Crown Insurance Services Pty Ltd v National Mutual Life Association of Australasia Ltd

[2005] VSCA 218

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No. 2107 of 2001

CROWN INSURANCE SERVICES PTY LTD (ACN 005 214 237)

and

ROBERT BRUCE BROADLEY

v.

THE NATIONAL MUTUAL LIFE ASSOCIATION OF AUSTRALASIA LTD (ACN 004 020 437)

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JUDGES:	WARREN, C.J., BUCHANAN, J.A. and BYRNE, A.J.A.
WHERE HELD:	MELBOURNE
DATE OF HEARING:	22-23 June 2005
DATE OF JUDGMENT:	1 September 2005
MEDIUM NEUTRAL CITATION:	[2005] VSCA 218

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INSURANCE – Proof of loss dependent upon what plaintiff would have done – Causation to be established on balance of probabilities – Loss not to be characterised as loss of a chance.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Mr J.E. Middleton QC, with Mr B.M. Griffin	Deacons
For the Respondent	Mr D.G. Collins S.C., with Mr C.R. Hanson	Lander & Rogers

WARREN, C.J.:

1. I agree with the reasons of Buchanan J.A. that I have read in draft form and, also, the disposition and course proposed by his Honour. 

BUCHANAN, J.A.:

1. On 2 July 1999 the first-named respondent (“the insurer”) issued a policy of insurance pursuant to which it agreed to pay a lump sum to the insured if he was totally and permanently disabled as a result of an injury and agreed to pay him weekly amounts if he was totally disabled as a result of an injury.  The insured brought an action against the insurer for the lump sum and weekly payments, alleging that he had become totally and permanently disabled as a result of an injury constituted by a prolapsed disc in his spine, which he suffered on 19 July 1999. 

1. The insurer sought to defend the claim on the basis that the insured had fraudulently failed to disclose that a CT scan had been made of the insured’s spine in May 1996, that his spine had been X-rayed in July 1997 and the results of the scan and X-ray.  The insurer also brought third-party proceedings against the first-named appellant and its employee, whom I shall refer to collectively as “the agent”.  The insurer claimed that the agent had breached duties in contract and tort owed to the insurer in obtaining the insured’s signature to blank proposal forms and failing to ask the insured questions contained in the forms, which would have revealed the scan and X-ray and the results of those procedures.

1. During the course of the trial of the proceedings the insurer and the insured reached a settlement.  The insurer suffered a declaration that the insured was entitled to indemnity under the policy and orders that it pay a lump sum of $953,545.87 and interest, make periodic payments at the rate of $2,273.20 per week and pay the insured’s costs of the proceedings.

1. The trial of the insurer’s claim against the agent proceeded.  The trial judge concluded that the settlement between the insurer and the insured was reasonable. 

He held that the insured was not guilty of fraud.   His Honour found that the agent failed to ask the insured any questions about his medical history, CT scans or X-rays.  The scan and X-ray showed no back problem;  they revealed no more than normal degeneration.  The insured did not believe that the condition of his spine was material to the risk against which he sought insurance. 

1. With respect to the third party claim, the trial judge concluded that, in obtaining the insured’s signature to blank proposals and failing to ask the insured any of the questions set out in the proposals, the agent was in breach of duties in contract and tort which the agent owed to the insured.

1. As to causation, the trial judge dealt with three issues.  First, he found that if the insured had been asked the questions in the proposal, he would have revealed the scan and X-ray.  Secondly, his Honour held that nevertheless the insurer would have accepted the risk without imposing any conditions excluding liability for back injury.  He said that investigation would have revealed no existing back problem. His Honour rejected the evidence of the underwriting witness called by the insurer that it would have imposed a condition, and said that he could more readily conclude that the insurer would not have imposed any condition because it failed to call the employees who accepted the risk.  He said:

“In those circumstances, the probabilities are that the (insurer) would have accepted the case advanced by the valued agent and valued client and would not have required a ‘full-back’ exclusion or a limited exclusion – for example, relating to the thoracic spine.”

Thirdly, his Honour held that the agent’s breach of duties deprived the insurer of the opportunity to consider whether it might limit the insurance cover it offered to the insured to exclude the risk of back injury.  His Honour determined that the opportunity was of some value and was of more than negligible value.  He said:

“I suggest that the lost opportunity should be assessed on the basis that there was a 20 per cent probability of the (insurer) using the opportunity to impose a ‘full-back’ exclusion clause.”

The trial judge proceeded to assess damages on that basis.

1. It is the third step which is in issue in this appeal.  The agent contended that as there had been a determination of what would have occurred but for the defendant’s breach of duty, there was no room for an award of damages for loss of an opportunity.  Counsel for the insurer, on the other hand, submitted that it was only required to establish on the balance of probabilities that the agent’s breach of duty had deprived it of the opportunity to impose a condition on the insurance excluding liability for back injury.  Provided that the value of the lost opportunity was not negligible, its value was to be determined according to the degree of probabilities or possibilities, and it was no answer to the insurer’s claim that the opportunity had no value because on the balance of probabilities it would not have imposed any conditions.  It was submitted on behalf of the insurer that the trial judge embarked upon an irrelevant exercise in deciding whether, on the balance of probabilities, the insurer would have imposed a condition excluding liability for back injury if the agent had fulfilled its duty.  Once it had been held on the balance of probabilities that the insurer had lost the opportunity to impose the condition as a result of the agent’s breach, all that needed to be determined was the value of the lost opportunity, and that question was not to be answered by applying the ordinary civil standard of proof.

1. The insurer, like any plaintiff, was obliged to prove on the balance of probabilities the it had sustained compensable loss.  Unless the insurer proved that it would have imposed a condition excluding liability for back injury if it had been informed of the scan and X-ray, it could not establish any loss caused by the agent’s wrongdoing.  In Sellars v. Adelaide Petroleum NL,[1] Mason, C.J., Dawson, Toohey and Gaudron JJ. said:

“The distinction between proof of causation and damages was emphasized in Hotson v. East Berkshire Area Health Authority.[2]   There Lord Ackner stated that the first issue that fell to be determined was that of causation.  This was to be determined on the balance of probabilities.  Once liability was established, the assessment of the plaintiff’s loss could proceed, taking into account any reduction arising from the uncertainty of future events.  When the issue of causation turns on what the plaintiff would have done, there is no particular reason for departing from proof on the balance of probabilities notwithstanding that the question is hypothetical.”[3]

Their Honours' observation as to proof of loss where the question is what the plaintiff would have done was echoed by Lord Hoffman in Gregg v. Scott.[4]His Lordship said:

“The fact that one cannot prove as a matter of necessary causation that someone would have done something is no reason why one should not prove that he was more likely than not to have done it.  So, for example, the law distinguishes between cases in which the outcome depends on what the claimant himself (McWilliams v. Sir William Arrol & Co. [1962] 1 W.L.R. 295) or someone for whom the defendant is responsible (Bolitho v. City and Hackney Health Authority [1998] A.C. 232) would have done, and cases in which it depends upon what some third party would have done. In the first class of cases the claimant must prove on a balance of probability that he or the defendant would have acted so as to produce a favourable outcome. In the latter class, he may recover for loss of the chance that the third party would have so acted. This apparently arbitrary distinction obviously rests on grounds of policy.”[5]

[1](1994) 179 C.L.R. 332.

[2][1987] A.C. 750. In that case it was held that a plaintiff claiming damages for medical negligence was required to establish on the balance of probabilities that if his injury had been diagnosed correctly and treated properly, he would not have suffered the vascular necrosis for which he sought compensation.

[3]Above at 353.  See also at 367–8 per Brennan, J.  And see Sykes v. Midland Bank Executor & Trustee Co. Ltd. [1971] 1 Q.B. 113.

[4][2005] 2 W.L.R. 268.

[5]Above at 287.  See also Allied Maples Group Ltd. v. Simmons & Simmons [1995] 1 W.L.R. 1602; Rosenberg v. Percival (2001) 205 C.L.R. 434. In the latter case loss due to failure to warn a patient of the dangers of an operation depended upon proof that the patient would have decided against the operation: the loss was not treated as a lost opportunity.

1. In the present case the issue of causation depended upon what the insurer would have done, and accordingly it was appropriate that that issue should be decided on the balance of probabilities.  Unless the insurer proved that it would have imposed a condition excluding liability if the agent had performed its duty, it had not established any loss caused by breach of the duty.

1. Counsel for the respondent drew a distinction between proof of historical facts on the one hand and proof of future possibilities and past hypothetical situations on the other hand.  He submitted that proof on the balance of probabilities was only required where the issues concerned historical facts.  Courts have drawn such a distinction, it is true, but only in assessing damages, after it has been established that the defendant breached a duty owed to the plaintiff and that breach caused loss.  Thus, in Malec v. J.C. Hutton Pty. Ltd.,[6] Deane, Gaudron and McHugh, JJ. said:

“When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly had occurred.  A common court determines on the balance of probabilities whether an event has occurred …  But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the Court is different.  The future may be predicted and the hypothetical may be conjectured.  But questions of the future or hypothetical effect that physical injury degeneration are not commonly susceptible of scientific demonstration or proof….  Where proof is necessarily unattainable, it would be unfair to treat as certain the protection which has a 51% probability of occurring but to ignore altogether a prediction which has a 49% probability of occurring.  Thus, the Court assesses a degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability.”[7]

[6](1990) 169 C.L.R. 638.

[7]Above at 642-3.  See also Mallett v. McMonagle [1970] A.C. 166 at 174 per Lord Pearce.

1. In referring to the establishment of liability their Honours were speaking of proof that the defendant’s wrongdoing caused loss to the plaintiff.  The plaintiff proved that as a result of the defendant’s negligence he suffered from a psychiatric condition which rendered him unemployable.  The question was the effect of a finding that it was likely that, independently of the defendant’s negligence, the plaintiff would have suffered from a similar neurotic condition and become unemployable.  In Sellars, Mason, C.J., Dawson, Toohey and Gaudron, JJ. said that in cases such as Malec, “The fact that the plaintiff has suffered some damage and therefore has a complete cause of action is normally established by evidence which satisfies the civil standard of proof.”[8]  Malec concerned the assessment of damages for personal injury.  The approach taken in that case also applies to the assessment of damages for loss of a commercial opportunity.[9]   The loss itself, however, must be proved on the balance of probabilities.

   [8]Above at 351.  The italics are in the original judgment.

   [9]See The Commonwealth v. Amann Aviation Pty. Ltd.(1991) 174 C.L.R. 54.

1. In certain cases it will be appropriate to characterise the loss suffered by a plaintiff as the loss of a chance.  The breach of a contract to provide a chance to win a prize in a competition may cause compensable loss although on the balance of probabilities the plaintiff would not have won the competition.[10]  Where the promisor contracts to provide a chance, and the breach of contract results in the loss of the chance,[11] the loss is treated as an actual loss.[12]  The same principles apply to contracts to provide a commercial advantage or opportunity, such as an opportunity to renew a contract.[13]  The decision in Sellars illustrates that loss represented by deprivation of an opportunity to gain a benefit may found an action in contravention of s.52 of the Trade Practices Act 1974 (Cth).

   [10]Chaplin v. Hicks [1911] 2 K.B. 786.

   [11]The plaintiff must first establish on the balance of probabilities that he would have availed himself of the opportunity.  See Price Higgins & Fidge v. Drysdale [1996] 1 V.R. 346.

   [12]See Fink v. Fink (1946) 74 C.L.R. 127 at 143 per Dixon and McTiernan, JJ.

   [13]The Commonwealth v. Amann Aviation Pty. Ltd. above.  See also Kitchen v. Royal Air Force Association [1958] 1 W.L.R. 563.

1. Loss in a case like the present, which was dependent upon establishing what the plaintiff would have done but for the defendant’s breach, is not to be characterised as loss of an opportunity.  Rather, loss of the benefit, not the opportunity to gain it, is to be established on the balance of probabilities.

1. Accordingly, I would allow the appeal and set aside the judgment and orders made by the trial judge on 11 September 2003.  In lieu thereof I would give judgment for the respondent against the appellants in a nominal sum, for the insurer did establish an infraction of a legal duty owed to it in contract by the agent.  The trial judge noted that the agent “has not sought to challenge the proposition that he was in breach of his duties to the (insurer) as its agent if it is found that the plaintiff signed proposals in blank and he failed to put to the plaintiff the questions asked in the proposals themselves.”  I would hear the parties as to the consequences of a

judgment for nominal damages.  Counsel for the agent informed the Court that there was correspondence bearing on the question of costs.

BYRNE, A.J.A.:

1. I have had the benefit of reading in draft the judgment of Buchanan J.A and I agree with the orders he proposes and for the reasons which his Honour gives.

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