Bell v The Queen
[2002] HCATrans 479
IN THE HIGH COURT OF AUSTRALIA
Office of the Registry
Sydney No S124 of 2002
B e t w e e n -
PERMANENT TRUSTEE AUSTRALIA LIMITED
First Appellant
PERMANENT TRUSTEE COMPANY LIMITED
Second Appellant
and
FAI GENERAL INSURANCE COMPANY LIMITED (IN LIQUIDATION)
Respondent
McHUGH J
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J
TRANSCRIPT OF PROCEEDINGS
AT CANBERRA ON TUESDAY, 8 OCTOBER 2002, AT 10.15 AM
Copyright in the High Court of Australia
MR R.J. ELLICOTT, QC: Your Honours, I appear with MR J.T. SVEHLA and MR G.A. ELLIOTT for the appellants. (instructed by Church & Grace)
MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friend, MR E.G. ROMANIUK, for the respondent. (instructed by Colin Biggers & Paisley)
McHUGH J: Mr Ellicott, what is the position with FAI? Is it still in provisional liquidation, do you know?
MR ELLICOTT: In liquidation.
McHUGH J: It is in liquidation, is it?
MR ELLICOTT: Yes.
GUMMOW J: Well, we will have to change the title.
MR ELLICOTT: I think the appeal may have been started off in liquidation, but then there was a request, I thought, to change the name. I did not quite understand ‑ ‑ ‑
McHUGH J: Well, the title of the proceedings ‑ ‑ ‑
MR ELLICOTT: It was below.
McHUGH J: ‑ ‑ ‑ will have to be changed. I will make an order giving you leave to change the title of the matter. There is one outstanding matter as well. There is an affidavit from Ms Middleton concerning documents. As far as I can see, it does not seem to have much relevance apart from discharge of an obligation to ‑ ‑ ‑
MR ELLICOTT: Under the Rules.
McHUGH J: Yes.
MR ELLICOTT: Of course, it was a very long trial and it has turned out to be a very burdensome requirement, but we do seek to ‑ ‑ ‑
McHUGH J: Well, is it sufficient we just note the affidavit?
MR ELLICOTT: If your Honour pleases.
McHUGH J: Yes. Have you anything to say, Mr Jackson?
MR JACKSON: No, your Honour.
McHUGH J: Yes.
MR ELLICOTT: Your Honours, there are five matters or five issues about which submissions have been put in. I just wanted to say the fourth issue in relation to statement, although there may be much to be said for it, we do not propose to advance argument in relation to that.
McHUGH J: Does that mean you do not rely on it or you do not put any argument in support?
MR ELLICOTT: I suppose it does mean it because it seemed on reflection that the view of the Court of Appeal was necessary in order to make the Act work. In other words, that not only statements in the strict sense, but also people’s actions, silence, conduct, et cetera, were too embedded ‑ ‑ ‑
McHUGH J: You have been convinced by the biblical reference, have you?
MR ELLICOTT: Yes, I was looking for that, your Honour, because that biblical attitude seems to come up again in the issue of fraud, but I will come to that a little later, your Honour.
As your Honours know, the first issue is of some significance because it requires the Court to consider the meaning of the words in section 21(1)(a):
the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk –
The particular matter here we have set out in paragraph 16 of the submissions, and if I might just refresh your Honours’ minds as to that. The primary judge said:
In my opinion, the true position is that the Permanent companies had, prior to 30th September 1991, decided that quotes should be obtained from insurers other than FAI, which should then be considered before any approach was made to FAI, and had through Sedgwick Australia actually set about doing this; the Permanent companies contemplated that, so long as the quotes from other insurers were satisfactory, then FAI would not be invited to participate; and the broker, Sedgwick Australia, had been instructed accordingly. In my opinion, it is not therefore strictly correct to say that the plaintiffs had, prior to the 30th September 1990, decided that FAI was to be replaced as an insurer of the plaintiffs.
That is a mouthful but, basically, we call it that there was a possibility ‑ my friends have tackled that and said it was more than a possibility. I suppose one has to concede there was a real chance, but it did depend on the other quotes, being satisfactory, there was a real chance that FAI would not be invited to renew, and it is that matter that it is alleged should have been disclosed. It is the matter which we say is not relevant to the assessment of the risk; it is a matter that was a commercial consideration and in the course of the evidence it became quite clear that what caused the reaction, or the likely reaction, of FAI was the fact that they had a very poor relationship at that time with Sedgwick London, but I will come to that later.
Your Honours will know that this was a very significant reform, that is to say the Insurance Contracts Act. I say that at the outset because it is important to bear in mind in one’s consideration of this Act that it was designed to alleviate the position of the insured and this restatement, as it were, of the duty of disclosure was intended to lift the burden I guess from all of us, because all of us, throughout Australia, from time to time are taking out policies which would fall within the purview of this particular Act. So the preamble of the Act is instructive:
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.
In the second reading speech of 29 May 1984 this was said:
Other authorities –
and they seem to have found favour in Australia –
have rejected this approach in favour of the “prudent insurer” test i.e. a fact is material if it would have reasonably affected the mind of a prudent insurer in determining whether it will accept the insurance, and if so, at what premium and on what conditions.
This rule imposes too strict a duty on the insured. Clause 21 both clarifies and ameliorates the existing law. It clearly states that the insured’s duty is only:
to disclose those facts which he knows or which a reasonable person in the circumstances could be expected to know would 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.
We submit at the outset that any interpretation which extended the common law test – and I will come back to that in a moment – would be antithetical to the Act because it is likely of course to operate against the intent of Parliament to ameliorate the burden on the insured.
Of course, as I have already said, one has to see the scope of the Act that it covers all aspects of general insurance with certain limited exceptions and it also covers life insurance. Therefore, ordinary people, we say, should not be burdened more than necessary to protect the interests of the insurer. It may be helpful to consider at the outset what a contract of insurance in simplicity really does. Kelly and Ball in their Principles of Insurance Law ‑ ‑ ‑
KIRBY J: Could I just interrupt to ask: what is the status under the Act - I have forgotten – of the uberrimae fides principle?
MR ELLICOTT: That is dealt with in section 12.
KIRBY J: Would that not have required – at least at common law it was an unusual contract. If you are starting back at basics, which I find helpful myself, would you not say that under the old law – let us start with the old law – you would have to reveal this fact because you are not in an ordinary arm’s length relationship; you are in an insurance relationship. I would have thought that if you are likely not going to go ahead with insurance with the insurer that under the old law you would in candour have had to reveal that fact.
MR ELLICOTT: No, to the contrary, your Honour, as I hope to convince your Honours by the end of my argument, that it would have been the other way. Indeed, when the legislature in the second reading speech of the Attorney‑General picks up the notion, he does not use the words “acceptance of the risk”. He translates it to mean the assessment of the risk.
KIRBY J: Is this a change wrought by the new Act?
MR ELLICOTT: No.
KIRBY J: Or do you say it is something that existed at common law as well?
MR ELLICOTT: We say it is something that existed at common law.
KIRBY J: Can I just explain my response and it may be caught up in those words “moral hazard”; that if one is applying a “moral hazard” approach then it is somewhat offensive that your clients’ employee gets on the phone and without revealing how they are thinking, what they are going to do, what they are probably going to do, that he goes ahead and, in a sense, misleads the insurer?
MR ELLICOTT: Well, we have to come to that, too, your Honour, as to whether it was misled. But if your Honour had a large number of insurances, if your Honour had a number of properties and your Honour was insured with the NRMA and a particular insurance had come up and you had become dissatisfied with the NRMA and you thought, “Well, later in the year I think I will terminate those other policies”, is your Honour under a duty ‑ or may have made a decision to do it – to tell them that you are going to take all your business away from them? I would submit not.
KIRBY J: Well, maybe not in general, but if you are asking for a favour, that is to say, the extension of 30 days, it at least raises the question in my mind that you have to say, “Well, we are asking you the favour and, by the way, we really feel in candour and out of the good faith that we owe you, we have to tell you that” ‑ ‑ ‑
MR ELLICOTT: Your Honour, I will come to that, but it really raises questions under other issues, but what we are concerned with here, is the meaning of the words, “the decision of the insurer whether to accept the risk and, if so, on what terms”, and if it is not known to be relevant to that matter, then it does not have to be disclosed, and we do say that the words, “whether to accept the risk” had a meaning at common law which involved the notion of assessment of the risk or take the risk, and that is why I suggested that it might be helpful to just have a look, in its simplicity, what a contract of insurance is about, and after all, section 13, “The duty of the utmost good faith”, is about a contract for insurance, not about some other contract, not about the renewal of some contract but about this contract for insurance. Insuring against professional negligence for 30 days, that is the contract we are concerned about, being an extension of an existing contract of insurance. Kelly and Ball say:
The purpose of a contract of insurance is to transfer the risk of loss that arises from the insured’s interest in the subject matter of the insurance ‑ ‑ ‑
McHUGH J: What page?
MR ELLICOTT: Page 1991 paragraph 1.11 ‑
and the contract transfers the risk from someone who has much of the information peculiar to the risk to someone who may not.
When it is borne in mind that what is being transferred is risk and that the duty of disclosure has always been seen as related to that and if so, on what terms and conditions, then it enables, we would submit, some better idea of what the legislature had in mind when they said “relevant to the decision of the insurer whether to accept the risk.” Now, of course, the Court of Appeal has held that the words “relevant to the decision . . . whether to accept the risk” mean no more than whether to enter into the contract of insurance because that is how you accept the risk. You enter into a contract of insurance.
But this is something that happens before one enters into the contract. The disclosure has to be made to the insurer before the relevant contract of insurance is entered into. That is what the section says. It is the risk that is being transferred and it is the assessment of the risk, whether to take the risk, and the words “accept the risk” are not words that are new to the statute. Those words are found in the Pegler test – and I will take your Honours to it in a moment – that was Mr Justice Samuels’ version of it, and that was approved by the Privy Council.
KIRBY J: That was approved by the Privy Council and it has been applied many times.
MR ELLICOTT: So the words “acceptance of the risk” were in the common law test. There is no need to give them some special meaning based on contractual notions of accepting an offer. That is not what it is about. It is about whether or not it is relevant to the insurer in deciding to take that risk or accept that risk or in assessing the risk that is being transferred. In this case, the question of renewal had nothing whatsoever to do with the question of risk. It did not matter two hoots whether or not the renewal took place so far as the premium is concerned and the assessment of the risk is concerned. It would have been just the same.
KIRBY J: But I thought it was an agreed fact that had the insurer known that you were in the position that you were in, that they would not have agreed to extend the insurance for 30 days.
MR ELLICOTT: Yes, and they said that in the most emotional terms possible. “I would’ve told them to ‘P’ off”, one of them said. There are all sorts of ways that the witnesses expressed it, but it was emotional and it was emotional because great heat had been generated between Sedgwick London, on the evidence, and FAI because FAI’s credit rating was reduced to Standard and Poors BBB ‑ ‑ ‑
McHUGH J: Minus.
MR ELLICOTT: ‑ ‑ ‑ and that assessment was a real question, so they said they would have reacted in that way. Of course, we do not know how they would have reacted because we do not know, but so far as risk is concerned ‑ ‑ ‑
KIRBY J: There is a finding on that, is there not?
MR ELLICOTT: Yes.
KIRBY J: I thought you did not dispute that.
MR ELLICOTT: I do not dispute the background fact, but what I dispute of course is the definitional approach taken by the Court of Appeal to these passages. Perhaps I should indicate to your Honours the particular passages and questions. They appear in 50 NSWLR 679, that is the Court of Appeal’s judgment. If your Honours go to page 686 in paragraph 29:
Mr Ellicott also sought support from pre‑Act authority on the meaning of risk, but they are not relevant ‑
they were not even discussed by his Honour ‑
because the meaning of the section, for present purposes, is tolerably clear. The matter to be disclosed must be “relevant to the decision of the insurer”. This is a decision whether to accept the risk and if so on what terms, and it is not simply a decision about the risk. Risks are accepted by contracts of insurance. The section refers to decisions whether to accept risks by entering into contracts.
GUMMOW J: Well, you fix on that, do you not, as offer and acceptance language?
MR ELLICOTT: I do, yes, and that is basic to our approach to it. The fact that the duty - first of all, fixing one’s gaze on what this contract of insurance is about and then looking at the common law test one sees that the words are not lifted out of Salmond and Williams on Contracts, or whatever it may have been, but they are lifted out of the common law of insurance. Risk we have dealt with. I had not in mind to take your Honours to the particular pages, but in paragraphs 31 and 32 of our submissions we set out, I think, in footnotes, some of the various meanings given.
First of all, in 31, “risk” in relation to insurance is defined as the hazard or chance of loss; the degree of probability of such loss; the amount which the insurance company may lose. This ordinary meaning of “risk” has been accepted and applied, et cetera. Couch, in that footnote 44(b):
“In order to have a contract of insurance there must be a risk which is specified or capable of identification, since a risk which is the coverage of the contract is of the very essence of insurance. In general, the risk may be any uncertain event which may in any way be of disadvantage to the party insurance. It should relate to a possibility of real loss which neither the insured nor the insurer has the power to avert or hasten.”
KIRBY J: If you talk about the common law, Mr Jackson, in his submission, says that there is no readily identifiable case, in all the hundreds of years of writing insurance, that you can point to where the fact of the type with which this case is concerned has been held not material.
MR ELLICOTT: Well, I am going to take your Honour to such a case, and ‑ ‑ ‑
KIRBY J: You have found one case.
MR ELLICOTT: ‑ ‑ ‑ your Honour may disagree with me – a very recent case. But, anyhow ‑ ‑ ‑
KIRBY J: No, I find this quite an interesting case ‑ ‑ ‑
MR ELLICOTT: Yes, your Honour, and it is ‑ ‑ ‑
KIRBY J: ‑ ‑ ‑ but I just felt I ought to express the contextual element of uberrima fides, which is preserved by the statute, which, as I understand it, Mr Welsh did not feel comfortable with what he was asked to do.
MR ELLICOTT: Yes. But, also ‑ ‑ ‑
KIRBY J: He was really misleading them, was he not?
MR ELLICOTT: One has to understand that we are dealing with a statute that was intended, not to increase the responsibility of disclosure, but the Australian Law Reform Commission, in this particular report ‑ ‑ ‑
KIRBY J: I remember it well.
MR ELLICOTT: ‑ ‑ ‑ emphasises that its purpose is to ameliorate the position of the insured and therefore not to increase the scope of disclosure. It uses the expression which, in substitution for the words in the very statute which it was recommending, the Bill – this was one of those rare occasions when the Bill was very close to what was ultimately enacted. In other words, the draft Bill and the Law Reform report had basically this provision in it. But when they came to discuss it – and I will take your Honours to it ‑ they talked about the assessment of the risk.
So when one comes to look at these words, we say, both the Attorney‑General in the Parliament and the Law Reform Commission has equated them with assessment of the risk – that is to say, answering the question, “Will I take this risk or will I not? Is it too chancy? Is there a physical hazard involved, or is there a moral hazard?” We are not talking about the morality of fraud or fraudulent misrepresentation or the non‑disclosure of other matters; we are concerned about matters which are relevant to, we say, the acceptance of the risk in the statute, meaning the assessment of the risk.
If your Honours go to paragraph 33 of our submissions, you will find set out there the Pegler test. Justice Samuels said:
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.
It is very odd that those seem to be the very words that are in the statute, but the Court of Appeal does not even give consideration to that. It says the words are tolerably clear and introduces these contractual notions. But one has to go behind it, I would submit, although this Court has said in Advance Insurance v Matthews 166 CLR 606 at page 615:
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 IV. To that extent Pt IV 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. However, in the light of our view as to the meaning –
et cetera. Now, that was the view expressed and we do not, of course, seek to depart from that, but we say that here the common law has been adopted, in effect, in the phraseology of this section and therefore ‑ ‑ ‑
HAYNE J: Yes, but is that right? Pegler posits, does it not, an objective test by referring to the mind of a prudent insurer?
MR ELLICOTT: Your Honour is quite correct limiting what I have just said, because the hypothetical prudent insurer is removed and one looks at what is known to the insured that is relevant to the risk. So that hypothesis is taken away. But the test – I will call it materiality, if one likes – the test of materiality or the test of relevance we say is basically the same and you go beyond the contractual notions of acceptance and you embrace the notion that one finds in the cases, in the Pegler test, and that, one would say, raises the question: would this have been a matter that would have been disclosable at common law?
We would submit not. If it is not, then it is quite unlikely that a Parliament that is trying to limit the duty of insureds is going to provide that anything – and this is why hard cases do not make good law – which an insured knows relevant to the contract or relevant to whether the insurer will decide to enter into it would place a very large burden on a lot of not just large companies, but ordinary people. Most of the people who have to make these decisions are millions of Australians. Are they to be asked to say to themselves, first of all, “Now, what do I know that might affect the decision of this insurance company to enter into this contract?” Not just affecting the risk that is involved. Of course, if I have been refused insurance or if I have a conviction and those sorts of things, I ought to know that those should be included, but where does one draw the line? It is because of that penumbra of uncertainty that one is going to, in our submission, tie these words to the issue of acceptance of the risk.
KIRBY J: But just pausing there, even if you do focus on acceptance of the risk and if the risk in question is the 30‑day extension, why is it not – you see, Mr Welsh was told, “Be careful”. Now why was he told, “Be careful”? He was careful and he felt uncomfortable about being careful. So why is that not, even on the test of the risk of accepting the risk, relevant to whether or not the insurer would accept the risk and known to your client to be relevant and known to Mr Welsh explaining his discomfiture?
MR ELLICOTT: Because it had nothing to do with the assessment or quantification of the risk as such, that is, the risk involved because the Permanent Company ‑ ‑ ‑
KIRBY J: But the risk is whether ‑ ‑ ‑
MR ELLICOTT: The risk is whether the Permanent Company would commit, through its officers, some negligent act in the 30 days and that is the physical and partly the moral hazard that is being insured. This question of renewal had nothing to do with that, it did not affect it one bit. It was a commercial consideration: “You are not going to renew this and, therefore, I won’t grant you the extension”. That is not relevant to the risk to say that, that is a commercial consideration; so that it is for that reason that we draw the line at that point. Of course, when I said a moment ago hard cases make bad law, what the Court is considering on this issue is not the question of Mr Welsh or Mr Daly, one is considering, what do these words mean in this statute?
McHUGH J: I have not had the advantage of reading all the evidence, but the finding that they would not have renewed for 30 days if they had been told strikes me as somewhat surprising. I would have thought, given FAI’s problems with Sedgwick, they would have been doing everything they could to carry favour with Sedgwick. To refuse the extension, on one view, might have been regarded as putting an end to the relationship.
MR ELLICOTT: Yes. Well, it is a hard test.
McHUGH J: But, anyway, you are stuck with that finding of fact.
MR ELLICOTT: It is a hard test when people are giving evidence years later and the claim is for something like $20 million to $30 million.
CALLINAN J: He would say that, would he not? But, Mr Ellicott, could I ask you this, I wonder if you could explain it to me. Was there to be a charge of 20 per cent of the total premium for the one month’s extension? Have I misunderstood that or is it ‑ ‑ ‑
MR ELLICOTT: Yes, your Honour, there was the lead insurer in London and this is how it arose: the lead insurer wanted further information about ‑ ‑ ‑
CALLINAN J: I understand that. What I am interested in is what the cost was going to be for the ‑ ‑ ‑
McHUGH J: It was 20 per cent pro rata, was it not?
MR ELLICOTT: Yes.
CALLINAN J: So that that strikes me as a high charge. Am I wrong about that? I would have thought eight and one third per cent, a 12th might have been appropriate.
MR ELLICOTT: Yes.
CALLINAN J: It looks rather like a super premium, but ‑ ‑ ‑
MR ELLICOTT: Well, it is and it is one that is apparently normal in those circumstances.
CALLINAN J: It just looks like an ordinary commercial transaction.
MR ELLICOTT: Yes.
CALLINAN J: If you want an extension, you have to pay what would be otherwise the odds.
MR ELLICOTT: What is the going rate.
CALLINAN J: Pay over the odds, yes.
MR ELLICOTT: There was no doubt that FAI indicated that they would accept the going rate and they did.
CALLINAN J: That would be attractive for insurers to, I would have thought then, to effect brief extensions because that sort of charge is considerably more than they would get for a renewal for a year.
MR ELLICOTT: Yes, and one, we would submit, has to be sceptical about evidence given some years later when faced with a large – but that was the evidence and the court ‑ ‑ ‑
CALLINAN J: That was the finding.
MR ELLICOTT: ‑ ‑ ‑ that was the finding, but there it is.
CALLINAN J: But in any event, that 20 per cent really emphasises the naked commerciality of the arrangements.
MR ELLICOTT: Yes, it does.
KIRBY J: Yes, but there would not have been an arrangement, naked, commercial or otherwise, if you had revealed that you were playing the market. You were in a sense suggesting you were going to go ahead business as usual, and that was the furthest thing from your mind.
MR ELLICOTT: Your Honour, I do not mean this offensively, but ‑ ‑ ‑
KIRBY J: Your best point is about the millions of Australians. Your best point is that this Act has to work in a whole range of circumstances and you have to keep your eye on it.
MR ELLICOTT: Yes, it is a very good one, your Honour.
KIRBY J: I think that is a good point, but in this transaction, just confining ourselves to this, you were being duplicitous.
MR ELLICOTT: Your Honour, I do not accept that, if I may say so, but I do not want to answer it now because I will be answering it later.
KIRBY J: No, you will come to that on issue 5.
MR ELLICOTT: I do not want to put the cart before the horse. I have to get this horse going first in section 21 and it is driving the whole thing. If we succeed on section 21, these other issues do not arise. Your Honour will appreciate that under this Act – and perhaps I should make this clear – under section 26 misrepresentation only extends to a situation when it is a misrepresentation about a matter which the insured knew:
or a reasonable person . . . 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.
So that if it is a statement that falls within that, that is to say – I will read the whole subsection:
(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 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.
So that if we are right about this first issue, the construction, there is no room for misrepresentation under this Act which, as this Court has said, is a code. Section 33 has to be borne in mind. It says:
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.
So that insurers can no longer make claims for misrepresentation about matters which lie outside those matters which are relevant to the question whether or not to accept the risk.
KIRBY J: But is not that against you, given that there was a finding in this case that Mr Welsh was told, “Be careful”. He was careful, he felt uncomfortable about it, and that rather indicates that he knew that that would have been a very relevant matter for the insurer to ‑ ‑ ‑.
MR ELLICOTT: Be careful about a matter which, in our submission, has no relevance to the question whether or not to accept the risk.
KIRBY J: Well, somebody thought it was relevant as to whether the extension would be granted.
MR ELLICOTT: The evidence that was given by experts was to the effect that this particular matter was not relevant, in their opinion, to the question whether to accept the risk. There was evidence given to that effect. Mr Daly had that view, that it was not relevant to the question whether to accept the risk. Therefore, they were in a territory where they did not have to disclose these matters, and it could not be a misrepresentation because 26 said so, if it was true, as they believed it to be, that this was a matter which was not relevant to the question of the acceptance of the risk. Once this issue is decided in our favour, those other issues do not arise and it is neither fraud, nor misrepresentation, et cetera. It is nothing.
GUMMOW J: Mr Ellicott, section 33, is that to be read – on its face it is – as putting aside the Trade Practices Act, section 52?
MR ELLICOTT: Your Honour, I think it is in Sutton on Insurance Law, and it seemed to me that there may be some strength in it, that this is only dealing with issues about misrepresentation, but on the other hand, if one is going to give a code effect to these provisions, then one might give those words a wider view, but there is an open question as to whether the Trade Practices Act is excluded for misleading and deceptive conduct.
GUMMOW J: And there was no Trade Practices argument in this case?
MR ELLICOTT: No, that argument was not in this case.
HAYNE J: Now, apropos of the risk, Mr Ellicott, where do we most conveniently find the policy wording that applied in respect of the 30 day extension that was made?
MR ELLICOTT: I will have to search for that, your Honour.
HAYNE J: If at some point you could let me know where that is and could you at the same time let me know whether it was a claims made policy as distinct from an occurrence policy?
MR ELLICOTT: I think it was a claims made policy.
HAYNE J: Some of the wording I have seen seems to be claims made, in which case a view may be that either the risk or an element of the risk insured was the risk that a claim for professional negligence would be made within the period of the 30 days concerned.
MR ELLICOTT: I understand that to be so, your Honour, but I will ‑ ‑ ‑
KIRBY J: That is what in fact occurred, is not it, that within the 30 days the claims were made?
MR ELLICOTT: Yes, the claim came up within the 30 days and that was it ‑ ‑ ‑
KIRBY J: Was there a cover note, a written cover note of some kind issued?
MR ELLICOTT: Volume 5, your Honour – could I answer – at 1160. Yes, the claims made – I think it is in 1162, between 15 and 20:
the Underwriters hereby agree to indemnify the Assured up to but not exceeding the sum stated in the Schedule for any sum or sums which the Assured may become legally liable to pay for breach of duty committed or alleged to have been committed in the professional conduct of their business, as stated in the Schedule arising from any claim or claims made against them during the Period of Insurance stated in the Schedule ‑ ‑ ‑
HAYNE J: And is that then to be married to what appears at 1160 and 1161, which is the 30‑day ‑ ‑ ‑
MR ELLICOTT: Yes, your Honour.
HAYNE J: ‑ ‑ ‑ time period?
MR ELLICOTT: I understand so. That is Addendum (A), and that appears from the form on 1160 at line 13:
“Follow Form” of primary wording (as expiring plus amendments as per Addendum A).
HAYNE J: Thank you.
KIRBY J: And the fax date indicates that that went out on 30 September, which was the last day of insurance.
MR ELLICOTT: Yes, that is right. Now, I just wanted to illustrate, in as quick a way as I can, how the common law judges, if I can call them that ‑ and your Honours would be, in a sense, common law judges – but prior to this Act coming into force, how they phrased this issue. Now, at page 7 of our submissions, we have, in note 46, Mayne Nickless, “accept the insurance”; Justice Glass in Barclay, “whether or not to accept the risk”; Acting Chief Justice Isaacs ‑
“whether . . . that fact would have influenced the company as a prudent insurer in fixing the premium or in determining to accept the risk” ‑
Brownlie v Campbell ‑
“may influence the underwriter’s opinion as to the risk he is incurring, and consequently as to whether he will take it, or what premium he will charge, if he does take it, you have to state what you know” ‑
over the page, section 24(2) of the Marine Insurance Act, what:
“a prudent insurer in fixing the premium, or determining whether he will take the risk.”
HAYNE J: Some of those are cast in subjective terms – see, for example, Brownlie v Campbell – some in objective terms.
MR ELLICOTT: Yes, I understand that. Different wording was used to convey what we submit is basically the same idea, and the words “accept the risk” are just part of the phraseology of the common law. They are not some special words adopted by the Law Reform Commission and recommended to the government for enactment, and then adopted by the government. Both the Commission, in its report – and I will take your Honours to that – and the Attorney‑General, in his second reading speech, indicate that that is so, as does the explanatory memorandum, because they talk, not about acceptance – they talk about the assessment of the risk.
KIRBY J: The words “whether it will accept the risk” are apt to this case. What you want to do is to say the focus must be upon the hazard of the insurance as distinct from the entirety of the factual circumstances.
MR ELLICOTT: That is so.
KIRBY J: Now, what is it in the Act ‑ ‑ ‑
MR ELLICOTT: The only morality in it is the moral hazard of somebody having committed a crime or been guilty of arson or been rejected as a reliable insurance, for instance.
KIRBY J: Where is the textual anchor for that more restricted view?
MR ELLICOTT: In the words “accept the risk” because those ‑ ‑ ‑
McHUGH J: Also 21(2)(a).
MR ELLICOTT: Yes.
McHUGH J: “Diminishes the risk”.
MR ELLICOTT: Yes. And (2)(a), as his Honour Justice McHugh has pointed out, talks about the “diminishes the risk” and says that that does not have to be disclosed, anything that diminishes the risk. Well, you would think that was the counterpart of (1)(a).
McHUGH J: It may be that if your argument is rejected then you would have to disclose to the insurer the fact that its premium is well below other offers that you have got from other insurers.
MR ELLICOTT: Yes.
McHUGH J: Unless the insurer can rely on 21(2)(c) that it is something in the ordinary course of its business it ought to know, although it might be hard to bring it within that.
MR ELLICOTT: One can sit and think of other examples. Once they go outside the risk then the possibility - they may be academic largely because in the ordinary world they do not occur very often, but it is the hard case that ‑ ‑ ‑
CALLINAN J: Insurance companies must appreciate that people will be shopping around for better premiums. It goes on all the time. Indeed, it is encouraged by the ACCC.
MR ELLICOTT: I thought it was the basis of our economy, your Honour.
CALLINAN J: Yes.
KIRBY J: Nobody is questioning that but it is whether, when you have, in a sense, made a provisional decision that because of various factors including the downgrading of FAI, that prima facie you are not going ahead with them. You have to be careful how you deal with them. “We want that 30 days. We have left our run a bit late. We have not got it lined up. We’re just going to wait until we get the 30 days and by then we’ll give them the chopper”.
MR ELLICOTT: Now the permanent company, as a result of this decision, if it is right, has to reveal forever and a day that it was found guilty of fraud. Now, that is a very serious matter of course for the permanent company, and I will come to this issue of fraud ‑ ‑ ‑
KIRBY J: That is your fifth point.
MR ELLICOTT: But that only shows that here is a ‑ if you want to talk about hard fact, the hard fact here is that Sedgwicks, unbeknown to the permanent company, did what they did and yet the permanent company is supposed to be caught with it. Then it is said that even though it has nothing to do with the risk in the sense that I am submitting, that forever and a day the permanent company has to disclose to insurers the results of these proceedings. That is a pretty tough decision that has been exercised against it. Right at the outset neither Mr Daly nor other people involved believed that they had to reveal this matter and therefore, a caveat emptor if you like so far as that was concerned. The whole thing was a matter for the insurer outside that issue. If they had asked a question and been misled, and it was not a matter that did come within 21(1)(a), then the question would arise, as Justice Gummow raised, as to whether Sedgwicks could be charged with misleading and deceptive conduct. But that is a different matter, a different case; not this one.
KIRBY J: Is your theory of the case that at that point where the extension was asked the insurer or the broker should have said, “By the way you are going to continue your insurance with us”?
MR ELLICOTT: Yes. It is not unusual for insurance not to be renewed.
McHUGH J: Well, it had been happening, apparently, quite regularly in the relationship between Sedgwick and FAI.
MR ELLICOTT: Yes, and you would think if you were sitting in the chair in FAI in 1991 and your Standard and Poors rating was down to BBB, that your renewal might be in jeopardy and you would think you would be doing what you could to either find out or, alternatively, to please the insureds so that they would continue, not to go off into the distance.
HAYNE J: Is the risk referred to in 21(1)(a) wholly identified by the insuring clause in the policy wording that ultimately applied?
MR ELLICOTT: Your Honour is talking about the clause that I just read?
HAYNE J: Just so.
MR ELLICOTT: Yes, your Honour, yes.
HAYNE J: Thus the field for debate on your argument is, what is a matter relevant to the decision whether to accept?
MR ELLICOTT: Yes, that is right, and that the question of those claims is not affected in any way by the question of renewal, which was, of course, another contract. Do your Honours have the Marine Insurance Act there of 1909? I think it is sufficiently – and this has been said too in cases in England. It was taken from the English Act of 1906. It has been said to state the common law. Every circumstance is material which would influence a judgment whether he will take the risk.
Now, I wanted to take your Honours to a case as a handy way of seeing how these matters were stated. It is Pan Atlantic Insurance v Pine Top Limited [1995] 1 AC 501, a judgment of Lord Mustill in the House of Lords. Your Honours, this case was about whether the material matter had to affect the mind of the insurer or whether it was something the insurer would take into account, and it was a very large issue in England. It is no longer an issue under the Act, so this case is not strictly relevant. But if I could start at page 517 just to illustrate various ways in which these matters were said. Between C and D:
it is not unreasonable to expect that an assured who is aware of, and understands, his duty of disclosure should be able to identify those circumstances, within his knowledge, which would have an impact on the mind of the insurer when considering whether to accept the risk and, if so, on what terms he should do so –
Then 525E, if I may take your Honours to that, Lord Justice Stephenson:
‘which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk?’ . . . what I take to be the judge’s opinion that a circumstance taken into account by a prudent insurer in the process of considering the risk offered and the premium and the terms required . . . a hypothetical prudent insurer’s consideration of a risk, whether to accept it and on what terms . . . to accept a risk and on what terms –
Then on page 526D:
considering the proposed insurance with a view to deciding whether to take it up and on what terms, including premium.
At 527F:
After all, there may be many commercial reasons for still writing the risk on the same terms.
At 536F:
The assured is not to keep anything back which goes to the computation of the “contingent chance,” for otherwise there is no “fair representation,” and the underwriter is led to approach the “risk understood to be run” on a false basis.
At 537C:
“Every fact and circumstance . . . in determining whether he will underwrite the policy at all, or at what premium he will underwrite it, is material.”
Between D and E after Phillips:
“tending to influence [the underwriter’s] estimate of the character and degree of the risk to be insured against.” . . . to induce the underwriter more readily to assume the risk . . . “their probable influence on the estimated value of the risks.”
At 538D:
when assessing the risk (i.e. the “speculation”) which he was consenting to assume . . . That the word “risk” must be understood in the wider sense is now beyond dispute, but this has no bearing on the principle –
That is a reference to moral hazard. I will take your Honours to that case of Ionides.
CALLINAN J: Mr Ellicott, could I just ask you about a matter that has been puzzling me. Justice Hayne put to you that the section contemplates an objective test and you accepted that. Did both sides call evidence as to what an insurer would or would not do?
MR ELLICOTT: Yes, there was evidence.
McHUGH J: I think Justice Hayne put a subjective test.
HAYNE J: What I was putting to you was that the case law spoke of an objective test, whereas this Act invites attention to “the insurer” rather than “a prudent insurer” or “an insurer”.
MR ELLICOTT: Yes.
CALLINAN J: I was looking at (b) actually, which speaks of “a reasonable person in the circumstances of the insured”. So that seems to be objective but the other part is subjective. I do not think it really alters the thrust of my question. There seemed to be evidence called as to what an insurer might think, which might well be possible with a subjective test, but that seemed to have descended also to what an insured would also think. There seems to be a lot of evidence. Nobody objected to that. It was called on both sides.
MR ELLICOTT: But a reasonable person in some cases – this judgment not only dealt with this, but a lot of other issues – in some cases, the question of whether a reasonable person could be expected to regard it as relevant arose. Justice Hodgson considered the evidence of experts in relation to that and it is ‑ ‑ ‑
CALLINAN J: I am just questioning whether the expert evidence wandered, perhaps, beyond what the section contemplated were the issues.
MR ELLICOTT: It could also be relevant to the other issues as to whether Daly was justified in thinking that it was not something that was relevant to the risk and that affected the state of mind, but that is quite another issue.
CALLINAN J: Yes, all right. I am sorry I interrupted you, Mr Ellicott.
MR ELLICOTT: Your Honours, could I take your Honours to the Law Reform Commission Report. In paragraph 183 – it is page 111 at the top and I think your Honours had a reference.
GUMMOW J: What page, Mr Ellicott?
MR ELLICOTT: Page 111, “Conclusion”, 183 is the paragraph.
GUMMOW J: Thank you.
MR ELLICOTT: It has 111 at the top right-hand corner. This illustrates what the Commission was thinking about it:
The existing duty of disclosure is not justified by the principle of uberrima fides. That principle would appear to suggest that an insurer should only be entitled to redress in the event of deliberate concealment or culpable indifference. A former member of the Commission was firmly of this view. However, the existing members are concerned that a rule based on concealment might give rise to unwarranted difficulties of proof and might conceivably make dishonesty more difficult to detect. They therefore recommend that the duty of disclosure should be retained in modified form. An insurer which wishes to rely on innocent non-disclosure should warn the insured of his duty of disclosure before the contract is entered into. The duty should itself extend to facts which the insured knew, or which a reasonable person in the insured’s circumstances would have known, to be relevant to the insured’s assessment of the risk.
That is how they saw it.
The substance of the test –
and they go on to speak about the English Law Reform Commission test.
McHUGH J: Is that a mistake for “insurer’s”, “The duty should itself extend to”?
MR ELLICOTT: Yes, your Honour, it is. It should be “the insurer’s assessment of the risk”. Over the page, that is made clear about perhaps 10 or 12 lines down:
An insurer should be entitled to redress for misrepresentations of a fact which the insured knew, or which a reasonable person in his circumstances ought to have known, to be relevant to the insurer’s assessment of the risk.
But that is how the Law Reform Commission looked at it and your Honours may not have it there, but the complete report has the draft in it.
KIRBY J: Where is that second quote? I just cannot pick it up.
MR ELLICOTT: That is about, maybe 12 lines down on page 112.
KIRBY J: Yes, I have it.
MR ELLICOTT: And the words in the draft Bill, “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” is identical; (b) was different. It read, “a person in the circumstances of the insured could reasonably be expected to know to be a matter so relevant”. That was amended in the Parliament.
Your Honours will have the Explanatory Memorandum – there are a couple of these but that is the one we have handed up. Just before leaving the Law Reform Commission Report, knowing the thoroughness – I mean, this report took some six years, but it was thoroughly investigated and it was probably the most successful bit of law reform that has been done in terms of a Bill being recommended and substantially adopted. One would have thought that the Law Reform Commission would have said something about the provision intending to depart from what we say is the common law position, and using those words “acceptance of the risk”. The whole thrust was to say in the rest of that passage at 111 – I did not read it – “We want to protect the insured. We want to cut it down and ameliorate” – I think is the word they used.
At page 40 of this Explanatory Memorandum – sorry, we should start earlier, page 34, clause 21, “The insured’s duty of disclosure”:
Present Law – An insured is required to disclose to the insurer all material facts relating to the insurance he proposes to effect and which are material to the insurer’s assessment of the risk he is incurring or as to the premium he should charge.
And in paragraph 61 over the page:
Proposed Law . . . which he knows or which a reasonable person in the circumstances could be expected to know –
and that quotes the section. Then down the bottom in paragraph 62, fifth line up:
Rationale – Clause 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 –
and it goes on to deal with what is in (b), and on page 40, dealing with misrepresentation:
The question of materiality ‑ ‑ ‑
KIRBY J: But the problem is the section itself does not use those words. I could understand the power of assessment and I take the point that you are making both from the Law Reform Report and the Explanatory Memorandum, but instead it uses “whether to accept the risk”.
MR ELLICOTT: Yes. Now, we answer that by simply saying that is Pegler and Pegler means assessing the risk. It is just another way of saying the same thing and that is why they say that. In this passage I am about to read, page 40, the Attorney‑General or the officers use a different term:
The question of materiality is determined by reference to what the prudent insurer would have regarded as material in the circumstances . . . ie as influencing his judgment in fixing the premium or determining the risk it will take.
They then pick up other notions and they are all, we say, covered by the same intent and that is to fix on the risk and ask the question, “Does this affect the assessment of the risk?”.
Now, I have already submitted to your Honours that if this test was adopted, as Justice Handley suggested, then it would make it, I would submit, very cumbersome for individual insureds and insurers would be probably employing a lot more investigators to find out what people may have known, which were not revealed, so that they could escape their insurance. But be that as it may, I was submitting that one can think of these things, think of instances of matters that might have to be revealed. If a particular insurance company has a stated policy that it will not insure tobacco companies, does an insured, in seeking an insurance, have to reveal that he or she has a large number of shares in Philip Morris or some shares in Philip Morris? Where does it begin and where does it end? It raises a very difficult issue, whereas the question of physical and moral hazard has, over the centuries, been looked at and is a well-worn path.
Your Honours, there is a case which we say has some teeth in it in terms of the question whether or not this has ever happened before or this question has been considered. It is Barclay’s Case (1987) 8 NSWLR 515. It is not exactly the same thing because, in this case, there had been a – and your Honour Justice Kirby may remember it – refusal to renew, and the question was whether that refusal to renew should have been revealed. The decision was that it was not a material matter to reveal. This is not under the Act, although it is 1987; this is an old pre-Act policy.
Your Honour Justice Kirby at 516 said, just below B:
Sometimes legislation has attempted to modify the test, usually to soften its obligation.
And your Honour, no doubt with some pride, referred to the Insurance Contracts Act 1984. But your Honour concluded at 520C:
And the expression of the principle to be applied as stated by Justice Samuels in Mayne Nickless Ltd v Pegler, clarified by this appeal, is to be most preferred. Its endorcement by the Privy Council reinforces, even if it does not bind us in, this view.
Now at E – and I do have to take your Honours a little way into the facts:
The following matters were established by the evidence. The plaintiff company was beneficially owned and controlled by one Miles Barclay. In 1982 Mr Barclay owned commercial office premises at Blacktown which were insured with the MLC Fire & General Insurance Co Pty Ltd. On 9 March 1982m, the premises were damaged by fire and a claim was made on the MLC policy. On 7 June 1982, a manager of the MLC wrote to Mr Barclay regretting that the company would be unable to invite renewal of his insurance from its expiry date. On 9 August 1982, the general manager of MLC wrote to Mr Barclay withdrawing the previous letter. The author of the first letter gave evidence at the trial that the original decision not to invite renewal was not based on questions of moral hazard but was a commercial decision based on administrative considerations. As it happened Mr Barclay had taken out insurance elsewhere in the period between the two letters. The author of the first letter also gave evidence that an investigation of the Revesby fire did not disclose any physical or moral hazard.
Mr Gyles asked some questions and they appear at 521F:
Q. I think in addition to that I would like you to assume, if you would, that the invitation from MLC to not just Mr Barclay but to the others to whom it was addressed . . . A. Yes.
Q. That that was for commercial administrative reasons and not for any reason of moral hazard? A. Yes.
And a couple of questions down:
Q. On those assumptions in your experience were the matters my learned friend put to that witness in your view matters which would be material to the risk which was here proposed?
Q. His Honour: Assuming those assumptions with all the other assumptions put to you? A. With the additional assumptions I would not regard those things as material.
There is further evidence that is set out there, but that was the state of the evidence. Then at 522 just above F:
The trial judge directed himself according to the definition of materiality propounded by Samuels J ‑
and that is set out ‑
The word “reasonably” is necessary to maintain control over the evidence and possibly absurdly stringent insurance practice ‑
Then there is a reference to “container transport” and then on 523F:
The outcome of the appeal depends in my view on the application of the Mayne Nickless Ltd v Pegler test to the evidence. Before reaching that stage of the adjudication, however, there is a second principle of law which must be considered and determined. The question may be expressed in the following manner. Does the Court apply the test of materiality to the two isolated facts viz the previous fire and the refusal to renew or is it to be applied to those undisclosed facts located in the web of surrounding circumstances which explain their true significance?
He goes on to say that you look at it in the circumstances. On page 525 appears under A:
The Western Australian Insurance Co Ltd v Dayton approach is in my view consistent with the nature of the uberrimae fidei duty which the proponent owes to the insurer to whom the proposal is made. This is traditionally described as a duty to disclose all facts material to the appraisal of the risk ‑
so that is how the duty is complied with ‑
which are known to the former but not known to the latter. If the previous loss when fully examined occurred in circumstances where no blame could attach to the proponent, it could not affect the risk and would not be a material fact.
Then there is a reference to Mayne Nickless and Western Australian Insurance. Then, against D:
When the Mayne Nickless Ltd v Pegler test of materiality and the Western Australian Insurance Co Ltd v Dayton concept of undisclosed matters are applied to the evidence in the appeal, the answer in my opinion is not open to doubt. The two experts agree that a fire which on investigation discloses no physical or moral hazard is not a material matter which the proponent is bound to disclose. The identical conclusion is yielded by the application of principle to the facts . . . Such a letter could imply a recognition of a physical or moral hazard and as such would be material. But when fully examined it was based on no such considerations whatsoever. It was shown to be a reaction to a client whose attitude had caused unusual delay and expense in the processing of the claim. Such considerations cannot in my view bear upon the risk in question and are not material to its appraisal. In any event the prima facie implications of the letter standing alone were negated when it was withdrawn.
I want to go to the judgment of Justice Priestley because it really sums up in a way what I am trying to put.
There, the question of renewal was held not to be a matter material to the risk. Now, it is not quite the same, but it is very close, in our submission. Justice Priestley refers to Hodgson v Richardson; he agrees with Justice Glass; and then he says:
There was in the course of this appeal considerable argument about the meaning of materiality in connection with the facts to be disclosed to an insurer. A review of the authorities shows that the underlying idea has been the same at least since Lord Mansfield’s time. Two years after Hodgson v Richardson Lord Mansfield repeated the idea in a little more detail (see Carter v Boehm (1766) 1 Wm Bl 593 at 593-594; 96 ER 342 at 343):
“Insurance is a contract on speculation: the special facts usually lie in the knowledge of the insured only. The underwriter trusts to him, that he conceals nothing, so as to make him form a wrong estimate. If a concealment happens without any fraudulent intention by mistake of the principal or his agent, still the policy is void, because the risk, which is run, is not that which the underwriter intended.”
The idea has been restated –
in the Act –
The most pertinent local example is that of Samuels J in Mayne Nickless v Pegler [1974] 1 NSWLR 228, which is set out in Glass JA’s reasons. This accurately embodies the idea upon which all the cases have proceeded, in England and Australia. The fact that the idea was accurately expressed in Mayne Nickless Ltd v Pegler does not mean that the words there used are the only way in which the idea can be stated. From Lord Mansfield’s time until now the same thought has been expressed in different (although often substantially similar) ways. No one form of expression can crowd all others out of the field. Further, the meaning of the later ways of expression in the series can most readily be grasped if the earlier versions are kept in mind. Thus it was by reference to the idea expressed in the Mayne Nickless Ltd v Pegler formulation, understood in the light of the many earlier expressions of it, that the present case was, in my opinion, to be decided.
And he agrees with the analysis. That does sum up what we would want to say about the common law and the word “acceptance” and how it was just one of a number of ways of saying the same thing. Your Honours, there are a couple of cases I need to go to. The first one is Tate v Hyslop ‑ ‑ ‑
McHUGH J: For what proposition, Mr Ellicott? Why are you taking us to this?
MR ELLICOTT: I am taking your Honour to it to just see how the common law dealt with materiality. This is one case that my friend might rely on, and I just want to flick it aside, if I can.
HAYNE J: We will measure the argument in nanoseconds, will we then, Mr Ellicott?
MR ELLICOTT: This was a case where the right of subrogation of the insurer was, in effect, put aside by an arrangement between an insured and a third party. Now, the insurer said that should have been disclosed. The judgment will show ‑ the Master of the Rolls, Brett ‑ that although in that case it was held to be material, if it were not for one singular fact, it would not have been material. That is to say, that the underwriters had announced that they would charge higher or lower premiums depending upon whether or not the right of subrogation, in effect, had been put aside and it was held that they having said that and made it public and that being known to the insured, then it was material to the risk and what it did, in effect, was it affected the total of the economic loss which would be suffered but the case itself, we say, is an exception.
McHUGH J: It seems fairly removed from this case. If your opponent relies on it, you can deal with it in reply.
MR ELLICOTT: I beg your Honour’s pardon.
McHUGH J: If your opponent relies on it, you can deal with it in reply. It seems pretty remote from this case.
MR ELLICOTT: Yes, your Honour, but I simply draw your Honour’s attention to 376 where he says:
If they had kept this resolution in their own breasts, it would have had no effect upon the matter which is here in question, as it would only have affected salvage, and would not therefore have been material, but they made it known, and there is evidence that it was known to the plaintiffs either personally or through their brokers before they effected these policies –
In a case of Guthrie ‑ and I have to take your Honours to this because it led to the Law Reform Commission recommending that section 68 be put into the Act which limited or made it clear that there was no obligation to make a disclosure, and perhaps if I take your Honours to that provision, 68:
(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.
(2) The duty of disclosure does not require the insured to disclose the existence of a contract that so limits the insured’s rights.
Now, the effect of 68(2) is to exclude the effect of Tate v Hyslop, in effect, because it just treats it as not a matter that should be the subject of disclosure and it comes in in a contractual sense.
In Guthrie’s Case, which was a New Zealand case where – and perhaps I can deal with it shortly. The test of non-disclosure is discussed from pages 77,608 – I am sorry, it is in (1982) 2 ANZ Insurance Cases at 77,604 and there is discussion of the question of materiality at 77,607 through to 77,610. I do not, of course, want to read all that. There is a reference to Tape v Hyslop which, in effect, as I say, puts Tape v Hyslop in its place and draws the conclusion that in the facts of that case, the particular matter need not have been disclosed because it was not material to the risk. It is another illustration of how the courts have dealt with issue and that was a decision of Justice Hardie Boys in New Zealand.
McHUGH J: The passage you are relying on is at 77610, column 1, is it not, at the top of the page?
MR ELLICOTT: Yes. It is a helpful discussion of the principle, if I may say so, from our point of view. We say that that is consistent with the true meaning of the section – and section 68 is a powerful provision – to show that what might otherwise have been thought to be relevant by some, eg the insurer in Tate v Hyslop, was not held to be so relevant. Could I take your Honours to the Marine Insurance Act of 1909. Your Honours have a copy of it.
HAYNE J: Just before you do that, can I see whether I can encapsulate the issue that you advance. Can the issue that you advance be described in these terms. Can a matter that will occur after the policy is ended and which will not affect liability under the policy be relevant to the decision to accept the risk? Does that capture the debate between the parties in this matter?
MR ELLICOTT: In this matter, yes, because it describes, if I may say so with respect, the nature of the matter here but it may not describe the full ambit of the section.
HAYNE J: No, I understand that.
MR ELLICOTT: This was a matter that related to something that was to occur after the period of insurance.
HAYNE J: And would not affect liability under the policy.
MR ELLICOTT: And would not affect liability under the policy. There is a case of SAIL v Farex. I will just give your Honours a reference to this: Societe Anonyme d’Intermediaries Luxembourgeois v Farex Gie (1995) LRLR 116. There is a passage at 149, Lord Justice Hoffmann, which deals with Tate v Hyslop:
In my judgment, the status of the retrocession agreement was not a “material circumstance” in relation to the reinsurance contracts. Section 18(2) defines a material circumstance as one which would “influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.” These are wide words and Tate v Hyslop (1883) 15 QBD 368 shows that they go beyond matters which are material to the risk in the sense of the likelihood and extent of the loss. They can include the likelihood and extent of recovery under the insured’s rights of subrogation.
But that of course was in circumstances where the insurers had announced that they would affect the premiums.
Such rights do however affect the insurer’s potential net loss under the contract of insurance.
That is emphasised. In a way, it fits in with what your Honour put to me, that for the purposes of this case that is not going to affect rights under this contract of insurance. It is something that is going to relate to another contract of insurance to be entered into, just as one can say that the non‑subrogation contract is something that is outside it. In this case, that is SAIL v Farex, the retrocession agreement or the re‑reinsurance, I think it was, was likewise something that was outside the contract of insurance.
HAYNE J: The case at its highest against you, and it may not even rise this high, is that Permanent should have said, “We, Permanent, will not deal with you, FAI, after the end of this contract of insurance”. Now, there are likelihoods, possibilities, et cetera that really need to be built into that but ‑ ‑ ‑
MR ELLICOTT: We of course would strongly resist that proposition because it has nothing to do with the risk. It is about something that is to happen beyond that and therefore does not affect it. In the Marine Insurance Act I just wanted to point out that in 24(2), and this was repealed I think by the Act of 1984 - it still exists, yes.
GUMMOW J: Yes, there are proposals to get rid of the Act.
MR ELLICOTT: Yes, it is one of the exceptions.
KIRBY J: I think there is another Law Reform Commission exercise on that.
MR ELLICOTT: But subsection (2) - and 25 - was said to incorporate the common law:
Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.
And 25 is about agents. I refer to it because it comes up a little later in our submissions:
Subject to the provisions of the preceding section as to circumstances which need not be disclosed, where an insurance is effected for the assured by an agent, the agent must disclose to the insurer -
(a) every material circumstance which is known to himself, and an agent to insure is deemed to know every circumstance which in the ordinary course of business ought to be known by, or to have been communicated to, him; and
(b) every material circumstance which the assured is bound to disclose, unless it come to his knowledge too late to communicate it to the agent.
That placed a duty ‑ ‑ ‑
KIRBY J: It is a well-known thing in insurance that continuity of contracts, extension over many years, ongoing relations between the insurer, the underwriter and the insured, spreading the risk over many years of premium, that all of these are factors relevant to that rather peculiar relationship. So why can one not - you see, the flaw in your argument is that Mr Welsh really knew that this was a relevant matter. He was told to be careful and did not reveal it. If it were totally irrelevant, why be careful?
MR ELLICOTT: Your Honour’s statement begs the question of what is a relevant matter. That is why I cannot accept it, with very great respect.
HAYNE J: And it may also invite attention to whether “claims made” policies are to be treated differently from “occurrence” policies, particularly “claims made” policies where one assumes one has to make the most ample disclosure of events or circumstances known as likely to give rise to claim.
MR ELLICOTT: That process is described in the chronology in this case as to what Permanent did in relation to that renewal by way of disclosure.
McHUGH J: How are we going for time, Mr Ellicott?
MR ELLICOTT: Your Honour, that is issue 1.
GUMMOW J: That is the big issue.
MR ELLICOTT: That is a big issue.
KIRBY J: Issue 4 has gone.
MR ELLICOTT: Issue 4 has gone, unless your Honours – I mean I cannot ‑ ‑ ‑
KIRBY J: No, we do not want to revive it.
MR ELLICOTT: I cannot tell your Honours not to so find, if that is what your Honours felt was the meaning of the section – and it is a viable view. Issues 2 and 3 ‑ ‑ ‑
HAYNE J: That is called not letting go, Mr Ellicott.
MR ELLICOTT: I was taught not to let go, your Honours, because you never know. I have discovered that in this Court from time to time. Your Honours, for the purposes of issue 2, one has to look at both 26(1)(a), as, no doubt, one did in relation to the first issue, and 26(2) – and I have read 26(2). The issue is the meaning of “acknowledge”. I should not have passed by what your Honour Justice McHugh asked me – how we are going for time. I think I will go beyond the luncheon adjournment, unless I hurry up or I am hurried up. Issue 2: if the renewal matter was a relevant matter, what does “knows” and “known” mean, and was it known to the broker?
KIRBY J: Could you just explain to me – I should understand this, but I do not quite – how the issues fit in. If you win on issue 1, is it necessary for us to look at issues 2, 3 and 5?
MR ELLICOTT: No.
KIRBY J: How do those issues alternate?
MR ELLICOTT: Well, if it is held that Justice Handley’s view of the section, 21(1)(a), is correct, then one has to consider these questions of knowledge and the meaning of the words “know”, “knows” and “known”, I think. If I could just take your Honours to the section, 21(1), the question of knowledge arises at three points. First of all, in the preface:
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 –
et cetera, and:
(b) a reasonable person in the circumstances could be expected to know –
Now, those words, “known”, “knows” and “know”, what do they mean? If it is a matter of fact, is it a state of mind? What is the quality of the state of mind that is required?
It also raises the question which merges into the third issue about attribution of knowledge as to whether this provision is not talking about what the insured knows and it does not take into account what agents know. In the decision in Advance Insurance your Honours at page 618 said this – I do not think I am reading too much into it but I may be and I will have to go back a step, but in the middle of page 618:
The first respondent contended that such a question as that proposed would have placed Mrs. Matthews on notice to inquire of her husband as to any prior claims he may have made. But even if this were so, the insurer would have advanced only a small distance because an insured is not required to disclose any matter unless it is “known to the insured”.
Now, what did the Court mean? I would submit that what the Court is saying there is that those are very particular words and that the question of knowledge is something which is not attributed but which the Act has in mind that it is something which has to be shown to be known to the insured. As I say, I am not wanting to read too much into it but it is interesting that the Court took that particular point.
What is interesting about these provisions - and the cases that are relied on seem to pursue this path actually. They are not quite what the Court of Appeal said they are. They did not decide what the Court said. There are two issues here: there is the knowledge of the matter, and then there is the knowledge of the relevance of the matter. Now, (a) deals with the knowledge of the relevance of the matter. Why is (b) there, one might ask? It is our submission that (a) and (b) when read together lead to the view that certainly the word “knows” in (a) requires the insured to know whatever “know” means, and that if the insured does not know, then the test comes in of the reasonable person, that is to say, a reasonable person in the circumstances could be expected to know.
In other words, in that provision – and here I am getting into issue 3 but I might as well – it will be shorter if I can deal with it now on this particular point – that on the question of knowledge of relevance, it does not matter what the agent knows, it is what the insured knows. A helpful decision on that particular matter is the case of Vines v Djordjevitch 91 CLR 512.
Section 47(1) of the Motor Car Act 1951 provides that “Where the death of or bodily injury –
et cetera, and there is a proviso:
Provided that no such judgment may be obtained unless such person as soon as possible after he knew that the identity of the motor car could not be established gave to the Minister notice of intention to make the claim and a short statement of the grounds thereof” ‑ ‑ ‑
Now, a reasonably powerful court dealt with the matter at page 521, about six or eight lines down:
The question whether the evidence is sufficient to enable the jury to find that the burden was discharged can hardly be answered without some consideration of the meaning of the sub-section. Is it clear what the fact is which the plaintiff is to “know” so that as soon as possible he must give notice to the Minister? In other words what is meant by the expression “the identity of the car cannot be established”? The word “established” does not seem to mean “proved by admissible evidence to the satisfaction of a court”, although doubtless it is capable of that meaning. Cases may be imagined where the identity of the car is known but there is a lack of admissible evidence to prove it. Rather the word seems to mean, “ascertained definitely or with reasonable certainty”.
The provision which in Victoria began as section 13(1) of the Motor Car (Third-Party Insurance) Act . . . There the word “ascertain” is used. It is not easy to understand why in Victoria it was changed to “establish”, but if it was intended that possession or the existence of evidence to prove the issue of identity should be the test, it surely would have been definitely stated. The word “knew” seems to have caused difficulties. The person who must “know” is the person referred to in the main part of the sub‑section as a person who could have obtained judgment against the driver. It is urged for the nominal defendant that the word “knew” does not require an actual state of mind on his part; it is enough if the facts brought to his notice would satisfy a reasonable man that the identity of the car could not be established. For this reliance is placed ‑ ‑ ‑
et cetera.
Of course the plaintiff’s state of knowledge must be judged from his means of knowledge, that is to say excepting any direct evidence of his own state of mind which the plaintiff may give if the tribunal of fact sees fit to prefer it to natural inferences from more objective facts. But when the proviso says “knew”, it is very difficult to substitute some external or objective fact for the state of mind that the word signifies as a matter of English. It goes without saying that a strong presumption of fact arises that knowledge exists of a fact, whether a negative or a positive fact, when the circumstances would convey to a reasonable man that the fact exists. But that is a different thing from saying that the plaintiff is conclusively presumed to know the fact. The distinction is of much importance in the present case where the plaintiff relies on her ignorance of the English language and of her environment and on the duration and extent of her incapacitation ‑
all matters that are mentioned in the Law Reform Commission’s report as reasons for not expanding, but ameliorating the duty of disclosure.
The fact to be known is not a physical event or thing. It is negative in character, namely the impossibility of establishing what car it was that caused her injuries. It is therefore a question of opinion or belief. The word “know” is used in the provision in an ordinary sense, without any intention that it should be analysed or refined upon. But of course there are gradations of knowledge or belief upon such a matter. The gradations extend from a slight inclination of opinion to complete assurance. Here it seems to amount to an awareness or consciousness that no reasonable probability exists of ascertaining the identity of the car satisfactorily or with any certainty. Complete assurance is by no means necessary. When the plaintiff has come to think that the identity cannot be established that is enough. If the expression “think” must be refined upon, it may be said to mean that the steady preponderance of his opinion or belief is that it cannot be done.
McHUGH J: But this question and the question posed under issue 2 really does not arise in this case, does it? Is not the real question as to whether or not the agent’s knowledge which even on the most stringent test of “known” was satisfied can be attributed to Permanent? I mean, there is no doubt that Welsh knew the relevant matter if you are otherwise caught by 21.
MR ELLICOTT: Yes, but, your Honour, the significance ‑ ‑ ‑
McHUGH J: He had a consciousness or an awareness of that fact.
MR ELLICOTT: The significance of this argument is that we are submitting that certainly the words in (a), “the insured knows”, requires a state of mind of the insured, not of an agent, but of the insured and ‑ ‑ ‑
KIRBY J: But Welsh was an employee, was he not?
MR ELLICOTT: No, he was the agent. He was an employee of Sedgwicks Australia, so he was an agent and the ‑ ‑ ‑
KIRBY J: But he was told by somebody within Permanent, “Be careful”.
MR ELLICOTT: No, no, he was told by somebody within Sedgwicks to be careful. This is the point. Permanent did not know – this was found by Justice Hodgson ‑ the relevance of this matter.
McHUGH J: They knew the fact, but they did not know its relevance.
MR ELLICOTT: They did not know its relevance. So the question ‑ ‑ ‑
McHUGH J: But Daly and Welsh did and so you succeed on this point unless you can attribute the knowledge of Daly or Welsh or both of them to Permanent. Is that not the only issue? There can be no doubt that both Daly and Welsh had the relevant subjective knowledge.
MR ELLICOTT: There, again, I will have to address your Honours about it, but that is not the point I am on and I ‑ ‑ ‑
McHUGH J: I know it is not the point you are on, but I do not know where it leads to.
MR ELLICOTT: I am reluctant to leave the point because I think it is a good one and it is a good one because it is saying, in this case, that Permanent did not know its relevance and section 21(1)(a), when you look at it in the light of cases such as Vines v Djordjevitch, would require a finding that the words “the insured knows” means the insured itself in this case actually knows the relevance. It does not matter what ‑ ‑ ‑
McHUGH J: I appreciate that, Mr Ellicott, but that seems to be saying no more than that you must succeed on issue 3. But issue 2 seems to be addressed to what does “know” mean.
MR ELLICOTT: Yes. Well, I have addressed that and it is a statement of mind and ‑ ‑ ‑
KIRBY J: Yes, but you are a corporation. You have neither blood nor soul. You can only act through your servants or agents, but ‑ ‑ ‑
MR ELLICOTT: That is, with respect, not quite the theory. The theory we would submit is this, that a company does not have a state of mind, except the state of mind of its directors or – and there has been argument about this – the state of mind of those employees – not agents, they can be called agents – whose task it is to know particular matters, and that is the company’s state of mind. Otherwise, it does not have it.
It is not a question of attribution of knowledge. This is where some of the judges who have adumbrated on this, in our respectful submission, have fallen into error. It is not a case of attribution of knowledge. It is a question that an individual has a state of mind, a company has it, but it has it through its directors, et cetera, it is its state of mind. So, in our submission, we do not talk about attribution of knowledge. If it is Permanent in this case, it did not know the relevance. Its state of mind was – the managing director gave evidence – it did not know the relevance, and it was upheld. The only people who are supposed to have known the relevance are either Daly or Welsh but they are agents ‑ ‑ ‑
KIRBY J: Yes, but Vines has nothing to do with this case because it is dealing with a real live human being. We are talking in this case of an Insurance Contracts Act that must apply to a whole range of circumstances, live human being insureds, corporate insureds. Corporate insureds can only act through servants and agents. When the statute talks of knowledge, one would think it means the knowledge of the corporation’s servant or agent because they are the people who the Act contemplates will know and disclose. To limit it to the board of directors is a little bit unrealistic, especially given what we know now about boards of directors in Australia.
MR ELLICOTT: Your Honour, it is not unrealistic if you are dealing with (1)(a) and (b) because (1)(a) says, “the insured knows” - and if the insured does not know there is an alternative, and this is:
(b) a reasonable person in the circumstances could be expected to know ‑
So you do not need to consider the knowledge of an agent. It just does not come up. That is the way in which the Parliament has decided to deal with this matter. In other words, where the word “know” or “knows” as in (a) and (b), we are only dealing with the state of mind of the insured and only the insured.
McHUGH J: Well, Ham, who was an employee of Permanent, knew from 20 May that FAI was unlikely to be renewing insurance for Permanent. But you have a finding of fact that Ham and Davis did not realise the materiality of that fact. So the real question becomes whether the knowledge of Daly or Welsh can be attributed to your client. Is that not the only issue?
MR ELLICOTT: No, your Honour. The first step is that can you even go to the knowledge of Daly and Welsh? The section requires the insurer to prove that the insured actually knew and if the insured did not know, all the knowledge in the world that the agents have is not relevant. It is a state of mind. That is why Vines’ Case is relevant. It emphasises that knowledge is a state of mind.
McHUGH J: But it is a question of construction, is it not?
MR ELLICOTT: It is a question of construction, but it is one that ‑ ‑ ‑
McHUGH J: You assert that because of the use of the terms “knows”, “known” and “know” that it must be the conscious knowledge of the insured.
MR ELLICOTT: Yes.
McHUGH J: The question is whether that is right or not or whether, in accordance with principle, you can attribute, at least in some situations, an agent’s knowledge to the insured so that the insured does know, knows or has known.
MR ELLICOTT: That is right, your Honour.
CALLINAN J: But the section does not use the language or the words “insurance intermediary”.
MR ELLICOTT: No.
CALLINAN J: That is a defined term and which I think Sedgwick would be, is that correct?
MR ELLICOTT: Yes, and it is not to be thought that the Parliament passed this Act ignorant of the Marine Insurance Act, to which I have just referred, which specifically refers in section 25 to the knowledge of the agent. Why did they not say something about it in sections 21 or 26 if that was intended? We say that for the simple reason that there was introduced a new test: is this known to the insured, the relevance? If it is not, could a reasonable person in the circumstances be expected to know? End of section. No need to ask any other questions. No need to ask about the mind of the agent because there is a sensible test that a reasonable person could be expected to know. That is our argument on that.
Passing from that argument, it is also suggested that Daly and Welsh knew the relevance, even if Permanent did not. A separate question arises as to whether each of them knew the relevance. If your Honours go to ‑ ‑ ‑
KIRBY J: Is this still on the second issue, or ‑ ‑ ‑
MR ELLICOTT: It is on the second issue, because it raises the question, if I am wrong on that first point, whether, actually, Daly and Welsh knew the relevance of it. Now, if your Honours go to page 258 of 44 NSWLR, that is Justice Hodgson’s decision – 9.3 is the paragraph. Is your Honour Justice Kirby wanting the reference to the appeal book?
KIRBY J: I do not have the report. 93.
MR ELLICOTT: Page 175 in the red appeal book. At 9.3, it is said:
I accept that these matters were not known to be relevant by any employee or officer of the Permanent companies; so the crucial questions are whether they were known to be relevant by Mr Daly or Mr Welsh, and if so whether this knowledge is to be attributed to the Permanent companies.
Mr Welsh agreed that he knew that the normal course of business was for existing Australian underwriters to be asked to renew; and that it was probable that an underwriter being asked for an extension, who was told that he was not to be asked to renew the following year, would refuse the extension.
Mr Daly agreed in cross-examination that the fact that an underwriter was not to be asked to participate in the following year’s insurance was relevant to the underwriter’s decision whether to grant an extension and if so on what terms: an underwriter not being asked to participate might be willing to offer a form of extension, but was likely to set terms that were different or special because it was not being asked to renew. In re‑examination, he said his belief was that this matter was not relevant to an underwriter’s accepting and underwriting the risk, but was relevant in that the premium might be varied or made dependent on what happens after an extension. (It is in fact clear on the evidence that insurers generally require higher rates of premium for a short period of insurance, in order to cover the greater proportional overheads; but that extensions to existing policies are generally granted for short periods on much more favourable terms than for short periods standing alone.)
Mr Daly also agreed that he believed that if he told Mr Hunter that FAI was not being invited to participate, it was likely that Mr Hunter would not agree to a thirty-day extension; and that his telling Mr Welsh to be careful when speaking to Mr Hunter was sufficient to convey to Mr Welsh that he should not volunteer that FAI were not being invited.
Although Mr Coles submitted that this evidence does not relate at all to the true position, namely that the only decision was to obtain quotes from insurers excluding FAI and to accept them if they were satisfactory, in my opinion this distinction is too fine. So in my opinion the evidence justifies the conclusion that Mr Daly and Mr Welsh believed that, if they had disclosed to FAI the matters referred to in section 9.2, it was likely that the thirty-day extension would not have been granted. I accept the evidence of Mr Hunter and Mr McIver –
they are from FAI –
that the extension would not in fact have been granted; with the result that, if these matters had been disclosed, they certainly would have been relevant to FAI’s decision whether or not to grant the extension. Mr Daly and Mr Welsh believed the matters were relevant in this sense; and as I have said, that belief was true. With some hesitation, I think the belief was held with sufficient assurance to amount to knowledge.
At 690 the matter was dealt with by Justice Handley in paragraph 54:
The belief of Messrs Daly and Welsh in the likely attitude of FAI was held with sufficient assurance for both of them to conduct themselves in a business transaction as if it were true. 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 s21. It follows that Messrs Daly and Welsh knew that the relevant matter was relevant to FAI’s decision to accept the risk involved in the extension.
Now, Mr Daly’s evidence was that in his opinion the renewal matter was not relevant to the underwriter’s decision whether to accept the risk and, if so, on what terms. That was his ‑ ‑ ‑
McHUGH J: Well, that may be so, but you have to proceed on the hypothesis that it is relevant to section 21 that he knew that it was likely that the policy would not be renewed.
MR ELLICOTT: No.
McHUGH J: I mean, if you win on the first point, you are home and hosed, on your construction of the section, but the hypothesis we are now dealing with is that you have lost on that, is not it?
MR ELLICOTT: Yes, I have lost that, but we are still dealing with a state of mind.
McHUGH J: Yes.
MR ELLICOTT: We are looking at Mr Daly’s state of mind, and he is a man – see, they are operating in a milieu where they do not think the question of renewal is relevant to an insurer’s decision as to whether to accept the risk, not relevant ‑ ‑ ‑
KIRBY J: You have to say to “accept the risk” as distinct from “accept the insurance”.
MR ELLICOTT: Yes, whether to “accept the risk”. That is what the section says, and they do not think it is relevant to that – Daly does not think it is relevant to that – but the finding is not that, except an inferential finding that Justice Handley makes in the last sentence that I just read. The finding of Justice Hodgson is not that at all. His finding was that they knew it was relevant to the decision of the insurer whether to grant the extension. There is a significant difference between those two matters when one is asking the question, “Did the agent know whether it was relevant to the insurer’s decision whether to accept the risk?”. My point is simply this, that in ‑ ‑ ‑
McHUGH J: What you have just put itself raises a question of construction, does not it? Does the knowledge extend to the relevancy of it or is it sufficient that the knowledge is of a matter, and the relevance of it being an adjectival description of that particular matter. Do you follow the point? From what you have just said, it is your submission that the insured must know both the matter and its relevance.
MR ELLICOTT: Yes. You cannot determine that the insured knows the relevance unless – first of all we say the insured must know the relevance but if not, you have to – if an agent can know the relevance, the agent has to know the relevance; you cannot split the states of mind. If you are going to impute it, then the next question is whether you impute it, but that is another matter.
So we submit that there is a clear difference between the findings of Justice Hodgson, which are to be accepted, and a view that they knew the relevance of the matter to the decision whether to accept the risk when they themselves quite genuinely, there is no doubt ‑ these people were said to be honest by Justice Hodgson. There is no question that they were disbelieved or anything like that. There are strong findings in their favour as being honest people. So they know ‑ they say, “We did not know it was relevant to the acceptance of the risk.” So, in those circumstances, they think the person would be likely not to grant the extension if they knew about the non‑renewal possibility and the question then is whether that is enough to constitute knowledge, that is a state of mind, a preponderance of belief. We are not dealing with fact, we are dealing with ‑ ‑ ‑
KIRBY J: Is it not a bit difficult for us to reach a different view given that the trial judge, who saw these witnesses, reached a relatively cautious but, nonetheless, stated view with hesitation that he felt that their beliefs amounted to knowledge? That is very much a matter of assessment, is it not?
MR ELLICOTT: Well, it is a matter of assessment. The question is whether he actually decided the issue that 21(1)(a) threw up, and that is whether or not it was relevant to the decision whether to accept the risk. That is, using those words in the insurance jargon, if you like, that I have been putting as the common law test, which is different from saying the decision to enter into the contract of insurance.
McHUGH J: But, Mr Ellicott, I think, with respect, your argument on this point is sliding into your first argument. You keep talking about accepting a risk, whether it was relevant to accepting a risk, but a construction has been put on section 21, which seems to downplay the question of accepting a risk and, in effect, substituting a decision to enter into the contract. Now, if you take that hypothesis, then surely Daly and Welsh had a relevant state of mind about that and in fact knew what they were holding back was relevant to that particular decision. Now you may be right about the construction, but if you lose on the construction argument, it seems to me you are in trouble on this point unless you can make out your argument on issue 3.
MR ELLICOTT: Your Honour, I am not making myself clear.
McHUGH J: I think you are.
KIRBY J: Let me state what I understand your point to be: you say, “I have lost on issue 1 for this hypothesis, but, unfortunately, these two people were focusing, for the purpose of their knowledge, on issue 1 as we propound it. They did not see it as relevant to the acceptance of the risk and therefore such knowledge as they had, being a subjective matter, was not addressed to knowledge of the acceptance of the risk as the court, on this hypothesis, is interpreting it, and therefore they did not have the knowledge of the requisite kind, because they just were not focusing their mind on that.” Is that the way you are putting it?
MR ELLICOTT: It is. I am about to focus on the different aspect of it, but it needs to take into account that these people, or Daly, thought he did not have to reveal this under what I call common law understanding of it because it was not a matter that went to the risk. Now, that factor needs to be borne in mind in deciding whether or not the knowledge of Daly, or the knowledge of Welsh, or the belief of Welsh, was sufficient to constitute knowledge.
Now, in the case that I have referred to, knowledge and belief are obviously two different things, but where it is knowledge of something which is a matter of opinion the High Court has said in this case when the plaintiff has come to think that the identity cannot be established that is enough. Well, has the person come to think that the matter is relevant to the decision, whether to accept the risk? Has Daly come to that belief?
McHUGH J: I know, but you leave out the vital words “by entering into the contract”. That is the construction the Court of Appeal has placed onto it. It is not merely a question of accepting the risk. That is your first argument. The Court of Appeal said the section goes beyond that. It refers to decisions whether to accept the risk by entering into the contract, and your client knew.
MR ELLICOTT: I understand that. I understand what your Honour is putting to me. I am taking note of what your Honour has said and I am moving on. I am trying to put this submission, that now let us have a look at what Daly’s state of mind was. I am saying point 1 is he had this view that it was not relevant in the sense that I have addressed in relation to issue one. He had this view because - and it was backed up by other insurance experts who also said it was not relevant. But, all right, we have lost issue 1 and now we are into issue 2.
We are asking the question, and the first point has gone, the insured does not have to know but an agent has to know, and you transfer the state of mind apparently to the insured, but we will deal with that later. Does the agent know? Again, I want to distinguish for the purposes of the argument between belief and knowledge. I am saying that Vines’ Case is a helpful way of assessing what the test ought to be in the sentence:
If the expression “think” must be refined upon, it may be said to mean that the steady preponderance of his opinion or belief is that it cannot be done.
So that what one has to determine is whether or not Daly had that steady preponderance of belief, if you accept this test, that it was relevant in the sense that the contract of renewal would be refused.
HAYNE J: Do you accept that he knew FAI’s likely commercial response?
MR ELLICOTT: Yes.
HAYNE J: Yes.
MR ELLICOTT: Now, the question is whether to know the likelihood of something is to know it.
HAYNE J: Yes, I understand the point.
MR ELLICOTT: That is the point. We would submit that because there is a difference, not between belief and knowledge, that Daly’s belief, as such, as illustrated by the evidence, was not an assured belief at all. It was only a belief as to the likelihood of something happening.
KIRBY J: You have spent almost as much time on this theological issue as on the first.
MR ELLICOTT: Not quite, your Honour. Only half an hour, your Honour.
McHUGH J: After all, belief is only an inclination of mind towards accepting a proposition.
MR ELLICOTT: Now, in relation to Daly, if I can just put these propositions. Daly thought that if it was revealed to FAI, it was likely an extension would be refused. That is the first. This is not a belief that it would be refused. I just want that to be clear. It is not a belief that it would be refused. Now, that is Daly. The critical person is probably Welsh and Welsh’s evidence, if I can take your Honours to volume 3 and, if I may say, with some haste. At 560 at line 15, Welsh was asked:
Q. You understood perfectly well, did you not, that the reason for that instruction was that if you had passed on to Mr Hunter what you knew, namely that he was not being asked to participate, then it was Mr Daly’s fear that Mr Hunter very likely would have refused an extension?
A. It is a matter of degrees as to whether it was very likely or that he may not have, I don’t know, and I can’t really speak for Mr Daly.Q. As far as your own perception was concerned, you were aware that it would be, I suggest to you, very likely that Mr Hunter would refuse . . . I am asking you to accept “very likely”. Do you or don’t you?
A. I really couldn’t comment on “very likely”.Q. You would be happy with “may”. This is clear, is it not, if you did understand at the time you spoke to him about extension that if you passed on that piece of information to him, first of all you would be disobeying your instructions to keep quiet about it?
A. More to the point, yes.Q. Secondly, you would be at the very least, imperilling the possibility of extension?
A. That’s correct, yes.
“Imperilling the possibility”. Now, that is the knowledge, that is the understanding or that is the belief. The judge has said that that was knowledge and that should be imputed and we submit it is not knowledge.
KIRBY J: Yes, but he said, “not without hesitation”. I mean, really, are we going to go over every ‑ ‑ ‑
MR ELLICOTT: Yes, but the words ‑ ‑ ‑
KIRBY J: ‑ ‑ ‑ finding that a judge makes, which is very much a matter of assessment of the witnesses, it seems to me.
MR ELLICOTT: The judge, with respect, has not made that precise finding. He has made a finding that they believed it was not likely, and we are saying that that finding was not enough. That is the evidence upon which he based that decision, and we say that the Court, with respect, should go behind that.
McHUGH J: Well, I think we have grasped this point, Mr Ellicott. I think we should move on to issue 3.
MR ELLICOTT: That is exactly where I am, your Honour. It is right in front of me. The question is whether, if Daly and Welsh had the relevant knowledge, this can be attributed to Permanent. Now, on this issue, we have four submissions, your Honours. First of all, one that I have already dealt with, and that is that 21(1)(a) contemplates the insured having the knowledge or state of mind, and your Honours will decide that in accordance with what I have already submitted. The second submission is that none of the cases which were relied upon is authority for the proposition that knowledge of an agent of the relevance of the matter can be attributed.
The furthest – and I will take your Honours to the cases – the furthest those cases go is to establish that the knowledge of a fact which the agent possesses can be attributed to the insured in the circumstances there in question, but not the relevance. In those cases, knowledge of relevance of the matter so attributed was established through the “reasonable person” test in 21(1)(b). I do not think I need – perhaps I do – to take your Honours to the judgments as to where their Honours relied heavily on those three cases, but they did rely on them heavily; that is to say, that you attribute the knowledge, not of a particular fact ‑ for instance, whether there has been a failure to reveal a conviction, or whether a property is being used as a brothel – but knowledge of the relevance of that to the insurer.
Lindsay v CIC Insurance (1989) 16 NSWLR 673 ‑ ‑ ‑
KIRBY J: There is nothing in the Law Reform Report or the Explanatory Memorandum that helps on this issue?
MR ELLICOTT: I do not think so, your Honour, no. I have not found any. At page 680 Justice Rogers at the top he concluded:
If, as I conclude he did, Mr Newey was aware of the use to which the offices were being put, in my opinion, he would have and did disclose that to Mr Lindsay. In the result, in my opinion, it was known to the insured . . . that, at the time of obtaining cover . . . part of the building was used as a brothel.
End of case, it could have been, but his Honour:
A difficult question would arise if, in fact, Mr Newey, knew but Mr Lindsay did not have the requisite knowledge, of the use to which the premises were being put. If the knowledge of the facts was confined to Mr Mark Newey, should that be held to be knowledge of the plaintiffs for the purposes of s 21(1).
And further down, after referring to Advance:
There is nothing in the Act itself that indicates one way or the other whether the knowledge that s 21 requires to be disclosed is actual knowledge of the insured or whether the knowledge of an agent is sufficient. The report of the Australian Law Reform Commission . . . is based, and . . . may be had pursuant to the . . . adverts to this question only in the footnote. The report ALRC 20 (1982) (par 151 footnote 2) –
there is a reference, your Honour –
suggests that “it is doubtful whether, in fields other than marine insurance, constructive knowledge is attributed to the insured”. The comment is supported by reference to MacGillivray & Parkington . . . In the more recent edition . . . the same material is repeated simply with the addition of one more recent decision. For the purpose of looking, in the first instance, only at the words of the Act, it is necessary to note merely that the report expressed doubt as to the position under the general law.
Now, that fits in with what this Court said in Advance v Matthews and it fits in with our earlier argument that “known to the insured” in subparagraph (a) means known to the insured and not to an agent.
On the next page:
In accordance with the now accepted principles of statutory interpretation, the Act is to be given a purposive interpretation. In my view, the matter required to be disclosed is what is “known” either to the proponent personally, or to a relevant agent of the proponent.
Let it be assumed that all matters of insurance are delegated by the proponent to an employee. The proponent is not involved in any way with effecting the insurance. The employee knows facts calling for disclosure. The proponent does not. Surely it cannot be accepted that the proponent is relieved from disclosing, through the employee ‑
So his Honour uses the employer/employee relationship. Now, I have already answered that by saying that is not about attribution. That simply is identifying the state of mind of the company and that is not a theological question. It is just a legal issue that that is how you determine the state of mind of the company. To use that as an argument for saying you attribute knowledge, we would submit, is not sound reasoning, be that as it may. Now, your Honours, at page 684:
In my view, the pre‑1984 law imputed to a proponent the knowledge of appropriate agents . . . 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 imputer to the owners. In other words, by delegating the management of the property to an agent, the owners cannot avoid having knowledge of matters . . .
In the result, in my view, even if Mr Newey did not inform Mr Lindsay of the use to which the premises were being put, Mr Newey’s knowledge must be imputed to Mr Lindsay ‑
Now his knowledge, not his knowledge of relevance but knowledge that it is used as a brothel ‑
The next question for consideration is whether, accepting that the premises were conducted as a brothel, that was a matter that required to be disclosed pursuant to the provisions of s 21(1) . . . Mr Maconachie, for the defendant, cross‑examined Mr Lindsay with a view to showing that Mr Lindsay knew it to be a matter relevant to the decision of the insurer whether to accept the risk, and, if so, on what terms.
Not Mr Newey but Mr Lindsay, the owner of the premises.
Mr Lindsay evaded giving a clear answer to the question. However, It seems to me 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.
So this is not a case ‑ ‑ ‑
GUMMOW J: You say it is a paragraph (b) case?
MR ELLICOTT: It is a paragraph (b) case. The same reasoning would apply – and I do not think I need take your Honours to them specifically – to the other cases. That is to say Ayoub v Lombard (1989) 97 FLR 284 at 295 and 296 and Macquarie Bank Ltd v National Mutual (1996) 40 NSWLR 543 at 610B-C and 614B-F. In each of those cases the matter was ultimately determined on 21(1)(b) and they are not cases which support – in two of them I think it is obiter, but just put that aside – they are not cases which are authorative of the proposition that knowledge of the relevance of a matter can be imputed and they are not against the first proposition I put that the insured should know it and you cannot impute for the purposes of (a) the knowledge of the insured. Is that an appropriate time?
McHUGH J: We might continue on for a little while. I am becoming a little concerned, Mr Ellicott, because you still have the very important fraud point to argue ‑ ‑ ‑
MR ELLICOTT: I understand that.
McHUGH J: ‑ ‑ ‑and I want Mr Jackson to have – Mr Jackson, how long do you think you will be?
MR JACKSON: Your Honour, I do not think the case will finish today. I expect to be about two hours.
McHUGH J: Yes, well, carry on, Mr Ellicott.
MR ELLICOTT: I just point out, your Honour, that in this case the application of 21(1)(b) was never considered and before it could be applied one would have to consider a lot of matters that are just not in the judgment, so it is not a question of substituting some other paragraph; you cannot do that in this case.
The courts below, we also say, were in error in concluding that Permanent had delegated their duty of disclosure. Your Honours, this is a question of interpretation of factual matters, but what Permanent said was, “Attend to the formalities” and it is our submission that that did not include, on its face in the circumstances - and we refer to those in our submissions - the delegation of the duty of disclosure.
In other words, Permanent had always done its own disclosing. There was no practice for Sedgwicks to do it on their behalf. They did it themselves and when they said, “Complete the formalities”, that was not an instruction to take over the duty of disclosure. All they had to do was to get the extension. I do not need to say any more. The references are in our submissions.
In any event, we say, knowledge not gained in the course of the agency should not be attributed to the insured. Now, this raises a point which could take a day and a half but, your Honours, I would stress that I do not think for the purposes of argument that I need to go in depth to all the cases that Justice Handley went to because what we say is that the proper principle to apply is that which was disclosed in Sargent v ASL Developments 131 CLR 634, and if I may quickly just read the passages from Justice Mason’s decision in that case.
GUMMOW J: Sargent was not referred to in the Court of Appeal, I do not think.
MR ELLICOTT: No. I hope it was not our failure, your Honour.
GUMMOW J: I am not suggesting it is anyone’s failure.
MR ELLICOTT: At 658 and 659, this is Justice Mason:
As against a third party the law imputes to a principal knowledge gained by his agent in the course of, and which is material to, a transaction in which the agent is employed on behalf of the principal, under such circumstances that it is the duty of the agent to communicate it to the principal.
At 649, a similar statement by Justice Stephen:
Now where, as in this case, a vendor employs a solicitor to attend to the carrying out of the legal aspects of a sale he necessarily authorizes that solicitor to attend to all the usual aspects of conveyancing practice; that authority will here extend to the obtaining of the necessary planning certificate and the solicitor’s knowledge, gained from that certificate, may properly be imputed to his clients since it was acquired both for the purpose of that transaction and in the course of it.
That, we say, is the outer limit of the imputation knowledge so far as Sedgwicks was concerned, that is to say knowledge gained in the course of the agency.
There is no doubt on the evidence that what it was ‑ and the references are there ‑ that led to their knowledge was their knowledge of the relationship, the low point relationship, between Sedgwicks – which might be described as Sedgwicks in London and FAI because of the matter I have already referred to, namely, the fact Standard and Poors BBB rating had been given to FAI and FAI’s relationship had fallen to a low ebb and because of that they were saying that they knew or thought it likely ‑ whatever words one wants to pick out of the transcript or the judgment ‑ they thought it likely because of that. That was knowledge, not gained in the course of this agency to complete the formalities, that was knowledge gained outside it.
GUMMOW J: Yes. Could you just look at paragraph 96 of the Court of Appeal judgment, Mr Ellicott? I think that may encapsulate the issue between you. Paragraph 96 of the Court of Appeal. They say, it was, “knowledge acquired by them in the Australian insurance market”, and you say that is too wide.
MR ELLICOTT: Yes. We would submit that that, in itself, may be too wide a description of how they got the knowledge, because it was something that came out of the special relationship between Sedgwicks and FAI.
HAYNE J: Why was Sedgwick, as agent for Permanent, not bound to Permanent to reveal this information to Permanent if relevant to the discharge of their retainer?
GUMMOW J: Which is paragraph 97, I think.
HAYNE J: Yes.
MR ELLICOTT: Well, that may or may not be so, but it does not answer the question whether or not their knowledge should be attributed. They were not – the knowledge ‑ ‑ ‑
HAYNE J: So even if bound to disclose it to Permanent, do you say that it is not knowledge to be attributed to Permanent?
MR ELLICOTT: It is not knowledge to be attributed, for that reason. That is to say, it was not knowledge – it may be something that Permanent might complain about in the relationship between Permanent and Sedgwicks, but not knowledge which should be attributed for the purposes of the application of the Insurance Act.
McHUGH J: Is that the end of your submissions on issue 3, Mr Ellicott?
MR ELLICOTT: Very close, your Honour. I would just give your Honours a reference to Jessett Properties Ltd v UDC Finance Ltd – it is a strong New Zealand court – [1992] 1 NZLR 138 at 143.
If we are correct in saying that this is knowledge which came from outside the agency, then I just want to make this point, that it would be inappropriate to fix ordinary insureds with knowledge of an agent gained outside the agency. It just would not work fairly in favour of ordinary insureds, and that takes me to issue 5.
McHUGH J: Yes, we might come back to that at 2 o’clock.
MR ELLICOTT: If your Honour pleases.
AT 12.54 PM LUNCHEON ADJOURNMENT
UPON RESUMING AT 2.00 PM:
McHUGH J: Yes, Mr Ellicott.
MR ELLICOTT: Your Honours, on the question of whether the knowledge was gained in the course of the agency, could I just refer your Honours to page 3 item No 7 of the chronology that we filed, and 30 July 1991:
(a) FAI had announced a very large loss, and had a Standard and Poors rating of BBB – when most of its competition was A rated;
(b) the Sedgwick London Security Committee had classified FAI as a “discretionary market”: in effect, neither an insurer which was automatically considered acceptable, nor one with whom it was forbidden to do business, but one with whom business could be done if the circumstances seemed appropriate;
(c) Sedgwick Australia had removed business from FAI including “some very significant FAI clients”;
(d) the Sedgwick London Security Committee had told FAI in a series of meetings in London in which Mr Maciver participated . . . of concerns that it or its clients had about FAI’s security position. FAI’s representatives did not satisfactorily answer the Sedgwick London Security Committee’s concerns;
(e) FAI believed that the Sedgwick London Security Committee had told Sedgwick Australia’s chief executive to reduce the amount of business done with FAI.
This belief was held, amongst others, by Maciver;
et cetera. Those are the matters which we say were outside the scope of the agency and between 1989 and 1991 FAI’s total premiums for all business placed with the defendant, that is FAI by Sedgwick, had fallen from 18.5 million to 5.2 million. That appears at volume 4 page 862.
Your Honours, on the question of fraud, which I now come to, could I take your Honours to some passages which appear in paragraph 9.4.1, first of all. It is 44 NSWLR 263, 182 of the appeal book. These are Justice Hodgson’s findings which have been upset or one of them is, the other is not. He says:
I accept that Mr Hunter took what Mr Welsh did say as indicating that the Permanent companies and Sedgwick Australia intended to invite FAI to quote for renewal. In my opinion, the crucial question is whether this was just a conclusion that Mr Hunter arrived at, or was something that was actually asserted by implication in what was said to him.
On the whole, taking into account the circumstance that extensions of this kind are normally granted in the context of a continuing relationship, as something of a favour predicated on the continuing relationship, I think what was said was enough to assert to Mr Hunter that FAI was to be invited to quote renewal terms. However, I do not think that Mr Welsh intended to assert this to Mr Hunter; so that while what was said was, in my opinion, enough to constitute a misrepresentation, I am not satisfied that it was enough to base a finding that the misrepresentation was fraudulent.
Then he goes on to deal with fraudulent non‑disclosure, and he finds there is not any, but it is important, we say, to bear these matters in mind, because really, they are relevant to the question of fraud, that is fraudulent misrepresentation as distinct from fraudulent non‑disclosure. You cannot divide them up.
On the other hand, in relation to non‑disclosure, it could be said that Mr Daly and Mr Welsh knew certain matters, knew them to be relevant to FAI’s decision and deliberately withheld them in order to ensure that FAI made a favourable decision; and there is authority that that is enough for fraud in relation to non‑disclosure. However, it seems to me that would be a harsh finding in circumstances where, in my opinion, Mr Daly and Mr Welsh believed that there was no duty to disclose the Permanent companies’ commercial intentions. I have found that these matters were disclosable under s21 only after making a decision which I have found very difficult, and which I have reached after some weeks of reflection. Mr Daly and Mr Welsh had to make a quick decision in a difficult situation. I do not think either Mr Daly or Mr Welsh are dishonest persons; and I think they did what they thought appropriate when they had to make a quick decision in a difficult situation. I am not prepared to find that the non‑disclosure was fraudulent.
That finding was not upset and presumably the Court of Appeal had to accept what his Honour said in that paragraph, but it surely is very relevant to the question as to whether the misrepresentation was fraudulent.
If I could go not to paragraph 122, Justice Handley, after setting out some evidence which he later says was not adverted to by the judge, then says at 122:
The Judge found that what Mr Welsh said to Mr Hunter “was enough to assert to Mr Hunter that FAI was to be invited to quote renewal terms” but that Mr Welsh had not intended to assert this. That finding cannot be disturbed.
“That finding cannot be disturbed”. Now that must include that but Mr Welsh had not intended to assert this and intention, fraudulent intent, is essential but his Honour has accepted that. Then one goes over to 123:
What Mr Welsh said, fairly understood by a reasonable person in Mr Hunter’s position, was false, Mr Hunter understood it in that sense and acted on it, but Mr Welsh had not intended his remarks to be understood that way.
Again, no intent.
Mr Welsh at that point of time was not guilty of fraudulent misrepresentation.
The position changed however when Mr Hunter made the remarks recorded in the last paragraph of Mr Welsh’s note. This made it clear that Mr Hunter had assumed from the conversation that FAI were going to be invited to renew. In those circumstances Mr Welsh did the only thing that his instructions allowed him to do. He said nothing. In answer to the Judge who asked Mr Welsh about his thinking at the time Mr Welsh said he thought what he did “could mislead Mr Hunter”.
That, again, does not add up to a finding of fraudulent intent. Now, it is important to note what his Honour did in relation to the evidence, because he later says ‑ ‑ ‑
KIRBY J: This is a fine line, is it not, between what you intend affirmatively to do and what you intend by keeping silent, knowing that people will draw an inference from your silence.
MR ELLICOTT: Yes, it is a fine line, and that is sometimes a reason why a Court of Appeal should not interfere. We say, there is not a fine line here, because there was no finding of fraudulent intent. But if one is going to use a fine principle such as “Oh, well you knew – you did not intend that, but all of a sudden something became clear and you should have said this” – which is momentary in time, in circumstances where the trial judge has said, in effect, “Well, they had to make a quick decision and do the best they could”, well ‑ ‑ ‑
KIRBY J: Justice Handley is accepting Mr Welsh at its highest on Mr Welsh’s statement and with the contemporary note. So he is not, as it were, putting his own gloss. He is using Mr Welsh.
MR ELLICOTT: I am about, hopefully, to demonstrate, your Honour, that he did not do that.
GUMMOW J: Do you dispute, if I can ask, Mr Ellicott, a statement of principle at 125 – set out by Justice Handley at 125 – from Spencer Bower:
“Where the representor discovers, before his misrepresentation is acted upon, that it was false when made, and does not correct it ” ‑
et cetera? In other words, you start off in one state of mind that something happens, and that makes it incumbent upon you to speak out.
MR ELLICOTT: Well, your Honour, this is our problem with that principle – is that it seems to be a situation where a person has time to think, if your Honour follows me. One makes a statement, something happens to throw up that it is not, and then there is a duty to speak out and to correct it. That is a different principle to the one that one, in our submission, is considering here, because you are just looking at a conversation.
Can I just refer to these matters. First of all, that transcript which is set out in paragraph 120 and paragraph 121 appears at page 591 of volume 3, and I would like your Honours to go to that, at line 28, and it goes over to page 591A and to the top of 592. There is further material, which is in paragraph 121, which appears at 595. Now, I am not of course going to read that, but the point is this. If your Honours would go to 591 and read from line 15, which was not quoted by his Honour but immediately precedes what he did quote:
Q. It was clear to you in this conversation with Mr Hunter, wasn’t it, that he anticipated the receipt of renewal information, didn’t he?
A. No.Q. He made it clear to you, did he not, that he had the ordinary expectation of receipt of renewal information for this business?
A. No.Q. He said to you, did he not, that if you were to send renewal information while he was away, it was to be sent to Angus Maciver?
A. They were his words.Q. And those words conveyed to you, did they not, that he expected renewal information and that if you were going to send it while he was away, “Please send it to Maciver”?
A. No.
Now, that is very relevant evidence, which his Honour has omitted, which goes to the question of fraudulent intent. There is Welsh saying that he did not get that knowledge, did not have that understanding. This evidence is from a person whose it has been held to be honest. When his Honour, Justice Handley, says:
The evidence in question is that of the witness himself and is clear on its face ‑
this is paragraph 130. I am sorry, at 128:
The judge did not refer to the evidence I have set out, including the answer to his own questions, which established that Mr Welsh had become aware that Mr Hunter had taken more from his remarks than he had intended.
KIRBY J: They are rather objectionable questions because they are asking the witness to interpret what Mr Hunter was thinking.
MR ELLICOTT: No. Well, they are also asking him to say what he took from what Mr Hunter said, and he said he did not take it that he thought that renewal information was going to be sent.
KIRBY J: He is sticking just to the words.
MR ELLICOTT: He is sticking to the words but he is giving evidence – this is now in the witness box seven years later and he is giving the evidence and he answers “No”. Here is the Court of Appeal quoting evidence, but I would submit something that was most critical was not quoted. It does not lie in the mouth of the Court of Appeal to say that the judge did not refer to the evidence. It is set out. One can assume that Justice Hodgson, who considered this matter over many weeks, I think he said, had not taken this matter into account.
HAYNE J: Can I understand exactly what it is that the trial judge identifies when he says, “I have said that while what Mr Welsh said to Mr Hunter was enough to amount to misrepresentation”, what words does he fasten on as constituting the misrepresentation?
MR ELLICOTT: I think one has to go to the note which is at page 1137. At line 32:
Stephen also said that if we were to send renewal information, this should be sent to Angus MacIver to look at, as Steve will be out of the office from the end of next week for the rest of October.
HAYNE J: That is what Hunter ‑ ‑ ‑
MR ELLICOTT: That is what Hunter said – that is Stephen.
HAYNE J: So what words or conduct of Welsh are said to constitute the misrepresentation?
MR ELLICOTT: The fact that when that was said he did not say anything to the effect, “Oh well, we’re not going to renew”. In other words, what is ‑ ‑ ‑
HAYNE J: This whole argument about fraud, misrepresentation, et cetera is built on a foundation, the content of which is not evident to me.
MR ELLICOTT: No, I understand that, and that it is impression. It is saying that when he said that, that meant, “You’re going to renew it”.
HAYNE J: So what, the misrepresentation is constituted by silence in response?
MR ELLICOTT: By silence.
KIRBY J: Do you accept that misrepresentation can be constituted by silence?
MR ELLICOTT: I have said it could be because we have not pursued issue 4, but in this case certainly not.
KIRBY J: I would have thought it could be.
MR ELLICOTT: That statement is not the foundation for it.
KIRBY J: But it hardly fits with the words “send it to Mr MacIver” and with the fact that he was told to be careful, with the fact that he said nothing, he kept silent, and with his note that he then recorded: “Gotcha”.
MR ELLICOTT: No, up to the point of the note his Honour has found that there was no fraud at all at any point, but also Justice Handley accepts that up to that point of the note he was not fraudulent. He says that in paragraph 123:
What Mr Welsh said, fairly understood by a reasonable person in Mr Hunter’s position, was false, Mr Hunter understood it . . . but Mr Welsh had not intended his remarks to be understood that way. Mr Welsh at that point of time was not guilty of fraudulent misrepresentation.
The position changed however when Mr Hunter made the remarks recorded in the last paragraph of Mr Welsh’s note.
The position changed because, apparently, according – you see, the judge had said, on the whole – that is Justice Hodgson at 9.4.1:
On the whole, taking into account the circumstance that extensions of the kind are normally granted in the context of a continuing relationship, as something of a favour predicated on the continuing relationship, I think what was said was enough to assert to Mr Hunter that FAI was to be invited to quote renewal terms.
But there was nothing said, it was more what was not said that is said to be the fraudulent misrepresentation, that when somebody said, “Well, if” – and I must emphasise “if” – “if you are going to send any renewal terms, send them to Maciver because I am going to be away”. That is a fairly harsh judgment to say that that turning point based on an inference that somebody is assuming that there is going to be renewal, that somebody is suddenly switched from a state of innocent to fraudulent intent. There is no doubt of the honesty and there is no doubt at that page, 591, that I read he said “Those words did not convey to me that he expected renewal information”. That was his honest answer accepted by the Court. So, in ‑ ‑ ‑
KIRBY J: But the honesty relates to his evidence, it does not relate to his assessment of the quality of what he was doing as the insurer.
MR ELLICOTT: No, but we have to find evidence of his state of mind.
McHUGH J: He never seems to have been asked about this second aspect of the case.
MR ELLICOTT: No.
McHUGH J: Never seems to have been put to the witness, this theory.
MR ELLICOTT: I think the totality of the evidence is now what is in front of your Honours in those passages and, of course, in what is in the single judge’s findings. But his statement in 9.4.1:
I accept that Mr Hunter took what Mr Welsh did say as indicating that the Permanent companies and Sedgwick Australia intended to invite FAI to quote for a renewal.
But Mr Welsh did not get that message. Mr Welsh, on his evidence, says he did not. He is an honest person. There is no basis upon which to conclude that he has suddenly acquired a fraudulent intent and all the more in circumstances where something is being done, as it were, quickly. Quick decisions have to be made. This is what ‑ ‑ ‑
HAYNE J: Is there any examination of either Welsh or Hunter directed to demonstrating that the last paragraph of the note at 1137 was inaccurate in
that it was not conditional, “if we were to send renewal information”, but absolute, “when we send renewal information”?
Rather than delay, Mr Ellicott, it may be that those who appeared at trial would be good enough to examine it carefully because it is a matter that obviously requires some close attention.
MR ELLICOTT: Our submission places great emphasis on that word, “if” because ‑ ‑ ‑
McHUGH J: I appreciate the force of that but there is another point. His Honour Justice Handley refers to the last sentence in paragraph 106 of Spencer Bower, saying at 313:
The representation is continuing, it has become false to the knowledge of the representee, and is then acted on by the representee.
I think that passage must be “representor” – “and is then acted on by the representor” where it first appears, I think. But the point is that you have to show that it has become false to the knowledge.
MR ELLICOTT: Yes, that is exactly right and that is why that passage is important and that is why, I would submit, that what Justice Hodgson says at page 263, or 9.4.2, although in relation to non-disclosure is immensely important and, therefore, we would submit, that the Court of Appeal was not justified in overturning the issue of fraud.
Your Honours, could I just say this in conclusion, that if, as we of course hope but we cannot be sure, your Honours did find for us on the first issue, we would nevertheless ask your Honours to express a view that this was not a fraudulent act on the part of Permanent, because it has been sheeted home to Permanent, and it has been in business since, I think, 1878, or something, and we are not aware of any other occasion when it was so held to be fraudulent, even though on the actions of an agent. If the Court pleases.
McHUGH J: Thank you, Mr Ellicott. Yes, Mr Jackson.
MR JACKSON: Sorry, your Honours, I am looking for the Act which may have something to do with the case.
McHUGH J: That will help.
MR JACKSON: Your Honours, may I just say three things before I commence our submissions in response to our learned friends. The first is – and this relates to something that your Honour Justice Callinan mentioned this morning – this is not a case where we obtained any kind of super premium.
CALLINAN J: I have picked that up, Mr Jackson. I see this was a fairly standard rate.
MR JACKSON: Yes. Well, your Honour, what it was was simply one month’s premium pro rata the previous year plus 20 per cent of that. So that really works out, instead of being ‑ ‑ ‑
CALLINAN J: Yes, and I see that it was explained on the basis of administration charges anyway.
MR JACKSON: Well, it is a little more than that, if I could just say something, your Honour. So effectively it works out at 10 per cent, broadly speaking, for the year of the previous year’s premium. Your Honours will see that in two places: first of all in the slip itself at page 1159, volume 5; secondly, Justice Handley paragraph 7. Your Honours, could I also say that the difficulty in money terms that arises in relation to extensions for a short time can be seen in two passages of evidence of Mr MacIver. One is in volume 2 at page 492. Your Honours will see at about line 33 he said:
the rationale for taking 12 months premium is that the major issue in professional indemnity insurance is defence costs and, if you take one month’s premium and end up with a claim having to pay substantial defence costs with one month’s premium is not very easy, so obviously you know the preference in the industry was to write 12 month policies.
And, your Honours, to the same effect, volume 3 page 510. Your Honours, that is the first matter.
The second matter, your Honours, concerns in a sense one aspect of the course which the case has taken in relation to our learned friend’s issue 4. What I mean by that is this. Your Honours will have seen that issue 4 concerned a finding that there was a misrepresentation, and the challenge to that was that it was said that what had been conveyed was not a statement in terms of section 26(2) of the Act. If I could take your Honours to section 26(2) for just a moment.
Now, your Honours will see that section 26 deals with a number of circumstances in which statements are not to be treated as a misrepresentations. That forms part of Division 2 which deals with misrepresentations. Now, section 26(2) says:
Where a statement that was made by a person in connection with a proposed contract . . . shall not be taken to be a misrepresentation . . . unless the person who made the statement knew or a reasonable person in the circumstances could be expected to have know ‑
then your Honours will see the relevance issue then referred to. Your Honours, the argument that was sought to be advanced under issue 4 was that the misrepresentation - I am sorry, your Honours, I will start again. All misrepresentations had to be statements. This could not be a statement because it consisted of not saying something in circumstances where something else was said. That argument is not advanced. Your Honours, that leaves the situation that except in the most passing way ‑ and I am not even certain that was actually agitated ‑ there has been no contention raised ‑ and your Honours will see from our learned friend’s written and oral submissions - that the finding of misrepresentation, absent the other aspects of section 26(2), should be set aside.
Your Honours, that leaves a situation where, as your Honours will see from the words of 26(2), it does not turn on the insured. It does not give rise to the arguments that might be raised or have been raised as issues 2 and 3. What one simply has is a question of the person who makes the statement and that person of course in the present case, or those persons, were the officers of Sedgwick. So issues 2 and 3 do not arise, and really the only issue that seems to arise in relation to the misrepresentation issue is the relevance question, in a sense, issue 1. Now, your Honours, that is the submission we will be making, that in the end the issues that are raised by issues 2 and 3 do not need to be decided.
Your Honours, the third point that we would - your Honour Justice Hayne, I might mention in passing, I am sorry, said, “Where is the misrepresentation?” I think your Honour was referring to the one that was held to be fraudulent, but the misrepresentation that is the subject of the other finding, your Honour will see it is in the first of the red volumes, it goes through from page 182 to page 183. I will come back to it, your Honour, a little later if I may.
The third point, your Honours, is that our learned friend’s argument with respect appears to have diverged a little from the proposition that was set out in the written submissions, and in that regard could I refer to paragraph 2 of those written submissions where issue 2 is described. Perhaps, your Honours, I will leave that point. I think I may be in error in that regard myself. It is a misreading of something.
Your Honours, could I then move to the substance of our argument. In our submission ‑ I am dealing, your Honours, with issue 1 ‑ the starting point, in our submission, is the Act itself. That is obvious of course but it does reflect the object of section 33. May I take your Honours to that.
Your Honours will see that section 33 is concerned, as its terms indicate, essentially with remedies. It speaks of rights:
that the insurer has otherwise under this Act in respect to a failure by the insured to disclose a matter –
et cetera.
Now, your Honours, as is apparent from its terms, it is speaking of rights in the insurer that would arise in respect to the subject matters there referred to and they are two, namely, first, failure by the insured to disclose a matter and secondly, a misrepresentation or an incorrect statement. Your Honours, if one takes those two categories, one sees, again looking at section 33, that in respect of the former category it uses the expression “before the contract is entered into”. Now, it recognises the fact that there will be a contract, “before the contract is entered into”. That is respect of the former, that is the non‑disclosure. In respect of the misrepresentation or incorrect statement, of course, if there were no contract following from it then no issue would arise. So that it assumes that one is talking about a situation which is contractual.
Now, your Honours, the exclusion by section 33 of other non‑statutory – if I can put it that way – remedies, takes one to the remedies which are provided for by the Act. Could I pause, your Honours, to say one thing before going to them, and that is in response to a question asked by your Honour Justice Gummow, and it is this, your Honours, “Is the Trade Practices Act available?”, for example Well, your Honours, the answer would seem to be – section 33 would say, no. However, but is it a complication and necessary to resolve, your Honours, brought about by section 7. Section 7 says that:
It is the intention of the Parliament that this Act is not, except in so far as . . . otherwise provides, to affect the operation –
to put it shortly –
of any other law of the Commonwealth.
But our submission would be that it does otherwise provide in section 33.
Now, your Honours, if one goes to the terms of the remedies that are provided for by the Act, one seems them, essentially, in section 28. May I take your Honours to that. May I pause to say this, your Honours: the language of section 28(1), in our submission, casts some light on the approach to be taken to the interpretation of section 21 and also the provision of section 26(2). It does so in two ways. First of all, your Honours, if one looks at the opening words of section 28(1) what your Honours will see that what it focuses upon is, to say that:
This section applies where the person who became the insured under a contract of general insurance upon the contract being entered into.
Now, your Honours, what that phrase reflects is the entry into a contract and the entry into a contrast is quintessentially the way in which a risk is accepted. So too, is it, the way in which a premium is fixed; so too, is it, the way in which – to use the language of, for example, section 21(1)(a) – a term of the contract is arrived at. Your Honours, if one goes also to section 26(2), it says:
the decision . . . to accept the risk and . . . on what terms.
The acceptance and the terms are, in our submission, reflected by the event referred to in the opening part of section 28(1).
That is the first aspect of section 28(1) which we would submit is relevant. The second, your Honours, is to be seen in the words which follow subparagraphs (a) and (b), where it goes on to say:
but does not apply where –
and your Honours will see again, the focus being upon entry into contract –
the insurer would have entered into the contract for the same premium and on the same terms and conditions –
and your Honours will see the words thereafter referred to, including the concluding words of the paragraph. Now, if one goes from that then to section 21, what one sees in section 21(1) is that there is an obligation to disclose, and the obligation to disclose is expressed to be one “before the relevant contract of insurance is entered into”. What has to be disclosed are matters known to the insured.
The matters known to the insured must be disclosed in the first place in the circumstances adverted to in section 21(1)(a), namely, if the insured knows the matter to be “relevant to the decision of the insurer whether to accept the risk” or to fix terms. Pausing at that point – and I do not want to labour the point unduly – the acceptance of the risk takes place by entry into the contract. One sees that rather graphically in the present case in two parts of the evidence. The first is in volume 2 at page 376, when Mr Hunter was giving evidence.
KIRBY J: What page?
MR JACKSON: Page 376, your Honour. It is the passage commencing at line 25 on the left column. He was asked to give his “best recollection of the terms of the telephone conversation”, and he said:
Certainly. My best recollection was that Rick Welsh from Sedgwick rang me and told me that he would be seeking an extension –
and your Honours will see then the remainder of the paragraph. He ends up by saying, “I agreed to do so, on the basis of what was told to me”.
Could I just pause to say, your Honour Justice Hayne asked my learned friend, were any questions put to Mr Hunter about the last paragraph of the memorandum by Mr Welsh. It appears, I think, your Honour, on a couple of occasions, but one of them is the bottom of that page. His evidence was to the effect that when the renewal submission was to come, send it to Maciver rather than himself. That is the first of the two references. The second is in what I have taken your Honours to already, that is, the actual document itself, in volume 5, page 1159, where you will see the handwritten observations by Mr Hunter on that document.
KIRBY J: I think you are correct that we really have to start with the Act and look at the language. One possible problem for you there is that the section, the paragraph, talks of “whether to accept the risk and, if so, on what terms”. It could have said, “whether to accept the contract of insurance”, but instead, it talks in terms of accepting the risk, which is something, as it were ‑ a particular characteristic of the contract of insurance – the risk that is involved in that particular contract of insurance.
MR JACKSON: Your Honour, could I say really two things about that. The first is this, that one is looking really - your Honour said whether to accept the contract and that is, with respect, if I may say so, not quite in a sense the language of contract. What I mean by that is this, that the way in which the section is phrased is to say before the contracts are entered into, every matter that is known. It is a question of entry into the contract but entry into the contract is the thing that accepts the risk, because the risk is the risk undertaken by the contract. Your Honours were taken this morning to the insuring clause in the contract which identifies what the risk is.
KIRBY J: I take that point. You probably would not have worded it as “accept the contract” but you might have said “whether to execute the contract of insurance” or something of that kind. Some support for Mr Ellicott’s argument textually seems to be given. In the umbrella of the subparagraph it talks of the “relevant contract of insurance” and then when it gets down to what the insured knows, it is “to accept the risk”.
MR JACKSON: Your Honour, the relevant contract of insurance will differ depending on what risk is accepted and what are the terms on which it is accepted. When one speaks of “the relevant contract of insurance”, it is speaking of one which represents the only point at which one can say the risk is identified and the terms on which it is accepted are identified, identified in the sense of being contractually identified. I think I am labouring the point, but the only way in which that risk, which is in a sense a term well known in insurance law – that is, what is the obligation of the insurer under the contract? The way of accepting that is by the contract.
The terms, in our submission, are fixed by contract and our submission is that Justice Handley was perfectly correct in the observation which he made halfway through paragraph 29:
Risks are accepted by contracts of insurance. The section refers to decisions whether to accept risks by entering into contracts.
Your Honours, our submission is that there is not really any particular basis for reading down the terms of section 21(1)(a).
GUMMOW J: We do begin with the idea that it was designed to ameliorate the position of the customer.
MR JACKSON: It does, your Honour. The provisions of this part of the Act, Part IV, are designed to ameliorate the position so far as the customer is concerned but does so in a number of ways. One is by reducing the number of circumstances in which there can be reliance upon misstatements, incorrect statements and misrepresentations. That is in section 28 and other provisions.
There is the provision cutting out the ability to rely on deemed warranties, for example, section 24. Your Honour will recall many insurance proposals contain terms saying that was said in the proposal then was to be treated as a warranty, and so on, and then section 26. So it is not only section 22. But if one does look at section 22, what it takes away, on the one hand, is the prudent hypothetical insurer. It substitutes in subsection (1)(a) and (1)(b) the real insurer and, on the other hand, it does not operate until one has something that is, as appears from the first words of the subsection, something “known to the insured”. So that is what it operates on. It requires something known. Your Honour, that is what I would seek to say in response to that.
Could I say your Honour Justice McHugh referred to section 21(2)(a). What one has of course, your Honour, is that section 21(2) is a provision which carves out from the duty of disclosure a number of matters that are there referred to. Now, it does so by in effect operating as a proviso to the obligation to disclose. Our submission is that it does not cut down the obligation, but simply limits circumstances in which something would otherwise come within the obligation or, if the obligation apparently there by section 21(1) is not performed but section 21(2) applies, then section 21(1) has not been – “contravened” is not quite the right word, but has not been satisfied.
GUMMOW J: What does this word “relevant” mean in 21(1)? Once you get into paragraph (a) and once you have real live…..as it were rather than legal constructs, and one party knowing something that is in the mind of the other, where would you stop, other than by putting some brake on “relevant”?
MR JACKSON: Your Honour, one does start with the situation that the ultimate question is, is the decision of the insurer whether to accept it or not and, if so, on what terms? So it has to be something which can be regarded as within the range of possible realms, capable of being so, in our submission. Your Honour, the question for the judge as distinct from the question for the jury in effect. By that I mean should the issue go to the jury, to put it shortly. So, your Honour, that perhaps is the limitation but it is certainly wider, but the limitation is in a sense provided by the fact that it has to be known that it partakes of that quality; that is for 21(1)(a).
HAYNE J: Thus you have to go so far, do you not, as to say that a matter that will occur after the policy has ended does not and will not affect liability under the policy can be relevant to the decision to accept the risk?
MR JACKSON: Yes, I do, your Honour, but could I say about that, that so far as the present case is concerned, if one were talking about the events insured against, that is true; if one is talking about the period for which a later insurance or another insurance would cover, that also is true for 11 months of the period, but, your Honour, what one is talking about is an event which would have been likely to occur during the month, and that is the question of the renewal of the insurance for the period of the year.
HAYNE J: I wonder whether another answer available to you may not be denial of the fact that this is a matter occurring after the policy has ended and not affecting liability under it in the sense that there is evidence, apparently, that you might have struck the premium differently for the one month contract.
MR JACKSON: Yes, quite, your Honour. Yes, indeed. Now, your Honours, what I was going to say was it was perfectly clear, both as a matter of evidence and as a matter of findings in the present case, that the matter in question was, in fact, relevant to the decision of the respondent, on the one hand, and, secondly, that it was known to be so. Could I give your Honours the reference to the findings. Your Honours have been taken to them already, I think. Justice Hodgson in volume 1 of the red volumes page 175 line 46 through to page 176 line 11. Your Honours will see at the bottom of page 174 his Honour said, last three lines:
crucial questions are whether they were known to be relevant by Mr Daly or Mr Welsh ‑
Then at the top of the next page your Honours will see:
Mr Welsh agreed that he knew that the normal course of business was for existing Australian underwriters to be asked to renew; and that it was probable that an underwriter being asked for an extension, who was told that he was not to be asked to renew the following year, would refuse the extension.
Now, your Honours, I will not read the passage out, but could I invite your Honours to read the passages at page 175 going up to line 11 on page 176, and then Justice Handley referred to these matters shortly in paragraph 25 of his reasons.
The references I have just given your Honours are to the first of the two questions, relevance in fact to the insurer. Could I say, your Honours, that the evidence on this aspect was very strong. Your Honours, we have prepared a document – I have given a copy to our learned friends this morning – which endeavours to summarise the evidence of the witnesses. I will not take your Honours through it, but it contains the relevant references. Could I give your Honours copies of that and just indicate the passages to which I would refer.
KIRBY J: This is to demonstrate that the insurer regarded it as relevant and the insured or the agent knew that it was?
MR JACKSON: It deals with both those aspects. The indications I am about to give your Honours so far as the document is concerned deal with the first of those aspects, that it was in fact relevant. They commence at page 5. They come, of course, from the evidence of Mr Hunter and also Mr Maciver. Mr Hunter’s evidence commences, relevantly, in the passages referred to throughout page 5 and, your Honours, going on to page 6, particularly the top box on page 6. Mr Hunter spoke in an Australian way, if I can put it that way, your Honours, forcefully but displayed in the course of doing so, the fact that he regarded themselves as having been, to a degree, ripped off by what took place.
Now, your Honours will see also on the same page, commencing the last four items on the page ‑ Mr Maciver’s evidence your Honours will see, remaining on page 6 of that document, the third item down and then on page 7 and throughout page 7 but in particular, the first two items, to put it shortly, that if they had been told they were likely to be replaced, the discussion would have been very short.
KIRBY J: What would that mean in Mr MacIver’s second of the statements on page 7, that no insurer in their right mind would go on risk for one month; it was not worth the risk? I mean, is not the risk neutral as to the months of the year and, given that this is a claims made policy, is that not just a question of luck as to when the claim comes in?
MR JACKSON: Well, not necessarily, your Honour. There was evidence on which, I think, in the end the primary judge did not make any finding to the effect that when an insurer is going off-risk, as it were, that a degree of housekeeping tends to be done and things that are possible claims or indications of claims are looked at by the insured more closely and the possibility of them being made in that period is greater.
The particular passage to which we have referred deals also more particularly with the period of time, the particular period at which the issue arose, and your Honour will see that he was saying it was a very difficult time for the insurance industry and he describes the reasons for that in the passage to which we have made a reference and that everything was being examined closely.
Now, your Honours, I had referred to the first of the two aspects raised by section 21(1)(a), namely relevance to the insurer in fact. The second aspect was the question of belief and there was, of course, the finding by Justice Hodgson that Daly and Welsh both believed the matter to be relevant. Your Honours will see that in volume 1 of the red volumes at page 175, commencing at line 46, going through to page 176 about line 11. Again, your Honours, that is summarised by Justice Handley in paragraph 25. Your Honours, again, the evidence on this issue was strong. It is referred to in the document I gave your Honours a few moments ago and your Honours will see it particularly at page 2, the last box, Mr Daly’s evidence, the whole of his evidence and the whole of the extracts from the evidence of Mr Welsh on the next page.
This perhaps in a sense relates back to something your Honour Justice Gummow asked a few moments ago. Your Honours will see that section 21(1)(a) speaks in terms of relevance as distinct from, in a sense, degrees of relevance. It does not have to be more than 50 per cent relevant or does not have to be very material; it just simply has to be something that is relevant.
GUMMOW J: Yes, “relevant” seems to have been used in preference to using “material”, because of the baggage that word carries in this area of the law.
MR JACKSON: Yes, your Honour. Perhaps one can have “material” sometimes meaning “relevant” and some relevant matters can be material, but they do not entirely overlap.
GUMMOW J: No.
MR JACKSON: Your Honours, our submission is there is not any particular reason to read down section 21(1)(a) nor do the decisions in the past really suggest that there is any very good reason for reading it down. Your Honours, I do not take a long time doing it, but may I just say that what I propose to do is take your Honours to a few decisions and references indicating that a broader view of what is material has been taken than underlies the submissions advanced by our learned friends. May I in that regard take your Honours to the general principle stated in this Court by Justice Isaacs, with Justice Gavan Duffy agreeing, in Western Australian Insurance Company Limited v Dayton 35 CLR 355 at page 379.
CALLINAN J: Mr Jackson, I suppose you would say that the obligation might even extend to something that the insurer already knew, because failure to disclose that might reflect upon the integrity of the insurer. Do you go as far as that?
MR JACKSON: Yes, your Honour, I do but it would be qualified because of the terms of section 21(2)(c), that is, you do not have to disclose something that they know, “or in the ordinary course of the insurer’s business as an insurer ought to know”; 21(2)(c).
CALLINAN J: I know this does not seem to have been argued, or I take it was not argued, but that somebody might go into the marketplace to get a competitive premium, would that not be a matter of common knowledge?
MR JACKSON: It probably would be, your Honour, yes. It would depend on how it was put, yes.
CALLINAN J: Why would not an insurer know that every time a premium comes up for renewal the insured is likely to be testing the market. There is no right to perpetual goodwill, is there?
MR JACKSON: No, your Honour. not at all.
CALLINAN J: Or to an automatic renewal.
MR JACKSON: No, not at all. We do not suggest that and have not suggested that but, your Honour, what the evidence was that ‑ this was a situation where in a sense they were asking for a “favour” might be the wrong word, but asking for something that is not in a sense the ordinary thing to do.
CALLINAN J: They were asking for something in respect of which a standard fee was fixed.
MR JACKSON: In respect of which a fee which was a standard fee, your Honour, if one were to be offered, invited to renew. We did not have to renew, nor did they have to accept it. The situation was, in our submission, that the evidence did disclose that if we had known that they were not going to offer it to us, unless they could not get something better, that we would not have granted this insurance.
CALLINAN J: Mr Jackson, was any attention paid by anybody to 21(2)(c)?
MR JACKSON: Subsection (2)(c), your Honour?
CALLINAN J: Yes, or (2)(b).
MR JACKSON: Your Honour, I will check this, but I do not think they are referred to particularly, except as being recited.
CALLINAN J: Thank you, Mr Jackson.
MR JACKSON: The point I was going to go to was that your Honours will see at the bottom of page 379 that Justice Isaacs said, about point 7 on the page:
As to materiality, that is always a question of fact, dependent on “all the circumstances at the time” the contract was made –
your Honours will see, he recites Carter v Boehm –
The test of materiality is whether in view of “all the circumstances at the time,” which include, of course, the full circumstances of the fact undisclosed, that fact would have influenced the Company as a prudent insurer in fixing the premium or in determining to accept the risk. But it must not be forgotten that “the circumstances” include the knowledge, the practice and the proved conduct of the insurer. If, for instance, it were the known practice of a company to disregard a certain class of facts, the non-disclosure of such a fact would not prima facie qua that company be material, however, it might be with regard to another company.
If I could just pause there. That contains the suggestion that one looks at the situation of the particular company, the particular insurer, which is involved, and it carries with it, of course, in a sense, the obverse, namely that if something is not material – or if non-disclosure of a particular matter would not be material to a particular company, it may be for another and other matters may be for another. If one just pauses at those observations in this Court, they indicate, in our submission, that a narrow view should not be taken and that it does look to the position of the particular individual company.
In a decision in the Queen’s Bench Division in the United Kingdom, in The “Dora” [1989] 1 Lloyd’s Rep 69 at 91 one sees the now Master of the Rolls in the United Kingdom referring to the fact, which was a purely commercial matter – to put it shortly, what was relied on was the fact that the suggestion had been made that there were to be four of these ships which were to be insured. In fact, only one of them ever came into being. Your Honours will see at the bottom of page 90, in the right column ‑ the heading really is in the left column on page 90, where he sets out the alleged misrepresentation and then said, at the bottom of the page, in the right column:
The representation that Euro-Exchange were producing yachts at the rate of approximately four per annum was plainly made for one purpose only, to indicate to underwriters the likely scale of business that they were being offered.
Your Honours will see that goes through the remainder of that paragraph and then at the top of the next page, where the black line is in the left column:
I accept, however, that an offer of bulk business, assuming that it was of a type that appealed to the underwriter, was likely to be more attractive than an offer of a single hull and therefore calculated to produced some reduction in the individual premium.
Your Honours will see that goes through the remainder of that paragraph – we would refer your Honours to that. But it is clear, in the second part of the line beside it, that he regarded that as a misrepresentation and that purely related not to the risk, not to anything apart from the commercial matter, but to something that would affect the rate of the premium. That is an indication, in our submission, of a case where a matter of this kind has been taken into account.
The summary of decisions by Lord Lloyd in Pan Atlantic Insurance v Pine Top Limited [1995] 1 AC 501 ‑ ‑ ‑
GUMMOW J: Was he dissenting in that case?
MR JACKSON: He was, your Honour, but not relevantly in respect to this aspect of the case. I was going to go to page 560. I should say that on the aspects to which I am about to refer, his Lordship’s observations do not seem very different, if at all, from those of Lord Mustill to which reference was made this morning. In that regard your Honours were taken to Lord Mustill at page 538. Could I just say if one goes to the top of page 538 of Lord Mustill for the moment, the second line, his Lordship said:
According to Parsons . . . the material fact must be such that it would “naturally and reasonably enter into the estimate of the risk, or the reasons for or against entering into the contract of insurance;” . . . they furnish substantial support for the view that the duty of disclosure extended to all matters which would have been taken into account by the underwriter when assessing the risk (i.e. the “speculation”) which he was consenting to assume . . . That the word “risk” must be understood in the wider sense is now beyond dispute –
If one goes then to Lord Lloyd at page 560, the first new paragraph on that page, he said:
My provisional conclusion, before coming to the authorities, is that . . . it must be shown that a prudent insurer, if he had known of the undisclosed fact, would either have declined the risk altogether, or charged an increased premium.
Then at the bottom of the page:
Next I mention Ionides v Pender LR 9 QB 531. This case is important because, as appears from Sir Mackenzie Chalmers’s . . . it was the foundation of section 18 –
Then if I could go between B and C on page 561, the point of the case relevantly in a sense was that the court had preferred in that case the rule in Parsons:
that all should be disclosed which would affect the judgment of a rational underwriter. In other words, materiality is not limited, as Duer thought, to the risks “considered in their own nature.”
This seems to be risks as risks, which is in a sense our learned friend’s argument. He goes on to say:
It covers also what we would now call the moral hazard.
Then at page 562 ‑ ‑ ‑
KIRBY J: What does that expression mean, “the moral hazard”?
MR JACKSON: Your Honour, it is an expression which is loosely applied, if I could put it that way, apparently relating to many matters which on one view might be thought really to increase the risk in the sense ‑ ‑ ‑
McHUGH J: You do not give insurance to bad guys.
MR JACKSON: The ones who may be bad, your Honour. It refers to ‑ someone who has relevant form, for example, would be thought to have in the sense of ‑ ‑ ‑
McHUGH J: You are talking about criminal convictions?
MR JACKSON: Yes, your Honour, I am, criminal convictions and other things. In one of the cases it was held that it was relevant to know that a particular company declined to insure cars where the owner of the car was a bookmaker, for example. I am not certain of the ‑ ‑ ‑
KIRBY J: But I asked the question because the word “hazard” and the word “risk” seem to be addressing not the commercial decision of whether to give an extension to a contracting insured who is not going to continue business with you, but the hazard and the risks of the particular insurance and that seems to be a different subject matter.
MR JACKSON: Well, your Honour, could I put it this way: there is overlapping, that is one thing I would say; but what one does have in relation to particular types of insurance is actually the risk insured against. Now, if you took the question of fire insurance, the risk of there being a fire would be affected by a number of matters. It would be affected by the type of premises, the location, meaning by that its proximity to sources of ignition, possibility of bushfire nearby, many things of that kind, but inherently giving rise to the possibility of fire brought about without the action of a particular person intending to bring the fire into being or to extend its effects.
One comes from that in a sense to what might be described as the moral hazard. Now, if one had as the person seeking insurance a person who had a history of fires, being careless with matches, as was sometimes put, your Honour, one would see in relation to that the possibility of there being a higher premium, higher deductible, something of that kind, would be part of the moral hazard. In one sense, the moral hazard in many cases is, one might think, an element of risk in the larger sense because the potentiality for ‑ ‑ ‑
KIRBY J: “Hazard” in French is merely chance, but in English it has the connotation of risk and ‑ ‑ ‑
MR JACKSON: Possibility.
KIRBY J: ‑ ‑ ‑ your case has to be that here accepting the risk will normally be simply the hazard of a particular insurance, but the words used are broad enough to include in this particular case accepting the risks of the contract of insurance which you have a finding of fact the insurer would not have done in this case if it had known that it was only for a month and not for an extension of ‑ ‑ ‑
MR JACKSON: Yes. Your Honour, it really applies, in a sense, to any matter which the insurer would say “is a matter which will induce me not to accept this contract or contracts of this kind”. Now, if you took, for example, an insurer which only wished to provide house insurance for, say, home units, or buildings or, let us say, detached or non‑detached dwellings, however it might be, and an agent knew that and the agent just dealt with the insurer, the agent knowing that the insurer would assume that the premises that were being put up were ‑ or premises, for example, in respect of which a cover note was sought ‑ for premises that satisfied the insurer’s range of business. Well, now, your Honours, there is no reason in our submission why that would not amount to something falling within section 21(1)(a).
Similarly, if one took, for example, an insurer which was prepared only to insure ‑ again, take houses, for example ‑ in the case of persons who did not drink alcohol or temperance, one that was a temperance‑based society that was an insurer, now it would be, again, although it would not be likely to affect in the case of temperate persons the possibility of damage to the premises, it would be something that would affect the question whether the insurance would be taken up.
KIRBY J: What is your answer to Mr Ellicott’s point that we must construe the statute so that it operates not only to big fellows like you but to lots of little – thousands of ordinary Australians making life insurance and other insurance contracts, and that they can be expected to know the hazard of their risk of the particular insurance, but not necessarily the risks that insurers will take into account in providing insurance or not in the first place?
MR JACKSON: Well, take the simplest case, your Honour, if one takes the simplest case of the little person. The first requirement of the duty of disclosure is that the matter – and I am speaking about one‑to‑one insurer and person ‑ be something that is known to them. The second thing is that it must have a quality for 21(1)(a) to apply, that it must be known to be relevant to the decision of the insurer. Now, if neither of those is satisfied, the issue comes to an end. If, on the other hand, the first is satisfied but the second is not, then the question is tested by reference to 21(1)(b) and that is the position of the reasonable person and, your Honour, that seems ‑ ‑ ‑
KIRBY J: Is that right? If it is known, that is it, is not it?
MR JACKSON: No, I am sorry, your Honour.
KIRBY J: If the insured knows under (a), that is enough?
MR JACKSON: No, your Honour, I am sorry, there are two “knows”, of course, your Honour. The first is in the opening words of section 21(1). The second is in paragraph (a). It is possible for a matter to be known to the prospective insured, but for the insured not to know what is in 21(1)(a). Now, if that happens, then 21(1)(b) comes into play, and Parliament has provided a test there that seems eminently fair, with respect.
KIRBY J: So you say that in this particular case we are not dealing with the little people dealing with insurers. We are dealing with big chaps who, you contend, knew or a reasonable person in their circumstances could be expected to know that it was relevant that they were likely not to extend beyond one month.
MR JACKSON: Your Honour, we would simply say they engaged people who were professionals in the field to deal with people who were professionals in the field. The professionals they engaged knew as much as we did that the matter that they did not disclose was one that professionals in the field treated as relevant to a decision to insure.
HAYNE J: Now, does that then direct attention to the nature of the matter that is in issue, namely, a present attitude of a commercial enterprise to a future decision being an attitude which, by hypothesis, is open to change according to changing circumstance? Is that a fair characterisation of the matter?
MR JACKSON: Well, your Honour, I suppose so, yes. Your Honour’s questions may have involved an element of futurity and no doubt that is so in the sense that the attitude that we had was an attitude of, to put it shortly, expectation that something we might have been offered already had not yet been offered and their approach to us was one that encouraged the expectation that we would be asked in the future to do it retrospectively.
HAYNE J: And those were matters which, in part at least, were beyond the control of Permanent and FAI in that there were other layers of cover, were there not, upon which this layer depended?
MR JACKSON: Well, this was two layers of cover which intersected at particular points. They did not necessarily have to be someone below or above. Your Honour, what one sees is that – and it was referred to, I think, in the opening part of Justice Handley’s reasons – we had cover at particular levels – had provided cover at particular levels. Your Honours will see, I think, paragraph 2 of his Honour’s reasons.
HAYNE J: What I had in mind, Mr Jackson, was the need for this layer to march in step with other layers of cover.
MR JACKSON: I do not really wish to disagree with your Honour, but what I am seeking to say about it though is that it would be perfectly possible for us not to have been – in respect to these layers of insurance, for there to have been a blank file as distinct from all marching together.
HAYNE J: Yes.
MR JACKSON: So that there could have been areas where they were not covered. To put it shortly, they could have got renewals from the others but not from us, and then become, as the evidence refers to in a number of places, self‑insurers for that amount.
I was, I think, referring to the Pan Atlantic Case and I want to refer your Honours to page 562. Your Honours will see a reference there to Tate v Hyslop, between C and D, but, in particular, in the paragraph commencing just after F it was said:
The judgment of Brett MR is of particular interest.
Your Honours will see then the quotation from his Lordship’s reasons between G and H:
“The authorities show that the materiality is not as to the risk, but as to whether it would influence the underwriters in entering upon the insurance or the terms on which they would insure.”
Your Honours will see that is developed through the remainder of that page and at the top of the next page his Lordship said:
All three cases establish that materiality is not limited to the insured risks, in the narrow sense . . . but covers everything which would influence or affect the mind of underwriters, so as to decline the business, or increase the premium.
Finally, in relation to that case, at page 569 your Honours will see a reference to a number of passages from Arnould set out from about C to the bottom of the page.
Your Honours, could I say also one sees in some other references, for example, in the Sixth edition of Colinvaux’s Law of Insurance 1990 at page 109 item 520, referring to “Types of material facts”. At the bottom of the left-hand page, 108, there is a reference, in effect, to The “Dora” to which I referred earlier:
In addition a fact may be material if it might influence the premium, whether or not that fact affects the physical or moral hazard. Thus where the insurer issued a policy on a yacht at a discounted premium, on the understanding that the assured intended to insurer four yachts per year, the assured’s false statement in this regard was held to be material.
Your Honours will see that there is a reference in item 5-21 to various matters affecting the “moral hazard”. In paragraph (d) there is a reference to “his nationality and racial origin”.
In footnote 21 your Honours will see a reference to a Horne v Poland. I do not want to go to it, your Honours, particularly. It is a case which attitudinally - as the Americans might put it - it is somewhat dated. What the court was trying to say was that he was a gypsy and could not be trusted, but it was not quite put in that way.
HAYNE J: There are other much more colourful examples of that too to be found in the older books.
MR JACKSON: And in this Court, your Honour. Some of the discussions about immigration. Immigration power are expressed vividly. Your Honours, I was going to refer also to Hardy Ivamy, General Principles of Insurance Law, Sixth edition, 1993, at page 149.
Your Honours will see there, under the heading “THE CLASSIFICATION OF MATERIAL FACTS” at page 148:
In general, it can be said that the following facts will usually be held to be material ‑
and then they are listed. Item 5 in particular:
All facts which to the knowledge of the proposed assured are regarded by the insurers as material.
Now, your Honours, that does not seem very far from section 21(1)(a). One sees then on page 153 that elaborated upon, and the reference in footnote 20 is to Holmes v Cornhill which was the bookmaker case.
Finally, your Honours, in this regard, could I refer to Kelly and Ball, Principles of Insurance Law 2001 at page 2463. In the paragraph commencing about point 3 on the page:
However, that analysis cannot be correct . . . The concept of relevance in s 21 is a straightforward one. The question is whether the insured knew, or a reasonable person in the circumstances ought to have known ‑
and the second of course is (1)(b) ‑
that a particular fact would be “relevant to the insurer”. That phrase is quite unambiguous. “The insurer” in question is clearly the particular insurer, not the prudent insurer.
KIRBY J: There are a number of textbooks on the Insurance Contracts Act. Have you looked at them to see whether the authors of them observe anything on this issue?
MR JACKSON: We have, your Honour. Nothing really that takes the matter very far.
KIRBY J: We have a choice, I think, because the statute could be given a construction that favours your viewpoint and could be given a construction that favours Mr Ellicott’s. On the one hand one says this was not a statute that was intended to extend the duties of insureds. On the other hand, I suppose you can say, “Well, let that be so” and in many cases the insured will not know that this is something that is relevant to an insurer or that they ought to have known that. But in this particular case the silence was telling.
MR JACKSON: Your Honour, could I say this ‑ ‑ ‑
KIRBY J: That is obviously how the Court of Appeal thought, and Justice Hodgson.
MR JACKSON: Yes. Your Honour, what Parliament has sought to do in this Part IV of the Act has been to reduce the circumstances for various reasons policies of insurance are brought to an end.
Now, one of the significant ways in which that has been done has been by the provision of section 28(3) which reduces liability as distinct from empowering an insurer to avoid the contract.
A second way – and, your Honour, this is particularly relevant to what your Honour was putting to me – is to say in section 21(1)(a), do not look at hypothetical situations, except to the extent to which it is reasonably necessary to do so, look at reality, and 21(1)(a) looks at reality.
McHUGH J: But 21(1)(b) does not.
MR JACKSON: Well, I mean to say, your Honour, that is it. What you have is a situation where 21(1)(a) says if something is known that would affect the particular insurer, it should be disclosed. Section 21(1)(b) says if something is known but it is not known that it would affect the decision of the particular insurer, it had to be disclosed if a reasonable person in the circumstances would have known that.
McHUGH J: That is the paragraph that catches Mr Ellicott’s little Aussie battlers.
MR JACKSON: Well, your Honour, it catches the battlers who do not act, in sense, reasonably. Now, your Honour, that is the parliamentary choice and it ‑ ‑ ‑
McHUGH J: But the wider you construe 21, the more battlers they catch.
MR JACKSON: Well, I am not sure that is so, with respect, your Honour. However one construes section 21, the range of battlers, if I can put it that way, your Honour, is limited to those who fall within the opening words of the provision, they know something, something is known. Now, there being something known, it is a question whether that is known to be relevant or a reasonable person would know it to be relevant. That is the ambit of the duty of disclosure. It looks at the particular insurer. The particular insurer may be one that may be offering concessions, all sorts of things. It takes away from the ambit of the duty of disclosure what is in 21(2). So that, your Honour, it is a parliamentary resolution of the situation. No doubt there might be other possibilities but the one that has been chosen, in our submission, is one that if one applies or simply reads the words of it, this case falls within.
Your Honours, I was going to say that the language of past decisions ‑ and I will deal with this very briefly ‑ does not, in our submission support really the distinction drawn by the appellants. Could I go to really the seminal case, as it were, of Carter v Boehm (1766) 3 Burr – sorry, I have just lost the English Reports reference to it, your Honours, but I think it is either 69 or 96 –
HAYNE J: It is 97 ER 1162.
MR JACKSON: Thank you, your Honour. I wanted to refer to page 1164 where your Honours will see Lord Mansfield – this is the page where the number “[1909]” appears:
Lord Mansfield now delivered the resolution of the Court.
Then about point 6 on the page said:
First. Insurance is a contract upon speculation.
One sees following that the paragraph to which our learned friends, I think, refer. One then sees his Lordship going on to say:
The keeping back such circumstance –
the circumstances being those referred to in the preceding paragraph –
is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the under-writer 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.
Then a little further down:
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.
Now, your Honours, he is speaking in the context of the risk of the French attack on the trading premises that is the subject of it, but your Honours will see the way in which he expresses the governing principle. The governing principle is applicable to all contracts and then in “Good faith forbids” et cetera, and your Honours will see the words of the following sentence.
Your Honours have been referred already to Justice Hardie Boys in the Guthrie House Case. That recognised a category beyond physical and moral peril. Tate v Hyslop (1885) 15 QBD 368, if I could take your Honours to that for just a moment, that contains a specific statement that the risk is not the be-all and end-all. At page 376, your Honours will see at the bottom of the page a passage which was quoted by Lord Lloyd:
The authorities shew that the materiality is not as to the risk, but as to whether it would influence the underwriters –
et cetera. At page 379, Lord Justice Bowen, in the first paragraph of his reasons, towards the end of it, said:
The materiality of the fact depends upon whether or no a prudent underwriter would take the fact into consideration in estimating the premium, or in underwriting the policy.
Your Honours will see the expression, “or in underwriting the policy”. Now, finally, in this regard, Justice Brooking in Twenty-First Maylux Pty Ltd v Mercantile Mutual Insurance Australia Ltd [1990] VR 919 – I am sorry, your Honours, I have just lost the passage I was about to refer to in that. I was going to submit that is against the appellants’ contention. May I come back to that and give your Honours a more precise reference to it. Yes, I was going to say, at page 923, about line 26, having referred to section 21(1), he said:
This provision is elliptically expressed. By this I mean that the element of relevance to the decision of the insurer whether to accept the risk and, if so, on what terms is not expressed as a distinct element of that which brings into operation the duty of disclosure; rather it is bound up in the statement in paras (a) and (b) of what the insured knows or what a reasonable person in the circumstances could be expected to know.
May I make three comments about our learned friends’ submissions, and do so by reference to their written submissions on this issue. The first concerns paragraphs 31 to 36 of their submissions. Our submission is that if one looks at the range of matters relevant to the decision to accept the risk which have been adverted to under the general law, they have gone, in our submission, rather beyond the somewhat constricted range referred to in those submissions. One sees, if one looks at the passage from Mayne Nickless v Pegler, which is referred to in paragraph 33, the way in which it is expressed:
“in determining whether he will accept the insurance – ”
That, your Honours, is the expression: “whether he will accept the insurance”.
The second thing, your Honours, is this. If one goes to paragraphs 38 and 39, reference is made to the fact that an:
insurer may in a given case decide not to undertake a particular insurance for reasons unrelated to . . . the risk . . . a desire to move out of the particular class of insurance.
Your Honours, why does not a decision to move out of a class of insurance fall within 21(1)(a)? If a potential insured, knowing that the insurer does not wish to cover a particular class of insurance but does not inform the insurer that the particular case is one within that class but falls within another class, surely that is directly within the terms of 21(1)(a).
The third thing is that if one looks at paragraphs 43 to 48 of our learned friend’s submissions, this part of the argument really seems to create two notions: the insurance decision and the commercial decision, as if they are two separate things. Of course, there are different elements involved but one is part of the other. Your Honours have seen in the particular case that the commercial decision and the insurance decision were taken at exactly the same time, that it is the same decision. Those are our submissions in relation to the question of relevance, the first issue.
HAYNE J: Just before you depart from it, Mr Jackson, do you adopt the statement of Justice Handley which you quote at page 5 of your written submissions ‑ it is paragraph 17 of his Honour’s judgment – that the matter in respect of which 21(1) was engaged was:
the appellants’ provisional decision not to offer renewal to FAI for the 1991-1992 year, and, if possible, to place its share of the business elsewhere ‑ ‑ ‑
MR JACKSON: Is your Honour referring to paragraph 23 of his Honour’s reasons?
HAYNE J: I am reading from your citation where it was to be found. Paragraph 17, I thought, of Justice Handley.
MR JACKSON: I am sorry, why I was referring to paragraph 23 was that he picked up “The relevant fact in the words of the Judge”.
HAYNE J: Yes. The judge had given a lengthier description, I think, which is quoted in para 23. Do you say that the relevant fact is:
the appellants’ provisional decision not to offer renewal to FAI . . . and, if possible, to place its share of the business elsewhere ‑ ‑ ‑
MR JACKSON: Yes, your Honour, that is so. I should say, as your Honours will see from the words in parentheses in 17 when he says “The relevant fact”, that it does not seem that he was intending to convey anything different from the finding by the primary judge.
HAYNE J: I understand that.
MR JACKSON: Yes, your Honour, I accept that.
HAYNE J: The material or the matter then, has those elements of condition about it that are evident?
MR JACKSON: Yes. Your Honour, the position was that the appellants had, in effect, a reserve position. The first position was not us, if others could be obtained. The second position was, if others could not be obtained, then probably us.
HAYNE J: And wrapped up in that were notions of price as well, presumably?
MR JACKSON: Yes. Your Honours, before moving on to the second issue, could I just say this: I said at the start of our submissions that this is an issue – the first issue is one that arises under two provisions. It arises, of course, under section 21(1)(a), but then when one comes to the misrepresentation case, the same issue arises under section 26. It arises under section 26, your Honours, because – and your Honours will appreciate there was a finding of misrepresentation but the statements made are not misrepresentations unless the person who made the statement –and here, of course, that is Mr Welsh – knew ‑ leave out the intermediate words ‑ that the statement would have been relevant to the decision of the insurer whether to accept the risk.
Now, your Honours, the point I was seeking to make earlier about section 26(2) was that the issues that are 2 and 3 really do not arise in relation to section 26(2), and they do not arise because section 26(2) looks at the position of the person who made the statement, and the person who made the statement in this case is Mr Welsh. One does not need to explore any further aspect of knowledge. One looks to his situation, he knew that the statement would have been relevant to the decision of the insurer.
So that, your Honours, our submission is that in the end the issues, 2 and 3, do not in fact arise, and do not in fact arise because one has not heard from the other side any attack on the finding of misrepresentation that is related to the finding of non‑disclosure. I am not talking about the fraudulent one, I am talking about this. So the case, really, in that regard, turns simply on the relevance question.
GUMMOW J: And issue 5?
MR JACKSON: Your Honour, issue 5 still arises.
GUMMOW J: No matter what?
MR JACKSON: No matter what, your Honour, yes.
HAYNE J: And issue 5, I assume, must be judged, must it, first identifying what it is that is said to be false?
MR JACKSON: Yes, your Honour.
HAYNE J: What do you say it is that is said to be false that constitutes the misrepresentation as found?
MR JACKSON: Yes. In relation to issue 5, your Honour?
HAYNE J: Yes.
MR JACKSON: In relation to issue 5, what we say was false was the creation – I will need to say this in a few words. There was the creation and maintenance – I am going to add a qualification in a moment – of the view in the FAI officers, that they were to be offered to participate in the further insurance for the ensuing year. I said “creation”; I add a qualification to that. The qualification is that the finding of the primary judge was that the creation of that as such was not affected fraudulently, although it was a misrepresentation. What was the relevant misrepresentation, so far as the Court of Appeal was concerned, was the question of not advising of any change to that situation. Now, your Honour, I am putting that a little inarticulately, but that is what I am seeking to say.
HAYNE J: I think I understand what you say. Maintenance of the view in FAI that FAI was to be offered participation in the 1991/2 year; does that capture it?
MR JACKSON: Yes, your Honour.
HAYNE J: Was certainly to be offered, was probably to be offered, was likely to be offered?
MR JACKSON: Your Honour, was to be offered, if I could put it that way, was to be offered, and that being brought about by the request for insurance for the interim period in circumstances where that would not have been done without, in the custom of the trade, there being the offer of the further insurance and in circumstances where it was understood, as the judge found, that they knew that that is what we thought. When I say the judge, I mean Justice Handley, I should say.
KIRBY J: But what do you say about the “if” – “If you extend, contact Mr Maciver”. It did seem to indicate that within your client there was acknowledged what one would normally expect to be acknowledged, namely that it is the prerogative of an insured to hunt around for something cheaper.
MR JACKSON: Your Honour, we did not accept that proposition and the evidence from Mr Hunter was that it was not “If you’re contacting us”, but “Contact us through Mr Maciver, because I’ll be away”.
KIRBY J: But Mr Welsh said “if”, did he not?
MR JACKSON: Mr Welsh said he did and Mr Welsh ‑ ‑ ‑
KIRBY J: The judge said Mr Welsh was an honest witness.
MR JACKSON: Well, he said he gave his evidence honestly, your Honour, but there was no suggestion that we did not either. Our evidence was accepted in relation to the conversation of what took place.
HAYNE J: Now, “was to be offered participation” means, does it, was to be offered the opportunity to tender for the business?
MR JACKSON: Yes, your Honour, yes.
HAYNE J: And not to be offered a contract, but to be offered the opportunity to tender?
MR JACKSON: Yes, and your Honour will appreciate, as I was saying before, we were part of sections of the flagpole, as it were, of liability and we were to be invited to participate in that again.
In the ordinary course of events one would no doubt expect it to be the same thing, but it may have been more, it may have been less. One would expect no less, but it may have been more. Your Honours, in our submission the approach taken by the Court of Appeal in relation to that issue, which, as your Honours have seen, commences at page 117, whilst unusual – and your Honours will see our submissions accept that, that it is unusual for there to be a finding of fraud in the first instance in the Court of Appeal – in the intermediate Appeal Court. Having said that, however, the particular issue was not one on which the judge below had expressed a view, as the Court of Appeal recognised. From there the court applied, in our submission, a correct principle which you will see at paragraph 25. It is not suggested that was not correctly identified.
HAYNE J: Were witnesses given a chance to deny the fraud that was found against them?
MR JACKSON: I will show your Honour a reference in that regard. At page 591A I think it is. I am going to refer your Honours to the bottom of the page. You will see there Mr Welsh’s attitude in the last answer:
Mr Daly’s instructions for me to get through the conversation that far, and for me not to have to say anything as to whether to confirm that we were definitely sending him renewal instructions . . . then I thought I got off very lightly, so I didn’t actually say anything at all.
Q. You said nothing?
And up at the top of the next page, about line 13, the opportunity was there:
The opportunity existed right through the telephone conversation.
Q. And you, of course, consciously declined to take that opportunity?
A. To conform with my instructions, yes.
It was the next day that he sent the letter of 27 September, which is the letter referred to in the earlier part of the reasons in the Court of Appeal, that letter being referred to in paragraph 13. Now, your Honour, subject to again checking, I do not think I can say in answer to your Honour Justice Hayne that it was put to him in a more precise form than that, but what your Honours will see from that ‑ ‑ ‑
HAYNE J: What troubles me about that a little, Mr Jackson, was at 592 lines 42 to 45 in the discussion when the witness is asked to leave the courtroom while counsel take the matter up with the judge there is some discussion about consciousness of wrongdoing and then the matter is left tail away on the witness returning to the courtroom. Now, maybe I am seeing things in that which I should not.
MR JACKSON: Well, if one goes to page 595, your Honour will see at about line 13 he was asked:
Now, without traversing all the factors and all the ground again, do you agree with me that on that occasion you, yourself could perceive, and did perceive, that remaining silent about the question of non‑participation . . . was not the most honest conduct?
He is asked about remaining silent. Your Honours will see the answer. He identified the problem and then in the question and answer commencing about line 24 he “had been told by Daly not to tell FAI” and he had a problem with that. Your Honours will see what goes down to the start of the re‑examination on that page. Now, your Honours will see he is asked about “remaining silent” in the context where he did nothing thereafter.
McHUGH J: But the judge made a finding there was no fraud in respect of the non‑disclosure.
MR JACKSON: Yes, he did, your Honour. The initial non‑disclosure, yes.
KIRBY J: Courts have normally had very strict rules about finding fraud. It has to be pleaded; it has to be asserted; it has to be clearly proved; it has to be put to people. It is a serious thing. I just have a sense of disquiet about substitution in an appellate court, which does not see Mr Welsh, of this finding.
MR JACKSON: Your Honour, of course.
KIRBY J: Do the cases you have mentioned – you accept that that is a rare thing to happen.
MR JACKSON: Of course, your Honour, yes.
KIRBY J: You mention about five cases. Are any of them similar to this where an appellate court has felt authorised and required to substitute its conclusion?
GUMMOW J: Why did it have to get into this question of red-blooded fraud?
MR JACKSON: Well, your Honour, it ‑ ‑ ‑
GUMMOW J: In terms of the Act.
MR JACKSON: ‑ ‑ ‑ got into it because we raised it, and we raised it because it had brought about the result that section 28(2) would apply, and section 28(2) would have the effect ‑ ‑ ‑
McHUGH J: So there would be no reduction.
MR JACKSON: I am sorry, your Honour?
McHUGH J: So there would be no reduction.
MR JACKSON: No. No reduction. I mean, there was not a reduction anyway, but we would just give back to premiums, anyway, and it may have had some effect on costs, perhaps, in the end.
McHUGH J: Mr Jackson, can I put to you what I find the most difficult thing about supporting this finding of fraud, and that is the answer at 591, line 25, which was never resiled from, so far as I can see, and that is that the witness was asked:
And those words conveyed to you, did they not, that he expected renewal information and that if you were going to send it while he was away, “Please sent it to Maciver?”
And he has answered: “No”. Now, given that statement, how can you find fraud against him?
KIRBY J: Unless you disbelieve the answer.
MR JACKSON: Well, your Honour, the situation was that there was an issue on which there was evidence, I suppose, both ways, in the sense that Mr Hunter said that he had said they were doing it – I am sorry, he had said that his understanding was that they would be offered, and that it was not right to say that he made it a conditional thing, “If you want to do it, contact so and so”. He had said, “Contact so and so, because I will be away”.
Now, so far as what was said by the Court of Appeal was concerned, our submission is that they were entitled to look at the obvious state of mind of Mr Welsh from the answers he gave, in the pattern of the succeeding pages; they were entitled to look at what took place immediately afterwards; they were entitled to look at the circumstances in which the issue arose; they were entitled to look at the findings that were made – and, your Honours, I will not go back to them, but the findings that were made at first instance ‑ about the knowledge of the officers of the brokers in relation to what effect this will have and the circumstances in which it would take place; and, in those circumstances, to take the view that he really must have known.
McHUGH J: But accepting for the moment that might be so, the fact is that the Court of Appeal did not approach it in that manner. The way they approached it was to seize on the last paragraph of Mr Welsh’s note which appears at 1137 of the book. If you look at 312, paragraph 124 of the judgment, Justice Handley says:
The position changed however when Mr Hunter made the remarks recorded in the last paragraph of Mr Welsh’s note. This made it clear that Mr Hunter had assumed from the conversation that FAI were going to be invited to renew.
So it is that “if” clause in the last paragraph that seems to found the conclusion of the Court of Appeal.
MR JACKSON: Well, your Honour, “if” sometimes means “when”. I do not mean that facetiously, your Honour, but one is looking at the observation made in the circumstances in which it took place and he was speaking in temporal terms: “I’ll be away in October, and the person to send it to is Maciver, not me”. Your Honours, on issue 5, apart from what I have submitted, we rely on our written submissions.
Your Honours, I have not yet dealt with the second and third issues. May I return, as it were, to the second ‑ ‑ ‑
KIRBY J: Just before you quite leave the fifth issue, if you lost that issue, that is to say, if this Court concluded that neither in how it went about it nor in what it concluded the Court of Appeal was authorised to substitute a finding of fraud, then is that fatal to your case if you have also lost your first issue of construction of the Act?
MR JACKSON: Your Honour, if we lost the fraud issue by itself, then if one looks at the actual orders made by the court - I am just looking at them in paragraph 152 of the reasons of Justice Handley for the moment - then the orders that would be set aside would be orders (3) and (4). So that would be the position with that.
If we were to lose on the issue of relevance, issue 1, then I think we lose altogether.
KIRBY J: Yes.
MR JACKSON: It would be possible, your Honours, to lose by reference to non‑disclosure on I suppose issue 2 or issue 3 but that would still leave misrepresentation.
GUMMOW J: This figure of $4,242. That is a premium, is it?
MR JACKSON: Premium, your Honour, yes.
GUMMOW J: That comes about through the application of what section?
MR JACKSON: That comes about because of 28(2).
McHUGH J: Section 28(3), is it not?
GUMMOW J: Section 28(3), is it not?
MR JACKSON: I am sorry, your Honour.
McHUGH J: Section 28(2), “may avoid the contract”.
MR JACKSON: Yes.
GUMMOW J: I understand that.
MR JACKSON: Your Honour, I think we may be at cross‑purposes.
GUMMOW J: How did the trial judge come up with 2,400?
MR JACKSON: I do not think he did, your Honour.
KIRBY J: Not having found fraud, the trial judge did not set aside the contract and did not order the repayment of the premium and you cross‑appealed.
MR JACKSON: We cross‑appealed and got that on the fraud, because of the success in the fraud.
GUMMOW J: So we are debating $4,242.
MR JACKSON: Yes, your Honour. It is a wild sum.
KIRBY J: So it is orders 3 and 4, 3 allowing cross‑appeal and 4 ordering the repayment of the premium.
MR JACKSON: Yes. Your Honour, may I go to issue 2. This concerns of course the meaning of the term “knows” in paragraph (a) of section 21(1). Your Honours, that term is a term of course to be construed in its context, and the context has a number of relevant aspects. One is the assumption, which appears from the earlier part of section 21(1), that the matter is “known”. The second aspect of it of course is that the matter will not be something in the abstract; it will be something that has a nature. The question which then arises is whether the insured – and I leave aside for the moment the question of who might be the insured relevantly, that is issue 3 – knows it to be relevant to the decision of the insurer.
Your Honours, in many and indeed probably most cases there will be little difference between knowledge and belief. If the matter is relevant and the insured believes it to be relevant, that usually will be sufficient. Your Honours, to use the term “belief” as if there is necessarily something different from knowledge involved in the term “belief”, does obscure the question a little. There are other terms which can, in particular contexts, particular factual situations, describe the relevant state of mind. If one uses, for example, the word “understands”; if one understands it to be a matter relevant to the decision of the insurer and, your Honours, various states of mind which might, in relevant context, amount to knowledge, were referred to in the passage in Vines v Djordjevitch, to which my learned friend referred this morning.
But if one turns to the evidence for a moment, the trial judge’s finding in volume 1 at page 175 in one of the red books line 46, was, in our submission, amply justified, where he found, your Honours, that the evidence justified the conclusion and Mr Daly and Mr Welsh believed that if they had disclosed to FAI the matters referred to in section 9(2), it was likely that the 30‑day extension would not have been granted. Now, your Honours, the evidence in relation to that can be seen, and if I could take your Honours very quickly to the most relevant passages in volume 1 of the blue books at page 146, line 7, he was asked:
Q. Accepting that for a moment, Mr Daly, as a fact asserted by you, does it not remain the fact that when you left for Brisbane, you knew that if Mr Welsh conformed to what you wanted him to do –
could I pause to say the word “knew” is there, your Honours –
namely refrain from volunteering the piece of information, he, Mr Welsh, would be withholding from Mr Hunter a piece of information relevant to Mr Hunter’s consideration of whether he would grant the extension and, if so, on what terms?
A. Yes.
So he ‑ a question framed in terms of knowing, he answered yes. At page 142, going back a few pages, line 37:
Q. You had decided, had you not, that you didn’t want Mr Hunter to know specifically that he was not being invited to participate, didn’t you?
A. I didn’t think it was going to achieve anything if that information was provided.
Q. It went further than that, did it not, Mr Daly? You thought that if that information was provided, it was very likely that you wouldn’t get an extension from Mr Hunter at all?
A. There was that possibility, yes.
Q. You thought it was very likely, did you not?
A. It was a type of reaction that I would have expected from Stephen Hunter and other underwriters at FAI at that time.
Q. But is the answer to my question that you thought that if you told
Mr Hunter, or anybody told Mr Hunter, that FAI was not being invited to participate, it was likely that he would not agree to a 30 day extension?
A. It was likely, yes.
Your Honours, then if one goes finally to page 144 in relation to Mr Daly, line 30, and it is the passage that goes through to page 145 line 34 and it concludes on page 145 at line 29:
It was a piece of information of a kind which you have agreed with me, have you not, earlier this afternoon, was relevant to consideration by an underwriter in the Australian market for professional indemnity insurance in his consideration of whether he would grant an extension or, if so, on what terms?
A. Yes.
Now, your Honours, those answers were obviously accepted by the judge and they went directly to that issue. Then Mr Welsh’s evidence, your Honours, to the same effect. May I simply give your Honours the references in that regard without taking your Honours to the particular passages. It is in volume 3 of the blue volumes, page 560 line 10 to line 34, and then – it is a lengthy passage your Honours have already been taken to – page 591 commencing at line 28 going through to page 591A line 27.
Your Honours, our submission is on this point, issue 2, that the tests adopted by the trial judge and by the Court of Appeal were correct. Could I
refer your Honours to the passage from Justice Hodgson quoted in the Court of Appeal’s reasons at paragraphs 40 to 43 and also by Justice Handley himself in paragraph 54 of the same reasons where he said:
The belief of Messrs Daly and Welsh in the likely attitude of FAI was held with sufficient assurance for both of them to conduct themselves in a business transaction as if it were true. 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 –
et cetera.
Your Honours, if one stands back from the detail of the evidence in a case like this, if one looks at a situation where professional brokers say nothing about a particular matter because they know that the result is likely to be that the extension for a month of the insurance they are seeking will not be granted, it is very difficult to say that their understanding that that is the real possibility should not be treated as knowledge in the context of section 21(1)(a) whether one regards the appropriate synonym as being understanding or belief it is, in relevant terms, knowledge. One is, after all, applying section 21(1)(a) in a context which does have a commercial aspect.
Your Honours, that is what we would want to say about the second issue. Could I refer particularly as well to our written submissions in paragraphs 25 to 27 and also paragraph 32. That brings me to the third issue, I see the time.
McHUGH J: Yes, how long will be, Mr Jackson?
MR JACKSON: Your Honour, I would be about 20 minutes to half an hour, I think.
McHUGH J: Yes, we will adjourn until 10 o’clock in the morning.
AT 4.14 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 9 OCTOBER 2002
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