the
    insurance came into force upon renewal in January '86. So that
    would it be a new policy or would it be a renewal of an old
    policy.
     KING CJ: All those things have to be considered, but the
    evidence is there, the parties are required to produce their
    evidence at trial, there wouldn't be any basis for reopening the
    hearing and hearing further evidence about matters like that. I
    mean the evidence is there, we have to do the best we can with
    it, the trial judge would have to do the best he could with it.
     MR McCARTHY: I can refer the court to the evidence, of course,
    and what, of course, I can't do, is refer this court to any
    findings that his Honour made. His Honour accepted the evidence
    of Norelli about the fire, he said that -
     KING CJ: We feel that we should proceed to make any findings
    that is necessary to be made and do the best we can with the
    evidence that's been produced at the trial. You go ahead and
    make your submissions on what conclusions we should draw from
all that." 16. It is apparent that Mr McCarthy clearly understood that the s.28(3) issues had been canvassed at trial. He sought a remitter to the trial judge for further findings on the evidence which had been given, but the Court ruled that any necessary additional findings could be made by the Full Court. 17. I see no reason to depart from that ruling. It was for the party to present its evidence at trial and there is no justification for re-opening the hearing. Clearly the s.28(3) issues as to the reduction of the second respondent's liability relate to liability and not to the quantum of loss or damages and that was understood at trial. 18. It is necessary to consider the s.28(3) issues in the light of the evidence. The learned trial judge was not satisfied that the second respondent would have refused insurance and that finding is not challenged. There was general evidence as to conditions which might have been imposed. There is no evidence which would justify a finding on the balance of probabilities as to what "safety requirements" might have been imposed, still less as to whether such requirements would have prevented or diminished the fire damage. What remains is the question of any increase in the premiums. 19. The judge made a finding that the second respondent would have charged a higher premium and that finding has not been challenged. It follows that in order to place the second respondent "in a position in which he would have been if the failure had not occurred or the misrepresentation had not been made", it will be necessary to estimate the additional premium which would have been received and to deduct it from the amount of the loss resulting from the fire for which the second respondent is liable. 20. I think that on the basis of Mr Hughes' evidence, it would be reasonable to find that the second respondent, if proper disclosure had been made, would have increased the premium by 25 cents per $100 of the amount insured. 21. In my opinion the appeals of the first respondent and the appellant should be allowed and the judgment entered by the trial judge should be set aside. The case should be referred to a Master for an assessment of the amount of the loss sustained by the first respondent in consequence of the fire, and for judgment to be entered for the plaintiff against the defendant Sun Alliance for that amount less the additional amount, calculated on the above basis, of the premium which the second respondent would have collected. Sun Alliance should be ordered to pay the plaintiff's costs of action to be taxed, such costs to include such costs as the plaintiff is required to pay to the defendant Stenhouse. 22. Although the defendant Stenhouse has been held to have been negligent in failing to advise the plaintiff of its obligation to make disclosure, no damage has been proved to have resulted from that negligence, as the plaintiff would recover from Sun Alliance the same amount as it would have been entitled to recover if disclosure had been made. There must therefore be judgment for Stenhouse dismissing the plaintiff's claim against Stenhouse with costs.

JUDGE2 PRIOR J I agree with the reasons published by the Chief Justice and with the orders he proposes.

JUDGE3 MULLIGHAN J I agree with the orders proposed by the Chief Justice and with the reasons he has given. There is nothing which I wish to add.