Davis v Westpac Life Insurance Services Ltd

[2007] NSWCA 175

New South Wales

Court of Appeal

CITATION:	Davis v Westpac Life Insurance Services Ltd [2007] NSWCA 175
HEARING DATE(S):	16 February 2007
JUDGMENT DATE:	24 July 2007
JUDGMENT OF:	Hodgson JA at 1; Santow JA at 3; McColl JA at 4
DECISION:	Appeal dismissed with costs.
CATCHWORDS:	INSURANCE – contract of life insurance – non-disclosure of medical condition – whether insurer would not have been prepared to enter into a contract of life insurance on any terms with the insured had he complied with his duty of disclosure - AVOIDANCE OF CONTRACT OF LIFE INSURANCE – whether insurer entitled to avoid contract of life insurance – Insurance Contracts Act 1984 (Cth) – s 29(3) –whether insurer must prove s 29(3) notional decision as at the date of the contract it seeks to avoid or whether it can avoid contract if it proves it would not have made a decision at that date but would have deferred consideration of the proposal and later would not have been prepared to enter into a contract of life insurance on any terms with the insured
LEGISLATION CITED:	Insurance Contracts Act 1984 (Cth) Life Insurance Act 1945 (Cth)
CASES CITED:	Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 Australian Securities Commission v Malborough [1993] HCA 15; (1993) 177 CLR 485 Barclay Holdings (Australia) Pty Ltd v British Insurance Co Ltd (1987) 8 NSWLR 514 Gamer’s Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd [1987] HCA 30; (1987) 163 CLR 236 Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd [1976] 2 Lloyd’s Rep 631 Mayne Nickless Ltd v Peglar [1974] 1 NSWLR 228 McCabe v Royal & Sun Alliance Life Assurance Australia Ltd [2003] WASCA 162; (2003) 12 ANZ Ins Cas 90-119 Mutual Life Insurance Co of New York v Ontario Metal Products Co Ltd [1925] AC 344 Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182; (2003) 12 Anz Ins Cas 90-116 Summerton v SGIC Life Ltd [1999] SASC 121; (1999) 10 ANZ Ins Cas 90-102 Western Australian Insurance Co Ltd v Dayton [1924] HCA 58; (1924) 35 CLR 355
PARTIES:	Gary James Davis - Appellant Westpac Life Insurance Services Ltd - Respondent
FILE NUMBER(S):	CA 40709 of 2005
COUNSEL:	J J Graves SC and B C Kasep - Appellants D L Davies SC and A P Coleman - Respondents
SOLICITORS:	McCullough & Buggy - Appellants Henry Davis York - Respondents
LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	DC 2457 of 2004
LOWER COURT JUDICIAL OFFICER:	Garling DCJ
LOWER COURT DATE OF DECISION:	12 August 2005

CA 40709/05
DC 2457/04

HODGSON JA
SANTOW JA
McCOLL JA

GARY JAMES DAVIS v WESTPAC LIFE INSURANCE SERVICES

The appellant entered into an income protection policy of insurance with the respondent, Westpac Life Insurance Services (“Westpac”) on 12 November 2001. After an injury on or about 7 June 2003, the appellant sought to recover under the policy on the basis that he had been unable to work from that time.

The appellant completed an application for the policy on 28 August 2001. On 3 November 2001 the appellant’s general practitioner referred him to a specialist for treatment for sleep apnoea. On 5 November the specialist informed the general practitioner that he had arranged further diagnostic study “for what will almost certainly turn out to be sleep apnoea”. The study, undertaken in January 2002, demonstrated that the appellant was suffering 94 respiratory events an hour, and that they were mainly apnoeas. The appellant did not disclose the consultations with his GP or the speicialist before the inception of the policy on 12 November 2001.

Westpac purported to avoid the policy on 13 January 2004 pursuant to s 29(3) of the Insurance Contracts Act 1984 (Cth) on the basis of the appellant’s non-disclosure of these facts. The avoidance letter stated:

“Had Westpac Life Insurance Services Ltd (Westpac Life) been aware of this referral [to Dr Maccioni] we would not have accepted your application for Income Protection Policy for that risk on any terms and your application would not have been considered until results for those test results were known to us…”

The appellant conceded the non-disclosure issue and that if he had complied with his duty of disclosure Westpac would not have entered into the policy: s 29(1)(c). The critical issue at trial and on appeal concerned the time at which Westpac had to establish it would not have been prepared to enter into a contract of life insurance with the appellant on any terms: s 29(3). Two underwriters from Westpac gave evidence at the trial. They said that had they known of the appellant’s sleep apnoea, they would have deferred writing the policy until they had the results of the tests to determine the appellant’s rate of respiratory events. Given the high rate of respiratory events disclosed by the tests, they said they would have postponed the decision whether to write the policy for 12 months to determine if the sleep apnoea could be treated. If there had been no successful treatment of the sleep apnoea after the postponement period the insurer would not have entered into a contract of life insurance on any terms with the appellant. The primary judge held that Westpac had established it was entitled to avoid the policy under s 29(3). On appeal the appellant argued that for the purposes of s 29(3) Westpac had to establish that it would not have entered into a policy on any terms with the insured as at the date the policy was entered into.

Held, dismissing the appeal, per McColl JA (Hodgson and Santow JJA agreeing)

On its proper interpretation s 29(3) does not impose a time limit on the notional decision that the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms. [61], [71] – [75], [79]

Schaffer v Royal & Sun Alliance Life Assurance Aust Ltd [2003] QCA 182; (2003) 12 ANZ Ins Cas ¶90-116 followed;
McCabe v Royal & Sun Alliance Life Assurance Australia Ltd [2003] WASCA 162; (2003) 12 ANZ Ins Cas ¶90-119 distinguished;
Summerton v SGIC Life Ltd [1999] SASC 121; (1999) 10 ANZ Ins Cas ¶90-102 doubted.

CA 40709/05
DC 2457/04

HODGSON JA
SANTOW JA
McCOLL JA

Tuesday 24 July 2007

GARY JAMES DAVIS v WESTPAC LIFE INSURANCE

SERVICES

Judgment

1 HODGSON JA: I agree with the orders proposed by McColl JA and with her reasons.

2 In particular, I support the following propositions:

(1) If Doyle CJ’s decision in Summerton v. SGIC Life Limited [1999] SASC 121, (1999) 10 ANZ Ins Cas 90-102, were to be understood as meaning that it is sufficient to ground avoidance of an insurance contract under s.29(3) of the Insurance Contracts Act 1984 (the Act) that the insurer would, had the duty of disclosure been complied with, not have entered into any contract of insurance at the time it did but would have deferred its decision, then this decision would be incorrect.

(2) If McPherson JA’s reasoning in par.[81] of the decision in Schaffer v. Royal & Sun Alliance Life Assurance Australia Limited [2003] QCA 182, (2003) 12 ANZ Ins Cas 90-116 were to be understood as meaning that it is necessary to ground avoidance of an insurance contract under s.29(3) of the Act that the insurer would, had the duty of disclosure been complied with, have given a final decision declining insurance at the time it actually entered into the contract, then this reasoning would be incorrect.

(3) The views on s.29 expressed by Davies JA in Schaffer , with which McPherson JA and Cullinane J expressed concurrence, are correct.

(4) If an insurer did not have a remedy under s.29(3) in those cases where it would, had the duty of disclosure been complied with, have deferred its decision and later, after investigation, declined insurance, it would have no remedy under s.29 at all; and yet in those cases where it would have deferred its decision and later, after investigation, given insurance for a higher premium, it would have a remedy under s.29(4); and that would be an unreasonable anomaly.

3 SANTOW JA: I agree with McColl JA as to both orders proposed and reasons and with the additional observation of Hodgson JA.

4 McCOLL JA: The appellant appeals by leave from a decision of Garling DCJ dismissing his action to enforce an income protection contract of insurance (the “policy”) he had entered into with the respondent on 12 November 2001. The appellant was injured on or about 7 June 2003 and sought to recover under the policy on the basis that he had been unable to work from that time.

5 The respondent purported to avoid the policy on 13 January 2004 pursuant to s 29 of the Insurance Contracts Act 1984 (Cth). The primary judge held that the avoidance was in accordance with the Act.

6 Resolution of the appeal turns on the proper interpretation of s 29 which provides:

“Life insurance

(1) This section applies where the person who became the insured under a contract of life insurance upon the contract being entered into:

(a) failed to comply with the duty of disclosure; or

(b) made a misrepresentation to the insurer before the contract was entered into;

but does not apply where:

(c) the insurer would have entered into the contract even if the insured had not failed to comply with the duty of disclosure or had not made the misrepresentation before the contract was entered into; or

(d) the failure or misrepresentation was in respect of the date of birth of one or more of the life insureds.

(2) If the failure was fraudulent or the misrepresentation was made fraudulently, the insurer may avoid the contract.

(3) If the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or the misrepresentation had not been made, the insurer may, within 3 years after the contract was entered into, avoid the contract.

(4) If the insurer has not avoided the contract, whether under subsection (2) or (3) or otherwise, the insurer may, by notice in writing given to the insured before the expiration of 3 years after the contract was entered into, vary the contract by substituting for the sum insured (including any bonuses) a sum that is not less than the sum ascertained in accordance with the formula.”

7 “Avoid” means avoid from the inception of the policy: s 11.

8 Section 21 of the Act requires an insured to disclose to the insurer before the relevant contract of insurance is entered into every matter that either the insured, or a reasonable person in the circumstances, knew or could be expected to know was relevant to the decision of the insurer to accept the risk.

9 The respondent’s s 29 right to avoid arose because, prior to entering into the policy, the appellant failed to disclose he suffered from the condition of sleep apnoea.

10 At trial the appellant conceded that non-disclosure was established and that if he had complied with his duty of disclosure the respondent would not have entered into the policy (s 29(1)(c)) so that s 29, prima facie, applied. He disputed, however, that the respondent had established that it would not have been prepared to enter into a contract of life insurance with him on any terms if he had complied with his duty of disclosure: s 29(3).

Statement of the case

11 The appellant completed an application for the policy on 28 August 2001. The policy incepted on 12 November 2001. On 3 November 2001 the appellant consulted his general practitioner and was given a referral to Dr Maccioni for treatment of sleep apnoea. On 5 November Dr Maccioni wrote to the general practitioner advising that he had arranged for the appellant to undergo a diagnostic study “for what will almost certainly turn out to be sleep apnoea”. The appellant did not disclose these consultations to the respondent prior to 12 November 2001. The study was undertaken in January 2002 and demonstrated that the appellant was suffering repetitive respiratory events at a rate of 94 an hour, and that the events “were mainly apnoeas”.

12 The respondent’s avoidance of the policy was communicated to the appellant by letter dated 13 January 2004 (the “avoidance letter”). After outlining the information it had received from the appellant prior to entering into the policy, and referring to his duty of disclosure and the information obtained after entry into the policy, that prior to that entry the appellant had been referred to a respiratory and sleep physician for treatment of sleep apnoea, the letter expressed the view that the appellant had breached his duty of disclosure, then said:

“ The Policy
Had Westpac Life Insurance Services Ltd (Westpac Life) been aware of this referral we would not have accepted your application for Income Protection Policy for that risk on any terms and your application would not have been considered until results for those tests results were known to us. If Westpac Life is aware of the results of your SPLIT Diagnostic and CPAP sleep study report, we would not have accepted this policy on any terms. Accordingly, Westpac Life has avoided the policy from inception pursuant to Section 29(3) of ICA. Westpac Life is also of the view that you have breached your duty requiring you to act in good faith towards to Westpac Life in respect of the Policy.” [grammar as in original]

13 At trial, the respondent called evidence from two underwriters, one who had considered the appellant’s application for the policy and another who undertook a “blind underwrite”. A “blind underwrite” involves a consideration of the original policy proposal and any relevant information consequently obtained but which pre-dated the commencement of the policy and ought to have been made known to the insurer prior to that commencement, to determine what decision would have been made but for the failure to disclose.

14 The first witness, Mr Lowe, said that if he had known about the appellant’s sleep apnoea, he would not have decided whether to write the policy until he obtained the results of tests to determine the number of respiratory events the appellant suffered each hour. He referred to guidelines issued by Munich Re (the “MIRA guidelines”), which recommended that anyone with a sleep apnoea index greater than 20 respiratory events an hour should not be granted an income protection policy on any terms. The trial judge found the MIRA guidelines were in use at the time of the underwriting decision.

15 Ms Morrow undertook the blind underwrite. She said that having considered all the relevant material the appropriate underwriting approach was to decline to offer cover for income protection until the results of the consultation with the doctor were available.

16 Both underwriters’ evidence was that given the high rate of respiratory events disclosed in the January 2002 test, they would either have postponed the decision whether to write the policy for twelve months to determine if the appellant’s sleep apnoea could be successfully treated, or recommended that the policy be declined. If there had been no successful treatment of the sleep apnoea after the postponement of the underwriting decision, the insurer would not have entered into any contract with the appellant.

17 The respondent called other evidence but the primary judge regarded the two underwriters’ evidence as determinative. He summarised that evidence as saying:

“… If there had not been successful treatment they would not have entered into the policy and until there was successful treatment they would not enter into the policy. … There was nothing in the end which would allow me to find that they would have done anything but decline [the policy] but invite the plaintiff to come back had the plaintiff had successful treatment and I have no evidence of that. That would lead me to a conclusion that the defendant was correct in their avoidance of the policy.”

18 He entered a verdict for the respondent and ordered the appellant to pay the respondent’s costs.

Submissions on Appeal

19 Mr J Graves SC, who appeared with Mr B Kasep for the appellant, submitted that three issues arose concerning the interpretation of s 29:

(a) whether s 29(3) requires the notional underwriting decision referred to in that subsection to be made at or before the date the insurer and insured entered into the contract of life insurance then under consideration for avoidance by reason of the insured’s breach of the duty of disclosure;

(b) whether the insurer’s notional underwriting decision must be made on the information the insurer had when it decided to enter into the contract with the insured with the addition, and only the addition, of the matter not disclosed in breach of an insured’s duty under s 21;

(c) whether the notional underwriting decision must be an unequivocal and unqualified rejection of the insured’s application for insurance at the time the insurer in fact entered into the policy with the insured.

20 Mr Graves argued that all three questions had to be answered affirmatively before the respondent could successfully invoke its s 29(3) right of avoidance. He contended that the respondent had to establish that it would not have entered into the policy even if the appellant had complied with the duty of disclosure before it was entered into (s 29(1)(c)) and secondly, that as at the date the policy was entered into, it would not have been prepared to enter into a contract of life insurance with the appellant on any terms (the “notional policy”) if the duty of disclosure had been complied with: s 29(3).

21 Mr Graves submitted that, contrary to the primary judge’s findings, the respondent did not establish the second of these matters, both as a matter of fact and, significantly, as at the date the policy was avoided.

22 He contended that the avoidance letter established that, had the appellant complied with his duty of disclosure, the respondent would have deferred the decision whether to enter into a policy of insurance and that deferral is not declinature. In other words it would not, immediately prior to entering into the policy, have rejected the appellant’s proposal but, rather, would have been prepared to continue to treat. He contended that that letter did not satisfy the requirements of s 29(1)(c) and s 29(3).

23 He contended that this argument was supported by McPherson JA’s decision in Schaffer v Royal & Sun Alliance Life Assurance Australia Ltd [2003] QCA 182; (2003) 12 ANZ Ins Cas ¶90-116 (special leave refused Royal & Sun Alliance Life Assurance Australia Ltd v Schaffer [2004] HCATrans 247). He argued McPherson JA’s reasons departed from those of Davies JA (with whom Cullinane J agreed) and that on the assumption his interpretation of McPherson JA was correct, this Court should follow McPherson JA in preference to the majority.

24 Mr Graves accepted that s 29(3) ought not be construed as enacting the common law of avoidance which, he argued, focused on an assessment of the breach of the duty of disclosure made at the moment the insurer was deciding whether or not to accept the risk and not when the insurer undertook an investigation of the risk: Barclay Holdings (Australia) Pty Ltd v British Insurance Co Ltd (1987) 8 NSWLR 514 at 523 per Glass JA. Nevertheless, he argued that the reference to the “duty of disclosure” in s 29(3) indicated that the remedy of avoidance was linked to the duty of disclosure which s 21 of the Act required should be discharged prior to the contract of insurance being entered into. Thus he submitted that s 21 defined the temporal limits of the inquiry under s 29(3) into whether the insurer would have been prepared to enter into a notional policy.

25 In substance he submitted that it was not open to the respondent to say that had it become aware of the appellant’s sleep apnoea prior to deciding whether to issue the policy, it would have deferred the decision whether to write the policy pending the outcome of the respondent’s sleep apnoea tests. Rather, it had to establish that had the appellant made full disclosure prior to the policy incepting it would have refused to enter into a policy on any terms at that time.

Schaffer v Royal & Sun Alliance Life Assurance Aust Ltd

26 In Schaffer, the insured disclosed in her application for a policy of insurance (which it was accepted was a contract of life insurance within the meaning of the Act) that her last consultation with her doctor was June 1997 (whereas in fact it was December 1997) and that it had been a routine yearly check-up and that she was “fully fit”. The insured had attended the December consultation because she was having difficulty breathing and her doctor prescribed an asthma medication. It was held that those statements constituted a misrepresentation within the meaning of s 26(2) of the Act.

27 The issue was whether the insurer had established that it could avoid the policy under s 29.

28 At trial, the parties appeared to have approached s 29 on the basis that the tests in s 29(1)(c) and s 29(3) were the same, an approach reflected in the decision of the trial judge that “the appellant failed to prove that it would not have entered into the contract or been prepared to enter into a contract on any terms, within the meaning of those provisions respectively”. Davies JA pointed out that in so doing, they failed to advert to the difference between “the contract” in s 29(1)(c) and “a contract ... on any terms” in s 29(3) or to the difference between “would have entered” in the former and “would not have been prepared to enter” in the latter: see [37] – [38].

29 Davies JA summarised counsel for the insurer’s argument as follows:

“[35] First he submitted that the evidence established, and indeed he submitted that it was common ground, that the appellant would not have entered into a contract of insurance on any terms on 3 September 1998 if these misrepresentations had not been made. And secondly he submitted, as a matter of law, that that was sufficient to enable the respondent to avoid the contract as it did; that is, that the question under s 29(3) is whether, if either of these misrepresentations had not been made, the appellant would have been prepared to enter into a contract of insurance with the respondent on any terms on 3 September 1998. It would be irrelevant, on this construction that the appellant would have been prepared to enter into a contract, even on the same terms as this one, at some time shortly after 3 September 1998, because, for example, it would have taken a little longer than that for the appellant to fully investigate the true facts if they had been disclosed in the proposal of 26 August 1998. ” (emphasis added).

30 Davies JA analysed the operation of s 29 in the following terms:

“[39] … [Section] 29(1)(c) excludes the operation of s 29, that is the right of avoidance under either s 29(2) or s 29(3), ‘where the insurer would have entered into the contract even if the insured ... had not made the representation’. So, even in the case of fraud, the insurer cannot avoid the contract for misrepresentation if it would have entered into it even if the misrepresentation had not been made.

[40] In my opinion, under this subsection, ‘the contract’ means the same contract, the contract in fact entered into, in this case, on 3 September 1998. I would have had no doubt about that were it not for s 28(1), the equivalent provision with respect to general insurance, which provides that it does not apply ‘where the insurer would have entered into the contract, for the same premium and on the same terms and conditions , even if the insured had ... not made the misrepresentation before the contract was entered into.’ The addition in s 28 of the words which I have emphasized and their omission from s 29(1)(c) gives cause to doubt my opinion. However I think that they were added to s 28 to emphasize the limited nature of the exception to what is, by contrast to s 29, a right in an insurer to avoid a contract for non-disclosure or misrepresentation only in the case of fraud.

[41] Subject only to s 29(1)(c) or (d) an insured may avoid a contract of life insurance for, relevantly, fraudulent misrepresentation: s 29(2). A more limited right to avoid for innocent misrepresentation is provided for in s 29(3). For that reason it is unnecessary to consider whether, under s 29(1)(c), the appellant would have entered into the same contract if the above misrepresentations had not been made.

[42] Subsection 29(3) permits avoidance only if the insurer ‘would not have been prepared to enter into a contract ... on any terms’ if the misrepresentation had not been made. So this subsection, unlike s 29(1)(c), is concerned, not with whether the insurer would have entered into the contract , but with whether it would have been prepared to enter into a contract on any terms. It is put in negative terms; so what must be established, for the section to operate, is that the insurer would not have been prepared to enter into a contract with the insured on any terms if the misrepresentation had not been made.

[43] What that means is this: for a right of avoidance under s 29(3) to arise it must be shown that, on the insured's offer on the assumption that it had stated the true facts, the insurer would not have been prepared to enter into a contract on any terms; in other words, the insurer would have declined the risk.

[44] Once that is accepted, it can be seen that if, absent the misrepresentation, on 3 September 1998 the appellant would still have been undecided on the question whether it would be prepared to enter into a contract on some terms or other with the respondent, perhaps because it needed to conduct future investigation, the appellant did not establish its right to avoid the contract under subsection (3). That it would probably have deferred its decision on 3 September would not be sufficient. It must be shown that, at some point, the offer would probably have been declined.

[45] What subsection (3) does not require, expressly or implicitly, is that any such hypothetical contract, the preparedness to have entered into which must be excluded, be one entered into on the date on which the actual contract was entered into. The only reference in the subsection to that date is in the requirement that, the condition of subsection (3) having been established, the avoidance take place within three years after that date.
[46] This construction of s 29(3), in my opinion also accords with the scheme of s 29 and s 31, read together. This may be stated relevantly in the following way.


1. Subject to s 31, an insurer's right to avoid for fraudulent misrepresentation is excluded only where, if it had known the true facts, the insurer would have entered into the same contract; that is, where the fraud was not material to the risk: s 29(1)(c), (2).

2. However an insurer's right to avoid for innocent misrepresentation is further limited by s 29(3) which permits it to avoid only where, if it had known the true facts, it would not have been prepared to enter into any contract of insurance on any terms; in other words, it would have declined the risk.

3. Otherwise the insurer's rights are limited to variation of the contract by reducing the sum insured to an amount which appears calculated to reflect the sum for which the insured could have been insured for the premium in fact paid if the insurer had known the true facts: subsection (4).[20]

4. Even, but only, in the case of fraudulent misrepresentation, an insured may still recover the whole or some part of the sum insured where, in the court's opinion, the insurer has not been prejudiced by the misrepresentation or any such prejudice is minimal or insignificant: s 31.

It would be inconsistent with that scheme that an insurer could escape liability entirely for an innocent misrepresentation merely because, if the insurer had known the true facts, it would not have entered into a contract on the date on which the contract was actually made but would have deferred the decision to do so, even though the possibility would have remained on that date that it would enter into a contract, on some terms or other, on the basis of the true facts. If that were so, an insurer's right to avoid for innocent misrepresentation would appear to be wider than its right to do so for fraudulent misrepresentation.” (bold emphasis in original, italics added).

31 The insurer’s case on what it would have done if the true facts had been disclosed was based on the evidence of two underwriters, which Davies JA summarised as follows:

“[65] The effect of the evidence of Mr Angus and Mr Willison may be summarized as follows. If the respondent had disclosed the true facts in lieu of the fact misrepresented in her proposal the appellant would have sought a Private Medical Attendant Report from Dr Joseph. But neither was prepared to speculate as to what the appellant would have done had Dr Joseph provided the appellant with his full medical notes and Dr Coghlan's report and had said that neither could find any cause of the respondent's breathlessness; or, more generally, to express an opinion on whether the appellant would eventually have declined the proposal. There was simply no evidence on this question. One possibility plainly was that the appellant would still have insured the respondent either at the same or a higher premium. Even if further investigation had shown that the respondent's symptoms were stress related (this was not diagnosed until after the policy had issued) it is possible, it seems, on the evidence of Mr Willison and the underwriting guide, that the appellant may still have entered into a contract of insurance on the same or some other terms.” (emphasis added).

32 On the basis of that evidence Davies JA held (at [66]) that the insurer had failed to discharge its burden of proof under s 29(3) of showing that it would not have been prepared to enter into a contract of insurance with the respondent on any terms if the misrepresentations had not been made.

33 McPherson JA said (at [68]) that he agreed with Davies JA’s reasons. However, because in his opinion the result might be at odds with Doyle CJ’s decision in Summerton v SGIC Life Ltd [1999] SASC 121; (1999) 10 ANZ Ins Cas ¶90-102 at 86, 129, he stated his own reasons on the insured’s alleged failure to comply with the duty of disclosure before she entered into the policy of insurance. While his Honour accepted (at [69]) that that question was governed by s 29, he sought guidance in the law before the Act.

34 He referred to Mayne Nickless Ltd v Peglar [1974] 1 NSWLR 228 where Samuels J held (at 239) that, before entering into a contract of insurance, a proponent was bound to disclose to the insurer every fact that was material; and that “... a fact [was] material if it would reasonably have 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.” That test was approved by the Privy Council in Marene Knitting Mills Pty Ltd v Greater Pacific General Insurance Ltd [1976] 2 Lloyd’s Rep 631, 642; and was applied in Barclay Holdings (Australia) Pty Ltd v British National Insurance Co Ltd. In the latter case, as McPherson JA pointed out, Kirby P said (at 517):

“Furthermore, I would read the test in Mayne Nickless Ltd v Pegler to require that the effect on the mind of the insurer, to which Samuels J was referring, should be ... something more than the effect produced by information which the insurer would have been generally interested to have. If though interested to have it, such information would not, in the end , have determined for a reasonably prudent insurer the acceptance or rejection of insurance, the setting of the premium, or the attachment of conditions, there is no such effect on the mind as requires disclosure by the insured. The information, although of interest, is not material.” (emphasis added)

35 Glass JA (at 523) concluded that the Court was bound by Mayne Nickless Ltd v Pegler to hold that “the relevance of the hypothetical facts, assuming they had been disclosed, is judged at the moment the underwriter is deciding whether or not to accept the risk” and said:

“If circumstances are only material when they bear upon the underwriter’s decision whether to accept or not to accept the risk and not when they merely suggest that there be a delay for further inquiry the circumstances must be revealed by the proponent with sufficient detail to enable the underwriting determination to be made. ” (emphasis added).

36 After referring to these passages from Mayne Nickless McPherson JA concluded (at [71]):

“From this it appears that before the Act, the question in the present case would have been determined according to whether or not, assuming the necessary disclosure to have been made when it should have been, the insurer would have rejected the proposal outright, and not merely deferred it pending further investigation of the risk that might in turn have led to rejection of the proposal or to an increase in the premium or the addition of further terms or conditions.” (emphasis added).

37 McPherson JA next observed (at [72]), that the object of the Act was reform the law of insurance, and that it “adopted the basic framework of the general law but … made some substantial changes that were designed to improve the legal position of the insured”.

38 After referring to s 28 (avoidance of a contract of general insurance), McPherson JA said:

“[75] When one turns to the subject of life insurance in s 29, it is seen that the remedies provided for non-disclosure are more extensive at the same time as their availability is more confined. Section 29(2) confers on the insurer a right of avoidance for fraudulent non-disclosure comparable to that given by s 28(2). In addition, however, s 29(3) confers a right of avoidance (exercisable within three years of the contract) for non-disclosure whether it is fraudulent or not. But the availability of both of those rights to avoid is restricted by s 29(1)(c), which limits the scope or applicability of s 29. The effect of s 29(1)(c) is that neither is available where the insurer ‘would have entered into the contract even if the insured had not failed to comply with the duty of disclosure...’ That makes sense, and it accords with the law as it was before the Act in the case of proved non-disclosure. If disclosure of the relevant matter would not have deflected the insurer from entering into the contract, then there is no right to avoid it. It seems clear that the reference in s 29(1)(c) to ‘the contract’ is to the contract of life insurance in fact entered into between the same parties, which of course means a contract having the same premium and the same terms and conditions.

[76] It is when s 29(3) is reached that the major difference in the statutory regimes applicable to general insurance and to life insurance becomes manifest. Section 29(3) extends to non-disclosure that is innocent or, at any rate, not fraudulent; and it confers on the insurer a right of avoidance for non-disclosure if but only if:
‘(3) ... the insurer would not have been prepared to enter into a contract of life insurance with the insured on any terms....’


[77] The shift in language from ‘would have entered into the contract’ in s 29(1)(c) to ‘would not have been prepared to enter into a contract’ in s 29(3) cannot have been accidental. The difference must have some interpretative significance. Both provisions speak of ‘the insurer’, which can only mean the particular insurer in question, i.e. the defendant insurer in this case. The idiosyncrasies of the particular insurer are now controlled by the provisions of s 21(1)(b) concerning what a reasonable person could be expected to know it was relevant to disclose. In that way, it performs much the same function as the word ‘reasonably’ in the formulation by Samuels JA in Mayne Nickless Ltd v Pegler referred to above.

[78] The question posed by s 29(3) is whether, if the relevant matter had been disclosed, the defendant insurer would have been prepared to enter into a contract with the plaintiff insurer on any terms . If the answer is No, the right of the avoidance conferred by s 29(3) is exercisable; otherwise it is not. The emphasis ‘on any terms’ stands in marked contrast to the expression used in s 28(1) in the case of general insurance, which is ‘would have entered into the contract for the same premium and on the same terms and conditions.’ What is implicit in the language of s 29(3) is that it is only if the insured would not have been prepared to enter into a contract of insurance at all (whether for the same or a different premium, or on the same or different terms or conditions) that the right to avoid for non-disclosure is available. In other words, the insurer must in order to avoid establish that, if s 21(1) had been complied with, the insurer would not have been prepared to enter into any contract of life insurance with the insured, but instead would have declined the risk altogether.

[79] On the limited footing on which I am approaching the matter, s 29(3) is the crucial provision. For this purpose, it is assumed that there was a failure by the plaintiff to comply with her duty to disclose a matter relevant to the defendant insurer’s decision to accept the risk on some terms, but that her non-disclosure of that matter was not fraudulent. From what has been said it follows that, in order to entitle the defendant to avoid the contract of life insurance under s 29(3), it is not enough for it to prove that, had the requisite disclosure been made, it might have entered into a contract of life insurance with the plaintiff; or even that it would have done so, but for a different premium or on different terms or conditions. On the contrary, it must be in a position to show that it would not have been prepared to enter into any life insurance contract with her at all.

[80] In that regard, it is not, I consider, sufficient for the defendant to establish only that, had the requisite disclosure been made, it would have made further inquiries to determine whether or not to accept the risk either at all or at a different premium or on different terms. Proving that its decision whether or not to accept the risk would have been deferred is not to demonstrate that in the end it would not have entered into any contract of life insurance with the insured. That is, I conceive, the significance of the phrase ‘in the end’ in the passage quoted earlier from the judgment of Kirby P in Barclay Holdings v British National Insurances to the effect that the additional information, although of interest to the insurer, is not material unless it determines for the insurer the acceptance or rejection of the insurance. ... What must be shown is that there would have been no contract, not merely a different one. A similar conclusion is implicit in the passage from the reasons for judgment of Glass JA in Barclays Holdings referred to earlier. It is also implicit in the extract from Mutual Life Insurances Co of New York v Ontario Metal Products Co Ltd [1925] AC 344, 351-352, mentioned with approval in the dissenting speech of Lord Lloyd in Pan Atlantic Insurance Ltd v Pine Top Insurance Ltd [1995] AC 501, 564. As was recognised there, it was not enough under the general law to show that, if disclosure had in fact been made, the only difference would have been ‘delay and delay alone.’

[81] Conceptions like these continue to underlie the regime now governing remedies for non-disclosure introduced by the Act. To exercise the right conferred by s 29(3) of avoiding the contract of life insurance, the insurer must establish that, if the relevant matter had been disclosed, the insurer would not have been prepared to enter into any contract of life insurance. In Barclays Holdings v British National Insurance Co , Glass JA said that that question was to be judged at the moment the underwriter was deciding whether or not to accept the risk, and not at the moment of undertaking an investigation of the risk. This, I consider, is why s 29(3) speaks of the insurer ‘not being prepared to’ enter into a contract of life insurance. Unless the insurer proves it would not have been prepared to do so at the time the disclosure ought to have been made no right to avoid for non-fraudulent non-disclosure is available under s 29(3). That time is when (or before) the contract was entered into, which makes it necessary for the insurer to demonstrate what its attitude would have been at that time if the duty of disclosure had been complied with.

[82] In the present case the defendant failed to establish that it would not have been prepared to enter into a contract of life insurance on any terms with the plaintiff on 8 September 1998, which was the date of the parties’ contract. At most, it proved that, had the relevant matter been disclosed, it would have deferred its decision on acceptance or rejection of the risk until further inquiries had been made. It proved no more than that there would have been “delay, and delay alone”. It therefore failed to establish a right to avoid the contract under s 29(3) of the Act. Nor has it claimed the benefit of s 29(4) conferring power to vary the contract so as to substitute a reduced insurance sum and there is no occasion to consider that provision, which confers an alternative remedy of varying the contract where avoidance has not taken place.” (emphasis added)

39 Mr Graves accepts that the primary judge applied the approach of Davies JA, that for the purposes of s 29(3) the insurer is not limited to the decision which would have been taken when the duty of disclosure should have been complied with. However he submitted that para [81] of McPherson JA’s reasons supported the proposition that for the purpose of s 29(3), the insurer’s decision is restricted to that which would have been made at the time that the duty of disclosure should have been complied with. According to this argument, he contended, s 29(3) is not satisfied if the insurer says it would have deferred making a decision at that time, even if, as in this case, it says that if investigations had revealed more than 20 respiratory events an hour, it would have declined to enter into any policy with the appellant.

40 Mr Graves submitted that Davies JA failed to have regard to the significance of the interaction between ss 21 and 29(3) of the Act and that his Honour’s construction of s 29(3) ignored the mechanics of the test of avoidance under that subsection. He argued that although s 29(3) enlivened the consideration of a “hypothetical” contract, the test of avoidance proceeded upon a consideration of what would have occurred if the duty of disclosure had been complied with as it related to the particular facts and circumstances of the case. He argued that the duty imposed by s 21 was defined as arising “before the relevant contract of insurance was entered into”, and that that temporal element was imported into the test of avoidance under s 29(3).

41 Mr Graves argued that McPherson JA recognised the significance of s 29(3) as embracing a temporal element consistent with the time at which the duty of disclosure arose and that his Honour’s interpretation of s 29(3) accorded with its language and the codified remedy of avoidance.

42 He argued that the interpretation of s 29(3) for which he contended had been accepted in McCabe v Royal & Sun Alliance Life Assurance Australia Ltd [2003] WASCA 162; (2003) 12 ANZ Ins Cas ¶90-119.

43 Mr D Davies SC, who appeared for the respondent with Mr A Coleman, submitted that the trial judge had taken the correct approach to Schaffer, framing the question raised by s 29(3) as whether, at some time, the insurer would have declined to enter into a policy on any terms. He contended that this formulation of the question reflected Davies JA’s approach to s 29(3) in Schaffer, which he submitted was correct. Further he argued that, properly understood, McPherson JA’s interpretation of s 29(3) did not differ from Davies JA’s. He submitted that the substance of McPherson JA’s decision was that, while the s 29(3) decision is to be evaluated at, or before, the time the contract was entered into, it could be illuminated by facts or events revealed after the decision was made. He argued that this Court ought to follow Schaffer as a decision of a comparable Court of Appeal bench in another state, unless persuaded that it was wrong: Australian Securities Commission v Marlborough [1993] HCA 15; (1993) 177 CLR 485 at 492.

44 Mr Davies submitted that the appellant’s attempt to import a temporal element into the construction of s 29(3) using s 21 would defeat the distinction between s 29(1)(c) and s 29(3). He contended that the structure of Pt IV of the Act indicated there was no warrant for importing a condition on avoidance under s 29(3) that the insurer would have declined to issue a policy on any terms as at the date the policy was entered into.

Consideration

45 Section 29 substantially reproduces cl 30 of a draft Bill prepared by the Australian Law Reform Commission in its report on insurance contracts: The Law Reform Commission, Insurance Contracts, Report No 20, Australian Government Publishing Service, Canberra, 1982.

46 At the time the Report was written, s 84 of the Life Insurance Act 1945 (Cth) provided:

“ Incorrect statement in proposal not to avoid policy

84. A policy shall not be avoided by reason only of any incorrect statement (other than a statement as to the age of the life insured) made in any proposal or other document on the faith of which the policy was issued or reinstated by the company unless the statement –
(a) was fraudulently untrue; or
(b) being a statement material in relation to the risk of the company under the policy, was made within the period of 3 years immediately preceding the date on which the policy is sought to be avoided or the date of the death of the life insured, whichever is the earlier.”

47 The Report recommended (at [198]) that s 84 should be retained in modified form and should extend to oral misstatements and to non-disclosure. It then said:

“That leaves the question of the appropriate method of assessing damages for an innocent misrepresentation or non-disclosure within the contestable period … the choice lies between proportionality and common law damages. While the latter has been adopted for general insurance, the former is more appropriate for life insurance. Proportionality does not give rise to the same difficulties in life insurance as it does in many cases of general insurance. … Proportionality has already been adopted in the case of mis-statements of age. Its extended application would provide a uniform remedy for innocent misrepresentation and non-disclosure within the contestable period in the whole area of life insurance. Where a misrepresentation or breach of the duty of disclosure is discovered within 3 years of the contract being entered into, the insurer should be entitled to reduce the amount payable under the contract in accordance with the principle of proportionality. An exception should be made where the insurer would not have entered into the contract at all. In those cases, the only remedy is avoidance. As in the case of general insurance, a life insurer should, subject to a court’s over-riding discretion to disregard the avoidance and award damages instead, retain a right to avoid a contract where the insured is guilty of fraudulent non-disclosure or misrepresentation.” (emphasis added).

48 Section 29 appears in Pt IV, Div 3 of the Act. Section 33, which is also found in Div 3, states:

“No other remedies

The provisions of this Division are exclusive of any right that the insurer has otherwise than under this Act in respect of a failure by the insured to disclose a matter to the insurer before the contract was entered into and in respect of a misrepresentation or incorrect statement.”

49 In Advance (NSW) Insurance Agencies Pty Ltd v Matthews [1989] HCA 22; (1989) 166 CLR 606 (at 615) Mason CJ, Dawson, Toohey and Gaudron JJ said:

“The evident intention of the legislature [in enacting Pt IV of the Act] 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.”

50 Their Honours then referred to Gamer's Motor Centre (Newcastle) Pty Ltd v Natwest Wholesale Australia Pty Ltd [1987] HCA 30; (1987) 163 CLR 236 at 243–4, where Mason CJ said:

“It is a well-settled rule of construction that in the case of a statute being a code intended to replace the common law, its meaning is to be ascertained in the first instance from its language and the natural meaning of that language is not to be qualified by considerations derived from the antecedent law: Brennan v R (1936) 55 CLR 253 at 263; Bank of England v Vagliano Brothers [1891] AC 107 at 144–5. But an appeal to earlier decisions can be justified if the language of the statute is itself doubtful or if some other special ground is made out, for example, if words used have previously acquired a special meaning which differs from their ordinary meaning: Sungrave Pty Ltd v Middle East Airlines Airliban SAL (1975) 134 CLR 1 at 22”

51 Mr Graves pressed on with his argument that McPherson JA’s reasons departed from those of Davies JA notwithstanding that he faced what some might have regarded as an insuperable hurdle, namely that McPherson JA expressly agreed with Davies JA’s reasons and only stated his own reasons on the duty of disclosure question because of his concern that the result in Schaffer may be at odds with Doyle CJ’s decision in Summerton.

52 In Summerton the insurer decided on 24 May 1995 that it would accept the insured’s proposal for life insurance. Two days earlier, on 22 May, the insured had consulted her general practitioner who found a swelling in her abdomen which required immediate investigation. The following day, 23 May, he told her that the mass was a tumour of the kidney and the next morning, 24 May, that it was probably cancerous. None of this was communicated to the insurer which despatched the policy to the insured on 2 June. The insured underwent surgery in June and again in September but died in October 1995 as a sequelae of the tumour. The insurer purported to avoid the policy by letter in November 1995 on the grounds of non-disclosure and, in its defence, on the further ground of misrepresentation.

53 Doyle CJ (sitting at first instance) concluded (at [50]) that the further knowledge the insured acquired on 23 and 24 May was knowledge that a reasonable person could be expected to know would be relevant to the decision whether to insure her life, (s 21(1)(b)) and found (at [74]) that the insured had breached her duty of disclosure and (at [78]) had been guilty of misrepresentation. He concluded (at [43]) that the contract of insurance came into existence not before 30 May, and probably on, 2 June 1995.

54 The insurer called evidence from a Ms Holding, who worked in its life insurance section and had authority to decide whether to accept a life insurance proposal. Doyle CJ said of her evidence:

“51. I also accept the evidence of Ms Holding that had she known on 24 May what Mrs Vidic knew on 22 May, after the first appointment with Dr Hawkes, Ms Holding would have deferred making a decision. I accept her evidence that had she known on 24 May the matters known to Mrs Vidic on 23 May and 24 May, after the second and third visits to Dr Hawkes, she would have declined the proposal altogether.

52. I therefore find that SGIC would not have entered into the contract on 24 May if the matters known to Mrs Vidic on 22 May were disclosed. I find that SGIC would have declined the proposal on 24 May had the matters known to Mrs Vidic on 23 May and the morning of 24 May been disclosed to SGIC: see s29 of the ICA.”

55 After dealing with other matters, his Honour said:

“Remedies

79. Section 29 of the ICA entitles SGIC to avoid the contract with Mrs Vidic if SGIC would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with or if the misrepresentation had not been made. I find, on the basis of Ms Holding's evidence, that if the matters of which Mrs Vidic had knowledge on 23 May and 24 May had been disclosed to SGIC, it would not have been prepared to enter into a contract with her on any terms. I also find that as of 24 May, if the knowledge that Mrs Vidic had on 22 May had been disclosed to SGIC, SGIC at that time would not have been prepared to enter into a contract of life insurance with Mrs Vidic on any terms, because, as Ms Holding said, it would have deferred a decision if it had known of those matters. ” (emphasis added).

56 He accordingly held (at [80]) that the insurer was entitled to avoid the contract of insurance.

57 In Schaffer, Davies JA considered Summerton (at [48] – [50]).

58 He referred to the passage in para [29] of Summerton I have emphasised and said:

“[50] If his Honour was there saying that, on the assumption that the contract was entered into on 24 May, SGIC would not have been prepared to enter into a contract of life insurance with Mrs Vidic on any terms if the duty of disclosure had been complied with, within the meaning of s 29(3), because, if that duty had been complied with, it would not have entered into a contract that day but would have deferred its decision on that question, I would with great respect, disagree. The right of avoidance in that case arose, and could have arisen only because SGIC would eventually have declined the offer; that is, it would not have accepted it on any terms.”

59 McPherson JA too was clearly concerned to explain why he disagreed with Doyle CJ’s conclusion that deferral could be sufficient for the purposes of s 29(3). His Honour chose to explore the question of the insured’s duty of disclosure by considering, in the first instance, the antecedent common law. He did not refer to Advance (NSW) Insurance Agencies Pty Ltd v Matthews, but even if he had, it is an available interpretation that he regarded reference to the earlier law as justifiable because the language of s 29 was doubtful, a conclusion his Honour might have felt was warranted because of Doyle CJ’s conclusion in Summerton.

60 It is useful to consider some of the common law authorities to which McPherson JA referred to gain further insight into his Honour’s reasons.

61 Barclay Holdings concerned the question whether the plaintiff had failed to disclose material facts when proposing premises for insurance in breach of its common law duty. The plaintiff claimed under a policy of insurance in respect of a fire which destroyed premises it owned at Revesby. The plaintiff company was beneficially owned and controlled by one Miles Barclay who, in 1982, owned commercial office premises at Blacktown which were insured with the MLC Fire & General Insurance Co Pty Ltd. On 9 March 1982, 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 Blacktown fire did not disclose any physical or moral hazard.

62 As I have said, Glass JA held that at common law the decision on whether a fact is material, and thus must be disclosed by an insured to an insurer, is made at the moment the underwriter is deciding whether or not to accept the risk and not at the moment when the insurer undertakes an investigation of the risk. Having reached that conclusion, however, his Honour considered a second principle of law, namely whether the Court applied the test of materiality to the two isolated facts, viz the previous fire and the refusal to renew or whether it was to be applied to “those undisclosed facts located in the web of surrounding circumstances which explained their true significance”. He applied Western Australian Insurance Co Ltd v Dayton [1924] HCA 58; (1924) 35 CLR 355 (at 379 – 380) where Isaacs ACJ said:

“... 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 the non-disclosure of the claim be relevant, its nature and circumstances are necessarily relevant ; for, without them as proved or assumed, the alleged failure of duty to disclose cannot be pronounced upon.” (emphasis in original)

63 Glass JA held (at 525) that:

“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 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. In a sense the Mayne Nickless Ltd v Pegler principle and the Western Australian Insurance Co Ltd v Dayton principle exert a mutually reinforcing effect upon each other. If circumstances are only material when they bear upon the underwriter's decision whether to accept or not accept the risk and not when they merely suggest that there be a delay for further inquiry the circumstances must be revealed by the proponent with sufficient detail to enable the underwriting determination to be made. Conversely if the previous occurrence exposed in its circumstantial detail could not affect the mind of a hypothetical underwriter there is no obligation to disclose it. It follows that if the assured knowing the full facts but misjudging their materiality fails to disclose them, the policy can be avoided. If, however, the insurer proves only the suspicious part of the circumstances and the full story as proved by the plaintiff discloses no moral or physical hazard and for that reason no materiality the defence will fail.” (emphasis added).
[Priestley JA agreed (at 526) with Glass JA’s analysis of the Mayne Nickless Ltd v Pegler test of materiality and the Western Australian Insurance Co Ltd v Dayton concept of undisclosed matters.]

64 I understand Glass JA to have been saying that the question whether the non-disclosed fact was material, while tested at the time the insurer entered the policy, was based on the fact which should have been disclosed and other facts the insurer ascertained on inquiry. It was only “material”, thus giving the insurer a right of avoidance, if, on the basis of those facts, they would have influenced the insurer’s decision as to whether or not to accept the risk.

65 Similarly, I understand McPherson JA as saying (at [81] – [82]) that the time for assessing whether any policy would have been declined is immediately prior to inception, on the assumption that, because the duty of disclosure has been complied with, in the Barclay Holdings sense, the insurer is in possession of all the relevant facts.

66 I accept that there is some tension between the reasons of Davies JA and McPherson JA. Thus, while Davies JA made it plain (at [45]) that s 29(3) did not require the notional policy to be one entered into on the date on which the policy was entered into, McPherson JA (at [81]) was of the view that s 29(3) tested the insurer’s attitude to the notional policy at the time disclosure ought to have been made, namely when (or before) the contract was entered into.

67 At the same time there is, in my view, an internal inconsistency between paras [80] and [81] of McPherson JA’s reasons. In para [80] his Honour appeared to be of the view that an insurer which established that had the requisite disclosure been made it would have made further enquiries and after those enquiries have declined the risk, would have demonstrated that “in the end it would not have entered into any contract of life insurance with the insured”. His Honour there approved Kirby P’s statement in Barclay Holdings v British National Insurances that “the additional information which is acquired is only material if it determines for the insurer whether to accept or reject the insurance”. His Honour read the same conclusion as implicit in Glass JA’s judgment in the same case.

68 Further, the passage from Mutual Life Insurance Co of New York v Ontario Metal Products Co Ltd [1925] AC 344 at 351-352 to which his Honour referred (para [80]) read:

“When statements made by an insured person upon his application for a policy of life insurance are not made the basis of the contract but are to be treated merely as representations, an inaccurate statement is material so as to vitiate the policy if the matters concealed or misrepresented, had they been truly disclosed, would have influenced a reasonable insurer to decline the risk, or to have stipulated for a higher premium; it is not sufficient that they would merely have caused delay in issuing the policy while further enquiries were being made. ” (emphasis added).

69 As McPherson JA said (at [80]):

“As was recognised there, it was not enough under the general law to show that if disclosure had in fact been made, the only difference would have been ‘delay and delay alone’.”

70 It is important to understand, however, that because McPherson JA approached his additional observations from the perspective of the duty of disclosure, and, to that end, looked at authorities dealing with the question of materiality, his Honour was focusing on authorities which dealt with the insurer’s attitude to accepting a risk if the duty of disclosure had been fully complied with. Because those authorities focused on compliance with the duty of disclosure, they looked at the duty which, at common law, exists up to when the contract of insurance is entered into. Both cases proceeded, therefore, on the assumption that the test of materiality turned on facts which the insured knew, or ought to have been aware, would reasonably have affected the mind of a prudent insurer in determining whether to accept the insurance and at what premium and on what conditions (Mayne Nickless).

71 McPherson JA (at [81]) regarded the concepts to which he referred (at [80]) as continuing to underlie the regime for non-disclosure. To the extent that his Honour then said (at [81]) that s 29(3) turned on the insurer establishing that “if the relevant matter had been disclosed, [it] would not have been prepared to enter into any contract of life insurance”, I would agree. His Honour up to this stage, clearly envisages the insurer being able to make further inquiries, and to avoid the policy if “if as a consequence of more inquiries, it would have declined to enter into ‘a’ policy with the insured on any terms.”

72 The point at which I part company with his Honour is when, in the balance of para [81], he said that for the purposes of s 29(3), the insurer must prove it would not have been prepared to enter into a contract of life insurance at the time that disclosure ought to have been made. If, by that, his Honour meant that that decision could not be informed by information the insurer ascertained after the policy was incepted, I do not agree.

73 It is not entirely clear that this is the result which his Honour was advocating for two reasons. First because he agreed with Davies JA’s reasons which were clearly to the opposite effect (see [45]) and, secondly, because, as I have already said, he appeared to approve Kirby P and Glass JA’s reasons in Barclay Holdings which accepted that while mere delay and further enquiries were not sufficient, a deferral of a decision pending inquiries which led to the conclusion that a reasonably prudent insurer would have rejected a proposal, would suffice to lead to the conclusion that a fact was material.

74 If, however, the passage in McPherson JA’s judgment upon which the appellant relies can be read in the manner for which Mr Graves contended, in my opinion it is incorrect.

75 In my view Davies JA’s interpretation of s 29(3) was correct. It is supported by the passage from the Report which I set out earlier in these reasons, which did not identify any temporal limit in s 29(3), merely viewing it as an alternative to the exercise which found its way into s 29 (4). Section 29(4) gives an insurer which has not avoided the contract the ability to vary it by substituting for the sum insured a sum calculated in accordance with the formula where “Q” is:

"Q" is the number of dollars that is equal to the premium, or to the sum of the premiums, that the insurer would have been likely to have charged if the duty of disclosure had been complied with or the misrepresentation had not been made.”

76 It is plain that s 29(4) does not look to the time the policy was entered into. Section 29(6) provides, in effect, a relation back so that a variation of a contract under subs (4) has effect from the time when the contract was entered into. The only temporal limit on s 29(4) is the same three year period referred to in s 29(3).

77 As was pointed out in the course of argument, unless an insurer can take into account information acquired after the date the contract of insurance was entered into for the purposes of determining whether it had satisfied the s 29(3) test, it could never determine the “Q” amount it would have been likely to have charged if the duty of disclosure had been complied with or the misrepresentation had not been made.

78 Mr Graves submitted in response to this proposition that if an insurer had passed the s 29(1)(c) test, but did not have a right to avoid a contract under either ss 29(2) or 29(3), it had no remedy. This argument would lead to the anomalous result that an insurer which would have deferred making a decision if the duty of disclosure had been complied with and only made it when armed with, for example, the results of the appellant’s respiratory tests, would not be able to avoid the policy under s 29(3) and, further, could not adjust the premium as contemplated by s 29(4).

79 Finally I would observe that, in my opinion, McCabe v Royal & Sun Alliance Life Assurance Australia Ltd does not assist the appellant. That case concerned the question whether an insurer was entitled to avoid a policy of life insurance on the basis of non-disclosure. The trial judge had found in favour of the insurer. On appeal Murray J (with whom Wallwork and Anderson JJ agreed) upheld the trial judge’s reasons. McCabe was heard in September 2002 and decided in July 2003. The judgment in Schaffer was delivered in May 2003 but it is clear that it did not come to the attention of the Supreme Court of Western Australia nor, apparently, was the Court’s attention drawn to Summerton. Thus, after finding that the trial judge had been correct to hold that the insured deceased had failed to comply with her duty of disclosure, when Murray J came to consider whether the insured had proved, for the purposes of s 29(3), that it would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with, he noted that “although the submission was unsupported by authority” he was inclined to accept as correct the insured’s submissions on this point that:

“On its proper construction, s 29(3) of the Act referred to a final decision by an insurer not to insure on any terms, rather than an interim decision to defer insuring pending the pursuit of further inquiries … .” (at [32]).

80 His Honour went on to find (at [36]-[37]) that the insurer had discharged the s 29(3) test.

81 The time at which the s 29(3) test stood for consideration was not expressly considered in McCabe. It is apparent, however, from the evidence of the underwriter in that case that it would have made a number of enquiries if the duty of disclosure had been complied with and, after making those enquiries, would have declined the risk. In my view it is implicit in Murray J’s conclusion that the s 29(3) test had been complied with that the inquiries referred to could have been made after the date on which the duty of disclosure ought to have been complied with.

82 In my opinion s 29(4) makes it plain that for the purposes of s 29(3) an insurer is entitled to demonstrate that it would not have been prepared to enter into a contract of life insurance with the insured on any terms if the duty of disclosure had been complied with by taking into account information it would have obtained as a result of enquiries made consequent upon compliance with the duty of disclosure. As Davies JA said in Schaffer, the only relevant time period is three years after entry into the policy. If, during that time, the insurer becomes aware of facts which reveal that the insured had not complied with the s 21 duty of disclosure (and/or made a misrepresentation), but needs to obtain further information before determining what its attitude to acceptance of the risk would have been, it is entitled to bring the results of those consequent inquiries to bear in that exercise. If after making those enquiries it determines it would not have been prepared to enter into any policy, it can avoid the policy.

Notice of Contention

83 The right of avoidance under s 29(3) must be exercised within three years of entry into the relevant contract of insurance. Prior to the trial the respondent amended its defence to rely upon a notional avoidance case to the effect that its decision to avoid the policy was also valid because of two matters it discovered after avoidance and after the three years expired, which would also have permitted it to avoid the policy. The primary judge ruled in an interlocutory decision that the respondent was not entitled to do so because, assuming there was no fraudulent non-disclosure, the right of avoidance had to be exercised within three years. He said he would ordinarily have struck out the paragraphs of the defence in which the notional avoidance case was raised. Having regard to the fact the matter had been set down for hearing for four days and that witnesses were present, including one from New Zealand, he proceeded to hear the case, including the notional avoidance case. He held that if his interlocutory interpretation of s 29(3) was wrong, then the respondent had established that after taking the additional two matters into account as well as the non-disclosures of the sleep apnoea it would not have entered into a contract with the appellant on any terms.

84 The respondent relied upon a notice of contention arguing that the decision of the primary judge should be affirmed on additional grounds, the first being that the primary judge erred in failing to permit the respondent to rely upon matters pleaded in paras 12 and 13 of its further amended defence in support of its avoidance of the policy and, secondly, that the primary judge erred in his construction of s 29(3) in deciding that the respondent could only rely on matters that were known to it within three years of entering into the contract of insurance with the appellant in order to avoid the policy.

85 Having regard to the conclusion I have reached on the appeal, it is unnecessary to consider these issues.

Orders

86 The appeal should be dismissed with costs.

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